28 August 2008

IMI plc 2008 First Half Results

IMI plc, the international engineering group, today announced its interim results for the six months ended 30 June 2008.

Norman Askew, Chairman of IMI commented:

"This is a strong set of results with all businesses contributing positively to another period of good organic growth. This growth and the higher margins associated with new products together with benefits arising from our restructuring programme have delivered a 30% increase in adjusted earnings per share. We remain confident of continued progress in the remainder of this year".

INTERIM REVIEW

Interim Management Report

The Directors submit their Interim Management Report ("IMR"), together with condensed consolidated financial statements of the Group for the six months ended 30 June 2008.

(Important information on the status of statements made in this report and the definition of terms used are given in note 12)

Summary

In the six months ended 30 June 2008, IMI Group delivered organic growth in revenue of 6% and in operating profit of 15%. Reported operating profit was £108.8m, up 41% on the prior period. Underlying operating profit (before restructuring, investigation costs and acquired intangible amortisation) increased by 28%. We have made further progress towards our operating margin target of 15%, reaching 13.2% against 12.0% in the first half of 2007.

Reported profit before tax was £103.7m, up 35% on the prior period; underlying profit before tax (before restructuring, investigation costs and acquired intangible amortisation) was £115.5m, up 23%.

Our three year £60m restructuring programme is nearing completion and the anticipated benefits are being delivered in line with our expectations. We continue to build on our new product development capabilities and the percentage of revenues derived from new products launched in the prior three years is now 13%. Our business in emerging markets continues to respond to the investments that we are making and is showing good growth. These ongoing initiatives, together with our low cost procurement activities, have helped improve our operating margins despite raw material and energy cost inflation.

The on-market share buyback programme has continued, albeit at a lower level than the prior year. We continue to target at least £80m-£100m of bolt-on acquisitions each year and we maintain a strong balance sheet to support this acquisition programme.

The Board has decided to increase the interim dividend by 7% to 8.0p (2007: 7.5p).  

Review of results

Revenues increased by 17% to £911m, which includes £25m from 2007 acquisitions. Organic growth was 6% and exchange rate movements contributed £60m or an additional 8 points of growth, helped by the appreciation of the Euro which was 13% stronger than in the prior period. Operating profit was £120.6m, a 28% increase on the prior period. Acquisitions contributed £1.9m to these profits and exchange rate translation accounted for a further £9.5m or 10 percentage points of the increase. The remaining organic operating profit growth was 15%.

Interest costs on net borrowings were £8.3m and were covered 16 times by earnings before interest, tax, depreciation and amortisation. The IAS19 pension net financing credit was £1.9m, compared to £5.3m in the first half of 2007, reflecting the higher discount rate used to arrive at the financing costs of the defined benefit obligations. The change in the fair value of financial instruments under IAS39 was a credit of £1.3m. The total net financing costs were £5.1m.

Adjusted profit before tax was £115.5m, an increase of 23%.

Restructuring costs were £5.6m (2007: £10.9m) which includes further rationalisation of Fluid Power's European distribution network, the completion of the Shipston UK plant closure and certain redundancy costs from other selected cost containment programmes. After these restructuring costs, the amortisation of acquired intangibles, principally in respect of customer relationships of Truflo and Kloehn, of £3.5m (2007: £6.3m) and Severe Service investigation costs of £2.7m (2007: £nil), reported profit before tax was £103.7m, an increase of 35% on the corresponding period.

The estimated effective tax rate for 2008 is 30%, which compares to an effective rate of 31% applied for the first half of 2007. The total profit for the period was £72.6m and after minority interests, the profit attributable to the equity shareholders of the Company was £71.2m. The average number of shares in issue during the period was 320.2m, giving a basic earnings per share of 22.2p, up 44% on the prior period's 15.4p. Adjusted basic earnings per share from continuing operations was 24.5p, compared to 18.9p, an increase of 30%.

Cash flow

The net cash from operating activities was £64m, compared to £21m in the corresponding period. Capital expenditure on plant property and equipment amounted to £25m and was 1.2 times the depreciation charge for the period of £21m. This expenditure includes the ongoing expansion of capacity at Orton for supply of Severe Service valves to the oil and gas sector, which should complete in early 2009. The major cash outflows in the period were £24m of tax, dividends of £41m and share buybacks of £15m. The total cash outflow for the period was £25m, compared with an outflow in the corresponding period of £118m.

Balance sheet

Closing net debt was £275m (June 2007: £192m). The debt to annualised EBITDA ratio was 1.0 at the end of June. Net debt was £42m higher than at 31 December 2007, comprising the cash outflow during the period and a translation loss of £16m on the revaluation of the Group's foreign currency debt.

As part of the Group's normal funding programme, an additional three year bank facility for £25m was finalised in January 2008. $100m of US loan notes maturing in 2009 were refinanced in early 2008 extending the maturity to 2018 and increasing the principal to $150m. This was achieved at a coupon below 6%. The average maturity of the Group's borrowings is now 4.5 years.

The IAS19 pension deficit was revalued to £129m which compares to the deficits of £41m at June 2007 and £64m at December 2007. The increase in the deficit was primarily due to a decline of nearly 7%, or £75m, in the value of the pension assets. The triennial actuarial valuation of the UK defined benefit pension plan as at 31 March 2008 has commenced. While the exact funding requirement will not be known until the valuation has been completed, it is likely that further additional contributions from the Company will be required, in line with the practice over the last three years.

During the period, the Company bought back into Treasury a further 3.1m shares at a cost of £14.8m. At 30 June 19.1m shares were held in Treasury, representing 5.6% of the issued share capital. Whilst we continue to believe that the acquisition of our own shares at current price levels remains attractive, we are looking to maintain a strong balance sheet allowing us to take advantage of increased acquisition opportunities that a more uncertain macroeconomic environment may present.

Shareholders' equity at the end of June was £375m, a reduction of £31m since the end of last year, which includes the attributable profit for the period of £71m, less an after tax actuarial loss on the defined benefit pension plans of £48m, the 2007 final dividend of £41m paid in May and share buybacks of £15m.

Severe Service investigation

The independent investigation into the Severe Service business is being finalised and external counsel expect to report to the Department of Justice in September. The investigation has also identified possible incidental breaches of US trade law. In the period, the Company incurred costs of £2.7m connected with this investigation. At this stage, it is still not possible to assess the level of any fines, defence or other costs arising from any action which may be taken or the timing of any such actions and accordingly no provision has been made for them in these accounts. The Company is hopeful that matters can be resolved with the Department of Justice by the end of the first quarter next year.

Operations review

The following review of our business areas for the six months to 30 June 2008 compares the performance of our operations with the six month period to 30 June 2007. This section also comments on the current market conditions in each of our businesses.  

           Severe Service

Revenues in the first half were up 12% to £191m (2007: £171m) and operating profit rose 22% to £31.8m (2007: £26.0m). Reported operating profit was £26.8m (2007: £21.1m).

Despite the disruption earlier in the year arising from the investigation, the organic revenue growth recovered to a better than anticipated 3% for the half year. Routes to market are now fully restored and order intake has fully recovered. The order book at the end of June was some 20% higher than at the end of June 2007. The North American and emerging markets performed well, but the phasing of certain fossil and nuclear power projects resulted in a decline in our Japanese revenues. The aftermarket business, which accounts for about 30% of Severe Service revenues, grew at close to 10%. Interest in new nuclear applications continues to grow and we have made good progress in securing the required industry certifications.

The Severe Service operating margin was 16.6%, an improvement on the prior period's 15.2%, helped somewhat by the stronger aftermarket business.

We are now well placed to benefit from the continued buoyancy of the oil and gas and power markets. Second half revenue growth is expected to be around 10%.

           Fluid Power

Revenues in the first half were up 20% to £339m (2007: £282m) and operating profit rose 37% to £48.2m (2007: £35.1m). Reported operating profit was £42.6m (2007: £25.5m).

The organic growth in revenues was 7%. Our sector business within Fluid Power accounts for about 35% of the revenues and targets niche markets with major Original Equipment Manufacturers that serve the commercial vehicle, automotive plant, life science, rail, print, packaging and PET/beverage markets. Our commercial vehicle business grew at over 10% globally, including some recovery in the US which we expect to continue into the second half. Our rail and PET/beverage sectors showed good growth while the automotive plant and print sectors were weaker. The remainder of the business provides general pneumatic and fluid control solutions for a broad range of industrial users. In this space Asia Pacific grew at 15% and both our US and German businesses grew at around 10%. The growth in our UK business was more muted. 

Across the whole of the Fluid Power business, Western Europe, excluding the UK, now accounts for 55% of our revenues and grew organically at 6%. The emerging markets performed very strongly with growth over 20% and we will be investing to expand our Chinese capacity in the second half of 2008.

The operating margin for the period was 14.2%, being a 180 basis point improvement on the first half of 2007. The closure of plants in the UK and US and a restructuring in Switzerland resulting in the transfer of production to Mexico and the Czech Republic, have contributed to this improvement. The business continues to face increasing cost pressures, albeit these were successfully offset in the first half through efficiency programmes and continued procurement initiatives.  

Momentum generally remains encouraging. Our sector business should show good second half growth, albeit the recovery in the US truck market is slower than anticipated and the US automotive business, although a relatively small sector for us, continues to deteriorate. Our general pneumatics business, whilst dependent on the capital equipment cycle, is holding up well.

Indoor Climate

Revenues in the first half were up 39% to £135m (2007: £97m) and operating profit rose 37% to £18.9m (2007: £13.8m). Reported operating profit was £18.8m (2007: £13.8m).

Organic revenue growth was 7% in the period. Price increases have offset increased energy and metal costs. Pneumatex, which was acquired in September 2007, contributed £17m of revenues in the period. Integration of this business has proceeded to plan and investments are being made to broaden the geographic presence of its range of water conditioning equipment. Our balancing valve business performed well in both West and East European markets. Our thermostatic radiator valve business has continued to grow in East European markets but was marginally lower than the prior period in its largest market, Germany.  

Our new product activities continue to focus on initiatives to improve energy efficiency which, over time, will enhance the value of our balancing valve systems to specifiers and end users alike, thus extending our recent track record of increasing our revenues per project.

The operating profit margin was 14.0% compared with 14.2% in the prior period. The anticipated seasonality in the Pneumatex business impacted the operating margin in the period.

Project activity remains high, and the demand for energy efficient solutions is growing. We are witnessing some slowdown in the commercial construction market, but the number of project delays or cancellations experienced to date has not had a significant impact on our business. Whilst residential construction markets have weakened in much of Western Europe, our thermostatic radiator valve business is more dependent on replacement and maintenance activity which, in the main, has held up reasonably well, with Germany stabilising after a weak second half in 2007 and continued growth in Eastern Europe.

Beverage Dispense

Revenues in the first half were up 7% to £157m (2007: £147m) and operating profit rose 28% to £14.3m (2007: £11.2m). Reported operating profit was £13.4m (2007: £8.6m).

Organic revenue growth was 3% in the period. Our North American business performed strongly in the first half with sales to the Quick Service Restaurant sector showing good growth. Our continental West European markets also performed well helped by the continuing progress of new products.  

With the UK beer industry continuing to see big declines in on-trade beer volumes, our UK business, comprising around 15% of Beverage Dispense and focused on the supply of drinks dispense equipment to the brewers, has declined by nearly 20%.

Our new product agenda continues to make good progress with several new launches and test programmes addressing the growing demand for draft dispense of newer age drinks categories and more energy efficient equipment.

The operating profit margin was 9.1% compared with 7.6% in the prior period, although the prior period margin was closer to 9.0% after adjusting for the impact of a flood at our Sheffield site in June 2007. The operating margin benefitted from the closure of one US and one UK plant in 2007 but has been held back by increases in raw material costs. We continue to address the cost base, especially in the UK, through headcount reductions and further procurement and operating efficiencies.

Our Beverage Dispense business does face a more challenging environment in the second half, with no signs of improvement in the difficult UK beer sector, and evidence, in recent weeks, of a slowdown in demand from soft drinks bottlers and food service distributors in the US market. We now expect overall volumes for the year to be little changed, if not slightly down, on last year.

Merchandising 

Revenues in the first half were up 6% to £89m (2007: £84m) and operating profit declined 8% to £7.4m (2007: £8.0m). Reported operating profit was £7.2m (2007: £7.9m).

Organic growth in revenues was 9%. Revenues from the merchandising units for confectionery, beverages and newspapers within US grocery stores performed very well, helped by the first shipments of one large contract towards the end of the period. Our consumer electronics sector business also made a strong recovery from its 2007 levels. The cosmetics sector saw good revenue growth, but our plans to make in-roads into the US market are taking longer than anticipated. Our legacy carts and machinery business was down quite sharply as US businesses cut material handling budgets in the face of a worsening economy. The automotive sector was also below last year's levels.

The operating margin was 8.3%, down from the 9.5% level reported in the corresponding period. The first half margin was impacted significantly by the rapid increase in steel costs which rose by about 60% between January and June and there is a lag before we recover these costs through price increases. We have recently announced the closure of one of our US west coast plants and the capacity will transfer to our other facilities.

Our Merchandising business has a strong order book and is well placed to continue the momentum in its revenue growth into the second half. The carts, machinery, and US cosmetics sectors will continue, however, to remain difficult. The margin is expected to recover in the second half as a result of selling price increases and further supply chain efficiencies.

Outlook

With a healthy order book, and continued momentum from both new products and emerging markets, we are confident of further revenue progression in the second half. We remain focussed on margin improvement with ongoing cost reduction initiatives expected to mitigate the impact of raw material and energy cost increases. We are alert to the possibility of a further deterioration in economic conditions, and whilst we may continue to experience some pockets of weakness, we anticipate another period of solid progress in the remainder of the year.

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 page 40 of its 2007 Annual Report (a copy of which is available at IMI's website at www.imiplc.com), the Company set 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: political and natural catastrophe; economic cycle; environmental; key customers and suppliers; legal and regulatory; financial market risks; competitive markets; talent acquisition; internal controls; new products and technology; M&A activity; and pension funding. Many of these risks are such that their potential to impact the Group's operations are inherent to IMI as a global business and they remain valid as regards their potential to impact the Group during the remainder of the second half of 2008. 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.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

• the interim management report includes a fair review of the information required by:

M J Lamb                                 D M Hurt

Chief Executive                       Finance Director

28 August 2008

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 2008 which comprises the Condensed Consolidated Interim Income Statement, the Condensed Consolidated Interim Balance Sheet, the Condensed Consolidated Interim Statement of Cash Flows, the Condensed Consolidated Interim Statement of Recognised Income and Expense 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 the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

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 DTR of the UK FSA.

As disclosed in note 12, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

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

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. 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 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

KPMG Audit Plc
Chartered Accountants  

Birmingham

28 August 2008

CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT