Annual Financial Report

RNS Number : 6109I

IMI PLC

26 March 2015

 

26 March 2015

Annual Financial Report

IMI plc (the "Company") announces that copies of the Annual Report and Accounts for the year ended 31 December 2014 and the Notice of Annual General Meeting for 2015 are available on the Company's website www.imiplc.com and may be viewed and downloaded online at www.imiplc.com/investors(click on Annual Reports).

Hard copy documents are being posted to shareholders who have elected to receive them and are also available from the Company Secretary at the Company's registered office at Lakeside, Solihull Parkway, Birmingham Business Park, B37 7XZ.

Copies of the above documents, together with the notice of availability to shareholders receiving web-communications and the form of proxy for the 2015 Annual General Meeting have been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do.

The Company's 2015 Annual General Meeting will be held at the Hilton Birmingham Metropole Hotel, National Exhibition Centre, Birmingham on Thursday 7 May 2015, commencing at 10am.

The Company's preliminary results announcement of 27 February 2015 contained a management report as well as the audited financial statements which were prepared in accordance with the applicable accounting standards.  The Annual Report and Accounts submitted to the National Storage Mechanism also contains information regarding the Company's principal risks and uncertainties and a responsibility statement relating to the content of the Annual Report and Accounts (from the Directors in office as at 26 February 2015); an extract of this information is provided below as required under paragraph 6.3.5 of the DTR, however this material should be read in conjunction with and is not a substitute for reading the preliminary results announcement of 27 February 2015.

This announcement should be read in conjunction with and is not a substitute for reading the full Annual Report and Accounts. 

There are no related party transactions requiring disclosure. 

Page and note references in the text below refer to page numbers and notes in the Annual Report and Accounts.

Statement of Directors' Responsibilities

The following statement is repeated here solely for the purpose of complying with DTR 6.3.5.  This statement relates to and is extracted from page 145 of the Annual Report and Accounts and is signed by order of the Board by John O'Shea, Company Secretary.  Responsibility is for the full Annual Report and Accounts and not the extracted information presented in this announcement or the preliminary results announcement.

Directors' responsibility statement under the Disclosure and Transparency Rules

Each of the directors listed on pages 44 and 45 confirms that:

Ü the Group and Parent Company financial statements in this Annual Report, which have been prepared in accordance with applicable UK law and with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

Ü the Annual Report (which includes the Directors' Report and the Strategic Report) includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

Principal Risks and Uncertainties

The Board has responsibility for determining the nature and extent of the principal risks it is willing to take to achieve the Company's strategic objectives. The Executive Committee is responsible for implementing and monitoring internal controls and other elements of risk management systems and operates in parallel with the Audit Committee, which has primary responsibility for oversight of financial controls, the Nominations Committee, which has primary responsibility for succession risk, and the Remuneration Committee, which has primary responsibility for remuneration and incentive structure risk.

During the year a new business unit based risk management process was introduced within the Group. Each site is required to develop and keep updated a full risk profile identifying the key risks facing the site. Each risk is assessed, rated and appropriate mitigation actions developed. Leading KPIs are tracked for each risk and site management teams review on a monthly basis both the risk profile, progress on mitigation actions and KPIs to ensure appropriate actions are taken. Site level risk profiles will be formally uploaded to the Group intranet every six months and biannually, these will be consolidated into divisional risk registers and a Group risk register. By the end of March 2015 all key sites will have conducted an initial risk profile which will be routinely reviewed and updated. This will supersede the current process where risks were considered primarily at divisional and Group levels.

Each Divisional Managing Director has appointed a risk champion with responsibility for embedding the Group risk assessment process within their business. The businesses' risk reports, including mitigation action plans for significant risks, are reviewed by the most senior executive within the relevant business. These are then reviewed by the Executive Committee, which in turn submits a full half yearly risk assessment to the Board. The Board explicitly considers the risks associated with the Group's strategic objectives. The Executive Committee also reports to the Board on major business and other risks involved in specific investment decisions including acquisitions and divestments.

Through these processes a list of significant risks is identified, assessed and ranked according to their probability and materiality and, following Executive Committee review, the Board considers the measures to be utilised to mitigate, transfer or avoid such risks. Risk appetite across the range of strategic objectives of the Group is also reviewed by the Board.

In addition to strategic and operational risks, we are also exposed to a number of financial market risks including credit risk, liquidity risk, counter party risk and fluctuations in foreign exchange rates, interest rates and commodity prices. A description of these risks and our centralised approach to managing them is set out in section 4.4 to the financial statements.

During 2015 we will be further enhancing our risk management process in line with the recent revisions to the UK Corporate Governance Code and associated best practice guidance.

The key strategic and operational risks facing the Group are shown in the table on pages 31 to 33. This table includes a description of the risk and the potential impact on the Group, a summary of the mitigation actions, the risk movement and the main changes during 2014.

Risk	Risk description and potential impact	Mitigation
Regulatory Breach Failure to comply with legislation and a breach of our own high standards of ethical behaviour	We have set ourselves very high standards in our approach to ethics and rejection of corruption in business. We need to ensure, as we expand our operations to achieve our desired growth, that we maintain these high standards. We face legislation around anti-bribery, fraud and competition law and need to ensure compliance otherwise we face both financial and reputational damage	Ü Commitment to good governance practices which are embodied in The IMI Way Ü Further enhancement of the internal controls declaration process and continued rigorous financial audits by our Group Assurance team Ü The annual IMI Way Day was held in June across the Group and included face-to-face training for all employees Ü Policies, manuals, training and guidelines are available to all employees under the legal & compliance and financial sections of the IMI global intranet, which was launched in 2014 Ü Group, divisional and specific territory resources dedicated to legal and regulatory compliance Ü Training of employees focusing on how to apply The IMI Way in everyday situations and key risk areas such as competition law, fraud and anti-bribery and corruption Ü Availability and promotion of the whistle blowing policy and the confidential IMI hotline to report concerns Ü Group standard operating procedures updated with increased rigour around core legal and compliance processes Ü We have introduced standard agency agreements and terminated non-compliant agents
Changes during 2014	Whilst the external regulatory environment is increasingly more onerous, our processes and procedures are now more embedded throughout the business. Access to the procedures is available world-wide on the Group intranet
Major project execution We fail to deliver major transformational projects on time and on a budget	We will need to undertake a number of major change projects in line with our strategic objectives including business reorganisations and implementation of IT systems. If we fail to deliver the desired objectives it could have an adverse financial impact on the Group	Ü Further upgrade of resources and talent in project management, in particular around introduction of new Group-wide core processes Ü Regular review of project progression by the Executive Committee Ü Enhanced risk assessment process including full mitigation action plans for all major change projects Ü Group Assurance reviews of major new projects
Changes during 2014	The number of major change projects started in 2014 has increased significantly, particularly around IT projects, business organisation and implementation on new Group-wide processes. As a result we have introduced bi-weekly process meetings, overseen by the Executive, to ensure key improvement projects are on track, adequately resourced and monitored so that resources are not overstretched
Health, Safety & Environmental (HS&E) Controls Failure of our health, safety and environmental (HS&E) controls resulting in harm to employees or other stakeholders	We recognise that we have a duty of care to our employees. Though we have made great progress in recent years we understand the impact on our employees from the failure of this obligation and therefore still consider this a key risk. Failure of controls could result in injury, death and environmental damage with the consequential impact of reputational damage and risk of regulator action	Ü Introduction of lean manufacturing as one of IMI's core processes including 5S (housekeeping methodology for manufacturing areas) and Gemba walks (management walks in manufacturing areas) Ü Enhancement of standard work processes, new lifting and slinging procedures and improved planning around plant layout Ü Established global process in place to ensure that health, safety and environmental matters are appropriately addressed and any such risks are minimised including monthly reporting to, and review at the Executive Committee Ü Group and divisional level HS&E resource to proactively manage and audit HS&E performance and to provide guidance and support to site management
Changes during 2014	We measure our progress in this area by tracking our lost time accidents (LTAs) per 100,000 hours worked. In 2014, the >1 day rate improved by 15% relative to 2013. HS&E best practice sharing has been a source of this improvement and has included a standardised process for near-miss and hazard reporting called SAFER (See and Fix Error Report) as well as the 5-Why Root Cause Analysis, and investment in pressure testing safety systems and machine guarding
Product Failure Product failure leading to Warranty issues, recall, Injury, damage or disruption To customer's business	We pride ourselves on the innovative engineering solutions we provide for our customers. The quality and safety of our products is of the highest importance and if we fail to deliver quality and safe products or advanced technical solutions, then we face the financial and reputational impact	Ü Continued focus on quality and safety, including audits to appropriate quality standards Ü Processes to mitigate the reputational and legal implications of any failure Ü Upgrade of talent and focus on functional excellence in quality and product development Ü Contract management resources for both sales and purchases Ü Development of Group-wide standard for advanced product quality planning (APQP), which is being launched across the Group in 2015
Changes during 2014	Customers are increasingly insisting on more onerous contractual terms relating to product quality and performance. We are implementing a new APQP process, standard work instructions and lean manufacturing tools such as poka-yoke (quality system with the goal of achieving zero defects), which will reduce the likelihood of issues arising and have taken increased insurance cover in one higher risk area to reduce possible impact
Loss of a key facility Interruption to business as a result of a loss of a Key facility	A temporary or permanent loss of a key manufacturing site or warehouse as a result of a natural catastrophe or any other reason would have a material adverse impact on our ability to meet our customers' needs	Ü Introduction of lean in all key manufacturing sites with focus on 5S, Gemba walks and Total Productive Maintenance (holistic approach to preventative maintenance involving all employees to maximise operational time of equipment) Ü Site level risk profiling which identifies the key operating risks, tracks key leading KPI's and identifies mitigation actions Ü Maintenance and regular testing of robust business continuity plans Ü Risk control surveys undertaken annually at all key sites to ensure compliance with best practice in property risk management
Changes during 2014	Introduction of lean including 5S, Gemba walks and Total Productive Maintenance at site level has created a cultural change in management's risk behaviour. Enhancement of site level risk profiling, particularly around key operating risks, is leading to a greater focus on those risks that could impact the continuity of the business
New product introduction Failure to develop a pipeline of new products	Our strategy of doubling operating profit in the next five years is underpinned by organic growth, which will be achieved in part by delivering a stream of innovative new products for our customers. Failure to maintain new product momentum will impact our ability to grow	Ü Continued investment in research and development, working with our key account management teams to ensure we meet our customer needs Ü Centres of design and technological excellence established in a number of locations Ü Presented 2015 strategy with substantially increased spend in respect of new products and capital equipment
Changes during 2014	New product introductions have become an increasingly important part of our strategic growth agenda. Best practice within IMI is in our Hydronic Engineering division which has brought 14 new products to the market in 2014 and we are now sharing processes and learnings across the other two divisions
Acquisition Risk Failure to grow the business by making the right acquisitions and integrating them successfully	An important part of our growth agenda is to make acquisitions which complement or extend our product portfolio. Failure to make the right acquisitions that deliver synergies would restrict our ability to meet growth targets	Ü Resourced central M&A function working with our divisions to identify acquisition opportunities Ü Robust due diligence with Executive stewardship Ü Standardised integration process Ü Introduction of bi-weekly business development matrix meetings to monitor and manage acquisitions and disposals
Changes during 2014	To achieve our strategic objective of doubling operating profit over five years, a number of value enhancing acquisitions will need to be made. To support this we have introduced bi-weekly process meetings attended by the Executive to increase rigour and visibility. A standard integration process has been introduced to acquisitions to ensure efficiency synergies are maximised
People Capability Failure to attract and retain talent	Our success as a business will depend on ensuring we get the right people in key positions in the organisation. If we fail to acquire, retain and develop talent leading to a failure to effectively succession plan, this will result in the loss of knowledge, intellectual property and performance	Ü Appropriate reward programmes to ensure people are motivated to deliver our Group objectives Ü Rigorous appraisal and succession plans in place, which are reviewed twice yearly Ü Group-wide training and development programmes being established for implementation in 2015
Changes during 2014	During 2014 we introduced a new Group-wide performance management and talent review/succession planning process. A new leadership development programme is being established and the graduate development scheme is planned to double the number of graduates when compared with 2014 intake
Supply Chain Failure to manage the supply chain	We have a significant number of contracts with a broad base of suppliers. If we fail to meet our customers' requirements in respect of quality or delivery, it could have a material impact on the Group's results	Ü Monitoring of risks and development of contingency plans to mitigate the impact of a supplier failure or increased prices Ü Review of supply base to reduce over-reliance on key suppliers Ü Dual supply on all critical components
Changes during 2014	Introduction of standard processes to obtain intimate knowledge of key suppliers to ensure that all are robust and capable. Increased collaboration across divisions to share knowledge of suppliers and use of standardised scorecards to monitor trends in key supplier performance
IT Resilience A major disruption to IT systems	We utilise a significant number of IT systems to support the Group's production, technology, marketing, sales and financial functions. Failure of any of the systems or corruption or loss of data could have a major impact on operations	Ü Development and regular testing of business continuity plans Ü Introduce strategy to upgrade or replace key systems Ü Detailed and improved plans to implement new ERP platforms in each of three operating divisions
Changes during 2014	Major Enterprise Resource Planning (ERP) implementation has begun in all three divisions during 2014. Each ERP project has fortnightly Executive overview, including management of risk. The new Group intranet has added substantial capability, which replaces a number of legacy systems
Cyber Security Unwanted external access to our IT systems	Breach of our IT systems by third parties could result in loss of intellectual property, theft of financial assets and a reduction in the integrity of our systems. For customer facing systems there could be business interruption and reputational damage	Ü Increased monitoring of IT systems Ü Disaster recovery plans reviewed and tested Ü New Group IT Director joined the Company in 2014 Ü New Group IT Security Director joined the Company in 2014 Ü Increased IT security resources and establishment of an IT security steering group comprising representatives for all divisions and corporate offices Ü Investment in three-year plan to significantly improve infrastructure and standards
Changes during 2014	The nature and number of security threats has increased during 2014 but the Group has recruited a number of IT security specialists to better understand the threat landscape and develop appropriate responses to increase resilience
Macro-Economic Instability Global economic/ political Instability impacting upon our ability to achieve the desired organic growth	We operate in global markets and demand for our products is dependent on customer and market confidence. A downturn in a regional economy, a change in oil price, movements in exchange rates or a political event could impact end market demand and result in a reduction in both sales and profit	Ü Our divisional management are close to key customers and quickly pick up and feedback change in customer sentiment Ü Our new core forecasting process utilises early indications of reduced demand and the operational output can be right sized appropriately Ü The Group operates in all main regional markets and our strategy is to ensure that we have a balanced portfolio of markets to ensure we are not too dependent on any one region or market
Changes during 2014	As we have progressed through 2014, European markets have become challenging due to slower growth. Growth in Asia Pacific is strong but increasing at a slower rate than in 2013. The conflicts in areas such as Ukraine and the Levant with associated sanctions are concerning and impact our Critical Engineering business
Competitive Markets Increasingly competitive markets leading to pricing pressures or loss of Customers	Increased volatility and slowdown in major economies would result in increased competition. This could lead to loss of customers and/or pricing pressures leading to lost sales and reduced profits	Ü Review of capacity utilisation at sites as part of the lean benchmarking process and business improvement plans to obtain better utilisation and improved productivity Ü Review of standard costings to ensure thorough understanding of product cost Ü Monitoring of market to ensure right balance between cost competitiveness and quality solutions
Changes during 2014	Heightened macro-economic issues will inevitably increase both competitive and pricing risks and will become a more important factor during 2015. As a result this has been included as a principal risk

Risk Appetite

The Board has considered the Group's risk appetite and it is considered appropriate to achieve our strategic objectives. Risk appetite is higher for new product introduction, acquisitions and major change projects in keeping with our growth strategy but lower for health, safety and environmental controls, regulatory compliance, cyber security and IT resilience.

Our risk appetite has been communicated to the Executive to ensure their decision making behaviour is consistent with the risk appetite set by the Board.

Enquiries to:

Kam Pawar                    Corporate Counsel                    Tel:            0121 717 3700

Will Shaw                       Investor Relations                      Tel:            0121 717 3700

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