85
Annual Report and Accounts 2014
COMMENTARY ON THE CONSOLIDATED INCOME STATEMENT
Results summary (on continuing operations and before exceptional items)
Revenue decreased by 3% to £1,686m (2013: £1,744m). After adjusting for an
adverse exchange rate impact of £96m and the contribution from acquisitions
and disposals, the organic revenue increase was 2% despite more difficult
market conditions.
Segmental operating profit was £298m, compared to £322m in 2013. At
constant exchange rates and excluding acquisitions and disposals, segmental
operating profit fell by 1%. The segmental operating margin was 17.7% (2013:
18.4%). Restructuring costs of £3m that arose from normal recurring cost
reduction exercises have not been treated as exceptional.
Continuing net interest costs on net borrowings were £14m (2013: £16m).
These were covered 27 times (2013: 21 times) by continuing earnings before
interest, tax, depreciation and amortisation of £371m (2013: £332m), see the
cash flow commentary on page 91 for further details of the EBITDA calculation.
The net pension financing charge under IAS19 was £3m (2013: £8m).
Profit before taxation and exceptional items was £278m (2013: £298m) a decrease
on the previous year of 7%. This measure will be used as a metric for the 2015
IMI Incentive Plan as discussed on page 63 of the Remuneration Report.
The effective tax rate for the Group before exceptional items remained at 22%
(2013: 22%). The total tax charge for the year on continuing operations was
£61m (2013: £66m) and continuing profit after tax was £217m (2013: £232m).
The Group seeks to manage its tax affairs within its core tax principles of
compliance, fairness, value and transparency, in accordance with The IMI Way,
which is explained further in section 2.4 on page 100.
Exceptional items
Operating profit was £270m (2013: £271m) after the deduction of exceptional
items which are discussed below:
Reversal of net economic hedge contract losses/(gains)
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 segmental revenues
and operating profit of the relevant business segment. The exceptional item at the
operating level reverses this treatment and the loss of £4m (2013: gain of £5m).
Restructuring costs
Exceptional restructuring costs in the year were £9m (2013: £14m). The 2014
costs comprises £4m for the closure of IMI Components, announced in August
2014 and £5m on completion of IMI Norgren UK’s factory move.
Pensions
During the year the UK Fund was split into two newly formed schemes, one
for pensioners and one for deferred members resulting in a one-off settlement
gain of £4m. In addition, the insurance buy-out of one of our Swedish schemes
resulted in a further settlement gain of £3m.
Impairment and acquired intangible amortisation
The Group recorded exceptional impairment charges of £41m of which £27m is
against Remosa and £1m is against IMI Components in Critical Engineering,
£11m is against Analytical Flow Products (‘AFP’) in Precision Engineering,
and £2m is for the impairment of legacy IT software as our Hydronic
Engineering division implements a fully integrated ERP system. Acquired
intangible amortisation decreased to £20m (2013: £22m).
Disposal of non-core businesses
During the year, the Group disposed of a number of subsidiaries which were
considered to be non-core to the Group’s strategy. On 4 October 2014 the Group
disposed of Eley Limited, Eley Americas Inc and Accles & Shelvoke Limited
(together ‘Eley’) for a cash consideration of £42m, resulting in a gain on disposal
of £33m. The Group also disposed of its investment in AFP resulting in a gain on
disposal of £1m. Neither of these businesses were considered to be a major class
of business and therefore their results for the year and gains on disposal have
been classified within continuing operations.
Acquisitions
On 2 January 2015 the Group announced the acquisition of Bopp & Reuther for
€
153m (£118m). Bopp & Reuther is a good strategic fit and it will significantly
enhance IMI’s presence in the growing power sector. Bopp & Reuther is
very closely aligned with IMI Critical Engineering’s existing large control valve
business (‘CCI’) and therefore we expect to deliver strong synergies from the
combination of the companies. Acquisition and disposal costs were £2m (2013:
£10m) and primarily comprise £2m of fees associated with this acquisition.
Financing costs
A net charge arose on the revaluation of financial instruments and derivatives
under IAS39 of £7m (2013: credit of £3m) principally reflecting movements
in exchange rates during the year on forward foreign exchange contracts.
Taxation
An exceptional tax credit of £8m (2013: £10m) arose in connection with
business restructuring and other exceptional costs.
Profit from continuing operations after tax and exceptionals
Profit after taxation and exceptional items was £193m (2013: £194m).
Disposal of Retail Dispense businesses and discontinued operations
As previously reported, on 1 January 2014 our Retail Dispense businesses
were sold to the Marmon Group, a Berkshire Hathaway company, for cash
consideration of £691m resulting in a gain on disposal of £478m. Detail of
discontinued operations is given in section 2.5 on page 103. The disposal
proceeds were used to return £620m of cash to shareholders and invest
£70m into the UK Pension Fund.
Earnings per share (‘EPS’)
Basic EPS was up 243% to 243.4p (2013: 71.0p) and diluted EPS was 241.3p
(2013: 70.1p), both increasing as a result of the profit on disposal of the Retail
Dispense businesses of £478m. The Board considers that a more meaningful
indication of the underlying performance of the Group is provided by earnings
before exceptional items after tax. Details of this calculation are given in section
2.3 to the Group financial statements on page 99. On this basis the adjusted
EPS from continuing operations was 78.0p, an increase of 7% over last year’s
72.6p. The increase is as a result of the 7 for 8 share consolidation, which
occurred on 17 February 2014.
Corporate costs
In 2014 and prior years corporate costs have been allocated to each of the
divisions to arrive at segmental operating profit. For our 2015 reporting and
onwards we intend to separately disclose our corporate costs in our segmental
information. This change will give greater transparency of the underlying
segmental operating profits for each division. In section 2.1.1 we have included
an analysis to show how the Group’s 2014 segmental information would be
presented on this new basis.
Exchange rates
The most important foreign currencies for the Group remain the Euro and the
US Dollar and the relevant average rates of exchange for the consolidated
income statement were:
2014
2013
Euro
1.24
1.18
US dollar
1.65
1.56
The movement in average exchange rates between 2013 and 2014 resulted
in our reported 2014 segmental revenue and segmental operating profit each
being 6% lower as the average Euro and US Dollar rates against Sterling were
5% and 6% weaker, respectively.
If the exchange rates as at 16 February 2015 of US$1.54 and
€
1.35 were
projected for the full year and applied to our 2014 results, it is estimated
that segmental revenue and segmental operating profit would have been
3% lower and 1% lower respectively. In addition, we estimate that the recent
strengthening of the Swiss Franc against the Euro if sustained would result in
a further transactional foreign exchange headwind on operating profits in 2015
of around £6m, meaning that the total impact on operating profits is currently
estimated to be around 3%.
Dividend
The Board has recommended a final dividend in respect of 2014 of 24.0p
(2013: 22.5p) per share, an increase of 6.7% over the 2013 final dividend.
This makes the total dividend for 2014 37.6p (2013: 35.3p). The cost of the
final dividend is expected to be £65m (2013: £61m), leading to a total dividend
cost of £102m (2013: £101m) in respect of the year ended 31 December 2014.
Dividend cover based on adjusted earnings for the continuing businesses is
2.1 times (2013: 2.1 times).
