Annual Financial Report

RNS Number : 6989T

IMI PLC

26 March 2021

 

26 March 2021

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 2020 and the Notice of Annual General Meeting for 2021 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). Copies will be posted to those shareholders who have requested it. 

Copies of the above documents, together with the form of proxy for the 2021 Annual General Meeting have been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism . In compliance with its obligations under section 6.3.5(1) of the Disclosure Guidance and Transparency Rules (DTR), the Company also releases the unedited full text of its Annual Report 2020.

The Company's preliminary results announcement of 26 February 2021 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 2020 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 2020 (from the Directors in office as at 25 February 2021). An extract from the Annual Report and Accounts 2020  is provided below as required under paragraph 6.3.5 of the DTR.

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

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  is extracted from page 114 of the Annual Report and Accounts 2020 and is signed by order of the Board by John O'Shea, Company Secretary. Responsibility is for the full Annual Report and Accounts 2020 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 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 team. 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."

"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	» Risks, mitigating controls and outstanding actions presented and challenged at operation performance reviews. » Develops bi-annually a detailed Group and divisional risk profile. 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. » Create risk profiles for each manufacturing operation 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 2020 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 2020 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 Strengthening customer intimacy Reducing complexity Driving market-led innovation Risk appetite Balanced	No change This continues to be one of the Group's highest risks, as evidenced by the significant fall in demand for discretionary products in Q2 due to the Coronavirus pandemic. Whilst IMI Precision saw a substantial increase in the demand for its life science products in 2020, in Q2, demand for Commercial Vehicles was down 51% and Motion Control was down 19% before improving. IMI Critical continues to face highly competitive markets and faces a structural decline in the New Construction Fossil Power sector. The pandemic has also placed restrictions on the levels of field service work. IMI Hydronic saw a decline in demand, for a period this year, as construction activity reduced due to the pandemic.	We compile annual strategic plans and maintain a balanced portfolio operating across a range of markets, sectors and geographies with no significant single dependency. Our divisions ensure their forecasting processes include scenario stress testing, reviews of sector metrics and early indications of reduced customer demand to allow proactive and rapid management of plant output. We have continued to improve our performance during the year through rationalisation and restructuring programmes. All three divisions are continuing with restructuring programmes to optimise their operational footprint. The Group has not closed down operations and declared redundancies as a direct result of the Coronavirus pandemic. Brexit mitigation measures are in place to address supply chain issues and continue to serve customer needs.
2.  Business disruption / Natural disasters The risk to life or disruption to production caused by large scale events such as, pandemics, fires, floods, international conflicts etc.. Link to strategy Strengthening customer intimacy Reducing complexity Digital Risk appetite Very prudent	Increased Although this risk has partly been reflected within the global economic or political uncertainty risk above, it has specifically been added in response to the COVID-19 pandemic.	From the onset of the COVID-19 pandemic the Executive Committee, supported by a cross-function, cross divisional team has led the mitigation against this risk, initially meeting three times a week. Rapid changes were made to sites to ensure the wellbeing of our employees and to reduce the risk of disruption. Where possible home working has been supported for indirect employees. Site risk assessments were carried out and site response plans activated to ensure appropriate measures were in place (these included infection control measures, restriction of visitors, vastly reduced international travel, changes to the layout of some sites, increased communications, shutdown procedures, transfer of production to alternative sites, substitute suppliers etc). We have been supporting our employees not only with the issuance of personal protective equipment, but also with information on working safely, mask usage guides and how employees can protect themselves and their families outside of the factories allowing them to undertake their own personal risk assessments. Whilst travel has been drastically curtailed, we have utilised video conferencing and devices like Google lens to assist in field service calls, remote site inspection & assurance walks and to facilitate customer acceptance testing.
3.  Competitive markets Competition in our core markets, from both existing and new competitors could create strong pricing pressures, potentially resulting in lost sales and reduced profits. Link to strategy Strengthening customer intimacy Reducing complexity Driving market-led innovation Digital Risk appetite Receptive	No change Even prior to the Coronavirus pandemic several of our markets were seeing levels of reduced demand. Lower economic activity has led to excess supply in several sectors (fossil power and Oil & Gas) and reduced demand for certain products	We monitor competition risk via selected indicators during the monthly operational reviews undertaken by each of our businesses. We also defend our trademarks and brands, have a strategy for patent recognition and continue to develop our market leading applications engineering expertise. Our NPD Ignite and Growth Accelerator programmes aim to create significant customer-pull and uncover new opportunities by solving our customers key problems through advanced applications engineering, helping us deliver more competitive products. We also have an M&A strategy which looks to apply our expertise and ability to create synergistic benefits in established, new and adjacent market sectors
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 Strengthening customer intimacy Reducing complexity Driving market-led innovation Digital Risk appetite Very prudent	No change Whilst the overall risk has not changed, this area continues to be a key focus for our businesses, to insure any cost of quality issues, including warranty claims, are kept to a minimum.	We have 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.
5.  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 Strengthening customer intimacy Reducing complexity Digital Risk appetite Prudent	Decreased Whilst several projects have been delayed due to the Coronavirus pandemic, many projects have been successfully progressed or completed in the year.	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. Project management and governance processes underpin all IT projects to support efficient ERP system roll out.
6.  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 Reducing complexity Digital Risk appetite Receptive	No change The acquisition of PBM (which gives us access to the Pharmaceutical and Food Processing markets) was completed in 2019. Bimba was acquired in 2018 and has been integrated into IMI Precision. We continue to manage these operations to ensure they deliver value and the planned synergies, and provide ongoing support and training for the local management teams	We have in-house M&A expertise and, as highlighted previously, operate a proven structured integration process. The 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.
7.  Unauthorised access to our IT systems Given the digital and security threat environment is constantly evolving, we can never fully guarantee that our actions will stop all external threats. Unapproved access to our IT systems could result in loss of intellectual property, fraudulent activity, theft and business interruption. Link to strategy Reducing complexity Digital Risk appetite Very prudent	No change During 2020, we continued to detect, block and remediate threats on an ongoing basis. The volume and complexity of threats continue to rise, these include malware, ransomware, attempted data theft, credential theft, phishing and external hacking attempts. To counter the increase in threat activity we continue our significant investment in detective and preventative IT measures. With the increased amount of homeworking we have enhanced firewall protection.	We have a well-developed IT security strategy, which is reviewed monthly. Due to the increased homeworking during the Coronavirus pandemic the IT Security team met daily to safeguard the security perimeter of the network. 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.
8.  Failure to manage the supply chain Failure to manage the supply chain could have a material impact on our financial performance and reputation Link to strategy Strengthening customer intimacy Reducing complexity Driving market-led innovation Digital Risk appetite Prudent	Increased The reduced production capacity and increased cost of disruption caused to our business by COVID-19 (government import/export restrictions, reduced availability of product transportation and the downturn in the global economy) has increased the risks associated with receiving materials in the right place, at the right quality and at the right time. The signing on 30 December 2020 of the EU-UK Trade and Cooperation Agreement does reduce materially the potential Brexit disruption, however there may be consequences of the UK leaving the EU which may still risk disrupting the supply chain (additional documentation, changes in taxation, changes in the way goods are delivered into Northern Ireland etc).	The divisional procurement teams, throughout the Coronavirus pandemic, performed thorough reviews of our supplier base, including reviewing our suppliers financial standing. Where appropriate the business created dual sourcing arrangements, moved the supply chain closer to our facilities, and created safety stocks. Brexit is not expected to have a material impact on the Group's businesses. IMI Precision Engineering, the division most exposed to Brexit has less than 10% of its cross-border trade potentially affected by Brexit. Buffer stocks and other mitigating actions are in place to reduce the potential disruption from Brexit. Procurement teams also assess specific Supplier Code of Conduct risks across the divisional supply chains and audit high risk suppliers for all aspects of supply chain risk including Modern Slavery. The teams also have regular review meetings with key suppliers, and as required, deploy escalation meetings.
9. 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 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 Strengthening customer intimacy Reducing complexity Digital Risk appetite Very prudent	No change We continue to operate in similar markets as last year, with no significant changes in legislation.	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. 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. In 2020 around half of the entire workforce - some 5,972 employees - completed online training modules on conflicts of interest, dealing with third parties and anti-competitive practices 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.
10. New product development Failure to deliver market leading products, on time and on budget, could impact our ability to grow. Link to strategy Strengthening customer intimacy Reducing complexity Driving market-led innovation Digital Risk appetite Receptive	No change One of our core values is customer intimacy, ensuring unmet and emerging customer needs are at the core of our operations. The Growth Accelerator programmes rather than starting with existing products aims to start with the customer, working with them to understand their problems to work together to find the solution	The use of the IMI Growth Advisory Board and the expansion of the Growth Hub aims to ensure appropriate processes and governance are in place to avoid new product concentration risk, projects are scalable and relevant teams have the bandwidth to deliver successful new products/services effectively. The use of the NPD Ignite process allows a much shorter validation window to determine if the proposed solution to a customer problem has a viable business and value proposition. This shorter timetable allows efficient use of resources to ensure only the most appropriate solutions are developed. We have established centres of design and technological excellence across our businesses. 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. Further details of the processes and governance of our new product development can be seen in the Technology and applications engineering sections."

Enquiries to:

John O'Shea  Company Secretary  Tel:  [phone]

John Dean  Investor Relations  Tel:   [phone]

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