IMI Regulatory News (IMI)

1 March 2019

Preliminary results, year ended 31 December 2018

Key points

· Results ahead of market expectations

· Good growth across all Precision Engineering verticals

· Critical Engineering sales growth despite continued New Construction Power weakness

· Hydronic Engineering margin recovery delivered

· Bimba integration progressing well

· Adjusted Basic EPS increased 12%

· Further reduction of global pension liabilities

· 3% increase in the full year dividend recommended

· Roy Twite to succeed Mark Selway as Chief Executive

Lord Smith of Kelvin, Chairman, commented:

"2018 was another year of important progress. We delivered results ahead of market expectations and continued to execute our strategy effectively. In the year we reported increases in revenues, margins and earnings per share and enhanced our competitive capabilities."

"We have a strong balance sheet and inherently cash generative operations which continue to provide the headroom to invest in organic development and appropriate acquisition opportunities as they arise."

Mark Selway, Chief Executive, added:

"It is pleasing to report the continuation of the progress achieved in the first half of 2018. Our strategic plan to drive sustainable long-term growth continues to make a real difference across all parts of the Group. Our new product pipeline is developing well, our manufacturing operations have further improved and the new systems and processes being embedded throughout the business are delivering gains in efficiency and competitiveness."

"In the first half of 2019 we expect organic revenues to be lower than the same period in 2018 due to the phasing of Critical Engineering's order book and slowing market demand in the Industrial Automation sector in Precision Engineering. Margins are expected to be broadly similar, supported by our operational initiatives and an improved performance from Hydronic Engineering. Results for the full year will also reflect the benefits of restructuring and our normal second-half bias."

Enquiries to:

A live webcast of the analyst meeting taking place today at 08:30am (GMT) 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 9 May 2019.

Results overview

2018 was another year of important progress for IMI. A now well-established culture of continuous improvement, both within our operations and in our product offering, further enhances our competitive position, irrespective of the market environment.

Adjusted Group revenues were 9% higher at £1,907m (2017: £1,751m). Excluding adverse foreign exchange and the acquisition of Bimba, Group revenues on an organic basis were 5% higher when compared to the prior year. Adjusted segmental operating profit was 11% higher at £266m (2017: £241m). Excluding the impact of adverse foreign exchange and Bimba, segmental operating profits were 9% higher on an organic basis. The Group's operating margin was 14.0% against 13.8% in 2017 and adjusted earnings per share were 12% higher at 73.2p (2017: 65.3p).

Adjusted operating cash flow of £222m (2017: £218m) followed a strong performance last year and reflected higher working capital to support growth in Precision Engineering and comparatively higher advanced payments received by Critical Engineering in 2017. Both debtor and inventory days showed modest improvement while creditors reflected the impact of lower pre-payments in Critical Engineering. Net Debt of £405m (2017: £265m) reflected payment of the consideration for Bimba and resulted in a Net Debt to adjusted EBITDA ratio of 1.3x against 0.9x at the end of 2017.

We continue to be proactive in our efforts to manage the Group's pension liabilities and in 2018 successfully completed the transfer of a further £409m of liabilities to insurance partners. This brings the total value of pension schemes removed from our balance sheet over the last two years to £838m. The UK schemes remain in surplus and the overseas deficit remained constant at £80m in the year.

Dividend

Reflecting the continued confidence in the Group's prospects, the Board is recommending an increase in the final dividend of 3% to 26.0p (2017: 25.2p) making a total dividend for the year of 40.6p, an increase of 3% over last year's 39.4p.

Outlook

In the first half of 2019 we expect organic revenues to be lower than the same period in 2018 due to the phasing of Critical Engineering's order book and slowing market demand in the Industrial Automation sector in Precision Engineering. Margins are expected to be broadly similar, supported by our operational initiatives and an improved performance from Hydronic Engineering. Results for the full year will also reflect the benefits of restructuring and our normal second-half bias.

Integration of Bimba Manufacturing Company ('Bimba')

The acquisition of Bimba for a total consideration of £138m (US$198m) was completed on 31 January 2018. The transaction has increased our US revenues while extending IMI Precision Engineering's presence in its core Industrial Automation segment. Good progress has been made with the integration of Bimba into Precision Engineering's North American operations. We have also accelerated some of our plans for Bimba to improve its operations and IT infrastructure in readiness for the opportunities for growth and margin improvement.

Trading environment

Trading conditions across our three divisions continued to be mixed throughout 2018 with growth in IMI Precision Engineering's end markets offsetting declines in New Construction Fossil Power and Energy markets in IMI Critical Engineering.

For IMI Critical Engineering, the Petrochemical market again produced some encouraging opportunities which reflect the division's success at extending its reach into a broader range of applications. The improving outlook in some parts of the Oil & Gas sector again contrasted with the challenging outlook for coal-fired power generation.

In IMI Precision Engineering, all of the division's verticals and regions showed further good progress in the year. This was achieved despite tougher comparators and increased market volatility, particularly in Industrial Automation, through the latter part of 2018.

Within IMI Hydronic Engineering where European construction represents over 79% of the division, markets were marginally stronger than the previous year. Although less significant for the division overall, the North America and China construction markets also continued to grow.

While we have a broad international manufacturing footprint and less than 5% of sales in the UK, it would be remiss not to mention the potential impact of Brexit on the Group's operating performance. Despite prevailing uncertainty, the Group has developed a number of Brexit related contingency plans, including a programme of building long lead-time inventories to support customers in the event of increased border controls or delays in getting clearance to and from the UK. While we hope that these increased inventories will not be required, it is essential that we do as much as we can to minimise potential supply chain disruption and ensure our customer delivery commitments are met.

Divisional review

The following review relates to our continuing businesses' performance on an adjusted basis for the year ended 31 December 2018 when compared to the year ended 31 December 2017. References to organic growth are on a constant currency basis and exclude disposals and acquisitions.

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.

Performance

In 2018 the division continued to experience a mixed trading environment in some of its most important markets. Value Engineering and New Product Development programmes continued to provide competitive levers which have enabled us to outpace the market. Our continuing high order win-rate indicates that we have been capturing more of the available projects than our competitors.

Full year order intake at £652m (2017: £658m) was flat on an organic basis and, as expected, included a strong second half recovery. The Value Engineering process, which is now fully embedded within the division and used on all New Construction quotes of scale, supported the delivery of £180m or 60% of New Construction orders in the year.

Strong order growth from Water contrasted with softer market conditions elsewhere. HIPPS orders were also ahead of 2017, partially offsetting lower Upstream and Midstream orders. Aftermarket orders were 11% higher and reflected a 22% increase in upgrades and a 6% increase in parts, when compared to the prior year. At the year-end, the order book was £474m (2017: £510m) with margins slightly higher, compared with 2017.

Revenues of £682m (2017: £648m) were 5% higher on an adjusted basis and, after excluding £6m of adverse foreign exchange and £3m from disposals, were 7% higher on an organic basis. Segmental operating profit of £88.3m (2017: £84.0m) was 5% higher on an adjusted basis and 6% higher on an organic basis. Margins were flat versus 2017, reflecting the division's ongoing work to counter softer markets with the benefits from restructuring and Value Engineering.

Lean scores improved significantly in the year from 70% to 74% and our core customer satisfaction metrics also showed continued progress. The division progressed its long-term footprint reorganisation which has resulted in the closure or transfer of thirteen lower growth operations. These initiatives delivered £12m of benefit in 2018 and have strengthened the division's competitive position by realigning its manufacturing footprint with customers in higher growth markets. 

In addition to the product and operational investments, the division continued its programme of ERP roll-out. This system is now fully embedded in fourteen of IMI Critical Engineering's sites.

Key Achievements

· Value Engineering secured £180m of new orders and underpinned excellent order win-rates

· Further success in securing new business in adjacent markets

· Profit growth supported by successful restructuring programme

· On-time and on-budget ERP implementation across fourteen sites

· Increased average Lean score to 74%

Outlook

Based on current order book phasing and the comparatively large Petrochemical deliveries in early 2018, we expect first half organic revenues and profits to be lower when compared to 2018. Results for the full year are expected to reflect a more favourable second half phasing and the benefits from restructuring.

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.

Performance

IMI Precision Engineering had another year of good progress and delivered solid growth across all verticals and regions. Revenues of £916m (2017: £791m) were 16% higher on an adjusted basis and, after excluding £10m of adverse foreign exchange and £88m from the Bimba acquisition, were 6% higher on an organic basis.

Strong Industrial Automation sales in the first half of 2018 slowed in the third quarter and declined slightly in the fourth, leaving the full year up 2% when compared to 2017. Commercial Vehicle related sales of £196m reflected stronger than anticipated markets and were 8% higher in the year, despite £8m of contract completions. European Commercial Vehicle revenues were slightly higher whilst North America grew by 15%. Energy sales were 16% higher than 2017 while Life Sciences and Rail were 12% and 14% higher, respectively.

Segmental operating profit of £153.2m (2017: £133.5m) was 15% higher on an adjusted basis and, after excluding £2m of adverse foreign exchange and £7m from the Bimba acquisition, was 11% higher on an organic basis. Operating margins of 16.7% (2017: 16.9%) reflect the impact of the Bimba acquisition in the year. Excluding Bimba, underlying margins compared favourably to last year at 17.7%.

Good progress has been made with the integration of Bimba into Precision Engineering's North American operations. We have also accelerated some of our plans for Bimba to improve its operations and IT infrastructure, in readiness for the opportunities for growth and margin improvement.

Operationally, the division continued to make solid progress and the combination of Lean, New Product Development and cost-reduction initiatives all contributed to a good performance in the year. We also completed the relocation of our Indian operation to a new and larger facility in New Delhi which was officially opened in October. This new plant expands Precision Engineering's low-cost, world-class manufacturing and engineering capabilities and enhances the division's ability to serve our rapidly expanding market positions across Asia.

The implementation of Lean throughout the division has continued to make excellent progress. At the end of 2018 Precision Engineering's Lean score increased to 75% compared to 70% at the end of 2017.

Our focus on New Product Development to enhance our market competitiveness gathered momentum. The addition of integrated intelligence and connectivity across our product range remains an important element of that strategy. In 2018, new products were introduced across the entire range and represented an increase in the vitality index (sales from new products introduced in the last three years) to 12%.

In-sourcing actions already completed combined with improved market conditions have helped increase utilisation in the year. Localisation and low-cost manufacturing transfers continue to reduce lead times and improve customer service and competitiveness.

In addition to product and operational investments, the division continues to implement its new ERP system and now has a world-class, fully integrated IT system which is now planned to be rolled-out in our Asian operations.

Key Achievements

· On-time and on-budget completion of world-class facility in India

· Commercial Vehicle contract wins support growth

· Improved underlying margin despite cost pressures

· Increased average Lean score to 75%

· Bimba integration progressing to plan

Outlook

The industrial outlook has become more volatile with leading indicators pointing to continued but slower growth in the Industrial Automation and the Commercial Vehicle markets in 2019.

Based on current market conditions, we expect first half organic revenues to be slightly higher, with broadly flat margins, when compared to the first half of 2018. The benefits of new product launches and operational improvements are expected to support improved results for the full year.

IMI Hydronic Engineering

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

Performance

IMI Hydronic Engineering's 2018 performance was a tale of two halves with the first half being focused on the actions necessary to deliver significant improvements in the second half of the year. The actions taken successfully recovered margins and consolidated the division's position as a market leader in our core geographies and sectors.

Recovering substantially from the decline experienced in the first half of the year, revenues on an adjusted basis of £309m (2017: £312m) were 1% lower than 2017 and, after excluding £3m of adverse foreign exchange, were flat on an organic basis. The result was affected by the actions taken to return to satisfactory margins, including the closure of a loss-making service business and the decision to avoid product and project sales that generated unacceptable margins.

Segmental operating profit of £52.0m (2017: £49.7m) was 5% higher on an adjusted basis and, after excluding £1m of adverse foreign exchange, 6% higher on an organic basis. Margins improved to 16.8% (2017: 15.9%) for the full year, with a significant improvement in the second half to 18.4% (2017: 15.9%).

In our core territories market shares have remained strong. Our key distributors, installers and specifiers have responded positively to our refreshed product offering, constantly improving customer service and ongoing commitment to customer support.

New product investment continued and contributed £69m, or 22% of sales, in the year. The division also maintained its excellent Lean score of 78%, with the Polish plant once again achieving the highest Lean score in the Group.

The roll-out of the new JD Edwards ERP system continued throughout 2018 with the system now live in three manufacturing businesses and thirteen of the division's sales offices.

Key Achievements

· Second half margins improved to 18.4% (2017: 15.9%)

· Successfully re-established foundations for sustainable and profitable growth

· New product launches continue to build sustainable competitive advantage

· Maintained excellent Lean score of 78%

· On-time on-budget implementation of divisional ERP

Outlook

Based on current market conditions organic revenue is expected to grow in the first half of 2019 with margins slightly improved when compared to the first half of last year. Results for the full year are expected to reflect the benefits of our 2018 restructuring and our normal second half bias.

Good strategic progress

Our strategic plan to drive long-term sustainable growth is making a real difference across all parts of the Group. Significantly improved operational performance, new systems and processes that are helping us operate more efficiently and a new product pipeline all continue to enhance our competitive position.

Improving our operational performance

During 2018 each of our divisions further enhanced their operational performance. At the year-end the Group's average Lean score increased to 75% compared to 71% at the same point in 2017. Scrap rates, on-time-delivery and inventory management all improved and the benefits were evident in the Group's results in the year. Most importantly, this improved performance provides an important foundation for our increased competitiveness and responsiveness to customers.

Positioning our businesses for growth

In the past four years much has been done to simplify the way our businesses operate and make them more efficient.

We have invested heavily in new systems and processes which are essential if the Group is to deliver long-term sustainable growth. An increasing number of our businesses are upgrading their core IT systems to modern divisional platforms that automatically manage business processes to deliver consistent, accurate data. As a result, we have better visibility across the production process and we are able to manage our day-to-day operations more cost and time effectively and make our product and service offering more competitive.

Across all of our operations we have embedded disciplined and efficient processes, including New Product Development and Value Engineering. These consistent processes support our continuous improvement culture and help ensure that our investments ultimately deliver an earlier and greater return.

New product pipeline

For each division targeted New Product Development initiatives remain a key focus. We launched a significant number of new products during 2018 covering a range of applications.  All three divisions have ambitious plans to continue their focused product development strategies in 2019 and beyond.

By increasingly combining New Product Development initiatives with Value Engineering processes, we have continued to expand our addressable markets and are competing in segments that were not previously accessible.

Business development

Alongside our organic growth initiatives, targeted acquisitions that meet our clearly defined and disciplined criteria continue to represent a core part of our strategy. We seek opportunities that are culturally aligned and have the potential to deliver sustainable long-term profitable growth. As was the case with the acquisition of Bimba in January 2018, we aim to engage early with potential partners with the ambition of securing preferred buyer status ahead of any formal process being started.

Board and governance

This morning we have, in a separate statement, announced that following five years with the Group, Mark Selway has confirmed that he intends to step down as Chief Executive immediately following the Company's Annual General Meeting (the 'AGM') on 9 May 2019 and retire from the Board on 31 July 2019. He will be succeeded by Roy Twite, currently Divisional Managing Director of IMI Critical Engineering, who will become Chief Executive Designate from 1 March 2019 and Chief Executive immediately following the AGM. An announcement will be made on the appointment of the new IMI Critical Engineering Divisional Managing Director, in due course.

During the year two new non-executive directors joined our Board bringing considerable and relevant experience as well as fresh perspectives. Katie Jackson joined the Board on 1 July 2018 and became a member of the Nominations and Remuneration Committees. Katie has deep knowledge of the international Oil & Gas market, and significant corporate finance and business development experience. Thomas Thune Andersen also joined the Board on 1 July 2018 and also became a member of the Nominations and Remuneration Committees. Thomas has extensive knowledge and experience of a number of the key sectors we operate in, including oil, energy and critical infrastructure.

With effect from 1 January 2019 Birgit Nørgaard, became our Employee Engagement Director. This important role, which is in line with the revised Corporate Governance Code's recommendations, will enhance the various mechanisms we already operate to ensure we continue to engage effectively with our people.

Financial review

Results Summary

Revenue increased by 9% to £1,907m (2017: £1,751m). After adjusting for the adverse exchange rate impact of £19m, the £88m contribution of Bimba and the £3m impact of disposals, organic revenue grew by 5% reflecting strong growth in the Critical Engineering and Precision Engineering divisions despite mixed market conditions. Statutory revenue increased by 9% to £1,907m (2017: £1,751m).

Adjusted segmental operating profit of £266m (2017: £241m) rose by 11% and after removing the impact of exchange rates, the acquisition of Bimba and the impact of disposals, by 9%. The segmental operating margin was 14.0% (2017: 13.8%). Statutory operating profit was £232m (2017: £193m). We consider that the presentation of adjusted results allows for improved insight to the trading performance of the Group.

Adjusted net interest costs on net borrowings were £12.9m (2017: £14.3m). Adjusted net interest costs were covered 25 times (2017: 20 times) by continuing adjusted earnings before interest, tax, depreciation, amortisation, impairment and adjusting items of £320m (2017: £288m). The net pension financing expense under IAS 19 was £1.4m (2017: £0.8m expense).

Adjusted profit before taxation was £251m (2017: £224m), an increase on the previous year of 12%.

Adjusting Items and Discontinued Operations

Restructuring costs

Restructuring costs presented as adjusting items in 2018 of £12m (2017: £35m) are as a result of a number of significant restructuring projects across the Group, in particular within Critical Engineering and Hydronic Engineering. Restructuring costs of £1m (2017: £2m) that arose from normal recurring cost reduction exercises are included in the adjusted financial performance of the Group.

Pensions

During 2018, de-risking activities relating to our defined benefit schemes continued including the conversion of certain pension benefits to non-inflation linked, occurring in the UK, which resulted in net gains of £1.4m. Regulatory changes and the completion of a buy out in Switzerland resulted in gains totalling £3.0m. The completion of the transfer of £409m of liabilities covered by insurance policies to the insurance companies through a formal buy-out transaction resulted in a net gain of £2.8m. An expense of £0.4m, arising from the equalisation of the UK defined benefit schemes, has been recognised following the ruling on the test case on Guaranteed Minimum Pensions.

Loss on disposal of subsidiaries

No subsidiaries have been disposed of in 2018. A gain of £1m has been recognised following the expiry of an indemnity provision on a historical disposal. In 2017, the Group disposed of Stainless Steel Fasteners Limited resulting in a loss of £2m.

Impairment losses

The Group recorded an adjusting impairment charge of £2m (2017: £nil) against the goodwill associated with the Hydronic services companies CGU in the IMI Hydronic Engineering division.

Reversal of net economic hedge contract losses

For segmental reporting purposes, changes in the fair value of economic hedges which are not designated as hedges for accounting purposes, together with the gains and losses on their settlements, are included in the adjusted revenues and operating profit of the relevant business segment. The adjusting item at the operating level reverses this treatment with the net loss of £2m (2017: reversal of a gain of £1m) and records a charge within interest.

Financing costs

A net loss arose on the revaluation of financial instruments and derivatives under IFRS 9 of £4m (2017: £3m gain), principally reflecting movements in exchange rates during the year on forward foreign exchange contracts.

Acquired intangible amortisation and acquisition costs

For segmental purposes, acquired intangible amortisation is excluded from adjusted profits, to allow for better comparability of the performance across divisions. This allows users of the financial statements to gain a clearer understanding of the performance of the business, with the impact of amortisation identified separately in line with internal reporting to management. Acquired intangible amortisation increased to £25m (2017: £18m). The increase in 2018 reflects the amortisation of the intangible assets recognised on the acquisition of Bimba during the year, including the full amortisation of the Bimba order book which contributed £4m to the charge. Also included is a release of the fair value uplift to inventory, recognised as part of the Bimba acquisition accounting in accordance with IFRS 3 'Business Combinations', of £4m (2017: £nil).

Indirect taxes arising on reorganisation

Following a retrospective change to European tax law on the transfer of assets a provision of £3.2m to reflect the probable exposure has been recognised. The provision is recognised as an adjusting item in operating profit as it relates to indirect taxes. 

Taxation 

A tax credit of £9m (2017: £12m) arose in connection with the above adjusting items.

Discontinued operations

There was no profit or loss from discontinued operations in 2018. A pre-tax gain of £2m and post-tax gain of £17m was recognised in 2017 as a result of the finalisation of a number of matters relating to historical discontinued operations.

Taxation

The adjusted effective tax rate for the Group remained at 21% (2017: 21%). The total adjusted tax charge for the year on continuing operations was £53m (2017: £47m). The Group seeks to manage its tax affairs within its core tax principles of compliance, fairness, value and transparency, in accordance with the Group's Tax Policy.

Earnings per Share

The Board considers that a more meaningful indication of the performance of the Group is provided by adjusted earnings per share. Adjusted basic EPS was 73.2p, an increase of 12% on last year's 65.3p. Statutory basic EPS increased by 5% at 62.5p (2017: 59.8p) and statutory diluted EPS increased by 5% at 62.4p (2017: 59.7p).

Foreign Exchange

The movement in average exchange rates between 2017 and 2018 resulted in our adjusted 2018 revenue being 1% lower and segmental operating profit being 1% lower as the average Euro rate was 1% stronger and the US dollar rate was 3% weaker.

If the average exchange rates for January 2019 of US$1.30 and €1.14 were projected for the full year and applied to our 2018 results, it is estimated that both adjusted revenue and profits (including corporate costs) would be broadly unchanged.

Cash Flow

Adjusted operating cash flow was £222m (2017: £218m). After the £9m cash outflow from adjusting items (2017: £29m outflow), the operating cash flow was £213m (2017: £189m). This represents a conversion rate of total Group segmental operating profit after restructuring costs into operating cash flow of 83% (2017: 91%).

Net working capital balances increased in the current year (2017: equal). Inventory decreased by £6m (2017: £4m decrease) due to decreases in inventory within Critical Engineering which were partially offset by increases in inventory in Precision Engineering following continued growth in 2018. The Group's receivables increased by £8m (2017: £27m increase) as a result of an increase in revenue. Payables decreased by £47m (2017: £22m increase) due to overall payment timing, including higher project advance payments received by Critical Engineering in 2017.

Cash spent on property, plant and equipment and other non-acquired intangibles in the year was £58m (2017: £70m) which was equivalent to 1.1 times (2017: 1.5 times) depreciation and amortisation thereon. Research and development spend including capitalised intangible development costs of £7m (2017: £9m) totalled £49m (2017: £50m).

In 2018 the Group paid tax of £41m (2017: £40m) which was 78% (2017: 85%) of the adjusted tax charge for the year.

Dividends paid to shareholders totalled £108m (2017: £106m) and there was a cash outflow of £5m (2017: £2m outflow) for net share purchases to satisfy employee share options.

Balance Sheet

Net debt at the year-end was £405m compared to £265m at the end of the previous year, reflecting the acquisition of Bimba during the year. The net debt is composed of a cash balance of £132m (2017: £99m), a bank overdraft of £83m (2017: £31m) and interest-bearing loans and borrowings of £455m (2017: £333m).

The year-end net debt to adjusted EBITDA ratio was 1.3 times (2017: 0.9 times) based on continuing adjusted EBITDA. At the end of 2018 loan notes totalled £455m (2017: £329m), with a weighted average maturity of 6.2 years (2017: 3.5 years) and other loans including bank overdrafts totalled £83m (2017: £31m). Total committed bank loan facilities available to the Group at the year-end were £300m (2017: £302m), of which £nil (2017: £nil) was drawn.

The value of the Group's intangible assets increased to £607m at 31 December 2018 (2017: £509m). This increase was due to the recognition of intangible assets following the Bimba acquisition and other additions to intangible assets of £20m (2017: £22m) partially offset by the amortisation charge for the year of £37m (2017: £27m), impairment of £3m (2017: £nil) and an increase arising from exchange movements of £22m (2017: £7m decrease).

The net book value of the Group's PPE at 31 December 2018 was £284m (2017: £270m). Capital expenditure on PPE amounted to £38m (2017: £47m), with capital expenditure focused on new product lines in the US and a new Indian factory in Precision Engineering. Including capitalised intangible assets, total capital expenditure was £58m (2017: £70m) and was 1.1 times (2017: 1.5 times) the depreciation and amortisation charge (excluding acquired intangible amortisation) for the year of £55m (2017: £48m).

Pensions

The net deficit for defined benefit obligations at 31 December 2018 was £52m (2017: £78m deficit). The UK surplus was £28m (2017: £2m surplus) and constituted 75% (2017: 85%) of the total defined benefit liabilities and 87% (2017: 92%) of the total defined benefit assets. The deficit in the overseas funds as at 31 December 2018 was £80m (2017: £80m deficit).

NOTES RELATING TO THE FINANCIAL STATEMENTS

1. Segmental information

Segmental information is presented in the consolidated financial statements for each of the Group's operating segments. The operating segment reporting format reflects the Group's management and internal reporting structures and represents the information that was presented to the chief operating decision-maker, being the Executive Committee. Each of the Group's three divisions has a number of key brands across its main markets and operational locations. For the purposes of reportable segmental information, operating segments are aggregated into the Group's three divisions, as the nature of the products, production processes and types of customer are similar within each division. Inter-segment revenue is insignificant.

IMI Critical Engineering

IMI Critical Engineering is a world-leading provider of critical flow control solutions that enable vital energy and process industries to operate safely, cleanly, reliably and more efficiently.

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 Hydronic Engineering

IMI Hydronic Engineering designs and manufactures technologies which deliver optimal and energy efficient heating and cooling systems to the residential and commercial building sectors.

Performance is measured based on segmental operating profit which is defined in the table below. 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 IFRS 9, these contracts do not meet the requirements for hedge accounting and gains and losses are reversed out of adjusted revenue and operating profit and are recorded in net financial income and expense for the purposes of the consolidated income statement.

Alternative Performance Measures

To facilitate a more meaningful review of performance, certain alternative performance measures have been included within this announcement. These APMs are used by the Executive Committee to monitor and manage the performance of the Group, in order to ensure that decisions taken align with its long-term interests. Movements in adjusted revenue and segmental operating profit are given on an organic basis (see definition below) so that performance is not distorted by acquisitions, disposals and movements in exchange rates. The table below details the definition of each APM and a reference to where it can be reconciled to the equivalent statutory measure.

2. Discontinued operations

A pre-tax gain of £2.2m and post-tax gain of £16.9m was recognised in 2017 as a result of the finalisation of a number of matters relating to historical discontinued operations.

There was no profit or loss from discontinued operations in 2018.

3. Net financial income and expense

Included in financial instruments are current year trading gains and losses on economically effective transactions which for management reporting purposes are included in adjusted revenue and 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.

4. Taxation

The adjusted effective tax rate for the Group remained constant at 21% (2017: 21%). The total adjusted tax charge for the year on continuing operations was £53m (2017: £47m). Taxes of £41m (2017: £40m) were paid in the year. The Group seeks to manage its tax affairs within its core tax principles of compliance, fairness, value and transparency, in accordance with the Group's Tax Policy.

5. Earnings per ordinary share