IMI Regulatory News (IMI)

29 July 2022

Accelerating business performance with improving growth and margin

On track for sustainable, profitable growth and Group operating margin of 20%

Increasing momentum from purpose-led strategy and Growth Hub

Interim results, six months ended 30 June 2022

1 Excluding the effect of adjusting items as reported in the income statement. See Note 2 for definitions of alternative performance measures.

2 Adjusted operating cash flow, as described in Note 2 to the financial statements. Statutory measure is Cash generated from operations as shown on the cash flow statement.

3 After adjusting for acquisitions, disposals and exchange rates (see Note 3).

Continued strong performance

§ 7% sales growth, 13% adjusted profit before tax growth, 18% adjusted basic EPS growth

§ Adjusted operating margin 70bps higher than H1 2021

§ Statutory operating profit up 5%

§ Statutory profit after tax up 12%

§ Order book growth, £22m of Growth Hub orders, pipelines growing

§ Operating cash flow impacted by higher inventory to prioritise customer service

§ Bahr acquisition provides highly scalable electric actuation portfolio

§ Interim dividend increased by 5%

§ Group operating margin target increased to 20% through the cycle

§ Continue to expect full year adjusted EPS to exceed 100p

Roy Twite, Chief Executive, said:

"We have made excellent progress with our purpose-led strategy during the first half. We are creating tremendous value for all our stakeholders by increasing customer intimacy, driving market-led innovation and reducing complexity. We continue to invest in Growth Hub and Sprint Teams, delivering £22m of orders from these projects during the first half. We completed the acquisition of Bahr Modultechnik, the electric linear automation specialist, offering the potential for great synergies with our existing businesses. We remain on track to deliver our long-term ambition of sustainable profitable growth and achieve our 20% margin target through the cycle."

"Based on the strong first half result and current market conditions we continue to expect 2022 full year adjusted EPS to exceed 100p."

Enquiries

A live webcast of the analyst meeting taking place today at 08:00am (BST) will be available on the investor page of the Group's website: www.imiplc.com. The Group plans to release its next Interim Management Statement on 8 November 2022.

Results overview

IMI has delivered a strong first half performance, with Group revenue growth of 7% compared to the same period last year and 3% higher organically. First half adjusted operating margin has increased by 70bps when compared to the prior period.

1 Excluding the effect of adjusting items as reported in the income statement. See Note 2 for definitions of alternative performance measures.

2 During H2 2021 the Energy business was transferred from IMI Precision to IMI Critical. Prior period results have been restated to be on the same basis. Please see Note 3 for further details.

3 After adjusting for exchange rates, acquisitions and disposals (see Note 2).

This strong performance reflects continued focus on our unifying purpose-led strategy [Breakthrough Engineering for a better world]. We are creating value by increasing customer intimacy, driving market-led innovation and reducing complexity. These actions have allowed us to generate strong growth in the order book and revenue as well as improving margins.

Good momentum in our Growth Hub and Sprint Teams continue to drive cultural changes through the

business. We delivered £22m of orders from these projects during the first half and remain on track to deliver over £40m in 2022.

We remain confident in delivering our Group operating margin target of 20% through the cycle.

Dividend

The Board is recommending a 2022 interim dividend of 8.3p per share (2021: 7.9p per share). Payment will be made on 16 September 2022 to shareholders on the register at the close of business on 12 August 2022.

Outlook

Based on the strong first half results and current market conditions we continue to expect 2022 full year adjusted EPS will exceed 100p.

Strategic progress

Our purpose-led strategy [Breakthrough Engineering for a better world] continues to accelerate business performance, driving sustainable, profitable growth across the Group.

We are delivering Value Today - evident in our improved returns - through greater customer intimacy, operational efficiencies and complexity reduction; and Value Tomorrow by developing creative and innovative solutions to the greatest challenges our customers and society face.

We continue to invest in Business Development resource and Growth Hub projects and are seeing real, tangible benefits. We delivered £22m of orders from Growth Hub projects in the first half. Adaptas, our recent acquisition in the attractive Life Sciences sector, is performing strongly.

The acquisition of Bahr, the German electric linear motion specialist, completed in June 2022. As part of the Industrial Automation Business Unit within IMI Precision Engineering, Bahr will enable the delivery of a power agnostic offering of pneumatic and electric linear motion systems. The addition of Bahr offers the potential for significant synergies and is expected to be both margin and growth accretive to IMI Precision, delivering a financial return in excess of IMI's cost of capital by the end of year three.

Along with investments into our future growth, IMI continues to identify and execute on opportunities to drive more efficient operations. The following provides a summary of progress on our restructuring programmes:

*Future looking forecast information.

All three divisions advanced their multi-year significant restructuring programmes, which contributed £7m of benefits in the first half. The Group is on track to deliver £10m for the full year.

This includes the previously announced £35m additional cost (£30m cash, £5m non-cash) and £13m of benefits, which will expand the programme for IMI Critical.

The forecast cash cost also reduced by £15m as a result of improved proceeds for a property sale and wider project savings.

These programmes are expected to run until 2024, although the Group will always seek and execute projects that improve its competitive position.

Divestment of Russia subsidiary

IMI strongly opposes the invasion of Ukraine. We are deeply concerned for its people and are supporting humanitarian efforts for the ongoing refugee crisis.

IMI fully supports all sanctions. On 4 March 2022 we ended all new business and international deliveries to Russia and on 27 May 2022 we completed the divestment of our Russian subsidiary to local management. See Note 15 for further details.

Russia accounted for 2% of Group revenue in 2021 and represented less than 1% of revenue for IMI Precision, 4% for IMI Critical and 2% for IMI Hydronic.

Environmental, Social & Governance (ESG)

Our purpose, [Breakthrough Engineering for a better world], continues to drive our actions and create real energy across our organisation. IMI's solutions support the safety, sustainability, and productivity of our customers' products and operations, and often directly contribute to the delivery of their carbon reduction targets. When considering investments, we ensure impacts on IMI's overall ESG positioning is a prime consideration.

IMI sees a natural link between pursuing our ESG objectives with vigour and our wider ambitions for improved growth and profitability. Many of our best growth opportunities are supporting customers in developing solutions for a zero-carbon future.

We continue to reduce the environmental impact of our facilities and operations. All divisions are progressing actions that will contribute to our goal of halving our factory CO2 intensity by 2030, and IMI is committed to achieving net zero Scope 1 and Scope 2 emissions by 2040. Supported by external expertise, we are developing our reduction plans for Scope 3 emissions.

Our Inclusion and Diversity activities are helping us build a more dynamic and innovative organisation. The female representation on the Executive Committee is currently 43% and we have met the Parker Review requirements for non-white representation on our board. Whilst we recognise there is still work to be done, the benefits of increased diversity are being felt across the organisation - employee engagement increased from 80% to 82% in our recent survey.

Ensuring all our employees feel safe at work is central to our strategy and culture and we have a continued focus on identifying and reducing workplace hazards. The number of recordable incidents reduced by 48% during the first half and whilst this is excellent progress, we remain committed to the ambition of an accident-free workplace.

More information about our ESG credentials and initiatives, including our policies and practices, can be found on our website: www.imiplc.com.

Divisional results overview

The following review relates to our continuing businesses' performance for the six months ended 30 June 2022 when compared to the same period in 2021. References to organic growth are on a constant currency basis and exclude disposals and acquisitions, see Note 3 for a reconciliation of these measures.

Segmental information - Energy Transfer

During the second half of 2021 the Energy business of IMI Precision Engineering was transferred into IMI Critical Engineering. Prior period comparatives have been re-presented to reflect this, with IMI Critical Engineering H1 2021 revenue increasing by £28m and operating profit increasing by £2.9m. The equal and opposite impact has reduced prior period results of IMI Precision Engineering. 

IMI Precision Engineering

IMI Precision Engineering specialises in the design and manufacture of motion and fluid control technologies where precision, speed and reliability are essential to the processes in which they are involved. IMI Precision Engineering operates across three principal business units: Industrial Automation, Precision Fluid OEM and Transport. Further details on that segmentation, and comparison with the 2021 first half report, are available in Note 3.

*See Note 2 for definitions of alternative performance measures and the references to reconciliations of these measures.

**2021 results have been restated for the impact of the Energy business transfer, please see Note 3 for further details. 

Key developments

§ Strong sales growth of 18%, organic growth of 7%

§ Adjusted operating margin up 30bps

§ Acquisition of Bahr completed, expanding electric linear motion offering

§ Statutory operating profit up 5%

2022 H1 performance

IMI Precision's core end markets continue to provide excellent new opportunities for growth.

During the period, the division delivered very strong growth of 18% supported by revenue from the recent Adaptas acquisition. On an organic basis, revenue grew 7%.

Industrial Automation delivered strong organic revenue growth of 14% compared with the first half 2021, with Precision Fluid OEM ahead 5% and Transport broadly flat on the same basis. The division's proactive management of supply chains minimised customer disruptions and enabled this strong performance.

Adjusted operating margin in the division improved in the period by 30bps to 18.2%. The division continues to advance complexity reduction initiatives which will enable further improvements and support progress towards its margin targets.

Statutory operating profit increased by 5% due to the strong trading result partly offset by increased acquired intangible amortisation and other acquisition costs following the acquisitions of Adaptas and Bahr.

Outlook

Based on strong first half results and current market conditions, we continue to expect IMI Precision Engineering's 2022 organic revenue and margin to be higher than in 2021.

IMI Critical Engineering

IMI Critical Engineering is a world-leading provider of flow control solutions that enable vital energy and process industries to operate safely, cleanly, reliably and more efficiently. Our products control the flow of steam, gas and liquids in harsh environments and are designed to withstand temperature and pressure extremes as well as intensely abrasive or corrosive cyclical operations. Further details on IMI Critical Engineering market segmentation, and comparison with the 2021 first half, are available in Note 3 of this statement.

*See Note 2 for definitions of alternative performance measures and the references to reconciliations of these measures.

**2021 results have been restated for the impact of the Energy business transfer, please see Note 3 for further details. 

Key developments

§ Strong Aftermarket orders, up 17% in the first half

§ Growth Hub delivers £19m orders

§ Statutory operating profit up 11%

2022 H1 performance

IMI Critical Engineering continues to advance its strategy and is actively deploying Growth Hub where its expertise can support sustainable future growth. The division's Growth Hub and Sprint Teams are providing a significant impact to the divisional results and contributed £19m of orders in the period (2021: £5m).

Organic order intake for the first half of 2022 was 4% higher than the first half of 2021. Aftermarket orders grew 17%, with strong growth in Oil & Gas, Refining and Petrochemical and Nuclear. New Construction orders were 11% lower largely reflecting reduced petrochemical activity.

The IMI Critical order book at the end of the period was 3% higher than at June 2021, with order book margins also higher.

Organic revenue was 3% lower than the prior period, and 4% lower on an adjusted basis. Aftermarket organic sales were 7% higher than the first half of 2021, largely due to growth in the Refining and Petrochemical, Marine and Power segments. New Construction organic sales were 15% lower compared with last year, largely due to lower Power and Oil & Gas sales.

Organic adjusted operating profit was 7% higher than first half 2021, another strong result reflecting the division's strategy to maximise aftermarket opportunities and optimise its operating footprint for the future. Adjusted operating margin for the first half was 15.6%, 150bps higher than the prior period.

Statutory operating profit increased by 11% due to strong aftermarket growth.

Outlook

Based on the division's order book and current market conditions, we continue to expect IMI Critical Engineering's 2022 adjusted revenue and margin to be in line with 2021.

IMI Hydronic Engineering

IMI Hydronic Engineering is a leading provider of technologies that deliver energy efficient water-based heating and cooling systems for the residential and commercial building sectors. 

*See Note 2 for definitions of alternative performance measures and the references to reconciliations of these measures.

Key developments

§ 5% organic sales growth with adjusted operating margin improved to 20.3%

§ Continued strong demand for our energy saving solutions

§ Statutory operating profit up 13%

2022 H1 performance

With its strong brands and product positioning, combined with the global imperative to reduce energy consumption in buildings, IMI Hydronic Engineering is positioned to deliver sustainable, profitable growth.

Revenue for the first half was 5% higher on an organic basis when compared to the same period in the prior year. Growth in the first half was supported by strong orders for automated control and actuation products. Sales of our digitally enabled products - including the TA-Smart valve - continue to make excellent progress.

Adjusted operating profit increased 8% on an organic basis versus the prior year and adjusted operating margin improved to 20.3%, an increase of 20 basis points.

Statutory operating profit increased by 13% due to the strong trading result and non-repeat of restructuring costs.

Outlook

Given the strong first half results and current market conditions, we continue to expect IMI Hydronic Engineering's 2022 organic revenue to be higher than 2021, with margins slightly higher.

Financial review

Continued strong performance

Revenue of £972m was up 7% (2021: £907m). Organic revenue increased 3% when compared with the same period in the previous year, after adjusting for acquisitions, disposals and exchange rate movements. Adjusted operating profit was £160m, a 12% increase on the prior period (2021: £142m). On an organic basis, adjusted operating profit increased by 9%. Group adjusted operating margin increased by 70bps to 16.4% (2021: 15.7%), with all three divisions showing adjusted operating margin improvement. Statutory operating profit was up 5% at £129m (2021: £123m).

Adjusted net interest costs on borrowings were £6.6m (2021: £5.7m) and were covered 31 times by adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £202m (2021: £186m). The IAS19 pension net financial income was £0.8m (2021: £0.3m income). The total adjusted net financial expense was £5.8m (2021: £5.4m). Profit before tax and adjusting items was £154m, an increase of 13% (2021: £137m).

The adjusted effective tax rate on profit for 2022 is 21%, which is consistent with the rate applicable in the first half of 2021 (21%).

Statutory profit before tax was £121m (2021: £123m). The total statutory profit for the period after taxation was £95m (2021: £85m).

Adjusting items

Restructuring costs were £8m (2021: £7m), primarily relating to the ongoing significant restructuring programme in IMI Precision Engineering.

The impact of amortisation of acquired intangibles and other acquisition costs was £15m (2021: £7m). The reversal of net economic hedge contract gains and losses resulted in a £1m charge (2021: £nil).

Costs associated with our decision to exit the Russian market have been recognised as an adjusting item. The impact in the period was £9m (2021: £nil).

The tax effect of the above adjusting items was a credit of £6m (2021: £3m). During 2021 the UK Government announced an increase in the corporation tax rate from 19% to 25% resulting in a charge of £18m in the prior period, which was partially offset by a £5m gain following the resolution of a tax authority audit.

Earnings per share

The average number of shares in issue during the period was 258m (2021: 271m), resulting in adjusted basic earnings per share of 47.1p (2021: 39.9p). Statutory basic earnings per share was 36.6p (2021: 31.3p) and statutory diluted earnings per share was 36.5p (2021: 31.2p).

Foreign exchange

The impacts of translation on the reported growth of first half revenue and adjusted operating profit was an increase of £6m and increase of £1m, respectively. The most significant foreign currencies for the Group remain the Euro and the US Dollar and the relevant rates of exchange for the period and at the period end are shown in Note 13 to this report.

If the exchange rates on 15 July (US$1.19 and €1.18) remained constant for the remainder of the year, it would positively impact both revenue and adjusted operating profit by 3% in the full year when compared to 2021.

Cash flow

Cash generated from operations decreased to £111m (2021: £128m). Adjusted operating cash flow (see definition in Note 2) decreased to £79m (2021: £111m), as IMI made the decision to increase stock levels to support customer deliveries and continued its capital investment programme. Trade and other receivables increased by £45m, inventories increased by £42m and trade and other payables increased by £9m. Capital expenditure amounted to £40m (2021: £22m) and was 1.4 times (2021: 0.8 times) the adjusted depreciation and amortisation charge for the period of £28m (2021: £29m), which excludes depreciation from the IFRS 16 right of use assets of £14m (2021: £14m).

The other major cash outflows in the period were the Bahr acquisition of £84m, dividends of £41m, employee benefit trust share purchases of £20m, a £21m outflow for adjusting items primarily related to the Group's restructuring programme, and £20m of tax. The total cash outflow for the period, excluding the impact of foreign exchange was £122m, compared with an outflow of £19m in the first half of the previous year.

Definitions of adjusted performance measures are included in Note 2 and a reconciliation of adjusted measures to statutory measures is included in Note 11.

Balance sheet

The Group maintains an appropriate mixture of cash and short, medium and long-term debt arrangements which provide sufficient headroom for both ongoing activities and acquisitions. Total committed bank loan facilities available to the Group at 30 June 2022 were £300m (December 2021: £300m), of which £49m (December 2021: £70m) was drawn.

The ratio of net debt to the last twelve months' EBITDA (before adjusting items) is a funding covenant that is currently limited to 3.0x, and was 1.8x at the end of June 2022 (December 2021: 1.5x).

Trade and other receivables have increased by £51m (12%) to £465m at 30 June 2022 (December 2021: £414m) and inventories have increased by £63m (19%) to £398m at 30 June 2022 (December 2021: £335m) to secure customer deliveries.

Goodwill increased to £646m (December 2021: £534m) following the Bahr acquisition.

The IAS19 net pension surplus was £82m which compares to a surplus of £27m at 30 June 2021 and a surplus of £63m at 31 December 2021. This amount included a surplus of £123m (December 2021: £129m) relating to the UK Fund which is the most significant of the Group's defined benefit schemes. The surplus decrease since the year end is a result of movements in the actuarial assumptions. The deficit relating to the overseas schemes decreased to £42m (December 2021: £66m) due to increases in the discount rates.

Shareholders' equity at the end of June was £863m, an increase of £84m since the end of last year. This is largely attributable to the profit for the period of £95m; an after-tax actuarial gain on the defined benefit pension plans of £11m; favourable exchange differences and related tax of £35m; and the after-tax impact of the share-based payments of £4m. These gains were offset by dividends paid of £41m and purchases for the employee benefit trust of £20m.

Other regulatory information

Going concern After making enquiries, the directors have a reasonable expectation that IMI plc ('the Company') and the Group have adequate resources to continue in operational existence for the foreseeable future and for a period of at least twelve months following the approval of the Interim Financial Report. Accordingly, they continue to adopt the going concern basis. See Note 1 for further information of the directors' considerations in reaching this conclusion.

The directors have considered the current macroeconomic conditions on the Group's financial results and financial position. The directors have assessed the viability of the Group and reviewed detailed cash flow forecast scenarios, including comparing a reverse stress test to those detailed forecasts. The directors have a reasonable expectation that the financial headroom will not be exhausted during the twelve months following the date of approval of the Interim Financial Report.

Principal risks and uncertainties The Group has a risk management structure and internal controls in place which are designed to identify, manage and mitigate business risk. IMI faces a number of risks and uncertainties which could have a material impact on the Group's long-term performance.

On pages 74 to 79 of its 2021 Annual Report (a copy of which is available on IMI's website: 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 risks include macro-economic and political instability, competitive markets, supply chain risk, talent retention and attraction, product quality issues, acquisition risk, cyber security risks, regulatory breach and new product development. Having considered the current environment, the directors have considered that these risks remain valid and have the potential to impact the Group during the second half of 2022. The impact of the economic and end-market environments in which the Group's businesses operate have been considered in making the comments in the divisional review and outlook sections of this Interim Financial Report.

Safe harbour statement This Interim Financial Report contains 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 preparation of this announcement and the Company undertakes no obligation to update these forward-looking statements. All written or oral forward-looking statements attributable to IMI plc are qualified by this caution. Nothing in this Interim Financial Report should be construed as a profit forecast.

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 IAS 34 'Interim Financial Reporting' as adopted by the UK;

§ 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; and

§ there were no related party transactions or changes in the related party transactions described in the 2021 Annual Report that materially affected the Group's results or financial position during the six months ended 30 June 2022.

The directors of IMI plc are listed on the IMI plc website (www.imiplc.com).

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

Roy Twite Daniel Shook Chief Executive Finance Director28 July 2022 28 July 2022

Notes to editors

IMI plc, the specialist engineering company, designs, manufactures and services highly engineered products that control the precise movement of fluids. Its innovative technologies, built around valves and actuators, enable vital processes to operate safely, sustainably, cleanly, efficiently and cost effectively. IMI employs around 10,000 people, has manufacturing facilities in 19 countries and operates a global service network. The Company is listed on the London Stock Exchange and is a constituent of the FTSE4Good Index. Further information is available at www.imiplc.com.

IMI plc is registered in England No. 714275. Its legal entity identifier ('LEI') number is 2138002W9Q21PF.

INDEPENDENT REVIEW REPORT TO IMI PLC

Conclusion

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 2022 which comprises the comprehensive income, condensed consolidated interim balance sheet, condensed consolidated interim statement of changes in equity, condensed consolidated interim statement of cash flows and related Notes 1 to 15.

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 2022 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, 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 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.

As disclosed in Note 1, the annual financial statements of the group will be prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE (UK), however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the group a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London

28 July 2022