TIDMSMIN
RNS Number : 6803I
Smiths Group PLC
23 March 2018
News release
Smiths Group plc announces interim results for the six months
ended 31 January 2018
London, Friday 23 March 2018
On track for growth in FY18
Highlights
-- Group underlying revenue broadly flat at GBP1,549m,
reflecting an improving trend. Reported revenue (4)% due to adverse
foreign exchange translation
-- Operating profit impacted by programme phasing in Detection
and higher R&D costs in Medical associated with the significant
programme of new product launches
-- Underlying operating margin down (20)bps, including the
adjustment for restructuring and pension administration costs which
are now headline items
-- Continued focus on working capital with improved stock turns at 3.6x
-- Good cash generation with cash conversion of 98%
-- Continued investment for sustainable growth, R&D at 4.6% of sales
-- Further progress on portfolio high grading:
o Morpho integration on track
o Agreement to sell John Crane's Bearings business for $35m
-- ROCE declined (110)bps to 15.2% reflecting the impact of the Morpho acquisition
-- Headline tax rate now expected to be 25.5-26.5% for FY2018 falling to 22-24% in FY2019
-- Headline basic EPS down (11)% at 40.4p per share, down (2)%
on an underlying basis. Statutory basic EPS 26.0p
-- Interim dividend of 13.80 pence per share, up 1.8%
-- 2018 full year outlook reaffirmed
Results for the six months ended 31 January 2018
Headline(1) Statutory
----------------------------------------- ----------------
H1 2018 H1 2017 Reported Underlying(2) H1 2018 H1 2017
GBPm GBPm growth growth GBPm GBPm
------------------ ------- ------- -------- ------------- ------- -------
Revenue 1,549 1,617 (4)% (1)% 1,549 1,617
Operating profit 247 277 (11)% (2)% 229 377
Operating margin 16.0% 17.1% (110)bps (20)bps 14.8% 23.3%
Pre-tax profit 217 248 (12)% (3)% 199 346
Free cash-flow 113 176 (36)% 113 176
Return on capital
employed 15.2% 16.3% (110)bps
Continuing basic
EPS 40.4p 45.7p (11)% (2)% 26.0p 76.5p
Dividend 13.80p 13.55p 1.8% 13.80p 13.55p
(1) 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.
(2) Underlying modifies headline performance to: adjust prior
year to reflect an equivalent period of ownership for divested
businesses; include restructuring and pension administration costs
as headline for both years; and exclude the effects of foreign
exchange, acquisitions and supplemental sales for divested
businesses.
Andy Reynolds Smith, Group Chief Executive, commented:
"Smiths Group made an encouraging start to the year as we
continued to execute our strategy for sustainable growth.
Underlying revenue was broadly in line with the prior year, with
John Crane returning to growth, the new product introductions in
Smiths Medical contributing to its gradual improvement and strong
growth in Flex-Tek. As anticipated, Smiths Detection continued to
achieve good growth in Air Transportation but this was offset by
programme phasing in the non-aviation segments. Following a period
of significant strategic and structural change at Smiths
Interconnect, sales declined as the division completes its
restructuring process.
This year we have commenced our previously announced policy of
including restructuring and pension administration costs as part of
underlying profit. On an underlying basis the Group margin was down
20 basis points, whilst we continued to invest in commercially
focused R&D and innovation. Our relentless focus on operational
efficiency and cash generation delivered further stock turn
improvements and good cash conversion during the period.
The outlook for 2018 is reaffirmed (on a constant currency
basis). The Group's current trading, the strong order books in John
Crane and Smiths Detection, as well as the substantial ongoing
programme of new product launches in Smiths Medical, support our
confidence that the Group's growth rate will accelerate over the
balance of the year. At current rates, foreign exchange will remain
a headwind for the full year.
Over the medium-term, we are confident that we will achieve
organic revenue growth above our chosen markets, which in aggregate
are growing 3-4% annually. This is founded on our strategy to
maintain and continue to develop leadership positions in attractive
growth markets, our increasing investment in technology and new
products, our established operating model for excellence, and our
strong financial framework. In parallel with our continued active
portfolio management this 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 GBP199m (2017: GBP346m) and continuing
basic earnings per share were 26.0p (2017: 76.5p).
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 Media enquiries Andrew
Jemma Spalton, Smiths Group Lorenz, FTI Consulting
+44 (0)20 7004 1637 +44 (0)20 3727 1323
+44 (0)78 6739 0350 +44 (0)77 7564 1807
jemma.spalton@smiths.com smiths@fticonsulting.com
Marion Le Bot, Smiths Group Deborah Scott, FTI Consulting
+44 (0)20 7004 1672 +44 (0)203 727 1459
+44 (0)75 8315 4386 +44 (0)797 953 7449
marion.lebot@smiths.com smiths@fticonsulting.com
Presentation
The presentation slides and a live webcast of the analyst
presentation will be available at www.smiths.com/investors 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
www.smiths-images.com.
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding the
intentions, beliefs and/or current expectations of Smiths Group plc
(the "Company") and its subsidiaries (together, the "Group") and
those of their respective officers, directors and employees
concerning, amongst other things, the results of operations,
financial condition, liquidity, prospects, growth, strategies and
the businesses operated by the Group. By their nature, these
statements involve uncertainty since future events and
circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this document and, unless otherwise required by
applicable law, the Company undertakes no obligation to update or
revise these forward-looking statements. Nothing in this document
should be construed as a profit forecast. The Company and its
directors accept no liability to third parties. This presentation
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 H1 2018 H1 2017 H1 2018 H1 2017
growth(2) growth
==================== ========== ======== ========= ========= ========== ==========
John Crane 3% (2)% 21.3% 20.8% 23.4% 21.3%
Smiths Medical 0% (5)% 18.1% 21.0% 15.8% 16.3%
Smiths Detection (11)% 15% 16.2% 16.8% 10.6% 14.7%
Smiths Interconnect (3)% (41)% 10.3% 11.3% 11.4% 11.3%
Flex-Tek 10% 5% 18.6% 18.3% 36.4% 32.8%
==================== ========== ======== ========= ========= ========== ==========
Group (1)% (4)% 16.0% 17.1% 15.2% 16.3%
==================== ========== ======== ========= ========= ========== ==========
Smiths Group delivered an encouraging performance in the first
half, and made further progress on the execution of our strategy -
to deliver sustainable above-market growth in our chosen markets
and achieve world-class competitiveness, underpinned by a strong
financial framework.
Group revenue declined (4)% on a reported basis, reflecting
GBP(49)m of adverse foreign exchange translation and GBP(8)m net
impact of four divestitures and the acquisition of Morpho Detection
('Morpho') which were completed in FY2017. Group headline revenue
fell (1)% on an underlying(2) basis, reflecting an improving trend,
up from (2)% in the first quarter. Good growth in John Crane and
Flex-Tek, and an improved performance in Smiths Medical were offset
by the anticipated decline in Smiths Detection, reflecting
programme phasing in the non-aviation segments, and a decline in
Smiths Interconnect as the business completes its
restructuring.
Revenue from higher-growth regions, which represents 17% of
Group sales, grew 6% on an underlying(2) basis, driven by good
sales growth in China, up 7%, reflecting our continued focus on
growing the Group's activities in Asia.
Group headline operating profit of GBP247m was down (2)% on an
underlying(2) basis (including the 2017 adjustment for the
restructuring and pension administration costs that are now
recorded as headline items) and down (11)% on a reported basis.
Restructuring and pension administration costs in H1 2017 amounted
to GBP(19)m and were classified as non-headline items. During the
reporting period foreign exchange translation reduced operating
profit by GBP(10)m, whilst the net impact of acquisitions and
disposals contributed GBP4m. As a result, on an underlying(2)
basis, operating profit reduced by GBP(4)m or (2)%. This reflected
growth in John Crane and Flex-Tek, and a broadly flat performance
in Smiths Interconnect, which were more than offset by lower
operating profit in Smiths Medical, Smiths Detection and the
increased investment in the Group-wide i(3) innovation framework
and Digital Forges.
The Group's headline operating profit margin decreased (110)bps
on a reported basis, reflecting the programme phasing in Smiths
Detection and higher R&D costs associated with the significant
programme of new product launches in Smiths Medical. The Group
operating margin on an underlying(2) basis was broadly flat
(including the 2017 adjustment for the restructuring and pension
administration costs that are now recorded as headline items).
Driving operational excellence remains a key focus for the Group
as we continue to improve speed and efficiency supporting further
structural working capital reductions and strong cash generation.
This focus drove further improvements in stock turns at 3.6x (July
2017: 3.5x). Working capital as a percentage of sales remained flat
at 29% (July 2017: 29%) despite a build up of inventory associated
with orders for delivery in the second half. This resulted in good
cash conversion of 98% and free cash flow of GBP113m.
Group investment in R&D increased to 4.6% of sales (2017:
4.5%), to drive future growth through the development of
innovative, commercially focused products.
During the period the Group made further progress on the high
grading of the portfolio for long-term growth in attractive markets
and in January reached agreement to sell the John Crane Bearings
business to Miba AG for an enterprise value of $35m. The deal is
expected to complete during the second half of the year.
ROCE declined (110)bps to 15.2% (2017: 16.3%) primarily
reflecting the 10 month impact of the Morpho asset base.
The headline tax charge for the first half of 2018 of GBP56m
(2017: GBP66m) represented an effective rate of 25.8% on the
headline profit before taxation (2017: 26.5%).
Following the Group's announcement on 12 January 2018 regarding
the impact of the new US tax legislation, Smiths Group now
estimates a headline effective tax rate between 25.5% and 26.5% for
FY2018, as the one-off revaluation of the deferred tax assets will
now be recognised as a non-headline item, in line with market
practice. For FY2019, the headline effective tax rate is now
estimated to be between 22.0% and 24.0%.
Net debt at 31 January 2018 was GBP961m, representing a
reduction of GBP6m in the period giving a net debt to EBITDA
position of 1.5x at the end of period. Our strong balance sheet
continues to allow us to deploy significant further investment
capacity to support sustainable growth.
Basic headline earnings per share from continuing activities
decreased (11)% to 40.4p (2017: 45.7p), (2)% on an underlying(2)
basis.
Pension
The net pension position has improved to a surplus of GBP237m at
31 January 2018 from a surplus of GBP224m at 31 July 2017.
The Group continues to work with the Trustees to de-risk the
pension schemes. In October 2017, the SIPS scheme announced a
GBP207m buy-in with Canada Life, and in December 2017 the US scheme
paid $36m to members who opted to take lump sums in lieu of
annuities.
Dividend
The Board has a progressive dividend policy, with the aim of
increasing dividends in line with the long-term underlying(2)
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 cash dividend cover of
around 2.0x. The Board has declared an interim dividend per share
of 13.80p (2017: 13.55p per share). The interim dividend will be
paid on 23 April to shareholders registered at close of business on
6 April. The ex-dividend date is 5 April.
Statutory results
On a statutory basis, after taking into account all items
excluded from headline performance, operating profit of GBP229m was
GBP(148)m lower than last year (2017: GBP377m). In 2017, statutory
operating profit included GBP126m of profit on disposal of
businesses.
Outlook
The outlook for 2018 is reaffirmed (on a constant currency
basis). The Group's current trading, the strong order books in John
Crane and Smiths Detection, as well as the substantial ongoing
programme of new product launches in Smiths Medical, support our
confidence that the Group's growth rate will accelerate over the
balance of the year. At current rates foreign exchange will remain
a headwind for the full year.
We anticipate continued growth in John Crane, as it leverages
its leading OE and aftermarket service offering in strengthening
markets. In Smiths Medical, we anticipate a return to growth for
the year overall supported by its significant programme of product
launches. In Smiths Detection we anticipate a strong second half,
driven by Air Transportation, which should generate good overall
growth for the year. In Smiths Interconnect, our focus on fewer,
higher-growth end markets is expected to offset declining sales
associated with the segments it is exiting. Flex-Tek is expected to
deliver continued strong growth.
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 66% 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, pharmaceutical, power
generation, water and wastewater, and pulp and paper. John Crane
represents 28% of Group revenue.
H1 2018 H1 2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------- ------- -------- -------------
Revenue 428 435 (2)% 3%
Headline operating profit 91 90 1% 5%
Headline operating margin 21.3% 20.8% 50bps 30bps
Statutory operating profit 86 87 (1)%
Return on capital employed 23.4% 21.3% 210bps
--------------------------- ------- ------- -------- -------------
Performance
John Crane delivered a good performance, returning to growth
with revenue up 3% on an underlying(2) basis. Reported revenue
decreased (2)%, reflecting GBP(10)m of adverse foreign exchange
translation and an GBP(11)m impact from the disposal of Artificial
Lift in September 2016.
Underlying(2) sales from John Crane's oil & gas and non-oil
& gas activities were up c.4% and c.3%, respectively,
reflecting the improving trend in global energy markets and good
growth in John Crane's chemical, pharma and pulp & paper
activities. These market conditions were also reflected in the
improving underlying(2) sales of Original Equipment ('OE') that
were flat. Investment in OE projects and expansion of the installed
base continued during the period. Multiple new project agreements
were secured, including for petro-chemical plants in Thailand and
China. John Crane's large installed base and leading service
offering ensured that it was well positioned to satisfy the pent-up
aftermarket requirements for repairs, maintenance and upgrades,
driving 5% growth in underlying(2) aftermarket revenue. There was a
significant number of aftermarket contract wins globally across oil
& gas customers, as well as in the chemical and paper markets.
We anticipate continued good growth in John Crane supported by the
strong OE and aftermarket order book.
Revenue from higher-growth regions, which represents 25% of
sales, grew 12% on an underlying(2) basis with strong sales growth
in China.
Headline operating profit increased 5% on an underlying(2)
basis, driven by the improved volumes. Headline operating profit
margin increased by 30bps to 21.3%, on an underlying(2) basis
reflecting the favourable mix from strong aftermarket growth. The
difference between statutory and headline operating profit
primarily reflects the movements in provisions for asbestos
litigation.
Return on capital increased 210bps to 23.4%, principally due to
increased profitability and the impact of the Artificial Lift
disposal in 2016.
John Crane has made further progress on focusing the business on
scalable leading positions in attractive growth markets. During the
period we announced that we had reached agreement to sell the
Bearings business to Miba AG for an enterprise value of $35m. The
deal is expected to complete during the second half of the year. We
continue to look at opportunities to enhance John Crane's
technology leadership and the innovative solutions and capabilities
it provides to its customers.
R&D expenditure during the period increased by 13% to 1.4%
of sales.
John Crane continued to develop Sense(TM), its predictive
diagnostics platform, covering both wet and dry gas applications.
John Crane also made further investments in research to support the
enhancement of seals performance, such as reducing methane
emissions with the new gas seal, the unique secondary sealing
technology of John Crane's new crude oil pipeline seal and
single-use seal for general industries.
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.
H1 2018 H1 2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------- ------- -------- -------------
Revenue 451 473 (5)% 0%
Headline operating profit 82 99 (18)% (5)%
Headline operating margin 18.1% 21.0% (290)bps (90)bps
Statutory operating profit 79 189 (58)%
Return on capital employed 15.8% 16.3% (50)bps
--------------------------- ------- ------- -------- -------------
Performance
During the period Smiths Medical made significant progress on
its return to growth with underlying(2) revenue improving to be
flat year over the year. This was supported by the launch of 11 new
products across its segments to support core-market category
leadership. Reported revenue declined (5)%, impacted by GBP(15)m
adverse foreign exchange translation and the GBP(5)m impact of the
divestment of the Wallace product line in November 2016.
Underlying(2) revenue was flat in Infusion Systems with good
growth in the sales of disposables offset by lower sales in
infusion hardware. Vascular Access underlying(2) revenue declined
by (1)% where an improved performance in sharps safety supported by
the launch of NeoHeel(TM) , a safety lancet to collect blood
samples for infants, was offset by declines in peripheral
intravenous catheters ('PIVC'). Underlying(2) revenue from Vital
Care and Specialty Products was flat with growth in most product
segments offset by a decline in respiratory and chronic obstructive
pulmonary disease products.
Revenue from higher-growth regions, which represents 9% of
sales, increased 7% on an underlying(2) basis driven by growth in
China.
Headline operating profit declined (5)% on an underlying(2)
basis. This movement reflects both the adjustment for restructuring
costs in the prior year, GBP6m of which were related to Smiths
Medical, and the impact in the reporting period of higher R&D
costs, associated with the products launch. As a result, the
headline operating margin of 18.1% was (90)bps lower than the prior
year, on an underlying(2) basis. The difference between statutory
and headline operating profit included GBP2m of amortisation of
acquired intangible assets.
Return on capital employed decreased (50)bps to 15.8%,
reflecting the lower profitability during the period.
R&D expenditure during the period represented 6.0% of sales
(2017: 6.8%). Smiths Medical continues to invest in research and
development to support its long-term, sustainable growth, with the
development of innovative, commercially focused products across the
portfolio. Since the beginning of the financial year 11 new
products have been launched. These included:
- CADD(TM) Solis connected pump, our first wireless connected pump
- Upgrades to the PharmGuard(R) server platform
- Jelco(R) Seriva PIVC targeted at higher growth markets
- HemoDraw(TM) plus closed blood sampling system which reduces the risk of injury and infection
- NeoHeel(TM) a safety lancet to collect blood samples from infants
- DeltaVen(TM) a closed system IV catheter
Sales from the 11 new products are gradually ramping up,
contributing to the division's anticipated return to growth in the
second half of the year, alongside around 12 further product
launches expected during the second half.
Smiths Detection
Smiths Detection is a leader in the 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. 48% of Smiths Detection's sales
derived from the aftermarket. Smiths Detection represents 24% of
Group revenue.
H1 2018 H1 2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------- ------- -------- -------------
Revenue 367 318 15% (11)%
Headline operating profit 59 54 11% (13)%
Headline operating margin 16.2% 16.8% (60)bps (40)bps
Statutory operating profit 39 47 (17)%
Return on capital employed 10.6% 14.7% (410)bps
--------------------------- ------- ------- -------- -------------
Performance
As expected, Smiths Detection underlying(2) revenue decreased by
(11)%. This reflected continued good growth in Air Transportation,
despite a strong comparator, that was offset by programme phasing
in the non-aviation segments. Overall aftermarket revenue grew by
2% on an underlying(2) basis, now accounting for 48% of total
revenue (2017: 35%). On a reported basis, revenue increased by 15%
including GBP91m of incremental revenue associated with the
acquisition of Morpho Detection ('Morpho'), partially offset by
GBP(8)m adverse foreign exchange translation.
Revenue in Air Transportation increased 8% on an underlying(2)
basis. Air Transportation is Smiths Detection's largest segment and
following the acquisition of Morpho now represents 66% of Smiths
Detection's total revenue. During the period there was strong
growth in EMEA as a result of deliveries associated with the ECAC
standard 3 regulation for hold baggage, and strong growth in Asia
Pacific. Major deliveries were completed for Amsterdam, Munich,
Frankfurt, Saudi Arabia and Thailand. Contract wins included orders
for integrated checkpoint lanes in the Middle East, hold baggage
systems in Scandinavia, Canada and nine airports in India, as well
as significant orders from major air cargo customers. Revenue from
Ports & Borders decreased by (26)% on an underlying(2) basis
following the completion of key programmes in Italy, Kuwait and
Belgium last year. Underlying(2) revenue in Military decreased by
(75)% against last year's strong comparator and reflects the wind
down of some major US military programmes. Urban Security revenues
were down (4)% on an underlying(2) basis, with growth from
RadSeeker sales to the US Department for Homeland Security, offset
by lower sales to the US Federal Protection Service and the
completion of ENEC/Atlas Security deliveries in the UAE. The
division's robust order book, with deliveries scheduled for the
second half of the year, and further strong demand in Air
Transportation supports our confidence in delivering good growth
for the year as a whole.
Revenue from higher-growth regions represented 20% of sales, in
line with prior year on an underlying(2) basis. We continue to
experience pricing pressure in some end-use markets, and in
unregulated parts of the market from lower-priced competitors.
Headline operating profit declined (13)% on an underlying(2)
basis, reflecting the programme phasing. Headline reported
operating margin decreased by (40)bps to 16.2%, on an underlying(2)
basis with the impact of lower volumes partially offset by a higher
mix of aftermarket revenue and the Morpho synergies. The difference
between statutory and headline operating profit largely constitutes
the integration costs associated with the acquisition of Morpho and
amortisation of acquired intangibles. The integration of Morpho
continues to progress well and we are on track to the deliver the
$30m of annualised cost synergies by the third year of
ownership.
Return on capital employed decreased (410)bps to 10.6% driven
primarily by the impact of Morpho's asset base.
Total R&D expenditure during the period represented 6.6% of
sales, or 6.0% excluding customer funded R&D (2017: 6.3% and
5.4% respectively). Specific highlights include continued
investment in:
- X-ray machines capable of meeting the new EU/ECAC Standard C3
- Newer and faster CT machines for hold baggage screening
- Next generation chemical warfare detection devices for the military market
- Launch of CORAL, our advanced predictive analytics suite for hold baggage detection systems
In February it was announced that Roland Carter has been
appointed as President of Smiths Detection alongside his current
role of President, Smiths Asia Pacific, with effect from 1 March
2018. Roland has held numerous senior management roles within
Smiths Group and as a qualified engineer with the proven capability
of running complex global businesses, is very well placed to lead
Smiths Detection through its next stage of development.
Smiths Interconnect
Smiths Interconnect designs solutions for high-speed, secure
connectivity in reliability applications for the defence,
aerospace, space, rail, medical and semiconductor test markets.
Smiths Interconnect represents 9% of Group revenue.
H1 2018 H1 2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------- ------- -------- -------------
Revenue 135 230 (41)% (3)%
Headline operating profit 14 26 (46)% (1)%
Headline operating margin 10.3% 11.3% (100)bps 20bps
Statutory operating profit 11 45 (76)%
Return on capital employed 11.4% 11.3% 10bps
--------------------------- ------- ------- -------- -------------
Performance
Following the significant strategic and structural change at
Smiths Interconnect last year, declining sales associated with
certain products and customers that we are exiting to complete the
restructuring process offset 3% revenue growth in Smiths
Interconnect's six key market segments. As a result underlying(2)
revenue was down (3)%.
On a reported basis, revenue declined by (41)%, reflecting the
GBP(82)m impact of the divestments of Power and Microwave Telecoms
businesses in January and May 2017 respectively and GBP(9)m adverse
foreign exchange translation.
Underlying(2) revenue in the Defence segment grew by 10%
supported by increased defence spending in the US, Europe and
Middle East including programmes such as Eurofighter, Joint Strike
Fighter and various naval programmes. In the Medical segment
underlying(2) revenue grew by 22% driven by strong sales of highly
specialist connectors for patient monitoring and imaging systems.
In the Space segment revenue increased 32% driven by the rise of
our connectivity product content within satellite programs. The
Rail segment increased by 1%. The Semiconductor Test and Commercial
Aerospace sectors declined by (14)% and (18)% respectively
primarily due to order timing. In the second half, with the focus
on Smiths Interconnect's six key market segments, we anticipate an
improved performance.
Revenue from higher-growth regions, which represents 15% of
sales, decreased by (17)% as a result of the phasing of
semiconductor sales in China which are expected to improve in the
second half.
Headline operating profit declined (1)% on an underlying(2)
basis to GBP14m where an improvement in gross margin was offset by
the lower volumes in the period. Headline operating margin was
20bps higher at 10.3%, on an underlying(2) basis. The difference
between statutory and headline operating profit primarily reflects
adjustments for amortisation of acquired intangibles and the loss
on disposal of a trade investment.
During the period we signed a memorandum of understanding to
form a joint venture with Sichuan Huafeng Enterprise Group Co. Ltd
- a major manufacturer of electronic components in China. Our
combined portfolio of highly specialised electronic components and
customer relationships will speed up penetration and growth in this
important market. The joint venture agreement is expected to be
signed imminently.
Return on capital employed increased 10bps to 11.4% driven by
the Power and Telecoms businesses in FY2017.
Total R&D expenditure represented 7.7% of revenue (2017:
6.4%) (6.8% excluding customer funded R&D, 2017: 5.7%). Product
developments during the period included:
- Volta semiconductor solutions for testing integrated chip packages
- SpaceNXT(TM) HC Series - a range of high reliability microwave
components qualified for next-generation commercial space
applications.
- Eclipta (TM) connector - a double ended edge card contact
technology for disposable medical applications.
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.
H1 2018 H1 2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------- ------- -------- -------------
Revenue 168 161 5% 10%
Headline operating profit 31 30 7% 15%
Headline operating margin 18.6% 18.3% 30bps 80bps
Statutory operating profit 39 37 5%
Return on capital employed 36.4% 32.8% 360bps
--------------------------- ------- ------- -------- -------------
Performance
Flex-Tek delivered a strong performance with revenue up 10% on
an underlying(2) basis, supported by growth in all segments. On a
reported basis revenue increased 5%, despite a GBP(7)m adverse
foreign exchange translation.
Construction revenue grew 4% on an underlying(2) basis, with
both Gastite and Thermaflex benefiting from the continued growth in
the US housing market. Fluid Management revenue was up 14% on an
underlying(2) basis, driven by strong sales of its aerospace
solutions across a range of engine and airframe platforms. Heat
Solutions revenue increased by 14% on an underlying(2) basis,
principally due to growth in its engineered solutions as well as
increased sales of clothes dryer elements and HVAC systems.
Flexible Solutions underlying(2) revenue growth of 8% was driven by
increased demand from the medical sector, partially offset by a
decline in the floor care segment. We anticipate Flex-Tek to
continue to deliver a strong performance.
Revenue from higher-growth regions, which represents 10% of
sales, increased 22% driven by strong sales into China, Russia and
Mexico.
On an underlying(2) basis headline operating profit increased
15% to GBP31m and the headline operating margin increased 80bps to
18.6% driven by the strong sales growth and further operational
efficiency savings. The difference between statutory and headline
operating profit is primarily due to the GBP8m reduction in the
provision for Titeflex Corporation subrogation claims due to higher
US discount rates.
Return on capital employed increased 360bps to 36.4%, driven by
improved profitability.
In November 2017 the Heat Solutions business completed the
acquisition of the heating element division of Osram. The
integration of the business is now largely complete and the
benefits of broadening its portfolio into faster growing engineered
heating solutions are starting to flow through.
R&D expenditure remained consistent at 0.6% of sales (2017:
0.7%), focused on market-leading innovative solutions to meet
specific customer needs such as Gastite's FlashShield II, the next
generation of flexible gas piping, which is expected to launch by
the end of the year.
Financial review
Headline revenue
Reported revenue decreased by GBP(68)m (4%) to GBP1,549m,
including the negative effects of foreign currency translation
(GBP(49)m) and the net impact of acquisitions and disposals
(GBP(8)m). On an underlying(2) basis, revenue declined (1)% as
growth in John Crane (GBP14m; 3%) and Flex-Tek (GBP15m; 10%) and
flat Medical (GBP(1)m; flat) was offset by declines in Detection
(GBP(35)m; (11)%) and Interconnect (GBP(4)m; (3)%).
Operating profit
Headline operating profit of GBP247m was GBP(30)m lower than
prior year (2017: GBP277m) including the GBP(10)m adverse effect of
foreign exchange translation. On an underlying(2) basis, adjusted
for the GBP(19)m reclassification of restructuring and pension
administration costs in H1 2017 and the GBP4m impact of
acquisitions and disposals, operating profit decreased (2)%, driven
primarily by programme phasing in Detection and higher R&D
costs associated with the significant programme of new product
launches in Smiths Medical. Headline operating margin decreased
(110)bps to 16.0% (2017: 17.1%). The Group headline operating
margin would have been broadly flat had the restructuring and
pension administration costs been treated as headline items in H1
2017.
John Crane margin of 21.3% (2017: 20.8%) improved 30bps on an
underlying(2) basis driven by the improved volumes. Smiths Medical
margin of 18.1% (2017: 21.0%) decreased (90)bps on an underlying(2)
basis with lower revenue and higher R&D costs associated with
the launch of new products. Smiths Detection margin of 16.2% (2017:
16.8%) decreased (40)bps on an underlying(2) basis due to lower
volumes, partially offset by favourable mix and synergies. Smiths
Interconnect margin of 10.3% (2017: 11.3%) increased 20bps on an
underlying(2) basis driven by the disposal of lower profitability
businesses. Operating margin in Flex-Tek of 18.6% (2017: 18.3%)
improved 80bps on an underlying(2) basis, reflecting the impact of
increased revenue and efficiencies. Central costs increased by
GBP2m on an underlying(2) basis to GBP30m including investment in
innovation 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 GBP229m (2017:
GBP377m) - see note 3 to the accounts for information on the
excluded items. The decrease was driven by the non-repeat of
GBP126m profit on disposal of businesses generated in 2017. Other
non-headline charges are GBP8m lower at GBP18m reflecting the
change in presentation of restructuring costs and pension
administration costs as headline in the current period (2017:
GBP15m restructuring costs and GBP4m operating charge for pension
administration classified as non-headline).
Headline finance costs
Headline finance cost during the period totalled GBP30m, GBP1m
higher than the previous period, reflecting the effect of higher US
dollar interest rates.
Non-headline items relating to continuing activities excluded
from headline profit before tax
These items amounted to a charge of GBP18m compared with a
credit of GBP98m in 2017. They comprised:
-- GBPnil for restructuring (2017: GBP15m for the Fuel for
Growth programme) as costs of this nature are now recorded in
headline operating profit;
-- GBP12m charge in relation to the integration of Morpho and
the existing Smiths Detection business (2017: GBPnil);
-- GBP2m credit for acquisition cost provision release (2017:
GBP6m charge);
-- GBP8m credit (2017: GBP8m credit) in connection with Titeflex
Corporation litigation;
-- GBP4m charge (2017: GBP3m charge) in connection with John
Crane, Inc. asbestos litigation;
-- GBPnil operating charge for pension administration costs
(2017: GBP4m charge) as these costs are now recorded in headline
operating profit;
-- GBP4m settlement gain on post retirement benefit schemes
(2017: GBPnil);
-- GBP15m amortisation of intangible assets acquired in business
combinations (2017: GBP6m) increasing due to the intangible assets
acquired with the Morpho acquisition. The ongoing amortisation
charge relates principally to technology and customer
relationships;
-- GBP1m loss on disposal of businesses relating to an
investment held within Interconnect (2017: GBP126m gain on disposal
of John Crane Artificial Lift, Smiths Medical Wallace and Smiths
Interconnect Power);
-- GBP3m charge on the unwind of discounted provisions (2017:
GBP3m charge); and
-- GBP3m gain on retirement benefit finance (2017: GBP1m
gain).
Research and development
The Group invested GBP70m in R&D (2017: GBP73m), equivalent
to 4.6% of revenue (2017: 4.5%). Of that, GBP67m was funded by the
Company compared with GBP69m in 2017. The Group actively seeks
funding from customers to support R&D and this amounted to
GBP3m (2017: GBP4m). Under IFRS, certain development costs are
capitalised, and this amounted to GBP14m in the period (2017:
GBP20m). The gross capitalisation is shown as an intangible asset.
Where customers contribute to the costs of the development, the
contribution is included as deferred income and disclosed within
trade and other payables.
Taxation
The GBP56m headline tax charge for the first half of 2018 (2017:
GBP66m) represented an effective rate of 25.8% on the headline
profit before taxation (2017: 26.5%). On a statutory basis, the tax
charge on continuing activities was GBP95m (2017: GBP43m) which
included an exceptional one off charge of GBP45m representing the
revaluation of deferred tax balances and a deemed repatriation
charge following US tax reform law changes effective from 1 January
2018.
The Group continues to take advantage of 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 other compliance
requirements.
An effective headline tax rate of between 25.5% and 26.5% is
expected in the current year ending 31 July 2018, falling to
between 22% and 24% in the year ending 31 July 2019.
Earnings per share
Basic headline earnings per share from continuing activities
decreased (11)% to 40.4p (2017: 45.7p), (2)% on an underlying2
basis, driven by lower operating profit, which was partly offset by
a decrease in the effective tax rate to 25.8% from 26.5%.
On a statutory basis, the basic earnings per share from
continuing activities were 26.0p (2017: 76.5p), reflecting the
impact of non-headline items which included a profit on disposal of
businesses of GBP126m in 2017.
Cash generation and net debt
Headline operating cash-flow decreased to GBP241m (2017:
GBP320m), reflecting reduced operating profit and a lower inflow
from working capital. This represented 98% (2017: 115%) of headline
operating profit. See note 15 to the financial statements for a
reconciliation of headline operating cash and free cash-flow to
statutory cash-flow measures.
Free cash-flow decreased by GBP63m to GBP113m, reflecting the
GBP79m decrease in headline operating cash-flow, offset by lower
pension contributions.
On a statutory basis, net cash inflow from operations was
GBP159m (2017: GBP225m).
Net debt at 31 January 2018 was GBP961m, a reduction of GBP6m in
the period. With the majority of the Group's net debt held in
currencies other than pounds sterling to hedge the underlying asset
base of the Group, foreign exchange translation decreased net debt
by GBP24m in the period. Excluding foreign exchange and the
associated GBP3m gain on hedging, net debt increased by GBP21m.
At the end of the period, the Group had gross debt of GBP1,552m
(31 July 2017: GBP1,749m) and cash reserves of GBP591m (31 July
2017: GBP782m). Of this gross debt, GBP21m (31 July 2017: GBP151m)
falls due for repayment within one year.
Acquisitions and Disposals
In November 2017, we completed the acquisition of the heating
element division of Osram for consideration of GBP15m.
In January 2018, we announced the proposed disposal of John
Crane's Bearing business to Miba AG, for an enterprise value of
$35m. The transaction is subject to the satisfaction of certain
regulatory conditions and is expected to complete before the fiscal
year end. The assets and liabilities of this business have been
presented as held for sale in the consolidated balance sheet.
Dividend
The Board has declared an interim dividend of 13.80p per share
(2017: 13.55p per share). The interim dividend will be paid on 23
April 2018 to shareholders registered at close of business on 6
April 2018.
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 using 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 GBP237m at 31 January 2018
from a surplus of GBP224m at 31 July 2017, benefitting from GBP30m
of contributions in the period and a one-off settlement gain of
GBP4m, being offset by an actuarial loss on the bulk annuity buy-in
agreement. 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-Jan-18 31-Jul-17
--------------------------- ---------- ----------
Funded plans
UK plans - funding
status 111% 111%
US plans - funding
status 96% 91%
Other plans - funding
status 82% 81%
--------------------------- ---------- ----------
Total - funding status 110% 109%
--------------------------- ---------- ----------
31-Jan-18 31-Jul-17
--------------------------- ---------- ----------
Surplus / (deficit)
Funded plans 364 354
Unfunded plans (127) (130)
--------------------------- ---------- ----------
Total surplus / (deficit) 237 224
--------------------------- ---------- ----------
Retirement benefit
assets 383 390
Retirement benefit
liabilities (146) (166)
--------------------------- ---------- ----------
237 224
--------------------------- ---------- ----------
Return on capital employed
The headline return on capital employed (ROCE) is calculated
over a rolling 12-month period and 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 non-headline items net of tax, and net debt. ROCE decreased
(110)bps to 15.2% (2017: 16.3%) primarily as a result of a higher
asset base from the Morpho acquisition.
Exchange rates
The results of overseas operations are translated into sterling
at average exchange rates. The net assets are translated at
period-end rates. The principal exchange rates, expressed in terms
of the value of sterling, are shown in the following table.
31
31 January 31 January July
2018 2017 2017
--------------- ---------- ---------- ----------------- ----- -----------------
Average rates:
Dollar weakened Dollar weakened
US dollar 1.33 1.26 6% 1.27 5%
Euro strengthened Euro strengthened
Euro 1.12 1.16 3% 1.16 3%
Period-end
rates:
Dollar weakened Dollar weakened
US dollar 1.42 1.26 13% 1.32 8%
Euro strengthened Euro weakened
Euro 1.14 1.17 3% 1.12 2%
--------------- ---------- ---------- ----------------- ----- -----------------
Risk management
The principal risks and uncertainties affecting the business
activities of the Group and relevant mitigating activities were set
out on pages 62-67 of the Annual Report for the year ended 31 July
2017, a copy of which is available at the Company's website at
www.smiths.com.
Developments since the Annual Report
In the view of the Board, the principal risks and uncertainties
affecting the Group for the remaining six months of the financial
year continue to be those set out briefly below and more fully in
the Annual Report.
Technology disruption by existing or future competitor
Developing differentiated new products and services is critical
to our success. Failure to maintain technological differentiation
could lead to a loss of market share and competitive advantage.
People
People are our only truly sustainable source of competitive
advantage. The inability to attract key talent could lead to a loss
of competitive advantage and materially affect our growth
prospects.
Wrong acquisitions and poor integration
Failure to identify suitable acquisition targets or successfully
integrate newly-acquired businesses may result in less value
generation, fewer synergies or require more investment than
anticipated, impacting the Group's financial performance.
Not operating in the right markets
Failure to select the right markets and geographies could impact
our strategic progress and financial performance.
Economic outlook and geo-political environment
Economic and financial market conditions may cause adverse
effects on customers or suppliers with consequential capacity or
cash-flow implications for Smiths Group.
Interruption to supply chain - manufacturing concentration
Our manufacturing continues to be exposed to risk of a number of
external events such as natural catastrophes, disease pandemics and
terrorist attacks which may result in supply disruption.
Interruption to supply chain - sole source of supply
We rely on sole source component suppliers to provide raw
materials or purchased components for some of our products. Any
failure on their part or unforeseen adverse consequences in the
region or market where they operate would impact our ability to
deliver solutions to customers and drive growth.
Product quality issue - recall / litigation / catastrophic
event
Manufacturing flaws, component failures and / or design defects
could require us to recall products. The group, in particular,
Smiths Detection and Smiths Medical may be exposed to losses in the
event of a cyber security breach relating to the Group's
products.
Failure to meet contractual obligations
There is a risk that we may fail to deliver, in a timely
fashion, or at all, the products and services we are required to
deliver, or fail in our contractual execution due to delays by our
suppliers or counterparties.
Significant ethical or compliance breach
We operate in highly regulated markets, as well as in countries
where the risks of bribery, corruption and modern slavery are high,
creating a risk that a significant ethical or compliance breach may
occur which could seriously harm our reputation and impact our
financial performance, customer relationships and ability to retain
talent.
Cyber security
Cyber attacks could compromise the confidentiality, integrity
and availability of our assets, impacting our ability to deliver to
customers and ultimately, financial performance and reputation.
Statement of directors' responsibilities
The Interim report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the Interim report in accordance with the Disclosure and
Transparency Rules ("DTR") of the United Kingdom Financial Conduct
Authority ("FCA"). The DTR require that the accounting policies and
presentation applied to the half-yearly figures must be consistent
with those applied in the latest published annual accounts, except
where the accounting policies and presentation are to be changed in
the subsequent annual accounts, in which case the new accounting
policies and presentation should be followed, and the changes and
the reasons for the changes should be disclosed in the Interim
report, unless the FCA agrees otherwise.
The directors confirm that these condensed interim financial
statements have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting' as adopted by
the European Union, and that the interim management report herein
includes a fair review of:
-- the important events that have occurred during the first six
months of the financial year and their impact on the condensed set
of financial statements as required by DTR 4.2.7;
-- the principal risks and uncertainties for the remaining six
months of the year as required by DTR 4.2.7; and
-- related party transactions that have taken place in the first
six months of the current financial year that have materially
affected and changes in the related party transactions described in
the previous annual report that could have materially affected the
financial position or performance of the Smiths Group plc (the
"Parent Company") and its subsidiaries (together, the "Group")
during the first six months of the current financial year as
required by DTR 4.2.8.
Having reassessed the principal risks, the directors consider it
appropriate to adopt the going concern basis of accounting in
preparing the Interim report.
The directors of the Parent Company are listed in the Parent
Company's Annual Report for the year ended 31 July 2017, except for
the following changes to the membership of the board, which have
occurred since the Annual Report was approved on 21 September
2017:
-- On 1 January 2018 John Francis Shipsey joined the Board as
the Chief Financial Officer.
For and on behalf of the Board of Directors:
Andy Reynolds Smith John Shipsey
Chief Executive Chief Financial Officer
22 March 2018
Independent review report to Smiths Group plc
Report on the condensed interim financial statements
Our conclusion
We have reviewed Smiths Group plc's condensed interim financial
statements (the "interim financial statements") in the interim
report of Smiths Group plc for the 6 month period ended 31 January
2018. Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The condensed interim financial statements comprise:
-- the consolidated balance sheet (unaudited) as at 31 January
2018;
-- the consolidated income statement (unaudited) and
consolidated statement of comprehensive income (unaudited) for the
period then ended;
-- the consolidated cash-flow statement (unaudited) for the
period then ended;
-- the consolidated statement of changes in equity (unaudited)
for the period then ended; and
-- the explanatory notes to the interim financial
statements.
The interim financial statements included in the interim report
have been prepared in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The interim report, including the interim financial statements,
is the responsibility of, and has been approved by, the directors.
The directors are responsible for preparing the interim report in
accordance with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the interim report based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of condensed interim financial statements
involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
22 March 2018
(a) The maintenance and integrity of the Smiths Group plc
website is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the interim financial statements
since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Consolidated income statement (unaudited)
Period ended Period ended
31 January 2018 31 January 2017
============================== ==============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ===== ======== ============ ====== ======== ============ ======
Continuing operations
Revenue 2 1,549 1,549 1,617 1,617
Cost of sales (838) (838) (870) (870)
=============================== ===== ======== ============ ====== ======== ============ ======
Gross profit 711 711 747 747
Sales and distribution
costs (219) (219) (223) (223)
Administrative expenses (245) (17) (262) (247) (26) (273)
(Loss)/profit on business
disposal (1) (1) 126 126
=============================== ===== ======== ============ ====== ======== ============ ======
Operating profit/(loss) 247 (18) 229 277 100 377
=============================== ===== ======== ============ ====== ======== ============ ======
Interest receivable 3 3 1 1
Interest payable (33) (33) (30) (30)
Other financing losses (3) (3) (3) (3)
Other finance income -
retirement benefits 3 3 1 1
=============================== ===== ======== ============ ====== ======== ============ ======
Finance costs (30) (30) (29) (2) (31)
=============================== ===== ======== ============ ====== ======== ============ ======
Profit/(loss) before taxation 217 (18) 199 248 98 346
=============================== ===== ======== ============ ====== ======== ============ ======
Taxation 5 (56) (39) (95) (66) 23 (43)
=============================== ===== ======== ============ ====== ======== ============ ======
Profit/(loss) for the
period 161 (57) 104 182 121 303
=============================== ===== ======== ============ ====== ======== ============ ======
Attributable to:
Smiths Group shareholders
- continuing operations 160 (57) 103 181 121 302
Non-controlling interests
in respect of continuing
operations 1 1 1 1
161 (57) 104 182 121 303
=============================== ===== ======== ============ ====== ======== ============ ======
Earnings per share 4
Basic 26.0p 76.5p
Diluted 25.7p 75.6p
=============================== ===== ======== ============ ====== ======== ============ ======
Dividends per share (declared) 14 13.80p 13.55p
=============================== ===== ======== ============ ====== ======== ============ ======
Consolidated statement of comprehensive income (unaudited)
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
=============================================== ====== ======== ========
Profit for the period 104 303
=============================================== ====== ======== ========
Other comprehensive income:
Actuarial losses on retirement benefits 6 (24) (62)
Taxation recognised on actuarial movements (4) 9
=============================================== ====== ======== ========
Other comprehensive income and expenditure
which will not be reclassified to the
consolidated
income statement (28) (53)
Other comprehensive income which will
be, or has been, reclassified:
Exchange (losses)/gains (179) 107
Cumulative exchange gains recycled on
disposal (31)
Fair value gains/(losses) and reclassification
adjustments:
- deferred in the period on cash-flow
and net investment hedges 90 (62)
- reclassified to income statement on
cash-flow and net investment hedges (1) 21
Total other comprehensive income/(expenditure) (118) (18)
Total comprehensive income/(expenditure) (14) 285
=============================================== ====== ======== ========
Attributable to:
Smiths Group shareholders (14) 285
Non-controlling interests
=============================================== ====== ======== ========
(14) 285
=============================================== ====== ======== ========
Consolidated balance sheet (unaudited)
31 January 31 July
2018 2017
Notes GBPm GBPm
======================================= ===== ========== =======
Non-current assets
Intangible assets 7 1,908 2,015
Property, plant and equipment 8 291 315
Financial assets - other investments 18 21
Retirement benefit assets 6 383 390
Deferred tax assets 199 272
Trade and other receivables 64 57
Financial derivatives 86 56
======================================= ===== ========== =======
2,949 3,126
Current assets
Inventories 439 452
Current tax receivable 37 62
Trade and other receivables 640 722
Cash and cash equivalents 9 591 782
Financial derivatives 11 13
======================================= ===== ========== =======
1,718 2,031
Assets of business held for sale 13 19
Total assets 4,686 5,157
======================================= ===== ========== =======
Current liabilities
Financial liabilities
- borrowings 9 (21) (151)
- financial derivatives (10) (10)
Provisions for liabilities and charges 11 (81) (85)
Trade and other payables (529) (576)
Current tax payable (58) (45)
======================================= ===== ========== =======
(699) (867)
Liabilities of business held for sale 13 (4)
Non-current liabilities
Financial liabilities
- borrowings 9 (1,531) (1,598)
- financial derivatives (4) (2)
Provisions for liabilities and charges 11 (245) (283)
Retirement benefit obligations 6 (146) (166)
Deferred tax liabilities (69) (111)
Trade and other payables (22) (26)
======================================= ===== ========== =======
(2,017) (2,186)
======================================= ===== ========== =======
Total liabilities (2,720) (3,053)
======================================= ===== ========== =======
Net assets 1,966 2,104
======================================= ===== ========== =======
Shareholders' equity
Share capital 148 148
Share premium account 358 355
Capital redemption reserve 6 6
Revaluation reserve 1 1
Merger reserve 235 235
Retained earnings 1,404 1,634
Hedge reserve (201) (290)
======================================= ===== ========== =======
Total shareholders' equity 1,951 2,089
Non-controlling interest equity 15 15
======================================= ===== ========== =======
Total equity 1,966 2,104
======================================= ===== ========== =======
Consolidated statement of changes in equity (unaudited)
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 July 2017 503 242 1,634 (290) 2,089 15 2,104
========================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 103 103 1 104
Other comprehensive
income:
Exchange losses net
of recycling (178) (178) (1) (179)
Actuarial losses
on retirement benefits
and tax (28) (28) (28)
Fair value gains/(losses) 89 89 89
========================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income/(expenditure)
for the period (103) 89 (14) (14)
Transactions relating
to ownership interests:
Exercises of share
options 3 3 3
Purchase of own shares (15) (15) (15)
Dividends - equity
shareholders 14 (117) (117) (117)
Share-based payment 5 5 5
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 January 2018 506 242 1,404 (201) 1,951 15 1,966
========================== ====== ======== ========= ========= ======== ============== =============== =======
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 302 302 1 303
Other comprehensive
income:
Exchange gains net
of recycling 77 77 (1) 76
Actuarial losses
on retirement benefits
and tax (53) (53) (53)
Fair value losses (41) (41) (41)
========================= ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive
income for the period 326 (41) 285 285
Transactions relating
to ownership interests:
Exercises of share
options 2 2 2
Purchase of own shares (9) (9) (9)
Dividends - equity
shareholders 14 (114) (114) (114)
Share-based payment 8 8 8
========================= ===== ======== ========= ========= ======== ============== =============== =======
At 31 January 2017 502 242 1,416 (342) 1,818 14 1,832
========================= ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement (unaudited)
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
============================================== ====== ======== ========
Net cash inflow from operating activities 15 159 225
Cash-flows from investing activities
Expenditure on capitalised development (13) (19)
Expenditure on other intangible assets (5) (3)
Purchases of property, plant and equipment (28) (29)
Disposals of property, plant and equipment 2 2
Investment in financial assets (2)
Disposal of investment 6
Acquisition of businesses (15)
Disposals of businesses - continuing
operations 320
Net cash-flow used in investing activities (55) 271
Cash-flows from financing activities
Proceeds from exercise of share options 3 2
Purchase of own shares (15) (9)
Dividends paid to equity shareholders (117) (114)
Cash inflow/(outflow) from matured derivative
financial instruments 4 (2)
Increase in borrowings 1
Reduction and repayment of borrowings (132) (1)
============================================== ====== ======== ========
Net cash-flow used in financing activities (257) (123)
Net (decrease)/increase in cash and cash
equivalents (153) 373
Cash and cash equivalents at beginning
of the period 781 430
Exchange differences (37) 10
============================================== ====== ======== ========
Cash and cash equivalents at end of the
period 591 813
============================================== ====== ======== ========
Cash and cash equivalents at end of the
period comprise:
- cash at bank and in hand 229 307
- short-term deposits 362 509
- bank overdrafts (3)
============================================== ====== ======== ========
591 813
============================================== ====== ======== ========
Reconciliation of net cash-flow to movement in net debt
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
=============================================== ====== ======== ========
Net debt at start of period 9 (967) (978)
=============================================== ====== ======== ========
Net (decrease)/increase in cash and cash
equivalents (153) 373
Increase in borrowings (1)
Reduction and repayment of borrowings 132 1
=============================================== ====== ======== ========
Movement in net debt resulting from cash-flows (21) 373
Capitalisation, interest accruals and
unwind of capitalisation of fees (6)
Fair value movement from interest rate
hedging 3 12
Foreign exchange gains/(losses) 24 (36)
=============================================== ====== ======== ========
Movement in net debt in the period 6 343
=============================================== ====== ======== ========
Net debt at end of period 9 (961) (635)
=============================================== ====== ======== ========
Notes to the condensed interim financial statements
1 Basis of preparation
The financial information for the period ended 31 January 2018
does not constitute statutory accounts as defined in section 434 of
the Companies Act 2006. A copy of the statutory accounts for the
year ended 31 July 2017 has been delivered to the Registrar of
Companies. The auditors' report on those accounts was not
qualified, did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying the
report, and did not contain statements under section 498(2) or (3)
of the Companies Act 2006.
The financial information included in this announcement has been
prepared on a going concern basis using accounting policies
consistent with International Financial Reporting Standards (IFRS)
as adopted by the European Union and in accordance with IAS 34
Interim Financial Reporting. The current period financial
information presented in this document has been reviewed, not
audited and the review report is attached to this document.
The condensed interim financial statements should be read in
conjunction with the annual financial statements for the year ended
31 July 2017, which have been prepared in accordance with IFRS as
adopted by the European Union.
Accounting policies
The same accounting policies, estimates, presentation and
methods of computation are followed in the half year report as
applied in the Group's latest annual audited financial
statements.
A number of new standards and amendments to standards and
interpretations have been issued but are not yet effective for the
current accounting period. None of these are expected to have a
material impact on the consolidated financial statements of the
Group, except the following set out below:
-- IFRS 9 - Financial Instruments, is effective for the Group's
year ending 31 July 2019. Adopting IFRS 9 will impact hedge
accounting and receivables provisioning. Hedge accounting under the
new standard will be linked more closely to the risk management
objectives of the hedging activity, 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, accelerating the recognition of provisions for
credit risk, impacting the timing and value of provision
recognition on higher risk balances. At 31 January 2018 the Group
has GBP69m of receivables which are more than three months overdue
or considered to be high risk; under the current methodology
provisions of GBP31m have been recognised for these
receivables.
-- IFRS 15 - Revenue from contracts with customers, is effective
for the Group's year ending 31 July 2019. The new standard combines
a number of previous standards, setting out a five-step model for
the recognition of revenue and establishing principles for
reporting useful information to users of financial statements about
the nature, amount, timing and uncertainty of revenue and cash
flows arising from an entity's contracts with customers.
The Group is undertaking a detailed contract level review of the
impact of IFRS 15 across all revenue streams and is making good
progress in developing policies and disclosures. Further details of
the impact of IFRS 15 will be provided later in the year.
-- IFRS 16 - Leases, is effective for the Group's year ending 31
July 2020. This standard removes the distinction between operating
and finance leases, resulting in a lease liability and
corresponding asset being recognised on the balance sheet for
almost all leases. The Group is currently assessing the impact of
the new standard. Our initial assessment of IFRS 16 is that it will
not have a material effect of the Group's net assets.
Having assessed the principal risks discussed above, the
Directors believe that the Group is well placed to manage its
financing and other business risks satisfactorily, and have a
reasonable expectation that the Group have adequate resources to
continue in operation for at least 12 months from the signing date
of these financial statements. They therefore consider it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements.
The interim financial information was approved by the Board on
22 March 2018.
Presentation of results
In order to provide users of the accounts with a clear and
consistent presentation of the underlying performance of the
Group's ongoing trading activity, the Group presents its results in
the income statement with amounts relating to costs of acquisitions
(including integration costs) and disposals (including transition
services), amortisation of acquired intangibles, impairments,
legacy liabilities, material one-off items and certain
re-measurements in a separate column. See note 3 for a breakdown of
the items excluded from headline operating profit and headline
finance costs.
Measures of the underlying performance of the Group's ongoing
trading activity are described as 'headline' and used by management
to measure and monitor performance. See note 2 for disclosures of
headline operating profit and note 17 for more information about
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,
divestments, presentational changes and the effects of foreign
exchange translation, by making the following adjustments:
-- Exclude acquisitions from the current period for the first 12
months of ownership;
-- Exclude the divested businesses performance after the date of
disposal from comparative period;
-- Include restructuring and pension administration costs as
headline items for both the current and comparative periods;
and
-- Retranslate the comparative to current year exchange rates
before calculating growth measures.
2 Segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These
divisions design and manufacture the following products:
-- John Crane - mechanical seals, seal support systems, 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 which 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 profit measures. Intersegment
sales and transfers are charged at arm's length prices.
Segment trading performance
Period ended 31 January 2018
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 428 451 367 135 168 1,549
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 91 82 59 14 31 277
Corporate headline operating
costs (30) (30)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 91 82 59 14 31 (30) 247
Items excluded from headline
measures (note 3) (5) (3) (20) (3) 8 5 (18)
Operating profit/(loss) 86 79 39 11 39 (25) 229
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating margin 21.3% 18.1% 16.2% 10.3% 18.6% 16.0%
================================= ====== ======== ========== ============= ======== ========= =====
Period ended 31 January 2017
====== ===============================================================
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ======== ========== ============= ======== ========= =====
Revenue 435 473 318 230 161 1,617
================================= ====== ======== ========== ============= ======== ========= =====
Divisional headline operating
profit 90 99 54 26 30 299
Corporate headline operating
costs (22) (22)
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating profit/(loss) 90 99 54 26 30 (22) 277
Items excluded from headline
measures (note 3) (7) (10) (7) (3) 7 (6) (26)
Profit on disposal of
businesses 4 100 22 126
================================= ====== ======== ========== ============= ======== ========= =====
Operating profit/(loss) 87 189 47 45 37 (28) 377
================================= ====== ======== ========== ============= ======== ========= =====
Headline operating margin 20.8% 21.0% 16.8% 11.3% 18.3% 17.1%
================================= ====== ======== ========== ============= ======== ========= =====
Segment assets and liabilities
Segment assets
31 January 2018
===========================================================================
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 83 220 101 33 33 19 489
Inventory, trade and
other receivables 309 241 367 100 102 24 1,143
============================ ====== ======== ========== ============= ======== ============= =====
Segment assets 392 461 468 133 135 43 1,632
============================ ====== ======== ========== ============= ======== ============= =====
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
============================ ====== ======== ========== ============= ======== ============= =====
Segment liabilities
31 January 2018
===========================================================================
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ============= =====
Divisional liabilities (110) (102) (242) (38) (37) (529)
Corporate and non-headline
liabilities (348) (348)
=========================== ====== ======== ========== ============= ======== ============= =====
Segment liabilities (110) (102) (242) (38) (37) (348) (877)
=========================== ====== ======== ========== ============= ======== ============= =====
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)
=========================== ====== ======== ========== ============= ======== ============= =====
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
=================== ===================
31 January 31 July 31 January 31 July
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
=================================== ========== ======= ========== =======
Segment assets and liabilities 1,632 1,762 (877) (970)
Goodwill and acquired intangibles 1,728 1,820
Derivatives 97 69 (14) (12)
Current and deferred tax 236 334 (127) (156)
Retirement benefit assets and
obligations 383 390 (146) (166)
Cash and borrowings 591 782 (1,552) (1,749)
Assets and liabilities of business
held for sale 19 (4)
==================================== ========== ======= ========== =======
Statutory assets and liabilities 4,686 5,157 (2,720) (3,053)
==================================== ========== ======= ========== =======
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 2017: GBP787m)
and eliminate post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt. See note 17 for additional details.
The 12-month rolling average capital employed by division, which
Smiths use to calculate divisional return on capital employed, is
set out below:
31 January 2018
===============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Average total capital
employed 874 1,212 1,027 385 185 8 3,691
=========================== ====== ======== ========== ============= ======== ========= =====
Return on capital employed 23.4% 15.8% 10.6% 11.4% 36.4% 15.2%
=========================== ====== ======== ========== ============= ======== ========= =====
31 January 2017
===============================================================
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ====== ======== ========== ============= ======== ========= =====
Average total capital
employed 908 1,246 629 562 175 (30) 3,490
=========================== ====== ======== ========== ============= ======== ========= =====
Return on capital employed 21.3% 16.3% 14.7% 11.3% 32.8% 16.3%
=========================== ====== ======== ========== ============= ======== ========= =====
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 period ended
31 January 2018 144 284 428
Revenue period ended
31 January 2017 158 277 435
========================= ========== =========== =====
Infusion Vascular Vital Specialty
systems access care products Total
Smiths Medical GBPm GBPm GBPm GBPm GBPm
===================== ======== ======== ===== ========= =====
Revenue period ended
31 January 2018 149 150 122 30 451
Revenue period ended
31 January 2017 150 154 134 35 473
======================= ======== ======== ===== ========= =====
Ports
Air and Urban
transportation borders Military security Total
Smiths Detection GBPm GBPm GBPm GBPm GBPm
===================== =============== ======== ======== ========= =====
Revenue period ended
31 January 2018 241 31 11 84 367
Revenue period ended
31 January 2017 140 43 45 90 318
======================= =============== ======== ======== ========= =====
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
===================== ========== ========= ===== =====
Revenue period ended
31 January 2018 95 40 135
Revenue period ended
31 January 2017 83 100 47 230
======================== ========== ========= ===== =====
Fluid Flexible Heat Construction
management solutions solutions products Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
===================== =========== ========== ========== ============ =====
Revenue period ended
31 January 2018 41 31 41 55 168
Revenue period ended
31 January 2017 39 30 37 55 161
======================= =========== ========== ========== ============ =====
3 Non-statutory profit measures
Headline profit measures
The Group seeks to present a measure of underlying performance
which is not impacted by material non-recurring items or items
considered non-operational in nature. This measure of profit is
described as 'headline' and is used by management to measure and
monitor performance. See the disclosures on presentation of results
in accounting policies for an explanation of the adjustments. The
items excluded from 'headline' are referred to as 'non-headline'
items.
Non-headline operating profit items
The non-headline items included in statutory operating profit
are as follows:
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
=============================================== ===== ======== ========
Restructuring programmes (15)
Integration programmes (12)
Acquisition cost provision release/(accrual) 2 (6)
Provision for Titeflex Corporation subrogation
claims 11 8 8
Provision for John Crane, Inc. asbestos
litigation 11 (4) (3)
Administration costs for post-retirement
benefit schemes (4)
Settlement gain/(losses) on post-retirement
benefits schemes 6 4
Amortisation of acquired intangible assets 7 (15) (6)
Profit/(Loss) on disposal of businesses (1) 126
=============================================== ===== ======== ========
Non-headline items in operating profit (18) 100
=============================================== ===== ======== ========
Material items for the period ended 31 January 2018
Integration programmes comprise GBP12m in respect of the
integration of Morpho Detection into the Smiths Detection
business.
A provision release of GBP8m has been recognised by Titeflex
Corporation in respect of changes to the estimated cost of future
claims including those from insurance companies seeking recompense
for damage allegedly caused by lightning strike. The provision
release is predominantly related to a fall in the expected number
of claims.
The operating charge in respect of John Crane, Inc. litigation
comprises a charge of GBP8m in respect of an increased provision
for adverse judgments and legal defence costs, GBP2m in respect of
litigation management, defence strategy and legal fees in
connection with litigation against insurers, and a credit of GBP6m
arising from the increase in US risk free rates.
Non-headline finance costs items
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
=========================================== ===== ======== ========
Adjustment to discounted provisions 11 (3) (3)
Other finance income - retirement benefits 6 3 1
=========================================== ===== ======== ========
Non-headline items in finance costs (2)
=========================================== ===== ======== ========
Non-headline (loss)/profit before taxation (18) 98
=========================================== ===== ======== ========
Non-headline taxation items
A non-headline tax charge of GBP39m (31 January 2017: GBP23m
credit) has been taken in the period. See note 5 for further
details.
4 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the period attributable to equity shareholders of the Parent
Company by the average number of ordinary shares in issue during
the year.
Period Period
ended ended
31 January 31 January
2018 2017
GBPm GBPm
=========================================== =========== ===========
Profit attributable to equity shareholders
for the period
- total 103 302
=========================================== =========== ===========
Average number of shares in issue during
the period 395,690,311 395,383,836
=========================================== =========== ===========
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 401,246,135 (period ended
31 January 2017: 399,856,483) ordinary shares, being the average
number of ordinary shares in issue during the year adjusted by the
dilutive effect of employee share schemes.
A reconciliation of basic and headline earnings per share is as
follows:
Period ended Period ended
31 January 2018 31 January 2017
================== ==================
EPS EPS
GBPm (p) GBPm (p)
=========================================== ======== ======== ======== ========
Profit attributable to equity shareholders
of the Parent Company 103 26.0 302 76.5
Exclude:
Non-headline items and related tax
(note 3) 57 14.4 (121) (30.8)
=========================================== ======== ======== ======== ========
Headline profit attributable to equity
shareholders of the Parent Company 160 40.4 181 45.7
=========================================== ======== ======== ======== ========
Statutory EPS - diluted (p) 25.7 75.6
=========================================== ======== ======== ======== ========
Headline EPS - diluted (p) 39.9 45.2
=========================================== ======== ======== ======== ========
5 Taxation
The interim tax rate of 47.5% (31 January 2017: 12.4%) is
calculated by applying the estimated effective headline tax rate of
25.8% (31 January 2017: 26.5%) for the year ended 31 July 2018 to
headline profit before tax and then taking into account the tax
effect of non-headline items in the interim period.
A reconciliation of total and headline tax charge is as
follows:
Period ended Period ended
31 January 31 January
2018 2017
================== ==================
Continuing Continuing
operations Tax operations Tax
GBPm rate GBPm rate
======================================== =========== ===== =========== =====
Profit before taxation 199 346
Taxation (95) 47.5% (43) 12.4%
======================================== =========== ===== =========== =====
Adjustments
Non-headline items excluded from profit
before taxation (note 3) (18) (98)
Taxation on non-headline items and
non-headline tax adjustment (39) 23
======================================== =========== ===== =========== =====
Headline
Headline profit before taxation 217 248
Taxation on headline profit (56) 25.8% (66) 26.5%
======================================== =========== ===== =========== =====
The changes in the value of the net tax asset/(liability) in the
period were:
Net
Current Deferred tax
tax tax balance
GBPm GBPm GBPm
=========================== ======= ======== ========
At 31 July 2017 17 161 178
Foreign exchange gains and
losses (2) (6) (8)
Credit/(charge) to income
statement (56) 6 (50)
Exceptional one-off impact
of US tax reform (18) (27) (45)
Debit to reserves (4) (4)
Tax paid 38 38
============================== ======= ======== ========
At 31 January 2018 (21) 130 109
============================== ======= ======== ========
The deferred tax charge to reserves derives from the revaluation
of deferred tax related to US pension plans. The exceptional
one-off impact to US tax reform is discussed in more detail
below.
Developments in the Group tax position
US Tax Reform
The Tax Cuts and Jobs Act enacted on 22 December 2017 reduced
the US Federal tax rate from 35% to 21% from 1 January 2018. This
revised rate has been used to revalue net deferred tax assets in
the United States, leading to a charge to the income statement of
GBP27 million. In addition there is a one-time deemed repatriation
tax charge of GBP18 million related to unremitted foreign earnings,
payable over 8 years. The total of GBP45m for these two items is
included in the table above as a non-headline tax adjustment.
FII GLO
Smiths Group plc is one of the companies enrolled in the FII GLO
litigation against HMRC. The court actions first filed in 2003 are
nearing an end and some claimants with different fact patterns have
received payments. There are further relevant legal actions that
could impact the Group's recoveries which amount to around GBP28m
(after deducting the 45% withholding tax). The Group has not
recognised any impact to the financial statements in the current
period or the prior year, due to the uncertainty of the eventual
outcome, except for the amount received in the period in respect of
Foreign Income Dividends.
Claims related to the impact of the Foreign Income Dividends
(FID) regime are included in the FII GLO litigation claims the
Group issued in 2009. Under the final relevant ECJ decision, FID
claims are now conclusively successful and the only outstanding
matters that could affect restitution payments are court decisions
awaited regarding the amount of interest (compound or simple) and
withholding tax. Accordingly the Group made its claim in respect of
FID's and received GBP2.1m in August 2017. This amount has been
calculated using simple interest and has been paid under deduction
of withholding tax.
EU Commission Investigation regarding Claims for Partial (75%)
Exemption for Profits from qualifying loan relationships under
Chapter 9 FA2012
In October 2017, the European Commission opened a state aid
investigation into the Group Financing Exemption in the UK
controlled foreign company rules. The Group Financing Exemption was
introduced in legislation by the UK government in 2013. In common
with other UK-based international companies whose arrangements were
in line with current UK CFC legislation, the Group may be affected
by the outcome of this investigation and is monitoring
developments. If the preliminary findings of the European
Commission's investigation are upheld, the estimated maximum
potential liability is approximately GBP14 million. Based on our
current assessment, no provision is being made in respect of this
issue.
6 Post retirement benefits
The Group provides post-retirement benefits to employees in a
number of countries throughout the world. The arrangements include
defined benefit and defined contribution plans and, mainly in the
United Kingdom (UK) and United States of America (US),
post-retirement healthcare. The principal defined benefit pension
plans are in the UK and in the US and these have been closed so
that no future benefits are accrued.
Where any individual scheme shows a surplus under IAS 19, this
is disclosed on the balance sheet as a retirement benefit asset.
The IAS 19 surplus of any one scheme is not available to fund the
IAS 19 deficit of another scheme. The retirement benefit asset
arises from the rights of the employers to recover the surplus at
the end of the life of the scheme. The schemes in surplus are
mature, with a duration averaged over all scheme participants of 17
years. However 35% of the liabilities of these schemes are expected
to be paid after 2038.
The amounts recognised in the balance sheet were as follows:
31 January 31 July
2018 2017
GBPm GBPm
=========================================== ========== =======
Market value of funded plan assets 4,189 4,259
Present value of funded scheme liabilities (3,825) (3,905)
Unfunded pension plans (110) (111)
Postretirement healthcare (17) (19)
Net retirement benefit asset 237 224
============================================ ========== =======
Retirement benefit assets 383 390
Retirement benefit obligations (146) (166)
============================================ ========== =======
Net retirement benefit asset 237 224
============================================ ========== =======
The principal assumptions used in updating the valuations are
set out below:
31 January 2018 31 July 2017
================= ==============
UK US UK US
======================================== ======= ======== ====== ======
Rate of increase in salaries n/a n/a n/a n/a
Rate of increase for active deferred
members 4.2% n/a 4.1% n/a
Rate of increase in pensions in payment 3.3% n/a 3.2% n/a
Rate of increase in deferred pensions 3.3% n/a 3.2% n/a
Discount rate 2.6% 3.80% 2.6% 3.85%
Inflation rate 3.3% n/a 3.2% n/a
Healthcare cost increases 4.7% n/a 4.2% n/a
======================================== ======= ======== ====== ======
The methods for setting the mortality assumptions for the UK
schemes are consistent with the 31 July 2017 valuation. The US
schemes have adopted the mortality improvement scale MP-2017 (31
July 2017 - MP-2016).
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 January 2018 31 July 2017
- GBPm - GBPm
============================ ============================
SIPS TIGPS US schemes SIPS TIGPS US schemes
=============================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme
liabilities
- Active deferred members (61) (60) (95) (81) (92) (101)
- Deferred members (847) (616) (121) (891) (625) (160)
- Pensioners (1,110) (826) (29) (1,053) (809) (31)
=============================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme
liabilities (2,018) (1,502) (245) (2,025) (1,526) (292)
Market value of scheme assets 2,227 1,675 234 2,238 1,703 266
=============================== ======= ======= ========== ======= ======= ==========
Surplus/(deficit) 209 173 (11) 213 177 (26)
=============================== ======= ======= ========== ======= ======= ==========
SIPS uses repurchase arrangements, total return swaps, inflation
swaps and interest rate swaps to hedge the interest and inflation
risks of the scheme liabilities. At 31 January 2018 SIPS assets
were net of GBP790m (31 July 2017: GBP773m) repurchase obligations,
and included GBP2m losses (31 July 2017: GBP4m gains) on interest
rate swaps, GBP6m gains (31 July 2017: GBP8m gains) on inflation
swaps and GBP1m gain (31 July 2017: GBP1m gain) on total return
assets. The scheme was holding GBP3m (31 July 2017: GBP1m) in
liquidity funds to meet potential future obligations to
collateralise repurchase arrangements or swap agreements.
Contributions
Group contributions to the funded defined benefit pension plans
totalled GBP27m (31 January 2017: GBP42m), this comprised regular
contributions of GBP12m to SIPS and GBP2m to TIGPS, a one-off
GBP12m contribution to US schemes and contributions to other
schemes of GBP1m. In addition, GBP3m (31 January 2017: GBP3m) was
spent on providing benefits under unfunded defined benefit pension
and post-retirement healthcare plans. No additional contributions
to support risk reduction programmes were made in the current
period.
Contributions in the second half of the year are expected to be:
GBP12m to SIPS; GBP2m to TIGPS and GBP1m to other plans.
The changes in the present value of the net pension balance in
the period were:
Period Year
ended ended
31 31
January July
2018 2017
GBPm GBPm
================================================ ======== ======
At beginning of period 224 80
Exchange adjustment 4 (6)
Current service cost (2) (4)
Scheme administration costs (3) (7)
Past service cost, curtailments and settlements 5 (1)
Finance credits/(charges) - retirement benefits 3 2
Contributions by employer 30 105
Actuarial (loss)/gain (24) 55
Net retirement benefit asset 237 224
================================================== ======== ======
Actuarial losses are entirely due to a loss of GBP24m on the UK
schemes, principally arising from a GBP26m loss on the bulk annuity
buy-in agreement with Canada Life, announced on 20 October
2017.
7 Intangible assets
Software,
patents
and
Development Acquired intellectual
Goodwill costs intangibles property Total
Notes GBPm GBPm GBPm GBPm GBPm
============================= ===== ======== =========== ============ ============= =====
Cost
At 31 July 2017 1,658 330 574 206 2,768
Exchange adjustments (92) (19) (35) (8) (154)
Business combinations 12 22 6 28
Additions 14 5 19
Disposals (8) (8)
Assets held for sale (1) (28) (29)
At 31 January 2018 1,587 325 517 195 2,624
============================= ===== ======== =========== ============ ============= =====
Amortisation
At 31 July 2017 88 180 324 161 753
Exchange adjustments (5) (11) (18) (5) (39)
Charge for the period 14 15 9 38
Disposals (8) (8)
Assets held for sale (28) (28)
============================= ===== ======== =========== ============ ============= =====
At 31 January 2018 83 183 293 157 716
============================= ===== ======== =========== ============ ============= =====
Net book value at 31 January
2018 1,504 142 224 38 1,908
Net book value at 31 July
2017 1,570 150 250 45 2,015
============================= ===== ======== =========== ============ ============= =====
8 Property, plant and equipment
Fixtures,
fittings,
Land Plant tools
and and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
================================== ========== ========== ========== =====
Cost
At 31 July 2017 204 635 209 1,048
Exchange adjustments (10) (33) (9) (52)
Additions 3 20 5 28
Disposals (4) (21) (16) (41)
Assets held for sale (1) (19) (2) (22)
================================== ========== ========== ========== =====
At 31 January 2018 192 582 187 961
================================== ========== ========== ========== =====
Depreciation
At 31 July 2017 107 461 165 733
Exchange adjustments (5) (24) (7) (36)
Charge for the period 4 16 7 27
Disposals (3) (20) (15) (38)
Assets held for sale (1) (14) (1) (16)
================================== ========== ========== ========== =====
At 31 January 2018 102 419 149 670
================================== ========== ========== ========== =====
Net book value at 31 January 2018 90 163 38 291
Net book value at 31 July 2017 97 174 44 315
================================== ========== ========== ========== =====
9 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments relating
to hedge accounting.
31 January 31 July
2018 2017
GBPm GBPm
======================================= ========== =======
Cash and cash equivalents
Net cash and deposits 591 782
======================================= ========== =======
Long-term borrowings
$250m 7.20% US$ Guaranteed notes 2019 (176) (189)
$400m 3.625% US$ Guaranteed notes 2022 (276) (301)
EUR600m 1.25% Eurobond 2023 (519) (533)
EUR650m 2.00% Eurobond 2027 (559) (574)
Bank and other loans (1) (1)
======================================= ========== =======
(1,531) (1,598)
======================================= ========== =======
Short-term borrowings
Bank overdrafts (1)
$175m 7.37% US$ Private placement 2018 (133)
Bank and other loans (1) (1)
Interest accrual (20) (16)
======================================= ========== =======
(21) (151)
======================================= ========== =======
Borrowings (1,552) (1,749)
======================================= ========== =======
Net debt (961) (967)
======================================= ========== =======
On 1 November 2017, the Group refinanced the US$800m Revolving
Credit Facility for a new five year period until 1 November 2022.
The new facility has two one-year extension options to further
extend the maturity until 2024. At 31 January 2018 this Revolving
Credit Facility was undrawn.
Movements in net debt
Net
cash
and Other
cash short-term Long-term Net
equivalents borrowing borrowings debt
GBPm GBPm GBPm GBPm
================================== ============ =========== =========== =====
At 31 July 2017 781 (150) (1,598) (967)
Foreign exchange gains and
losses (37) 1 60 24
Net cash outflow (153) (153)
Repayment and drawdown of
borrowings 132 132
Capitalisation, interest accruals
and unwind of capitalisation
of fees 1 (1)
Fair value movement from interest
rate hedging (5) 8 3
==================================== ============ =========== =========== =====
At 31 January 2018 591 (21) (1,531) (961)
==================================== ============ =========== =========== =====
10 Fair value of financial instruments
Carrying Fair Carrying Fair
value value value value
31 31 31 31
January January July July
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
===================================== ======== ======== ======== =======
Level 2 valuations
Financial assets - other investments 13 13 11 11
Financial derivatives - assets 97 97 69 69
Borrowings (1,552) (1,581) (1,749) (1,792)
Financial derivatives - liabilities (14) (14) (12) (12)
Level 3 valuations
Financial assets - other investments 5 5 10 10
===================================== ======== ======== ======== =======
Derivatives are valued at the net present value of the future
cash-flows calculated using market exchange rates and yield curves
at the balance sheet date. Borrowings are valued at the net present
value of the future cash-flows using credit spreads and yield
curves derived from market data.
Cash, trade receivables and trade payables are excluded from
this table because carrying value is a reasonable approximation to
fair value for all these assets and liabilities.
11 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 25 30 21 9 85
Non-current liabilities 6 207 63 7 283
============================== ======= =========== ============ ===== =====
At 31 July 2017 31 237 84 16 368
Exchange adjustments (2) (16) (5) (23)
Provision charged 9 2 6 17
Provision released (5) (8) (2) (15)
Unwind of provision discount 2 1 3
Utilisation (6) (11) (4) (3) (24)
At 31 January 2018 27 214 68 17 326
============================== ======= =========== ============ ===== =====
Current liabilities 25 31 15 10 81
Non-current liabilities 2 183 53 7 245
============================== ======= =========== ============ ===== =====
At 31 January 2018 27 214 68 17 326
============================== ======= =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Warranty provision and product liability
At 31 January 2018 there are warranty and product liability
provisions of GBP24m (31 July 2017: GBP28m). 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 the Group properly understands risks and concerns and
can take steps both to manage immediate issues and to improve its
practices and procedures for the future. The Group 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. The JCI
products generally referred to in these cases consist of industrial
sealing product, primarily packing and gaskets. The asbestos was
encapsulated within these products in such a manner that causes JCI
to believe, based on tests conducted on its behalf, that the
products were safe. JCI ceased manufacturing products containing
asbestos in 1985.
The table below summarises the JCI claims experience over the
last 38 years since the start of this litigation:
31 January 31 July
2018 2017
==================================== ========== =======
JCI claims experience
Claims against JCI that have
been dismissed 275,000 273,000
Claims JCI is currently a defendant
in 50,000 50,000
Cumulative final judgments,
after appeals, against JCI since
1979 140 138
Cumulative value of awards ($'m)
since 1979 164 160
======================================= ========== =======
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
The provision is based on past history and published tables of
asbestos incidence projections and is determined using asbestos
valuation experts, Bates White LLC. The assumptions made in
assessing the appropriate level of provision include: the period
over which the expenditure can be reliably estimated; the future
trend of legal costs; the rate of future claims filed; the rate of
successful resolution of claims; and the average amount of
judgments awarded.
The JCI asbestos litigation provision has developed in the
period as follows:
Period Year
ended ended
31 31
January July
2018 2017
GBPm GBPm
================================================ ======== ======
John Crane, Inc. litigation provision
Gross provision 238 260
Discount (24) (23)
================================================ ======== ======
Discounted provision 214 237
================================================ ======== ======
Operating profit charge/(credit)
Increased provision for adverse judgments
and legal defence costs 8 17
Decreased provision for change in US risk
free rates (6) (13)
Litigation management expense - legal fees
in connection with litigation against insurers
and defence strategy 2 11
Recoveries from insurers (6)
================================================ ======== ======
Operating profit charge 4 9
================================================ ======== ======
Cash-flow
Provision utilisation (11) (24)
John Crane, Inc. litigation spend 13 32
================================================ ======== ======
The reduction to the provision in the period is principally due
to foreign exchange.
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 GBP213m and future spend at
the 95th percentile of GBP275m (31 July 2017: GBP231m and GBP304m,
respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total
future spend will fall between GBP223m and GBP249m (31 July 2017:
between GBP243m and GBP272m), compared with the gross provision
value of GBP238m (31 July 2017: GBP260m).
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 GBP14m (31 July
2017: GBP17m) and reducing it by five years would reduce the
provision by GBP86m (31 July 2017: GBP98m).
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 GBP12m (31 July 2017: GBP14m) and
extending it by five years would increase the provision by GBP50m
(31 July 2017: GBP58m). 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 GBP68m (31 July 2017: GBP84m) is a discounted
pre-tax provision using discount rates, being the risk-free rate on
US debt instruments for the appropriate period. The deferred tax
asset related to this provision is shown within the deferred tax
balance.
31 January 31 July
2018 2017
GBPm GBPm
============================== ========== =======
Gross provision 112 136
Discount (44) (52)
============================== ========== =======
Discounted pre-tax provision 68 84
Deferred tax (17) (33)
============================== ========== =======
Discounted post-tax provision 51 51
============================== ========== =======
Titeflex Corporation litigation provision sensitivities
The significant uncertainty associated with the future level of
claims and of the costs arising out of related litigation mean that
there can be no guarantee that the assumptions used to estimate the
provision will result in an accurate prediction of the actual costs
that may be incurred. Therefore the provision may be subject to
potentially material revision from time to time, if new information
becomes available as a result of future events.
The projections incorporate a long-term assumption regarding the
impact of safe installation initiatives on the level of future
claims. If the assumed annual benefit of bonding and grounding
initiatives were 0.5% higher, the provision would be GBP4m (31 July
2017: GBP5m) lower, and if the benefit were 0.5% lower, the
provision would increase by GBP4m (31 July 2017: GBP5m).
Other non-headline and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by the Group.
Non-headline provisions comprise all provisions which were
disclosed as non-headline items when they were charged to the
income statement.
These provisions cover non-headline reorganisation, vacant
properties, disposal indemnities and litigation in respect of old
products and discontinued business activities.
12 Acquisitions
On 1 November 2017, Tutco LLC, part of Flex-Tek's Heat Solutions
business, completed the acquisition of the heating element division
of Osram. This acquisition has been rebranded as Tutco
Sureheat.
The intangible assets recognised on this acquisition comprise
technology and customer relationships. Goodwill represents
synergies and the value of the expertise in the assembled
workforce. The goodwill recognised is expected to be deductible for
tax purposes.
From the date of acquisition to 31 January 2018, the acquired
business contributed GBP1m to revenue, with less than a million to
profit before taxation. If the Group had acquired this business at
the beginning of the financial period, the acquisition would have
contributed GBP3m to revenue with less than a million to profit
before taxation.
The provisional balance sheet at the date of acquisition is:
Tutco Sureheat
GBPm
-------------------------------------- --------------
Non-current assets
- acquired intangible assets 6
Current assets
- inventory 1
- trade and other receivables 1
Net assets acquired 8
Goodwill on current year acquisitions 7
======================================= ==============
Total consideration 15
======================================= ==============
Cash paid during the year 15
Total consideration 15
--------------------------------------- --------------
Acquisitions in previous years
The Group acquired the Morpho Detection business from Safran S.
A. on 6 April 2017. Since the acquisition the Group has undertaken
a thorough review of the business and has adjusted the fair value
of assets and liabilities on the acquisition balance sheet,
resulting in a GBP15m increase in the Goodwill associated to this
acquisition in the half year to 31 January 2018.
13 Businesses held for sale
At 31 January 2018 the assets and liabilities of the John Crane
Bearings business were disclosed as held for sale. No impairment
loss was recognised.
John
Crane
Bearings
GBPm
======================================= =========
Non-current assets
Tangible assets 6
Intangible assets 1
========================================= =========
7
Current assets
Inventories 7
Trade and other receivables 5
========================================= =========
Total assets of business held for sale 19
========================================= =========
Current liabilities
Trade and other payables (4)
========================================= =========
Total liabilities of business held for
sale (4)
========================================= =========
14 Dividends
The following dividends were declared and paid in the
period:
Period Period
ended ended
31 31
January January
2018 2017
GBPm GBPm
=========================================== ======== ========
Ordinary final dividend of 29.70p for 2017
(2016: 28.75p) paid 17 November 2017 117 114
=========================================== ======== ========
An interim dividend of 13.80 pence per share was declared by the
Board on 22 March 2018 and will be paid to shareholders on 23 April
2018. 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 6 April 2018.
15 Cash-flow from operating activities
Period ended Period ended
31 January 2018 31 January 2017
============================= =============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ======== ============ ===== ======== ============ =====
Operating profit 247 (18) 229 277 100 377
Amortisation of intangible
assets 21 17 38 23 6 29
Depreciation of property,
plant and equipment 27 27 29 29
Loss on disposal of property,
plant and equipment 1 1 4 4
Profit on disposal of
business (126) (126)
Profit on disposal of
investment (1) (1)
Share-based payment expense 5 5 8 8
Retirement benefits 2 (32) (30) 1 (39) (38)
(Increase)/decrease in
inventories (19) 1 (18) (2) (2)
Decrease/(increase) in
trade and other receivables 33 33 62 5 67
(Decrease)/increase in
trade and other payables (30) (1) (31) (28) (28)
(Decrease)/increase in
provisions (2) (20) (22) (5) (31) (36)
================================ ======== ============ ===== ======== ============ =====
Cash generated from operations 285 (54) 231 369 (85) 284
Interest paid (34) (5) (39) (23) (23)
Interest received 3 2 5 1 9 10
Tax paid (38) (38) (46) (46)
================================ ======== ============ ===== ======== ============ =====
Net cash inflow from operating
activities 216 (57) 159 301 (76) 225
================================ ======== ============ ===== ======== ============ =====
The split of tax payments between headline and non-headline only
considers the nature of payments made. No adjustment has been made
for reductions in tax payments required as a result of tax relief
received on non-headline items.
Headline cash measures
The Group measure of headline operating cash excludes interest
and tax and includes capital expenditure supporting organic
growth.
Period ended Period ended
31 January 2018 31 January 2017
============================= =============================
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ============ ===== ======== ============ =====
Net cash inflow from operating
activities 216 (57) 159 301 (76) 225
================================== ======== ============ ===== ======== ============ =====
Include:
Expenditure on capitalised
development, other intangible
assets and property, plant
and equipment (46) (46) (51) (51)
Disposals of property, plant
and equipment 2 2 2 2
Investment in financial assets
relating to operating activities (2) (2)
================================== ======== ============ ===== ======== ============ =====
Free cash-flow 170 (57) 113 252 (76) 176
================================== ======== ============ ===== ======== ============ =====
Exclude:
Investment in financial assets
relating to operating activities 2 2
Interest paid 34 5 39 23 23
Interest received (3) (2) (5) (1) (9) (10)
Tax paid 38 38 46 46
================================== ======== ============ ===== ======== ============ =====
Headline operating cash-flow 241 (54) 187 320 (85) 235
================================== ======== ============ ===== ======== ============ =====
Reconciliation of free cash-flow to total movement in cash and
cash-equivalents
Period Period
ended ended
31 31
January January
2018 2017
GBPm GBPm
===================================================== ======== ========
Free cash-flow 113 176
Acquisition of businesses (15)
Disposal of businesses 320
Disposal of investments 6
Net cash-flow used in financing activities (257) (123)
===================================================== ======== ========
Net (decrease)/increase in cash and cash equivalents (153) 373
===================================================== ======== ========
16 Related party transactions
The related party transactions in the period were consistent
with the nature and size of transactions disclosed in the Annual
Report for the year ended 31 July 2017.
17 Non-statutory capital and credit metrics
In addition to the non-statutory profit measures explained in
note 3, the Group 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 adjustments.
Return on capital employed (ROCE)
The Group's ROCE is calculated over a rolling 12-month period
and is the percentage which headline operating profit comprises of
monthly average capital employed.
See note 2 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 January 2017: GBP801m)
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 January 31 January
2018 2017
Notes GBPm GBPm
=============================================== ===== ========== ==========
Net assets 1,966 1,832
Adjust for:
Goodwill recognised directly in reserves 787 801
Post-retirement benefit assets and liabilities 6 (237) (51)
Tax related to post retirement benefit
assets and liabilities 30 (18)
John Crane, Inc. litigation provisions
and related tax 168 168
Titeflex Corporation litigation provisions
and related tax 51 59
Net debt 9 961 635
=============================================== ===== ========== ==========
Capital employed 3,726 3,426
=============================================== ===== ========== ==========
Return on capital employed
31 January 31 January
2018 2017
Notes GBPm GBPm
======================================= ===== ========== ==========
Headline operating profit for previous
twelve months 560 570
Average capital employed 2 3,691 3,490
======================================= ===== ========== ==========
ROCE 15.2% 16.3%
======================================= ===== ========== ==========
Credit metrics
Smiths Group monitors the ratio of net debt to Headline EBITDA
as part of its management of credit ratings. This ratio is
calculated as follows.
Headline earnings before interest, tax, depreciation and
amortisation (Headline EBITDA)
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
======================================== ===== ======== ========
Headline operating profit 2 247 277
Exclude:
- depreciation 8 27 29
- amortisation of development costs 7 14 14
- amortisation of software, patents and
intellectual property 7 9 9
======================================== ===== ======== ========
Headline EBITDA 297 329
======================================== ===== ======== ========
Annualised headline EBITDA
Period Period
ended ended
31 31
January January
2018 2017
Notes GBPm GBPm
=========================================== ====== ======== ========
Headline EBITDA for the period 297 329
Add:
- headline EBITDA for the previous year 690 606
Exclude:
- headline EBITDA for the first six months (329) (262)
=================================================== ======== ========
Annualised headline EBITDA 658 673
=================================================== ======== ========
Ratio of net debt to annualised headline EBITDA
31 January 31 January
2018 2017
Notes GBPm GBPm
===================================== ===== ========== ==========
Annualised headline EBITDA 658 673
Net debt 9 961 635
===================================== ===== ========== ==========
Ratio of net debt to headline EBITDA 1.5 0.9
===================================== ===== ========== ==========
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR FKBDKFBKDFNB
(END) Dow Jones Newswires
March 23, 2018 03:00 ET (07:00 GMT)
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