2021 Interim Results

RNS Number : 3234H
Rotork PLC
03 August 2021
 

Tuesday 3rd August 2021

 

Rotork plc

2021 Interim Results

Good progress in H1 and a return to growth

 

Adjusted highlights
H1 2021
H1 2020
% change
OCC3 % change
Order intake1
£298.2m
£300.5m
-0.8%
+3.2%
Revenue
£288.3m
£283.2m
+1.8%
+5.7%
Adjusted 2 operating profit
£62.7m
£61.2m
+2.4%
+6.5%
Adjusted 2 operating margin
21.8%
21.6%
+20bps
+20bps
Adjusted 2 basic earnings per share
5.5p
5.4p
+1.9%
+6.4%
Cash conversion 4
94%
116%
-22%

-

Statutory highlights
H1 2021
H1 2020
% change
 
Revenue
£288.3m
£283.2m
+1.8%
 
Operating profit
£54.0m
£50.2m
+7.5%
 
Operating margin
18.7%
17.7%
+100bps
 
Profit before tax
£54.1m
£50.0m
+8.4%
 
Basic earnings per share
4.7p
4.4p
+6.8%
 
Interim dividend 5
2.35p
-
 
 

 

Summary

· Orders and revenues were higher year-on-year on an OCC4 basis driven by encouraging performances from our Water & Power and Chemical, Process & Industrial Divisions

· Oil & Gas revenues were lower, with reduced spending by upstream customers. Sales to the less cyclical midstream / downstream sectors were ahead year-on-year (OCC basis)

· Adjusted operating margins were 20bps ahead at 21.8%, reflecting the increase in sales and Growth Acceleration Programme savings which were partly offset by higher supply chain costs

· Revenue opportunities linked to our purpose, keeping the world flowing for future generations, were identified and commitments made in our inaugural Sustainability Report

· Closing net cash £144.3m (June 2020: £143.6m)

· ROCE4 increased to 32.2%, up 150bps

· Full year guidance resumed and half year interim dividend reinstated

Kevin Hostetler, Chief Executive, commenting on the results, said: 

"I'm pleased to report that Rotork returned to underlying growth in the first half. Our strategy of focusing our sales teams on specific end markets and investing in targeted geographies and in aftermarket activities is delivering results. Margin improvement continued, despite significantly higher logistics and commodity costs, through our focus on managing inflation and the continued successful execution of our Growth Acceleration Programme.

 

Our first half performance demonstrates good momentum, and whilst mindful of the risks of additional Covid-19 disruption and of continuing component shortages, we anticipate 2021 to be a year of progress on a constant currency basis."

 

1 Order intake represents the value of orders received during the period.

2 Adjusted 4 figures exclude the amortisation of acquired intangible assets and restructuring costs (see note 4).

3 OCC 4 is organic constant currency results excluding discontinued businesses and restated at 2020 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.

5 Rotork did not pay an interim dividend in respect of H1 2020, however an interim dividend of 3.9p was paid which was equivalent to the 2019 final dividend which was previously deferred.

 

Rotork plc

Tel:  +44 (0)1225 733 200

Kevin Hostetler, 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 BST today in the Great Hall 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/60eec6e42527a916004efc14/21hyr . Please join the meeting 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 cleaner 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.

 

Health, safety and wellbeing

The wellbeing of our people and our wider stakeholders is the number one priority of everyone at Rotork. During the period we successfully rolled-out our new 'Rotork Life Saving Rules'. These are based on the globally recognised 'Life Saving Rules' which are widely used in industries including Oil & Gas.

 

Business performance

Group order intake in the period decreased 0.8% year-on-year, but increased 3.2% on an OCC basis, to £298.2m. Orders were solidly ahead at both Water & Power and Chemical, Process & Industrial ("CPI"). Oil & Gas faced tougher prior year comparisons and, as expected, is proving to be relatively late cycle.

 

Our customers continue to spend on automation and environmental projects as well as maintenance and upgrade activities. Large project activity remains generally subdued. The majority of Rotork's activity is driven by customers' operational rather than capital expenditure. We estimate that maintenance, repair and small to mid-sized automation/upgrade projects (individual orders less than £100k) generate 75% of Group orders by value in a typical year, and that orders above £1m represent only 5% of Group order intake.

 

Our operational teams performed well in what was a very challenging period due to Covid-19. Whilst we made every effort to keep our production facilities open, we did not hesitate to shut them if we believed there was any risk to our colleagues, and there were several closures in the period. The requirement for staff to isolate and quarantine affected many of our facilities. Similar issues were also faced by our component and logistics suppliers, causing supply chain delays and disruption, which were further impacted by the temporary closure of the Suez Canal in March. As widely reported these disruptions have had a very significant impact on logistics costs (particularly sea freight) and commodities. We have responded by utilising our global network to mitigate supply chain disruption and in some cases have built tactical inventories. Our Global Strategic Sourcing team have been focussed on mitigating the impact of rising commodity costs. We expect component supply and costs (including of electronics) to remain a challenge for the remainder of the year, as well as escalated logistics costs and logistics disruption.

 

Group revenue was 1.8% higher year-on-year (5.7% OCC). Oil & Gas sales were lower, the result of significantly reduced spending by upstream customers. Sales to the less cyclical midstream and downstream sectors (representing 75% of Oil & Gas sales) were in aggregate unchanged year-on-year on an OCC basis. CPI revenue was strongly ahead, driven by the chemical and process sectors. Water & Power sales were up 10.1% OCC, benefiting from increased activity in the water sector.

 

By geography, Asia Pacific revenues by destination grew double-digits year-on-year. Europe, Middle East & Africa ("EMEA") sales were lower, the result of a significant reduction in activity at Oil & Gas. Americas revenues were ahead on an OCC basis, benefiting from a strong performance in Latin America.

 

Rotork Site Services, our global service network and a key differentiator in our industry, made good progress in the period despite access to customer sites remaining a challenge in some countries. Revenues are back to pre-pandemic levels and our Lifetime Management and Reliability Services programmes are performing above expectations. Rotork Site Services is managed as a separate unit within Rotork's divisions and continues to contribute a significant proportion of Group sales (19% in the period).

 

Adjusted operating profit was 2.4% higher year-on-year (6.5% OCC) reflecting increased sales and benefits from the Growth Acceleration Programme which were partly offset by foreign exchange headwinds and significantly higher logistics costs. Adjusted operating margins increased 20 basis points to 21.8%. We introduced temporary logistics surcharges on the most affected routes early in the period. Given the customary lag we expect most of the benefits from these surcharges to be weighted to the second half.

 

Return on capital employed increased to 32.2% (H1 2020: 30.7%), driven by higher operating profit and lower capital employed. Cash conversion was 94% (116%) reflecting the lower working capital position at the start of this year and phasing of activity within the second quarter.

 

Our balance sheet remains strong, with a net cash position of £144m at the period end. This provides us with optionality in uncertain times and the financial flexibility to execute our organic investment plans and our targeted M&A strategy. It also enabled us to navigate the COVID-19 crisis without taking government funding or seeking material payroll support.

 

Strategy update

Our target is to deliver mid to high single-digit revenue growth through a combination of organic growth and acquisitions. We are targeting mid-20s adjusted operating margins over time through simplifying our core business, manufacturing improvements and development of our global supply chain. We aim to play our part in improving our world and making it more sustainable by helping our customers better their own environmental performance, while at the same time working to improve our own environmental and social performance as well as that of our suppliers.

 

Our Growth Acceleration Programme ("GAP"), which we began to implement in the second half of 2018, is designed to deliver these targets. This 5-year programme is about refining how we do things, building on our strong foundations, through people, processes and systems. During the period we made further good progress implementing our GAP initiatives.

 

Driving our growth

Several of our GAP initiatives are specifically designed to drive our future growth.

 

One of the most important is market re-alignment, focusing our sales teams more closely on end-market segments. We completed this transition in early 2020. Our new structure more closely addresses customer needs and facilitates closer customer relationships through key account management. We continue to see benefits of the change, as evidenced by the sales performance of CPI and Water & Power. To further improve the effectiveness of our sales efforts we recently launched a new digital sales enablement platform.

 

The expansion of Rotork Site Services is a key opportunity for us. We benefit from having the largest installed base of any electric actuator manufacturer and our customers are investing more in advanced analytics, with uptime and availability an increasingly important consideration. We are focused on driving new and recurring service revenue through our Lifetime Management and Reliability Services programmes and through targeted footprint expansion, including new service centres in actuator intensive locations.

 

Industry analysts forecast more than half of future global flow control spend to occur in Asia, meaning a strong presence in high growth regions such as China and India is an imperative. We have a leading position in many parts of the region and as part of GAP we are investing in additional sales and business development personnel and selectively localising production. The benefits of our position and investment to date was apparent in our first half sales performance.

 

We are reinvigorating and re-focusing our research, innovation, and new product development processes with a particular focus on enabling greater positive environmental impact. The benefits of improvements in these areas take time, but we are now seeing the launch of a greater number of more meaningful products, and there will be more in the second half of the year and into 2022. To be sure we are focusing on the correct customer challenges we completed a major voice-of-customer survey in the Spring.

 

We have identified adjacent markets which we believe could become major opportunities for growth in the future, including biofuels, hydrogen and carbon capture, utilisation and storage (CCUS) and we are investing to position ourselves to benefit from these. Additionally we see further growth opportunities arising from the energy transition such as the electrification of valve actuation.  

 

Improving our margins

The Rotork mixed-model lean continuous improvement programme is well embedded within our larger plants and was rolled-out to our other facilities in 2020. Further good progress was made in the period with over 180 rapid improvement events completed, and we have ambitious plans for the second half. These events aim to improve quality and on-time-delivery as well as freeing-up factory space, enabling increased production and in some cases footprint consolidation.

 

We stepped-up our sourcing and supply chain initiatives in the period, as previously announced. Our work to focus on a smaller number of suppliers continues and we made good progress, reducing the number by over a thousand. As widely reported, we have seen a significant increase in logistics costs and higher commodity costs, reducing our near-term targets for net savings from these programmes.

 

Our footprint optimisation work continues on track. We recently announced plans to consolidate two mid-sized manufacturing plants into other locations in the second half. Upon completion we will have 17 manufacturing sites, down from 30 at the start of GAP. Site rationalisation has several benefits including improved cyclical resilience and reduced capital employed. We continued the back office consolidation work which was started in 2020. 

 

Our inventory reduction initiatives continue, with the Rotork Inventory Optimiser tool now rolled-out across the Group. We saw a temporary increase in inventory in the first half as we introduced some buffer stocks in certain locations. These helped us to maintain customer service levels despite significant disruptions to global logistics.

 

We continue to find opportunities to improve our operational efficiency whilst at the same time delivering net positive environmental benefit. One such example is the shortly to be opened state-of-the-art paint line at our Rochester, US, manufacturing facility. Bringing the capability into our operation provides environmental benefits from avoided transportation and packaging when compared with outsourcing, though it will increase our own energy and water consumption at the site.

 

Enabling a sustainable future

Managing Environmental, Social & Governance ("ESG") opportunities and risks is integrated throughout Rotork's business. We have worked hard to articulate our ambitions and underpin our approach and in June we published our inaugural Sustainability Report. In it we reaffirm our full commitment to improving our ESG performance in all areas and highlight the many ways Rotork's products and services can enable a sustainable future.

 

· We have a major role to play in the new energies and technologies that will support the transition to a low-carbon economy. Our products and services have applications in the production of low- and no- carbon fuels such as hydrogen and in climate change mitigation technologies, such as carbon capture and storage, and helping customers to tackle methane emissions from their operations.

· Rotork's products and services also have applications in processes that help preserve natural resources such as fresh water, through leak reduction, water recovery, recycling and treatment. Our products are widely used elsewhere to manage water, including in flood protection and desalination.  

· In addition, Rotork can support a broad spread of industries, as they make greater use of automation, electrification and digitalisation to reduce the environmental impact of their operations, including through facilitating the use of renewable energy.

In the report we also present our commitments for each of the pillars of our sustainability framework: Operating Responsibly; Enabling a Sustainable Future; and Making a Positive Social Impact. We will:

 

· Aim to reduce our lost time injury rate each year and strive for a zero-harm workplace

· Embed social, ethical and environmental considerations into our Global Supplier Excellence Programme

· Aim to reduce carbon emissions generated per £1m revenue and work to develop a net-zero roadmap

· Enable sustainable management of water resources and greater water efficiency for our customers

· Support customers' energy and emissions reduction and enable them to incorporate renewable energy into their operations

· Play our part to enable the global energy transition and support a cleaner more sustainable future

· Develop and deliver initiatives to drive greater gender and ethnic diversity

· Contribute to a fairer society more broadly, including by ensuring 100% of employees are covered by our Fair Pay Framework

The Sustainability Report also provides additional information on our safety, diversity and environmental performance, as well as our current view of climate-related risks and opportunities, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

 

Capital deployment strategy

Rotork remains a highly cash generative business and our net cash balance was £144.3m at period end. Our cash position provides us with considerable financial flexibility in uncertain times. The priorities for our cash remain unchanged: organic development (new markets, new product development); our progressive dividend policy; followed by targeted acquisitions. We regularly review our capital requirements and in the event in the future we determine we have surplus cash, we will look to return it to shareholders.

 

Dividend

We recognise the importance of a growing dividend to our shareholders and are committed to a progressive dividend policy subject to satisfying cash requirements, which can vary significantly from year to year. The Board is declaring an interim dividend of 2.35p per share which is equivalent to 2.3 times cover based on adjusted earnings per share. The interim dividend will be payable on 24 September 2021 to shareholders on the register on 20 August 2021.

 

CEO transition

As announced separately today, Kevin Hostetler has informed the Board of his decision to return home to the US next year. Kevin is fully committed to leading Rotork through his notice period, and to ensuring an effective handover to his successor, at which time he will step down from the Board and as Chief Executive Officer of Rotork. The process is expected to conclude by 30 June 2022.

 

 

Outlook

Our first half performance demonstrates good momentum, and whilst mindful of the risks of additional Covid-19 disruption and of continuing component shortages, we anticipate 2021 to be a year of progress on a constant currency basis.

 

 

Divisional review

 

Oil & Gas

£m

H1 2021

H1 2020

Change

OCC3 Change

Revenue

129.6

137.2

-5.6%

-1.9%

Adjusted operating profit

26.9

29.0

-7.1%

-3.6%

Adjusted operating margin

20.8%

21.1%

-30bps

-30bps

 

Oil & Gas' customers remained cautious regarding their discretionary spending in the period, particularly in the upstream sector which represented 25% of sales, meaning the division has so far experienced a slower post-pandemic recovery than our others. This supply side constraint has however led to hydrocarbon prices recently making multi-year highs. The division is well positioned to respond if these higher prices lead to increased customer spending.

 

Divisional revenues fell 5.6% year-on-year (-1.9% OCC) driven by the upstream sector. Sales to the less cyclical midstream / downstream sectors were in aggregate slightly lower year-on-year but ahead on an OCC basis. EMEA sales were lower with the upstream and downstream sectors declining. However, the resumption of spending on small/mid-sized automation projects benefited Rotork Site Services' regional revenues. Asia Pacific sales grew strongly, with increased downstream activity particularly in China more than offsetting Covid-19 related project slippage in India. Americas revenues were slightly ahead OCC, driven by the midstream sector, and we saw an increase in emissions reduction related activity. Our new US intermountain region service centre is performing well.  

 

Adjusted operating profits were £26.9m, 7.1% lower year-on-year. The decline in profits reflected reduced sales and higher logistics costs, partly offset by GAP savings and a reduced share of costs shared across the divisions. Adjusted margins fell 30 basis points to 20.8%, reflecting the above factors and adverse mix.

 

Oil & Gas aims to outperform its markets through several strategic initiatives. These include leveraging our installed base (through Rotork Site Services and our iAM and Lifetime Management programmes), helping our customers improve their operational and environmental performance, and increasing our sales of low energy consumption and connected products. We are also making targeted investments in high growth regions such as the Middle East and Asia Pacific.

 

We consider the energy transition to be a significant opportunity where we play an important role. The production, distribution, and utilisation of low and zero carbon fuels (including hydrogen and biofuels such as HVO) is valve and actuator intensive. We have an important part to play in climate change mitigation technologies such as methane emissions reduction and carbon capture usage and storage. The focus on the oil & gas industry's methane emissions has stepped-up the policy agenda further following a widely reported United Nations Environment Programme campaign. We believe that electrification has an important role to play in the reduction of our customers' carbon emissions across their upstream, midstream and downstream processes, and that as the world leader in electric actuation we are well placed to assist them on this journey. Gasification / fuel switching in the power generation sector in the US and Europe and in the residential and industrial sectors in Asia Pacific is expected to benefit the midstream sector.

 

 

Water & Power

£m

H1 2021

H1 2020

Change

OCC3 Change

Revenue

77.5

73.2

5.9%

10.1%

Adjusted operating profit

21.0

20.7

1.8%

5.8%

Adjusted operating margin

27.1%

28.2%

-110bps

-110bps

 

Water & Power's products and services, and those of its customers, are generally considered essential, and activity has largely continued without any significant disruption throughout the pandemic. The first half's encouraging progress therefore largely reflects the benefit of earlier initiatives such as our transition to an end-market aligned structure and value selling. Looking ahead, the world's governments have identified water infrastructure investment as a priority, not only for population health and safety reasons but also for economic development. The division is well placed to support these efforts.

 

Revenues increased 5.9% year-on-year (10.1% OCC) with higher sales in all geographic regions on an OCC basis. In Asia Pacific both segments achieved solid growth with particularly strong demand from the water sector and the waste-to-energy segment within the power sector. In the Americas, water sales were higher, whilst power sales were lower largely due to the strong comparison. The growth in EMEA sales was largely driven by the water sector. The region also saw strong growth in the currently small but high potential district heating segment. For the division overall, both water and power sector sales were ahead year-on-year on an OCC basis.

 

The division's adjusted operating profits were £21.0m, 1.8% higher year-on-year. Adjusted margins were 27.1%, down 110bps year-on-year. The margin decline reflected higher logistics costs and foreign exchange, which disproportionately affected the division, as well as an increased share of common costs, which together exceeded the savings derived from GAP.

 

Water & Power aims to outperform its markets through an optimised channel strategy, regional expansion and new product development. The division is focused on solving its customers' challenges. For example, water customers rely on Rotork's technologies to achieve higher water quality standards, lower operational costs, reduce water leakage and increase the lifecycle of assets above- and under- ground. In power, our teams are targeting environmental opportunities such as waste-to-energy investments, flue-gas desulphurisation retrofits and seeking refurbishment opportunities within our large installed base.

 

 

Chemical, Process & Industrial ("CPI")

£m

H1 2021

H1 2020

Change

OCC3 Change

Revenue

81.2

72.9

11.5%

15.4%

Adjusted operating profit

20.6

16.8

23.0%

27.8%

Adjusted operating margin

25.4%

23.0%

240bps

250bps

 

CPI delivered a strong sales recovery in the first half. The division serves a broad range of end markets and has a higher proportion of short-cycle sales and a shorter order book than Rotork's other divisions. CPI is seeing the benefits of the economic recovery as well as earlier GAP initiatives such as focusing on key niches for profitable growth. Examples include business wins in mining, hydrogen, semi-conductor, li-ion battery and data centre end markets and the addition of carefully selected specialist distribution partners.

 

Revenues grew 15.4% year-on-year on an OCC basis. Asia Pacific saw the strongest growth, with most end markets well ahead of the prior year period, including basic materials. EMEA sales were slightly lower year-on-year but unchanged on an OCC basis, with Covid-19 continuing to affect customer activity in some markets including the Iberian Peninsula. Americas revenues grew double digits OCC despite the naval and specialist marine end market remaining quiet.

 

The process sector represents a substantial proportion of CPI overall. Process revenues in EMEA were broadly unchanged. In Asia Pacific we continued to see strong demand from control valve OEMs in China. Americas process sales grew. Both chemical and industrial sector revenues were higher year-on-year.

 

The division's adjusted operating profit was £20.6m, 23.0% up year-on-year. Adjusted operating margins increased 240bps to 25.4% reflecting the drop-through of higher sales, beneficial mix and GAP savings which were only partly offset by slightly higher logistics costs and a higher share of common costs.

 

CPI aims to outgrow its markets through focusing on niche sectors and high growth regions, optimising its channel coverage and developing the aftermarket. The division is targeting key sectors including HVAC, chemicals and basic materials. The decarbonisation trend presents a key opportunity for CPI - through new industrial processes such as hydrogen, carbon capture usage and storage and plastic recycling, as well as the substitution of high maintenance and inefficient pneumatic systems with electric actuators.

 

 

Financial Key Performance Indicators (KPIs)


H1 2021

H1 2020

FY 2020

Revenue growth

1.8%

-11.1%

-9.7%

Adjusted operating margin

21.8%

21.6%

23.6%

Cash conversion

94.0%

116.1%

129.5%

Return on capital employed

32.2%

30.7%

31.9%

Adjusted EPS growth

1.9%

-7.3%

-3.9%

 

The KPIs are defined below:

· Revenue growth is defined as the increase in revenue divided by prior period revenue.

· Adjusted operating margin is defined as adjusted operating profit as a percentage of revenue (note 2a).

· Cash conversion is defined as cash flow from operating activities before tax outflows, payments of restructuring charges and the pension charge to cash adjustment as a percentage of adjusted operating profit (note 2a).

· Return on capital employed is defined as adjusted operating profit as a percentage of average capital employed. Capital employed is defined as shareholders' funds less net cash held, with the pension fund deficit net of related deferred tax asset added back (note 2d).

· Adjusted EPS growth is defined as the increase in adjusted basic EPS (based on adjusted profit after tax) divided by the prior year adjusted basic EPS (note 2c).

Adjusted items

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

 

The statutory profit measures are adjusted to exclude amortisation of acquired intangibles and other adjustments, which in both periods comprise restructuring costs, including redundancy costs, asset write downs relating to the merger of businesses and other restructuring costs. Restructuring costs in the first half year were £4.1m, with GAP initiatives and other restructuring costs of £5.6m offset by gain on disposal of properties of £1.5m. Restructuring costs are currently expected to be lower in the second half.

 

£m

Statutory results

Amortisation of acquired intangibles

Restructuring costs (note 4)

 

Adjusted results






Operating profit

54.0

4.7

4.1

62.7






Profit before tax

54.1

4.7

4.1

62.9

Tax

(13.3)

(1.0)

(0.7)

(15.0)

Profit after tax

40.8

3.7

3.4

47.9

 

Financial position

The balance sheet remains strong and we ended the period with net cash of £144.3m (Dec 2020: £178.1m). The December cash balance benefited from the timing of dividend payments. Net cash comprises cash balances of £153.4m less loans and borrowings and leases of £9.1m.

 

Our focus on working capital management resulted in a net working capital decrease since the year end of £8.7m to £131.8m at the period end. This was offset by increases in other receivables relating to timing of treasury and sales tax inflows, resulting in a cash conversion KPI of 94.0% of adjusted operating profit into operating cash, down from 116.1% in H1 2020. Inventory increased £1.6m since year end, which is the normal pattern during the first half of the year, but is £18.1m lower than June 2020. A £8.5m reduction in trade receivables since the year end more than offsets the increase in inventory and the days sales outstanding remains at the same level it was in December, 57 days. In total, net working capital as a percentage of sales is 22.9% compared with 23.2% in December and 27.5% in June 2020.

 

The estimated average annual tax rate used for the year ending 31 December 2021 is 24.5% (2020: 23.5%) and the estimated adjusted effective tax rate for the year ending 31 December 2021, based on adjusted profit before tax, is 23.9% (2020: 23.4%). This increase is due to the balance of profits in the Group moving towards high tax jurisdictions. The 2020 effective tax rate also benefitted from a one-off reduction in the deferred tax liability on unremitted earnings driven by a decrease in Indian withholding tax rates.

 

Retirement benefits

The Group operates two defined benefit pension schemes, the larger of which is in the UK. Both the UK and US schemes are closed to future accrual.

 

The pension scheme deficit decreased from £38.5m at 31 December 2020 to £22.2m at 30 June 2021, principally due to an increase in the discount rate.

 

Currency

Overall, currency headwinds decreased revenue by £11.1m (3.9%) compared with the first half of 2020. The average US dollar rate was $1.39 (H1 2020: $1.26) and the average Euro rate was €1.15 (H1 2020: €1.14), whilst the rates at 30 June 2021 were $1.38 and €1.17 respectively (30 June 2020: $1.24 and €1.10).

 

Dividend

The Board recommends an interim dividend of 2.35p per ordinary share. The interim dividend will be paid on 24 September 2021 to shareholders on the register at the close of business on 20 August 2021.

 

Principal risk and uncertainties

The Group has an established risk management process as part of the corporate governance framework set out in the 2020 Annual Report and Accounts. The principal risks and uncertainties facing our businesses are monitored on an ongoing basis in line with the Corporate Governance Code. The risk management process is described in detail on pages 38 to 39 of the 2020 Annual Report and Accounts. The Group's principal risks and uncertainties have been reviewed by the Board and the Board have concluded that they remain applicable for the second half of the financial year. A more detailed description of the Group's principal risks and uncertainties is set out on pages 42 to 45 of the 2020 Annual Report and Accounts.

 

Risk update

Whilst there has been no change in the principal risks and uncertainties under review by the business, the following risks have increased.

• Supply chain disruption - we continue to monitor impacts to our supply chain across the globe and have been working with our suppliers to reduce any impact to the business and our customers.

• Risks to our IT systems and cyber security - cyber risk has increased globally with all companies facing an increased threat of cyber-attacks. Threat intelligence has played a key role in the mitigation of this risk.

 

Impacts of COVID-19 on Rotork's risk profile

We continue to monitor the impact of COVID-19 across our principal risks and uncertainties. Many of the risks associated with COVID-19 are now part of our business as usual risk management practices.  In the next six months, focus will be on the return to the workplace in a safe manner.

 

Climate risk

We continue to monitor climate risk closely given its significance internally and externally. As we noted in our 2020 Sustainability report, during 2021, we will undertake a TCFD-aligned scenario analysis as part of our journey to better understand, and quantify, climate risks and opportunities for Rotork. Outcomes of the scenario analysis will be published in our 2021 Annual Report and Accounts.

 

Emerging risks

We continue to monitor and review emerging risks that may impact our business including environmental, climate and sustainability risks. 

 

Principal risks and uncertainties

1. Decline in market confidence: A decline in government and private sector confidence and spending will lead to cancellations of expected projects or delays to existing expenditure commitments. This lower investment in Rotork's traditional market sectors would result in a smaller addressable market, which in turn could lead to a reduction in revenue from that sector.

2. Increased competition: Increased competition on price or product offering leading to a loss of sales globally or market share.

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

4. Failure of an acquisition to deliver value: Failure of an acquisition to deliver the growth or synergies anticipated, either due to unforeseen changes in market conditions or failure to integrate an acquisition effectively. Significant financial under performance could lead to an impairment write down of the associated intangible assets.

5. Health, Safety and the Environment: The nature of Rotork's core business and geographical locations involves potential risks to the Health and Safety of our employees or other stakeholders. A failure of our products or internal processes could have an impact on the environment.

6. Compliance with laws and regulations: Failure of our staff or third parties who we do business with to comply with law or regulation or to uphold our high ethical standards and Values.

7. Major in-field product failure: Major in-field failure of a new or existing Rotork product potentially leading to a product recall, major on-site warranty programme or the loss of an existing or potential customer.

8. Supply chain disruption: Supply chain disruption which may arise such as a tooling failure at a key supplier, logistics issue, severe weather events impacting key suppliers which would cause disruption to manufacturing at a Rotork factory.

9. Critical IT system failure and cybersecurity: Failure to provide, maintain and update the systems and infrastructure required by the Rotork business. Failure to protect Rotork operations, sensitive or commercial data, technical specifications and financial information from cybercrime.

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

 

Statement of Directors' Responsibilities

 

The directors confirm that, to the best of their knowledge, this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the United Kingdom, the interim financial statements give a true and fair view of the consolidated assets, liabilities, financial position and profit of the Company and its group companies taken as a whole; and that the interim management report includes a  fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

 

· An indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· Material related-party transactions in the first six months, and any material changes in the related-party transactions described in the last annual report.

These interim financial statements and the interim management report are the responsibility of, and have been approved by, the directors. A list of the current directors can be found in the "About Us" section of the Rotork website: www.rotork.com . Sally James served as a director until the conclusion of the AGM on 30 April 2021.

 

By order of the Board 

Kevin G. Hostetler

Chief Executive

2 August 2021

 

 

Independent Review Report to Rotork plc

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 which comprises the consolidated income statement, the consolidated statement of comprehensive income and expense, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and related notes 1 to 16. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

Directors' responsibilities

 

The half -yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 1, the annual financial statements of the group will be prepared in accordance with United Kingdom adopted International Financial Reporting Standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34 "Interim Financial Reporting".

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Base d on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Use of our report

 

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

 

 

 

Deloitte LLP

Statutory Auditor

London, United Kingdom

2 August 2021

 

Consolidated Income Statement

 



First half

First half

Full year



2021

2020

2020


Notes

£000

£000

£000






Revenue

3

288,261

283,234

604,544

Cost of sales


(155,081)

(150,504)

(320,234)

Gross profit


133,180

132,730

284,310

Other income


220

393

1,581

Distribution costs


(2,504)

(2,525)

(5,271)

Administrative expenses


(76,858)

(80,351)

(157,336)

Other expenses


(34)

(29)

(710)






Adjusted operating profit

Adjustments

2

 

62,735

 

61,237

 

142,543

 

Amortisation of acquired intangible assets


(4,655)

(7,058)

(14,110)

Other adjustments

4

(4,076)

(3,961)

(5,859)

Operating profit

3

54,004

50,218

122,574

Finance income

5

1,341

1,635

2,394

Finance expense

6

(1,196)

(1,888)

(2,931)

Profit before tax


54,149

49,965

122,037






Income tax expense

7

(13,265)

(11,728)

(28,709)






Profit for the period


40,884

38,237

93,328








Pence

Pence

Pence

Basic earnings per share

9

4.7

4.4

10.7

Adjusted basic earnings per share

2

5.5

5.4

12.5

Diluted earnings per share

9

4.7

4.4

10.7

Adjusted diluted earnings per share

2

5.5

5.4

12.5

 

 

 

Consolidated Statement of Comprehensive Income and Expense


 

First half

First half

Full year

 

2021

2020

2020

 

£000

£000

£000

 

 

 


Profit for the period

40,884

38,237

93,328

 

 

 

 

Other comprehensive income and expense

 

 

 

Items that may be subsequently reclassified to the income statement:

 

 

 

Foreign currency translation differences

(8,559)

15,699

(3,913)

Effective portion of changes in fair value of cash flow
hedges net of tax

342

(1,738)

(12)

 

(8,217)

13,961

(3,925)

Items that are not subsequently reclassified to the income statement:

 

 

 

Actuarial gain / (loss) in pension scheme net of tax

10,241

(16,521)

(14,836)

Income and expenses recognised directly in equity

2,024

(2,560)

(18,761)


 

 

 

Total comprehensive income for the period

42,908

35,677

74,567

 

 

 

Consolidated Balance Sheet




30 June

30 June



2021

2020

2020


Notes

£000

£000

£000






Goodwill


218,283

229,636

223,537

Intangible assets


46,450

37,809

25,145

Property, plant and equipment


80,593

96,571

100,620

Deferred tax assets


8,036

14,057

16,624

Other receivables


332

335

-

Total non-current assets


353,694

378,408

365,926






Inventories

10

63,077

81,166

61,467

Trade receivables


104,104

112,275

112,565

Current tax


5,740

4,237

7,180

Derivative financial instruments

16

1,676

44

1,582

Other receivables


33,308

30,799

25,868

Assets classified as held for sale


-

-

1,119

Cash and cash equivalents


153,361

153,811

187,204

Total current assets


361,266

382,332

396,985






Total assets


714,960

760,740

762,911






Ordinary shares

12

4,371

4,364

4,370

Share premium


17,153

14,858

16,826

Reserves


12,717

38,820

20,934

Retained earnings


533,067

515,918

540,400

Total equity


567,308

573,960

582,530






Interest-bearing loans and borrowings

13

5,051

6,020

5,396

Employee benefits


22,042

44,111

42,846

Deferred tax liabilities


1,060

2,674

8,705

Derivative financial instruments

16

40

495

-

Other payables


314

-

-

Provisions


1,707

1,854

1,720

Total non-current liabilities


30,214

55,154

58,667






Interest-bearing loans and borrowings

13

4,038

4,156

3,754

Trade payables


35,385

37,448

33,560

Employee benefits


19,006

18,904

23,645

Current tax


13,074

16,486

14,765

Derivative financial instruments

16

-

2,088

168

Other payables


38,316

44,852

41,334

Provisions


7,619

7,692

4,488

Total current liabilities


117,438

131,626

121,714






Total liabilities


147,652

186,780

180,381






Total equity and liabilities


714,960

760,740

762,911

 

 

Consolidated Statement of Changes in Equity

 

 

 

Issued equity

capital

£000

Share

premium

£000

Translation

reserve

£000

Capital

redemption

reserve

£000

 

Hedging reserve

£000

 

Retained earnings

£000

Total

£000

 

Balance at 31 December 2020

4,370

16,826

18,374

1,644

916

540,400

582,530

 

Profit for the period

-

-

-

-

-

40,884

40,884

 

Other comprehensive (expense)/income








 

Foreign currency translation differences

-

-

(8,559)

-

-

-

(8,559)

 

Effective portion of changes in fair value of cash flow hedges

-

-

-

-

422

-

422

 

Actuarial gain on defined benefit
pension plans

-

-

-

-

-

12,837

12,837

 

Tax in other comprehensive (expense)/income

-

-

-

-

(80)

(2,596)

(2,676)

 

Total other comprehensive (expense)/income

-

-

(8,559)

-

342

10,241

2,024

 

Total comprehensive income

-

-

(8,559)

-

342

51,125

42,908

 

Transactions with owners, recorded directly in equity








 

Equity settled share based payment transactions

-

-

-

-

-

(4,325)

(4,325)

 

Tax on equity settled share based payment transactions

-

-

-

-

-

817

817

 

Share options exercised by employees

1

327

-

-

-

-

328

 

Own ordinary shares acquired

-

-

-

-

-

(5,409)

(5,409)

 

Own ordinary shares awarded under share schemes

-

-

-

-

-

5,455

5,455

 

Dividends

-

-

-

-

-

(54,996)

(54,996)

 

Balance at 30 June 2021

4,371

17,153

9,815

1,644

1,258

533,067

567,308

 

 

 

 

Issued equity

capital

£000


Share

premium

£000


Translation

reserve

£000

Capital

redemption

reserve

£000

 

Hedging reserve

£000

 

Retained earnings

£000

Total

£000

Balance at 31 December 2019

4,363

14,521

22,287

1,644

928

495,657

539,400

Profit for the period

-

-

-

-

-

38,237

38,237

Other comprehensive income/(expense)








Foreign currency translation differences

-

-

15,699

-

-

-

15,699

Effective portion of changes in fair value of cash flow hedges

-

-

-

-

(2,106)

-

(2,106)

Actuarial loss on defined benefit
pension plans

-

-

-

-

-

(20,781)

(20,781)

Tax in other comprehensive income/(expense)

-

-

-

-

368

4,260

4,628

Total other comprehensive income/(expense)

-

-

15,699

-

(1,738)

(16,521)

(2,560)

Total comprehensive income

-

-

15,699

-

(1,738)

21,716

35,677

Transactions with owners, recorded directly in equity








Equity settled share based payment transactions

-

-

-

-

-

(2,495)

(2,495)

Tax on equity settled share based payment transactions

-

-

-

-

-

473

473

Share options exercised by employees

1

337

-

-

-

-

338

Own ordinary shares acquired

-

-

-

-

-

(3,625)

(3,625)

Own ordinary shares awarded under share schemes

-

-

-

-

-

4,192

4,192

Balance at 30 June 2020

4,364

14,858

37,986

1,644

(810)

515,918

573,960

 


Issued equity

capital

£000

Share

premium

£000

Translation

reserve

£000

Capital

redemption

reserve

£000

 

Hedging reserve

£000

 

Retained earnings

£000

Total

£000









Balance at 31 December 2019

4,363

14,521

22,287

1,644

(928)

495,657

539,400

Profit for the year

-

-

-

-

-

93,328

93,328

Other comprehensive expense








Foreign currency translation differences

-

-

(3,913)

-

-

-

(3,913)

Effective portion of changes in fair value of cash flow hedges

-

-

-

-

6

-

6

Actuarial loss on defined benefit pension plans

-

-

-

-

-

(18,570)

(18,570)

Tax in other comprehensive expense

-

-

-

-

(18)

3,734

3,716

Total other comprehensive expense

-

-

(3,913)

-

(12)

(14,836)

(18,761)

Total comprehensive income

-

-

(3,913)

-

(12)

78,492

74,567

Transactions with owners, recorded directly in equity








Equity settled share based payment transactions

-

-

-

-

-

(306)

(306)

Tax on equity settled share based payment transactions

-

-

-

-

-

(65)

(65)

Share options exercised by employees

7

2,305

-

-

-

-

2,312

Own ordinary shares acquired

-

-

-

-

-

(3,645)

(3,645)

Own ordinary shares awarded under share schemes

-

-

-

-

-

4,193

4,193

Dividends

-

-

-

-

-

(33,926)

(33,926)

Balance at 31 December 2020

4,370

16,826

18,374

1,644

916

540,400

582,530

 

Consolidated Statement of Cash Flows


 



First half

First half

Full year



2021

2020

2020


Notes

£000

£000

£000

Cash flows from operating activities





Profit for the period


40,884

38,237

93,328

Amortisation of acquired intangible assets


4,655

7,058

14,110

Other adjustments

4

4,076

3,961

5,859

Amortisation of development and software costs


978

1,098

2,967

Depreciation


7,905

7,600

16,313

Equity settled share based payment expense


1,951

2,172

3,685

Net (profit)/loss on sale of property, plant and equipment


(27)

-

146

Finance income


(1,341)

(1,626)

(2,394)

Finance expense


1,196

1,879

2,931

Income tax expense


13,265

11,728

28,709



73,542

72,107

165,654

(Increase)/decrease in inventories


(3,070)

(4,618)

12,561

(Increase)/decrease in trade and other receivables


(1,070)

14,156

14,672

(Decrease)/increase in trade and other payables


(1,667)

302

(7,195)

Restructuring costs paid


(1,663)

(739)

(6,437)

Difference between pension charge and cash contribution


(3,733)

(6,496)

(10,109)

Decrease in provisions


(162)

(529)

(483)

Decrease in employee benefits


(8,615)

(10,339)

(622)



53,562

63,844

168,041

Income taxes paid


(15,245)

(10,907)

(30,781)

Net cash flows from operating activities


38,317

52,937

137,260

 

Investing activities





Purchase of property, plant and equipment


(7,541)

(11,595)

(25,279)

Development and software costs capitalised


(6,979)

(597)

(1,298)

Proceeds from sale of property, plant and equipment


3,028

(21)

272

Disposal of business


-

3,807

3,807

Settlement of hedging derivatives


205

(2,455)

(3,157)

Interest received


540

912

1,389

Net cash flows from investing activities


(10,747)

(9,949)

(24,266)

 

Financing activities





Issue of ordinary share capital


328

338

2,312

Own ordinary shares acquired


(5,409)

(3,625)

(3,645)

Interest paid


(458)

(497)

(954)

Repayment of borrowings


(34)

(34)

(69)

Repayment of lease liabilities


(2,380)

(2,626)

(5,168)

Dividends paid on ordinary shares


(54,996)

-

(33,926)

Net cash flows from financing activities


(62,949)

(6,444)

(41,450)






Net (decrease)/increase in cash and cash equivalents


(35,379)

36,544

71,544






Cash and cash equivalents at 1 January


187,204

117,612

117,612

Effect of exchange rate fluctuations on cash held


1,536

(345)

(1,952)

Cash and cash equivalents at end of period


153,361

153,811

187,204

 

 

 

Notes to the Half Year Report

 

1.  Status of condensed consolidated interim statements, accounting policies and basis of significant estimates

 

General information

 

Rotork plc is a company domiciled in England and Wales. The Company has its premium listing on the London Stock Exchange.

 

The condensed consolidated interim financial statements for the six months ended 30 June 2021 are unaudited and the auditor has reported in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity'.

 

The information shown for the year ended 31 December 2020 does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006, statutory accounts for the year ended 31 December 2020 were approved by the Board on 1 March 2021 and delivered to the Registrar of Companies. The auditor's report on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006. The consolidated financial statements of the Group for the year ended 31 December 2020 are available from the Company's registered office or website.

 

Basis of preparation

 

The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2021 comprise the Company and its subsidiaries (together referred to as 'the Group'). These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the United Kingdom. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2020, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) adopted by the United Kingdom.

 

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 condensed consolidated interim financial information.

 

In forming this view, the on-going impact of COVID-19 on the Group has been considered. The directors have reviewed: the current financial position of the Group, which has net cash of £144m and unused committed debt facilities of £60m as at the period 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 any downside scenarios are considered remote and that the Group would continue to have headroom on available facilities.   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.

 

Critical accounting estimates and judgements

 

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience, and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the current financial year are discussed in the financial statements for the year ended 31 December 2020.

 

Accounting policies

 

The accounting policies applied and significant estimates used by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements for the year ended 31 December 2020, except for the adoption of new standards effective as of 1 January 2021. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

New accounting standards and interpretations

 

During April 2021 the IFRS Interpretations Committee finalised their agenda decision regarding configuration and customisation costs in Cloud Computing Arrangements (Software as a Service, 'SaaS') under IAS 38. This agenda decision offers clarification of the treatment of implementation costs which is relevant to the Group's ongoing Growth Acceleration Programme ('GAP'). This programme is driving technology investments which are predominantly SaaS arrangements with third party implementation partners.

 

The Group's investment in IT infrastructure is large scale and complex, involving the configuration and customisation of both cloud-based and on-premises systems using multiple independent service vendors and incorporating a wider business controls transformation. Capitalised expenditure as at 30 June 2021 is £26.1m (30 June 2020: £12.5m, 31 December 2020: £20.0m). Hosting and licencing costs for SaaS arrangements have already been expensed.

 

The Group intends to change its accounting policy for capitalisation and configuration costs, to align with the agenda decision. However, a detailed assessment will need to be made by management to determine the amount of costs that will be accounted for differently in accordance with IFRICs interpretation and, given the complexities described, it has not been possible to complete that assessment in time for those adjustments to be reflected in these interim financial statements. As a consequence of the proposed change in accounting policy it is anticipated that there will be a material level of previously-capitalised costs that will be expensed and presented as other adjustments in the income statement. The timing and quantum of cash outflows for these costs will be unchanged.

 

Other amendments

A number of other 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

Other amendments

Further narrow scope amendments have been issued which are mandatory for periods commencing on or after 1 January 2022. The application of these amendments will not have any material impact on the disclosures, net assets or results of the Group.

 

 

2.  Alternative performance measures

 

The Group uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believe these measures facilitate greater comparison of the Group's underlying results with prior periods and assessment of trends in financial performance.

 

The key alternative performance measures used by the Group include adjusted profit measures and organic constant currency (OCC). Explanations of how they are calculated and how they are reconciled to IFRS statutory results are set out below.

 

 

a.  Adjusted operating profit

 

Adjusted operating profit is the Group's operating profit excluding the amortisation of acquired intangible assets and other adjustments that are considered to be significant and where treatment as an adjusted item provides stakeholders with additional useful information to assess the trading performance of the Group on a consistent basis. Further details on these adjustments are given in note 4.

 

 

b.  Adjusted profit before tax

 

The adjustments in calculating adjusted profit before tax are consistent with those in calculating adjusted operating profit above.


First half

First half

Full year


2021

2020

2020


£000

£000

£000

Profit before tax

54,149

49,965

122,037

Adjustments:




Amortisation of acquired intangible assets

4,655

7,058

14,110

Redundancy and executive change costs

2,863

3,961

5,744

Other restructuring costs

2,782

-

115

Gain on disposal of properties

(1,569)

-

-

Adjusted profit before tax

62,880

60,984

142,006

 

 

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. Adjusted net profit attributable to ordinary shareholders is calculated as follows:


First half

First half

Full year


2021

2020

2020


£000

£000

£000





Net profit attributable to ordinary shareholders

40,884

38,237

93,328

Adjustments:




Amortisation of acquired intangible assets

4,655

7,058

14,110

Loss on disposal of businesses

-

-

-

Redundancy and executive change costs

2,863

3,961

5,744

Other restructuring costs

2,782

-

115

Gain on disposal of properties

(1,569)

-

-

Tax effect on adjusted items

(1,728)

(2,557)

(4,484)

Adjusted net profit attributable to ordinary shareholders

47,887

46,699

108,313

 

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 9).

 

 

d.  Return on capital employed

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

 


First half

First half

Full year


2021

2020

2020


£000

£000

£000

Adjusted operating profit




As reported

-

-

142,543

Rolling 12 months

144,041

145,003

-





Capital employed




Shareholders' funds

567,308

573,960

582,530

Cash and cash equivalents

(153,361)

(153,811)

(187,204)

Interest bearing loans and borrowings

9,089

10,176

9,150

Pension deficit net of deferred tax

17,228

35,153

30,965


440,264

465,478

435,441

Average capital employed

447,061 1

472,235 1

446,357 2

Return on capital employed

32.2%

30.7%

31.9%

 

1 defined as the average of the capital employed at June 2020, December 2020 and June 2021 (2019: June 2019, December 2019, and June 2020).

2 defined as the average of the capital employed at December 2019 and December 2020.

 

 

e.  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.

 

 

f.  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 2021 half year results are restated using the average exchange rates applied for the 2020 comparative period.

 

For businesses acquired, the full results are removed from the year of acquisition. In the following year, the results for the number of months equivalent to the pre-acquisition period in the prior year are removed. For disposals and closure of businesses, the results are removed from the current and prior periods.

 

There are no acquisitions or disposals in the current and prior periods.

 

Key headings in the income statement are reconciled to OCC as follows:


30 June

2021

 

Currency adjustment

OCC

30 June

2021

 

30 June

2020






Revenue

288,261

11,011

299,272

283,234

Cost of sales

(155,082)

(6,642)

(161,724)

(150,504)

Gross margin

133,179

4,369

137,548

132,730

Net overheads

(70,444)

(1,875)

(72,319)

(71,493)

Adjusted operating profit

62,735

2,494

65,229

61,237

Adjusted operating margin

21.8%


21.8%

21.6%






Adjusted profit before tax

62,880

2,494

65,374

60,984

Adjusted basic earnings per share

5.5p

-

5.5p

5.4p

 

 

g.  Flow through

Flow through is calculated as the change in adjusted operating profit as reported, divided into the change in revenue.

 


First half

First half

Change vs first half

Second half

Change vs second half


2021

2020

2020

2020

2020


£000

£000

£000

£000

£000







Revenue

288,261

283,234

5,027

321,310

(33,049)

Adjusted operating profit

62,735

61,237

1,498

81,306

(18,571)

Flow through



29.8%


56.2%

 

3.  Analysis by operating segment

 

The Group has chosen to organise the management and financial structure by the grouping of end markets. 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

· Water & Power

· Chemical, Process & Industrial

 

Unallocated expenses comprise corporate expenses.

 

 

 

 

Half year to 30 June 2021




 

Oil & Gas

 

£000

Water & Power

£000

Chemical, Process & Industrial£000

 

Unallocated

 

£000

 

Group

£000

Revenue



129,562

77,496

81,203

-

288,261









Adjusted operating profit



26,924

21,019

20,627

(5,835)

62,735

Amortisation of acquired intangibles assets

(3,300)

(433)

(922)

-

(4,655)

Segment result before other adjustments

23,624

20,586

19,705

(5,835)

58,080

Other adjustments







(4,076)

Operating profit







54,004

Net financing income







145

Income tax expense







(13,265)

Profit for the period







40,884

 

Half year to 30 June 2020




 

Oil & Gas

 

£000

Water & Power

£000

Chemical, Process & Industrial£000

 

Unallocated

 

£000

 

Group

£000

Revenue



137,189

73,194

72,851

-

283,234









Adjusted operating profit



28,969

20,654

16,769

(5,155)

61,237

Amortisation of acquired intangibles assets

(3,691)

(473)

(2,894)

-

(7,058)

Segment result before other adjustments

25,278

20,181

13,875

(5,155)

54,179

Other adjustments







(3,961)

Operating profit







50,218

Net financing expense







(253)

Income tax expense







(11,728)

Profit for the period







38,237

 

 

 

Full year to 31 December 2020




 

Oil & Gas

 

£000

Water & Power

£000

Chemical, Process & Industrial£000

 

Unallocated

 

£000

 

Group

£000

Revenue



292,173

157,766

154,605

-

604,544









Adjusted operating profit



67,949

47,037

38,553

(10,996)

142,543

Amortisation of acquired intangibles assets

(7,380)

(945)

(5,785)

-

(14,110)

Segment result before other adjustments

60,569

46,092

32,768

(10,996)

128,433

Other adjustments







(5,859)

Operating profit







122,574

Net financing expense







(537)

Income tax expense







(28,709)

Profit for the year







93,328

 

 

Revenue by location of subsidiary


First half

First half

Full year


2021

2020

2020


£000

£000

£000





UK

29,569

29,641

66,077

Italy

27,440

31,230

62,176

Rest of Europe

51,860

53,498

106,940

USA

51,619

58,514

109,929

Other Americas

19,560

13,597

35,965

Rest of World

108,213

96,754

223,457


288,261

283,234

604,544

 

 

4.  Other adjustments

 

The other adjustments are adjustments that management consider to be significant and where separate disclosure enables stakeholders to assess the underlying trading performance of the Group on a consistent basis.

 

The other adjustments to profit included in statutory profit are as follows:

 


First half

Full year


2021

2020


£000

£000

£000





Gain on disposal of properties

1,569

-

Redundancy and executive change costs

(2,863)

(5,744)

Other restructuring costs

(2,782)

(115)


(4,076)

(3,961)

(5,859)

 

In 2021 it was announced that the Group's operations in Cusago, Italy would cease during the second half of 2021 and the production. The closure of the Cusago facility will result in redundancy costs of £1,377,000 and other restructuring costs of £2,696,000.

 

A further £1,486,000 (2020: £3,961,000) redundancy and executive change costs have been incurred as a result of the progress made with the Growth Acceleration Programme.

 

The £1,569,000 (2020: £nil) gain on disposal of properties relates to the sale of two properties in the period.

 

All adjustments are included in administrative expenses. The adjustments are taxable or tax deductible in the country in which the expense is incurred.

 

5.  Finance income


First half

Full year


2021

2020


£000

£000

£000





Interest income

697

1,517

Foreign exchange gains

644

877


1,341

1,635

2,394

 

 

 

6.  Finance expense

 


First half

Full year


2021

2020


£000

£000





Interest expense

376

872

Interest expense on lease liabilities

206

499

Interest charge on pension scheme liabilities

275

609

Foreign exchange losses

339

951


1,196

1,888

2,931

 

 

 

7.  Income taxes

 

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for the year ending 31 December 2021 is 24.5%. This is higher than the effective tax rate for the year ended 31 December 2020 of 23.5%, reflecting the mix of taxable profits in group companies worldwide. 

 

The estimated adjusted effective tax rate for the year ending 31 December 2021, based on the adjusted profit before tax, is 23.9%. This is higher than the effective tax rate for the year ended 31 December 2020 of 23.4% due to the balance of profits within the group moving towards high tax jurisdictions.  The 2020 effective tax rate also benefitted from a one-off reduction in the deferred tax liability on unremitted earnings driven by a decrease in Indian withholding tax rates.

 

The Group continues to operate in many jurisdictions where local profits are taxed at their national statutory rates. As a result, the Group income tax charge will be subject to fluctuation depending on the actual profit mix. The Group continues to expect its effective corporation tax rate to be higher than the standard UK rate of 19% due to higher tax rates in the majority of overseas subsidiaries.

 

8.  Dividends


First half

First half

Full year


2021

2020

2020


£000

£000

£000

The following dividends were paid in the period per

qualifying ordinary share:

 




6.30p final dividend

54,996

-

-

3.90p interim dividend

-

-

33,926


54,996

-

33,926





The following dividends per qualifying ordinary share were

declared/proposed at the balance sheet date:








6.30p final dividend proposed

-

-

55,059

2.35p interim dividend declared (2020: 3.90p)

20,523

34,036

-


20,523

34,036

55,059

 

Last year in response to the COVID-19 pandemic the recommendation to pay a 3.90 pence per share final dividend in respect of 2019 was withdrawn and no dividend was paid in the period to 30 June 2020. An interim dividend of 3.90 pence was declared in the second half of 2020, which was equivalent to the previously deferred 2019 final dividend. In March 2021 a dividend, reflecting the combined interim and final dividends, was proposed in respect of the year to 31 December 2020 and this was paid in May 2021. This year we are returning to the regular schedule of dividend payments and are declaring an interim dividend of 2.35 pence which will be payable on 24 September 2021 to shareholders on the register on 20 August 2021.

 

9.  Earnings per share

 

Earnings per share is calculated using the profit attributable to the ordinary shareholders for the period and 873.1m shares (six months to 30 June 2020: 871.3m; year to 31 December 2020: 871.7m) being the weighted average ordinary shares in issue.

 

Diluted earnings per share is based on the profit for the year attributable to the ordinary shareholders and 874.2m shares (six months to 30 June 2020: 872.8m; year to 31 December 2020: 873.3m). 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.

 

10.  Inventories

 


30 June

2020

£000

30 June

2020

£000

31 Dec 2020

£000





Raw materials and consumables

49,461

Work in progress

3,755

Finished goods

9,861

15,610

11,736


63,077

81,166

61,467

 

 

11.  Pension schemes - Defined benefit deficit

 

The defined benefit obligation at 30 June 2021 of £22,184,000 (30 June 2020: £44,440,000; 31 December 2020: £38,517,000) is estimated based on the latest full actuarial valuations at 31 March 2019 for UK and US plans. The valuation of the most significant plan, namely the Rotork Pension and Life Assurance Scheme in the UK, has been updated at 30 June 2021 by independent actuaries to reflect updated assumptions regarding discount rates, inflation rates and asset values.

 


30 June

2021

%

30 June

2020

%

31 Dec 2020

%





Discount rate

1.8

Rate of inflation

3.2

2.8

2.9

 

In addition, the defined benefit plan assets and liabilities have been updated to reflect the regular payments, the £3.4 million payment made in respect of past service and the benefits earned during the period to 30 June 2021.

 

12.  Share capital and reserves

 

The number of ordinary 0.5p shares in issue at 30 June 2021 was 874,147,000 (30 June 2020: 872,730,000; 31 December 2020: 873,955,000). All issued shares are fully paid.

 

The Group acquired 1,468,000 of its own shares through purchases on the London Stock Exchange during the period (30 June 2020: 1,424,000; 31 December 2020: 1,431,000). The total amount paid to acquire the shares was £5,409,000 (30 June 2020: £3,625,000; 31 December 2020: £3,645,000), and this has been deducted from shareholders' equity. At 30 June 2021 the number of shares held in trust for the benefit of directors and employees for future payments under the Share Incentive Plan and Long-term incentive plan was 814,000 (30 June 2020: 990,000; 31 December 2020: 997,000). In the period 803,000 shares were transferred from the trust to employees in respect of the share investment plan and the overseas profit linked share plan.

 

In respect of the SAYE scheme, options exercised during the period to 30 June 2021 resulted in 193,000 ordinary 0.5p shares being issued (30 June 2020: 192,000 shares), with exercise proceeds of £328,000 (30 June 2020: £338,000). The weighted average market share price at the time of exercise was £3.46 (30 June 2020: £2.89) per share.

 

The share based payment charge for the period was £1,951,000 (30 June 2020: £2,172,000; 31 December 2020: £3,685,000).

 

13.  Loans and borrowings

 

The following loans and borrowings were issued and repaid during the six months ended 30 June 2021:

 


Lease liabilities

£000

Bank loans

£000

Preference shares

£000

Total

£000






Balance at 31 December 2020

8,302

797

40

9,139

Additions/drawdowns

2,534

-

-

2,534

Repayment

(2,380)

(34)

-

(2,414)

Disposals

(130)

-

-

(130)

Exchange differences

(8)

(32)

-

(40)

Balance at 30 June 2021

8,318

731

40

9,089




Lease liabilities

£000

Bank loans

£000

Preference shares

£000

Total

£000






Current

3,972

66

-

4,038

Non-current

4,346

665

40

5,051

Balance at 30 June 2021

8,318

731

40

9,089

 

 

The Group has committed loan facilities of £60,000,000 (First half 2020: £60,000,000; Full year 2020: £60,000,000), of which £nil (30 June 2020: £nil; 31 December 2020: £nil) was drawn down at the balance sheet date. The facilities attract a blended interest rate of LIBOR plus 0.65%.

 

14.  Share-based payments

 

A grant of share options was made on 24 March 2021 to selected members of senior management at the discretion of the Remuneration Committee. The key information and assumptions from this grant were:

 


Equity Settled
TSR condition

Equity Settled

EPS condition

Equity Settled

ROIC condition





Grant date

24 March 2021

24 March 2021

24 March 2021

Share price at grant date

£3.62

£3.62

£3.62

Shares awarded under scheme

401,664

401,664

401,666

Vesting period

3 years

3 years

3 years

Expected volatility

34.0%

34.0%

34.0%

Risk free rate

0.1%

0.1%

0.1%

Expected dividends expressed as a dividend yield

nil

nil

nil

Probability of ceasing employment before vesting

5% p.a.

5% p.a.

5% p.a.

Fair value

£2.37

£3.62

£3.62

 

The basis of measuring fair value is consistent with that disclosed in the 2020 Annual Report & Accounts.

 

 

 

15.  Related parties

 

The Group has a related party relationship with its subsidiaries and with its directors and key management. A list of subsidiaries is shown in the 2020 Annual Report and Accounts. Transactions between key subsidiaries for the sale and purchase of products or between the subsidiary and parent for management charges are priced on an arm's length basis.

 

There were no significant changes in the nature and size of related party transactions for the period to those reported in the 2020 Annual Report and Accounts.

 

 

16.  Financial instruments fair value disclosure

 

The Group held forward currency contracts designated as hedge instruments in a cash flow hedging relationship. At 30 June 2021 the fair value of these contracts was a net asset of £1,636,000 (30 June 2020: a net liability of £2,539,000; 31 December 2020: a net asset of £1,414,000). The fair value was estimated using period end spot rates adjusted for the forward points to the appropriate value dates, and gains and losses are taken to equity estimated using market foreign exchange rates at the balance sheet date. All derivative financial instruments are categorised at Level 2 of the fair value hierarchy. There was no ineffectiveness to be recorded from the use of foreign exchange contracts.

 

The other financial instruments, comprising trade and other receivables/payables and contingent consideration, are classified as Level 3 in the fair value hierarchy and their carrying amount is deemed to reflect the fair value. The Group had no derivative financial instruments in the current or previous year with fair values that would be classified as Level 3 in the fair value hierarchy.

 

 

Shareholder information

 

The interim report and half year results presentation is available on the Rotork website at www.rotork.com .

 

General shareholder contact numbers:

Shareholder General Enquiry Number (UK):  0371 384 2280

International Shareholders - General Enquiries:  (00) 44 121 415 7047

 

For enquires regarding the Dividend Reinvestment Plan (DRIP) contact:

 

The Share Dividend Team
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

 

Tel: 0371 384 2280

 

 

Group information

 

Secretary and registered office:

Stuart Pain

Rotork plc

Rotork House

Brassmill Lane

Bath

BA1 3JQ

 

Company website:

www.rotork.com

 

Investors section:

http://www.rotork.com/en/investors/

 

 

 

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