Interim Results

IMI PLC 10 September 2001 10 September 2001 IMI plc presents its Strategy and First Half Results Gary Allen, Chairman commented: 'The Board has completed its strategy review and formulated plans to reshape the Group. This will involve concentrating on operations representing around 65% of current sales. We are repositioning these businesses, with target markets more closely defined, a heavy emphasis on the development of large global customers, and a major redistribution in assets and resources away from high cost manufacturing into high value, knowledge-based, systems engineering and service provision.' 2001 2000 Sales £847m £813m Results before restructuring & rationalisation * Operating profit £82.6m £91.1m Profit after interest £68.6m £77.7m Adjusted earnings per share 14.5p 15.0p Profit before tax £68.4m £66.4m Earnings per share 15.2p 12.2p Operating cash flow £49.3m £18.0m Dividend per share 6.0p 6.0p * Before goodwill amortisation and exceptional items CHAIRMAN'S STATEMENT In my first statement as Chairman I am pleased to report that the new management structure put into effect at the beginning of the year has enabled sound progress to be made in tackling the operational and strategic challenges facing the Group. OVERVIEW The strategy review announced earlier in the year has been completed and the repositioning of IMI is now well underway. The financial results for the six months to 30 June 2001 are in line with our expectations at the time of issuing the trading update on 3 July. A strong cash performance produced operating cash flow of £49m (2000: £18m) which helped improve free cash flow by £36m over the first half of last year. The interim dividend will be unchanged at 6.0p. STRATEGY The Board has completed its strategy review and formulated plans to reshape the Group. This will involve concentrating on operations representing around 65% of current sales. We are repositioning these businesses, with target markets more closely defined, a heavy emphasis on the development of large global customers, and a major redistribution in assets and resources away from high cost manufacturing into high value, knowledge-based, systems engineering and service provision. These businesses will be grouped as follows: Fluid Controls The provision of advanced flow control systems serving the following industry segments: - Pneumatics systems, with a special emphasis on large global customers in niche, high growth industry segments. - Control valves and related systems in the management of fluids in severe service applications for the power generation, oil & gas, and petrochemical industries. - Control systems for the regulation of climatic conditions in large commercial buildings. Current businesses comprise Fluid Power (Norgren), Severe Service (CCI) and Indoor Climate (TA/Heimeier), with combined sales of approximately £700m. Retail Dispense The provision of innovative merchandising, dispense, and data management systems for the world's leading consumer brands companies. Current businesses are Beverage Dispense (Cornelius) and Point of Purchase (Cannon) with combined sales of approximately £400m. These businesses share the same characteristics, enjoying leadership positions in niche, but global, markets and benefit from strong fundamentals in terms of market growth, added value and the potential for differentiation through technology or service. Opportunities for further growth through acquisition are considerable. The £60m restructuring charge announced in March will be primarily directed at delivering improvements in these businesses. In the first half of the year £ 10.2m of the £11.8m expenditure on restructuring and rationalisation costs was in these areas. The remaining parts of the Group comprise sound businesses. Current market positions will be robustly managed, with selective investment and cost reduction measures where value can be enhanced. Disposals will be made over time consistent with realising maximum shareholder value. The acquisitions of BTG (Severe Service Valves) and Display Technologies (Point of Purchase) and the disposal of most of the smaller Energy Controls businesses, together with the restructuring to date, are the first steps in implementing this strategy. We believe that the combination of niche, market-leading businesses, sharing a distinctive competence in the development of large global customers, will deliver both the growth and consistency required to maximise shareholder value. RESULTS SUMMARY Reported sales at £847m were 4% higher than last year but after adjusting for acquisitions, disposals and exchange rates, sales were 1.5% lower. Operating profit before restructuring and rationalisation costs and goodwill amortisation was around 9% lower at £82.6m (2000: £91.1m). Restructuring and rationalisation costs charged against profit in the first half were £11.8m (2000: £5.0m). The effective rate of tax for 2001 on profit before goodwill amortisation and exceptional items, is expected to be 25%. The underlying rate of tax is around 32%. Adjusted earnings per share (before restructuring and rationalisation costs, goodwill amortisation and exceptional items), were 14.5p (2000: 15.0p revised to exclude rationalisation costs). Basic earnings per share were 15.2p (2000: 12.2p). Borrowings at the end of June were £414m with gearing at 81% (June 2000: 100%; December 2000: 84%). Interest cover for the six months based on operating profit before exceptional items and goodwill amortisation was 5 times. OPERATIONAL REVIEW The first half of 2001 proved to be every bit as challenging as expected as the economic climate in the US deteriorated. Towards the end of the second quarter European confidence began to wane. Faced with these difficult conditions we responded with early cost reduction measures and tight expenditure controls. Nevertheless, reduced volumes and pricing pressures meant lower profits than last year. Those of our businesses with exposure to the German construction market, principally Heimeier thermostatic radiator valves and copper tube & fittings, were faced with a further 20% reduction in demand during the first half. Polypipe Building Products succeeded in holding on to volume and started to rebuild margins through a combination of price increases and raw material cost reductions. The other Polypipe businesses experienced difficult trading conditions and work continues to improve profitability. Cornelius, our Beverage Dispense business, successfully countered the slowdown in the US food service market with market share gains and a strong contribution from recently introduced new products. This together with European volumes ahead of last year, excellent progress in UK beer business and a lower cost base enabled Cornelius to produce a solid first half performance. Cannon sales were ahead of last year with a strong performance from the mainstream POP (Point of Purchase) business. The integration of Display Technologies purchased in June is going well. The US slowdown had its biggest impact in Fluid Power where sales to the automotive and commercial vehicle sectors were lower by up to 40% and general industrial sales fell by around 15%. Despite these market conditions, strong operational improvements at Norgren Automotive (ISI) produced better results. UK demand continued to be subdued. Mainland Europe was ahead of last year but there are signs that the second half will be weaker. Strong demand continues in the power generation, oil and gas markets providing good opportunities for our Severe Service business. We continued to invest in sales and engineering resource to provide the platform for future growth and although first half margins as a result are a little lower, we are confident this business will have a good second half. OUTLOOK In the short term, the challenging trading environment in North America and, more recently, Europe is likely to continue. A strong performance in Beverage Dispense and Severe Service, together with management actions already taken, will lessen the impact of a deteriorating position in the European construction and fluid power markets. In the longer term, the fundamentals surrounding our chosen segments look very encouraging, and we are confident that the strategic actions we are taking will deliver attractive returns. GROUP PROFIT AND LOSS ACCOUNT -------------------------------------------------------------------------------- 6 months to 30 June 2001 -------------------------------- Before exceptional Exceptional items & items & goodwill goodwill amortisation amortisation Total Notes £m £m £m -------------------------------------- Turnover 1 Continuing operations 814 814 Acquisitions 11 11 -------------------------------------- Total continuing operations 825 825 Discontinued operations 22 22 -------------------------------------- Total turnover 847 847 -------------------------------------- Operating profit 1 -------------------------------- Continuing operations before 80.4 80.4 goodwill amortisation and rationalisation/restructuring Acquisitions 1.0 1.0 -------------------------------- Total continuing operations 81.4 81.4 Rationalisation/restructuring (11.8) (11.8) Goodwill amortisation (8.0) (8.0) Discontinued operations 1.2 1.2 -------------------------------- Operating profit 70.8 (8.0) 62.8 Exceptional items Profit on disposal of 1 19.6 19.6 discontinued operations Profit on disposal of property - -------------------------------- Profit before interest 70.8 11.6 82.4 Net interest payable (14.0) (14.0) -------------------------------------- Profit before taxation 56.8 11.6 68.4 Tax on profit 2 (14.2) (14.2) Tax on exceptional profit (0.5) (0.5) -------------------------------------- Profit after taxation 42.6 11.1 53.7 Equity minority interests (0.4) (0.4) -------------------------------------- Profit for the period 42.2 11.1 53.3 -------------------------------------- Dividends paid and proposed 3 (21.1) ------ Transfer to reserves 32.2 ------ Earnings per share 4 15.2p Diluted earnings per share 4 15.2p Adjusted earnings per share 4 14.5p -------------------------------------------------------------- 6 months to Year to 30 June 2000 31 December 2000 Before Before exceptional exceptional items & items & goodwill goodwill amortisation Total amortisation Total Notes £m £m £m £m -------------------------- ------------------- Turnover 1 Continuing operations 782 782 1556 1556 Acquisitions - - - - -------------------------- ------------------- Total continuing operations 782 782 1556 1556 Discontinued operations 31 31 59 59 -------------------------- ------------------- Total turnover 813 813 1615 1615 -------------------------- ------------------- Operating profit 1 -------------------------- ------------------- Continuing operations before 88.3 88.3 176.6 176.6 goodwill amortisation and rationalisation/restructuring Acquisitions - - - - -------------------------- ------------------- Total continuing operations 88.3 88.3 176.6 176.6 Rationalisation/restructuring (5.0) (5.0) (6.6) (6.6) Goodwill amortisation (6.3) (15.2) Discontinued operations 2.8 2.8 6.3 6.3 -------------------------- ------------------- Operating profit 86.1 79.8 176.3 161.1 Exceptional items Profit on disposal of 1 - 0.5 discontinued operations Profit on disposal of - 10.0 property -------------------------- ------------------- Profit before interest 86.1 79.8 176.3 171.6 Net interest payable (13.4) (13.4) (28.0)(28.0) -------------------------- ------------------- Profit before taxation 72.7 66.4 148.3 143.6 Tax on profit 2 (23.3) (23.3) (47.4) (47.4) Tax on exceptional profit (0.9) -------------------------- ------------------- Profit after taxation 49.4 43.1 100.9 95.3 Equity minority interests (0.3) (0.3) (0.3) (0.3) -------------------------- ------------------- Profit for the period 49.1 42.8 100.6 95.0 --------------- -------------- Dividends paid and proposed 3 (21.1) (54.5) --------- -------- Transfer to reserves 21.7 40.5 --------- -------- Earnings per share 4 12.2p 27.1p Diluted earnings per share 4 12.2p 27.0p Adjusted earnings per share 4 15.0p 29.9p GROUP BALANCE SHEET -------------------------------------------------------------------------------- 30 June 30 June 31 December 2001 2000 2000 £m £m £m ------------------------------------------- Fixed assets Intangible assets 306.6 246.1 286.4 Tangible assets 374.6 392.2 386.9 ------------------------------------------- 681.2 638.3 673.3 ------------------------------------------- Current assets Stocks 328.4 317.1 325.4 Debtors 380.9 383.6 332.7 Investments 2.1 2.0 4.4 Cash and deposits 59.0 39.4 50.4 ------------------------------------------- 770.4 742.1 712.9 Creditors: amounts falling due within one year Borrowings and finance leases (123.5) (87.6) (100.0) Other creditors (354.1) (337.0) (335.5) ------------------------------------------- Net current assets 292.8 317.5 277.4 ------------------------------------------- Total assets less current 974.0 955.8 950.7 liabilities Creditors: amounts falling due after more than one year Borrowings and finance leases (349.8) (406.1) (353.4) Other creditors (36.3) (30.9) (37.6) Provisions for liabilities and (72.9) (62.7) (81.7) charges ------------------------------------------- Net assets 515.0 456.1 478.0 ------------------------------------------- Capital and reserves Called up share capital 87.9 87.8 87.9 Share premium account 132.3 131.6 132.1 Revaluation reserve 1.0 1.0 1.0 Other reserves 1.6 1.6 1.6 Profit and loss account 289.4 234.1 255.4 ------------------------------------------- Equity shareholders' funds 512.2 456.1 478.0 ------------------------------------------- Minority interests 2.8 - - ------------------------------------------- 515.0 456.1 478.0 ------------------------------------------- GROUP CASH FLOW STATEMENT -------------------------------------------------------------------------------- 6 months to 6 months to Year to 30 June 30 June 31 December 2001 2000 2000 £m £m £m ------------------------------------------- Reconciliation of operating profit to net cash inflow from operating activities Operating profit 62.8 79.8 161.1 Depreciation/amortisation 42.1 41.1 84.4 Stocks (increase)/decrease (12.2) (22.3) (21.2) Debtors (increase)/decrease (42.0) (73.9) (13.3) Creditors and provisions 22.9 25.9 (10.4) increase/(decrease) ------------------------------------------- Net cash inflow from operating 73.6 50.6 200.6 activities ------------------------------------------- CASH FLOW STATEMENT Net cash inflow from operating 73.6 50.6 200.6 activities Return on investments and (14.1) (12.4) (28.5) servicing of finance Taxation (14.3) (21.4) (38.3) Capital expenditure and (24.3) (28.5) (47.4) financial investment Acquisitions and disposals 8.1 (8.7) (23.4) Equity dividends paid (33.4) (32.7) (53.8) ------------------------------------------- Cash flow before use of liquid (4.4) (53.1) 9.2 resources and financing Management of liquid resources (4.3) (1.1) (5.4) Financing Issue of ordinary shares 0.2 0.9 1.5 Increase / (decrease) in 21.8 34.2 (19.4) borrowings ------------------------------------------- 22.0 35.1 (17.9) ------------------------------------------- Increase/(decrease) in cash in 13.3 (19.1) (14.1) the period ------------------------------------------- Reconciliation of net cash to movement in net borrowings Increase/(decrease) in cash in 13.3 (19.1) (14.1) the period Cash (inflow) / outflow from (21.8) (34.2) 19.4 borrowings Cash outflow from movement in 4.3 1.1 5.4 liquid resources ------------------------------------------- Change in borrowings resulting (4.2) (52.2) 10.7 from cash flows Borrowings assumed with - (0.8) (5.5) acquisitions Loan notes issued as part of - - (9.7) acquisition Currency translation (7.1) (13.3) (10.5) differences ------------------------------------------- Movement in net borrowings in (11.3) (66.3) (15.0) the period Net borrowings at start of (403.0) (388.0) (388.0) period ------------------------------------------- Net borrowings at end of (414.3) (454.3) (403.0) period ------------------------------------------- STATEMENT OF GROUP TOTAL RECOGNISED GAINS AND LOSSES -------------------------------------------------------------------------------- 6 months 6 months Year to to 30 June to 30 June 31 December 2001 2000 2000 £m £m £m ---------------------------------------------- Profit for the period 53.3 42.8 95.0 Currency translation differences (3.9) 4.4 6.6 ---------------------------------------------- Total recognised gains and losses 49.4 47.2 101.6 for the period ---------------------------------------------- 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 to 30 31 June June December 2001 2000 2000 £m £m £m ----------------------------- Profit for the period 53.3 42.8 95.0 Dividends (21.1) (21.1) (54.5) ----------------------------- 32.2 21.7 40.5 Previously written off goodwill taken through 5.7 - 0.4 profit & loss account in arriving at the profit for the period Other recognised gains and losses relating to the (3.9) 4.4 6.6 period Contribution to the QUEST - - (0.1) New ordinary share capital issued 0.2 0.9 1.5 ----------------------------- Net increase in shareholders' funds for the period 34.2 27.0 48.9 Shareholders' funds at start of period 478.0 429.1 429.1 ----------------------------- Shareholders' funds at end of period 512.2 456.1 478.0 ----------------------------- 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 2001 2000 2000 2001 2000 2000 £m £m £m £m £m £m ------------------------------- ------------------------- (i) by activity: before goodwill amortisation and rationalisation/restructuring Hydronic 357 338 667 37.0 42.9 83.0 Controls Drinks 189 176 340 19.4 17.1 34.6 Dispense Fluid 219 221 444 19.4 23.7 46.6 Power Energy 60 47 105 5.6 4.6 12.4 Controls ------------------------------- ------------------------- Continuing 825 782 1556 81.4 88.3 176.6 operations ------------------------------- ------------------------- after goodwill amortisation and rationalisation/restructuring Hydronic 28.4 36.0 67.6 Controls Drinks 17.2 15.5 32.6 Dispense Fluid 10.5 20.9 42.2 Power Energy 5.5 4.6 12.4 Controls ------------------------- Continuing 61.6 77.0 154.8 operations ------------------------- Operating Assets --------------------------------- 6 mths Year to to to 30 June 30 June 31 Dec 2001 2000 2000 £m £m £m (i) by activity: --------------------------------- before goodwill amortisation and rationalisation/restructuring Hydronic Controls 306 338 301 Drinks Dispense 146 133 116 Fluid Power 216 227 222 Energy Controls 32 18 21 --------------------------------- Continuing operations 700 716 660 --------------------------------- (ii) by geographical origin: after goodwill amortisation and rationalisation/restructuring UK 299 280 546 23.4 29.3 52.4 Rest of 279 266 531 22.6 26.6 58.9 Europe The Americas 222 212 431 14.3 19.4 41.1 Asia/Pacific 25 24 48 1.3 1.7 2.4 -------------------------- -------------------------- Continuing 825 782 1556 61.6 77.0 154.8 operations -------------------------- -------------------------- (ii) by geographical origin: after goodwill amortisation and rationalisation/restructuring UK 286 334 284 Rest of Europe 226 219 211 The Americas 173 149 150 Asia/Pacific 15 14 15 -------------------------- Continuing operations 700 716 660 -------------------------- (iii) turnover by geographical destination: 6 mths 6 mths Year to to to 30 June 30 June 31 Dec 2001 2000 2000 £m £m £m ------------------------------------------- UK 258 239 462 Germany 99 103 199 Rest of Europe 200 187 376 USA 197 188 376 Asia 31 29 64 Rest of World 40 36 79 ------------------------------------------- Continuing operations 825 782 1556 ------------------------------------------ 1. Segmental Analysis (continued) Acquisitions BTG is reported within Energy Controls from its acquisition in February 2001 and Display Technologies within Drinks Dispense from its acquisition in June 2001. Discontinued operations The amounts shown for discontinued operations comprise the turnover and operating profits of Fittings Australia sold in November 2000, previously reported within Hydronic Controls and Asia/Pacific together with a number of valve companies sold in June 2001 which were previously reported in Energy Controls and located in the UK, France and US. 2. Taxation The underlying tax rate on profit before goodwill amortisation and exceptional items is around 32%, the same as last year. However, the effective rate of tax for 2001 is expected to be 25%, reflecting the benefit derived from the repatriation of overseas earnings from prior years. 3. Dividends The Directors have declared an interim dividend for the current year of 6.0p per share (six months to 30 June 2000: 6.0p) which will be paid on 22 October 2001 to shareholders on the register on 19 September 2001. 4. Earnings per share The weighted average number of shares in issue during the period was 351.4m, 351.6m diluted for the effect of outstanding share options (six months to 30 June 2000: 350.9m, 350.9m diluted). Earnings per share have been calculated on earnings of £53.3m, (six months to 30 June 2000: £42.8m). The Directors consider that adjusted earnings per share figures, using earnings as calculated below, give a more meaningful indication of the underlying performance. 6 months to 6 months to Year to 30 June 2001 30 June 2000 31 Dec 2000 £m £m £m ----------------------------------------------- Profit for the period 53.3 42.8 95.0 Goodwill amortisation 8.0 6.3 15.2 Exceptional items (after tax) (19.1) - (9.6) Rationalisation/restructuring 8.9 3.4 4.5 (after tax) ----------------------------------------------- Earnings for adjusted EPS 51.1 52.5 105.1 ----------------------------------------------- 5. 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 2001 2000 2000 2001 2000 2000 ------ ----- ------ ------- ------ ------ Euro 1.60 1.63 1.64 1.66 1.58 1.59 US Dollar 1.44 1.57 1.52 1.41 1.51 1.49 6. 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 2000 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 13 September 2001 and will be available from the same date at the Company's registered office, Kynoch Works, Witton, Birmingham, B6 7BA. NEXT TRADING ANNOUNCEMENT Our next trading update will be issued on 18 December 2001. Enquiries to: Martin Lamb - Chief Executive - Tel: 020 7329 0096 Trevor Slack - Finance Director - Tel: 020 7329 0096 Gerard Whelan - Corporate Communications - Tel: 020 7329 0096 Press release available on the Internet at www.imi.plc.uk Issued by: Ben Padovan - Weber Shandwick Worldwide - Tel: 020 7329 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 5 to 11 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 Financial Services Authority 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 2001. KPMG Audit Plc Chartered Accountants Birmingham 10 September 2001

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