TIDMSMIN
RNS Number : 3995A
Smiths Group PLC
24 March 2017
News release
Smiths Group plc announces interim results for the six months
ended 31 January 2017
London, Friday 24 March 2017
For immediate release
Strong operational performance, further progress on strategic
initiatives
Key points
-- Group headline revenue in line on an underlying(1) basis; up 18% on a reported basis
-- Group headline operating profit up 8% on an underlying(1) basis; up 27% on a reported basis
-- Cash conversion strong at 115% with a 44% increase in free cash flow
-- Headline basic EPS up 30% at 45.7 pence per share
-- Proposed interim dividend of 13.55 pence per share, up 2.3%
-- Operational improvements support increased R&D investment in long-term growth opportunities
-- Balance sheet strengthened by business disposals and improved pension funding
-- Morpho Detection acquisition in final stages, with approval and completion expected shortly
Interim results for the six months ended 31 January 2017
Headline* Statutory
------------------------------------ --------------
2017 2016 Reported Underlying 2017 2016
GBPm GBPm growth growth GBPm GBPm
------------------------ ------ ------ -------- ---------- ------ ------
Revenue 1,616 1,372 18% 0% 1,617 1,372
Operating profit 277 217 27% 8% 377 183
Operating margin 17.1% 15.8% 130 bps 150 bps 23.3% 13.3%
Pre-tax profit 248 189 31% 10% 346 168
Basic EPS 45.7p 35.2p 30% 76.5p 32.8p
Headline free cash-flow 252 174 44%
Dividend 13.55p 13.25p 2.3% 13.55p 13.25p
Return on capital
employed 16.3% 15.4% 90 bps
------------------------ ------ ------ -------- ---------- ------ ------
*In addition to statutory reporting, Smiths Group reports its
continuing operations on a headline basis. Definitions of headline
metrics, and information about the adjustments to statutory
measures are provided in the notes to the financial statements
Andy Reynolds Smith, Group Chief Executive, said:
"In the past six months we have made good progress to focus our
portfolio and run our businesses better. Strong cash conversion and
improved margins across the Group provide us with additional
resources to invest for the future. By laying the foundations for
organic growth through targeted investments and by taking a
disciplined approach to acquisitions and disposals, we are building
a bigger, better and more focused Smiths.
"While sales were flat for the first six months of the year,
Smiths Group delivered good underlying profit growth. Once again,
Smiths Detection delivered strong growth in revenue and profit,
offsetting declines at Smiths Medical and John Crane, and
reinforcing our view that the acquisition of Morpho Detection makes
compelling sense and will increase our exposure to a growing
market. We are in the final stages of securing all necessary
regulatory approvals, and expect to complete the acquisition
shortly. In tough markets, John Crane continued to show resilience
with a modest return to growth in the aftermarket, which now
accounts for two-thirds of the division's revenue. Smiths Medical
had a weak first half and performance at Smiths Interconnect and
Flex-Tek was in line with expectations.
"In September, we set out a new strategy for Smiths. We're now
implementing measures across the Group that we believe, in the
medium term, will deliver our twin priorities of chosen market
outperformance and world-class competitiveness. We've made good
progress, generating over GBP330m of proceeds from the disposal of
three non-core businesses, investing for growth with increased
R&D spend and introducing the Smiths Excellence System.
"Overall, the outlook for 2017 is unchanged. Group performance
is expected to be slightly weighted towards the second half, albeit
with a more balanced split between the first and second half than
we saw last year. We expect some improvement in Smiths Medical's
revenue performance in the second half. John Crane's first-fit end
markets are expected to remain tough, somewhat counterbalanced by
continued resilience in aftermarket. We anticipate sales growth at
Smiths Detection in the second half, albeit at lower levels than we
saw in the first half, and margins will moderate given contract mix
and investment in new products. Smiths Interconnect and Flex-Tek
are expected to continue to perform in line with the first half. We
expect cash conversion to continue to be strong as the rate of
progress on inventory management improves. The depreciation of
sterling is expected to provide a tailwind to reported revenue and
operating profit, should current rates prevail."
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance. On a statutory basis, pre-tax profit from
continuing operations was GBP346m (2016: GBP168m) and basic
earnings per share were 76.5p (2016: 32.8p).
See Accounting policies for an explanation of the presentation
of results and note 3 to the accounts for an analysis of
non-headline items.
Contact details
Investor enquiries
Andrew Lappin, Smiths Group
+44 (0)20 7004 1657
+44 (0)78 0500 7035
andrew.lappin@smiths.com
Marion Le Bot, Smiths Group
+44 (0)20 7004 1672
+44 (0)75 8315 4386
marion.lebot@smiths.com
Media enquiries
Andrew Lorenz, FTI Consulting
+44 (0)20 3727 1323
+44 (0)77 7564 1807
smiths@fticonsulting.com
Deborah Scott, FTI Consulting
+44 (0)203 727 1459
+44 (0)797 953 7449
smiths@fticonsulting.com
Presentation
The presentation slides and a live webcast of the presentation
to analysts are available at www.smiths.com/results at 09.00 (UK
time) on Friday 24 March. A recording of the webcast is available
later that day. A live audio broadcast of the presentation is also
available by dialling (no access code required):
UK toll free: 0808 237 0062
International: +44 (0)20 3427 0662
US/Canada toll free: +1 866 928 6048
An audio replay is available for thirty days on the following
numbers (access PIN 683518#)
UK toll free: 0808 237 0026
International: +44 (0)20 3426 2807
US/Canada toll free: +1 866 535 8030
Photography
Original high-resolution photography and broadcast quality video
is available to the media from the media contacts above or from
http://www.smiths.com/images.aspx.
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding our
intentions, beliefs or current expectations and those of our
officers, directors and employees concerning, amongst other things,
our results of operations, financial condition, liquidity,
prospects, growth, strategies and the business we operate. By their
nature, these statements involve uncertainty since future events
and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this document and, unless otherwise required by
applicable law, the Company undertakes no obligation to update or
revise these forward-looking statements. Nothing in this document
should be construed as a profit forecast. The Company and its
directors accept no liability to third parties in respect of this
document save as would arise under English law.
This press release contains brands that are trademarks and are
registered and/or otherwise protected in accordance with applicable
law.
Chief Executive's review
Group results overview
Group headline revenue was in line on an underlying(1) basis.
John Crane revenue fell 4% on an underlying(1) basis as the
continuation of difficult trading conditions in global energy drove
reduced sales in first-fit, down 15% in the period. Aftermarket
revenue returned to growth, up 3% on an underlying(1) basis, as
activity levels stabilised and a number of significant contract
wins led to a growing aftermarket order book. Smiths Medical
revenue fell 2% on an underlying(1) basis, mainly driven by
softness in Infusion Systems and Vascular Access, and only
partially offset by growth in Vital Care as we look to reposition
our business. Smiths Detection revenue was up 12% on an underlying
basis(1) , delivering good growth across all end-use markets with
the exception of Ports & Borders; aftermarket sales continued
to grow. On an underlying(1) basis, Smiths Interconnect revenue was
down 1% and Flex-Tek revenue grew 2%. Group revenue grew 18% on a
reported basis, as the benefits of foreign exchange were only
partially offset by the impact of disposals.
Group headline operating profit of GBP277m was up 8% on an
underlying(1) basis and up 27% on a reported basis. The Group's
operating profit margin increased by 150 basis points on an
underlying basis, with margin expansion in all divisions reflecting
trading performance in addition to cost control, business
improvement and restructuring activities.
The Group delivered an improvement in cash generation with a
cash conversion rate of 115%. Headline free cash flow of GBP252m
increased 44% and net debt of GBP635m reduced by GBP367m excluding
valuation adjustments, reflecting the benefit of the disposal of
non-core assets, improved cash generation and a significantly lower
pension contribution compared to the prior year.
Strategy implementation
In September, we set out our vision to establish Smiths as one
of the world's leading technology companies, based on a strategy of
outperforming our chosen markets and achieving world-class
competitiveness, supported by a strong financial framework. In the
first half of this year, we have taken a number of further steps to
deliver these priorities, laying the foundations for future growth
and a bigger, better, more focused Smiths Group.
Outperforming our chosen markets
As we position Smiths Group for long-term growth, we are
targeting organic and inorganic opportunities that offer the best
levels of sustainable growth and value creation. We are building
market-leading positions in our chosen markets with a more focused
portfolio of businesses that embody the essential characteristics
of where Smiths Group creates value:
-- good competitive positioning in attractive growth
markets;
-- strength in technology differentiation, including digital
capabilities;
-- asset-light operations; and
-- a high proportion of aftermarket service revenue.
After a detailed review of the competitiveness of our businesses
and the attractiveness of the markets in which they operate, we
assess that more than 60% of our revenue is derived from businesses
that are well positioned. Our view is that the remainder either can
be improved, through measures such as smarter investment in
R&D, improved competitiveness, revised channels to market and a
stronger position in emerging markets, or divested. In order to
focus the portfolio on those areas with the greatest potential for
value creation and long-term growth, we have accordingly begun a
disciplined programme of select disposals. To date we have
completed the sale of John Crane's Artificial Lift, Smiths
Medical's Wallace and Smiths Interconnect's Power businesses, which
together accounted for GBP150m of revenue, for a total
consideration of GBP334m. In April last year, we announced the
proposed acquisition of Morpho Detection for $710m. This
acquisition will better position us to meet customer requirements
for high-technology, cost-efficient solutions and services,
including software. We are in the final stages of securing all
necessary regulatory approvals, which requires the disposal of
Morpho Detection's Trace business, and expect to complete the
acquisition shortly. We look forward to bringing Morpho Detection
into Smiths Group.
Across the Group, we continue to focus on activities that will
deliver longer-term organic revenue growth. John Crane has made
progress in diversifying its end markets and the disposal of
Artificial Lift significantly reduces the division's exposure to
commoditised aspects of upstream oil and gas segments. A higher
proportion of revenue now comes from non-oil and gas markets, with
contract wins in the first half with customers in the pulp and
paper, chemical and power markets. Further opportunities are being
targeted in biotech, marine, military and aerospace. Smiths Medical
continued to reposition its product portfolio towards higher-growth
segments, with R&D spend in the first half increasing to 6.8%
of sales. We launched products across the portfolio and expect the
rate of new product launches to accelerate towards the end of 2017
and into 2018. Smiths Detection secured key certifications which
will support future growth, including approval from the Civil
Aviation Administration of China (CAAC) for the IONSCAN 600 and
European Civil Aviation Conference (ECAC) approval for the HI-SCAN
6040aTiX. As European regulators focus on moving towards automatic
detection of explosives in cabin baggage, this advanced checkpoint
screening solution is the first in the industry to be awarded the
new European Explosive Detection Systems (EDS) certification EDS CB
C1 for its automated explosives detection capability. The
restructuring of Smiths Interconnect to prioritise customers who
seek more sophisticated and differentiated technology solutions is
enabling the division to increase its focus on product platforms
over bespoke solutions.
We have also revised our approach to targeting growth in key
geographies, such as China and Asia-Pacific. Asia accounts for
c.10% of Smiths Group revenues today, a figure that we consider too
low. With long-term growth dynamics such as increasing trade and
infrastructure investment, growing energy and industrial demand and
ever-greater requirements for quality healthcare solutions, these
are attractive markets for Smiths Group where we can differentiate
ourselves with customers. We need to make a step change in our
approach that demonstrates our long-term commitment to the region
and that invests in building capacity and talent to meet the scale
of our ambitions for sustainable above-market growth in the future.
Roland Carter, President, Smiths Interconnect, has agreed to become
Smiths Group Asia President in order to lead the important work of
energising our commercial presence, developing our operations and
our people, and building the Smiths Group brand with key customers
and stakeholders across the region. Roland will continue to report
to me as a member of the Executive Committee in this role.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Achieving world-class competitiveness
A key conclusion of our strategic review was that there is
material opportunity to improve competitiveness by ensuring robust
and consistent execution across Smiths Group, focused on continuous
improvement, speed and efficiency. We have begun to roll out the
Smiths Excellence System across the Group and, while it will take
time to yield sustainable benefits, key activities in the first
half of this year included:
-- Customer Excellence
We are improving our approach to channel to market management
and strategic pricing, with a focus on developing opportunities for
aftermarket support and servicing. For example, as part of the
strategic reorganisation of Smiths Interconnect, on 1 March we
announced that the division would unify a number of its technology
brands in order to position Smiths Interconnect as a more
comprehensive solutions provider across the breadth of these
solutions.
-- People Excellence
We have established a leadership development programme and
culture change programme that will build a learning organisation
that attracts, retains, develops, engages and inspires the very
best people. An example of this approach is a partnership on a
series of leadership programmes with the University of California,
Los Angeles (UCLA).
-- Technology Excellence
We have established a Group-wide New Product Innovation process
that will ensure our product and service vitality is strong and
will sharpen our focus on commercialisation. The Group-wide i(3)
innovation forum has approved the first projects under the GBP10m
central Innovation Fund to build digital and related capabilities
that can be leveraged across Smiths Group. These projects aim to
increase internal capability in both hardware and software and to
lay foundations in the areas of software monetisation, machine
learning, Internet of Things (IoT) cloud platforms and high speed
data transmission.
-- Production Excellence
We have made progress in developing a culture of Continuous
Improvement and lean enterprise, supported by the correct
structures, processes, enablers, measures and people skills. These
measures are focused on delivering sustainable efficiency savings
that can help fund innovation in order to fuel organic growth.
-- Programme Excellence
We have implemented a gated programme management process and
increased our focus on rigorous contract management across the
Group.
-- Supply Chain Excellence
We are beginning to see some signs of improvement in inventory
turns. Although initially modest, I am confident that we can create
the momentum to deliver sustainable improvements in working capital
management.
Dividend
The Board has a progressive dividend policy for future payouts,
with the aim of increasing dividends in line with the long term
underlying growth in earnings. This policy will enable us to retain
sufficient cash flow to finance our investment in the drivers of
growth and to meet our financial obligations. In setting the level
of dividend payments, the Board will take into account prevailing
economic conditions and future investment plans, along with the
objective to maintain minimum dividend cover of around 2.0. The
Board has declared an interim dividend of 13.55p per share (2016:
13.25p per share). The interim dividend will be paid on 28 April to
shareholders registered at close of business on 7 April. The
ex-dividend date is 6 April.
Outlook
Overall, the outlook for 2017 is unchanged. Group performance is
expected to be slightly weighted towards the second half, albeit
with a more balanced split between the first and second half than
we saw last year. We expect some improvement in Smiths Medical's
revenue performance in the second half. John Crane's first-fit end
markets are expected to remain tough, somewhat counterbalanced by
continued resilience in aftermarket. We anticipate sales growth at
Smiths Detection in the second half, albeit at lower levels than we
saw in the first half, and margins will moderate given contract mix
and investment in new products. Smiths Interconnect and Flex-Tek
are expected to continue to perform in line with the first half. We
expect cash conversion to continue to be strong as the rate of
progress on inventory management improves. The depreciation of
sterling is expected to provide a tailwind to reported revenue and
operating profit, should current rates prevail.
Business review
% of Group revenue Headline operating Headline return
profit margin on capital employed
==================== ==================== ======================
2017 2016 2017 2016 2017 2016
==================== ========= ========= ========= ========= ========== ==========
John Crane 27% 29% 20.8% 19.9% 21.3% 22.7%
Smiths Medical 29% 30% 21.0% 20.5% 16.3% 14.9%
Smiths Detection 20% 17% 16.8% 12.4% 14.7% 10.9%
Smiths Interconnect 14% 14% 11.3% 9.7% 11.3% 9.2%
Flex-Tek 10% 10% 18.3% 17.6% 32.8% 32.3%
==================== ========= ========= ========= ========= ========== ==========
Group 100% 100% 17.1% 15.8% 16.3% 15.4%
==================== ========= ========= ========= ========= ========== ==========
John Crane
John Crane provides engineered products and services to global
energy and process industry customers. John Crane's revenue is
currently comprised of 64% aftermarket sales. Approximately half of
revenue is derived from the oil and gas and petrochemical sector
(of which approximately 85% is downstream and 15% midstream), with
the other half coming from other industries including Chemicals,
Pharmaceuticals, Power and Pulp & Paper.
2017 2016 Reported Underlying
GBPm GBPm growth growth
--------------------------- ----- ----- -------- ----------
Revenue 435 393 11% (4)%
Headline operating profit 90 78 16% (4)%
Headline operating margin 20.8% 19.9% 90bps
Statutory operating profit 87 72 22%
Return on capital employed 21.3% 22.7% (140)bps
--------------------------- ----- ----- -------- ----------
Performance
Revenue fell 4% on an underlying basis as difficult market
conditions continued throughout global energy markets. The decline
was driven by reduced sales in first-fit with aftermarket returning
to modest growth. Reported revenue increased by 11% driven by
foreign exchange translation benefits, partially offset by the
impact of the disposal of Artificial Lift.
Underlying(1) aftermarket revenue returned to growth and was up
3% as activity levels stabilised and a number of significant
contract wins led to a growing aftermarket order book, reflecting
the resilience of this business. There were pockets of geographic
strength but weaknesses remained in North America. Aftermarket
revenue represented 64% of total revenue (2016: 58%). Underlying(1)
first-fit sales were down 15% in the period, driven by continuous
volatility in global energy markets, especially in North America.
We continued to focus on expanding the installed base and increased
our investment in first-fit projects.
Revenue from emerging markets represented 23% of John Crane
sales, slightly below the prior year, reflecting headwinds in
certain Latin American markets and challenging conditions in
China.
Headline operating profit was down 4% on an underlying(1) basis,
as lower sales and strategic investments in first-fit projects were
only partially offset by strong cost control. As a result, headline
operating profit margin increased by 90 basis points to 20.8%. The
difference between statutory and headline operating profit
primarily reflects GBP3m restructuring and GBP3m litigation costs
net of GBP4m gain on the sale of the Artificial Lift business.
Return on capital decreased 140 basis points to 21.3%,
principally due to lower underlying profits.
John Crane's Artificial Lift business was sold in November 2016.
Artificial Lift was held for sale at the year ended 31 July 2016.
The business performance of Artificial Lift is included within the
financial summary and results presented above. In the first half of
2017, Artificial Lift sales were GBP11m, operating loss was GBP2m
and net assets were GBP24m.
John Crane continued to invest in research and development
projects in 2017 to meet customers' challenges. Specific
developments included:
-- Sense(TM), a predictive diagnostics platform for John Crane
products currently under development and in field trials. The
system replaces manual inspection of equipment, by processing
industrial sensor data and using state of the art algorithms to
monitor operation and provide performance deviation alarms. Using
advanced statistical methods, insights are developed to diagnose
and predict future events. In current field trials, Sense(TM) has
successfully helped customers to identify equipment problems and
procedural issues in their plants, and provided data to support
equipment upgrades and work process modifications. Based on these
results, we are now extending field trial activity to more
customers.
-- Several material development projects are progressing through
the phases of our technology development process. These include
research into the tribological properties of graphene; the use of
nanoparticles in the processing of ceramic materials in order to
enhance mechanical properties; and the development of capabilities
for the additive manufacturing of metals, polymers and ceramics,
which has the potential to significantly reduce cycle time and the
cost of complex components within John Crane products.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Smiths Medical
Smiths Medical supplies medical devices and consumables that are
vital to patient care globally. Our products include Infusion
Systems, Vascular Access, Vital Care and Specialty Products. 83% of
Smiths Medical's sales are from consumable and disposable
products.
2017 2016 Reported Underlying
GBPm GBPm growth growth
--------------------------- ----- ----- -------- ----------
Revenue 472 411 15% (2)%
Headline operating profit 99 84 18% 7%
Headline operating margin 21.0% 20.5% 50 bps
Statutory operating profit 189 72 161%
Return on capital employed 16.3% 14.9% 140bps
--------------------------- ----- ----- -------- ----------
Performance
Revenue declined 2% on an underlying(1) basis, driven by
Infusion Systems and Vascular Access. Reported revenue grew 15%
with favourable foreign exchange translation effects, partially
offset by the impact of the disposal of Wallace and the underlying
revenue decline.
Infusion Systems underlying(1) revenue declined 2% due to
softness in ambulatory infusion hardware and disposables. Vascular
Access underlying(1) revenue decreased 4%, as growth in
cardiothoracic and ports products was offset by declines in sharps
safety and peripheral intravenous catheters (PIVC). Vital Care
underlying(1) revenue growth of 1% was driven by tracheostomy and
chronic obstructive pulmonary disease (COPD) products. Specialty
Products underlying(1) revenue declined 4% due to a reduction in
patient monitoring sales.
Sales into emerging markets decreased 12% in the first half on
an underlying(1) basis, with continued strength in India (+24%) and
South East Asia (+8%) more than offset by issues such as economic
challenges in Venezuela and the timing of orders from key customers
in China.
Headline operating profit grew 7% on an underlying(1) basis, as
operational efficiencies and tight cost controls more than offset
revenue declines and continued pricing pressure in the sector. As a
result, headline operating margin of 21.0% was 50 basis points
higher than the prior year. The difference between statutory and
headline operating profit reflects the GBP100m profit on disposal,
net of GBP6m of restructuring charges and GBP4m amortisation of
intangible assets.
Return on capital employed increased 140 basis points to 16.3%,
reflecting improved profitability that supported greater capital
expenditure in new product development, capacity and manufacturing
tooling.
Smiths Medical's Wallace product line was sold in November 2016.
Wallace sales in H1 2017 were GBP5m, operating profit was GBP3m and
net assets sold were GBP32m.
Research and development investment increased to 6.8% of sales
in the period (2016: 5.8%), as the first wave of new products
approached launch, including new offerings in infusion systems,
PIVC, tracheostomy and temperature management. Many of these are
expected to launch late in the second half of 2017 and into 2018.
In the first half, new product launches included a Closed Blood
Sampling System, the ViaValve Winged Safety intravenous catheter
and MedFusion Smart Pump programming, the latter driving stronger
sales in our hospital infusion market.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Smiths Detection
Smiths Detection is a global authority on the manufacture,
application and management of world class detection and screening
technology. It delivers customised security solutions to protect
society from the threat and illegal passage of explosives,
prohibited weapons, contraband, toxic chemicals and narcotics. 35%
of sales are from the aftermarket.
2017 2016 Reported Underlying
GBPm GBPm growth growth
--------------------------- ----- ----- -------- ----------
Revenue 318 240 33% 12%
Headline operating profit 54 30 80% 51%
440
Headline operating margin 16.8% 12.4% bps
Statutory operating profit 47 28 68%
Return on capital employed 14.7% 10.9% 380bps
--------------------------- ----- ----- -------- ----------
Performance
Revenue grew 12% on an underlying(1) basis, with growth in all
end-use markets other than Ports & Borders. Overall aftermarket
revenue grew by 5%, accounting for 35% of total revenue (2016:
38%), as initiatives continued to increase service attach rates and
the sales of premium service contracts. On a reported basis,
revenue grew 33%, boosted by favourable foreign exchange
translation effects.
Transportation underlying(1) revenue growth of 12% was driven by
strong performances in the EMEA region, including major deliveries
to Abu Dhabi and Berlin Brandenburg airports. Ports & Borders
sales declined 14% on an underlying(1) basis, as an encouraging
performance in EMEA that included major deliveries in Kuwait and
Italy was more than offset by the impact of the completion of key
programmes in Nicaragua and Indonesia last year. Military
underlying(1) revenue growth of 21% was driven by the continued
benefit of a number of long term contracts, mostly in the US and
the UK. Critical infrastructure revenue increased by 24% on an
underlying(1) basis, with growth in all regions as a number of key
contracts came on stream, such as the US Federal Protection
Service, and in the UAE. There is continued pricing pressure in
some end-use markets, with high levels of competition to win large
programme contracts and, in the unregulated parts of the market,
ongoing challenge from lower-priced competitors.
Headline operating profit grew 51% on an underlying(1) basis, as
increased sales, aftermarket growth and favourable business mix
were reinforced by the implementation of business improvement
initiatives, value engineering and good programme management
discipline. As a result, headline operating margin was up 440 basis
points to 16.8%. The difference between statutory and headline
operating profit includes GBP6m costs associated with the Morpho
acquisition.
Return on capital employed increased 380 basis points to 14.7%,
driven by improved profitability.
Smiths Detection continued to invest in research and development
in the period, accounting for 6.3% of sales, 5.4% excluding
customer funded R&D (2016: 5.6% and 4.9%, respectively.). The
launch of a number of new digital products to benefit the aviation
segment included Checkpoint.Evo(plus) and the HI-SCAN 6040aTiX:
-- Checkpoint.Evo(plus) is an advanced screening and management
platform, which integrates independent components and sensors into
a single, intelligent solution producing invaluable operational
data and supporting new functions such as centralised remote
screening and directed search.
-- As European regulators focus on moving towards automatic
detection of explosives in cabin baggage, through the new EU
2015/1998 standard, the HI-SCAN 6040aTiX advanced checkpoint
screening solution has become the first product in the industry to
be awarded the new European Explosive Detection Systems (EDS)
certification EDS CB C1 for its automated explosives detection.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Smiths Interconnect
Smiths Interconnect is a global provider of technically
differentiated radio frequency and electronic components and
subsystems for critical applications in the commercial aviation,
defence, space, medical, rail, semiconductor test, wireless
communications and industrial markets.
2017 2016 Reported Underlying
GBPm GBPm growth growth
--------------------------- ----- ----- -------- ----------
Revenue 230 196 17% (1)%
Headline operating profit 26 19 37% 15%
160
Headline operating margin 11.3% 9.7% bps
Statutory operating profit 45 13 244%
Return on capital employed 11.3% 9.2% 210bps
--------------------------- ----- ----- -------- ----------
Performance
Revenue was down 1% on an underlying(1) basis, with broadly flat
Connectors sales offset by lower Microwave revenue. Revenue grew
17% on a reported basis, boosted by foreign exchange translation
benefits, partially offset by the impact of the disposal of the
Power business.
Connectors revenue was broadly stable on an underlying(1) basis,
driven by the expansion of performance capabilities of
semiconductor test socket technology for a key account. Microwave
revenue declined 3% on an underlying(1) basis, partially offset by
gains in the space market where we increased our product content
with GEO (Geostationary Earth Orbit) and LEO (Low Earth Orbit)
satellite programmes. Orders were strong in the commercial satcom
market, bolstered by two orders from an in-flight entertainment and
communications provider to continue outfitting commercial aircraft
with KU-band wireless connectivity. Continued strength in the
defence market also contributed to a strong order backlog.
Headline operating profit grew 15% on an underlying(1) basis and
the headline operating margin increased 160 basis points to 11.3%,
driven by the benefit of restructuring activity and continued
procurement savings. The difference between statutory and headline
operating profit primarily reflects GBP22m profit on disposal.
Return on capital employed increased 210 basis points to 11.3%,
driven by improved profitability and control of working
capital.
In January 2017, Smiths Interconnect's Power business was sold.
For 2017, sales were GBP47m and operating profit was GBP7m and net
operating assets were GBP138m.
Research and development spend was in line with last year, with
restructuring enabling increased focus on product platforms over
bespoke solutions.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Flex-Tek
Flex-Tek provides engineered components that heat and move
fluids and gases for the aerospace, medical, industrial,
construction and domestic appliance markets.
2017 2016 Reported Underlying
GBPm GBPm growth growth
--------------------------- ----- ----- -------- ----------
Revenue 161 132 22% 2%
Headline operating profit 30 23 28% 7%
Headline operating margin 18.3% 17.6% 70 bps
Statutory operating profit 37 30 23%
Return on capital employed 32.8% 32.3% 50bps
--------------------------- ----- ----- -------- ----------
Performance
Revenue grew 2% on an underlying(1) basis, with growth in all
segments except Fluid Management. On a reported basis, foreign
exchange translation benefits lead to revenue growth of 22%.
Construction revenue grew 3% on an underlying(1) basis, with
both Gastite and Thermaflex benefiting from growth in the US
housing market. Fluid Management revenue was down 3% on an
underlying(1) basis, primarily due to order timing, although the
aerospace market for aircraft components otherwise remained strong.
Heat Solutions revenue was up 10% on an underlying(1) basis, with
growth in all segments, particularly in heat kits used in US
residential construction. Flexible Solutions revenue was in line
with last year on an underlying(1) basis, driven by growth in the
medical segment, partially offset by a decline in the floor care
market.
Headline operating profit of GBP30m delivered a margin of 18.3%,
70 basis points above last year. Margins expanded in all segments
with the exception of Fluid Management, due to a less favourable
product mix. Improvements in profitability were driven by fixed
costs absorption combined with procurement and value engineering
savings. The difference between statutory and headline operating
profit primarily reflects the GBP8m reduction in the Titeflex
Corporation subrogation claims due to increasing US discount
rates.
Return on capital employed increased 50 basis points to 32.8%,
driven by improved profitability.
1Underlying excludes the impact of acquisitions and divestments,
and the effects of foreign exchange translation
Financial review
2017 performance review
As a global business, Smiths Group is exposed to a number of
different industries and macroeconomic trends. The nature of our
diversified portfolio means that we are well placed to mitigate
exposure to any specific sector or industry, as is reflected in the
results for the first half of 2017.
Group revenue was in line on an underlying basis, with a strong
performance at Smiths Detection, growth at Flex-Tek and a return to
growth for John Crane's aftermarket offset by declines in John
Crane's first-fit and in Smiths Medical and Smiths
Interconnect.
Headline revenue
Reported headline revenue increased by GBP244m (+18%) to
GBP1,616m (2016: GBP1,372m), including the positive effects of
foreign currency translation (+GBP251m) and the adverse impact of
disposals (-GBP15m). On an underlying basis, revenue was flat as
growth in Smiths Detection (+GBP33m; +12%) and Flex-Tek (+GBP4m;
+2%) was almost entirely offset by declines in John Crane (-GBP18m;
-4%), Smiths Medical (-GBP9m; -2%) and Smiths Interconnect
(-GBP2m;-1%) year-on-year.
Headline operating profit
Reported headline operating profit of GBP277m was GBP60m higher
than prior year (2016: GBP217m) including the positive effects of
foreign currency translation (+GBP39m) and the impact of disposals
(-GBP1m). On an underlying basis operating profit increased 8%,
with improvements in all divisions. Operating margin increased by
130 basis points to 17.1% (2016: 15.8%), with improvements in all
divisions as sales growth was combined with favourable mix, cost
savings and efficiencies.
John Crane margins improved by 90 basis points to 20.8% (2016:
19.9%) despite weaker sales and investment in strategic first-fit
projects, benefiting from the disposal of Artificial Lift,
favourable mix and strong cost control actions. Smiths Medical
delivered a 50 basis point margin increase to 21.0% (2016: 20.5%)
with efficiencies and cost control offsetting lower sales and
pricing pressure. Smiths Detection's margin was up 440 basis points
to 16.8% (2016: 12.4%) due to sales growth, combined with
favourable mix and efficiencies. Smiths Interconnect improved its
operating margin by 160 basis points to 11.3% (2016: 9.7%)
reflecting the benefit of restructuring combined with procurement
savings. Operating margins of 18.3% in Flex-Tek were 70 basis
points higher than last year (2016: 17.6%) reflecting higher sales
combined with efficiency savings.
Operating profit on a statutory basis, after taking account of
the items excluded from the headline figures, was GBP377m (2016:
GBP183m) - see note 3 for information on the excluded items. The
increase was driven by the GBP126m profit on disposal of
businesses. Other non-headline charges are GBP8m lower at GBP26m
reflecting the benefit of lower amortisation of acquired intangible
assets (GBP3m) and no charges for pension de-risking (2016: GBP11m
charge) offset by acquisition costs for Morpho (GBP6m).
Headline finance costs
Headline finance cost during the period totalled GBP29m, GBP1m
higher than the previous period. The small increase reflects the
lower rates on cash deposits in the period and the effects of a
weaker pound, offsetting the benefit of the 2016 bond
repayment.
Non-headline items relating to continuing activities excluded
from headline profit before tax
These items amounted to a credit of GBP98m compared to a charge
of GBP21m in 2016. They comprised:
-- GBP126m gain on the three disposals in the period: GBP4m on
John Crane Artificial Lift, GBP100m on Smiths Medical Wallace and
GBP22m on Smiths Interconnect Power;
-- GBP6m charge for acquisition costs;
-- amortisation of intangible assets acquired in business
combinations of GBP6m (2016: GBP9m). The ongoing amortisation
charge relates principally to technology and customer
relationships;
-- GBP3m charge (2016: GBP2m) in connection with John Crane,
Inc. asbestos litigation;
-- GBP8m credit (2016: GBP7m credit) in connection with Titeflex
Corporation litigation;
-- GBP15m charge for restructuring (2016: GBP15m) in respect of
the Fuel for Growth programme;
-- GBP4m operating charge post-retirement benefit schemes (2016:
GBP15m charge);
-- GBP1m gain on retirement benefit finance (2016: GBP1m
charge); and
-- GBPnil of financing gains (2016: GBP17m gain including GBP19m
gain on contributing government bonds to a pension scheme).
Research and development
The Group invested GBP73m in R&D (2016: GBP55m), equivalent
to 4.5% of revenue (2016: 4.0%). Of that, GBP69m was funded by the
Company compared with GBP52m in 2016, an underlying increase of
13%. The Group actively seeks funding from customers to support
R&D and this amounted to GBP4m (2016: GBP3m). Under IFRS,
certain development costs are capitalised, and this amounted to
GBP20m in the period (2016: GBP9m). The gross capitalisation is
shown as an intangible asset. Where customers contribute to the
costs of the development, the contribution is included as deferred
income and disclosed within trade and other payables.
Taxation
The headline tax charge for 2017 of GBP66m (2016: GBP49m)
represented an effective rate of 26.5% on the headline profit
before taxation (2016: 26.0%). On a statutory basis, the tax charge
on continuing activities was GBP43m (2016: GBP38m).
The Group aims to take advantage of global manufacturing,
research and development and other tax incentives, to allocate its
capital in the most tax-efficient manner where the regulatory
environment allows, and to ensure the effective and timely
management of its tax filings and compliance.
An effective tax rate of between 26% and 27% is expected in the
year ending 31 July 2017, benefiting from credits in the year from
the successful resolution of prior year risks and other tax
management activities. The global corporate tax regulatory
environment is currently undergoing significant change and we
anticipate this will have the effect of increasing the effective
tax rate of the Group in the coming years. We currently expect our
effective tax rate to be in the region of 30% to 31% in 2018 and to
remain around that level thereafter.
Earnings per share
Basic headline earnings per share from continuing activities
were 45.7p (2016: 35.2p). The reported 30% increase was driven by
higher operating profit partly offset by an increase in the
effective tax rate to 26.5% from 26.0%.
On a statutory basis, the basic earnings per share from
continuing activities were 76.5p (2016: 32.8p), reflecting the
impact of the profit on disposal of businesses.
Cash generation and net debt
Operating cash generation remained strong, with headline
operating cash-flow of GBP320m (2016: GBP218m), representing 115%
(2016: 101%) of headline operating profit. See note 14 to the
accounts for a reconciliation of headline operating cash and free
cash-flow to statutory cash-flow measures.
Headline free cash-flow increased by GBP78m to GBP252m,
reflecting the GBP102m increase in headline operating cash-flow,
offset by a GBP21m increase in cash tax payments from GBP25m to
GBP46m. Total free cash-flow, stated after all legacy costs,
interest and taxes but before acquisitions and dividends, increased
by GBP104m to GBP176m, reflecting the increase of GBP78m in
headline free cash-flow, a GBP40m reduction in contributions to
legacy defined benefit pension schemes and GBP8m higher litigation
spend.
On a statutory basis, net cash inflow from operations was
GBP225m (2016: GBP121m).
Net debt at 31 January 2017 was GBP635m, a reduction of GBP343m
in the period. With the majority of the Group's net debt held in
currencies other than pounds sterling to hedge the underlying asset
base of the Group, the ongoing decline in the value of sterling
resulted in a foreign exchange translation-driven increase of
GBP36m in net debt. On an underlying basis, excluding foreign
exchange and the associated GBP12m gain on hedging, net debt
reduced by GBP367m, reflecting GBP320m proceeds of disposals and
good operational cash generation.
At the end of the period, the Group had gross debt of GBP1,451m
(31 July 2016: GBP1,409m) and cash reserves of GBP816m (31 July
2016: GBP431m). Of this gross debt, GBP286m (31 July 2016: GBP270m)
falls due for repayment within one year.
In February 2017, the Group issued a new bond for EUR650m with a
2% coupon. The bond will be used principally to repay the EUR300m
2017 and $175m 2018 bonds.
Acquisitions and Disposals
In April 2016 we announced the acquisition of Morpho Detection
for US$710m. The transaction is expected to complete during 2017,
subject to regulatory clearances, and following completion will be
merged with Smiths Detection. Following the regulatory requirement
to dispose of Morpho Detection's Trace business, our annual cost
synergies expectations are c.$20m by the third full year after
closing.
In November 2016 we completed the disposal of our Artificial
Lift business in John Crane for US$39.5m.
In November 2016, we completed the disposal of our Wallace
business in Medical for a total enterprise value of GBP140m.
In January 2017, we completed the disposal of the Power business
in Interconnect for an enterprise value of GBP162m.
Dividend
The Board has declared an interim dividend of 13.55p per share
(2016: 13.25p per share). The interim dividend will be paid on 28
April to shareholders registered at close of business on 7
April.
Retirement benefits
In 2016, agreement was reached on the triennial valuations with
the Trustees of both major UK pension schemes. As a result, total
required cash contributions to defined benefit pension schemes will
fall substantially from GBP124m in 2016 to between GBP50m and
GBP60m, depending on foreign exchange rates, in 2017. As part of
the company's commitment to de-risking its pension liabilities, in
October 2016 the Trustee of the Smiths Industries Pension Scheme
entered into a bulk annuity buy-in agreement covering liabilities
of GBP254m and in February 2017 the Trustee of the TI Group Pension
Scheme entered a similar agreement covering liabilities of
GBP130m.
As required by IFRS, the balance sheet reflects the net surplus
or deficit in retirement benefit plans, taking assets at their
market values at 31 January 2017 and evaluating liabilities at
period-end AA corporate bond interest rates.
The tables below disclose the net status across a number of
individual plans. Where any individual plan shows a surplus under
IAS 19, this is disclosed on the balance sheet as a retirement
benefit asset. The IAS 19 surplus of any one plan is not available
to fund the IAS 19 deficit of another plan. The net pension
position is a surplus of GBP51m at 31 January 2017 from a surplus
of GBP80m at 31 July 2016. The buy-ins reduce the IAS 19 surplus on
the scheme, since the insurance assets are valued on the same basis
as the insured liabilities.
The accounting basis under IAS 19 does not necessarily reflect
the funding basis agreed with the Trustees and, should the schemes
be wound up while they had members, they would need to buy out the
benefits of all members. The buyouts would cost significantly more
than the present value of scheme liabilities calculated in
accordance with IAS 19.
31 January 31 July 31 January
2017 2016 2016
------------------------------- ---------- ------- ----------
Surplus/(deficit)
Funded plans 191 217 249
Unfunded plans (140) (137) (120)
-------------------------------- ---------- ------- ----------
Total surplus 51 80 129
-------------------------------- ---------- ------- ----------
Retirement benefit assets 265 328 361
Retirement benefit liabilities (214) (248) (232)
-------------------------------- ---------- ------- ----------
51 80 129
------------------------------- ---------- ------- ----------
Return on capital employed
The return on capital employed (ROCE) is calculated over a
rolling 12-month period and the percentage that headline operating
profit comprises of monthly average capital employed. Capital
employed comprises total equity adjusted for goodwill recognised
directly in reserves, post-retirement benefit-related assets and
liabilities net of tax, litigation provisions relating to
non-headline items net of tax, and net debt. ROCE increased 90
basis points to 16.3% (2016: 15.4%) as a result of improved
profitability. ROCE increased in all divisions except John Crane as
a result of lower profits following revenue decline.
Exchange rates
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
period-end rates. The principal exchange rates, expressed in terms
of the value of sterling, are shown in the following table.
31 January 31 January 31 July
2017 2016 2016
----------- ---------- ---------- ------------------- ------- -------------------
Average
rates:
Dollar strengthened Dollar strengthened
US dollar 1.26 1.51 16% 1.46 14%
Euro strengthened Euro strengthened
Euro 1.16 1.37 16% 1.32 12%
Period-end
rates:
Dollar strengthened Dollar strengthened
US dollar 1.26 1.42 12% 1.32 5%
Euro strengthened Euro strengthened
Euro 1.17 1.31 11% 1.19 2%
----------- ---------- ---------- ------------------- ------- -------------------
Risk management
The principal risks and uncertainties affecting the business
activities of the Group and relevant mitigating activities were set
out on pages 52-60 of the Annual Report for the year ended 31 July
2016, a copy of which is available at the Company's website at
www.smiths.com.
Developments since the Annual Report
In the view of the Board, the risks and uncertainties affecting
the Group for the remaining six months of the financial year
continue to be those set out briefly below and more fully in the
Annual Report.
The key risks and uncertainties are summarised below:
Economic outlook and geo-political environment
Economic and financial market conditions may lead to recession
and may cause adverse effects on customers or suppliers with
consequential capacity or cash-flow implications for Smiths
Group.
Compliance with legislation and regulations
A complex legislative and regulatory environment applies to the
Group's activities such that failure to comply could have a
significant impact on the financial results.
Pension funding
Defined benefit pension scheme obligations are funded by Group
companies based on actuarial assumptions. Changes in discount
rates, inflation, returns or mortality could lead to material
changes in funding requirements.
Financial risks
Financial risk, whether from foreign exchange fluctuations,
availability of funding, changes in tax rates or availability of
insurance cover may cause adverse effects on the Group's net
assets, earnings or liquidity.
Product liability and litigation
Product liability claims and litigation, particularly given the
Group's significant sales exposure to the US market, may have a
significant impact on the financial results.
Global supply chain and business/process transformation
Reliance on sole suppliers or concentration of manufacturing in
the supply chain - especially in areas exposed to natural
catastrophe - may result in disruption to the supply of
products.
Government customers
A significant share of revenues are from governments or
influenced by governments. Many such governments are reducing
expenditure in the present economic environment with consequential
risks to revenue.
Technology and innovation
Product innovation is key to long-term revenue growth. Failure
of the Group to innovate its products and services could materially
affect market share and sales growth.
Talent and succession planning
Suitably qualified personnel are an important asset that
underpins the Group's success. Failure to attract or retain such
personnel may result in weaker growth and returns.
Programme delivery
Failure to deliver products and services according to
contractual obligations may lead to higher costs, liquidated
damages or other penalties.
Acquisitions and disposals
Acquisitions are subject to execution risk and may be more
difficult to integrate than expected so that the full benefits are
not realised.
Information technology and cyber-security
Information systems are subject to security risk and play an
important part in business processes, both internally and
externally.
Statement of directors' responsibilities
The Interim report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the Interim report in accordance with the Disclosure and
Transparency Rules ("DTR") of the United Kingdom Financial Conduct
Authority ("FCA"). The DTR require that the accounting policies and
presentation applied to the half-yearly figures must be consistent
with those applied in the latest published annual accounts, except
where the accounting policies and presentation are to be changed in
the subsequent annual accounts, in which case the new accounting
policies and presentation should be followed, and the changes and
the reasons for the changes should be disclosed in the Interim
report, unless the FCA agrees otherwise.
The directors confirm that this condensed set of financial
statements has been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting' as adopted by
the European Union, and that the interim management report herein
includes a fair review of:
-- the important events that have occurred during the first six
months of the financial year and their impact on the condensed set
of financial statements as required by DTR 4.2.7;
-- the principal risks and uncertainties for the remaining six
months of the year as required by DTR 4.2.7; and
-- related party transactions that have taken place in the first
six months of the current financial year that have materially
affected and changes in the related party transactions described in
the previous annual report that could have materially affected the
financial position or performance of the group during the first six
months of the current financial year as required by DTR 4.2.8.
Having reassessed the principal risks, the directors consider it
appropriate to adopt the going concern basis of accounting in
preparing the Interim report.
The directors of Smiths Group plc are listed in the Smiths Group
plc Annual Report for the year ended 31 July 2016, except for the
following changes to the membership of the board have occurred
since the Annual Report was approved on 27 September 2016:
-- On 1 January 2017 Noel Naval Tata joined the Board as an
independent non-executive director.
For and on behalf of the Board of Directors:
Andy Reynolds Smith Chris O'Shea
Chief Executive Chief Financial Officer
23 March 2017
Independent review report to Smiths Group plc
Report on the condensed interim financial statements
Our conclusion
We have reviewed Smiths Group plc's condensed interim financial
statements (the "condensed interim financial statements") in the
Interim report of Smiths Group plc for the six month period ended
31 January 2017. Based on our review, nothing has come to our
attention that causes us to believe that the condensed interim
financial statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting' as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
What we have reviewed
The condensed interim financial statements comprise:
-- --the consolidated balance sheet as at 31 January 2017;
-- --the consolidated income statement and consolidated
statement of comprehensive income for the period then ended;
-- --the consolidated cash-flow statement for the period then
ended;
-- --the consolidated statement of changes in equity for the
period then ended; and
-- --the explanatory notes to the condensed interim financial
statements.
The condensed interim financial statements included in the
Interim report have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the condensed interim financial
statements, the financial reporting framework that has been applied
in the preparation of the full annual financial statements of the
Group is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
Responsibilities for the condensed interim financial statements
and the review
Our responsibilities and those of the directors
The Interim report, including the condensed interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Interim
report in accordance with the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
Our responsibility is to express a conclusion on the condensed
interim financial statements in the Interim report based on our
review. This report, including the conclusion, has been prepared
for and only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of condensed interim financial statements
involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) and, consequently, does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the Interim
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
23 March 2017
(a) The maintenance and integrity of the Smiths Group plc
website is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the condensed interim financial
statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Consolidated income statement (unaudited)
Year
ended
31
July Period ended Period ended
2016 31 January 2017 31 January 2016
Non-headline Non-headline
(note (note
Total Headline 3) Total Headline 3) Total
GBPm Notes GBPm GBPm GBPm GBPm GBPm GBPm
======= ============================== ===== ======== ============ ====== ======== ============ ======
Continuing operations
2,949 Revenue 2 1,616 1 1,617 1,372 1,372
(1,600) Cost of sales (869) (1) (870) (749) (749)
======= ============================== ===== ======== ============ ====== ======== ============ ======
1,349 Gross profit 747 747 623 623
Sales and distribution
(403) costs (223) (223) (192) (192)
(575) Administrative expenses (247) (26) (273) (214) (34) (248)
16 Other operating income
Profit on business
disposal 12 126 126
======= ============================== ===== ======== ============ ====== ======== ============ ======
387 Operating profit 277 100 377 217 (34) 183
======= ============================== ===== ======== ============ ====== ======== ============ ======
3 Interest receivable 1 1 2 2
(62) Interest payable (30) (30) (30) (30)
15 Other financing gains/(losses) (3) (3) 14 14
Other finance income/(charges)
3 - retirement benefits 1 1 (1) (1)
======= ============================== ===== ======== ============ ====== ======== ============ ======
(41) Finance costs (29) (2) (31) (28) 13 (15)
======= ============================== ===== ======== ============ ====== ======== ============ ======
346 Profit before taxation 248 98 346 189 (21) 168
======= ============================== ===== ======== ============ ====== ======== ============ ======
(85) Taxation 5 (66) 23 (43) (49) 11 (38)
======= ============================== ===== ======== ============ ====== ======== ============ ======
261 Profit for the period 182 121 303 140 (10) 130
======= ============================== ===== ======== ============ ====== ======== ============ ======
Attributable to
259 Smiths Group shareholders 181 121 302 139 (10) 129
2 Non-controlling interests 1 1 1 1
======= ============================== ===== ======== ============ ====== ======== ============ ======
261 182 121 303 140 (10) 130
======= ============================== ===== ======== ============ ====== ======== ============ ======
Earnings per share 4
65.6p Basic 76.5p 32.8p
64.9p Diluted 75.6p 32.5p
======= ============================== ===== ======== ============ ====== ======== ============ ======
Dividends per share
(declared) 13
13.25p - interim 13.55p 13.25p
28.75p - final
======= ============================== ===== ======== ============ ====== ======== ============ ======
42.00p 13.55p 13.25p
======= ============================== ===== ======== ============ ====== ======== ============ ======
Consolidated statement of comprehensive income (unaudited)
Year Period Period
ended ended ended
31 31 31
July January January
2016 2017 2016
GBPm Notes GBPm GBPm
====== ============================================== ====== ======== ========
261 Profit for the period 303 130
====== ============================================== ====== ======== ========
Other comprehensive income
Actuarial (losses)/gains on retirement
(40) benefits 6 (62) 33
10 Taxation recognised on actuarial movements 9 1
====== ============================================== ====== ======== ========
Other comprehensive income and expenditure
which will not be reclassified to
(30) the consolidated income statement (53) 34
Other comprehensive income which will
be, or has been, reclassified
420 Exchange gains 107 196
Cumulative exchange gains recycled
on disposal (31)
Fair value gains/(losses) and reclassification
adjustments
- deferred in the period on available
(2) for sale financial assets (3)
- reclassified to income statement
(19) on available for sale financial assets (19)
- deferred in the period on cash-flow
(238) and net investment hedges (62) (113)
- reclassified to income statement
on cash-flow and net investment hedges 21 (1)
====== ============================================== ====== ======== ========
131 Total other comprehensive income (18) 94
392 Total comprehensive income 285 224
====== ============================================== ====== ======== ========
Attributable to
386 Smiths Group shareholders 285 222
6 Non-controlling interests 2
====== ============================================== ====== ======== ========
392 285 224
====== ============================================== ====== ======== ========
Consolidated balance sheet (unaudited)
31 January 31 January 31 July
2017 2016 2016
Notes GBPm GBPm GBPm
======================================= ===== ========== ========== =======
Non-current assets
Intangible assets 7 1,640 1,642 1,742
Property, plant and equipment 8 319 280 315
Financial assets - other investments 9 10 9
Retirement benefit assets 6 265 361 328
Deferred tax assets 253 226 246
Trade and other receivables 71 35 51
Financial derivatives 5 12 29
======================================= ===== ========== ========== =======
2,562 2,566 2,720
Current assets
Inventories 484 490 478
Current tax receivable 57 36 62
Trade and other receivables 660 639 745
Cash and cash equivalents 9 816 461 431
Financial derivatives 11 14 13
======================================= ===== ========== ========== =======
2,028 1,640 1,729
======================================= ===== ========== ========== =======
Assets of business held for sale 24
======================================= ===== ========== ========== =======
Total assets 4,590 4,206 4,473
======================================= ===== ========== ========== =======
Non-current liabilities
Financial liabilities
- borrowings 9 (1,165) (1,267) (1,139)
- financial derivatives (4) (1) (1)
Provisions for liabilities and charges 11 (296) (264) (305)
Retirement benefit obligations 6 (214) (232) (248)
Deferred tax liabilities (103) (79) (95)
Trade and other payables (28) (25) (29)
======================================= ===== ========== ========== =======
(1,810) (1,868) (1,817)
Current liabilities
Financial liabilities
- borrowings 9 (286) (180) (270)
- financial derivatives (14) (18) (19)
Provisions for liabilities and charges 11 (88) (87) (94)
Trade and other payables (511) (460) (536)
Current tax payable (49) (53) (72)
======================================= ===== ========== ========== =======
(948) (798) (991)
======================================= ===== ========== ========== =======
Liabilities of business held for sale (5)
======================================= ===== ========== ========== =======
Total liabilities (2,758) (2,666) (2,813)
======================================= ===== ========== ========== =======
Net assets 1,832 1,540 1,660
======================================= ===== ========== ========== =======
Shareholders' equity
Share capital 148 148 148
Share premium account 354 351 352
Capital redemption reserve 6 6 6
Revaluation reserve 1 1 1
Merger reserve 235 235 235
Retained earnings 1,416 966 1,205
Hedge reserve (342) (177) (301)
======================================= ===== ========== ========== =======
Total shareholders' equity 1,818 1,530 1,646
Non-controlling interest equity 14 10 14
======================================= ===== ========== ========== =======
Total equity 1,832 1,540 1,660
======================================= ===== ========== ========== =======
Consolidated statement of changes in equity (unaudited)
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 July 2016 500 242 1,205 (301) 1,646 14 1,660
======================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 302 302 1 303
Other comprehensive
income
Exchange gains/(losses)
net of recycling 77 77 (1) 76
Actuarial losses
on retirement benefits
and tax (53) (53) (53)
Fair value losses (41) (41) (41)
======================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period 326 (41) 285 285
Transactions relating
to ownership interests
Exercises of share
options 2 2 2
Purchase of own shares (9) (9) (9)
Dividends
- equity shareholders 13 (114) (114) (114)
Share-based payment 8 8 8
======================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 January 2017 502 242 1,416 (342) 1,818 14 1,832
======================== ====== ======== ========= ========= ======== ============== =============== =======
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 July 2015 497 242 743 (63) 1,419 9 1,428
======================== ===== ======== ========= ========= ======== ============== =============== =======
Profit for the period 129 129 1 130
Other comprehensive
income
Exchange gains 195 195 1 196
Actuarial gains on
retirement benefits
and tax 34 34 34
Fair value losses (22) (114) (136) (136)
======================== ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period 336 (114) 222 2 224
Transactions relating
to ownership interests
Exercises of share
options 2 2 2
Purchase of own shares (7) (7) (7)
Dividends
- equity shareholders 13 (111) (111) (111)
- non-controlling
interests (1) (1)
Share-based payment 5 5 5
======================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 January 2016 499 242 966 (177) 1,530 10 1,540
======================== ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement (unaudited)
Year Period Period
ended ended ended
31 31 31
July January January
2016 2017 2016
GBPm Notes GBPm GBPm
====== ========================================== ====== ======== ========
358 Net cash inflow from operating activities 14 225 121
Cash-flows from investing activities
(23) Expenditure on capitalised development (19) (8)
(11) Expenditure on other intangible assets (3) (5)
(74) Purchases of property, plant and equipment (29) (29)
1 Disposals of property, plant and equipment 2 1
(9) Investment in financial assets (8)
(8) Acquisition of businesses (8)
Disposals of businesses 320
====== ========================================== ====== ======== ========
(124) Net cash-flow used in investing activities 271 (57)
Cash-flows from financing activities
3 Proceeds from exercise of share options 2 2
(8) Purchase of own shares (9) (7)
(163) Dividends paid to equity shareholders (114) (111)
Cash inflow/(outflow) from matured
(14) derivative financial instruments (2) 3
1 Increase in borrowings 1 1
(151) Reduction and repayment of borrowings (1) (1)
====== ========================================== ====== ======== ========
(332) Net cash-flow used in financing activities (123) (113)
Net increase /(decrease) in cash and
(98) cash equivalents 373 (49)
Cash and cash equivalents at beginning
495 of the period 430 495
33 Exchange differences 10 12
====== ========================================== ====== ======== ========
Cash and cash equivalents at end of
430 the period 813 458
====== ========================================== ====== ======== ========
Cash and cash equivalents at end of
the period comprise
161 - cash at bank and in hand 307 130
270 - short-term deposits 509 331
(1) - bank overdrafts (3) (3)
====== ========================================== ====== ======== ========
430 813 458
====== ========================================== ====== ======== ========
Reconciliation of net cash-flow to movement in net debt
Year Period Period
ended ended ended
31 31 31
July January January
2016 2017 2016
GBPm Notes GBPm GBPm
====== ===================================== ====== ======== ========
(818) Net debt at start of period 9 (978) (818)
====== ===================================== ====== ======== ========
Net increase/(decrease) in cash and
(98) cash equivalents 373 (49)
(1) Increase in borrowings (1) (1)
151 Reduction and repayment of borrowings 1 1
====== ===================================== ====== ======== ========
Movement in net debt resulting from
52 cash-flows 373 (49)
Capitalisation, interest accruals
(2) and unwind of capitalisation of fees (6) (10)
Fair value movement from interest
(23) rate hedging 12 (16)
(187) Foreign exchange gains and losses (36) (93)
====== ===================================== ====== ======== ========
(160) Movement in net debt in the period 343 (168)
====== ===================================== ====== ======== ========
(978) Net debt at end of period 9 (635) (986)
====== ===================================== ====== ======== ========
Notes to the Interim report (unaudited)
1 Basis of preparation
The condensed interim financial statements cover the six month
period ended 31 January 2017 and has been prepared under
International Financial Reporting Standards (IFRS) as adopted by
the European Union, in accordance with International Accounting
Standard 34 'Interim Financial Reporting' and the Disclosure and
Transparency Rules of the Financial Services Authority. It is
unaudited but has been reviewed by the auditors and their report is
attached to this document.
The interim financial information does not constitute statutory
accounts within the meaning of Section 434 of the Companies Act
2006. It should be read in conjunction with the statutory accounts
for the year ended 31 July 2016, which were prepared in accordance
with IFRS as adopted by the European Union and have been filed with
the Registrar of Companies. The auditors' report on these statutory
accounts was unqualified and did not contain a statement under
Section 498(2) or (3) of the Companies Act 2006.
Accounting policies
The condensed interim financial information has been prepared on
the basis of the accounting policies applicable for the year ending
31 July 2017.
These accounting policies are consistent with those applied in
the preparation of the financial statements for the year ended 31
July 2016.
Significant judgements, key assumptions and estimates
The preparation of the accounts in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the accounts and the reported amounts of
revenues and expenses during the reporting period. Actual results
may differ from these estimates. The key estimates and assumptions
used in these consolidated financial statements are set out
below.
Revenue recognition
The timing of revenue recognition on contracts depends on the
assessed stage of completion of contract activity at the balance
sheet date. This assessment requires the expected total contract
revenue and costs to be estimated based on the current progress of
the contract. Revenue of GBP27m (31 July 2016: GBP42m) has been
recognised in the period in respect of contracts in progress at the
period end with a total expected value of GBP204m (31 July 2016:
GBP175m) and cumulative revenue recognised to date of GBP158m (31
July 2016: GBP137m). A 5% reduction in the proportion of the
contract activity recognised in the current period would have
reduced operating profit by less than GBP1m for both Smiths
Detection and Smiths Interconnect (31 July 2016: less than
GBP1m).
Smiths Detection also has multi-year contractual arrangements
for the sale of goods and services. Where these contracts have
separately identifiable components with distinct patterns of
delivery and customer acceptance, revenue is accounted for
separately for each identifiable component. Judgement is applied in
the identification of the components of the contract, and the
allocation of contract revenue to each component.
Smiths Medical has rebate arrangements in place with some
distributors in respect of sales to end customers where sales
prices have been negotiated by Smiths Medical. Rebates are
estimated based on the level of discount derived from sales data
from distributors, the amount of inventory held by distributors and
the time lag between the initial sale to the distributor and the
rebate being claimed. The rebate accrual at 31 January 2017 was
GBP29m (31 July 2016: GBP28m).
Contract profitability
Smiths Detection has multi-year contractual arrangements for the
sale of goods and services. Margins achieved on these contracts can
reflect the impact of commercial decisions made in different
economic circumstances. In addition, contract delivery is subject
to commercial and technical risks which can affect the outcome of
the contract. At 31 January 2017 there was a GBP4m (31 July 2016:
GBP4m) balance sheet liability in respect of ongoing onerous
contracts. No other contracts had been assessed as being at
significant risk of becoming onerous.
Taxation
The Group has recognised deferred tax assets of GBP52m (31 July
2016: GBP87m) relating to losses and GBP109m (31 July 2016:
GBP120m) relating to the John Crane, Inc. and Titeflex Corporation
litigation provisions. The recognition of assets pertaining to
these items involves judgement by management as to the likelihood
of realisation of these deferred tax assets. This is based on a
number of factors, which seek to assess the expectation that the
benefit of these assets will be realised, including expected future
levels of operating profit, expenditure on litigation, pension
contributions and the timing of the unwind of other tax positions.
It has been concluded that there are sufficient taxable profits in
future periods to support recognition. A 5% reduction in expected
future operating profits would reduce the level of deferred tax
recognised by GBP10m (31 July 2016: GBP9m), and a 5% increase in
expected future operating profits would increase the level of
deferred tax recognised by GBP12m (31 July 2016: GBP11m).
Retirement benefits
The consolidated financial statements include costs in relation
to, and provision for, retirement benefit obligations. The costs
and the present value of any related pension assets and liabilities
depend on such factors as life expectancy of the members, the
returns that plan assets generate and the discount rate used to
calculate the present value of the liabilities. The Group uses
previous experience and independent actuarial advice to select the
values of critical estimates.
At 31 January 2017 there is a retirement benefit asset of
GBP265m (31 July 2016: GBP328m), principally relating to UK
schemes, which arises from the rights of the employers to recover
the surplus at the end of the life of the scheme. If the pension
schemes were wound up while they still had members, the schemes
would need to buy out the benefits of all members. The buyouts
would cost significantly more than the present value of the scheme
liabilities calculated in accordance with IAS 19: Employee
benefits.
Receivables provisions
If the carrying value of any receivable is higher than the fair
value, the Group makes provisions writing down the balance to its
fair value. The fair value of receivables is considered
individually for each customer and incorporates past experience and
progress with collecting receivables.
At 31 January 2017 the gross value of receivables partly
provided for, or more than three months overdue, was GBP78m (31
July 2016: GBP83m) and there were provisions of GBP34m (31 July
2016: GBP31m) against these receivables. Consequently, these
receivables were carried at a net value of GBP44m (31 July 2016:
GBP52m).
Inventory provisions
The calculation of inventory provisions requires judgement by
management of the expected value of future sales. If the carrying
value of inventory is higher than the expected recoverable value,
the Group makes provisions writing inventory down to its net
recoverable value. Inventory is initially assessed for impairment
by comparing inventory levels to recent utilisation rates and
carrying values to historical selling prices. A detailed review is
completed for inventory lines identified in the initial assessment
considering sales activity, order flow, customer contracts and
current selling prices.
At 31 January 2017, there were provisions of GBP65m (31 July
2016: GBP70m) against gross inventory of GBP550m (31 July 2016:
GBP548m).
A 10% increase in the proportion of raw materials provided for
would increase the provision by GBP19m (31 July 2016: GBP20m) and a
10% increase in the proportion of finished goods provided for would
increase the provision by GBP23m (31 July 2016: GBP23m).
Impairment
Goodwill is tested at least annually for impairment and other
assets, including intangible assets acquired in business
combinations, are tested if there are any indications of
impairment, in accordance with the accounting policy set out below.
The recoverable amounts of cash generating units and assets are
determined based on value in use calculations unless future trading
projections cannot be adjusted to eliminate the impact of a major
restructuring. The value in use calculations require the use of
estimates including projected future cash-flows and other future
events.
Provisions for liabilities and charges
As previously reported, John Crane, Inc., a subsidiary of the
Group, is currently one of many co-defendants in litigation
relating to products previously manufactured which contained
asbestos. Provision of GBP251m (31 July 2016: GBP252m) has been
made for the future defence costs which the Group is expected to
incur and the expected costs of future adverse judgments against
John Crane, Inc. Whilst published incidence curves can be used to
estimate the likely future pattern of asbestos related disease,
John Crane, Inc.'s claims experience is significantly impacted by
other factors which influence the US litigation environment. These
can include: changing approaches on the part of the plaintiffs'
bar; changing attitudes amongst the judiciary at both trial and
appellate levels; and legislative and procedural changes in both
the state and federal court systems. Therefore, because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of the related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred. John Crane, Inc. takes account
of the advice of an expert in asbestos liability estimation in
quantifying the expected costs.
As previously reported, Titeflex Corporation, a subsidiary of
the Group in the Flex-Tek division, has received a number of claims
from insurance companies seeking recompense on a subrogated basis
for the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes; however some claims have been settled
on an individual basis without admission of liability. Provision of
GBP85m (31 July 2016: GBP94m) has been made for the costs which the
Group is expected to incur in respect of these claims. However,
because of the significant uncertainty associated with the future
level of claims, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred.
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
though there can be no guarantee that such provisions (which may be
subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
All provisions may be subject to potentially material revisions
from time to time if new information becomes available as a result
of future events. See note 11 for details of the assumptions and
disclosures on the sensitivity of the provision calculations.
Presentation of results
In order to provide users of the accounts with a clear and
consistent presentation of the underlying performance of the
Group's ongoing trading activity, Smiths Group plc presents its
results in the income statement with amounts relating to costs of
acquisitions and disposals (including transition services),
amortisation of acquired intangibles, impairments, legacy
liabilities, significant restructuring, material one-off items and
certain re-measurements in a separate column. See note 3 for a
breakdown of the items excluded from headline operating profit and
headline finance costs.
Measures of the underlying performance of the Group's ongoing
trading activity are described as 'headline' and used by management
to measure and monitor performance. See note 2 for disclosures of
headline operating profit and note 16 for more information about
the calculation of return on capital employed and credit
metrics.
2 Segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These
divisions design and manufacture the following products:
-- John Crane - mechanical seals, seal support systems,
engineered bearings, power transmission couplings and specialist
filtration systems;
-- Smiths Medical - infusion systems, vascular access (including
safety needles), patient airway and temperature management
equipment and specialty devices in areas of in vitro fertilisation,
diagnostics and emergency patient transport;
-- Smiths Detection - sensors that detect and identify
explosives, narcotics, weapons, chemical agents, biohazards and
contraband;
-- Smiths Interconnect - specialised electronic and radio
frequency components and sub-systems that connect, protect and
control critical systems;
-- Flex-Tek - engineered components that heat and move fluids
and gases, flexible hosing and rigid tubing.
The position and performance of each division is reported at
each Board meeting to the Board of directors. This information is
prepared using the same accounting policies as the consolidated
financial information except that the Group uses headline operating
profit to monitor divisional results and operating assets to
monitor divisional position. See note 3 for an explanation of which
items are excluded from headline profit measures. Intersegment
sales and transfers are charged at arm's length prices.
Segment trading performance
Period ended 31 January 2017
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 435 472 318 230 161 1,616
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 90 99 54 26 30 299
Corporate headline operating
costs (22) (22)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 90 99 54 26 30 (22) 277
Items excluded from headline
measures (note 3) (7) (10) (7) (3) 7 (6) (26)
Profit on disposal of
businesses 4 100 22 126
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 87 189 47 45 37 (28) 377
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating margin 20.8% 21.0% 16.8% 11.3% 18.3% 17.1%
================================= ====== ======== ========== ============= ======== ========= =====
Period ended 31 January 2016
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 393 411 240 196 132 1,372
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 78 84 30 19 23 234
Corporate headline operating
costs (17) (17)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 78 84 30 19 23 (17) 217
Items excluded from headline
measures (note 3) (6) (12) (2) (6) 7 (15) (34)
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 72 72 28 13 30 (32) 183
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating margin 19.9% 20.5% 12.4% 9.7% 17.6% 15.8%
================================= ====== ======== ========== ============= ======== ========= =====
Year ended 31 July 2016
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 830 874 526 435 284 2,949
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 181 187 69 57 51 545
Corporate headline operating
costs (35) (35)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 181 187 69 57 51 (35) 510
Items excluded from headline
measures (note 3) (30) (21) (6) (31) (14) (21) (123)
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 151 166 63 26 37 (56) 387
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating margin 21.9% 21.4% 13.0% 13.1% 18.0% 17.3%
================================= ====== ======== ========== ============= ======== ========= =====
Segment assets and liabilities
Segment assets
31 January 2017
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== ============= =====
Property, plant, equipment,
development projects,
other intangibles and
investments 98 238 94 43 36 13 522
Inventory, trade and
other receivables 336 273 331 144 98 33 1,215
============================ ====== ======== ========== ============= ======== ============= =====
Segment assets 434 511 425 187 134 46 1,737
============================ ====== ======== ========== ============= ======== ============= =====
31 July 2016
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== ============= =====
Property, plant, equipment,
development projects,
other intangibles and
investments 100 221 95 46 33 15 510
Inventory, trade and
other receivables 364 280 316 189 99 26 1,274
============================ ====== ======== ========== ============= ======== ============= =====
Segment assets 464 501 411 235 132 41 1,784
============================ ====== ======== ========== ============= ======== ============= =====
Segment liabilities
31 January 2017
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ============= =====
Divisional liabilities (119) (118) (204) (53) (32) (526)
Corporate and non-headline
liabilities (398) (398)
=========================== ====== ======== ========== ============= ======== ============= =====
Segment liabilities (119) (118) (204) (53) (32) (398) (924)
=========================== ====== ======== ========== ============= ======== ============= =====
31 July 2016
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ============= =====
Divisional liabilities (124) (121) (196) (78) (37) (556)
Corporate and non-headline
liabilities (408) (408)
=========================== ====== ======== ========== ============= ======== ============= =====
Segment liabilities (124) (121) (196) (78) (37) (408) (964)
=========================== ====== ======== ========== ============= ======== ============= =====
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation to segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
========== ======= ========== ===========
31 January 31 July 31 January 31 July
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
=============================== ========== ======= ========== ===========
Segment assets and liabilities 1,737 1,784 (924) (964)
Goodwill and acquired
intangibles 1,446 1,556
Derivatives 16 42 (18) (20)
Current and deferred
tax 310 308 (152) (167)
Retirement benefit assets
and obligations 265 328 (214) (248)
Cash and borrowings 816 431 (1,450) (1,409)
Assets and liabilities
of business held for
sale 24 (5)
================================== ========== ======= ========== ===========
Statutory assets and
liabilities 4,590 4,473 (2,758) (2,813)
================================== ========== ======= ========== ===========
Segment capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP801m (31 July 2016: GBP815m)
and eliminate post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt. See note 16 for additional details.
The 12-month rolling average capital employed by division, which
Smiths use to calculate divisional return on capital employed, is
set out below:
31 January 2017
===============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Average total capital
employed 908 1,246 629 562 175 (30) 3,490
=========================== ====== ======== ========== ============= ======== ========= =====
Return on capital employed 21.3% 16.3% 14.7% 11.3% 32.8% 16.3%
=========================== ====== ======== ========== ============= ======== ========= =====
31 January 2016
===============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ========= =====
Average total capital
employed 873 1,155 566 542 154 (61) 3,229
=========================== ====== ======== ========== ============= ======== ========= =====
Return on capital employed 22.7% 14.9% 10.9% 9.2% 32.3% 15.4%
=========================== ====== ======== ========== ============= ======== ========= =====
Analysis of revenue
The revenue for the main product and service lines for each
division is:
First-Fit Aftermarket Total
John Crane GBPm GBPm GBPm
===================== ========= =========== =====
Revenue period ended
31 January 2017 158 277 435
Revenue period ended
31 January 2016 167 226 393
========================= ========= =========== =====
Infusion Vascular Vital Specialty
systems access care products Total
Smiths Medical GBPm GBPm GBPm GBPm GBPm
===================== ======== ======== ===== ========= =====
Revenue period ended
31 January 2017 150 154 134 34 472
Revenue period ended
31 January 2016 129 136 111 35 411
======================= ======== ======== ===== ========= =====
Ports
and Critical
Transportation borders Military infrastructure Total
Smiths Detection GBPm GBPm GBPm GBPm GBPm
===================== ============== ======== ======== =============== =====
Revenue period ended
31 January 2017 140 43 60 75 318
Revenue period ended
31 January 2016 106 42 42 50 240
======================= ============== ======== ======== =============== =====
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
===================== ========== ========= ===== =====
Revenue period ended
31 January 2017 83 100 47 230
Revenue period ended
31 January 2016 70 87 39 196
======================== ========== ========= ===== =====
Fluid Flexible Heat
Management Solutions Solutions Construction Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
===================== =========== ========== ========== ============ =====
Revenue period ended
31 January 2017 39 30 37 55 161
Revenue period ended
31 January 2016 33 25 29 45 132
======================= =========== ========== ========== ============ =====
3 Non-statutory profit measures
Headline profit measures
The Company seeks to present a measure of underlying performance
which is not impacted by material non-recurring items or items
considered non-operational in nature. This measure of profit is
described as 'headline' and is used by management to measure and
monitor performance. See the disclosures on presentation of results
in accounting policies for an explanation of the excluded items.
The excluded items are referred to as 'non-headline' items.
Headline revenue
The non-headline items included in statutory revenue are as
follows:
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
Notes GBPm GBPm GBPm
================================== ====== ======== ======== ======
Activity under Wallace transition
services agreement 1
Non-headline items in revenue 1
========================================== ======== ======== ======
The agreement to sell Smiths Medical's Wallace product line
includes an obligation to continue manufacturing products for the
acquirer to support the orderly transition of the business. This
activity is expected to continue for 12 months after the date of
disposal. It has been treated as non-headline because it does not
contribute to Smiths Medical's ongoing business.
Headline operating profit
The non-headline items included in statutory operating profit
are as follows:
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
Notes GBPm GBPm GBPm
=========================================== ===== ======== ======== ======
Restructuring programmes (15) (15) (37)
Acquisition costs (6) (6)
Provision for Titeflex Corporation
subrogation claims 11 8 7 (11)
Provision for John Crane, Inc. asbestos
litigation (3) (2) (23)
Cost recovery for John Crane, Inc.
asbestos litigation 16
Post-retirement benefits changes to
schemes and administration costs 6 (4) (15) (16)
Impairment of goodwill, property,
plant and equipment and trade investments (31)
Amortisation of acquired intangible
assets 7 (6) (9) (15)
Profit on disposal of businesses 12 126
=========================================== ===== ======== ======== ======
Non-headline items in operating profit 100 (34) (123)
=========================================== ===== ======== ======== ======
Material items for the period ended 31 January 2017
Restructuring costs comprise GBP15m in respect of Fuel for
Growth. This programme, which involves redundancy, relocation and
consolidation of manufacturing, is considered a material
non-recurring item by virtue of its size.
A provision release of GBP8m has been recognised by Titeflex
Corporation in respect of changes to the estimated cost of future
claims including those from insurance companies seeking recompense
for damage allegedly caused by lightning strike. A GBP2m increase
in the expected gross cost has been offset by a credit of GBP10m
arising from an increase in the discount rate.
The operating charge in respect of John Crane, Inc. litigation
comprises a charge of GBP10m in respect of an increased provision
for adverse judgments and legal defence costs, GBP5m in respect of
litigation management, defence strategy and legal fees in
connection with litigation against insurers, and a credit of GBP12m
arising from the increase in US risk free rates.
Headline finance costs
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
Notes GBPm GBPm GBPm
========================================== ===== ======== ======== ======
Adjustment to discounted provisions 11 (3) (3) (5)
Fair value gain realised on contributing
government bonds to a pension scheme 19 19
Other financing gains and losses (2) 1
Other finance costs - retirement benefits 6 1 (1) 3
========================================== ===== ======== ======== ======
Non-headline items in finance costs (2) 13 18
========================================== ===== ======== ======== ======
4 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the period attributable to equity shareholders of the Parent
Company by the average number of ordinary shares in issue during
the year.
Period Period Year
ended ended ended
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
=========================================== =========== =========== ===========
Profit attributable to equity shareholders
for the period
- total 302 129 259
=========================================== =========== =========== ===========
Average number of shares in issue during
the period 395,383,836 395,061,486 395,095,591
=========================================== =========== =========== ===========
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 399,856,483 (period ended
31 January 2016: 398,130,311; year ended 31 July 2016: 398,957,837)
ordinary shares, being the average number of ordinary shares in
issue during the year adjusted by the dilutive effect of employee
share schemes.
A reconciliation of basic and headline earnings per share is as
follows:
Period ended Period ended Year ended
31 January 31 January 31 July
2017 2016 2016
============== ============== ============
EPS EPS EPS
GBPm (p) GBPm (p) GBPm (p)
=============================== ====== ====== ====== ====== ===== =====
Profit attributable to equity
shareholders of the Parent
Company 302 76.5 129 32.8 259 65.6
Exclude
Non-headline items and related
tax (note 5) (121) (30.8) 10 2.4 77 19.6
=============================== ====== ====== ====== ====== ===== =====
Headline profit attributable
to equity shareholders of
the Parent Company 181 45.7 139 35.2 336 85.2
=============================== ====== ====== ====== ====== ===== =====
Statutory EPS - diluted (p) 75.6 32.5 64.9
=============================== ====== ====== ====== ====== ===== =====
Headline EPS - diluted (p) 45.2 34.9 84.3
=============================== ====== ====== ====== ====== ===== =====
5 Taxation
The interim tax charge of 12.4% is calculated by applying the
estimated effective headline tax rate of 26.5% for the year ending
31 July 2017 to headline profit before tax and then taking into
account the tax effect of non-headline items in the interim
period.
A reconciliation of total and headline tax charge is as
follows:
Period ended Period ended Year ended
31 January 31 January 31 July
2017 2016 2016
================== ================== ==================
Continuing Continuing Continuing
operations Tax operations Tax operations Tax
GBPm rate GBPm rate GBPm rate
================================= =========== ===== =========== ===== =========== =====
Profit before taxation 346 168 346
Taxation (43) 12.4% (38) 22.4% (85) 24.6%
================================= =========== ===== =========== ===== =========== =====
Adjustments
Non-headline items excluded
from profit before taxation
(note 3) (98) 21 105
Taxation on non-headline items
and non-headline tax adjustment (23) (11) (28)
================================= =========== ===== =========== ===== =========== =====
Headline
Headline profit before taxation 248 189 451
Taxation on headline profit (66) 26.5% (49) 26.0% (113) 25.0%
================================= =========== ===== =========== ===== =========== =====
The profits on the sale of Smiths Medical's Wallace product line
and the Smiths Interconnect Power business included in non-headline
items are sheltered by previously unrecognised losses or are
non-taxable.
The changes in the value of the net tax liability in the period
were:
Net
Current Deferred tax
tax tax balance
GBPm GBPm GBPm
=========================== ======= ======== ========
At 31 July 2016 (10) 151 141
Foreign exchange gains and
losses 3 6 9
Charge to income statement (35) (8) (43)
Credit to reserves 9 9
Business combinations 4 (8) (4)
Tax paid 46 46
============================== ======= ======== ========
At 31 January 2017 8 150 158
============================== ======= ======== ========
The deferred tax credit to reserves relates to net actuarial
losses on the pension plans.
The current tax asset of GBP8m includes GBP16m of advance
payments relating to a disputed audit assessment, paid to avoid
possible penal interest and penalties.
Developments in the Group tax position
In 2012 GBP27m of UK deferred tax was written off as a
deteriorating position in legacy pension plans made UK activities
structurally loss making. As a result of an improvement in the UK
pension position and restructuring financing activities, the UK is
now expected to earn taxable profits and a GBP27m deferred tax
asset has been recognised as a non-headline gain in the period,
including the benefit of losses brought forward.
Smiths Group is one of the companies enrolled in the FII GLO
litigation against HMRC. The court cases and appeals are nearing
the end and some claimants, with different fact patterns, have
received payments. Smiths claims amount to around GBP30m (after
deducting 45% withholding tax). However, there are further relevant
legal actions that could impact the claims. The benefit of this
claim has not been recognised in the current period, or previous
financial statements, due to the uncertainty of the eventual
outcome.
6 Post retirement benefits
Smiths provides post-retirement benefits to employees in a
number of countries throughout the world. The arrangements include
defined benefit and defined contribution plans and, mainly in the
United Kingdom (UK) and United States of America (US),
post-retirement healthcare. The principal defined benefit pension
plans are in the UK and in the US and these have been closed so
that no future benefits are accrued.
Where any individual scheme shows a surplus under IAS 19, this
is disclosed on the balance sheet as a retirement benefit asset.
The IAS 19 surplus of any one scheme is not available to fund the
IAS 19 deficit of another scheme. The retirement benefit asset
arises from the rights of the employers to recover the surplus at
the end of the life of the scheme. The schemes in surplus are
mature, with a duration averaged over all scheme participants of 17
years. However 38% of the liabilities of these schemes are expected
to be paid after 2037.
The amounts recognised in the balance sheet were as follows:
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
=========================================== ========== ========== =======
Market value of funded plan assets 4,302 3,766 4,312
Present value of funded scheme liabilities (4,110) (3,517) (4,094)
Unfunded pension plans (120) (100) (116)
Postretirement healthcare (20) (20) (21)
Unrecognised asset due to surplus
restriction (1) (1)
============================================ ========== ========== =======
Net retirement benefit asset 51 129 80
============================================ ========== ========== =======
Retirement benefit assets 265 361 328
Retirement benefit obligations (214) (232) (248)
============================================ ========== ========== =======
Net retirement benefit asset 51 129 80
============================================ ========== ========== =======
The principal assumptions used in updating the valuations are
set out below:
31 January 31 January 31 July
2017 2016 2016
UK US UK US UK US
============================= ===== ===== ===== ===== ==== =====
Rate of increase for active
deferred members 4.4% n/a 3.9% n/a 3.6% n/a
Rate of increase in pensions
in payment 3.5% n/a 3.0% n/a 2.7% n/a
Rate of increase in deferred
pensions 3.5% n/a 3.0% n/a 2.7% n/a
Discount rate 2.8% 4.15% 3.6% 4.40% 2.3% 3.45%
Inflation rate 3.5% n/a 3.0% n/a 2.7% n/a
Healthcare cost increases 4.2% n/a 4.7% n/a 4.2% n/a
============================= ===== ===== ===== ===== ==== =====
The methods for setting the mortality assumptions for the UK and
US schemes are consistent with the 31 July 2016 valuation.
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 January 2017 31 July 2016
GBPm GBPm
SIPS TIGPS US schemes SIPS TIGPS US schemes
============================== ======= ======= ========== ======= ======= ==========
Present value of funded
scheme liabilities
- Active deferred members (84) (98) (116) (82) (82) (124)
- Deferred members (920) (669) (161) (881) (688) (175)
- Pensioners (1,088) (865) (15) (1,086) (869) (16)
============================== ======= ======= ========== ======= ======= ==========
Present value of funded
scheme liabilities (2,092) (1,632) (292) (2,049) (1,639) (315)
Market value of scheme assets 2,220 1,768 230 2,227 1,787 216
============================== ======= ======= ========== ======= ======= ==========
Surplus/(deficit) 128 136 (62) 178 148 (99)
============================== ======= ======= ========== ======= ======= ==========
On 18 October 2016 Smiths Industries Pension Scheme ("SIPS")
bought annuity cover from Pensions Insurance Corporation for a
significant tranche of the scheme pensioners for a premium of
GBP253m. As a result, insured liabilities have increased from
GBP23m of the scheme assets to GBP234m, with a corresponding
reduction in other asset classes. On 25 January 2017 TI Group
Pension Scheme ("TIGPS") bought annuity cover from Pensions
Insurance Corporation for a further tranche of pensioners for a
premium of GBP136m, increasing insured liabilities to GBP866m at
the balance sheet date from GBP763m last year end, with a
corresponding reduction in government bonds.
SIPS has a portfolio of exchange traded equity index futures,
which are valued at market prices. These futures increase
"leverage" in SIPS, creating additional asset exposure. At 31
January 2017, the gross equity exposure generated by these exchange
traded futures was GBP104m (31 July 2016: GBP163m) and the
aggregate value of this strategy, including cash received as
collateral, was GBP5m (31 July 2016: GBP9m). The scheme was holding
GBP16m (31 July 2016: GBP44m) in liquidity funds to meet potential
future obligations to collateralise equity index futures.
SIPS uses repurchase arrangements, total return swaps, inflation
swaps and interest rate swaps to hedge the interest and inflation
risks of the scheme liabilities. At 31 January 2017 SIPS assets
were net of GBP810m (31 July 2016: GBP720m) repurchase obligations,
and included GBP1m gains (31 July 2016: GBP11m gains) on interest
rate swaps and GBP13m gains (31 July 2016: GBP2m losses) on
inflation swaps. The scheme was holding GBP17m (31 July 2016:
GBP45m) in liquidity funds to meet potential future obligations to
collateralise repurchase arrangements or swap agreements.
Contributions
Company contributions to the funded defined benefit pension
plans totalled GBP42m (31 January 2016: GBP234m). This comprised
regular contributions of GBP12m to SIPS, GBP2m to TIGPS and GBP28m
to US schemes. No additional contributions to support risk
reduction programmes were made in the current period.
Contributions in the second half of the year are expected to be:
GBP12m to SIPS; GBP2m to TIGPS and GBP4m to other plans.
The changes in the present value of the net pension balance in
the period were:
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
======================================= ========== ========== =======
At beginning of period 80 (108) (108)
Exchange adjustment (7) (15) (31)
Current service cost (2) (2) (3)
Scheme administration costs (4) (5) (7)
Past service cost, curtailments
and settlements (10) (9)
Finance credits/(charges) - retirement
benefits 1 (1) 3
Contributions by employer 45 237 275
Actuarial (loss)/gain (62) 33 (39)
Movement in surplus restriction (1)
========================================= ========== ========== =======
Net retirement benefit asset 51 129 80
========================================= ========== ========== =======
Actuarial losses are principally due to a loss of GBP86m on the
UK schemes due to higher expected inflation, offset by actuarial
gains of GBP37m on the US pension scheme were the benefit of higher
discount rates is not offset by increases in expected inflation,
since benefits are not linked.
There was no actuarial gain on the UK assets, since the benefit
of asset returns exceeding the discount rate was offset by the
difference between the assets transferred to the insurers and the
valuation of the insured liabilities in accordance with IAS 19.
7 Intangible assets
Software,
patents
and
Development Acquired intellectual
Goodwill costs intangibles property Total
GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ============ ============= =====
Cost
At 1 August 2016 1,679 302 477 199 2,657
Exchange adjustments 67 14 21 5 107
Additions 20 3 23
Disposals (1) (1)
Business disposals (206) (113) (319)
================================== ======== =========== ============ ============= =====
At 31 January 2017 1,540 336 385 206 2,467
================================== ======== =========== ============ ============= =====
Amortisation
At 1 August 2016 162 166 438 149 915
Exchange adjustments 7 8 19 3 37
Charge for the period 14 6 9 29
Disposals (1) (1)
Business disposals (40) (113) (153)
================================== ======== =========== ============ ============= =====
At 31 January 2017 129 188 350 160 827
================================== ======== =========== ============ ============= =====
Net book value at 31 January 2017 1,411 148 35 46 1,640
Net book value at 31 January 2016 1,426 123 43 50 1,642
Net book value at 31 July 2016 1,517 136 39 50 1,742
================================== ======== =========== ============ ============= =====
8 Property, plant and equipment
Fixtures,
fittings,
Land Plant tools
and and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
================================== ========== ========== ========== =====
Cost
At 1 August 2016 223 631 220 1,074
Exchange adjustments 9 25 6 40
Additions 2 19 8 29
Disposals (12) (3) (15)
Business disposals (1) (3) (2) (6)
================================== ========== ========== ========== =====
At 31 January 2017 233 660 229 1,122
================================== ========== ========== ========== =====
Depreciation
At 1 August 2016 119 466 174 759
Exchange adjustments 5 18 6 29
Charge for the period 4 18 7 29
Disposals (7) (3) (10)
Business disposals (2) (2) (4)
================================== ========== ========== ========== =====
At 31 January 2017 128 493 182 803
================================== ========== ========== ========== =====
Net book value at 31 January 2017 105 167 47 319
Net book value at 31 January 2016 89 146 45 280
Net book value at 31 July 2016 104 165 46 315
================================== ========== ========== ========== =====
9 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments relating
to hedge accounting.
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
======================================= ========== ========== =======
Cash and cash equivalents
Net cash and deposits 816 461 431
======================================= ========== ========== =======
Short-term borrowings
Bank overdrafts (3) (3) (1)
GBP150m 7.25% Sterling Eurobond 2016 (150)
EUR300m 4.125% Eurobond 2017 (258) (255)
Bank and other loans (2) (1) (1)
Interest accrual (23) (26) (13)
======================================= ========== ========== =======
(286) (180) (270)
======================================= ========== ========== =======
Long-term borrowings
EUR300m 4.125% Eurobond 2017 (232)
$175m 7.37% US$ Private placement 2018 (139) (123) (132)
$250m 7.20% US$ Guaranteed notes 2019 (198) (175) (189)
$400m 3.625% US$ Guaranteed notes 2022 (314) (281) (304)
EUR600m 1.25% Eurobond 2023 (512) (454) (512)
Bank and other loans (2) (2) (2)
======================================= ========== ========== =======
(1,165) (1,267) (1,139)
======================================= ========== ========== =======
Borrowings (1,451) (1,447) (1,409)
======================================= ========== ========== =======
Net debt (635) (986) (978)
======================================= ========== ========== =======
On 21 February 2017 Smiths Group plc raised EUR650,000,000 2.00%
ten year notes under the Company's EUR2,500,000,000 Euro Medium
Term Note Programme.
At 31 January 2017 the $800m Revolving Credit Facility maturing
in 2021 was undrawn.
Movements in net debt
Net
cash
and Other
cash short-term Long-term Net
equivalents borrowing borrowings debt
GBPm GBPm GBPm GBPm
================================== ============ =========== =========== =====
At 31 July 2016 430 (269) (1,139) (978)
Foreign exchange gains and
losses 10 (5) (41) (36)
Net cash inflow/(outflow) 373 373
Repayment and drawdown of
borrowings 1 (1)
Capitalisation, interest accruals
and unwind of capitalisation
of fees (6) (6)
Fair value movement from interest
rate hedging (3) 15 12
Change in maturity analysis (1) 1
==================================== ============ =========== =========== =====
At 31 January 2017 813 (283) (1,165) (635)
==================================== ============ =========== =========== =====
10 Fair value of financial instruments
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
31 31 31 31 31 31
January January January January July July
2017 2017 2016 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
===================================== ======== ======== ======== ======== ======== =======
Level 2 valuations
Financial derivatives - assets 16 16 26 26 42 42
Borrowings (1,451) (1,481) (1,447) (1,486) (1,409) (1,463)
Financial derivatives - liabilities (18) (18) (19) (19) (20) (20)
Level 3 valuations
Financial assets - other investments 9 9 10 10 9 9
===================================== ======== ======== ======== ======== ======== =======
Derivatives are valued at the net present value of the future
cash-flows calculated using market exchange rates and yield curves
at the balance sheet date. Borrowings are valued at the net present
value of the future cash-flows using credit spreads and yield
curves derived from market data.
Cash, trade receivables and trade payables are excluded from
this table because carrying value is a reasonable approximation to
fair value for all these assets and liabilities.
11 Provisions and contingent liabilities
Non-headline
Trading and legacy Total
======= ================================ =====
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
============================= ======= =========== ============ ===== =====
Current liabilities 26 32 20 16 94
Non-current liabilities 6 220 74 5 305
============================== ======= =========== ============ ===== =====
At 31 July 2016 32 252 94 21 399
Exchange adjustments 1 13 4 18
Provision charged 10 2 5 17
Provision released (4) (2) (10) (16)
Unwind of provision discount 2 1 3
Utilisation (7) (14) (6) (8) (35)
Disposal of business (2) (2)
============================== ======= =========== ============ ===== =====
At 31 January 2017 30 251 85 18 384
============================== ======= =========== ============ ===== =====
Current liabilities 27 33 17 11 88
Non-current liabilities 3 218 68 7 296
============================== ======= =========== ============ ===== =====
At 31 January 2017 30 251 85 18 384
============================== ======= =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Warranty provision and product liability
At 31 January 2017 there are warranty and product liability
provisions of GBP28m (31 July 2016: GBP29m). Warranties over the
Group's products typically cover periods of between one and three
years. Provision is made for the likely cost of after-sales support
based on the recent past experience of individual businesses.
Commercial disputes and litigation in respect of ongoing
business activities
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
though there can be no guarantee that such provisions (which may be
subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to
commercial disputes and litigation such as government price audits,
product liability claims, employee disputes and other kinds of
lawsuits, and faces different types of legal issues in different
jurisdictions. The high level of activity in the US, for example,
exposes the Group to the likelihood of various types of litigation
commonplace in that country, such as 'mass tort' and 'class action'
litigation, legal challenges to the scope and validity of patents,
and product liability and insurance subrogation claims. These types
of proceedings (or the threat of them) are also used to create
pressure to encourage negotiated settlement of disputes. Any claim
brought against the Group (with or without merit), could be costly
to defend. These matters are inherently difficult to quantify. In
appropriate cases a provision is recognised based on best estimates
and management judgement but there can be no guarantee that these
provisions (which may be subject to potentially material revision
from time to time) will result in an accurate prediction of the
actual costs and liabilities that may be incurred. There are also
contingent liabilities in respect of litigation for which no
provisions are made.
The Group operates in some markets where the risk of unethical
or corrupt behaviour is material and has procedures, including an
employee 'Ethics Alertline', to help it identify potential issues.
Such procedures will, from time to time, give rise to internal
investigations, sometimes conducted with external support, to
ensure that Smiths Group properly understands risks and concerns
and can take steps both to manage immediate issues and to improve
its practices and procedures for the future. The Group also
co-operates with relevant authorities in investigating business
conduct issues whenever requested to. The Group is not aware of any
issues which are expected to generate material financial
exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in
numerous lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. Until
2006, the awards, the related interest and all material defence
costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product
liability. Provision is made in respect of the expected costs of
defending known and predicted future claims and of adverse
judgments in relation thereto, to the extent that such costs can be
reliably estimated.
The JCI products generally referred to in these cases consist of
industrial sealing product, primarily packing and gaskets. The
asbestos was encapsulated within these products in such a manner
that causes JCI to believe, based on tests conducted on its behalf,
that the products were safe. JCI ceased manufacturing products
containing asbestos in 1985.
John Crane, Inc. litigation provision
While JCI has excess liability insurance, the availability of
such insurance and scope of the cover are currently the subject of
litigation in the United States. Pending the outcome of that
litigation, JCI has met defence costs directly. In the year to 31
July 2016, JCI recognised the recovery of GBP16m through a
settlement with an insurer (see note 3) but this agreement does not
provide any cover for future costs. The calculation of the
provision does not take account of any potential recoveries from
insurers.
JCI continues to actively monitor the conduct and effect of its
current and expected asbestos litigation, including the most
efficacious presentation of its 'safe product' defence, and intends
to continue to resist these asbestos claims based upon this
defence. Approximately 250,000 claims (31 July 2016: 247,000
claims) against JCI have been dismissed before trial over the last
37 years. JCI is currently a defendant in cases involving
approximately 71,000 claims (31 July 2016: 74,000 claims). Despite
the large number of claims brought against JCI, since the inception
of the litigation it has had final judgments against it, after
appeals, in 137 cases (31 July 2016: 137 cases) over the period,
and has had to pay awards amounting to approximately US$158m (31
July 2016: US$158m). JCI has also incurred significant additional
defence costs. The litigation involves claims for a number of
allegedly asbestos related diseases, with awards, when made, for
mesothelioma tending to be larger than those for the other diseases
JCI's ability to defend mesothelioma cases successfully is,
therefore, likely to have a significant impact on its annual
aggregate adverse judgment and defence costs. The provision is
based on past history and published tables of asbestos incidence
projections and is determined using asbestos valuation experts,
Bates White LLC. Whilst published incidence curves can be used to
estimate the likely future pattern of asbestos related disease,
John Crane, Inc.'s claims experience is significantly impacted by
other factors which influence the US litigation environment. These
can include: changing approaches on the part of the plaintiffs'
bar; changing attitudes amongst the judiciary at both trial and
appellate levels; and legislative and procedural changes in both
the state and federal court systems. The projections use a 10 year
time horizon on the basis that Bates White LLC consider that there
is substantial uncertainty in the asbestos litigation environment
so probable expenditures are not reasonably estimable beyond this
time horizon.
The assumptions made in assessing the appropriate level of
provision include: the period over which the expenditure can be
reliably estimated; the future trend of legal costs; the rate of
future claims filed; the rate of successful resolution of claims;
and the average amount of judgments awarded.
The provision in respect of JCI is a discounted pre-tax
provision using discount rates, being the risk-free rate on US debt
instruments for the appropriate period. The deferred tax asset
related to this provision is shown within the deferred tax balance.
Set out below is the gross, discounted and post-tax information
relating to this provision:
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
============================== ========== ========== =======
Gross provision 277 247 267
Discount (26) (18) (15)
============================== ========== ========== =======
Discounted pre-tax provision 251 229 252
Deferred tax (83) (76) (84)
============================== ========== ========== =======
Discounted post-tax provision 168 153 168
============================== ========== ========== =======
John Crane, Inc. litigation provision sensitivities
However, because of the significant uncertainty associated with
the future level of asbestos claims and of the costs arising out of
related litigation, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred and, as a
result, the provision may be subject to potentially material
revision from time to time if new information becomes available as
a result of future events.
Statistical analysis of the provision indicates that there is a
50% probability that the total future spend will fall between
GBP258m and GBP291m (31 July 2016: between GBP250m and GBP280m),
compared to the gross provision value of GBP277m (31 July 2016:
GBP267m).
The projections use a 10 year time horizon. Reducing the time
horizon by one year would reduce the provision by GBP17m (31 July
2016: GBP18m) and reducing it by five years would reduce the
provision by GBP103m (31 July 2016 GBP107m).
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of
adverse judgments expected to occur. JCI's claims experience is
significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on
the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. As
a result, whilst the Group anticipates that asbestos litigation
will continue beyond the period covered by the provision, the
uncertainty surrounding the US litigation environment beyond this
point is such that the costs cannot be reliably estimated.
Although the methodology used to calculate the JCI litigation
provision can in theory be applied to show claims and costs for
longer periods, the Directors consider, based on advice from Bates
White, that the level of uncertainty regarding the factors used in
estimating future costs is too great to provide for reasonable
estimation of the numbers of future claims, the nature of such
claims or the cost to resolve them for years beyond the 10 year
time horizon.
Titeflex Corporation
In recent years Titeflex Corporation, a subsidiary of the Group
in the Flex-Tek division, has received a number of claims from
insurance companies seeking recompense on a subrogated basis for
the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes; however some claims have been settled
on an individual basis without admission of liability. Equivalent
third-party products in the US marketplace face similar
challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement,
together with the recent market place activity, provide sufficient
evidence to recognise a liability in the accounts. Therefore
provision has been made for the costs which the Group is expected
to incur in respect of future claims to the extent that such costs
can be reliably estimated. Titeflex Corporation sells flexible gas
piping with extensive installation and safety guidance (revised in
2008) designed to assure the safety of the product and minimise the
risk of damage associated with lightning strikes.
The assumptions made in assessing the appropriate level of
provision, which are based on past experience, include:
-- the period over which expenditure can be reliably
estimated;
-- the number of future settlements;
-- the average amount of settlements;
-- and the impact of statutes of repose and safe installation
initiatives on the expected number of future claims.
The provision of GBP85m (31 July 2016: GBP94m) is a discounted
pre-tax provision using discount rates, being the risk-free rate on
US debt instruments for the appropriate period. The deferred tax
asset related to this provision is shown within the deferred tax
balance.
31 January 31 January 31 July
2017 2016 2016
GBPm GBPm GBPm
============================== ========== ========== =======
Gross provision 142 75 140
Discount (57) (5) (46)
============================== ========== ========== =======
Discounted pre-tax provision 85 70 94
Deferred tax (26) (27) (36)
============================== ========== ========== =======
Discounted post-tax provision 59 43 58
============================== ========== ========== =======
Titeflex Corporation litigation provision sensitivities
However, because of the significant uncertainty associated with
the future level of claims and of the costs arising out of related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred and, as a result, the provision
may be subject to potentially material revision from time to time
if new information becomes available as a result of future
events.
The projections incorporate a long-term assumption about the
impact of safe installation initiatives on the level of future
claims. If the assumed annual benefit of bonding and grounding
initiatives was 0.5% higher the provision would be GBP5m (31 July
2016: GBP6m) lower, and if the benefit was 0.5% lower, the
provision would increase by GBP5m (31 July 2016: GBP7m).
Other non-headline and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by Smiths.
Non-headline provisions comprise all provisions which were
disclosed as non-headline items when they were charged to the
income statement.
These provisions cover non-headline reorganisation, vacant
properties, disposal indemnities and litigation in respect of old
products and discontinued business activities.
12 Disposals
In the period, the Group has sold the John Crane Artificial Lift
business (US: 31 October 2016, Romania: 23 November 2016), Smiths
Medical's Wallace product line (7 November 2016) and the Smiths
Interconnect Power business (25 January 2017).
Smiths Medical's Wallace product line was fully integrated, so
products will continue to be manufactured on behalf of the acquirer
under a Manufacturing Transition Services Agreement while the
acquirer is setting up their manufacturing capacity, see note
3.
John
Crane Smiths Smiths
Artificial Medical Interconnect
lift Wallace Power Total
GBPm GBPm GBPm GBPm
================================ =========== ======== ============= =====
Consideration 30 134 170 334
Less: transaction costs (1) (2) (6) (9)
================================== =========== ======== ============= =====
Net consideration received 29 132 164 325
Net assets disposed of:
- intangible assets (32) (134) (166)
- property, plant and equipment (2) (2)
- inventory (17) (12) (29)
- trade and other receivables (11) (19) (30)
- tax (1) (3) (4)
- cash and cash equivalents (5) (5)
- liabilities 5 18 23
================================== =========== ======== ============= =====
Net assets (24) (32) (157) (213)
Recycling of foreign exchange (1) 15 14
================================== =========== ======== ============= =====
Profit on disposals 4 100 22 126
================================== =========== ======== ============= =====
13 Dividends
The following dividends were declared and paid in the
period:
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
GBPm GBPm GBPm
=========================================== ======== ======== ======
Ordinary final dividend of 28.75p for
2016 (2015: 28.00p) paid 18 November 2016 114 111 111
Ordinary interim dividend of 13.25p for
2016 paid 22 April 2016 52
=========================================== ======== ======== ======
114 111 163
=========================================== ======== ======== ======
An interim dividend of 13.55p per share was declared by the
Board on 23 March 2017 and will be paid to shareholders on 28 April
2017. This dividend has not been included as a liability in these
accounts and is payable to all shareholders on the register of
Members at close of business on 7 April 2017.
14 Cash-flow from operating activities
Year
ended
31
July Period ended Period ended
2016 31 January 2017 31 January 2016
Non-headline Non-headline
(note (note
Total Headline 3) Total Headline 3) Total
GBPm Notes GBPm GBPm GBPm GBPm GBPm GBPm
====== ========================== ===== ======== ============ ===== ======== ============ =====
387 Operating profit 277 100 377 217 (34) 183
Amortisation of intangible
58 assets 23 6 29 20 9 29
Impairment of intangible
23 assets
Impairment of trade
2 investments
Depreciation of property,
53 plant and equipment 29 29 25 25
Impairment of property,
6 plant and equipment
Loss on disposal of
property, plant and
2 equipment 4 4 2 2
Profit on disposal
of business (126) (126)
Share-based payment
9 expense 8 8 5 5
(103) Retirement benefits 1 (39) (38) 1 (69) (68)
(Increase)/decrease
30 in inventories (2) (2) (3) (3)
Decrease/(increase)
in trade and other
(37) receivables 62 5 67 29 29
(Decrease)/increase
in trade and other
1 payables (28) (28) (41) 2 (39)
(Decrease)/increase
2 in provisions (5) (31) (36) 4 (18) (14)
====== ========================== ===== ======== ============ ===== ======== ============ =====
Cash generated from
433 operations 369 (85) 284 259 (110) 149
(61) Interest paid (23) (23) (20) (20)
48 Interest received 1 9 10 1 16 17
(62) Tax paid (46) (46) (25) (25)
====== ========================== ===== ======== ============ ===== ======== ============ =====
Net cash inflow from
358 operating activities 301 (76) 225 215 (94) 121
====== ========================== ===== ======== ============ ===== ======== ============ =====
Interest received in the period includes GBP9m cash inflows on
foreign exchange contracts used to hedge exposures on intra-group
loans.
The split of tax payments between headline and non-headline only
considers the nature of payments made. No adjustment has been made
for reductions in tax payments required as a result of tax relief
received on non-headline items.
Headline cash measures
The Group measure of headline operating cash excludes interest
and tax and includes capital expenditure supporting organic
growth.
-- Period ended Period ended 31
31 January 2017 January 2016
====================================== =============================
-- Headline -- Non-headline -- Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== =========== =============== ======== ======== ============ =====
Net cash inflow from operating
activities 301 (76) 225 215 (94) 121
=============================== =========== =============== ======== ======== ============ =====
Include
Expenditure on capitalised
development, other intangible
assets and property, plant
and equipment (51) (51) (42) (42)
Disposals of property,
plant and equipment 2 2 1 1
Investment in financial
assets relating to pensions
financing (8) (8)
=============================== =========== =============== ======== ======== ============ =====
Headline free cash-flow 252 (76) 176 174 (102) 72
=============================== =========== =============== ======== ======== ============ =====
Exclude
Interest paid 23 23 20 20
Interest received (1) (9) (10) (1) (16) (17)
Tax paid 46 46 25 25
=============================== =========== =============== ======== ======== ============ =====
Headline operating cash-flow 320 (85) 235 218 (118) 100
=============================== =========== =============== ======== ======== ============ =====
Reconciliation of headline free cash-flow to total movement in
cash and cash-equivalents
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
GBPm GBPm GBPm
================================================== ======== ======== ======
Headline free cash-flow 252 174 400
Non-headline free cash-flows (76) (102) (157)
Investment in other financial assets (1)
Acquisition of businesses (8) (8)
Disposal of businesses 320
Net cash-flow used in financing activities (123) (113) (332)
================================================== ======== ======== ======
Net increase/(decrease) cash and cash equivalents 373 (49) (98)
================================================== ======== ======== ======
15 Related party transactions
The related party transactions in the period were consistent
with the nature and size of transactions disclosed in the Annual
Report for the year ended 31 July 2016.
16 Non-statutory capital and credit metrics
In addition to the non-statutory profit measures explained in
note 3, the Company calculates credit metrics and return on capital
employed incorporating the same adjustments. See the disclosures on
presentation of results in accounting policies for an explanation
of the excluded items.
Return on capital employed (ROCE)
Smiths ROCE is calculated over a rolling 12-month period and is
the percentage that headline operating profit comprises of monthly
average capital employed.
See note 2 for the divisional headline operating profit and
average divisional capital employed used to calculate divisional
ROCE.
Capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP801m (31 July 2016: GBP815m)
and eliminate post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt.
31 January 31 January 31 July
2017 2016 2016
Notes GBPm GBPm GBPm
=========================================== ===== ========== ========== =======
Net assets 1,832 1,540 1,660
Adjust for
Goodwill recognised directly in reserves 801 815 815
Post-retirement benefit assets and
liabilities 6 (51) (129) (80)
Tax related to post retirement benefit
assets and liabilities (18) (48) (4)
John Crane, Inc. litigation provisions
and related tax 11 168 153 168
Titeflex Corporation litigation provisions
and related tax 11 59 43 58
Net debt 9 635 986 978
=========================================== ===== ========== ========== =======
Capital employed 3,426 3,360 3,595
=========================================== ===== ========== ========== =======
Return on capital employed
31 January 31 January 31 July
2017 2016 2016
Notes GBPm GBPm GBPm
======================================= ===== ========== ========== =======
Headline operating profit for previous
twelve months 570 496 510
Average capital employed 2 3,490 3,229 3,324
======================================= ===== ========== ========== =======
ROCE 16.3% 15.4% 15.3%
======================================= ===== ========== ========== =======
Credit metrics
Smiths Group monitors the ratio of net debt to Headline EBITDA
as part of its management of credit ratings. This ratio is
calculated as follows.
Headline earnings before interest, tax, depreciation and
amortisation (Headline EBITDA)
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
Notes GBPm GBPm GBPm
==================================== ===== ======== ======== ======
Headline operating profit 2 277 217 510
Exclude
- depreciation 8 29 25 53
- amortisation of development costs 7 14 12 26
- amortisation of software, patents
and intellectual property 7 9 8 17
==================================== ===== ======== ======== ======
Headline EBITDA 329 262 606
==================================== ===== ======== ======== ======
Annualised headline EBITDA
Period Period Year
ended ended ended
31 31 31
January January July
2017 2016 2016
Notes GBPm GBPm GBPm
==================================== ====== ======== ======== ======
Headline EBITDA for the period 329 262 606
Add
- headline EBITDA for the previous
year 606 598
Exclude
- headline EBITDA for the first six
months (262) (272)
============================================ ======== ======== ======
Annualised headline EBITDA 673 588 606
============================================ ======== ======== ======
Ratio of net debt to annualised headline EBITDA
31 January 31 January 31 July
2017 2016 2016
Notes GBPm GBPm GBPm
===================================== ===== ========== ========== =======
Annualised headline EBITDA 673 588 606
Net debt 9 635 986 978
===================================== ===== ========== ========== =======
Ratio of net debt to headline EBITDA 0.9 1.7 1.6
===================================== ===== ========== ========== =======
This information is provided by RNS
The company news service from the London Stock Exchange
END
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