Annual Financial Report

RNS Number : 4631A

IMI PLC

24 March 2017

Annual Financial Report of IMI plc (LEI: 2138002W9Q21PF751R30)

IMI plc (the "Company") announces that copies of the Annual Report and Accounts for the year ended 31 December 2016 and the Notice of Annual General Meeting for 2017 are available from today 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, Birmingham, B37 7XZ.

Copies of the above documents, together with the form of proxy for the 2017 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 2017 Annual General Meeting will be held at the Hilton Birmingham Metropole Hotel, National Exhibition Centre, Birmingham on Thursday 4 May 2017, commencing at 10am.

The Company's preliminary results announcement of 24 February 2017 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 today 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 23 February 2017); 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 24 February 2017.

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 136 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 46 and 47 confirms that:

• 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

• 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

Our risk management processes were significantly updated in 2015 and are now well embedded in all our businesses. These processes identify, evaluate and manage the risks which could impact the performance or reputation of IMI and its ability to implement its growth strategy.

The Board determines the Group's risk appetite and reviews the Group's risks formally throughout the year. Responsibility for implementing and monitoring internal controls and other elements of risk management, is delegated to the Group Chief Executive and the Executive Committee. The Executive Committee operates alongside 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.

Risk appetite

The Board is responsible for determining the nature and extent of the principal risks it is prepared to accept to achieve the Group's strategic objectives. Specific risk exposures and appetites vary according to the nature of the risk, including the organisation's ability to mitigate its impact.

Details on risk appetite are communicated to the Divisional Managing Directors and the Group's Executive Committee to ensure that decision making and behaviours across the business are consistent with the guidance set by the Board.

Risk management

The risk management processes we operate ensure that we have a common, Group-wide approach to the identification, assessment and quantification of risks and the way in which they are managed, mitigated and monitored.

Our risk management processes are embedded in all parts of our operations and our bottom up risk management framework, which is described below, ensures that the Board and the senior leadership team is able to actively assess risks and monitor the measures used to mitigate, transfer or avoid such risks.

All of the Group's manufacturing operations are required to maintain an up-to-date risk profile which identifies the key risks facing the business, assesses the mitigating processes and controls in place to manage the risk and monitors and measures the effectiveness of those controls. The risk profile enables management to identify issues and areas that require improvement and to efficiently develop remediation action plans. During the year, the formality and rigour of risk assessment within our manufacturing businesses was enhanced principally through incorporating it into each business' monthly management reporting procedures. This monthly review increases management ownership and accountability, both of which are crucial to ensuring an effective risk management framework.

Bi-annually each manufacturing operation uploads its risk profile to the Group intranet. Each of our three divisions review and consolidate their most significant site level risks and mitigation strategies into a summarised divisional risk profile, which includes any additional divisional level risks as appropriate. The divisional risk profiles are then consolidated into a single Group risk profile using the same methodology. Both the divisional and Group risk profiles are presented and reviewed by the Executive Committee twice a year. The Executive Committee's review, which includes a detailed analysis of the Group risk profile, the supporting divisional summaries and actions undertaken to ensure compliance with the enhanced requirements of the UK Corporate Governance Code, are all submitted to the Board.

The key strategic, operational, financial and compliance risks facing the Group, in order of priority, are shown in the table on the following pages. This analysis includes why we think the risk is important, how we are mitigating the risk, our perception of whether the risk has increased or not, and the main changes during 2016.

In addition to strategic, operational and compliance risks, the Group is also exposed to broader financial market risks, in particular, currency exchange rate volatility following the Brexit referendum. A description of these risks and our centralised approach to managing them is described in Section 4.4 of the financial statements.

Risk	Risk description and potential impact		Mitigation
Macro-economic instability Global economic or political instability impacting the group's ability to achieve forecast and market expectations	The Group operates in global markets and demand for our products is dependent on economic and sector-facing environments. A downturn in a global / regional economy or political instability could impact end-market demand and the Group's ability to achieve market expectations. The risks associated with Brexit are not considered as material to the Group.	• • • • •		Divisional management monitor key customers and respond quickly to changes in customer demand. Our core forecasting process utilises early indications of reduced demand and ensures operational output can be right sized appropriately. The Group operates across a range of regional markets and our strategy is to ensure that we have a balanced portfolio with no single dependency on a single market sector or geography. Enhanced stress testing and sensitivity analysis of business plans with regular reviews of key market and sector metrics. Increased investment in new product development, enhanced operation performance to improve competitiveness.
Changes during 2016	Economic and market conditions have remained challenging throughout 2016. Critical Engineering experienced reduced activity in Oil & Gas and Power generation as the effects of the low oil price continue to impact these and related sectors. Precision Engineering was affected by lower demand in Europe and Asia for Industrial Automation and the Commercial Vehicle market was significantly down in the Americas. The Group has continued to increase investment in new product development, enhanced operational performance and increased value engineering initiatives to improve competitiveness. To mitigate the impact of current market weakness, all three divisions have implemented significant cost-reduction programmes which will be executed in the early part of 2017.
Major project implementation Failure to deliver major transformational projects on time and on budget	The Group is undertaking a number of major change projects to adjust to the changing economic conditions including: business reorganisations and implementation of new IT systems. Failure to deliver the desired objectives on time and on budget and failure to react quickly enough to changing market conditions, could have an adverse financial impact on the Group.	• • • • • •		Continued management of resources to execute projects. Detailed plans with clear and measurable milestones reviewed by the Divisional Managing Directors to track progress. Regular review of major project progress by the Executive Committee. Enhanced risk assessment process including full mitigation action plans for all major change projects. Specialist IT and Group Assurance reviews of major IT projects. Detailed contingency plans.
Changes during 2016	In response to adverse market developments, the Group continues to execute major change projects relating to business reorganisations. The continued ERP investment programme will also see a number of complex IT system implementations. All significant projects during 2016 have received substantial senior management oversight in the form of bi-weekly Executive project reviews to ensure they are appropriately resourced and remain on track to deliver the objectives that were approved at project initiation.
Product quality Quality issues leading to product failure, recall, warranty issues, injury, damage or disruption to customer's business	The Group's investment in innovative engineering solutions will continue to be a priority across all three divisions. The quality and safety of our products is of the highest importance and failure to deliver the quality required would result in negative financial and reputational impact.	• • • • •		Adherence to Group-wide standard for Advanced Product Quality Planning process (APQP). Continued focus on quality management systems, including audits to appropriate quality standards. Testing of finished product and customer sign off on the most critical of products. Targeted lean events to improve quality and application of problem solving tools. Upgrade of talent and focus on excellence in quality and product development.
Changes during 2016	The Group has continued to implement lean manufacturing methodology to improve how we create value, reduce waste and improve performance. Lean assessments continue to show significant improvements in 2016. In order to extend the benefits of sharing Group-wide best practice, management have instigated a combined metric which consists of the lean assessment, the Health, Safety and Environment assessment and five key performance indicators: cost of quality, on time delivery, productivity, inventory turns and Lost Time Accidents. In addition, the APQP process introduced in 2015 now underpins new product development across all divisions and manufacturing operations.
Acquisition risk Failure to integrate acquisitions successfully and deliver the required Synergies	An integral part of the Group's strategy is to make value enhancing acquisitions that complement our product portfolio. Failure to deliver the post integration strategy would reduce the value of acquired businesses.	• • •		Central M&A function, suitably resourced, working with divisions to identify hard and soft synergies within targeted acquisition opportunities. Formalised acquisition approval, due diligence and post-acquisition integration processes. Documented process and toolkit to monitor and effectively manage 100 days post-acquisition integration.
Changes during 2016	The revised and formalised integration process used in the acquisition of Bopp & Reuther has been further enhanced. This process results in a mix of divisional and Group resources being assigned to ensure the right skills and people across all disciplines are available to successfully project manage acquisition integration.
Regulatory breach Failure to comply with legislation or a breach of our own high standards of ethical behaviour	IMI has established a framework which instigates the highest standards to ethics and regulatory compliance across our business. As we expand our operations to achieve growth it is important that we maintain these standards. Legislative requirements around tax, anti-bribery, fraud and competition law require rigorous monitoring and training to avoid financial and reputational damage.	• • • • • • • • •		Commitment to good governance practices which are embodied in the IMI Way. Continued enhancement of the internal controls declaration process and continued rigorous financial audits by our Group Assurance team. The annual IMI Way Day was held in June across the Group and included ethics training for all employees. Policies, manuals and guidelines are available to all employees under the legal, compliance and financial sections of the IMI global intranet. Group, division and specific territory resources dedicated to legal and regulatory compliance. Training of employees focusing on how to apply the IMI Way in everyday situations and key risk areas such as competition law, fraud and antibribery and corruption. The confidential IMI hotline to report concerns. Group standard operating procedures are available on the intranet and increased rigour around core legal and compliance processes. Third party agent due diligence and approval procedures, standard agency agreements and terminated non-compliant agents.
Changes during 2016	IMI has a zero appetite for compliance risk and the challenging market and regulatory environment demands the very highest standards of conduct. Our processes and procedures have continued to strengthen and embed throughout the business. During 2016 we trained over half our workforce on anti-bribery and a third of our employees on competition law using eLearning modules hosted on our new IMI Learn platform. This system provides the ability to target particular employee groups and tracks completion of required compliance training. The introduction of stringent new procedures and processes to operate in high risk territories ensures compliance when we address future business opportunities in these regions.
Supply chain Failure to manage the supply chain	The Group has a significant number of contracts with a broad base of suppliers. Failure to meet customers' requirements in respect of quality or delivery, could have a material impact on the Group's results.	• • • •		Monitoring of risks and development of contingency plans to mitigate the impact of a supplier failure or increased prices. Preferred supplier lists for all major materials and components in each of the divisions. Adequate safety stock and/or dual supply for critical components. Supplier scorecard process to monitor performance, capability and resilience.
Changes during 2016	The implementation of a supply scorecard. The supplier risk assessment selection tool and introduction of commodity experts, has resulted in a reduction in the likelihood of a critical, strategic supplier failure. Preferred suppliers lists have been produced to concentrate strategic purchasing with certified and approved suppliers. Framework agreements have been introduced to increase formality in standard purchase agreements.
Cyber security Unauthorised access to our IT systems	Unapproved access to IT systems could result in loss of intellectual property, fraudulent activity, theft and business interruption.	• • • •		IT Security Improvement programme underway across the Group. IT security steering group comprising representatives from all divisions with corporate sponsorship and oversight. Cyber security awareness training for all employees, particularly with regard to fraud. Disaster recovery plans instigated on all critical IT assets.
Changes during 2016	The Group is in the second year of a three year Group-wide Security Improvement Programme and during 2016, a 24/7 security operation centre was established to monitor and resolve security incidents. The programme includes deployment of consistent anti-virus, firewalls, intruder detection, device control and encryption software across the Group. Combined with greater cyber risk awareness and behaviours from our employees, these developments have helped mitigate the increasing cyber threat to a level consistent with 2015.
Competitive markets Increasingly competitive markets leading to pricing pressures or loss of customers	Increased volatility and slowdown in major economies could result in increased competition, leading to loss of customers and/or pricing pressures leading to lost sales and reduced profits.	• • • • •		Competitor tear-down and value engineering procedures. Review of site capacity as part of the lean benchmarking to better utilise facilities and improve productivity. Standard costings to ensure thorough understanding of product cost. Monitoring of markets to ensure cost competitiveness and market shares. Formal market, competitor and peer reviews undertaken quarterly.
Changes during 2016	Improvements in operational capabilities, routine tear-down testing and competitive benchmarking of competitor products in all three divisions has underpinned new product development and value engineering initiatives. These procedures have proved crucial success factors in winning business, particularly in the Critical Engineering division. The APQP process is also producing tangible benefits across the Group following its successful introduction in 2015.
New product development Lack of innovation or development of a pipeline of new products	The Group's strategy for sustainable long-term growth will be achieved in part by delivering a pipeline of innovative new products. Failure to deliver market leading products will impact our ability to grow.	• • • • •		Five year technology roadmaps included in divisional strategies. Continued investment in research and development to ensure we target the most profitable opportunities. Centres of design and technological excellence established with dedicated teams to monitor progress. New product introduction procedures in place. Tracking of key performance metrics - level of sales from new products and level of research and development spend against sales.
Changes during 2016	The APQP process launched in 2015 is now operating effectively across all three divisions. Hydronic Engineering, the division which pioneered the process, continued to benefit from the pipeline of new products, generating £30m of sales in 2016 (£30m in 2015). New product development is now an integral component of the five year strategic planning cycle and establishes commercial priorities and development roadmaps for all the Group's principal markets.