TIDMSMIN
RNS Number : 5644T
Smiths Group PLC
26 March 2021
Smiths Group plc - Interim Results for the half year ended 31
January 2021
Robust first half performance with improving trends
Highlights
-- Robust performance despite market disruption
o Underpinned by our market-leading positions and high
proportion of aftermarket revenues
-- Good profit conversion and excellent cash generation
o Group-wide operating model driving efficiency, innovation and
consistent execution
o Strategic restructuring on track to deliver full GBP70m
annualised benefit from FY2022
-- Further portfolio strengthening for long-term value creation
o Continued investment in new technologies
o Flex-Tek acquisition of Royal Metal in February 2021
-- Smiths Group of the future - aligned to long-term trends of sustainability and digitisation
o All businesses united by the shared purpose of making a safer,
cleaner and more efficient world
-- Smiths Medical - continuing to strengthen ahead of separation in Q4 FY2021
o Finalising key separation workstreams
Headline(1) Statutory
HY 2021 HY 2020 Reported Underlying HY 2021 HY 2020 Reported
GBPm GBPm growth growth(2) GBPm GBPm growth
-------------------------------- ------- ------- -------- ------- ------- --------
Smiths continuing operations(3)
Revenue 1,150 1,240 (7)% (5)% 1,150 1,240 (7)%
Operating profit 166 186 (11)% (6)% 143 145 (1)%
Smiths Medical - discontinued
operations(3)
Profit after tax 67 70 (4)% +5% 107 133 (20)%
Total Group(4)
Profit for the half year 171 187 (9)% (3)% 129 145 (11)%
Basic EPS 42.9p 46.9p (9)% (3)% 32.3p 36.3p (11)%
Free cash-flow(5) 188 110 +71%
Cash conversion(5) 129% 98% +31% +33%
------- ------- -------- ---------- ------- ------- --------
Dividend(6) 11.7p 11.0p +6% 11.7p 11.0p +6%
------- ------- -------- ---------- ------- ------- --------
The differences between headline and statutory operating profit
are non-headline items as defined in note 3 to the condensed
financial statements, of which the largest constituents are the
amortisation of acquired intangibles, cost recovery for asbestos
litigation in John Crane, Inc and subrogation claims in Titeflex
Corporation.
Outlook
-- Improving H2 trends
-- Restructuring benefits supporting further good profit conversion
-- Continued strong cash generation
-- Dividend increase reflects our confidence in the medium and longer term prospects
-- Subject to continued market recovery, Group is confident of
meeting market expectations for the full year
Andy Reynolds Smith , Group Chief Executive, commented:
"This is a robust set of results relative to our end markets,
with a resilient top line, good profit conversion and excellent
cash generation. This has been delivered by our exceptional people
in very challenging circumstances and my sincere thanks go to them.
We have continued to position Smiths in the very best way -
strategically, operationally, and financially - to enable us to
take full advantage of market recovery when it comes.
The Group is united by the shared purpose of making a safer,
cleaner and more efficient world. The accelerating global trends of
sustainability and digitisation play to the core strengths and
capabilities of Smiths' existing business model. We continue to
enhance the positioning of the Group for outperformance through
targeted investment in innovation and disciplined transactions -
including the planned separation of Smiths Medical by the end of
FY2021, which will focus and simplify the Group and maximise value
for all stakeholders.
Whilst economic uncertainty remains, against the backdrop of our
robust first half performance and the improving second half trends,
the Group is confident of meeting market expectations for the full
year and delivering long-term sustainable value."
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance. On a statutory basis, total Group profit for
the half year was GBP129m (HY 2020: GBP145m) and basic earnings per
share were 32.3p (HY 2020: 36.3p).
See accounting policies for an explanation of the presentation
of results and note 3 to the condensed financial statements for an
analysis of non-headline(5) items.
Definitions
The following definitions are applied throughout the financial
report and are Alternative Performance Measures (APMs) as defined
in note 19 to the condensed financial statements:
(1) Headline: In addition to statutory reporting, the Group
reports on a headline basis. Definitions of headline metrics, and
information about the adjustments to statutory measures, are
provided in note 3 to the condensed financial statements.
(2) Underlying modifies headline performance to adjust prior
year to reflect an equivalent period of ownership for divested
businesses, exclude the effects of foreign exchange, acquisitions,
restructuring costs and write-downs, and include depreciation and
amortisation of discontinued operations for comparability
purposes.
(3) Continuing operations exclude Smiths Medical which is
accounted for as 'Discontinued operations - businesses held for
distribution to owners'. Discontinued operations are defined in
note 17 to the condensed financial statements.
(4) Total Group comprises continuing operations and discontinued
operations.
(5) APMs are defined in note 19 to the condensed financial
statements.
(6) HY 2020 dividend was declared in September 2020 as part of
the full year announcement.
Investor enquiries Media enquiries Alex Le May, FTI Consulting
Jemma Spalton, Smiths Richard Mountain, FTI +44 (0)20 3727 1308
Group Consulting +44 (0)770 244 3312
+44 (0)20 7004 1637 +44 (0)20 3727 1374 smiths@fticonsulting.com
+44 (0)78 6739 0350 +44 (0)790 968 4466
jemma.spalton@smiths.com smiths@fticonsulting.com
Presentation
The management presentation via webcast will begin at 09.00 (UK
time) today at
https://smiths.com/investors/results-reports-and-presentations,
with a recording available from 13.00 (UK time).
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding the
intentions, beliefs and/or current expectations of Smiths Group plc
(the "Company") and its subsidiaries (together, the "Group") and
those of their respective officers, directors and employees
concerning, amongst other things, the results of operations,
financial condition, liquidity, prospects, growth, strategies and
the businesses operated by the Group. 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. This document
contains brands that are trademarks and are registered and/or
otherwise protected in accordance with applicable law.
Results overview
Continuing operations HY 2020 Foreign Restructuring Acquisitions Underlying HY 2021
(GBPm) exchange costs & disposals
====================== ======= ========= ============= ============ ========== =======
Revenue 1,240 (34) - 1 (57) 1,150
====================== ======= ========= ============= ============ ========== =======
Headline operating
profit 186 (7) (1) (0) (12) 166
====================== ======= ========= ============= ============ ========== =======
Headline operating
margin 15.0% (20)bps (10)bps (10)bps (20)bps 14.4%
====================== ======= ========= ============= ============ ========== =======
HY 2021 Underlying revenue Underlying margin Underlying variance
growth in margin to prior
year
====================== ================== ================= ===================
John Crane (10)% 19.8% (130)bps
Smiths Detection (6)% 12.7% (240)bps
Flex-Tek (1)% 18.5% +20bps
Smiths Interconnect +11% 12.1% +560bps
====================== ================== ================= ===================
Continuing operations (5)% 14.6% (20)bps
====================== ================== ================= ===================
Smiths (continuing operations)
The commentary below refers to continuing operations (excluding
Smiths Medical), unless otherwise stated.
Revenue
Revenue for continuing operations was down GBP(57)m or (5)%, on
an underlying basis, against a very challenging market backdrop and
pre-COVID comparators. The robust results reflect the Group's
market-leading positions and high proportion of aftermarket
revenues. Aftermarket represented 49% of underlying revenue during
the period.
Revenue declined (7)% on a reported basis, to GBP1,150m (HY
2020: GBP1,240m). This included GBP(34)m of adverse foreign
exchange translation and +GBP1m from PathSensors, a leading
bio-technology solutions and environmental-testing company acquired
by Smiths Detection in August 2020.
Operating profit and margin
The Group delivered good profit conversion, with headline
operating profit down GBP(12)m or (6)% on an underlying basis.
Central costs decreased by GBP(7)m to GBP(20)m, as the Group
continues to focus on optimising operational efficiency.
Headline operating profit decreased (11)% on a reported basis,
to GBP166m (HY 2020: GBP186m). This included GBP(7)m of adverse
foreign exchange translation, and GBP(1)m of restructuring
costs.
Headline operating margin decreased (20)bps on an underlying
basis, reflecting the strong cost controls, and (60)bps on a
reported basis to 14.4%.
The GBP(23)m difference between headline operating profit of
GBP166m and statutory operating profit of GBP143m is non-headline
items as defined in note 3 of the condensed financial statements.
The largest constituents relate to amortisation of acquired
intangible assets, cost recovery for asbestos litigation in John
Crane, Inc and subrogation claims in Titeflex Corporation. On a
statutory basis, after taking into account all items excluded from
headline performance, operating profit of GBP143m was GBP(2)m lower
than last year (HY 2020: GBP145m), reflecting the lower headline
profit.
Finance costs
Headline finance costs of GBP(21)m (HY 2020: GBP(26)m) were
GBP5m lower than last year. This reflects the impact of lower US
dollar interest rates. Statutory finance costs were GBP(59)m (HY
2020: GBP(99)m) mainly due to a GBP(38)m foreign exchange loss on
an intercompany loan with Smiths Medical (HY 2020: GBP(68)m) ; the
matching credit in discontinued operations nets out to zero in
Total Group earnings.
Taxation
The headline tax charge for the half year of GBP(41)m (HY 2020:
GBP(43)m) represents an effective rate of 28% (FY2020: 28%). The
Total Group headline effective tax rate was 27% (FY2020: 26%).
Non-headline taxation items of GBP(21)m (HY 2020: GBP(9)m)
related to the write-off of deferred tax driven by pension
movements. The statutory effective tax rate was 74.4% (HY 2020:
74.3%) due to the non-headline items. Please refer to notes 3 and 6
of the condensed financial statements for further details.
R&D and capex
Technology and innovation are driving the future of Smiths. To
support that, we have increased Group-wide R&D spend by 34% in
the last five years. Through our Group-wide innovation framework we
selectively invest in future-focused projects that are aligned with
our purpose and strategy. Due to the timing of some large R&D
projects, the income statement cost of R&D of GBP(41)m was
below prior year (HY 2020: GBP(46)m). The cash cost decreased to
GBP(48)m or 4.2% of sales (HY 2020: GBP(62)m or 5.0%).
Capex of GBP(29)m (HY 2020: GBP(37)m) represented 1.2x
depreciation and amortisation (HY 2020: 1.4x).
Portfolio
The Group continues to enhance its strategic positioning through
the recycling of capital out of lower growth and lower return
businesses into higher growth and higher return opportunities.
Since 2016 the Group has completed 11 disposals with proceeds of
c.GBP540m and 12 acquisitions for c.GBP1bn.
In February 2021, the Group acquired Royal Metal Products LLC
("Royal Metal"), a leading manufacturer of residential and light
commercial HVAC products for $107m. Royal Metal will be integrated
into Flex-Tek with adjacent product offerings for the air
distribution market and access to a larger customer base, including
wholesalers. The acquisition will complement the organic growth
that Flex-Tek is already driving through the development of
innovative air distribution products that support improved energy
efficiency and indoor air quality. For more information, please see
note 18 of the condensed financial statements.
Smiths Medical (discontinued operations)
The Group is committed to completing the separation of Smiths
Medical by the end of the financial year, with the primary focus on
ensuring we maximise shareholder value. We are finalising the key
separation workstreams including governance, tax planning, debt
structure, transaction documents and pensions.
Accounting standards require the Group to stop charging
depreciation and amortisation within Smiths Medical, since it has
been reclassified as discontinued operations. For comparability
purposes, depreciation and amortisation of GBP21m (HY 2020: GBP23m)
have been included in the calculation of underlying measures.
Smiths Medical delivered revenue of GBP427m, up +0.2% on an
underlying basis, with good growth held back by the impact of fewer
elective procedures as a result of COVID-19. Revenue was down (2)%
on a reported basis, including GBP(8)m of adverse foreign exchange
translation.
Headline operating profit of GBP89m was up +2% on an underlying
basis. Headline operating profit was down (5)% on a reported basis,
due to GBP(2)m of adverse foreign exchange and GBP(3)m of
restructuring costs. Restructuring costs include site
consolidation, as well as delayering and decentralisation to
increase efficiency and effectiveness. Headline operating margin
was up +30bps on an underlying basis, but down (80)bps to 20.9% on
a reported basis due to restructuring charges.
The difference between statutory and headline operating profit
is GBP1m of separation costs.
Further detail on Smiths Medical's performance can be found in
the divisional section later in the release.
Total Group
The commentary below refers to Total Group, unless otherwise
stated.
COVID-19
The health, safety and wellbeing of our people and our
operations have always been our number one priority. During the
COVID-19 pandemic we have put in place measures to ensure that our
colleagues and others are kept safe and well while continuing to
serve our customers. We have maintained business continuity
throughout with minimal interruption to our aftermarket
support.
We adopted a Group-led approach to managing the global
challenges; as a result we were able to respond better, faster and
more cost effectively. This unified response supported our robust
performance in the first half of FY2021 despite the challenging
market backdrop. Pleasingly we are beginning to see improvements in
some end markets and improving order books in some of our
businesses. We are very well positioned to maximise the growth
opportunities when they come.
Restructuring costs
HY 2021 Total
HY 2021 restructuring restructuring HY 2021
GBPm P&L costs P&L costs to date cash outflow
John Crane (0) (14) (5)
Smiths Detection (0) (14) (2)
Flex-Tek (0) (0) (0)
Smiths Interconnect (1) (3) (2)
Centre - (1) (1)
Group - continuing
operations (1) (32) (10)
==================== ============== ================== =============
Smiths Medical (3) (7) (0)
==================== ============== ================== =============
Total Group (4) (39) (10)
==================== ============== ================== =============
The Group announced last year that it was undertaking a
strategic restructuring programme; this brings together a number of
pre-COVID initiatives to ensure that the Group is better positioned
for long-term growth and consistent outperformance. The programme
supports the achievement of our goal to deliver operating margins
of 18-20%.
The programme impacts all divisions and is on track to deliver
full annualised benefits of at least GBP70m from FY2022 onwards.
The total cost of the programme is now anticipated to be
c.GBP(60)-(65)m spread across FY2020 and FY2021. In H1 2021 the
restructuring benefits were ahead of the programme's costs but are
still expected to be neutral for the full year. In the first half
we incurred GBP(4)m of P&L costs and a cash outflow of
GBP(10)m. The overall programme is on track, despite some phasing
changes related to local consultations.
Total profit and EPS
Total headline profit after tax decreased by (9)% on a reported
basis. Headline basic EPS was down (3)% on an underlying basis and
(9)% on a reported basis. Total statutory profit after tax
decreased by (11)% to GBP129m (HY 2020: GBP145m), with non-headline
items flat to HY 2020. Statutory basic EPS was also down (11)% to
32.3p (HY 2020: 36.3p).
Cash-flow
Strong cash generation is a key characteristic of our business.
The Group delivered an excellent cash performance in the first
half. Operating cash-flow* was GBP301m (HY 2020: GBP252m). This was
achieved despite ongoing disruption associated with the COVID-19
pandemic. Operating headline cash conversion was 129% (HY 2020:
98%), or 131% excluding restructuring costs.
Free cash-flow of GBP188m (HY 2020 restated to include lease
payments: GBP110m) increased by GBP78m, underpinned by the strong
operating cash-flow. Free cash-flow as a percentage of operating
profit has now been added as a key performance measure to our
long-term incentive programmes, to ensure closer alignment with
shareholder interests.
Net cash inflow from operating activities was GBP262m (HY 2020:
GBP187m). See note 15 to the condensed financial statements for a
reconciliation of headline operating cash-flow to statutory
cash-flow.
Debt
Net debt* (including leases) at 31 January 2021 was GBP1,075m, a
decrease of GBP(66)m in the period. Annualised headline EBITDA*
from continuing and discontinued operations was GBP582m. Net debt
to EBITDA was 1.7x after inclusion of lease liabilities under
IFRS16 (1.8x including restructuring costs).
Gross debt* was GBP1,574m (FY2020: GBP1,609m). There are no
covenants associated with this debt. The weighted average maturity
was 3.7 years and there are no maturities before October 2022. Cash
balances increased to GBP399m (FY2020: GBP386m).
An $800m (c.GBP584m at the period-end exchange rate) revolving
credit facility ('RCF') remains undrawn and matures in November
2024. The only covenant relates to interest cover which must be
greater than or equal to 3 times, compared with 11 times for the
half year. Taking cash and the RCF together, total liquidity was
approximately GBP1bn at the end of the period.
Strong cash conversion and a conservative balance sheet are the
foundations of our strong financial framework, ensuring we are well
positioned to deliver sustainable, long-term shareholder value.
* APMs are defined in note 19 to the condensed financial
statements
Pensions
On 27 October 2020, the Smiths Industries Pension Scheme
('SIPS') secured an additional GBP146.5m bulk annuity buy-in
agreement with Canada Life, which insured the benefits of a further
c.1,000 pensioners. This followed the TI Group Pension Scheme
('TIGPS') securing a buy-in bulk annuity with Aviva in September
2020 (as previously announced). Both buy-ins demonstrate continued
progress in the de-risking of the Company's pension
liabilities.
The two main UK pension schemes and the US pension plan are well
positioned to withstand a volatile market environment. They are
well hedged against changes in interest and inflation rates.
Approximately 90% of assets are invested in third-party annuities,
government bonds and investment grade credit. Approximately 1% of
assets is invested in equities. As at 31 January 2021 approximately
40% of the UK liabilities had been de-risked through the purchase
of annuities from third party insurers.
The net accounting surplus decreased to GBP293m (FY2020:
GBP372m) principally driven by asset returns underperforming the
discount rate over the period and the accounting treatment of the
UK schemes' recent bulk annuity purchases.
The formal triennial valuation for TIGPS at 5 April 2020 has
recently concluded. It shows a surplus on a technical provsions
basis and further progress towards full buy-out. Barring unforeseen
events, we now expect to reach a full buy-out of TIGPS ahead of the
target date of 2028 and without any further cash cost to the
company. As a result pension contributions are expected to reduce
by GBP4m this year and by GBP12m in FY2022.
The triennial valuation for SIPS is still being finalised and is
due to be completed by the end of June 2021.
Dividend
The Group maintains a progressive dividend policy, aiming to
increase dividends in line with long-term underlying growth in
earnings and cash-flow. The policy enables us to retain sufficient
cash-flow to finance investment in the drivers of growth to meet
our financial obligations. In setting the level of dividend
payments, the Board considers prevailing economic conditions and
future investment plans, along with the objective to maintain
minimum dividend cover* of around 2 times.
In FY2020 the Board recommended a total dividend of 35.0p per
share for the year. This included a delayed interim dividend of
11.0p. The Board has declared an interim FY2021 dividend of 11.7p
per share, up 6% reflecting the Board's confidence in the Group's
performance and improving trajectory. The interim dividend will be
paid on 14 May 2021 to shareholders on the register at close of
business on 9 April 2021.
The Company offers a Dividend Reinvestment Plan (DRIP) - see our
website for details. To participate in the DRIP shareholders must
submit their election notice to be received by 23 April 2021 (the
Election Date). Elections received after the Election Date will
apply to dividends paid after 14 May 2021. Purchases under the DRIP
are made on or as soon as practicable after the dividend payment
date and at prevailing market prices.
Return on Capital Employed (ROCE)*
ROCE was 11.2% (HY 2020: 14.7%). This is calculated using the
Group's 12-month rolling average capital employed and therefore
includes 10 months of COVID-related disruption. The decrease
reflects lower profitability and restructuring costs during that
12-month period. For further detail of its calculation, please
refer to note 19 to the condensed financial statements.
Foreign exchange
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
period-end rates. The Group is exposed to foreign exchange
movements, mainly the US Dollar and the Euro. The principal
exchange rates, expressed in terms of the value of sterling, are
shown in the following table.
Average rates Period-end rates
---- ---------------------- ----------------------
31 January 31 January 31 January 31 January
2021 (6 2020 (6 2021 2020
months) months)
---- ---------- ---------- ---------- ----------
USD 1.32 1.27 1.37 1.32
EUR 1.11 1.15 1.13 1.19
---- ---------- ---------- ---------- ----------
Brexit
Given that over 95% of Group revenue originates outside the UK,
the impact of Brexit was, as anticipated, very limited.
* APMs are defined in note 19 to the condensed financial
statements
Outlook
Whilst economic uncertainty remains, against the backdrop of a
robust first half performance and the improving second half trends,
the Group is confident of meeting market expectations for the full
year. This is supported by improving order books and the benefits
of the strategic restructuring programme. The Group is well
positioned to maximise growth opportunities and deliver long-term
sustainable outperformance and value creation.
Business review
John Crane
John Crane is a leading provider of mission-critical engineered
solutions for global energy and process industries, supporting
improved efficiency and emission reductions. c.59% of revenue is
derived from the energy sector (downstream and midstream oil &
gas and power generation, including renewable and sustainable
sources of energy). c.41% comes from other process industries
(including chemical, pharmaceutical, mining, water treatment, and
pulp & paper). 68% of John Crane revenue comes from aftermarket
sales. John Crane represents 36% of continuing Group revenue.
HY 2021 HY 2020 Reported Underlying
GBPm GBPm growth growth
------------------------------- --------------- ------- -------- ----------
Revenue 410 474 (14)% (10)%
Original Equipment 130 154 (16)% (14)%
Aftermarket 280 320 (13)% (9)%
Headline operating profit 81 101 (20)% (16)%
Statutory operating profit 82 94 (13)%
Return on capital employed 16.9% 23.3% (640)bps
R&D cash costs as % of sales 2.1% 1.9% +20bps
------------------------------- --------------- ------- -------- ----------
Revenue
(GBPm) HY 2020 Foreign Acquisitions Underlying HY 2021
reported exchange & disposals reported
======== ========= ========= ============ ========== =========
Revenue 474 (16) - (48) 410
======== ========= ========= ============ ========== =========
John Crane's market-leading positions and the strength of its
global service network continued to underpin its performance,
despite the challenges in the energy market and COVID-19
disruptions. As anticipated, revenue was down (10)% on an
underlying basis. Revenue was down (14)% on a reported basis, as
foreign exchange had a GBP(16)m adverse impact.
Underlying revenue from John Crane's Energy segment was down
(16)%, impacted by the market downturn and pandemic related
disruptions. Underlying revenue from Industrial activities was
marginally down at c.(1)%, with good growth in chemical processing
offset by a slowdown in general industry.
Underlying revenue from Original Equipment ('OE') declined
(14)%, as volatility in energy prices and COVID-19 disruptions put
pressure on customers across all geographies. However, the rate of
orders is improving, and John Crane secured multiple new contracts
during the period. These include some important wins for midstream
upgrade projects, using our new pipeline technologies that reduce
emissions, as well as further liquified natural gas projects
incorporating our digital sensor technology and methane reduction
solutions. These contracts draw on John Crane's core capabilities
of supporting our customers' enhanced efficiency, performance and
sustainability. These are examples of where our leading technology,
asset management capabilities and global footprint drive
competitive advantage and ensure we are well positioned to capture
growth opportunities when markets recover.
Underlying aftermarket revenue declined (9)%, with continued
economic uncertainty driving slower customer upgrades and
retrofits. In previous cycles postponed maintenance has typically
lasted 6-9 months and this cycle is following a similar pattern.
John Crane's large installed base and leading service offering
positions it well to meet the pent-up demand for aftermarket
repairs, maintenance and upgrades. Customer need for improving
overall equipment effectiveness is driving increased commercial
interest for our unique digital solutions, including John Crane
Sense(TM) . Aftermarket now represents 68% of John Crane's revenue
(HY 2020: 67%).
Operating profit
(GBPm) HY 2020 reported Foreign Acquisitions Restructuring Underlying HY 2021 reported
exchange & disposals costs
=================== ================ ========= ============ ============= ========== ================
Headline operating
profit 101 (4) - (0) (16) 81
=================== ================ ========= ============ ============= ========== ================
Headline operating
margin 21.3% (20)bps (130)bps 19.8%
=================== ================ ========= ============ ============= ========== ================
Headline operating profit of GBP81m decreased by (16)% on an
underlying basis, reflecting the lower volumes and adverse
programme mix. Headline operating profit declined (20)% on a
reported basis, due to GBP(4)m of adverse foreign exchange. John
Crane continues to make good progress on its restructuring actions,
which are focused on enhancing its flexibility to withstand the
cyclicality of its end markets and improve its efficiency. Some
restructuring projects planned for the first half were delayed
until later this year as we engage in the necessary consultation
processes.
Headline operating margin was 19.8%, down (150)bps on a reported
basis and (130)bps on an underlying basis. The difference between
statutory and headline operating profit includes the net cost in
relation to the provision for John Crane, Inc. asbestos
litigation.
ROCE
ROCE was down (640)bps at 16.9%, due to the lower profitability
in the last twelve months.
R&D
Cash R&D expenditure during the period represented 2.1% of
sales, +20bps higher than last year. John Crane's innovation is
primarily focused on enhancing efficiency, performance and
sustainability by using materials science advancements, coatings
and additive manufacturing. John Crane is also leveraging the
Group's digital expertise to support the development of predictive
diagnostic platforms and other innovative digital technologies.
During the first half of the year, John Crane introduced several
new technologies, including a booster and filter to support dry gas
seals on turbo compressors and further product developments to
reduce the effects of friction and extreme pressure on pipeline
applications.
Smiths Detection
Smiths Detection is a global leader in the detection and
identification of threats and contraband, supporting safety,
security and freedom of movement. It produces equipment for
customers in the Aviation market and Other Security Systems for
ports & borders, defence and urban security markets. 48% of
Smiths Detection's sales are derived from the aftermarket. Smiths
Detection represents 30% of continuing Group revenue.
HY 2021 HY 2020 Reported Underlying
GBPm GBPm growth growth
----------------------------------- ------- ------- -------- ----------
Revenue 350 378 (7)% (6)%
Aviation 260 254 +2% +4%
Other Security Systems 90 124 (27)% (27)%
Headline operating profit 44 57 (23)% (21)%
Statutory operating profit 33 44 (25)%
Return on capital employed 6.3% 11.5% (520)bps
R&D cash costs as % of sales 7.6% 10.5% (290)bps
----------------------------------- ------- ------- -------- ----------
Revenue
(GBPm) HY 2020 Foreign Acquisitions Underlying HY 2021
reported exchange & disposals reported
======== ========= ========= ============ ========== =========
Revenue 378 (6) 1 (23) 350
======== ========= ========= ============ ========== =========
The strength of Smiths Detection's market position and its
leading technology drove its resilient performance, with revenue
down (6)% on an underlying basis, and a continued strong
performance in its Aviation segment.
The delivery of previously announced contract wins underpinned
Original Equipment ('OE'), down (6)% on an underlying basis despite
the significant declines in its markets. Aftermarket revenue also
declined (6)% on an underlying basis, as service and maintenance
levels reduced during the COVID-19 pandemic. Revenue was down (7)%
on a reported basis, including GBP(6)m of adverse foreign exchange
translation and GBP1m contribution from PathSensors Inc, a leading
bio-technology solutions and environmental-testing company acquired
in August 2020.
Revenue from Aviation increased +4% on an underlying basis as a
result of the division's existing strong order book. Aviation is
Smiths Detection's largest segment, representing 74% of total
revenue. Deliveries included computed tomography ('CT') hold
baggage systems for AENA in Spain and CT cabin baggage screening
systems for the TSA in the US.
Despite a slower rate of new tenders, Smiths Detection continues
to secure new contracts. It is announced today that Smiths
Detection has been selected by London Heathrow to be the supplier
of their new integrated checkpoint systems throughout the airport
incorporating CT cabin baggage scanners and integrated lane and
tray return technology with installation beginning later this
year.
Other recent orders for its CT cabin baggage systems include
Milan Airports Malpensa and Linate, Kuwait International Airport
and Hamad International Airport (HIA) in Qatar. HIA also placed an
order for ultraviolet light kits, capable of destroying up to 99.9%
of microorganisms present on baggage trays at the security
checkpoint. This new technology supports heightened hygiene
standards which will be important as airports seek to restore the
confidence of travellers and staff during and after the COVID-19
pandemic.
Revenue from Other Security Systems declined by (27)% on an
underlying basis. This performance reflects both the strong
comparator and a slowdown in urban security markets due to the
pandemic. Smiths Detection secured new contracts with U.S. and
French customs agencies and the Greek police force for mobile x-ray
inspection systems. It also won an order from the Phoenix Suns
Arena, Arizona for systems that include our digital iCMORE weapons
detection technology; this enhances the arena's security and
reduces the need for hands-on searches.
Smiths Detection continues to respond to the pandemic by driving
its digital portfolio and investing selectively in chemical and
biological detection capabilities that will support a safer post
COVID-19 world. This response has been strengthened by the
successful integration of PathSensors Inc which brought additional
capability in the areas of environment monitoring, food safety and
mail screening. Smiths Detection's environment monitoring tool,
BioFlash(R), has been proven to detect and identify the COVID-19
virus in the air. Further testing is underway to understand how
this technology can be used in environments such as hospitals,
schools and commercial buildings, representing an important future
opportunity for the division. Smiths Detection also gained
certification for a pathogen identifier that gives food and
beverage companies a new, rapid solution to ensure food safety.
There continues to be good demand for Smiths Detection's mail room
screening solutions that can detect dangerous biological agents as
well as other hazards.
Operating profit
(GBPm) HY 2020 reported Foreign Acquisitions Restructuring Underlying HY 2021 reported
exchange & disposals costs
=================== ================ ========= ============ ============= ========== ================
Headline operating
profit 57 (1) 0 (0) (12) 44
=================== ================ ========= ============ ============= ========== ================
Headline operating
margin 15.0% +10bps (10)bps (240)bps 12.6%
=================== ================ ========= ============ ============= ========== ================
Headline operating profit decreased (21)% on an underlying
basis, reflecting programme volume and mix. Headline operating
profit of GBP44m was down (23)% on a reported basis, including
GBP(1)m adverse foreign exchange translation. Headline operating
margin was 12.6%, down (240)bps on a reported and underlying basis.
The difference between statutory and headline operating profit
primarily reflects amortisation of acquired intangibles.
ROCE
ROCE decreased by (520)bps to 6.3%, impacted by reduced
profitability.
R&D
Cash R&D expenditure was 7.6% of sales, (290)bps lower than
last year. R&D excluding customer funding was 6.5% for HY 2021
(HY 2020: 7.9%). We continue to invest in the development of the
next generation of detection devices for the defence market, new
algorithms to improve the detection of dangerous goods for cargo
applications and digital solutions to strengthen our aftermarket
proposition to make people and infrastructure safer. Certain
programmes are co-funded by strategic customers seeking
next-generation solutions to security challenges.
Flex-Tek
Flex-Tek provides innovative components to heat and move fluids
and gases for aerospace and industrial applications that support
energy efficiency and improved air quality. 80% of Flex-Tek's
revenue is derived from Industrials and 20% from the Aerospace
sector. 46% of Flex-Tek's revenue comes from aftermarket sales.
Flex-Tek represents 21% of continuing Group revenue.
HY 2021 HY 2020 Reported Underlying
GBPm GBPm growth growth
----------------------------- ------- ------- -------- ----------
Revenue 238 248 (4)% (1)%
Industrials 190 171 +11% +14%
Aerospace 48 77 (38)% (35)%
Headline operating profit 44 46 (4)% +0%
Statutory operating profit 38 25 52%
Return on capital employed 17.9% 20.6% (270)bps
R&D cash costs as % of sales 0.5% 0.5% 0bps
----------------------------- ------- ------- -------- ----------
Revenue
(GBPm) HY 2020 Foreign Acquisitions Underlying HY 2021
reported exchange & disposals reported
======== ========= ========= ============ ========== =========
Revenue 248 (8) - (2) 238
======== ========= ========= ============ ========== =========
Flex-Tek's revenue decreased (1)% on an underlying basis, as
strong revenue growth in Industrials offset almost all of the
downturn in Aerospace. Revenue declined (4)% on a reported basis,
including GBP(8)m adverse foreign exchange translation.
Industrials underlying revenue was up +14%. This strong growth
was driven by demand for our construction related products in the
US, particularly for HVAC applications, where we continued to
outperform the underlying market. Other drivers included good
growth of our industrial heat applications. Aerospace revenue was
down (35)%, driven by the sharp downturn in commercial aerospace,
however defence aerospace remained more resilient.
Operating profit
(GBPm) HY 2020 reported Foreign Acquisitions Restructuring Underlying HY 2021 reported
exchange & disposals costs
=================== ================ ========= ============ ============= ========== ================
Headline operating
profit 46 (2) - - 0 44
=================== ================ ========= ============ ============= ========== ================
Headline operating
margin 18.4% (10)bps +20bps 18.5%
=================== ================ ========= ============ ============= ========== ================
Headline operating profit was flat on an underlying basis, with
lower volumes offset by strong cost controls. Headline operating
profit was down (4)% at GBP44m on a reported basis, including
GBP(2)m adverse foreign exchange translation. Headline operating
margin was up 10bps to 18.5%, on a reported basis. The difference
between statutory and headline operating profit is due to
amortisation of acquired intangible assets and provision for
Titeflex Corporation subrogation claims.
In February 2021, the Group acquired Royal Metal Products LLC
("Royal Metal"), a leading manufacturer of residential and light
commercial HVAC products for $107m. Royal Metal will be integrated
into Flex-Tek with adjacent product offerings for the air
distribution market and access to a larger customer base, including
wholesalers. The acquisition will complement the organic growth
that Flex-Tek is already driving through the development of
innovative air distribution products that support improved energy
efficiency and indoor air quality. For more information, please see
note 18 of the condensed financial statements.
ROCE
ROCE decreased (270)bps to 17.9%, mainly driven by lower
profitability in the second half of FY2020.
R&D
Cash R&D expenditure remained consistent at 0.5% of sales.
R&D is focused on developing new products for construction, and
an expanded product offering in aerospace.
Smiths Interconnect
Smiths Interconnect designs solutions for high-speed, secure
connectivity in demanding applications for various end markets
including defence, semiconductor test, medical, space, commercial
aerospace, and rail. Smiths Interconnect represents 13% of
continuing Group revenue.
HY 2021 HY 2020 Reported Underlying
GBPm GBPm growth growth
----------------------------- ------- ------- -------- ----------
Revenue 152 140 +9% +11%
Headline operating profit 17 9 +89% +109%
Statutory operating profit 16 7 +129%
Return on capital employed 8.2% 10.1% (190)bps
R&D cash costs as % of sales 7.1% 8.2% (110)bps
----------------------------- ------- ------- -------- ----------
Revenue
(GBPm) HY 2020 Foreign Acquisitions Underlying HY 2021
reported exchange & disposals reported
======== ========= ========= ============ ========== =========
Revenue 140 (4) - 16 152
======== ========= ========= ============ ========== =========
Smiths Interconnect delivered a strong first half performance
with revenue up +11% on an underlying basis, reflecting the
division's continued good momentum. Revenue increased by +9% on a
reported basis, including GBP(4)m adverse foreign exchange
translation.
This strong performance reflects high growth in the
semiconductor test business, as customers increased capacity for
the production of graphics chips and other microprocessors to
support demand for laptops, data centres and games consoles, as
well as new customer wins. There was also growth in the space and
defence market segments from specific projects and satellite
programmes. This growth was partly offset by a slight decline in
the industrials market driven in part by the timing of medical
orders.
During the period, Smiths Interconnect received significant
orders for its space qualified products for space exploration
projects and commercial satellite constellations. Smiths
Interconnect is proud that its high-performance connectors are
onboard NASA's six-wheeled science rover, Perseverance, which
recently landed safely on Mars to begin the search for traces of
ancient microbial life.
Operating profit
(GBPm) HY 2020 reported Foreign Acquisitions Restructuring Underlying HY 2021 reported
exchange & disposals costs
=================== ================ ========= ============ ============= ========== ================
Headline operating
profit 9 (0) - (1) 9 17
=================== ================ ========= ============ ============= ========== ================
Headline operating
margin 6.5% (90)bps +560bps 11.2%
=================== ================ ========= ============ ============= ========== ================
Headline operating profit increased +109% on an underlying
basis, reflecting strong volumes and the benefits of restructuring
actions. Headline operating profit was up +89% to GBP17m on a
reported basis, including GBP(1)m of restructuring costs to further
optimise the operational footprint. Headline operating margin was
11.2%, up +470bps on a reported basis and +560bps to 12.1% on an
underlying basis, excluding the impact of the restructuring costs.
The difference between statutory and headline operating profit
reflects adjustments for amortisation of acquired intangibles.
ROCE
ROCE decreased (190)bps to 8.2%, driven by lower profitability
in the second half of FY2020.
R&D
Cash R&D expenditure decreased to 7.1% of sales (6.7%
excluding customer funded R&D, HY 2020: 7.4%), as we continued
to invest in technology-led growth. R&D is focused on bringing
to market new products that improve connectivity and product
integrity in demanding operating environments. Product launches
included the new Volta 180 wafer test solution for semiconductor
test customers.
Smiths Medical - discontinued operations
Smiths Medical supplies quality, cost-effective medical devices
and consumables vital to patient care globally. Its portfolio
incorporates established brands, with strong positions in select
segments of the Infusion Systems, Vascular Access, and Vital Care
markets. 82% of Smiths Medical's sales are from consumable and
disposable products.
HY 2021 HY 2020 Reported Underlying
GBPm GBPm growth growth
----------------------------- ------- ------- -------- ----------
Revenue 427 434 (2)% +0.2%
Headline operating profit 89 94 (5)% +2%
Statutory operating profit 88 83 +6%
Return on capital employed 13.2% 13.2% +0bps
R&D cash costs as % of sales 5.6% 6.1% (50)bps
----------------------------- ------- ------- -------- ----------
Accounting standards require the Group to stop charging
depreciation and amortisation within Smiths Medical, from the point
of reclassifcation as discontinued operations. For comparability
purposes, depreciation and amortisation of GBP21m (HY 2020: GBP23m)
have been included in the calculation of underlying measures.
Update on separation
The Group is committed to completing the separation of Smiths
Medical by the end of the financial year with the primary focus on
ensuring we maximise shareholder value. We are finalising key
separation workstreams including governance, tax planning, debt
structure, transaction documents and pensions.
Smiths Medical is pursuing a focused strategy to accelerate
growth and drive enhanced performance to deliver the medium-term
ambition to grow ahead of its markets, with operating margin in
excess of 20% and attractive returns. The division's first half
performance demonstrated an uninterrupted focus on these underlying
improvement plans.
Revenue
(GBPm) HY 2020 Foreign Acquisitions Underlying HY 2021
reported exchange & disposals reported
======== ========= ========= ============ ========== =========
Revenue 434 (8) - 1 427
======== ========= ========= ============ ========== =========
Smiths Medical delivered a resilient performance with revenue of
GBP427m, up 0.2% on an underlying basis. Good growth was held back
by the impact of fewer elective procedures due to COVID-19. Revenue
was down (2)% on a reported basis, including GBP(8)m of adverse
foreign exchange translation.
Underlying revenue from Infusion Systems was up +5% driven by
increased sales to alternate care environments such as emergency
medical services, clinics, hospices and homes. Underlying revenue
from Vital Care grew +2% with growth driven by tracheostomy tubes
and respiratory products. Underlying revenue from Vascular Access
decreased (6)% with good growth of syringe and needle products
offset by the impact of fewer elective procedures as a result of
COVID-19. Smiths Medical is successfully delivering on its
agreement with the U.S. Government to expand syringe and needle
device production to support COVID-19 vaccine efforts. Smiths
Medical has also received large orders for vaccination devices for
Australia and Japan to be delivered throughout the remainder of
2021.
Operating profit
(GBPm) HY 2020 Foreign Restructuring Depreciation Underlying HY 2021
reported exchange costs & amortisation reported
================= ========= ========= ============= =============== ========== =========
Operating profit 94 (2) (3) (2) 2 89
================= ========= ========= ============= =============== ========== =========
Operating margin 21.7% (10)bps (70)bps (30)bps +30bps 20.9%
================= ========= ========= ============= =============== ========== =========
Headline operating profit of GBP89m was up +2% on an underlying
basis, reflecting the drive for enhanced performance. Headline
operating profit was down (5)% on a reported basis, due to GBP(2)m
of adverse foreign exchange and GBP(3)m of restructuring costs.
Restructuring costs include site consolidation, as well as
delayering and decentralisation to increase efficiency and
effectiveness. Headline operating margin was up +30bps on an
underlying basis, but down (80)bps to 20.9% on a reported basis due
to restructuring charges.
The difference between statutory and headline operating profit
is GBP1m of separation costs.
ROCE
ROCE remained at 13.2% in HY 2021.
R&D
Cash R&D expenditure was 5.6% of sales, down (50)bps year on
year. Smiths Medical continues to invest in the development of
innovative, commercially focused products across the portfolio to
support long-term, sustainable growth. Product launches
included:
-- PharmGuard software enhancements for the CADD(TM) Solis Infusion Pump
-- Comprehensive pain management solutions with new dedicated connectors
-- A new endotracheal tube range
-- DeltaVen Fast Flash, expanding our PIVC offering
Other financial matters
Risk management
The Group's principal risks and uncertainties and relevant
mitigating activities were set out on pages 67-76 of the FY2020
Annual Report. In the view of the Board, the principal 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.
COVID-19: COVID-19 is impacting our colleagues, customers,
suppliers and operations to varying degrees across different
territories and different parts of our business. This includes, but
is not limited to: risks to the wellbeing of our people, their
families and communities; our customers, who have in many cases
revised their demand forecasts; our suppliers, whose businesses
have had challenges maintaining continuity of supply; and our own
operations which have had to deal with all the combined challenges
of the pandemic.
Technology: Differentiated new products and services are
critical to our success. We may be unable to maintain technological
differentiation or to meet customers' needs and may face disruptive
innovation by a competitor.
Economy and geopolitics: COVID-19 has triggered a highly
significant global economic downturn. In many sectors, demand has
reduced. There is a likelihood that the impact on demand will be
prolonged, especially in commercial aerospace. A global recession
may also lead to an increase in bankruptcies of both customers and
suppliers. Conversely, the crisis is opening up new opportunities,
most obviously in Smiths Medical and Smiths Detection; and
inorganic opportunities are likely to arise more frequently and at
better values. Geopolitical tensions continue to rise, most notably
between China and the US, but also affecting other Governments,
which pose threats to the free movement of goods, capital and
people.
Group Portfolio: Our strategy is predicated primarily on organic
growth. However, acquisitions/divestments can also play a role in
building and/or strengthening competitive positions. Acquisitions
bring risk as well as opportunity. We may invest substantial funds
and resources in acquisitions which fail to deliver on expectations
- due to incorrect appraisal of the target and/or poor execution.
The opposite risk is that (perhaps through an excess of caution) we
miss out on opportunities to build market-leading positions and
growth. Divestments also carry risk. We may divest an asset at the
wrong time, or may not realise appropriate value for the asset.
Separation may be complex and, if poorly executed, may impact the
wider business.
Liquidity: COVID-19 has triggered a highly significant global
economic downturn. In many sectors, demand has reduced, in some
cases close to zero. We, along with our customers and suppliers,
have also faced disruption to operations and higher costs. If
disruption were to be deep and sustained over many months, our
financial position could be eroded by lower revenues, higher costs
and cash write-offs (e.g. non-payment by customers). We might not
be able to rely on access to committed facilities, either through
breach of our financial covenant or because lenders were unable to
meet their obligations.
Product quality: In the ordinary course of business, we are
potentially subject to product liability claims and lawsuits,
including potential class actions. The mission-critical nature of
many of our solutions makes the potential consequences of failure
more serious than may otherwise be the case.
Customers: Our markets are evolving at a fast pace, creating
potential for customers to change their business models as they
look to deliver products and services at higher quality, with
better service and at lower cost. Failure of the Group to keep pace
with customer changes/requirements (innovation, go-to-market
strategies) could have a materially adverse impact on Group
performance.
People: People are our only truly sustainable source of
competitive advantage and competition for key skills is intense,
especially around science, technology, engineering and mathematics
(STEM) disciplines. We may not be successful in attracting,
retaining, developing, engaging and inspiring the right people with
the right skills to achieve our growth ambitions
Cyber security: Cyber attacks seeking to compromise the
confidentiality, integrity and availability of IT systems and the
data held on them are a continuing risk. We operate in markets and
product areas which are known to be of interest to criminals.
Integrated Supply chain: Timely, efficient supply of raw
materials and purchased components is critical to our ability to
deliver to our customers. Manufacturing and supply chain continuity
are exposed to external events that could have significant adverse
consequences, including natural catastrophes, civil or political
unrest, changes in regulatory conditions, terrorist attacks and
disease pandemics - this applies to our own manufacturing sites and
those of our key component suppliers.
Markets: A significant proportion of our revenue comes from the
US and European markets, with a notable proportion coming from
governments. In addition to geographical markets, there is a risk
we do not focus on attractive sectors where we have, or could have,
a sustainable position.
Ethical breach: We operate in highly regulated markets requiring
strict adherence to laws with risk areas including: Bribery and
corruption; Anti-trust matters; International trade laws and
sanctions; Human rights, modern slavery and international labour
standards; General Data Protection Regulation (GDPR); and
Government contracting regulations. There is a risk that a
significant ethical or compliance breach may occur which could
seriously harm our reputation and impact our financial performance,
customer relationships and ability to retain talent.
Contractual obligations: We may fail to deliver the products and
services or fail in our contractual execution due to delays or
breaches by our suppliers or other counterparties.
Statement of directors' responsibilities
The directors confirm that, to the best of our knowledge:
the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by
the European Union ("EU") pursuant to Regulation (EC) No 1606/2002
as it applies in the EU and in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006 ;
-- the interim management report includes a fair review of the information required by:
a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
For and on behalf of the Board of directors:
Andy Reynolds Smith John Shipsey
Chief Executive Chief Financial Officer
25 March 2021
Independent review report to Smiths Group plc
Conclusion
We have been engaged by Smiths Group plc ("the Company") to
review the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 January 2021 which
comprises the consolidated income statement, the consolidated
statement of comprehensive income, the consolidated balance sheet,
the consolidated statement of changes in equity, the consolidated
cash flow statement and the related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
January 2021 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting adopted pursuant
to Regulation (EC) No 1606/2002 as it applies in the European Union
("EU") and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
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
UK. 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. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) 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.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the latest annual financial statements
of the group were prepared in accordance with International
Financial Reporting Standards as adopted by the EU and the next
annual financial statements will be prepared in accordance with
International Financial Reporting Standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the EU and in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Michael Maloney
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
25 March 2021
Consolidated income statement (unaudited)
Six months ended
Six months ended 31 January 2020 -
31 January 2021 represented*
=============================== ===============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ===== ======== ============ ======= ======== ============ =======
Continuing operations
Revenue 2 1,150 - 1,150 1,240 - 1,240
Operating costs 2 (984) (23) (1,007) (1,054) (41) (1,095)
========================================= ===== ======== ============ ======= ======== ============ =======
Operating profit/(loss) 166 (23) 143 186 (41) 145
========================================= ===== ======== ============ ======= ======== ============ =======
Interest receivable 5 - 5 4 - 4
Interest payable (26) - (26) (30) - (30)
Other financing losses - (41) (41) - (77) (77)
Other finance income - retirement
benefits - 3 3 - 4 4
========================================= ===== ======== ============ ======= ======== ============ =======
Finance costs (21) (38) (59) (26) (73) (99)
========================================= ===== ======== ============ ======= ======== ============ =======
Continuing operations - profit/(loss)
before taxation 145 (61) 84 160 (114) 46
========================================= ===== ======== ============ ======= ======== ============ =======
Taxation 5 (41) (21) (62) (43) 9 (34)
========================================= ===== ======== ============ ======= ======== ============ =======
Continuing operations - profit/(loss)
for the period 104 (82) 22 117 (105) 12
========================================= ===== ======== ============ ======= ======== ============ =======
Discontinued operations
Profit from discontinued operations 17 67 40 107 70 63 133
========================================= ===== ======== ============ ======= ======== ============ =======
PROFIT/(LOSS) FOR THE PERIOD 171 (42) 129 187 (42) 145
========================================= ===== ======== ============ ======= ======== ============ =======
Attributable to
Smiths Group shareholders - continuing
operations 103 (82) 21 116 (105) 11
Smiths Group shareholders - discontinued
operations 67 40 107 70 63 133
Non-controlling interests 1 - 1 1 - 1
========================================= ===== ======== ============ ======= ======== ============ =======
171 (42) 129 187 (42) 145
========================================= ===== ======== ============ ======= ======== ============ =======
Earnings per share 4
Basic 32.3p 36.3p
Basic - continuing 5.3p 2.8p
Diluted 32.2p 36.2p
Diluted - continuing 5.3p 2.8p
========================================= ===== ======== ============ ======= ======== ============ =======
Dividends per share (declared) 14 11.7p -
========================================= ===== ======== ============ ======= ======== ============ =======
* Results in the comparatives for the period ended 31 January
2020 have been represented to show operating costs on the face of
the income statement; see note 2 'Operating costs' for further
details.
Consolidated statement of comprehensive income (unaudited)
Six months Six months
ended ended
31 January 31 January
2021 2020
Notes GBPm GBPm
=========================================================== ====== =========== ===========
Profit for the period 129 145
=========================================================== ====== =========== ===========
Other comprehensive income
Re-measurement of post retirement benefits assets
and obligations 6 (94) 1
Taxation thereon 17 -
=========================================================== ====== =========== ===========
Other comprehensive income which will not be reclassified
to the consolidated income statement (77) 1
Other comprehensive income which will be reclassified
and reclassifications
Exchange losses (104) (257)
Fair value gains and reclassification adjustments:
- on financial assets at fair value through other
comprehensive income 3 1
- deferred in the period on cash-flow and net investment
hedges 51 112
- reclassified to income statement on cash-flow and
net investment hedges 1 (1)
=========================================================== ====== =========== ===========
Total other comprehensive expenditure (126) (144)
Total comprehensive income 3 1
=========================================================== ====== =========== ===========
Attributable to
Smiths Group shareholders 3 1
Non-controlling interests - -
=========================================================== ====== =========== ===========
3 1
=========================================================== ====== =========== ===========
Total comprehensive income attributable to Smiths Group
shareholders arising from
Continuing operations (53) (37)
Discontinued operations 56 38
=========================================================== ====== =========== ===========
3 1
=========================================================== ====== =========== ===========
Consolidated balance sheet (unaudited)
31 January 31 July
2021 2020
Notes GBPm GBPm
============================================ ===== ========== =======
Non-current assets
Intangible assets 7 1,492 1,564
Property, plant and equipment 8 212 218
Right of use assets 9 87 94
Financial assets - other investments 13 19
Retirement benefit assets 6 432 516
Deferred tax assets 97 102
Trade and other receivables 49 52
Financial derivatives 100 82
============================================ ===== ========== =======
2,482 2,647
Current assets
Inventories 394 446
Current tax receivable 44 46
Trade and other receivables 551 627
Cash and cash equivalents 10 375 366
Financial derivatives 4 2
Assets held for distribution to owners 17 1,251 1,279
============================================ ===== ========== =======
2,619 2,766
============================================ ===== ========== =======
Total assets 5,101 5,413
============================================ ===== ========== =======
Current liabilities
Financial liabilities:
- borrowings 10 (19) (10)
- lease liabilities 10 (27) (31)
- financial derivatives (3) (4)
Provisions 12 (39) (55)
Trade and other payables (471) (527)
Current tax payable (74) (79)
Liabilities held for distribution to owners 17 (257) (295)
============================================ ===== ========== =======
(890) (1,001)
Non-current liabilities
Financial liabilities:
- borrowings 10 (1,422) (1,455)
- lease liabilities 10 (64) (65)
Provisions 12 (264) (276)
Retirement benefit obligations 6 (134) (139)
Corporation tax payable (4) (5)
Deferred tax liabilities (22) (27)
Trade and other payables (50) (51)
============================================ ===== ========== =======
(1,960) (2,018)
============================================ ===== ========== =======
Total liabilities (2,850) (3,019)
============================================ ===== ========== =======
Net assets 2,251 2,394
============================================ ===== ========== =======
Shareholders' equity
Share capital 149 149
Share premium account 363 361
Capital redemption reserve 6 6
Revaluation reserve 1 1
Merger reserve 235 235
Cumulative translation adjustments 571 674
Retained earnings 1,165 1,259
Hedge reserve (260) (312)
============================================ ===== ========== =======
Total shareholders' equity 2,230 2,373
Non-controlling interest equity 21 21
============================================ ===== ========== =======
Total equity 2,251 2,394
============================================ ===== ========== =======
Consolidated statement of changes in equity (unaudited)
Share Cumulative
capital translation
and adjustments Equity
share Other GBPm Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
At 31 July 2020 510 242 674 1,259 (312) 2,373 21 2,394
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
Profit for the period - - - 128 - 128 1 129
Other comprehensive income:
* exchange losses net of recycling - - (103) - - (103) (1) (104)
* re-measurement of post-retirement benefits and
related tax - - - (77) - (77) - (77)
* fair value gains and related tax - - - 3 52 55 - 55
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
Total comprehensive income
for the period - - (103) 54 52 3 - 3
Transactions relating to
ownership interests
Issue of new equity shares 2 - - - - 2 1 3
Purchase of own shares - - - (16) - (16) - (16)
Dividends:
* equity shareholders 14 - - - (138) - (138) - (138)
* non-controlling interests - - - - - (1) (1)
Share-based payment - - - 6 - 6 - 6
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
At 31 January 2021 512 242 571 1,165 (260) 2,230 21 2,251
------------------------------------------------------ ----- ------- -------- ----------- -------- ------- ------------- --------------- ------
Share Cumulative
capital translation
and adjustments Equity
share Other GBPm Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
At 31 July 2019 508 242 878 1,115 (383) 2,360 21 2,381
Impact of adopting IFRS
16 - - - (1) - (1) - (1)
Impact of adopting IFRIC
23 - - - (4) - (4) - (4)
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
Profit for the period - - - 144 - 144 1 145
Other comprehensive income:
* exchange losses net of recycling - - (256) - - (256) (1) (257)
* re-measurement of post-retirement benefits and
related tax - - - 1 - 1 - 1
* fair value gains and related tax - - - 1 111 112 - 112
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
Total comprehensive income
for the period - - (256) 146 111 1 - 1
Transactions relating to
ownership interests
Exercises of share options 2 - - - 2 - 2
Purchase of own shares - - - (18) - (18) - (18)
Dividends:
* equity shareholders 14 - - - (126) - (126) - (126)
* non-controlling interests - - - - - - (1) (1)
Share-based payment - - - 6 - 6 - 6
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
At 31 January 2020 510 242 622 1,118 (272) 2,220 20 2,240
====================================================== ===== ======= ======== =========== ======== ======= ============= =============== ======
Retained earnings in the comparatives for the period to 31
January 2020 have been represented to show the cumulative foreign
exchange translation differences as a separate component of
equity.
Consolidated cash-flow statement (unaudited)
Six months Six months
ended ended
31 January 31 January
2021 2020
Notes GBPm GBPm
=========================================================== ====== =========== ===========
Net cash inflow from operating activities 15 262 187
Cash-flows from investing activities
Expenditure on capitalised development (15) (18)
Expenditure on other intangible assets (7) (8)
Purchase of property, plant and equipment (33) (29)
Income from financial assets 4 -
Acquisition of businesses (5) (24)
=========================================================== ====== =========== ===========
Net cash-flow used in investing activities (56) (79)
Cash-flows from financing activities
Proceeds from issue of new equity shares 2 2
Purchase of own shares (16) (18)
Dividends paid to equity shareholders and non-controlling
interests (139) (126)
Settlement of share awards in cash - (1)
Cash outflow from matured derivative financial instruments (5) (1)
Lease payments (23) (22)
=========================================================== ====== =========== ===========
Net cash-flow used in financing activities (181) (166)
Increase/(decrease) in cash and cash equivalents 25 (58)
Cash and cash equivalents at beginning of the period 366 289
(Increase)/decrease in cash held in disposal group (4) 4
Exchange differences (12) (29)
=========================================================== ====== =========== ===========
Cash and cash equivalents at end of the period 375 206
=========================================================== ====== =========== ===========
Cash and cash equivalents at end of the period comprise:
- cash at bank and in hand 193 179
- short-term deposits 182 27
=========================================================== ====== =========== ===========
375 206
=========================================================== ====== =========== ===========
Notes to the condensed interim financial statements
(unaudited)
1 Basis of preparation
The financial information for the period ended 31 January 2021
does not constitute statutory accounts as defined in section 434 of
the Companies Act 2006. A copy of the statutory accounts for the
year ended 31 July 2020 has been delivered to the Registrar of
Companies. The auditor's report on those accounts was not
qualified, did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying the
report, and did not contain statements under section 498(2) or (3)
of the Companies Act 2006.
This condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU pursuant to Regulation (EC) No 1606/2002 as it applies in
the EU.
The annual financial statements of the Group for the year ended
31 July 2021 will be prepared in accordance with International
Financial Reporting Standards (IFRSs) adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the EU and in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006. As required by the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority, this condensed set of financial statements has been
prepared applying the accounting policies and presentation that
were applied in the preparation of the Company's published
consolidated financial statements for the year ended 31 July 2020
which were prepared in accordance with IFRSs as adopted by the
EU.
The Directors have assessed the principal risks discussed on
page 16. As part of this, they have modelled a severe but plausible
downside scenario for COVID-19 (incorporating latest thinking on
possible winter timing and severity of a COVID-19 resurgence),
whereby the Group experiences:
(i) Continuation of challenges in FY2021:
- ongoing weakness (and no recovery) in end markets across all
divisions for the second half of FY2021, resulting in a -5% decline
on forecast revenues.
(ii) COVID-19 resurgence in FY2022:
- a significant increase in COVID-19, further lockdowns at the
start of winter, and severe disruption to both customer demand and
supply chain; and
- plant closures across most sites for a full two months
(November/December 2021) with inventory build-up during shutdown,
delays in customer receipts, and increases in customer
defaults.
This scenario assumes a curtailment of dividend payments but no
additional mitigating actions in terms of staff reductions,
restructuring or government subsidies. Based on past experience the
likelihood of this scenario is remote and throughout this severe
but plausible downside scenario the Group continues to have
significant liquidity headroom on existing facilities and against
the Rolling Credit Facility financial covenant.
The Directors believe that the Group is well placed to manage
its financing and other business risks satisfactorily, and have a
reasonable expectation that the Group will have adequate resources
to continue in operation for at least 12 months from the signing
date of these condensed consolidated interim financial statements.
They therefore consider it appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
The interim financial information was approved by the Board on
25 March 2021.
Accounting policies
The same accounting policies, estimates, presentation and
methods of computation are followed in the condensed interim
financial statements as applied in the Group's latest annual
audited financial statements.
New standards and interpretations not yet adopted
No new standards, new interpretations or amendments to standards
or interpretations have been published which are expected to have a
significant impact on the Group's financial statements.
Presentation of results
In order to provide users of the accounts with a clear and
consistent presentation of the performance of the Group's ongoing
trading activity, the income statement is presented in a three
column format with 'headline' profits shown separately from
non-headline items in a form consistent with the prior year.
Judgement is required in determining which items should be
included as non-headline. The amortisation of acquired intangibles,
legacy liabilities, material one-off items and certain
re-measurements are included in a separate column of the income
statement. See note 3 for a breakdown of the items excluded from
headline profit.
Performance measures for 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 19 for more information about the
alternative performance measures ('APMs') used by the Group and the
calculation of return on capital employed and credit metrics.
In addition, the Group reports underlying growth rates for sales
and profit measures where the determination of adjustments requires
judgement. Underlying growth excludes the effects of foreign
exchange, acquisitions and disposals, restructuring charges,
impairment of capitalised development and COVID-19 related balance
sheet write-downs, by making the following adjustments:
- exclude acquisitions from the current period for the first 12 months of ownership;
- exclude the performance of divested businesses after the date
of disposal from comparative period;
- exclude charges recognised due to the strategic restructuring programme in either period;
- exclude the impairment of capitalised development and COVID-19
related balance sheet write-downs from the comparative period;
and
- retranslate the comparative to current year exchange rates
before calculating growth measures.
2 Analysis of revenue, operating costs and segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Detection, Flex-Tek, Smiths Interconnect and Smiths Medical. These
divisions design and manufacture the following products:
- John Crane - mechanical seals, seal support systems, power
transmission couplings and specialised filtration systems;
- Smiths Detection - sensors and systems that detect and
identify explosives, narcotics, weapons, chemical agents,
biohazards and contraband;
- Flex-Tek - engineered components, flexible hosing and rigid
tubing which heat and move fluids and gases;
- Smiths Interconnect - specialised electronic and radio
frequency board-level and waveguide devices, connectors, cables,
test sockets and sub-systems used in high-speed, high reliability,
secure connectivity applications; and
- Smiths Medical - infusion systems, vascular access products,
patient airway and temperature management equipment and specialised
devices in areas of diagnostics and emergency patient
transport.
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 and note 19 for more
information on which items are excluded from headline profit
measures.
Following the reclassification of the Smiths Medical business as
a discontinued operation, the segmental information for the Smiths
Medical division is disclosed in note 17.
Intersegment sales and transfers are charged at arm's length
prices.
Segment trading performance
Six months ended 31 January 2021
=============================================================
John Smiths Smiths Corporate
Crane Detection Flex-Tek Interconnect costs Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ========== ======== ============= ========= =====
Revenue 410 350 238 152 - 1,150
================================== ====== ========== ======== ============= ========= =====
Divisional headline operating
profit 81 44 44 17 - 186
Corporate headline operating
costs - - - - (20) (20)
================================== ====== ========== ======== ============= ========= =====
Headline operating profit/(loss) 81 44 44 17 (20) 166
Items excluded from headline
measures (note 3) 1 (11) (6) (1) (6) (23)
================================== ====== ========== ======== ============= ========= =====
Operating profit/(loss) for the
period 82 33 38 16 (26) 143
================================== ====== ========== ======== ============= ========= =====
Headline operating margin 19.8% 12.6% 18.5% 11.2% - 14.4%
================================== ====== ========== ======== ============= ========= =====
Six months ended 31 January 2020
=============================================================
John Smiths Smiths Corporate
Crane Detection Flex-Tek Interconnect costs Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ========== ======== ============= ========= =====
Revenue 474 378 248 140 - 1,240
================================== ====== ========== ======== ============= ========= =====
Divisional headline operating
profit 101 57 46 9 - 213
Corporate headline operating
costs - - - - (27) (27)
================================== ====== ========== ======== ============= ========= =====
Headline operating profit/(loss) 101 57 46 9 (27) 186
Items excluded from headline
measures (note 3) (7) (13) (21) (2) 2 (41)
================================== ====== ========== ======== ============= ========= =====
Operating profit/(loss) for the
period 94 44 25 7 (25) 145
================================== ====== ========== ======== ============= ========= =====
Headline operating margin 21.3% 15.0% 18.4% 6.5% - 15.0%
================================== ====== ========== ======== ============= ========= =====
Segment assets and liabilities
Segment assets
31 January 2021
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= ======
Property, plant, equipment, right
of use assets, development projects,
other intangibles and investments 136 122 62 48 21 389
Inventory, trade and other receivables 343 377 133 119 22 994
======================================== ====== ========== ======== ============= ============= ======
Segment assets 479 499 195 167 43 1,383
======================================== ====== ========== ======== ============= ============= ======
31 July 2020
=================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================== ====== ========== ======== ============= ============= =====
Property, plant, equipment, development
projects, other intangibles and
investments 143 125 64 49 26 407
Inventory, trade and other receivables 395 438 144 136 11 1,124
========================================= ====== ========== ======== ============= ============= =====
Segment assets 538 563 208 185 37 1,531
========================================= ====== ========== ======== ============= ============= =====
Non-headline assets comprise receivables relating to
non-headline items, acquisitions and disposals.
Segment liabilities
31 January 2021
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= ======
Divisional liabilities (120) (263) (59) (46) - (488)
Corporate and non-headline liabilities - - - - (336) (336)
======================================== ====== ========== ======== ============= ============= ======
Segment liabilities (120) (263) (59) (46) (336) (824)
======================================== ====== ========== ======== ============= ============= ======
31 July 2020
=================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= =====
Divisional liabilities (142) (288) (60) (55) - (545)
Corporate and non-headline liabilities - - - - (364) (364)
======================================== ====== ========== ======== ============= ============= =====
Segment liabilities (142) (288) (60) (55) (364) (909)
======================================== ====== ========== ======== ============= ============= =====
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
=================== ===================
31 January 31 July 31 January 31 July
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
============================================= ========== ======= ========== =======
Segment assets and liabilities 1,383 1,531 (824) (909)
Goodwill and acquired intangibles 1,415 1,489 - -
Derivatives 104 84 (3) (4)
Current and deferred tax 141 148 (100) (111)
Retirement benefit assets and obligations 432 516 (134) (139)
Cash and borrowings 375 366 (1,532) (1,561)
Assets and liabilities held for distribution
to owners 1,251 1,279 (257) (295)
============================================== ========== ======= ========== =======
Statutory assets and liabilities 5,101 5,413 (2,850) (3,019)
============================================== ========== ======= ========== =======
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 GBP787m (31 July 2020: GBP787m),
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 19 for additional details.
The 12-month rolling average capital employed by division, which
Smiths uses to calculate divisional return on capital employed, is
set out below:
31 January 2021
==================================================
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
==================================== ====== ====== ====== ========== ======== ============= =======
Average divisional capital employed 988 1,103 452 415 2,958
Average capital employed - assets held
for distribution to owners 1,355
Average corporate capital employed 13
==================================================== ====== ========== ======== ============= =======
Average total capital employed 4,326
==================================================== ====== ========== ======== ============= =======
Return on capital employed 16.9% 6.3% 17.9% 8.2% 11.2%
==================================================== ====== ========== ======== ============= =======
31 January 2020
==================================================
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
==================================== ====== ====== ====== ========== ======== ============= =======
Average divisional capital employed 962 1,125 469 380 2,936
Average capital employed - assets held
for distribution to owners 1,290
Average corporate capital employed (70)
==================================================== ====== ========== ======== ============= =======
Average total capital employed 4,156
==================================================== ====== ========== ======== ============= =======
Return on capital employed 23.3% 11.5% 20.6% 10.1% 14.7%
==================================================== ====== ========== ======== ============= =======
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original
equipment Aftermarket Total
John Crane GBPm GBPm GBPm
==================================== ========== =========== =====
Revenue six months ended 31 January
2021 130 280 410
Revenue six months ended 31 January
2020 154 320 474
======================================== ========== =========== =====
Other
security
Aviation systems Total
Smiths Detection GBPm GBPm GBPm
==================================== ======== ========= =====
Revenue six months ended 31 January
2021 260 90 350
Revenue six months ended 31 January
2020 254 124 378
======================================== ======== ========= =====
Aerospace Industrials Total
Flex-Tek GBPm GBPm GBPm
==================================== ========= =========== =====
Revenue six months ended 31 January
2021 48 190 238
Revenue six months ended 31 January
2020 77 171 248
======================================== ========= =========== =====
Components,
Connectors
& Subsystems
Smiths Interconnect GBPm
==================================== =============
Revenue six months ended 31 January
2021 152
Revenue six months ended 31 January
2020 140
========================================== =============
The Group's statutory revenue is analysed as follows:
Six months
Six ended
months 31 January
ended 2020
31 January Restated*
2021 GBPm
GBPm
======================================= =========== ===========
Sale of goods recognised at a point in
time 840 905
Sale of goods recognised over time 24 23
Services recognised over time 286 312
=========================================== =========== ===========
Revenue - continuing operations 1,150 1,240
=========================================== =========== ===========
* Following a review of the Group's revenue disclosures, the
comparative period ended 31 January 2020 has been adjusted to
reclassify GBP74m of repairs revenue from 'Sale of goods recognised
at a point in time' to 'Services recognised over time'. This
reclassification has no impact on total revenue, profit or net
assets recorded in the comparative period ended 31 January
2020.
Operating costs
The Group's headline operating costs for continuing operations
are analysed as follows:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
========================================= =========== ===========
Direct materials, labour, production and
distribution overheads 709 743
Selling costs 105 126
Administrative expenses 170 185
============================================= =========== ===========
Headline operating costs 984 1,054
============================================= =========== ===========
Income statement representation
Following a review of the Group's external and internal
reporting requirements, management have decided to present the
consolidated income statement in a revised format disclosing
operating costs on the face of the income statement instead of cost
of sales, sales and distribution costs and administrative expenses
separately.
The results in the comparatives for the period ended 31 January
2020 have been represented accordingly. Management consider that
the revised income statement presentation provides users of the
financial statements
with more accessible, reliable and relevant information about the Group's financial performance.
Strategic restructuring programme
In June 2020 the Group commenced a strategic restructuring
programme to ensure that the Group emerges stronger from the
COVID-19 crisis and better able to deliver consistent
outperformance. In the current period, restructuring costs of GBP1m
(31 January 2020: GBPnil) were recognised in continuing operations
and GBP3m (31 January 2020: GBPnil) in discontinued operations.
The table below shows a reconciliation of h eadline operating
profit excluding restructuring costs to headline operating profit
for continuing operations. See note 19 for further detail.
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
================================================== =========== ===========
Headline operating profit 166 186
Strategic restructuring costs recognised
in headline administrative expenses (1) -
====================================================== =========== ===========
Headline operating profit excluding restructuring
costs 167 186
====================================================== =========== ===========
3 Non-statutory profit measures
Headline profit measures
The Group seeks to present a measure of 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 adjustments. The
items excluded from 'headline' are referred to as 'non-headline'
items.
Non-headline operating profit items
The non-headline items included in statutory operating profit
for continuing operations are as follows:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
============================================================= =========== ===========
Post-acquisition integration costs and fair value adjustment
unwind
Integration programmes (1) (3)
Acquisition related transactions costs
Business acquisition costs - (2)
Legacy pension scheme arrangements
Guaranteed Minimum Pension (GMP) equalisation (6) -
Settlement gains on post-retirement benefit schemes - 8
Non-headline litigation provision movements
Provision for John Crane, Inc. asbestos litigation (2) (11)
Cost recovery for John Crane, Inc. asbestos litigation 6 -
Movement in provision held against Titeflex Corporation
subrogation claims 7 (5)
Other items
Amortisation of acquisition related intangible assets (27) (28)
============================================================== =========== ===========
Non-headline items in operating profit - continuing
operations (23) (41)
============================================================== =========== ===========
Post-acquisition integration costs and fair value adjustment
unwind
The GBP1m (31 January 2020: GBP3m) of integration programme
costs relate to defined projects for the integration of United
Flexible into the existing Flex-Tek business. Integration programme
costs include the direct costs of organisational change, site
rationalisation and entity closure costs. The United Flexible
integration programme is due to conclude in calendar year 2021.
Integration costs are recognised as non-headline items because they
are considered to be non-operational in nature and bear no relation
to the ongoing performance of the acquired businesses.
Acquisition related transaction costs
In the prior year the GBP2m of business acquisition costs
related to the acquisition of Reflex Photonics Inc. which completed
in October 2019. These costs do not include the cost of employees
working on transactions, and are reported as non-headline because
they are dependent on the level of acquisition and disposal
activity in the period.
Legacy pension scheme arrangement
In the current year GBP6m of past service costs (31 January
2020: GBPnil) were recognised following a further ruling from the
UK High Court on GMP equalisation. In the prior year the GBP8m
settlement gain on post-retirement benefit schemes is due to
changes to the US post-retirement healthcare plans as a result of
the US Patient Protection and Affordable Care Act. These are
recognised as non-headline as they are non-recurring and relate to
legacy pension schemes.
Non-headline litigation provision movements
The following litigation costs and recoveries have been treated
as non-headline items because the provisions were treated as
non-headline when originally recognised and the subrogation claims
and litigation relate to products that the Group no longer sells in
these markets:
- The GBP2m (31 January 2020: GBP11m) charge in respect of John
Crane, Inc. asbestos litigation is principally due to litigation
management expenses and discount rate movements following an
increase in US treasury bond yields. The costs recovered via
insurer settlements in the current period were GBP6m. See note 12
for further details; and
- A GBP7m credit (31 January 2020: GBP5m charge) has been
recognised by Titeflex Corporation in respect of changes to the
estimated cost of future claims. The current year credit is driven
by discount rate movements. See note 12 for further details.
Other items
Acquisition related intangible asset amortisation costs of
GBP27m (31 January 2020: GBP28m) were recognised in the current
period. This is considered to be a non-headline item on the basis
that these charges result from acquisition accounting and do not
relate to current trading activity.
Non-headline finance costs items
The non-headline items included in finance costs for continuing
operations are as follows:
Six
Six months months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
============================================================= =========== ============
Unwind of discount on provisions (1) (3)
Other finance income - retirement benefits 3 4
Foreign exchange loss on intercompany loan with discontinued
operations (38) (68)
Other financing losses (2) (6)
============================================================== =========== ============
Non-headline items in finance costs - continuing operations (38) (73)
============================================================== =========== ============
Continuing operations - non-headline loss before taxation (61) (114)
============================================================== =========== ============
The financing elements of non-headline legacy liabilities,
including the GBP1m (31 January 2020: GBP3m) unwind of discount on
provisions, are excluded from headline finance costs because these
provisions were originally recognised as non-headline and this
treatment has been maintained for ongoing costs and credits.
Other finance income comprises GBP3m (31 January 2020: GBP4m) of
financing credits relating to retirement benefits. These are
excluded from headline finance costs because the ongoing costs and
credits are a legacy of previous employee pension arrangements.
Foreign exchange gains or losses on intercompany financing
between Smiths Medical and the continuing group are recognised on
the face of the income statement as a non-headline item due to the
classification of Smiths Medical as a discontinued operation. The
GBP38m foreign exchange loss in continuing operations (31 January
2020: GBP68m) matches the foreign exchange gain in discontinued
operations. This is excluded from headline net finance costs as
these fair value movements are non-operational in nature and are
purely a consequence of the presentational requirements for
discontinued operations.
Other financing losses represent fair value movements on
financial instruments and foreign exchange movements on borrowings,
which the Group excludes from headline net finance costs. The
current period loss of GBP2m (31 January 2020: GBP6m) is
principally due to hedge ineffectiveness on the Group's 2027
Eurobonds, which will reverse over the remaining period to
maturity. These fair value movements are excluded from headline net
finance costs when the following requirements are met:
- Fair value gains and losses on the interest element of
derivative financial instruments hedging the Group's net debt
exposures are excluded from headline, as they will either reverse
over time or be matched in future periods by interest charges.
- Fair value gains and losses on the currency element of
derivative financial instruments hedging the Group's net debt and
exposures, and exchange gains and losses on borrowings are
excluded, as the relevant foreign exchange gains and losses on the
commercially hedged items are recognised as a separate component of
other comprehensive income, in accordance with the Group's foreign
currencies accounting policy.
Non-headline taxation items
The GBP21m non-headline taxation charge for continuing
operations (31 January 2020: GBP9m credit) represents the tax
attributable to the non-headline items above and the write-off of
UK deferred tax, the latter matched by a credit in other
comprehensive income.
Non-headline items for discontinued operations
The non-headline items for discontinued operations are as
follows:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
========================================================== =========== ===========
Acquisition and disposal related transactions costs
and provision releases
Medical separation costs (1) (11)
Non-headline finance costs items
Foreign exchange gain on intercompany loan with parent 38 68
Non-headline taxation items
Taxation on non-headline profit 3 6
=========================================================== =========== ===========
Non-headline items in profit from discontinued operations 40 63
=========================================================== =========== ===========
Profit for the period - non-headline items for continuing
and discontinued operations (42) (42)
=========================================================== =========== ===========
The GBP1m of Medical separation costs (31 January 2020: GBP11m)
represent incremental costs incurred by the Group to separate
Smiths Medical. This cost has been reported as non-headline as the
full year effect of the transaction on the Group's financial
statements is both material and non-recurring.
The GBP38m foreign exchange gain on intercompany loan with
parent (31 January 2020: GBP68m) directly offsets the foreign
exchange loss in continuing operations. This is excluded from
headline net finance costs as these fair value movements are
non-operational in nature and are purely a consequence of the
presentational requirements for discontinued operations.
4 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the period attributable to equity shareholders of the Company
by the average number of ordinary shares in issue during the
period.
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
------------------------------------------------------------- ----------- -----------
Profit attributable to equity shareholders for the period
- Continuing 21 11
- Discontinuing 107 133
------------------------------------------------------------- ----------- -----------
Total 128 144
------------------------------------------------------------- ----------- -----------
Average number of shares in issue during the period 396,331,156 396,181,277
------------------------------------------------------------- ----------- -----------
Statutory earnings per share continuing operations - basic 5.3 2.8
Statutory earnings per share continuing operations - diluted 5.3 2.8
------------------------------------------------------------- ----------- -----------
Statutory earnings per share total - basic 32.3 36.3
Statutory earnings per share total - diluted 32.2 36.2
------------------------------------------------------------- ----------- -----------
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 397,355,869 (31 January
2020: 397,628,603) 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 statutory and headline earnings per share is
as follows:
Six months ended Six months ended
31 January 2021 31 January 2020
-------------------- --------------------
Basic Diluted Basic Diluted
EPS EPS EPS EPS
GBPm (p) (p) GBPm (p) (p)
----------------------------------------- ---- ----- ------- ---- ----- -------
Basic earnings per share:
Total profit attributable to equity
shareholders of the Parent Company 128 32.3 32.2 144 36.3 36.2
Exclude: Non-headline items (note
3) 42 42
----------------------------------------- ---- ----- ------- ---- ----- -------
Headline earnings per share 170 42.9 42.8 186 46.9 46.8
----------------------------------------- ---- ----- ------- ---- ----- -------
Profit from continuing operations
attributable to equity shareholders
of
the Parent Company 21 5.3 5.3 11 2.8 2.8
Exclude: Non-headline items (note
3) 82 105
----------------------------------------- ---- ----- ------- ---- ----- -------
Headline earnings per share - continuing
operations 103 26.0 25.9 116 29.3 29.2
----------------------------------------- ---- ----- ------- ---- ----- -------
5 Taxation
The interim tax rate of 74.4% (31 January 2020: 74.3%) is
calculated by applying the estimated effective headline tax rate
for continuing operations of 28.0% (31 January 2020: 27.0%) for the
year ended 31 July 2021 to headline profit before tax and then
taking into account the tax effect of non-headline items in the
interim period.
A reconciliation of headline and total tax charge is as
follows:
Six months Six months
ended 31 January ended 31 January
2021 2020
--------------------- ---------------------
Continuing Continuing
operations operations
GBPm Tax rate GBPm Tax rate
------------------------------------------------ ----------- -------- ----------- --------
Headline tax rate
Headline profit before taxation 145 160
Taxation on headline profit (41) 28.0% (43) 27.0%
------------------------------------------------ ----------- -------- ----------- --------
Adjustments
Non-headline items excluded from profit before
taxation (note 3) (61) (114)
Taxation on non-headline items and non-headline
tax adjustment (21) 9
------------------------------------------------ ----------- -------- ----------- --------
Total interim tax rate
Profit before taxation 84 46
Taxation (62) 74.4% (34) 74.3%
------------------------------------------------ ----------- -------- ----------- --------
The changes in the value of the net tax asset/(liability) in the
period were:
Current Deferred Net tax
tax tax balance
GBPm GBPm GBPm
---------------------------------- ------- -------- --------
At 31 July 2020 (38) 75 37
Foreign exchange gains and losses 1 (3) (2)
Charge to income statement (45) (17) (62)
Credit to equity - 20 20
Tax paid 48 - 48
------------------------------------- ------- -------- --------
At 31 January 2021 (34) 75 41
------------------------------------- ------- -------- --------
Developments in the Group tax position
Franked Investment Income Group Litigation Order (FII GLO)
The Group joined the FII GLO litigation against HM Revenue &
Customs (HMRC) in 2009. The court actions were first filed in 2003
and the Group joined the GLO shortly before the then understood
latest date by which it was "in time" to make a claim. Since then
there have been about 12 years of litigation in the both the EU and
English Courts. In November 2020 the Supreme Court, in allowing
HMRC's appeal, decided that the time limit for claims should be
determined as 6 years from when the claimants, including the Group
knew, or by undertaking reasonable diligence could have known, that
they had a valid claim. The case has now returned to the High Court
to determine the actual date on the facts of the matter. This is
expected to add at least three years to the litigation.
In the light of this decision, management's view of the
likelihood of a successful outcome in the Courts has changed. So
rather than incurring the costs and management time in continuing
with litigation, with a worst case involving an outflow of cash of
around GBP2m, the Group has chosen to settle with HMRC. The
settlement amount of GBP0.8m was paid to the Group on 11 February
2021. This amount is in addition to GBP2m which the Group received
in FY2018. The Group has now withdrawn from the FII GLO.
European Commission Investigation regarding Claims for Partial
(75%) Exemption for Profits from qualifying loan relationships
under Chapter 9 FA2012
The Group continues to disclose a contingent liability in
relation to the European Commission decision that the UK's tax
rules constituted illegal State Aid. The maximum amount has
slightly reduced from GBP15m to GBP14m as a result of clarification
of applicable interest rates. In June 2019 the UK government
appealed to the General Court of the EU against the decision. Many
UK based international companies have also appealed the decision,
including the Group in October 2019. Nonetheless, the UK Government
is required to commence recovery from beneficiaries of the alleged
aid in line with the European Commission's decision. The recovery
process by the UK tax authorities is underway and HMRC has begun
issuing charging notices. The Group has not yet received a charging
notice. If it does, UK tax authority guidance states that tax
reliefs (including losses) can be taken into account in computing
the amount of the State Aid to be paid. These reliefs should mean
there is no material cash outlay for the Group, even if the
European Commission's decision is ultimately upheld. Nevertheless,
the use of these attributes is not certain and the estimated
maximum potential liability (which includes both tax and interest)
is GBP14m. Based on our current assessment, no provision is being
made in respect of this issue.
6 Post retirement benefits
The Group 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 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
16 years.
The amounts recognised in the balance sheet are as follows:
31 January 31 July
2021 2020
GBPm GBPm
------------------------------------------------- ---------- -------------
Market value of scheme assets 4,379 4,582
Present value of funded scheme liabilities (3,957) (4,078)
-------------------------------------------------- ---------- -------------
Surplus 422 504
-------------------------------------------------- ---------- -------------
Unfunded pension plans (121) (123)
Post-retirement healthcare (8) (9)
-------------------------------------------------- ---------- -------------
Present value of unfunded obligations (129) (132)
-------------------------------------------------- ---------- -------------
Net retirement benefit asset 293 372
-------------------------------------------------- ---------- -------------
Post-retirement assets 432 516
Post-retirement liabilities (134) (139)
Liabilities held for distribution to owners (see
note 17) (5) (5)
-------------------------------------------------- ---------- -------------
Net retirement benefit asset 293 372
-------------------------------------------------- ---------- -------------
The principal assumptions used in updating the valuations are
set out below:
31 January 2021 31 July 2020
----------------- --------------
UK US UK US
--------------------------------------------- -------- ------- ------ ------
Rate of increase for active deferred members 3.9% n/a 3.8% n/a
Rate of increase in pensions in payment 3.0% n/a 2.9% n/a
Rate of increase in deferred pensions 3.0% n/a 2.9% n/a
Discount rate 1.5% 2.7% 1.4% 2.4%
--------------------------------------------- -------- ------- ------ ------
The methods for setting the mortality assumptions for the UK
schemes are consistent with the 31 July 2020 valuation. The US
schemes have adopted the mortality improvement scale MP-2020 (31
July 2020: MP-2019).
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 January 2021 -
GBPm 31 July 2020 - GBPm
---------------------------- ----------------------------
SIPS TIGPS US schemes SIPS TIGPS US schemes
------------------------------------------- ------- ------- ---------- ------- ------- ----------
Present value of funded scheme liabilities
- Active deferred members (43) (30) (83) (44) (61) (95)
- Deferred members (831) (638) (124) (961) (593) (138)
- Pensioners (1,256) (816) (74) (1,178) (866) (81)
------------------------------------------- ------- ------- ---------- ------- ------- ----------
Present value of funded scheme liabilities (2,130) (1,484) (281) (2,183) (1,520) (314)
Market value of scheme assets 2,377 1,669 280 2,466 1,754 311
------------------------------------------- ------- ------- ---------- ------- ------- ----------
Surplus/(deficit) 247 185 (1) 283 234 (3)
------------------------------------------- ------- ------- ---------- ------- ------- ----------
Contributions
Group contributions to the funded defined benefit pension plans
in the period totalled GBP16m (31 January 2020: GBP12m), comprising
regular contributions of GBP6m (31 January 2020: GBP6m) to SIPS,
GBP6m (31 January 2020: GBP6m) to TIGPS and GBP4m (31 January 2020:
GBPnil) to funded US Schemes. In addition, GBP3m (31 January 2020:
GBP4m) was paid to unfunded defined benefit pension schemes and
post-retirement healthcare plans. No additional contributions to
support risk reduction programmes were made in the current or
previous period.
The changes in the present value of the net pension balance in
the period were:
Six months Year
ended ended
31 January 31 July
2021 2020
GBPm GBPm
---------------------------------------------- ----------- --------
At beginning of period 372 311
Foreign exchange rate movements 3 2
Current service cost (1) (3)
Scheme administration costs (3) (5)
Past service cost, curtailments, settlements (6) 8
Finance income - retirement benefits 3 7
Contributions by employer 19 33
Actuarial gain/(loss) (94) 19
------------------------------------------------ ----------- --------
Net retirement benefit asset at end of period 293 372
------------------------------------------------ ----------- --------
Past service costs, curtailments and settlements
The past service cost of GBP29m was recognised in the year ended
31 July 2019 to reflect the estimated cost of equalising benefits
in the Group's UK schemes, in line with the requirements of the
court judgment on 26 October 2018 in the case involving Lloyds
Banking Group and relating to Guaranteed Minimum Pensions. In the
current period, a further past service cost of GBP6m has been
recognised in relation to the subsequent court judgment addressing
the need to equalise historical transfer values. In the prior
period the Group recognised a curtailment gain of GBP8m due to
changes to the US post-retirement healthcare plans.
Buy-in agreements
In September 2020 TIGPS purchased a buy-in annuity policy with
Aviva for a premium of approximately GBP141m. An actuarial loss of
GBP23m was recognised in the period as a result of this buy-in
agreement. In October 2020 SIPS purchased a buy-in annuity policy
with Canada Life for a premium of approximately GBP146m. An
actuarial loss of GBP17m was recognised in the period as a result
of this buy-in agreement. Across SIPS and TIGPS, approximately 70%
of pensioner liabilities are now de-risked through 10 bulk
annuities.
7 Intangible assets
Software,
patents
Development Acquired and intellectual
Goodwill costs intangibles property Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------- ----------- ------------ ----------------- ------
Cost
At 31 July 2020 1,254 155 546 174 2,129
Exchange adjustments (42) (4) (22) (4) (72)
Business combinations 13 3 - 2 - 5
Additions - 4 - 6 10
---------------------------------- -------- ----------- ------------ ----------------- ------
At 31 January 2021 1,215 155 526 176 2,072
---------------------------------- -------- ----------- ------------ ----------------- ------
Amortisation
At 31 July 2020 62 112 249 142 565
Exchange adjustments (2) (2) (10) (4) (18)
Charge for the period - 3 27 3 33
---------------------------------- -------- ----------- ------------ ----------------- ------
At 31 January 2021 60 113 266 141 580
---------------------------------- -------- ----------- ------------ ----------------- ------
Net book value at 31 January 2021 1,155 42 260 35 1,492
Net book value at 31 July 2020 1,192 43 297 32 1,564
---------------------------------- -------- ----------- ------------ ----------------- ------
8 Property, plant and equipment
Fixtures,
fittings,
Land Plant tools
and and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
---------------------------------- ---------- ---------- ---------- -----
Cost or valuation
At 31 July 2020 175 383 133 691
Exchange adjustments (1) (13) (3) (17)
Additions - 17 1 18
Disposals - (5) (3) (8)
---------------------------------- ---------- ---------- ---------- -----
At 31 January 2021 174 382 128 684
---------------------------------- ---------- ---------- ---------- -----
Depreciation
At 31 July 2020 102 261 110 473
Exchange adjustments (1) (11) (2) (14)
Charge for the period 4 12 3 19
Disposals - (3) (3) (6)
---------------------------------- ---------- ---------- ---------- -----
At 31 January 2021 105 259 108 472
---------------------------------- ---------- ---------- ---------- -----
Net book value at 31 January 2021 69 123 20 212
Net book value at 31 July 2020 73 122 23 218
---------------------------------- ---------- ---------- ---------- -----
9 Right of use assets
Properties Vehicles Equipment Total
GBPm GBPm GBPm GBPm
------------------------------------ ---------- -------- --------- -----
Cost
At 31 July 2020 110 14 1 125
Exchange adjustments (2) - - (2)
Recognition of right of use assets 8 1 - 9
Modification of right of use assets 1 - - 1
------------------------------------ ---------- -------- --------- -----
At 31 January 2021 117 15 1 133
------------------------------------ ---------- -------- --------- -----
Depreciation
At 31 July 2020 26 5 - 31
Charge for the period 12 3 - 15
------------------------------------ ---------- -------- --------- -----
At 31 January 2021 38 8 - 46
------------------------------------ ---------- -------- --------- -----
Net book value at 31 January 2021 79 7 1 87
Net book value at 31 July 2020 84 9 1 94
------------------------------------ ---------- -------- --------- -----
10 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 fair value adjustments to debt
relating to hedge accounting.
31 January 31 July
2021 2020
GBPm GBPm
------------------------------------------------------------- ---------- -------
Cash and cash equivalents
Net cash and cash equivalents 375 366
------------------------------------------------------------- ---------- -------
Short-term borrowings
Lease liabilities (27) (31)
Interest accrual (19) (10)
------------------------------------------------------------- ---------- -------
(46) (41)
------------------------------------------------------------- ---------- -------
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022 (294) (308)
EUR600m 1.25% Eurobond 2023 (536) (546)
EUR650m 2.00% Eurobond 2027 (592) (601)
Lease liabilities (64) (65)
------------------------------------------------------------- ---------- -------
(1,486) (1,520)
------------------------------------------------------------- ---------- -------
Borrowings (1,532) (1,561)
------------------------------------------------------------- ---------- -------
Derivatives managing interest rate risk and currency profile
of the debt 100 82
------------------------------------------------------------- ---------- -------
Net debt (excludes net debt of GBP18m in businesses held
for distribution (31 July 2020: GBP28m)) (1,057) (1,113)
------------------------------------------------------------- ---------- -------
Total Group net debt including net debt in businesses held for
distribution is GBP1,075m (31 July 2020: GBP1,141m).
Movements in net debt
Interest
rate
Cash and cross
and Short-term Long-term currency
deposits borrowings borrowings swaps Net debt
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------- --------- ----------- ----------- ---------- --------
At 31 July 2020 366 (41) (1,520) 82 (1,113)
Foreign exchange gains and losses (12) (1) 33 - 20
Net cash inflow from continuing operations* 21 - - - 21
Net movement arising from lease modifications - - (12) - (12)
Fair value movement from interest
rate hedging - - 3 - 3
Revaluation of derivative contracts - - - 18 18
Finance costs recognised in income
statement** - (15) (1) - (16)
Interest paid - 5 - - 5
Payment of lease liabilities - 17 - - 17
Reclassification to short-term - (11) 11 - -
----------------------------------------------- --------- ----------- ----------- ---------- --------
At 31 January 2021 375 (46) (1,486) 100 (1,057)
----------------------------------------------- --------- ----------- ----------- ---------- --------
* The GBP21m of net cash inflow from continuing operations
excludes GBP4m of net cash inflow from discontinued operations. Net
cash inflow for the total Group including discontinued operations
was GBP25m.
** The Group has also incurred GBP5m of bank charges that are
expensed when paid and are not included in net debt.
11 Fair value of financial instruments
As at 31 January 2021 As at 31 July 2020
---------------------------------------------- ----------------------------------------------
Basis At fair At fair
for value At fair value At fair
determining At through value Total Total At through value Total Total
fair amortised profit through carrying fair amortised profit through carrying fair
value cost or loss OCI value value cost or loss OCI value value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------------ --------- ------- ------- -------- ------- --------- ------- ------- -------- -------
Financial assets
Other
investments A - 7 - 7 7 - 11 - 11 11
Other
investments* E - - 6 6 6 - - 8 8 8
Cash and cash
equivalents A 259 116 - 375 375 206 160 - 366 366
Trade and other
financial
receivables A/B 600 - - 600 600 679 - - 679 679
Derivative
financial
instruments B - 104 - 104 104 - 84 - 84 84
---------------- ------------ --------- ------- ------- -------- ------- --------- ------- ------- -------- -------
Total f inancial
assets 859 227 6 1,092 1,092 885 255 8 1,148 1,148
------------------------------ --------- ------- ------- -------- ------- --------- ------- ------- -------- -------
Financial
liabilities
Trade and other
financial
payables A (521) - - (521) (521) (578) - - (578) (578)
Lease
liabilities
(long and short
term) C (91) - - (91) (91) (96) - - (96) (96)
Other short-term
borrowings D (19) - - (19) (19) (10) - - (10) (10)
Other long-term
borrowings D (1,422) - - (1,422) (1,471) (1,455) - - (1,455) (1,473)
Derivative
financial
instruments B - (3) - (3) (3) - (4) - (4) (4)
---------------- ------------ --------- ------- ------- -------- ------- --------- ------- ------- -------- -------
Total financial liabilities (2,053) (3) - (2,056) (2,105) (2,139) (4) - (2,143) (2,161)
------------------------------ --------- ------- ------- -------- ------- --------- ------- ------- -------- -------
* Fair value gains and losses in this category of financial
assets are recognised in other comprehensive income.
The fair value of a financial instrument is the price at which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's-length transaction. Fair
values have been determined with reference to available market
information at the balance sheet date, using the methodologies
described below:
A Carrying value is assumed to be a reasonable approximation to fair
value for all of these assets and liabilities (Level 2 as defined
by IFRS 13 Fair Value Measurement).
B Fair values of derivative financial assets and liabilities and
trade receivables held to collect or sell are estimated by discounting
expected future contractual cash-flows using prevailing interest
rate curves. Amounts denominated in foreign currencies are valued
at the exchange rate prevailing at the balance sheet date. These
financial instruments are included on the balance sheet at fair
value, derived from observable market prices (Level 2 as defined
by IFRS 13 Fair Value Measurement).
C Leases are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance
sheet date. The fair value of the lease contract is estimated by
discounting contractual future cash-flows (Level 2 as defined by
IFRS 13).
D Borrowings are carried at amortised cost. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. The fair value of borrowings is estimated
using quoted prices (Level 1 as defined by IFRS 13).
E The fair value of instruments is estimated by using unobservable
inputs to the extent that relevant observable inputs are not available.
Unobservable inputs are developed using the best information available
in the circumstances, which may include the Group's own data, taking
into account all information about market participation assumptions
that is reliably available. (Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy:
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1
inputs
Level 3 - inputs not based on observable market data
12 Provisions and contingent liabilities
Non-headline and
Headline legacy Total
-------- -------------------------------- -----
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- ----------- ------------ ----- -----
Current liabilities 12 26 13 4 55
Non-current liabilities 2 205 53 16 276
------------------------------ -------- ----------- ------------ ----- -----
At 31 July 2020 14 231 66 20 331
Exchange adjustments (1) (10) (3) (1) (15)
Provision charged 4 1 - - 5
Provision released (1) - (7) - (8)
Unwind of provision discount - 1 - - 1
Utilisation (3) (6) (2) - (11)
------------------------------ -------- ----------- ------------ ----- -----
At 31 January 2021 13 217 54 19 303
------------------------------ -------- ----------- ------------ ----- -----
Current liabilities 12 15 9 3 39
Non-current liabilities 1 202 45 16 264
------------------------------ -------- ----------- ------------ ----- -----
At 31 January 2021 13 217 54 19 303
------------------------------ -------- ----------- ------------ ----- -----
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Headline provisions and contingent liabilities:
Warranty provision and product liability
At 31 January 2021 there are warranty and product liability
provisions of GBP11m (31 July 2020: GBP13m). 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,
although 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 the 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 is not aware of
any issues which are expected to generate material financial
exposures.
Non-headline and legacy provisions and contingent
liabilities:
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. 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.
The table below summarises the JCI claims experience over the
last 40 years since the start of this litigation:
31 January 31 July
2021 2020
-------------------------------------------- ---------- -------
JCI claims experience
Claims against JCI that have been dismissed 304,000 297,000
Claims which JCI is currently a defendant
in 22,000 25,000
Cumulative final judgments, after appeals,
against JCI since 1979 149 149
Cumulative value of awards ($m) since
1979 175 175
----------------------------------------------- ---------- -------
John Crane, Inc. litigation insurance recoveries
JCI has certain excess liability insurance which may provide
coverage for certain asbestos claims. JCI has also collected
recoveries from its insurers in settlement of now concluded
litigation in the United States. JCI meets its asbestos defence
costs directly. The calculation of the provision does not take
account of any recoveries from insurers. See note 3 for the cost
recovery achieved in both the current and prior periods.
John Crane, Inc. litigation provision
The provision is based on past history and published tables of
asbestos incidence projections and is determined using asbestos
valuation experts, Bates White LLC. 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 utilised in the period is lower
than previous periods, principally due to court closures and trial
delays arising from the COVID-19 pandemic.
The JCI asbestos litigation provision has developed in the
period as follows:
Six months
ended Year ended
31 January 31 July
2021 2020
GBPm GBPm
------------------------------------------------------------ ----------- ----------
John Crane, Inc. litigation provision
Gross provision 224 235
Discount (7) (4)
------------------------------------------------------------ ----------- ----------
Discounted provision 217 231
Taxation (55) (59)
------------------------------------------------------------ ----------- ----------
Discounted post-tax provision 162 172
------------------------------------------------------------ ----------- ----------
Operating profit (credit)/charge
Increased provision for adverse judgments and legal defence
costs 4 14
Change in US risk free rates (3) 16
============================================================ =========== ==========
Subtotal - items charged to the provision 1 30
Litigation management expense - legal fees in connection
with litigation against insurers and defence strategy 1 1
Recoveries from insurers (6) (3)
============================================================ =========== ==========
Total operating profit (credit)/charge (4) 28
============================================================ =========== ==========
Cash-flow
Provision utilisation - legal defence costs and adverse
judgements (6) (23)
Litigation management expense - (1)
Recoveries from insurers 3 3
============================================================ =========== ==========
Net cash outflow (3) (21)
============================================================ =========== ==========
John Crane, Inc. litigation provision sensitivities
The provision may be subject to potentially material revision
from time to time if new information becomes available as a result
of future events. 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 because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related
litigation.
Statistical reliability of projections over the ten year time
horizon
In order to evaluate the statistical reliability of the
projections, a population of outcomes is modelled using randomised
verdict outcomes. This generated a distribution of outcomes with
future spend at the 5th percentile of GBP203m and future spend at
the 95th percentile of GBP259m (31 July 2020: GBP214m and GBP271m,
respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total
future spend will fall between GBP212m and GBP233m (31 July 2020:
between GBP222m and GBP244m), compared with the gross provision
value of GBP224m (31 July 2020: GBP235m).
Sensitivity of the projections to changes in the time horizon
used
If the asbestos litigation environment becomes more volatile and
uncertain, for example if defendants are successful in legal cases
against plaintiff law firms and this impacts the nature of claims
filed, the time horizon over which the provision can be calculated
may reduce. Conversely, if the environment became more stable, or
JCI changed approach and committed to long term settlement
arrangements, the time period covered by the provision might be
extended.
The projections use a 10 year time horizon. Reducing the time
horizon by one year would reduce the discounted pre-tax provision
by GBP18m (31 July 2020: GBP20m) and reducing it by five years
would reduce the discounted pre-tax provision by GBP98m (31 July
2020: GBP106m).
We consider, after obtaining advice from Bates White LLC, that
to forecast beyond ten years requires that the litigation
environment remains largely unchanged with respect to the
historical experience used for estimating future asbestos
expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If
one assumed that the asbestos litigation environment would remain
unchanged for longer and extended the time horizon by one year it
would increase the discounted pre-tax provision by GBP15m (31 July
2020: GBP17m); extending it by five years would increase the
discounted pre-tax provision by GBP61m (31 July 2020: GBP69m).
However, there are also reasonable scenarios that, given certain
recent events in the US asbestos litigation environment, would
result in no additional asbestos litigation for JCI beyond ten
years. At this time, how the asbestos litigation environment may
evolve beyond 10 years is not reasonably estimable.
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 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 LLC, that the level of uncertainty regarding the factors used
in estimating future costs is too great to provide for reasonable
estimation of the number of future claims, the nature of such
claims or the cost to resolve them for years beyond the 10 year
time horizon.
Titeflex Corporation litigation
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
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 assumptions relating to
the number of future settlements exclude the use of recent claims
history due to the uncertain impact that the COVID-19 lockdown has
had on the number of claims.
The provision of GBP54m (31 July 2020: GBP66m) 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 July
2021 2020
GBPm GBPm
============================== ========== =======
Gross provision 79 86
Discount (25) (20)
============================== ========== =======
Discounted pre-tax provision 54 66
Taxation (13) (16)
============================== ========== =======
Discounted post-tax provision 41 50
============================== ========== =======
Titeflex Corporation litigation provision sensitivities
The significant uncertainty associated with the future level of
claims and of the costs arising out of related litigation means
that 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. Therefore 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 regarding the
impact of safe installation initiatives on the level of future
claims. If the assumed annual benefit of bonding and grounding
initiatives were 0.5% higher, the discounted pre-tax provision
would be GBP4m (31 July 2020: GBP6m) lower, and if the benefit were
0.5% lower, the discounted pre-tax provision would be GBP5m (31
July 2020: GBP7m) higher.
The projections use assumptions of future claims that are based
on both the number of future settlements and the average amount of
those settlements. If the assumed average number of future
settlements increased 10%, the discounted pre-tax provision would
rise by GBP5m (31 July 2020: GBP5m), with an equivalent fall for a
reduction of 10%. If the assumed amount of those settlements
increased 10%, the discounted pre-tax provision would rise by GBP4m
(31 July 2020: GBP3m), also with an equivalent fall for a reduction
of 10%.
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 that were disclosed
as non-headline items when they were charged to the consolidated
income statement. These provisions include non-headline
reorganisation, disposal indemnities and litigation in respect of
old products and discontinued business activities.
13 Acquisitions
On 2 August 2020, Smiths Detection completed the acquisition of
100% of the share capital of PathSensors Inc for an enterprise
value of US$7.4m. PathSensors Inc is a leading biotechnology
solutions and environmental testing company providing, high-speed,
high-sensitivity pathogen detection and biothreat prevention. This
acquisition brings new technology to Smiths Detection to strengthen
its position in the markets in which it operates.
Goodwill represents the expected synergies from the strategic
fit of the acquisition and the value of the expertise in the
workforce. From the date of acquisition to 31 January 2021,
PathSensors Inc contributed GBP1m to revenue and less than GBP1m to
profit before taxation. If the Group had acquired this business at
the beginning of the financial year, the acquisition would have
contributed the same value to revenue and profit.
The provisional balance sheet at the date of acquisition is:
PathSensors
Inc
GBPm
============================== ===========
Non-current assets - acquired
intangible assets 2
=============================== ===========
Total identifiable net assets 2
Goodwill 3
=============================== ===========
Total 5
=============================== ===========
Satisfied by:
Cash paid during the period 5
=============================== ===========
Total consideration 5
=============================== ===========
These provisional fair values contain amounts which will be
finalised no later than one year after the date of acquisition.
Provisional amounts have been included at 31 January 2021 as a
consequence of the timing and complexity of the acquisition.
14 Dividends
The following dividends were declared and paid in the
period:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
============================= =========== ===========
Dividends paid in the period 138 126
============================= =========== ===========
In the current period a total dividend of 35.0p, comprising a
delayed interim dividend of 11.0p and an ordinary final dividend of
24.0p, was paid on 20 November 2020. In the comparative period an
ordinary final dividend of 31.8p was paid in respect of FY2019.
An interim dividend of 11.7 pence per share was declared by the
Board on 25 March 2021 and will be paid to shareholders on 14 May
2021. 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 9 April 2021.
15 Cash-flow from operating activities
Six months ended Six months ended
31 January 2021 31 January 2020
============================= =============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
GBPm GBPm GBPm GBPm GBPm GBPm
=================================================== ======== ============ ===== ======== ============ =====
Operating profit/(loss) - continuing
operations 166 (23) 143 186 (41) 145
- discontinued
operations 89 (1) 88 94 (11) 83
Amortisation of intangible assets 6 27 33 7 28 35
Depreciation of property, plant
and equipment 19 - 19 20 - 20
Depreciation of right of use
assets 15 - 15 16 - 16
Loss on disposal of property,
plant and equipment 1 - 1 1 - 1
Loss on disposal of businesses - - - - 1 1
Share-based payment expense 6 - 6 8 - 8
Retirement benefits 2 (12) (10) 4 (24) (20)
Distribution from trading investment 4 - 4 - - -
Recycling of cash flow hedge
reserve 1 - 1 - - -
Decrease/(increase) in inventories 35 - 35 (98) - (98)
Decrease/(increase) in trade
and other receivables 88 (2) 86 149 - 149
Decrease in trade and other payables (73) (4) (77) (78) - (78)
(Decrease)/increase in provisions (3) (14) (17) (2) 3 1
==================================================== ======== ============ ===== ======== ============ =====
Cash generated from operations 356 (29) 327 307 (44) 263
Interest paid (12) - (12) (17) - (17)
Interest received 2 - 2 1 - 1
Tax paid (55) - (55) (60) - (60)
==================================================== ======== ============ ===== ======== ============ =====
Net cash inflow/(outflow) from
operating activities 291 (29) 262 231 (44) 187
==================================================== ======== ============ ===== ======== ============ =====
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. The Group uses operating cash-flow for the calculation of
cash conversion and free cash-flow for management of capital
purposes. See note 19 for additional details.
The table below reconciles the Group's net cash-flow from
operating activities to headline operating cash-flow and free
cash-flow:
Six months ended Six months ended
31 January 2021 31 January 2020
============================= =============================
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ======== ============ ===== ======== ============ =====
Net cash inflow/(outflow) from operating
activities 291 (29) 262 231 (44) 187
========================================= ======== ============ ===== ======== ============ =====
Include:
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (55) - (55) (55) - (55)
Repayment of lease liabilities (23) - (23) (22) - (22)
Investment in financial assets relating
to operating activities and pensions
financing outstanding at the balance
sheet date 4 - 4 - - -
========================================= ======== ============ ===== ======== ============ =====
Free cash-flow 188 110
========================================= ======== ============ ===== ======== ============ =====
Exclude:
Investment in financial assets relating
to operating activities and pensions
financing outstanding at the balance
sheet date (4) - (4) - - -
Repayment of lease liabilities 23 - 23 22 - 22
Interest paid 12 - 12 17 - 17
Interest received (2) - (2) (1) - (1)
Tax paid 55 - 55 60 - 60
========================================= ======== ============ ===== ======== ============ =====
Operating cash-flow 301 (29) 272 252 (44) 208
========================================= ======== ============ ===== ======== ============ =====
Headline cash conversion
Headline operating cash conversion for the total Group is
calculated as follows:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
=================================================================== =========== ===========
Headline operating profit - including discontinued operations 255 280
Depreciation and amortisation of held for distribution assets (21) (23)
=================================================================== =========== ===========
Pro-forma operating profit including depreciation and amortisation
on held for distribution assets 234 257
Headline operating cash-flow 301 252
=================================================================== =========== ===========
Headline operating cash conversion 129% 98%
=================================================================== =========== ===========
Reconciliation of free cash-flow to total movement in cash and
cash equivalents
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
===================================================== =========== ===========
Free cash-flow 188 110
Acquisition of business (5) (24)
Net cash-flow used in financing activities (158) (144)
===================================================== =========== ===========
Net increase/(decrease) in cash and cash equivalents 25 (58)
===================================================== =========== ===========
16 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 2020.
17 Discontinued operations and businesses held for distribution
to owners
The Group is currently pursuing the demerger of the Smiths
Medical business to list it separately on the UK Stock Exchange;
accordingly the Smiths Medical business has been accounted for as a
discontinued operation and as a business held for distribution to
owners at 31 January 2021.
We are finalising the key separation workstreams to deliver the
separation of Smiths Medical in Q4 of the current financial
year.
Discontinued operations
The financial performance of the Smiths Medical business in the
current and prior period is presented below:
Six months ended
Six months ended 31 January 2020 -
31 January 2021 represented*
============================= =============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
GBPm GBPm GBPm GBPm GBPm GBPm
====================================== ======== ============ ===== ======== ============ =====
Revenue 427 - 427 434 - 434
======================================= ======== ============ ===== ======== ============ =====
Direct materials, labour, production
and distribution overheads (224) - (224) (216) - (216)
Selling costs (58) - (58) (59) - (59)
Administrative expenses (56) (1) (57) (65) (11) (76)
======================================= ======== ============ ===== ======== ============ =====
Operating costs (338) (1) (339) (340) (11) (351)
======================================= ======== ============ ===== ======== ============ =====
Operating profit/(loss) 89 (1) 88 94 (11) 83
Finance costs - 38 38 (2) 68 66
Taxation (22) 3 (19) (22) 6 (16)
Profit from discontinued operations 67 40 107 70 63 133
* Results in the comparatives for the period ended 31 January
2020 have been represented to show operating costs on the face of
the income statement; see note 2 for further details.
Cash-flow from discontinued operations included in the
consolidated cash-flow statement is as follows:
Six months Six months
ended ended
31 January 31 January
2021 2020
GBPm GBPm
===================================================== =========== ===========
Net cash inflow from operating activities 50 44
Net cash-flow used in investing activities (27) (18)
Net cash-flow used in financing activities (15) (48)
===================================================== =========== ===========
Net increase/(decrease) in cash and cash equivalents 8 (22)
===================================================== =========== ===========
Businesses held for distribution to owners
The carrying value of the assets and liabilities of the Smiths
Medical business as at 31 January 2021 and 31 July 2020 is as
follows:
31 January 31 July
2021 2020
GBPm GBPm
Assets classified as held for distribution to owners:
Intangible assets 718 734
Property, plant and equipment 151 141
Right of use assets 55 54
Inventories 164 164
Deferred tax assets 12 14
Current tax receivable 3 3
Trade and other receivables 121 148
Cash and cash equivalents 24 20
Financial derivatives 3 1
Assets classified as held for distribution to owners 1,251 1,279
Liabilities classified as held for distribution to
owners:
Financial liabilities
- lease liabilities (42) (48)
- financial derivatives (4) (4)
Trade and other payables (130) (167)
Current tax payable (10) (10)
Deferred tax liabilities (61) (53)
Retirement benefit obligations (5) (5)
Provisions (5) (8)
Liabilities classified as held for distribution to
owners (257) (295)
Additional segmental information for discontinued operations
Revenue for the Smiths Medical discontinued operation is
analysed by the following product lines: Infusion Systems GBP152m
(31 January 2020: GBP148m), Vascular Access GBP133m (31 January
2020: GBP145m) and Vital Care/Other GBP142m (31 January 2020:
GBP141m).
Pro-forma balance sheet of the Group excluding Smiths
Medical
31 January
2021
GBPm
Non-current assets
Intangible assets 1,492
Property, plant and equipment 212
Right of use assets 87
Financial assets - other investments 13
Retirement benefit assets 432
Deferred tax assets 97
Trade and other receivables 49
Financial derivatives 100
2,482
Current assets
Inventories 394
Current tax receivable 44
Trade and other receivables 551
Cash and cash equivalents 375
Financial derivatives 4
1,368
Total assets 3,850
Current liabilities
Financial liabilities
- borrowings (19)
- lease liabilities (27)
- financial derivatives (3)
Provisions (39)
Trade and other payables (471)
Current tax payable (74)
(633)
Non-current liabilities
Financial liabilities
- borrowings (1,422)
- lease liabilities (64)
Provisions for liabilities and charges (264)
Retirement benefit obligations (134)
Corporation tax payable (4)
Deferred tax liabilities (22)
Trade and other payables (50)
(1,960)
Total liabilities (2,593)
Net assets 1,257
18 Post Balance Sheet Events
On 16 February 2021, the Group's Flex-Tek division completed the
acquisition of 100% of the share capital of Royal Metal Products,
LLC (Royal Metal) for a provisional cash cost of GBP78m
($107m).
Royal Metal is a manufacturer of metal duct products and
flexible ducting used in commercial and residential construction,
mainly in the South Eastern states of the US. This acquisition
strengthens Flex-Tek's market leadership of the heating,
ventilation, and air conditioning (HVAC) sub-segment of the US
construction market by broadening its offerings.
Royal Metal had revenue of GBP56m in the year ended 31 December
2020. The acquisition accounting for this business combination is
in progress and therefore incomplete. The fair value of goodwill,
customer relationships, branding, business combination
consideration and other assets and liabilities is currently being
determined and will be reported in the Group's 2021 Annual
Report.
In March 2021, the formal triennial valuation for the TI Group
Pension Scheme (TIGPS) at 5 April 2020 was concluded. It shows a
surplus on a technical provisions basis and further progress
towards full buy-out, see page 6 for further detail.
19 Alternative performance measures
The Group uses several alternative performance measures ('APMs')
in order to provide additional useful information on underlying
trends and the performance and position of the Group. APMs are
non-GAAP and not defined by IFRS; therefore they may not be
directly comparable with other companies' APMs and should not be
considered a substitute for IFRS measures.
The Group uses APMs which are common across the industry, in
both planning and reporting, to enhance the comparability of
information between reporting periods and business units. The
measures are also used in discussions with the investment analyst
community and by credit rating agencies.
We have identified and defined the following key measures which
are used within the business by management to assess the
performance of the Group's businesses:
Term Definition and purpose
Capital employed Capital employed is a non-statutory measure of invested
resources. It comprises statutory
net assets and is adjusted to add goodwill recognised
directly in reserves in respect of subsidiaries
acquired before 1 August 1998 and to eliminate
post-retirement benefit assets and liabilities
and non-headline litigation provisions related to John Crane,
Inc. and Titeflex Corporation,
both net of deferred tax, and net debt. It is used to monitor
capital allocation within the
Group. See below for a reconciliation from net assets to
capital employed.
Capital expenditure Comprises additions to property, plant and equipment,
capitalised development and other intangible
assets, excluding assets acquired through business
combinations.
Dividend cover - headline Dividend cover is the ratio of headline earnings per share
(see note 4) to dividend per share
(see note 14).
Divisional headline DHOP comprise divisional earnings before central costs,
operating profit ('DHOP') finance costs and taxation. DHOP is
used to monitor divisional performance. A reconciliation of
DHOP to operating profit is shown
in note 2.
Free cash-flow Free cash-flow is calculated by adjusting the net cash inflow
from operating activities to
include capital expenditure, the repayment of lease
liabilities and proceeds from the disposal
of property, plant and equipment.
The measure shows cash generated by the Group before
discretionary expenditure on acquisitions
and returns to shareholders. A reconciliation of free
cash-flow is shown in note 15.
Gross debt Gross debt is total borrowings (bank, bonds and lease
liabilities). It is used to provide
an indication of the Group's overall level of indebtedness.
Gross vitality Gross vitality is calculated as the percentage of revenue
over the last 12 months derived
from new products and services launched in the last three
years.
Headline The Group has defined a 'headline' measure of performance
that excludes material non-recurring
items or items considered non-operational/trading in nature.
Items excluded from headline
are referred to as non-headline items. This measure is used
by the Group to measure and monitor
performance excluding material non-recurring items or items
considered non-operational. See
note 3 for an analysis of non-headline items.
Headline EBITDA EBITDA is a widely used profit measure, not defined by IFRS,
being earnings before interest,
taxation, depreciation and amortisation. A reconciliation of
headline operating profit to
headline EBITDA is shown in the note below.
Headline EBITDA before restructuring costs Headline EBITDA, as defined above, is adjusted to exclude
restructuring costs from the Group's
strategic restructuring programme which commenced in FY2020.
A reconciliation of Headline
EBITDA to Headline EBITDA before restructuring costs is shown
in the note below.
Headline cash conversion ratio Comprises cash flow from operations before non-headline items
as a percentage of headline
operating profit.
This measure is used to show the proportion of headline
operating profit converted into cash
flow from operations before investment, finance costs,
non-headline items and taxation. This
measure is presented for the total Group including
discontinued operations and the calculation
is shown in note 15.
Net debt Net debt is total borrowings (bank, bonds and lease
liabilities) less cash balances and derivatives
used to manage the interest rate risk and currency profile of
the debt. This measure is used
to provide an indication of the Group's overall level of
indebtedness and is widely used by
investors and credit rating agencies. See note 10 for an
analysis of net debt.
Headline operating profit excluding restructuring costs Headline operating profit is adjusted for strategic
restructuring programme costs and write-downs.
See note 2.
Non-headline The Group has defined a 'headline' measure of performance
that excludes material non-recurring
items or items considered non-operational/trading in nature.
Items excluded from headline
are referred to as non-headline items. This is used by the
Group to measure and monitor material
non-recurring items or items considered non-operational. See
note 3 for an analysis of non-headline
items.
Operating cash-flow Comprises free cash-flow and excludes cash-flows relating to
interest, taxation, lease repayments
and non-headline cash items. The measure shows how cash is
generated from operations in the
Group. A reconciliation of operating cash-flow is shown in
note 15.
Operating profit Operating profit is earnings before finance costs and
taxation. A reconciliation of operating
profit to profit before tax is shown on the income statement.
This common measure is used
by the Group to measure and monitor performance.
Ratio of capital expenditure Represents the amount of capital expenditure as a proportion
to depreciation and amortisation of the depreciation and amortisation
charge for the period. This measure shows the level of
reinvestment in operations.
Return on capital ROCE is calculated over a rolling 12-month period and is the
employed ('ROCE') percentage that headline operating
profit represents of the monthly average capital employed on
a rolling 12-month basis. This
measure of return on invested resources is used to monitor
performance and capital allocation
within the Group. See below for Group ROCE and note 2 for
divisional headline operating profit
and divisional capital employed.
Stock turns Stock turns during the year is calculated as the last 12
month cost of sales divided by the
12 month average inventory. This measure is included as a key
performance indicator of the
Group to measure the efficiency of the Group
Underlying Underlying measures are calculated by excluding the effects
of foreign exchange, disposals
and acquisitions, strategic restructuring programme costs and
write-downs (see note 2), and
to include depreciation and amortisation charges for Smiths
Medical. Underlying measures are
used by the Group to monitor performance.
Working capital Working capital is calculated as the sum of the 12-month
rolling average of inventory, trade
receivables, contract assets, trade payables, trading
provisions and contract liabilities.
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 GBP787m (31 January 2020:
GBP787m), and to eliminate post-retirement benefit assets and
liabilities and litigation provisions relating to John Crane, Inc.
and Titeflex Corporation, both net of related tax, and net
debt.
31 January 31 January
2021 2020
Notes GBPm GBPm
========== ==========
Net assets 2,251 2,240
Adjust for:
Goodwill recognised directly in reserves 787 787
Post-retirement benefit assets and liabilities 6 (293) (343)
Tax related to post-retirement benefit assets and liabilities 55 61
John Crane, Inc. litigation provision and related tax 12 162 174
Titeflex Corporation litigation provision and related
tax 12 41 53
Net debt (including GBP18m of net debt in discontinued
operations (31 January 2020: GBP19m)) 10 1,075 1,270
==========
Capital employed 4,078 4,242
Return on capital employed
31 January 31 January
2021 2020
Notes GBPm GBPm
========== ==========
Headline operating profit for previous twelve months 486 608
Monthly average capital employed 2 4,326 4,156
ROCE 11.2% 14.7%
==========
Credit metrics - Total Group including discontinued
operations
The Group monitors the ratio of net debt to headline earnings
before interest, tax, depreciation and amortisation as part of its
management of credit ratings. This ratio is calculated as
follows:
Headline earnings before interest, tax, depreciation and
amortisation ("headline EBITDA") - Total Group including
discontinued operations
Six months Six months
ended ended
31 January 31 January
2021 2020
Notes GBPm GBPm
=========== ===========
Headline operating profit 2 166 186
Include:
- headline operating profit of discontinued operations
(excludes depreciation and amortisation) 17 89 94
Add back:
- depreciation of property, plant and equipment 8 19 20
- depreciation of right of use assets 9 15 16
- amortisation of development costs 7 3 3
- amortisation of software, patents and intellectual
property 7 3 4
===========
Headline EBITDA 295 323
Add back: restructuring costs (including GBP3m in discontinued
operations (31 January 2020: GBPnil)) 2 4 -
Headline EBITDA before restructuring costs 299 323
Annualised headline EBITDA - Total Group including discontinued
operations
Year Year
ended ended
31 January 31 January
2021 2020
Notes GBPm GBPm
=========== ===========
Headline EBITDA for the period 295 323
Add:
- headline EBITDA for the previous year 610 666
Exclude:
- headline EBITDA for the first six months of the previous
year (323) (290)
===========
Annualised headline EBITDA 582 699
Add back: restructing costs and write-downs in past
twelve months (including GBP7m in discontinued operations
(31 January 2020: GBPnil)) 51 -
=========== ===========
Annualised headline EBITDA before restructuring costs
and write-downs 633 699
=========== ===========
Ratio of net debt to annualised headline EBITDA - Total Group
including discontinued operations
31 January 31 January
2021 2020
GBPm GBPm
========== ==========
Annualised headline EBITDA 582 699
Net debt (including GBP18m of net debt in discontinued
operations (31 January 2020: GBP19m)) 1,075 1,270
==========
Ratio of net debt to headline EBITDA 1.8 1.8
========== ==========
Ratio of net debt to annualised headline EBITDA before
restructuring costs and write-downs - Total Group including
discontinued operations
31 January 31 January
2021 2020
GBPm GBPm
========== ==========
Annualised headline EBITDA before restructuring costs
and write-downs 633 699
Net debt (including GBP18m of net debt in discontinued
operations (31 January 2020: GBP19m)) 1,075 1,270
==========
Ratio of net debt to headline EBITDA before restructuring
costs and write-downs 1.7 1.8
========== ==========
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
IR SEAFUIEFSESD
(END) Dow Jones Newswires
March 26, 2021 03:00 ET (07:00 GMT)
Smiths (LSE:SMIN)
Historical Stock Chart
From Mar 2024 to Apr 2024
Smiths (LSE:SMIN)
Historical Stock Chart
From Apr 2023 to Apr 2024