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IMI PLC (IMI)

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Thursday 26 August, 2010

IMI PLC

Half Yearly Report

RNS Number : 6585R
IMI PLC
26 August 2010
 
26 August 2010
 
IMI plc Interim Financial Report
For the six months ended 30 June 2010
 
 
Six months ended
30 June
 
 
Continuing operations:
2010
 
2009
 
change
     Revenue
£925m
 
£900m
 
+3%
 
 
 
 
 
 
     Segmental operating profit
£145.6m
 
£97.4m
 
+49%
     Segmental operating margin
15.7%
 
10.9%
 
 
     Adjusted profit before tax1
£136.4m
 
£86.4m
 
+58%
 
 
 
 
 
 
     As reported:
 
 
 
 
 
          Operating profit
£136.6m
 
£89.5m
 
+53%
          Profit before tax
£133.5m
 
£79.7m
 
+68%
 
 
 
 
 
 
     Adjusted earnings per share2
29.8p
 
18.5p
 
+61%
     Basic earnings per share
29.4p
 
17.0p
 
+73%
 
 
 
 
 
 
     Net borrowings3
   £157m
 
   £172m
 
 
 
 
 
 
 
 
     Interim dividend
9.0p
 
8.0p
 
+13%
 
 
 
 
 
 
 
Norman Askew, Chairman of IMI commented:
 
“IMI has delivered a very strong set of results for the first half of 2010 as we continue to see the benefits coming through from the gradual but fundamental reshaping of the Group, which has been underway for many years now. The focus on achieving leading positions in niche global markets, with highly bespoke engineered products and a low cost manufacturing base has created a significant and sustainable improvement in the underlying quality and profitability of the business. The Group delivered record profits and margins during the period on volumes that remain more than 10% below the peak levels seen in 2008.
 
Whilst the general macro-economic environment remains uncertain, we are optimistic that the momentum seen in the first half will continue for the remainder of the year.”
 
 
1    before exceptional items (restructuring, acquired intangible amortisation and impairment and financial instruments excluding the reversal of economic hedge contract gains and losses) totalling £2.9m (2009: £6.7m)
2     before the after tax net cost of exceptional items totalling £1.5m (2009: £4.6m)
3     net borrowings as at 30 June 2010 and comparable as at 31 December 2009
 
 
INTERIM FINANCIAL REPORT
 
Overview
 
Revenue grew by 4% on an organic basis which was broadly in line with expectations, given our balanced mix of early and late cycle businesses and the improvement in trading conditions in most of our end markets. A strong bounce back in Fluid Power, with organic revenue growth of over 30%, helped to offset the expected lower volumes in Severe Service. Operating profit, on a constant currency basis increased 48% to £145.6m and adjusted earnings per share by 61% to 29.8p, both achieving record first half levels for IMI. 
 
As a result of the strong first half performance and as a reflection of its confidence in the future prospects of the Group the Board has decided to increase the interim dividend by 13% to 9.0p (2009: 8.0p). 
 
We achieved an operating margin of 15.7% versus 10.9% in the first half of 2009. This was also a new record level, reflecting the benefits arising from the gradual but fundamental reshaping of the Group we embarked on several years ago, and comfortably ahead of the long range margin target of 15% we set at that time. With established and leading market positions, an accelerating programme of new product development and further benefits to accrue from the transfer of manufacturing to low cost economies, there remains, over time, scope to raise these margin objectives further.   
 
During the half we have continued to invest in enhancing our core management skills for engineering advantage and key account management across the Group. These skills are vital as we seek to continue to develop new differentiated engineered solutions which create real value for our major customers. This approach will enable us to deliver long term sustainable growth by taking advantage of some of the key growth drivers that we have identified in our various end markets. These drivers include clean energy where markets such as nuclear, liquefied natural gas and clean coal offer exciting growth prospects; sustainability, where increased customer enthusiasm (often backed by government legislation) for reduced pollution and higher energy efficiency is driving demand for many of our more innovative products across all five business platforms; and life sciences where increased investment in healthcare and new advanced medical equipment represents a significant opportunity for our Fluid Power business.  
 
As highlighted below the Group retains a strong balance sheet, providing the flexibility to consider additional investments in organic growth, further restructuring initiatives, and bolt-on acquisitions as and when suitable opportunities arise.
 
 
Review of results
 
Segmental revenues increased by 4% to £927m (2009: £890m). Overall exchange rate benefits were minimal leaving organic growth also at 4%. Segmental operating profit was £145.6m, a 49% increase on the prior period (2009: £97.4m). At constant exchange rates segmental operating profit increased by 48%. The segmental operating margin was 15.7%, up from 10.9% in the first half last year. Reported operating profit was up 53% at £136.6m (2009: £89.5m).
 
Net interest costs, before interest cost capitalised, of £8.5m (2009: £8.9m) were covered approximately 20 times by earnings before interest, tax, depreciation and amortisation (EBITDA) on continuing operations of £168m (2009: £119m). The IAS19 pension net financing charge was £0.9m (2009: £2.1m). The net IAS39 credit of £6.1m (2009: £1.2m) reflects the increase in the value of outstanding derivatives offset by net settlement costs during the period. The total net financing costs were £3.1m (2009: £9.8m).
 
Adjusted profit before tax (before exceptional items) was £136.4m, an increase of 58% (2009: £86.4m).
 
As expected, restructuring costs were significantly lower than in the first half of last year at £3.3m (2009: £17.5m). These related to a number of projects including the transfer of production lines to low cost manufacturing sites in our Severe Service business. Restructuring costs for the full year are still expected to be around £10m. After these restructuring costs, the amortisation of acquired intangibles of £3.6m (2009: £3.7m), the reversal of net economic hedge contract gains of £2.1m (2009: reversal of losses of £13.3m) and net exceptional financial instrument gains of £6.1m (2009: £1.2m), reported profit before tax was £133.5m, an increase of 68% on the corresponding period in 2009.
 
The estimated effective tax rate on profit before exceptional items for 2010 is 30%, which compares to an effective rate of 31% applied for the first half of 2009. The total profit for the period was £99.4m and, after non-controlling interests, the profit attributable to the equity shareholders of the Company was £99.3m. The average number of shares in issue during the period was 319.6m, giving a basic earnings per share from continuing operations of 29.4p, up 73% (2009: 17.0p). Adjusted basic earnings per share from continuing operations were 29.8p, compared to 18.5p in the first half of 2009, an increase of 61%.
 
Cash flow
 
The net cash inflow from operating activities after a special cash contribution to the UK Pension Fund of £48.6m was £58.7m, compared to £68.9m in the corresponding period last year. Capital expenditure on plant, property and equipment amounted to £20.0m and was 0.8 times the depreciation charge for the period of £25.3m. The major cash outflows in the period were £29.3m of tax, dividends of £42.2m and £8.2m on restructuring. In addition the Group paid £14.0m for the remaining 30% minority interest in Pneumatex and purchased £10.5m of IMI shares for employee share plans. The Group received the £48.6m cash back as an investment from the UK pension fund (see note 12 to the interim financial statements). The total cash inflow for the period was £21.9m, compared with an outflow in the first half of last year of £32.2m.
 
Balance sheet
 
The balance sheet remains strong and net debt fell during the period to £157m (December 2009: £172m), despite the payment of the final dividend and the cash outflows highlighted above. The £15m reduction since December 2009 included the cash inflow during the period, partially offset by a negative translation impact of £6.4m on the revaluation of the Group’s foreign currency debt. The ratio of net debt to the last twelve months EBITDA was 0.5 at the end of June. 
 
There were no significant changes in the Group’s debt facilities during the half. The Group maintains an appropriate mixture of short, medium and long term debt facilities which provide sufficient headroom for both ongoing activities and appropriate bolt-on acquisitions. 
 
Shareholders’ equity at the end of June was £364.8m, a reduction of £35.0m since the end of last year, which includes the attributable profit for the period of £99.3m, less an after-tax actuarial loss on the defined benefit pension plans of £88.5m and the 2009 final dividend of £42.2m paid in May.
 
Pensions update
 
The IAS19 pension net deficit was revalued to £329m which compares to the deficits of £281m at June 2009 and £258m at December 2009. The increase in the deficit since December results mainly from a reduction in AA corporate bond yields used to discount the value of future liabilities and from weaker equity returns. A recovery plan was agreed with the pension fund Trustee following the March 2008 actuarial valuation that requires additional cash contributions of £16.8m to be paid in July of each year until 2016. The next triennial actuarial valuation of the Fund will be undertaken as at the end of March 2011. 
 
During the first half of 2010 the Group and the Trustee implemented a number of actions aimed at improving the funding position and reducing the volatility risk of its UK defined benefit pension scheme (“the Fund”).   As previously announced in March, the Group entered into consultation with the members of the Fund concerning a proposal to close the Fund to future accrual. Following an extensive consultation the Group can confirm that this change will now take place with effect from 31 December 2010. Employees affected are being offered alternative defined contribution pension arrangements. The closure to future accrual is expected to result in a curtailment gain of approximately £10m in the second half.  
 
In addition, the Fund entered into two bulk annuity agreements with two insurance companies for approximately £325m which insure a proportion of the Fund’s liabilities to pensioners as at June 2010. These insurance contracts will provide protection to the Fund and employer against certain financial and demographic risks in respect of its pensioner members including interest rate risk, inflation risk and mortality risk. The Fund will continue to pay pensions and members will not be impacted directly as the policies are investments of the Fund. This “buy-in” is a key step towards reducing the overall funding volatility faced by the Fund. The Trustee has also made changes to the allocation of the remainder of the Fund’s assets with the objective of maintaining expected investment returns.  
 
In connection with these changes in the Fund’s investment and risk management strategy the Group and the Trustee have agreed an additional cash contribution arrangement which will provide £4.4m per annum to the Fund for a period of 20 years. This additional funding stream has been recognised as an asset of the Fund at a current value of approximately £48.6m. Should the scheme have a funding surplus in the future, there is a mechanism for the payments to cease. Together with the £16.8m payable pursuant to the existing recovery plan, this brings the total additional annualised special contributions from the Group to £21.2m.
 
The combined impact of these measures is expected to result in an improvement to the funding position measured on a technical provisions basis of around £25m; a reduction to the volatility risk of 25% and the removal of approximately 20% of the mortality risk. The Group and the Trustee will continue to look at further risk management and mitigation opportunities for the Fund.  
 
 
Operations review
 
The following review of our business areas for the six months to 30 June 2010 compares the performance of our operations with the six month period to 30 June 2009. This section also comments on the current market conditions in each of our businesses. 
 
Severe Service
 
 
 
2010
2009
 
 
Segmental Revenue
£217m
£252m
 
 
Segmental Operating Profit
£38.4m
£47.9m
 
 
Operating Margin
17.7%
19.0%
 
 
Severe Service, which is a later cycle business, saw an organic revenue decline of 15% in the half year, reflecting the lower order intake seen in new construction markets in the second half of last year. This was slightly below our earlier expectations with some shipments deferred into the second half of 2010. Aftermarket revenues, accounting for around 40% of sales, continued to show good growth. 
 
Order intake recovered in the first half, up around 3% on what was a strong first half last year.   Higher quotation activity previously noted in the oil and gas market converted into some good orders for both control valves and isolation valves notably in the liquefied natural gas sector. Overall order intake in oil and gas was up strongly, around 70% higher than in the first half of 2009 when order intake was weaker. We also achieved good growth of around 45% in order intake in the nuclear market where there continue to be significant growth opportunities. Whilst there was an increase in quotation activity in fossil power this is yet to convert into increased orders, and bookings were down around 30%.   Order intake in the aftermarket was down over 10% compared to a very strong performance in the first half of last year. 
 
Operating margins in the period fell to 17.7% from 19.0% in the first half of last year, reflecting the impact of lower volumes and some continued pricing pressure in oil and gas markets, partially offset by a good aftermarket sales mix, and further improvements in operational efficiencies. Our new manufacturing facility in the Czech Republic opened in May 2010 and its sister facility, under construction in India, is still on schedule to open by the end of the year.     

Shipments in the second half are expected to be slightly down on the second half of last year. Orders, however, are anticipated to be significantly ahead of the prior year, supporting an anticipated return to growth for Severe Service in 2011.

Fluid Power
 
 
 
2010
2009
 
 
Segmental Revenue
£333m
£255m
 
 
Segmental Operating Profit
£49.8m
£7.4m
 
 
Operating Margin
15.0%
2.9%
 

The organic growth in revenues was 31% reflecting a good recovery in our end markets, many of which were very depressed in the first half of 2009.

During the first half we continued to make good progress in the strategic repositioning of the business. The focused sector business, which engineers bespoke solutions for key OEM customers, grew at 36% in the half, compared to 26% for the rest of the Fluid Power business. This increased the overall percentage of revenues from our targeted sectors to 41%. After a very difficult 2009 the commercial vehicle sector recovered strongly with volumes up 50%. The Life Sciences and Rail sectors, which were both less impacted by the downturn last year, have also performed well, up 25% and 30% respectively. 

The business delivered strong profits drop-through on the higher volumes which helped push margins up to 15%. As well as benefiting from much higher demand, this strong margin performance was driven by a number of factors including the full benefit of the 2009 rationalisation programme and the increased proportion of manufacturing in low cost economies.   We also implemented further initiatives to drive material costs lower through supplier rationalisation, negotiation and value engineering as well as selectively increasing selling prices. 
 
We continue to maintain close contact with our largest customers to assess future demand levels. The medium term outlook for Fluid Power remains positive, with second half revenues expected to match the first half.
 
Indoor Climate
 
 
 
2010
2009
 
 
Segmental Revenue
£142m
£142m
 
 
Segmental Operating Profit
£30.8m
£24.2m
 
 
Operating Margin
21.7%
17.0%
 
 
Indoor Climate continues to demonstrate encouraging resilience despite the later cycle nature of this business and the more difficult market for new commercial construction. After the challenges of the severe weather in the first quarter in much of continental Europe, Indoor Climate performed well in the second quarter to finish the half with an organic revenue decline of just 1%. 
 
The continued trend towards more energy efficient buildings and related legislation has helped the business perform well during the half, both in new construction markets and in the aftermarket which now accounts for over 60% of sales. The increasing demand for higher specification heating and cooling systems as well as the need to comply with new legislation in countries such as Turkey is leading to increased penetration of our products.   We continue to invest in our customer seminars which help drive demand for our products with particular focus this year on increasing this investment in North America, Germany and China. Asia Pacific was the strongest performing area during the half with good double digit growth. 
 
As expected, the cumulative impact of a number of cost saving initiatives implemented throughout the course of last year has led to a significant improvement in first half margins which have risen to 21.7% from 17.0% last year. In the first half Indoor Climate also benefited from lower materials costs compared to 2009. We currently expect higher metals costs in the second half, however prices remain volatile.
 
Looking forward we are now seeing some increased activity amongst architects and consultants and markets are expected to remain relatively stable for the remainder of the year.   We will continue to focus on growth areas such as energy efficient buildings and renovation and, whilst the traditionally key heating season between September and November will again be important, the business is expected to return to modest growth in the second half.   
 
Beverage Dispense
 
 
 
2010
2009
 
 
Segmental Revenue
£159m
£154m
 
 
Segmental Operating Profit
£16.9m
£10.5m
 
 
Operating Margin
10.6%
6.8%
 
 
Beverage Dispense volumes strengthened in the second quarter, lifting organic revenue growth in the first half to 3%. At the same time we exited a number of lower margin product lines, accounting for around 2% of revenue, indicating an organic growth rate on retained product lines for the period of 5%.
 
Customer demand has improved in the US and remains buoyant in Asia, with major bottlers and quick service restaurant chains lifting their capital budgets. The UK is showing some signs of stabilisation, whilst activity in Europe is mixed with retrenchment in the south offsetting gains elsewhere. The contribution from new products continues to grow, with new offerings targeted at the non-carbonated, frozen, and smoothies markets doing particularly well. Customers are also highly focused on sustainability initiatives, driving further opportunities for our products which deliver substantial improvements in energy efficiency. Our 3Wire parts management business in the US continues to expand its distribution capabilities and attract new national chain customers to its integrated parts management solutions.
 
The combination of an improved sales mix, both from the introduction of higher margin new products and the exit from low margin commodity lines, and further cost savings arising from improved efficiencies, helped deliver a substantial increase in operating margin during the period, from 6.8% in the first half of last year to 10.6%.
 
We expect beverage markets to remain positive, leaving revenues broadly in line with the second half of last year after the impact of further withdrawals from lower margin business.
 
Merchandising
 
 
 
2010
2009
 
 
Segmental Revenue
£76m
£87m
 
 
Segmental Operating Profit
£9.7m
£7.4m
 
 
Operating Margin
12.8%
8.5%
 
 
Organic revenues declined by 12% in the first half, broadly in line with expectations, with most sectors impacted by the lower order intake in the second half of last year. As with Beverage Dispense, a targeted withdrawal from lower margin, more commoditised product lines contributed to this decline (around 2%), leaving underlying volumes on a retained business basis down around 10% in the period. There were some encouraging trends during the period, with cosmetics volumes returning to growth.  The automotive sectoralso stabilised after a very difficult 2 – 3 years, with a number of important project orders taken in the period which will improve second half performance.
 
Operating margins improved significantly during the period, from 8.5% to 12.8%, buoyed by the improved sales mix (both the prioritisation of higher margin, more differentiated projects, and the withdrawal from low margin commoditised product lines) and better operational efficiencies. The first half margin was also helped by a property disposal and an insurance claim which, collectively, accounted for around two percentage points of the margin improvement.
 
We expect second half revenues to be comfortably ahead of both the first and second half of last year, benefiting in particular from the aforementioned project wins secured in the automotive sector. These higher demand levels will lend support to further progress on the margin in the second half.
 
 
Board and management changes
 
IMI has emerged as a stronger business from what has been a significant and global economic downturn over the last 18 months. As we now look to a more progressive future agenda, with a renewed focus on growth, a number of management changes are being made effective 1 September 2010.
 
Ian Whiting (46), President of the Severe Service business, is appointed to the Board, assuming responsibilities for developing IMI’s interests in the emerging markets (including IMI China) and for the Group’s procurement activities, in addition to retaining his responsibilities for Severe Service.
 
Roy Twite (43), in addition to retaining his current Board responsibilities for Fluid Power, will reassume Board responsibility for the Retail Dispense businesses, which he relinquished 18 months ago on taking up his Fluid Power role.
 
Sean Toomes (42), for the last 3 years President of the Indoor Climate business, and with over 25 years experience in IMI, has been appointed to the Group’s Executive Committee. He takes over responsibility for the Group’s Key Account Management and Responsible Business agendas, in addition to retaining his leadership role in Indoor Climate.
 
These management changes represent a significant strengthening of the Executive team. Together with the CEO and FD, they possess over 85 years of collective experience across the IMI Group.
 
 
Outlook
 
IMI has delivered a very strong set of results for the first half of 2010 as we continue to see the benefits coming through from the gradual but fundamental reshaping of the Group, which has been underway for many years now. The focus on achieving leading positions in niche global markets, with highly bespoke engineered products, and a low cost manufacturing base has created a significant and sustainable improvement in the underlying quality and profitability of the business. The Group delivered record profits and margins during the period on volumes that remain more than 10% below the peak levels seen in 2008.
 
Whilst the general macro-economic environment remains uncertain, we are optimistic that the momentum seen in the first half will continue for the remainder of the year.
 
 
Principal Risks and Uncertainties
 
The Group has in place a risk management structure and internal controls which are designed to identify, manage and mitigate business risk.
 
In common with all businesses, IMI faces a number of risks and uncertainties which could have a material impact on the Group’s long-term performance.
 
On pages 39 to 41 of its 2009 Annual Report (a copy of which is available at IMI’s website at www.imiplc.com), the Company sets out what the Directors regarded as being the principal risks and uncertainties facing the Group and which could have a material impact on the Group’s long-term performance. These include: economic and market environment; key customers; supply chain; competitive markets; legal, regulatory and political risks; financial market risks; talent acquisition; Compliance and internal controls; products and technology; health, safety and environmental; M&A activity; and pension funding. These risks remain valid and have the potential to impact the Group during the remainder of the second half of 2010. The impact of the economic and end-market environments in which the Group’s businesses operate are considered in the operations review and outlook sections of this Interim Management Report above, together with an indication if management is aware of any likely change in this situation.
 
Cautionary Statement
 
This Interim Financial Report contains forward-looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward-looking statement which could cause actual results to differ materially from those currently anticipated.  
 
Responsibility statement of the directors in respect of the Interim Financial Report
 
We confirm that to the best of our knowledge:
§         the condensed set of interim financial statements has been prepared in accordance with IAS34 ‘Interim Financial Reporting’ as adopted by the EU;
§         the Interim Financial Report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year 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 year;
§         there were no related party transactions or changes in the related party transactions described in the 2009 Annual Report that materially affected the Group’s results or financial position during the six months ended 30 June 2010. 
 
The Directors of IMI plc are listed in the IMI Annual Report for the year ended 31 December 2009. 
Approved by the Board of IMI plc and signed on its behalf by:
 
 
NBM Askew
Chairman
26 August 2010
 
 
INDEPENDENT REVIEW REPORT TO IMI plc
Introduction
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 2010 which comprises the Condensed Consolidated Interim Income Statement, the Condensed Consolidated Interim Statement of Comprehensive Income, the Condensed Consolidated Interim Balance Sheet, the Condensed Consolidated Interim Statement of Changes in Equity, the Condensed Consolidated Interim Statement of Cash Flows and the related explanatory notes. 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.
 
This report is made solely to the Company in accordance with guidance contained in 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 Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
 
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 and Transparency Rules of the United Kingdom's Financial Services Authority.
 
As disclosed in note14, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
 
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed interim 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 Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, 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 Ireland) 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
Based 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 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
 
 
 
Ernst & Young LLP
Birmingham
26 August 2010
 
 
CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes
6 months to
30 June 2010
(unaudited)
 
6 months to
30 June 2009
(unaudited)
 
Year to
31 Dec 2009
 
 
 
 
 
 
 
Before
except-
ional
items
Except-
ional
items
Total
 
Before
except-
ional
items
Except-
ional
items
Total
 
Before
except-
ional
items
Except-
ional
items
Total
 
 
 
 
 
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
2
 
927 
(2)
925 
 
890 
10 
900 
 
1,785 
1,792 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segmental operating profit
 
2
 
145.6 
 
145.6 
 
97.4 
 
97.4 
 
234.2 
 
234.2 
 
Restructuring costs
 
 
 
 
(3.3)
(3.3)
 
 
(17.5)
(17.5)
 
 
(34.9)
(34.9)
 
Acquired intangible amortisation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and impairment
 
 
 
 
(3.6)
(3.6)
 
 
(3.7)
(3.7)
 
 
(7.2)
(7.2)
 
Reversal of economic hedge
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
contract (gains)/losses
 
 
 
 
(2.1)
(2.1)
 
 
13.3 
13.3 
 
 
8.9 
8.9 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
 
2
 
145.6 
(9.0)
136.6 
 
97.4 
(7.9)
89.5 
 
234.2 
(33.2)
201.0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial income
 
5
 
36.4 
11.7 
48.1 
 
32.3 
19.9 
52.2 
 
64.4 
37.2 
101.6 
 
Financial expense
 
5
 
(45.6)
(5.6)
(51.2)
 
(43.3)
(18.7)
(62.0)
 
(86.9)
(29.5)
(116.4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net financial expense
 
5
 
(9.2)
6.1 
(3.1)
 
(11.0)
1.2 
(9.8)
 
(22.5)
7.7 
(14.8)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit before tax
 
 
 
136.4 
(2.9)
133.5 
 
86.4 
(6.7)
79.7 
 
211.7 
(25.5)
186.2 
 
Taxation
 
6
 
(40.9)
1.4 
(39.5)
 
(26.8)
2.1 
(24.7)
 
(63.6)
9.8 
(53.8)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit of continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
after tax
 
 
 
95.5 
(1.5)
94.0 
 
59.6 
(4.6)
55.0 
 
148.1 
(15.7)
132.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain from discontinued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
operations (net of tax)
 
 
 
5.4 
5.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total profit for the period
 
 
 
95.5 
3.9 
99.4 
 
59.6 
(4.6)
55.0 
 
148.1 
(15.7)
132.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owners of the parent
 
 
 
 
 
99.3 
 
 
 
54.2 
 
 
 
130.2 
 
 
Non-controlling interests
 
 
 
 
 
0.1 
 
 
 
0.8 
 
 
 
2.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
 
 
 
 
99.4 
 
 
 
55.0 
 
 
 
132.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
31.1p
 
 
 
17.0p
 
 
 
40.8p
 
 
Diluted
 
 
 
 
 
30.7p
 
 
 
17.0p
 
 
 
40.6p
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic - from continuing operations
 
 
 
29.4p
 
 
 
17.0p
 
 
 
40.8p
 
 
Diluted - from continuing operations
 
 
 
29.0p
 
 
 
17.0p
 
 
 
40.6p
 
 
 
CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME
 
 
 
 
 
6 months to
30 June 2010
(unaudited)
6 months to
30 June 2009
(unaudited)
Year to
31 Dec 2009
 
 
£m
£m
£m
 
 
 
 
Profit for the period
99.4 
55.0 
132.4 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Effective portion of change in fair value of net investment hedges
(4.6)
9.9 
13.3 
Income tax effect
1.3 
(2.8)
(3.7)
 
 
 
 
 
(3.3)
7.1 
9.6 
 
 
 
 
Fair value gain/(loss) on available for sale financial assets
1.8 
(0.5)
1.2 
 
 
 
 
Exchange differences on translation of foreign operations
4.5 
(36.6)
(28.1)
Income tax effect
(0.6)
3.2 
3.0 
 
 
 
 
 
3.9 
(33.4)
(25.1)
 
 
 
 
Actuarial loss on defined benefit plans
(123.1)
(159.0)
(153.3)
Income tax effect
34.6 
40.6 
44.0 
 
 
 
 
 
(88.5)
(118.4)
(109.3)
 
 
 
 
Other comprehensive income for the period, net of tax
(86.1)
(145.2)
(123.6)
 
 
 
 
 
 
 
 
Total comprehensive income for the period, net of tax
13.3 
(90.2)
8.8 
 
 
 
 
 
 
 
 
Attributable to:
 
 
 
   Owners of the parent
12.9 
(90.0)
7.0 
   Non-controlling interests
0.4 
(0.2)
1.8 
 
 
 
 
Total comprehensive income for the period, net of tax
13.3 
(90.2)
8.8 
 
 
 
 
 
 
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET
 
 
 
 
 
30 June 2010
30 June 2009
31 Dec 2009
 
(unaudited)
(unaudited)
 
 
£m
£m
£m
Assets
 
 
 
Intangible assets
391.6 
372.5 
386.4 
Property, plant and equipment
222.8 
232.8 
233.0 
Employee benefit assets
2.1 
0.6 
Deferred tax assets
114.0 
86.5 
89.6 
 
 
 
 
Total non-current assets
728.4 
693.9 
709.6 
 
 
 
 
 
 
 
 
Inventories
265.3 
265.5 
249.9 
Trade and other receivables
346.9 
334.8 
311.4 
Other current financial assets
19.5 
16.9 
Current tax
3.9 
4.1 
4.2 
Investments
18.3 
14.7 
17.7 
Cash and cash equivalents
132.6 
112.2 
81.0 
 
 
 
 
Total current assets
786.5 
731.3 
681.1 
 
 
 
 
Total assets
1,514.9 
1,425.2 
1,390.7 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
Bank overdraft
(0.8)
(2.5)
(5.3)
Interest-bearing loans and borrowings
(2.9)
(65.0)
(1.2)
Provisions
(14.5)
(29.8)
(22.4)
Current tax
(25.0)
(16.0)
(25.8)
Trade and other payables
(359.1)
(316.3)
(340.6)
Other current financial liabilities
(4.7)
(4.0)
 
 
 
 
Total current liabilities
(407.0)
(429.6)
(399.3)
 
 
 
 
 
 
 
 
Interest-bearing loans and borrowings
(285.8)
(308.2)
(246.9)
Employee benefit obligations
(329.3)
(283.1)
(258.1)
Provisions
(44.3)
(34.3)
(44.5)
Deferred tax liabilities
(15.2)
(15.6)
(15.0)
Other payables
(19.5)
(25.0)
(24.9)
 
 
 
 
Total non-current liabilities
(694.1)
(666.2)
(589.4)
 
 
 
 
Total liabilities
(1,101.1)
(1,095.8)
(988.7)
 
 
 
 
Net assets
413.8 
329.4 
402.0 
 
 
 
 
 
 
 
 
Equity
 
 
 
Share capital
84.9 
84.8 
84.9 
Share premium
167.4 
165.2 
166.6 
Other reserves
56.7 
45.3 
56.4 
Retained earnings
55.8 
27.9 
91.9 
 
 
 
 
 
 
 
 
Equity attributable to owners of the parent
364.8 
323.2 
399.8 
Non-controlling interests
49.0 
6.2 
2.2 
 
 
 
 
Total equity
413.8 
329.4 
402.0 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
Share capital
Share premium account
Capital redemption reserve
Hedging reserve
Translation reserve
Retained earnings
Total
parent equity
Non-controlling interests
Total
equity
 
 
£m
£m
£m
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
As at 1 January 2010
84.9 
166.6 
7.9 
7.4 
41.1 
91.9 
399.8 
2.2 
402.0 
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
 
 
 
 
99.3 
99.3 
0.1 
99.4 
Other comprehensive income
 
 
 
(3.3)
3.6 
(86.7)
(86.4)
0.3 
(86.1)
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
(3.3)
3.6 
12.6 
12.9 
0.4 
13.3 
 
 
 
 
 
 
 
 
 
 
 
Issue of share capital
 
0.8 
 
 
 
 
0.8 
 
0.8 
Dividends paid
 
 
 
 
 
(42.2)
(42.2)
 
(42.2)
Share based payments (net
 
 
 
 
 
 
 
 
 
 
of tax)
 
 
 
 
 
4.0 
4.0 
 
4.0 
Shares held in trust for employee
 
 
 
 
 
 
 
 
 
 
share schemes
 
 
 
 
 
(10.5)
(10.5)
 
(10.5)
Investment in pension partnership
 
 
 
 
 
 
 
 
 
 
by UK Pension Fund
 
 
 
 
 
 
 
46.4 
46.4 
 
 
 
 
 
 
 
 
 
 
 
At 30 June 2010
84.9 
167.4 
7.9 
4.1 
44.7 
55.8 
364.8 
49.0 
413.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at 1 January 2009
84.7 
165.1 
7.9 
(2.2)
65.4 
131.5 
452.4 
9.3 
461.7 
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
 
 
 
 
54.2 
54.2 
0.8 
55.0 
Other comprehensive income
 
 
 
7.1 
(32.9)
(118.4)
(144.2)
(1.0)
(145.2)
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
7.1 
(32.9)
(64.2)
(90.0)
(0.2)
(90.2)
 
 
 
 
 
 
 
 
 
 
 
Issue of share capital
0.1 
0.1 
 
 
 
 
0.2 
 
0.2 
Dividends paid
 
 
 
 
 
(40.5)
(40.5)
(1.6)
(42.1)
Share based payments (net
 
 
 
 
 
 
 
 
 
 
of tax)
 
 
 
 
 
1.4 
1.4 
 
1.4 
Shares held in trust for employee
 
 
 
 
 
 
 
 
 
 
share schemes
 
 
 
 
 
(0.3)
(0.3)
 
(0.3)
Acquisition of non-controlling
 
 
 
 
 
 
 
 
 
 
interests
 
 
 
 
 
 
 
(1.3)
(1.3)
 
 
 
 
 
 
 
 
 
 
 
At 30 June 2009
84.8 
165.2 
7.9 
4.9 
32.5 
27.9 
323.2 
6.2 
329.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at 1 January 2009
84.7 
165.1 
7.9 
(2.2)
65.4 
131.5 
452.4 
9.3 
461.7 
 
 
 
 
 
 
 
 
 
 
 
Profit for the year
 
 
 
 
 
130.2 
130.2 
2.2 
132.4 
Other comprehensive income
 
 
 
9.6 
(24.3)
(108.5)
(123.2)
(0.4)
(123.6)
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
9.6 
(24.3)
21.7 
7.0 
1.8 
8.8 
 
 
 
 
 
 
 
 
 
 
 
Issue of share capital
0.2 
1.5 
 
 
 
 
1.7 
 
1.7 
Dividends paid
 
 
 
 
 
(66.0)
(66.0)
(1.6)
(67.6)
Cancellation of unclaimed
 
 
 
 
 
 
 
 
 
 
dividends
 
 
 
 
 
0.2 
0.2 
 
0.2 
Share based payments (net
 
 
 
 
 
 
 
 
 
 
of tax)
 
 
 
 
 
4.8 
4.8 
 
4.8 
Shares held in trust for employee
 
 
 
 
 
 
 
 
 
 
share schemes
 
 
 
 
 
(0.3)
(0.3)
 
(0.3)
Acquisition of non-controlling
 
 
 
 
 
 
 
 
 
 
interests
 
 
 
 
 
 
 
(7.3)
(7.3)
 
 
 
 
 
 
 
 
 
 
 
At 31 December 2009
84.9 
166.6 
7.9 
7.4 
41.1 
91.9 
399.8 
2.2 
402.0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
 
 
 
 
 
6 months to
30 June 2010
(unaudited)
6 months to
30 June 2009
(unaudited)
Year to
31 Dec 2009
 
 
£m
£m
£m
Cash flows from operating activities
 
 
 
Profit for the period *
99.4 
55.0 
132.4 
Adjustments for:
 
 
 
    Depreciation
25.3 
23.4 
48.7 
    Amortisation and impairment
5.9 
6.1 
12.8 
Gain on sale of property, plant and equipment and investments
(2.2)
Financial income
(48.1)
(52.2)
(101.6)
Financial expense
51.2 
62.0 
116.4 
Equity-settled share-based payment expenses
1.8 
1.4 
4.1 
Income tax expense
39.5 
24.7 
53.8 
(Increase)/Decrease in trade and other receivables
(35.9)
26.3 
48.0 
(Increase)/Decrease in inventories
(12.5)
30.3 
57.5 
Increase/(Decrease) in trade and other payables
22.0 
(75.0)
(44.8)
Increase in provisions and employee benefits
(6.9)
(6.9)
(8.4)
 
 
 
 
Cash generated from the operations
139.5 
95.1 
318.9 
Income taxes paid
(29.3)
(26.2)
(52.6)
 
110.2 
68.9 
266.3 
CCI investigation costs and fine
(2.9)
(13.5)
Additional pension scheme funding
(16.8)
Special contribution to the UK Pension Fund
(48.6)
 
 
 
 
Net cash from operating activities
58.7 
68.9 
236.0 
Cash flows from investing activities
 
 
 
Interest received
2.3 
1.7 
3.7 
Proceeds from sale of property, plant and equipment
4.5 
0.7 
1.8 
Sale of investments
1.0 
0.2 
0.5 
Purchase of investments
(0.2)
(0.1)
(1.0)
Settlement of derivatives
3.9 
(9.7)
(7.5)
Income from investments
0.1 
Acquisitions of controlling interests
(1.6)
(1.3)
Acquisition of property, plant and equipment
(20.0)
(17.1)
(37.3)
Capitalised development expenditure
(1.4)
(2.6)
(4.9)
 
 
 
 
Net cash from investing activities
(11.4)
(26.9)
(46.0)
Cash flows from financing activities
 
 
 
Interest paid
(9.7)
(13.0)
(23.5)
Investment in pension partnership by UK Pension Fund
48.6 
Acquisition of non-controlling interests
(12.4)
(19.0)
(18.1)
Purchase of own shares
(10.5)
(0.3)
(0.3)
Proceeds from the issue of share capital for employee
    share schemes
0.8 
0.2 
1.7 
Net drawdown/(repayment) of borrowings
22.7 
28.4 
(125.2)
Dividends paid to non-controlling interests
(1.6)
(1.6)
Dividends paid to equity shareholders
(42.2)
(40.5)
(66.0)
 
 
 
 
Net cash from financing activities
(2.7)
(45.8)
(233.0)
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
44.6 
(3.8)
(43.0)
Cash and cash equivalents at start of the year
75.7 
119.3 
119.3 
Effect of exchange rate fluctuations on cash held
11.5 
(5.8)
(0.6)
 
 
 
 
Cash and cash equivalents at the end of the period **
131.8 
109.7 
75.7 
 
 
 
 
* Including £5.4m profit from discontinued operations
 
 
 
** Net of bank overdrafts
 
 
 
 
 
 
 
Reconciliation of net cash to movement in net borrowings appears in note 9.
 
 
NOTES TO THE CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
 
 
1. Reclassification
 
To assist the user of the accounts, the condensed consolidated interim income statement has been presented in a columnar format with exceptional items shown on the face of the statement consistent with the annual report 2009. The 2009 comparative consolidated income statement has been reclassified on a comparable basis. There is no change to total revenue, operating profit, profit before tax, earnings per share or net assets as a result of this reclassification. There is no change in the value or nature of items, reported on the face of the statement other than the amount described as “profit before tax before restructuring, investigation costs and fines, acquired intangible amortisation and impairment, other income and financial instruments excluding economic hedge contract gains and losses”, which is now described as profit before tax and exceptional items. In accordance with IAS7 revised, the aggregate cash flows to acquire a non controlling interest are now classified as financing activities within the consolidated statement of cash flows. Previously these had been classified as investing activities. This revision has been applied retrospectively. 
 
 
2. Segmental information
 
Segmental information is presented in the condensed consolidated interim financial statements for each of the Group's operating segments. The operating segment reporting format reflects the Group's management and internal reporting structures. Inter-segment revenue is insignificant.    
 
The Group continues to include the following five operating segments and activities:       
 
Fluid Controls                                                                                                                                                     
Severe Service
Design, manufacture, supply and service of high performance critical control valves and associated equipment for power generation plants, oil and gas producers and other process industries.
Fluid Power
Design, manufacture and supply of motion and fluid control systems, principally pneumatic devices, for original equipment manufacturers in commercial vehicle, life science, process, rail, food and beverage and other industries.
Indoor Climate
Design, manufacture and supply of indoor climate control systems, principally balancing valves for large commercial buildings and thermostatic radiator valves for residential buildings.
 
Retail Dispense
Beverage Dispense
Design, manufacture and supply of still and carbonated beverage dispense systems and associated merchandising equipment for brand owners and retailers.
Merchandising
Design, manufacture and supply of point of purchase display systems for brand owners and retailers.
 

Information regarding the operations of each reporting segment is included below. Performance is measured based on segmental operating profit before restructuring and acquired intangible amortisation and impairment. Segmental operating profit is also reported to the Chief Executive as if economic currency and metals hedges were effective for financial reporting purposes. Businesses enter into forward currency and metal contracts to provide economic hedges against the impact on profitability of swings in rates and values in accordance with the Group's policy to minimise the risk of volatility in revenues, costs and margins. Segmental operating profits are therefore charged/credited with the impact of these contracts. In accordance with IAS39, these contracts do not meet the technical provisions required for hedge accounting and gains and losses are reversed out of segmental profit and are recorded in net financial income and expense for the purposes of the condensed consolidated interim income statement.

 
 
Segmental
 
Segmental
 
Segmental
 
 
revenue *
 
operating profit *
 
operating margin *
 
 
6 months
to 30 June
2010
6 months
to 30 June
2009
Year
to 31 Dec
2009
 
6 months
to 30 June
2010
6 months
to 30 June
2009
Year
to 31 Dec
2009
 
6 months
to 30 June
2010
6 months
to 30 June
2009
Year
to 31 Dec
2009
 
£m
£m
£m
 
£m
£m
£m
 
%
%
%
Fluid Controls
692 
649 
1,324 
 
119.0 
79.5 
194.9 
 
17.2 
12.2 
14.7 
 
Severe Service
217 
252 
512 
 
38.4 
47.9 
101.4 
 
17.7 
19.0 
19.8 
 
Fluid Power
333 
255 
520 
 
49.8 
7.4 
32.8 
 
15.0 
2.9 
6.3 
 
Indoor Climate
142 
142 
292 
 
30.8 
24.2 
60.7 
 
21.7 
17.0 
20.8 
Retail Dispense
235 
241 
461 
 
26.6 
17.9 
39.3 
 
11.3 
7.4 
8.5 
 
Beverage Dispense
159 
154 
297 
 
16.9 
10.5 
21.1 
 
10.6 
6.8 
7.1 
 
Merchandising
76 
87 
164 
 
9.7 
7.4 
18.2 
 
12.8 
8.5 
11.1 
Segmental result
927 
890 
1,785 
 
145.6 
97.4 
234.2 
 
15.7 
10.9 
13.1 
 
 
 
 
 
 
 
 
 
 
 
 
 
* before exceptional items
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of reported segmental revenue and operating profit
 
 
 
 
 
 
Revenue
 
Profit
 
 
 
 
 
 
6 months
to 30 June
2010
6 months
to 30 June
2009
Year
to 31 Dec
2009