Annual Financial Report

RNS Number : 8133I

IMI PLC

23 March 2018

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 2017 and the Notice of Annual General Meeting for 2018 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 2018 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 2018 Annual General Meeting will be held at the Hilton Birmingham Metropole Hotel, National Exhibition Centre, Birmingham on Thursday 3 May 2018, commencing at 10am.

The Company's preliminary results announcement of 2 March 2018 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 1 March 2018); 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 2 March 2018.

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 150 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, as at the date of this report, 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 are embedded in all our businesses. These processes identify, evaluate and manage the risks which could impact our performance, our reputation or our ability to successfully execute our growth strategy.

The Board determines our risk appetite monitors and reviews the risk management processes we operate. Responsibility for implementing and monitoring internal controls and other elements of risk management is delegated to the 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 risks which it feels are acceptable and appropriate for us to achieve our strategic objectives. Specific risk exposures and appetites vary according to the nature of the risk, including our ability to mitigate their impact.

Risk management

We adopt a common, Group-wide approach to the identification, assessment and quantification of risks and the way they are managed, mitigated and monitored. We operate a bottom-up risk management framework, which is described below. This approach ensures that the Board and the senior leadership team are able to actively assess risks and monitor the measures used to mitigate, transfer or avoid such risks. It also ensures that risks are managed at multiple levels throughout the Group and that feedback is communicated to our operations to incorporate in their local risk management processes.

Group strategic risk management process		Operational risk management process
Strategic review of the Group's principal risks and constructive challenge in relation to the monitors and measures implemented to manage such risks.	Board	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 UK Corporate Governance Code, is submitted to the Board twice a year. The Board also undertakes an annual review to assess the effectiveness of internal controls used to manage risk across the Group.
Delivery of Group-wide strategic actions and monitoring of risks and key performance indicators.	Divisional and Group Executive	Bi-annually each manufacturing operation uploads its risk profile to the Group intranet. Our three divisions review and consolidate their most significant site level and commercial risks and mitigation strategies into a 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 and the divisional and Group risk profiles are presented and reviewed by the Executive Committee twice a year.
Feedback and communications provided to operating companies and manufacturing operations on Group and Divisional strategic actions.	Operating companies	All manufacturing operations 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 efficiently develop remediation action plans. The risk profile is incorporated into each business' monthly management reporting procedures which increases management ownership and accountability, both of which are crucial to ensuring an effective risk management framework.

Strategic growth priorities key

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 managing the risk, and the main changes during 2017.

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	Why we think this is important		How we are mitigating the risk
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 market conditions. A downturn in the economy or political instability could impact demand and the Group's ability to achieve market expectations. The Group needs to be responsive to market conditions whether weak or buoyant.	• Maintain a balanced business portfolio operating across a range of markets. • Monitor key customers and respond quickly to changes in customer demand. • Utilise core forecasting processes that ensure operational output can be right-sized appropriately. • Undertake enhanced stress testing and sensitivity analysis of business plans and regularly review key market and sector metrics. • Focus on enhancing competitiveness by increasing investment in New Product Development, Value Engineering and improving operational performance. • Develop robust contingency plans to ensure agility if realignment of cost base is required.
Changes during 2017	While IMI Critical Engineering has continued to face challenges in many of its key markets, Value Engineering has enabled the division to win new orders in adjacent segments. Both IMI Precision Engineering and IMI Hydronic Engineering have experienced a stable or improving trading environment. We have continued to execute our strategy and our competitiveness is improving. Further information about our strategic progress during the year is detailed in the Chief Executive's review and Operational review - see pages 12 & 28 respectively.
Failure to deliver major transformational projects on time and on budget	The Group is continually evolving and changing, both to respond to external pressures and conditions but also to ensure that we are in a strong position to achieve our strategic goals. Change projects include business reorganisations and implementation of new IT systems which are complex and long-term. 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.	• Detailed plans with clear and measurable milestones reviewed by Divisional Managing Directors. • Regular review of major project progress by Executive Committee. • Enhanced risk assessment process including full mitigation action plans. • Specialist IT and Group Assurance reviews of major IT projects. • Detailed contingency plans. • Monthly operational meetings which rigorously review progress of all projects. • ERP steering committee meetings and post go-live audits to review progress on implementation plans.
Changes during 2017	As outlined in the Operational review on page 28 each division has robust systems and procedures to manage and monitor business critical projects. In addition, our ERP investment programme continued to be delivered on schedule and on budget. While the risk of failed ERP implementations remains pertinent due to more of our operations introducing new systems, the risk is mitigated by greater experience from prior implementation, proficient system implementation teams and a proven control environment. There have been no major post-implementation ERP issues in the year and this has contributed to a net reduction in the risk for the Group.
Quality issues leading to product failure, recall, warranty issues, injury, damage or disruption to customers' business	Developing innovative and technically advanced products is at the heart of what we do. 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 damage.	• Adherence to Group-wide standard for Advanced Product Quality Planning process (APQP). • Weekly and monthly reporting on APQP process to identify improvements in the early phases of the development process. • Continued focus on quality management systems and audits. • Testing of finished product and customer sign-off on the most critical products. • Targeted Lean events to improve quality, including implementation of Obeya reviews for projects work. • Upgrade of talent with a focus on both quality and product development excellence.
Changes during 2017	During the year our operational performance continued to improve. Details of key developments are detailed on page 22. New Product Development momentum increased during the year and further details are included on page 24. Despite increased investment and a significant number of new product launches the level of risk has remained the same year-on-year due to improved processes and controls and proven success in this New Product Development area.

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 have the potential to broaden our addressable markets, leverage our position in existing attractive end markets. Failure to deliver the post-acquisition strategy would reduce the value of acquired businesses.	• Annual Strategic review process to identify potential target acquisitions that align with the Group Strategy • 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 2017	Our post acquisition integration process, which deploys a mix of divisional and Group resources, ensures that the right people across all disciplines are available to successfully project manage acquisition integration. Following a review of our M&A resource, we strengthened certain functions and areas. These resources are in place and already being deployed to support the integration of Bimba Manufacturing.
Failure to comply with legislation or a breach of our own high standards of ethical behaviour	The Group has an established framework which instigates the highest ethical standards and regulatory compliance across our business. As we expand our operations it is important that we maintain these standards. Legislative requirements around tax, antibribery, fraud and competition law require rigorous monitoring and training to avoid financial and reputational damage.	• Commitment to good governance practices as embodied in the IMI Way. • Continued enhancement of the internal controls declaration process and continued, rigorous audits by our Group Assurance team. • Policies, manuals, guidelines and standard operating procedures are available to all employees under the legal, compliance and financial sections of the IMI global intranet. • Group, division and local resources dedicated to compliance. • Employee training focused on how to apply the IMI Way in everyday situations and key risk areas such as competition law, fraud and antibribery and corruption. • Confidential IMI hotline to report concerns. • Divisional risk assessed compliance plans. • Third party agent due diligence and approval procedures and termination of non-compliant agents. • Extensive control framework for dealings with higher risk territories, including formal training for relevant employees.
Changes during 2017	The challenging market and regulatory environment demands the very highest standards of conduct and further details of the processes and procedures we operate to help ensure this are detailed on page 36. We have stringent procedures and processes that allow us to operate in high risk territories. Since the lifting of non-US Iranian sanctions in 2016, we have significantly enhanced our compliance procedures within IMI Critical Engineering to ringfence our business development activities in Iran to ensure no breach of trade sanctions. Despite the more challenging territories, we believe the enhancements made to our compliance framework are sufficient to mitigate this increased risk.
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. • Escalation process and regular review meetings with key suppliers. • Adequate safety stock and/or dual supply for critical components.
Changes during 2017	Following the initial introduction in 2016 of a supply scorecard, preferred supplier lists, a supplier risk assessment selection tool and commodity experts, we have focused on embedding these processes within our businesses. During the year we have implemented procedures to ensure compliance with the Modern Slavery Act including training for over 300 procurement employees to spot, monitor and deal with any concerns relating to forced labour in our supply chain. We have a zero-risk appetite to engage with suppliers who are not aligned with our own code of conduct and strong ethical standards. Each of our three divisions assesses supplier code of conduct risks and audits any high-risk suppliers for all aspects of supply chain risk. As such, we believe our risk profile remained unchanged in 2017.
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. • Regular communication with employees to raise awareness of cyber security. • Disaster recovery plans instigated on all critical IT assets. • 24/7 monitoring from security operations centre.
Changes during 2017	Recognising the increased threat to both our IT systems and data, we have strengthened our Group-wide Security Improvement programme. Phase 1 of that programme was completed in September and included deployment of security software to all laptops and factory control devices at 147 locations in 44 countries together with 24/7 monitoring by our dedicated Security Operations Centre. Phase 2 of the programme is well underway to deploy robust server protection. In addition, we have also strengthened the data back-up and re-installation testing procedures at our business units. We continue to communicate regularly with all our employees to raise awareness of cyber risks and mitigating procedures and behaviours.
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. • Lean implementation to increase operational performance, quality delivery and service standards. • Customer feedback surveys on performance and actions tracked to improve performance.
Changes during 2017	Improvements in operational capabilities, routine tear-down testing and competitive benchmarking of competitor products continue to underpin New Product Development across all our divisions. Value Engineering processes enabled IMI Critical Engineering to win a number of new orders, further details of which are provided on page 26. 2017 has also seen greater volatility in input costs, particularly around commodities. Internal reporting has been adapted to track and ensure these cost increases are managed appropriately.
New product development	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 and product 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. • Detailed project plans to track new product introduction actions on both a weekly and monthly basis. • Tracking of key performance metrics including sales from new products and research and development spend against sales.
Changes during 2017	New product development is an integral component of the five-year strategic planning cycle and establishes commercial priorities and development roadmaps for all the Group's principal markets. Our end to end Advanced Product Quality Planning (APQP) and New Product Development processes cover design, prototyping, testing, costing and launch to market and has successfully delivered competitively priced new products to market. Further information about our New Product Development activities are detailed on page 24.