Accounting Standards
The Group accounting policies fully reflect the current requirements of the Accounting Standards Board. This year FRS10 Goodwill and Intangible Assets has been adopted and all goodwill arising on acquisitions completed after 1 January 1998 has been capitalised and amortised. The total goodwill capitalised in 1998 was £20.5 million and amortisation charged to the profit and loss account was £0.4 million. Goodwill on acquisitions in prior accounting periods has not been capitalised and amortised as allowed in the standard.

Results

First half profit before tax and exceptional items (PBTE) was 4.4 per cent higher and second half PBTE 3.4 per cent higher than in 1997 making the result for the year 3.9 per cent higher at £152.2 million compared with £146.5 million. Sales were marginally higher at £1455 million.

Copper prices reduced significantly during the year. In 1998 the average LME price per tonne was around £1,000 compared to £1,400 in 1997, and a year end price of £875. Scrap became increasingly more difficult to obtain and as a result the input cost to our refinery increased considerably. We estimate that the combination of these factors reduced the sales value and operating profit by £33 million and £2.5 million respectively.

The impact of acquisitions consists of the additional months contribution from the 1997 acquisitions and the 1998 acquisitions from the date of purchase. Herion was acquired in November 1997 and the results for the fourteen months to December 1998 are included. KIP was acquired in June 1998. The net increase in PBTE from all the acquisitions after taking into account financing costs was around £1.3 million after charging £0.4 million amortisation of goodwill.
Rationalisation costs include £2.3 million for Herion and total £9 million compared to £7 million in 1997.

Operating profits in three of the business areas increased in both the first half and second half of the year. Margins improved except in Fluid Power where they were lower due to the impact of the acquisition of Herion and the reduced contribution from the automotive sector, especially in the second half of the year.

The sales and profit by business area are shown in the Financial Statements.

Businesses sold during the year are shown in the Financial Statements. Operating profit to dates of disposal was £1.8 million compared to £4.7 million for the full year 1997. After taking into account interest on the proceeds it is estimated that the benefit in 1998 to PBTE is £0.7 million.

The total proceeds from these disposals were £74 million realising a profit on disposal of £35 million which, after writing back goodwill of £20 million, resulted in an exceptional profit of £14.8 million. Using the post tax operating profit, the aggregate exit price/earnings ratio was 22.
Interest was slightly lower than last year. Good operational cash generation and lower rates offset the increase of around £3.8 million in interest arising from the net impact of acquisitions and disposals. Interest cover was 28 times.

PBTE at £152.2 million is a record and profit before taxation at £167 million is also a record.

The payment of the 1998 interim dividend as a Foreign Income Dividend (FID) means that we are now able to recover all surplus advance corporation tax. The impact of paying FIDs has benefited the tax charge by £3.5 million in 1998 and £8.5 million in 1997. The tax rate has, as a consequence, increased from 27 per cent to 30 per cent. The underlying rate however has remained at around 33 per cent.

The total dividend is 14.8p, an increase of 5.7 per cent over last year and is covered 2 times on pre-exceptional earnings (1997: 2.2 times) and 2.3 times including exceptional items.

Return on Capital Employed
Return on Capital Employed of continuing operations, defined as operating profit as a percentage of average operating assets plus goodwill, was 16.1 per cent (1997: 16.7 per cent). This equates to a post tax return of 10.8 per cent using the underlying tax rate of 33 per cent.

Cash Flow
Click here to see the group cash flow statement.

Operating cash flow was 94 per cent of profit before interest and exceptional items. Maintenance of tight working capital consistent with meeting market requirements of customers and suppliers remains a high priority for operational management. Investment in new fixed capital during the year was in line with depreciation.

Funding and Gearing

Net borrowings of £86 million at the year end (comprising gross borrowings of £133 million and cash of £47 million) represented gearing of 21 per cent, down from 58 per cent at the end of 1997. There are no material funds outside the UK where repatriation is restricted. The strength
of the Group’s financial position is reflected both in the long maturity profile of the balance sheet term debt (£89 million) and the level of undrawn committed facilities (£171 million) with average lives of 10 and 3 years respectively.

The Group’s relationships with its banks and other funding sources is such that no difficulty is anticipated in renewing existing facilities nor increasing borrowing capacity should the need arise.

The chart below shows the funding facilities available to the Group at the end of 1998 and committed over the next few years.

The risk inherent in the translation of currency-based net assets is reduced through a combination of currency loans and foreign exchange contracts. The Group reduces its exposure to short term swings in interest rates through a combination of fixed rate debt and derivative contracts where appropriate. Analysis of this hedging is shown in Note 18 to the Financial Statements. Assuming no change in the borrowing profile a global increase in interest rates of 1 per cent would increase the Group’s interest bill for 1999 by less than £1 million. Our current balance sheet hedging policy described above allows the Group to benefit from the favourable differential between Sterling and European interest rates. Should the forecast convergence of rates materialise this benefit will gradually be eroded.

Treasury Policy
The Group’s central treasury function operates within Board approved policies and parameters to ensure that the major financial risks to the Group are minimised within a solid financial base. The policies cover areas including funding liquidity, foreign exchange and interest rate risk. The use of financial instruments including derivatives are permitted where their effect is to minimise risk to the Group. A control and reporting system is in place to monitor compliance with the policies. There have been no changes during the year or since the year end to the major financial risks to the Group or to the way in which they are managed.

Foreign Exchange and Cash Management
It is the Group’s policy to minimise risk to exchange rates by hedging currency exposures at the time of commitment using currency instruments (primarily forward exchange contracts). The introduction of the Euro has simplified and reduced the Group’s currency exposures. The Group is implementing a cash management programme which will take advantage of the single currency by improving both the pooling of funds across Europe and the efficiency of cross border payments. IMI’s operations are fully prepared to trade in the Euro.

Share Price
The share price at 31 December 1998 was 237.5p (1997: 405.5p) valuing the Group at £832 million. This compares with shareholders’ funds of £409 million and capital invested, after adding back goodwill written off, of £836m.

Based on the year end share price the total dividend for 1998 of 14.8p per share gives a yield of 6.2 per cent.

Year 2000
Work continues on implementation of the changes required to ensure that all business critical systems will be millenium compliant within the time available. No significant problems have arisen during the year and, as indicated last year, the total cost of dealing with the millenium and the introduction of the Euro are expected to amount to £3 million over three years.