Annual Financial Report

RNS Number : 1000T

IMI PLC

23 March 2016

 

23 March 2016

Annual Financial Report

IMI plc (the "Company") announces that copies of the Annual Report and Accounts for the year ended 31 December 2015 and the Notice of Annual General Meeting for 2016 are available from today on the Company's website www.imiplc.com and may be viewed and downloaded online at www.imiplc.com/investors (click on Annual Reports).

Hard copy documents are being posted to shareholders who have elected to receive them and are also available from the Company Secretary at the Company's registered office at Lakeside, Solihull Parkway, Birmingham Business Park, Birmingham, B37 7XZ.

Copies of the above documents, together with the form of proxy for the 2016 Annual General Meeting have been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do.

The Company's 2016 Annual General Meeting will be held at the Hilton Birmingham Metropole Hotel, National Exhibition Centre, Birmingham on Thursday 5 May 2016, commencing at 10am.

The Company's preliminary results announcement of 26 February 2016 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 25 February 2016); 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 26 February 2016.

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 137 of the Annual Report and Accounts and is signed by order of the Board by John O'Shea, Company Secretary.  Responsibility is for the full Annual Report and Accounts and not the extracted information presented in this announcement or the preliminary results announcement.

Directors' responsibility statement under the Disclosure and Transparency Rules

Each of the directors listed on pages 46 and 47 confirms that:

•      the Group and parent company financial statements in this Annual Report, which have been prepared in accordance with applicable UK law and with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

•      the Annual Report (which includes the Directors' Report and the Strategic Report) includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

Principal risks and uncertainties

The Board has responsibility for determining the nature and extent of the principal risks it is prepared to accept to achieve the Group's strategic objectives. The Executive Committee has delegated responsibility from the Board for implementing and monitoring internal controls and other elements of risk management systems. The Executive Committee operates alongside the Audit Committee, which has primary responsibility for oversight of financial controls, the Nominations Committee, which has primary responsibility for succession risk, and the Remuneration Committee, which has primary responsibility for remuneration and incentive structure risk.

In 2014 a new risk management process was piloted across the Group which for the first time required our principal business units to produce detailed risk profiles. Following the successful pilot exercise, Group-wide deployment of the new risk profile was completed in March 2015. Each site is now required to develop and maintain a current risk profile, which identifies the key risks facing the business. Every risk is assessed, rated and appropriate mitigating procedures and, where necessary, improvement actions are developed. Specific key performance indicators ('KPIs') are tracked for each risk and site management are required to review progress on a monthly basis. Site level risk profiles are uploaded to the Group intranet every six months and then consolidated into divisional risk registers and ultimately the Group risk register. During 2015 all required business units completed and uploaded their risk profile, demonstrating strong process adherence and a high level of management commitment.

Each Divisional Managing Director reviewed and approved their business unit risk profiles and as part of this review process calibrated risk assessment across their division, assessed local management mitigating procedures and tracked the status of improvement actions. Once complete, the most significant business unit level risks were consolidated into a summarised divisional risk profile, including any additional divisional level risks as appropriate.

The three divisional risk profiles were subsequently consolidated into a single Group risk profile and the divisional and consolidated Group risk profiles were presented at Executive Committee meetings in the second half of 2015. The senior leadership team reviewed the most pertinent risks facing the IMI Group. This review, the supporting risk profiles and a detailed analysis of the Group risk profile and actions undertaken to ensure compliance with the enhanced requirements of the UK Corporate Governance Code were submitted to the Board. The Board explicitly considers the risks associated with the Group's strategic objectives and the risks involved in specific investment decisions, including acquisitions and divestments.

Through these processes the significant risks facing the business are identified, assessed and ranked according to their likelihood and impact on the business and, following Executive review, the Board is able to actively monitor the measures used to mitigate, transfer or avoid such risks. Risk appetite across the range of Group strategic objectives is also reviewed by the Board.

In addition to strategic, operational and compliance risks, the Group is also exposed to broader financial market risks including credit risk, liquidity risk, counter party risk, fluctuations in foreign exchange rates, interest rates and commodity prices. A description of these risks and our centralised approach to managing them is described in section 4.4 of the financial statements.

The key strategic and operational risks facing the Group are shown in the table on pages 33 to 35. This analysis includes a description of the risk and the potential impact for the Group, a summary of the mitigation actions, the risk movement and the main changes during 2015.

Risk	Risk description and potential impact	Mitigation
Macro-economic instability Global economic or political instability impacting the group's ability to achieve forecast and market expectations	The Group operates in global markets and demand for our products is dependent on a number of economic and sector-facing environments. A downturn in a regional economy or a political event could impact end-market demand and result in reductions in revenue and profit.	•  Divisional management monitor key customers and respond quickly to changes in customer demand. •  Our core forecasting process utilises early indications of reduced demand and the operational output can be right sized appropriately. •  The Group operates in all main regional markets and our strategy is to ensure that we have a balanced portfolio of markets to ensure we are not too dependent on any one region or market. •  Enhanced stress testing and sensitivity analysis of business plans with regular reviews of key market and sector metrics.
Changes during 2015	Economic and market conditions have become increasingly challenging with weakness in Brazil and slower growth in China coupled with lower activity in Oil & Gas and Nuclear Power generation. The Group continues to increase investment in new product development and improve operational performance to enhance competitiveness. To mitigate, where practical, the impact of current market weakness, Critical Engineering and Precision Engineering are reviewing a number of cost-reduction initiatives which will be introduced in 2016.
Major project implementation Failure to deliver major transformational projects on time and on budget	The Group will undertake a number of major change projects in line with our strategic objectives including: business reorganisations and implementation of IT systems. Failure to deliver the desired objectives and failure to react quickly enough to changing market conditions, could have an adverse financial impact on the Group.	•  Continued upgrade of resources to manage projects including the introduction of new Group-wide core processes. •  Detailed plans with clear and measurable milestones reviewed by the Divisional Managing Directors to track progress. •  Regular review of major project progress by the Executive Committee. •  Enhanced risk assessment process including full mitigation action plans for all major change projects. •  Specialist IT and Group Assurance reviews of major IT projects. •  Detailed contingency plans.
Changes during 2015	The Group has a similar volume of major change projects compared to 2014, with the majority now relating to business re-organisations and IT system implementations. All significant projects receive substantial senior management oversight in the form of bi-weekly Executive project reviews to deliver the objectives which were approved at project initiation, to ensure they remain on track and are adequately resourced.
Product quality Quality issues leading to product failure, recall, warranty issues, injury, damage or disruption to customer's business	The Group prides itself on the innovative engineering solutions we provide our customers. The quality and safety of our products is of the highest importance and failure to deliver the quality required would result in negative financial and reputational impact.	•  Implementation of Group-wide standard for advanced product quality planning ('APQP') programme. •  Continued focus on adherence to existing quality management systems, including audits to appropriate quality standards. •  Testing of finished product and customer sign off on the most critical of products. •  Targeted lean events to improve quality and application of problem solving tools to address significant re-occurring quality issues per site. •  Upgrade of talent and focus on functional excellence in quality and product development. •  Processes to mitigate the reputational and legal implications of product failures.
Changes during 2015	Customers continue to insist on more onerous contractual terms relating to product quality and performance. The Group has implemented a new APQP process across all manufacturing operations. Significant progress has been made embedding standard work and lean tools such a poka-yoke (quality system with the goal of achieving zero defects), which will reduce the likelihood of issues arising. Introduction of Obeya rooms in Critical Engineering and the addition of a global standard IMI Norgren quality system in Precision Engineering will add significantly to systems integrity and performance monitoring.
Acquisition risk Failure to integrate acquisitions successfully and deliver the required Synergies	An important part of our growth agenda is to make acquisitions that complement or extend our product portfolio. Failure to implement the post integration strategy would reduce the value enhancing synergies.	•  Resourced central M&A function working with our divisions to identify hard and soft synergies within targeted acquisition opportunities. •  Formalised acquisition approval, due diligence and post-acquisition integration processes. •  Weekly review of the 100 day post-acquisition plan with the integration team to track progress, led by the Divisional Managing Director.
Changes during 2015	The revised acquisition integration process introduced in 2014 which was used for the acquisition of Bopp & Reuther at the start of 2015 will ensure efficiency synergies are maximised. This revised and formalised process has improved the visibility and rigour of delivery of the planned synergies.
Supply chain Failure to manage the supply chain	The Group has a significant number of contracts with a broad base of suppliers. Failure to meet customers' requirements in respect of quality or delivery, could have a material impact on the Group's results.	•  Monitoring of risks and development of contingency plans to mitigate the impact of a supplier failure or increased prices. •  Review of supply base to reduce over-reliance on key suppliers. •  Adequate safety stock and/or dual supply for critical components. •  Supplier scorecard process to monitor performance, capability and resilience.
Changes during 2015	Continued collaboration across divisions to share knowledge of suppliers and use of standardised scorecards to monitor trends in key supplier performance. Introduction of value engineering programmes across divisions. Introduction of global agreements to leverage Group purchase and ensure all supplies are sourced from reputable suppliers under standard terms and pricing.
Cyber security Unauthorised access to our IT systems	Unapproved access to IT systems resulting in loss of intellectual property, fraudulent activity and theft of cash or data, business interruption and reputational damage.	•  Increased IT security resources and establishment of an IT security steering group comprising representatives for all divisions and corporate offices. •  Increased cyber security awareness training for all employees, particularly with regard to fraud. •  Disaster recovery plans developed. •  Increased monitoring of IT systems.
Changes during 2015	The nature and number of security threats has increased during 2015 and the Group has responded with significant investments in sophisticated anti-virus and firewall preventative measures coupled with increased user awareness. In addition, following a wide-ranging review of the Group's IT infrastructure and cyber security, the Group has agreed and funded a comprehensive Security Improvement Programme, which is currently being piloted in a number of business units before being rolled out across the Group.
Regulatory breach Failure to comply with legislation or a breach of our own high standards of ethical behaviour	We have set ourselves very high standards in our approach to ethics and rejection of corruption in business. We need to ensure, as we expand our operations to achieve our desired growth, that we maintain these high standards. We face legislation around tax, anti-bribery, fraud and competition law and need to ensure compliance to avoid financial and reputational damage.	•  Commitment to good governance practices which are embodied in the IMI Way. •  Further enhancement of the internal controls declaration process and continued rigorous financial audits by our Group Assurance team. •  The annual IMI Way Day was held in June across the Group and included face-to-face training for all employees. •  Policies, manuals, training and guidelines are available to all employees under the legal and compliance and financial sections of the IMI global intranet. •  Group, division and specific territory resources dedicated to legal and regulatory compliance. •  Training of employees focusing on how to apply the IMI Way in everyday situations and key risk areas such as competition law, fraud and anti-bribery and corruption. •  Availability and promotion of the whistle blowing policy and the confidential IMI hotline to report concerns. •  Group standard operating procedures are available on the intranet and increased rigour around core legal and compliance processes. •  Enhanced third party agent due diligence and approval procedures, standard agency agreements and terminated non-compliant agents.
Changes during 2015	Whilst the external regulatory environment is increasingly arduous, our process and procedures are more embedded throughout the business. During 2015 we significantly enhanced our due diligence and approval procedures for sales agents and have organised our legal and compliance resources under a divisional structure so that they are now an integral part of our operational management teams.
Competitive markets Increasingly competitive markets leading to pricing pressures or loss of customers	Increased volatility and slowdown in major economies may result in increased competition, leading to loss of customers and/or pricing pressures leading to lost sales and reduced profits.	•  Review of site capacity as part of the lean benchmarking process and to obtain better utilisation and improved productivity. •  Rigorous review of standard costings to ensure thorough understanding of product cost. •  Monitoring of markets to ensure cost competitiveness and market shares understood and managed. •  Formal market, competitor and peer reviews undertaken quarterly.
Changes during 2015	Increased macro-economic pressures have increased competitive and pricing risks. Formal new product introduction procedures, improvements in operational capabilities, routine teardown testing and competitive benchmarking of competitor products have placed the Group in a better position to respond to these challenges.
New product development Lack of innovation or development of a pipeline of new products	The Group's strategy to double operating profit is underpinned by organic growth, which will be achieved in part by delivering a pipeline of innovative new products. Failure to achieve this objective will impact our ability to grow.	•  Implementation of Group-wide standard for advanced APQP programme. •  Five year technology roadmaps included in divisional strategies. •  Continued investment in research and development, working with our key account management teams to ensure we meet our customer needs. •  Centres of design and technological excellence established in a number of locations with dedicated teams to monitor progress. •  New product introduction procedures in place. •  Tracking of key performance metrics - level of sales from new products and level of research and development spend against sales.
Changes during 2015	A new advanced product quality planning process was launched across the Group which had been developed and piloted in Hydronic Engineering. Fifteen new products in Hydronic Engineering generated £30m of sales in 2015. Five year regional plans including new product priorities were established for the industrial engineering sector and roadmaps were included as an integral component of divisional strategies.
Health, safety & Environmental controls Failure of health, safety and environmental (HSE) controls resulting in harm to employees or other stakeholders	The Group recognises our duty of care to our employees and other stakeholders. Whilst we have made great progress in recent years we understand the impact on our employees and other stakeholders from the failure of this obligation and therefore consider this a key risk. Failure of controls could result in injury, death and environmental damage with the consequential impact of reputational damage and risk of regulator action.	•  Application of lean manufacturing principles into an improved HSE assessment and audit process including 5S (housekeeping methodology for manufacturing areas) and Gemba walks (management walks in manufacturing areas). •  Improved standard work processes, new lifting and slinging procedures and improved planning around plant layout. •  Global process in place to ensure that HSE matters are appropriately monitored and addressed and risks minimised including monthly reporting to, and review at the Executive Committee. •  Group and divisional level HSE resource proactively manage and audit divisional HSE performance and provide guidance and support to site management.
Changes during 2015	We measure progress by tracking lost time accidents ('LTAs'), medical incidents and near misses. In 2015, the Group implemented an improved HSE audit process, incorporating similar methodology to our lean manufacturing benchmark and audit process. These reviews are undertaken more frequently and improve hazard detection across sites in different divisions and regions.

Risk Appetite

The Board has considered the Group's risk appetite and it is deemed to be appropriate to pursuing and achieving our strategic objectives. Specific risk exposures and appetites vary according to the nature of the risk.

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

Improved risk management processes have meant that the identification and mitigation of risks are now well-embedded within the operating protocols across our businesses.

Enquiries to:

James Segal                  Corporate General Counsel       Tel:            0121 717 3700

John Dean                     Investor Relations                      Tel:            0121 717 3700

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