IMI interims

IMI is a global engineering group focused on the precise control and movement of fluids in critical applications and comprises five platform businesses - Severe Service, Fluid Power, Indoor Climate, Beverage Dispense & Merchandising. I have a holding in my income portfolio (epic code: IMI)

 

IMI announced interim results today with revenue showing a very small decline from £1,090m to £1,087m and a 3% decline organically for the six months to 30 June.  Operating profits though improved by 4.6% to £162.2m with a 69bps increase in margins to 14.92%.

Diluted EPS was 34.5p an improvement of 8.5% and the interim dividend was increased 8.5% to 12.8p.

For the five divisions:
 
Severe Service showed good order intake momentum with orders up 19% and particularly strong in the Oil & Gas sector where orders were up 66%.  Sales were down -1.2%, but operating profit up 7.7% and second half margins are expected to show significant progress over the first half.

Fluid Power continues to suffer weak demand from the commercial vehicles market and consequently revenues were down -2.7% and operating profit down -7.5%.  Management expect a return to growth in the second half. 

Indoor Climate is continuing to rely on refurbishment activity due to the depressed market for new commercial construction in Europe; so a reasonable performance given the economic environment with sales up 2.8% and operating profits improving by 2.2%.

Beverage Dispense markets were weaker than expected as major customers in the US and Latin America delayed some capital expenditure, with sales down -4.4% and operating profit down -6.4%. 

Merchandising business continued to exhibit strong momentum across most of its end markets with sales increasing 18.6% and operating margins up 440bps resulting in operating profits up 73.1%.  The process to divest this division is on track.

Sales for the half year by territory and end markets are detailed below:

Click on chart to enlarge

Click on chart to enlarge

   

Free cash flow was strong at £95.1m compared to £6.6m last year.  In addition to dividend payments (£66.0m), a good portion of this FCF (£68.1m)  was spent on the stock repurchase programme, consequently net debt increased from £143.8m at 31 December to £210.5m, representing gearing of 31.6%. 

Finally in their outlook they state "...We continue to anticipate better trading conditions in the remainder of the year.   In addition, we expect the Group to benefit from an improving sales mix and an increasing contribution from a number of recently launched new products.  Overall, we remain confident that the Group will deliver good progress in 2013..."

So in summary a good performance given the economic backdrop and a positive outlook, with expectations for an improved second half from a well managed business.  Returns to shareholders by the way of dividends are likely to maintain their strong momentum, with ample capacity for high single digit increases.  I would be happier if the share repurchase programme, undertaken as the price to book value approaches 7, was not taking place.  At these prices the programme is value destroying and the funds would be better used if returned to shareholders by way of a special dividend.