TIDMSMIN
RNS Number : 5010R
Smiths Group PLC
22 September 2017
News release
Smiths Group plc announces results for the year ended 31 July
2017
London, Friday 22 September 2017
Good progress in executing our strategy for sustainable
growth
Highlights
-- Group underlying revenue broadly in line with prior year, up 11% on a reported basis
-- Underlying headline operating profit up 3%, and up 16% on a reported basis
-- Margin expansion in all divisions combined with increased investment.
-- Operational excellence supporting strong cash conversion of 118%
-- Significant portfolio upgrading
o c.75% of the Group now well-positioned in growth markets
o Increased investment in all divisions to drive future growth,
up 60bps to 4.6% of sales
o Four non-core businesses sold
o Morpho Detection acquisition integration on track
-- Balance sheet remains strong with further investment capacity for sustainable growth
-- ROCE up 90bps with increases in all divisions
-- Headline basic EPS up 15% at 97.6 pence per share
-- Proposed final dividend of 29.70 pence per share. Full year dividend growth of 3%
Results for the year ended 31 July 2017
Continuing Operations
Headline* Statutory
--------------------------------------- -------------
2017 2016 Reported Underlying(#) 2017 2016
GBPm GBPm growth growth GBPm GBPm
------------------ ------ ------ -------- ------------- ------ -----
Revenue 3,280 2,949 11% (1)% 3,280 2,949
Operating profit 589 510 16% 3% 674 387
Operating margin 18.0% 17.3% 70bps 20.5% 13.1%
Pre-tax profit 528 451 17% 601 346
Free cash-flow 370 243 52%
Return on capital
employed 16.2% 15.3% 90bps
Continuing basic
EPS 97.6p 85.2p 15% 144.1p 65.6p
Dividend 43.25p 42.00p 3%
*In addition to statutory reporting, Smiths Group reports its
continuing operations on a headline basis. Definitions of headline
metrics, and information about the adjustments to statutory
measures are provided in the notes to the financial statements
(#) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Andy Reynolds Smith, Group Chief Executive, commented:
"Smiths has made good progress this year as we continue to
execute our strategy for sustainable growth. We are well underway
in repositioning the business through organic and inorganic
investment with approximately 75% of the Group now well positioned
in attractive markets. The disposal of four non-core businesses and
the acquisition of Morpho Detection has supported the significant
upgrading of the portfolio as we increasingly focus on scalable,
technology-differentiated leadership positions in our chosen
markets.
Underlying revenue was broadly in line with the prior year, with
growth across the portfolio offset by John Crane's oil & gas
business and in Smiths Medical due to market challenges in John
Crane and a delay in some new product launches in Smiths Medical.
The underlying quality of our businesses and the increasing impact
of the Smiths Excellence System supported a strong operating profit
performance. We delivered margin expansion in all divisions while
making increased, smarter investment in R&D and innovation.
This has delivered a strong pipeline of new products due to be
launched in FY2018 and beyond. Our relentless focus on operational
efficiency and cash generation is delivering results with
significant reductions in working capital and strong cash
conversion supporting continued investment for growth.
The progress delivered in executing our strategy ensures that
we're well positioned for the Group to return to growth in FY2018.
As in previous years, we expect Group performance to be weighted
towards the second half. Growth in John Crane's non-oil & gas
business, as well as an increase in aftermarket is expected to more
than offset the challenging market conditions in oil & gas. We
expect the introduction of new products during the year to support
a gradual improvement in Smiths Medical. In Smiths Detection we
anticipate a strong second half driven by air transportation, which
should generate good growth for the year as a whole. In Smiths
Interconnect, our focus on fewer, higher-growth end markets is
anticipated to support further good progress in this division.
Flex-Tek is expected to deliver continued steady growth.
We're confident that our focus on attractive growth markets,
increasing investment in technology and new products, our
established operating model for excellence and strong financial
framework will deliver long-term sustainable growth and attractive
returns."
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance. On a statutory basis, pre-tax profit from
continuing operations was GBP601m (2016: GBP346m) and continuing
basic earnings per share were 144.1p (2016: 65.6p).
See Accounting policies for an explanation of the presentation
of results and note 3 to the accounts for an analysis of
non-headline items.
Contact details
Investor enquiries
Jemma Spalton, Smiths Group
+44 (0)20 7004 1637
+44 (0)78 6739 0350
jemma.spalton@smiths.com
Marion Le Bot, Smiths Group
+44 (0)20 7004 1672
+44 (0)75 8315 4386
marion.lebot@smiths.com
Media enquiries
Andrew Lorenz, FTI Consulting
+44 (0)20 3727 1323
+44 (0)77 7564 1807
smiths@fticonsulting.com
Deborah Scott, FTI Consulting
+44 (0)203 727 1459
+44 (0)797 953 7449
smiths@fticonsulting.com
Presentation
The presentation slides and a live webcast of the analyst
presentation will be available at www.smiths.com/results at 09.00
(UK time) today. A recording of the webcast will be made available
from 13.00 (UK time).
Photography
Original high-resolution photography and broadcast quality video
is available to the media from the media contacts above or from
http://www.smiths.com/images.aspx.
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding our
intentions, beliefs or current expectations and those of our
officers, directors and employees concerning, amongst other things,
our results of operations, financial condition, liquidity,
prospects, growth, strategies and the business we operate. By their
nature, these statements involve uncertainty since future events
and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this document and, unless otherwise required by
applicable law, the Company undertakes no obligation to update or
revise these forward-looking statements. Nothing in this document
should be construed as a profit forecast. The Company and its
directors accept no liability to third parties in respect of this
document save as would arise under English law. This press release
contains brands that are trademarks and are registered and/or
otherwise protected in accordance with applicable law.
Group results overview
Headline revenue Headline operating Headline return
profit margin on capital employed
==================== ==================== ======================
Underlying Reported 2017 2016 2017 2016
growth(1) growth
==================== ========== ======== ========= ========= ========== ==========
John Crane (4)% 7% 23.0% 21.9% 22.9% 20.3%
Smiths Medical (3)% 9% 22.0% 21.4% 16.7% 15.7%
Smiths Detection 4% 31% 15.0% 13.0% 12.6% 11.9%
Smiths Interconnect 1% (3)% 13.4% 13.1% 11.4% 10.3%
Flex-Tek 3% 19% 19.3% 18.0% 35.8% 31.6%
==================== ========== ======== ========= ========= ========== ==========
Group (1)% 11% 18.0% 17.3% 16.2% 15.3%
==================== ========== ======== ========= ========= ========== ==========
Smiths Group delivered a good performance in 2017, with the
ongoing execution of our strategy to deliver sustainable
above-market growth in our chosen markets and achieve world-class
competitiveness, supported by our strong financial framework. We
made significant progress on the strategic repositioning of our
portfolio in attractive growth markets globally, and in improving
our overall market competitiveness by focusing on robust and
consistent execution across the Group to drive operational
excellence. Group investment in R&D increased to 4.6% of sales
(2016: 4.0%) to support future growth with the development of
innovative, commercially focused products.
Group headline revenue fell 1% on an underlying(1) basis with
growth in all divisions, offset by John Crane's oil & gas
activities and in Smiths Medical due to a delay in some new product
launches as we continue to refresh and expand our product
portfolio.
Group revenue grew 11% on a reported basis, benefiting from
foreign exchange, and in particular the strength of the US dollar,
partially offset by the net impact of the four divestitures and the
acquisition of Morpho Detection ('Morpho').
Group headline operating profit of GBP589m was up 3% on an
underlying(1) basis and up 16% on a reported basis. The Group's
operating profit margin increased 70 basis points on a reported
basis, with margin expansion in all divisions reflecting the focus
on operational efficiency and the upgrading of the portfolio.
The Group delivered strong cash generation with a cash
conversion rate of 118%. We made further progress in improving
stock turns during the year, with GBP52m cash in-flow from
inventory reductions. Free cash flow of GBP370m increased 52%. Net
debt of GBP967m reduced by GBP11m reflecting the benefits of the
disposal of non-core assets, strong operating profit conversion,
the reduction in working capital and a significantly lower pension
contribution compared to the prior year.
The headline tax charge for 2017 of GBP140m (2016: GBP113m)
represented an effective tax rate of 26.5% (2016: 25.0%). In 2017,
52% of the Group's revenue originated in the US, where a higher tax
rate exists. A tax rate of between 29.5% and 30.0% is expected in
the year ending 31 July 2018.
ROCE improved 90 basis points to 16.2% (2016: 15.3%) with
improvement in all divisions, offsetting the dilutive impact of the
acquisition of Morpho in April 2017.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Strategy implementation
In September 2016 we set out our ambition to establish Smiths as
one of the world's leading technology companies, based on a
strategy to deliver sustainable above-market growth in our chosen
markets and achieve world-class competitiveness, supported by our
strong financial framework. During 2017 we made good progress to
deliver against these strategic objectives.
Outperforming our chosen markets
Our priority through this year has been to better position the
business for growth through organic investment, with inorganic
development to accelerate our move towards scalable,
technology-differentiated leadership positions in our chosen
markets.
In the last 18 months we have moved the Group portfolio from
c.60% of our business units which are well positioned by market and
competitiveness to c.75%. To support this repositioning, during the
course of the year we divested four non-core assets generating
proceeds of GBP399m and completed the acquisition of Morpho. This
portfolio upgrading exchanged similar annual revenue that was
declining for growing revenue with a higher margin.
We are focusing the Group on higher growth market segments
globally to support the delivery of long-term organic growth. To
support this we have recently relocated one of our Group Executive
Committee members, Roland Carter, to Asia as Smiths Group Asia
President to drive our focus and pace on growing the Group's
activities in the region. John Crane has made further progress on
diversifying its end markets, with its non-oil & gas business
now representing around 45% of the division's revenue. Smiths
Medical continued its work to reposition its product portfolio with
increased investment in R&D supporting an accelerated rate of
new product launches in FY2018 and beyond. In addition to the
Morpho acquisition, Smiths Detection has secured a number of
world-first certifications and significant new contracts which will
support future growth, particularly in the high growth air
transportation market. At Smiths Interconnect we undertook a
significant repositioning to focus on fewer, higher growth markets.
We divested non-core assets accounting for c.40% of the division's
revenue, with the remaining core now a faster-growing leader in
high-speed, secure connectivity in markets such as space and
commercial aerospace. Post year-end, Flex-Tek's Tutco LLC business
signed an agreement to acquire the heating element division of
Osram, broadening its portfolio into faster growing engineered
heating solutions.
Achieving world-class competitiveness
Smiths Group's operating model is founded on strong and
consistent execution. It is critical that we enhance our
capabilities to ensure continuous improvement in everything we do.
This has been a key priority for us during the year as we continue
to focus on operational effectiveness, innovation and people.
The implementation of the Smiths Excellence System is focused on
building a culture of continuous improvement and sharing best
practice globally. Results are already being delivered with our
efforts on strategic sourcing delivering c.GBP40m of procurement
savings and improved speed and efficiency supporting working
capital reductions that delivered an GBP85m cash improvement, of
which GBP52m came from inventory. The reduction in working capital
and our focus on cash generation supported the strong cash
conversion of 118%.
We are energising the innovation agenda through the new
Group-wide i(3) innovation framework. This framework aims to
increase internal capability in both hardware and software and to
lay the foundations in the areas of software monetisation, machine
learning, Internet of Things (IoT), cloud platforms and high-speed
data transmission. i(3) has sponsored six important projects to
build digital and other technology capabilities that can be
leveraged across Smiths Group.
To help accelerate the Group's digital transformation we're
opening two Digital Forges, with one in Silicon Valley and another
planned in London. These forges are global centres of excellence,
helping us define new digital business models and build Group-wide
capability in areas of focus including artificial intelligence,
analytics and data security. This is not just about developing
digital technology to complement existing business models - it's
about defining new business models for the future and ensuring we
are ahead on the capabilities they will require.
Recognising that people are the true source of competitive
advantage, we continued to invest in our people and have
established a global strategic people plan across the Group to help
attract, retain, develop and engage the very best people and to
support the diversity of experience and best practice sharing
across the Group.
Strong Financial Framework
These strategic objectives are underpinned by our strong
financial framework.
We are inherently an asset light business with healthy
sustainable margins. Our financial discipline is evidenced by our
superior returns and strong balance sheet, allowing us to invest in
growth opportunities.
We are a strong cash flow generator and are making significant
improvements to the quality and consistency of our cash flow
generation, with our focus on operational efficiency and working
capital reduction.
Finally, we are very disciplined on how we use the cash that we
generate: we invest organically in future growth and we pursue
value creative acquisitions that support the accelerated
implementation of our strategy for growth and market
competitiveness, consistent with our strong financial framework on
a risk adjusted basis. In 2017, we deployed the cash we generated
to fund further organic investment, the dividend and self-funded
the acquisition of Morpho.
Our strong balance sheet ensures that we have significant
further investment capacity to support sustainable growth with Net
Debt to EBITDA of 1.4x at year end.
Dividend
The Board has a progressive dividend policy, with the aim of
increasing dividends in line with the long-term underlying growth
in earnings and cash flow. This policy will enable us to retain
sufficient cash flow to finance our investment in the drivers of
growth and to meet our financial obligations. In setting the level
of dividend payments, the Board will take into account prevailing
economic conditions and future investment plans, along with the
objective to maintain minimum dividend cover of around 2.0. The
Board is recommending a final dividend per share of 29.70 pence,
giving a total dividend for the year of 43.25 pence, an increase of
3% year-on-year. The final dividend will be paid on 17 November to
shareholders registered at close of business on 20 October. The
ex-dividend date is 19 October.
Outlook
The progress delivered in executing our strategy ensures that
we're well positioned for the Group to return to growth in FY2018.
As in previous years, we expect Group performance to be weighted
towards the second half. Growth in John Crane's non-oil & gas
business, as well as an increase in aftermarket is expected to more
than offset the challenging market conditions in oil & gas. We
expect the introduction of new products during the year to support
a gradual improvement in Smiths Medical. In Smiths Detection we
anticipate a strong second half driven by air transportation, which
should generate good growth for the year as a whole. In Smiths
Interconnect, our focus on fewer, higher-growth end markets is
anticipated to support further good progress in this division.
Flex-Tek is expected to deliver continued steady growth.
We're confident that our focus on attractive growth markets,
increasing investment in technology and new products, our
established operating model for excellence and strong financial
framework will deliver long-term sustainable growth and attractive
returns.
Business review
John Crane
John Crane is a leading provider of mission-critical engineered
solutions for global energy and process industries. John Crane's
revenue is currently comprised of 64% aftermarket sales. c.55% of
revenue is derived from the energy sector (downstream and midstream
oil & gas, power generation) with c.45% coming from other
process industries, including chemical, power generation, water and
wastewater, and pulp and paper. John Crane represents 27% of Group
revenue.
2017 2016 Reported Underlying(1)
GBPm GBPm growth growth
--------------------------- ----- ----- -------- -------------
Revenue 885 830 7% (4)%
Headline operating profit 204 181 12% (4)%
Headline operating margin 23.0% 21.9% 110bps
Statutory operating profit 190 151 26%
Return on capital employed 22.9% 20.3% 260bps
--------------------------- ----- ----- -------- -------------
Performance
Growth in John Crane's non-oil & gas and aftermarket revenue
was offset by declines in its oil & gas activities that were
impacted by the difficult conditions throughout global energy
markets. On an underlying(1) basis total revenue fell 4%. Reported
revenue increased 7%, with favourable foreign exchange translation
benefits partially offset by the impact of the divestment of the
Artificial Lift business that refocused John Crane on to its core
end markets and higher margin businesses.
John Crane continued its expansion into non-oil & gas
industries, which now represent c.45% of total revenue, with sales
up 2%, on an underlying(1) basis. This was offset by reduced oil
& gas underlying(1) sales, down 7% reflecting the challenging
market conditions. These market conditions also impacted total
Original Equipment ('OE') underlying(1) sales that fell 11% during
the year. We remain focused on increased investment in OE projects
and expanding the installed base with multiple new project
agreements secured during the year, particularly in the Middle
East. John Crane's large installed base and market leading service
offering ensured it is well positioned to satisfy the pent-up
aftermarket requirements for repairs, maintenance and upgrades,
driving 1% growth in underlying(1) aftermarket revenue. Aftermarket
represented 64% of total revenue during the year (2016: 59%). A
number of significant contract wins across oil & gas customers,
as well as smaller retrofit and upgrades with municipal water
companies and power plants led to an increased aftermarket order
book.
Revenue from higher-growth regions represented 24% of sales,
broadly in line with the prior year on an underlying(1) basis,
despite lower activity in certain parts of Latin America.
Headline operating profit was down 4% on an underlying(1) basis,
as lower sales and strategic investments in OE projects were only
partially offset by operational efficiencies. Headline operating
profit margin increased by 110 basis points to 23.0% benefiting
from the disposal of Artificial Lift and continued operational
efficiencies. The difference between statutory and headline
operating profit primarily reflects GBP7m restructuring and GBP9m
litigation costs net of the GBP4m gain on the sale of the
Artificial Lift business.
Return on capital increased 260 basis points to 22.9%,
principally due to reduced assets following the disposal of
Artificial Lift.
The divestiture of the Artificial Lift business in November 2016
significantly reduced John Crane's exposure to the commoditised
aspects of upstream oil & gas and was margin accretive. Prior
to the sale in November, Artificial Lift sales were GBP12m, with an
operating loss of GBP2m, and net assets were GBP24m. The business
performance of Artificial Lift up to the date of divestiture is
included within the financial summary and results presented
above.
Research and development expenditure increased by 17% to GBP10m
resulting in several new product launches, including:
- The introduction of a range of high performance aftermarket replacement filter elements
- An innovative new pipeline seal engineered to withstand the
harsh abrasive and clogging fluid properties of crude oil
- Two new coupling designs that enhance the protection of critical rotating equipment assets
Active areas of research include: the use of nano-materials to
enhance seal face performance, and investment in our dry gas seal
development facilities enabling ultra-high pressure gas seal
testing capability. We continue to further develop Sense, our
predictive diagnostics platform, with the installed base of around
30 field trial units, which has grown from 5 units in 2016,
demonstrating excellent performance results and a fast growing
customer demand for additional units.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Smiths Medical
Smiths Medical supplies high-quality, cost effective medical
devices and consumables that are vital to patient care globally.
Our portfolio incorporates established brands and strong positions
in select segments of the Infusion Systems, Vascular Access, and
Vital Care markets. 82% of Smiths Medical's sales are from
consumable and disposable products. Smiths Medical represents 29%
of Group revenue.
2017 2016 Reported Underlying(1)
GBPm GBPm growth growth
--------------------------- ----- ----- -------- -------------
Revenue 951 874 9% (3)%
Headline operating profit 209 187 12% 8%
Headline operating margin 22.0% 21.4% 60bps
Statutory operating profit 286 166 72%
Return on capital employed 16.7% 15.7% 100bps
--------------------------- ----- ----- -------- -------------
Performance
During the year Smiths Medical made progress on the ongoing
repositioning of its portfolio, and increased targeted investment
in its key product categories to address the historic
underperformance in its product portfolio to support core-market
category leadership. Underlying(1) revenue was down 3%, driven by
softer performances in Infusion Systems and Vascular Access where
the product portfolios are in the process of being revitalised and
expanded. Reported revenue grew 9%, with favourable foreign
exchange translation benefits partially offset by the impact of the
divestment of the Wallace product line and the underlying revenue
softness.
Underlying(1) revenue declined by 3% in Infusion Systems due to
lower sales in hospital infusion hardware and disposables, and a
slower than anticipated transition to advanced technology
ambulatory pumps in the home infusion market. Vascular Access
underlying(1) revenue declined by 4% as growth in cardio thoracic
was offset by declines in sharps safety and peripheral intravenous
catheters ('PIVC'). Underlying(1) revenue from Vital Care and
Specialty Products was down 2%, with continued growth in
tracheostomy and respiratory chronic obstructive pulmonary disease
('COPD') products being offset by declines in temperature
management and commoditised anaesthesia products.
Sales into higher-growth regions decreased 12% on an
underlying(1) basis. This decrease was driven by a one-off
regulatory situation in China which has now been resolved.
Headline operating profit grew 8% on an underlying(1) basis with
operational efficiencies and a medical device tax refund more than
offsetting the impact of the revenue declines and downward pricing
pressure on older products. The headline operating margin of 22.0%
was 60bps higher than the prior year. The difference between
statutory and headline operating profit reflects GBP16m of
restructuring charges, GBP6m amortisation of intangible assets, and
a GBP100m gain on the sale of Wallace.
Return on capital employed increased 100bps to 16.7%, reflecting
improved profitability that supported greater capital expenditure
in new product development, capacity and manufacturing
efficiency.
In November 2016 Smiths Medical divested the Wallace product
line as part of an ongoing programme to focus the portfolio on
scalable, technology differentiated leadership positions in its
chosen markets. Prior to the sale, Wallace revenue was GBP5m, with
operating profit of GBP4m and net assets sold were GBP32m. The
business performance of Wallace up to the date of divestiture is
included within the financial summary and results presented
above.
During the year Smiths Medical increased investment in research
and development to support future growth, with the development of
innovative, commercially focused products across the portfolio
generating a strong pipeline of products due to be launched in
FY2018 and beyond. Research and development expenditure increased
to GBP61m (2016: GBP52m) representing 6.4% of sales (2016: 6.0%).
Specific developments included:
- Within Infusion Systems, enhanced digital and information
security capabilities, in particular wirelessly enabling the CADD
line of ambulatory infusion pumps to connect to the PharmGuard
server software, which received FDA clearance post year end.
- Differentiated technology developments in Vascular Access
including the Closed Blood Sampling System, the Jelco Seriva and
ViaValve Winged Safety peripheral catheters, and the Delta Ven
Closed System catheter.
- A strong pipeline of new products in Vital Care, particularly
in the Tracheostomy product lines.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Smiths Detection
Smiths Detection is a leader in detection and identification of
security threats and contraband. It produces equipment for
customers in the air transportation, ports and borders, military
and urban security end-use markets. 39% of Smiths Detection's sales
are from the aftermarket. Smiths Detection represents 21% of Group
revenue.
2017 2016 Reported Underlying(1)
GBPm GBPm growth growth
--------------------------- ----- ----- -------- -------------
Revenue 687 526 31% 4%
Headline operating profit 103 69 50% 21%
Headline operating margin 15.0% 13.0% 200bps
Statutory operating profit 70 63 12%
Return on capital employed 12.6% 11.9% 70bps
--------------------------- ----- ----- -------- -------------
Performance
Smiths Detection's market-leading position in growing markets
drove an underlying(1) revenue increase of 4%, in particular in the
air transportation market and in the Asia Pacific region. Focus on
aftermarket supported growth in revenue and aftermarket revenue now
accounts for 39% of total revenue (2016: 37%). On a reported basis,
revenue grew by 31%. This included GBP62m revenue from the
acquisition of Morpho Detection ('Morpho'), which completed in
April 2017 and is now being integrated, as well as favourable
foreign exchange translation benefits.
Underlying(1) revenue in air transportation increased 9% with
strong growth in EMEA and Asia, including deliveries to Berlin
Brandenburg Airport and revenue from long-term contracts in Abu
Dhabi. Contract wins during the year include orders for 85 CT hold
baggage scanners for Amsterdam Airport Schiphol, London Gatwick
Airport, Cochin International Airport, EL AL Airlines and by the US
Transportation Security Administration ('TSA'). Post year end we
have also won two additional contracts for orders totalling 55 CT
scanners for Frankfurt Airport and Narita International Airport.
Future growth in air transportation was also underpinned by key
regulatory certifications achieved in the period. Revenue from
ports & borders decreased by 2% on an underlying(1) basis as
growth in EMEA, including major deliveries in Africa, Italy and the
Middle East, was offset by last year's strong comparator due to the
completion of a number of key programmes. Underlying(1) revenue in
military decreased by 2% as a number of US military programmes
started to wind down, partly offset by stronger growth in EMEA.
Urban security revenues were flat on an underlying(1) basis with
strong growth in Asia and sales to emergency responders in the US,
offset by lower sales elsewhere. We continued to experience
pressure on government budgets in all regions, which was most
marked in the US due to the effect of the Continuing Budget
Resolution.
Revenue from higher-growth regions represented 21% of sales
broadly in line with prior year on an underlying(1) basis.
Headline operating profit grew 21% on an underlying(1) basis,
reflecting the strong sales growth, increased focus on aftermarket
and improved business mix. This growth in profitability was despite
continued competitive pricing pressure on large programme contracts
and the ongoing challenge from lower-priced competitors in
unregulated parts of the market. Headline operating margin
increased by 200 basis points to 15.0%. Headline reported operating
profit improved 50%, including GBP8m profit contribution from the
Morpho acquisition and GBP10m of favourable foreign exchange
translation benefit. The difference between statutory and headline
operating profit includes a GBP4m restructuring charge, GBP8m
amortisation of intangibles and the GBP18m costs of the acquisition
of Morpho.
Return on capital employed improved 70 basis points to 12.6%
with higher profitability offsetting the dilutive impact of the
acquisition of Morpho.
The acquisition of Morpho completed on 6 April 2017 and
significantly enhances Smiths Detection's position in attractive
growth markets and expands the product portfolio. Regulatory
clearance for this acquisition was conditional on the
post-completion divestment of Morpho's explosive trace detection
business which completed on 7 July 2017. For the four months since
completion Morpho delivered headline revenue of GBP62m and headline
operating profit of GBP8m with good air transportation sales during
the second half of the year, including deliveries to the US TSA.
The integration of Morpho is progressing well and we are confident
that we will be able to drive even more benefits from the
combination than initially anticipated and expect the acquisition
to drive future margin expansion for the division overall.
Smiths Detection increased its investment in research and
development during the year, accounting for 7.1% of sales, or 6.0%
excluding customer funded R&D (2016: 5.2% and 4.7%
respectively). Specific highlights include:
- For the air transportation market, x-ray machines capable of
meeting the new EU/ECAC Standard C3, new versions of our
CheckPoint.Evo remote screening software and faster CT machines for
hold baggage screening.
- In the military market, the development of the next generation
of chemical warfare detection devices.
- In ports & borders we launched CORSYS, our large-scale
enterprise platform that connects an entire ports & border
security operation and supports the need for digital expansion in
this market.
- We continue to focus on software development, building on the
strengths of our existing business and Morpho's software expertise,
as well as value engineering projects to deliver competitive
products in cost-critical sectors as well as country-specific
versions of some of our most successful products.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Smiths Interconnect
Smiths Interconnect designs solutions for high-speed, secure
connectivity in reliability applications in the defence, aerospace,
space, rail, medical and semiconductor test markets. Smiths
Interconnect represents 13% of Group revenue.
2017 2016 Reported Underlying(1)
GBPm GBPm growth growth
--------------------------- ----- ----- -------- -------------
Revenue 419 435 (3)% 1%
Headline operating profit 56 57 (1)% 5%
Headline operating margin 13.4% 13.1% 30bps
Statutory operating profit 124 26 372%
Return on capital employed 11.4% 10.3% 110bps
--------------------------- ----- ----- -------- -------------
Performance
During the year Smiths Interconnect completed significant
strategic and structural change to focus on fewer, higher-growth
end markets. This included the divestments of the Power and
Microwave Telecoms businesses and a major reorganisation of the
business structure. In a period of considerable change the business
was able to deliver an underlying(1) revenue increase of 1%, driven
by growth in both the space and aerospace segments. On a reported
basis, revenue declined by 3%, as favourable foreign exchange
translation benefits were offset by the impact of the divestments.
Isolating the performance of the remaining core business,
underlying(1) revenue grew 3%.
Underlying(1) revenue grew by 20% in the space segment driven by
increased spending on Low Earth Orbit constellations and increased
content of the next generation high throughput satellites using
flexible digital payloads. In aerospace, underlying(1) revenue grew
by 44% driven by the continued deployment of our SATCOM antenna
products and connector and component solutions on military and
commercial airframes tied to new higher efficiency engines. The
strong, double digit growth in both these segments was offset by
small declines in the defence, semiconductor test and rail
segments. Underlying(1) revenue decline in defence of 4% reflected
a slowdown in deliveries on several key defence programmes
approaching end of life that was not offset by revenues from new
programme wins. The medical segment grew, with underlying(1)
revenue up 4% tied to increased volume at one of our leading
customers. Industry consolidation impacted the buying patterns of
several of our key customers in the semiconductor test segment with
underlying(1) revenue down 4%.
Operating profit grew 5% on an underlying(1) basis and the
headline operating margin increased 30bps to 13.4% driven by the
benefits of restructuring activity in the prior year combined with
a continued procurement and operational efficiency focus. The
difference between statutory and headline operating profit
primarily reflects a GBP72m profit on business disposals.
Return on capital employed increased 110 basis points to 11.4%
driven by the higher profitability during the year and the positive
mix impact of the two disposals.
During the course of the year Smiths Interconnect disposed of
both its Power and Microwave Telecoms businesses to concentrate on
its remaining core with scalable, top 3 leadership positions in its
chosen markets. Prior to the sale of the Power business in January
2017 sales were GBP47m, with headline operating profit of GBP7m and
net assets were GBP157m. Prior to the sale of the Microwave
Telecoms business in May 2017 sales were GBP55m, headline operating
profit was GBP1m and net assets were GBP41m. The performance of
both the Power and Microwave Telecoms businesses are included
within the financial summary and results presented above.
Total research and development expenditure of GBP28m was GBP2m
higher than the prior year, representing 6.7% of revenue. During
the year Smiths Interconnect's engineering function was realigned
with our strategic market segments of Defence, Aerospace, Space,
Rail, Medical and Semiconductor test, with significant emphasis on
driving improved time to market for new product development and an
increased focus on developing product platforms over bespoke
solutions. Product developments during the year included:
- For the space market, the development of the K2TVA Series to
our Thermopad(R) portfolio with an improved thick-film thermistor
technology to enable more temperature compensation and mitigate the
degradation at higher frequencies typical of this type of
technology.
- In semiconductor test we introduced a higher performance
version of our DaVinci test socket which can now be used to test
the most advanced CPU and GPU semiconductor devices.
- We also expanded our Outrigger resistor line with the CRHB 1216 product series, improving the power-to-size ratio of our resistor line, which has applications in most of our core markets.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Flex-Tek
Flex-Tek provides engineered components that heat and move
fluids and gases for the aerospace, medical, industrial,
construction and domestic appliance markets. Flex-Tek represents
10% of Group revenue.
2017 2016 Reported Underlying(1)
GBPm GBPm growth growth
--------------------------- ----- ----- -------- -------------
Revenue 338 284 19% 3%
Headline operating profit 65 51 28% 11%
Headline operating margin 19.3% 18.0% 130bps
Statutory operating profit 68 37 85%
Return on capital employed 35.8% 31.6% 420bps
--------------------------- ----- ----- -------- -------------
Performance
Flex-Tek delivered a strong performance with revenue up 3% on an
underlying(1) basis, driven by growth in all segments except Fluid
Management. On a reported basis, foreign exchange translation
benefits led to revenue growth of 19%.
Construction revenue grew 2% on an underlying(1) basis, with
both Gastite and Thermaflex benefiting from growth in the US
housing market and Gastite's increasing European presence. Heat
Solutions revenue increased by 12% on an underlying(1) basis,
principally due to growth in its engineered solutions. Flexible
Solutions underlying(1) revenue growth of 3% was driven by
increased demand from the medical sector, partially offset by a
decline in the floor care segment. Fluid Management revenue was
down 2% on an underlying(1) basis, primarily due to order timing
issues associated with a specific customer. The aerospace market
for components otherwise remained strong.
Headline operating profit increased 11% on an underlying(1)
basis to GBP65m and the headline operating margin increased 130bps
to 19.3%. Margins expanded in all segments with the exception of
Thermaflex due to pricing pressure. Improvements in profitability
were driven by positive mix in Heat Solutions, procurement savings
in Gastite and Flexible Solutions, and continued strong operating
cost control. The difference between statutory and headline
operating profit is primarily due to the GBP4m release in the
provision for Titeflex Corporation subrogation claims due to
increasing US discount rates.
Return on capital employed increased 420 basis points to 35.8%,
driven by improved profitability.
Since the year end Tutco LLC, part of the Heat Solutions
business, has signed an agreement to purchase the heating element
division of Osram, broadening its portfolio into faster growing
engineered heating solutions.
Total research and development expenditure remained broadly
consistent at 0.6% of sales, focused on market-leading innovative
solutions to meet specific customer needs. In particular:
- The continued development of 5000psi aerospace tubing for a broader range of applications.
- In Gastite, the further development of its technology leading
FlashShield product to improve ease of installation.
- Heat Solutions re-focused development of flexible heaters,
with a new production cell for this product now operational.
- Flexible Solutions expanded the use of its heated wire hose
technology in medical hose applications.
(1) Underlying excludes the effects of foreign exchange
translation and acquisitions but includes divested business for the
period they were owned in the reported financial year and adjusts
the prior financial year comparator as if the divested business
were owned for the same period in that financial year to aid
comparability
Financial review
Headline revenue
Reported revenue increased by GBP331m (11%) to GBP3,280m,
including the positive effects of foreign currency translation
(GBP421m) and the net impact of acquisitions and disposals
(-GBP65m). On an underlying basis, revenue declined 1% as growth in
Smiths Detection (+GBP22m; 4%), Smiths Interconnect (+GBP4m; 1%)
and Flex-Tek (+GBP11m; 3%) was offset by declines in John Crane
(-GBP33m; -4%) and Smiths Medical (-GBP29m; -3%).
Operating profit
Headline operating profit of GBP589m was GBP79m higher than
prior year (2016: GBP510m) including the positive effects of
foreign currency translation (GBP71m) and the net impact of
acquisitions and disposals (-GBP10m). On an underlying basis
operating profit increased 3%, with improvements in all divisions
except John Crane. Headline operating margin increased by 70 basis
points to 18.0% (2016: 17.3%), with improvements in all divisions
reflecting operational efficiencies.
John Crane margin improved by 110 basis points to 23.0% (2016:
21.9%) benefiting from the disposal of the Artificial Lift
business, favourable mix and operational efficiencies. Smiths
Medical increased 60 basis points to 22.0% (2016: 21.4%) as the
benefits of cost control, efficiencies and a medical device tax
refund, offset lower revenue and pricing pressures. Smiths
Detection delivered a 200 basis points improvement to 15.0% (2016:
13.0%), reflecting sales growth, increased focus on aftermarket and
favourable mix. Morpho contributed GBP8m of operating profit in the
period post acquisition. Smiths Interconnect improved operating
margin by 30 basis points to 13.4% (2016: 13.1%) due to increased
revenue, coupled with benefits from restructuring and a range of
productivity and efficiency initiatives. Operating margins in
Flex-Tek improved by 130 basis points to 19.3% (2016: 18.0%),
reflecting the impact of increased revenue and efficiencies.
Central costs increased by GBP13m including investment in corporate
development activities, resources to support the Smiths Excellence
System, and investment in people development, to build capabilities
to support sustainable growth.
Operating profit on a statutory basis, after taking account of
the items excluded from the headline figures, was GBP674m (2016:
GBP387m) - see notes 3 and 28 to the accounts for information on
the excluded items. The increase was driven by the GBP175m profit
on disposal of businesses during the year, coupled with a decrease
in charges for legacy liabilities and no impairment charges being
recorded in the current year.
Finance costs
Headline finance costs during the year totalled GBP61m, GBP2m
higher than the previous year. This was principally due to adverse
foreign exchange movements, partly offset by lower interest payable
due to the repayment of the higher rate GBP150m 7.25% Eurobond
which matured in June 2016. Statutory finance costs totalled GBP73m
(2016: GBP41m).
Non-headline items relating to continuing activities excluded
from headline profit before tax
These items amounted to a gain of GBP73m compared to a charge of
GBP105m in 2016. They comprised:
-- GBP175m gain on the four disposals made in the year: GBP4m on
John Crane Artificial Lift, GBP100m on Smiths Medical Wallace,
GBP22m on Smiths Interconnect Power and GBP50m on Smiths
Interconnect Microwave Telecoms;
-- GBP37m charge for restructuring (2016: GBP37m), which
included GBP33m in respect of the Fuel for Growth programme which
completed in the year (2016: GBP37m) and GBP4m of restructuring
costs associated with the integration of Morpho Detection and the
existing Smiths Detection business. The four-year Fuel for Growth
programme has now concluded with total spend of GBP185m and
cumulative benefits to date totalling GBP70m. Ongoing restructuring
costs will be recorded in headline operating profit in 2018;
-- GBP19m charge for acquisition costs (2016: GBP6m);
-- GBP9m net charge (2016: GBP7m) in connection with John Crane, Inc. asbestos litigation;
-- GBP4m credit (2016: GBP11m charge) in connection with Titeflex Corporation litigation;
-- GBP9m charge for changes to post retirement benefits and
administration costs (2016: GBP16m);
-- GBPnil impairment of goodwill, property, plant and equipment
and trade investments (2016: GBP31m); amortisation of intangible
assets acquired in business combinations of GBP17m (2016: GBP15m).
The ongoing amortisation charge relates principally to technology
and customer relationships;
-- GBP3m charge for the unwind of fair value uplift of inventory
on the acquisition balance sheet (2016: GBPnil)
-- GBP6m charge related to the unwind of discounts on provisions (2016: GBP5m)
-- GBPnil fair value gain on contributing government bonds to a pension scheme (2016: GBP19m);
-- GBP8m of financing losses (2016: GBP1m gain); and
-- GBP2m gain on retirement benefit finance (2016: GBP3m gain).
Discontinued operations
Discontinued operations comprised the Morpho Detection explosive
trace business generating a loss after tax of GBP8m in the year
(2016: GBPnil).
Taxation
The principles of the Group's approach to taxation remain
unchanged. The Group seeks to manage the cost of taxation in a
responsible manner to enhance its competitive position on a global
basis while managing its relationships with tax authorities on the
basis of full disclosure, co-operation and legal compliance. A
semi--annual tax report is reviewed by the Audit Committee to
monitor compliance with these principles to ensure the Group
delivers its tax objectives. The headline tax charge for 2017 of
GBP140m (2016: GBP113m) represented an effective rate of 26.5% on
the headline profit before taxation (2016: 25.0%). On a statutory
basis, the tax charge on continuing activities was GBP29m (2016:
GBP85m), representing an effective tax rate of 4.8% (2016: 24.6%),
impacted by the recognition of UK deferred tax assets and gains on
sale of businesses which were either non-taxable or sheltered by
previously unrecognised losses.
The Group aims to utilise global manufacturing, research and
development and other tax incentives, to allocate its capital in
the most tax efficient manner where the regulatory environment
allows, and to ensure the effective and timely management of its
tax filings and compliance.
In 2017, the Group paid GBP82m in direct corporate tax on
profits (2016: GBP62m) and GBP116m in employment and other taxes
(2016: GBP105m). The Group additionally collected GBP224m on behalf
of tax authorities, primarily from employees but also other
indirect taxes such as VAT (2016: GBP210m). The total amount of tax
paid over to tax authorities during the year totalled GBP422m
(2016: GBP377m). A rate of between 29.5% and 30.0% is expected in
the year ending 31 July 2018.
Earnings per share
Basic headline earnings per share from continuing activities
were 97.6p (2016: 85.2p). The reported 15% increase was driven by
favourable foreign exchange movements and higher operating profit
partly offset by an increase in the effective tax rate to 26.5%
from 25.0% in 2016.
On a statutory basis, the basic earnings per share from
continuing activities was 144.1p (2016: 65.6p), reflecting the
profit on disposal of businesses of GBP175m and lower non headline
costs compared to 2016.
Cash generation and net debt
Operating cash generation remained strong, with headline
operating cash-flow of GBP695m (2016: GBP520m), representing 118%
(2016: 102%) of headline operating profit (see note 29 to the
accounts for a reconciliation of headline operating cash and free
cash flow to statutory cash-flow measures). Movement in working
capital was an inflow of GBP85m (2016: inflow of GBP9m) reflecting
a reduction in inventory and receivables.
Total free cash-flow, stated after all legacy costs, interest
and taxes but before acquisitions, divestitures and dividends,
increased by GBP127m to GBP370m (2016: GBP243m), reflecting the
higher operating cash generated and reduced pension payments.
Continued strong cash generation is expected in 2018.
On a statutory basis, net cash inflow from operations was
GBP479m (2016: GBP358m).
Net debt at 31 July 2017 was GBP967m, a decrease of GBP11m in
the year. On an underlying basis, excluding the impact of foreign
exchange movements, net debt reduced by GBP72m, reflecting strong
operational cash generation and the Morpho acquisition being
largely financed from business disposals.
At the end of the period, the Group had gross debt of GBP1,749m
(2016: GBP1,409m) and cash reserves of GBP782m (2016: GBP431m). Of
this gross debt, GBP151m (2016: GBP270m) falls due for repayment
within one year including the $175m 7.37% Notes due in February
2018. On 11 August 2017, the Group prepaid these Notes in full from
cash resources.
The maturity profile of the major tranches of the debt in issue
is as follows;
2018 - GBP133m ($175m 7.37% bond)*
2019 - GBP189m ($250m 7.20% bond)
2022 - GBP301m ($400m 3.625% bond)
2023 - GBP533m (EUR600m 1.25% bond)
2027 - GBP574m (EUR650m 2.00% bond)
*prepaid in August 2017
Acquisitions and Disposals
On 6 April 2017 we completed our acquisition of Morpho Detection
for final consideration of GBP590m. A condition of this transaction
receiving regulatory approval, was the subsequent disposal of
Morpho Detection's explosive trace detection business. This was
sold to OSI Systems, Inc. on 7 July 2017 for GBP63m.
The Group has completed the disposal of a number of non-core
businesses: our Artificial Lift business in John Crane for GBP29m
in November 2016; our Wallace business in Smiths Medical for
GBP132m in November 2016; our Power business in Smiths Interconnect
for GBP164m in January 2017; and our Microwave Telecoms business in
Smiths Interconnect for GBP85m in May 2017.
Dividend
Dividends paid in the year on ordinary shares amounted to
GBP167m (2016: GBP163m). The Board has recommended a final dividend
of 29.70 pence per share to be paid on 17 November 2017 to
shareholders on the register at close of business on 20 October.
When added to the 2017 interim dividend of 13.55p per share paid on
28 April 2017, the 2017 full year dividend of 43.25p represents an
increase of 3.0% on the 2016 full year dividend of 42.0 pence per
share.
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 July 2017 and evaluating liabilities at
period-end AA corporate bond interest rates.
The tables below disclose the net status across a number of
individual plans. Where any individual plan shows a surplus under
IAS 19, this is disclosed on the balance sheet as a retirement
benefit asset. The IAS 19 surplus of any one plan is not available
to fund the IAS 19 deficit of another plan. The net pension
position has improved to a surplus of GBP224m at 31 July 2017 from
a surplus of GBP80m at 31 July 2016, benefitting from GBP105m of
contributions in the year, the matching between assets and
liabilities and changes in the UK and US mortality assumptions. 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 is shown below:
31-Jul-17 31-Jul-16
----------------------- ---------- ----------
Funded plans
UK plans - funding
status 111% 109%
US plans - funding
status 91% 69%
Other plans - funding
status 81% 88%
----------------------- ---------- ----------
Total - funding
status 109% 105%
----------------------- ---------- ----------
31-Jul-17 31-Jul-16
----------------------- ---------- ----------
Surplus / (deficit)
Funded plans 354 217
Unfunded plans (130) (137)
----------------------- ---------- ----------
Total surplus /
(deficit) 224 80
----------------------- ---------- ----------
Retirement benefit
assets 390 328
Retirement benefit
liabilities (166) (248)
----------------------- ---------- ----------
224 80
----------------------- ---------- ----------
The approximate pension membership for the three main schemes at
31 July 2017 is set out in the table below:
Pension scheme members
as at 31 July 2017
SIPS TIGPS US plans Total
---------------- -------- ------- --------- -------
Deferred
active 276 161 2,090 2,527
Deferred 9,880 11,496 2,922 24,298
Pensioners 13,023 15,761 384 29,168
---------------- -------- ------- --------- -------
Total 23,179 27,418 5,396 55,993
---------------- -------- ------- --------- -------
Goodwill and intangibles
Goodwill from acquisitions has been capitalised since 1998.
Until 1 August 2004 it was amortised over a maximum 20-year period.
Under IFRS goodwill is no longer amortised but instead is subject
to annual reviews to test for impairment.
Intangible assets arising from business combinations ('acquired
intangibles') are assessed at the time of acquisition in accordance
with IFRS 3 (Revised) and are amortised over their expected useful
life. This amortisation is excluded from the measure of headline
profits. When indicators of impairments are identified, the
intangible assets are tested and any impairment identified is
charged in full. The impairment charge is excluded from the measure
of headline profits. Other intangible assets comprise development
costs or software which are capitalised as intangible assets as
required by IFRS. Amortisation charged on these assets is deducted
from headline profits.
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-related
assets and liabilities net of tax, litigation provisions relating
to exceptional items net of tax, and net debt. ROCE increased 90
basis points to 16.2% (2016: 15.3%) as a result of increased
profitability across the group.
Exchange rates
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
year-end rates. The principal exchange rates, expressed in terms of
the value of sterling, are shown in the following table.
31 July 31 July
2017 2016
---------------- ------- ------- -------------------
Average rates:
Dollar strengthened
US dollar 1.27 1.46 13%
Euro strengthened
Euro 1.16 1.32 12%
Year-end rates:
US dollar 1.32 1.32 No change
Euro strengthened
Euro 1.12 1.19 6%
---------------- ------- ------- -------------------
Financial information
The financial information in this preliminary announcement which
comprises the consolidated income statement, consolidated statement
of comprehensive income, consolidated balance sheet, consolidated
cash-flow statement, consolidated statement of changes in equity,
accounting policies and related notes does not constitute statutory
accounts within the meaning of Section 434 of the Companies Act
2006.
The statutory accounts for the year ended 31 July 2016 have been
filed with the Register of Companies. The auditors have reported on
those accounts and on the statutory accounts for the year ended 31
July 2017, which will be filed with the Registrar of Companies
following the Annual General Meeting. Both the audit reports were
unqualified and did not contain any statement under section 498 of
the Companies Act 2006.
_______________________________________________________
Consolidated income statement
Year ended 31 Year ended 31
July 2017 July 2016
=============================== ===============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ===== ======== ============ ======= ======== ============ =======
Continuing operations
Revenue 1 3,280 3,280 2,949 2,949
Cost of sales (1,755) (1,755) (1,600) (1,600)
=============================== ===== ======== ============ ======= ======== ============ =======
Gross profit 1,525 1,525 1,349 1,349
Sales and distribution
costs (449) (449) (403) (403)
Administrative expenses (487) (90) (577) (436) (139) (575)
Other operating income 16 16
Profit on business
disposal 28 175 175
=============================== ===== ======== ============ ======= ======== ============ =======
Operating profit 2 589 85 674 510 (123) 387
=============================== ===== ======== ============ ======= ======== ============ =======
Interest receivable 5 5 3 3
Interest payable (66) (66) (62) (62)
Other financing (losses)/gains (14) (14) 15 15
Other finance income
- retirement benefits 8 2 2 3 3
=============================== ===== ======== ============ ======= ======== ============ =======
Finance costs 4 (61) (12) (73) (59) 18 (41)
=============================== ===== ======== ============ ======= ======== ============ =======
Continuing operations
- Profit before taxation 528 73 601 451 (105) 346
=============================== ===== ======== ============ ======= ======== ============ =======
Taxation 6 (140) 111 (29) (113) 28 (85)
=============================== ===== ======== ============ ======= ======== ============ =======
Continuing operations
- Profit for the year 388 184 572 338 (77) 261
=============================== ===== ======== ============ ======= ======== ============ =======
Discontinued operations
(Loss)/profit - discontinued
operations 27 (8) (8)
=============================== ===== ======== ============ ======= ======== ============ =======
Profit for the year 388 176 564 338 (77) 261
=============================== ===== ======== ============ ======= ======== ============ =======
Profit for the year
attributable to
Smiths Group shareholders
- continuing operations 386 184 570 336 (77) 259
Smiths Group shareholders
- discontinued operations (8) (8)
Non-controlling interests
in respect of continuing
operations 2 2 2 2
=============================== ===== ======== ============ ======= ======== ============ =======
388 176 564 338 (77) 261
=============================== ===== ======== ============ ======= ======== ============ =======
Earnings per share 5
Basic 142.1p 65.6p
Basic - continuing 144.1p 65.6p
Diluted 140.3p 64.9p
Diluted - continuing 142.3p 64.9p
=============================== ===== ======== ============ ======= ======== ============ =======
Consolidated statement of comprehensive income
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
=============================================== ====== ====== ======
Profit for the period 564 261
=============================================== ====== ====== ======
Other comprehensive income
Actuarial gains/(losses) on retirement
benefits 8 55 (40)
Taxation recognised on actuarial movements 6 (13) 10
=============================================== ====== ====== ======
Other comprehensive income and expenditure
which will not be reclassified to the
consolidated income statement 42 (30)
Other comprehensive income which will
be reclassified and reclassifications
Exchange gains 25 420
Cumulative exchange gains recycled on
business disposals (41)
Fair value gains/(losses) and reclassification
adjustments
- deferred on available for sale financial
assets 1 (2)
- reclassified to income statement on
available for sale financial assets 4 (19)
- deferred in the period on cash-flow
and net investment hedges (14) (238)
- reclassified to income statement on
cash-flow and net investment hedges 25
Taxation recognised on fair value gains 6 (1)
=============================================== ====== ====== ======
Total other comprehensive income 37 131
Total comprehensive income 601 392
=============================================== ====== ====== ======
Attributable to
Smiths Group shareholders 600 386
Non-controlling interests 1 6
=============================================== ====== ====== ======
601 392
=============================================== ====== ====== ======
Consolidated balance sheet
31 July 31 July
2017 2016
Notes GBPm GBPm
======================================= ===== ======= =======
Non-current assets
Intangible assets 10 2,015 1,742
Property, plant and equipment 12 315 315
Financial assets - other investments 16 21 9
Retirement benefit assets 8 390 328
Deferred tax assets 6 272 246
Trade and other receivables 14 57 51
Financial derivatives 19 56 29
======================================= ===== ======= =======
3,126 2,720
Current assets
Inventories 13 452 478
Current tax receivable 6 62 62
Trade and other receivables 14 722 745
Cash and cash equivalents 17 782 431
Financial derivatives 19 13 13
======================================= ===== ======= =======
2,031 1,729
======================================= ===== ======= =======
Assets of business held for sale 27 24
======================================= ===== ======= =======
Total assets 5,157 4,473
======================================= ===== ======= =======
Non-current liabilities
Financial liabilities
- borrowings 17 (1,598) (1,139)
- financial derivatives 19 (2) (1)
Provisions for liabilities and charges 22 (283) (305)
Retirement benefit obligations 8 (166) (248)
Deferred tax liabilities 6 (111) (95)
Trade and other payables 15 (26) (29)
======================================= ===== ======= =======
(2,186) (1,817)
Current liabilities
Financial liabilities
- borrowings 17 (151) (270)
- financial derivatives 19 (10) (19)
Provisions for liabilities and charges 22 (85) (94)
Trade and other payables 15 (576) (536)
Current tax payable 6 (45) (72)
======================================= ===== ======= =======
(867) (991)
======================================= ===== ======= =======
Liabilities of business held for sale 27 (5)
======================================= ===== ======= =======
Total liabilities (3,053) (2,813)
======================================= ===== ======= =======
Net assets 2,104 1,660
======================================= ===== ======= =======
Shareholders' equity
Share capital 23 148 148
Share premium account 355 352
Capital redemption reserve 6 6
Revaluation reserve 1 1
Merger reserve 235 235
Retained earnings 1,634 1,205
Hedge reserve 25 (290) (301)
======================================= ===== ======= =======
Total shareholders' equity 2,089 1,646
Non-controlling interest equity 15 14
======================================= ===== ======= =======
Total equity 2,104 1,660
======================================= ===== ======= =======
Consolidated statement of changes in equity
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 July 2016 500 242 1,205 (301) 1,646 14 1,660
========================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 562 562 2 564
Other comprehensive
income
Actuarial gains
on retirement benefits
and related tax 42 42 42
Exchange losses (15) (15) (1) (16)
Fair value gains/(losses)
and related tax 11 11 11
========================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period 589 11 600 1 601
Transactions relating
to ownership interests
Exercises of share
options 23 3 3 3
Taxation recognised
on share options 6 3 3 3
Purchase of own
shares 25 (10) (10) (10)
Dividends
- equity shareholders 24 (167) (167) (167)
Share-based payment 9 14 14 14
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 July 2017 503 242 1,634 (290) 2,089 15 2,104
========================== ====== ======== ========= ========= ======== ============== =============== =======
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 July 2015 497 242 743 (63) 1,419 9 1,428
======================== ===== ======== ========= ========= ======== ============== =============== =======
Profit for the year 259 259 2 261
Other comprehensive
income
Actuarial losses
on retirement benefits
and related tax (30) (30) (30)
Exchange gains 416 416 4 420
Fair value losses (21) (238) (259) (259)
======================== ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the year 624 (238) 386 6 392
Transactions relating
to ownership interests
Exercises of share
options 23 3 3 3
Purchase of own
shares 25 (8) (8) (8)
Dividends
- equity shareholders 24 (163) (163) (163)
- non-controlling
interest (1) (1)
Share-based payment 9 9 9 9
======================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 July 2016 500 242 1,205 (301) 1,646 14 1,660
======================== ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
============================================== ===== ====== ======
Net cash inflow from operating activities 29 479 358
Cash-flows from investing activities
Expenditure on capitalised development (37) (23)
Expenditure on other intangible assets 10 (8) (11)
Purchases of property, plant and equipment 12 (62) (74)
Disposals of property, plant and equipment 9 1
16,
Investment in financial assets 27 (18) (9)
Acquisition of businesses 26 (580) (8)
Disposals of businesses - continuing
operations 28 399
Disposals of businesses - discontinued
operations 27 63
============================================== ===== ====== ======
Net cash-flow used in investing activities (234) (124)
Cash-flows from financing activities
Proceeds from exercise of share options 23 3 3
Purchase of own shares 25 (10) (8)
Dividends paid to equity shareholders 24 (167) (163)
Cash inflow/(outflow) from matured derivative
financial instruments (14)
Increase in new borrowings 17 546 1
Reduction and repayment of borrowings 17 (256) (151)
============================================== ===== ====== ======
Net cash-flow used in financing activities 116 (332)
Net increase/(decrease) in cash and cash
equivalents 361 (98)
Cash and cash equivalents at beginning
of year 430 495
Exchange differences (10) 33
============================================== ===== ====== ======
Cash and cash equivalents at end of year 17 781 430
============================================== ===== ====== ======
Cash and cash equivalents at end of year
comprise
- cash at bank and in hand 226 161
- short-term deposits 556 270
- bank overdrafts (1) (1)
============================================== ===== ====== ======
781 430
============================================== ===== ====== ======
Included in cash and cash equivalents
per the balance sheet 782 431
Included in overdrafts per the balance
sheet (1) (1)
============================================== ===== ====== ======
781 430
============================================== ===== ====== ======
Reconciliation of net cash-flow to movement in net debt
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
=============================================== ===== ====== ======
Net debt at start of year 17 (978) (818)
=============================================== ===== ====== ======
Net increase/(decrease) in cash and cash
equivalents 361 (98)
Increase in borrowings (546) (1)
Reduction and repayment of borrowings 256 151
=============================================== ===== ====== ======
Movement in net debt resulting from cash-flows 71 52
Capitalisation, interest accruals and
unwind of capitalisation fees (4) (2)
Movement from fair value hedging 5 (23)
Exchange differences (61) (187)
=============================================== ===== ====== ======
Movement in net debt in the year 11 (160)
=============================================== ===== ====== ======
Net debt at end of year 17 (967) (978)
=============================================== ===== ====== ======
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with the Companies
Act 2006 applicable to companies reporting under International
Financial Reporting Standards (IFRS) and International Financial
Reporting Interpretations Committee (IFRS IC) interpretations, as
adopted by the European Union, on a going concern basis and under
the historical cost convention modified to include revaluation of
certain financial instruments, share options and pension assets and
liabilities, held at fair value as described below.
The accounting policies adopted are consistent with those of the
previous financial year.
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 GBP24m (2016: GBP42m) has been recognised
in the period in respect of contracts in progress at the period end
with a total expected value of GBP48m (2016: GBP175m) and
cumulative revenue recognised to date of GBP36m (2016: GBP137m). A
5% reduction in the proportion of the contract activity recognised
in the current period would have reduced operating profit by less
than GBP1m for both Smiths Detection and Smiths Interconnect (2016:
less than GBP1m).
Smiths Detection also has multi-year contractual arrangements
for the sale of goods and services. Where these contracts have
separately identifiable components with distinct patterns of
delivery and customer acceptance, revenue is accounted for
separately for each identifiable component. Judgement is applied in
the identification of the components of the contract, and the
allocation of contract revenue to each component.
Smiths Medical has rebate arrangements in place with some
distributors in respect of sales to end customers where sales
prices have been negotiated by Smiths Medical. Rebates are
estimated based on the level of discount derived from sales data
from distributors, the amount of inventory held by distributors and
the time lag between the initial sale to the distributor and the
rebate being claimed. The rebate accrual at 31 July 2017 was GBP27m
(2016: GBP28m).
Contract profitability
Smiths Detection has multi-year contractual arrangements for the
sale of goods and services. Margins achieved on these contracts can
reflect the impact of commercial decisions made in different
economic circumstances. In addition, contract delivery is subject
to commercial and technical risks which can affect the outcome of
the contract. At 31 July 2017 there was GBPnil (2016: GBP4m)
balance sheet liability in respect of ongoing onerous contracts and
no other contracts had been assessed as at significant risk of
becoming onerous.
Taxation
The Group has recognised deferred tax assets of GBP129m (2016:
GBP87m) relating to losses and GBP112m (2016: GBP120m) relating to
the John Crane, Inc. and Titeflex Corporation litigation
provisions. The recognition of assets pertaining to these items
involves judgement by management as to the likelihood of
realisation of these deferred tax assets. This is based on a number
of factors, which seek to assess the expectation that the benefit
of these assets will be realised, including expected future levels
of operating profit, expenditure on litigation, pension
contributions and the timing of the unwind of other tax positions.
It has been concluded that there are sufficient taxable profits in
future periods to support recognition. A 5% reduction in expected
future operating profits would reduce the level of deferred tax
recognised by GBP8m (2016: GBP9m), and a 5% increase in expected
future operating profits would increase the level of deferred tax
recognised by GBP11m (2016: GBP11m). Further detail on the Group's
deferred taxation position is included in note 6.
Retirement benefits
The consolidated financial statements include costs in relation
to, and provision for, retirement benefit obligations. The costs
and the present value of any related pension assets and liabilities
depend on such factors as life expectancy of the members, the
returns that plan assets generate and the discount rate used to
calculate the present value of the liabilities. The Group uses
previous experience and independent actuarial advice to select the
values of critical estimates. The estimates, and the effect of
variances in key estimates, are disclosed in note 8.
At 31 July 2017 there is a retirement benefit asset of GBP390m
(2016: GBP328m), principally relating to UK schemes, which arises
from the rights of the employers to recover the surplus at the end
of the life of the scheme. If the pension schemes were wound up
while they still had members, the schemes would need to buy out the
benefits of all members. The buyouts would cost significantly more
than the present value of the scheme liabilities calculated in
accordance with IAS 19: Employee benefits.
Receivables provisions
If the carrying value of any receivable is higher than the fair
value, the Group makes provisions writing down the balance to its
fair value. The fair value of receivables is considered
individually for each customer and incorporates past experience and
progress with collecting receivables.
At 31 July 2017 the gross value of receivables partly provided
for or more than three months overdue was GBP73m (2016: GBP83m) and
there were provisions of GBP33m (2016: GBP31m) against these
receivables. Consequently, these receivables were carried at a net
value of GBP40m (2016: GBP52m). See note 14 for disclosures on
credit risk and ageing of trade receivables.
Inventory provisions
The calculation of inventory provisions requires judgement by
management of the expected value of future sales. If the carrying
value of inventory is higher than the expected recoverable value,
the Group makes provisions writing inventory down to its net
recoverable value. Inventory is initially assessed for impairment
by comparing inventory levels to recent utilisation rates and
carrying values to historical selling prices. A detailed review is
completed for inventory lines identified in the initial assessment
considering sales activity, order flow, customer contracts and
current selling prices.
At 31 July 2017, there were provisions of GBP55m (2016: GBP70m)
against gross inventory of GBP507m (2016: GBP548m). See note 13 for
a breakdown of inventory.
A 10% increase in the proportion of raw materials provided for
would increase the provision by GBP17m (2016: GBP20m) and a 10%
increase in the proportion of finished goods provided for would
increase the provision by GBP22m (2016: GBP23m).
Impairment
Goodwill is tested at least annually for impairment and other
assets, including intangible assets acquired in business
combinations, are tested if there are any indications of
impairment, in accordance with the accounting policy set out below.
The recoverable amounts of cash generating units and assets are
determined based on value in use calculations unless future trading
projections cannot be adjusted to eliminate the impact of a major
restructuring. The value in use calculations require the use of
estimates including projected future cash-flows and other future
events.
See note 11 for details of the critical assumptions made,
including the forecast earnings and valuation multiples for Morpho
Detection and disclosures on the sensitivity of the impairment
testing to these key assumptions, including details of the changes
in assumptions which would be required to trigger an impairment in
Morpho Detection.
Provisions for liabilities and charges
As previously reported, John Crane, Inc. ("JCI"), a subsidiary
of the Group, is currently one of many co-defendants in litigation
relating to products previously manufactured which contained
asbestos. Provision of GBP237m (2016: GBP252m) has been made for
the future defence costs which the Group is expected to incur and
the expected costs of future adverse judgments against JCI. Whilst
well-established incidence curves can be used to estimate the
likely future pattern of asbestos related disease, 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. 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.
JCI takes account of the advice of an expert in asbestos
liability estimation in quantifying the expected costs. The
following judgements were made in preparing the provision
calculation:
-- the period over which the expenditure can be reliably
estimated is judged to be ten years, based on past experience
regarding significant changes in the litigation environment that
have occurred every few years and on the amount of time taken in
the past for some of those changes to impact the broader asbestos
litigation environment. See note 22 for a sensitivity showing the
impact on the provision of reducing or increasing this time
horizon;
-- the future trend of legal costs; the rate of future claims
filed; the rate of successful resolution of claims; and the average
amount of judgments awarded have been projected based on the past
history of JCI claims and well-established tables of asbestos
incidence projections, since this is the best available evidence.
Claims history from other defendants is not used to calculate the
provision because JCI's defence strategy generates a significantly
different pattern of legal costs and settlement expenses. See note
22 for a sensitivity showing the range of expected future
spend.
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
GBP84m (2016: GBP94m) has been made for the costs which the Group
is expected to incur in respect of these claims. In preparing the
provision calculation, judgements were made about the impact of
safe installation initiatives on the level of future claims. See
note 22 for a sensitivity showing the impact on the provision of
reducing or increasing the expected impact. 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.
Presentation of results
Non-statutory performance measures, described as 'headline', are
presented to give a clear and consistent presentation of the
performance of the Group's ongoing trading activity. These measures
are used by management to measure and monitor performance. Headline
measures exclude amounts relating to costs of acquisitions and
disposals, amortisation of acquisition fair value adjustments,
including the recognition of acquired intangibles, impairments,
legacy liabilities, significant restructuring, material one-off
items and certain re-measurements. Smiths Group plc presents its
results in the income statements with items excluded from headline
measures in a separate column. See note 1 for divisional headline
operating profit, note 3 for a breakdown of the items excluded from
headline operating profit and headline finance costs and note 30
for information on the calculation of return on capital employed
and credit metrics.
In addition, the Group reports underlying growth rates for sales
and profit measures, which exclude the impact of acquisitions and
divestments and the effects of foreign exchange translation, by
making the following adjustments:
-- Retranslate the comparative to current year exchange rates
before calculating growth measures
-- Exclude acquisitions from the current period for the first 12
months of ownership; and
-- Exclude the divested businesses performance after the date of
disposal from comparative period.
For the convenience of users, supplementary primary financial
statements translated into US dollars have been presented after the
Group financial record. Assets and liabilities have been translated
into US dollars at the exchange rate at the date of that balance
sheet and income, expenses and cash-flows are translated at average
exchange rates for the period.
Accounting policies
Basis of consolidation
The consolidated accounts incorporate the financial statements
of Smiths Group plc (the 'Company') and its subsidiary
undertakings, together with the Group's share of the results of its
associates. A list of the subsidiaries of Smiths Group plc is
provided on pages 207 to 214.
Subsidiaries are all entities controlled by the Company.
Subsidiaries are fully consolidated from the date on which control
is obtained by the Company to the date that control ceases.
Associates are entities over which the Group has significant
influence but does not control, generally accompanied by a share of
between 20% and 50% of the voting rights. Investments in associates
are accounted for using the equity method.
Foreign currencies
The Company's presentational currency is sterling. The financial
position of all subsidiaries and associates that have a functional
currency different from sterling are translated into sterling at
the rate of exchange at the date of that balance sheet, and the
income and expenses are translated at average exchange rates for
the period. All resulting exchange differences are recognised as a
separate component of equity.
On consolidation, exchange differences arising from the
translation of the net investment in foreign entities, and of
borrowings and other currency instruments designated as hedges of
such investments, are taken to shareholders' equity. When a foreign
operation is sold, the cumulative amount of such exchange
differences is recognised in the income statement as part of the
gain or loss on sale.
Exchange differences arising on transactions are recognised in
the income statement. Those arising on trading are taken to
operating profit; those arising on borrowings are classified as
finance income or cost.
Revenue
Revenue is measured at the fair value of the consideration
received, net of trade discounts (including distributor rebates)
and sales taxes. Revenue is discounted only where the impact of
discounting is material.
When the Group enters into complex contracts with multiple,
separately identifiable components, the terms of the contract are
reviewed to determine whether or not the elements of the contract
should be accounted for separately. If a contract is being split
into multiple components, the contract revenue is allocated to the
different components at the start of the contract. The basis of
allocation depends on the substance of the contract. The Group
considers relative stand-alone selling prices, contractual prices
and relative cost when allocating revenue.
Sale of goods
Revenue from the sale of goods is recognised when the risks and
rewards of ownership have been transferred to the customer, the
amount of revenue can be measured reliably and recovery of the
consideration is probable. For established products with simple
installation requirements, revenue is recognised when the product
is delivered to the customer in accordance with the agreed delivery
terms. For products which are technically innovative, highly
customised or require complex installation, revenue is recognised
when the customer has completed its acceptance procedures.
Services
Revenue from services is recognised in accounting periods in
which the services are rendered, by reference to completion of the
specific transaction, assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Depending on the nature of the contract, revenue will be recognised
on the basis of the proportion of the contract term completed, the
proportion of the contract costs incurred or the specific services
provided to date.
Construction contracts
Contracts for the construction of substantial assets are
accounted for as construction contracts if the customer specifies
major structural elements of the design, including the ability to
amend the design during the construction process. These projects
normally involve installing customised systems with site-specific
integration requirements.
Where the outcome of a construction contract can be estimated
reliably, revenue and costs are recognised by reference to the
stage of completion of the contract activity at the balance sheet
date. The Group uses the 'percentage of completion method' to
determine the appropriate amount to recognise in a given period.
The assessment of the stage of completion is dependent on the
nature of the contract, but will generally be based on the
estimated proportion of the total contract costs which have been
incurred to date. If a contract is expected to be loss-making, a
provision is recognised for the entire loss.
Leases
Leases in which a significant portion of the risks and rewards
of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases are charged to the
income statement on a straight-line basis over the period of the
lease.
Taxation
The charge for taxation is based on profits for the year and
takes into account taxation deferred because of temporary
differences between the treatment of certain items for taxation and
accounting purposes.
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. Tax benefits are not recognised unless it is likely
that the tax positions are sustainable. Once considered to be
likely, tax benefits are reviewed to assess whether a provision
should be made based on prevailing circumstances. Tax provisions
are included in current tax labilities, including any anticipated
interest & penalties. The tax rates and tax laws used to
compute the amount are those that are enacted or substantively
enacted, at the reporting date in the countries where the Group
operates and generates taxable income.
Deferred tax is provided in full using the balance sheet
liability method. A deferred tax asset is recognised where it is
probable that future taxable income will be sufficient to utilise
the available relief. Tax is charged or credited to the income
statement except when it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in
equity.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the timing
of the reversal of the temporary differences is controlled by the
Company and it is probable that the temporary difference will not
reverse in the foreseeable future.
Deferred tax liabilities and assets are not discounted.
Employee benefits
Share-based compensation
The fair value of the shares or share options granted is
recognised as an expense over the vesting period to reflect the
value of the employee services received. The fair value of options
granted, excluding the impact of any non-market vesting conditions,
is calculated using established option pricing models, principally
binomial models. The probability of meeting non-market vesting
conditions, which include profitability targets, is used to
estimate the number of share options which are likely to vest.
For cash-settled share-based payment, a liability is recognised
based on the fair value of the payment earned by the balance sheet
date. For equity-settled share-based payment, the corresponding
credit is recognised directly in reserves.
Pension obligations and post-retirement benefits
The Group has defined benefit plans, defined contribution plans
and post-retirement healthcare schemes.
For defined benefit plans and post-retirement healthcare schemes
the liability for each scheme recognised in the balance sheet is
the present value of the obligation at the balance sheet date less
the fair value of any plan assets. The obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value is determined by discounting the
estimated future cash outflows using interest rates of AA-rated
corporate bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity
approximating to the terms of the related liability. Actuarial
gains and losses arising from experience adjustments and changes in
actuarial assumptions are recognised in full in the period in which
they occur, outside of the income statement, and are presented in
the statement of comprehensive income. Past service costs are
recognised immediately in the income statement.
For defined contribution plans, the Group pays contributions to
publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. Contributions are
expensed as incurred.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the identifiable net
assets of the acquired subsidiary at the date of acquisition.
Goodwill arising from acquisitions of subsidiaries after 1
August 1998 is included in intangible assets, tested annually for
impairment and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold. Goodwill arising
from acquisitions of subsidiaries before 1 August 1998 was set
against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Any
impairment is recognised immediately in the income statement.
Subsequent reversals of impairment losses for goodwill are not
recognised.
Research and development
Expenditure on research and development is charged to the income
statement in the year in which it is incurred with the exception
of:
-- amounts recoverable from third parties; and
-- expenditure incurred in respect of the development of major
new products where the outcome of those projects is assessed as
being reasonably certain as regards viability and technical
feasibility. Such expenditure is capitalised and amortised over the
estimated period of sale for each product, commencing in the year
that sales of the product are first made. Amortisation is charged
straight line or based on the units produced, depending on the
nature of the product and the availability of reliable estimates of
production volumes.
The cost of development projects which are expected to take a
substantial period of time to complete includes attributable
borrowing costs.
Intangible assets acquired in business combinations
The identifiable net assets acquired as a result of a business
combination may include intangible assets other than goodwill. Any
such intangible assets are amortised straight line over their
expected useful lives as follows:
Patents, licences up to 20 years
and trademarks
Technology up to 13 years
Customer relationships up to 11 years
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to 7 years
Patents and intellectual shorter of the economic life and the period the right
property is legally enforceable
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Property, plant and equipment
Property, plant and equipment is stated at historical cost less
accumulated depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other
assets estimated to write off the depreciable amount of relevant
assets by equal annual instalments over their estimated useful
lives. In general, the rates used are: Freehold and long leasehold
buildings - 2%; Short leasehold property - over the period of the
lease; Plant, machinery, etc. - 10% to 20%; Fixtures, fittings,
tools and other equipment - 10% to 33%.
The cost of any assets which are expected to take a substantial
period of time to complete includes attributable borrowing
costs.
The assets' residual values and useful lives are reviewed, and
adjusted if appropriate, at each balance sheet date. An asset's
carrying amount is written down immediately to its recoverable
amount if the asset's carrying amount is greater than its estimated
recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is determined using the first-in, first-out (FIFO)
method. The cost of finished goods and work in progress comprises
raw materials, direct labour, other direct costs and related
production overheads (based on normal operating capacity). The cost
of items of inventory which take a substantial period of time to
complete includes attributable borrowing costs. Net realisable
value is the estimated selling price in the ordinary course of
business, less applicable variable selling expenses.
Trade and other receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost, less any appropriate
provision for estimated irrecoverable amounts. A provision is
established for irrecoverable amounts when there is objective
evidence that amounts due under the original payment terms will not
be collected.
Provisions
Provisions for warranties and product liability, disposal
indemnities, restructuring costs, vacant leasehold property and
legal claims are recognised when: the Company has a legal or
constructive obligation as a result of a past event; it is probable
that an outflow of resources will be required to settle the
obligation; and the amount has been reliably estimated. Provisions
are not recognised for future operating losses.
Provisions are discounted where the time value of money is
material.
Where there are a number of similar obligations, for example
where a warranty has been given, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognised even if
the likelihood of an outflow with respect to any one item included
in the same class of obligations may be small.
Assets and businesses held for sale
Assets and businesses classified as held for sale are measured
at the lower of carrying amount and fair value less costs to sell.
Impairment losses on initial classification as held for sale and
gains or losses on subsequent remeasurements are included in the
income statement. No depreciation is charged on assets and
businesses classified as held for sale.
Assets and businesses are classified as held for sale if their
carrying amount will be recovered or settled principally through a
sale transaction rather than through continuing use. The asset or
business must be available for immediate sale and the sale must be
highly probable within one year.
Discontinued operations
A discontinued operation is either:
-- a component of the Group's business that represents a
separate major line of business or geographical area of operations
that has been disposed of, has been abandoned or meets the criteria
to be classified as held for sale; or
-- a business acquired solely for the purpose of selling it.
Discontinued operations are presented on the income statement as
a separate line and are shown net of tax.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with maturities of three
months or less.
In the cash-flow statement, cash and cash equivalents are shown
net of bank overdrafts, which are included as current borrowings in
liabilities on the balance sheet.
Financial assets
The classification of financial assets depends on the purpose
for which the assets were acquired. Management determines the
classification of an asset at initial recognition and re-evaluates
the designation at each reporting date. Financial assets are
classified as: loans and receivables, available for sale financial
assets or financial assets where changes in fair value are charged
(or credited) to the income statement.
Financial assets are initially recognised at transaction price
when the Group becomes party to contractual obligations. The
transaction price used includes transaction costs unless the asset
is being fair valued through the income statement.
The subsequent measurement of financial assets depends on their
classification. Loans and receivables are measured at amortised
cost using the effective interest rate method. Available for sale
financial assets are subsequently measured at fair value, with
unrealised gains and losses being recognised in other comprehensive
income. Financial assets where changes in fair value are charged
(or credited) to the income statement are subsequently measured at
fair value. Realised and unrealised gains and losses arising from
changes in the fair value of the 'financial assets at fair value
through the income statement' category are included in the income
statement in the period in which they arise.
Financial assets are derecognised when the right to receive
cash-flows from the assets has expired, or has been transferred,
and the Company has transferred substantially all of the risks and
rewards of ownership. When securities classified as available for
sale are sold or impaired, the accumulated fair value adjustments
previously taken to reserves are included in the income
statement.
Financial assets are classified as current if they are expected
to be realised within 12 months of the balance sheet date.
Financial liabilities
Borrowings are initially recognised at the fair value of the
proceeds, net of related transaction costs. These transaction
costs, and any discount or premium on issue, are subsequently
amortised under the effective interest rate method through the
income statement as interest over the life of the loan, and added
to the liability disclosed in the balance sheet. Related accrued
interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least one year after the balance sheet date.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured
at their fair value. The method of recognising any resulting gain
or loss depends on whether the derivative is designated as a
hedging instrument and, if so, the nature of the item being
hedged.
Changes in the fair value of any derivative instruments that do
not qualify for hedge accounting are recognised immediately in the
income statement.
Fair value hedge
Changes in the fair values of derivatives that are designated
and qualify as fair value hedges are recorded in the income
statement, together with any changes in the fair values of the
hedged assets or liabilities that are attributable to the hedged
risk.
Net investment hedge
Hedges of net investments in foreign operations are accounted
for similarly to cash-flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is
recognised in other comprehensive income; the gain or loss relating
to any ineffective portion is recognised immediately in the income
statement.
When a foreign operation is disposed of, gains and losses
accumulated in equity related to that operation are included in the
income statement.
Cash-flow hedge
The effective portions of changes in the fair values of
derivatives that are designated and qualify as cash-flow hedges are
recognised in equity. The gain or loss relating to any ineffective
portion is recognised immediately in the income statement.
Amounts accumulated in the hedge reserve are recycled in the
income statement in the periods when the hedged items will affect
profit or loss (for instance when the forecast sale that is hedged
takes place). If a forecast transaction that is hedged results in
the recognition of a non-financial asset (for example, inventory)
or a liability, the gains and losses previously deferred in the
hedge reserve are transferred from the reserve and included in the
initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in the hedge reserve at that time remains in the
reserve and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or
loss that was reported in other comprehensive income is immediately
transferred to the income statement.
Fair value of financial assets and liabilities
The fair values of financial assets and financial liabilities
are the amounts at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
or liquidation sale.
'IFRS 13: Fair value measurement' requires fair value
measurements to be classified according to the following
hierarchy:
-- level 1 - quoted prices in active markets for identical
assets or liabilities;
-- level 2 - valuations in which all inputs are observable
either directly (ie as prices) or indirectly (ie derived from
prices); and
-- level 3 - valuations in which one or more inputs that are
significant to the resulting value are not based on observable
market data.
See note 20 for information on the methods the Group uses to
estimate the fair values of its financial instruments.
Dividends
Dividends are recognised as a liability in the period in which
they are authorised. The interim dividend is recognised when it is
paid and the final dividend is recognised when it has been approved
by shareholders at the Annual General Meeting.
Recent accounting developments
The following standards and interpretations have been issued by
the IASB and will affect future annual reports and accounts.
-- 'IFRS 9: Financial instruments'
-- 'IFRS 15: Revenue from contracts with customers'
-- 'IFRS 16: Leases'
A review of the impact of these standards and interpretations is
being undertaken, and the impact of adopting them will be
determined once this review has been completed. Smiths will adopt
IFRS 9 and IFRS 15 on 1 August 2018 and IFRS 16 on 1 August 2019
unless developments in the relationship between the UK and the EU
change the reporting requirements for UK companies.
IFRS 9: Financial instruments
Adopting IFRS 9 will impact hedge accounting and receivables
provisioning. The basis of documentation and effectiveness testing
of hedges under the new standard will be linked more closely to the
risk management objectives, which may generate different levels of
ineffectiveness than the current testing under IAS 39. Receivables
provisioning will move from an incurred to an expected loss model.
The Group's largest exposure is trade receivables, which had a
gross value of GBP716m at 31 July 2017. No impact is anticipated
for high credit quality balances settled on agreed terms. However,
the new model will impact the timing and value of provision
recognition on higher risk balances. Under the current methodology,
provisions of GBP33m have been recognised on GBP73m of receivables
which are more than three months overdue or considered to be high
risk.
IFRS 15: Revenue from contracts with customers
The review of the impact of 'IFRS 15: Revenue from contracts
with customers' requires an assessment at contract level to confirm
the full impact of adopting this standard.
Based on the analysis completed to date, we consider that the
new standard is unlikely to have a material impact on revenue
recognition for the following business activities, which had
revenue of circa GBP1.7bn this year:
-- Smiths branded products sold under basic PO terms;
-- Customer specific products where the Group is manufacturing
at risk with no contractual rights to recovery;
-- Smiths Interconnect military contracts accounted for on a
percentage of completion basis using proportion of costs
incurred;
-- Detection programs currently accounted for as multi-element
contracts with consideration allocated on the relative fair value
of the components; and
-- Spares and ad hoc service callouts to repair or replace
equipment.
The basis of revenue recognition may change for the following
revenue streams:
-- Customer specific products where the contractual terms
include rights to payment for work performed to date. Revenue for
most of these contracts is expected to be recognised rateably over
the manufacturing period, depending on the specific rights in the
contract; and
-- Product development contracts where revenue is recognised on
reaching development milestones. Revenue for recognition for some
of these contracts is expected to move to a percentage of
completion basis using proportion of costs incurred.
-- John Crane has service contracts, which include bonuses and
penalties based on the performance of the asset being maintained.
Depending on the evidence available to estimate the levels of
performance achieved, bonuses may be recognised earlier under IFRS
15.
IFRS 16: Leases
The review of this standard is at an early stage. This standard
will require a lease liability and corresponding asset to be
recognised on the balance sheet for leases currently classified as
operating leases and not recognised on the balance sheet. IFRS 16
can require changes to the valuation of lease liabilities. However,
preliminary work has not identified any material leases with
contingent rentals. The total value of operating lease commitments
at 31 July 2017 was GBP140m (2016: GBP146m).
Notes to the accounts
1 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, manufacture and support the following
products:
-- John Crane - mechanical seals, seal support systems,
engineered bearings, power transmission couplings and specialised
filtration systems;
-- Smiths Medical - infusion systems, vascular access products
(including safety needles), patient airway and temperature
management equipment and specialised devices in areas of
diagnostics and emergency patient transport;
-- Smiths Detection - sensors and systems that detect and
identify explosives, narcotics, weapons, chemical agents,
biohazards and contraband;
-- Smiths Interconnect - specialised electronic and radio
frequency board-level and waveguide devices, connectors, cables,
test sockets and sub-systems used in high-speed, high reliability,
secure connectivity applications;
-- Flex-Tek - engineered components flexible hosing and rigid
tubing that heat and move fluids and gases.
The position and performance of each division is reported at
each Board meeting to the Board of Directors. This information is
prepared using the same accounting policies as the consolidated
financial information except that the Group uses headline operating
profit to monitor divisional results and operating assets to
monitor divisional position. See note 3 for an explanation of which
items are excluded from headline measures.
Intersegment sales and transfers are charged at arm's length
prices.
Segment trading performance
Year ended 31 July 2017
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 885 951 687 419 338 3,280
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 204 209 103 56 65 637
Corporate headline operating
costs (48) (48)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 204 209 103 56 65 (48) 589
Items excluded from headline
measures (note 3) (17) (23) (33) (4) 3 (16) (90)
Profit on disposal of
businesses 3 100 72 175
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 190 286 70 124 68 (64) 674
================================= ====== ======== ========== ============= ======== ========= =====
Year ended 31 July 2016
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 830 874 526 435 284 2,949
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 181 187 69 57 51 545
Corporate headline operating
costs (35) (35)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 181 187 69 57 51 (35) 510
Items excluded from headline
measures (note 3) (30) (21) (6) (31) (14) (21) (123)
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 151 166 63 26 37 (56) 387
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating profit is stated after charging
the following items:
Year ended 31 July 2017
=========================================================================
John Smiths Smiths Smiths Reconciling
Crane Medical Detection Interconnect Flex-Tek items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== =========== =====
Depreciation 15 21 8 8 4 1 57
Amortisation of capitalised
development 14 13 27
Amortisation of software,
patents and intellectual
property 2 5 4 2 5 18
Amortisation of acquired
intangibles 17 17
Share-based payment 3 2 1 1 1 7 15
============================ ====== ======== ========== ============= ======== =========== =====
Year ended 31 July 2016
=========================================================================
John Smiths Smiths Smiths Reconciling
Crane Medical Detection Interconnect Flex-Tek items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== =========== =====
Depreciation 15 20 6 8 3 1 53
Amortisation of capitalised
development 14 12 26
Amortisation of software,
patents and intellectual
property 2 4 3 2 6 17
Amortisation of acquired
intangibles 15 15
Impairment of goodwill 23 23
Impairment of trade
investments 2 2
Impairment of property,
plant and equipment 6 6
Share-based payment 1 2 1 1 1 4 10
============================ ====== ======== ========== ============= ======== =========== =====
The reconciling items are central costs and charges that are
treated as non-headline (see note 3).
Segment assets and liabilities
Segment assets
31 July 2017
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== ============= =====
Property, plant, equipment,
development projects,
other intangibles and
investments 96 233 107 40 35 20 531
Inventory, trade and
other receivables 337 256 389 118 104 27 1,231
============================ ====== ======== ========== ============= ======== ============= =====
Segment assets 433 489 496 158 139 47 1,762
============================ ====== ======== ========== ============= ======== ============= =====
31 July 2016
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ====== ======== ========== ============= ======== ============= =====
Property, plant, equipment,
development projects,
other intangibles and
investments 100 221 95 46 33 15 510
Inventory, trade and
other receivables 364 280 316 189 99 26 1,274
============================ ====== ======== ========== ============= ======== ============= =====
Segment assets 464 501 411 235 132 41 1,784
============================ ====== ======== ========== ============= ======== ============= =====
Segment liabilities
31 July 2017
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ============= =====
Divisional liabilities (124) (120) (246) (48) (39) (577)
Corporate and non-headline
liabilities (393) (393)
=========================== ====== ======== ========== ============= ======== ============= =====
Segment liabilities (124) (120) (246) (48) (39) (393) (970)
=========================== ====== ======== ========== ============= ======== ============= =====
31 July 2016
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ============= =====
Divisional liabilities (124) (121) (196) (78) (37) (556)
Corporate and non-headline
liabilities (408) (408)
=========================== ====== ======== ========== ============= ======== ============= =====
Segment liabilities (124) (121) (196) (78) (37) (408) (964)
=========================== ====== ======== ========== ============= ======== ============= =====
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation to segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
====== ===========
31 July 31 July 31 July 31 July
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
========================================== ======= ======= ======= =======
Segment assets and liabilities 1,762 1,784 (970) (964)
Goodwill and acquired intangibles 1,820 1,556
Derivatives 69 42 (12) (20)
Current and deferred tax 334 308 (156) (167)
Retirement benefit assets and obligations 390 328 (166) (248)
Cash and borrowings 782 431 (1,749) (1,409)
Assets and liabilities of business
held for sale 24 (5)
========================================== ======= ======= ======= =======
Statutory assets and liabilities 5,157 4,473 (3,053) (2,813)
========================================== ======= ======= ======= =======
Segment capital expenditure
The capital expenditure on property, plant and equipment,
capitalised development and other intangible assets for each
division is:
John Smiths Smiths Smiths Reconciling
Crane Medical Detection Interconnect Flex-Tek items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================= ====== ======== ========== ============= ======== =========== =====
Capital expenditure
year ended 31 July 2017 12 58 22 10 6 1 109
Capital expenditure
year ended 31 July 2016 14 53 19 12 9 3 110
========================= ====== ======== ========== ============= ======== =========== =====
The reconciling items include corporate capital expenditure
through Smiths Business Information Services on IT equipment and
software.
Segment capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP787m (31 July 2016: GBP815m)
and eliminate post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt. See note 30 for a reconciliation of net
assets to capital employed.
The 12-month rolling average capital employed by division, which
Smiths use to calculate divisional return on capital employed,
is:
31 July 2017
============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ====== ======== ========== ============= ======== =====
Average divisional capital
employed 890 1,257 820 492 182 3,641
Average corporate capital
employed (2)
=============================== ====== ======== ========== ============= ======== =====
Average total capital employed 3,639
=============================== ====== ======== ========== ============= ======== =====
31 July 2016
============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ====== ======== ========== ============= ======== =====
Average divisional capital
employed 895 1,190 578 549 162 3,374
Average corporate capital
employed (50)
=============================== ====== ======== ========== ============= ======== =====
Average total capital employed 3,324
=============================== ====== ======== ========== ============= ======== =====
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original
equipment Aftermarket Total
John Crane GBPm GBPm GBPm
========== =========== =====
Revenue year ended 31
July 2017 314 571 885
Revenue year ended 31
July 2016 338 492 830
========================== ========== =========== =====
John Crane original equipment revenue was previously described
as "First Fit". This has been changed to provide a description
relevant to a broader range of end markets, as John Crane expands
its non-oil and gas revenues.
Infusion Vascular Vital Specialty
systems access care products Total
Smiths Medical GBPm GBPm GBPm GBPm GBPm
=================== ======== ======== ===== ========= =====
Revenue year ended
31 July 2017 302 318 273 58 951
Revenue year ended
31 July 2016 273 289 240 72 874
====================== ======== ======== ===== ========= =====
Ports
Air and Urban
transportation borders Military security Total
Smiths Detection GBPm GBPm GBPm GBPm GBPm
=================== =============== ======== ======== ========= =====
Revenue year ended
31 July 2017 355 100 94 138 687
Revenue year ended
31 July 2016 235 89 79 123 526
====================== =============== ======== ======== ========= =====
Smiths Detection previously reported its air transportation
revenue as "transportation". The description has been expanded to
avoid any confusion with the "Transportation" market discussed on
page 29, since Smiths Detection operates in the Security and
defence market. Smiths Detection previously reported its urban
security revenue as "critical infrastructure". This has been
changed to reflect the range of opportunities developing in this
area.
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
==================== ========== ========= ===== =====
Revenue year ended
31 July 2017 177 195 47 419
Revenue year ended
31 July 2016 155 192 88 435
======================== ========== ========= ===== =====
Fluid Flexible Heat Construction
Management Solutions Solutions Products Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
=================== =========== ========== ========== ============ =====
Revenue year ended
31 July 2017 81 64 84 109 338
Revenue year ended
31 July 2016 72 54 66 92 284
====================== =========== ========== ========== ============ =====
The Group's statutory revenue is analysed as follows:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
======================== ====== ======
Sale of goods 2,865 2,607
Services 394 312
Contracts qualifying as
construction contracts 21 30
============================ ====== ======
3,280 2,949
======================== ====== ======
Analysis by geographical areas
The Group's revenue by destination and non-current operating
assets by location are shown below:
Intangible
assets and
property
plant and
Revenue equipment
====== ======= ================
Year Year
ended ended
31 31
July July 31 July 31 July
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
============================ ====== ======= ======= =======
United Kingdom 118 114 92 129
Germany 160 131 363 325
France 96 85 16 17
Other European 355 291 72 70
============================ ====== ======= ======= =======
Total European 729 621 543 541
============================ ====== ======= ======= =======
United States of America 1,531 1,396 1,627 1,349
Canada 114 106 13 14
Other North American 33 33 12 10
============================ ====== ======= ======= =======
Total North American 1,678 1,535 1,652 1,373
============================ ====== ======= ======= =======
Japan 119 101 19 21
China (excluding Hong Kong) 93 95 49 63
Rest of the World 661 597 67 59
============================ ====== ======= ======= =======
3,280 2,949 2,330 2,057
============================ ====== ======= ======= =======
2 Operating profit is stated after charging
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
================================= ====== ======
Research and development expense 98 87
Operating leases
- land and buildings 34 30
- other 8 8
================================= ====== ======
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
============================================= ====== ======
Audit services
Fees payable to the Company's auditors for
the audit of the Company's annual financial
statements 4 3
Fees payable to the Company's auditors and
its associates for other services
- the audit of the Company's subsidiaries 2 2
============================================= ====== ======
6 5
All other services 1
============================================= ====== ======
Other services comprise audit-related assurance services GBP0.2m
(2016: GBP0.1m), tax advisory services GBP0.1m (2016: GBP0.1m),
one-off IT and consulting projects GBP0.2m (2016: GBPnil) and other
services GBPnil (2016: GBP0.1m). Total fees for non-audit services
comprise 8% (2016: 6%) of audit fees. Audit-related assurance
services include the review of the Interim Report.
3 Non-statutory profit measures
Headline profit measures
The Company seeks to present a measure of trading performance
which is not impacted by material non-recurring items or items
considered non-operational in nature. This measure is described as
'headline' and used by management to measure and monitor
performance. See the disclosures on presentation of results in
accounting policies for an explanation of the excluded items, which
are referred to as 'non-headline'.
Headline revenue
The agreement to sell Smiths Medical's Wallace product line
included an obligation to continue manufacturing products for the
acquirer for 12 months after the date of disposal. In the Interim
results to 31 January 2017, revenue arising from this activity was
treated as non-headline because it was not expected to contribute
to Smiths Medical's ongoing business. This treatment was reviewed
in response to developments in the commercial relationship with
CooperSurgical, Inc. and the activity is now being reported within
headline activity.
Headline operating profit
The non-headline items included in statutory operating profit
are as follows:
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
=========================================== ===== ====== ======
Restructuring programmes (37) (37)
Acquisition costs (19) (6)
Provision for Titeflex Corporation
subrogation claims 22 4 (11)
Provision for John Crane, Inc. asbestos
litigation 22 (15) (23)
Cost recovery for John Crane, Inc.
asbestos litigation 6 16
Post-retirement benefits changes to
schemes and administration costs 8 (9) (16)
Impairment of goodwill, property,
plant and equipment and trade investments (31)
Amortisation of acquired intangible
assets 10 (17) (15)
Unwind of fair value uplift of inventory
on the acquisition balance sheet (3)
Profit on disposal of businesses 28 175
=========================================== ===== ====== ======
Non-headline items in operating profit 85 (123)
=========================================== ===== ====== ======
Items for the year ended 31 July 2017
Restructuring costs include GBP33m in respect of Fuel for
Growth. This programme, which involves redundancy, relocation and
consolidation of manufacturing, is considered a material
non-recurring item by virtue of its size. No further costs are
expected in respect of this program. In addition, there are GBP4m
of initial costs in respect of the integration of Morpho Detection
and the existing Smiths Detection business. The integration is
expected to take two years. The total costs over the two years are
projected to be material and non-recurring.
Acquisition costs have been treated as non-headline because they
depend on the level of acquisition activity in the year. Only
incremental costs directly linked to the transaction are reported
as non-headline. They do not include the costs of the employees
working on transactions.
See note 22 for details of the costs, and cost recoveries
relating to Titeflex Corporation subrogation claims and John Crane,
Inc asbestos litigation. These costs and recoveries have been
treated as non-headline because the provision were treated as
non-headline when they were originally recognised and the
subrogation claims and litigation relate to products that the Group
no longer sells in these markets.
Post-retirement benefit changes and costs relate to closed
schemes, so the costs are a legacy of previous employee pension
arrangements.
The impacts of business combination fair value adjustments,
including amortisation of intangible assets, impairment or
unwinding, have been excluded from headline measures on the basis
that these charges result from acquisition accounting and do not
relate to current trading activity.
See note 28 for a breakdown of the profit by transaction. It is
non-headline since the profit and cash impact is material and
non-recurring.
Items for the year ended 31 July 2016
Restructuring costs comprise GBP37m in respect of Fuel for
Growth. This programme, which involves redundancy, relocation and
consolidation of manufacturing, is considered a material
non-recurring item by virtue of its size.
The GBP9m charge relating to post-retirement benefits comprises
the GBP10m settlement cost for the buy-out of retiree liabilities
completed by the US pension scheme on 14 August 2015, net of a
GBP1m settlement gain on closing a small scheme in Holland.
Impairments comprise GBP23m goodwill write-downs (see note 11),
GBP6m on property plant and equipment and GBP2m on trade
investments.
Headline finance costs
The non-headline items included in finance costs are as
follows:
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
=========================================== ===== ====== ======
Adjustment to discounted provisions 22 (6) (5)
Fair value gain realised on contributing
government bonds to Smiths Industries
Pension Scheme 4 19
Other financing (losses)/gains (8) 1
Other finance income - retirement benefits 8 2 3
=========================================== ===== ====== ======
Non-headline (losses)/gains in finance
costs (12) 18
=========================================== ===== ====== ======
The unwind of discounting on provisions has been excluded from
headline finance costs because these provisions were originally
recognised as non-headline and this treatment has been maintained
for ongoing costs and credits.
The fair value gain realised on contributing government bonds to
Smiths Industries Pension Scheme was excluded from headline finance
costs because it was a large, on-off item relating to funding
previous employee pension arrangements.
Other financing gains and losses represent the potentially
volatile gains and losses on derivatives, loans inside the group
and other financial instruments which are not hedge accounted under
IAS 39. They have been excluded from headline finance costs because
they do not accurately reflect the aggregate risks of the group,
since offsetting gains have been recognised in reserves or deferred
in assets and liabilities which are not held at fair value.
Financing credits relating to retirement benefits are excluded
from headline finance costs because the ongoing costs and credits
are a legacy of previous employee pension arrangements.
4 Net finance costs
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
=========================================== ===== ====== ======
Interest receivable 5 3
=========================================== ===== ====== ======
Interest payable
- bank loans and overdrafts, including
associated fees (9) (8)
- other loans (57) (54)
=========================================== ===== ====== ======
Interest payable (66) (62)
=========================================== ===== ====== ======
Other financing gains/(losses)
- fair value gains/(losses) on hedged
debt 6 (23)
- fair value on (losses)/gains fair
value hedges (6) 23
- fair value gain realised on contributing
government bonds to Smiths Industries
Pension Scheme 19
- net foreign exchange (losses)/gains (8) 1
- adjustment to discounted provisions (6) (5)
=========================================== ===== ====== ======
Other financing (losses)/gains (14) 15
=========================================== ===== ====== ======
Net interest income on retirement benefit
obligations 8 2 3
=========================================== ===== ====== ======
Net finance costs (73) (41)
=========================================== ===== ====== ======
The government bonds contributed to the Smiths Industries
Pension Scheme in December 2015 were accounted for as available for
sale financial assets, and cumulative fair value gains of GBP19m on
these assets were recycled from other comprehensive income to the
income statement.
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.
Year Year
ended ended
31 July 31 July
2017 2016
GBPm GBPm
=========================================== =========== ===========
Profit attributable to equity shareholders
for the year
- continuing 570 259
- total 562 259
=========================================== =========== ===========
Average number of shares in issue during
the year 395,422,421 395,095,591
=========================================== =========== ===========
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 400,518,049 (2016:
398,957,837) ordinary shares, being the average number of ordinary
shares in issue during the year adjusted by the dilutive effect of
employee share schemes. For the year ended 31 July 2017, zero
options (2016: 223,993) were excluded from this calculation because
their effect was anti-dilutive for continuing operations.
A reconciliation of basic and headline earnings per share -
continuing is as follows:
Year ended Year ended
31 July 31 July
2017 2016
============= ============
EPS EPS
GBPm (p) GBPm (p)
=========================================== ===== ====== ===== =====
Profit attributable to equity shareholders
of the Parent Company 570 144.1 259 65.6
Exclude
Non-headline items and related tax (184) (46.5) 77 19.6
=========================================== ===== ====== ===== =====
Headline profit attributable to
equity shareholders for the year 386 97.6 336 85.2
=========================================== ===== ====== ===== =====
Statutory earnings per share - diluted
(p) 142.3 64.9
=========================================== ===== ====== ===== =====
Headline earnings per share - diluted
(p) 96.3 84.3
=========================================== ===== ====== ===== =====
6 Taxation
The Group's approach to taxation is set out in the Financial
review. This note only provides information about corporate income
taxes under IFRS. Smiths companies operate in over 50 countries
across the world. They pay and collect many different taxes in
addition to corporate income taxes including: payroll taxes; value
added and sales taxes; property taxes; product-specific taxes and
environmental taxes. The costs associated with these other taxes
are included in profit before tax.
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
=========================================== ====== ======
The taxation charge in the consolidated
income statement for the year comprises
Continuing operations
- current income tax charge 58 56
- current tax adjustments in respect
of prior periods 3
============================================= ====== ======
Current taxation 61 56
- deferred taxation (32) 29
============================================= ====== ======
Total taxation expense - continuing
operations 29 85
============================================= ====== ======
Discontinued operations
- current income tax credit (9)
- deferred taxation 6
============================================= ====== ======
Total taxation expense in the consolidated
income statement 26 85
============================================= ====== ======
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
========================================== ====== ======
Tax on items charged/(credited) to equity
Deferred tax charge/(credit)
- retirement benefit schemes 13 (10)
- cash flow hedge accounting 1
- share options (3)
========================================== ====== ======
11 (10)
========================================== ====== ======
The net retirement benefit charge to equity includes GBP6m
(2016: GBP4m credit) relating to UK schemes and GBP5m (2016: GBP4m
credit) relating to US schemes.
Reconciliation of the tax charge
The tax expense on the profit for the year for continuing
operations is different from the standard rate of corporation tax
in the UK of 19.7% (2016: 20.0%). The difference is reconciled as
follows:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
======================================== ====== ======
Profit before taxation 602 346
========================================== ====== ======
Notional taxation expense at UK
rate of 19.7% (2016: 20.0%) 118 69
Different tax rates on non-UK profits
and losses 55 24
Non-deductible expenses 14 16
Tax credits and non-taxable income (15) (11)
Non-headline recognition of UK deferred
tax (69)
Other adjustments to unrecognised
deferred tax (23) 2
Current and deferred benefits from
closed financing arrangement (19) (15)
Effect of non-taxable profits on
business disposals (35)
Prior year true-up 3
Tax on discontinued activities (3)
========================================== ====== ======
26 85
======================================== ====== ======
Comprising
- taxation on headline profit 140 113
- tax on non-headline loss (27) (34)
- change in deferred tax recognition
treated as non-headline (84) 6
- taxation on discontinued operation (3)
========================================== ====== ======
Taxation expense in the consolidated
income statement 26 85
========================================== ====== ======
The head office of Smiths Group is domiciled in the UK, so the
tax charge has been reconciled to UK tax rates.
In recent years, Smiths has made substantial payments to its UK
defined benefit pension plans, which generated significant UK tax
losses. This resulted in the non-recognition of deferred tax on UK
losses and other temporary differences. The current position of the
UK pension schemes has significantly improved and the pension
contributions envisaged going forwards are significantly reduced.
Reduced pension contributions and increased trading and investing
profits have made the UK tax group structurally profitable,
resulting in the recognition of all UK deferred tax assets and
generating a non-headline credit of GBP69m in the current year.
Included in other adjustments to unrecognised deferred tax is
recognition of GBP17m deferred tax following the reorganisation of
a US business.
As a result of changes in tax legislation and the reorganisation
of finance activities, the credit for closed financing arrangements
will not be repeated in future years.
Current taxation
Current
tax
GBPm
==================================== =======
At 1 August 2015 (20)
Foreign exchange gains and losses 4
(Charge)/credit to income statement (56)
Tax paid 62
======================================= =======
At 31 July 2016 (10)
Foreign exchange gains and losses 2
(Charge)/credit to income statement
- continuing (61)
(Charge)/credit to income statement
- discontinued 9
Business combinations (1)
Business disposals (4)
Tax paid 82
======================================= =======
At 31 July 2017 17
======================================= =======
Current tax receivable 62
Current tax payable (45)
======================================= =======
At 31 July 2017 17
======================================= =======
Provisions included in current tax liabilities are established
based on reasonable estimates for the possible consequences of tax
authority audits in the various countries in which the Group
operates. Management judgement is used to determine the amount of
such provisions based on an understanding of the relevant local tax
law, taking into account the differences of interpretation that can
arise on a wide variety of issues, depending on the prevailing
circumstances, including the nature of current tax audits and the
experience of previous enquiries.
Deferred taxation
Property,
plant
and
equipment
and Losses
intangible Employment carried
assets benefits forward Provisions Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
========================== =========== ========== ======== ========== ===== =====
At 1 August 2015 (116) 61 28 126 48 147
Credit/(charge) to income
statement (7) (72) 53 (10) 7 (29)
Credit/(charge) to equity 10 10
Business combinations (1) (1)
Exchange adjustments (21) 9 6 24 6 24
========================== =========== ========== ======== ========== ===== =====
At 31 July 2016 (145) 8 87 140 61 151
========================== =========== ========== ======== ========== ===== =====
Deferred tax assets (24) 8 84 134 44 246
Deferred tax liabilities (121) 3 6 17 (95)
========================== =========== ========== ======== ========== ===== =====
At 31 July 2016 (145) 8 87 140 61 151
========================== =========== ========== ======== ========== ===== =====
Reallocation 4 (4)
(Charge)/credit to income
statement - continuing 11 (9) 43 (7) (6) 32
(Charge)/credit to income
statement - discontinued (6) (6)
Credit/(charge) to equity (10) (1) (11)
Business combinations (6) 2 (4)
Business disposals (3) (3)
Exchange adjustments 1 1 (1) 1 2
========================== =========== ========== ======== ========== ===== =====
At 31 July 2017 (148) (10) 129 138 52 161
========================== =========== ========== ======== ========== ===== =====
Deferred tax assets (4) (10) 127 133 26 272
Deferred tax liabilities (144) 2 5 26 (111)
========================== =========== ========== ======== ========== ===== =====
At 31 July 2017 (148) (10) 129 138 52 161
========================== =========== ========== ======== ========== ===== =====
The deferred tax asset relating to losses carried forward has
been recognised on the basis that evidence demonstrates a
consistent pattern of improving results and the Group has
implemented plans to support continuing improvements or the losses
relate to specific, identified non-recurring events.
In 2012 UK deferred tax was written off as a deteriorating
position in legacy pension plans made UK activities structurally
loss making. As a result of an improvement in the UK pension
position and restructuring financing activities, the UK is now
expected to earn taxable profits and a GBP69m deferred tax asset
has been recognised as a non-headline gain in the period. The
closing deferred tax balance related to UK activities at 31 July
2017, including the benefit of losses brought forward and deferred
tax liabilities on UK pension schemes, amounted to GBP64m.
Deferred tax relating to provisions includes GBP79m (2016:
GBP84m) relating to the John Crane, Inc. litigation provision, and
GBP33m (2016: 36m) relating to Titeflex Corporation. See note 22
for additional information on provisions; and
Included in other deferred tax balances above is a deferred tax
asset of GBP14m (2016: GBP25m) relating to inventory where current
tax relief is only available when the inventory is sold.
The Group has unrecognised deferred tax relating to deductible
temporary differences in the UK amounting to GBPnil (2016: GBP402m)
and non-UK losses amounting to GBP68m (2016: GBP93m).
The expiry date of operating losses carried forward is dependent
upon the law of the various territories in which the losses arise.
A summary of expiry dates for losses in respect of which deferred
tax has not been recognised is set out below.
Restricted losses
2017 Expiry of 2016 Expiry of
GBPm losses GBPm losses
======================== ===== ========= ===== =========
Territory
- Americas 36 2019-2036
- Asia 12 2018-2024 11 2017-2023
======================== ===== ========= ===== =========
Total restricted losses 12 47
Unrestricted losses
- operating losses 55 No expiry 211 No expiry
======================== ===== ========= ===== =========
Total 67 258
======================== ===== ========= ===== =========
Franked Investment Income Group Litigation Order
Smiths Group is one of the companies enrolled in the FII GLO
litigation against HMRC. The court cases and appeals are nearing
the end and some claimants, with different fact patterns, have
received payments. Smiths claims amount to around GBP30m (after
deducting 45% withholding tax). However, there are further relevant
legal actions that could impact the claims. The benefit of this
claim has not been recognised in the current or previous financial
statements due to the uncertainty of the eventual outcome.
7 Employees
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
============================================== ====== ======
Staff costs during the period
Wages and salaries 833 745
Social security 94 84
Share-based payment (note 9) 15 10
Pension costs (including defined contribution
schemes) (note 8) 36 33
============================================== ====== ======
978 872
============================================== ====== ======
The average number of persons employed, rounded to the nearest
50 employees, was:
Year Year
ended ended
31 31
July July
2017 2016
==================== ====== ======
John Crane 6,050 6,550
Smiths Medical 7,700 7,600
Smiths Detection 2,450 2,050
Smiths Interconnect 3,250 3,400
Flex-Tek 2,100 2,050
Corporate 350 350
==================== ====== ======
21,900 22,000
==================== ====== ======
Key management
The key management of the Group comprises Smiths Group plc Board
directors and Executive Committee members. Their aggregate
compensation is shown below. Details of directors' remuneration are
contained in the report of the Remuneration Committee.
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
========================================== ====== ======
Key management compensation
Salaries and short-term employee benefits 13.2 12.8
Cost of post-retirement benefits 0.1 0.1
Cost of share-based incentive plans 5.3 4.5
========================================== ====== ======
No member of key management had any material interest during the
period in a contract of significance (other than a service contract
or a qualifying third-party indemnity provision) with the Company
or any of its subsidiaries. Options and awards held at the end of
the period by key management in respect of the Company's
share-based incentive plans were:
Year ended Year ended
31 July 31 July
2017 2016
======================= =======================
Number Weighted Number Weighted
of average of average
instruments exercise instruments exercise
'000 price '000 price
================= ============ ========= ============ =========
CIP 204 468
SEP 134
LTIP 1,041 1,185
Restricted stock 254 261
SAYE 7 GBP10.87 15 GBP8.99
================= ============ ========= ============ =========
Related party transactions
The only related party transactions in the year ended 31 July
2017 were key management compensation (31 July 2016: key management
compensation).
8 Post-retirement benefits
Smiths provides post-retirement benefits to employees in a
number of countries. This includes defined benefit and defined
contribution plans and, mainly in the United Kingdom (UK) and
United States of America (US), post-retirement healthcare.
Defined contribution plans
The Group operates a number of defined contribution plans across
many countries. In the UK a defined contribution plan has been
offered since the closure of the UK defined benefit pension plans.
In the US a 401k defined contribution plan operates. The total
expense recognised in the consolidated income statement in respect
of all these plans was GBP33m (2016: GBP30m).
Defined benefit and post-retirement healthcare plans
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.
For all schemes, pension costs are assessed in accordance with
the advice of independent, professionally qualified actuaries.
These valuations have been updated by independent qualified
actuaries in order to assess the liabilities of the schemes as at
31 July 2017. Scheme assets are stated at their market values.
Contributions to the schemes are made on the advice of the
actuaries, in accordance with local funding requirements.
The changes in the present value of the net pension asset in the
period were:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
=============================================== ====== ======
At beginning of period 80 (108)
Exchange adjustment (6) (31)
Reclassification of small unfunded obligations
Current service cost (4) (3)
Scheme administration costs (7) (7)
Past service cost, curtailments, settlements (1) (9)
Finance income - retirement benefits 2 3
Contributions by employer 105 275
Actuarial gain/(loss) 55 (40)
=============================================== ====== ======
Net retirement benefit asset 224 80
=============================================== ====== ======
UK pension schemes
Smiths funded UK pension schemes are subject to a statutory
funding objective, as set out in UK pension legislation. Scheme
trustees need to obtain regular actuarial valuations to assess the
scheme against this funding objective. The trustees and sponsoring
companies need to agree funding plans to improve the position of a
scheme, when it is below the acceptable funding level.
The UK Pensions Regulator has extensive powers to protect the
benefits of members, promote good administration and reduce the
risk of situations arising which may require compensation to be
paid from the Pension Protection Fund. These powers include
imposing a schedule of contributions or the calculation of the
technical provisions, where a trustee and company fail to agree
appropriate calculations.
Smiths Industries Pension Scheme ("SIPS")
This scheme was closed to future accrual effective 1 November
2009. SIPS provides index-linked pension benefits based on final
earnings at date of closure. SIPS is governed by a corporate
trustee (SI Trustee Limited, a wholly owned subsidiary of Smiths
Group plc). The board of trustee directors comprises five
company-nominated trustees and four member-nominated trustees, with
an independent chairman selected by Smiths Group plc. Trustee
Directors are responsible for the management, administration,
funding and investment strategy of the scheme.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 31 March 2015, and
experience gains and losses identified during this valuation have
been incorporated into the IAS 19 valuation. Under the funding plan
for SIPS agreed in November 2015 Smiths pays cash contributions of
GBP2m a month until June 2020. As part of this agreement, Smiths
contributed the index-linked gilts previously held in an escrow
account. Under the governing documentation of the SIPS, any future
surplus would be returnable to Smiths Group plc by refund, assuming
gradual settlement of the liabilities over the lifetime of the
scheme.
SIPS will implement Guaranteed Minimum Pensions equalisation in
respect of members contracted out of the State Earnings Related
Pensions Scheme prior to 6 April 1997, once the government has
completed its consultations and confirmed an approach. It is not
yet possible to reliably quantify the impact of this
adjustment.
The duration of the SIPS liabilities is around 23 years (2016:
23 years) for active deferred members, 22 years (2016: 24 years)
for deferred members and 11 years (2016: 12 years) for pensioners
and dependants.
TI Group Pension Scheme ("TIGPS")
This scheme was closed to future accrual effective 1 November
2009. TIGPS provides index-linked pension benefits based on final
earnings at the date of closure. TIGPS is governed by a corporate
trustee (TI Pension Trustee Limited, an independent company). The
board of trustee directors comprises five company-nominated
trustees and four member-nominated trustees, with an independent
trustee director selected by the Trustee. The Trustee is
responsible for the management, administration, funding and
investment strategy of the scheme.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 5 April 2015. Under
the funding plan for TIGPS agreed in March 2016 Smiths pays cash
contributions of GBP3m a year until April 2018. Under the governing
documentation of the TIGPS, any future surplus would be returnable
to Smiths Group plc by refund, assuming gradual settlement of the
liabilities over the lifetime of the scheme.
TIGPS will implement Guaranteed Minimum Pensions equalisation in
respect of members contracted out of the State Earnings Related
Pensions Scheme prior to 6 April 1997, once the government has
completed its consultations and confirmed an approach. It is not
yet possible to reliably quantify the impact of this
adjustment.
The duration of the TIGPS liabilities is around 24 years (2016:
25 years) for active deferred members, 22 years (2016: 24 years)
for deferred members and 11 years (2016: 11 years) for pensioners
and dependants.
US pension plans
The most recent valuations of the principal US pension and
post-retirement healthcare plans were performed at 1 January
2017.
The pension plans were closed with effect from 30 April 2009 and
benefits were calculated as at that date and are not revalued.
Governance of the US pension plans is managed by a Settlor
Committee appointed by Smiths Group Services Corp, a wholly owned
subsidiary.
The duration of the liabilities for the largest US plan is
around 19 years (2016: 20 years) for active deferred members, 19
years (2016: 20 years) for deferred members and 12 years (2016: 12
years) for pensioners and dependants.
Last year the US funded plans completed a buy-out of retiree
liabilities for $527m, transferring the obligation to pay pensions
to Voya Retirement Insurance and Annuity Company. A settlement loss
of GBP10m was recognised on this transaction (see note 3).
Risk management
The pensions schemes are exposed to risks that:
-- investment returns are below expectations, leaving the scheme
with insufficient assets in future to pay all its pension
obligations;
-- members and dependants live longer than expected, increasing
the value of the pensions the scheme has to pay;
-- inflation rates are higher than expected, so amounts payable
under index-linked pensions are higher than expected; and
-- increased contributions may be required to meet regulatory
funding targets if lower interest rates increase the current value
of liabilities.
These risks are managed separately for each pension scheme.
However Smiths has adopted a common approach of closing defined
benefit schemes to cap members' entitlements and supporting
trustees in adopting investment strategies which match assets to
future obligations, after allowing for the funding position of the
scheme.
TI Group Pension Scheme ("TIGPS")
TIGPS with a mature member profile, and a strong funding
position, has been able to progress its matching strategy to the
point where roughly 50% of liabilities are covered by matching
annuities, eliminating investment return, longevity, inflation and
funding risks.
Smiths Industries Pension Scheme ("SIPS")
In August 2014 SIPS adjusted the scheme investment strategy. The
scheme has investments in diversified growth funds and a portfolio
of exchange traded equity index futures managed by BlackRock. The
risk and return characteristics of equity index futures are similar
to physical equities, but provide the scheme with improved
liquidity. As at 31 July 2017 the SIPS portfolio of exchange traded
equity index futures generated a GBP73m (2016: GBP163m) exposure to
equities.
Following the company contribution of GBP152m UK government
bonds to SIPS in December 2015 and the resulting improvement in the
funding position, the trustees have adopted a leveraged liability
matching strategy. The scheme uses repurchase arrangements, total
return swaps, inflation swaps and interest rate swaps to hedge the
interest and inflation risks of the scheme liabilities. Repurchase
agreements exchange government bonds held by the scheme for cash
with an obligation to buy back the asset at a fixed future date and
price. The cash is invested in liability matching assets, reducing
funding risk. A total return swap exchanges the return on a
specified asset (for example an index-linked bond) and an interest
payment (fixed or floating). Contracts are spread across a panel of
banks. To minimise the risk that counterparties fail to settle
obligations, positions are collateralised. For repurchase
agreements, collateral is the difference between the present value
of the repurchase obligation and the value of the asset exchanged.
For swaps, collateral is based on market values. At 31 July 2017
scheme assets were net of GBP773m (2016: GBP720m) repurchase
obligations, and nominal exposure from interest rate swaps of
GBP340m (2016: GBP293m), inflation swaps of GBP293m (2016: GBP263m)
and total return swaps of GBP14m (2016: GBP14m).
The principal assumptions used in updating the valuations are
set out below:
2017 2017 2017 2016 2016 2016
UK US Other UK US Other
============================= ==== ===== ====== ==== ===== ======
Rate of increase in salaries n/a n/a 2.8% n/a n/a 2.8%
Rate of increase for active
deferred members 4.1% n/a n/a 3.6% n/a n/a
Rate of increase in pensions
in payment 3.2% n/a 1.5% 2.7% n/a 1.6%
Rate of increase in deferred
pensions 3.2% n/a 0.1% 2.7% n/a 0.1%
Discount rate 2.6% 3.85% 2.6% 2.3% 3.45% 2.8%
Inflation rate 3.2% n/a 2.2% 2.7% n/a 2.3%
Healthcare cost increases 4.2% n/a 1.8% 4.2% n/a 1.4%
============================= ==== ===== ====== ==== ===== ======
The assumptions used in calculating the costs and obligations of
the Group's defined benefit pension plans are set by Smiths after
consultation with independent professionally qualified actuaries.
The assumptions used are estimates chosen from a range of possible
actuarial assumptions which, due to the timescale covered, may not
necessarily occur in practice. For countries outside the UK and USA
assumptions are disclosed as a weighted average.
Discount rate assumptions
The UK schemes use a discount rate based on the yield on the
iBOXX over 15-year AA-rated corporate bond index, adjusted if
necessary to better reflect the shape of the yield curve
considering the Aon Hewitt GBP Select AA curve. For the USA, the
discount rate is based on the Towers Watson cash-flow matching
models and set with reference to Moody's Aa annualised yield, the
Citigroup High Grade Index and the Merrill Lynch 15+ years High
Quality Index.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are
based on the new "SAPS S2" All Birth year tables with relevant
scaling factors based on the recent experience of the schemes. The
assumption allows for future improvements in life expectancy in
line with the 2016 CMI projections, blended to a long-term rate of
1.25%. The mortality assumptions used in the principal US schemes
are based on the RP-2014 table adjusted backward to 2006 with
MP-2014 and projected forward using MP-2016 as of 31 July 2017. The
table selected allows for future mortality improvements and applies
an adjustment for job classification (blue collar versus white
collar).
Expected further
years of life UK schemes US schemes
============================ ============================
Male Female Male Female Male Female Male Female
31 31 31 31 31 31 31 31
July July July July July July July July
2017 2017 2016 2016 2017 2017 2016 2016
====================== ===== ====== ===== ====== ===== ====== ===== ======
Member who retires
next year at age
65 23 24 23 24 21 23 21 23
Member, currently
45, when they retire
in 20 years' time 24 25 24 26 23 24 23 25
====================== ===== ====== ===== ====== ===== ====== ===== ======
Sensitivity
Sensitivities in respect of the key assumptions used to measure
the principal pension schemes as at 31 July 2017 are set out below.
These sensitivities show the hypothetical impact of a change in
each of the listed assumptions in isolation, with the exception of
the sensitivity to inflation which incorporates the impact of
certain correlating assumptions. In practice, such assumptions
rarely change in isolation.
Profit Profit
before Increase/ (Increase)/ before Increase/ (Increase)/
tax (decrease) decrease tax (decrease) decrease
for in in for in in
year scheme scheme year scheme scheme
ended assets liabilities ended assets liabilities
31 31 31 31 31 31
July July July July July July
2017 2017 2017 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ======= =========== ============ ======= =========== ============
Rate of mortality - 1 year
increase in life expectancy (3) 67 (177) (3) 53 (183)
Rate of mortality - 1 year
decrease in life expectancy 3 (66) 177 3 (53) 183
Rate of inflation - 0.25%
increase (2) 20 (97) (2) 16 (119)
Discount rate - 0.25% increase 4 (27) 151 4 (19) 168
Market value of scheme assets
- 2.5% increase 2 79 2 86
=============================== ======= =========== ============ ======= =========== ============
The effect on profit before tax reflects the impact of current
service cost and net interest cost. The value of the scheme assets
is affected by changes in mortality rates, inflation and
discounting because they affect the carrying value of the insurance
assets.
Asset valuation
Liquidity funds, equities and bonds are valued using quoted
market prices in active markets. Exchange traded equity index
futures are valued at market prices.
Total return, interest and inflation swaps are bilateral
agreements between counterparties and do not have observable market
prices. These derivative contracts are valued using observable
market inputs.
Insured liabilities comprise annuity policies matching the
scheme obligation to identified groups of pensioners. These assets
are valued at the actuarial valuation of the corresponding
liability, reflecting this matching relationship. Property is
valued by specialists applying recognised property valuation
methods incorporating current market data on rental yields and
transaction prices.
Retirement-benefit plan assets
31 July 2017 31 July 2016
GBPm GBPm
===================================== =====================================
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
========================== ======== ======== ========== ===== ======== ======== ========== =====
Cash and cash equivalents
- cash 33 1 1 35 57 1 58
- liquidity funds 271 271 89 89
- cash collateral
and liquidity funds
held to support
exchange traded
futures 4 4 53 53
Equities
- UK funds 1 3 4 111 3 114
- North American
funds 124 2 126
- other regions
and global funds 94 1 95 214 5 219
Government bonds
- index-linked
bonds 1,298 1,298 1,410 1,410
- fixed-interest
bonds 393 81 3 477 599 70 20 689
Corporate bonds 1,048 184 1,232 861 145 5 1,011
Insured liabilities 1,050 1 1,051 802 1 803
Property 133 1 134 149 1 150
Other
- diversified growth
funds and scheme
receivables 407 24 431 285 25 310
- repurchase obligations (773) (773) (720) (720)
========================== ======== ======== ========== ===== ======== ======== ========== =====
Total market value 3,959 266 34 4,259 4,034 216 62 4,312
========================== ======== ======== ========== ===== ======== ======== ========== =====
SIPS has a portfolio of exchange traded equity index futures,
which are valued at market prices. These futures increase
"leverage" in SIPS, creating additional asset exposure. At 31 July
2017, the gross equity exposure generated by these exchange traded
futures was GBP73m (2016: GBP163m). At 31 July 2017 the aggregate
value of this strategy, including cash received as collateral, was
GBP3m (2016: GBP9m). The scheme was holding GBP10m (2016: GBP44m)
in liquidity funds to meet potential future obligations to
collateralise equity index futures.
UK other investments at 31 July 2017 included GBP70m (2016:
GBP162m) of investments in diversified growth funds held by SIPS,
GBP184m (2016: GBP107m) of investments in leveraged index linked UK
government bond funds held by TIGPS and GBP12m (2016: GBP9m) SIPS
interest and inflation swaps.
At 31 July 2017 SIPS assets were net of GBP773m (2016: GBP720m)
repurchase obligations, and included GBP4m (2016: GBP11m) gains on
interest rate swaps, GBP8m gains (2016: GBP2m losses) on inflation
swaps and GBP1m gains (2016: GBPnil) on total return swaps. See
risk management disclosures on page 160 for information on how the
scheme is using repurchase arrangements and swap contracts to match
the interest rate and inflation exposures of its assets to the
interest rate and inflation exposures of the scheme liabilities.
The scheme was holding GBP1m (2016: GBP45m) in liquidity funds to
meet potential future obligations to collateralise repurchase
arrangements or swap agreements.
The scheme assets do not include any property occupied by, or
other assets used by, the Group. Equities include investments in
broad-based equity indices, some of which hold ordinary equity
shares in Smiths Group plc.
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 July 2017 31 July 2016
GBPm GBPm
========================== ==========================
US US
SIPS TIGPS schemes SIPS TIGPS schemes
============================== ======= ======= ======== ======= ======= ========
Present value of funded
scheme liabilities
- Active deferred members (81) (92) (101) (82) (82) (124)
- Deferred members (891) (625) (160) (881) (688) (175)
- Pensioners (1,053) (809) (31) (1,086) (869) (16)
============================== ======= ======= ======== ======= ======= ========
Present value of funded
scheme liabilities (2,025) (1,526) (292) (2,049) (1,639) (315)
Market value of scheme assets 2,238 1,703 266 2,227 1,787 216
============================== ======= ======= ======== ======= ======= ========
Surplus/(deficit) 213 177 (26) 178 148 (99)
============================== ======= ======= ======== ======= ======= ========
Net retirement benefit obligations
31 July 2017 31 July 2016
GBPm GBPm
======================================= =======================================
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
============================== ======== ======== ========== ======= ======== ======== ========== =======
Market value of
scheme assets 3,959 266 34 4,259 4,034 216 62 4,312
Present value of
funded scheme liabilities (3,571) (292) (42) (3,905) (3,709) (315) (70) (4,094)
============================== ======== ======== ========== ======= ======== ======== ========== =======
Surplus/(deficit) 388 (26) (8) 354 325 (99) (8) 218
============================== ======== ======== ========== ======= ======== ======== ========== =======
Unfunded pension
plans (55) (8) (48) (111) (56) (8) (52) (116)
Post-retirement
healthcare (6) (11) (2) (19) (8) (12) (1) (21)
============================== ======== ======== ========== ======= ======== ======== ========== =======
Present value of
unfunded obligations (61) (19) (50) (130) (64) (20) (53) (137)
============================== ======== ======== ========== ======= ======== ======== ========== =======
Unrecognised asset
due to surplus
restriction (1) (1)
============================== ======== ======== ========== ======= ======== ======== ========== =======
Net pension asset/(liability) 327 (45) (58) 224 261 (119) (62) 80
============================== ======== ======== ========== ======= ======== ======== ========== =======
Post-retirement
assets 390 390 327 1 328
Post-retirement
liabilities (63) (45) (58) (166) (66) (119) (63) (248)
============================== ======== ======== ========== ======= ======== ======== ========== =======
Net pension asset/(liability) 327 (45) (58) 224 261 (119) (62) 80
============================== ======== ======== ========== ======= ======== ======== ========== =======
Where any individual scheme shows a recoverable 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 disclosed arises from the rights of the
employers to recover the surplus at the end of the life of the
scheme.
Amounts recognised in the consolidated income statement
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
========================================== ====== ======
Amounts charged to operating profit
Current service cost 4 3
Settlement loss 1 9
Scheme administration costs 7 7
========================================== ====== ======
12 19
========================================== ====== ======
The operating cost is charged as follows:
Cost of sales 1 1
Sales and distribution costs 1 1
Headline administrative expenses 2 1
Non-headline administrative expenses 8 16
========================================== ====== ======
12 19
========================================== ====== ======
Amounts (credited) to finance costs
Net interest income (2) (3)
========================================== ====== ======
Amounts recognised directly in the consolidated statement of
comprehensive income
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
==================================================== ====== ======
Actuarial gains/(losses)
Difference between interest credit and return
on assets (31) 395
Experience gains on scheme liabilities 22 58
Actuarial gains arising from changes in demographic
assumptions 69 47
Actuarial losses arising from changes in
financial assumptions (6) (539)
Movements in surplus restriction 1 (1)
==================================================== ====== ======
55 (40)
==================================================== ====== ======
Changes in present value of funded scheme assets
31 July 2017 31 July 2016
GBPm GBPm
===================================== =====================================
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
======================= ======== ======== ========== ===== ======== ======== ========== =====
At beginning of
period 4,034 216 62 4,312 3,523 445 49 4,017
Interest on assets 91 9 2 102 124 9 3 136
Actuarial (loss)/gain
on scheme assets (15) (14) (2) (31) 372 20 3 395
Employer contributions 27 67 5 99 199 68 2 269
Assets distributed
on settlement (32) (32) (360) (360)
Scheme administration
costs (5) (2) (7) (4) (3) (7)
Exchange adjustments (1) 2 1 51 8 59
Benefits paid (173) (9) (3) (185) (180) (14) (3) (197)
======================= ======== ======== ========== ===== ======== ======== ========== =====
At end of period 3,959 266 34 4,259 4,034 216 62 4,312
======================= ======== ======== ========== ===== ======== ======== ========== =====
Changes in present value of funded defined benefit
obligations
31 July 2017 31 July 2016
GBPm GBPm
======================================= =======================================
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
========================= ======== ======== ========== ======= ======== ======== ========== =======
At beginning of
period (3,709) (315) (70) (4,094) (3,385) (568) (57) (4,010)
Current service
cost (2) (2) (1) (1)
Interest on obligations (83) (11) (3) (97) (115) (12) (2) (129)
Actuarial gain/(loss)
on liabilities 48 27 1 76 (389) (31) (3) (423)
Liabilities extinguished
on settlement 31 31 350 1 351
Exchange adjustments (2) (2) (4) (68) (11) (79)
Benefits paid 173 9 3 185 180 14 3 197
========================= ======== ======== ========== ======= ======== ======== ========== =======
At end of period (3,571) (292) (42) (3,905) (3,709) (315) (70) (4,094)
========================= ======== ======== ========== ======= ======== ======== ========== =======
Changes in present value of unfunded defined benefit pensions
and post-retirement healthcare plans
Assets Obligations
====== ====== ====== ===========
Year Year Year Year
ended ended ended ended
31 31 31 31
July July July July
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
=================================== ====== ====== ====== ===========
At beginning of period (137) (115)
Reclassification of small unfunded
obligations
Current service cost (2) (2)
Interest on obligations (3) (4)
Actuarial gain/(loss) 9 (11)
Employer contributions 6 6
Exchange adjustments (3) (11)
Benefits paid (6) (6) 6 6
=================================== ====== ====== ====== ===========
At end of period (130) (137)
=================================== ====== ====== ====== ===========
Cash contributions
Company contributions to the defined benefit pension plans and
post-retirement healthcare plans for 2017 totalled GBP105m (2016:
GBP275m). This comprised regular contributions to funded schemes of
GBP24m (2016: GBP32m) to SIPS, GBP3m (2016: GBP11m) to TIGPS,
GBP67m (2016: GBP34m) to funded US Schemes, GBP2m to other schemes
and additional contributions of GBP3m to fund the closure of a
scheme in Canada. In addition, GBP6m (2016: GBP6m) was spent on
providing benefits under unfunded defined benefit pension and
post-retirement healthcare plans.
In 2018 the cash contributions to the Group's principal funded
defined benefit schemes are expected to total about GBP50m,
including GBP24m to SIPS and GBP3m to TIGPS, with the balance
relating mainly to the US scheme. Group contributions in respect of
the unfunded schemes and post-retirement healthcare are expected to
be in line with 2017.
9 Employee share schemes
The Group operates share schemes and plans for the benefit of
employees. The nature of the principal schemes and plans, including
general conditions, is set out below:
Long-Term Incentive Plan (LTIP)
The LTIP is a share plan under which an award over a capped
number of shares will vest after the end of the three-year
performance period if performance conditions are met. LTIP awards
are made to selected senior executives, including the executive
directors. Awards made prior to 2016 were made with different
targets for corporate executives and divisional executives. Since
2016 all LTIP awards have had one set of targets.
LTIP performance conditions
Each performance condition has a threshold below which no shares
vest and a maximum performance target at or above which the award
vests in full. For performance between 'threshold' and 'maximum',
awards vest on a straight-line sliding scale. The performance
conditions are assessed separately, so performance on one condition
does not affect the vesting of the other elements of the award. To
the extent that the performance targets are not met over the
three-year performance period, awards will lapse. There is no
re-testing of the performance conditions.
Group LTIP awards have performance conditions relating to
underlying revenue growth, growth in headline EPS adjusted to
exclude tax, ROCE, cash conversion and, for awards made before
2015, TSR relative to the FTSE 100 (excluding financial services
companies).
Divisional LTIP awards have performance conditions relating to
divisional performance against headline KPIs, including underlying
revenue and operating profit growth, operating margins, ROCE,
operating cash conversion, employee engagement and quality
metrics.
Smiths Group Co-Investment Plan (CIP) and Smiths Share Matching
Plan (SMP)
In 2015 the CIP was replaced by the SMP. Under the CIP and SMP
participants are required to invest between 25% and 50% of their
post-tax bonus purchasing the Company's shares at the prevailing
market price. At the end of a three-year period, if the executive
is still in office and provided the performance test is passed,
matching shares will be awarded in respect of any invested shares
retained for that period. The number of matching shares to be
awarded is determined by the Remuneration Committee at the end of
the year in which the bonus is earned by reference to annual bonus,
and other corporate financial criteria. The maximum award will not
exceed the value, before tax, of the bonus or salary invested in
shares by the executive.
For the CIP, vesting of matching shares will occur, and the
matching shares will be released, at the end of the three-year
period if the Group's Return on Capital Employed ('ROCE') over the
performance period exceeds the Group's weighted average cost of
capital ('WACC') over the performance period by an average margin
of at least 1% per annum. If ROCE exceeds WACC by an average margin
of 3% per annum, the enhanced performance condition is met, and a
second matching share will be issued for every purchased share. For
the SMP, vesting of matching shares will occur, and the matching
shares will be released, at the end of the three-year period
depending on the performance of the Group LTIP issued for the same
performance period. The first matching share is awarded if the
Group LTIP vests under any performance condition.
No future awards will be made under the CIP or SMP.
Smiths Excellence Plan (SEP)
In September 2016 the Smiths Excellence plan (SEP) was
introduced. The SEP is designed to reinforce value creation over
the medium term by focusing on specific objectives in key areas of
operational performance. Awards vest after two years, depending on
performance on the operational objectives during the first year and
continued employment with the Group. There is no retesting of
performance. However the Remuneration Committee has discretion to
adjust vesting rates if material misstatements in reported
performance are subsequently identified and awards are subject to
clawback provisions in the event of mis-conduct.
Directors are not eligible to participate in the SEP.
Restricted stock
The restricted stock is used by the Remuneration Committee, as a
part of the recruitment strategy, to make awards in recognition of
incentive arrangements forfeited on leaving a previous employer. If
an award is considered appropriate, the award will take account of
relevant factors including the fair value of awards forfeited, any
performance conditions attached, the likelihood of those conditions
being met and the proportion of the vesting period remaining.
Weighted
average
CIP Long-term Other exercise
and incentive Restricted share price
SEP SMP plans stock schemes Total GBP
====================== ==== ===== ========== ========== ======== ======= =========
Ordinary shares under
option ('000)
1 August 2015 1,369 2,649 1,494 5,512 GBP2.57
Granted 635 1,628 303 329 2,895 GBP0.99
Exercised (530) (199) (30) (380) (1,139) GBP2.95
Lapsed (35) (724) (222) (981) GBP2.20
====================== ==== ===== ========== ========== ======== ======= =========
31 July 2016 1,439 3,354 273 1,221 6,287 GBP1.83
Granted 817 1,581 58 218 2,674 GBP1.06
Exercised (339) (198) (119) (259) (915) GBP2.77
Lapsed (69) (174) (939) (7) (70) (1,259) GBP0.51
====================== ==== ===== ========== ========== ======== ======= =========
31 July 2017 748 926 3,798 205 1,110 6,787 GBP1.64
====================== ==== ===== ========== ========== ======== ======= =========
Options were exercised on an irregular basis during the period.
The average closing share price over the financial year was
1,499.95p (2016: 1,049.61p). There has been no change to the
effective option price of any of the outstanding options during the
period.
Weighted Weighted Exercisable Exercisable
average average weighted weighted
remaining remaining average average
Total Total exercise exercise
shares contractual shares contractual Options price Options price
under under
option life option life exercisable for exercisable for
at at at at at options at options
31 31 31 31 31 31
Jul July Jul July July exercisable July exercisable
2017 2017 2016 2016 2017 at 2016 at
31 31
Range of exercise July July
prices ('000) (months) ('000) (months) ('000) 2017 ('000) 2016
================== ======== ============= ======== ============= ============= ============= ============= =============
GBP0.00 - GBP2.00 5,677 17 5,066 18
GBP2.01 - GBP6.00 17 6
GBP6.01 - GBP10.00 791 24 924 33 42 GBP9.20 60 GBP9.04
GBP10.01 -
GBP14.00 319 32 280 13 90 GBP10.96 175 GBP10.95
================== ======== ============= ======== ============= ============= ============= ============= =============
For the purposes of valuing options to arrive at the share-based
payment charge, the Binomial option-pricing model has been used for
most schemes and the Monte Carlo method is used for schemes with
total shareholder return performance targets. The key assumptions
used in the models for 2017 and 2016 are volatility of 20% to 25%
(2016: 25% to 30%) and dividend yield of 3.50% (2016: 3.75%), based
on historical data, for the period corresponding with the vesting
period of the option. These generated a weighted average fair value
for SEP of GBP12.86p (2016: no grant), LTIP of GBP12.68 (2016:
GBP10.33), and restricted stock of GBP12.59 (2016: GBP10.03).
Included within staff costs is an expense arising from
share-based payment transactions of GBP15m (2016: GBP10m), of which
GBP14m (2016: GBP9m) relates to equity-settled share-based
payment.
10 Intangible assets
Acquired Software,
intangibles patents
(see and
Development table intellectual
Goodwill costs below) property Total
GBPm GBPm GBPm GBPm GBPm
================================ ======== =========== ============ ============= =====
Cost
At 1 August 2015 1,421 237 403 177 2,238
Exchange adjustments 253 43 71 17 384
Business combinations 5 3 8
Additions 25 11 36
Disposals (3) (6) (9)
================================ ======== =========== ============ ============= =====
At 31 July 2016 1,679 302 477 199 2,657
Exchange adjustments 23 4 (2) 1 26
Business combinations (note
26) 210 240 6 456
Additions 39 8 47
Disposals (15) (5) (20)
Business disposals (note 28) (254) (141) (3) (398)
================================ ======== =========== ============ ============= =====
At 31 July 2017 1,658 330 574 206 2,768
================================ ======== =========== ============ ============= =====
Amortisation
At 1 August 2015 115 121 358 126 720
Exchange adjustments 24 22 65 11 122
Charge for the year 26 15 17 58
Impairment charge 23 23
Disposals (3) (5) (8)
================================ ======== =========== ============ ============= =====
At 31 July 2016 162 166 438 149 915
Exchange adjustments 5 2 9 1 17
Charge for the year 27 17 18 62
Disposals (15) (5) (20)
Business disposals (note 28) (79) (140) (2) (221)
================================ ======== =========== ============ ============= =====
At 31 July 2017 88 180 324 161 753
================================ ======== =========== ============ ============= =====
Net book value at 31 July 2017 1,570 150 250 45 2,015
Net book value at 31 July 2016 1,517 136 39 50 1,742
Net book value at 1 August 2015 1,306 116 45 51 1,518
================================ ======== =========== ============ ============= =====
In addition to goodwill, the acquired intangible assets
comprise:
Patents,
licences Total
and Customer acquired
trademarks Technology relationships intangibles
GBPm GBPm GBPm GBPm
================================ =========== ========== ============== ============
Cost
At 1 August 2015 72 136 195 403
Exchange adjustments 13 24 34 71
Business combinations 3 3
================================ =========== ========== ============== ============
At 31 July 2016 85 160 232 477
Exchange adjustments 2 (3) (1) (2)
Business combinations (note 26) 103 137 240
Business disposals (note 28) (30) (49) (62) (141)
================================ =========== ========== ============== ============
At 31 July 2017 57 211 306 574
================================ =========== ========== ============== ============
Amortisation
At 1 August 2015 49 120 189 358
Exchange adjustments 9 22 34 65
Charge for the year 3 7 5 15
================================ =========== ========== ============== ============
At 31 July 2016 61 149 228 438
Exchange adjustments 1 2 6 9
Charge for the year 3 8 6 17
Business disposals (note 28) (29) (49) (62) (140)
================================ =========== ========== ============== ============
At 31 July 2017 36 110 178 324
================================ =========== ========== ============== ============
Net book value at 31 July 2017 21 101 128 250
Net book value at 31 July 2016 24 11 4 39
Net book value at 1 August 2015 23 16 6 45
================================ =========== ========== ============== ============
11 Impairment testing
Goodwill
Goodwill is not amortised but is tested for impairment at least
annually. Value in use or fair value less cost to sell calculations
are used to determine the recoverable amount of goodwill held
allocated to each group of cash generating units (CGU). Value in
use is calculated as the net present value of the projected
risk-adjusted cash-flows of the CGU. These forecast cash-flows are
based on the 2018 budget, the five-year strategic plan approved by
the Board and detailed divisional strategic projections, where
these have been prepared and approved by the Board. Fair value less
cost to sell is calculated using available information on past and
expected future profitability, valuation multiples for comparable
quoted companies and similar transactions (adjusted as required for
significant differences) and information on costs of similar
transactions. Fair value less costs to sell models are used when
trading projections in the strategic plan cannot be adjusted to
eliminate the impact of a major restructuring.
Goodwill is allocated by division as follows:
2017 2016
Number Number
2017 of 2016 of
GBPm CGUs GBPm CGUs
==================== ===== ======= ===== =======
John Crane 111 1 108 3
Smiths Medical 561 1 591 1
Smiths Detection 629 2 410 1
Smiths Interconnect 242 2 381 5
Flex-Tek 27 2 27 2
==================== ===== ======= ===== =======
1,570 8 1,517 12
==================== ===== ======= ===== =======
Following the disposal of the John Crane Artificial Lift
business (see note 28) and a restructuring to integrate China into
the global John Crane management structure, John Crane is now a
single CGU. Impairment testing has been completed on this basis for
2017.
Morpho Detection was acquired in April 2017 (see note 26). At 31
July 2017 a single management team was in place covering Continuing
Smiths Detection and Morpho Detection. However, the integration of
the two businesses was not sufficiently advanced to support
treating them as a single CGU for impairment testing. Based on the
current integration plan, it is anticipated that there will be
single CGU in 2018.
Following the disposal of Smiths Interconnect Power and Smiths
Interconnect Microwave Telecoms (see note 28) and the integration
of Smiths Interconnect Connectors and Smiths Interconnect Microwave
Components, Smiths Interconnect now has two CGUs, Smiths
Interconnect Connectors and Components and Smiths Interconnect
Microwave Subsystems.
Impairment testing assumptions
John Crane and Smiths Medical have strong aftermarket and
consumables businesses, with consistent sales trends. Smiths
Detection and Smiths Interconnect have greater sales and margin
volatility due to lower levels of recurring revenue and involvement
in government-funded programmes, particularly defence, and
customer-led technology innovation. The key assumptions used in
value in use calculations are:
-- Sales: projected sales are built up with reference to markets
and product categories. They incorporate past performance,
historical growth rates and projections of developments in key
markets.
-- Margins: projected margins reflect historical performance and
the impact of all completed projects to improve operational
efficiency and leverage scale. The projections do not include the
impact of future restructuring projects to which the Group is not
yet committed.
-- Discount rate: the discount rates have been calculated based
on the Group's weighted average cost of capital and risks specific
to the CGU being tested. The discount rates disclosed incorporate
risk adjustments where the projected sales and margins are affected
by significant delivery risks. Pre-tax rates of 12.2% to 16.9%
(2016: 11.0% to 14.3%) have been used for the impairment
testing.
-- Long-term growth rates: as required by IAS 36, growth rates
for the period after the detailed forecasts are based on the
long-term GDP projections of the primary market for the CGU. The
average growth rate used in the testing was 2.1% (2016: 2.2%).
These rates do not reflect the long-term assumptions used by the
Group for investment planning.
The assumptions used in the impairment testing of significant
CGUs are as follows:
Year ended
31 July
2017
======= ======== ========== ========== ========================
John Smiths
Crane Medical Smiths Detection Smiths Interconnect
======= ======== ====================== ========================
Original Connectors
Smiths Morpho Microwave and
Detection Detection Subsystems Components
============================= ======= ======== ========== ========== =========== ===========
Net book value of goodwill
(GBPm) 111 561 429 200 75 167
============================== ======= ======== ========== ========== =========== ===========
Fair
value
less
Value Value Value costs Value Value
Basis of valuation in use in use in use to sell in use in use
============================= ======= ======== ========== ========== =========== ===========
Discount rate 14.9% 12.2% 14.1% n/a 12.2% 16.9%
Period covered by management 5 years 5 years 1 year 5 years 5 years
projections 5 years
Long-term growth rates 2.2% 2.1% 2.0% n/a 2.2% 2.1%
============================== ======= ======== ========== ========== =========== ===========
The discount rate for Smiths Interconnect Connectors and
Components includes a risk adjustment.
Year ended 31
July 2016
========== ======== ========== ================================
John Smiths Smiths
Crane Medical Detection Smiths Interconnect
========== ======== ========== ================================
Core Original
Rotating Smiths Microwave
Equipment Detection Subsystems Connectors Power
============================= ========== ======== ========== =========== ========== =======
Net book value of goodwill
(GBPm) 104 591 410 75 100 128
============================= ========== ======== ========== =========== ========== =======
Value Value Value Value Value Value
Basis of valuation in use in use in use in use in use in use
============================= ========== ======== ========== =========== ========== =======
Discount rate 13.4% 11.0% 13.9% 11.8% 13.5% 11.7%
Period covered by management 5 years 5 years 5 years 5 years 5 years
projections 5 years
Long-term growth rates 2.3% 2.1% 2.0% 2.3% 2.0% 2.3%
============================= ========== ======== ========== =========== ========== =======
The remaining balance of the goodwill represents smaller
individual amounts which have been allocated to smaller CGUs.
Sensitivity analysis
Morpho Detection explosive detection business
Morpho Detection's fair value less costs to sell exceeds its
carrying value by GBP38m. Fair value was calculated using a level 3
valuation model. Sensitivity analysis performed around the base
case assumptions has indicated that for Morpho Detection, the
following changes in assumptions (in isolation), would cause the
fair value less costs to sell to fall below the carrying value. The
business was acquired in the year, so there are no
comparatives.
Year ended 31
July 2017
Change required
to trigger impairment
============================ ======================
Forecast earnings before
interest, tax, depreciation 8% reduction
and amortisation in EBITDA
0.9 reduction
Valuation multiple in multiple
============================ ======================
Forecast earnings before interest, tax, depreciation and
amortisation have been projected using:
-- expected future sales, based on orders, projected sales under
framework agreements, sales opportunities and current contract win
rates;
-- current cost structure and production capacity; and
-- adjustments to profit which a market participant would
normally make in assessing a business of this nature, including
market participant synergies.
The valuation multiple has been estimated using current share
prices for similar listed companies, multiples paid in recent
transactions and advice on current market pricing.
Other CGUs
For the other CGUs, sensitivity analysis performed around the
base case assumptions has indicated that no reasonable changes in
key assumptions would cause the carrying amount of any of the CGUs
to exceed their respective recoverable amounts.
Goodwill impairment
No impairment charges have been incurred (2016: GBP23m). In 2016
the following goodwill impairments were recognised: GBP5m for John
Crane Production Solutions, GBP7m for Smiths Interconnect Microwave
Components and GBP11m for Smiths Interconnect Microwave Telecoms.
All three of these businesses were sold in the current year, see
note 28.
Other intangible assets
The Group has no indefinite life intangible assets other than
goodwill. During the year impairment tests were carried out for
development projects which have not yet started to be amortised and
acquired intangibles where there were indications of impairment.
Value in use calculations were used to determine the recoverable
values of these assets.
No impairment charges have been incurred (2016: GBPnil).
Property, plant and equipment
Impairment charges of GBP5m for John Crane Production Solutions,
principally relating to property, and GBP1m for sites affected by
the Fuel for Growth restructuring were recognised in 2016.
12 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 2015 181 536 199 916
Exchange adjustments 31 91 30 152
Additions 19 42 13 74
Disposals (2) (35) (21) (58)
Transfers to disposal group held
for sale at the year end (6) (3) (1) (10)
================================= ========== ========== ========== =====
At 31 July 2016 223 631 220 1,074
Exchange adjustments 5 10 5 20
Business combinations (note 26) 7 1 8
Additions 6 44 12 62
Disposals (24) (42) (24) (90)
Business disposals (note 28) (6) (15) (5) (26)
=================================
At 31 July 2017 204 635 209 1,048
================================= ========== ========== ========== =====
Depreciation
At 1 August 2015 97 403 157 657
Exchange adjustments 16 68 24 108
Charge for the year 8 31 14 53
Impairments (note 11) 5 1 6
Disposals (1) (34) (20) (55)
Transfers to disposal group held
for sale at the year end (6) (3) (1) (10)
================================= ========== ========== ========== =====
At 31 July 2016 119 466 174 759
Exchange adjustments 2 8 4 14
Charge for the year 9 34 14 57
Disposals (18) (36) (23) (77)
Business disposals (note 28) (5) (11) (4) (20)
=================================
At 31 July 2017 107 461 165 733
================================= ========== ========== ========== =====
Net book value at 31 July 2017 97 174 44 315
Net book value at 31 July 2016 104 165 46 315
Net book value at 1 August 2015 84 133 42 259
================================= ========== ========== ========== =====
13 Inventories
31 July 31 July
2017 2016
GBPm GBPm
============================== ======= =======
Inventories comprise
Raw materials and consumables 148 174
Work in progress 86 102
Finished goods 218 202
============================== ======= =======
452 478
============================== ======= =======
The Group consumed GBP1,470m (2016: GBP1,319m) of inventories
during the period. In the year to 31 July 2017, GBP17m (2016:
GBP16m) was charged for the write-down of inventory and GBP6m
(2016: GBP4m) was released from inventory provisions no longer
required.
Inventory provisioning
31 July 31 July
2017 2016
GBPm GBPm
========================================= ======= =======
Gross inventory carried at full value 414 436
Gross value of inventory partly or fully
provided for 93 112
========================================= ======= =======
507 548
Inventory provision (55) (70)
========================================= ======= =======
Inventory after provisions 452 478
========================================= ======= =======
14 Trade and other receivables
31 July 31 July
2017 2016
GBPm GBPm
================== ======= =======
Non-current
Trade receivables 41 31
Accrued income 2 3
Prepayments 1
Other receivables 14 16
================== ======= =======
57 51
================== ======= =======
Current
Trade receivables 642 665
Accrued income 11 18
Prepayments 28 21
Other receivables 41 41
================== ======= =======
722 745
================== ======= =======
Trade receivables include balances not yet due of GBP75m (2016:
GBP47m) relating to multi-year Smiths Detection contracts, where
revenue recognition does not align with the agreed payment
schedule. The Group also has cash received of GBP78m (2016: GBP41m)
deferred in trade and other payables relating to Smiths Detection
contracts.
Trade receivables do not carry interest. Management considers
that the carrying value of trade and other receivables approximates
to the fair value. Trade and other receivables, including
prepayments, accrued income and other receivables qualifying as
financial instruments are classified as 'loans and receivables'.
The maximum credit exposure arising from these financial assets is
GBP720m (2016: GBP745m).
Trade receivables are disclosed net of provisions for bad and
doubtful debts. The provisions for bad and doubtful debts are based
on specific risk assessment and reference to past default
experience.
Credit risk is managed separately for each customer and, where
appropriate, a credit limit is set for the customer based on
previous experience of the customer and third party credit ratings.
The Group has no significant concentration of credit risk, with
exposure spread over a large number of customers. The largest
single customer is the US Federal Government, representing less
than 5% (2016: less than 5%) of Group revenue.
Ageing of trade receivables
31 July 31 July
2017 2016
GBPm GBPm
============================================ ======= =======
Trade receivables which are not impaired
and not yet due 539 535
Trade receivables which are not impaired
and less than three months overdue 104 109
Trade receivables which are not impaired
and more than three months overdue 30 45
Gross value of partially and fully provided
receivables 43 38
============================================ ======= =======
716 727
Provision for bad and doubtful debts (33) (31)
============================================ ======= =======
Trade receivables 683 696
============================================ ======= =======
15 Trade and other payables
31 July 31 July
2017 2016
GBPm GBPm
========================================= ======= =======
Non-current
Other payables 26 29
========================================= ======= =======
Current
Trade payables 202 202
Other payables 17 11
Other taxation and social security costs 27 25
Accruals 247 231
Deferred income 83 67
========================================= ======= =======
576 536
========================================= ======= =======
Trade and other payables, including accrued expenses and other
payables qualifying as financial instruments, are accounted for at
amortised cost and are categorised as other financial
liabilities.
16 Financial assets
At 31 July 2017 GBP11m (2016: GBPnil) was held on deposit with
banks as security for liabilities or letters of credit.
The Group invests in early stage businesses that are developing
or commercialising related technology. In 2016, GBP2m was invested
in Detection businesses.
17 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 July 31 July
2017 2016
GBPm GBPm
======================================= ======= =======
Cash and cash equivalents
Net cash and deposits 782 431
======================================= ======= =======
Short-term borrowings
Bank overdrafts (1) (1)
EUR300m 4.125% Eurobond 2017 (255)
$175m 7.37% US$ Private placement 2018 (133)
Bank and other loans (1) (1)
Interest accrual (16) (13)
======================================= ======= =======
(151) (270)
======================================= ======= =======
Long-term borrowings
$175m 7.37% US$ Private placement 2018 (132)
$250m 7.20% US$ Guaranteed notes 2019 (189) (189)
$400m 3.625% US$ Guaranteed notes 2022 (301) (304)
EUR600m 1.25% Eurobond 2023 (533) (512)
EUR650m 2.00% Eurobond 2027 (574)
Bank and other loans (1) (2)
======================================= ======= =======
(1,598) (1,139)
======================================= ======= =======
Borrowings (1,749) (1,409)
======================================= ======= =======
Net debt (967) (978)
======================================= ======= =======
The $175m 7.37% US$ Private placement 2018 was repaid early in
August 2017.
Cash and cash equivalents include highly liquid investments with
maturities of three months or less.
Borrowings are accounted for at amortised cost and are
categorised as other financial liabilities. See note 18 for a
maturity analysis of borrowings.
Interest of GBP45m (2016: GBP47m) was charged to the
consolidated income statement in this period in respect of public
bonds.
Secured loans
Loans amounting to GBP2m (2016: GBP3m) were secured on plant and
equipment with a book value of GBP3m (2016: GBP3m).
Net cash and cash equivalents
31 July 31 July
2017 2016
GBPm GBPm
============================== ======= =======
Cash at bank and in hand 226 161
Short-term deposits 556 270
============================== ======= =======
Cash and cash equivalents 782 431
Bank overdrafts (1) (1)
============================== ======= =======
Net cash and cash equivalents 781 430
============================== ======= =======
Netting
Cash and overdraft balances in interest compensation cash
pooling systems are reported gross on the balance sheet. The cash
pooling agreements incorporate a legally enforceable right of net
settlement. However, there is no intention to settle the balances
net, so these arrangements do not qualify for net presentation. At
31 July 2017 the total value of overdrafts on accounts in interest
compensation cash pooling systems was GBPnil (2016: less than
GBP1m). The balances held in zero balancing cash pooling
arrangements have daily settlement of balances, so netting is not
relevant.
Movements in net debt
Net
cash
and Other
cash short-term Long-term Net
equivalents borrowings borrowings debt
GBPm GBPm GBPm GBPm
==================================== ============ =========== =========== =====
At 31 July 2016 430 (269) (1,139) (978)
Foreign exchange gains and
losses (10) 5 (56) (61)
Net cash inflow 361 361
Repayment of borrowings 256 256
Drawdown of borrowings (546) (546)
Capitalisation, interest
accruals and unwind of capitalised
fees (3) (1) (4)
Fair value movement from
interest rate hedging 1 4 5
Change in maturity analysis (140) 140
====================================== ============ =========== =========== =====
At 31 July 2017 781 (150) (1,598) (967)
====================================== ============ =========== =========== =====
18 Financial risk management
The Group's international operations and debt financing expose
it to financial risks which include the effects of changes in
foreign exchange rates, changes in debt market prices, interest
rates, credit risks and liquidity risks.
Treasury and risk management policies are set by the Board. The
policy sets out specific guidelines to manage foreign exchange
risk, interest rate risk, credit risk and the use of financial
instruments to manage risk. The instruments and techniques used to
manage exposures include foreign currency derivatives, debt and
other interest rate derivatives. The central treasury function
monitors financial risks and compliance with risk management
policies. The management of operational credit risk is discussed in
note 14.
(a) Foreign exchange risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from
sales or purchases by businesses in currencies other than their
functional currency. It is Group policy that, when the net foreign
exchange exposure to known future sales and purchases is material,
this exposure is hedged using forward foreign exchange contracts.
The net exposure is calculated by adjusting the expected cash-flow
for payments or receipts in the same currency linked to the sale or
purchase. This policy minimises the risk that the profits generated
from the transaction will be affected by foreign exchange movements
which occur after the price has been determined. Hedge accounting
documentation and effectiveness testing are only undertaken if it
is cost effective.
The following table shows the currency of financial instruments.
It excludes loans and derivatives designated as net investment
hedges.
At 31 July 2017
====================================
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
==================================== ======== ===== ===== ===== =====
Financial assets and liabilities
Financial instruments included
in trade and other receivables 55 351 143 171 720
Financial instruments included
in trade and other payables (57) (214) (69) (72) (412)
Cash and cash equivalents 5 512 80 184 781
Borrowings not designated as
net investment hedges 1 (12) (275) (2) (288)
==================================== ======== ===== ===== ===== =====
4 637 (121) 281 801
Exclude balances held in operations
with the same functional currency (5) (220) (102) (195) (522)
Exposure arising from intra-group
loans (352) (85) (83) (520)
Impact of fair value hedging
of exchange exposure (269) 269
Forward foreign exchange contracts (88) 19 50 19
==================================== ======== ===== ===== ===== =====
(358) 84 11 22 (241)
==================================== ======== ===== ===== ===== =====
At 31 July 2016
====================================
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
==================================== ======== ===== ===== ===== =====
Financial assets and liabilities
Financial instruments included
in trade and other receivables 38 391 136 180 745
Financial instruments included
in trade and other payables (48) (203) (72) (79) (402)
Cash and cash equivalents 189 129 41 72 431
Borrowings not designated as
net investment hedges 1 (12) (5) (1) (17)
==================================== ======== ===== ===== ===== =====
180 305 100 172 757
Exclude balances held in operations
with the same functional currency (180) (188) (101) (167) (636)
Exposure arising from intra-group
loans (165) (70) (77) (312)
Forward foreign exchange contracts (286) 112 119 55
==================================== ======== ===== ===== ===== =====
(286) 64 48 (17) (191)
==================================== ======== ===== ===== ===== =====
Financial instruments included in trade and other receivables
comprise trade receivables, accrued income and other receivables
which qualify as financial instruments. Similarly, financial
instruments included in trade and other payables comprise trade
payables, accrued expenses and other payables that qualify as
financial instruments.
Based on the assets and liabilities held at the year-end, if the
specified currencies were to strengthen 10% while all other market
rates remained constant, the change in the fair value of financial
instruments not designated as net investment hedges would have the
following effect:
Impact Impact
on profit Gain/(loss) on profit Gain/(loss)
for recognised for recognised
the in the in
year reserves year reserves
31 31 31 31
July July July July
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
========== ========== =========== ========== ===========
US dollar (5) (5) 3 2
Euro (3) 2 (6) (3)
Sterling 1 (1) 16 (2)
========== ========== =========== ========== ===========
These sensitivities were calculated before adjusting for tax and
exclude the effect of quasi-equity intra-group loans.
Cash-flow hedging
The Group uses foreign currency contracts to hedge future
foreign currency sales and purchases. At 31 July 2017 contracts
with a nominal value of GBP407m (2016: GBP393m) were designated as
hedging instruments. In addition, the Group had outstanding foreign
currency contracts with a nominal value of GBP243m (2016: GBP529m)
which were being used to manage transactional foreign exchange
exposures, but were not accounted for as cash-flow hedges. The fair
value of the contracts is disclosed in note 19.
The majority of hedged transactions will be recognised in the
consolidated income statement in the same period that the cash
flows are expected to occur, with the only differences arising
because of normal commercial credit terms on sales and purchases.
Of the foreign exchange contracts designated as hedging instruments
86% are for periods of 12 months or less (2016: 91%).
The movements in the cash-flow hedge reserve during the period
are summarised in the table below:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
============================================= ====== ======
Brought forward cash-flow hedge reserve at
start of year (7) 3
Gains/(losses) on effective cash-flow hedges
recognised in equity 3 (10)
Amounts removed from the hedge reserve and
recognised in the following lines on the
income statement
- revenue 9 (1)
- cost of sales (4) 1
============================================= ====== ======
Carried forward cash-flow hedge reserve at
end of year 1 (7)
============================================= ====== ======
Translational currency exposure
The Group has significant investments in overseas operations,
particularly in the United States and Europe. As a result, the
sterling value of the Group's balance sheet can be significantly
affected by movements in exchange rates. The Group seeks to
mitigate the effect of these translational currency exposures by
matching the net investment in overseas operations with borrowings
denominated in their functional currencies, except where
significant adverse interest differentials or other factors would
render the cost of such hedging activity uneconomic. This is
achieved by borrowing primarily in the relevant currency or in some
cases indirectly using forward foreign exchange contracts and
cross-currency swaps.
Net investment hedges
The table below sets out the currency of loans and swap
contracts designated as net investment hedges:
At 31
July
2017
======== ======= ===== ===== =======
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
=================================== ======== ======= ===== ===== =======
Loans designated as net investment
hedges (621) (840) (1,461)
Cross-currency swap contracts 254 (568) 359 45
Currency swap contracts 109 (109)
=================================== ======== ======= ===== ===== =======
363 (1,189) (481) (109) (1,416)
=================================== ======== ======= ===== ===== =======
At 31
July
2016
======== ===== ===== ===== =======
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
=================================== ======== ===== ===== ===== =======
Loans designated as net investment
hedges (625) (767) (1,392)
Cross-currency swap contracts (358) 373 15
Currency swap contracts 111 (111)
=================================== ======== ===== ===== ===== =======
111 (983) (394) (111) (1,377)
=================================== ======== ===== ===== ===== =======
At 31 July 2017 swap contracts hedged the Group's exposure to
Canadian dollars, Japanese yen and Chinese renminbi (31 July 2016:
Canadian dollars, Japanese yen and Chinese renminbi).
All the currency swap contracts designated as net investment
hedges are current (2016: current). The cross-currency swap
contracts are non-current. Swaps generating GBP327m of the US
dollar exposure (2016: GBP358m) will mature in April 2023 and swaps
generating GBP241m of the US dollar exposure (2016: GBPnil) will
mature in February 2027.
The gains and losses that have been deferred in the net
investment hedge reserve, and recycled in the period, are shown in
the table below:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
============================================= ====== ======
Brought forward net investment hedge reserve
at start of year (294) (66)
Amounts removed from the hedge reserve and
recognised in the income statement 20
Amounts deferred in the period on effective
net investment hedges (17) (228)
============================================= ====== ======
Carried forward net investment hedge reserve
at end of year (291) (294)
============================================= ====== ======
The fair values of these net investment hedges are subject to
exchange rate movements. Based on the hedging instruments in place
at the year-end, if the specified currencies were to strengthen 10%
while all other market rates remained constant, it would have the
following effect:
Loss Loss
recognised recognised
in in
hedge hedge
reserve reserve
31 31
July July
2017 2016
GBPm GBPm
========== ============ ===========
US dollar 132 98
Euro 53 35
============ ============ ===========
These movements would be fully offset by an opposite movement on
the retranslation of the net assets of the overseas subsidiaries.
These sensitivities were calculated before adjusting for tax.
(b) Interest rate risk
The Group operates an interest rate policy designed to optimise
interest cost and reduce volatility in reported earnings. The
Group's current policy is to require interest rates to be fixed for
greater than 70% of the level of gross debt. This is achieved
through fixed rate borrowings and interest rate swaps. At 31 July
2017 57% (2016: 59%) of the Group's gross borrowings were at fixed
interest rates, after adjusting for interest rate swaps and the
impact of short maturity derivatives designated as net investment
hedges. The Group monitors its fixed rate risk profile against both
gross and net debt. For medium-term planning, it now focuses on
gross debt to eliminate the fluctuations of variable cash levels
over the cycle.
The weighted average interest rate on borrowings and
cross-currency swaps at 31 July 2017, after interest rate swaps, is
3.52% (2016: 3.68%).
Interest rate profile of financial assets and liabilities and
the fair value of borrowings
The following table shows the interest rate risk exposure of
investments, cash and borrowings, with the borrowings adjusted for
the impact of interest rate hedging. The other financial assets and
liabilities do not earn or bear interest and for all financial
instruments except for borrowings the carrying value is not
materially different from their fair value.
Available Cash Fair Available Cash Fair
for and value for and value
sale cash of sale cash of
investments equivalents Borrowings borrowings investments equivalents Borrowings borrowings
31 31 31 31 31 31 31 31
July July July July July July July July
2017 2017 2017 2017 2016 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
===================== =========== =========== ========== ========== =========== =========== ========== ==========
Fixed interest
Less than one year (134) (140) (153) (158)
Between one and five
years (190) (206) (322) (362)
Greater than five
years (672) (693) (353) (362)
===================== =========== =========== ========== ========== =========== =========== ========== ==========
Total fixed interest
financial
assets/(liabilities) (996) (1,039) (828) (882)
Floating rate
interest
financial
assets/(liabilities) 6 711 (753) (753) 390 (581) (581)
===================== =========== =========== ========== ========== =========== =========== ========== ==========
Total
interest-bearing
financial
assets/(liabilities) 6 711 (1,749) (1,792) 390 (1,409) (1,463)
Non-interest-bearing
assets/(liabilities)
in the same category 15 71 9 41
===================== =========== =========== ========== ========== =========== =========== ========== ==========
Total 21 782 (1,749) (1,792) 9 431 (1,409) (1,463)
===================== =========== =========== ========== ========== =========== =========== ========== ==========
Interest rate hedging
At 31 July 2017 and 31 July 2016 the Group has designated the
following hedges against variability in the fair value of
borrowings arising from fluctuations in base rates:
-- US$150m interest rate swap which matures on 12 October 2022
partially hedging the US$ 2022 Guaranteed notes; and
-- the fixed/floating element of EUR400m of EUR/US$ interest
rate swaps which mature on 28 April 2023 partially hedging the EUR
2023 Eurobond.
At 31 July 2017 the Group has designated the following hedge
against variability in the fair value of borrowings arising from
fluctuations in base rates and exchange rates:
-- the fixed/floating and EUR exchange exposure of EUR300m of
EUR/US$ interest rate swaps which mature on 23 February 2027
partially hedging the EUR 2027 Eurobond.
The fair values of the hedging instruments are disclosed in note
19. The effect of the swaps is to convert GBP741m (2016: GBP552m)
debt from fixed rate to floating rate.
Sensitivity of interest charges to interest rate movements
The Group has exposure to sterling, US dollar and euro interest
rates. However the Group does not have a significant exposure to
interest rate movements for any individual currency. Based on the
composition of net debt and investments at 31 July 2017, and taking
into consideration all fixed rate borrowings and interest rate
swaps in place, a one percentage point (100 basis points) change in
average floating interest rates for all three currencies would have
less than GBP1m impact (2016: impact of GBP2m) on the Group's
profit before tax.
(c) Financial credit risk
The Group is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but
does not currently expect any counterparties to fail to meet their
obligations. Credit risk is mitigated by the Board-approved policy
of only placing cash deposits with highly rated relationship bank
counterparties within counterparty limits established by reference
to their Standard & Poor's long-term debt rating. In the normal
course of business, the Group operates cash pooling systems, where
a legal right of set-off applies.
The maximum credit risk exposure in the event of other parties
failing to perform their obligations under financial assets,
excluding trade and other receivables and derivatives, totals
GBP803m at 31 July 2017 (2016: GBP440m).
31 July 31 July
2017 2016
GBPm GBPm
========================================= ======= =======
Cash in AAA+ liquidity funds 376
Cash at banks with at least a AA- credit
rating 226 215
Cash at banks with a A+ credit rating 98 126
Cash at other banks 82 90
Investments in bank deposits 11
Other investments 10 9
========================================= ======= =======
803 440
========================================= ======= =======
At 31 July 2017 the maximum exposure with a single bank for
deposits and cash is GBP126m (2016: GBP97m), whilst the maximum
mark to market exposure for derivatives is GBP20m (2016: GBP10m).
These banks have AA- and AA- credit rating, respectively (2016: AA-
and AA-).
(d) Liquidity risk
Borrowing facilities
The Board policy specifies the maintenance of unused committed
credit facilities of at least GBP200m at all times to ensure it has
sufficient available funds for operations and planned development,
which is provided by a multi-currency revolving credit
facility.
Smiths has a $800m Revolving Credit Facility that matures on 19
February 2021. At the balance sheet date, the Group had the
following undrawn credit facilities:
31 July 31 July
2017 2016
GBPm GBPm
=================================== ======= =======
Expiring within one year
Expiring between one and two years
Expiring after more than two years 607 605
=================================== ======= =======
607 605
=================================== ======= =======
Cash deposits
As at 31 July 2017, GBP556m (2016: GBP270m) of cash and cash
equivalents was on deposit with various banks of which GBP83m
(2016: GBP119m) was on deposit with UK banks, GBP375m (2016:
GBPnil) was in liquidity funds and GBP11m (2016: GBPnil) of
investments comprised bank deposits held to secure liabilities and
letters of credit.
Gross contractual cash-flows for borrowings
Contractual Total Contractual Total
Fair Fair
Borrowings value interest contractual Borrowings value interest contractual
(Note (Note
17) adjustments payments cash-flows 17) adjustments payments cash-flows
31 31 31 31 31 31 31 31
July July July July July July July July
2017 2017 2017 2017 2016 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======== ========== ============= =========== ============= ========== ============= =========== =============
Less
than
one
year (151) 1 (38) (188) (270) 2 (39) (307)
Between
one and
two
years (190) (43) (233) (133) (41) (174)
Between
two and
three
years (29) (29) (190) (1) (32) (223)
Between
three
and
four
years (29) (29) (18) (18)
Between
four
and
five
years (29) (29) (18) (18)
Greater
than
five
years (1,408) (1) (71) (1,480) (816) 8 (30) (838)
======== ========== ============= =========== ============= ========== ============= =========== =============
Total (1,749) (239) (1,988) (1,409) 9 (178) (1,578)
======== ========== ============= =========== ============= ========== ============= =========== =============
The figures presented in the borrowings column include the
non-cash adjustments which are highlighted in the adjacent column.
The contractual interest reported for borrowings is before the
effect of interest rate swaps.
Gross contractual cash-flows for derivative financial
instruments
Net Net
Receipts Payments cash-flow Receipts Payments cash-flow
31 31 31 31 31 31
July July July July July July
2017 2017 2017 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
====================== ======== ======== ========== ======== ======== ==========
Assets
Less than one year 315 (310) 5 425 (415) 10
Greater than one year 710 (642) 68 378 (374) 4
Liabilities
Less than one year 279 (287) (8) 467 (485) (18)
Greater than one year 51 (54) (3) 28 (29) (1)
====================== ======== ======== ========== ======== ======== ==========
Total 1,355 (1,293) 62 1,298 (1,303) (5)
====================== ======== ======== ========== ======== ======== ==========
This table presents the undiscounted future contractual
cash-flows for all derivative financial instruments. For this
disclosure, cash-flows in foreign currencies are translated using
the spot rates at the balance sheet date. The fair values of these
financial instruments are presented in note 19.
Gross contractual cash-flows for other financial liabilities
The contractual cash-flows for financial liabilities included in
trade and other payables are: GBP400m (2016: GBP388m) due in less
than one year, GBP8m (2016: GBP9m) due between one and five years
and GBP4m (2016: GBP5m) due after more than five years.
19 Derivative financial instruments
The tables below set out the nominal amount and fair value of
derivative contracts held by the Group, identifying the derivative
contracts which qualify for hedge accounting treatment:
At 31
July
2017
============== ====== =========== ======
Contract
or underlying
nominal Fair
amount value
=============== ====== =========== ======
Assets Liabilities Net
GBPm GBPm GBPm GBPm
====================================== ============== ====== =========== ======
Foreign exchange contracts (cash-flow
hedges) 407 11 (10) 1
Foreign exchange contracts (not
hedge accounted) 243 2 (1) 1
======================================= ============== ====== =========== ======
Total foreign exchange contracts 650 13 (11) 2
======================================= ============== ====== =========== ======
Currency swaps (net investment
hedges) 109
======================================= ============== ====== =========== ======
Cross currency swaps (fair value
and net investment hedges) 569 56 56
Interest rate swaps (fair value
hedges) 113 (1) (1)
======================================= ============== ====== =========== ======
Total financial derivatives 1,441 69 (12) 57
======================================= ============== ====== =========== ======
Balance sheet entries
Non-current 745 56 (2) 54
Current 696 13 (10) 3
======================================= ============== ====== =========== ======
Total financial derivatives 1,441 69 (12) 57
======================================= ============== ====== =========== ======
At 31
July
2016
============== ====== =========== ======
Contract
or underlying
nominal Fair
amount value
=============== ====== =========== ======
Assets Liabilities Net
GBPm GBPm GBPm GBPm
====================================== ============== ====== =========== ======
Foreign exchange contracts (cash-flow
hedges) 393 8 (15) (7)
Foreign exchange contracts (not
hedge accounted) 529 3 (4) (1)
======================================= ============== ====== =========== ======
Total foreign exchange contracts 922 11 (19) (8)
======================================= ============== ====== =========== ======
Currency swaps (net investment
hedges) 111 (1) (1)
======================================= ============== ====== =========== ======
Cross currency swaps (fair value
and net investment hedges) 326 25 25
Interest rate swaps (fair value
hedges) 214 6 6
======================================= ============== ====== =========== ======
Total financial derivatives 1,573 42 (20) 22
======================================= ============== ====== =========== ======
Balance sheet entries
Non-current 473 29 (1) 28
Current 1,100 13 (19) (6)
======================================= ============== ====== =========== ======
Total financial derivatives 1,573 42 (20) 22
======================================= ============== ====== =========== ======
Currency swaps not hedge accounted
These contracts comprise derivatives which were previously part
of the net investment hedging programme and matching contracts to
eliminate this exposure. There is no further net exposure arising
from these contracts.
Accounting for other derivative contracts
Any foreign exchange contracts which are not formally designated
as hedges and tested are classified as 'held for trading' and not
hedge accounted.
Netting
International Swaps and Derivatives Association (ISDA) master
netting agreements are in place with derivative counterparties
except for contracts traded on a dedicated international electronic
trading platform used for operational foreign exchange hedging.
Under these agreements if a credit event occurs, all outstanding
transactions under the ISDA are terminated and only a single net
amount per counterparty is payable in settlement of all
transactions. The ISDA agreements do not meet the criteria for
offsetting, since the offsetting is enforceable only if specific
events occur in the future, and there is no intention to settle the
contracts on a net basis.
Assets Liabilities Assets Liabilities
31 31 31 31
July July July July
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
=============================== ====== =========== ====== ===========
Gross value of assets and
liabilities 69 (12) 42 (20)
Related assets and liabilities
subject to master netting
agreements (1) 1 (2) 2
================================= ====== =========== ====== ===========
Net exposure 68 (11) 40 (18)
================================= ====== =========== ====== ===========
20 Fair value of financial instruments
Carrying Fair Carrying Fair
value value value value
31 31 31 31
July July July July
2017 2017 2016 2016
Notes GBPm GBPm GBPm GBPm
========================= ===== ======== ======= ======== =======
Level 2 valuations
Financial assets - other
investments 16 11 11
Financial derivatives -
assets 19 69 69 42 42
Borrowings 17 (1,749) (1,792) (1,409) (1,463)
Financial derivatives -
liabilities 19 (12) (12) (20) (20)
Level 3 valuations
Financial assets - other
investments 16 10 10 9 9
========================== ===== ======== ======= ======== =======
Investments in bank deposits are valued at the bank balance,
adjusted for accrued interest.
Derivatives, including forward exchange contracts, currency
swaps, interest rate instruments, and embedded derivatives, are
valued at the net present value of the future cash-flows calculated
using market data at the balance sheet date (principally exchange
rates and yield curves).
Borrowings are valued at the net present value of the future
cash-flows using credit spreads and yield curves derived from
market data. Borrowings are carried on the balance sheet at
amortised cost adjusted for fair value interest rate hedging. The
fair value of fixed rate borrowings is only used for supplementary
disclosures.
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.
21 Commitments
Operating lease commitments - minimum lease payments
The minimum uncancellable lease payments which the Group is
committed to make are:
31 July 31 July
2017 2016
========== ======= ========== =======
Land Land
and and
buildings Other buildings Other
GBPm GBPm GBPm GBPm
==================================== ========== ======= ========== =======
Payments due
- not later than one year 34 7 35 7
- later than one year and not later
than five years 68 7 76 6
- later than five years 24 22
==================================== ========== ======= ========== =======
126 14 133 13
==================================== ========== ======= ========== =======
Other commitments
At 31 July 2017, commitments, comprising bonds and guarantees
arising in the normal course of business, amounted to GBP186m
(2016: GBP174m), including pension commitments of GBP54m (2016:
GBP54m).
22 Provisions and contingent liabilities
Non-headline
Trading and legacy Total
======= ================================ =====
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
============================= ======= =========== ============ ===== =====
Current liabilities 26 32 20 16 94
Non-current liabilities 6 220 74 5 305
============================== ======= =========== ============ ===== =====
At 31 July 2016 32 252 94 21 399
Exchange adjustments 1 1 1 3
Business combinations (note
26) 2 2
Provision charged 21 5 8 8 42
Provision released (9) (1) (13) (2) (25)
Unwind of provision discount 4 2 6
Utilisation (14) (24) (8) (11) (57)
Business disposals (2) (2)
============================== ======= =========== ============ ===== =====
At 31 July 2017 31 237 84 16 368
============================== ======= =========== ============ ===== =====
Current liabilities 25 30 21 9 85
Non-current liabilities 6 207 63 7 283
============================== ======= =========== ============ ===== =====
At 31 July 2017 31 237 84 16 368
============================== ======= =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions that are discounted.
Trading
Warranty provision and product liability
At 31 July 2017 there are warranty and product liability
provisions of GBP28m (2016: GBP29m). Warranties over the Group's
products typically cover periods of between one and three years.
Provision is made for the likely cost of after-sales support based
on the recent past experience of individual businesses.
Commercial disputes and litigation in respect of ongoing
business activities
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
though there can be no guarantee that such provisions (which may be
subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to
commercial disputes and litigation such as government price audits,
product liability claims, employee disputes and other kinds of
lawsuits, and faces different types of legal issues in different
jurisdictions. The high level of activity in the US, for example,
exposes the Group to the likelihood of various types of litigation
commonplace in that country, such as 'mass tort' and 'class action'
litigation, legal challenges to the scope and validity of patents,
and product liability and insurance subrogation claims. These types
of proceedings (or the threat of them) are also used to create
pressure to encourage negotiated settlement of disputes. Any claim
brought against the Group (with or without merit), could be costly
to defend. These matters are inherently difficult to quantify. In
appropriate cases a provision is recognised based on best estimates
and management judgement but there can be no guarantee that these
provisions (which may be subject to potentially material revision
from time to time) will result in an accurate prediction of the
actual costs and liabilities that may be incurred. There are also
contingent liabilities in respect of litigation for which no
provisions are made.
The Group operates in some markets where the risk of unethical
or corrupt behaviour is material and has procedures, including an
employee 'Ethics Alertline', to help it identify potential issues.
Such procedures will, from time to time, give rise to internal
investigations, sometimes conducted with external support, to
ensure that Smiths Group properly understands risks and concerns
and can take steps both to manage immediate issues and to improve
its practices and procedures for the future. The Group also
co-operates with relevant authorities in investigating business
conduct issues whenever requested to. The Group is not aware of any
issues which are expected to generate material financial
exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in
numerous lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. Until
2006, the awards, the related interest and all material defence
costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product
liability. Provision is made in respect of the expected costs of
defending known and predicted future claims and of adverse
judgments in relation thereto, to the extent that such costs can be
reliably estimated.
The JCI products generally referred to in these cases consist of
industrial sealing product, primarily packing and gaskets. The
asbestos was encapsulated within these products in such a manner
that causes JCI to believe, based on tests conducted on its behalf,
that the products were safe. JCI ceased manufacturing products
containing asbestos in 1985.
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. The table below summarises the JCI claims experience over
the last 38 years since the start of this litigation:
Year Year Year Year Year
ended ended ended ended ended
31 31 31 31 31
July July July July July
2017 2016 2015 2014 2013
============================ ======= ======= ======= ======= =======
JCI claims experience
Claims against JCI that
have been dismissed 273,000 247,000 242,000 235,000 230,000
Claims JCI is currently
a defendant in 50,000 74,000 76,000 80,000 81,000
Cumulative final judgments,
after appeals, against JCI
since 1979 138 137 133 131 121
Cumulative value of awards
($'m) since 1979 160 158 153 149 120
============================ ======= ======= ======= ======= =======
The number of claims outstanding at 31 July 2017 reflects the
benefit of 26,000 claims being dismissed in the year.
JCI has also incurred significant additional defence costs. The
litigation involves claims for a number of allegedly asbestos
related diseases, with awards, when made, for mesothelioma tending
to be larger than those for the other diseases. JCI's ability to
defend mesothelioma cases successfully is, therefore, likely to
have a significant impact on its annual aggregate adverse judgment
and defence costs.
John Crane, Inc. litigation provision
The provision is based on past history of JCI claims and
well-established tables of asbestos-related disease incidence
projections. The provision is determined using advice from asbestos
valuation experts, Bates White LLC. The assumptions made in
assessing the appropriate level of provision include: the period
over which the expenditure can be reliably estimated; the future
trend of legal costs; the rate of future claims filed; the rate of
successful resolution of claims; and the average amount of
judgments awarded.
Established incidence curves can be used to estimate the likely
future pattern of asbestos related disease. However, JCI's claims
experience is also 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
in specific jurisdictions which move the balance of risk and
opportunity for claimants; and legislative and procedural changes
in both the state and federal court systems. The build-up of assets
in trusts established by asbestos defendants in Chapter 11
restructuring ("524(g) trusts") will increase the influence of
these trusts on the behaviour of claimants. Developments in the
Garlock Sealing Technologies LLC Chapter 11 proceedings have
provided additional data on plaintiff claims to 524 (g) trusts.
Given the evidence that emerged of inconsistent duplicate claims,
there is a significant likelihood that this will lead to changes in
the pattern of claims made in the future, and the costs arising
from claims.
The projections use a limited 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. Asbestos is the
longest running mass tort litigation in American history which is
constantly evolving in ways that cannot be anticipated. JCIs
defence strategy also generates a significantly different pattern
of legal costs and settlement expenses from other defendants, so
JCI is in an extremely rare position, and evidence from other
litigation cannot be used to improve the reliability of the
projections. A ten year (2016: ten years) time horizon has been
used based on past experience regarding significant changes in the
litigation environment that have occurred every few years and on
the amount of time taken in the past for some of those changes to
impact the broader asbestos litigation environment, and recent
events, like the Garlock Sealing Technologies LLC Chapter 11
proceedings, which may lead to further major changes.
The rate of future claims filed has been estimated using
well-established tables of asbestos incidence projections to
determine the likely population of potential claimants, and JCI's
past experience to determine what proportion of this population
will make a claim against JCI. The JCI products generally referred
to in claims had industrial and marine applications. As a result,
the incidence curve used for JCI projections excludes construction
workers, and is a composite of the curves that predict asbestos
exposure-related disease from shipyards and other occupations. This
is consistent with JCI's litigation history.
The rate of successful resolution of claims and the average
amount of any judgments awarded are projected based on the past
history of JCI claims, since this is the best available evidence,
given JCI's unusual strategy of defending all claims.
The future trend of legal costs is estimated based on JCI's past
experience, adjusted to reflect the assumed levels of claims and
trial activity, since the number of trials is a key driver of legal
costs.
John Crane, Inc. litigation insurance recoveries
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. The calculation of
the provision does not take account of any potential recoveries
from insurers.
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision has developed over the
last five years as follows:
Year Year Year Year Year
ended ended ended ended ended
31 31 31 31 31
July July July July July
2017 2016 2015 2014 2013
GBPm GBPm GBPm GBPm GBPm
==================================== ====== ====== ====== ====== ======
John Crane, Inc. litigation
provision
Gross provision 260 267 236 227 233
Discount (23) (15) (20) (23) (23)
==================================== ====== ====== ====== ====== ======
Discounted provision 237 252 216 204 210
==================================== ====== ====== ====== ====== ======
Operating profit charge/(credit)
Increased provisions for adverse
judgments and legal defence
costs 17 8 14 49 23
Change in US risk free rates (13) 7 1 (2) (9)
Litigation management, legal
fees in connection with litigation
against insurers and defence
strategy 11 8 4 1
Recoveries from insurers (6) (16)
==================================== ====== ====== ====== ====== ======
Operating profit charge 9 7 19 48 14
==================================== ====== ====== ====== ====== ======
Cash-flow
Provision utilisation (24) (22) (24) (36) (27)
John Crane, Inc. litigation
spend 32 32 27 25 29
==================================== ====== ====== ====== ====== ======
The reduction in 2017 is due to increasing US dollar discount
rates, with no material movement in the gross provision.
The significant increase in the provision in 2016 is primarily
due to the weakening of Smiths reporting currency against the US
dollar (GBP39m increase in the provision) and lower US discount
rates (GBP7m charge to the income statement).
The operating charge for John Crane, Inc. litigation
comprises:
-- a charge of GBP17m (2016: GBP8m) in respect of the net
increased provision for adverse judgments and legal defence
costs,
-- a credit of GBP13m arising from an increase in US risk free
rates (2016: charge of GBP7m), and
-- GBP11m (2016: GBP8m) costs for litigation management, defence
strategy and legal fees in connection with litigation against
insurers.
In the year ended 31 July 2016 JCI recognised the recovery of
GBP16m through a settlement with an insurer. This agreement does
not provide any cover for future costs, so there is no material
impact on the closing litigation provision. A further settlement
was agreed in the current year.
John Crane, Inc. litigation provision sensitivities
The provision may be subject to potentially material revision
from time to time if new information becomes available as a result
of future events. There can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related
litigation.
Statistical reliability of projections over the ten year time
horizon
In order to evaluate the statistical reliability of the
projections, a population of outcomes is modelled using randomised
verdict outcomes. This generated a distribution of outcomes with
future spend at the 5th percentile of GBP231m and future spend at
the 95th percentile of GBP304m (2016: GBP236m and GBP311m,
respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total
future spend will fall between GBP243m and GBP272m (2016: between
GBP250m and GBP280m), compared to the gross provision value of
GBP260m (2016: GBP267m).
Sensitivity of the projections to changes in the time horizon
used
If the asbestos litigation environment becomes more volatile and
uncertain, for example if defendants are successful in legal cases
against plaintiff law firms and this impacts the nature of claims
filed, the time horizon over which the provision can be calculated
may reduce. Conversely, if the environment became more stable, or
JCI changed approach and committed to long term settlement
arrangements, the time period covered by the provision might be
extended.
The projections use a 10 year time horizon. Reducing the time
horizon by one year would reduce the provision by GBP17m (2016:
GBP18m) and reducing it by five years would reduce the provision by
GBP98m (2016: GBP107m).
We consider, after obtaining advice from Bates White LLC, that
to forecast beyond ten years requires that the litigation
environment remains largely unchanged with respect to the
historical experience used for estimating future asbestos
expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If
one assumed that the asbestos litigation environment would remain
unchanged for longer and extended the time horizon by one year it
would increase the provision by GBP14m (2016: GBP16m) and extending
it by five years would increase the provision by GBP58m (2016:
GBP67m). However, there are also reasonable scenarios that, given
certain recent events in the US asbestos litigation environment,
would result in no additional asbestos litigation for JCI beyond
ten years. At this time, how the asbestos litigation environment
may evolve beyond 10 years is not reasonably estimable.
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of
adverse judgments expected to occur. JCI's claims experience is
significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on
the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. As
a result, whilst the Group anticipates that asbestos litigation
will continue beyond the period covered by the provision, the
uncertainty surrounding the US litigation environment beyond this
point is such that the costs cannot be reliably estimated.
Although the methodology used to calculate the JCI litigation
provision can in theory be applied to show claims and costs for
longer periods, the Directors consider, based on advice from Bates
White LLC, that the level of uncertainty regarding the factors used
in estimating future costs is too great to provide for reasonable
estimation of the numbers of future claims, the nature of such
claims or the cost to resolve them for years beyond the 10 year
time horizon.
Titeflex Corporation
In recent years Titeflex Corporation, a subsidiary of the Group
in the Flex-Tek division, has received a number of claims from
insurance companies seeking recompense on a subrogated basis for
the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes; however some claims have been settled
on an individual basis without admission of liability. Equivalent
third-party products in the US marketplace face similar
challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement,
together with the recent market place activity, provide sufficient
evidence to recognise a liability in the accounts. Therefore
provision has been made for the costs which the Group is expected
to incur in respect of future claims to the extent that such costs
can be reliably estimated. Titeflex Corporation sells flexible gas
piping with extensive installation and safety guidance (revised in
2008) designed to assure the safety of the product and minimise the
risk of damage associated with lightning strikes.
The assumptions made in assessing the appropriate level of
provision, which are based on past experience, include: the period
over which expenditure can be reliably estimated; the number of
future settlements; the average amount of settlements; and the
impact of statutes of repose and safe installation initiatives on
the expected number of future claims.
The provision of GBP84m (2016: GBP94m) is a discounted pre-tax
provision using discount rates, being the risk-free rate on US debt
instruments for the appropriate period. The deferred tax asset
related to this provision is shown within the deferred tax balance
(note 6).
31 July 31 July
2017 2016
GBPm GBPm
============================== ======= =======
Gross provision 136 140
Discount (52) (46)
============================== ======= =======
Discounted pre-tax provision 84 94
Deferred tax (33) (36)
============================== ======= =======
Discounted post-tax provision 51 58
============================== ======= =======
Titeflex Corporation litigation provision history
An additional provision of GBP8m (2016: GBP12m) has been
recognised by Titeflex Corporation in respect of changes to the
estimated cost of future claims from insurance companies seeking
recompense for damage allegedly caused by lightning strikes. The
offsetting provision release of GBP13m is principally due to
increasing discount rates.
In 2016, a GBP1m overprovision for the costs of settling claims
was released, generating a net charge for the year of GBP11m.
Titeflex Corporation litigation provision sensitivities
However, because of the significant uncertainty associated with
the future level of claims and of the costs arising out of related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that may be incurred and, as a result, the provision
may be subject to potentially material revision from time to time
if new information becomes available as a result of future
events.
The projections incorporate a long-term assumption about the
impact of safe installation initiatives on the level of future
claims. If the assumed annual benefit of bonding and grounding
initiatives was 0.5% higher the provision would be GBP5m (2016:
GBP6m) lower, and if the benefit was 0.5% lower, the provision
would increase by GBP5m (2016: GBP7m).
Other non-headline and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by Smiths.
Non-headline provisions comprise all provisions that were disclosed
as non-headline items when they were charged to the consolidated
income statement.
These provisions cover non-headline reorganisation, vacant
properties, disposal indemnities and litigation in respect of old
products and discontinued business activities.
Reorganisation and property
At 31 July 2017 there were provisions of GBP8m (2016: GBP11m)
related to Fuel for Growth, GBP3m (2016: GBP3m) related to onerous
leases and dilapidations provisions, and GBP2m (2016: GBP2m)
related to actual and potential environmental issues for sites
which were no longer occupied by Smiths operations. The Fuel for
Growth provisions are expected to be utilised in 2018.
Disposal
Other provisions include disposal provisions of GBP3m (2016:
GBP3m) relating to warranties and other obligations in respect of
the disposal of the Marine Systems and Aerospace businesses. Most
of the balance is expected to be utilised within the next five
years.
23 Share capital
Issued
capital Consideration
Number of shares GBPm GBPm
==================================== ================ ======== =============
Ordinary shares of 37.5p each
Total share capital at 31 July 2015 394,860,004 148
Exercise of share options 363,068 3
==================================== ================ ======== =============
Total share capital at 31 July 2016 395,223,072 148
Exercise of share options 253,590 3
==================================== ================ ======== =============
Total share capital at 31 July 2017 395,476,662 148
==================================== ================ ======== =============
At 31 July 2017 all of the issued share capital was in free
issue. All issued shares are fully paid.
24 Dividends
The following dividends were declared and paid in the
period:
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
============================================= ====== ======
Ordinary final dividend of 28.75p for 2016
(2015: 28.00p) paid 18 November 2016 114 111
Ordinary interim dividend of 13.55p for 2017
(2016: 13.25p) paid 28 April 2017 53 52
============================================= ====== ======
167 163
============================================= ====== ======
The final dividend for the year ended 31 July 2017 of 29.70p per
share was recommended by the Board on 21 September 2017 and will be
paid to shareholders on 17 November 2017, subject to approval by
the shareholders. 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 20 October
2017.
25 Reserves
Retained earnings include the value of Smiths Group plc shares
held by the Smiths Industries Employee Benefit Trust. In the year
the Company issued nil (2016: nil) shares to the Trust, and the
Trust purchased 658,217 shares (2016: 760,218 shares) in the market
for a consideration of GBP10m (2016: GBP8m). At 31 July 2017 the
Trust held 766 (2016: 852) ordinary shares.
The capital redemption reserve, revaluation reserve and merger
reserve arose from: share repurchases; revaluations of property,
plant and equipment; and merger accounting for business
combinations before the adoption of IFRS, respectively.
Capital management
Capital employed comprises total equity adjusted for goodwill
recognised directly in reserves, net post-retirement benefit
related assets and liabilities, net litigation provisions relating
to non-headline items and net debt. The efficiency of the
allocation of the capital to the divisions is monitored through the
return on capital employed (ROCE). This ratio is calculated over a
rolling 12-month period and is the percentage that headline
operating profit comprises of monthly average capital employed. The
ROCE was 16.2% (2016: 15.3%), see note 30.
The capital structure is based on the directors' judgement of
the balance required to maintain flexibility while achieving an
efficient cost of capital.
The ratio of net debt to headline EBITDA of 1.4 (2016: 1.6) is
within the Group's stated policy of 2.0 or less over the medium
term. The Group's robust balance sheet and record of strong cash
generation is more than able to fund the immediate investment needs
and other legacy obligations. See note 30 for the definition of
headline EBITDA and the calculation of this ratio.
As part of its capital management the Group strategy is to
maintain a solid investment grade credit rating to ensure access to
the widest possible sources of financing and to minimise the
resulting cost of capital. At 31 July 2017 the Group had a credit
rating of BBB+/Baa2 (2016: BBB+/Baa2) with Standard & Poor's
and Moody's respectively.
The Board has a progressive dividend policy for future payouts,
with the aim of increasing dividends in line with the long-term
underlying growth in earnings. In setting the level of dividend
payments, the Board will take into account prevailing economic
conditions and future investment plans, along with the objective to
maintain minimum dividend cover of around 2.0.
Hedge reserve
31 July 31 July
2017 2016
GBPm GBPm
======================================= ======= =======
The hedge reserve on the balance sheet
comprises
- cash-flow hedge reserve 1 (7)
- net investment hedge reserve (291) (294)
======================================== ======= =======
(290) (301)
======================================= ======= =======
See transactional currency exposure risk management disclosures
in note 18 for additional details of cash-flow hedges, and
translational currency exposure risk management disclosure also in
note 18 for additional details of net investment hedges.
26 Acquisitions
The Group acquired the Morpho Detection business from Safran S.
A. on 6 April 2017. The terms of the competition clearance for this
transaction required the Group to sell the Morpho Detection
explosive trace detection business. Consequently, the Morpho
Detection explosive trace detection business was treated as a
business acquired for resale, and the trading result during the
period of ownership and the loss on disposal have been reported in
discontinued operations, see note 27.
The intangible assets recognised on this acquisition comprise
technology, in process research and development, customer and
service relationships and the order book on acquisition. Goodwill
represents the potential future technology developments and the
cost savings that can be realised by integrating Morpho Detection
with the continuing Smiths Detection business. The goodwill
recognised is expected to be deductible for tax purposes.
From the date of acquisition to 31 July 2017, Morpho Detection,
excluding its explosive trace detection business, contributed
GBP62m to revenue, GBP5m to headline profit before taxation and a
loss of GBP24m to profit before taxation due to the unwind of
inventory fair value adjustments GBP3m, the amortisation of
acquired intangible assets GBP8m and integration and acquisition
costs GBP18m. If Smiths had acquired Morpho Detection at the
beginning of the financial period, the acquisition, excluding its
explosive trace detection business, would have contributed GBP184m
to revenue, GBP19m to headline profit before taxation and a loss of
GBP22m to profit before taxation.
The provisional balance sheet of Morpho Detection on the date of
acquisition is:
Morpho
Detection
----------
GBPm
------------------------------------------------ ----------
Non-current assets
- acquired intangible assets 240
- software 6
- plant and equipment 8
Current assets
- inventory 50
- trade and other receivables 49
- cash and cash equivalent 12
Morpho Detection explosive trace detection
business 68
Non-current liabilities
- deferred taxation (5)
Current liabilities
- other current liabilities (48)
------------------------------------------------- ----------
Net assets acquired 380
Goodwill on current year acquisitions 210
================================================= ==========
Total consideration 590
================================================= ==========
Cash paid during the year 592
Recycling of cash-flow hedging on consideration (2)
================================================= ==========
Total consideration 590
------------------------------------------------- ----------
27 Discontinued operations and businesses held for sale
The Group acquired the Morpho Detection explosive trace
detection business on 6 April 2017 after making commitments to the
European Commission and the US Departments of Justice to sell this
business to an approved purchaser. The Group began marketing this
business for sale once the terms of the competition clearance were
known. Consequently, this business was treated as a business
acquired for resale, and the assets and liabilities were classified
as held for sale during the period the business was owned by the
Group. The sale was completed on 7 July 2017 for a cash
consideration of GBP63m.
A loss after tax of GBP8m (2016: GBPnil) was generated by
discontinued operations, giving a loss per share from discontinued
operations, basic and diluted, of 2.0p (2016: nil). Cash invested
in financial assets includes GBP7m (2016: GBPnil) relating to
discontinued operations.
There were no assets or businesses held for sale at 31 July
2017. At 31 July 2016 the assets and liabilities of the John Crane
Artificial lift business were disclosed as held for sale. No
impairment loss was recognised on writing these assets down to fair
value less disposal costs although impairments were recognised
earlier in the year relating to this business, see note 11.
31 July
2016
GBPm
======================================= =======
Current assets
Inventories 17
Trade and other receivables 7
========================================= =======
Total assets of business held for sale 24
========================================= =======
Current liabilities
Trade and other payables (5)
========================================= =======
Total liabilities of business held for
sale (5)
========================================= =======
28 Disposals
In the year, the Group has sold the John Crane Artificial Lift
business (US: 31 October 2016, Romania: 23 November 2016), Smiths
Medical's Wallace product line (7 November 2016), the Smiths
Interconnect Power business (25 January 2017) and Smiths
Interconnect Microwave Telecoms (28 April 2017).
Smiths Medical's Wallace product line was fully integrated, so
products will continue to be manufactured on behalf of the acquirer
under a Manufacturing Transition Services Agreement while the
acquirer is setting up their manufacturing capacity. This activity
has been treated as ongoing trading activity.
John Smiths
Crane Smiths Smiths Interconnect
Artificial Medical Interconnect Microwave
lift Wallace Power Telecoms Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================ =========== ======== ============= ============= ===== =====
Consideration 30 134 170 91 425
Less: transaction costs (1) (2) (6) (6) (15)
================================ =========== ======== ============= ============= ===== =====
Net consideration received 29 132 164 85 410
Net assets disposed of:
- intangible assets (32) (134) (12) (178)
- property, plant and equipment (2) (4) (6)
- inventory (17) (12) (16) (45)
- trade and other receivables (11) (19) (20) (1) (51)
- tax (1) (3) (3) (7)
- cash and cash equivalents (5) (6) (11)
- liabilities 5 18 20 43
================================ =========== ======== ============= ============= ===== =====
Net assets (24) (32) (157) (41) (1) (255)
Recycling of foreign exchange (1) 15 6 20
================================ =========== ======== ============= ============= ===== =====
Profit on disposals 4 100 22 50 (1) 175
================================ =========== ======== ============= ============= ===== =====
29 Cash-flow
Cash-flow from operating activities
Year ended 31 Year ended 31
July 2017 July 2016
============================= =============================
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================ ======== ============ ===== ======== ============ =====
Operating profit 589 85 674 510 (123) 387
Amortisation of intangible
assets 44 18 62 43 15 58
Impairment of intangible
assets 23 23
Impairment of trade investments 2 2
Depreciation of property,
plant and equipment 57 57 53 53
Impairment of property,
plant and equipment 6 6
Loss on disposal of property,
plant and equipment 4 4 2 2
Profit on disposal of
business (175) (175)
Share-based payment expense 13 1 14 9 9
Retirement benefits 1 (94) (93) 1 (104) (103)
Decrease in inventories 52 52 30 30
Decrease/(increase) in
trade and other receivables 31 8 39 (21) (16) (37)
Increase/(decrease) in
trade and other payables 8 8 16 1 1
(Decrease)/Increase in
provisions (6) (34) (40) (1) 3 2
================================ ======== ============ ===== ======== ============ =====
Cash generated from operations 793 (183) 610 627 (194) 433
Interest paid (65) (65) (61) (61)
Interest received 5 11 16 3 45 48
Tax paid (82) (82) (62) (62)
================================ ======== ============ ===== ======== ============ =====
Net cash inflow from
operating activities 651 (172) 479 507 (149) 358
================================ ======== ============ ===== ======== ============ =====
Interest received in the period includes GBP6m (2016: Interest
received includes GBP41m cash inflows) on foreign exchange
contracts hedging exposures on intra-group loans, and GBP5m
exchange gains (2016: GBP4m exchange gains) realised on internal
interest.
The split of tax payments between headline and non-headline only
considers the nature of payments made. No adjustment has been made
for reductions in tax payments due to tax relief received on
non-headline items.
Retirement benefit contributions in 2016 included cash
contributions of GBP123m and a non-cash transaction where GBP152m
of financial assets were contributed to the Smiths Industries
Pension Scheme
Headline cash measures
The Group measure of headline operating cash excludes interest
and tax and includes capital expenditure supporting organic
growth.
Year ended 31 Year ended 31
July 2017 July 2016
============================= =============================
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ======== ============ ===== ======== ============ =====
Net cash inflow from
operating activities 651 (172) 479 507 (149) 358
=============================== ======== ============ ===== ======== ============ =====
Include
Expenditure on capitalised
development, other intangible
assets and property,
plant and equipment (107) (107) (108) (108)
Disposals of property,
plant and equipment 9 9 1 1
Investment in financial
assets relating to operating
activities and pensions
financing (5) (6) (11) (8) (8)
=============================== ======== ============ ===== ======== ============ =====
Free cash-flow 548 (178) 370 400 (157) 243
=============================== ======== ============ ===== ======== ============ =====
Exclude
Investment in financial
assets relating to operating
activities and pensions
financing outstanding
at the balance sheet 5 6 11
Interest paid 65 65 61 61
Interest received (5) (11) (16) (3) (45) (48)
Tax paid 82 82 62 62
=============================== ======== ============ ===== ======== ============ =====
Headline operating cash-flow 695 (183) 512 520 (202) 318
=============================== ======== ============ ===== ======== ============ =====
Reconciliation of headline free cash-flow to total movement in
cash and cash-equivalents
Year Year
ended ended
31 31
July July
2017 2016
GBPm GBPm
================================================== ====== ======
Free cash-flow 370 243
Investment in other financial assets (7) (1)
Acquisition of businesses (580) (8)
Disposal of businesses and discontinued
operations 462
Net cash-flow used in financing activities 116 (332)
================================================== ====== ======
Net increase/(decrease) cash and cash equivalents 361 (98)
================================================== ====== ======
30 Non-statutory capital and credit metrics
In addition to the non-statutory profit measures explained in
note 3, the Company calculates credit metrics and return on capital
employed incorporating the same adjustments. See the disclosures on
presentation of results in accounting policies for an explanation
of the excluded items.
Return on capital employed (ROCE)
Smiths ROCE is calculated over a rolling 12-month period and is
the percentage that headline operating profit comprises of monthly
average capital employed.
See note 1 for the divisional headline operating profit and
average divisional capital employed used to calculate divisional
ROCE.
Capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP787m (31 July 2016: GBP815m)
and eliminate post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt.
31 July 31 July
2017 2016
Notes GBPm GBPm
=============================================== ===== ======= =======
Net assets 2,104 1,660
Adjust for
Goodwill recognised directly in reserves 787 815
Post-retirement benefit assets and liabilities 8 (224) (80)
Tax related to post retirement benefit
assets and liabilities 22 (4)
John Crane, Inc. litigation provisions
and related tax 22 158 168
Titeflex Corporation litigation provisions
and related tax 22 51 58
Net debt 17 967 978
=============================================== ===== ======= =======
Capital employed 3,865 3,595
=============================================== ===== ======= =======
Return on capital employed
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
======================================= ===== ====== ======
Headline operating profit for previous
twelve months 589 510
Average capital employed 1 3,639 3,324
======================================= ===== ====== ======
ROCE 16.2% 15.3%
======================================= ===== ====== ======
Credit metrics
Smiths Group monitors the ratio of net debt to Headline EBITDA
as part of its management of credit ratings, see note 25 for
details. This ratio is calculated as follows.
Headline earnings before interest, tax depreciation and
amortisation (Headline EBITDA)
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
==================================== ===== ====== ======
Headline operating profit 589 510
Exclude
- depreciation 12 57 53
- amortisation of development costs 10 27 26
- amortisation of software, patents
and intellectual property 10 17 17
==================================== ===== ====== ======
Headline EBITDA 690 606
==================================== ===== ====== ======
GBP1m of software amortisation was charged to restructuring
projects, so treated as a non-headline cost.
Ratio of net debt to headline EBITDA
Year Year
ended ended
31 31
July July
2017 2016
Notes GBPm GBPm
===================================== ===== ====== ======
Headline EBITDA 690 606
Net debt 17 967 978
===================================== ===== ====== ======
Ratio of net debt to headline EBITDA 1.4 1.6
===================================== ===== ====== ======
This information is provided by RNS
The company news service from the London Stock Exchange
END
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September 22, 2017 02:00 ET (06:00 GMT)
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