TIDMSMIN
RNS Number : 6652Q
Smiths Group PLC
21 October 2011
21 OCTOBER 2011
SMITHS GROUP PLC
ANNUAL FINANCIAL REPORT 2011
LISTING RULE LR 9.6.3 R
The Company has today submitted copies of the documents listed
below to the UK Listing Authority, in compliance with Listing Rule
LR 9.6.1 R.
1. Annual Report 2011;
2. Notice of Annual General Meeting;
3. Notice of the availability of company documents in electronic format; and
4. Proxy Form.
The above-mentioned documents have been uploaded to the National
Storage Mechanism website, in pdf file format, and will shortly be
available for viewing by visiting
http://www.hemscott.com/nsm.do.
Copies of the documents referred to above have been posted to
some shareholders and made available online to the other
shareholders today, in accordance with their respective elections
for company communications.
The Annual Report 2011 and the Notice of Annual General Meeting
are now available online at the Company's website,
www.smiths.com/ar11. Printed copies may be obtained by writing to
The Company Secretary, Smiths Group plc, 2nd Floor, Cardinal Place,
80 Victoria Street, London SW1E 5JL or sending an e-mail request to
secretary@smiths.com.
DISCLOSURE & TRANSPARENCY RULE DTR 6.3.5(2)
A condensed set of the Company's financial statements and
information on important events that occurred during the financial
year ended 31 July 2011 and their impact on the financial
statements were contained in the Final Results announcement issued
by the Company, through the Regulated News Service of the London
Stock Exchange, at 07:00 on 28 September 2011. That information,
together with the information set out below, which is extracted
from the Annual Report 2011, constitute the material required by
Disclosure & Transparency Rule 6.3.5 to be communicated to the
media in full unedited text through a Regulatory Information
Service. This announcement is not a substitute for reading the full
Annual Report 2011. Page and note references in the text below
refer to page numbers in the Annual Report 2011 and notes to the
financial statements (available online from www.smiths.com and
www.hemscott.com/nsm.do).
RISK MANAGEMENT
(Extract comprising pages 52 to 56 in the Annual Report
2011)
Smiths is exposed to a wide range of risks in running its
businesses. The Company and its divisions consider these risks on a
regular basis and seek to put in place appropriate risk management
processes, policies and other measures, including insurance where
appropriate.
However, there can be no assurance that these measures will be
effective in any particular case. If any of these risks, or other
unforeseen risks, materialise, they could have a significant
adverse effect not only on our business and financial condition but
also on our reputation and the trading prices and liquidity of our
securities. This could lead to a loss for investors of part of or,
in a worst case scenario, all of their investment.
The Group's process for identifying, evaluating and managing
significant business risks is reviewed by the Audit Committee and
monitored by the Group Internal Audit Department. During the year,
we undertook an additional corporate risk review, to augment our
divisional risk management review processes. An outline of this
year's review process by the Board and Audit Committee is set out
in the Statement of the independent non-executive directors, on
page 75. A description of the Company's internal controls and risk
management processes is given in the Corporate governance
statement, on page 70.
Further information is provided below on our principal risks and
the mitigating activities in place to address them. The Group is
exposed to a larger number of risks than those listed. However, we
have made a conscious effort to disclose those risks that have been
debated at recent Board or Audit Committee meetings and are of most
concern to the business at this time.
Economic outlook
Risk
Smiths operates in more than 50 countries and is affected by
global economic conditions, particularly in the US. Our business is
also affected by government spending priorities, in particular in
the US and UK, and the willingness of governments to commit
substantial resources to homeland security and defence.
Current global economic and financial market conditions, and the
potential for a significant and prolonged global recession, may
materially and adversely affect the Company's performance and
financial condition. A recession may also materially affect its
customers, suppliers and other parties with which it does business.
Adverse economic and financial market conditions may cause our
customers to terminate existing orders, to reduce their purchases
from Smiths, or to be unable to meet their obligations to pay
outstanding amounts due to Smiths. These market conditions may also
cause our suppliers to be unable to meet their commitments to
Smiths or to change the credit terms they extend to us.
Potential impact
A significant and sustained economic downturn, or any similar
event, could have a material adverse effect on the Group's
operational performance and financial condition.
Risk management
- The Group has a diversified portfolio of businesses that
mitigates against exposure to any one country or sector.
- The divisions regularly monitor their order flows and other
leading indicators, where available, so that they may respond
quickly to a deterioration in trading conditions.
- In the event of a significant economic downturn, there may be
opportunities to identify and implement cost reduction
opportunities to offset the impact on margins from a deterioration
in sales.
Financial risks (foreign exchange, funding, tax and
insurance)
Risk
Foreign exchange: Exchange rate fluctuations have had, and could
continue to have, a material impact on the reported results. Smiths
is exposed to two types of currency risk: transaction and
translation.
Funding: Smiths ability to refinance its borrowings in the bank
or capital markets is dependent on market conditions and the proper
functioning of financial markets.
Tax: The Group's future profitability, particularly if in the US
where there are higher rates of corporation tax, may cause the
headline tax rate to increase over time. Changes in tax and fiscal
regulations and transfer pricing rules in the countries in which we
operate could affect the Group, particularly at times when public
sector debt is high, as could the uncertainty surrounding the basis
of taxation of foreign profits under the UK's controlled foreign
companies regulations.
Insurance: Smiths cannot be certain that it will be able to
obtain insurance on acceptable terms or at all. Furthermore, Smiths
cannot be certain that its insurance will cover losses arising from
events or that insurers will not dispute coverage. In addition,
even if our coverage is sufficient, the insurance industry is
subject to credit risk, particularly in the event of a catastrophe
or where an insurer has substantial exposure to a specific
risk.
Potential impact
Foreign exchange: The Group's reported results will fluctuate as
average exchange rates change. The Group's reported net assets will
fluctuate as the year-end exchange rate changes.
Funding: The Group may be unable to refinance its debt when
due.
Tax: Taxation costs could rise and earnings per share could
deteriorate, which could affect the Group's market valuation.
Insurance: If insurance cover is inadequate or does not pay out
as expected, Smiths could be exposed to an unexpected material cash
outflow, which may impact on the Group's liquidity and/or share
price.
Risk management
- Foreign exchange: The Group's hedging strategy, whereby larger
transactions are hedge accounted, mitigates the risk to
profitability to some extent. Net investment hedging of overseas
assets of approximately 50% through borrowing in non-sterling
currencies mitigates the impact of exchange rate fluctuations on
net assets.
- Funding: The Group's debt maturity is staggered so that the
refinancing risk is minimised. As at 31 July 2011, we had an
undrawn revolving credit facility of $800m.
- Tax: The Group's taxation staff co-ordinate tax management to
mitigate possible increases in the effective tax rate. Regular
reporting to the Board of tax risks and exposures provides good
visibility of issues.
- Insurance: Insurance risk is spread across a number of
carriers to minimise individual insured risk and counterparty
risk.
Go to page 50 for more information.
Global supply chain/concentration of manufacturing
Risk
Smiths business depends on the availability and timely delivery
of raw materials and purchased components, and could be affected by
a disruption to its supply chain. In particular, we rely on sole
suppliers to provide raw materials or components for some of our
products.
The Group's manufacturing facilities are exposed to a number of
natural catastrophe risks, which, like other external events such
as terrorist attacks or a disease pandemic, could have significant
adverse consequences. Smiths is also affected by the social,
economic, regulatory and political conditions in the countries
where it operates, which are often unpredictable and outside its
control, particularly in developing countries.
Potential impact
The concentration of manufacturing in lower cost countries, in
particular in Mexico and China, increases the length of the supply
chain and means that an adverse event could have more significant
consequences for our ability to supply customers on time.
A longer supply chain also affects transport costs, which could
be exacerbated by energy cost inflation.
Risk management
- Business continuity and disaster recovery plans are in place
and tested for critical locations, to reduce the impact of an
event.
- Single source supplier risks are identified and, where
possible, key materials or components are dual sourced to mitigate
the impact of an event.
- The Group regularly evaluates its key sites for a range of
risk factors using externally benchmarked assessments, and takes
action to improve these ratings, where appropriate.
- Smiths has business interruption and property damage insurance.
Government customers
Risk
We derive a significant proportion of our revenues in mature
Western economies. Additionally, over 40% of the Group's revenues
are from governments and their agencies or are influenced by
government regulation.
Smiths Detection, Smiths Medical and Smiths Interconnect
frequently tender for government contracts. The timing of contract
awards and payments under these contracts may be uncertain and
uneven over a given financial year.
Any significant disruption or deterioration in relationship with
these governments could result in fewer contracts and lower
revenues.
Potential impact
At a time when government finances are under pressure, these
headwinds may lead to slower growth across the business.
A decrease in spending by key government customers could
materially affect the Group's results and financial condition.
Delays in awarding government contracts can affect the Group's
sales, margins and cash conversion in a particular reporting
period.
Risk management
- The Group has a diversified portfolio of businesses that
mitigates against exposure to any one country or sector.
- Some of our government-related business has a services or
consumables component, which can be more resilient during an
economic downturn.
- The Group has enhanced its government relations function so
that it can inform policy and maintain close relationships with
customers. This supports the monitoring of lead indicators and
helps us to position our businesses appropriately for the economic
cycle.
Information technology
Risk
Smiths information systems, personnel and facilities are subject
to security risk. Smiths is dependent on information technology
systems for both internal and external communications and for the
day-to-day management of its operations.
Potential impact
Any disruption to the information systems could have significant
adverse consequences for the Group's operations or its ability to
trade.
Risk management
- Extensive controls and reviews are undertaken to maintain the
integrity and efficiency of IT infrastructure and data.
- There are also processes to deal with significant IT security incidents.
Acquisitions and disposals
Risk
The success of the Group's acquisition strategy depends on
identifying targets, obtaining authorisations and having the
necessary financing. Even if an acquisition is completed, the
acquired products and technologies may not be successful or may
require significantly greater resources and investment than
anticipated.
Smiths may not be able to integrate the businesses that it
acquires. If integration is unsuccessful, anticipated benefits are
not realised or trading by acquired businesses falls below
expectations, it may be necessary to impair the carrying value of
these assets.
In recent years, Smiths has disposed of a number of businesses,
including its Aerospace operations, where it has given indemnities,
warranties and guarantees to counterparties. Smiths is also party
to a number of contracts relating to formerly owned businesses
which it has not yet novated to the purchasers of these
businesses.
Potential impact
The Group's return on capital employed may fall if acquisition
hurdle rates are not met.
The Group's financial performance may suffer from goodwill or
other acquisition-related impairment charges.
Insufficient allowance for indemnities and warranties given at
disposal may affect our financial position.
Risk management
- We perform comprehensive strategic and financial reviews of
all opportunities. Detailed due diligence and integration work is
undertaken and reviewed in accordance with Group policy.
- Due diligence includes an assessment of the acquisition
target's talent and competencies. We also consider the integration
process and management.
- The Board only authorises acquisitions after completion of due
diligence, and approval is subject to meeting the capital
allocation and other financial hurdles set by the Board.
- The Board regularly reviews post-acquisition performance and integration.
- The Executive Committee and Board review the acquisition
pipeline. There are monthly reviews with strategy leads for each
division.
- On disposals, the Company seeks to minimise its exposure to
indemnities and warranties and any that are provided are reviewed
on a regular basis.
Compliance with legislation and regulations
Risk
There is a risk that Smiths may not always be in complete
compliance with laws, regulations or permits, for example
concerning environmental or safety requirements.
Smiths operates in highly regulated sectors. Smiths Detection,
Smiths Interconnect and Smiths Medical are particularly subject to
regulation, with certain customers, regulators or other enforcement
bodies routinely inspecting the Group's practices, processes and
premises.
Due to their products' security functions, Smiths Detection and
Smiths Interconnect are subject to numerous export controls,
technology licensing and other government regulations.
In addition, new legislation, regulations or certification
requirements may require additional expense, restrict commercial
flexibility and business strategies or introduce additional
liabilities for the company or directors. There also appears to be
a growing trend for legislation that could be described as
'protectionist', which may affect our businesses.
Potential impact
Smiths could be held responsible for liabilities and
consequences arising from past or future environmental damage,
including potentially significant remedial costs. There can be no
assurance that any provisions for expected environmental
liabilities and remediation costs will adequately cover these
liabilities or costs.
Should a regulator's approval process take a particularly long
time, our products may be delayed in getting to market, which could
lead to a loss of revenue or benefit a competitor with a similar
product.
Failure to comply with certain regulations may result in
significant financial penalties, debarment from government
contracts and/or reputational damage.
Risk management
- Environmental, health and safety data are reported to the
Quarterly Business Reviews, Executive Committee and the Board,
along with actions to improve performance over time.
- Smiths Medical has dedicated staff who maintain close contact
with the US Food and Drug Administration and other key
regulators.
- All divisions have trade compliance advice and training. This
includes training on the Group's Code of Business Ethics and
assessments to support compliance.
- Divisional and Group General Counsel monitor legislative
changes (assisted by Government Relations staff) and report and
monitor actions as necessary. This may require modifications to our
supply chains and customer arrangements.
Pension funding
Risk
At 31 July 2011, Smiths has legacy defined benefit pension
plans, with aggregate liabilities in excess of GBP3bn. While on an
accounting basis the reported net deficit is relatively modest,
changes in discount rates, inflation, asset returns or mortality
assumptions could lead to a materially higher deficit. For example,
the cost of a buyout on a discontinued basis, and therefore using
more conservative assumptions, is likely to be significantly higher
than the accounting deficit.
In addition, there is a risk that the plans' assets, such as
investments in equity and debt securities, will not be sufficient
to cover the value of those benefits.
Potential impact
The implications of a higher pension deficit include a direct
impact on valuation, credit rating and potential additional funding
requirements at subsequent triennial reviews. Contingent payment
commitments made in the 2009 triennial valuation may also be more
likely to crystallise.
In the event of a major disposal that generates significant cash
proceeds that are returned to shareholders, the Group may be
required to make additional cash payments to the schemes or provide
additional security.
Risk management
- All major schemes (US/UK) have been closed to future accrual.
- Agreed funding plans are in place with the major UK schemes
following the last triennial reviews. The Group seeks a good
working relationship with the trustees through regular update
meetings.
- There are plans in place to reduce the mismatch between assets
classes and liabilities, as relative outperformance of the assets
versus liabilities is achieved, although there is no downside
protection in place should this not occur.
- Pension matters are regularly reported to the Board.
Go to note 10 on pages 108-111 for more information.
Product liability and litigation
Risk
In the ordinary course of its business, Smiths is subject to
litigation such as product liability claims and lawsuits, including
potential class actions, alleging that the Group's products have
resulted or could result in an unsafe condition or injury.
In addition, manufacturing flaws, component failures or design
defects could require us to recall products. Many of our products
are used in critical applications where the consequences of a
failure could be extremely serious and, in some cases, potentially
catastrophic.
Products sold to the aviation, security, healthcare, energy and
consumer/domestic industries are particularly critical in
nature.
Furthermore, over half the Group's sales are in the US, where
there is potentially increased litigation risk.
Potential impact
Any liability claim against Smiths, with or without merit, could
be costly to defend and could increase our insurance premiums. Some
claims might not be covered by our insurance policies, either
adequately or at all.
An adverse event involving one of our products could damage our
reputation and reduce market acceptance and demand for all of our
products.
Risk management
- Quality assurance processes are embedded in our manufacturing
locations for critical equipment, supporting compliance with
industry regulations.
- A global best practice programme is underway to enhance
product quality processes across the Group. This is sponsored by
the Executive Committee and leverages the ongoing work in Smiths
Medical and John Crane.
- The divisions have procedures for dealing with product
liability issues and potential product recalls. These procedures
are being informed by crisis management planning workshops and
rehearsals.
- The Group has insurance cover for product liability. The US
'Safety Act' provides legislative protection for certain Smiths
Detection products in the US; and we support efforts to implement
similar legislation in other markets.
- Any litigation is managed under the supervision of the Group's
General Counsel. We have detailed action plans to manage actual or
threatened litigation.
Go to page 51 and note 23 on pages 124-125.
Technology and innovation
Risk
Developing new products and improving existing products is
critical to our business and competitors may innovate more
effectively.
The emergence of a disruptive technology could have an impact on
a major cash-flow contributor to the Group over time.
The speed of innovation in certain markets may lead to shorter
product lifecycles, increasing the need for innovation.
Additionally, the entry of new competitors, the consolidation of
existing competitors and changed or irrational competitor behaviour
could all significantly affect the Group's business.
Potential impact
The failure of the Group to develop its products and services,
or more effective innovation by a competitor, could have a
materially adverse affect on sales growth.
Risk management
- The Group has a diversified technology portfolio in a range of sectors and geographies.
- Our continued investment in R&D supports new product and service development.
- The Group looks to expand the addressable markets of its key
businesses by building capabilities in adjacent markets, through
organic investment and targeted acquisitions.
Talent and succession planning
Risk
The loss of key personnel, or the failure to plan adequately for
succession or develop new talent.
Competition for personnel is intense and Smiths may not be
successful in attracting or retaining qualified personnel,
particularly engineering professionals. In addition, certain
personnel may be required to receive security clearance and
substantial training to work on certain programmes. The loss of key
employees, Smiths inability to attract new or adequately trained
employees, or a delay in hiring key personnel could seriously harm
the Group's business.
Potential impact
May impact the reputation of the group, or lead to a disruption
in the leadership of the business.
Over time, our competitive advantage is defined by the quality
of our people - should we fail to attract, develop and retain key
talent, in time our competitive advantage will erode, leading to
weaker growth potential or returns.
Risk management
- Each division or function holds talent and succession plan
reviews at least annually. These plans are reviewed by the
Nomination Committee.
- Remuneration packages, including variable and long-term
elements of the compensation arrangements are evaluated regularly
against market practice.
Go to pages 60-61 for more information.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
(This statement is repeated here solely for the purposes of
complying with Disclosure & Transparency Rule 6.3.5. This
statement relates to and is extracted from page 85 of the Annual
Report 2011. It is not connected to the extracted information
presented in this announcement or to the Final Results announcement
released on 28 September 2011.)
Company law requires the directors to prepare accounts for each
financial year. Under company law the directors must not approve
the accounts unless they are satisfied that they give a true and
fair view of the state of affairs of the Group and the Company and
of the profit or loss of the Group for that period. In preparing
these accounts, the directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether the consolidated accounts comply with
International Financial Reporting Standards ("IFRS"), and the
Parent Company accounts comply with applicable UK Accounting
Standards, subject to any material departures disclosed and
explained in the accounts;
-- prepare the accounts on the going concern basis unless it is
inappropriate to presume that the Group and the Company will
continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and the
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and the Company and enable
them to ensure that the accounts and the Directors' remuneration
report comply with the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation. They are
also responsible for safeguarding the assets of the Group and the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
In accordance with the Disclosure and Transparency Rules of the
UK Listing Authority, each of the directors (who are listed in the
Group directors' report) confirms that to the best of his or her
knowledge:
-- the Group's financial statements have been prepared in
accordance with IFRS and give a true and fair view of the Group's
assets, liabilities and financial position as at 31 July 2011 and
of its profit for the financial year then ended; and
-- the Group directors' report includes a fair review of the
development and performance of the business and the position of the
Group, together with a description of the principal risks and
uncertainties that the Group faces.
(This Statement was signed on behalf of the Board on 27
September 2011.)
This announcement contains certain statements that are
forward-looking statements. They include statements regarding the
Company's intentions, beliefs or current expectations and those of
its officers, directors and employees concerning, amongst other
things, our results of operations, financial condition, liquidity,
prospects, growth, strategies and the business we operate. By their
nature, these statements involve uncertainty since future events
and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect the knowledge and information available at the date of this
announcement and unless otherwise required by applicable law the
Company undertakes no obligation to update or revise these
forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
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