TIDMSMIN
RNS Number : 7154H
Smiths Group PLC
18 March 2015
News release London, Wednesday 18 March 2015
For immediate release
Interim results for the six months ended 31 January 2015
Headline* Statutory
============================================= ==============
2015 2014 2015 2014
GBPm GBPm Reported Underlying(#) GBPm GBPm
============================ ======= ======= ========== =============== ====== ======
Revenue 1,416 1,442 (2)% 1% 1,416 1,442
Operating profit 232 245 (5)% (3)% 164 170
Operating margin 16.4% 17.0% (60) bps - 11.6% 11.8%
Pre-tax profit 208 215 (3)% 0% 131 132
Basic EPS 38.5p 39.5p (3)% 21.8p 23.7p
Free cash-flow 58 30
Dividend 13.00p 12.75p 2% 13.00p 12.75p
(120)
Return on capital employed 15.4% 16.6% bps
============================ ======= ======= ========== =============== ====== ======
*In addition to statutory reporting, Smiths Group reports its
continuing operations on a headline basis. Headline profit is
before exceptional items, impairment of goodwill and amortisation
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.
(#) Organic growth adjusting for foreign exchange
translation.
Highlights
-- Underlying revenue growth driven by Smiths Medical, Flex-Tek and John Crane
-- Strong growth at Smiths Medical reflecting recent investment in infusion pumps
-- John Crane delivered a resilient performance reflecting aftermarket strength
-- Performance at Smiths Detection starting to stabilise as a result of initiatives
-- Smiths Interconnect faces tough trading conditions; Flex-Tek performed well
-- Headline operating margin lower with pressure in Detection and Interconnect
-- Strong headline operating cash conversion at 88%; dividend up 2%
"Smiths Group delivered underlying revenue growth. Improvements
at Smiths Medical, John Crane and Flex-Tek more than offset revenue
declines at Smiths Detection and Smiths Interconnect where tough
trading conditions persist. The reported results were held back by
adverse foreign exchange.
"We remain focused on repositioning the business to accelerate
medium-term revenue growth and have launched a new cross-divisional
programme to add further momentum. 'Engineered for Growth' has four
workstreams: sales and marketing effectiveness; bringing new
products to market faster through innovation; quality improvement;
and increasing our presence in China. Our growth investment is
funded by ongoing operational improvements and our 'Fuel for
Growth' programme, which is on track to generate GBP60m of annual
savings by 2017.
"We expect to deliver improved underlying performance in the
second half. Smiths Detection will benefit from a prior year
comparator affected by one-off charges. John Crane is expected to
see a slight easing in trading as upstream customers adjust their
expenditure to the lower oil price and as some projects may be
deferred. The growth rate at Smiths Medical will slow versus the
strong first half performance. Seasonality will bias performance at
Smiths Interconnect to the second half but trading in the second
half will remain below last year's levels. Flex-Tek should continue
to perform well. We are focused on investing to drive sales growth
in what are attractive long-term markets, and on delivering further
operational improvements, while generating strong cash conversion
and returns."
Philip Bowman
Chief Executive
Divisional highlights*
% of Group Underlying Underlying Headline operating Headline return on
revenue revenue headline profit margin* capital employed*
growth* operating
profit
growth*
========== ========== ========== ==================== ====================
2015 2014 2015 2014
==================== ========== ========== ========== ========= ========= ========= =========
John Crane 32% 1% 0% 23.2% 23.2% 26.5% 26.5%
Smiths Medical 29% 6% 9% 19.0% 18.3% 15.1% 15.3%
Smiths Detection 16% (5)% (15)% 10.3% 11.8% 3.1% 8.6%
Smiths Interconnect 14% (6)% (33)% 9.2% 13.1% 12.0% 12.2%
Flex-Tek 9% 4% 3% 18.1% 18.3% 33.7% 32.7%
==================== ========== ========== ========== ========= ========= ========= =========
Group 100% 1% (3)% 16.4% 17.0% 15.4% 16.6%
==================== ========== ========== ========== ========= ========= ========= =========
*All figures are on a headline basis. Revenue and profit growth
are at constant currency and exclude the impact of acquisitions and
disposals.
John Crane
-- Resilient performance with revenue up 1% driven by its focus
on aftermarket services for rotating equipment
-- Margins maintained at 23.2%; manufacturing constraints have
now been addressed
-- Current order book is solid, but project delays are possible
in the current environment
-- Tougher market conditions in upstream and first fit OEM
signal a slight decline in trading for the full year
Smiths Medical
-- Revenue up 6% due to strong ambulatory infusion performance
and recovery in disposables
-- Margins up 70 bps, reflecting higher volumes and
efficiencies
-- Full year performance is expected to moderate more in line
with the market
Smiths Detection
-- Revenue down 5% amid continued tough trading conditions;
making progress on stabilising operations
-- Margins down 150 bps with lower volumes and adverse pricing
masking the benefit of efficiency gains
-- Full year revenue is expected to be lower than last year;
margins should improve against a weak comparator
-- Recent order wins have strengthened order book for delivery
in FY16
Smiths Interconnect
-- Revenue 6% lower with pressures in Microwave and Connectors
offsetting growth in Power
-- Margins down 390 basis points on lower volumes, adverse
operational gearing and mix
-- We expect that seasonality will bias performance to the
second half but will remain below prior year levels
Flex-Tek
-- Revenue up 4% driven by US residential construction,
specialty heating elements and aero/automotive hoses
-- Margins down 20 bps with increased investment in marketing
and new product development
-- US construction and heating demand should support growth;
margin outlook stable despite increased investment
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 18 March. A recording of the webcast is
available later that day. A live audio broadcast of the
presentation is also available by dialling (no access code
required):
UK toll free: 0808 237 0062
International: +44 (0)20 3427 0662
US/Canada toll free: 1 877 841 4559
An audio replay is available for seven days on the following
numbers (access PIN 654131#):
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 GBP131m (2014: GBP132m) and earnings per
share were 21.8p (2014: 23.7p).
See note 3 to the interim report for the definition of headline
profit measures and note 4 for an analysis of exceptional
items.
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
The results benefited from Smiths Group's strength and breadth
as a diversified engineering company, with a portfolio of
leading-edge, technology-driven businesses serving a wide range of
end markets and geographies. Underlying revenues rose as Smiths
Medical saw growth in infusion pumps and a disposables recovery.
Both Flex-Tek and John Crane reported further progress. Smiths
Detection and Smiths Interconnect continue to face challenging end
markets which affected revenues and profit margins. Foreign
exchange translation continued to be a headwind to our reported
results.
We maintained our programme of operational improvements and
efficiencies across the businesses, helping to fund increased
investment in high growth markets and new product development to
accelerate medium-term revenue growth.
John Crane delivered a resilient performance as a result of its
focus on aftermarket services despite the impact of a lower oil
price on the wider energy services sector. Underlying revenue grew
with higher aftermarket revenues for its rotating equipment more
than offsetting pressures from its upstream oil services and
first-fit rotating equipment business. Headline operating margins
were maintained. Smiths Medical saw strong revenue growth as a
result of its strategy to invest in infusion pumps in recent years
and a recovery in disposables performance following the US
distributor destocking last year. Margins improved on higher
volumes and efficiency gains. Revenue and margins at Smiths
Detection fell as it continues to trade in difficult markets with
volume and price pressures. However, encouraging progress has been
made in delivering efficiency gains and restructuring the business,
which will deliver benefits over time. They have also secured new
orders to strengthen the order book for the next financial year.
Smiths Interconnect also experienced a weak first half due to
customer spending delays and some programme slowdowns in various
markets. Margins fell on the reduced volumes and associated cost
absorption issues as well as adverse mix. Flex-Tek revenues
benefited from growth from its US residential construction
products, specialty heating elements and hoses for aerospace and
automotive applications. Margins were stable despite increased
investment in marketing and innovation.
Strategy
Our strategy is to continue to grow shareholder value by:
-- Delivering revenue growth through investment in organic
drivers, including new product development and expansion in
high-growth markets, and through targeted acquisitions;
-- Enhancing margins through a relentless drive for operational
improvement across all our businesses;
-- Finding smarter ways of working and having the best
people;
-- Promoting a culture of responsibility in everything we
do;
-- Generating strong operating cash-flows with efficient balance
sheet management; and
-- Allocating capital rigorously across the business, through
both organic investment and acquisitions & disposals.
We continued to pursue these objectives and some examples of our
progress are set out below. Of these objectives, the area where we
see greatest opportunity is revenue growth. This remains a key
priority for the Group as we seek to reposition the business.
Investing to accelerate revenue growth - 'Engineered for
Growth'
We have launched a new Group-wide programme - 'Engineered for
Growth' - to accelerate revenue growth, which is focused around
four main priority areas: sales and marketing excellence, quality
improvement, China, and innovation. This programme is designed to
share and leverage our expertise across the divisions and to build
momentum in these targeted areas. We expect this multi-year
programme to deliver improved results over the medium-term as the
initiatives gain traction.
Sales and marketing excellence - We recognise that we have in
the past focused more on technology and engineering solutions and
not enough on the customer and their needs. We are upgrading our
sales and marketing capabilities to become a more customer and
market-led business. Group-wide sales and marketing councils have
been formed to improve customer insight and market segmentation,
ensure better price positioning, drive the changes needed to build
a more customer-centred business, and better exploit the Smiths
brand. We have also held our first Sales Academy which is designed
to improve the capabilities of our sales people.
Quality - We see a significant opportunity to improve quality
that will in turn support our growth agenda and help reduce the
costs of poor quality. We have developed a suite of metrics for
defining the cost of poor quality with the aim of driving out these
costs. These are being implemented across the Group. This should
also improve customer satisfaction and perceptions.
China - As part of our broader initiative to increase our
presence in high-growth emerging markets, we are prioritising
resources and investment into China. We are establishing a Smiths
Group presence in China that will provide key local expertise in
legal, government affairs and commercial practice for all of the
divisions. This will provide a focus to co-ordinate and leverage
the Group's activities, presence and scale. The divisions are
committed to delivering their strategic plans for China. John
Crane, for instance, has recently undertaken a major long-term
investment in its manufacturing and customer service centre in
Tianjin. We continue to concentrate on our wider objective to
increase the Group's presence in emerging markets. Emerging market
revenues grew 5% at constant currencies and now represent 16.2% of
Group revenues, an increase of 100 basis points.
Innovation - Innovation is our lifeblood as a technology company
and we have invested consistently in R&D over recent years. Our
task is to ensure this is at least matched by the contribution of
new products to our revenues. It is also to accelerate the speed to
market from the idea generation to the finished product. This
workstream is examining ways to improve the effectiveness of our
investment. Improved processes and performance yardsticks for new
product vitality and attrition across all divisions have been
agreed. Greater sharing of technical knowledge is also a priority
and an Innovation Summit was held in January to devise the best
ways of delivering the ground-breaking solutions our customers
demand.
We are focused on improving the effectiveness of our innovation
spend. Our company-funded investment in R&D declined 8% to
GBP53m - mainly as a result of recent product launches at Smiths
Detection, such as their XCT checked baggage screener, which
signals the end of an investment phase on such projects. Smiths
Detection has focused its investment more tightly around products
that are expected to deliver more certain returns and has cut back
on less attractive, non-strategic project areas.
Recent new product launches included John Crane's AURA 220 gas
seal, the first of a new family of gas seals to be unveiled, which
uses a common global design and patented polymeric sealing device
to help cut operating costs. Among products developed and to be
unveiled soon by Smiths Interconnect are a tail-mounted airborne
antenna targeted at the regional and business jet market and a RF
test product to complement its successful PIM (passive
intermodulation) offerings. Checkpoint.Evo, a new software solution
that greatly enhances inspection and integration capabilities at
airport checkpoints, was launched by Smiths Detection in January
and has already attracted orders.
'Fuel for Growth' - programme to fund growth investment
We are funding investment in these growth initiatives through
our Fuel for Growth programme, which is expected to generate GBP60m
of annual savings for reinvestment in sales, marketing and new
product development. The programme is expected to cost GBP120m over
a three-year period, which will be treated as an exceptional item.
There will also be some accompanying capital expenditure. This
restructuring focuses on three areas: site rationalisation with a
particular emphasis on manufacturing footprint to support future
growth at lower costs; organisational effectiveness through
delayering and broadening management control spans; and the
upgrading of information systems - particularly in John Crane - to
improve decision-making and to support the next stage of
globalisation. To date, we have incurred costs of GBP44m across the
programme, which has delivered annualised savings of GBP20m. For
the full year, we expect to achieve an annualised savings of around
GBP25m a year and incur GBP40m of costs which will be treated as
exceptional.
Programme to date Total programme expectations
==================== ==================== ==============================
Costs Annualised Total costs Full annual
to date savings by end FY benefits
to date 2017 by end FY
2017
==================== ======== ========== ============== ==============
John Crane 8 10 25 13
Smiths Medical 15 5 45 23
Smiths Detection 13 - 34 14
Smiths Interconnect 8 5 12 7
Flex-Tek - - 4 3
==================== ======== ========== ============== ==============
Total 44 20 120 60
==================== ======== ========== ============== ==============
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.
While the medium-term objective is to maintain this dividend cover,
we will operate some flexibility in applying the 2.5 times cover to
take account of short-term impacts such as foreign exchange.
The Board has declared an interim dividend of 13.00p per share,
an increase of 2% reflecting the strong cash conversion in the
period. The interim dividend will be paid on 24 April to
shareholders registered at the close of business on 27 March. The
ex-dividend date is 26 March.
Outlook
We expect to deliver improved underlying performance in the
second half. Smiths Detection will benefit from a prior year
comparator affected by one-off charges. John Crane is expected to
see a slight easing in trading as upstream customers adjust their
expenditure to the lower oil price and as some OE projects may be
deferred. The growth rate at Smiths Medical will slow versus the
strong first half performance. Seasonality will bias performance at
Smiths Interconnect to the second half but trading in the second
half will remain below last year's levels. Flex-Tek should continue
to perform well. We are focused on investing to drive sales growth
in what are attractive long-term markets, and on delivering further
operational improvements, while generating strong cash conversion
and returns.
Business review
Revenue
Revenue grew 1%, or GBP9m, on an underlying basis to GBP1,416m.
Including adverse currency translation of GBP35m, overall reported
revenue declined GBP26m (2%). The GBP9m underlying increase was
driven by growth in Smiths Medical (+GBP25m), Flex-Tek (+GBP5m) and
John Crane (+GBP3m), which was partially offset by declines at
Smiths Interconnect (-GBP12m) and Smiths Detection (-GBP12m).
Profit
Headline operating profit saw an underlying reduction of 3%
(GBP7m) to GBP232m. On a reported basis, headline operating profit
fell GBP13m (5%) including adverse foreign exchange translation of
GBP6m. Headline operating margin fell to 16.4% (2014: 17.0%),
mainly the result of the tough trading conditions in Smiths
Interconnect and Smiths Detection. The main drivers of the GBP7m
underlying reduction were higher revenues and efficiencies at
Smiths Medical (+GBP7m) and increased volumes at Flex-Tek (+GBP1m),
which were more than offset by lower volumes, reduced overhead cost
recovery and adverse mix at Smiths Interconnect (-GBP9m), weaker
volumes and price at Detection (-GBP4m) and higher corporate costs
(-GBP2m).
Operating profit on a statutory basis, after taking account of
the items excluded from the headline figures, was GBP164m (2014:
GBP170m) - see notes 3 and 4 for information on the excluded items.
The decline was driven mainly by the GBP26m goodwill impairment on
John Crane Production Solutions and the reduced headline operating
profit.
The net interest charge on debt was reduced to GBP24m (2014:
GBP30m), primarily due to the repayment of the $250m 6.05% fixed
rate Notes in May 2014. Headline profit before tax decreased GBP7m
to GBP208m (2014: GBP215m). On an underlying basis, headline profit
before tax was flat.
The Group's tax rate on headline profit for the period was 26.5%
(2014: 27.0%). Headline earnings per share decreased by 3% to 38.5p
(2014: 39.5p).
On a statutory basis, profit before tax declined GBP1m to
GBP131m (2014: GBP132m); it is stated after taking account of
exceptional costs, a pensions finance charge of GBP4m (2014: GBP5m)
and other items excluded from the headline measure.
Cash generation
Operating cash generation remained strong with headline
operating cash of GBP204m (2014: GBP211m), representing 88% (2014:
86%) 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 increased GBP28m to
GBP58m (2014: GBP30m). 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 GBP112m (2014: GBP83m).
Dividends paid in the period on ordinary shares amounted to
GBP108m (2014: GBP225m consisting of final and special
dividends).
Net debt at 31 January was GBP929m, up from GBP804m at 31 July
2014. The increase in net debt reflects outflows from dividends
(GBP108m) and pension funding (GBP36m) as well as adverse foreign
exchange translation (GBP47m).
John Crane
2015 2014 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 453 469 (3)% 1%
Headline operating profit 105 109 (3)% 0%
Headline operating margin 23.2% 23.2% 0 bps
Statutory operating profit 61 64 (5)%
Return on capital employed 26.5% 26.5% 0 bps
=========================== ===== ===== ======== ==========
John Crane's underlying revenue grew 1% against a backdrop of
more difficult market conditions in some parts of the energy
segment. Reported revenue, including GBP19m of adverse foreign
exchange translation, declined 3%. The underlying revenue growth
reflects increased revenue in the aftermarket rotating equipment
business, offset by declining sales in the first-fit rotating
equipment and upstream oil services businesses. Excluding upstream
oil services, revenues showed a 3% underlying increase.
Headline operating profit margin was maintained at 23.2%.
Reported headline operating profit declined 3% (GBP4m), driven by
adverse currency translation of GBP4m. Underlying headline
operating profit was flat. The difference between statutory and
headline operating profit primarily reflects a GBP26m goodwill
impairment on John Crane Production Solutions as a result the
impact of lower oil prices on their customers; the cost of John
Crane, Inc. asbestos litigation of GBP12m and amortisation of
acquired intangible assets of GBP4m. Return on capital employed was
maintained at 26.5%.
Overall aftermarket revenues grew 3% on an underlying basis.
However, excluding our upstream oil services business, sales rose
7% illustrating the strength of the rotating equipment aftermarket.
Consumer demand for oil and gas has remained high and refineries
are operating at full capacity, with the US and Latin America
particularly strong. Recent contracts include a global framework
agreement with a large petrochemical manufacturer based in Saudi
Arabia and a new gas seal reliability management contract in
Singapore.
John Crane continued to focus on strengthening its aftermarket
capabilities in strategic locations, upgrading about 10% of our
service centres around the globe in the last two years to give
customers additional services, training and technical expertise. In
ASEAN, we expanded the service super centre in Singapore and opened
two facilities in Malaysia: a sales and service office in Kuala
Lumpur and a service centre in Bintulu. In the Middle East, the
Dubai service super centre was upgraded, along with service centres
in Saudi Arabia, Egypt and Kuwait. Additionally, several new
service centres were established across Saudi Arabia and Iraq. The
super centres in South Africa and Canada were also expanded.
Building on our 2011 acquisition of Turbo Components and
Engineering (TCE), we expanded our hydrodynamic bearing service
offering by opening or upgrading sites in Canada, Germany, Dubai
and Singapore.
Underlying sales of first-fit original equipment fell 2% as
market pressures in Europe were partially offset by demand in North
America. As in the prior 18 months, the business continues to gain
a leading share of large downstream greenfield projects, although
we are seeing some projects being delayed and cancelled. However,
John Crane recently signed an exclusive framework agreement for
part of the Kuwait National Petroleum Company's (KNPC) Clean Fuels
Project, a modernisation programme that will upgrade two refineries
in Kuwait.
Our rotating equipment manufacturing capacity constraints are
now behind us. As previously outlined, we increased internal
machining capacity by about 10% during the period, cutting our
overall use of outsourced manufacturing. The capacity was added in
lower cost, emerging market factories including China, India, the
Czech Republic and Mexico.
A decline in our upstream oil services business, reported as
part of our aftermarket revenue, continued, as crude oil prices
fell. The business remains focused on strengthening local customer
service capabilities and expanding to new countries.
Revenue from emerging markets rose 11% and now represents 25% of
John Crane sales, with the higher increases resulting from growth
in Mexico and Nigeria.
Research and development
John Crane increased investment in R&D by 28% compared to
the prior period, illustrating its commitment to address future
market needs. During the period we introduced the AURA 220 gas
seal, representing the next-generation of advanced gas seal
technology and the first to be unveiled as part of a new family of
gas seals. The new technology uses a common global design and
patented polymeric sealing device with Active Deflection Control to
help customers reduce operating and transaction costs.
Building on our long engineering heritage, the company has
launched "Engineering U" an accelerated career development
programme for promising entry-level mechanical engineers. The first
12-month US-based pilot is underway and we intend to implement the
programme at our global R&D centres in the UK and China in the
future.
Outlook
On a constant currency basis, trading may be at slightly lower
levels to prior year in the second half. Cost saving initiatives
are expected to underpin operating profit margins. Mid- and
downstream order book should support modest second half sales
growth in this segment, whereas difficult market conditions,
directly related to the reduction in crude oil prices, in our
upstream segment are expected to persist.
Smiths Medical
2015 2014 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 406 389 4% 6%
Headline operating profit 78 71 9% 9%
Headline operating margin 19.0% 18.3% 70 bps
Statutory operating profit 68 63 7%
Return on capital employed 15.1% 15.3% (20) bps
=========================== ===== ===== ======== ==========
Reported revenue grew 4% (GBP17m). Excluding a currency
translation impact of GBP8m, underlying revenue grew 6%. This
growth was driven by our strength and investment focus on
ambulatory infusion amid ongoing competitor disruptions, and
continued improvement in supply chain reliability. A weak prior
year comparator for disposables, affected by distributor
destocking, also helped.
Smiths Medical delivered strong profit growth in the first half,
driven mainly by higher underlying revenue, tight cost controls and
the initial benefits of restructuring. Headline operating profit
grew 9%, on a reported and underlying basis, resulting in a 70
basis point increase in operating margins to 19.0%. This
improvement stems from higher volumes, operating efficiencies and
the benefit of restructuring on lowering overheads. These more than
offset price headwinds, input cost inflation, and adverse
transactional foreign exchange.
The difference between statutory and headline operating profit
principally reflects the amortisation of acquired intangibles and
restructuring costs. Return on capital employed declined 20 basis
points to 15.1%, as a result of higher inventory and increased
capital spending to underpin the restructuring programmes.
Underlying sales of consumables, which represent 81% of total
revenue, were up 3%. We saw strong growth in ambulatory infusion
disposables on the back of improved sales of our ambulatory pumps,
continued robust performance in assisted reproduction products and
a return to growth in PIVC, safety needles, and tracheostomy,
albeit from a softer comparable period. Underlying sales of
hardware rose 24% on the strength of our infusion products.
Medication delivery underlying revenues were up 19% driven by
strong ambulatory infusion sales, reflecting the continued success
of our CADD product range. A sharper emphasis on this product line
is enhancing our already favourable market position. Our targeted
sales initiative began producing positive results in the second
half of last year and accelerated in this first half. While we
expect to continue to perform well in ambulatory infusion, growth
rates in the second half will slow against the tougher comparator.
Infusions systems growth also reflects the launch of a new infusion
pump in China. We continue to invest in interoperability
capabilities to support the integration of our devices with
electronic medical records and other hospital systems, which will
further support future performance in the infusion franchise. We
are also building a robust pipeline of new products to ensure our
long-term leadership in infusion technologies.
Vital care underlying sales were slightly up despite sluggish
procedure volumes and price pressures in developed countries.
Assisted reproduction grew strongly and tracheostomy maintained its
steady growth. General anaesthesia, respiratory and temperature
management all grew, despite difficult market conditions, against a
weak prior year comparator affected by distributor destocking.
Safety devices underlying revenue increased 3% with a return to
growth in PIVC and safety needles, albeit against a soft prior year
period affected by trade inventory reductions. Syringe sales were
strong in the US, and PIVC revenue in emerging markets also showed
good growth. The recently introduced ViaValve continues to be
received positively in the US. Although competitive pressures in
Europe have limited the success of our IntuitIV product, launched
at the same time, this product positions us well to benefit from
the EU directive to improve workplace safety by preventing sharps
injuries.
We are maintaining our investment levels in the faster growing
emerging markets. After a disappointing performance in China last
year, our focus on key product registrations, better sales channel
alignment, sales incentives and faster new product introductions
are now delivering positive results. Recent product launches in
China and the introduction of a strong distribution partner for our
infusion business has resulted in first half growth of 17%.
Elsewhere, our transition to a direct selling model in India
delivered growth of 43%. Sales to our distributor markets have been
more challenging with strong sales in South East Asia offset in
recent months by the impact of macro-economic factors in Russia and
the Middle East. We believe that a focus on expanding our presence
in the emerging markets is a sound strategy to counter slower
growth in developed markets. While these results are much more
encouraging, we clearly have more work to do to deliver
consistently high growth in the emerging markets.
Research and Development
Investment in R&D remains a priority. Our first half R&D
cash spend of GBP22m (2014: GBP19m) grew 13% and amounted to 5.3%
of sales (2014: 4.9%). We have continued our initiative to
streamline the organisation, upgrade talent and improve processes
to accelerate speed-to-market. In particular, we have introduced
new processes for prioritising our investment toward new products
that will deliver the strongest returns, while supporting a more
balanced product strategy across our three segments.
Sales of our CADD Solis PIB pump grew strongly in the US and
Europe, supported by solid performances by Medfusion 4000, Jelco
IntuitIV and ViaValve. These were all launched in the last 2-3
years, reinforcing the importance and potential of improving our
new product development pipeline. Anticipated launches of new
products in vascular access, temperature management, pain
management and infusion over the next 2-3 years, give us confidence
in our ability to accelerate sales in line with or better than
market growth
Outlook
We expect the growth rate to slow in the second half compared to
the first half, reflecting last year's strong second half
comparator. Medication delivery should perform well on the back of
recent product launches and effective sales and marketing although
the growth rate will slow in the second half. We continue to work
on improving performance in vital care and safety devices with
increased investment in new product development. Margins are
expected to show modest improvement for the full year reflecting
the benefit of operational efficiencies and restructuring despite
foreign exchange transaction headwinds.
Smiths Detection
2015 2014 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 231 251 (8)% (5)%
Headline operating profit 24 30 (20)% (15)%
(150)
Headline operating margin 10.3% 11.8% bps
Statutory operating profit 14 28 (50)%
(550)
Return on capital employed 3.1% 8.6% bps
=========================== ===== ===== ======== ==========
Faced with an increasingly competitive market, Smiths Detection
is implementing a series of initiatives to reshape the business and
return to profitable growth. While solid progress has been made on
a number of priorities, both sales and profits declined in the
first half as trading remained challenging.
Revenue fell 5% on an underlying basis, due partly to delays in
a number of major programmes. Weakness in transportation and ports
& borders was only partially offset by an encouraging
performance in critical infrastructure. Regionally, continuing
pressure on government budgets in EMEA was reflected in lower
activity in transportation and ports & borders, although major
airport contracts were won in Abu Dhabi and the UK.
Headline operating profit declined 14% underlying, driven by
lower sales volumes and continued competitive pricing pressure in
some end use markets and business mix. Headline operating margin of
10.3% was 150 basis points lower than the same period last year
despite stronger control measures, especially in programme
management. Including GBP9m of adverse foreign exchange
translation, reported headline operating profit fell 20%.
The difference between statutory and headline operating profit
primarily relates to GBP9m of exceptional restructuring costs
arising from the Group's Fuel for Growth programme. Return on
capital declined 550 basis points as a result of the lower
profitability over the past 12 months.
Value engineering and cost saving actions are continuing
alongside the Fuel for Growth initiative. This comprehensive
business improvement programme initiated in 2014 will deliver
annual savings of some GBP14m at an expected total cost of GBP34m
by the end of FY17. Costs of GBP9m were incurred in the first
half.
Among the major cost-saving measures, three facilities in North
America will close this year. The Malaysian hub exceeded output
targets ahead of a further ramp-up of production to support sales
to the EMEA region in the third quarter. Production of small X-ray
machines will cease in Germany and their manufacture is also
transferred to Malaysia. Simplifying this global supply chain will
enable us to realise substantial long-term benefits.
Transportation sales fell 5% on an underlying basis amid
challenging and increasingly competitive market conditions. Last
year's revenues also benefited from a large contract to supply
airport screening equipment to Doha.
Nevertheless the order book benefited from the award of two
significant contracts - to equip a new terminal at Abu Dhabi
Airport and to supply London Heathrow its future requirement for
out-of-gauge X-ray equipment. Under the contracts, the equipment
will be supported by multi-year service agreements. The growing
importance of the Middle East to Smiths Detection is also seen in a
major order completed for Emirates Group Security at its cargo
handling facility at the new Al Maktoum International Airport.
A number of key contracts were also renewed or extended in the
Americas: including a major service contract with Leidos. Revenue
also benefited from the delivery of automatic explosives scanners
(aTiX) for carry-on baggage screening under an Advanced Technology
2 contract with the US Transport Security Administration. In Asia
Pacific, Detection won an important contract from Manila
International Airport for 14 eqo body-screening systems.
In Europe, security improvements driven by new legislation are
increasingly affecting airport buying decisions. The newly
introduced EU Standard 3 covering all automated hold baggage
inspection for explosives, has triggered a new replacement cycle.
This is generating increased interest in the recently developed
HI-SCAN 180180 XCT scanner, which is Standard 3 compliant. Already
operating in Germany and Morocco, the new scanner is the main
element of the Heathrow contract.
During the period, the HI-SCAN 6040-2is HR became the first
dual-view X-ray system in the world to achieve Standard 3 Type C
approval as a liquid explosive detection system.
Revenue from critical infrastructure was especially strong,
rising 36% on an underlying basis. Sales in the US grew by 30%,
principally as a result of increased orders from the New York Court
Authority to supply networked X-ray equipment to courthouses and
other facilities. Sales in the Middle East expanded strongly from a
small base and our X-ray equipment is now used to safeguard a range
of Saudi Arabian government ministries, armed forces establishments
and royal palaces.
Underlying revenue in ports & borders fell 55% with the
decline most noticeable in Europe and the US. It continues to be a
challenging market with increased competitive pressures, which has
caused the significant drop in volumes. Latin America remains a
growth prospect, and orders in the period included cargo inspection
systems worth some GBP14m for Nicaragua and Paraguay.
Underlying military revenues were up 1% as defence budgets
remained constrained. Long term contracts underpin this business
and we secured an additional order of more than $9m from the US
Department of Defense.
The aftermarket, accounting for 36% of total revenue, is an
important growth driver, with an 11% increase in sales in the first
half. Among new business successes, our support for a major
installation at Doha's new international airport was confirmed with
a five-year service/maintenance contract.
Research and development
Smiths Detection continues to focus on developing new products
and systems as platforms for its principal technologies.
Company-funded R&D fell 31% to GBP13m, or 6% of sales (2014:
8%), reflecting the decision to focus investment more tightly on
fewer projects. Capitalised projects accounted for GBP2m (2014:
GBP8m) of the funded R&D. Customer and government support for
R&D totalled GBP2m in the period (2014: GBP2m), bringing total
R&D spend to GBP15m (2014: GBP21m).
New products, benefiting transportation and critical
infrastructure in particular included Checkpoint.Evo, a new
software solution that greatly enhances inspection and integration
capabilities at aviation checkpoints. It enables real-time data
collection, distribution and management to improve both the
inspection process and operational efficiency.
Air cargo screening is an expanding market requiring large-scale
scanning equipment. To meet global legal requirements for 100%
inspection of air cargo on passenger flights, the HI-SCAN
180180-2is pro was launched as an advanced version of its
market-leading predecessor.
Outlook
The rate of sales decline seen in the first half is likely to
persist during the second half. However, recent contract wins and
the strengthening order book are expected to support increased
revenue in FY16. Headline operating margins should improve in the
second half against a comparator period affected by one-off costs.
Excluding these one-off costs, like-for-like margins in the second
half will continue to be relatively soft in some markets, partially
offset by the benefits of the cost reduction initiatives. Margins
in the medium term are expected to improve as the product
initiatives such as value engineering and other cost savings take
effect.
Smiths Interconnect
2015 2014 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Sales 198 210 (6)% (6)%
Headline operating profit 18 27 (33)% (33)%
(390)
Headline operating margin 9.2% 13.1% bps
Statutory operating profit 7 16 (56)%
Return on capital employed 12.0% 12.2% (20) bps
=========================== ===== ===== ======== ==========
Smiths Interconnect's reported and underlying revenue declined
6%, or GBP12m, mainly due to delays in customer spending and
programme slowdowns in many of our end markets. This was only
slightly offset by growth in data centres. While sales in Europe
improved marginally, revenue from North America fell slightly and
emerging markets, particularly China, were impacted by contract
timing with revenue from certain test equipment orders benefiting
the prior year. In addition, some major projects, such as the
Chinese commercial aircraft programme, are moving from design to
qualification with a consequential demand dip before volumes start
increasing in the production phase.
Headline operating profit fell 33%, or GBP9m, on both an
underlying and reported basis. Margins declined 390 basis points to
9.2%. The main contributors were adverse mix, reflecting revenue
declines in higher margin sectors, and negative operational gearing
from lower volumes. Pricing pressure also continued in several
sectors. Appropriate restructuring and cost controls have been
implemented and will continue for the rest of the financial year.
In addition, we continue to drive procurement and operational
efficiencies through our lean and value engineering programmes.
Return on capital employed fell 20 basis points with the lower
profitability. The difference between statutory and headline
operating profit reflects amortisation of acquired intangible
assets (GBP9m) and exceptional restructuring costs of (GBP2m).
Connectors underlying revenues fell 4%. Following a strong close
to the prior year, the first half started slowly with shipments to
European defence customers cut due to export licence delays and
lower demand from two large medical customers. Revenues improved
slightly in the second quarter on the back of recovery in defence
and medical and strong demand for our new semiconductor test
products. The high reliability and harsh environment value
proposition of Connectors was highlighted by the use of our
products in the Rosetta mission which landed a probe on a comet in
deep space last November. We were also awarded a High & New
Technology Certification from the Chinese Government for our
semiconductor test products. Operationally, Connectors continues to
restructure its US presence, consolidating into its mid-West and
Mexico facilities.
Microwave sales fell 12% on an underlying basis reflecting
significant revenue reductions across all its markets. Wireless
telecoms demand declined as the rate of 4G LTE deployments in the
US slowed with one operator cutting capex spending significantly.
Internationally, demand from Australian operators grew and there
was positive progress on opportunities in Indonesia and China which
will benefit the second half. The change in timing of certain
orders for our high performance cable assemblies, which helped
prior year revenue, caused a large reduction in H1 test equipment
sales. This cable assembly programme experiences annual surges in
demand around the middle of the calendar year and we remain well
positioned to secure significant orders in 2015. In commercial
aerospace, sales to the main customer for our airborne antenna
system fell, but we continue to develop new product offerings and
new customers, particularly in Asia. Defence revenues were flat
despite further delays and volume reductions on some key programmes
such as datalink terminals. Defence budgets have generally
stabilised, and
demand held up on our larger production programmes. New
contracts included an RF filter project for a Canadian government
application.
Underlying revenue at Power increased 4%. Data centre sales
grew, particularly in the US, due to favourable market conditions,
increasing win rates and large project awards from both existing
colocation customers and new enterprise customers in financial
services and IT. Sales of our industrial products were affected by
a significant prior year customer filing for bankruptcy. The power
protection markets remained soft, especially US telecoms, because
of similar customer dynamics as experienced by the Microwave
business. However, new design opportunities with one of the larger
US network operators should provide some recovery in the second
half and beyond. Margins were constrained as the positive effects
of volume and fixed cost reductions from prior year restructuring
were offset by pricing pressure due to strong competition on large
data centre projects and reinvestment in future growth
opportunities.
Research and development
Total R&D expenditure remained at 6.5% of sales (GBP13m)
with the customer-funded portion flat at GBP1.5m in line with
stabilising defence budgets. Business development activities
continued to focus R&D investment on commercial markets with
higher growth potential. Examples include additional variants of
our next generation semiconductor test sockets; a tail-mounted
airborne antenna targeted at the regional and business jet market;
a value engineered version of our busway range for the high growth
emerging markets; and a new RF test product to complement our
successful PIM (passive intermodulation) offerings.
Outlook
Looking ahead, market conditions are expected to be largely
similar with continued strength in data centre and semiconductor
test. Defence is starting to show some signs of modest growth,
although individual programme dynamics will be a greater influence
on our future performance. US wireless operators are expected to
continue to limit infrastructure investment, although there are new
network deployments in Asia and Australia that provide opportunity.
Other commercial markets such as medical are likely to trend
positively. We expect that seasonality will bias performance
towards the second half although trading in the second half will
remain below prior year levels.
Flex-Tek
2015 2014 Reported Underlying
GBPm GBPm growth growth
=========================== ===== ===== ======== ==========
Revenue 128 123 4% 4%
Headline operating profit 23 22 3% 3%
Headline operating margin 18.1% 18.3% (20) bps
Statutory operating profit 22 18 22%
Return on capital employed 33.7% 32.7% 100 bps
=========================== ===== ===== ======== ==========
Flex-Tek revenues grew 4%, or GBP5m, on a reported and
underlying basis. The increase was driven by the reviving US
residential construction market as well as sales growth in
specialty heating elements and hoses for aerospace and automotive
applications. Headline operating margins at 18.1% were slightly
down on increased volumes because of higher investment costs in
marketing and new product development. Return on capital employed
improved 100 basis points.
The difference between statutory and headline operating profit
reflects exceptional litigation costs of GBP1m.
Fluid Management revenues rose 1% with a better performance in
commercial airframe and engine makers only partially offset by
lower sales for satellite launch vehicles and military gas
turbines. New aircraft project awards are starting to boost
revenues, although first half growth was offset by reduced sales in
Europe. Major airframe manufacturers, Airbus and Boeing, and engine
makers Pratt & Whitney, GE, and Rolls-Royce, won new orders to
push the large commercial jet backlog to record levels. Our sales
into automotive fuel and brake applications continue to grow.
Sales of flexible gas piping and HVAC ducting to the
construction market rose 4%. Revenue growth benefited from greater
activity in US residential construction and from our success in
cross-selling ducting, flexible gas piping and HVAC heating element
product lines to the US distribution market. Our new sales efforts
introducing flexible gas piping into the UK market have proved
successful and we have plans for expansion.
Heat Solutions revenues rose 13% on the back of strong growth in
specialty heating elements and slightly improved sales to the
appliance sector. Sales to distributors, via cross-selling efforts
with ducting and gas piping, and the growth of heating elements for
bespoke applications accounted for most of the improvement.
Investments in product development and in new technologies
continued at last year's increased levels. Sales in China were flat
for the half as growth in specialty applications was offset by
weakness in the appliance side of the business.
Underlying revenue at Flexible Solutions fell 2%, reflecting the
continued decline of the floor care market. Growth in specialty
applications and R&D investment in medical products continue to
deliver positive results.
Research and development
Our increased R&D investment aimed at approvals on
next-generation airplanes and new heating technologies is proving
effective and we continue to seek acquisition opportunities to
build on the strength of the businesses and management. R&D
investment increased 23% in the period.
In Fluid Management, new product development spend continues to
be focused on requirements for the next generation of quieter, more
fuel-efficient aircraft, and developments in 3000 psi and 5000 psi
hoses are expected to drive future revenues.
Opportunities to develop specialty heating elements that open up
higher margin markets and create scope for additional revenue
growth are another high priority.
Outlook
US residential housing numbers continue to show modest
improvement, although higher interest rates, higher home prices,
and stricter lending practices could hinder anticipated growth.
Aerospace demand for our Fluid Management business is likely to
remain muted as the new programmes benefiting our product lines
have yet to ramp up. Improved general economic conditions are
expected to benefit Heat Solutions.
Financial review
Earnings per share
Basic headline earnings per share from continuing activities
were 38.5p (2014: 39.5p), a decline of 3%. This reflects the lower
headline operating profit which has been partly offset by a lower
finance charge and tax rate.
On a statutory basis, the basic earnings per share from
continuing activities were 21.8p (2014: 23.7p).
Exceptional and other items relating to continuing activities
excluded from headline profit before tax
These items amounted to a charge of GBP77m compared to a charge
of GBP83m in 2014. They comprised:
- Amortisation of intangible assets acquired in business
combinations of GBP18m (2014: GBP21m) and a GBP26m goodwill
impairment charge for John Crane Production Solutions because of
the impact of a lower oil price environment on its customers. The
ongoing amortisation charge relates principally to technology and
customer relationships;
- GBP14m charge (2014: GBP36m) in connection with John Crane,
Inc. asbestos litigation;
- GBP2m charge (2014: GBP6m) in connection with Titeflex
Corporation litigation;
- GBP19m charge for restructuring (2014: GBP14m) in respect of
the 'Fuel for Growth' programme;
- GBP13m gain on changes to post-retirement benefits;
- GBP4m charge for retirement benefit finance (2014: GBP5m);
- GBP5m charge for legacy retirement benefit administration
(2014: GBP3m); and
- GBP2m of financing losses (2014: nil).
In the period to 31 January 2014, in addition to the above,
GBP2m profit on disposal of businesses; GBP1m cost of acquisition
and disposals and GBP1m gain on legal settlement of diabetes
royalty payments were also excluded from headline performance.
Cash generation and net debt
Operating cash generation remained strong with headline
operating cash of GBP204m (2014: GBP211m), representing 88% (2014:
86%) 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 increased GBP28m to
GBP58m (2014: GBP30m). 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 GBP112m (2014: GBP83m).
Dividends paid in the period on ordinary shares amounted to
GBP108m (2014: GBP225m consisting of final and special
dividends).
Net debt at 31 January was GBP929m, up from GBP804m at 31 July
2014. The increase in net debt reflects outflows from dividends
(GBP108m) and pension funding (GBP36m) as well as adverse foreign
exchange translation (GBP47m).
Headline interest and other financing costs
Interest payable on debt, net of interest earned on cash
deposits, was GBP24m (2014: GBP30m). It reduced as the $250m 6.05%
fixed rate Notes were repaid in May 2014. Headline interest costs
were covered 9.7 times by headline operating profits.
The Group accounts for pensions using IAS 19. As required by
this standard, a finance charge of GBP4m (2014: GBP5m) 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 GBP56m in R&D (2014: GBP61m),
equivalent to 3.9% of revenue (2014: 4.2%). Of that total, GBP53m
was funded by the Company compared with GBP57m in 2014, a decrease
of 8%. This decrease was caused by some long-running programmes
coming to an end and as we seek to improve the efficiency of our
innovation investment. We actively seek funding from customers to
support R&D and this amounted to GBP3m (2014: GBP4m). Under
IFRS, certain development costs are capitalised, and this amounted
to GBP9m in the period (2014: GBP15m). 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 GBP55m (2014: GBP58m) represented an
effective rate of 26.5% on the headline profit before taxation
(2014: 27.0%). This rate is expected to be sustained for the full
year. On a statutory basis, the tax charge on continuing activities
was GBP44m (2014: GBP37m).
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 comprises of 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 120
basis points to 15.4% (2014: 16.6%), primarily as a result of lower
returns on capital in Smiths Detection and Smiths Interconnect.
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 2015 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 risen to GBP338m at 31 January 2015 from GBP242m at 31 July
2014. The increase reflects the impact of lower bond yields and new
mortality assumptions for the US plans, partly offset by the
benefit of scheme contributions and asset returns.
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
2015 2014 2014
========================== ========== ======= ==========
Funded plans
UK plans - funding status 99% 99% 99%
US plans - funding status 73% 84% 85%
Other plans - funding
status 80% 79% 80%
=========================== ========== ======= ==========
31 January 31 July 31 January
2015 2014 2014
GBPm GBPm GBPm
=============================== ========== ======= ==========
Deficit
Funded plans (224) (135) (132)
Unfunded plans (114) (107) (104)
================================ ========== ======= ==========
Total deficit (338) (242) (236)
================================ ========== ======= ==========
Retirement benefit assets 158 123 102
Retirement benefit liabilities (496) (365) (338)
================================ ========== ======= ==========
(338) (242) (236)
=============================== ========== ======= ==========
In the current year, cash contributions to the schemes are
expected to total approximately GBP85m (2014: GBP88m). In addition,
the Group will invest GBP24m (2014: 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 2015 is set out in the table below:
Pension scheme membership SIPS TIGPS US plans Total
========================== ====== ====== ======== ======
Deferred active 460 250 2,810 3,520
Deferred 11,120 13,600 3,070 27,790
Pensioners 13,040 17,350 5,550 35,940
========================== ====== ====== ======== ======
Total 24,620 31,200 11,430 67,250
========================== ====== ====== ======== ======
Exchange rates
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
period-end rates. The principal exchange rates, expressed in terms
of the value of sterling, are shown in the following table.
31 January 31 January 31 July
2015 2014 2014
=============== ========== ========== ==================== ========
Average rates:
Dollar strengthened
US dollar 1.59 1.61 1% 1.64
Euro 1.27 1.19 Euro weakened 7% 1.21
Period end
rates:
Dollar strengthened
US dollar 1.50 1.65 9% 1.69
Euro 1.33 1.22 Euro weakened 9% 1.26
=============== ========== ========== ==================== ========
Risk management
The principal risks and uncertainties affecting the business
activities of the Group and relevant mitigating activities were set
out on pages 60-65 of the Annual Report for the year ended 31 July
2014, a copy of which is available at the Company's website at
www.smiths.com.
Developments since the Annual Report
In the view of the Board, the risks and uncertainties affecting
the Group for the remaining six months of the financial year
continue to be those set out briefly below and more fully in the
Annual Report. Since the Annual Report, the Board has announced
that the Chief Executive and Finance Director will both step down
during the course of 2015, which increases the possible risks
arising from managing this management transition and the potential
failure to attract suitably qualified personnel. Currency
volatility has continued to prevail 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.
The key risks and uncertainties are summarised below:
Economic outlook and geo-political environment
Economic and financial market conditions may lead to recession
and may cause adverse effects on customers or suppliers with
consequential capacity or cash-flow implications for Smiths
Group.
Compliance with legislation and regulations
A complex legislative and regulatory environment applies to the
Group's activities such that failure to comply could have a
significant impact on the financial results.
Pension funding
Defined benefit pension scheme obligations are funded by Group
companies based on actuarial assumptions. Changes in discount
rates, inflation, returns or mortality could lead to material
changes in funding requirements.
Financial risks
Financial risk, whether from foreign exchange fluctuations,
availability of funding, changes in tax rates or availability of
insurance cover may cause adverse effects on the Group's net
assets, earnings or liquidity.
Product liability and litigation
Product liability claims and litigation, particularly given the
Group's significant sales exposure to the US market, may have a
significant impact on the financial results.
Global supply chain and business/process transformation
Reliance on sole suppliers or concentration of manufacturing in
the supply chain - especially in areas exposed to natural
catastrophe - may result in disruption to the supply of
products.
Government customers
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.
Programme delivery
Failure to deliver products and services according to
contractual obligations may lead to higher costs, liquidated
damages or other penalties.
Acquisitions and disposals
Acquisitions are subject to execution risk and may be more
difficult to integrate than expected so that the full benefits are
not realised.
Information technology and cyber-security
Information systems are subject to security risk and play an
important part in business processes, both internally and
externally.
Statement of directors' responsibilities
The Interim report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the Interim report in accordance with the Disclosure and
Transparency Rules 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 2014. There have been
no changes to the membership of the board.
For and on behalf of the Board of Directors:
Philip Bowman Peter Turner
Chief Executive Finance Director
17 March 2015
Independent review report to Smiths Group plc
Report on the condensed interim financial statements
Our conclusion
We have reviewed the condensed interim financial statements,
defined below, in the Interim report of Smiths Group plc for the
period ended 31 January 2015. Based on our review, nothing has come
to our attention that causes us to believe that the condensed
interim financial statements are not prepared, in all material
respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
This conclusion is to be read in the context of what we say in
the remainder of this report.
What we have reviewed
The condensed interim financial statements, which are prepared
by Smiths Group plc, comprise:
-- --the consolidated balance sheet as at 31 January 2015;
-- --the consolidated income statement and consolidated
statement of comprehensive income for the period then ended;
-- --the consolidated cash flow statement for the period then
ended;
-- --the consolidated statement of changes in equity for the
period then ended; and
-- --the notes to the Interim report.
As disclosed in note 1, the financial reporting framework that
has been applied in the preparation of the full annual financial
statements of the group is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European
Union.
The condensed interim financial statements included in the
Interim report have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
What a review of condensed interim financial statements
involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) and, consequently, does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the Interim
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed interim financial statements.
Responsibilities for the condensed interim financial statements
and the review
Our responsibilities and those of the directors
The Interim report, including the condensed interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Interim
report in accordance with the Disclosure and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
Our responsibility is to express to the company a conclusion on
the condensed interim financial statements in the Interim report
based on our review. This report, including the conclusion, has
been prepared for and only for the company for the purpose of
complying with the Disclosure and Transparency Rules of the
Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed by our
prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
17 March 2015
(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 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
========================================================== ====== =========== =========== ========
Continuing operations
Revenue 2 1,416 1,442 2,952
Cost of sales (776) (791) (1,626)
========================================================== ====== =========== =========== ========
Gross profit 640 651 1,326
Sales and distribution costs (202) (201) (398)
Administrative expenses 4 (274) (280) (550)
========================================================== ====== =========== =========== ========
Operating profit 164 170 378
========================================================== ====== =========== =========== ========
Comprising
---------------------------------------------------------- ------ ----------- ----------- --------
- headline operating profit 3 232 245 504
---------------------------------------------------------- ------ ----------- ----------- --------
- exceptional items, impairment of goodwill, amortisation
of acquired intangibles 3 (68) (75) (126)
========================================================== ====== =========== =========== ========
164 170 378
========================================================== ====== =========== =========== ========
Interest receivable 1 2 3
Interest payable (25) (32) (62)
Other financing losses (5) (3) (8)
Other finance charges - retirement benefits (4) (5) (9)
========================================================== ====== =========== =========== ========
Finance costs (33) (38) (76)
Profit before taxation 131 132 302
========================================================== ====== =========== =========== ========
Comprising
---------------------------------------------------------- ------ ----------- ----------- --------
- headline profit before taxation 3 208 215 445
* exceptional items, impairment of goodwill,
amortisation of acquired intangibles and other
financing gains and losses 3 (77) (83) (143)
========================================================== ====== =========== =========== ========
131 132 302
========================================================== ====== =========== =========== ========
Taxation 6 (44) (37) (67)
========================================================== ====== =========== =========== ========
Profit for the period 87 95 235
========================================================== ====== =========== =========== ========
Attributable to
Smiths Group shareholders 86 94 233
Non-controlling interests 1 1 2
========================================================== ====== =========== =========== ========
87 95 235
========================================================== ====== =========== =========== ========
Earnings per share 5
Basic 21.8p 23.7p 59.0p
Diluted 21.6p 23.6p 58.4p
========================================================== ====== =========== =========== ========
Dividends per share (declared) 13
- interim 13.00p 12.75p 12.75p
- final 27.50p
========================================================== ====== =========== =========== ========
13.00p 12.75p 40.25p
========================================================== ====== =========== =========== ========
Consolidated statement of comprehensive income (unaudited)
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
========================================================== ====== =========== =========== ========
Profit for the period 87 95 235
========================================================== ====== =========== =========== ========
Other comprehensive income
Actuarial losses on retirement benefits 7 (120) (37) (77)
Taxation recognised on actuarial movements 32 (3) 6
========================================================== ====== =========== =========== ========
Other comprehensive income which will not be reclassified
to the consolidated income statement (88) (40) (71)
Other comprehensive income which will be, or has
been, reclassified
Exchange gains/(losses) 127 (186) (257)
Fair value gains/(losses)
- on available for sale financial assets 15 3
- deferred in the period on cash-flow and net investment
hedges (64) 88 119
- reclassified to income statement 2 (2) (3)
========================================================== ====== =========== =========== ========
Total other comprehensive income (8) (140) (209)
Total comprehensive income 79 (45) 26
========================================================== ====== =========== =========== ========
Attributable to
Smiths Group shareholders 78 (45) 25
Non-controlling interests 1 1
========================================================== ====== =========== =========== ========
79 (45) 26
========================================================== ====== =========== =========== ========
Consolidated balance sheet (unaudited)
31 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
======================================= ===== ========== ========== =======
Non-current assets
Intangible assets 8 1,606 1,609 1,544
Property, plant and equipment 9 275 259 258
Financial assets - other investments 146 99 117
Retirement benefit assets 7 158 102 123
Deferred tax assets 238 174 185
Trade and other receivables 41 31 35
Financial derivatives 9 13 9
======================================= ===== ========== ========== =======
2,473 2,287 2,271
Current assets
Inventories 487 443 427
Current tax receivable 43 25 34
Trade and other receivables 596 608 635
Cash and cash equivalents 10 178 176 190
Financial derivatives 24 11 8
======================================= ===== ========== ========== =======
1,328 1,263 1,294
Total assets 3,801 3,550 3,565
======================================= ===== ========== ========== =======
Non-current liabilities
Financial liabilities
- borrowings 10 (1,084) (894) (982)
- financial derivatives (5) (7) (4)
Provisions for liabilities and charges 12 (275) (256) (245)
Retirement benefit obligations 7 (496) (338) (365)
Deferred tax liabilities (64) (68) (58)
Trade and other payables (29) (33) (28)
======================================= ===== ========== ========== =======
(1,953) (1,596) (1,682)
Current liabilities
Financial liabilities
- borrowings 10 (23) (183) (12)
- financial derivatives (15) (7) (5)
Provisions for liabilities and charges 12 (89) (73) (82)
Trade and other payables (437) (416) (464)
Current tax payable (74) (55) (75)
======================================= ===== ========== ========== =======
(638) (734) (638)
======================================= ===== ========== ========== =======
Total liabilities (2,591) (2,330) (2,320)
======================================= ===== ========== ========== =======
Net assets 1,210 1,220 1,245
======================================= ===== ========== ========== =======
Shareholders' equity
Share capital 148 148 148
Share premium account 348 346 346
Capital redemption reserve 6 6 6
Revaluation reserve 1 1 1
Merger reserve 235 235 235
Retained earnings 583 565 559
Hedge reserve (120) (88) (58)
======================================= ===== ========== ========== =======
Total shareholders' equity 1,201 1,213 1,237
Non-controlling interest equity 9 7 8
======================================= ===== ========== ========== =======
Total equity 1,210 1,220 1,245
======================================= ===== ========== ========== =======
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 2014 494 242 559 (58) 1,237 8 1,245
========================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 86 86 1 87
Other comprehensive income
Exchange gains 127 127 127
Actuarial losses on
retirement
benefits and tax (88) (88) (88)
Fair value gains/(losses) 15 (62) (47) (47)
========================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive income
for the period 140 (62) 78 1 79
Transactions relating to
ownership interests
Exercises of share options 2 2 2
Taxation recognised on
share options (1) (1) (1)
Purchase of own shares (11) (11) (11)
Dividends
- equity shareholders 13 (108) (108) (108)
Share-based payment 4 4 4
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 January 2015 496 242 583 (120) 1,201 9 1,210
========================== ====== ======== ========= ========= ======== ============== =============== =======
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 488 242 930 (174) 1,486 7 1,493
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Profit for the period 94 94 1 95
Other comprehensive income
Exchange losses (185) (185) (1) (186)
Actuarial losses on
retirement
benefits and tax (40) (40) (40)
Fair value gains/(losses) 86 86 86
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive income
for the period (131) 86 (45) (45)
Transactions relating to
ownership interests
Exercises of share options 6 6 6
Purchase of own shares (13) (13) (13)
Dividends
- equity shareholders 13 (225) (225) (225)
Share-based payment 4 4 4
=========================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 January 2014 494 242 565 (88) 1,213 7 1,220
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement (unaudited)
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
===================================================== ===== =========== =========== ========
Net cash inflow from operating activities 14 112 83 256
Cash-flows from investing activities
Expenditure on capitalised development (8) (13) (23)
Expenditure on other intangible assets (8) (8) (17)
Purchases of property, plant and equipment (28) (24) (54)
Disposals of property, plant and equipment 2 4 5
Investment in financial assets (13) (12) (28)
Acquisition of businesses (1)
Disposals of businesses 3 3
===================================================== ===== =========== =========== ========
Net cash-flow used in investing activities (55) (50) (115)
Cash-flows from financing activities
Proceeds from exercise of share options 2 6 6
Purchase of own shares (11) (13) (13)
Dividends paid to equity shareholders (108) (225) (275)
Cash (outflow)/inflow from matured derivative
financial instruments (3) 3 11
Increase in new borrowings 91 138
Reduction and repayment of borrowings (53) (180)
===================================================== ===== =========== =========== ========
Net cash-flow used in financing activities (82) (229) (313)
Net (decrease)/increase in cash and cash equivalents (25) (196) (172)
Cash and cash equivalents at beginning of the
period 189 387 387
Exchange differences 13 (21) (26)
===================================================== ===== =========== =========== ========
Cash and cash equivalents at end of the period 177 170 189
===================================================== ===== =========== =========== ========
Cash and cash equivalents at end of the period
comprise
- cash at bank and in hand 105 102 115
- short-term deposits 73 74 75
- bank overdrafts (1) (6) (1)
===================================================== ===== =========== =========== ========
177 170 189
===================================================== ===== =========== =========== ========
Reconciliation of net cash-flow to movement in net debt
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
===================================================== ===== =========== =========== ========
Net (decrease)/increase in cash and cash equivalents (25) (196) (172)
Net (increase)/decrease in borrowings resulting
from cash-flows (38) 42
===================================================== ===== =========== =========== ========
Movement in net debt resulting from cash-flows (63) (196) (130)
Capitalisation, interest accruals and unwind
of capitalisation of fees (9) (8) 3
Movement in fair value hedging (6) (3) (3)
Exchange differences (47) 50 70
===================================================== ===== =========== =========== ========
Movement in net debt in the period (125) (157) (60)
Net debt at start of period 10 (804) (744) (744)
===================================================== ===== =========== =========== ========
Net debt at end of period 10 (929) (901) (804)
===================================================== ===== =========== =========== ========
Notes to the Interim report (unaudited)
1 Basis of preparation
The condensed interim financial statements cover the six month
period ended 31 January 2015 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 2014, 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 2015. These accounting policies are consistent with those
applied in the preparation of the financial statements for the year
ended 31 July 2014.
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 GBP20m (31 July 2014: GBP29m) has been
recognised in the period in respect of contracts in progress at the
period end with a total expected value of GBP118m (31 July 2014:
GBP113m). A 5% reduction in the proportion of the contract activity
recognised in the current period would have reduced operating
profit by less than GBP1m for both Smiths Detection and Smiths
Interconnect (31 July 2014: less than GBP1m).
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 2015 was
GBP22m (31 July 2014: GBP19m).
Taxation
The Group has recognised deferred tax assets of GBP26m (31 July
2014: GBP21m) relating to losses and GBP103m (31 July 2014: GBP91m)
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.
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 2015 there is a retirement benefit asset of
GBP158m (31 July 2014: GBP123m) 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: Employee benefits.
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 2015 the carrying value of inventory incorporates
provisions of GBP73m (31 July 2014: GBP76m). The inventory turn
rate of 3.2 (31 July 2014: 3.8) varies across the five divisions.
Smiths Detection has the slowest inventory utilisation with a turn
rate of 2.6 (31 July 2014: 3.1).
At 31 January 2015 the gross value of receivables partly
provided for or more than 3 months overdue was GBP61m (31 July
2014: GBP46m) and there were provisions of GBP21m (31 July 2014:
GBP18m) against these receivables which were carried at a net value
of GBP40m (31 July 2014: GBP28m).
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 2014. 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 note 8 and the Annual Report 2014 for details of the
critical assumptions made, including the sales and margin
volatility in Smiths Detection, Smiths Interconnect Power, and
disclosures on the sensitivity of the impairment testing to these
key assumptions.
See note 8 for the results of the half year impairment testing
for John Crane Production Solutions.
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 GBP232m (31 July 2014: GBP204m) 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
GBP66m (31 July 2014: GBP61m) 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.
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 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 2015
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================================== ====== ======== ========== ============= ======== ========= =====
Revenue 453 406 231 198 128 1,416
========================================== ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 105 78 24 18 23 248
Corporate headline operating
costs (16) (16)
========================================== ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 105 78 24 18 23 (16) 232
Exceptional operating items (note
4) (13) (6) (10) (2) (1) 13 (19)
Legacy retirement benefits administration
costs (5) (5)
Impairment of goodwill and amortisation
of acquired intangible assets (31) (4) (9) (44)
========================================== ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 61 68 14 7 22 (8) 164
Exceptional finance costs - adjustment
to discounted provision (note
4) (2) (1) (3)
Net finance costs - other (30)
========================================== ====== ======== ========== ============= ======== ========= =====
Profit before taxation 131
========================================== ====== ======== ========== ============= ======== ========= =====
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 469 389 251 210 123 1,442
========================================== ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 109 71 30 27 22 259
Corporate headline operating
costs (14) (14)
========================================== ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 109 71 30 27 22 (14) 245
Exceptional operating items (note
4) (38) (3) (2) (2) (4) (2) (51)
Legacy retirement benefits administration
costs (3) (3)
Amortisation of acquired intangible
assets (7) (5) (9) (21)
========================================== ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 64 63 28 16 18 (19) 170
Exceptional finance costs - adjustment
to discounted provision (note
4) (2) (1) (3)
Net finance costs - other (35)
========================================== ====== ======== ========== ============= ======== ========= =====
Profit before taxation 132
========================================== ====== ======== ========== ============= ======== ========= =====
Year ended 31 July 2014
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================================== ====== ======== ========== ============= ======== ========= =====
Revenue 941 804 512 445 250 2,952
========================================== ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 234 159 25 71 47 536
Corporate headline operating
costs (32) (32)
========================================== ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 234 159 25 71 47 (32) 504
Exceptional operating items (note
4) (56) (8) (1) (5) (10) (1) (81)
Legacy retirement benefits administration
costs (6) (6)
Amortisation and impairment of
acquired intangible assets (12) (9) (1) (17) (39)
========================================== ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 166 142 23 49 37 (39) 378
Exceptional finance costs - adjustment
to discounted provision (note
4) (5) (1) (6)
Net finance costs - other (70)
========================================== ====== ======== ========== ============= ======== ========= =====
Profit before taxation 302
========================================== ====== ======== ========== ============= ======== ========= =====
The net operating assets of the five divisions are set out
below:
31 January 2015
==============================================================
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 97 181 95 41 21 435
Working capital assets 358 241 268 163 81 1,111
========================================= ====== ======== ========== ============= ======== =======
Operating assets 455 422 363 204 102 1,546
Derivatives, tax and retirement benefit
assets 472
Goodwill and acquired intangibles 1,432
Corporate assets 173
Cash 178
========================================= ====== ======== ========== ============= ======== =======
Total assets 3,801
========================================= ====== ======== ========== ============= ======== =======
Working capital liabilities (161) (99) (166) (63) (29) (518)
Corporate and non-headline liabilities (312)
Derivatives, tax and retirement benefits (654)
Borrowings (1,107)
========================================= ====== ======== ========== ============= ======== =======
Total liabilities (2,591)
========================================= ====== ======== ========== ============= ======== =======
Average divisional capital employed 871 1,098 604 519 142 3,234
Average corporate capital employed (46)
========================================= ====== ======== ========== ============= ======== =======
Average total capital employed 3,188
========================================= ====== ======== ========== ============= ======== =======
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 GBP815m (31 July 2014: GBP815m)
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 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 91 159 97 39 19 405
Working capital assets 350 228 275 161 73 1,087
========================================= ====== ======== ========== ============= ======== =======
Operating assets 441 387 372 200 92 1,492
Derivatives, tax and retirement benefit
assets 359
Goodwill and acquired intangibles 1,382
Corporate assets 142
Cash 190
========================================= ====== ======== ========== ============= ======== =======
Total assets 3,565
========================================= ====== ======== ========== ============= ======== =======
Working capital liabilities (143) (97) (166) (70) (26) (502)
Corporate and non-headline liabilities (317)
Derivatives, tax and retirement benefits (507)
Borrowings (994)
========================================= ====== ======== ========== ============= ======== =======
Total liabilities (2,320)
========================================= ====== ======== ========== ============= ======== =======
Average divisional capital employed 876 1,100 632 518 139 3,265
Average corporate capital employed (47)
========================================= ====== ======== ========== ============= ======== =======
Average total capital employed 3,218
========================================= ====== ======== ========== ============= ======== =======
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original equipment
manufacture Aftermarket Total
=================== ======================================================== =====
Oil, Chemical
gas and and General
petrochemical pharmaceutical Distributors industry
John Crane GBPm GBPm GBPm GBPm GBPm GBPm
===================== ================== ============== =============== ============ ========= =====
Revenue period ended
31 January 2015 166 171 39 35 42 453
Revenue period ended
31 January 2014 176 180 40 33 40 469
======================= ================== ============== =============== ============ ========= =====
Medication Vital Safety
delivery care devices Total
Smiths Medical GBPm GBPm GBPm GBPm
======================== ========== ===== ======== =====
Revenue period ended 31
January 2015 128 159 119 406
Revenue period ended 31
January 2014 110 162 117 389
============================ ========== ===== ======== =====
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
2015 116 19 26 6 61 3 231
Revenue period ended 31
January
2014 127 44 26 6 47 1 251
============================= ============== ======== ======== =========== =============== ============ =====
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
================================ ========== ========= ===== =====
Revenue period ended 31 January
2015 70 80 48 198
Revenue period ended 31 January
2014 73 91 46 210
=================================== ========== ========= ===== =====
Fluid Flexible Heat
Management Solutions Solutions Construction Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
================================ =========== ========== ========== ============ =====
Revenue period ended 31 January
2015 33 25 29 41 128
Revenue period ended 31 January
2014 (restated) 33 26 25 39 123
================================== =========== ========== ========== ============ =====
The allocation of Flex-Tek revenue for the period ended 31
January 2014 has been restated following reorganisation which moved
a business from Fluid Management to Flexible Solutions.
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;
-- impairment of goodwill and amortisation of intangible assets
acquired in a business combination - the impairment and
amortisation charges are non-cash items, 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 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
======================================================= ===== =========== =========== ========
Operating profit 164 170 378
Exclude
- exceptional operating items 4 19 51 81
- legacy retirement benefits administration costs 5 3 6
- impairment of goodwill 8 26
- amortisation of acquired intangible assets 8 18 21 39
======================================================= ===== =========== =========== ========
Non-headline items in operating profit 68 75 126
======================================================= ===== =========== =========== ========
Headline operating profit 232 245 504
======================================================= ===== =========== =========== ========
Finance costs (33) (38) (76)
Exclude
- exceptional finance costs 4 3 3 6
- other financing gains and losses 2 2
- other finance costs - retirement benefits 4 5 9
======================================================= ===== =========== =========== ========
Non-headline items in finance costs 9 8 17
======================================================= ===== =========== =========== ========
Headline finance costs (24) (30) (59)
======================================================= ===== =========== =========== ========
Profit before taxation 131 132 302
Non-headline items in operating profit 68 75 126
Non-headline items in finance costs 9 8 17
======================================================= ===== =========== =========== ========
Headline profit before taxation 208 215 445
======================================================= ===== =========== =========== ========
Profit after taxation - continuing operations 87 95 235
Exclude
- non-headline items in profit before taxation 77 83 143
- tax on excluded items (11) (21) (53)
======================================================= ===== =========== =========== ========
66 62 90
======================================================= ===== =========== =========== ========
Headline profit after taxation - continuing operations 153 157 325
======================================================= ===== =========== =========== ========
Headline earnings before interest, tax depreciation and
amortisation
Smiths use the following calculation of Headline EBITDA for the
ratio of net debt to EBITDA.
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
Notes GBPm GBPm GBPm
=================================================== ===== =========== =========== ========
Headline operating profit 232 245 504
Exclude
Depreciation 9 24 23 46
Amortisation of development costs 8 10 10 21
Amortisation of software, patents and intellectual
property 8 6 7 13
=================================================== ===== =========== =========== ========
Headline EBITDA 272 285 584
=================================================== ===== =========== =========== ========
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 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
======================================================== =========== =========== ========
Operating items
Restructuring programmes (19) (14) (29)
Gains on changes to post-retirement benefits 13
Profit on disposals and acquisition and disposal costs 1 4
Resolution of items originally reported as non-headline 1 2
Litigation
- provision for Titeflex Corporation subrogation claims
(note 12) (1) (5) (10)
- provision for John Crane, Inc. asbestos litigation
(note 12) (12) (34) (48)
======================================================== =========== =========== ========
(19) (51) (81)
Financing items
Exceptional finance costs - adjustment to discounted
provision
- provision for Titeflex Corporation subrogation claims
(note 12) (1) (1) (1)
- provision for John Crane, Inc. asbestos litigation
(note 12) (2) (2) (5)
======================================================== =========== =========== ========
(22) (54) (87)
======================================================== =========== =========== ========
Period ended 31 January 2015
Restructuring costs comprise GBP19m in respect of Fuel for
Growth. This programme, which involves redundancy, relocation and
consolidation of manufacturing, is considered exceptional by virtue
of its size.
Gains of GBP13m on changes to post-retirement benefits arise
from a settlement offer by the US defined benefit pension plans
allowing deferred members a one-off option to elect to cash out
their retirement entitlements rather than receive a pension at
retirement which was completed in September 2014. See note 9 in the
Annual Report 2014.
A charge of GBP1m 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. A reduction in the expected
gross cost has been offset by a charge of GBP2m relating to changes
in discounting.
The operating charge in respect of John Crane, Inc. litigation
comprises GBP6m in respect of increased provision for adverse
judgments and legal defence costs, GBP1m in respect of litigation
management and legal fees in connection with litigation against
insurers, and GBP5m arising from the decrease in US risk free
rates.
5 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
ended ended Year ended
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
================================================== =========== =========== ===========
Profit attributable to equity shareholders for
the year
- total 86 94 233
================================================== =========== =========== ===========
Average number of shares in issue during the year 394,695,781 394,166,825 394,296,986
================================================== =========== =========== ===========
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 398,359,970 (period ended
31 January 2014: 396,377,484; year ended 31 July 2014: 398,399,449)
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
31 January 31 January Year ended
2015 2014 31 July 2014
GBPm GBPm GBPm
============== ============== ===============
EPS EPS EPS
GBPm (p) GBPm (p) GBPm (p)
=========================================== ====== ====== ====== ====== ======= ======
Profit attributable to equity shareholders
of the Parent Company 86 21.8 94 23.7 233 59.0
Exclude
Non-headline items and related tax
(note 3) 66 16.7 62 15.8 90 22.8
=========================================== ====== ====== ====== ====== ======= ======
Headline 152 38.5 156 39.5 323 81.8
=========================================== ====== ====== ====== ====== ======= ======
Statutory EPS - diluted (p) 21.6 23.6 58.4
=========================================== ====== ====== ====== ====== ======= ======
Headline EPS - diluted (p) 38.2 39.2 81.0
=========================================== ====== ====== ====== ====== ======= ======
6 Taxation
The interim tax charge of 33.6% is calculated by applying the
estimated effective headline tax rate of 26.5% for the year ending
31 July 2015 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
31 January 31 January Year ended
2015 2014 31 July 2014
GBPm GBPm GBPm
======================================== ===================== ===================== =====================
Continuing Continuing Continuing
operations operations operations
GBPm Tax rate GBPm Tax rate GBPm Tax rate
======================================== =========== ======== =========== ======== =========== ========
Profit before taxation 131 132 302
Taxation (44) 33.6% (37) 28.2% (67) 22.3%
======================================== =========== ======== =========== ======== =========== ========
Adjustments
Non-headline items excluded from profit
before taxation (note 3) 77 83 143
Taxation on non-headline items (11) (21) (53)
======================================== =========== ======== =========== ======== =========== ========
Headline
Headline profit before taxation 208 215 445
Taxation on headline profit (55) 26.5% (58) 27.0% (120) 27.0%
======================================== =========== ======== =========== ======== =========== ========
The changes in the value of the net tax liability in the period
were:
Current Deferred Net tax
tax tax balance
GBPm GBPm GBPm
==================================== ======= ======== ========
At 31 July 2014 (41) 127 86
Foreign exchange gains and losses 1 15 16
(Charge)/credit to income statement (45) 1 (44)
Credit to reserves 31 31
Tax paid 54 54
======================================= ======= ======== ========
At 31 January 2015 (31) 174 143
======================================= ======= ======== ========
The deferred tax credit 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.
7 Post retirement benefits
Smiths provides post retirement benefits to employees in a
number of countries throughout the world. The arrangements include
defined benefit and defined contribution plans and, mainly in the
United Kingdom (UK) and United States of America (US), post
retirement healthcare. The principal defined benefit pension plans
are in the UK and in the US and these have been closed so that no
future benefits are accrued.
Where any individual scheme shows a surplus under IAS 19, this
is disclosed on the balance sheet as a retirement benefit asset.
The IAS 19 surplus of any one scheme is not available to fund the
IAS 19 deficit of another scheme. The retirement benefit asset
arises from the rights of the employers to recover the surplus at
the end of the life of the scheme. 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.
The amounts recognised in the balance sheet were as follows:
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
=========================================== ========== ========== =======
Market value of funded plan assets 4,118 3,716 3,800
Present value of funded scheme liabilities (4,342) (3,848) (3,935)
Unfunded pension plans (94) (85) (89)
Post retirement healthcare (20) (19) (18)
============================================= ========== ========== =======
Net retirement benefit liability (338) (236) (242)
============================================= ========== ========== =======
Retirement benefit assets 158 102 123
Retirement benefit obligations (496) (338) (365)
============================================= ========== ========== =======
Net retirement benefit liability (338) (236) (242)
============================================= ========== ========== =======
The principal assumptions used in updating the valuations are
set out below:
31 January 31 January
2015 2014 31 July 2014
UK US UK US UK US
======================================== ===== ===== ===== ===== ====== ======
Rate of increase for active deferred
members 3.6% n/a 4.2% n/a 4.2% n/a
Rate of increase in pensions in payment 2.7% n/a 3.3% n/a 3.3% n/a
Rate of increase in deferred pensions 2.7% n/a 3.3% n/a 3.3% n/a
Discount rate 2.9% 3.65% 4.2% 4.70% 4.0% 4.40%
Inflation rate 2.7% n/a 3.3% n/a 3.3% n/a
Healthcare cost increases 5.0% n/a 5.0% n/a 4.3% n/a
======================================== ===== ===== ===== ===== ====== ======
The mortality assumptions for the UK schemes are consistent with
the 31 July 2014 valuation. However for the US schemes, the
mortality tables were updated from RP-2000 projected to 2025 as of
31 July 2014 to RP-2014 projected generationally with scale MP-14
as of 31 January 2015, to reflect the new mortality tables
finalised since the year end. The updated US assumptions give the
following:
Expected further years of life US schemes
Male Female Male Female
31 January 31 January 31 July 31 July
2015 2015 2014 2014
============================================= =========== =========== ======== ========
Member who retires next year at age 65 22 24 20 21
Member, currently 45, when they retire in 20
years' time 23 26 20 21
============================================= =========== =========== ======== ========
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 Jan 2015 31 July 2014
GBPm GBPm
SIPS TIGPS US schemes SIPS TIGPS US schemes
=========================================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme liabilities
- Active deferred members (80) (81) (130) (71) (74) (97)
- Deferred members (838) (678) (164) (714) (589) (221)
- Pensioners (1,078) (856) (357) (999) (810) (277)
=========================================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme liabilities (1,996) (1,615) (651) (1,784) (1,473) (595)
Market value of scheme assets 1,807 1,772 473 1,639 1,594 500
=========================================== ======= ======= ========== ======= ======= ==========
Surplus/(deficit) (189) 157 (178) (145) 121 (95)
=========================================== ======= ======= ========== ======= ======= ==========
Smiths Industries Pension Scheme has a synthetic equity
investment strategy using exchange-traded futures to invest in
global equity markets. At 31 January 2015 the aggregate value of
these derivatives was a liability of GBP8m.
The changes in the present value of the net pension liability in
the period were:
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
================================================ ========== ========== =======
At beginning of period (242) (254) (254)
Exchange adjustment (15) 12 19
Current service cost (1) (1) (3)
Scheme administration costs (5) (3) (6)
Past service cost, curtailments and settlements 13
Finance charges - retirement benefits (4) (5) (9)
Contributions by employer 36 52 88
Actuarial (loss)/gain (120) (37) (77)
================================================== ========== ========== =======
Net retirement benefit liability (338) (236) (242)
================================================== ========== ========== =======
Actuarial losses have primarily arisen from lower discount rates
in the UK and US and the change in mortality assumptions for the US
scheme, partly offset by higher returns on scheme assets.
8 Intangible assets
Software,
patents
Development Acquired and intellectual
Goodwill costs intangibles property Total
GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ============ ================= =====
Cost
At 1 August 2014 1,395 216 386 164 2,161
Exchange adjustments 95 19 37 6 157
Additions 9 8 17
Disposals (2) (3) (5)
================================== ======== =========== ============ ================= =====
At 31 January 2015 1,490 244 421 175 2,330
================================== ======== =========== ============ ================= =====
Amortisation
At 1 August 2014 86 102 313 116 617
Exchange adjustments 8 9 30 5 52
Charge for the period 10 18 6 34
Impairment charge 26 26
Disposals (2) (3) (5)
================================== ======== =========== ============ ================= =====
At 31 January 2015 120 121 359 124 724
================================== ======== =========== ============ ================= =====
Net book value at 31 January 2015 1,370 123 62 51 1,606
Net book value at 31 January 2014 1,352 119 93 45 1,609
Net book value at 31 July 2014 1,309 114 73 48 1,544
================================== ======== =========== ============ ================= =====
Goodwill impairment
John Crane Production Solutions ("JCPS")
JCPS is a business unit of John Crane focused on the servicing
and provision of onshore down-hole 'artificial lift' pumping
hardware and systems. Goodwill of GBP6m (31 July 2014: GBP30m) is
allocated to JCPS. An impairment test was carried out because the
significant decline in oil prices since 31 July 2014 has adversely
affected JCPS' customers. JCPS anticipates that customers will
scale back expansion plans and work to reduce running costs. The
JCPS goodwill has been impaired by GBP26m because JCPS is now
expected to have lower operating margins and less growth in the
future, significantly reducing the value in use of the
business.
The impairment loss has been recognised in John Crane
administration expenses, and excluded from headline operating
profit for the division, as part of "impairment of goodwill and
amortisation of acquired intangible assets".
Period ended 31 Year ended 31 July
January 2015 2014
================================== =============== ==================
Impairment loss recognised GBP26m
Basis of valuation value in use value in use
Discount rate used for impairment
test 12.9% 12.6%
Long-term growth rates 2.2% 2.2%
=================================== =============== ==================
Sales assumptions for JCPS are based on:
-- Anticipated levels of maintenance and repair activities based
on the current forward curve for oil prices; and
-- Expected North American drilling activity.
The gross margins included in the projections are lower than
historical due to lower levels of activity. As required by IAS 36:
Impairment of assets, margin projections for JCPS are based on the
current fixed cost base, and do not incorporate any future
restructuring.
Goodwill sensitivity analysis
Smiths Detection
Goodwill of GBP366m (31 July 2014: GBP369m) is allocated to
Smiths Detection. The impairment testing carried out for Annual
Report 2014 has been updated to 31 January 2015. The value in use
model incorporates a discount rate of 12.7% (31 July 2014: 12.5%)
and assumes long-term growth of 2.2% (31 July 2014: 2.3%). No
impairment has been identified, but sensitivity analysis identifies
that the following changes in assumptions (in isolation) would
cause the value in use to fall below the carrying value:
Period ended 31 Year ended 31 July
January 2015 2014
Change required Change required
to trigger impairment to trigger impairment
============================ ====================== ======================
Surplus over carrying value GBP170m GBP165m
Forecast operating cash-flow 29% reduction 30% reduction
300 basis points 300 basis points
Discount rate higher higher
690 basis points 690 basis points
Long-term growth rates lower lower
============================ ====================== ======================
Sales assumptions for Smiths Detection are based on:
-- the current order book and tenders in progress, including
airport, cargo scanning and military opportunities;
-- expected market growth rates. Market growth drivers
considered include
- passenger numbers for air transportation;
- global trade for cargo screening;
- increased regulatory standards to detect a wider range of
substances at lower threat mass; and
- expected rate of replacement for units initially installed following 11 September 2001.
-- expected rate of adoption of new products and technologies,
including HI-SCAN 10080 XCT for baggage handling systems, HI-SCAN
6040-2is for critical infrastructure and Ace-ID for trace; and
-- forecast servicing of the installed product base.
Margin projections for Smiths Detection are based on historical
margins, projected margins on tenders in progress and the current
fixed cost base.
The directors also reviewed the fair value less costs to sell
for the division when considering the results of the impairment
testing, which supported the conclusion that the Smiths Detection
goodwill was not impaired.
Smiths Interconnect Power
Goodwill of GBP128m (31 July 2014: GBP114m) is allocated to
Smiths Interconnect Power. The impairment testing carried out for
Annual Report 2014 has been updated to 31 January 2015. The value
in use model incorporates a discount rate of 12.3% (31 July 2014:
11.4%) and assumes long-term growth of 2.5% (31 July 2014: 2.5%).
No impairment has been identified, but sensitivity analysis
identifies that the following changes in assumptions (in isolation)
would cause the value in use to fall below the carrying value:
Period ended 31 Year ended 31 July
January 2015 2014
Change required Change required
to trigger impairment to trigger impairment
============================ ====================== ======================
Surplus over carrying value GBP15m GBP8m
Forecast operating cash-flow 11% reduction 6% reduction
90 basis points 40 basis points
Discount rate higher higher
180 basis points 70 basis points
Long-term growth rates lower 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.
The directors also reviewed the fair value less costs to sell
for Smiths Interconnect Power when considering the results of the
impairment testing, which supported the conclusion that the
goodwill was not impaired.
Other CGUs
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.
9 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 2014 184 520 212 916
Exchange adjustments 12 39 8 59
Additions 3 16 9 28
Disposals (3) (6) (4) (13)
================================== ========== ========== ========== =====
At 31 January 2015 196 569 225 990
================================== ========== ========== ========== =====
Depreciation
At 1 August 2014 95 393 170 658
Exchange adjustments 7 30 7 44
Charge for the period 4 14 6 24
Disposals (3) (4) (4) (11)
================================== ========== ========== ========== =====
At 31 January 2015 103 433 179 715
================================== ========== ========== ========== =====
Net book value at 31 January 2015 93 136 46 275
Net book value at 31 January 2014 93 125 41 259
Net book value at 31 July 2014 89 127 42 258
================================== ========== ========== ========== =====
10 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments relating
to hedge accounting.
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
======================================= ========== ========== =======
Cash and cash equivalents
Net cash and deposits 178 176 190
======================================= ========== ========== =======
Short-term borrowings
Bank overdrafts (1) (6) (1)
$250m 6.05% US$ Guaranteed notes 2014 (152)
Bank and other loans (1) (1) (1)
Interest accrual (21) (24) (10)
======================================= ========== ========== =======
(23) (183) (12)
======================================= ========== ========== =======
Long-term borrowings
GBP150m 7.25% Sterling Eurobond 2016 (150) (150) (150)
EUR300m 4.125% Eurobond 2017 (230) (251) (243)
$175m 7.37% US$ Private placement 2018 (116) (106) (104)
Revolving Credit Facility 2019 (155) (106)
$250m 7.20% US$ Guaranteed notes 2019 (166) (151) (147)
$400m 3.625% US$ Guaranteed notes 2022 (265) (235) (231)
Bank and other loans (2) (1) (1)
======================================= ========== ========== =======
(1,084) (894) (982)
======================================= ========== ========== =======
Borrowings (1,107) (1,077) (994)
======================================= ========== ========== =======
Net debt (929) (901) (804)
======================================= ========== ========== =======
Under the terms of the US$800m Revolving Credit Facility dated
19 February 2014, Smiths Group has the option to request that the
original maturity date of 19 February 2019 be extended by 12
months. This option was duly exercised and agreed with the lending
banks on 4 February 2015. Smiths can request exercise of the
remaining uncommitted one-year extension option in December
2015.
Movements in net debt
Net cash
and Other
cash short-term Long-term
equivalents borrowing borrowings Net debt
GBPm GBPm GBPm GBPm
===================================== ============ =========== =========== ========
At 31 July 2014 189 (11) (982) (804)
Foreign exchange gains and losses 13 (60) (47)
Net cash inflow/(outflow) (25) (25)
Repayment and drawdown of borrowings 1 (39) (38)
Capitalisation, interest accruals
and unwind of capitalised fees (9) (9)
Fair value movement from interest
rate hedging (2) (4) (6)
Change in maturity analysis (1) 1
======================================= ============ =========== =========== ========
At 31 January 2015 177 (22) (1,084) (929)
======================================= ============ =========== =========== ========
11 Fair value of financial instruments
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
31 January 31 January 31 January 31 January 31 July 31 July
2015 2015 2014 2014 2014 2014
GBPm GBPm GBPm GBPm GBPm GBPm
===================================== =========== =========== =========== =========== ======== ========
Level 1 valuations
Financial assets - other investments 139 139 96 96 111 111
Level 2 valuations
Financial derivatives - assets 33 33 24 24 17 17
Borrowings (1,107) (1,183) (1,077) (1,153) (994) (1,065)
Financial derivatives - liabilities (20) (20) (14) (14) (9) (9)
Level 3 valuations
Financial assets - other investments 7 7 3 3 6 6
===================================== =========== =========== =========== =========== ======== ========
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.
12 Provisions and contingent liabilities
Trading Exceptional and legacy Total
======= ================================ =====
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
At 31 July 2014 43 204 61 19 327
Exchange adjustments 1 25 7 1 34
Provision charged 10 13 1 8 32
Provision released (2) (2) (4)
Unwind of provision discount 2 1 3
Utilisation (11) (10) (4) (3) (28)
=============================== ======= =========== ============ ===== =====
At 31 January 2015 41 232 66 25 364
=============================== ======= =========== ============ ===== =====
Current liabilities 33 28 10 18 89
Non-current liabilities 8 204 56 7 275
=============================== ======= =========== ============ ===== =====
At 31 January 2015 41 232 66 25 364
=============================== ======= =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Trading
The trading provision includes warranties and product
liabilities provisions of GBP32m (31 July 2014: GBP35m), GBP8m (31
July 2014: GBP7m) in connection with ongoing price audits of
overhead cost recovery charges associated with certain historical
supply agreements and GBP1m (31 July 2014: GBP1m) for 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 government price audits,
product liability claims, employee disputes and other kinds of
lawsuits, and faces different types of legal issues in different
jurisdictions. The high level of activity in the US, for example,
exposes the Group to the likelihood of various types of litigation
commonplace in that country, such as 'mass tort' and 'class action'
litigation, legal challenges to the scope and validity of patents,
and product liability and insurance subrogation claims. These types
of proceedings (or the threat of them) are also used to create
pressure to encourage negotiated settlement of disputes. Any claim
brought against the Group (with or without merit), could be costly
to defend. These matters are inherently difficult to quantify. In
appropriate cases a provision is recognised based on best estimates
and management judgement but there can be no guarantee that these
provisions (which may be subject to potentially material revision
from time to time) will result in an accurate prediction of the
actual costs and liabilities that may be incurred. There are also
contingent liabilities in respect of litigation for which no
provisions are made.
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.
John Crane, Inc. litigation provision
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 237,000 claims (31 July 2014: 235,000
claims) against JCI have been dismissed before trial over the last
35 years. JCI is currently a defendant in cases involving
approximately 79,000 claims (31 July 2014: 80,000 claims). Despite
the large number of claims brought against JCI, since the inception
of the litigation it has had final judgments against it, after
appeals, in only 132 cases (31 July 2014: 131 cases) over the
period, and has had to pay awards amounting to approximately
US$150m (31 July 2014: US$149m). JCI has also incurred significant
additional defence costs. The litigation involves claims for a
number of allegedly asbestos related diseases, with awards, when
made, for mesothelioma tending to be larger than those for other
diseases. JCI's ability to defend mesothelioma cases successfully
is, therefore, likely to have a significant impact on its annual
aggregate adverse judgment and defence costs.
The provision is based on past history and published tables of
asbestos incidence projections and is determined using asbestos
valuation experts, Bates White LLC. Whilst published incidence
curves can be used to estimate the likely future pattern of
asbestos related disease, John Crane, Inc.'s claims experience is
significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on
the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. The
projections use a 10 year time horizon on the basis that Bates
White LLC consider that there is substantial uncertainty in the
asbestos litigation environment so probable expenditures are not
reasonably estimable beyond this time horizon.
The assumptions made in assessing the appropriate level of
provision include:
-- The period over which the expenditure can be reliably
estimated.
-- The future trend of legal costs.
-- The rate of future claims filed.
-- The rate of successful resolution of claims.
-- The average amount of judgments awarded.
The provision in respect of JCI is a discounted pre-tax
provision using discount rates, being the risk-free rate on US debt
instruments for the appropriate period. The deferred tax asset
related to this provision is shown within the deferred tax balance.
Set out below is the gross, discounted and post-tax information
relating to this provision:
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
============================== ========== ========== =======
Gross provision 249 231 227
Discount (17) (24) (23)
============================== ========== ========== =======
Discounted pre-tax provision 232 207 204
Deferred tax (78) (70) (68)
============================== ========== ========== =======
Discounted post-tax provision 154 137 136
============================== ========== ========== =======
John Crane, Inc. litigation provision sensitivities
However, because of the significant uncertainty associated with
the future level of asbestos claims and of the costs arising out of
related litigation, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred and, as a
result, the provision may be subject to potentially material
revision from time to time if new information becomes available as
a result of future events.
Statistical analysis of the provision indicates that there is a
50% probability that the total future expenditure will fall between
GBP235m and GBP263m, compared to the gross provision value of
GBP249m.
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.
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.
The provision is a discounted pre-tax provision using discount
rates, being the risk free rate on US debt instruments for the
appropriate period. The deferred tax asset related to this
provision is shown within the deferred tax balance.
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
============================== ========== ========== =======
Gross provision 71 69 67
Discount (5) (7) (6)
============================== ========== ========== =======
Discounted pre-tax provision 66 62 61
Deferred tax (25) (23) (23)
============================== ========== ========== =======
Discounted post-tax provision 41 39 38
============================== ========== ========== =======
Titeflex Corporation litigation provision sensitivities
However, because of the significant uncertainty associated with
the future level of claims and of the costs arising out of related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred and, as a result, the provision
may be subject to potentially material revision from time to time
if new information becomes available as a result of future
events.
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. The GBP8m charge in
the period relates to projects in the Fuel for Growth
programme.
13 Dividends
The following dividends were declared and paid in the
period:
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
========================================================== =========== =========== ========
Ordinary final dividend of 27.50p for 2014 (2013: 27.00p)
paid 21 November 2014 108 107 107
Special dividend of 30.00p for 2013 paid 22 November
2013 118 118
Ordinary interim dividend of 12.75p for 2014 paid 25
April 2014 50
========================================================== =========== =========== ========
108 225 275
========================================================== =========== =========== ========
An interim dividend of 13.00p per share was declared by the
Board on 18 March 2015 and will be paid to shareholders on 24 April
2015. 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 27 March 2015.
14 Cash-flow from operating activities
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
========================================================== =========== =========== ========
Operating profit - continuing 164 170 378
Amortisation of intangible assets 34 37 73
Impairment of intangible assets 26
Loss/(profit)on disposal of property, plant and equipment
and intangible assets 2 2
Profit on disposal of business (2) (3)
Depreciation of property, plant and equipment 24 23 46
Share-based payment expense 4 4 9
Retirement benefits (44) (47) (79)
Increase in inventories (38) (2) 4
Decrease/(increase) in trade and other receivables 60 36 (13)
Decrease in trade and other payables (47) (65) (9)
Increase in provisions 15 19
========================================================== =========== =========== ========
Cash generated from operations 183 171 427
Interest (17) (28) (76)
Tax paid (54) (60) (95)
========================================================== =========== =========== ========
Net cash inflow from operating activities 112 83 256
========================================================== =========== =========== ========
Headline operating cash-flow
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
=========================================================== =========== =========== ========
Net cash inflow from operating activities 112 83 256
Exclude
Interest 17 28 76
Tax paid 54 60 95
Cash outflow in respect of exceptional operating items 29 36 74
Pension deficit payments 34 49 82
Include
Expenditure on capitalised development, other intangible
assets and property, plant and equipment (44) (45) (94)
Disposals of property, plant and equipment in the ordinary
course of business 2 1
=========================================================== =========== =========== ========
Headline operating cash-flow 204 211 490
=========================================================== =========== =========== ========
Free cash-flow
Period Period Year
ended ended ended
31 January 31 January 31 July
2015 2014 2014
GBPm GBPm GBPm
========================================================= =========== =========== ========
Net cash inflow from operating activities 112 83 256
Expenditure on capitalised development, other intangible
assets and property, plant and equipment (44) (45) (94)
Disposals of property, plant and equipment 2 4 5
Investment in financial assets relating to pensions
financing (12) (12) (24)
========================================================= =========== =========== ========
Free cash-flow 58 30 143
Investment in other financial assets (1) (4)
Acquisition of businesses (1)
Disposal of businesses 3 3
Net cash-flow used in financing activities (82) (229) (313)
========================================================= =========== =========== ========
Net increase/(decrease) in cash and cash equivalents (25) (196) (172)
========================================================= =========== =========== ========
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 2014.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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