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Invensys plc
8 June 2009
Invensys plc
Annual Financial Report
Invensys plc (the "Company") will today post its 2009 annual report and accounts (the "2009 Annual Report and Accounts") and notice of the 2009 Annual General Meeting of the Company (the "2009 AGM Notice") to shareholders.
The 2009 Annual Report and Accounts, which were approved by the Board of Directors on 13 May 2009, constitute the Annual Financial Report for the purposes of DTR 4.1.
The Annual General Meeting is to be held at Park Plaza Victoria London, 239 Vauxhall Bridge Road, London, SW1V 1EQ on Friday, 17 July 2009 at 11.00 a.m.
In compliance with LR 9.6.1, the Company has submitted to the Financial Services Authority two copies of each of the following documents:
2009 Annual Report and Accounts;
2009 AGM Notice; and
Form of Proxy for Ordinary Shareholders for the Annual General Meeting.
These documents will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at the Financial Services Authority, 25 The North Colonnade, London E14 5HS. The 2009 Annual Report and Accounts and 2009 AGM Notice are also available on the Company's website at www.invensys.com.
In compliance with DTR 6.3.5, the following information is extracted from the 2009 Annual Report and Accounts and should be read in conjunction with the Company's Preliminary Results Announcement issued on 14 May 2009, both of which can be found at www.invensys.com. Together, these constitute the material required by DTR 6.3.5 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the 2009 Annual Report and Accounts in full and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2009 Annual Report and Accounts.
Chairman's Statement
The following information is extracted from pages 8 and 9 of the 2009 Annual Report and Accounts.
"Your company has had another good year despite the difficult economic conditions that have affected the global economy.
We achieved a creditable operating profit performance with good results from our Invensys Operations Management and Invensys Rail businesses and a resilient performance from our Invensys Controls business in the face of very difficult market conditions.
As I mentioned in last year's Annual Report, I will be retiring from my role as Chairman and director of Invensys after this year's AGM on 17 July 2009. In this, my final statement to shareholders, I would therefore like to reflect upon the significant achievements that the Group has made during the last six years.
I became Chairman of Invensys in 2003. Since then:
• our net debt, which stood at over £1.5 billion in 2003, has been reduced to the point where we are now debt free and have over £300 million of net cash and deposits;
• our legacy liabilities, excluding pensions, have reduced from £700 million to just £77 million;
• we have progressed from reporting an overall loss of nearly £1.5 billion in the year to 31 March 2003 to a net profit of £133 million;
• our market capitalisation has increased from £350 million in 2003 to around £1.6 billion today;
• we have reached a position where we are now able to pay a dividend for the first time since 2003; and we have rejoined the FTSE 100 Index, in June 2008, and have been reclassified as a technology company, recognising the significant change in our businesses during recent years.
It is with some sadness that I have to note that our shareholders have lost some of the value of their investment in Invensys in recent times, although most of this has been mirrored by the declines shown by many companies in our sector: overall our relative performance has been in line with our peer group.
I would like to pay tribute to everyone who has been at Invensys during my time as Chairman, particularly Ulf Henriksson and my other Board colleagues, without whom the Invensys recovery could not have happened.
The Board and our people
I am delighted that Sir Nigel Rudd, who became a director and Deputy Chairman on 1 January 2009, will be taking over from me as Chairman after the AGM. Sir Nigel has a long and distinguished industrial career, and is currently Chairman of BAA and Pendragon and a non-executive director of BAE Systems and Sappi. His previous chairmanships include Alliance Boots, Pilkington, Williams Holdings and Kidde, and he was also a director and Deputy Chairman of Barclays Bank.
Steve Hare, who has been our Chief Financial Officer since 2006, informed the Board in November 2008 that he will be leaving Invensys at the end of May 2009 to pursue a new challenge. During his time with us, he has made a great contribution by achieving the strong financial position that we find ourselves in today, in particular in driving strong operational cash flow from each of our businesses and the signing of our new five year banking facility in July 2008. On behalf of the whole Board, I would like to thank Steve for his efforts and wish him every success in the future.
As previously announced, Wayne Edmunds, who is currently CFO of Invensys Process Systems, will become our Chief Financial Officer from 1 June 2009. Wayne joined the Group from Reuters America, where he had been SVP of Finance, and has previously held senior financial roles in the technology sector, including 17 years with Lucent Technologies. Wayne is relocating to the UK and will work out of the Group's headquarters in London. He has been working with Steve Hare during the past two months to ensure a smooth handover of responsibilities.
Jean-Claude Guez, who has been a non-executive director since 2003, will not be seeking re-election at the AGM and will be retiring from the Board at the end of that meeting. It has been a pleasure working with Jean-Claude over the past six years and I am very grateful to him for his significant contributions and support during this time. We all wish him well in the future.
Dr Martin Read, formerly Chief Executive of LogicaCMG, and Francesco Caio, formerly Chief Executive of Cable & Wireless, will be joining the Board as non-executive directors on 18 July 2009. I am delighted that Martin and Francesco have agreed to join the Board. They each have enormous experience running large international enterprises and I know that they will contribute greatly to the next stage of Invensys' development.
The result of these changes is that Invensys continues to have a strong and experienced Board with a good balance of executive and non-executive directors.
I would like to thank everyone at Invensys for their efforts during the past year. Many have had to deal with difficult markets which have posed additional challenges, and they have met these with considerable enthusiasm and expertise.
Dividend
The strength of the Group's financial position, our excellent operational cash flow and the resilience being shown by our longer-cycle businesses within Invensys Operations Management and Invensys Rail has given the Board confidence that this is the right time to pay a dividend to shareholders for the first time since 2003. However, in light of current global economic conditions, the Board has decided to start at a prudent level which should allow a progressive dividend policy going forward. The Board has therefore recommended the payment of a final cash dividend for the year of 1.5p per share which, subject to approval by shareholders at the AGM on 17 July 2009, will be paid on 7 August 2009 to shareholders on the register at 26 June 2009.
Outlook
Relative to the market, there is strength in demand for our projects and solutions within our newly formed Invensys Operations Management division, and Invensys Rail has been successful in both its core and export markets. This gives us confidence that both will continue to perform well during the current financial year. Invensys Controls faces continued weakness in its markets and we continue to manage it for positive cash flow.
Our strong financial position is enabling us to take further actions in the current year to protect profitability and cash flow across the Group and, based upon our current expectations, we anticipate that restructuring charges in the current year will be around £65 million.
Overall we look to the future with confidence and expect to improve our performance in the current year.
Martin Jay
Chairman"
Chief Executive's Statement
The following information is extracted from pages 10 and 11 of the 2009 Annual Report and Accounts.
"We believe that the key to maximising both our customers' and our own potential lies in an open approach. This belief shapes the way we work, our mindset and approach, and the solutions, technologies and products that we develop with our customers.
I am pleased to be able to report that we achieved a robust performance during the past year against the background of one of the most difficult global economies in decades.
We had strong order intake, which is testimony to our customers' belief in our ability to deliver projects and solutions. We had strong cash flow across the Group, which has further strengthened our financial position; we are debt free with £309 million of net cash and deposits on the balance sheet. We have managed our pension assets and liabilities to reduce volatility and have agreed the future funding schedule with the Trustee of the UK Main Pension Scheme with no change to our annual payments. We have undertaken restructuring where there has been a need to realign capacity and improve productivity. This overall performance has given the Board confidence to recommend the resumption of dividend payments to shareholders.
Strategy
Our vision is to become the unquestioned leader in our markets. Our mission is to unlock our potential so that we can in turn help our customers to unlock theirs.
We believe that the key to maximising both our customers' and our own potential lies in an open approach. This belief shapes the way we work, our mindset and approach, and the solutions, technologies and products that we develop with our customers.
We are committed to collaboration, responsiveness and flawless execution.
As an unquestioned leader in providing industries with open thinking and open technologies, Invensys provides customers with the ability to respond more quickly to an ever-changing environment with confidence.
The development of standardised control systems technology reflects the movement away from customised equipment with proprietary operating systems towards platforms with open operating systems. In parallel, industry-standard communication specifications have been created to foster interoperability and create flexibility in system architectures and component selection. Open architectures also create the ability to draw information in real time from disparate parts of operations control and business support systems to enable higher levels of automation and optimisation.
We recognise the importance of these trends to our customers and support open architectures in our businesses. For example, Wonderware software was created specifically to allow broad levels of system integration and data communications. It is now in use in around one third of the world's manufacturing plants and increasingly in infrastructure operations. The application of communication and integration technologies is constantly being expanded and refined, including their use across our other businesses. Currently we are introducing these technologies into the rail industry to support advancements for infrastructure management and signalling control rooms.
Social, economic and environmental trends reflect the increasing need to run capital-intensive operations such as manufacturing, mining, power generation and transportation more efficiently. Our businesses have adopted the position that we need to work with our customers on their terms. We open our thinking to new approaches, collaborate with our customers and open the door to new value propositions for our customers. This open-minded approach to solving customer business issues resulted in an impressive new order performance over the past year.
Outside its core markets, Invensys Rail is developing its business in a number of other countries around the world. Rather than being a completely global player, we have selected a number of key markets in which to develop new regional businesses, and to continue our successful strategy of developing strong market share where we have an advantage in meeting the needs of customers. We have recently placed new business development teams into South East Asia, the Middle East, India, Germany and Latin America and we are already seeing success with several new orders. At the same time, we are driving a strong platform and component strategy through our development planning. We are developing new technical solutions that will facilitate the efficient operation of railways, in addition to the fundamental aspect of maintaining safety. In particular, we are investing in communications-based train control, intelligent operational control systems, European Railway Traffic Management System (ERTMS) and unified interlocking offerings, all of which we see as important pillars that will support our customers in the years to come.
At Invensys Controls, we have taken aggressive action to realign capacity and resources following the declines in its consumer cyclical markets while continuing our intense focus on improving productivity and generating cash. We are concentrating on emerging markets, geographic expansion of our heating segment and leveraging our global engineering capabilities to support our customers' new product introductions. These actions taken together position us well to capitalise upon an eventual market recovery.
Creation of Invensys Operations Management
The decision has been taken to integrate our three industrial automation businesses (Invensys Process Systems, Wonderware and Eurotherm) into a single division, Invensys Operations Management. This decision has been driven by the convergence of technologies that enable our customers to optimise their entire operations, the opportunity to create a continuum of solutions and services for the whole industrial market and the potential for cost savings from common sales and marketing, delivery and back office functions.
We have identified significant growth opportunities from more effective coverage of our customer base and attractive savings from using common approaches to business processes. Some integration activities began earlier in the year as a result of common research and development requirements between the businesses and the opportunity to eliminate redundant infrastructure costs. Throughout the remainder of the current year, additional integration will be carried out; however, we do not intend to make substantial changes to the business strategy, products, services and levels of support for our customers. We see this integration as a natural evolutionary step building upon the successes that we have already achieved with our strategy of becoming a solutions and services provider. We will be reporting Invensys Operations Management as a single division going forward.
Our industrial customers face an expanding set of challenges that go beyond the need for increased productivity. They face new pressures related to globalisation, shifting demographics, environmental issues, energy efficiency and greater complexity in the supply chain. They are seeking new ways to optimise their operations across their production assets, systems and processes. By bringing together our three businesses, we can harness technology, domain expertise and service delivery capability to provide agile real-time operations capability through integrated solutions backed by our deep industry knowledge. Our combined portfolio enables us to provide "right sized" solutions and delivery mechanisms that meet customers' needs most effectively.
Branding
During the year, we carried out a review of our branding to ensure that our visual identity and brand structure reflect an open approach and provide differentiation from our competitors.
This review has resulted in the new logo and visual identity which you see within this document and which more readily reflect our status as a technology company, following the reclassification by FTSE in June 2008. It also achieves the aim of creating the visible differentiation from our competitors that we required. Just as importantly, we have simplified our multi-tier brand structure to create greater emphasis upon the Invensys name. As we gradually implement the new branding across the Group's businesses over the next year, our people will become Invensys people and our renowned brands like Foxboro, Westinghouse and Wonderware, which are currently business names, will become product brands. We want our people to embrace our Invensys-wide aspiration to apply an open approach to unlocking potential.
Corporate Social Responsibility (CSR)
Invensys is committed to supporting the principles of economic success, environmental stewardship and social responsibility. We believe that by acting as a responsible corporate citizen, we will not only minimise business risk, but also enhance our reputation as a business partner. Our CSR report, which starts on page 22, contains more detailed descriptions of our achievements. I am pleased to announce that we have exceeded our targets for reductions of key performance indicators (KPIs) of consumption and waste production. I am also pleased that our injury and illness incident frequency rates have been reduced again since last year.
Invensys is producing a Sustainability Report, which will be available for download from our website. Also available from our website will be our revised and updated Code of Conduct, which summarises our goals and demonstrates our commitment to legal and ethical compliance. We believe that our performance and our values are things to be proud of and should be reported clearly and transparently, which is why we have made these documents available.
Our people
In 2008 we listened to our employees through an Invensys-wide Employee Engagement Survey. We have reviewed and collated the results of the Survey, and I am pleased to report that our employees' engagement with Invensys rates highly in comparison to other companies which have been through significant changes. Based on the findings of the Survey, our leaders are developing action plans to ensure that the voice of our people is heard. More information on our Employee Engagement Survey can be found in our CSR report.
Our people are a great strength, and I am delighted that we have such good people across Invensys who are dedicating their skills and time to help Invensys to succeed. Their commitment and achievements have helped us to deliver a robust performance at a time of considerable challenges, and I would like to thank them all for their contribution. We will strive to give our employees every reasonable encouragement and incentive to succeed.
Ulf Henriksson
Chief Executive"
Directors' Responsibility Statement
The following information is extracted from page 47 of the 2009 Annual Report and Accounts.
"We confirm that to the best of our knowledge:
a) the Financial Statements for the year ended 31 March 2009, prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation as a whole; and
b) the Business Review includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face.
By order of the Board
U C I Henriksson
Chief Executive
S Hare
Chief Financial Officer
13 May 2009"
Risks and Uncertainties
The following description of Risks and Uncertainties is extracted from pages 26 and 27 of the 2009 Annual Report and Accounts.
"Invensys operates globally in varied markets and is affected by a number of risks inherent in its activities, not all of which are within its control.
The Risk Committee has accountability for overseeing the risk management processes and procedures, and reports to the Board through the Audit Committee on the key risks facing the business. It also monitors the mitigating actions put in place by the relevant operational managers to address identified risks. As part of the regular review of activities, disclosures in the Annual Report have been revised to reflect the global changes to the business and the competitive business environment in which it operates.
The principal risks, which could cause the Group's actual results to vary materially from historic and expected results, are set out below.
The Group faces intense competition, and failure to maintain a competitive and technologically advanced product range could reduce its margins and revenue growth
Invensys operates in highly competitive markets and the Group's products and services are characterised by continually evolving industry standards and rapidly changing technology, driven by the demands of the Group's customers. Failure to keep pace with technological changes and system or application requirements in the industrial sectors may result in loss of market share and lower margins. In addition, competitors are consolidating and offering a widened product portfolio to provide integrated or bundled solutions to customers, thus providing enhanced competition to Invensys.
The Group invests in research and development to develop new technologies and products to sustain or improve its competitive position. However, all new technologies and products involve business risk in terms of possible abortive expenditure, reputation risk and the potential for onerous contracts and customer claims. The Group reviews its portfolio of technologies as part of the strategic planning process. In addition, the businesses control individual development projects through a stage gate review process.
The timing and frequency of substantial contract awards, particularly in the Group's Invensys Rail business, are uneven
The revenue of the Group's Invensys Rail business depends on a small number of large railway operators, such as Network Rail and London Underground in the UK and other large rail and mass transit operators in Europe, Asia Pacific and the US. New contract awards are often associated with major transport infrastructure upgrades and as a result are by nature large and infrequent. Funding for these new projects is often dependent on governmental investment decisions, and these may be affected by changes in political and economic conditions. As a result, the timing of contract awards is uncertain and delays in awards may result in volatility in the results of Invensys Rail. The business monitors sales activity, sales cover in its order book and the impact of potential delays on the expected results to allow appropriate mitigating actions to be considered.
The Group's Process Systems business is reliant on the capital expenditure requirements from the oil and gas and chemical sectors
A substantial part of the Group's Process Systems business is associated with the supply of technology, software and consulting to the oil and gas and chemical industries. Capital expenditure requirements from customers in these industries are often highly cyclical and linked to the international supply, demand and pricing of hydrocarbons. These may fluctuate depending on natural events, economic conditions, political developments or conflicts involving major oil exporting countries. Consequently, in addition to the inherent uncertainties of any competitive bid process, demand for products and services may fluctuate significantly based on the timing of investment decisions made by multinational customers.
The business tracks major sales opportunities and regularly reviews the status of the order book. Progress against plans is monitored through regular operational business reviews.
The Group is subject to ongoing litigation and environmental liabilities
As a consequence of the past disposal of a significant number of businesses, the Group has retained certain liabilities in relation to environmental claims (including the cost associated with the remediation of contaminated sites no longer owned by the Group), disputed taxes, litigation (including personal injury claims arising from alleged exposure to asbestos and silica), indemnity claims and other disposal costs relating to the disposed businesses. These risks have receded over time as warranties and indemnities in relation to past disposals have expired, existing disputes have been settled and remediation work on contaminated sites has been completed. The Group also has environmental liabilities in relation to the remediation of vacant sites owned by it. All of the above liabilities are subject to a number of uncertainties, assumptions and contingencies.
The Group continually monitors the remaining liabilities, regularly reviews the related provisions and aims in negotiations to limit the risk of future liabilities or disputes. However, there can be no assurance that the liabilities will not be substantially higher or become payable sooner than anticipated, or that the provisions in the Group's accounts in respect of any such liabilities will be sufficient if currently unknown liabilities should arise.
Operating in global markets subjects the Group to risks associated with changes in political and economic conditions and in applicable laws and regulations
The Group operates in global markets, with facilities in more than 50 countries. It is subject to a broad range of laws, regulations and standards in each of the jurisdictions in which it operates. In addition, a number of its production, engineering and back office services have been or are in the process of being relocated to countries in Asia, Eastern Europe and Mexico.
Also, a significant portion of its revenue is from customers outside Europe and North America, and the Group has become increasingly engaged with the development of new business in these markets. This brings increased risk through exposure to the different laws, regulations, political and economic conditions and other variable factors in these growth territories.
These risks are managed principally through regular operational business reviews.
The Group may be subject to liability as a result of product liability claims
Errors and defects in the Group's products, systems or applications, which may be used in safety-critical applications, could cause injury to persons or damage to property and equipment. These occurrences could result in claims, loss of revenue, warranty costs, costs and damages associated with product recalls, litigation, delays in market acceptance or harm to the Group's reputation for safety and quality. Each business has an established quality control function, and if an event occurs there are processes to investigate and manage the occurrence.
The Group could be exposed to deterioration in its financial results if the performance improvement initiatives of certain of the Group's operations are not successful
In response to increased competition and in order to enhance business opportunities, a number of significant business improvement initiatives have been identified. The objective of these initiatives is to increase market competitiveness by changing the mix of products and services offered to customers and by improving operational and manufacturing efficiencies. Initiatives include the modification of business practices and in certain instances the transfer of business operations. Although the Group has committed substantial resources to complete these performance improvement initiatives successfully, there can be no assurance that these will ultimately be completed as planned.
These activities are monitored through the regular operational review process to confirm progress on their implementation and to minimise any associated risks.
The Group may be exposed to liability through the actions of joint venture partners, cosource partners or its supply chain
The business activities of the Group are often conducted in conjunction with joint venture, consortium, codevelopment or cosource partners whose day-to-day management actions are outside of the control of the Group.
A significant element of the Group's risk profile is the delivery performance of its supply chain. Given the nature of the Group's businesses, a quality or other failure in the supply chain could present a risk to safety and delivery which could have a material adverse effect on the Group's business, financial performance and reputation.
Assessment, mitigation and management of these risks are addressed by the businesses in conjunction with the Group's legal, supply chain and risk functions.
Undertaking large, long-term projects exposes the Group's business to risk of loss
A significant amount of the Group's business involves long-term projects that can take many months or even years to complete. These projects may be subject to delays and cost overruns due to delays in equipment deliveries, engineering problems, work stoppages, unanticipated cost increases, shortages of materials or skilled labour or other unforeseen problems inherent in the nature of such projects.
The Group has established a process with clear delegated authorities for the approval of major contracts which includes a system for the approval of bids submitted to customers. Contracts with a large monetary value or onerous contractual terms require Board approval. Contract execution is monitored against the approved plans.
The Group may be exposed to additional liabilities with respect to its UK and US pension plans
The Group has a high proportion of pensioners relative to its active workforce. With respect to both the Group pension plans for its UK operations and for its US operations, any decline in the equity market, improvements in life expectancy, changes in expected morbidity rates, long periods of low inflation or deflation or future decreases in interest rates could increase the funding deficit and require additional funding contributions in excess of those currently expected. The current deficit funding plan was agreed on the basis of a valuation undertaken at 31 March 2008 and anticipates deficit recovery contributions being made on a six-monthly basis until March 2017. In addition to regular financial reporting under IAS 19, the Group regularly monitors the performance of the principal UK and US schemes.
If the Group is unable to recruit and retain skilled personnel, it may not be able to effectively implement its business strategy
The future success of the Group will depend in part upon the ability to recruit, develop and retain highly skilled personnel in a competitive market environment for technology companies. The Group has invested in its human resources function and processes to mitigate the risk.
The turbulence in the financial markets and the related downturn in business confidence has and will continue to have an impact on general business prospects
In these circumstances a number of commercial risks are heightened, including a greater risk of failure of a key customer or supplier exposing the Group to financial loss (for example bad debts or irrecoverable costs) or business disruption arising from the failure to secure required components and services.
If orders are delayed and sales volumes are significantly impacted then there is a greater risk that further restructuring activities will be required."
Related Party Transactions
The following description of related party transactions is extracted from Note 34 on page 115 of the 2009 Annual Report and Accounts. A condensed version of this note was published in the Preliminary Results Announcement as Note 17.
"(i) Remuneration of key management personnel
Key management comprises the executive directors. Remuneration is as follows:
|
|
2009
|
2008
|
|
|
£m
|
£m
|
|
Short-term employee benefits
|
3
|
3
|
|
Post-employment benefits
|
-
|
-
|
|
Other long-term benefits
|
-
|
-
|
|
Termination benefits
|
-
|
-
|
|
Share-based payment
|
2
|
2
|
|
|
5
|
5
|
Short-term employee benefits comprise salary and benefits earned during the year and bonuses awarded for the year. Post-employment benefits comprise the cost of pensions and post-retirement benefits. Full details of individual directors' remuneration are given in the Remuneration Report.
(ii) Other related party transactions
There are no other related parties transactions that have a material effect on the financial position or performance of the Group in the year (2008: none)."