TIDMSMIN
RNS Number : 6244C
Smiths Group PLC
19 March 2014
News release London, Wednesday 19 March 2014
For immediate release
Interim results for the six months ended 31 January 2014
Headline* Statutory
============================================= ==============
2014 2013 2014 2013
GBPm GBPm Reported Underlying(#) GBPm GBPm
=================== ======= ======= ========== =============== ====== ======
Revenue 1,442 1,475 (2)% (1)% 1,442 1,475
Operating profit 245 253 (3)% (2)% 170 211
(10)
Operating margin 17.0% 17.1% bps - 11.8% 14.3%
Pre-tax profit 215 223 (4)% (3)% 132 166
Basic EPS 39.5p 40.9p (4)% 23.7p 30.7p
Free cash-flow 30 71
Dividend 12.75p 12.50p 2% 12.75p 12.50p
Return on capital (10)
employed 16.6% 16.7% bps
=================== ======= ======= ========== =============== ====== ======
*In addition to statutory reporting, Smiths Group reports its
continuing operations on a headline basis. Headline revenue and
profit is before exceptional items, amortisation and impairment of
acquired intangible assets, pension charges and financing
gains/losses from currency hedging. Free cash-flow and return on
capital employed are described in the Financial review.
The statutory figures for 2013 have been restated for IAS 19
(revised 2011).
(#) Organic growth at constant currency.
Highlights
-- Company-funded investment in new product development up 7% to GBP57m
-- Strong headline operating cash conversion at 86%
-- Dividend up 2%; reflecting continued strong cash generation
-- Strength in commercial markets offset by challenging healthcare and defence markets
-- John Crane and Flex-Tek report underlying revenue and margin growth
-- Medical generated strong cash; margin affected by volume, price pressure and device tax
-- New divisional medium-term operating ranges for revenue growth and margins
"We made good progress in our businesses that serve commercial
customers, while those with significant government and healthcare
exposure continued to face challenging trading conditions.
Underlying revenue and margins advanced in John Crane and Flex-Tek
but were primarily offset by declines in Smiths Medical. Smiths
Interconnect and Smiths Detection saw more modest reductions
compared against strong prior periods.
"We continue to focus on operational improvements to support
investment in both high growth markets and new products to
accelerate medium-term revenue growth. We have outlined mid-term
operating ranges for revenue growth and headline operating margin
for each of the divisions. We also provide further details of our
'Fuel for Growth' programme scheduled to generate GBP60m of annual
savings by 2017 to reinvest in growth initiatives.
"We anticipate improved underlying trading in the second half
driven by a strong John Crane order book, some recovery in Smiths
Interconnect and further growth in Flex-Tek. Smiths Detection will
continue to be affected by government budget pressures. Smiths
Medical is expected to continue to face tough trading. At current
rates, foreign exchange headwinds will increase in the second half,
with a 4-5% impact on full year earnings. We will maintain our
focus on investing to drive sales growth in what are attractive
long-term markets, and delivering further operational improvements,
while providing strong cash conversion and returns."
Philip Bowman
Chief Executive
Divisional highlights*
% of Underlying Underlying Headline operating Return on capital
Group headline headline profit margin employed
headline revenue operating
revenue growth* profit
growth*
========= ========== ========== ==================== ===================
2014 2013 2014 2013
==================== ========= ========== ========== ========= ========= ========= ========
John Crane 32% 2% 9% 23.2% 21.8% 26.5% 24.3%
Smiths Medical 27% (4)% (18)% 18.3% 21.1% 15.3% 16.9%
Smiths Detection 17% (1)% (7)% 11.8% 12.0% 8.6% 12.2%
Smiths Interconnect 15% (4)% (7)% 13.1% 13.5% 12.2% 12.3%
Flex-Tek 9% 3% 13% 18.3% 16.7% 32.7% 29.8%
==================== ========= ========== ========== ========= ========= ========= ========
Group 100% (1)% (2)% 17.0% 17.1% 16.6% 16.7%
==================== ========= ========== ========== ========= ========= ========= ========
John Crane
-- Revenue up 2% driven by original equipment and aftermarket
revenue in mid- and downstream segments
-- Margins improved 140 bps to 23.2% to record high, driven by
higher revenue and cost efficiencies
-- Strong order book signals an improving growth rate through
the second half
Smiths Medical
-- Revenue down 4% driven by volume and price pressure; volume
affected by distributor destocking in the US
-- Margins down 280 bps, reflecting adverse operational gearing,
impact from US medical device tax
-- Full year revenue and profit expected to be below the level
achieved last year
Smiths Detection
-- Revenue down 1% against a strong comparator -critical
infrastructure gains offset by transportation declines
-- Margins down 20 bps with lower volumes and adverse
operational gearing
-- Full year revenue expected to be lower than the level
achieved last year on a slightly weaker order book
Smiths Interconnect
-- Revenue 4% lower against a strong comparator period,
constrained by headwinds in defence (c. 28% of sales)
-- Margins down 40 basis points with lower volumes and
investment for growth offsetting productivity gains
-- Second half should benefit from improvements in commercial
markets; cost savings support margin recovery
Flex-Tek
-- Revenue up 3% driven mainly by US residential construction
and specialty heating elements.
-- Margins up 160 bps, helped by better volumes, mix and
pricing.
-- Aerospace and US construction demand should support continued
growth; margins geared to volume
*All figures are on a headline basis. Revenue and profit growth
are at constant currency and exclude the impact of acquisitions and
disposals
Contact details
Investor enquiries
Peter Durman, Smiths Group
+44 (0)20 7808 5535
+44 (0)7825 145336
peter.durman@smiths.com
Media enquiries
Colin McSeveny, Smiths Group
+44 (0)20 7808 5534
colin.mcseveny@smiths.com
Anthony Cardew, Cardew Group
+44 (0)20 7930 0777
anthony.cardew@cardewgroup.com
Presentation
The presentation slides and a live webcast of the presentation
to analysts are available at www.smiths.com/results at 09.00 (UK
time) on Wednesday 19 March. A recording of the webcast is
available later that day. A live audio broadcast of the
presentation is also available by dialling (no access code
required):
UK toll free: 0808 237 0030
International: +44 (0)20 3139 4830
US/Canada toll free: 1 866 928 7517
Access code: 78370991#
An audio replay is available for seven days on the following
numbers (access PIN 645568#):
UK toll free: 0808 237 0026
International: +44 (0)20 3426 2807
US/Canada toll free: 1 866 535 8030
Photography
Original high-resolution photography and broadcast quality video
is available to the media from the media contacts above or from
http://www.smiths.com/images.aspx.
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance. On a statutory basis, pre-tax profit from
continuing operations was GBP132m (2013: restated GBP166m) and
earnings per share were 23.7p (2013: 30.7p).
The items excluded from headline performance comprise:
-- amortisation of acquired intangible assets of GBP21m (2013:
GBP23m);
-- GBP36m in connection with John Crane, Inc. asbestos
litigation (2013: GBP11m);
-- GBP5m in connection with Titeflex Corporation litigation
(2013: GBP3m);
-- GBP14m of exceptional restructuring costs (2013: GBP5m);
-- GBP5m for retirement benefit finance charge (2013: restated
charge of GBP12m);
-- GBP4m legacy retirement benefit administration costs (2013:
restated GBP4m)
-- GBP2m profit on disposal of businesses (2013: GBP1m);
-- GBP1m cost of acquisition and disposals (2013: nil); and
-- GBP1m gain on legal settlements and diabetes royalty
payments
In the period to 31 January 2013, in addition to the above,
GBP1m gain on changes to pension plans and GBP1m of financing
losses were also excluded from headline performance.
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding our
intentions, beliefs or current expectations and those of our
officers, directors and employees concerning, amongst other things,
our results of operations, financial condition, liquidity,
prospects, growth, strategies and the business we operate. By their
nature, these statements involve uncertainty since future events
and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this document and, unless otherwise required by
applicable law, the Company undertakes no obligation to update or
revise these forward-looking statements. Nothing in this document
should be construed as a profit forecast. The Company and its
directors accept no liability to third parties in respect of this
document save as would arise under English law.
This press release contains brands that are trademarks and are
registered and/or otherwise protected in accordance with applicable
law.
Chief Executive's review
Results overview
Smiths Group made further progress at John Crane and Flex-Tek,
while those divisions that serve the healthcare and
defence/security sectors have continued to experience tough
trading. The results at Medical were disappointing but reflect
difficult trading conditions, particularly in developed markets. We
still see opportunities to drive operational efficiencies at Smiths
Medical to support margins while continuing to invest more in
ongoing growth initiatives. The overall performance benefited from
our strength and breadth as a diversified engineering company, our
portfolio of leading-edge, technology-driven businesses serving a
wide range of end markets and geographies. We continue to drive
operational improvements and efficiencies across our businesses
while increasing investment in high growth markets and new product
development to accelerate medium-term revenue growth.
John Crane grew revenue with continued demand for first-fit OEM
applications and aftermarket services to energy customers. Headline
operating profit advanced from higher revenues and ongoing
productivity efforts resulting in higher margins, more than
offsetting cost inflation and our investment in growth
opportunities. Smiths Medical saw revenues decline as sluggish
procedure volumes, pricing pressure and distributor destocking took
effect. Margins also fell, weighed down by the impact of the lower
volumes which hit operational gearing and the incremental impact
from the US medical device tax introduced last year. At the same
time, Smiths Medical had to manage the inevitable disruption caused
by the approach last year to acquire the business. Smiths Detection
experienced a small reduction in revenue against a strong
comparator period. Underlying growth in the critical infrastructure
was offset by weakness in transportation, ports & borders and
military sectors. As expected, Smiths Interconnect also saw a
relatively weak first half against a strong performance last year,
primarily due to weaker defence revenues. Margins were down with
the reduced volumes, despite the benefit of cost saving
initiatives. Flex-Tek delivered strong revenue growth from its
construction products, generating higher margins as a result of its
strong operational gearing.
Strategy
Our strategy is to continue to grow shareholder value by:
-- Delivering sales growth through investment in organic drivers
including new product development and expansion in high growth
markets
-- Enhancing margins through a relentless drive for operational
improvement across all our businesses
-- Generating strong cash-flows with better balance sheet
management
-- Implementing a rigorous approach to allocating capital across
the businesses through active and disciplined portfolio management
and a targeted acquisition strategy
-- Improving returns on capital.
We continued to pursue these objectives during the period and
some examples are set out below. Clear opportunities remain for
Smiths Group to improve performance progressively and generate
further value for shareholders.
Investing to accelerate revenue growth - new products
Our firm commitment to new product development, which has given
us technology leadership in many areas, is crucial to driving
future revenue and margin growth as new products typically command
higher margins. We raised company-funded investment in R&D by
7% to GBP57m and secured a further GBP4m of customer-funded
investment to take our total spend to GBP61m, or 4.2% of revenue
(2013: 4.0%). John Crane was granted a patent for technology that
will monitor the condition of a gas seal to improve product
performance, extend average product lifespan and aid emission
reduction in operation across the energy sector. Smiths Medical's
CADD Solis PIB (Programmable Intermittent Bolus) pump, due for
launch in the US this year following recent FDA clearance, is
expected to provide continued growth opportunities, particularly in
labour and delivery wards. New temperature management, pain
management, airway and infusion products are also in the pipeline.
Smiths Detection has unveiled ACE-ID, a handheld explosives
identifier for use by bomb disposal and hazardous materials teams,
and two new high-energy scanners for the ports and borders market -
one static for checking light vehicles and the other a mobile
version designed for rapid deployment in confined spaces. Smiths
Interconnect is introducing higher density semiconductor test
sockets to enable testing of packaged chips to their full limits.
Flex-Tek continues to focus investment on specialist heating
elements, medical tubing and aerospace application.
Investing to accelerate revenue growth - high-growth markets
We have continued to invest to expand our presence in emerging
markets to improve the Group's growth profile over the medium term.
In the first half, revenue from emerging markets was maintained,
representing about 15% of Group sales. Increases in John Crane and
Smiths Interconnect were offset by declines in Smiths Detection and
Smiths Medical. We recognise that it takes time to establish a
local sales presence through recruitment, training and brand
building. In addition, there are also product registration
processes in many markets. However, we believe that this is the
right strategy for the Group to accelerate its growth profile and
generate improved returns in the medium term. In Smiths
Interconnect we saw good growth in Asia for connectors and secured
contracts in data centres in India and Brazil. In John Crane, we
continued to build infrastructure in select markets and to invest
in local technical service capabilities.
'Fuel for Growth' - programme to fund growth investment
Over the past six years, we have pursued a series of
restructuring programmes across the Group. This has improved the
efficiency and effectiveness of the Group as well as benefited
margins and provided the funds to invest in growth initiatives such
as new product development and expansion in emerging markets. In
September 2013, we announced another phase of restructuring, 'Fuel
for Growth', which was expected to generate annual savings of
GBP50m at a cost of GBP100m by the end of financial year 2017.
Further work on this initiative has highlighted more opportunities
and the programme is now expected to generate GBP60m of annual
savings for reinvestment in sales, marketing and new product
development. The programme is now expected to cost GBP120m, which
will be treated as an exceptional item. There will also be some
accompanying capital expenditure. This restructuring will
concentrate on three areas: site rationalisation with a particular
focus on manufacturing footprint to support future growth while
lowering costs; organisational effectiveness through delayering and
broadening management spans of control; and the upgrading of
information systems - particularly in John Crane - to improve
decision-making and to support the next stage of globalisation. In
the first half, we incurred costs of GBP12m across the programme,
which delivered savings of GBP1m in the period.
Total costs Full annual
by end FY benefits
2017 by end FY
2017
==================== =========== ===========
John Crane 28 14
Smiths Medical 46 23
Smiths Detection 28 14
Smiths Interconnect 15 7
Flex-Tek 3 2
==================== =========== ===========
Total 120 60
==================== =========== ===========
There is also an existing performance improvement initiative
that was initiated in 2011 in Smiths Detection, to lower the fixed
cost base and enable the business to respond better to variations
in demand, while improving customer service. It has continued to
make good progress with a further GBP3m of savings generated in the
period, bringing total savings to date to GBP28m. We expect to
deliver a further GBP1m of savings during the second half. The
total programme is expected to generate GBP33m of annual savings at
a cost of GBP29m by the end of financial year 2015. We will
conclude the programme at the end of this financial year and roll
any remaining elements into the 'Fuel for Growth' programme.
Setting medium-term operating ranges
In September 2008, we set out targets for revenue growth and
margin improvement. This coincided with the start of a severe and
prolonged economic recession. The divisions generally fared well on
margins which were more within our control as a result of the
programmes we implemented. However, revenue growth proved generally
harder to achieve. The continued uncertainty in the world economy
and financial markets in recent years made us reluctant to revisit
the operating ranges until there was a degree of economic stability
and forward visibility.
We announced at our 2013 annual results that we would publish
revised operating ranges as part of today's results and, for John
Crane, at its capital markets day held last December. These are
mid-term operating ranges with average annual growth rates at
constant currencies and margin expectations, assuming no
discontinuities in the market drivers. It is possible that
divisions may operate outside these ranges in any one period. For
example, as a government contracting business, Smiths Detection can
experience variability in its revenue and margin profile because of
the timing of orders and the implementation of new regulations.
Average annual organic revenue growth Headline operating
margin
==================== ======================================== ==================
John Crane Mid-single digit 4-6% 22-25%
Smiths Medical Low-single digit 0-3% 20-24%
Variable, averaging
Smiths Detection mid-single digits 4-6% 14-20%
Low to mid-single
Smiths Interconnect digits 3-5% 16-18%
Flex-Tek Mid-single digits 3-6% 15-20%
==================== ================================ ====== ==================
Further details on the underlying market drivers, our divisional
strategic initiatives and the dynamics of margin development are
provided in the results presentation materials available on
www.smiths.com. The revenue growth rates are typically lower than
those provided in 2008 while the margin ranges are at a similar or
higher level. This reflects that we are operating in a relatively
lower growth environment today - particularly given the outlook for
government budgets in defence and homeland security and the
pressures on the healthcare market in developed markets. However,
the objective of the 'Fuel for growth' programme is to improve the
organic growth characteristics over time. At the same time, we will
continue to seek acquisitions that accelerate our strategic
ambitions and generate value. These acquisitions will augment these
organic ranges and will be facilitated by the Group's strong
balance sheet.
Enhancing talent throughout the organisation
The successful implementation of our strategic initiatives
depends on us having the talent in place throughout the
organisation. Our processes to foster and retain the necessary
skills have been reinforced at all levels across the Group. Jeff
McCaulley joined in March to lead Smiths Medical into its next
phase of development. At both senior and junior management levels
leadership programmes have been refreshed as we work ever harder to
ensure that the appropriate competencies needed to strengthen the
organisation are in place.
Dividend
The Board has a progressive dividend policy for future pay-outs
while maintaining a dividend cover of around 2.5 times. This policy
will enable us to retain sufficient cash-flow to meet our legacy
liabilities and finance our investment in the drivers of
growth.
The Board has declared an interim dividend of 12.75p per share,
an increase of 2% reflecting the strong cash conversion in the
period. The interim dividend will be paid on 25 April to
shareholders registered at the close of business on 28 March. The
ex-dividend date is 26 March.
Outlook
We anticipate improved underlying trading in the second half
driven by a strong John Crane order book, some recovery in Smiths
Interconnect and further growth in Flex-Tek. Smiths Detection will
continue to be affected by government budget pressures. Smiths
Medical is expected to continue to face tough trading. At current
rates, foreign exchange headwinds will increase sharply in the
second half, with a 4-5% impact on full year earnings. We will
maintain our focus on investing to drive sales growth in what are
attractive long-term markets, and delivering further operational
improvements, while providing strong cash conversion and
returns.
Business review
Revenue
Revenue declined 1%, or GBP14m, on an underlying basis to
GBP1,442m. Including adverse currency translation of GBP19m,
overall reported revenue declined GBP33m (2%). The GBP14m
underlying decline was driven by growth in John Crane (+GBP10m) and
Flex-Tek (+GBP3m), which was more than offset by declines in Smiths
Medical (-GBP15m), Smiths Interconnect (-GBP8m) and Smiths
Detection (-GBP4m).
Profit
Headline operating profit saw an underlying reduction of 2%
(GBP6m) to GBP245m. On a reported basis, headline operating profit
fell GBP8m (3%) including adverse foreign exchange translation of
GBP2m. Headline operating margin fell slightly to 17.0% (2013:
17.1%), mainly the result of the tough trading conditions in Smiths
Medical and the incremental cost of the US medical device tax
(GBP3m). The main drivers of the GBP6m underlying reduction were
higher revenues and ongoing productivity efforts at John Crane
(+GBP9m), increased volumes and price at Flex-Tek (+GBP2m) and
lower corporate costs (+GBP3m) which was more than offset by lower
volumes, price and the US device tax at Smiths Medical (-GBP16m),
lower volumes at Detection (-GBP2m) and Interconnect (-GBP2m).
Operating profit on a statutory basis, after taking account of
the items excluded from the headline figures, was GBP170m (2013:
restated GBP211m). The decline was in large part a result of
increased exceptional costs (see note 4). Statutory profit for 2013
has been restated to take account of the reporting requirements of
IAS 19 (Revised 2011).
The net interest charge on debt was up slightly at GBP31m (2013:
GBP30m). Headline profit before tax decreased GBP8m to GBP215m
(2013: GBP223m). On an underlying basis, headline profit before tax
declined by 3%.
The Group's tax rate on headline profit for the period was 27.0%
(2013: 27.5%). Headline earnings per share decreased by 4% to 39.5p
(2013: 40.9p).
On a statutory basis, profit before tax declined GBP34m to
GBP132m (2013: restated GBP166m); it is stated after taking account
of increased exceptional costs, a pensions finance charge of GBP5m
(2013: restated charge of GBP12m) and other items excluded from the
headline measure.
Cash generation
Operating cash generation remained strong with headline
operating cash of GBP211m (2013: GBP223m), representing 86% (2013:
88%) of headline operating profit (see note 14 to the accounts for
a reconciliation of headline operating cash and free cash-flow to
statutory cash-flow measures). Free cash-flow fell GBP41m to GBP30m
(2013: GBP71m). Free cash-flow is stated after interest, tax and
pensions financing, but before acquisitions, financing activities
and dividends.
On a statutory basis, net cash inflow from continuing operations
was GBP83m (2013: GBP120m).
Dividends paid in the period on ordinary shares amounted to
GBP225m, consisting final and special dividends (2013:
GBP103m).
Net debt at 31 January was GBP901m, up from GBP744m at 31 July
2013. The increase in net debt reflects outflows from dividends
(GBP225m) and pension funding (GBP52m) offset by an exchange
translation benefit (GBP50m).
On 19 February, the Group completed the refinancing of its
existing bank facility with a new US$800m committed revolving
credit facility that matures in February 2019 with two one-year
extension options.
John Crane
2014 2013 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 469 469 0% 2%
Headline operating profit 109 102 6% 9%
Headline operating margin 23.2% 21.8% 140 bps
Statutory operating profit 64 87
Return on capital employed 26.5% 24.3% 220 bps
=========================== ===== ===== ======== ==========
John Crane delivered solid profit growth in the half, driven by
higher underlying revenues and ongoing productivity initiatives.
Headline operating profit grew 6% (GBP7m), driven by a 9% (GBP9m)
underlying increase offset by adverse currency translation of
GBP2m. Headline operating margin grew 140 basis points, or 150
basis points on a constant currency basis. The order book at the
end of the period was 9% higher than the prior year, a record
high.
The difference between statutory and headline operating profit
reflects the GBP34m expense of John Crane, Inc. asbestos
litigation, amortisation of acquired intangible assets of GBP7m and
restructuring costs of GBP4m. Return on capital employed improved
220 basis points to 26.5% because of increased profitability.
Underlying revenue grew 2% (GBP10m), offset by GBP10m of adverse
foreign exchange impact, leaving reported revenue flat. This
underlying improvement reflects increased revenue in first-fit
original equipment and aftermarket, offset by declining sales in
our upstream oil services segment. Excluding this upstream segment,
overall revenues reported a 4% underlying increase.
Underlying aftermarket revenues, excluding sales from our
upstream oil services business, were up 3% on the back of strong
activity with energy services customers across the Middle East,
Latin America and North America. Including sales to our upstream
oil services business, overall aftermarket revenues were flat on an
underlying basis. Several renewals and aftermarket service
contracts signed in the period with energy customers are expected
to bolster the long-term outlook for the business. Performance Plus
reliability programmes were secured in Singapore, Colombia,
Australia, the US and other countries around the world. A contract
covering a significant number of wet seal upgrades was signed with
BP Rumaila Iraq, and a large order for slurry seals was won in the
Democratic Republic of Congo. Additionally, John Crane was
recognised by Petrobras with an award for responsible partnership
for the fourth consecutive year, illustrating John Crane's
commitment to providing the highest level of service to
customers.
While our upstream oil services business, which is reported as
part of our aftermarket revenue, benefited from additional projects
for an existing OMV Petrom contract in Romania, underlying sales
declined overall. This decline in upstream activity was driven by
an increasingly competitive operating environment in the US, as
well as severe winter weather in North America, which affected
activity in the sector for a number of months.
Underlying revenues of first-fit original equipment rose 6% as
our customers continue to invest in new capital projects. We
continue to see customer confidence in the oil and gas segment,
while the power generation segment remains challenging. Commercial
activity again expanded in our high-growth markets, with multiple
orders secured to supply products for large capital projects. These
included the Zubair Project, covering the development of one of
Iraq's largest oil fields. A significant order from Rolls Royce was
won, reflecting an increase in filtration system orders.
Emerging markets remained a strong platform for growth. In the
first half of 2014, emerging market revenue increased about 9% at
constant currencies and comprised about 23% of our overall revenue.
We continue to build infrastructure in select markets and invest in
local technical service capabilities, preparing for future growth
in China, ASEAN countries and the Middle East.
Increased revenue during the period resulted in approximately
half of the underlying profit growth; the remaining profit growth
was the result of ongoing productivity efforts, some of which are
part of our 'Fuel for Growth' programme. This programme is expected
to deliver GBP14m of annualised savings by 2017 at an investment of
GBP28m, which will be reported as exceptional. GBP4m of exceptional
items were incurred during the first half. This revenue growth and
these savings initiatives drove margin expansion, despite continued
investment in highly competitive first-fit original equipment
projects and new product development which we believe will position
the company for accelerated medium-term growth.
Research and development
John Crane continues to invest in new product development and
engineering, reflecting its commitment to sustain investments in
R&D that will address future market needs. The company's focus
remains on developing engineered solutions that address customers'
growing processing demands while supporting reduced environmental
impact and improved energy efficiency. Operating conditions are
ever more challenging as customers face increasingly higher
pressure and speed criteria while exploiting more difficult
environments. As the industry leader in gas seal technology, John
Crane remains at the forefront of ultra-high pressure designs
capable of meeting the intensifying demands of compression
equipment and the new requirements of emerging markets.
Benefits of products in the R&D pipeline range from expanded
operating performance limits and lower energy consumption, to
extended product life cycles. John Crane anticipates several new
product launches over the next few years that will present new
market opportunities and improve customers' operating performance
and reduce costs. During the period, John Crane was awarded a
patent for a breakthrough technology that will monitor the
condition of a gas seal to improve product performance, extend
average product lifespan and aid emission reduction in operation
across the energy sector.
Outlook
Mid- and downstream order growth in the first half and strong
order book should support solid second half sales growth. However,
we anticipate market conditions in our upstream segment to continue
to be challenging. On a constant currency basis, these combined
effects should result in a second half sales growth rate within our
mid-single digit operating range. Margins in the second half are
expected to be at the higher end of our operating range.
Smiths Medical
2014 2013 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 389 413 (6)% (4)%
Headline operating profit 71 87 (18)% (18)%
(280)
Headline operating margin 18.3% 21.1% bps
Statutory operating profit 63 82
(160)
Return on capital employed 15.3% 16.9% bps
=========================== ===== ===== ======== ==========
Smiths Medical saw underlying headline revenue decline by 4%, or
GBP15m, mainly due to consumable product pressures which were
slightly offset by strong ambulatory infusion sales. Reported
headline revenue fell 6% (GBP24m), including an adverse currency
translation impact of GBP9m. The underlying decline stems from soft
trading conditions in the developed market medical devices sector.
These included adverse pricing, capital spending constraints and
relatively flat procedure growth rates. The pressures were
particularly acute in the US where sales weakened amid stalled
procedure volumes and distributor destocking. The last six months
has seen an acceleration in destocking, a trend evident among US
distributors for the past 18 months, resulting in first half US
sales down 6% against the prior half year. Our analysis of revenues
to US end-customers indicates more resilient underlying demand,
down by 1% over the same period. There has also been inevitable
disruption caused by the approach last year to acquire the
business.
Underlying sales of consumables, which represent almost 85% of
total revenue, were down 4%, reflecting distributor destocking in
the first half and weak procedure activity. Pressure was
particularly acute in peripheral intravenous catheters (PIVC),
safety needles and respiratory products, as well as in European
kitting operations as we continue to focus on more profitable
product lines. Underlying sales of hardware also fell 3% on the
back of declines in infusion systems and temperature management,
only partly offset by strong growth in ambulatory infusion
revenues.
Headline operating profit declined 18% on both a reported and
underlying basis resulting in a 280 basis points fall in margin to
18.3%. This stems from the impact of lower first half volumes on
factory performance, the incremental cost (GBP3m) from the
introduction of the US medical device tax last year and
approximately GBP2m of non-recurring insurance proceeds in the
prior year. We continue to aim to offset the impact of the medical
device tax by focusing on higher margin products and implementing
the operational restructuring plans announced in 2013.
The difference between statutory and headline operating profit
principally reflects the amortisation of acquired intangibles and
restructuring costs. Return on capital employed declined 160 basis
points to 15.3% as a result of the lower profits.
Medication delivery underlying revenues were flat, with strong
ambulatory infusion sales offset by weaker infusion system and
consumables business. Ambulatory infusion sales rose 7%, primarily
due to the continued success in the US and Europe of the CADD Solis
VIP pump. The CADD Solis PIB (Programmable Intermittent Bolus)
pump, which received FDA clearance in December 2013, launched in
the US early in the second half and is expected to provide
continued growth opportunities, particularly in labour and delivery
wards. Following a strong initial launch, sales of our Medfusion
4000 wireless syringe pump have been slower than expected as the
squeeze on hospital capital budgets is maintained. We believe our
Medfusion 4000 pipeline is well positioned for future growth, and
we continue to invest in interoperability capabilities (integration
with electronic medical records and other hospital systems), which
will further support future performance in the syringe infusion
market. We also anticipate that investment in wireless and
interoperable ambulatory pumps will speed up future growth, as we
leverage our leadership in ambulatory infusion.
Vital care underlying sales declined 3% in the face of continued
sluggish procedure volumes and pricing pressures in developed
countries. The assisted reproduction and invasive blood pressure
management (IBPM) businesses grew strongly, while tracheostomy was
relatively flat due to first half supply constraints. The general
anaesthesia, respiratory, patient monitoring and temperature
management businesses all declined given market pressures.
Respiratory performance, in particular, was impacted by channel
inventory movements in the first half and underlying demand for our
products remains robust. In contrast to the sluggish developed
markets, our investment in emerging markets generated steady
regional growth for IBPM, tracheostomy and patient monitoring.
Safety devices underlying revenue declined 8% amid pressures in
sharps safety, PIVC and vascular access sales. However, with the
emphasis on provider and patient safety, interest in both safety
needle and catheter products remains high in developed markets and
is growing in emerging markets, where we continue to invest and
drive sales productivity. In 2013, we launched two innovative PIVC
devices, ViaValve and Jelco IntuitIV. Our new blood control safety
PIVC device, ViaValve, has received very positive customer reviews
in the US, and we are expanding its launch to select European
countries in 2014. In Europe, the Jelco IntuitIV safety catheter
remains well placed to benefit from the EU Directive, effective in
2013, to improve workplace safety by preventing sharps
injuries.
Developed markets remain challenging and we are maintaining our
investment programme to expand in the faster growing emerging
markets. As previously signalled, we estimate that it typically
takes three to five years to reach target commercial productivity
levels as we register and introduce new products and build our
presence in these markets. In several territories, progress has
been slowed by our efforts to transition to new distributor
relationships capable of driving faster long term growth. Overall,
emerging market revenue declined 10% as regulatory approvals of a
new infusion pump in China were delayed and we experienced lower
distributor demand in several smaller markets. Nonetheless, we have
seen good growth in Brazil (15%) and India (27%) and total emerging
market sales represent over 10% of the business. While the pace of
executing this strategy is constrained by lengthy product
registration processes in some countries and the time needed to
recruit and train staff, we firmly believe that a continued focus
on expanding our emerging market exposure is the right strategy to
counter the challenges in developed markets.
Research and development
Investment in R&D remains a priority. Our total first half
R&D cash spend of GBP19m (2013: GBP18m) grew 5% and amounted to
4.9% of sales (2013: 4.4%). At the same time, we have continued our
initiative to streamline the organisation, upgrade talent and
improve processes to accelerate speed-to-market for new products.
We continue to invest in emerging market R&D and now have an
established product development team in Shanghai with particular
focus on infusion. We have also further increased our investment in
clinical research to deliver evidence of effectiveness and economic
benefit for our products, as customers increasingly demand proof of
performance and value.
We have seen good sales traction of our Graseby 2000/2100
syringe pumps in India, and the CADD Solis VIP pump in the US and
Europe. The pipeline for Medfusion 4000, CADD Solis VIP, Jelco
IntuitIV and ViaValve, plus the recent clearance of CADD Solis PIB
in the US as well as anticipated launches of new temperature
management, pain management and infusion products over the next
year, leave us well positioned for stronger new product sales. In
addition to new launches, we also continue to expand the
distribution and penetration of existing products into new regions,
broadening our offering particularly in emerging markets.
Outlook
The challenging revenue trends in developed markets are expected
to continue in the medium term and we will seek to counter them
through the launch of innovative products, offering a broad
portfolio, and executing our growth strategy in emerging markets.
While we will continue to seek cost saving initiatives and
operational enhancements, we expect profitability in the short term
to be impacted by the full year effect of the US medical device
tax, pricing headwinds, and our increased investment in new product
development. At constant currencies, second half revenue and profit
are expected to be below the equivalent period last year but with a
reduced rate of decline compared with that experienced in the first
half.
Smiths Detection
2014 2013 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 251 255 (1)% (1)%
Headline operating profit 30 31 (3)% (7)%
(20)
Headline operating margin 11.8% 12.0% bps
Statutory operating profit 28 26
(360)
Return on capital employed 8.6% 12.2% bps
=========================== ===== ===== ======== ==========
Smiths Detection's revenue declined 1% (GBP4m) on an underlying
basis against a strong comparator prior period. Growth in critical
infrastructure was more than offset by weakness in transportation,
military, ports and borders, and emergency responders.
Headline operating margins fell 20 basis points to 11.8% as
headline operating profit declined 7% on an underlying basis.
Profitability was affected by the lower volumes and some lower
margin contracts reflecting competitive pressures. These more than
offset the benefits of value engineering and cost savings delivered
by the performance improvement programme. Announced in 2011, this
programme has generated GBP28m of annual savings to date with costs
of GBP28m against total expected costs of GBP29m. The programme
will conclude at the end of the current financial year and any
remaining elements will be rolled into the 'Fuel for Growth'
programme. At the same time, we increased our investment in sales
and marketing. We also undertook a review of all major contracts
following the GBP15m provision that was made in the second half of
last year to meet additional costs arising from technical
challenges encountered on contract execution. No significant
adjustment to the provision was required as a result of the review,
although some further contract losses were incurred in the period.
We also continued reviewing working capital requirements and expect
that this review will conclude during the second half.
The difference between statutory and headline operating profit
includes exceptional restructuring costs of GBP2m. Return on
capital declined 360 basis points reflecting the lower
profitability.
Site rationalisation and headcount reduction continued and the
restructuring plan in Wiesbaden, Germany, is on track to reduce the
workforce by 175 by the end of this calendar year. An R&D
facility in Cork, Ireland, is due to close in the second half. Our
new Asia Pacific X-ray manufacturing hub in Johor Bahru, Malaysia,
was officially opened in January 2014 and its current workforce of
60 are producing up to 100 X-ray units per month. The new site
improves our competitive position and benefits aftermarket service
by reducing parts shipping time and costs. Its prime location in
the fastest growing region for air transportation positions it well
for significant growth as a manufacturing centre over the next few
years.
Continued focus on the aftermarket has delivered strong
underlying revenue growth, up 15% in the first half. This includes
the benefit from the start of a two-year, GBP18m contract for the
supply and management of bio-consumables for the UK MOD's fleet of
Integrated Biological Detection Systems and $14m in orders for
aftermarket support to the US Customs and Border Protection agency.
Excluding these large consumables contracts which are unlikely to
be repeated in the near term, aftermarket revenues grew to now
represent 27% of divisional sales.
Transportation sales fell 3% against a very strong comparator
period, which had benefited from several large contracts. However,
the US TSA (Transportation Security Administration) has placed a
$7m order for the RespondeR bottled liquid scanner, a product that
is attracting increased international interest as customers seek
fast and efficient ways to scan for liquids and gels. In Europe,
the recent adoption of the new liquids regulations for transiting
passengers has encouraged customers to pursue cost effective
methods for upgrading existing equipment. Products such as our new
Threat Identification Module (TIM) meet that need by enabling
airports to upgrade existing X-ray units, quickly and cheaply, to
achieve the latest standards for liquid detection. Our new HI-SCAN
10080 XCT automatic explosives scanner for checked baggage,
developed in conjunction with Analogic, has already passed the EU
Standard 3 tests that will be required for all new airport
applications from September 2014. The XCT is currently undergoing
operational testing with the TSA. The certification of the XCT
allows it to be included in airport tenders for what is we expect
to be a long-term replacement market over the next decade.
Revenue from critical infrastructure rose 17% on an underlying
basis, primarily driven by growth in emerging markets such as
Brazil, Singapore, Russia and India. It was also helped by a
stabilisation of US Government spending and a greater focus on
products specifically designed to meet the needs of customers
within this segment.
Although underlying revenue in ports and borders fell 3% due to
increased competitive and pricing pressures, we continue to see
growing demand for our advanced scanners from customs authorities
around the world seeking greater security and the improved tax
revenue collection. We recently won a US$8m order from the Canadian
Border Services and customer enquiries are generally high,
especially for our newer lightweight cargo inspection systems.
There is also growing confidence in the outlook for emerging
markets, increasingly attracted by the revenue-earning
opportunities from efficient tax collection coupled with improved
border security.
Underlying military revenues fell 11%, as pressures on defence
budgets continued. However, we secured new major US military
programs. An additional order of $7m was received for the latest
JCAD (Joint Chemical Agent Detector), our main, long-running
military contract. We have also continued to deliver the Chemical
Biological Protection System mobile shelter to the US Army and
National Guard, which will provide a steady revenue stream into
2015.
Research and Development
Smiths Detection is committed to the constant development of its
principal technologies, products and systems, the great majority of
which are funded and managed internally. Company funded R&D
increased 13% to GBP19m, equivalent to 7.5% of sales (2013: 6.6%).
This includes GBP8m of capitalised projects. We actively seek
customer and government support for R&D and total R&D spend
was GBP21m (2013: GBP20m) or 8.4% of sales.
New products introduced during the period included the HI-SCAN
6040-2is is a compact, next-generation, dual-view X-ray scanner
aimed at the transportation and critical infrastructure markets.
Its competitive price and new product advantages are already
helping win new business.
The ACE-ID is a handheld explosives identifier for use by bomb
disposal and hazmat teams. Using RAMAN laser based spectroscopy, it
enables the fast and safe identification of potential threats in a
small portable unit.
Two new powerful X-ray systems capable of scanning complete
vehicles have been launched. The HCVL is a fixed scanner to check
light vehicles at checkpoints and border crossings while the
HCVMe35 is a mobile truck and container system, designed for rapid
deployment in space-restricted areas. Both have already generated
significant interest from Customs authorities where excise revenue
collection is becoming an increasing important part of their
operations.
Outlook
The order book remains slightly behind the same time last year,
which points to lower underlying revenue in the second half.
However, as a government contracting business, Smiths Detection can
experience variability in its revenue and margin profile because of
the timing of orders and the implementation of government capital
spending. Headline operating margins will benefit from our
restructuring initiatives and on-going site rationalisation plans.
New product launches and certifications will support expansion into
new markets and provide opportunities in existing markets.
Smiths Interconnect
2014 2013 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 210 218 (4)% (4)%
Headline operating profit 27 30 (7)% (7)%
(40)
Headline operating margin 13.1% 13.5% bps
Statutory operating profit 16 20
(10)
Return on capital employed 12.2% 12.3% bps
=========================== ===== ===== ======== ==========
Reported revenue for Smiths Interconnect declined 4%, or GBP8m,
reflecting lower underlying revenue against a strong comparator.
Underlying sales fell GBP8m, or 4%, primarily due to sharply
reduced demand on military programmes in Europe, particularly the
Eurofighter, and the US, where communications and self-protection
programmes were scaled down as a result of the shrinking US
presence in Afghanistan. Strong growth in Asia, particularly China
and India, and general improvements in commercial markets such as
telecoms and data centres softened the defence impact. Foreign
exchange had a negative impact of GBP1m.
Headline operating profit decreased 7%, or GBP2m, on an
underlying basis. Margins fell 40 basis points to 13.1%, mainly
because of operational leverage on volume reductions and mix
effects due to the end of higher margin programmes. Year on year
savings from several ongoing productivity initiatives of almost
GBP2m were reinvested in business development capabilities to
support the continued transition to more commercial markets and
increased R&D activities to drive future revenue potential. In
addition, new cost reduction actions were instigated, including the
closure of two further manufacturing facilities, one in the US and
the other in Europe. Return on capital employed reduced by 10 basis
points due to lower profitability.
The difference between statutory and headline operating profit
principally reflects amortisation of acquired intangibles (GBP9m)
and restructuring costs (GBP3m).
In Connectors, underlying revenue fell by 3%, the net impact of
several positives and negatives. In Europe, the continued decline
in Eurofighter production and the operational disruption from the
closure of the UK manufacturing facility were only partially offset
by a general improvement in economic conditions and industrial
activity in Germany. While sales of recently launched semiconductor
test products started to gain traction, the seasonal ramp up to
support the sales of electronic consumer products over the
November/December holiday period was lower than in previous years.
Defence revenues also weakened on the back of the continued decline
in overall spending and delayed funding of new programs such as the
Ground Combat Vehicle. Asian revenues continued to grow, fuelled by
new sales resources and the creation of a Singapore entity
providing local language customer service and engineering support.
Commercial aviation and medical revenues remained robust with
further successes including a disposable catheter application and
an artificial heart system.
Microwave, with approximately one third of revenue to the
defence market, saw underlying revenue decline 6% as reductions in
major programmes supporting the US war effort in Afghanistan,
including Unmanned Aerial Vehicle datalinks and ground vehicle
self-protection radar systems, affected activity. The defence
focused businesses were restructured appropriately although some
margin leakage occurred. While business development and engineering
resources were shifted to more commercial opportunities, we
continued to win contracts on US strategic defence applications
such as ISR (Intelligence, Surveillance, Reconnaissance) with a new
programme providing over GBP2m of revenue in the current fiscal
year. Partially offsetting the challenges in defence, wireless
telecoms and test & measurement performed strongly. Network
optimisation filters revenues grew, particularly from Australian
operators and new customers in the Middle East, and our new
distributed antenna system product gained traction. Sales of PIM
(passive intermodulation) test instruments held up well despite
increased competition, and we were selected as the sole source PIM
instrument supplier for two network management contractors of a
major US wireless operator.
Underlying revenue in the Power business fell 2%. Data centre
demand was positive with strong international growth and robust
performance in the US, particularly in the colocation sector.
Significant contracts were secured in India, Ireland and Brazil,
mostly for our Busway and Power Distribution offerings, whilst in
the US, focused sales and marketing efforts have significantly
increased the value of our quote log. Industrial markets have also
shown signs of a rebound with resumption in orders from a
previously significant customer for furnace power controllers for
LED crystal growth applications. Sales of power protection products
continued to decline, particularly in the North America telecoms
market, more than offsetting Power's positive trends. This business
has now been restructured both commercially and operationally with
revenue and margin benefits expected to start accruing in the
second half. The commercial team has refocused on enhancing our
value proposition and driving new sales opportunities, and we have
completed a phased exit from the highly competitive Chinese
market.
Research and development
Total R&D increased GBP1m to GBP14m or 6.5% of sales. The
customer-funded portion, related mainly to the defence market,
remained flat at GBP1.5m as government research budgets continued
to be tightly controlled. However, to support the transition to
more commercial markets and position the business for future
growth, internal investment in R&D increased 8% to GBP12m or
5.8% of sales.
R&D investment continued to focus on new product innovation
for higher growth and budding commercial markets. New higher
density semiconductor test sockets were launched which enable
testing of the packaged chips to their full limits. Work also
continued on products for new applications such as electric
vehicles and downhole logging, as well as next generation variants
of existing offerings including PIM testing and satellite
communications antenna systems.
Outlook
The outlook is for a gradual improvement in commercial market
conditions to continue, while defence budgets are starting to
stabilise at a lower base level, although specific programme
lifecycle variations will drive performance. The strategy to focus
resources on both commercial markets and emerging geographies will
continue. Generally positive conditions in wireless telecoms,
semiconductor test and data centres, together with targeted
business development activities, the introduction of new products
and a stronger commercial order backlog, are expected to deliver an
improved performance in the second half. Margins are expected to
improve as the year progresses, benefitting from volume increases,
pricing initiatives and restructuring and efficiency savings.
Flex-Tek
2014 2013 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 123 120 3% 3%
Headline operating profit 22 20 13% 13%
160
Headline operating margin 18.3% 16.7% bps
Statutory operating profit 18 17
290
Return on capital employed 32.7% 29.8% bps
=========================== ===== ===== ======== ==========
Flex-Tek's reported and underlying revenues grew 3%, or GBP3m,
reflecting an improvement in the US residential construction market
and growth in sales of specialty heating elements and medical
hoses. Sales of aerospace components and OEM heating elements were
flat compared with the prior year. Headline operating profit
margins improved 160 basis points to 18.3%. The GBP2m (13%)
increase in headline operating profit on a reported and underlying
basis resulted from higher volumes and pricing which offset raw
material inflation. Return on capital employed rose 290 basis
points because of the improved profitability.
The difference between statutory and headline operating profit
principally reflects exceptional litigation costs of GBP5m.
Fluid Management revenues were flat as growth in commercial
airframe and automotive applications was offset by lower sales for
satellite launch vehicles, military gas turbines and development
work on next generation engines. Last year's first half revenues
had benefited from development programmes for new aerospace engines
which did not repeat in the period. However, the business is now
well positioned for sales growth when deliveries of the new
generation airframes and engines start in 2016. The healthy state
of the US automotive market is reflected in our order book.
Construction revenues of HVAC (heating, ventilation & air
conditioning) ducting and flexible gas piping products delivered an
underlying 10% increase. According to the US Census Bureau, the
December 2013 seasonally adjusted annual rate of new single family
home starts was 667,000 or 7% higher than the previous December.
Low home prices and interest rates continue to support high single
digit growth in this market.
Heat Solutions underlying revenues were flat with increased
sales of specialty heating elements and HVAC aftermarket
applications offset by lower revenues from household appliance and
residential HVAC OEM customers. OEM household appliance
manufacturers continue to project mid-single digit growth rates in
US markets and flat globally. Slow job creation and inflation
worries have kept consumer confidence cautious in the US.
Underlying revenues in Flexible Solutions were up 1%, with
strong growth in medical sleep apnoea products and slightly better
sales of US industrial ducting offsetting continuing weak demand
for floorcare applications.
Research and development
Flex-Tek continues to fund new product development for future
commercial airframes and engines. Additional spending has been
focused on specialist heating elements and medical tubing.
Significant progress has been achieved at our Asian facilities;
examples include the manufacture of heating elements from China for
local applications and serving customers in the Middle East, and
Airbus support from our factory in India. We continue to seek new
investments to grow our market share, expand our product portfolio,
and target potential bolt-on acquisitions to exploit the strength
of the management team.
Outlook
Looking to the second half, we expect the positive trends to be
maintained on the back of higher content in commercial airframes
from new lighter weight, high pressure hydraulic hose assemblies,
share gains in the HVAC heating element aftermarket, and continued
growth in US residential construction and medical tubing. The
gradually improving US economy and growth in Asia will provide
further support for these trends. Margins will benefit from higher
volumes but face pressure from increased investment in R&D,
inflation and competition.
Financial review
Earnings per share
Basic headline earnings per share from continuing activities
were 39.5p (2013: 40.9p), a decline of 4%. This reflects the lower
headline headline operating profit which has been partly offset by
a lower tax rate.
On a statutory basis, the basic earnings per share from
continuing activities were 23.7p (2013: 30.7p).
Exceptional and other items relating to continuing activities
excluded from headline profit before tax
These items amounted to a charge of GBP83m compared to a charge
of GBP57m in 2013. They comprised:
- Amortisation of intangible assets acquired in business
combinations of GBP21m (2013: GBP23m). The charge relates
principally to technology and customer relationships;
- GBP36m charge (2013: GBP11m) in connection with John Crane,
Inc. asbestos litigation;
- GBP5m charge (2013: GBP3m) in connection with Titeflex
Corporation litigation;
- GBP14m charge for restructuring (2013: GBP5m) in respect of
the 'Fuel for Growth' programme and performance improvement
programme in Smiths Detection;
- GBP5m charge for retirement benefit finance (2013: restated
charge of GBP12m);
- GBP4m charge for legacy retirement benefit administration
(2013: GBP4m)
- GBP2m profit on disposal of businesses (2013: GBP1m);
- GBP1m cost of acquisition and disposals (2013: nil); and
- GBP1m gain on legal settlement of diabetes royalty
payments
In the period to 31 January 2013, in addition to the above,
GBP1m gain on changes to pension plans and GBP1m of financing
losses were also excluded from headline performance.
Cash generation and net debt
Operating cash generation remained strong with headline
operating cash of GBP211m (2013: GBP223m), representing 86% (2013:
88%) of headline operating profit (see note 14 to the accounts for
a reconciliation of headline operating cash and free cash-flow to
statutory cash-flow measures). Free cash-flow fell GBP41m to GBP30m
(2013: GBP71m). Free cash-flow is stated after interest, tax and
pensions financing, but before acquisitions, financing activities
and dividends.
On a statutory basis, net cash inflow from continuing operations
was GBP83m (2013: GBP120m).
Dividends paid in the period on ordinary shares amounted to
GBP225m, consisting of final and special dividends (2013:
GBP103m).
Net debt at 31 January was GBP901m, up from GBP744m at 31 July
2013. The increase in net debt reflects outflows from dividends
(GBP225m) and pension funding (GBP52m) offset by an exchange
translation benefit of (GBP50m).
On 19 February, the Group completed the refinancing of its
existing bank facility with a new US$800m committed revolving
credit facility that matures in February 2019 with two one-year
extension options.
Headline interest and other financing costs
Interest payable on debt, net of interest earned on cash
deposits, was GBP31m (2013: GBP30m). Interest costs were covered
8.0 times by headline operating profits.
The Group accounts for pensions using IAS19. As required by this
standard, a finance charge of GBP5m (2013: a restated charge of
GBP12m) is recognised reflecting the unwinding of the discount on
the net pension liability.
Research and development
Investment in research and development (R&D) drives future
performance and is a measure of the Group's commitment to the
future organic growth of the business.
We invested a total of GBP61m in R&D (2013: GBP59m),
equivalent to 4.2% of revenue (2013: 4.0%). Of that total, GBP57m
was funded by the Company compared with GBP54m in 2013, an increase
of 7%. We actively seek funding from customers to support R&D
and this amounted to GBP4m (2013: GBP5m). Under IFRS, certain
development costs are capitalised, and this amounted to GBP15m in
the period (2013: GBP14m). The gross capitalisation is shown as an
intangible asset. Where customers contribute to the costs of
development, the contribution is included as deferred income and
disclosed within trade and other payables.
Taxation
The headline tax charge of GBP58m (2013: GBP61m) represented an
effective rate of 27.0% on the headline profit before taxation
(2013: 27.5%). This rate is expected to be sustained for the full
year. On a statutory basis, the tax charge on continuing activities
was GBP37m (2013: GBP45m).
The Group continues to take advantage of global manufacturing,
research and development and other tax incentives, the
tax-efficient use of capital and tax compliance management. The tax
rate is expected to be within the range of 26% and 28% over the
medium term.
Return on capital employed
The return on capital employed (ROCE) is calculated over a
rolling 12-month period and is the percentage that headline
operating profit represents monthly average capital employed.
Capital employed comprises total equity adjusted for goodwill
recognised directly in reserves, post-retirement benefit assets and
liabilities net of tax, litigation provisions relating to
exceptional items net of tax, and net debt. The ROCE decreased 10
basis points to 16.6% (2013: 16.7%) as a result of reduced
profitability in Smiths Medical, Detection and Interconnect
offsetting improved profitability in John Crane and Flex-Tek.
Retirement benefits
As required by IFRS, the balance sheet reflects the net surplus
or deficit in retirement benefit plans, taking assets at their
market values at 31 January 2014 and evaluating liabilities at
period-end AA corporate bond interest rates.
The tables below disclose the net status across a number of
individual plans. Where any individual plan shows a surplus under
IAS 19, this is disclosed on the balance sheet as a retirement
benefit asset. The IAS 19 surplus of any one plan is not available
to fund the IAS 19 deficit of another plan. The net pension deficit
has fallen to GBP236m at 31 January 2014 from GBP254m at 31 July
2013. The decrease reflects the benefit of scheme contributions,
while the asset returns and foreign exchange broadly offset the
increase in liabilities caused by a slight decrease in the discount
rates upon which the liability is calculated.
The accounting basis under IAS 19 does not necessarily reflect
the funding basis agreed with the Trustees and, should the schemes
be wound up while they had members, they would need to buy out the
benefits of all members. The buyouts would cost significantly more
than the present value of scheme liabilities calculated in
accordance with IAS 19.
The retirement benefit position was:
31 January 31 July 31 January
2014 2013 2013
====================== ========== ======= ==========
Funded plans
UK plans - funding
status 99% 99% 97%
US plans - funding
status 85% 81% 74%
Other plans - funding
status 80% 80% 71%
====================== ========== ======= ==========
31 January 31 July 31 January
2014 2013 2013
GBPm GBPm GBPm
=================== ========== ======= ==========
Deficit
Funded plans (132) (147) (276)
Unfunded plans (104) (107) (106)
=================== ========== ======= ==========
Total deficit (236) (254) (382)
=================== ========== ======= ==========
Retirement benefit
assets 102 121 83
Retirement benefit
liabilities (338) (375) (465)
=================== ========== ======= ==========
(236) (254) (382)
=================== ========== ======= ==========
In the current year, cash contributions to the schemes are
expected to total approximately GBP90m (2013: GBP78m). In addition,
the Group will invest GBP24m (2013: GBP24m) in an escrow account as
part of the 10-year funding plan agreed with the Smiths Industries
Pension Scheme (SIPS).
The approximate pension membership for the three main schemes in
January 2014 is set out in the table below:
Pension scheme membership SIPS TIGPS US plans Total
========================== ====== ====== ======== ======
Deferred active 540 270 3,220 4,030
Deferred 11,580 14,010 6,400 31,990
Pensioners 13,070 17,900 5,520 36,490
========================== ====== ====== ======== ======
Total 25,190 32,180 15,140 72,510
========================== ====== ====== ======== ======
Exchange rates
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
period-end rates. The principal exchange rates, expressed in terms
of the value of sterling, are shown in the following table.
31 31 31 July
January January 2013
2014 2013
=========== ======== ======== ================== =======
Average
rates:
Dollar weakened
US dollar 1.61 1.60 1% 1.57
Euro strengthened
Euro 1.19 1.24 4% 1.20
Period end
rates:
Dollar weakened
US dollar 1.65 1.59 4% 1.52
Euro weakened
Euro 1.22 1.17 4% 1.14
=========== ======== ======== ================== =======
Risk management
The principal risks and uncertainties affecting the business
activities of the Group and relevant mitigating activities were set
out on pages 56 to 61 of the Annual Report for the year ended 31
July 2013, a copy of which is available at the Company's website at
www.smiths.com. The key risks and uncertainties are summarised
below:
Economic outlook
Economic and financial market conditions may lead to recession
and may cause adverse effects on customers or suppliers with
consequential capacity or cash-flow implications for Smiths
Group.
Eurozone break-up
Political and economic structural weaknesses in the single
currency framework may result in the Eurozone breaking up which
could affect our business through currency devaluations and a wider
economic uncertainty.
Compliance with legislation and regulations
A complex legislative and regulatory environment applies to the
Group's activities such that failure to comply could lead to
financial penalty.
Pension funding
Defined benefit pension scheme obligations are funded by Group
companies based on actuarial assumptions. Changes in discount
rates, inflation, returns or mortality could lead to material
changes in funding requirements.
Financial risks
Financial risk, whether from foreign exchange fluctuations,
availability of funding, changes in tax rates or availability of
insurance cover may cause adverse effects on the Group's net
assets, earnings or liquidity.
Product liability and litigation
Product liability claims and litigation, particularly given the
Group's significant sales exposure to the US market, may have a
significant impact on the financial results.
Global supply chain/concentration of manufacturing
Reliance on sole suppliers or concentration of manufacturing in
the supply chain - especially in areas exposed to natural
catastrophe - may result in disruption to the supply of
products.
Government customers
Over 35% of revenues are from governments or influenced by
governments. Many such governments are reducing expenditure in the
present economic environment with consequential risks to
revenue.
Technology and innovation
Product innovation is key to long-term revenue growth. Failure
of the Group to innovate its products and services could materially
affect market share and sales growth.
Talent and succession planning
Suitably qualified personnel are an important asset that
underpins the Group's success. Failure to attract or retain such
personnel may result in weaker growth and returns.
Contractual liabilities
Failure to deliver products and services according to
contractual obligations may lead to higher costs, liquidated
damages or other penalties.
Acquisitions and disposals
Acquisitions are subject to execution risk and may be more
difficult to integrate than expected so that the full benefits are
not realised.
Information technology and cyber-security
Information systems are subject to security risk and play an
important part in business processes, both internally and
externally.
Developments since the Annual Report
In the view of the Board, the risks and uncertainties affecting
the Group for the remaining six months of the financial year
continue to be those set out briefly above and more fully in the
Annual Report. Since the Annual Report, continued constraints on
government budgets are likely to put pressure on public sector
spending in areas such as healthcare, defence and homeland security
in markets in which the Group operates. Currency volatility has
also increased since the Annual Report which could cause variations
in the Group's reported results as average exchange rates fluctuate
and variations in the value of the Group's reported net assets as
exchange rates change.
Statement of directors' responsibilities
The Interim report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the Interim report in accordance with the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority. The Disclosure and Transparency Rules ("DTR") require
that the accounting policies and presentation applied to the
half-yearly figures must be consistent with those applied in the
latest published annual accounts, except where the accounting
policies and presentation are to be changed in the subsequent
annual accounts, in which case the new accounting policies and
presentation should be followed, and the changes and the reasons
for the changes should be disclosed in the Interim report, unless
the United Kingdom Financial Conduct Authority agrees
otherwise.
The directors confirm that this condensed set of financial
statements has been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting' as adopted by
the European Union, and that the interim management report herein
includes a fair review of:
-- the important events that have occurred during the first six
months of the financial year and their impact on the condensed set
of financial statements as required by DTR 4.2.7;
-- the principal risks and uncertainties for the remaining six
months of the year as required by DTR 4.2.7; and
-- related party transactions that have taken place in the first
six months of the current financial year and changes in the related
party transactions described in the previous annual report that
have materially affected the financial position or performance of
the group during the first six months of the current financial year
as required by DTR 4.2.8.
The directors of Smiths Group plc are listed in the Smiths Group
plc Annual Report for the year ended 31 July 2013. Donald Brydon
retired as planned on 19 November 2013. There have been no other
changes to the membership of the board.
For and on behalf of the Board of Directors:
Philip Bowman Peter Turner
Chief Executive Finance Director
18 March 2014
Independent review report to Smiths Group plc
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the Interim report for the period ended
31 January 2014, which comprises the consolidated income statement,
consolidated statement of comprehensive income, consolidated
balance sheet, consolidated statement of changes in equity,
consolidated cash flow statement and related notes. We have read
the other information contained in the Interim report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
Directors' responsibilities
The Interim report is the responsibility of, and has been
approved by, the Directors. The Directors are responsible for
preparing the Interim report in accordance with the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this Interim report has been prepared in accordance with
International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the Interim report
based on our review. This report, including the conclusion, has
been prepared for and only for the Company for the purpose of the
Disclosure and Transparency Rules of the Financial Conduct
Authority and for no other purpose. We do not, in producing this
report, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands
it may come save where expressly agreed by our prior consent in
writing.
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 United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the Interim report for the period ended 31 January 2014 is not
prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European
Union and the Disclosure and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
PricewaterhouseCoopers LLP
Chartered Accountants
London
18 March 2014
(a) The maintenance and integrity of the Smiths Group plc
website is the responsibility of the Directors; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since
they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Consolidated income statement (unaudited)
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
(restated) (restated)
Notes GBPm GBPm GBPm
============================================ ====== ========= ============ ============
Continuing operations
Revenue 2 1,441.8 1,475.2 3,108.6
Cost of sales (790.5) (799.4) (1,694.0)
============================================ ====== ========= ============ ============
Gross profit 651.3 675.8 1,414.6
Sales and distribution costs (201.1) (214.0) (425.6)
Administrative expenses (282.7) (251.6) (503.4)
Profit on disposal of businesses 4 2.3 0.7 0.9
============================================ ====== ========= ============ ============
Operating profit 169.8 210.9 486.5
============================================ ====== ========= ============ ============
Comprising
-------------------------------------------- ------ --------- ------------ ------------
- headline operating profit 3 245.2 252.7 559.7
-------------------------------------------- ------ --------- ------------ ------------
- exceptional items, amortisation
of acquired intangibles 3 (75.4) (41.8) (73.2)
============================================ ====== ========= ============ ============
169.8 210.9 486.5
============================================ ====== ========= ============ ============
Interest receivable 1.5 1.2 2.6
Interest payable (32.2) (31.4) (64.3)
Other financing losses (2.9) (2.9) (6.1)
Other finance charges - retirement
benefits (4.7) (12.1) (23.0)
============================================ ====== ========= ============ ============
Finance costs (38.3) (45.2) (90.8)
Profit before taxation 131.5 165.7 395.7
============================================ ====== ========= ============ ============
Comprising
-------------------------------------------- ------ --------- ------------ ------------
- headline profit before taxation 3 214.5 222.5 498.0
- exceptional items, amortisation
of acquired intangibles and other
financing gains and losses 3 (83.0) (56.8) (102.3)
============================================ ====== ========= ============ ============
131.5 165.7 395.7
============================================ ====== ========= ============ ============
Taxation 5 (37.1) (44.5) (79.1)
============================================ ====== ========= ============ ============
Profit after taxation - continuing
operations 94.4 121.2 316.6
============================================ ====== ========= ============ ============
(Loss)/profit after taxation - discontinued
operations 0.1
============================================ ====== ========= ============ ============
Profit for the period 94.5 121.2 316.6
============================================ ====== ========= ============ ============
Attributable to
Smiths Group shareholders 93.4 120.5 315.0
Non-controlling interests 1.1 0.7 1.6
============================================ ====== ========= ============ ============
94.5 121.2 316.6
============================================ ====== ========= ============ ============
Earnings per share 7
Basic 23.7p 30.7p 80.1p
Diluted 23.6p 30.4p 79.3p
============================================ ====== ========= ============ ============
Dividends per share (declared) 6
- interim 12.75p 12.50p 12.50p
- final 27.00p
- special 30.00p
============================================ ====== ========= ============ ============
12.75p 12.50p 69.50p
============================================ ====== ========= ============ ============
Consolidated statement of comprehensive income (unaudited)
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
(restated) (restated)
Notes GBPm GBPm GBPm
=========================================== ====== ========= ============ ============
Profit for the period 94.5 121.2 316.6
=========================================== ====== ========= ============ ============
Other comprehensive income
Actuarial (losses)/gains on retirement
benefits 8 (37.3) 212.6 326.6
Taxation recognised on actuarial movements (3.1) (21.5) (39.0)
=========================================== ====== ========= ============ ============
Other comprehensive income which will
not be reclassified to the consolidated
income statement (40.4) 191.1 287.6
Other comprehensive income which will
be, or has been, reclassified
Exchange gains/(losses) (185.4) 29.0 99.8
Fair value gains/(losses)
- on available for sale financial assets 0.3 3.4 0.1
- deferred in the period on cash-flow
and net investment hedges 88.3 (2.0) (44.7)
- reclassified to income statement (2.1) (1.5) (4.3)
Taxation recognised on fair value gains
and losses (1.0)
=========================================== ====== ========= ============ ============
Total other comprehensive income (139.3) 220.0 337.5
Total comprehensive income (44.8) 341.2 654.1
=========================================== ====== ========= ============ ============
Attributable to
Smiths Group shareholders (44.9) 342.0 654.2
Non-controlling interests 0.1 (0.8) (0.1)
=========================================== ====== ========= ============ ============
(44.8) 341.2 654.1
=========================================== ====== ========= ============ ============
Consolidated balance sheet (unaudited)
31 January 31 January 31 July
2014 2013 2013
Notes GBPm GBPm GBPm
======================================= ===== ========== ========== =========
Non-current assets
Intangible assets 9 1,608.6 1,710.6 1,746.0
Property, plant and equipment 10 259.3 266.7 280.0
Financial assets - other investments 98.9 76.8 86.1
Retirement benefit assets 8 102.5 83.0 121.7
Deferred tax assets 174.0 181.1 185.4
Trade and other receivables 30.7 28.0 34.1
Financial derivatives 12.5 10.8 6.4
======================================= ===== ========== ========== =========
2,286.5 2,357.0 2,459.7
Current assets
Inventories 442.7 480.7 475.6
Current tax receivable 24.7 17.3 33.4
Trade and other receivables 608.6 626.0 695.5
Cash and cash equivalents 11 175.9 275.5 393.8
Financial derivatives 11.2 11.8 8.1
======================================= ===== ========== ========== =========
1,263.1 1,411.3 1,606.4
Total assets 3,549.6 3,768.3 4,066.1
======================================= ===== ========== ========== =========
Non-current liabilities
Financial liabilities
- borrowings 11 (893.9) (1,084.2) (951.1)
- financial derivatives (6.7) (3.9) (11.0)
Provisions for liabilities and charges 13 (255.7) (253.1) (258.1)
Retirement benefit obligations 8 (338.1) (464.9) (375.3)
Deferred tax liabilities (67.9) (68.8) (73.1)
Trade and other payables (33.2) (37.4) (31.0)
======================================= ===== ========== ========== =========
(1,595.5) (1,912.3) (1,699.6)
Current liabilities
Financial liabilities
- borrowings 11 (182.8) (46.3) (187.1)
- financial derivatives (7.1) (3.3) (5.8)
Provisions for liabilities and charges 13 (72.6) (76.2) (78.1)
Trade and other payables (416.4) (443.3) (521.8)
Current tax payable (54.7) (67.3) (80.1)
======================================= ===== ========== ========== =========
(733.6) (636.4) (872.9)
======================================= ===== ========== ========== =========
Total liabilities (2,329.1) (2,548.7) (2,572.5)
======================================= ===== ========== ========== =========
Net assets 1,220.5 1,219.6 1,493.6
======================================= ===== ========== ========== =========
Shareholders' equity
Share capital 147.9 147.5 147.7
Share premium account 345.9 336.5 340.8
Capital redemption reserve 5.8 5.8 5.8
Revaluation reserve 1.7 1.7 1.7
Merger reserve 234.8 234.8 234.8
Retained earnings 564.9 614.7 929.2
Hedge reserve (87.9) (128.3) (174.0)
======================================= ===== ========== ========== =========
Total shareholders' equity 1,213.1 1,212.7 1,486.0
Non-controlling interest equity 7.4 6.9 7.6
======================================= ===== ========== ========== =========
Total equity 1,220.5 1,219.6 1,493.6
======================================= ===== ========== ========== =========
Consolidated statement of changes in equity (unaudited)
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 July 2013 488.5 242.3 929.2 (174.0) 1,486.0 7.6 1,493.6
======================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 93.4 93.4 1.1 94.5
Other comprehensive
income
Exchange losses (184.3) (0.1) (184.4) (1.0) (185.4)
Actuarial losses
on retirement benefits
and tax (40.4) (40.4) (40.4)
Fair value gains 0.3 86.2 86.5 86.5
======================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period (131.0) 86.1 (44.9) 0.1 (44.8)
Transactions relating
to ownership interests
Exercises of share
options 5.3 5.3 5.3
Purchase of own shares (12.8) (12.8) (12.8)
Dividends
- equity shareholders 6 (224.7) (224.7) (224.7)
- non-controlling
interest (0.3) (0.3)
Share-based payment 4.2 4.2 4.2
======================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 January 2014 493.8 242.3 564.9 (87.9) 1,213.1 7.4 1,220.5
======================== ====== ======== ========= ========= ======== ============== =============== =======
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 July 2012 479.2 242.3 376.1 (124.8) 972.8 8.0 980.8
========================== ===== ======== ========= ========= ======== ============== =============== =======
Profit for the period 120.5 120.5 0.7 121.2
Other comprehensive
income
Exchange gains/(losses) 30.5 30.5 (1.5) 29.0
Actuarial losses
on retirement benefits
net of tax 191.1 191.1 191.1
Fair value gains/(losses) 3.4 (3.5) (0.1) (0.1)
========================== ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period 345.5 (3.5) 342.0 (0.8) 341.2
Transactions relating
to ownership interests
Exercises of share
options 4.8 4.8 4.8
Purchase of own shares (11.0) (11.0) (11.0)
Dividends
- equity shareholders 6 (103.2) (103.2) (103.2)
- non-controlling
interest (0.3) (0.3)
Share-based payment 7.3 7.3 7.3
========================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 January 2013 484.0 242.3 614.7 (128.3) 1,212.7 6.9 1,219.6
========================== ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement (unaudited)
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
Notes GBPm GBPm GBPm
=========================================== ===== ======== ======== =======
Net cash inflow from operating activities 14 83.2 119.9 353.4
Cash-flows from investing activities
Expenditure on capitalised development (13.6) (13.0) (28.4)
Expenditure on other intangible assets (8.0) (3.0) (11.1)
Purchases of property, plant and equipment (24.1) (23.1) (56.5)
Disposals of property, plant and equipment 4.3 2.0 3.9
Investment in financial assets (12.1) (12.1) (24.3)
Acquisition of businesses (0.5) (0.5)
Disposals of businesses 3.0 0.7 0.3
=========================================== ===== ======== ======== =======
Net cash-flow used in investing activities (50.5) (49.0) (116.6)
Cash-flows from financing activities
Proceeds from exercise of share options 5.3 4.8 9.3
Purchase of own shares (12.8) (11.0) (11.0)
Dividends paid to equity shareholders (224.7) (103.2) (152.4)
Dividends paid to non-controlling
interests (0.3) (0.3) (0.3)
Cash inflow/(outflow) from matured
derivative financial instruments 4.3 (2.0) (0.4)
Increase in new borrowings 0.1 247.2 247.2
Reduction and repayment of borrowings (0.4) (158.8) (159.1)
=========================================== ===== ======== ======== =======
Net cash-flow used in financing activities (228.5) (23.3) (66.7)
Net (decrease)/increase in cash and
cash equivalents (195.8) 47.6 170.1
Cash and cash equivalents at beginning
of the period 386.5 203.7 203.7
Exchange differences (20.9) 3.2 12.7
=========================================== ===== ======== ======== =======
Cash and cash equivalents at end of
the period 169.8 254.5 386.5
=========================================== ===== ======== ======== =======
Cash and cash equivalents at end of
the period comprise
- cash at bank and in hand 101.8 191.1 164.2
- short-term deposits 74.1 84.4 229.6
- bank overdrafts (6.1) (21.0) (7.3)
=========================================== ===== ======== ======== =======
169.8 254.5 386.5
=========================================== ===== ======== ======== =======
Reconciliation of net cash-flow to movement in net debt
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
Notes GBPm GBPm GBPm
====================================== ===== ======== ======== =======
Net (decrease)/increase in cash and
cash equivalents 14 (195.8) 47.6 170.1
Net (increase)/decrease in borrowings
resulting from cash-flows 0.3 (88.4) (88.1)
====================================== ===== ======== ======== =======
Movement in net debt resulting from
cash-flows (195.5) (40.8) 82.0
Capitalisation, interest accruals
and unwind of capitalisation of fees (8.3) (11.3) (3.8)
Movement in fair value hedging (3.2) 2.0 9.7
Exchange differences 50.6 (13.5) (40.9)
====================================== ===== ======== ======== =======
Movement in net debt in the period (156.4) (63.6) 47.0
Net debt at start of period (744.4) (791.4) (791.4)
====================================== ===== ======== ======== =======
Net debt at end of period (900.8) (855.0) (744.4)
====================================== ===== ======== ======== =======
Notes to the Interim report (unaudited)
1 Basis of preparation
The condensed interim financial information covers the six month
period ended 31 January 2014 and has been prepared under
International Financial Reporting Standards (IFRS) as adopted by
the European Union, in accordance with International Accounting
Standard 34 'Interim Financial Reporting' and the Disclosure and
Transparency Rules of the Financial Services Authority. It is
unaudited but has been reviewed by the auditors and their report is
attached to this document.
The interim financial information does not constitute statutory
accounts within the meaning of Section 434 of the Companies Act
2006. It should be read in conjunction with the statutory accounts
for the year ended 31 July 2013, which were prepared in accordance
with IFRS as adopted by the European Union and have been filed with
the Registrar of Companies. The auditors' report on these statutory
accounts was unqualified and did not contain a statement under
Section 498(2) or (3) of the Companies Act 2006.
Accounting policies
The condensed interim financial information has been prepared on
the basis of the accounting policies applicable for the year ending
31 July 2014. These accounting policies are consistent with those
applied in the preparation of the financial statements for the year
ended 31 July 2013, except for the adoption of:
-- 'IAS 19 (Revised 2011): Employee benefits'. The consolidated
income statement, consolidated statement of comprehensive income,
consolidated statement of changes in equity and related notes have
been restated to reflect the recognition requirements of this
standard;
-- 'IAS 28: Investments in Associates and Joint Ventures' which
has not led to any changes in reported figures or disclosures;
-- Amendments to IFRS 7 'Disclosures - Offsetting financial
assets and financial liabilities'. The additional disclosures
required will be included in the statutory accounts for the year
ended 31 July 2014;
-- 'IFRS 10: Consolidated financial statements' which has not
led to any changes in reported figures or disclosures;
-- 'IFRS 11: Joint Arrangements' which has not led to any
changes in reported figures or disclosures;
-- 'IFRS 12: Disclosed of Interests in Other Entities' which has
not led to any changes in reported figures or disclosures; and
-- 'IFRS 13: Fair value measurement'. Adopting this new
accounting requirement has increased the disclosure included in the
notes to the interim report.
Significant judgements, key assumptions and estimates
The preparation of the accounts in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the accounts and the reported amounts of
revenues and expenses during the reporting period. Actual results
may differ from these estimates. The key estimates and assumptions
used in these consolidated financial statements are set out
below.
Revenue recognition
The timing of revenue recognition on contracts depends on the
assessed stage of completion of contract activity at the balance
sheet date. This assessment requires the expected total contract
revenues and costs to be estimated based on the current progress of
the contract. Revenue of GBP25.8m (31 July 2013: GBP53.0m) has been
recognised in the period in respect of contracts in progress at the
period end with a total expected value of GBP132.6m (31 July 2013:
GBP149.7m). A 5% reduction in the proportion of the contract
activity recognised in the current period would have reduced
operating profit by an estimated GBP0.1m (31 July 2013: GBP0.5m)
for Smiths Detection and GBP0.1m (31 July 2013: GBP0.3m) for Smiths
Interconnect.
In addition to contracts accounted for on a percentage of
completion basis, Smiths Detection also has long-term contractual
arrangements for the sale of goods and services. Margins achieved
on these contracts can reflect the impact of commercial decisions
made in different economic circumstances. In addition, contract
delivery is subject to commercial and technical risks which can
affect the outcome of the contract.
Smiths Medical has rebate arrangements in place with some
distributors in respect of sales to end customers where sales
prices have been negotiated by Smiths Medical. Rebates are
estimated based on the level of discount derived from sales data
from distributors, the amount of inventory held by distributors and
the time lag between the initial sale to the distributor and the
rebate being claimed. The rebate accrual at 31 January 2014 was
GBP16.6m (31 July 2013: GBP17.0m).
Working capital provisions
For inventory and receivables, if the carrying value is higher
than the expected recoverable value, the Group makes provisions
writing down the assets to their recoverable value. The recoverable
value of inventory is estimated using historical selling prices,
sales activity and customer contracts. The recoverable value of
receivables is considered individually for each customer and
incorporates past experience and progress with collecting
receivables.
At 31 January 2014 the carrying value of inventory incorporates
provisions of GBP70.5m (31 July 2013: GBP74.4m). The inventory turn
rate of 3.6 (31 July 2013: 3.6) varies across the five divisions.
Smiths Detection has the slowest inventory utilisation with a turn
rate of 2.6 (31 July 2013: 2.4).
At 31 January 2014 the gross value of receivables partly
provided for or more than 3 months overdue was GBP55.1m (31 July
2013: GBP53.4m) and there were provisions of GBP15.9m (31 July
2013: GBP17.8m) against these receivables which were carried at a
net value of GBP39.2m (31 July 2013: GBP35.6m).
Impairment
Goodwill is tested at least annually for impairment and
intangible assets acquired in business combinations are tested if
there are any indications of impairment, in accordance with the
accounting policy set out in the Annual Report 2013. The
recoverable amounts of cash generating units and intangible assets
are determined based on value in use calculations. These
calculations require the use of estimates including projected
future cash-flows and other future events.
See the Annual Report 2013 for details of the critical
assumptions made, including the sales and margin volatility in
Smiths Detection and Smiths Interconnect and disclosures on the
sensitivity of the impairment testing to these key assumptions. See
note 9 for details of the changes in assumptions required to
trigger an impairment in Smiths Interconnect Power Management.
Provisions for liabilities and charges
As previously reported, John Crane, Inc., a subsidiary of the
Group, is currently one of many co-defendants in litigation
relating to products previously manufactured which contained
asbestos. Provision of GBP207.0m (31 July 2013: GBP210.0m) has been
made for the future defence costs which the Group is expected to
incur and the expected costs of future adverse judgments against
John Crane, Inc. Whilst published incidence curves can be used to
estimate the likely future pattern of asbestos related disease,
John Crane, Inc.'s claims experience is significantly impacted by
other factors which influence the US litigation environment. These
can include: changing approaches on the part of the plaintiffs'
bar; changing attitudes amongst the judiciary at both trial and
appellate levels; and legislative and procedural changes in both
the state and federal court systems. Therefore, because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of the related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred. John Crane, Inc. takes account
of the advice of an expert in asbestos liability estimation in
quantifying the expected costs.
As previously reported, Titeflex Corporation, a subsidiary of
the Group in the Flex-Tek division, has received a number of claims
from insurance companies seeking recompense on a subrogated basis
for the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes, however some claims have been settled
on an individual basis without admission of liability. Provision of
GBP62.3m (31 July 2013: GBP65.6m) has been made for the costs which
the Group is expected to incur in respect of these claims. However,
because of the significant uncertainty associated with the future
level of claims, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred.
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
though there can be no guarantee that such provisions (which may be
subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
All provisions may be subject to potentially material revisions
from time to time if new information becomes available as a result
of future events.
Retirement benefits
The consolidated financial statements include costs in relation
to, and provision for, retirement benefit obligations. The costs
and the present value of any related pension assets and liabilities
depend on such factors as life expectancy of the members and the
discount rate used to calculate the present value of the
liabilities. The Group uses previous experience and independent
actuarial advice to select the values of critical estimates.
At 31 January 2014 there is a retirement benefit asset of
GBP102.5m (31 July 2013: GBP121.7m) which arises from the rights of
the employers to recover the surplus at the end of the life of the
scheme. If the pension schemes were wound up while they still had
members, the schemes would need to buy out the benefits of all
members. The buy outs would cost significantly more than the
present value of the scheme liabilities calculated in accordance
with IAS 19 (Revised 2011): Employee benefits.
Taxation
The Group has recognised deferred tax assets of GBP24.7m (31
July 2013: GBP28.1m) relating to losses and GBP85.2m (31 July 2013:
GBP85.6m) relating to the John Crane, Inc. and Titeflex Corporation
litigation provisions. The recognition of assets pertaining to
these items involves judgement by management as to the likelihood
of realisation of these deferred tax assets and this is based on a
number of factors, which seek to assess the expectation that the
benefit of these assets will be realised, including appropriate
taxable temporary timing differences and it has been concluded that
there will be sufficient taxable profits in future periods to
support recognition.
2 Segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These
divisions design and manufacture the following products:
-- John Crane - mechanical seals, seal support systems,
engineered bearings, power transmission couplings and specialist
filtration systems;
-- Smiths Medical - medication delivery systems, vital care
products and safety devices that prevent needlestick injuries and
reduce cross-infection;
-- Smiths Detection - sensors that detect and identify
explosives, narcotics, weapons, chemical agents, biohazards and
contraband;
-- Smiths Interconnect - specialised electronic and radio
frequency components and sub-systems that connect, protect and
control critical systems;
-- Flex-Tek - engineered components that heat and move fluids
and gases, flexible hosing and rigid tubing.
The position and performance of each division is reported
monthly to the Board of Directors. This information is prepared
using the same accounting policies as the consolidated financial
information except that the Group uses headline operating profit to
monitor divisional results and operating assets to monitor
divisional position. See note 3 for an explanation of which items
are excluded from headline measures. Intersegment sales and
transfers are charged at arm's length prices.
Period ended 31 January 2014
====== =================================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================== ====== ======== ========== ============= ======== ========= =======
Revenue 468.8 388.9 251.4 209.5 123.2 1,441.8
============================== ====== ======== ========== ============= ======== ========= =======
Divisional headline operating
profit 108.6 71.1 29.6 27.4 22.6 259.3
Corporate headline operating
costs (14.1) (14.1)
============================== ====== ======== ========== ============= ======== ========= =======
Headline operating profit 108.6 71.1 29.6 27.4 22.6 (14.1) 245.2
Exceptional operating
items (note 4) (38.2) (3.3) (1.6) (2.7) (4.7) (0.8) (51.3)
Legacy retirement benefits (0.1) (3.4) (3.5)
Amortisation of acquired
intangible assets (6.6) (4.9) (0.1) (8.9) (0.1) (20.6)
============================== ====== ======== ========== ============= ======== ========= =======
Operating profit/(loss) 63.8 62.9 27.9 15.8 17.7 (18.3) 169.8
Exceptional finance costs
- adjustment to discounted
provision (note 4) (2.3) (0.6) (2.9)
Net finance costs - other (35.4)
============================== ====== ======== ========== ============= ======== ========= =======
Profit before taxation 131.5
============================== ====== ======== ========== ============= ======== ========= =======
Period ended 31 January 2013
====== =================================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================== ====== ======== ========== ============= ======== ========= =======
Revenue 469.5 412.9 254.6 218.5 119.7 1,475.2
============================== ====== ======== ========== ============= ======== ========= =======
Divisional headline operating
profit 102.1 87.1 30.5 29.6 20.0 269.3
Corporate headline operating
costs (16.6) (16.6)
============================== ====== ======== ========== ============= ======== ========= =======
Headline operating profit 102.1 87.1 30.5 29.6 20.0 (16.6) 252.7
Exceptional operating
items (note 4) (8.1) 0.3 (4.2) (2.6) (0.2) (14.8)
Legacy retirement benefits
(restated) (4.1) (4.1)
Amortisation of acquired
intangible assets (7.1) (5.6) (0.6) (9.5) (0.1) (22.9)
============================== ====== ======== ========== ============= ======== ========= =======
Operating profit/(loss)
(restated) 86.9 81.8 25.7 20.1 17.3 (20.9) 210.9
Exceptional finance costs
- adjustment to discounted
provision (note 4) (1.4) (0.4) (1.8)
Net finance costs - other
(restated) (43.4)
============================== ====== ======== ========== ============= ======== ========= =======
Profit before taxation
(restated) 165.7
============================== ====== ======== ========== ============= ======== ========= =======
Year ended 31 July 2013
====== =================================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =======
Revenue 985.7 850.4 559.0 460.6 252.9 3,108.6
================================= ====== ======== ========== ============= ======== ========= =======
Divisional headline operating
profit 230.5 189.1 58.0 68.8 43.2 589.6
Corporate headline operating
costs (29.9) (29.9)
================================= ====== ======== ========== ============= ======== ========= =======
Headline operating profit/(loss) 230.5 189.1 58.0 68.8 43.2 (29.9) 559.7
Exceptional operating
items (note 4) (10.8) 1.2 (4.9) (0.2) (7.0) 1.8 (19.9)
Legacy retirement benefits
(restated) (6.7) (6.7)
Amortisation and impairment
of acquired intangible
assets (14.2) (11.4) (1.1) (19.7) (0.2) (46.6)
================================= ====== ======== ========== ============= ======== ========= =======
Operating profit/(loss)
(restated) 205.5 178.9 52.0 48.9 36.0 (34.8) 486.5
Exceptional finance costs
- adjustment to discounted
provision (note 4) (3.3) (0.9) (4.2)
Net finance costs - other
(restated) (86.6)
================================= ====== ======== ========== ============= ======== ========= =======
Profit before taxation
(restated) 395.7
================================= ====== ======== ========== ============= ======== ========= =======
The net operating assets of the five divisions are set out
below:
31 January 2014
=================================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======= ======== ========== ============= ======== =========
Property, plant, equipment,
development projects and other
intangibles 91.1 154.3 104.1 35.6 18.9 404.0
Working capital assets 336.5 219.3 302.3 135.7 70.0 1,063.8
================================== ======= ======== ========== ============= ======== =========
Operating assets 427.6 373.6 406.4 171.3 88.9 1,467.8
Derivatives, tax and retirement
benefit assets 324.9
Goodwill and acquired intangibles 1,444.5
Corporate assets 136.5
Cash 175.9
================================== ======= ======== ========== ============= ======== =========
Total assets 3,549.6
================================== ======= ======== ========== ============= ======== =========
Working capital liabilities (133.8) (87.2) (162.3) (54.3) (22.5) (460.1)
Corporate and non-headline
liabilities (317.8)
Derivatives, tax and retirement
benefits (474.5)
Borrowings (1,076.7)
================================== ======= ======== ========== ============= ======== =========
Total liabilities (2,329.1)
================================== ======= ======== ========== ============= ======== =========
Average divisional capital
employed 895.9 1,135.4 663.4 543.4 140.5 3,378.6
Average corporate capital
employed (46.8)
================================== ======= ======== ========== ============= ======== =========
Average total capital employed 3,331.8
================================== ======= ======== ========== ============= ======== =========
Non-headline liabilities comprise provisions and accruals
relating to exceptional items, acquisitions and disposals.
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 GBP815.2m (31 July 2013:
GBP815.2m) and eliminate post retirement benefit assets and
liabilities and litigation provisions relating to exceptional
items, both net of related tax, and net debt.
31 July 2013
=================================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======= ======== ========== ============= ======== =========
Property, plant, equipment,
development projects and other
intangibles 100.8 163.8 108.7 36.7 20.4 430.4
Working capital assets 363.0 245.2 343.1 159.5 78.1 1,188.9
================================== ======= ======== ========== ============= ======== =========
Operating assets 463.8 409.0 451.8 196.2 98.5 1,619.3
Derivatives, tax and retirement
benefit assets 355.0
Goodwill and acquired intangibles 1,576.9
Corporate assets 121.1
Cash 393.8
================================== ======= ======== ========== ============= ======== =========
Total assets 4,066.1
================================== ======= ======== ========== ============= ======== =========
Working capital liabilities (166.8) (96.8) (202.0) (69.5) (28.5) (563.6)
Corporate and non-headline
liabilities (325.4)
Derivatives, tax and retirement
benefits (545.3)
Borrowings (1,138.2)
================================== ======= ======== ========== ============= ======== =========
Total liabilities (2,572.5)
================================== ======= ======== ========== ============= ======== =========
Average divisional capital
employed 897.9 1,141.4 657.4 554.4 140.2 3,391.3
Average corporate capital
employed (29.6)
================================== ======= ======== ========== ============= ======== =========
Average total capital employed 3,361.7
================================== ======= ======== ========== ============= ======== =========
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original
equipment
manufacture Aftermarket Total
============= ======================================================== =====
Oil,
gas Chemical
and and General
petrochemical pharmaceutical Distributors industry
John Crane GBPm GBPm GBPm GBPm GBPm GBPm
===================== ============ ============== =============== ============ ========= =====
Revenue period ended
31 January 2014 176.4 180.4 39.8 32.6 39.6 468.8
Revenue period ended
31 January 2013 168.5 184.8 40.2 33.1 42.9 469.5
====================== ============ ============== =============== ============ ========= =====
Medication Vital Safety
delivery care devices Total
Smiths Medical GBPm GBPm GBPm GBPm
===================== ========== ===== ======== =====
Revenue period ended
31 January 2014 110.1 162.3 116.5 388.9
Revenue period ended
31 January 2013 111.8 173.3 127.8 412.9
===================== ========== ===== ======== =====
Ports
and Emergency Critical
Transportation borders Military responders infrastructure Non-security Total
Smiths Detection GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ============== ======== ======== =========== =============== ============ =====
Revenue period ended
31 January 2014 127.2 44.1 25.6 6.2 47.3 1.0 251.4
Revenue period ended
31 January 2013 (restated) 131.1 44.5 29.0 8.1 41.0 0.9 254.6
============================ ============== ======== ======== =========== =============== ============ =====
The split of Smiths Detection's revenue has been restated to
consistently classify product sales. There is no impact on total
reported revenue.
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
===================== ========== ========= ===== =====
Revenue period ended
31 January 2014 73.0 90.9 45.6 209.5
Revenue period ended
31 January 2013 74.9 97.1 46.5 218.5
===================== ========== ========= ===== =====
Fluid Flexible Heat
Management Solutions Solutions Construction Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
===================== =========== ========== ========== ============ =====
Revenue period ended
31 January 2014 41.1 17.5 25.2 39.4 123.2
Revenue period ended
31 January 2013 41.2 17.5 25.0 36.0 119.7
===================== =========== ========== ========== ============ =====
3 Headline profit measures
The Company seeks to present a measure of underlying performance
which is not impacted by exceptional 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.
The following items have been excluded from the headline
measure:
-- exceptional items, including income and expenditure relating
to material litigation in respect of products no longer in
production;
-- costs of operating retirement benefit schemes which have been
closed so that no future benefits are accrued, which are referred
to below as legacy schemes, and financing credits and charges
relating to retirement benefits;
-- amortisation of intangible assets acquired in a business
combination - the amortisation charge is a non-cash item, and the
directors believe that it should be added back to give a clearer
picture of underlying performance; and
-- other financing gains and losses, which represent the
potentially volatile gains and losses on derivatives and other
financial instruments which do not fall to be hedge accounted under
IAS 39.
The excluded items are referred to as 'non-headline' items.
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
Notes GBPm GBPm GBPm
============================================ ===== ======== ======== ======
Operating profit (restated) 169.8 210.9 486.5
Exclude
- exceptional operating items 4 51.3 14.8 19.9
- legacy retirement benefits (restated) 3.5 4.1 6.7
- amortisation of acquired intangible
assets 9 20.6 22.9 46.6
============================================ ===== ======== ======== ======
Non-headline items in operating profit 75.4 41.8 73.2
============================================ ===== ======== ======== ======
Headline operating profit 245.2 252.7 559.7
============================================ ===== ======== ======== ======
Finance costs (restated) (38.3) (45.2) (90.8)
Exclude
- exceptional finance costs 4 2.9 1.8 4.2
- other financing gains and losses 1.1 1.9
- other finance income - retirement
benefits (restated) 4.7 12.1 23.0
============================================ ===== ======== ======== ======
Non-headline items in finance costs 7.6 15.0 29.1
============================================ ===== ======== ======== ======
Headline finance costs (30.7) (30.2) (61.7)
============================================ ===== ======== ======== ======
Profit before taxation (restated) 131.5 165.7 395.7
Non-headline items in operating profit
(restated) 75.4 41.8 73.2
Non-headline items in finance costs
(restated) 7.6 15.0 29.1
============================================ ===== ======== ======== ======
Headline profit before taxation 214.5 222.5 498.0
============================================ ===== ======== ======== ======
Profit after taxation - continuing
operations (restated) 94.4 121.2 316.6
Exclude
- non-headline items in profit before
taxation (restated) 83.0 56.8 102.3
- tax on excluded items (restated) (20.8) (16.6) (52.9)
============================================ ===== ======== ======== ======
62.2 40.2 49.4
============================================ ===== ======== ======== ======
Headline profit after taxation - continuing
operations 156.6 161.4 366.0
============================================ ===== ======== ======== ======
Statutory operating profit and finance costs and retirement
benefits charges have been restated to reflect the adoption of IAS
19 (Revised 2011): Employee benefits. There is no impact on any
headline measures because the principal defined benefit schemes
have been closed.
Headline earnings before interest, tax depreciation and
amortisation
Headline EBITDA, calculated as follows, is used to calculate the
ratio of net debt to EBITDA.
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
Notes GBPm GBPm GBPm
================================== ===== ======== ======== ======
Headline operating profit 245.2 252.7 559.7
Exclude
Depreciation 10 23.4 27.1 52.3
Amortisation of development costs 9 9.5 10.0 21.3
Amortisation of software, patents
and intellectual property 9 6.9 6.5 13.2
================================== ===== ======== ======== ======
Headline EBITDA 285.0 296.3 646.5
================================== ===== ======== ======== ======
4 Exceptional items
An analysis of the amounts presented as exceptional items in
these financial statements is given below:
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
GBPm GBPm GBPm
================================================= ======== ======== ======
Operating items
Restructuring programmes (14.3) (4.8) (7.8)
Sale of intellectual property relating
to diabetes 0.5 1.2
Resolution of legacy litigation 0.6
Gains on changes to post retirement benefits 1.7 3.5
Profit on disposal of businesses 2.3 0.7 0.9
Profit on disposal of property 5.0
Adjustment to contingent consideration
provided on acquisitions (0.5) 1.4
Costs of acquisitions, disposals and aborted
transactions (1.1) (3.0)
Litigation
- provision for Titeflex Corporation subrogation
claims (note 13) (4.7) (2.6) (6.8)
- provision for John Crane, Inc. asbestos
litigation (note 13) (34.1) (9.8) (14.3)
================================================= ======== ======== ======
(51.3) (14.8) (19.9)
Financing items
Exceptional finance costs - adjustment
to discounted provision
- provision for Titeflex Corporation subrogation
claims (note 13) (0.6) (0.4) (0.9)
- provision for John Crane, Inc. asbestos
litigation (note 13) (2.3) (1.4) (3.3)
================================================= ======== ======== ======
(54.2) (16.6) (24.1)
================================================= ======== ======== ======
Period ended 31 January 2014
Restructuring costs include GBP12.4m in respect of fuel for
growth and GBP1.7m in respect of the improvement programme in
Smiths Detection announced in September 2011. These programmes,
which involve redundancy, relocation and consolidation of
manufacturing, are considered exceptional by virtue of their
size.
Profit on disposal of businesses includes the expiry of certain
warranties on the disposal of Cross Match Technologies, Inc which
has generated an additional profit of GBP2.5m.
A charge of GBP4.7m has been made by Titeflex Corporation in
respect of changes to the estimated cost of future claims including
those from insurance companies seeking recompense for damage
allegedly caused by lightning strike, net of gains of GBP0.2m
relating to changes in discounting.
The operating charge in respect of John Crane, Inc. litigation
comprises GBP36.8m in respect of increased provision for adverse
judgments and legal defence costs, GBP0.5m in respect of legal fees
in connection with litigation against insurers, less GBP3.2m
arising from the increase in US risk free rates.
5 Taxation
The interim tax charge of 28.2% is calculated by applying the
estimated effective headline tax rate of 27.0% for the year ended
31 July 2014 to headline profit before tax and then taking into
account the tax effect of non-headline items in the interim
period.
A reconciliation of total and headline tax charge is as
follows:
Period ended Period ended Year ended
31 January 31 January 31 July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
================================ ================== ================== ==================
Continuing Continuing Continuing
operations Tax operations Tax operations Tax
GBPm rate GBPm rate GBPm rate
================================ =========== ===== =========== ===== =========== =====
Profit before taxation 131.5 165.7 395.7
Taxation (37.1) 28.2% (44.5) 26.9% (79.1) 20.0%
================================ =========== ===== =========== ===== =========== =====
Adjustments
Non-headline items excluded
from profit before taxation
(note 3) 83.0 56.8 102.3
Taxation on non-headline items (20.8) (16.6) (52.9)
================================ =========== ===== =========== ===== =========== =====
Headline
Headline profit before taxation 214.5 222.5 498.0
Taxation on headline profit (57.9) 27.0% (61.1) 27.5% (132.0) 26.5%
================================ =========== ===== =========== ===== =========== =====
Taxation on non-headline items includes a credit of GBP1.8m (31
January 2013: GBP2.0m; 31 July 2013: GBP4.5m) relating to tax
relief on the change in accounting for retirement benefit costs
following the adoption of IAS 19 (Revised 2011).
The changes in the value of the net tax liability in the period
were:
Net
Current Deferred tax
tax tax balance
GBPm GBPm GBPm
=========================== ======= ======== ========
At 31 July 2013 (46.7) 112.3 65.6
Foreign exchange gains and
losses (0.2) (9.1) (9.3)
(Charge)/credit to income
statement (43.1) 6.0 (37.1)
Charge to reserves (3.1) (3.1)
Tax paid 60.0 60.0
=========================== ======= ======== ========
At 31 January 2014 (30.0) 106.1 76.1
=========================== ======= ======== ========
The deferred tax charge to reserves relates to actuarial gains
on the US pension plans. No deferred tax credit has been recognised
in respect of the actuarial losses on the UK pension plans, because
the deferred tax asset has not been recognised due to uncertainty
as to its recoverability.
6 Dividends
The following dividends were declared and paid in the
period:
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
GBPm GBPm GBPm
=========================================== ======== ======== ======
Ordinary final dividend of 27.00p for 2013
(2012: 26.25p) paid 22 November 2013 106.4 103.2 103.2
Special dividend of 30.00p for 2013 paid
22 November 2013 118.3
Ordinary interim dividend of 12.50p for
2013 paid 26 April 2013 49.2
=========================================== ======== ======== ======
224.7 103.2 152.4
=========================================== ======== ======== ======
An interim dividend of 12.75p per share was declared by the
Board on 18 March 2014 and will be paid to shareholders on 25 April
2014. 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 28 March 2014.
7 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the year attributable to equity shareholders of the Parent
Company by the average number of ordinary shares in issue during
the year.
Period Period Year
ended ended ended
31 January 31 January 31 July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
=========================================== ============ ============ ============
Profit attributable to equity shareholders
for the year
- continuing 93.3 120.5 315.0
- total 93.4 120.5 315.0
=========================================== ============ ============ ============
Average number of shares in issue during
the year 394,166,825 393,075,730 393,323,206
=========================================== ============ ============ ============
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 396,377,484 (period ended
31 January 2013: 396,725,564; year ended 31 July 2013: 397,467,678)
ordinary shares, being the average number of ordinary shares in
issue during the year adjusted by the dilutive effect of employee
share schemes.
A reconciliation of basic and headline earnings per share -
continuing is as follows:
Period ended Period ended Year ended
31 January 31 January 31 July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
============== ============== ==============
EPS EPS EPS
GBPm (p) GBPm (p) GBPm (p)
=============================== ======= ===== ======= ===== ======= =====
Profit attributable to equity
shareholders of the Parent
Company 93.3 23.7 120.5 30.7 315.0 80.1
Exclude
Non-headline items and related
tax (note 3) 62.2 15.8 40.2 10.2 49.4 12.6
=============================== ======= ===== ======= ===== ======= =====
Headline 155.5 39.5 160.7 40.9 364.4 92.7
=============================== ======= ===== ======= ===== ======= =====
Headline EPS - diluted (p) 39.2 40.5 91.7
=============================== ======= ===== ======= ===== ======= =====
8 Post retirement benefits
Smiths provides post retirement benefits to employees in a
number of countries throughout the world. The arrangements include
defined benefit and defined contribution plans and, mainly in the
United Kingdom (UK) and United States of America (US), post
retirement healthcare. The principal defined benefit pension plans
are in the UK and in the US and these have been closed so that no
future benefits are accrued.
Where any individual scheme shows a surplus under IAS 19
(Revised 2011), this is disclosed on the balance sheet as a
retirement benefit asset. The IAS 19 (Revised 2011) surplus of any
one scheme is not available to fund the IAS 19 (Revised 2011)
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. If the pension schemes were wound up while
they had members, the schemes would need to buy out the benefits of
all members. The buy outs would cost significantly more than the
present value of scheme liabilities calculated in accordance with
IAS 19 (Revised 2011).
The principal assumptions used in updating the valuations are
set out below:
31 January 31 January 31 July
2014 2013 2013
UK US UK US UK US
============================= ===== ===== ===== ===== ==== ====
Rate of increase for active
deferred members 4.2% n/a 4.3% n/a 4.3% n/a
Rate of increase in pensions
in payment 3.3% n/a 3.4% n/a 3.4% n/a
Rate of increase in deferred
pensions 3.3% n/a 3.4% n/a 3.4% n/a
Discount rate 4.2% 4.7% 4.5% 4.2% 4.4% 4.8%
Inflation rate 3.3% n/a 3.4% n/a 3.4% n/a
Healthcare cost increases 5.0% n/a 5.0% n/a 5.0% n/a
============================= ===== ===== ===== ===== ==== ====
The amounts recognised in the balance sheet were as follows:
31 January 31 January 31 July
2014 2013 2013
GBPm GBPm GBPm
=================================== ========== ========== =========
Market value of funded plan assets 3,715.9 3,516.6 3,696.2
Present value of funded scheme
liabilities (3,847.5) (3,792.1) (3,842.6)
Unfunded pension plans (84.6) (84.7) (86.1)
Post retirement healthcare (19.4) (21.6) (21.1)
Unrecognised asset due to surplus
restriction (0.1)
=================================== ========== ========== =========
Net retirement benefit liability (235.6) (381.9) (253.6)
=================================== ========== ========== =========
Retirement benefit assets 102.5 83.0 121.7
Retirement benefit obligations (338.1) (464.9) (375.3)
=================================== ========== ========== =========
Net retirement benefit liability (235.6) (381.9) (253.6)
=================================== ========== ========== =========
The changes in the present value of the net pension liability in
the period were:
31 January 31 January 31 July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
====================================== === === ========== ============ ============
At beginning of period (253.6) (620.2) (620.2)
Exchange adjustment 13.3 0.9 (8.1)
Current service cost (1.4) (2.1) (4.1)
Scheme administration costs (3.5) (4.1) (6.7)
Past service cost, curtailments
and settlements 2.1 4.3
Finance charges - retirement benefits (4.7) (12.1) (23.0)
Contributions by employer 51.6 41.0 77.5
Actuarial (loss)/gain (37.3) 212.6 326.6
Movement in surplus restriction 0.1
================================================ ========== ============ ============
Net retirement benefit liability (235.6) (381.9) (253.6)
================================================ ========== ============ ============
Actuarial gains and losses have primarily arisen from increases
in the value of US scheme assets offset by losses due to lower
discount rates in the UK and US.
Adopting IAS 19 (Revised 2011) has had the following impact on
reported results:
31 January 31 January 31 July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
=============================== === === ========== ============ ============
Additional charge to operating
profit (3.5) (4.1) (6.7)
Increased finance charges (27.3) (18.0) (39.4)
Impact on profit before tax (30.8) (22.1) (46.1)
Change to actuarial gains and
losses recognised 30.8 22.1 46.1
========================================= ========== ============ ============
9 Intangible assets
Software,
patents
and
Development Acquired intellectual
Goodwill costs intangibles property Total
GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ============ ============= =======
Cost
At 1 August 2013 1,553.3 217.4 430.2 155.7 2,356.6
Exchange adjustments (109.8) (16.8) (32.5) (6.1) (165.2)
Additions 14.7 8.0 22.7
Disposals (2.7) (1.1) (1.7) (0.3) (5.8)
================================== ======== =========== ============ ============= =======
At 31 January 2014 1,440.8 214.2 396.0 157.3 2,208.3
================================== ======== =========== ============ ============= =======
Amortisation
At 1 August 2013 98.6 93.5 308.0 110.5 610.6
Exchange adjustments (7.0) (7.5) (23.5) (5.3) (43.3)
Charge for the period 9.5 20.6 6.9 37.0
Disposals (2.7) (1.7) (0.2) (4.6)
================================== ======== =========== ============ ============= =======
At 31 January 2014 88.9 95.5 303.4 111.9 599.7
================================== ======== =========== ============ ============= =======
Net book value at 31 January 2014 1,351.9 118.7 92.6 45.4 1,608.6
Net book value at 31 January 2013 1,412.1 114.3 140.5 43.7 1,710.6
Net book value at 31 July 2013 1,454.7 123.9 122.2 45.2 1,746.0
================================== ======== =========== ============ ============= =======
Goodwill sensitivity analysis
Goodwill of GBP117.1m (31 July 2013: GBP126.9m) is allocated to
Smiths Interconnect Power. The Annual Report 2013 disclosed that
reasonable changes in the calculation assumptions would cause the
value in use of Smiths Interconnect Power to fall below its
carrying value. This impairment testing has been updated to 31
January 2014. No impairment has been identified, but sensitivity
analysis identifies the following risks:
Period ended
31 January Year ended
2014 31 July 2013
Change required Change required
to trigger to trigger
impairment impairment
============================ ================ ================
Forecast operating cash-flow 9% reduction 4% reduction
Discount rate 0.9% higher 0.5% higher
Long-term growth rates 1.8% lower 0.9% lower
============================ ================ ================
Sales assumptions for Smiths Interconnect Power are based
on:
-- the current order book;
-- proportion of recent tenders which have been successful;
and
-- independent projections of the expected growth of the data
centre market in North America.
Margin projections for Smiths Interconnect Power are based on
current variable costs and production capacity, and the expected
costs of increasing capacity to support higher levels of sales.
For the other cash generating units, nothing has occurred since
the year end which would require additional review of carrying
values before the annual testing is carried out.
10 Property, plant and equipment
Fixtures,
fittings,
Land Plant tools
and and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
================================== ========== ========== ========== ======
Cost or valuation
At 1 August 2013 199.6 553.9 229.6 983.1
Exchange adjustments (14.2) (38.7) (18.5) (71.4)
Additions 2.6 15.5 6.0 24.1
Disposals (0.7) (5.5) (2.2) (8.4)
================================== ========== ========== ========== ======
At 31 January 2014 187.3 525.2 214.9 927.4
================================== ========== ========== ========== ======
Depreciation
At 1 August 2013 98.3 419.7 185.1 703.1
Exchange adjustments (6.9) (28.7) (15.4) (51.0)
Charge for the period 3.6 13.5 6.3 23.4
Disposals (0.5) (4.9) (2.0) (7.4)
================================== ========== ========== ========== ======
At 31 January 2014 94.5 399.6 174.0 668.1
================================== ========== ========== ========== ======
Net book value at 31 January 2014 92.8 125.6 40.9 259.3
Net book value at 31 January 2013 100.2 124.7 41.8 266.7
Net book value at 31 July 2013 101.3 134.2 44.5 280.0
================================== ========== ========== ========== ======
11 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments relating
to hedge accounting.
31 January 31 January 31 July
2014 2013 2013
GBPm GBPm GBPm
======================================= ========== ========== =========
Cash and cash equivalents
Net cash and deposits 175.9 275.5 393.8
======================================= ========== ========== =========
Short-term borrowings
Bank overdrafts (6.1) (21.0) (7.3)
$250m 6.05% US$ Guaranteed notes 2014 (151.8) (164.5)
Bank and other loans (1.0) (1.1) (1.2)
Interest accrual (23.9) (24.2) (14.1)
======================================= ========== ========== =========
(182.8) (46.3) (187.1)
======================================= ========== ========== =========
Long-term borrowings
$250m 6.05% US$ Guaranteed notes 2014 (157.2)
GBP150m 7.25% Sterling Eurobond 2016 (149.7) (149.5) (149.6)
EUR300m 4.125% Eurobond 2017 (251.0) (261.8) (267.5)
$175m 7.37% US$ Private placement 2018 (106.3) (110.2) (115.3)
$250m 7.20% US$ Guaranteed notes 2019 (151.1) (156.5) (163.8)
$400m 3.625% US$ Guaranteed notes 2022 (234.6) (247.3) (253.4)
Bank and other loans (1.2) (1.7) (1.5)
======================================= ========== ========== =========
(893.9) (1,084.2) (951.1)
======================================= ========== ========== =========
Borrowings (1,076.7) (1,130.5) (1,138.2)
======================================= ========== ========== =========
Net debt (900.8) (855.0) (744.4)
======================================= ========== ========== =========
On 19 February 2014 Smiths completed the refinancing of its
existing $800m Revolving Credit Facility which was due to mature in
December 2015. The new $800m Revolving Credit Facility matures in
February 2019 with two uncommitted one-year extension options.
Movements in net debt
Net
cash
and Other
cash short-term Long-term Net
equivalents borrowing borrowings debt
GBPm GBPm GBPm GBPm
================================== ============ =========== =========== =======
At 31 July 2013 386.5 (179.8) (951.1) (744.4)
Foreign exchange gains and
losses (20.9) 12.9 58.6 50.6
Net cash inflow/(outflow) (195.8) (195.8)
Repayment and drawdown of
borrowings 0.3 0.3
Capitalisation, interest accruals
and unwind of capitalised
fees (7.9) (0.4) (8.3)
Fair value movement from interest
rate hedging (2.0) (1.2) (3.2)
Change in maturity analysis (0.2) 0.2
================================== ============ =========== =========== =======
At 31 January 2014 169.8 (176.7) (893.9) (900.8)
================================== ============ =========== =========== =======
12 Fair value of financial instruments
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
31 31 31 31 31 31
January January January January July July
2014 2014 2013 2013 2013 2013
GBPm GBPm GBPm GBPm GBPm GBPm
===================================== ========= ========= ========= ========= ========= =========
Level 1 valuations
Financial assets - other investments 95.5 95.5 74.2 74.2 83.0 83.0
Level 2 valuations
Financial derivatives - assets 23.7 23.7 22.6 22.6 14.5 14.5
Borrowings (1,076.7) (1,152.7) (1,130.5) (1,231.8) (1,138.2) (1,225.5)
Financial derivatives - liabilities (13.8) (13.8) (7.2) (7.2) (16.8) (16.8)
Level 3 valuations
Financial assets - other investments 3.4 3.4 2.6 2.6 3.1 3.1
===================================== ========= ========= ========= ========= ========= =========
Investments with level 1 valuations comprise quoted government
bonds.
Derivatives are valued at the net present value of the future
cash-flows calculated using market exchange rates and yield curves
at the balance sheet date. Borrowings are valued at the net present
value of the future cash-flows using credit spreads and yield
curves derived from market data.
Cash, trade receivables and trade payables are excluded from
this table because carrying value is a reasonable approximation to
fair value for all these assets and liabilities.
13 Provisions and contingent liabilities
Exceptional
Trading and legacy Total
======= ================================ ======
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
At 31 July 2013 40.7 210.0 65.6 19.9 336.2
Exchange adjustments (2.9) (16.7) (5.2) (1.0) (25.8)
Provision charged 11.2 33.6 4.7 5.2 54.7
Provision released (1.8) (0.4) (2.2)
Unwind of provision
discount 2.3 0.6 2.9
Utilisation (9.0) (22.2) (3.4) (2.9) (37.5)
===================== ======= =========== ============ ===== ======
At 31 January 2014 38.2 207.0 62.3 20.8 328.3
===================== ======= =========== ============ ===== ======
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Trading
The trading provision primarily relates to warranties GBP37.6m
(31 July 2013: GBP40.0m) but also includes product liabilities and
litigation in respect of current products or on-going business
activities.
Contingent liabilities
In the ordinary course of its business, the Group is subject to
commercial disputes and litigation such as 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.
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in
numerous lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. Until
2006, the awards, the related interest and all material defence
costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product
liability. While JCI has excess liability insurance, the
availability of such insurance and scope of the cover are currently
the subject of litigation in the United States. Pending the outcome
of that litigation, JCI has met defence costs directly. Provision
is made in respect of the expected costs of defending known and
predicted future claims and of adverse judgments in relation
thereto, to the extent that such costs can be reliably estimated.
No account has been taken of recoveries from insurers as their
nature and timing are not yet sufficiently certain to permit
recognition as an asset for these purposes.
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.
JCI continues to actively monitor the conduct and effect of its
current and expected asbestos litigation, including the most
efficacious presentation of its 'safe product' defence, and intends
to continue to resist these asbestos claims based upon this
defence. Approximately 232,000 claims (31 July 2013: 230,000)
claims against JCI have been dismissed before trial over the last
34 years. JCI is currently a defendant in cases involving
approximately 81,000 cl-aims (31 July 2013: 81,000 claims). Despite
the large number of claims brought against JCI, it has had final
judgments against it, after appeals, in only 127 cases (31 July
2013: 121 cases) over the period, and has had to pay awards
amounting to approximately US$138m (31 July 2013: US$120m). JCI has
also incurred significant additional defence costs and, whilst the
number of claims being filed against JCI and other defendants has
been declining, the proportion of mesothelioma claims has
increased, and JCI's ability to defend these cases successfully is
likely to have a significant impact on its annual aggregate adverse
judgment and defence costs.
John Crane, Inc. litigation provision
The provision is based on past history and allows for decreasing
levels of new claims based on published tables of asbestos
incidence projections and is determined using asbestos valuation
experts, Bates White LLC. Whilst published incidence curves can be
used to estimate the likely future pattern of asbestos related
disease, John Crane, Inc.'s claims experience is significantly
impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of
the plaintiffs' bar; changing attitudes amongst the judiciary at
both trial and appellate levels; and legislative and procedural
changes in both the state and federal court systems. The
projections use a 10 year time horizon on the basis that Bates
White LLC consider that there is substantial uncertainty in the
asbestos litigation environment so probable expenditures are not
reasonably estimable beyond this time horizon.
The assumptions made in assessing the appropriate level of
provision include:
-- The period over which the expenditure can be reliably
estimated.
-- The future trend of legal costs.
-- The rate of future claims filed.
-- The rate of successful resolution of claims.
-- The average amount of judgments awarded.
However, because of the significant uncertainty associated with
the future level of asbestos claims and of the costs arising out of
related litigation, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred and, as a
result, the provision may be subject to potentially material
revision from time to time if new information becomes available as
a result of future events.
The provision in respect of JCI is a discounted pre-tax
provision using discount rates, being the risk-free rate on US debt
instruments for the appropriate period. The deferred tax asset
related to this provision is shown within the deferred tax balance.
Set out below is the gross, discounted and post-tax information
relating to this provision:
31 January 31 January 31 July
2014 2013 2013
GBPm GBPm GBPm
============================== ========== ========== =======
Gross provision 231.1 226.4 232.8
Discount (24.1) (17.7) (22.8)
============================== ========== ========== =======
Discounted pre-tax provision 207.0 208.7 210.0
Deferred tax (69.6) (49.8) (60.7)
============================== ========== ========== =======
Discounted post-tax provision 137.4 158.9 149.3
============================== ========== ========== =======
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of
adverse judgments expected to occur. JCI's claims experience is
significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on
the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. As
a result, whilst the Group anticipates that asbestos litigation
will continue beyond the period covered by the provision, the
uncertainty surrounding the US litigation environment beyond this
point is such that the costs cannot be reliably estimated.
Titeflex Corporation
In recent years Titeflex Corporation, a subsidiary of the Group
in the Flex-Tek division, has received a number of claims from
insurance companies seeking recompense on a subrogated basis for
the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes, however some subrogation claims have
been settled on an individual basis without admission of liability.
Equivalent third-party products in the US marketplace face similar
challenges with the profile of legal activity appearing to increase
in recent times.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement,
together with the recent market place activity, provide sufficient
evidence to recognise a liability in the accounts. Therefore
provision has been made for the costs which the Group is expected
to incur in respect of future claims to the extent that such costs
can be reliably estimated. Titeflex Corporation sells flexible gas
piping with extensive installation and safety guidance (revised in
2008) designed to assure the safety of the product and minimise the
risk of damage associated with lightning strikes.
The assumptions made in assessing the appropriate level of
provision, which are based on past experience, include:
-- The period over which expenditure can be reliably
estimated.
-- The number of future settlements.
-- The average amount of settlements.
The projections use a rolling 10 year time horizon on the basis
that there is substantial uncertainty in the US litigation
environment so probable expenditures are not reasonably estimable
beyond this time horizon.
However, because of the significant uncertainty associated with
the future level of claims and of the costs arising out of related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred and, as a result, the provision
may be subject to potentially material revision from time to time
if new information becomes available as a result of future
events.
The provision of GBP62.3m (31 July 2013: GBP65.6m) is a
discounted pre-tax provision using discount rates, being the
risk-free rate on US debt instruments for the appropriate
period.
Titeflex Corporation contingent liabilities
The Group anticipates that litigation might continue beyond the
period covered by the provision. However, the uncertainty
surrounding the US litigation environment beyond this point (which
reflects factors such as 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) is such that the costs
cannot be reliably estimated.
Other exceptional and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by Smiths.
Exceptional provisions comprise all provisions which were disclosed
as exceptional items when they were charged to the income
statement.
These provisions cover exceptional reorganisation, vacant
properties, disposal indemnities and litigation in respect of old
products and discontinued business activities.
14 Cash-flow from operating activities
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
(restated) (restated)
GBPm GBPm GBPm
============================================== ========= ============ ============
Operating profit - continuing 169.8 210.9 486.5
Amortisation of intangible assets 37.0 39.4 81.1
Loss/(profit)on disposal of property,
plant and equipment and intangible assets 2.0 0.5 (4.3)
Profit on disposal of business (2.3) (0.7) (0.9)
Depreciation of property, plant and equipment 23.4 27.1 52.3
Share-based payment expense 4.2 7.3 12.1
Retirement benefits (46.7) (36.9) (71.0)
Increase in inventories (1.6) (35.7) (20.3)
Decrease/(increase) in trade and other
receivables 35.8 22.9 (30.3)
(Decrease)/increase in trade and other
payables (65.0) (30.3) 31.8
Increase/(decrease) in provisions 14.6 (1.4) (9.9)
============================================== ========= ============ ============
Cash generated from operations 171.2 203.1 527.1
Interest (28.0) (19.9) (59.6)
Tax paid (60.0) (63.3) (114.1)
============================================== ========= ============ ============
Net cash inflow from operating activities 83.2 119.9 353.4
============================================== ========= ============ ============
Headline operating cash-flow
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
GBPm GBPm GBPm
=========================================== ======== ======== ======
Net cash inflow from operating activities 83.2 119.9 353.4
Exclude
Interest 28.0 19.9 59.6
Tax paid 60.0 63.3 114.1
Cash outflow in respect of exceptional
operating items 36.7 18.9 43.9
Pension deficit payments 49.0 37.9 71.4
Include
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (45.7) (39.1) (96.0)
Disposals of property, plant and equipment
in the ordinary course of business 0.2 2.0 1.5
=========================================== ======== ======== ======
Headline operating cash-flow 211.4 222.8 547.9
=========================================== ======== ======== ======
Free cash-flow
Period Period Year
ended ended ended
31 31 31
January January July
2014 2013 2013
GBPm GBPm GBPm
=========================================== ======== ======== ======
Net cash inflow from operating activities 83.2 119.9 353.4
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (45.7) (39.1) (96.0)
Disposals of property, plant and equipment 4.3 2.0 3.9
Investment in financial assets relating
to pensions financing (12.0) (12.0) (24.0)
=========================================== ======== ======== ======
Free cash-flow 29.8 70.8 237.3
Investment in other financial assets (0.1) (0.1) (0.3)
Acquisition of businesses (0.5) (0.5)
Disposal of businesses 3.0 0.7 0.3
Net cash-flow used in financing activities (228.5) (23.3) (66.7)
=========================================== ======== ======== ======
Net increase/(decrease) in cash and cash
equivalents (195.8) 47.6 170.1
=========================================== ======== ======== ======
15 Related party transactions
The related party transactions in the period were consistent
with the nature and size of transactions disclosed in the Annual
Report for the year ended 31 July 2013.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UWRWRSNAOAAR
Smiths (LSE:SMIN)
Historical Stock Chart
From Jun 2024 to Jul 2024
Smiths (LSE:SMIN)
Historical Stock Chart
From Jul 2023 to Jul 2024
