Half Yearly Report

RNS Number : 6585R

IMI PLC

26 August 2010

 

26 August 2010

 

IMI plc Interim Financial Report

For the six months ended 30 June 2010

 

	Six months ended 30 June
Continuing operations:	2010		2009		change
Revenue	£925m		£900m		+3%
Segmental operating profit	£145.6m		£97.4m		+49%
Segmental operating margin	15.7%		10.9%
Adjusted profit before tax1	£136.4m		£86.4m		+58%
As reported:
Operating profit	£136.6m		£89.5m		+53%
Profit before tax	£133.5m		£79.7m		+68%
Adjusted earnings per share2	29.8p		18.5p		+61%
Basic earnings per share	29.4p		17.0p		+73%
Net borrowings3	£157m		£172m
Interim dividend	9.0p		8.0p		+13%

 

Norman Askew, Chairman of IMI commented:

 

“IMI has delivered a very strong set of results for the first half of 2010 as we continue to see the benefits coming through from the gradual but fundamental reshaping of the Group, which has been underway for many years now. The focus on achieving leading positions in niche global markets, with highly bespoke engineered products and a low cost manufacturing base has created a significant and sustainable improvement in the underlying quality and profitability of the business. The Group delivered record profits and margins during the period on volumes that remain more than 10% below the peak levels seen in 2008.

 

Whilst the general macro-economic environment remains uncertain, we are optimistic that the momentum seen in the first half will continue for the remainder of the year.”

 

 

1    before exceptional items (restructuring, acquired intangible amortisation and impairment and financial instruments excluding the reversal of economic hedge contract gains and losses) totalling £2.9m (2009: £6.7m)

2     before the after tax net cost of exceptional items totalling £1.5m (2009: £4.6m)

3     net borrowings as at 30 June 2010 and comparable as at 31 December 2009

 

 

INTERIM FINANCIAL REPORT

 

Overview

 

Revenue grew by 4% on an organic basis which was broadly in line with expectations, given our balanced mix of early and late cycle businesses and the improvement in trading conditions in most of our end markets. A strong bounce back in Fluid Power, with organic revenue growth of over 30%, helped to offset the expected lower volumes in Severe Service. Operating profit, on a constant currency basis increased 48% to £145.6m and adjusted earnings per share by 61% to 29.8p, both achieving record first half levels for IMI. 

 

As a result of the strong first half performance and as a reflection of its confidence in the future prospects of the Group the Board has decided to increase the interim dividend by 13% to 9.0p (2009: 8.0p). 

 

We achieved an operating margin of 15.7% versus 10.9% in the first half of 2009. This was also a new record level, reflecting the benefits arising from the gradual but fundamental reshaping of the Group we embarked on several years ago, and comfortably ahead of the long range margin target of 15% we set at that time. With established and leading market positions, an accelerating programme of new product development and further benefits to accrue from the transfer of manufacturing to low cost economies, there remains, over time, scope to raise these margin objectives further.   

 

During the half we have continued to invest in enhancing our core management skills for engineering advantage and key account management across the Group. These skills are vital as we seek to continue to develop new differentiated engineered solutions which create real value for our major customers. This approach will enable us to deliver long term sustainable growth by taking advantage of some of the key growth drivers that we have identified in our various end markets. These drivers include clean energy where markets such as nuclear, liquefied natural gas and clean coal offer exciting growth prospects; sustainability, where increased customer enthusiasm (often backed by government legislation) for reduced pollution and higher energy efficiency is driving demand for many of our more innovative products across all five business platforms; and life sciences where increased investment in healthcare and new advanced medical equipment represents a significant opportunity for our Fluid Power business.  

 

As highlighted below the Group retains a strong balance sheet, providing the flexibility to consider additional investments in organic growth, further restructuring initiatives, and bolt-on acquisitions as and when suitable opportunities arise.

 

 

Review of results

 

Segmental revenues increased by 4% to £927m (2009: £890m). Overall exchange rate benefits were minimal leaving organic growth also at 4%. Segmental operating profit was £145.6m, a 49% increase on the prior period (2009: £97.4m). At constant exchange rates segmental operating profit increased by 48%. The segmental operating margin was 15.7%, up from 10.9% in the first half last year. Reported operating profit was up 53% at £136.6m (2009: £89.5m).

 

Net interest costs, before interest cost capitalised, of £8.5m (2009: £8.9m) were covered approximately 20 times by earnings before interest, tax, depreciation and amortisation (EBITDA) on continuing operations of £168m (2009: £119m). The IAS19 pension net financing charge was £0.9m (2009: £2.1m). The net IAS39 credit of £6.1m (2009: £1.2m) reflects the increase in the value of outstanding derivatives offset by net settlement costs during the period. The total net financing costs were £3.1m (2009: £9.8m).

 

Adjusted profit before tax (before exceptional items) was £136.4m, an increase of 58% (2009: £86.4m).

 

As expected, restructuring costs were significantly lower than in the first half of last year at £3.3m (2009: £17.5m). These related to a number of projects including the transfer of production lines to low cost manufacturing sites in our Severe Service business. Restructuring costs for the full year are still expected to be around £10m. After these restructuring costs, the amortisation of acquired intangibles of £3.6m (2009: £3.7m), the reversal of net economic hedge contract gains of £2.1m (2009: reversal of losses of £13.3m) and net exceptional financial instrument gains of £6.1m (2009: £1.2m), reported profit before tax was £133.5m, an increase of 68% on the corresponding period in 2009.

 

The estimated effective tax rate on profit before exceptional items for 2010 is 30%, which compares to an effective rate of 31% applied for the first half of 2009. The total profit for the period was £99.4m and, after non-controlling interests, the profit attributable to the equity shareholders of the Company was £99.3m. The average number of shares in issue during the period was 319.6m, giving a basic earnings per share from continuing operations of 29.4p, up 73% (2009: 17.0p). Adjusted basic earnings per share from continuing operations were 29.8p, compared to 18.5p in the first half of 2009, an increase of 61%.

 

Cash flow

 

The net cash inflow from operating activities after a special cash contribution to the UK Pension Fund of £48.6m was £58.7m, compared to £68.9m in the corresponding period last year. Capital expenditure on plant, property and equipment amounted to £20.0m and was 0.8 times the depreciation charge for the period of £25.3m. The major cash outflows in the period were £29.3m of tax, dividends of £42.2m and £8.2m on restructuring. In addition the Group paid £14.0m for the remaining 30% minority interest in Pneumatex and purchased £10.5m of IMI shares for employee share plans. The Group received the £48.6m cash back as an investment from the UK pension fund (see note 12 to the interim financial statements). The total cash inflow for the period was £21.9m, compared with an outflow in the first half of last year of £32.2m.

 

Balance sheet

 

The balance sheet remains strong and net debt fell during the period to £157m (December 2009: £172m), despite the payment of the final dividend and the cash outflows highlighted above. The £15m reduction since December 2009 included the cash inflow during the period, partially offset by a negative translation impact of £6.4m on the revaluation of the Group’s foreign currency debt. The ratio of net debt to the last twelve months EBITDA was 0.5 at the end of June. 

 

There were no significant changes in the Group’s debt facilities during the half. The Group maintains an appropriate mixture of short, medium and long term debt facilities which provide sufficient headroom for both ongoing activities and appropriate bolt-on acquisitions. 

 

Shareholders’ equity at the end of June was £364.8m, a reduction of £35.0m since the end of last year, which includes the attributable profit for the period of £99.3m, less an after-tax actuarial loss on the defined benefit pension plans of £88.5m and the 2009 final dividend of £42.2m paid in May.

 

Pensions update

 

The IAS19 pension net deficit was revalued to £329m which compares to the deficits of £281m at June 2009 and £258m at December 2009. The increase in the deficit since December results mainly from a reduction in AA corporate bond yields used to discount the value of future liabilities and from weaker equity returns. A recovery plan was agreed with the pension fund Trustee following the March 2008 actuarial valuation that requires additional cash contributions of £16.8m to be paid in July of each year until 2016. The next triennial actuarial valuation of the Fund will be undertaken as at the end of March 2011. 

 

During the first half of 2010 the Group and the Trustee implemented a number of actions aimed at improving the funding position and reducing the volatility risk of its UK defined benefit pension scheme (“the Fund”).   As previously announced in March, the Group entered into consultation with the members of the Fund concerning a proposal to close the Fund to future accrual. Following an extensive consultation the Group can confirm that this change will now take place with effect from 31 December 2010. Employees affected are being offered alternative defined contribution pension arrangements. The closure to future accrual is expected to result in a curtailment gain of approximately £10m in the second half.  

 

In addition, the Fund entered into two bulk annuity agreements with two insurance companies for approximately £325m which insure a proportion of the Fund’s liabilities to pensioners as at June 2010. These insurance contracts will provide protection to the Fund and employer against certain financial and demographic risks in respect of its pensioner members including interest rate risk, inflation risk and mortality risk. The Fund will continue to pay pensions and members will not be impacted directly as the policies are investments of the Fund. This “buy-in” is a key step towards reducing the overall funding volatility faced by the Fund. The Trustee has also made changes to the allocation of the remainder of the Fund’s assets with the objective of maintaining expected investment returns.  

 

In connection with these changes in the Fund’s investment and risk management strategy the Group and the Trustee have agreed an additional cash contribution arrangement which will provide £4.4m per annum to the Fund for a period of 20 years. This additional funding stream has been recognised as an asset of the Fund at a current value of approximately £48.6m. Should the scheme have a funding surplus in the future, there is a mechanism for the payments to cease. Together with the £16.8m payable pursuant to the existing recovery plan, this brings the total additional annualised special contributions from the Group to £21.2m.

 

The combined impact of these measures is expected to result in an improvement to the funding position measured on a technical provisions basis of around £25m; a reduction to the volatility risk of 25% and the removal of approximately 20% of the mortality risk. The Group and the Trustee will continue to look at further risk management and mitigation opportunities for the Fund.  

 

 

Operations review

 

The following review of our business areas for the six months to 30 June 2010 compares the performance of our operations with the six month period to 30 June 2009. This section also comments on the current market conditions in each of our businesses. 

 

Severe Service

 

		2010	2009
	Segmental Revenue	£217m	£252m
	Segmental Operating Profit	£38.4m	£47.9m
	Operating Margin	17.7%	19.0%

 

Severe Service, which is a later cycle business, saw an organic revenue decline of 15% in the half year, reflecting the lower order intake seen in new construction markets in the second half of last year. This was slightly below our earlier expectations with some shipments deferred into the second half of 2010. Aftermarket revenues, accounting for around 40% of sales, continued to show good growth. 

 

Order intake recovered in the first half, up around 3% on what was a strong first half last year.   Higher quotation activity previously noted in the oil and gas market converted into some good orders for both control valves and isolation valves notably in the liquefied natural gas sector. Overall order intake in oil and gas was up strongly, around 70% higher than in the first half of 2009 when order intake was weaker. We also achieved good growth of around 45% in order intake in the nuclear market where there continue to be significant growth opportunities. Whilst there was an increase in quotation activity in fossil power this is yet to convert into increased orders, and bookings were down around 30%.   Order intake in the aftermarket was down over 10% compared to a very strong performance in the first half of last year. 

 

Operating margins in the period fell to 17.7% from 19.0% in the first half of last year, reflecting the impact of lower volumes and some continued pricing pressure in oil and gas markets, partially offset by a good aftermarket sales mix, and further improvements in operational efficiencies. Our new manufacturing facility in the Czech Republic opened in May 2010 and its sister facility, under construction in India, is still on schedule to open by the end of the year.     

Shipments in the second half are expected to be slightly down on the second half of last year. Orders, however, are anticipated to be significantly ahead of the prior year, supporting an anticipated return to growth for Severe Service in 2011.

Fluid Power

 

		2010	2009
	Segmental Revenue	£333m	£255m
	Segmental Operating Profit	£49.8m	£7.4m
	Operating Margin	15.0%	2.9%

The organic growth in revenues was 31% reflecting a good recovery in our end markets, many of which were very depressed in the first half of 2009.

During the first half we continued to make good progress in the strategic repositioning of the business. The focused sector business, which engineers bespoke solutions for key OEM customers, grew at 36% in the half, compared to 26% for the rest of the Fluid Power business. This increased the overall percentage of revenues from our targeted sectors to 41%. After a very difficult 2009 the commercial vehicle sector recovered strongly with volumes up 50%. The Life Sciences and Rail sectors, which were both less impacted by the downturn last year, have also performed well, up 25% and 30% respectively. 

The business delivered strong profits drop-through on the higher volumes which helped push margins up to 15%. As well as benefiting from much higher demand, this strong margin performance was driven by a number of factors including the full benefit of the 2009 rationalisation programme and the increased proportion of manufacturing in low cost economies.   We also implemented further initiatives to drive material costs lower through supplier rationalisation, negotiation and value engineering as well as selectively increasing selling prices. 

 

We continue to maintain close contact with our largest customers to assess future demand levels. The medium term outlook for Fluid Power remains positive, with second half revenues expected to match the first half.

 

Indoor Climate

 

		2010	2009
	Segmental Revenue	£142m	£142m
	Segmental Operating Profit	£30.8m	£24.2m
	Operating Margin	21.7%	17.0%

 

Indoor Climate continues to demonstrate encouraging resilience despite the later cycle nature of this business and the more difficult market for new commercial construction. After the challenges of the severe weather in the first quarter in much of continental Europe, Indoor Climate performed well in the second quarter to finish the half with an organic revenue decline of just 1%. 

 

The continued trend towards more energy efficient buildings and related legislation has helped the business perform well during the half, both in new construction markets and in the aftermarket which now accounts for over 60% of sales. The increasing demand for higher specification heating and cooling systems as well as the need to comply with new legislation in countries such as Turkey is leading to increased penetration of our products.   We continue to invest in our customer seminars which help drive demand for our products with particular focus this year on increasing this investment in North America, Germany and China. Asia Pacific was the strongest performing area during the half with good double digit growth. 

 

As expected, the cumulative impact of a number of cost saving initiatives implemented throughout the course of last year has led to a significant improvement in first half margins which have risen to 21.7% from 17.0% last year. In the first half Indoor Climate also benefited from lower materials costs compared to 2009. We currently expect higher metals costs in the second half, however prices remain volatile.

 

Looking forward we are now seeing some increased activity amongst architects and consultants and markets are expected to remain relatively stable for the remainder of the year.   We will continue to focus on growth areas such as energy efficient buildings and renovation and, whilst the traditionally key heating season between September and November will again be important, the business is expected to return to modest growth in the second half.   

 

Beverage Dispense

 

		2010	2009
	Segmental Revenue	£159m	£154m
	Segmental Operating Profit	£16.9m	£10.5m
	Operating Margin	10.6%	6.8%

 

Beverage Dispense volumes strengthened in the second quarter, lifting organic revenue growth in the first half to 3%. At the same time we exited a number of lower margin product lines, accounting for around 2% of revenue, indicating an organic growth rate on retained product lines for the period of 5%.

 

Customer demand has improved in the US and remains buoyant in Asia, with major bottlers and quick service restaurant chains lifting their capital budgets. The UK is showing some signs of stabilisation, whilst activity in Europe is mixed with retrenchment in the south offsetting gains elsewhere. The contribution from new products continues to grow, with new offerings targeted at the non-carbonated, frozen, and smoothies markets doing particularly well. Customers are also highly focused on sustainability initiatives, driving further opportunities for our products which deliver substantial improvements in energy efficiency. Our 3Wire parts management business in the US continues to expand its distribution capabilities and attract new national chain customers to its integrated parts management solutions.

 

The combination of an improved sales mix, both from the introduction of higher margin new products and the exit from low margin commodity lines, and further cost savings arising from improved efficiencies, helped deliver a substantial increase in operating margin during the period, from 6.8% in the first half of last year to 10.6%.

 

We expect beverage markets to remain positive, leaving revenues broadly in line with the second half of last year after the impact of further withdrawals from lower margin business.

 

Merchandising

 

		2010	2009
	Segmental Revenue	£76m	£87m
	Segmental Operating Profit	£9.7m	£7.4m
	Operating Margin	12.8%	8.5%

 

Organic revenues declined by 12% in the first half, broadly in line with expectations, with most sectors impacted by the lower order intake in the second half of last year. As with Beverage Dispense, a targeted withdrawal from lower margin, more commoditised product lines contributed to this decline (around 2%), leaving underlying volumes on a retained business basis down around 10% in the period. There were some encouraging trends during the period, with cosmetics volumes returning to growth.  The automotive sectoralso stabilised after a very difficult 2 – 3 years, with a number of important project orders taken in the period which will improve second half performance.

 

Operating margins improved significantly during the period, from 8.5% to 12.8%, buoyed by the improved sales mix (both the prioritisation of higher margin, more differentiated projects, and the withdrawal from low margin commoditised product lines) and better operational efficiencies. The first half margin was also helped by a property disposal and an insurance claim which, collectively, accounted for around two percentage points of the margin improvement.

 

We expect second half revenues to be comfortably ahead of both the first and second half of last year, benefiting in particular from the aforementioned project wins secured in the automotive sector. These higher demand levels will lend support to further progress on the margin in the second half.

 

 

Board and management changes

 

IMI has emerged as a stronger business from what has been a significant and global economic downturn over the last 18 months. As we now look to a more progressive future agenda, with a renewed focus on growth, a number of management changes are being made effective 1 September 2010.

 

Ian Whiting (46), President of the Severe Service business, is appointed to the Board, assuming responsibilities for developing IMI’s interests in the emerging markets (including IMI China) and for the Group’s procurement activities, in addition to retaining his responsibilities for Severe Service.

 

Roy Twite (43), in addition to retaining his current Board responsibilities for Fluid Power, will reassume Board responsibility for the Retail Dispense businesses, which he relinquished 18 months ago on taking up his Fluid Power role.

 

Sean Toomes (42), for the last 3 years President of the Indoor Climate business, and with over 25 years experience in IMI, has been appointed to the Group’s Executive Committee. He takes over responsibility for the Group’s Key Account Management and Responsible Business agendas, in addition to retaining his leadership role in Indoor Climate.

 

These management changes represent a significant strengthening of the Executive team. Together with the CEO and FD, they possess over 85 years of collective experience across the IMI Group.

 

 

Outlook

 

IMI has delivered a very strong set of results for the first half of 2010 as we continue to see the benefits coming through from the gradual but fundamental reshaping of the Group, which has been underway for many years now. The focus on achieving leading positions in niche global markets, with highly bespoke engineered products, and a low cost manufacturing base has created a significant and sustainable improvement in the underlying quality and profitability of the business. The Group delivered record profits and margins during the period on volumes that remain more than 10% below the peak levels seen in 2008.

 

Whilst the general macro-economic environment remains uncertain, we are optimistic that the momentum seen in the first half will continue for the remainder of the year.

 

 

Principal Risks and Uncertainties

 

The Group has in place a risk management structure and internal controls which are designed to identify, manage and mitigate business risk.

 

In common with all businesses, IMI faces a number of risks and uncertainties which could have a material impact on the Group’s long-term performance.

 

On pages 39 to 41 of its 2009 Annual Report (a copy of which is available at IMI’s website at www.imiplc.com), the Company sets out what the Directors regarded as being the principal risks and uncertainties facing the Group and which could have a material impact on the Group’s long-term performance. These include: economic and market environment; key customers; supply chain; competitive markets; legal, regulatory and political risks; financial market risks; talent acquisition; Compliance and internal controls; products and technology; health, safety and environmental; M&A activity; and pension funding. These risks remain valid and have the potential to impact the Group during the remainder of the second half of 2010. The impact of the economic and end-market environments in which the Group’s businesses operate are considered in the operations review and outlook sections of this Interim Management Report above, together with an indication if management is aware of any likely change in this situation.

 

Cautionary Statement

 

This Interim Financial Report contains forward-looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward-looking statement which could cause actual results to differ materially from those currently anticipated.  

 

Responsibility statement of the directors in respect of the Interim Financial Report

 

We confirm that to the best of our knowledge:

§         the condensed set of interim financial statements has been prepared in accordance with IAS34 ‘Interim Financial Reporting’ as adopted by the EU;

§         the Interim Financial Report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year;

§         there were no related party transactions or changes in the related party transactions described in the 2009 Annual Report that materially affected the Group’s results or financial position during the six months ended 30 June 2010. 

 

The Directors of IMI plc are listed in the IMI Annual Report for the year ended 31 December 2009. 

Approved by the Board of IMI plc and signed on its behalf by:

 

 

NBM Askew

Chairman

26 August 2010

 

 

INDEPENDENT REVIEW REPORT TO IMI plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 which comprises the Condensed Consolidated Interim Income Statement, the Condensed Consolidated Interim Statement of Comprehensive Income, the Condensed Consolidated Interim Balance Sheet, the Condensed Consolidated Interim Statement of Changes in Equity, the Condensed Consolidated Interim Statement of Cash Flows and the related explanatory notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

As disclosed in note14, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed interim set of financial statements in the half-yearly financial report based on our review.

 

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

 

 

Ernst & Young LLP

Birmingham

26 August 2010     CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT
		Notes			6 months to 30 June 2010 (unaudited)					6 months to 30 June 2009 (unaudited)					Year to 31 Dec 2009
					Before except- ional items	Except- ional items	Total			Before except- ional items	Except- ional items		Total		Before except- ional items		Except- ional items	Total
					£m	£m	£m			£m	£m		£m		£m		£m	£m
Revenue			2		927	(2)	925			890	10		900		1,785		7	1,792
Segmental operating profit			2		145.6		145.6			97.4			97.4		234.2			234.2
Restructuring costs						(3.3)	(3.3)				(17.5)		(17.5)				(34.9)	(34.9)
Acquired intangible amortisation
	and impairment					(3.6)	(3.6)				(3.7)		(3.7)				(7.2)	(7.2)
Reversal of economic hedge
	contract (gains)/losses					(2.1)	(2.1)				13.3		13.3				8.9	8.9
Operating profit			2		145.6	(9.0)	136.6			97.4	(7.9)		89.5		234.2		(33.2)	201.0
Financial income			5		36.4	11.7	48.1			32.3	19.9		52.2		64.4		37.2	101.6
Financial expense			5		(45.6)	(5.6)	(51.2)			(43.3)	(18.7)		(62.0)		(86.9)		(29.5)	(116.4)
Net financial expense			5		(9.2)	6.1	(3.1)			(11.0)	1.2		(9.8)		(22.5)		7.7	(14.8)
Profit before tax					136.4	(2.9)	133.5			86.4	(6.7)		79.7		211.7		(25.5)	186.2
Taxation			6		(40.9)	1.4	(39.5)			(26.8)	2.1		(24.7)		(63.6)		9.8	(53.8)
Profit of continuing operations
	after tax				95.5	(1.5)	94.0			59.6	(4.6)		55.0		148.1		(15.7)	132.4
Gain from discontinued
	operations (net of tax)		4			5.4	5.4				-		-				-	-
Total profit for the period					95.5	3.9	99.4			59.6	(4.6)		55.0		148.1		(15.7)	132.4
Attributable to:
	Owners of the parent						99.3						54.2					130.2
	Non-controlling interests						0.1						0.8					2.2
Profit for the period							99.4						55.0					132.4
Earnings per share			7
	Basic						31.1p						17.0p					40.8p
	Diluted						30.7p						17.0p					40.6p
	Basic - from continuing operations						29.4p						17.0p					40.8p
	Diluted - from continuing operations						29.0p						17.0p					40.6p
CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME
								6 months to 30 June 2010 (unaudited)				6 months to 30 June 2009 (unaudited)				Year to 31 Dec 2009
								£m				£m				£m
Profit for the period								99.4				55.0				132.4
Other comprehensive income
Effective portion of change in fair value of net investment hedges								(4.6)				9.9				13.3
Income tax effect								1.3				(2.8)				(3.7)
								(3.3)				7.1				9.6
Fair value gain/(loss) on available for sale financial assets								1.8				(0.5)				1.2
Exchange differences on translation of foreign operations								4.5				(36.6)				(28.1)
Income tax effect								(0.6)				3.2				3.0
								3.9				(33.4)				(25.1)
Actuarial loss on defined benefit plans								(123.1)				(159.0)				(153.3)
Income tax effect								34.6				40.6				44.0
								(88.5)				(118.4)				(109.3)
Other comprehensive income for the period, net of tax								(86.1)				(145.2)				(123.6)
Total comprehensive income for the period, net of tax								13.3				(90.2)				8.8
Attributable to:
Owners of the parent								12.9				(90.0)				7.0
Non-controlling interests								0.4				(0.2)				1.8
Total comprehensive income for the period, net of tax								13.3				(90.2)				8.8
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET
								30 June 2010				30 June 2009				31 Dec 2009
								(unaudited)				(unaudited)
								£m				£m				£m
Assets
Intangible assets								391.6				372.5				386.4
Property, plant and equipment								222.8				232.8				233.0
Employee benefit assets								-				2.1				0.6
Deferred tax assets								114.0				86.5				89.6
Total non-current assets								728.4				693.9				709.6
Inventories								265.3				265.5				249.9
Trade and other receivables								346.9				334.8				311.4
Other current financial assets								19.5				-				16.9
Current tax								3.9				4.1				4.2
Investments								18.3				14.7				17.7
Cash and cash equivalents								132.6				112.2				81.0
Total current assets								786.5				731.3				681.1
Total assets								1,514.9				1,425.2				1,390.7
Liabilities
Bank overdraft								(0.8)				(2.5)				(5.3)
Interest-bearing loans and borrowings								(2.9)				(65.0)				(1.2)
Provisions								(14.5)				(29.8)				(22.4)
Current tax								(25.0)				(16.0)				(25.8)
Trade and other payables								(359.1)				(316.3)				(340.6)
Other current financial liabilities								(4.7)				-				(4.0)
Total current liabilities								(407.0)				(429.6)				(399.3)
Interest-bearing loans and borrowings								(285.8)				(308.2)				(246.9)
Employee benefit obligations								(329.3)				(283.1)				(258.1)
Provisions								(44.3)				(34.3)				(44.5)
Deferred tax liabilities								(15.2)				(15.6)				(15.0)
Other payables								(19.5)				(25.0)				(24.9)
Total non-current liabilities								(694.1)				(666.2)				(589.4)
Total liabilities								(1,101.1)				(1,095.8)				(988.7)
Net assets								413.8				329.4				402.0
Equity
Share capital								84.9				84.8				84.9
Share premium								167.4				165.2				166.6
Other reserves								56.7				45.3				56.4
Retained earnings								55.8				27.9				91.9
Equity attributable to owners of the parent								364.8				323.2				399.8
Non-controlling interests								49.0				6.2				2.2
Total equity								413.8				329.4				402.0

 

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
		Share capital	Share premium account	Capital redemption reserve	Hedging reserve	Translation reserve	Retained earnings	Total parent equity	Non-controlling interests	Total equity
		£m	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2010		84.9	166.6	7.9	7.4	41.1	91.9	399.8	2.2	402.0
Profit for the period							99.3	99.3	0.1	99.4
Other comprehensive income					(3.3)	3.6	(86.7)	(86.4)	0.3	(86.1)
Total comprehensive income					(3.3)	3.6	12.6	12.9	0.4	13.3
Issue of share capital			0.8					0.8		0.8
Dividends paid							(42.2)	(42.2)		(42.2)
Share based payments (net
	of tax)						4.0	4.0		4.0
Shares held in trust for employee
	share schemes						(10.5)	(10.5)		(10.5)
Investment in pension partnership
	by UK Pension Fund								46.4	46.4
At 30 June 2010		84.9	167.4	7.9	4.1	44.7	55.8	364.8	49.0	413.8
As at 1 January 2009		84.7	165.1	7.9	(2.2)	65.4	131.5	452.4	9.3	461.7
Profit for the period							54.2	54.2	0.8	55.0
Other comprehensive income					7.1	(32.9)	(118.4)	(144.2)	(1.0)	(145.2)
Total comprehensive income					7.1	(32.9)	(64.2)	(90.0)	(0.2)	(90.2)
Issue of share capital		0.1	0.1					0.2		0.2
Dividends paid							(40.5)	(40.5)	(1.6)	(42.1)
Share based payments (net
	of tax)						1.4	1.4		1.4
Shares held in trust for employee
	share schemes						(0.3)	(0.3)		(0.3)
Acquisition of non-controlling
	interests								(1.3)	(1.3)
At 30 June 2009		84.8	165.2	7.9	4.9	32.5	27.9	323.2	6.2	329.4
As at 1 January 2009		84.7	165.1	7.9	(2.2)	65.4	131.5	452.4	9.3	461.7
Profit for the year							130.2	130.2	2.2	132.4
Other comprehensive income					9.6	(24.3)	(108.5)	(123.2)	(0.4)	(123.6)
Total comprehensive income					9.6	(24.3)	21.7	7.0	1.8	8.8
Issue of share capital		0.2	1.5					1.7		1.7
Dividends paid							(66.0)	(66.0)	(1.6)	(67.6)
Cancellation of unclaimed
	dividends						0.2	0.2		0.2
Share based payments (net
	of tax)						4.8	4.8		4.8
Shares held in trust for employee
	share schemes						(0.3)	(0.3)		(0.3)
Acquisition of non-controlling
	interests								(7.3)	(7.3)
At 31 December 2009		84.9	166.6	7.9	7.4	41.1	91.9	399.8	2.2	402.0

 

 

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
	6 months to 30 June 2010 (unaudited)	6 months to 30 June 2009 (unaudited)	Year to 31 Dec 2009
	£m	£m	£m
Cash flows from operating activities
Profit for the period *	99.4	55.0	132.4
Adjustments for:
Depreciation	25.3	23.4	48.7
Amortisation and impairment	5.9	6.1	12.8
Gain on sale of property, plant and equipment and investments	(2.2)	-	-
Financial income	(48.1)	(52.2)	(101.6)
Financial expense	51.2	62.0	116.4
Equity-settled share-based payment expenses	1.8	1.4	4.1
Income tax expense	39.5	24.7	53.8
(Increase)/Decrease in trade and other receivables	(35.9)	26.3	48.0
(Increase)/Decrease in inventories	(12.5)	30.3	57.5
Increase/(Decrease) in trade and other payables	22.0	(75.0)	(44.8)
Increase in provisions and employee benefits	(6.9)	(6.9)	(8.4)
Cash generated from the operations	139.5	95.1	318.9
Income taxes paid	(29.3)	(26.2)	(52.6)
	110.2	68.9	266.3
CCI investigation costs and fine	(2.9)	-	(13.5)
Additional pension scheme funding	-	-	(16.8)
Special contribution to the UK Pension Fund	(48.6)	-	-
Net cash from operating activities	58.7	68.9	236.0
Cash flows from investing activities
Interest received	2.3	1.7	3.7
Proceeds from sale of property, plant and equipment	4.5	0.7	1.8
Sale of investments	1.0	0.2	0.5
Purchase of investments	(0.2)	(0.1)	(1.0)
Settlement of derivatives	3.9	(9.7)	(7.5)
Income from investments	0.1	-	-
Acquisitions of controlling interests	(1.6)	-	(1.3)
Acquisition of property, plant and equipment	(20.0)	(17.1)	(37.3)
Capitalised development expenditure	(1.4)	(2.6)	(4.9)
Net cash from investing activities	(11.4)	(26.9)	(46.0)
Cash flows from financing activities
Interest paid	(9.7)	(13.0)	(23.5)
Investment in pension partnership by UK Pension Fund	48.6	-	-
Acquisition of non-controlling interests	(12.4)	(19.0)	(18.1)
Purchase of own shares	(10.5)	(0.3)	(0.3)
Proceeds from the issue of share capital for employee     share schemes	0.8	0.2	1.7
Net drawdown/(repayment) of borrowings	22.7	28.4	(125.2)
Dividends paid to non-controlling interests	-	(1.6)	(1.6)
Dividends paid to equity shareholders	(42.2)	(40.5)	(66.0)
Net cash from financing activities	(2.7)	(45.8)	(233.0)
Net increase/(decrease) in cash and cash equivalents	44.6	(3.8)	(43.0)
Cash and cash equivalents at start of the year	75.7	119.3	119.3
Effect of exchange rate fluctuations on cash held	11.5	(5.8)	(0.6)
Cash and cash equivalents at the end of the period **	131.8	109.7	75.7
* Including £5.4m profit from discontinued operations
** Net of bank overdrafts
Reconciliation of net cash to movement in net borrowings appears in note 9.

 

 

NOTES TO THE CONDENSED CONSOLIDATED

INTERIM FINANCIAL STATEMENTS

 

 

1. Reclassification

 

To assist the user of the accounts, the condensed consolidated interim income statement has been presented in a columnar format with exceptional items shown on the face of the statement consistent with the annual report 2009. The 2009 comparative consolidated income statement has been reclassified on a comparable basis. There is no change to total revenue, operating profit, profit before tax, earnings per share or net assets as a result of this reclassification. There is no change in the value or nature of items, reported on the face of the statement other than the amount described as “profit before tax before restructuring, investigation costs and fines, acquired intangible amortisation and impairment, other income and financial instruments excluding economic hedge contract gains and losses”, which is now described as profit before tax and exceptional items. In accordance with IAS7 revised, the aggregate cash flows to acquire a non controlling interest are now classified as financing activities within the consolidated statement of cash flows. Previously these had been classified as investing activities. This revision has been applied retrospectively. 

 

 

2. Segmental information

 

Segmental information is presented in the condensed consolidated interim financial statements for each of the Group's operating segments. The operating segment reporting format reflects the Group's management and internal reporting structures. Inter-segment revenue is insignificant.    

 

The Group continues to include the following five operating segments and activities:       

 

Fluid Controls                                                                                                                                                     

Severe Service

Design, manufacture, supply and service of high performance critical control valves and associated equipment for power generation plants, oil and gas producers and other process industries.

Fluid Power

Design, manufacture and supply of motion and fluid control systems, principally pneumatic devices, for original equipment manufacturers in commercial vehicle, life science, process, rail, food and beverage and other industries.

Indoor Climate

Design, manufacture and supply of indoor climate control systems, principally balancing valves for large commercial buildings and thermostatic radiator valves for residential buildings.

 

Retail Dispense

Beverage Dispense

Design, manufacture and supply of still and carbonated beverage dispense systems and associated merchandising equipment for brand owners and retailers.

Merchandising

Design, manufacture and supply of point of purchase display systems for brand owners and retailers.

 

Information regarding the operations of each reporting segment is included below. Performance is measured based on segmental operating profit before restructuring and acquired intangible amortisation and impairment. Segmental operating profit is also reported to the Chief Executive as if economic currency and metals hedges were effective for financial reporting purposes. Businesses enter into forward currency and metal contracts to provide economic hedges against the impact on profitability of swings in rates and values in accordance with the Group's policy to minimise the risk of volatility in revenues, costs and margins. Segmental operating profits are therefore charged/credited with the impact of these contracts. In accordance with IAS39, these contracts do not meet the technical provisions required for hedge accounting and gains and losses are reversed out of segmental profit and are recorded in net financial income and expense for the purposes of the condensed consolidated interim income statement.

		Segmental				Segmental				Segmental
		revenue *				operating profit *				operating margin *
		6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009		6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009		6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009
		£m	£m	£m		£m	£m	£m		%	%	%
Fluid Controls		692	649	1,324		119.0	79.5	194.9		17.2	12.2	14.7
	Severe Service	217	252	512		38.4	47.9	101.4		17.7	19.0	19.8
	Fluid Power	333	255	520		49.8	7.4	32.8		15.0	2.9	6.3
	Indoor Climate	142	142	292		30.8	24.2	60.7		21.7	17.0	20.8
Retail Dispense		235	241	461		26.6	17.9	39.3		11.3	7.4	8.5
	Beverage Dispense	159	154	297		16.9	10.5	21.1		10.6	6.8	7.1
	Merchandising	76	87	164		9.7	7.4	18.2		12.8	8.5	11.1
Segmental result		927	890	1,785		145.6	97.4	234.2		15.7	10.9	13.1
* before exceptional items

 

 

Reconciliation of reported segmental revenue and operating profit
						Revenue				Profit
						6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009		6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009
						£m	£m	£m		£m	£m	£m
Segmental result						927	890	1,785		145.6	97.4	234.2
Restructuring costs										(3.3)	(17.5)	(34.9)
Acquired intangible amortisation and impairment										(3.6)	(3.7)	(7.2)
Reversal of economic hedge contract (gains)/losses						(2)	10	7		(2.1)	13.3	8.9
Total revenue/operating profit reported						925	900	1,792		136.6	89.5	201.0
Net financial expense										(3.1)	(9.8)	(14.8)
Profit before tax - continuing operations										133.5	79.7	186.2

 

 

3. Acquisitions

 

3.1 Controlling interests

 

There were no acquisitions in 2010. 

 

On 17 December 2009 the company acquired the assets of NASS Parts and Service for a consideration of £1.4m. The fair value of the net assets acquired was £0.4m resulting in a goodwill of £1.0m. The result of this acquisition is reported within Beverage Dispense, however there was no impact on the 2009 results. Had NASS Parts and Service been acquired at the beginning of 2009, Group revenue in 2009 would have been £3m higher and the impact on profit before tax would not have been material. 

 

3.2 Non-controlling interests

 

During the period the Group implemented an asset-backed cash payment scheme with the trustees of the IMI Pension Fund which created a non-controlling interest. Further details are given in note 12.

 

On 1 January 2009 the 19.1% non-controlling interest in Display Technologies LLC, part of the Merchandising group, was acquired by the Group under the terms of the original purchase agreement. At that date the net assets of the company were £6.3m. Based on the contracted pricing mechanism the cash consideration paid was £18.1m, resulting in additional goodwill of £16.9m. Display Technologies LLC was originally acquired in June 2001. 

 

In December 2009 the Group exercised its option to purchase the remaining 30% non-controlling interest in Pneumatex AG, the controlling interest in which was originally acquired on 28 December 2007. The exercise of the purchase option in December was unconditional and the whole controlling interest accordingly passed to IMI at that date, as a result additional goodwill of £6.1m was recognised at 31 December 2009. The acquisition of the non-controlling interest was completed during the first half 2010. The total consideration paid was £14.0m that included £1.6m of deferred consideration relating to the initial acquisition.

 

 

4. Discontinued operations

 

During the period the General Court of the European Union issued its judgement on the Group’s appeal against the fine levied in 2005 in respect of allegations of anti-competitive behaviour among certain manufacturers of Copper Tube. The result of the appeal was a reduction in the fine of £5.4m. This income has been shown as discontinued operations as it relates to a business that was sold in 2002. 

 

The impact of the discontinued operations on both the basic and the diluted earnings per share was 1.7p (2009: nil p). 

5. Net financial income and expense
		6 months to 30 June 2010						6 months to 30 June 2009
Recognised in the income statement		Interest	Other	Sub total	Financial instru- ments	Total		Interest	Other	Sub total	Financial instru- ments	Total
Interest income on bank deposits		2.2		2.2		2.2		1.9		1.9		1.9
Financial instruments at fair value through
profit or loss:
Designated hedges					0.4	0.4					1.6	1.6
Other economic hedges
- current period trading					2.9	2.9					3.2	3.2
- future period transactions					8.4	8.4					15.1	15.1
Income from investments			0.1	0.1		0.1			-	-		-
Expected return on defined benefit pension
plan assets			34.1	34.1		34.1			30.4	30.4		30.4
Financial income		2.2	34.2	36.4	11.7	48.1		1.9	30.4	32.3	19.9	52.2
Interest expense on financial liabilities
measured at amortised cost		(10.7)		(10.7)		(10.7)		(10.8)		(10.8)		(10.8)
Interest cost capitalised		0.1		0.1		0.1		-		-		-
Financial instruments at fair value through profit or loss:
Designated hedges					(0.3)	(0.3)					(1.7)	(1.7)
Other economic hedges
- current period trading					(3.4)	(3.4)					(14.3)	(14.3)
- future period transactions					(1.9)	(1.9)					(2.7)	(2.7)
Financial cost of defined benefit pension
scheme liabilities			(35.0)	(35.0)		(35.0)			(32.5)	(32.5)		(32.5)
Financial expense		(10.6)	(35.0)	(45.6)	(5.6)	(51.2)		(10.8)	(32.5)	(43.3)	(18.7)	(62.0)
Net financial (expense)/income		(8.4)	(0.8)	(9.2)	6.1	(3.1)		(8.9)	(2.1)	(11.0)	1.2	(9.8)
								Year to 31 Dec 2009
Recognised in the income statement								Interest	Other	Sub total	Financial instru- ments	Total
Interest income on bank deposits								3.7		3.7		3.7
Financial instruments at fair value through
profit or loss:
Designated hedges											2.0	2.0
Other economic hedges
- current year trading											11.6	11.6
- future year transactions											23.6	23.6
Expected return on defined benefit pension
plan assets									60.7	60.7		60.7
Financial income								3.7	60.7	64.4	37.2	101.6
Interest expense on financial liabilities
measured at amortised cost								(22.2)		(22.2)		(22.2)
Financial instruments at fair value through
profit or loss:
Designated hedges											(1.9)	(1.9)
Other economic hedges
- current year trading											(20.1)	(20.1)
- future year transactions											(7.5)	(7.5)
Financial cost of defined benefit pension
scheme liabilities									(64.7)	(64.7)		(64.7)
Financial expense								(22.2)	(64.7)	(86.9)	(29.5)	(116.4)
Net financial (expense)/income								(18.5)	(4.0)	(22.5)	7.7	(14.8)
Included in financial instruments are current year trading gains and losses on economically effective transactions which for statutory purposes (see note 2) are included in segmental operating profit. For statutory purposes these are required to be shown within net financial income and expense above. Gains or losses for future year transactions are in respect of financial instruments held by the Group to provide stability of future trading cash flows.

 

6. Taxation

 

The effective tax rate on profit before tax, excluding exceptional items is 30% (2009: 31%).

 

 

7. Earning per ordinary share

 

The weighted average number of shares in issue during the period, net of shares purchased by the Company and held as treasury shares or to satisfy employee share scheme vesting, was 319.6m, 323.7m diluted for the effect of outstanding share options (2009: 318.5m, 319.4m diluted). Basic and diluted earnings per share have been calculated on earnings of £99.3m (2009: £54.2m).

 

The directors consider that adjusted earnings per share figures, using earnings as calculated below, give a more meaningful indication of the underlying performance because either the quantum, the one off nature, or volatility of these items would otherwise distort the underlying performance.

 

			6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009
From continuing operations			£m	£m	£m
Profit for the period			94.0	55.0	132.4
Non-controlling interests			(0.1)	(0.8)	(2.2)
			93.9	54.2	130.2
Charges/(credits) included in profit for the period:
	Restructuring costs		3.3	17.5	34.9
	Acquired intangible amortisation and impairment		3.6	3.7	7.2
	Financial instruments excluding economic hedge contract gains and losses		(4.0)	(14.5)	(16.6)
			96.8	60.9	155.7
	Taxation on charges/(credits) included in profit before tax		(1.4)	(2.1)	(9.8)
Earnings for adjusted EPS			95.4	58.8	145.9
Weighted average number of shares			319.6m	318.5m	318.8m
Adjusted EPS			29.8p	18.5p	45.8p
Diluted adjusted EPS			29.5p	18.4p	45.5p

 

 

8. Dividend

 

The final dividend relating to the year ended 31 December 2009 of 13.2p per share was paid in May 2010 absorbing £42.2m (2009: £40.5m).

 

In addition, the directors have declared an interim dividend for the current year of 9.0p per share (2009: 8.0p) which will be paid on 15 October 2010 to shareholders on the register on 10 September 2010. In accordance with IAS10 ‘Events after the Balance Sheet Date’ this interim dividend has not been reflected in the interim financial statements.

9. Cash flow reconciliations
Reconciliation of net cash to movement in net borrowings
	6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009
	£m	£m	£m
Net increase/(decrease) in cash and cash equivalents	44.6	(3.8)	(43.0)
(Drawdown)/Repayment of borrowings	(22.7)	(28.4)	125.2
Cash inflow/(outflow)	21.9	(32.2)	82.2
Currency translation differences	(6.4)	67.4	44.1
Movement in net borrowings in the period	15.5	35.2	126.3
Net borrowings at the start of the period	(172.4)	(298.7)	(298.7)
Net borrowings at the end of the period	(156.9)	(263.5)	(172.4)

 

 

10. Exchange rates

 

The income statements of overseas operations are translated into sterling at average rates of exchange for the period, balance sheets are translated at period end rates. The most significant currencies are the Euro and the US Dollar – the relevant rates of exchange were:

		Income statement and cash flow average rates				Balance sheet rates as at
		6 months to 30 June 2010	6 months to 30 June 2009	Year to 31 Dec 2009		30 June 2010	30 June 2009	31 Dec 2009
Euro		1.15	1.12	1.12		1.22	1.17	1.13
US Dollar		1.52	1.50	1.57		1.50	1.65	1.61

  

11. Property, plant and equipment

 

Capital expenditure of £19.6m in the period includes £7.3m in respect of the construction of new manufacturing facilities for Severe Service in the Czech Republic. Capital commitments at 30 June 2010 include £0.2m for the completion of these Czech facilities and £5.7m for the construction of new manufacturing facilities for Severe Service in India.

 

 

12. Employee benefits
			30 June 2010				30 June 2009				31 Dec 2009
			UK	Overseas*	Total		UK	Overseas*	Total		UK	Overseas*	Total
			£m	£m	£m		£m	£m	£m		£m	£m	£m
Schemes in surplus
Fair value of assets
	(net of asset ceiling restriction)		-	2.8	2.8		-	16.8	16.8		-	35.8	35.8
Present value of defined
	benefit obligation		-	(2.8)	(2.8)		-	(14.7)	(14.7)		-	(35.2)	(35.2)
Recognised employee
	benefit net assets		-	-	-		-	2.1	2.1		-	0.6	0.6
Schemes in deficit
Fair value of assets			906.3	121.4	1,027.7		813.6	84.6	898.2		926.6	81.3	1,007.9
Present value of defined
	benefit obligations		(1,141.0)	(216.0)	(1,357.0)		(1,014.5)	(166.8)	(1,181.3)		(1,101.4)	(164.6)	(1,266.0)
Recognised employee benefit
	net obligations		(234.7)	(94.6)	(329.3)		(200.9)	(82.2)	(283.1)		(174.8)	(83.3)	(258.1)
*Including some overseas unfunded schemes and non-post employment schemes.

 

The UK Pension Fund constitutes around 84% of the total liabilities and 88% of the total assets for the Group’s long term employee benefit arrangements. The increase in employee benefit net obligations is mainly due to a reduction in the discount rate used to value the UK Pension Fund’s liabilities to 5.3% (31 December 2009: 5.7%) reflecting changes in yield’s on AA corporate bond indices. 

 

The Group has agreed with the trustees of the UK Pension Fund to implement an asset-backed cash payment scheme which will provide £4.4m per annum to the fund for a period of 20 years. The present value of this additional funding stream has been recognised as an asset of the scheme and is included in the Group’s pension scheme assets at a value of £48.6m. The annual payment to the scheme is at the discretion of the Group and this discretion is exercisable if the Group does not pay a dividend in the year. As a result payments to the scheme in respect of 2011 onwards are not a liability of the Group until a dividend is declared but are instead an interest in the Group’s assets held by the Trustee. This interest is included within non-controlling interests.

 

To facilitate this arrangement certain intercompany loan notes together with their associated income rights were transferred into a limited partnership established by the Group. The partnership is controlled by, and consolidated into the Group. The fair value of the loan notes transferred was £66.0m. In June 2010 the UK Pension Fund obtained a nominal limited interest in the partnership. The UK Pension Fund’s nominal partnership interest allows it to receive a distribution from the profits of the partnership of £4.4m per year for 20 years subject to the discretion of the Group noted above. The first distribution of £2.2m for the period to 31 December 2010 is expected to occur in the first half of 2011.

 

 

13. Contingencies

 

Following completion of the European Commission investigation into allegations of anti-competitive behaviour in the EU among certain manufacturers of copper fittings, the Company paid a fine of £32.8m in January 2007. This fine is the subject of an ongoing appeal. In preparing the interim financial statements, the directors have not anticipated the outcome of the appeal due to the inherent uncertainty of such processes.

 

Provision was made in respect of complying with the Group’s settlement in August 2009 with the US Department of Justice in respect of certain irregular payments by a US subsidiary, Control Components Inc (CCI). No provision has been made in respect of any collateral issues, if any, that may arise from the ongoing prosecution of former CCI management. At this date it is not possible to assess the nature or level of any potential costs and accordingly no provision has been made.

 

 

14. Financial information

 

This condensed set of financial statements has been prepared in accordance with IAS34 ‘Interim Financial Reporting’ as adopted by the EU. The Group’s annual financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU.

 

As required by the Disclosure and Transparency Rules of the Financial Services Authority, the condensed set of financial statements has been prepared applying the same accounting policies and computation methods that were applied in the preparation of the company's published consolidated financial statements for the year ended 31 December 2009 other than the adoption of Revised IFRS3 ‘Business Combinations (2008)’ and amended IAS27 ‘Consolidated and Separate Financial Statements (2008)’ which have been adopted as these standards will be implemented for the first time in the year ending 31 December 2010. None of these changes had any significant impact on the results or financial position. In accordance with IAS7 revised, the aggregate cash flows to acquire a non controlling interest are now classified as financing activities within the consolidated statement of cash flows. Previously these had been classified as investing activities. This revision has been applied retrospectively. 

 

This Interim Financial Report is unaudited, but has been reviewed by the Company’s auditor having regard to the International Standard on Review Engagements (UK and Ireland) 2410 Review of Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board for use in the UK. A copy of their unqualified review opinion is attached. 

 

The comparative figures for the financial year ended 31 December 2009 are not the Company’s statutory accounts for that financial year as defined in section 435 of the Companies Act 2006. Those accounts have been reported on by the Company’s auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

This announcement contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of the preparation of this announcement and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Interim Financial Report should be construed as a profit forecast.

 

This Interim Financial Report has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to IMI plc and its subsidiaries when viewed as a whole.

 

References in the commentary to segmental operating profit, operating margins and profit before tax, unless otherwise stated, relate to reported numbers after adjustment for restructuring, acquired intangible amortisation and impairment and financial instruments excluding economic hedge contract gains and losses. Segmental operating profit is reported as if economic currency and metals hedges were effective for financial reporting purposes. Business segments enter into forward currency and metal contracts to provide economic hedges against the impact on profitability of swings in rates and values in accordance with the Group’s policy to minimise the risk of volatility in revenues, costs and margins. Business segmental operating profits are therefore charged/credited with the impact of those contracts. In accordance with IAS39 ‘Financial Instruments: Recognition and Measurement’, these contracts do not meet the technical provisions required for hedge accounting and gains and losses are recorded in net financial income and expense. References to EPS, unless otherwise stated, relate to reported EPS from continuing operations adjusted for the per share after tax impact of restructuring, acquired intangible amortisation and impairment and financial instruments excluding economic hedge contract gains and losses. The directors consider that the quantum, one off nature or volatility of these adjustments can distort the underlying performance of the Group and for this reason the commentary discusses these adjusted amounts. 

 

References to organic growth are to like for like or underlying growth and exclude the impact of exchange rate translation and acquisitions or disposals that are included in headline reported growth figures. The organic growth is derived from excluding any contribution from acquired companies to revenues or profits in the current period until the first anniversary of their acquisition. It also excludes the contribution to revenues or profits in both the current and comparative period from any business that has been disposed of or sold. This adjusted growth in revenues or profits will then be compared to the adjusted prior period after its re-translation at the average exchange rates of the current period to provide the organic growth rate.

 

 

NEXT ANNOUNCEMENT

IMI expects to release its next interim management statement on 11 November 2010.

 

 

ENQUIRIES TO:

Will Shaw                                              Investor Relations Director                                                Tel: [phone]

Rollo Head / Clare Hunt                     Finsbury                                                                                Tel: [phone]

The press release, presentation and video webcast will be available on the corporate website at www.imiplc.com.

 

 

END

 

 

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