IMI plc has announced its preliminary results, year ended 31 December 2023.
| Adjusted1 | Statutory | ||||||
| 2023 | 2022 | Change | Organic4 | 2023 | 2022 | Change | |
| Revenue | £2,196m | £2,049m | +7% | +6% | £2,196m | £2,049m | +7% |
| Operating profit | £411m | £364m | +13% | +10% | £319m | £298m | +7% |
| Operating margin | 18.7% | 17.8% | +90bps | 14.5% | 14.6% | -10bps | |
| Profit before tax | £387m | £346m | +12% | £302m | £285m | +6% | |
| Basic EPS | 116.8p | 105.5p | +11% | 91.5p | 87.6p | +4% | |
| Operating cash flow2 | £366m | £290m | +26% | £439m | £336m | +31% | |
| Dividend per share | 28.3p | 25.7p | +10% | 28.3p | 25.7p | +10% | |
| Return on invested capital3 | 13.1% | 12.7% | +40bps | ||||
1 Excluding the effect of adjusting items as reported in the income statement. See Note 1 for definitions of alternative performance measures.
2 Adjusted operating cash flow, as described in Note 1 to the financial statements. Statutory measure is Cash generated from operations as shown on the cash flow statement.
3 Post-tax return on invested capital, as described in Note 1 to the financial statements.
4 After adjusting for acquisitions, disposals and exchange rates (see Note 1).
Key points
| · | 7% sales growth, 12% adjusted profit before tax growth |
| · | Adjusted basic earnings per share 11% higher than 2022 |
| · | Complexity reduction programme delivered £20m of incremental benefits |
| · | Adjusted operating margin up 90bps to 18.7% |
| · | Statutory profit before tax increased by 6% |
| · | Significant growth in operating cash flow to £366m |
| · | Return on invested capital increased to 13.1% |
| · | Record Process Automation order book provides momentum into 2024 |
| · | Proposed final dividend of 19.2p, increased by 10% |
| · | Unified IMI under one brand |
Roy Twite, Chief Executive, said:
“We continued to make significant progress in 2023 as we delivered our fourth consecutive year of profit and adjusted operating margin growth. Our purpose-led strategy, Breakthrough engineering for a better world, is accelerating performance as we continue to help our customers become safer, more sustainable, and more productive. We have a resilient portfolio with around 45% of sales now generated from the aftermarket, and our sectors are aligned to attractive growth markets supported by long-term global macroeconomic trends. Both our operating platforms increased revenues and margins in the year.
By harnessing our engineering expertise, addressing customer challenges, fostering market-led innovation, and reducing complexity in our business, we are creating real value.
Based on the strong 2023 results and current market conditions we expect 2024 full year adjusted EPS to be between 120p and 126p.”
A live webcast of the analyst meeting taking place today at 8:30am (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 2024.
Results overview
IMI delivered another strong financial performance in 2023. Organic revenue increased by 6% and organic adjusted operating profit increased by 10%. Group adjusted operating margin increased by 90bps to 18.7% and both platforms increased margins in the year. Statutory operating margin reduced by 10bps to 14.5% as we accelerated our complexity reduction programme in the year. Statutory profit before tax increased by 6%. Cash conversion was strong at 89% (2022: 80%) and the Group’s return on invested capital increased to 13.1% (2022: 12.7%). Our adjusted basic earnings per share increased by 11% to 116.8p (2022: 105.5p).
Everyone at IMI was pleased to see the Company rejoin the FTSE 100 index during the year. The sustainable improvements in financial performance that are being delivered are testament to the hard work of all our people. It is an important milestone in the continued delivery of our strategy.
As we unite our people and business around our purpose, it is time for the next step in our journey. We are consolidating under a unified IMI master brand while maintaining strong product brands within our sectors, all presented through a singular visual identity. This approach will simplify our engagement with customers, support our growth ambitions, unite us as one team and help us to attract top talent. Great things happen when we come together as one – finding the best ways of solving customer problems with breakthrough solutions that help build a better world.
Dividend
The Board is recommending a 2023 final dividend of 19.2p per share (2022: 17.4p per share). Payment will be made on 17 May 2024 to shareholders on the register at the close of business on 5 April 2024.
Outlook
Based on current market conditions, we expect 2024 full year adjusted basic EPS to be between 120p and 126p.
This guidance reflects strong growth in our Automation platform from the record order book in Process Automation and continued resiliency in our Industrial Automation sector as the competitive labour market drives investment. The Life Technology platform is expected to be broadly flat in the full year, reflecting continued demand for our energy efficient products in Climate Control, offset by softer performance in Life Science & Fluid Control and Transport. We expect that Life Technology revenue will be down in the first half.
We expect continued margin progression in 2024 towards our 20% through-cycle target, supported by the benefits from the complexity reduction programme.
Our guidance assumes a net interest charge of £17m, that our tax rate will increase to 24% and a weighted average number of shares of 260.5m. Foreign exchange rates are expected to have an adverse impact on sales and profits of c.2%.
Strategic progress
Accelerating Better World growth
Our purpose-led strategy, Breakthrough engineering for a better world, is accelerating growth as we continue to help our customers to operate more efficiently, safely and sustainably. We are aligned to attractive growth markets and are creating real value for all our stakeholders through a focus on customer satisfaction, market-led innovation and complexity reduction.
There is great momentum in our business, and I am delighted that we have delivered another strong financial performance in 2023. We have seen exceptionally strong growth in our Process Automation sector, where our focus on growing the aftermarket is showing tangible results, and global investments in energy security have led to a significant increase in demand for our solutions. Our focus on hydrogen as a sustainable fuel is also delivering results, and I am pleased to report that hydrogen orders doubled to £15m in 2023 (2022: £7m). The integration of Heatmiser, acquired in December 2022 and now part of our Climate Control sector, is progressing well and we successfully launched its innovative range of smart control products in Germany and France during the year.
I would like to thank everyone across IMI for contributing to another impressive year. We would not be where we are today without your dedication, collaboration, innovation and expertise.
Our new structure
In July 2023, we announced a new business structure as the next step in our purpose-led strategy, Breakthrough engineering for a better world. To build on the opportunities for growth, IMI has been organised into five market-focused sectors operating within two business platforms, Automation and Life Technology.
| Platform | Sectors | Previous Name |
| Automation | Process Automation | IMI Critical Engineering |
| Industrial Automation | IMI Precision Industrial Automation | |
| Life Technology | Climate Control | IMI Hydronic Engineering |
| Life Science & Fluid Control | IMI Precision Fluid OEM | |
| Transport | IMI Precision Transportation |
Our five market-focused sectors bring us even closer to our customers and align with long-term macro trends that will support our sustainable, profitable growth in the years to come.
Customer satisfaction
Understanding our customers and providing world-class engineering expertise is crucial to the delivery of our strategy. We continue to invest in our people and processes to strengthen the customer experience further, and are achieving industry-leading customer satisfaction scores across the Group. We thank our customers and partners for their business and look forward to continuing these partnerships which contribute to a better world.
Market-led innovation
We are accelerating market-led innovation by embracing our Growth Hub culture and processes. We are developing breakthrough solutions to solve key industry problems and support our customers with their most complex engineering challenges. Our innovation pipeline remains strong, with exciting projects across IMI. Supported by selective M&A, this is delivering Better World growth. The integration of recent acquisitions is progressing well, giving us further exposure to attractive end markets.
Complexity reduction
During the year, we have continued to identify and execute opportunities to reduce complexity and drive more efficient, resilient operations. As forecast, our restructuring programmes delivered £20m of incremental annual benefits in 2023. We now expect to deliver a further £15m of benefits in 2024 and £7m in 2025. Our complexity reduction investment is expected to complete in 2024.
We have also progressed initiatives focused on reducing the complexity and increasing the resilience of our supply chains. We are strengthening relationships with key suppliers whilst dual-sourcing components where appropriate to ensure we can continue to serve our customers’ needs.
Environmental, Social and Governance (ESG)
Our purpose, Breakthrough engineering for a better world, continues to focus our actions and create real energy across our organisation.
Empowering people
Ensuring all our employees feel safe at work has always been our number one priority. The Total Recordable Incident Frequency Rate (TRIFR) in 2023 was 0.44 (2022: 0.35), which despite remaining in the top quartile for our industry, was a disappointing outcome. We remain focused on identifying and reducing workplace hazards and are committed to the ambition of an accident-free workplace.
Our Inclusion and Diversity activities are helping to build a more dynamic and innovative organisation. The female representation on the Board is currently 44% and the Executive Committee is now at 50% as at 1 February 2024. Women in management, a key metric for improving gender balance in leadership roles, remained at 22% (2022: 22%).
Our continued focus on empowering people and on creating an inclusive, diverse, and safe workplace is being recognised. Our employee engagement remains high, with 77% of employees seeing IMI as a great place to work (2022: 80%). We were pleased to see an increase in survey participation.
Sustainable solutions
IMI’s solutions support our customers’ products and operations and often directly contribute to the delivery of their carbon reduction targets. When considering investments, we ensure that the impact on IMI’s overall ESG positioning and performance 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 involve supporting customers in developing solutions for a zero-carbon future.
In particular, we are developing solutions for many aspects of the hydrogen value chain, including electrolysis, liquid storage, refuelling and heavy-duty trucks. We delivered £15m of hydrogen-related orders in 2023 (2022: £7m) and expect further growth in 2024.
Climate action
We improved our CO2 intensity by 5% in 2023. Both platforms are progressing actions that will further reduce our Scope 1, 2 and 3 emissions as we make meaningful progress towards our net-zero targets. We committed to setting science-based targets during the year and have submitted both a near-term and net-zero target to the Science Based Targets initiative for validation. We continue to improve our metrics regarding water withdrawal and non-recyclable waste generation.
We also agreed our first sustainability linked revolving credit facility in June 2023 and used this as a template for a further revolving credit facility in the second half of the year.
More information about our ESG credentials and initiatives, including our policies and practices, can be found on our website: www.imiplc.com.
Roy Twite
Chief Executive Officer
29 February 2024
Financial review
Key highlights
| Adjusted1 | Statutory | ||||||
| 2023 | 2022 | Change | Organic4 | 2023 | 2022 | Change | |
| Revenue | £2,196m | £2,049m | +7% | +6% | £2,196m | £2,049m | +7% |
| Operating profit | £411m | £364m | +13% | +10% | £319m | £298m | +7% |
| Operating margin | 18.7% | 17.8% | +90bps | 14.5% | 14.6% | -10bps | |
| Profit before tax | £387m | £346m | +12% | £302m | £285m | +6% | |
| Basic EPS | 116.8p | 105.5p | +11% | 91.5p | 87.6p | +4% | |
| Operating cash flow2 | £366m | £290m | +26% | £439m | £336m | +31% | |
| Dividend per share | 28.3p | 25.7p | +10% | 28.3p | 25.7p | +10% | |
| Return on invested capital3 | 13.1% | 12.7% | +40bps | ||||
1 Excluding the effect of adjusting items as reported in the income statement. See Note 1 for definitions of alternative performance measures.
2 Adjusted operating cash flow, as described in Note 1 to the financial statements. The statutory measure is cash generated from operations as shown on the cash flow statement.
3 Post-tax return on invested capital, as described in Note 1 to the financial statements.
4 After adjusting for acquisitions, disposals and exchange rates (see Note 1).
Certain alternative performance measures (‘APMs’) have been included within this press release. These APMs are used by the Executive Committee to monitor and manage the performance of the Group, in order to ensure that the decisions taken align with the Group’s long-term interests. Movements in revenue and adjusted operating profit are given on an organic basis (see definition in Note 1) so that assessment of performance is not distorted by acquisitions, disposals and movements in exchange rates. Further rationale for the use of APMs, their definition, and a reconciliation of APMs to statutory measures is included in Note 1.
Delivering sustainable, profitable growth
The Group delivered a strong financial result in the year, as revenue, profit and adjusted operating margin improved. Revenue increased by 7% to £2,196m (2022: £2,049m). Organic revenue was 6% higher than the prior year, after adjusting for acquisitions, disposals and exchange rate movements. Exchange rate adjustments had an immaterial impact.
Adjusted operating profit of £411m (2022: £364m) was 13% higher than last year. On an organic basis, adjusted operating profit increased by 10%.
Group adjusted operating margin was 18.7% (2022: 17.8%). Both platforms grew adjusted margins in the year as we continue to progress towards our 20% margin target. Statutory operating profit was £319m (2022: £298m), which increased by 7%. The Group statutory operating margin was 10bps lower than last year, largely reflecting an increase in restructuring costs recognised in 2023.
Adjusted net financing costs on net borrowings of £22.7m (2022: £19.2m) was higher as a result of acquisitions completed in 2022 and increases in base rates and includes the impact of £2.9m (2022: £2.8m) interest cost on leases. Statutory net finance costs were £16.2m compared to £12.8m in 2022, largely reflecting the higher interest rate environment.
Adjusted net financing costs on borrowings were covered 22 times (2022: 24 times) by adjusted earnings before interest, tax, depreciation, amortisation, impairment and adjusting items of £503m (2022: £457m). Net pension financing interest expense under IAS 19 was £0.5m (2022: £1.5m income).
Adjusted profit before taxation was £387m (2022: £346m), which was 12% higher than 2022. Statutory profit before taxation increased 6% to £302m (2022: £285m) reflecting growth in the year and the Group’s continued execution of restructuring activities to improve customer satisfaction and long-term competitiveness. The total statutory profit for the period after taxation was £237m (2022: £226m).
Platform results
Automation
Automation specialises in the design and manufacture of motion and fluid control solutions that enable a diverse range of industries, to operate more efficiently, safely and sustainably. Our Process Automation sector supports vital process and energy industries whilst Industrial Automation helps create the smart, safe and sustainable factories, production lines and warehouse operations of the future.
| £m | Adjusted | Statutory | |||||
| 2023 | 2022 | Change | Organic1 | 2023 | 2022 | Change | |
| Revenue | |||||||
| Process Automation | 807 | 713 | +13% | +14% | 807 | 713 | +13% |
| Industrial Automation | 543 | 535 | +1% | 0% | 543 | 535 | +1% |
| Total Revenue | 1,350 | 1,248 | +8% | +8% | 1,350 | 1,248 | +8% |
| Operating profit | 257 | 225 | +14% | +14% | 202 | 188 | +7% |
| Operating margin | 19.1% | 18.1% | +100bps | 15.0% | 15.1% | -10bps | |
1 After adjusting for acquisitions, disposals and exchange rates (see Note 1).
| Process Automation (£m) | 2023 | 2022 | Change | Organic1 |
| Closing order book | 760 | 627 | +21% | |
| Order intake: | ||||
| Aftermarket | 561 | 458 | +22% | +23% |
| New Construction | 390 | 354 | +10% | +10% |
| Total order intake | 951 | 812 | +17% | +18% |
1 After adjusting for acquisitions, disposals and exchange rates (see Note 1).
Automation delivered strong organic revenue growth of 8%, with revenue also up 8% on a reported basis.
Process Automation had an excellent year, with strong order intake and continued organic growth. Orders were up 18% organically, with a 23% increase in Aftermarket. Organic revenue was 14% higher than 2022 and 13% higher on an adjusted basis. We have benefitted from our self-help initiatives in the Aftermarket and continued investments in energy security and have seen particular strength in LNG, Nuclear and downstream Oil & Gas.
Industrial Automation delivered a good performance, despite uncertain markets. Organic revenue was in line with the prior year, and was up 1% on an adjusted basis. We see continued demand for solutions that automate processes in a competitive labour market.
Adjusted operating profit increased by 14% on an organic basis and the adjusted operating margin improved by 100bps to 19.1%. This was a strong performance, reflecting a further shift towards higher-margin Aftermarket opportunities and the continued execution of footprint optimisation initiatives, which delivered £15m of incremental benefits in 2023. Statutory operating profit increased by 7% to £202m in the year.
We expect to deliver good growth in 2024, following on from the strong order book in Process Automation and continued resiliency in our Industrial Automation sector as the competitive labour market drives investment. We expect margins to increase, supported by the continued delivery of our complexity reduction programme.
Life Technology
Life Technology develops motion and flow control solutions that enhance and improve the quality of life across three key sectors. Climate Control’s innovative solutions help customers optimise heating and cooling systems, reduce energy consumption and improve building comfort. Life Science & Fluid Control develops solutions that empower our Life Science customers to enhance patient-focused critical care and diagnose disease earlier, and our Fluid Control customers to accelerate the safety, reliability and performance of everyday activities. Transport is at the heart of advancing commercial vehicles, our cutting-edge technology helps manufacturers to radically reduce emissions and improve vehicle safety.
| £m | Adjusted | Statutory | |||||
| 2023 | 2022 | Change | Organic1 | 2023 | 2022 | Change | |
| Revenue | |||||||
| Climate Control | 386 | 350 | +10% | +3% | 386 | 350 | +10% |
| Life Science & Fluid Control | 276 | 289 | -4% | -5% | 276 | 289 | -4% |
| Transport | 184 | 162 | +14% | +14% | 184 | 162 | +14% |
| Total Revenue | 846 | 801 | +6% | +2% | 846 | 801 | +6% |
| Operating profit | 153 | 139 | +11% | +3% | 116 | 110 | +6% |
| Operating margin | 18.1% | 17.3% | +80bps | 13.7% | 13.7% | – | |
1 After adjusting for acquisitions, disposals and exchange rates (see Note 1).
Life Technology delivered a resilient performance, despite some significant market uncertainty. Revenue was up 6% and 2% on an organic basis.
Climate Control saw good demand for its energy-saving products, with revenue up 10% when compared to 2022 and 3% higher on an organic basis. Whilst trends in the European construction market did impact sales in the second half, the sector continues to perform resiliently due to the strong retrofit demand for products that improve energy efficiency in buildings. The integration of Heatmiser, acquired in December 2022, has progressed well as we look to accelerate our growth in smart buildings.
Life Science & Fluid Control revenue was 4% lower than in 2022 and 5% lower on an organic basis. We saw customer destocking and reduced demand in the second half and expect this to continue into 2024. The long-term fundamentals of this sector are strong, and we remain excited about the opportunities for growth.
Transport revenue was up 14% when compared to 2022, and 14% higher organically. We saw growth across all regions in the year as supply chains recovered. We have benefitted from particularly strong demand in China and India.
Adjusted operating margin for the year was 18.1%, 80bps higher than the prior year. The platform continues to advance complexity reduction initiatives, delivering £5m of incremental benefits in the year. Statutory operating profit increased by 6% to £116m in the year.
We expect Life Technology to be broadly flat in 2024 reflecting continued demand for our energy-efficient products in Climate Control, offset by softer performance in Life Science and Transport. We expect margins to increase, supported by the continued delivery of our complexity reduction programme.
Adjusting items
| £m | 2023 | 2022 |
| Reversal of net economic hedge contract losses/(gains) | (8) | 3 |
| Restructuring costs | (48) | (26) |
| Acquired intangible amortisation and other acquisition items | (34) | (34) |
| Exit from Russia | (2) | (9) |
| Gains on instruments measured at fair value through profit or loss | 7 | 5 |
| Tax in connection with the above adjusting items | 19 | 15 |
| Total adjusting items | (66) | (46) |
Adjusting items that are excluded from adjusted profit before tax are listed 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 settlement, are included in the revenues and adjusted operating profit of the relevant business segment. The adjusting item reverses this treatment at an operating profit level, leading to a loss of £8m (2022: £3m gain).
· Restructuring costs: Restructuring costs of £48m were incurred in 2023, with a breakdown of these costs by platform, alongside expected benefits provided below. Further details on 2023 projects are included in Note 6.
· Acquired intangible amortisation and other acquisition items: Acquired intangible amortisation is excluded from adjusted profits, to allow for comparability of the performance across platforms. Acquired intangible amortisation increased to £32m (2022: £30m). Other acquisition costs of £2m (2022: £4m) were incurred relating to a Heatmiser IFRS 3 fair value inventory adjustment.
· Exit from Russia: During 2023, changes were made to the legal structure of a customer which resulted in a £2m write-off. In 2022, the Group’s decision to end all new business in Russia resulted in a charge of £9m.
· Gains on instruments measured at fair value through profit or loss: A gain arose on the revaluation of financial instruments and derivatives under IFRS 9 of £7m (2022: £5m gain).
· Taxation: The tax effect of the above items has been recognised as an adjusting item and amounts to a £19m gain (2022: £15m gain).
Complexity reduction continues to deliver benefits
Along with investments into our future growth, IMI continues to identify and execute on opportunities to drive more efficient operations. The following tables provide a summary of progress on our restructuring programme:
| £m | 2023 | 2024* | 2025* |
| Restructuring charge | |||
| Automation | (31) | (27) | – |
| Life Technology | (17) | (12) | – |
| Total charge | (48) | (39) | – |
| Cash impact | (40) | (27) | (5) |
| £m | 2023 | 2024* | 2025* |
| Incremental annual benefits | |||
| Automation | 15 | 6 | 6 |
| Life Technology | 5 | 9 | 1 |
| Total benefits | 20 | 15 | 7 |
*Future-looking forecast information.
Both platforms advanced their significant multi-year restructuring projects in 2023, recognising a total charge of £48m.
The restructuring programme contributed £20m of benefits in the year. Including 2023, the programme has cost £192m to date and has delivered annual benefits of £104m.
We continue to expect that the programme will complete in 2024, although the Group will always seek and execute on opportunities that improve its competitive position.
Taxation
The adjusted effective tax rate for the Group increased to 21.8% (2022: 21.3%), reflecting the increase in the UK statutory rate of corporation tax from 19% to 25% with effect from 1 April 2023. The tax rate in 2023 also benefitted from favourable resolutions of certain historic tax cases. The total adjusted tax charge for the year was £85m (2022: £74m) and the statutory effective tax rate was 21.5% (2022: 20.7%). 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 Corporate Tax Strategy which is available on the Group’s corporate website. We are expecting the adjusted effective tax rate to increase to around 24% in 2024, due in part to higher UK corporation tax rates and new minimum tax legislation.
Adjusted basic earnings per share increased by 11%
The average number of shares in issue during the period was 259m (2022: 258m), resulting in adjusted basic earnings per share of 116.8p (2022: 105.5p), an increase of 11%. Statutory basic earnings per share increased by 4% at 91.5p (2022: 87.6p) and statutory diluted earnings per share increased by 5% at 91.2p (2022: 87.2p).
Maintaining continued cash discipline
| Movement in net debt | 2023 | 2022 |
| £m | £m | |
| Adjusted EBITDA* | 503.2 | 457.0 |
| Working capital movements | (31.3) | (85.1) |
| Capital and development expenditure | (79.9) | (71.3) |
| Provisions and employee benefit movements** | (2.7) | 1.5 |
| Principal elements of lease payments | (29.0) | (32.3) |
| Other | 6.0 | 20.2 |
| Adjusted operating cash flow *** | 366.3 | 290.0 |
| Adjusting items | (43.1) | (52.6) |
| Interest | (22.7) | (19.2) |
| Derivatives | 9.8 | (8.6) |
| Tax paid | (76.1) | (48.6) |
| Additional pension scheme funding | – | (3.5) |
| Free cash flow before corporate activity | 234.2 | 157.5 |
| Dividends paid to equity shareholders | (68.8) | (62.2) |
| Acquisition/disposal of subsidiaries | 0.5 | (213.3) |
| Net issuance/(purchase) of own shares | 0.6 | (18.8) |
| Net cash flow (excluding debt movements) | 166.5 | (136.8) |
| Reconciliation of net cash to movement in net debt | ||
| Net increase in cash and cash equivalents excluding foreign exchange | 17.7 | 11.0 |
| Less: cash acquired/disposed | 0.4 | (10.0) |
| Net repayment/(drawdown) of borrowings excluding foreign exchange and net debt disposed/acquired | 148.4 | (137.8) |
| Decrease/(increase) in net debt before acquisitions, disposals and foreign exchange | 166.5 | (136.8) |
| Net cash acquired/disposed | (0.4) | 10.0 |
| Currency translation differences | 1.8 | (50.6) |
| Movement in lease liabilities | 5.5 | (11.8) |
| Movement in net debt in the year | 173.4 | (189.2) |
| Net debt at the start of the year | (812.0) | (622.8) |
| Net debt at the end of the year | (638.6) | (812.0) |
*Adjusted profit after tax (£302.9m) before interest (£23.2m), tax (£84.5m), depreciation (£74.8m), amortisation (£17.6m) and impairment (£0.2m).
**Movement in provisions and employee benefits as per the statement of cash flows (£0.9m) adjusted for the movement in restructuring provisions (£3.6m).
***Adjusted operating cash flow is the cash generated from the operations shown in the statement of cash flows, less cash spent acquiring property, plant and equipment, non-acquired intangible assets and investments; plus cash received from the sale of property, plant and equipment and the sale of investments, excluding the cash impact of adjusting items; a reconciliation is included in Note 9.
Adjusted operating cash flow was £366m (2022: £290m). This represents a conversion rate of total Group adjusted operating profit to adjusted operating cash flow of 89% (2022: 80%), largely reflecting good working capital management during 2023. There was a £43m cash outflow from adjusting items (2022: £53m outflow) primarily related to restructuring costs.
Net working capital balances increased by £31m, with a £58m increase in payables in line with growth offset by a £57m increase in receivables and a £32m increase in inventory, with investments in stock to support the Process Automation order book offsetting the strategic reduction of inventory in other sectors. The £85m increase in 2022 was due to a £39m increase in receivables and a £47m increase in inventory, partly offset by an increase in payables of £1m.
Cash spent on property, plant and equipment and other non-acquired intangibles in the year was £80m (2022: £71m), which was equivalent to 1.3 times (2022: 1.2 times) depreciation and amortisation thereon. The Group continues to deploy capital to support growth and improve the efficiency of its operations, including projects that support our net-zero carbon target.
Research and development spend, including capitalised intangible development costs of £6m (2022: £6m), totalled £72m (2022: £68m), representing 3.3% (2022: 3.3%) of sales. The Group continues to support investment in growth, with this spend focused on delivering Better World solutions. As this measure focuses primarily on the efforts of the engineering function, it does not fully capture the cross-functional support in Growth Hub initiatives – a significant further investment alongside our research and development spend.
In 2023, the Group paid cash tax of £76m (2022: £49m), which was 117% (2022: 82%) of the statutory tax charge for the year.
Free cash flow before corporate activity increased significantly to £234m (2022: £158m).
Dividends paid to shareholders totalled £69m (2022: £62m), and there was a cash inflow of £1m associated with the issue of share capital for employee share schemes (2022: £19m outflow).
Overall net debt reduced by £173m in 2023 (2022: £189m increase).
Strong balance sheet offers strategic flexibility
Net debt at the year-end was £639m, compared to £812m at the end of the previous year. The reduction reflects the strong cash generation in the year. The net debt is composed of a cash balance of £107m (2022: £133m), a bank overdraft of £66m (2022: £94m), interest-bearing loans and borrowings of £580m (2022: £746m) and lease liabilities of £100m (2022: £105m).
The year-end net debt to adjusted EBITDA ratio was 1.3 times (2022: 1.8 times). At the end of 2023, loan notes totalled £532m (2022: £546m), with a weighted average maturity of 3.6 years (2022: 4.6 years), and other loans including bank overdrafts totalled £114m (2022: £294m). Total committed bank loan facilities available to the Group at the year-end were £300m (2022: £300m), of which £nil (2022: £100m) was drawn.
At 31 December 2023, the value of the Group’s intangible assets, including goodwill, was £958m (2022: £1,014m restated).
The net book value of the Group’s property, plant and equipment at 31 December 2023 was £300m (2022: £299m). Capital expenditure on property, plant and equipment amounted to £60m (2022: £57m), with the main capital expenditure focused on production facility investment to support operational efficiency and growth. Including capitalised intangible assets, total capital expenditure was £80m (2022: £71m) and was 1.3 times (2022: 1.2 times) the depreciation and amortisation charge (excluding acquired intangible amortisation and lease asset depreciation) for the year of £63m (2022: £60m).
The net deficit for defined benefit obligations at 31 December 2023 was £49m (2022: £19m deficit). The UK deficit was £4m (2022: £28m surplus), with the liabilities fully bought-in in 2022. The deficit in the overseas funds as at 31 December 2023 was £45m (2022: £47m deficit).
Return on invested capital (‘ROIC’)
The Group uses ROIC as an indication of IMI’s ability to deploy capital effectively. The Group’s definition of ROIC is adjusted operating profit after tax divided by average capital invested. Capital invested is defined as net assets adjusted to remove net debt, derivative assets/liabilities, defined pension position (net of deferred tax) and to reverse historical impairments of goodwill and amortisation of acquired intangibles.
ROIC was 13.1% in 2023 (2022: 12.7%), which increased by 40bps, reflecting the strong trading performance and the full year profit impact of acquisitions completed in 2022.
| Return on invested capital | 2023£m | 2022£m |
| Adjusted operating profit | 410.6 | 363.8 |
| Notional tax charge | (89.5) | (77.5) |
| Net adjusted operating profit after tax | 321.1 | 286.3 |
| Net assets | 1,030.2 | 905.6 |
| Adjusted for: | ||
| Net debt | 638.6 | 812.0 |
| Restructuring provision | 20.9 | 17.8 |
| Net derivative assets/liabilities | (1.2) | (1.9) |
| Net defined pension benefit | 48.9 | 18.9 |
| Deferred tax on employee benefits | (13.5) | (5.0) |
| Previously written-off/impaired goodwill | 346.9 | 346.9 |
| Acquired intangibles amortisation | 387.6 | 366.5 |
| Closing capital invested | 2,458.4 | 2,460.8 |
| Opening capital invested | 2,460.8 | 2,039.6 |
| Average capital invested | 2,459.6 | 2,250.2 |
| Return on invested capital | 13.1% | 12.7% |
Disposals
On 2 October 2023 the Group disposed of IMI Aero-Dynamiek for proceeds of £0.8m resulting in a gain on disposal of £0.7m. The business contributed revenue of £4m and operating profit of £nil prior to disposal.
Foreign exchange
The income statements of overseas operations are translated into Sterling at average rates of exchange for the year, balance sheets are translated at year-end rates. The most significant currencies are the Euro and the US Dollar – the relevant rates of exchange were:
| Average Rates | Balance Sheet Rates | ||||
| 2023 | 2022 | 2023 | 2022 | ||
| Euro | 1.15 | 1.17 | 1.15 | 1.13 | |
| US Dollar | 1.24 | 1.24 | 1.27 | 1.21 | |
The movement in average exchange rates between 2022 and 2023 had no material impact on both revenue and adjusted operating profit in the full year when compared to 2022.
If exchange rates as at 16 February 2024 of US$1.27 and €1.17 were projected for the full year and applied to our 2023 results, it is estimated that both revenue and adjusted operating profit would be 2% lower.
Treasury
IMI has a centralised Treasury function that provides treasury services to Group companies including funding liquidity, credit, foreign exchange, interest rate and base metal commodity management. The Group Treasury function manages financial risks in compliance with Board-approved policies.
Disciplined approach to capital allocation
The Board has a clear and disciplined framework for capital allocation.
The Group will look to prioritise opportunities to deliver incremental organic growth as it continues to invest in its people and operations. Capital expenditure was 1.3x depreciation during the year (2022: 1.2x) with R&D expenditure at 3.3% of sales (2022: 3.3%), in line with a target to maintain spend above 3.0% of sales.
IMI will continue to pursue strategic acquisitions to further enhance the portfolio. These acquisitions must be in attractive, better world markets, and must deliver returns in line with our strict financial criteria, delivering returns above the Group weighted average cost of capital by year three and must not be materially dilutive to the Group return on invested capital by year five.
The Group is committed to a progressive dividend policy and would consider the appropriate mechanism to return additional surplus capital should the Group’s net debt to adjusted EBITDA fall sustainably below our 1.0x – 2.0x target range.
There is significant headroom to current funding covenants of 3.0x net debt to adjusted EBITDA.
The Group remained highly cash generative in 2023, with free cash flow before corporate activity increasing 48% to £234m in the year (2022: £158m). Net debt reduced to 1.3x adjusted EBITDA (2022: 1.8x), comfortably within our target range.
At 31 December 2023, IMI plc (the parent company) had distributable reserves of £304m (2022: £282m).
Daniel Shook
Chief Financial Officer
29 February 2024
