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Invensys plc
15 June 2010
Invensys plc
Annual Financial Report
Invensys plc (the "Company") yesterday posted its 2010 Annual Report and Accounts (the "2010 Annual Report and Accounts") and notice of the 2010 Annual General Meeting of the Company (the "2010 AGM Notice") to shareholders.
The 2010 Annual Report and Accounts, which were approved by the Board of Directors on 23 May 2010, 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 Wednesday, 28 July 2010 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:
· 2010 Annual Report and Accounts;
· 2010 AGM Notice; and
· Form of Proxy for Ordinary Shareholders for the Annual General Meeting.
These documents are 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 2010 Annual Report and Accounts and 2010 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 2010 Annual Report and Accounts and should be read in conjunction with the Company's Preliminary Results Announcement issued on 24 May 2010, 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 2010 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 2010 Annual Report and Accounts.
Chairman's Statement
The following information is extracted from pages 10 and 11 of the 2010 Annual Report and Accounts.
"Dear shareholder
In my first statement to you since my appointment as Chairman on 17 July 2009, I am pleased to report that Invensys has continued to make progress during the most difficult economic conditions in decades. Despite the recession, we improved our operating performance, further strengthened our financial position and have continued to invest significantly in research and development, restructuring, and sales and marketing so that our divisions are well prepared for the recovery. It is a credit to Ulf Henriksson and his management team that Invensys has managed to bridge the recession and is now in a very strong position to benefit as we begin to see economic recovery in some regions and industries. I have had the opportunity to visit many of our facilities around the world and meet many of our people. I have also, along with the rest of the Board, reviewed our three-year strategic plan for the Group and the divisions and our corporate governance procedures. I am pleased to confirm that Invensys has the highest standards of governance, backed up by our recently revised Code of Conduct, and we have the right plans in place to continue along our path of growth. As the world emerges from recession, considerable emphasis is going to be placed upon efficient use of resources, especially energy and water, and on safe, environmentally friendly transportation of both people and freight. Each of our three divisions is able to make a significant contribution in these areas, and I am confident that Invensys will be a leader in its markets.
The Board
There have been several changes to the Board during the past year, with the appointment of three non-executive directors with significant experience of running major international companies, particularly in the technology sector. Francesco Caio and Dr Martin Read joined the Board as non-executive directors on 18 July 2009. Francesco was formerly Chief Executive of Cable & Wireless and
Martin was formerly Chief Executive of LogicaCMG. Paul Lester, Chief Executive of VT Group, was
appointed to the Board on 1 January 2010. These three new directors, together with Bay Green,
Michael Parker and Pat Zito, give us the breadth of talent to support the executive team in their efforts. Our new Chief Financial Officer, Wayne Edmunds, joined the Board on 1 June 2009. He also comes from a technology background, having spent 17 years with Lucent Technologies. I would like to thank the two directors who retired at last year's Annual General Meeting for their contribution to Invensys over several years: my predecessor as Chairman, Martin Jay and Jean-Claude Guez, formerly Chairman of the Remuneration Committee.
Dividend
After the payment last year of a dividend to shareholders for the first time since 2003, the Board has decided to continue with its progressive dividend policy for the year, reflecting the Board's confidence in the future of the Group. Following the payment of an interim dividend of 1.0 pence
per share, the Board has recommended the payment of a final cash dividend for the year of 2.0 pence per share which, subject to approval by shareholders at the Annual General Meeting on 28 July 2010, will be paid on 6 August 2010 to shareholders on the register at 25 June 2010. This brings the total dividends payable in respect of the year ended 31 March 2010 to 3.0 pence per share, twice the payment of 1.5 pence per share in respect of last year.
Outlook
Looking forward, we are positive about the outlook based upon our large order book and our current view of economic conditions. We expect the Group to continue to deliver improved performance in the current year, with the phasing of profit similar to last year. At Invensys Operations Management, we expect revenue growth due to our large order book in combination with the anticipated market improvements later in the year. At Invensys Rail, we expect continued revenue growth due to our large order book. However, margins are likely to be slightly lower due to an increased proportion of revenue coming from large contracts in the early stages of execution.
At Invensys Controls, we expect the market to recover, especially in North America, and as volumes increase we expect margins to improve. Corporate costs will increase by £8 million as we invest for the next phase of the Group's development, particularly in our capabilities to execute bolt-on acquisitions and in business development. We anticipate that exceptional restructuring charges in the current year will be around 1.5% of Group revenue.
Sir Nigel Rudd
Chairman"
Chief Executive's Statement
The following information is extracted from pages 12 and 13 of the 2010 Annual Report and Accounts.
"We improved our performance and grew our order book, and at the same time increased our investment in the Group in spite of the worst economic climate in decades. We have established
a strong foundation and this makes us confident for the future. I am particularly pleased with our ongoing success in winning new large contracts in emerging markets, which will underpin our future growth. Around 40% of our order book at the year end was represented by emerging markets. Our success was based upon being prepared for an economic downturn and being agile in responding to it. We disposed of and reduced our exposure to those businesses and markets that we felt were likely to be most affected by a recession, such as our commercial building systems and the low-end appliance market.
• We invested in research and development to produce software, products and solutions that created a clear point of differentiation from the competition, with an emphasis on helping our customers to improve their performance.
• We worked with our customers for our mutual benefit to manage the potential impact of the volatility and unpredictability of commodity prices.
• We tailored our capital investment and restructuring to maximise our productivity gains in preparation for the recession.
Our success is also a consequence of the business model that we have had in place for the Group since 2005. This has given us a Group that is better able to perform across the economic cycle and which maximises value through:
• Leveraging our global diversity - we deliver products and services to around 180 countries.
• Leveraging our industrial range - we sell to all industries except finance and insurance.
• Unlocking our people's ability to make it happen.
Together these actions created the foundation that enabled us to bridge the recession.
Strategy
The demand for our products and services is driven by the need for productivity as a result of: economic growth, urbanisation and population growth; the need to reduce waste and to
increase efficiency; and the desire to respond quickly to an environment that is changing faster than ever. Our strategy has remained broadly unchanged for five years, though we are agile in changing the way that we implement it to adapt to market conditions. As a Group, we have based our strategy upon five principles:
1. Being a thought leader when we have a seat at the table where customers make decisions by giving them a different point of view and solutions to enable their success.
2. Being a technology leader through the development of industry-leading technologies for our customers that enable them to improve their businesses and operations with excellence in service, engineering and delivery.
3. Being focussed on achieving higher margins by targeting faster-growing countries and market segments with a high return on operating capital employed. These include countries like China, India and Brazil and industries like nuclear power generation, rail infrastructure expansion in emerging markets, and mid- and high-end appliances.
4. Being global, diverse, open and agile in our approach, thinking and abilities so that we unlock the potential of our people, our large installed base, our technology, our long-term customer relationships and our customers' need for global support.
5. Being a value-driven company by living the Invensys Values.
Each of our divisions applies these principles to its own strategy.
All this is supported by making bolt-on acquisitions that deliver new technologies or market access and by leveraging our global capabilities of research and development, global supply chain, continuous improvement, legal, human resources and finance across our divisions.
Performance
Our divisions
At Invensys Operations Management, we have made progress in executing our strategy to help our customers to be more efficient and empowered. Throughout the world, we are winning large and complex oil and gas and power projects. In May 2010, we were awarded a contract for the control and safety solutions for two further nuclear reactors in China following the contract for four reactors in December 2008. Although we continued to experience a decline in demand, particularly in North America and Europe, the order pipeline of prospects is growing. Operating margins returned to double digits in the second half.
At Invensys Rail, we have made progress in executing our strategy to help customers increase capacity at the same time as lowering their cost of ownership. We continue to improve our
market position in core regional markets and are expanding into new targeted regional markets - for example in the resignalling of three metro lines in São Paulo - due to our technology and
execution capabilities. The pipeline of order prospects is large and I am looking forward to continued success as a leading technology provider for the rail and transportation industry.
At Invensys Controls, we have executed our strategy well. Despite a reduction in revenue, profitability has improved due to new product launches, restructuring and investment. We are
seeing signs that the overall consumer market is beginning to recover, especially in the United States, and the operational gearing within the business will further help performance as
volumes recover.
The Group
We also had another good financial performance with operating cash conversion of 107%. Our balance sheet remains strong, which is reflected in the investment grade rating from Standard & Poor's.
Looking forward, we are positive about the outlook based upon our large order book and our current view of economic conditions. We expect the Group to continue to deliver improved
performance in the current year, with the phasing of profit similar to last year.
Corporate Social Responsibility (CSR)
Invensys is committed to supporting the principles of economic success, environmental stewardship, diversity and social responsibility. We believe that by acting as a responsible global 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 24, contains detailed descriptions of our
achievements. We have also published our second Sustainability Report, which is available for download from our website.
Our people
I am delighted with the commitment and excited by the capabilities of our people. The recession has made us stronger and has tested our ability to make things happen with limited resources and support. To put it another way, our people do what they say they will do. Many customers speak with me about our people in the context of lifelong relationships through good and bad times but with a shared commitment to success. When each of us has an open mind, and is personally
responsible and committed, we become a better company and each employee becomes even more competitive. I stand for giving every employee opportunities to become even more capable, so that they have more freedom to choose the life they want to have. The Invensys Values and our focus on our customers bring us together and create a framework for success. I believe that our people and our culture are our strengths.
Ulf Henriksson
Chief Executive"
Directors' Responsibility Statement
The following information is extracted from page 54 of the 2010 Annual Report and Accounts.
"We confirm that to the best of our knowledge:
a) the Financial Statements for the year ended 31 March 2010, 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
W Edmunds
Chief Financial Officer
23 May 2010"
Risks and Uncertainties
The following description of Risks and Uncertainties is extracted from pages 29 and 30 of the 2010 Annual Report and Accounts.
"Failure to maintain a competitive and technologically advanced product range could reduce 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.
Impact
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. Furthermore, delays to development programmes may adversely impact the delivery of major projects.
Mitigation
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, reputational risk and customer claims. The Group reviews its portfolio of technologies as part of the strategic planning process. In addition, the divisions control individual development programmes through a regular review process.
The timing and frequency of substantial contract awards are uneven
The revenue of the Group's Invensys Rail division depends on a small number of large railway operators, both in core markets in the UK, North America, Iberia and Australia and in export markets. New contract awards are often associated with major transport infrastructure upgrades, and as a result are by nature large and infrequent. The Invensys Operations Management division is associated with the supply of technology, software and consulting to the oil and gas, chemical and nuclear industries. Capital expenditure requirements from customers in these industries are often highly cyclical and linked to the international supply, demand and pricing of hydrocarbons.
Impact
The timing of contract awards is uncertain and delays in awards may result in volatility in the results. Major projects may also impact the business mix because a substantial element of the
contract may be supplied by third parties.
Mitigation
The Group monitors sales activity, sales cover in its order book, expected margins and the impact of potential delays on the expected results to allow appropriate mitigating actions to be considered.
Undertaking large, long-term projects exposes the Group 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. An increasing number of projects have been secured in export markets where execution risks may be greater.
Impact
The Group's failure to anticipate technical problems, estimate costs accurately or control delivery may reduce the profitability of such a contract or result in a loss.
Mitigation
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, and progress in major projects is reported to the Board.
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.
Impact
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.
Mitigation
Each division has an established quality control function, and if an event occurs, there are processes
to investigate and manage the occurrence.
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.
Impact
Given the nature of the Group's business mix, 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/or reputation.
Mitigation
Assessment, mitigation and management of these risks are addressed by the divisions in conjunction with the Group's Legal, Supply Chain and Risk functions.
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.
Impact
With respect to both the Group pension plans for its UK and 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.
Mitigation
The current UK 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 plans.
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 which it owns.
Impact
All of the aforementioned liabilities are subject to a number of uncertainties, assumptions and contingencies, and 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.
Mitigation
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."
Related Party Disclosures
The following description of related party transactions is extracted from Note 34 on page 124 of the 2010 Annual Report and Accounts. A condensed version of this note was published in the Preliminary Results Announcement as Note 14.
"(i) Remuneration of key management personnel
Key management comprises the executive directors. Remuneration is as follows:
2010
2009
£m
£m
Short-term employee benefits
4
3
Post-employment benefits
-
-
Other long-term benefits
-
-
Termination benefits
-
-
Share-based payment
2
2
6
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 (2009: none other than the director's loan disclosed in Note 33)."
Contact:
Invensys plc Steve Devany tel: +44 (0) 20 7821 3758
Annabel Michie tel: +44 (0) 20 7821 2121
This information is provided by RNSThe company news service from the London Stock ExchangeENDDOCBLGDLBUBBGGU