Interim Results

IMI PLC 6 September 1999 IMI plc Interim Results 1999 IMI plc, the major international engineering group, today announced its interim results for the half year ended 30 June 1999. 1999 1998 Sales £706m £767m Results before goodwill amortisation and exceptional items: Profit before interest £71.0m £77.2m Profit before tax £67.4m £73.5m Adjusted earnings per share 12.7p 14.7p Dividend per share 5.8p 5.7p Interest cover (times) 20 21 Gearing 102% 42% * First half results affected by fall in market demand and expenditure on cost reduction. * Excellent contribution from newly acquired Polypipe. * Strategic and operational actions will enhance future prospects. Interim Results 1999 Chairman's Statement As anticipated, the results for the first half were affected by the fall in market demand seen in the latter months of 1998, and also by expenditure of £10.2 million (1998: £4.8 million) on cost reduction measures. However, this was partly offset by an excellent contribution from newly acquired Polypipe. Sales for the six months were £706 million (1998: £767 million) and profit before exceptional items, interest and goodwill amortisation was £71.0 million (1998: £77.2 million). Interest costs were £3.6 million (1998: £3.7 million). Profit before exceptional items, goodwill amortisation and tax was £67.4 million (1998: £73.5 million). The tax charge on profit before exceptional items and goodwill amortisation is 34% (1998: 30%, underlying rate 33% after adjusting for benefit from Foreign Income Dividends). Adjusted earnings per share was 12.7p (1998: 14.7p). Since the date of acquisition Polypipe made an operating profit of £9.2 million on sales of £51 million. After taking into account interest charges on the acquisition cost, it is estimated that Polypipe, prior to goodwill amortisation of £1.5 million, added £7.0 million to profit before tax and 1.3p to earnings per share. Disposal of the Marston aerospace businesses resulted in an exceptional profit of £6 million. Balance sheet gearing at 30 June 1999 was 102% and interest cover, excluding exceptional profits, was 20 times. The Board has decided to increase the interim dividend to 5.8p (1998: 5.7p). Trading Review The comments that follow relate to continuing operations and compare performance with the first half of 1998. Hydronic Controls The contribution from Polypipe in the six weeks between acquisition and the end of June was encouraging. Excluding Polypipe, Hydronic Controls sales were down £35 million to £184 million (1998: £219 million). This was the result of the lower copper price, market weakness and the closure of the Wolverhampton Metal business at the end of 1998. Results from our German operations were affected by lower volumes in the early months of the year but improved late in the period, by which time the UK market was also showing welcome signs of recovery. TA Hydronics continued to grow its balancing valve products, especially in Scandinavia. We also continued with the successful rapid expansion of our Eastern European operations. The reduction in sales volume, pricing pressure and increasing losses in the copper smelting activity resulted in operating profit, excluding Polypipe, £4.1 million lower at £22.5 million (1998: £26.6 million). Efforts across the businesses to cut costs and preserve margins are proving effective. Drinks Dispense Sales and operating profit were £192 million (1998: £196 million) and £20.2 million (1998: £21.4 million) respectively. General weakness in Western Europe and Asia, together with a slowdown in activity with one of our major soft drinks customers, particularly towards the end of the second quarter, reduced sales by 2% and will continue to impact in the second half of the year. Market reaction to a number of new product releases has, however, been positive which augers well for medium term prospects. Melrose Displays, acquired in January, is settling in well with Cannon's successful point of purchase equipment business. Fluid Power Operating profit was £13.3 million (1998: £20.7 million) after planned rationalisation costs of £6.5 million (1998: £1.8 million). At £214 million, (1998: £244 million) sales were lower than last year's strong performance as the weakness in market demand experienced in the later months of 1998 continued. This affected sales to the North American automotive assembly market, but increased incoming orders provide a good platform for the second half. The rest of North America proved fairly robust and we made further useful progress in the commercial vehicle market. Volumes continued at second half 1998 levels in the UK but declined in Continental Europe, particularly in Germany. Price competition intensified throughout Europe. The integration of Herion and other rationalisation measures continued throughout the Group leading to a lower operating cost base and to a 10% reduction in the workforce. Encouragingly, the order book improved as the year progressed. Energy Controls Sales were £59 million (1998: £65 million) and operating profit £5.2 million (1998: £6.0 million). CCI increased sales of severe service valves in the USA but this was more than offset by lower sales in the Asia Pacific region following the low order intake in the second half of 1998. Nuclear Components made good progress but Mecafrance and Safety Systems experienced reduced demand. Eley sporting ammunition improved profit on lower sales. Prospects in Energy Controls for the second half are encouraging. Strategic Development We were delighted with the outcome of our recommended bid for Polypipe, which was launched on 15 April 1999 and declared unconditional on 19 May 1999. The total cost of the acquisition, including fees and expenses of both IMI and Polypipe, was £350 million. This, our largest acquisition to date, further advanced our strategy of adding new products, materials and market opportunities to our own impressive portfolio. The integration of Polypipe's operations will be achieved without significant rationalisation costs and we continue to be encouraged by the opportunities for development which the combined businesses present. In March we disposed of the Marston aerospace businesses for £16.6 million. After a strategic review of the smelting business of IMI Refiners we have concluded that the current unacceptable results are unlikely to improve materially. Consequently, we are proposing, subject to consultation, to close the smelting operation at an exceptional cost of around £20 million (estimated cash impact £10 million). Outlook Orders for the Group as a whole are now improving and there are growing signs of confidence returning to many of our major market sectors. We continue to implement cost reduction measures to lower our cost base. The strategic and operational actions we have taken will enhance future prospects. GROUP PROFIT AND LOSS ACCOUNT --------------------------------------------------------------------- Before exceptional items and goodwill Goodwill Exceptional amortisation amortisation items Notes £m £m £m --------------------------------------------- Turnover 1 Continuing operations 646 Acquisitions 54 --------------------------------------------- Total continuing operations 700 Discontinued operations 6 -------------------------------------------- Total turnover 706 --------------------------------------------- Operating profit ------------------------------------- Continuing operations 1 61.1 (0.4) Acquisitions 9.3 (1.6) ------------------------------------- Total continuing operations 70.4 (2.0) Discontinued operations 0.6 -------------------------------------- Operating profit 71.0 (2.0) Net interest payable (3.6) --------------------------------------------- Profit before exceptional items and taxation 67.4 (2.0) Profit on disposal of discontinued operations 2 6.0 --------------------------------------------- Profit before taxation 67.4 (2.0) 6.0 Tax on profit 3 (22.9) - (2.0) --------------------------------------------- Profit after taxation 44.5 (2.0) 4.0 Equity minority interests - --------------------------------------------- Profit for the period 44.5 (2.0) 4.0 --------------------------------------------- Dividends paid and proposed 4 Transfer to reserves Earnings per share 5 Diluted earnings per share 5 Adjusted earnings per share 5 ------------------------------------------------------------------------------ 6 months to 6 months to Year to 30 June 30 June 31 December 1999 1998 1998 Total Total Total Notes £m £m £m -------------------------------------------- Turnover 1 Continuing operations 646 724 1402 Acquisitions 54 - - ------------------------------------------- Total continuing operations 700 724 1402 Discontinued operations 6 43 53 ------------------------------------------- Total turnover 706 767 1455 ------------------------------------------- Operating profit 1 -------------------------------------- Continuing operations 60.7 74.7 154.3 Acquisitions 7.7 - - -------------------------------------- Total continuing operations 68.4 74.7 154.3 Discontinued operations 0.6 2.5 3.5 -------------------------------------- Operating profit 69.0 77.2 157.8 Net interest payable (3.6) (3.7) (5.6) -------------------------------------------- Profit before exceptional items and taxation 65.4 73.5 152.2 Profit on disposal of discontinued operations 2 6.0 14.8 14.8 -------------------------------------------- Profit before taxation 71.4 88.3 167.0 Tax on profit 3 (24.9) (26.1) (49.7) ------------------------------------------- Profit after taxation 46.5 62.2 117.3 Equity minority interests - - (0.3) ------------------------------------------- Profit for the period 46.5 62.2 117.0 Dividends paid and proposed 4 (20.3) (20.0) (51.9) ------------------------------------- Transfer to reserves 26.2 42.2 65.1 ------------------------------------- Earnings per share 5 13.3p 17.8p 33.5p Diluted earnings per share 5 13.3p 17.7p 33.4p Adjusted earnings per share 5 12.7p 14.7p 30.5p GROUP BALANCE SHEET -------------------------------------------------------------------------- 30 June 30 June 31 December 1999 1998 1998 Notes £m £m £m -------------------------------------------- Fixed assets Tangible assets 410.8 306.6 312.5 Goodwill 6 251.5 17.5 20.1 ------------------------------------- 662.3 324.1 332.6 ------------------------------------- Current assets Stocks 295.5 256.7 252.2 Debtors 334.7 296.0 238.1 Investments 4.8 12.6 12.6 Cash and deposits 77.9 48.4 47.0 ------------------------------------- 712.9 613.7 549.9 Creditors: amounts falling due within one year Borrowings and finance leases (113.1) (36.8) (43.9) Other creditors (338.2) (268.2) (260.5) ------------------------------------- Net current assets 261.6 308.7 245.5 ------------------------------------- Total assets less current liabilities 923.9 632.8 578.1 Creditors: amounts falling due after more than one year Borrowings and finance leases (411.4) (172.7) (88.9) Other creditors (25.9) (27.9) (26.2) Provisions for liabilities and charges 7 (50.1) (45.4) (53.5) ------------------------------------- Net assets 436.5 386.8 409.5 ------------------------------------- ------------------------------------- Capital and reserves Called up share capital 87.6 87.5 87.5 Share premium account 129.9 128.2 129.2 Revaluation reserve 1.0 1.0 1.0 Other reserves 1.6 1.6 1.6 Profit and loss account 216.4 168.5 190.2 ------------------------------------- Equity shareholders' funds 436.5 386.8 409.5 ------------------------------------- ------------------------------------- GROUP CASH FLOW STATEMENT --------------------------------------------------------------------------- 6 months to 6 months to Year to 30 June 30 June 31 December 1999 1998 1998 Notes £m £m £m ------------------------------------------- Reconciliation of operating profit to net cash inflow from operating activities Operating profit 69.0 77.2 157.8 Depreciation/amortisation 30.0 26.2 55.1 Stocks decrease/(increase) 1.9 (9.3) 6.4 Debtors (increase)/decrease (38.3) (57.5) 27.1 Creditors and provisions increase/(decrease) 5.5 4.8 (45.6) Exceptional items - (2.1) (3.3) -------------------------------------------- Net cash inflow from operating activities 8 68.1 39.3 197.5 -------------------------------------------- -------------------------------------------- CASH FLOW STATEMENT Net cash inflow from operating activities 68.1 39.3 197.5 Return on investments and servicing of finance 8 (3.2) (3.9) (5.7) Taxation (18.2) (18.0) (43.1) Capital expenditure and financial investment (12.8) (19.3) (48.5) Acquisitions and disposals 8 (319.0) 55.6 49.9 Equity dividends paid (31.9) (30.0) (50.0) -------------------------------------------- Cash flow before use of liquid resources and (317.0) 23.7 100.1 financing Management of liquid resources 1.4 (3.7) 7.9 Financing Issue of ordinary shares 0.8 3.1 4.2 Increase/(decrease) in borrowings 8 361.7 (24.7) (127.7) -------------------------------------------- 362.5 (21.6) (123.5) -------------------------------------------- Increase/(decrease) in cash in the period 46.9 (1.6) (15.5) -------------------------------------------- -------------------------------------------- Reconciliation of net cash to movement in net borrowings Increase/(decrease) in cash in the period 46.9 (1.6) (15.5) Cash (inflow)/outflow from borrowings (361.7) 24.7 127.7 Cash (inflow)/outflow from movement in liquid resources (1.4) 3.7 (7.9) -------------------------------------------- Change in borrowings resulting from cash flows (316.2) 26.8 104.3 Borrowings assumed with acquisitions (49.0) (3.3) - Currency translation differences 4.4 4.5 (1.0) -------------------------------------------- Movement in net borrowings in the period (360.8) 28.0 103.3 Net borrowings at start of period (85.8) (189.1) (189.1) -------------------------------------------- Net borrowings at end of period (446.6) (161.1) (85.8) -------------------------------------------- -------------------------------------------- STATEMENT OF GROUP TOTAL RECOGNISED GAINS AND LOSSES --------------------------------------------------------------------------- 6 months 6 months Year to to 30 June to 30 June 31 December 1999 1998 1998 £m £m £m ------------------------------------ Profit for the period 46.5 62.2 117.0 Currency translation differences - (3.7) (0.2) ------------------------------------ Total recognised gains and losses for the period 46.5 58.5 116.8 ------------------------------------ GROUP HISTORICAL COST PROFITS AND LOSSES --------------------------------------------------------------------------- There is no material difference between the profit before taxation and the retained profit for each period as shown in the Group profit and loss account and their historical cost equivalent. RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS --------------------------------------------------------------------------- 6 months 6 months Year to to 30 June to 30 June 31 December 1999 1998 1998 £m £m £m ------------------------------------ Profit for the period 46.5 62.2 117.0 Dividends (20.3) (20.0) (51.9) ------------------------------------ 26.2 42.2 65.1 Other recognised gains and losses relating to the period - (3.7) (0.2) Contributions to the Quest - - (0.3) New ordinary share capital issued 0.8 3.1 4.2 Goodwill on acquisitions made during prior periods - - (4.5) Purchased goodwill on businesses sold - 19.8 19.8 ------------------------------------ Net increase in shareholders' funds for the period 27.0 61.4 84.1 Shareholders' funds at start of period 409.5 325.4 325.4 ------------------------------------ Shareholders' funds at end of period 436.5 386.8 409.5 ------------------------------------ ------------------------------------ NOTES TO THE INTERIM FINANCIAL STATEMENTS 1. Segmental Analysis Turnover Operating Profit ----------------------- --------------------- 6 mths 6 mths Year 6 mths 6 mths Year to to to to to to 30 June 30 June 31 Dec 30 June 30 June 31 Dec 1999 1998 1998 1999 1998 1998 £m £m £m £m £m £m ------------------------ ----------------------- (i) by class of business: Hydronic Controls 235 219 431 31.7 26.6 61.5 Drinks Dispense 192 196 370 20.2 21.4 38.5 Fluid Power 214 244 464 13.3 20.7 39.8 Energy Controls 59 65 137 5.2 6.0 14.9 ------------------------ ----------------------- Continuing operations 700 724 1402 70.4 74.7 154.7 ------------------------ ----------------------- (ii) by geographical origin: UK 208 195 370 21.7 18.8 38.6 Rest of Europe 245 280 545 23.2 30.1 64.8 The Americas 217 219 430 24.4 25.5 49.6 Asia/Pacific 30 30 57 1.1 0.3 1.7 ----------------------- ----------------------- Continuing operations 700 724 1402 70.4 74.7 154.7 ------------------------ ----------------------- turnover by (iii) geographical destination: UK 161 151 Germany 103 133 Rest of Europe 176 176 USA 187 183 Asia 26 30 Rest of World 47 51 --------------- Continuing operations 700 724 --------------- 1. Segmental Analysis Operating Assets ------------------------- 30 June 30 June 31 Dec 1999 1998 1998 £m £m £m ------------------------- (i) by class of business: Hydronic Controls 320 159 148 Drinks Dispense 139 135 121 Fluid Power 200 257 220 Energy Controls 58 36 34 ------------------------- Continuing operations 717 587 523 ------------------------- (ii) by geographical origin: UK 310 170 154 Rest of Europe 227 223 202 The Americas 156 173 145 Asia/Pacific 24 21 22 ------------------------- Continuing operations 717 587 523 -------------------------- Acquisitions Acquisitions comprise sales of £51m and operating profit of £9.2 m in respect of Polypipe and sales of £3m and profit of £0.1m in respect of Melrose Displays. Polypipe is reported within Hydronic Controls from its acquisition in May 1999 and Melrose Displays in Drinks Dispense since its acquisition in January 1999. Profits are stated before goodwill amortisation of £1.6m. 1998 comparatives for Fluid Power include sales of £21m (mainly in Germany) and profits of £0.7m in respect of 1997 relating to the acquisition of Herion. Discontinued operations The amounts shown for discontinued operations comprise the turnover and operating profits of the Marston aerospace businesses, previously reported within Energy Controls and located in the UK. 1998 figures also include a number of engineering businesses disposed of in that year. 2. Exceptional items Profit on disposal of discontinued operations of £6m relates to the sale of the Marston aerospace businesses. The profit in 1998 comprises the surplus arising on the sale of a number of engineering businesses disposed of in that year. 3. Taxation The effective tax rate on the profit before exceptional items and goodwill amortisation is 34% (year 1998: 30%, underlying rate 33% after adjusting for the benefit from Foreign Income Dividends). 4. Dividends The Directors have declared an interim dividend for the current year of 5.8p per share (six months to 30 June 1998: 5.7p) which will be paid on 18 October 1999 to shareholders on the register on 17 September 1999. 5. Earnings per share The weighted average number of shares in issue during the period was 350.3m, 350.5m diluted for the effect of outstanding share options (six months to 30 June 1998: 349.0m, 351.4m diluted). Earnings per share have been calculated on earnings of £46.5m, (six months to 30 June 1998: £62.2m) and adjusted earnings per share on earnings of £44.5m (six months to 30 June 1998: £51.4m). Adjusted earnings per share figures exclude goodwill amortisation and exceptional items and have been shown because the Directors consider that they give a more meaningful indication of the underlying performance. 6. Goodwill Goodwill on businesses acquired in the first half of 1999 was £230m in respect of Polypipe and £3m in respect of other acquisitions. An assessment of the fair value of Polypipe assets has not yet been made. This will be finalised during the second half of the year. 7. Provisions for liabilities and charges To comply with the recently published Financial Reporting Standard ('FRS') 12 Provisions, Contingent Liabilities and Contingent Assets, a new policy has been adopted by the Group and is applied for the first time in this Interim Report. Adoption of the standard has had no material impact on any reported figures. 8. Cash flow Of the £68.1m net cash inflow from operating activities, £20.4m was contributed by Polypipe and of the £3.2m servicing of finance charge, £2.2m resulted from the acquisition of Polypipe. Acquisitions and disposals outflow represents £330.5m relating to Polypipe and £5.1m relating to Melrose less £16.6m received from the disposal of the Marston aerospace businesses. A further £12m outflow in relation to Polypipe occurred in July 1999. The acquisition of Polypipe was funded by increased borrowings. 9. Exchange rates The profit and loss accounts of overseas subsidiaries are translated into sterling at average rates of exchange for the period, balance sheets are translated at period end rates. The main currencies are: Average period rates Balance sheet rates --------------------- --------------------------- June June Dec 30 June 30 June 31 Dec 1999 1998 1998 1999 1998 1998 ------ ------ ------ ------- ------- --------- Deutschemark 2.91 2.98 2.92 2.99 3.01 2.77 US Dollar 1.62 1.65 1.66 1.58 1.67 1.66 10. Year 2000 The Group continues to monitor progress against detailed Year 2000 action plans. Most business critical systems are now compliant and those minor issues remaining will be resolved well before the end of the year. 11. Financial information This interim statement has been reviewed by the Group's auditors having regard to the bulletin Review of Interim Financial Information, issued by the Auditing Practices Board. A copy of their unqualified review opinion is attached. The comparative figures for the year ended 31 December 1998 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The Interim Report will be posted to shareholders on 9 September 1999 and will be available from the same date at the Company's registered office, Kynoch Works, Witton, Birmingham, B6 7BA. Enquiries to: Gary Allen - Chief Executive - Tel: 0171 329 0096 Nick Paul - Deputy Chief Executive - Tel: 0171 329 0096 Trevor Slack - Finance Director - Tel: 0171 329 0096 Gerard Whelan - Corporate Communications - Tel: 0171 329 0096 Nigel Gilpin - Controller - Tel: 0121 356 4848 Press release available on the Internet at www.imi.plc.uk Issued by: Ben Padovan - Shandwick International - Tel: 0171 329 0096 Independent review report by KPMG Audit Plc to IMI plc Introduction We have been instructed by the company to review the financial information set out on pages 3 to 9 and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The Listing Rules of the London Stock Exchange require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 1999. KPMG Audit Plc Chartered Accountants Birmingham

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