Annual Financial Report

RNS Number : 2969I

IMI PLC

31 March 2020

 

31 March 2020

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 2019 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). The Notice of Annual General Meeting for 2020 will be available from 2 April 2020 on the Company's website as outlined above.

Hard copy documents will be 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 2020 Annual General Meeting will be submitted to the National Storage Mechanism and will shortly be available for inspection at: www.morningstar.co.uk/uk/nsm on 2 April 2020.

The Company's 2020 Annual General Meeting will be held at the Crowne Plaza Hotel, Pendigo Way, Marston Green, Birmingham on Thursday 7 May 2020, commencing at 10am.

The Company's preliminary results announcement of 28 February 2020 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 27 February 2020); 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 28 February 2020.

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 101 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.

Our risk management framework

The Board has overall responsibility for ensuring that we manage our risk exposure appropriately to achieve our strategic objectives and build sustainable shareholder value.  This involves assessment of principal risks and emerging risks

The Board determines our risk appetite and monitors and reviews the risk management processes we operate. The Board delegates responsibility for implementing and monitoring internal controls and other elements of risk management to the Chief Executive and the Executive Committee. The Board has also tasked its committees with responsibility for key areas of risk, as follows:

» oversight of financial reporting, internal financial controls and assurance processes - the Audit Committee;

» talent and succession risk - the Nominations Committee; and

» remuneration and incentive structure risk - the Remuneration Committee

Our risk appetite

In determining the nature and level of risk we are prepared to accept to achieve our strategic objectives, the Board takes into account a number of factors including our strategic opportunities, the risks that could affect our business and our ability to mitigate their impact. During the year we updated our risk appetite ratings as follows:

Risk appetite rating	Definition
Very Prudent	No/very low tolerance to risk, regardless of the cost of the required controls.
Prudent	A low risk approach via sufficient and proportional controls and mitigation, in the knowledge this will limit any potential reward.
Balanced	Applied in circumstances where there is a high chance of success, equal consideration is given to the achievement of strategic objectives and potential negative risk impact. Risk reduction not carried out in instances of disproportional cost.
Receptive	Elevated levels of risk accepted in the case of opportunities that offer improved returns.
Very receptive	High levels of risk accepted in the case of unproven or new projects that offer significant returns or growth potential.

How we approach risk management

Across the Group we operate a "top-down, bottom-up approach" to risk management which is illustrated in the graphic below. This approach allows the Board and the Executive Committee to actively assess strategic risks and monitor the measures used to mitigate, transfer or avoid such risks. It also ensures that operational risks are identified and managed at multiple levels and that key risk information is communicated effectively across the Group.

Our risk management process is embedded in all our businesses and is a core element of our strategy review and monthly operational meetings. It provides guidance in relation to the identification, evaluation and management of risks, including emerging risks, which could impact our performance and our ability to implement our strategy.

Strategic risk management process		Operational risk management process
» Determines risk appetite. » Reviews principal risks. » Monitors and reviews risk management processes.	Board	» Reviews bi-annually a detailed analysis of the Group's risk profile including supporting divisional data and the actions undertaken. » Reviews annually the effectiveness of the Group's internal controls.
» Responsible for ensuring risk management culture is integrated across their division and aligned to the Group's objectives. » Determines principal risks and mitigation strategies. » Monitors changes in the risk profile. » Monitors quality and effectiveness of business level risk management processes.	Divisional and Group Executive	» Develops bi-annually a detailed Group and divisional risk profile which is based on information uploaded to the Group intranet by each manufacturing operation. This profile analyses each division's most significant risks and outlines mitigation strategies. » Horizon scans for new emerging risks using a number of mechanisms including divisional strategic and monthly reviews and market, competitor and product developments. » Publish risk profiles for each manufacturing operation to the Group intranet either once or twice a year depending on the operation's risk profile.
» Operates and monitors an active and effective risk management process. » Operates reporting systems that increase management ownership and accountability.	Operating companies	» Maintains an up-to-date risk profile which identifies the key risks facing the business, assesses mitigating processes and controls, operates key performance indicators to validate the effectiveness of those controls and identifies areas for improvement. » Provides monthly updates on key risks, mitigation and controls through incorporation of risk profile data in monthly management reporting process.

Our principal risks

The principal risks facing the Group are shown in order of priority in the table below. This analysis covers how each risk could impact our strategy, our risk appetite to the particular risk, how our assessment has changed during 2019 and explains what we are doing to monitor and mitigate each risk area.

Risk, link to strategy and risk appetite	Change	Risk mitigation including specific 2019 actions
1.  Global economic or political uncertainty The Group operates in diverse global markets and demand for our products is dependent on economic and sector-specific environments. A downturn in the global or a regional economy, brought on by economic cycles, political instability, health or environmental emergencies, could impact end market demand and as a result negatively impact revenue and our ability to deliver our strategy and achieve market expectations. Link to strategy Growth acceleration Commercial excellence Risk appetite Balanced	Increased IMI Critical continues to face highly competitive markets and a continued slow-down in the new construction fossil power sector. Whilst still in a strong position, IMI Precision has also seen a decline in markets, particularly industrial automation and predominately in its largest European market. IMI Hydronic has seen some growth opportunities but is operating in relatively flat markets. Health or climate emergencies can impact regional or global economic demand and disrupt supply and delivery chains. Although the UK formally exited the EU in January, uncertainty remains regarding the long-term economic arrangements.	Our divisions ensure their forecasting processes provide, whenever possible, early indications of reduced customer demand to allow proactive management of plant output. We have managed the economic instability during the year through restructuring programmes and footprint changes. IMI Precision is engaged in a significant cost restructuring programme. IMI Critical is continuing to right-size its business and reduce administrative and manufacturing overheads. The division has also introduced a flatter regional management structure which will enable it to be more efficient and agile. While IMI Hydronic's markets are less sensitive to global macro-economic factors, the division is continuing to challenge its cost structure and grow market share through commercial and technology partnerships and by focusing on faster growth adjacent markets (for example radiant heating and control/actuation). We maintain a balanced portfolio operating across a range of markets, sectors and geographies with no single dependency. We undertake enhanced stress testing and sensitivity analysis of business plans and regularly review key market and sector metrics. We have fine-tuned our Brexit mitigation and established, ahead of the event, Brexit contingency stock. Developments are being monitored and further mitigation actions may be taken as appropriate.
2.  Competitive markets Increased competition in our core markets, from both existing and new competitors, including new entrants from markets in decline as a result of economic slowdown. This could create strong pricing pressures, potentially resulting in lost sales and reduced profits. Link to strategy Customer focus Growth acceleration Operational excellence Commercial excellence Risk appetite Receptive	Increased In 2019 we saw a sales downturn in the industrial markets (in particular Industrial Automation and Commercial Vehicle) and continued margin pressure in the Fossil Power sector.	We monitor competition risk via selected indicators during the monthly operational reviews undertaken by each of our businesses. Our Growth Accelerator programme (see page 17) aims to create significant customer-pull by solving industry problems through applications engineering. Our Value Engineering activities in all of our divisions are helping us deliver more competitive products. We continue to develop our market leading applications engineering expertise and, in particular, our Valve Doctors in IMI Critical, our Hydronic College and Engineering Advantage teams in IMI Precision.
3.  Failure to deliver major transformational projects on time and on budget The Group is continually evolving and taking opportunities in response to external conditions and market pressures. Our current strategy includes large restructuring programmes and complex IT system installations. Failure to deliver the expected objectives on time and on budget, could have an adverse revenue and profit impact on the Group. Link to strategy Customer focus Growth acceleration Operational excellence Commercial excellence Risk appetite Prudent	Increased With the recent acquisition of PBM and the initiation of significant restructuring programmes, project execution risks have increased in 2019, particularly given the pressure that these projects impose on management capacity and resources.	We have deep and extensive restructuring and integration expertise. We operate robust and proven processes to manage and monitor major projects, including setting clear and measurable milestones which are reviewed regularly by our Executive Committee and divisional management teams. Divisional restructuring costs and the associated benefits are tracked against targets on a monthly basis. Standarised documentation and core processes underpin all IT projects to support efficient ERP system roll out.
4.  Quality issues leading to product recall, warranty issues, injury, damage or disruption to customers' business Developing innovative and technologically advanced products is at the heart of IMI. The quality and safety of our products and services is of the highest importance and failure to deliver the quality required could result in negative financial and reputational damage. Link to strategy Customer focus Growth acceleration Operational excellence Commercial excellence Risk appetite Very prudent	No change Inherent risk in this area has increased primarily due to the sale of more products with greater complexity across a larger geographic footprint. If unmanaged this could result in products being sold in territories without the necessary in-depth sales support and experience, which could lead to higher warranty claims. However, year on year, the risk profile remains similar due to a continuing focus on product quality and detailed mapping of our engineering resources across our customers and geographies.	Across our operational platform we have well embedded Lean Assessment quality improvement programmes, Obeya reviews and Advanced Product Quality Planning processes. Our most critical projects include extensive testing of the finished product and customer sign-off. IMI Hydronic is focusing on developing a smaller number of new products to ensure its product development and engineering resources are not overburdened.
5.  Failure to integrate acquisitions successfully and deliver the required synergies Underperforming acquisitions deliver below expectation synergies and reduced profit. If material, this can significantly impact shareholder value. Link to strategy Growth acceleration Operational excellence Commercial excellence Risk appetite Receptive	No change The acquisition of PBM (which gives us access to the Pharmaceutical and Food Processing markets) in the year was completed quickly and efficiently. PBM and divisional integration management teams are well resourced and the integration process is progressing well. The recent integration of Bimba (which is on track to deliver its acquisition case) and the phased roll out of divisional ERP systems demonstrates that we have effective integration experience and processes in place.	We have in-house M&A expertise and, as highlighted previously, operate a proven structured integration process. The Annual Strategic review process helps identify value enhancing acquisitions which would align with the Group's strategy. Once identified, a formalised acquisition approval, due diligence and integration process is followed. Upon completion, a detailed 100-day process is used to ensure adequate resources are in place, progress is on schedule and the identified synergies (both hard and soft) are being realised.
6.  Unauthorised access to our IT systems Unapproved access to our IT systems could result in loss of intellectual property, fraudulent activity, theft and business interruption. As the digital and security threat environment is quickly evolving we cannot guarantee that our actions are keeping pace with the constantly evolving threat environment. Link to strategy Operational excellence Commercial excellence Risk appetite Very prudent	No change During 2019, we continued to detect, block and remediate threats on an ongoing basis. These included malware, ransomware, attempted data theft, credential theft, phishing and external hacking attempts. The complexity and the frequency of the speculative attacks observed increased in 2019, although we have no evidence that we were specifically targeted. To counter the increase in threat activity in 2019 we have continued the significant investment in our detective and preventative IT measures by: » further improving our Group-wide Security Operations Centre ("SOC") monitoring service, which operates 24 hours a day; » rolling out a wide programme of new IT security protocols across the Group's infrastructure; and » holding security compliance workshops and IT security awareness programmes	We have a well-developed IT security strategy, which is reviewed monthly. We continue to implement improvements to our IT infrastructure to keep abreast of new threats. We continue to strengthen our security baseline through the enablement of automated global software updates and automatic lockdown capabilities. We have also strengthened our digital forensic capabilities and remediation processes in the event of a cyber security incident occurring. We regularly test our disaster recovery plans to ensure we have stringent system back up procedures in place.
7.  Failure to comply with legislation or a breach of our own high standards of ethical behaviour We have established a framework which demands the highest standards of ethics and regulatory compliance across all of our businesses. As we expand our operations to achieve growth, it is essential that we maintain these standards. A breach of legislative requirements in relation to tax, anti-bribery, fraud and competition law could result in financial and reputational damage. The markets in which IMI operates, particularly in IMI Critical, make the risk of regulatory breach an area of focus. Link to strategy Customer focus Growth acceleration Risk appetite Very prudent	No change We continue to operate in similar markets as last year, with no significant changes in legislation	Integrity is a cornerstone of our culture. It is one of our core values and underpins everything we do. Read more about our culture on pages 26 to 35. Dedicated resources at both the Group and Divisional level ensure employees are provided with the necessary training, guidelines and standard operating policies to ensure that everybody is aware of the conduct expected from them, in particular in relation to the key risk areas of anti-bribery & corruption, anti-trust and economic & trade sanctions. During the year our Code of Conduct was updated (see page 24). Each division assesses its own compliance risk and formulates an annual divisional compliance plan which is implemented by each Division's General Counsel, who report to the respective Divisional Managing Director. Due diligence on third parties, trade sanctions and customers are the subject of standard operating procedures and carried out by the divisions using Group-wide software. In 2019 around half of the entire workforce - some 5,635 employees - completed online training modules on third party risk via eLearning. In addition, detailed training is given to staff in more commercial roles who have significant autonomy to contract with customers and suppliers. We operate a confidential independent hotline to report concerns (see page 25).
8.  New Product Development Failure to deliver market leading products, on time and on budget, could impact our ability to grow. Link to strategy Customer focus Growth acceleration Commercial excellence Risk appetite Receptive	No change While we continue to introduce new products, launches are planned to avoid new product concentration risk and timed to ensure relevant teams have the bandwidth to deliver effectively	Each division has a New Product Development strategy which is regularly reviewed, with divisional engineering teams reporting on the performance of our existing products and new market or competitor developments. We implement a robust New Product Development Process which covers market analysis, design, prototyping, testing and costing. We have established centres of design and technological excellence across our businesses. Our Growth Accelerator programme, previously mentioned, is enhancing our innovation and development capabilities.

Enquiries to:

John O'Shea  Company Secretary  Tel:  [phone]

John Dean  Investor Relations  Tel:   [phone]

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