TIDMSMIN
RNS Number : 4796B
Smiths Group PLC
21 September 2018
Smiths Group plc annual results for the year ended 31 July
2018
London, Friday 21 September 2018
Return to growth
Headline(1) Statutory
--------------------------------------- ---------------
FY2018 FY2017 Reported Underlying(2) FY2018 FY2017
GBPm GBPm growth growth GBPm GBPm
--------------------------- ------ ------ -------- ------------- ------- ------
Revenue 3,213 3,280 (2)% 2% 3,213 3,280
Operating profit 544 589 (8)% 3% 494 674
Operating margin 16.9% 18.0% (110)bps 10bps 15.4% 20.5%
Pre-tax profit 487 528 (8)% - 435 601
Free cash-flow - - - - 302 370
Return on capital employed 14.6% 16.2% (160)bps - - -
Continuing basic EPS 90.7p 97.6p (7)% 4% 70.0p 144.1p
Dividend 44.55p 43.25p 3% - - -
(1) In addition to statutory reporting, the Group reports its
continuing operations on a headline basis. Definitions of headline
metrics, and information about the adjustments to statutory
measures are provided in note 3 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.
(3) Working capital as a percentage of sales is calculated as
the 12 month rolling average of inventory, trade receivables and
associated provisions, unbilled receivables, trade payables and
deferred revenue as a percentage of total annual sales
(4) Includes disposals and 2018 performance from acquisitions
that do not have comparators for the prior year
Highlights
-- Return to growth with underlying(2) revenue up 2% to
GBP3,213m. Reported revenue down (2)% due to adverse foreign
exchange translation
-- Underlying(2) headline(1) operating profit up 3%. Reported
headline operating profit down (8)% due to the reclassification of
restructuring and pension administration costs as headline items,
and adverse foreign exchange translation
-- Continued focus on operational excellence with stock turns at 3.7x (FY2017: 3.5x)
-- Good cash generation with cash conversion of 99% and strong balance sheet
-- Continued investment for sustainable growth with R&D at 4.6% of sales (FY2017: 4.6%)
-- Further progress on portfolio optimisation:
o $30m synergies from the Morpho acquisition will be delivered
ahead of schedule
o Agreement to sell Smiths Medical's sterile water bottling
business for $40m
-- Proposed final dividend of 30.75 pence per share. Full year dividend growth of 3%.
Andy Reynolds Smith, Group Chief Executive, commented:
"FY2018 marks an important milestone on our journey. We said
that this would be the year we returned to growth, and we've done
that. Our next objective is to deliver continued, sustainable
growth, on the way to outperforming our markets.
With the exception of Smiths Medical, where the second half was
disappointing, we delivered a good performance. As anticipated, our
growth rate accelerated in the second half of the year driven by
John Crane, Smiths Detection, Smiths Interconnect and Flex-Tek.
We continued to progress the high-grading of the portfolio
through organic and inorganic investment with approximately 80% of
the Group now well positioned in attractive markets. Our
acquisitions of Morpho Detection, Seebach and the heating element
division of Osram are being successfully integrated, with synergies
being delivered ahead of schedule. The disposal of two non-core
businesses in Smiths Medical and John Crane has supported our
increasing focus on products and services with scalable,
technology-differentiated leadership positions in our chosen
markets.
We're focused on world-class competitiveness. We delivered
further stock turn improvements, now at 3.7x, and good cash
conversion of 99%. This has helped to fund disciplined investment
in commercially focused R&D and innovation.
In FY2019 we anticipate at least sustaining the rate of
underlying(2) revenue growth. As in previous years, Group
performance in FY2019 is expected to be weighted towards the second
half. Foreign exchange will provide a tailwind to reported revenue
and operating profit, if current rates prevail.
Over the medium-term, we remain confident that we can grow
faster than our markets. This is driven by our strategy to focus
the portfolio for growth and deliver world-class competitiveness,
underpinned by our strong financial framework. In parallel with
continued active portfolio management, the Board remain confident
that this will drive 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 GBP435m (FY2017: GBP601m) and continuing
basic earnings per share were 70.0p (FY2017: 144.1p).
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
Jemma Spalton, Smiths Group Deborah Scott, FTI Consulting
+44 (0)20 7004 1637 +44 (0)20 3727 1459
+44 (0)78 6739 0350 +44 (0)797 953 7449
jemma.spalton@smiths.com smiths@fticonsulting.com
Marion Le Bot, Smiths Group Alex Le May, FTI Consulting
+44 (0)20 7004 1672 +44 (0)20 3727 1308
+44 (0)75 8315 4386 +44 (0)770 244 3312
marion.lebot@smiths.com smiths@fticonsulting.com
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
Presentation
The presentation slides and a live webcast of the analyst
presentation will be available at
https://smiths.com/investors/results-reports-and-presentations 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 is available to the media
from the media contacts above or from
http://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 document
contains brands that are trademarks and are registered and/or
otherwise protected in accordance with applicable law.
Group results overview
GBPm FY2017 Reclassification Foreign Acquisitions FY2017 proforma Underlying(2) FY2018
exchange & disposals(4) movement
=============== ====== ================ ========= =============== =============== ============= ======
Group revenue 3,280 - (126) 1 3,155 58 3,213
=============== ====== ================ ========= =============== =============== ============= ======
Group headline
operating
profit 589 (40) (26) 8 531 13 544
=============== ====== ================ ========= =============== =============== ============= ======
Headline(1) revenue Headline(1) operating profit margin
===================================== =====================================
Underlying growth(2) Reported growth FY2018 FY2017
==================== ==================== =============== ================== =================
John Crane 5% flat 22.9% 23.0%
Smiths Medical (2)% (7)% 17.6% 22.0%
Smiths Detection 1% 15% 16.9% 15.0%
Smiths Interconnect (1)% (28)% 14.1% 13.4%
Flex-Tek 10% 4% 18.9% 19.3%
==================== ==================== =============== ================== =================
Group 2% (2)% 16.9% 18.0%
==================== ==================== =============== ================== =================
Revenue
The Group returned to growth, with underlying(2) revenue up 2%.
This marked an important milestone on our journey to deliver
sustained outperformance.
Reported revenue of GBP3,213m (FY2017: GBP3,280m) was down (2)%
primarily due to GBP(126)m of adverse foreign exchange translation.
Underlying(2) revenue was up 2%, or GBP58m. Growth in John Crane,
Flex-Tek and Smiths Detection was partially offset by the
performance in Smiths Medical and Smiths Interconnect. Second half
growth was 5%, reflecting an improving trend over the year.
Revenue from higher-growth regions, which represent 17% of Group
sales, grew 6% on an underlying(2) basis. This was driven by good
sales growth in India and China.
Operating profit
On a reported basis, headline operating profit of GBP544m
(FY2017: GBP589m) was down (8)%. After adjustment for GBP(40)m of
restructuring and pension administration costs (reported as
non-headline in FY2017), GBP(26)m of adverse foreign exchange
translation and an GBP8m net impact from acquisitions and
disposals, headline operating profit was up 3% on an underlying(2)
basis. This was driven by good underlying(2) headline operating
profit growth in Smiths Detection, John Crane and Flex-Tek,
partially offset by the disruptions in Smiths Medical. Central
costs decreased by GBP5m on an underlying(2) basis to GBP(57)m, but
included increased investment in innovation to support sustainable
growth.
Operating margin
Headline operating margin increased 10bps to 16.9% on an
underlying(2) basis. This improvement was driven by continued focus
on operational excellence, as well as volume growth and Morpho cost
synergies, partially offset by the disruptions in Smiths Medical.
On a reported basis headline operating margin decreased
(110)bps.
Operational excellence
Operational excellence through the Smiths Excellence System
remains a key focus for the Group. We continue to improve speed and
efficiency. Stock turns increased to 3.7x (FY2017: 3.5x) and
working capital as a percentage of sales(3) improved to 26%
(FY2017: 27%). This resulted in good cash conversion of 99%
(FY2017:118%) and free cash-flow of GBP302m (FY2017: GBP370m).
R&D
The Group's investment in R&D was maintained with R&D
cash costs at 4.6% of sales or GBP147m (FY2017: 4.6% or GBP150m).
R&D P&L costs increased to GBP131m (FY2017: GBP125m) an
underlying(2) increase of 8%. In FY2018, we reported our Vitality
Index of 13% for the first time. It measures the revenue from new
products launched in the past three years as a percentage of total
revenue.
Portfolio
We are focused on maximising value for Smiths' shareholders. As
part of this process, we actively manage our portfolio of
businesses and review all options to enhance our leadership
positions.
We made further progress on portfolio optimisation through
organic and inorganic investment; approximately 80% of the Group is
now well positioned in attractive markets.
The integration of Morpho Detection continues to progress well
with the benefits of the combination supporting new contract wins,
including a $50m contract with Airports of India. The $30m of
annualised cost synergies are ahead of schedule and now expected to
be delivered in full by the end of FY2019.
Flex-Tek completed the acquisition of the heating element
division of Osram Sylvania, Inc in November 2017. John Crane
completed the sale of its Bearings business for an enterprise value
of $35m in May 2018 and the acquisition of Seebach GmbH, a highly
engineered filtration solutions business, for an enterprise value
of EUR60m in June 2018.
Post year end, Smiths Medical made further progress on focusing
the business on scalable leading positions in its chosen markets
and agreed the sale of its sterile water bottling business to
Amsino Healthcare (USA), Inc., for an enterprise value of $40m. The
deal is expected to complete in the first half of FY2019.
ROCE
ROCE declined (160)bps to 14.6% (FY2017: 16.2%) primarily due to
the reclassification of restructuring and pension administration
costs as headline items. The ROCE movement also reflects recent
investments, such as the acquisition of Morpho Detection, which are
expected to generate superior returns over the longer-term.
Taxation
The headline tax charge for the year of GBP126m (FY2017:
GBP140m) represents an effective rate of 25.8% (FY2017: 26.5%).
This was impacted by the new US tax legislation, where 44% of our
revenue originates. The statutory tax rate of 35.9% includes
one-time costs associated with US tax reform.
An effective tax rate of c.25% is expected for the year ending
31 July 2019.
Earnings per share
On a reported basis, basic headline earnings per share decreased
(7)% to 90.7p (FY2017: 97.6p), but was up 4% on an underlying(2)
basis.
Debt
Net debt at 31 July 2018 was GBP893m, a reduction of GBP74m in
the period. Net debt to EBITDA remained unchanged at 1.4x. Gross
debt was GBP1,610m (FY2017: GBP1,749m) and cash reserves were
GBP717m (FY2017: GBP782m). Of the gross debt, GBP203m fell due
within one year; the majority was repaid in September 2018 when the
Group redeemed $250m 7.2% Notes. Our strong balance sheet continues
to allow us to deploy significant further investment capacity to
support sustainable growth.
Pension
The net accounting pension position has improved to a surplus of
GBP381m (FY2017: GBP224m).
The Group continues to work with the Trustees to de-risk the
pension schemes. In August 2017, the Smiths Industries Pension
Scheme (SIPS) entered 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 pension.
In FY2017, formal valuations of the Group's principal UK defined
benefit schemes were undertaken one year ahead of the triennial
deadline and concluded in June 2018. The updated valuations showed
that SIPS had a surplus of GBP32m and the TI Group Pension Scheme
had a GBP35m deficit on a funding basis. The Company has agreed to
continue funding these schemes with total annual contributions of
GBP24m (FY2017: GBP27m). For FY2019, we expect total cash
contributions of up to GBP45m across all schemes (FY2018:
GBP49m).
Dividend
The Board has a progressive dividend policy, aiming to increase
dividends in line with long-term underlying growth in earnings and
cash-flow. This policy enables us to retain sufficient cash-flow to
finance investment in the drivers of growth and meet our financial
obligations. In setting the level of dividend payments, the Board
takes into account prevailing economic conditions and future
investment plans, along with the objective to maintain minimum
dividend cover of around 2.0x.
The Board is recommending a final dividend of 30.75p per share
(FY2017: 29.70p per share), to be paid on 16 November 2018 to
shareholders on the register at close of business on 19 October
2018. This will bring the total dividend for the year to 44.55p per
share (FY2017: 43.25p per share), a year-on-year increase of
3%.
Dividends paid in the year on ordinary shares amounted to
GBP172m (FY2017: GBP167m), which were covered by the Group's free
cash-flow generation.
Statutory results
On a statutory basis, after taking into account all items
excluded from headline performance, operating profit of GBP494m was
GBP180m lower than last year (FY2017: GBP674m), reflecting the
benefit in the prior year of GBP175m of profit on disposal of
businesses.
Foreign exchange
With over 95% of our revenue outside the UK, we are exposed to
foreign exchange movements, mainly the USD and the EUR. For each
$0.10 move, the annual operating profit impact is c.GBP25m. For
each EUR0.10 move, the annual operating profit impact is c.GBP10m.
Foreign exchange rates will provide a tailwind to reported headline
revenue and operating profit, if current rates prevail.
IFRS 15 - revenue from contracts with customers
A number of new accounting standards and amendments to standards
and interpretations have been issued but are not yet effective for
the current accounting period. These include IFRS 15 which will
impact the timing of and the disclosures for recognising revenue
from contracts with customers. A reasonable estimate of the
expected impact on the reported results for FY2018 would have been
a GBP(16)m reduction in revenue, no impact on operating profit and
a GBP(1)m reduction in net assets.
Outlook
In FY2019 we anticipate at least sustaining the rate of
underlying(2) revenue growth. As in previous years, Group
performance in FY2019 is expected to be weighted towards the second
half. Foreign exchange will provide a tailwind to reported headline
revenue and operating profit, if current rates prevail.
John Crane is expected to sustain its rate of growth with
further progress in the sales of original equipment and a slower
rate of improvement in aftermarket. In Smiths Medical, regulatory
and contract challenges will progressively abate - and we
anticipate revenue returning to growth in the second half. In
Smiths Detection, we anticipate growth driven by continued demand
in Air Transportation with programme phasing further weighted to
the second half. Smiths Interconnect is expected to return to
growth with its focus on core growing end markets. Flex-Tek is
expected to deliver continued good growth, albeit against a strong
prior year comparator.
Over the medium-term, we remain confident that we can grow
faster than our markets. This is driven by our strategy to focus
the portfolio for growth and deliver world-class competitiveness,
underpinned by our strong financial framework. In parallel with
continued active portfolio management, the Board remain confident
that this will drive long-term sustainable growth and attractive
returns.
Business review
John Crane
John Crane is a leading provider of mission-critical engineered
solutions for global energy and process industries. 67% of revenue
comes from aftermarket sales; c.56% of revenue is derived from the
energy sector (downstream and midstream oil & gas) and c.44%
comes from other process industries (including chemical,
pharmaceutical, power generation, mining, water treatment, and pulp
& paper). John Crane represents 27% of Group revenue.
FY2018 FY2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------ ------ -------- -------------
Revenue 881 885 flat 5%
Headline operating profit 202 204 (1)% 6%
Headline operating margin 22.9% 23.0% (10)bps 10bps
Statutory operating profit 199 190 5%
Return on capital employed 22.9% 22.9% flat
--------------------------- ------ ------ -------- -------------
Performance
John Crane delivered a good performance, returning to growth
with revenue up 5% on an underlying(2) basis. Reported revenue was
flat, reflecting GBP(31)m of adverse foreign exchange translation
and a GBP(16)m net impact from the disposals of Artificial Lift and
the Bearings business, and the acquisition of Seebach GmbH.
Underlying(2) sales from John Crane's Oil & Gas and Non-Oil
& Gas activities were up c.7% and c.3% respectively, reflecting
the improving trend in global energy markets and continued growth
in John Crane's chemical, pharma, mining and pulp & paper
activities. These market conditions were also reflected in
improving underlying(2) sales of Original Equipment ('OE'), which
were up 1%. Investment in OE projects and the expansion of the
installed base continued during the period. Multiple new project
agreements were secured, including contracts in Oil & Gas in
Asia and the Middle East, as well as marine, chemical and pulp
& paper contracts in the USA, Europe and Asia. John Crane's
large installed base and leading service offering positioned it
well to satisfy pent-up aftermarket demand for repairs, maintenance
and upgrades; underlying(2) aftermarket revenue grew 8% during the
period.
Revenue from higher-growth regions, which represent 25% of
sales, grew 14% on an underlying(2) basis with strong sales growth
in China.
Headline operating profit of GBP202m increased 6% on an
underlying(2) basis, driven by improved volumes. Headline operating
profit margin was 22.9%, up 10bps on an underlying(2) basis with
the positive impact of volume growth partially offset by geographic
mix and the costs of restarting capacity. The difference between
statutory and headline operating profit primarily reflects movement
in the provision for John Crane, Inc. asbestos litigation, offset
by gains on disposals.
ROCE was flat at 22.9% driven by the net impact of the two
disposals, one acquisition and increased profitability.
John Crane has made further progress on focusing the business on
leading positions in attractive markets. In May 2018, John Crane
sold its Bearings business for an enterprise value of $35m, and in
June 2018 completed the acquisition of Seebach GmbH, a highly
engineered filtration solutions business, for an enterprise value
of EUR60m. We continue to look for opportunities to enhance John
Crane's technology leadership and service offering.
Cash R&D expenditure during the period increased by 15% to
1.3% of sales (FY2017: 1.1%). Product developments included:
- A new dry gas seal in the Aura(TM) range which reduces methane emissions
- An advanced seal for crude oil pipeline pumps which supports
pump efficiency and tolerance of harsh operating environments
- An innovative filtration design tool to enhance performance
- Continued development of John Crane's Sense(TM) predictive diagnostics systems
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, with 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
28% of Group revenue.
FY2018 FY2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------ ------ -------- -------------
Revenue 885 951 (7)% (2)%
Headline operating profit 156 209 (26)% (14)%
Headline operating margin 17.6% 22.0% (440)bps (250)bps
Statutory operating profit 152 286 (47)%
Return on capital employed 13.1% 16.7% (360)bps
--------------------------- ------ ------ -------- -------------
Performance
Smiths Medical underlying(2) revenue was down (2)%. The
division's performance was impacted by the transition to a new
Notified Body for European Conformity registration. This led to a
short-term suspension of some Smiths Medical products in Europe.
This disruption and the loss of two contracts in the US offset good
underlying(2) growth that was underpinned by a growing contribution
from products launched during the year. Reported revenue fell (7)%,
reflecting GBP(37)m of adverse foreign exchange translation and the
GBP(11)m impact of the divestment of the Wallace product line in
November 2016.
Costs associated with the Notified Body transition and
implementation of the new EU Medical Device Regulation in 2020 are
expected to be GBP10-15m in each of FY2019 and FY2020.
Underlying(2) revenue was up 4% in Infusion Systems driven by
sales of ambulatory infusion disposables, partially offset by the
impact of a contract termination. Vascular Access underlying(2)
revenue declined by (4)% as a result of lower peripheral
intravenous catheter ('PIVC') sales. Underlying(2) revenue from
Vital Care and Specialty Products was down (6)%, with growth in
tracheostomy and general anaesthesia offset by a contract
termination.
Revenue from higher-growth regions, which represents 10% of
sales, increased 10% on an underlying(2) basis, driven by growth in
China and India.
Headline operating profit declined (14)% on an underlying(2)
basis. This included adjustment for GBP(16)m restructuring costs in
the prior year. In addition, there were higher R&D costs
associated with new product launches, and costs of transition to a
new Notified Body in Europe. As a result, headline operating margin
was (250)bps lower than the prior year on an underlying(2) basis at
17.6%. The difference between statutory and headline operating
profit included GBP(3)m of amortisation of acquired intangible
assets.
ROCE decreased (360)bps to 13.1%, reflecting the lower
profitability.
Post year end, Smiths Medical made further progress on focusing
the business on scalable leading positions in its chosen markets,
and agreed the sale of its sterile water bottling business to
Amsino Healthcare (USA), Inc., for an enterprise value of $40m. The
deal is expected to complete in the first half of FY2019.
Cash R&D expenditure was 5.8% of sales (FY2017: 6.4%) with
an increase in the P&L R&D costs. Smiths Medical continues
to invest in research and development to support long-term,
sustainable growth, with the development of innovative,
commercially focused products across the portfolio. Over 20 new
products were launched during the year. These included:
- CADD(TM) VIP ambulatory pump for homecare and alternate sites
- Upgrades to the PharmGuard(R) server platform for connecting
CADD Solis(TM) and Medfusion(TM) wireless pumps to hospital
networks
- EchoGlo(TM) needle, an ultrasound-guidable needle line for
targeted delivery of pain management medications in nerve block
procedures
- Sol-M, blood-draw venipuncture safety devices designed to
reduce the risk of infection and blood contamination
- A Closed System Catheter for the Chinese market that prevents
blood exposure and reduces IV set-up time
- A next generation paediatric tracheostomy tube line that is MRI-safe and DEHP-free
Smiths Detection
Smiths Detection is a global leader in the detection and
identification of security threats and contraband. It produces
equipment for customers in the Air Transportation, Ports &
Borders, Defence and Urban Security end-use markets. 44% of Smiths
Detection's sales are derived from the aftermarket. Smiths
Detection represents 25% of Group revenue.
FY2018 FY2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------ ------ -------- -------------
Revenue 793 687 15% 1%
Headline operating profit 134 103 30% 16%
Headline operating margin 16.9% 15.0% 190bps 240bps
Statutory operating profit 93 70 33%
Return on capital employed 12.1% 12.6% (50)bps
--------------------------- ------ ------ -------- -------------
Performance
Smiths Detection underlying(2) revenue increased by 1%. Second
half underlying(2) growth of 11% reflected continued strong growth
in Air Transportation enhanced by the phasing of contract
deliveries. Full year growth was partially offset by declines in
Ports & Borders and Defence. Overall aftermarket revenue grew
by 1% on an underlying(2) basis and now accounts for 44% of total
revenue (FY2017: 39%). On a reported basis, revenue increased by
15%; this included GBP124m of incremental revenue associated with
the acquisition of Morpho Detection ('Morpho'), and GBP(22)m of
adverse foreign exchange translation.
Revenue in Air Transportation increased 20% on an underlying(2)
basis. Air Transportation is Smiths Detection's largest segment
and, following the acquisition of Morpho, now represents 68% of
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. Major deliveries included projects in
the UK, Frankfurt and Amsterdam, as well as in the US and Saudi
Arabia. Contract wins included: providing Helsinki Airport with
eight XCT units to upgrade its hold baggage system; a $70m contract
with the TSA for hold baggage systems across the USA, and a
contract to sell 151 trace detection devices across airports in
China. Revenue from Ports & Borders fell (43)% on an
underlying(2) basis following the completion of key programmes in
Italy, Mali and Kuwait last year. Contract wins included an order
for CORSYS(TM) by the Port of Rotterdam. Underlying(2) revenue in
Defence decreased by (46)% against last year's strong comparator
and reflects the wind down of some major US military programmes.
Urban Security revenues increased 3% on an underlying(2) basis,
driven by growing sales of hand-held devices to detect and identify
nuclear-threats to the US Department for Homeland Security.
Revenue from higher-growth regions represented 19% of sales,
broadly in line with the prior year on an underlying(2) basis. Good
sales growth in India was offset by the completion of projects in
South Korea, Pakistan and Turkey. 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 increased 16% on an underlying(2)
basis, reflecting volume growth and the delivery of cost synergies
associated with the Morpho acquisition. Headline reported operating
margin increased by 240bps on an underlying(2) basis to 16.9%,
reflecting these cost synergies as well as other efficiency savings
and the benefit of one-off items associated with long term
programmes. The difference between statutory and headline operating
profit primarily reflects integration costs associated with the
acquisition of Morpho and amortisation of acquired intangibles. The
integration of Morpho continues to progress well, with the benefits
of the combination supporting new contract wins, including a $50m
contract with Airports Authority of India. The $30m of annualised
cost synergies are now expected to be delivered in full by the end
of FY2019, one year ahead of schedule.
ROCE decreased (50)bps to 12.1% driven by the impact of the
Morpho acquisition.
Cash R&D expenditure during the period was 7.4% of sales, or
6.3% excluding customer funded R&D (FY2017: 7.1% and 6.0%
respectively). Specific highlights included continued investment
in:
- A range of solutions for the Chinese aviation market
- Freight and cargo scanners that can now detect lithium batteries
- Next generation chemical warfare agent detection devices for the defence market
- Digital solutions - including CORAL, our advanced predictive
analytics suite for hold baggage detection systems and
Checkpoint.evo(plus) , our integrated checkpoint screening and
management platform
Smiths Interconnect
Smiths Interconnect designs solutions for high-speed, secure
connectivity in demanding applications for the defence,
semiconductor test, medical, space, commercial aerospace, and rail
markets. Smiths Interconnect represents 9% of Group revenue.
FY2018 FY2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------ ------ -------- -------------
Revenue 300 419 (28)% (1)%
Headline operating profit 42 56 (25)% (2)%
Headline operating margin 14.1% 13.4% 70bps (10)bps
Statutory operating profit 37 124 (70)%
Return on capital employed 11.9% 11.4% 50bps
--------------------------- ------ ------ -------- -------------
Performance
Smiths Interconnect's underlying(2) revenue was down (1)%,
reflecting an improved trend in the second half, especially in the
Defence, Semiconductor Test and Rail markets. On a reported basis,
revenue declined by (28)%, reflecting a GBP(96)m impact from the
divestments of Power and Telecoms businesses in January and May
2017 respectively, and GBP(19)m of adverse foreign exchange
translation.
Underlying(2) revenue in the Defence segment grew by 1%,
supported by increased defence spending in the US, Europe and the
Middle East, including programmes such as Eurofighter, Joint Strike
Fighter, Gripen and various naval programmes. In the Medical
segment, underlying(2) revenue grew by 7% driven by strong sales of
highly specialist connectors for patient monitoring and imaging
systems. In the Space segment, revenue increased 3% driven by
higher connectivity product content within satellite programs. The
Rail segment increased by 10% driven by power and data connectors.
Commercial Aerospace declined by (20)% due to lower sales of
antenna systems. Semiconductor Test declined by (9)% primarily due
to order timing.
Revenue from higher-growth regions, which represents 16% of
sales, decreased by (9)% on an underlying(2) basis as a result of
order timing in Semiconductor Test.
Headline operating profit declined (2)% on an underlying(2)
basis to GBP42m, where an improvement in gross margin was offset by
investment in sales, marketing and R&D to drive future growth.
Headline operating margin was broadly in line with last year at
14.1%, 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.
In April 2018, Smiths Interconnect signed a joint venture
agreement with Sichuan Huafeng Enterprise Group Co. Ltd - a major
manufacturer of electronic components in China. The combined
portfolio of highly specialised electronic components and customer
relationships is expected to accelerate penetration and growth in
this important market.
ROCE increased 50bps to 11.9% driven by disposal of the Power
and Telecoms businesses in FY2017.
Cash R&D expenditure was 7.0% of revenue (FY2017: 6.7%)
(6.0% excluding customer funded R&D, FY2017: 5.5%). Product
developments 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
- SpaceNXT(TM) Q Series - a range of flexible cable assemblies qualified for space applications
- Eclipta (TM) connector - a double ended edge card contact
technology for disposable medical applications
Flex-Tek
Flex-Tek provides innovative components to heat and move fluid
and gases for the aerospace, medical, industrial, construction and
domestic appliance markets. Flex-Tek represents 11% of Group
revenue.
FY2018 FY2017 Reported Underlying(2)
GBPm GBPm growth growth
--------------------------- ------ ------ -------- -------------
Revenue 354 338 4% 10%
Headline operating profit 67 65 2% 10%
Headline operating margin 18.9% 19.3% (40)bps flat
Statutory operating profit 68 68 flat
Return on capital employed 35.0% 35.8% (80)bps
--------------------------- ------ ------ -------- -------------
Performance
Flex-Tek delivered a strong performance with revenue up 10% on
an underlying(2) basis, with growth in all segments. On a reported
basis revenue increased 4%, despite a GBP(17)m adverse foreign
exchange translation.
Construction revenue grew 5% on an underlying(2) basis, with
both Gastite and Thermaflex benefiting from continued growth in the
US housing market. Fluid Management revenue was up 11% 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 17% on an underlying(2) basis,
principally due to growth in its engineered solutions as well as
increased sales of clothes dryer elements and heating, ventilation
and air conditioning (HVAC) systems. Flexible Solutions
underlying(2) revenue growth of 10% was driven by increased demand
from the medical sector, partially offset by a decline in the floor
care segment.
Revenue from higher-growth regions, which represents 9% of
sales, increased 16%, driven by strong sales into China and
India.
On an underlying(2) basis headline operating profit increased
10% to GBP67m and headline operating margin was in line with the
prior year at 18.9%. The difference between statutory and headline
operating profit is primarily due to a reduction in the provision
for Titeflex Corporation for subrogation claims.
In November 2017 the Heat Solutions business completed the
acquisition of the heating element division of Osram Sylvania, Inc.
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.
ROCE decreased (80)bps to 35.0%, driven by the acquisition of
Osram's heating element business.
R&D expenditure remained consistent at 0.6% of sales
(FY2017: 0.6%), focused on market-leading innovative solutions to
meet specific customer needs. Product developments included:
- Thermaflex floating core HVAC duct
- Gastite's FlashShield II, the next generation of flexible gas
piping which is expected to launch in FY2019
Other financial matters
Statutory operating profit
Operating profit on a statutory basis, after taking account of
the items excluded from the headline figures, was GBP494m (FY2017:
GBP674m) - see note 3 to the accounts for information on the
excluded items. Non-headline charges of GBP(50)m reflect the change
in reporting of restructuring costs and pension administration
costs as headline items (FY2017: GBP(33)m restructuring costs and
GBP(7)m operating charge for pension administration were classified
as non-headline items) and the GBP175m profit on disposal of
businesses generated in FY2017.
Finance costs
Headline finance costs of GBP(57)m (FY2017: GBP(61)m) were GBP4m
lower driven by the repayment of higher coupon debt. Statutory
finance costs were GBP(59)m (FY2017: GBP(73)m).
Non-headline items relating to continuing activities excluded
from headline profit before tax
These items amounted to a charge of GBP(52)m compared with a
credit of GBP73m in FY2017. The movement is driven by the GBP175m
profit on disposal of businesses in FY2017, as well as the
reclassification of costs in FY2018 from non-headline into
headline. Please see below a summary of the restructuring and
pension administration costs by divisions for FY2017 as recorded in
non-headline. Please refer to note 3 of the accounts for further
details.
John Crane Smiths Smiths Central
FY2017 Medical Detection Smiths Interconnect Flex-Tek costs Group
------------------------ ---------- -------- ---------- ------------------- -------- ------- --------
Restructuring programmes GBP(7)m GBP(16)m GBP(2)m GBP(1)m GBP(7)m GBP(33)m
------------------------ ---------- -------- ---------- ------------------- -------- ------- --------
Pension administration GBP(7)m
costs GBP(7)m
------------------------ ---------- -------- ---------- ------------------- -------- ------- --------
Total profit and earnings per share
Total statutory profit for the year of GBP279m and EPS of 70.0p
was down 51% on a reported basis, impacted by the non-headline
items; but on an underlying(2) basis EPS was up 4%.
Net capex, Depreciation & Amortisation
Net capex at GBP102m (FY2017: GBP98m) represented 1.1x
depreciation and amortisation, broadly in line with last year
(FY2017: 1.0x).
Working Capital
Movement in working capital was an outflow of GBP(16)m (FY2017:
GBP85m inflow), reflecting higher receivables following strong
growth in the latter part of the year as well as higher inventory
to support the return to growth. Working capital as a percentage of
sales(3) improved to 26% (FY2017: 27%).
Operating cash
Cash conversion was good at 99% (FY2017: 118%) translating into
headline operating cash-flow of GBP538m (FY2017: GBP695m).
Statutory operating cash was GBP405m (FY2017: GBP479m). See note 29
to the financial statements for a reconciliation of headline
operating cash to statutory cash-flow measures.
Acquisitions and disposals
During the year, the Group acquired two businesses and made one
disposal. For more information, please read notes 26, 27 and 28 of
the accounts.
-- On 1 November 2017, Flex-Tek acquired the heating element
division of Osram Sylvania, Inc for a consideration of GBP15m.
-- On 31 May 2018, John Crane disposed of its Bearings business
for an enterprise value of $35m.
-- On 13 June 2018, John Crane acquired Seebach GmbH, a highly
technological filtration business, for an enterprise value of
EUR60m.
Free cash-flow of GBP302m (FY2017: GBP370m) decreased by (18)%
reflecting GBP157m decrease in headline operating cash-flow, offset
by lower pension contributions and tax payments. See note 29 to the
accounts for further details.
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 July 31 July
2018 2017
------------------ ------- ------- ----------------------
Average rates:
US dollar 1.35 1.27 Dollar weakened 6%
Euro 1.13 1.16 Euro strengthened 3%
Period-end rates:
US dollar 1.31 1.32 Dollar strengthened 1%
Euro 1.12 1.12 Euro unchanged
------------------ ------- ------- ----------------------
Financial information
The financial information in this preliminary announcement which
comprises the consolidated income statement, consolidated statement
of comprehensive income, consolidated balance sheet, consolidated
cash-flow statement, consolidated statement of changes in equity,
accounting policies and related notes, does not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006.
The statutory accounts for the year ended 31 July 2017 have been
filed with the Registrar of Companies. The auditors have reported
on those accounts and on the statutory accounts for the year ended
31 July 2018, which will be filed with the Registrar of Companies.
Both the audit reports were unqualified and did not contain any
statement under section 498 of the Companies Act 2006.
Consolidated income statement
Year ended 31 July 2018 Year ended 31 July 2017
Non-headline Non-headline
Headline (note 3) Total Headline (note 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Continuing operations
Revenue 1 3,213 3,213 3,280 3,280
Cost of sales (1,749) (1,749) (1,755) (1,755)
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Gross profit 1,464 1,464 1,525 1,525
Sales and distribution costs (435) (435) (449) (449)
Administrative expenses (485) (57) (542) (487) (90) (577)
Profit on business disposal 28 7 7 175 175
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Operating profit 2 544 (50) 494 589 85 674
Interest receivable 7 7 5 5
Interest payable (64) (64) (66) (66)
Other financing losses (9) (9) (14) (14)
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Other finance income - retirement benefits 8 7 7 2 2
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Finance costs 4 (57) (2) (59) (61) (12) (73)
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Continuing operations - Profit before
taxation 487 (52) 435 528 73 601
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Taxation 6 (126) (30) (156) (140) 111 (29)
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Continuing operations - Profit for the year 361 (82) 279 388 184 572
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Discontinued operations
Loss on discontinued operations 27 (8) (8)
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit for the year 361 (82) 279 388 176 564
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit for the year attributable to:
Smiths Group shareholders - continuing
operations 359 (82) 277 386 184 570
Smiths Group shareholders - discontinued
operations (8) (8)
Non-controlling interests in respect
of continuing operations 2 2 2 2
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
361 (82) 279 388 176 564
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Earnings per share 5
Basic 70.0p 142.1p
Basic - continuing 70.0p 144.1p
Diluted 69.1p 140.3p
Diluted - continuing 69.1p 142.3p
------------------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Consolidated statement
of comprehensive income
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
------------------------------------------------------------ ------ -------- --------
Profit for the year 279 564
------------------------------------------------------------ ------ -------- --------
Other comprehensive income:
Actuarial gains on retirement benefits 8 104 55
Taxation recognised on actuarial movements 6 (18) (13)
------------------------------------------------------------ ------ -------- --------
Other comprehensive income and expenditure which will
not be reclassified
to the consolidated income statement 86 42
Other comprehensive income which will be reclassified
and reclassifications:
Exchange gains 6 25
Cumulative exchange gains recycled on business disposals (5) (41)
Fair value gains/(losses) and reclassification adjustments:
- deferred on available for sale financial assets 1 1
- deferred in the period on cash-flow and net investment
hedges (6) (14)
- reclassified to income statement on cash-flow and
net investment hedges (6) 25
Taxation recognised on fair value gains 6 (1)
------------------------------------------------------------ ------ -------- --------
Total other comprehensive income 76 37
Total comprehensive income 355 601
------------------------------------------------------------ ------ -------- --------
Attributable to:
Smiths Group shareholders 353 600
Non-controlling interests 2 1
------------------------------------------------------------ ------ -------- --------
355 601
------------------------------------------------------------ ------ -------- --------
Consolidated balance sheet
31 July 31 July
2018 2017
Notes GBPm GBPm
--------------------------------------- ----- ------- -------
Non-current assets
Intangible assets 10 2,061 2,015
Property, plant and equipment 12 320 315
Financial assets - other investments 16 18 21
Retirement benefit assets 8 526 390
Deferred tax assets 6 180 272
Trade and other receivables 14 57 57
Financial derivatives 19 50 56
--------------------------------------- ----- ------- -------
3,212 3,126
Current assets
Inventories 13 466 452
Current tax receivable 6 38 62
Trade and other receivables 14 733 722
Cash and cash equivalents 17 717 782
Financial derivatives 19 7 13
--------------------------------------- ----- ------- -------
1,961 2,031
--------------------------------------- ----- ------- -------
TOTAL ASSETS 5,173 5,157
--------------------------------------- ----- ------- -------
Non-current liabilities
Financial liabilities
- borrowings 17 (1,407) (1,598)
- financial derivatives 19 (6) (2)
Provisions for liabilities and charges 22 (262) (283)
Retirement benefit obligations 8 (145) (166)
Deferred tax liabilities 6 (77) (111)
Trade and other payables 15 (27) (26)
--------------------------------------- ----- ------- -------
(1,924) (2,186)
Current liabilities
Financial liabilities
- borrowings 17 (203) (151)
- financial derivatives 19 (4) (10)
Provisions for liabilities and charges 22 (76) (85)
Trade and other payables 15 (606) (576)
Current tax payable 6 (72) (45)
--------------------------------------- ----- ------- -------
(961) (867)
--------------------------------------- ----- ------- -------
TOTAL LIABILITIES (2,885) (3,053)
--------------------------------------- ----- ------- -------
NET ASSETS 2,288 2,104
--------------------------------------- ----- ------- -------
Shareholders' equity
Share capital 23 148 148
Share premium account 358 355
Capital redemption reserve 25 6 6
Revaluation reserve 25 1 1
Merger reserve 25 235 235
Retained earnings 1,826 1,634
Hedge reserve 25 (302) (290)
--------------------------------------- ----- ------- -------
Total shareholders' equity 2,272 2,089
Non-controlling interest equity 16 15
--------------------------------------- ----- ------- -------
TOTAL EQUITY 2,288 2,104
--------------------------------------- ----- ------- -------
Consolidated statement of changes in equity
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
At 31 July 2017 503 242 1,634 (290) 2,089 15 2,104
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
Profit for the year 277 277 2 279
Other comprehensive income:
Actuarial gains on
retirement
benefits and
related tax 86 86 86
Exchange gains 1 1 1
Fair value gains/(losses)
and related tax 1 (12) (11) (11)
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
Total comprehensive income
for the YEAR 365 (12) 353 2 355
Transactions relating to
ownership interests:
Exercises of share options 23 3 3 3
Purchase of own shares 25 (15) (15) (15)
Dividends:
- equity shareholders 24 (172) (172) (172)
- non-controlling interest (1) (1)
Share-based payment 9 14 14 14
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
At 31 July 2018 506 242 1,826 (302) 2,272 16 2,288
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
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 year 562 562 2 564
Other comprehensive income:
Actuarial gains on
retirement
benefits and
related tax 42 42 42
Exchange losses (15) (15) (1) (16)
Fair value gains and
related
tax 11 11 11
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
Total comprehensive income
for the year 589 11 600 1 601
Transactions relating to
ownership interests:
Exercises of share options 23 3 3 3
Taxation recognised on
share
options 6 3 3 3
Purchase of own shares 25 (10) (10) (10)
Dividends:
- equity shareholders 24 (167) (167) (167)
Share-based payment 9 14 14 14
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
At 31 July 2017 503 242 1,634 (290) 2,089 15 2,104
--------------------------- ----- -------- --------- --------- -------- -------------- --------------- -------
Consolidated cash-flow statement
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
---------------------------------------------------------- ----- -------- --------
Net cash inflow from operating activities 29 405 479
Cash-flows from investing activities
Expenditure on capitalised development (26) (37)
Expenditure on other intangible assets 10 (12) (8)
Purchases of property, plant and equipment 12 (68) (62)
Disposals of property, plant and equipment 4 9
Investment in financial assets 16 (1) (18)
Acquisition of businesses 26 (71) (580)
Disposals of businesses - continuing operations 28 29 399
Disposals of businesses - discontinued operations 27 63
---------------------------------------------------------- ----- -------- --------
Net cash-flow used in investing activities (145) (234)
Cash-flows from financing activities
Proceeds from exercise of share options 23 3 3
Purchase of own shares 25 (15) (10)
Settlement of cash settled options (1)
Dividends paid to equity shareholders 24 (172) (167)
Cash inflow from matured derivative financial instruments 4
Increase in new borrowings 17 546
Reduction and repayment of borrowings 17 (135) (256)
---------------------------------------------------------- ----- -------- --------
Net cash-flow used in financing activities (316) 116
Net (decrease)/increase in cash and cash equivalents (56) 361
Cash and cash equivalents at beginning of year 781 430
Exchange differences (8) (10)
---------------------------------------------------------- ----- -------- --------
Cash and cash equivalents at end of year 17 717 781
---------------------------------------------------------- ----- -------- --------
Cash and cash equivalents at end of year comprise:
- cash at bank and in hand 287 226
- short-term deposits 430 556
- bank overdrafts (1)
---------------------------------------------------------- ----- -------- --------
717 781
---------------------------------------------------------- ----- -------- --------
Included in cash and cash equivalents per the balance
sheet 717 782
Included in overdrafts per the balance sheet (1)
---------------------------------------------------------- ----- -------- --------
717 781
---------------------------------------------------------- ----- -------- --------
Reconciliation of net cash-flow to movement in net debt
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
--------------------------------------------------------------- ----- -------- --------
Net debt at start of year 17 (967) (978)
--------------------------------------------------------------- ----- -------- --------
Net (decrease)/increase in cash and cash equivalents (56) 361
Increase in borrowings (546)
Reduction and repayment of borrowings 135 256
--------------------------------------------------------------- ----- -------- --------
Movement in net debt resulting from cash-flows 79 71
Capitalisation, interest accruals and unwind of capitalisation
fees 2 (4)
Movement from fair value hedging 1 5
Exchange differences (8) (61)
--------------------------------------------------------------- ----- -------- --------
Movement in net debt in the year 74 11
--------------------------------------------------------------- ----- -------- --------
Net debt at end of year 17 (893) (967)
--------------------------------------------------------------- ----- -------- --------
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with the Companies
Act 2006 applicable to companies reporting under International
Financial Reporting Standards (IFRS) and International Financial
Reporting Interpretations Committee (IFRS IC) interpretations, as
adopted by the European Union, on a going concern basis and under
the historical cost convention modified to include revaluation of
certain financial instruments, share options and pension assets and
liabilities, held at fair value as described below.
The accounting policies adopted are consistent with those of the
previous financial year.
Significant judgements, key assumptions and estimates
The preparation of the accounts in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the accounts and the reported amounts of
revenues and expenses during the reporting period. Actual results
may differ from these estimates. The key judgements, estimates and
assumptions used in these consolidated financial statements are set
out below.
Revenue recognition
The timing of revenue recognition on contracts depends on the
assessed stage of completion of contract activity at the balance
sheet date. This assessment requires the expected total contract
revenues and costs to be estimated based on the current progress of
the contract. Revenue of GBP24m (FY2017: GBP24m) has been
recognised in the period in respect of contracts in progress at the
period end with a total expected value of GBP63m (FY2017: GBP48m)
and cumulative revenue recognised to date of GBP44m (FY2017:
GBP36m). A 5% reduction in the proportion of the contract activity
recognised in the current period would have reduced operating
profit by less than GBP1m for both Smiths Detection and Smiths
Interconnect (FY2017: less than GBP1m).
Smiths Detection also has multi-year contractual arrangements
for the sale of goods and services. Where these contracts have
separately identifiable components with distinct patterns of
delivery and customer acceptance, revenue is accounted for
separately for each identifiable component. Judgement is applied in
the identification of the components of the contract, and the
allocation of contract revenue to each component.
Smiths Medical has rebate arrangements in place with some
distributors in respect of sales to end customers where sales
prices have been negotiated by Smiths Medical. Rebates are
estimated based on the level of discount derived from sales data
from distributors, the amount of inventory held by distributors and
the time lag between the initial sale to the distributor and the
rebate being claimed. The rebate accrual at 31 July 2018 was GBP32m
(FY2017: GBP27m).
Contract profitability
Smiths Detection has multi-year contractual arrangements for the
sale of goods and services. Margins achieved on these contracts
can reflect the impact of commercial decisions made in different
economic circumstances. In addition, contract delivery is subject
to commercial and technical risks which can affect the outcome of
the contract.
At 31 July 2018 and 2017 no other contracts had been assessed as
at significant risk of becoming onerous and no provision was held
against onerous contracts.
Taxation
The Group has recognised deferred tax assets of GBP121m (FY2017:
GBP129m) relating to losses and GBP67m (FY2017: GBP112m) relating
to the John Crane, Inc. and Titeflex Corporation litigation
provisions. The recognition of assets pertaining to these items
involves judgement by management as to the likelihood of
realisation of these deferred tax assets. This is based on a number
of factors, which seek to assess the expectation that the benefit
of these assets will be realised, including expected future levels
of operating profit, expenditure on litigation, pension
contributions and the timing of the unwind of other tax positions.
It has been concluded that there are sufficient taxable profits in
future periods to support recognition. A 5% reduction in expected
future operating profits would reduce the level of deferred tax
recognised by GBP1m (FY2017: GBP8m), and a 5% increase in expected
future operating profits would increase the level of deferred tax
recognised by GBP7m (FY2017: GBP11m). Further detail on the Group's
deferred taxation position is included in note 6.
Retirement benefits
The consolidated financial statements include costs in relation
to, and provision for, retirement benefit obligations. The costs
and the present value of any related pension assets and liabilities
depend on such factors as life expectancy of the members, the
returns that plan assets generate and the discount rate used to
calculate the present value of the liabilities. The Group uses
previous experience and independent actuarial advice to select the
values of critical estimates. The estimates, and the effect of
variances in key estimates, are disclosed in note 8.
At 31 July 2018 there is a retirement benefit asset of GBP526m
(FY2017: GBP390m), principally relating to UK schemes, which arises
from the rights of the employers to recover the surplus at the end
of the life of the scheme. If the pension schemes were wound up
while they still had members, the schemes would need to buy out the
benefits of all members. The buyouts would cost significantly more
than the present value of the scheme liabilities calculated in
accordance with IAS 19: Employee benefits.
Receivables provisions
If the carrying value of any receivable is higher than the fair
value, the Group makes provisions writing down the balance to its
fair value. The fair value of receivables is considered
individually for each customer and incorporates past experience and
progress with collecting receivables.
At 31 July 2018 the gross value of receivables partly provided
for or more than three months overdue was GBP70m (FY2017: GBP73m)
and there were provisions of GBP32m (FY2017: GBP33m) against these
receivables. Consequently, these receivables were carried at a net
value of GBP38m (FY2017: GBP40m). See note 14 for disclosures on
credit risk and ageing of trade receivables.
Inventory provisions
The calculation of inventory provisions requires judgement by
management of the expected value of future sales. If the carrying
value of inventory is higher than the expected recoverable value,
the Group makes provisions writing inventory down to its net
recoverable value. Inventory is initially assessed for impairment
by comparing inventory levels to recent utilisation rates and
carrying values to historical selling prices. A detailed review is
completed for inventory lines identified in the initial assessment
considering sales activity, order flow, customer contracts and
current selling prices.
At 31 July 2018, there were provisions of GBP54m (FY2017:
GBP55m) against gross inventory of GBP520m (FY2017: GBP507m). See
note 13 for a breakdown of inventory.
A 10% increase in the proportion of raw materials provided for
would increase the provision by GBP17m (FY2017: GBP17m) and a 10%
increase in the proportion of finished goods provided for would
increase the provision by GBP23m (FY2017: GBP22m).
Capitalisation of development costs
Expenditure incurred in the development of major new products is
capitalised as internally generated intangible assets only when
strict criteria are met, specifically in relation to the products'
technical feasibility and probable future economic benefits. The
carrying value of intangible assets are amortised over their
expected useful lives, commencing in the year that sales are first
made.
The assessment of the future viability and technical feasibility
of development projects and the determination of the underlying
products' useful economic life and amortisation basis require
significant judgement and the use of assumptions and estimates.
Impairment
Goodwill is tested at least annually for impairment and other
assets, including capitalised development costs and intangible
assets acquired in business combinations, are tested if there are
any indications of impairment, in accordance with the accounting
policy set out below.
The recoverable amounts of cash generating units and assets are
determined based on value in use calculations unless future trading
projections cannot be adjusted to eliminate the impact of a major
restructuring. The value in use calculations require the use of
assumptions and estimates including projected future cash-flows and
other future events.
Provisions for liabilities and charges
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event and
it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. Where the
Group expects some or all of a provision to be reimbursed, for
example under an insurance contract, the reimbursement is
recognised as a separate asset but only when the reimbursement is
virtually certain.
Non-headline and legacy provisions
John Crane, Inc. ("JCI"), a subsidiary of the Group, is one of
many co-defendants in litigation relating to products previously
manufactured which contained asbestos. Provision of GBP223m
(FY2017: GBP237m) has been made for the future defence costs which
the Group is expected to incur and the expected costs of future
adverse judgments against JCI. Whilst well-established incidence
curves can be used to estimate the likely future pattern of
asbestos-related disease, JCI's claims experience is significantly
impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of
the plaintiffs' bar; changing attitudes amongst the judiciary at
both trial and appellate levels; and legislative and procedural
changes in both the state and federal court systems. Therefore,
because of the significant uncertainty associated with the future
level of asbestos claims and of the costs arising out of the
related litigation, there can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred.
JCI takes account of the advice of an expert in asbestos
liability estimation in quantifying the expected costs. The
following judgements were made in preparing the provision
calculation:
- the period over which the expenditure can be reliably
estimated is judged to be ten years, based on past experience
regarding significant changes in the litigation environment that
have occurred every few years and on the amount of time taken in
the past for some of those changes to impact the broader asbestos
litigation environment. See note 22 for a sensitivity showing the
impact on the provision of reducing or increasing this time
horizon;
- the future trend of legal costs; the rate of future claims
filed; the rate of successful resolution of claims; and the average
amount of judgments awarded have been projected based on the past
history of JCI claims and well-established tables of asbestos
incidence projections, since this is the best available evidence.
Claims history from other defendants is not used to calculate the
provision because JCI's defence strategy generates a significantly
different pattern of legal costs and settlement expenses. See note
22 for a sensitivity showing the range of expected future
spend.
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek
division, has received a number of claims from insurance companies
seeking recompense on a subrogated basis for the effects of damage
allegedly caused by lightning strikes in relation to its flexible
gas piping product. It has also received a number of product
liability claims regarding this product, some in the form of
purported class actions. Titeflex Corporation believes that its
products are a safe and effective means of delivering gas when
installed in accordance with the manufacturer's instructions and
local and national codes; however some claims have been settled on
an individual basis without admission of liability. Provision of
GBP78m (FY2017: GBP84m) has been made for the costs which the Group
is expected to incur in respect of these claims. In preparing the
provision calculation, judgements were made about the impact of
safe installation initiatives on the level of future claims. See
note 22 for a sensitivity showing the impact on the provision of
reducing or increasing the expected impact. However, because of the
significant uncertainty associated with the future level of claims,
there can be no guarantee that the assumptions used to estimate the
provision will result in an accurate prediction of the actual costs
that may be incurred.
Trading provisions
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
though there can be no guarantee that such provisions (which may be
subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
All provisions may be subject to potentially material revisions
from time to time if new information becomes available as a result
of future events.
Presentation of results
In order to provide users of the accounts with a clear and
consistent presentation of the performance of the Group's ongoing
trading activity, the income statement is presented in a three
column format with 'headline' profits shown separately from
non-headline items.
Judgement is required in determining which items should be
included as non-headline. The amortisation of acquired intangibles,
impairments, legacy liabilities, material one-off items and certain
re-measurements are included in a separate column of the income
statement. See note 3 for a breakdown of the items excluded from
headline operating profit and headline finance costs.
Performance measures for the Group's ongoing trading activity
are described as 'headline' and used by management to measure and
monitor performance. See note 1 for disclosures of headline
operating profit and note 30 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 and determining which items should be adjusted
for involves judgement. Underlying growth excludes 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 performance of divested businesses 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.
Accounting policies
Basis of consolidation
The consolidated accounts incorporate the financial statements
of Smiths Group plc (the 'Company') and its subsidiary
undertakings, together with the Group's share of the results of its
associates.
Subsidiaries are all entities controlled by the Company.
Subsidiaries are fully consolidated from the date on which control
is obtained by the Company to the date that control ceases.
Associates are entities which the Group has significant
influence over but does not control, generally accompanied by a
share of between 20% and 50% of the voting rights. Investments in
associates are accounted for using the equity method.
Foreign currencies
The Company's presentational currency is sterling. The financial
position of all subsidiaries and associates that have a functional
currency different from sterling are translated into sterling at
the rate of exchange at the date of that balance sheet, and the
income and expenses are translated at average exchange rates for
the period. All resulting exchange differences are recognised as a
separate component of equity.
On consolidation, exchange differences arising from the
translation of the net investment in foreign entities, and of
borrowings and other currency instruments designated as hedges of
such investments, are taken to shareholders' equity. When a foreign
operation is sold, the cumulative amount of such exchange
differences is recognised in the income statement as part of the
gain or loss on sale.
Exchange differences arising on transactions are recognised in
the income statement. Those arising on trading are taken to
operating profit; those arising on borrowings are classified as
finance income or cost.
Revenue
Revenue is measured at the fair value of the consideration
received, net of trade discounts (including distributor rebates)
and sales taxes. Revenue is discounted only where the impact of
discounting is material.
When the Group enters into complex contracts with multiple,
separately identifiable components, the terms of the contract are
reviewed to determine whether or not the elements of the contract
should be accounted for separately. If a contract is being split
into multiple components, the contract revenue is allocated to the
different components at the start of the contract. The basis of
allocation depends on the substance of the contract. The Group
considers relative stand-alone selling prices, contractual prices
and relative cost when allocating revenue.
Sale of goods
Revenue from the sale of goods is recognised when the risks and
rewards of ownership have been transferred to the customer, the
amount of revenue can be measured reliably, and recovery of the
consideration is probable. For established products with simple
installation requirements, revenue is recognised when the product
is delivered to the customer in accordance with the agreed delivery
terms. For products which are technically innovative, highly
customised or require complex installation, revenue is recognised
when the customer has completed its acceptance procedures.
Services
Revenue from services is recognised in accounting periods in
which the services are rendered, by reference to completion of the
specific transaction, assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Depending on the nature of the contract, revenue will be recognised
on the basis of the proportion of the contract term completed, the
proportion of the contract costs incurred or the specific services
provided to date.
Construction contracts
Contracts for the construction of substantial assets are
accounted for as construction contracts if the customer specifies
major structural elements of the design, including the ability to
amend the design during the construction process. These projects
normally involve installing customised systems with site-specific
integration requirements.
Where the outcome of a construction contract can be estimated
reliably, revenue and costs are recognised by reference to the
stage
of completion of the contract activity at the balance sheet
date. The Group uses the 'percentage of completion method' to
determine
the appropriate amount to recognise in a given period. The
assessment of the stage of completion is dependent on the nature of
the contract, but will generally be based on the estimated
proportion of the total contract costs which have been incurred to
date. If a contract is expected to be loss-making, a provision is
recognised for the entire loss.
Leases
Leases in which a significant portion of the risks and rewards
of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases are charged to the
income statement on a straight-line basis over the period of the
lease.
Taxation
The charge for taxation is based on profits for the year and
takes into account taxation deferred because of temporary
differences between the treatment of certain items for taxation and
accounting purposes.
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. Tax benefits are not recognised unless it is likely
that the tax positions are sustainable. Once considered to be
likely, tax benefits are reviewed to assess whether a provision
should be made based on prevailing circumstances. Tax provisions
are included in current tax liabilities, including any anticipated
interest and penalties. The tax rates and tax laws used to compute
the amount are those that are enacted or substantively enacted, at
the reporting date in the countries where the Group operates and
generates taxable income.
Deferred tax is provided in full using the balance sheet
liability method. A deferred tax asset is recognised where it is
probable that future taxable income will be sufficient to utilise
the available relief. Tax is charged or credited to the income
statement except when it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in
equity.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the timing
of the reversal of the temporary differences is controlled by the
Company and it is probable that the temporary difference will not
reverse in the foreseeable future.
Deferred tax liabilities and assets are not discounted.
Employee benefits
Share-based compensation
The fair value of the shares or share options granted is
recognised as an expense over the vesting period to reflect the
value of the employee services received. The fair value of options
granted, excluding the impact of any non-market vesting conditions,
is calculated using established option pricing models, principally
binomial models. The probability of meeting non-market vesting
conditions, which include profitability targets, is used to
estimate the number of share options which are likely to vest.
For cash-settled share-based payment, a liability is recognised
based on the fair value of the payment earned by the balance sheet
date. For equity-settled share-based payment, the corresponding
credit is recognised directly in reserves.
Pension obligations and post-retirement benefits
The Group has defined benefit plans, defined contribution plans
and post-retirement healthcare schemes.
For defined benefit plans and post-retirement healthcare schemes
the liability for each scheme recognised in the balance sheet is
the present value of the obligation at the balance sheet date less
the fair value of any plan assets. The obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value is determined by discounting the
estimated future cash outflows using interest rates of AA-rated
corporate bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity
approximating to the terms of the related liability. Actuarial
gains and losses arising from experience adjustments and changes in
actuarial assumptions are recognised in full in the period in which
they occur, outside of the income statement, and are presented in
the statement of comprehensive income. Past service costs are
recognised immediately in the income statement.
For defined contribution plans, the Group pays contributions to
publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. Contributions are
expensed as incurred.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the identifiable net
assets of the acquired subsidiary at the date of acquisition.
Goodwill arising from acquisitions of subsidiaries after 1
August 1998 is included in intangible assets, tested annually for
impairment and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold. Goodwill arising
from acquisitions of subsidiaries before 1 August 1998 was set
against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Any
impairment is recognised immediately in the income statement.
Subsequent reversals of impairment losses for goodwill are not
recognised.
Research and development
Expenditure on research and development is charged to the income
statement in the year in which it is incurred with the exception
of:
- amounts recoverable from third parties; and
- expenditure incurred in respect of the development of major
new products where the outcome of those projects is assessed as
being reasonably certain as regards viability and technical
feasibility. Such expenditure is capitalised and amortised over the
estimated period of sale for each product, commencing in the year
that sales of the product are first made. Amortisation is charged
straight line or based on the units produced, depending on the
nature of the product and the availability of reliable estimates of
production volumes.
The cost of development projects which are expected to take a
substantial period of time to complete includes attributable
borrowing costs.
Intangible assets acquired in business combinations
The identifiable net assets acquired as a result of a business
combination may include intangible assets other than goodwill. Any
such intangible assets are amortised straight line over their
expected useful lives as follows:
Patents, licences and trademarks up to 20 years
-------------------------------- --------------
Technology up to 13 years
-------------------------------- --------------
Customer relationships up to 11 years
-------------------------------- --------------
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to 7 years
--------------------------------- ----------------------------------------------------------------------------
Patents and intellectual property shorter of the economic life and the period the right is legally enforceable
--------------------------------- ----------------------------------------------------------------------------
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Property, plant and equipment
Property, plant and equipment is stated at historical cost less
accumulated depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other
assets estimated to write off the depreciable amount of relevant
assets by equal annual instalments over their estimated useful
lives. In general, the rates used are: Freehold and long leasehold
buildings - 2%; Short leasehold property - over the period of the
lease; Plant, machinery, etc. - 10% to 20%; Fixtures, fittings,
tools and other equipment - 10% to 33%.
The cost of any assets which are expected to take a substantial
period of time to complete includes attributable borrowing
costs.
The assets' residual values and useful lives are reviewed, and
adjusted if appropriate, at each balance sheet date. An asset's
carrying amount is written down immediately to its recoverable
amount if the asset's carrying amount is greater than its estimated
recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is determined using the first-in, first-out (FIFO)
method. The cost of finished goods and work in progress comprises
raw materials, direct labour, other direct costs and related
production overheads (based on normal operating capacity). The cost
of items of inventory which take a substantial period of time to
complete includes attributable borrowing costs. Net realisable
value is the estimated selling price in the ordinary course of
business, less applicable variable selling expenses.
Trade and other receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost, less any appropriate
provision for estimated irrecoverable amounts. A provision is
established for irrecoverable amounts when there is objective
evidence that amounts due under the original payment terms will not
be collected.
Provisions
Provisions for warranties and product liability, disposal
indemnities, restructuring costs, vacant leasehold property and
legal claims
are recognised when: the Company has a legal or constructive
obligation as a result of a past event; it is probable that an
outflow of resources will be required to settle the obligation; and
the amount has been reliably estimated. Provisions are not
recognised for
future operating losses.
Provisions are discounted where the time value of money is
material.
Where there are a number of similar obligations, for example
where a warranty has been given, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognised even if
the likelihood of an outflow with respect to any one item included
in the same class of obligations may be small.
Assets and businesses held for sale
Assets and businesses classified as held for sale are measured
at the lower of carrying amount and fair value less costs to sell.
Impairment losses on initial classification as held for sale and
gains or losses on subsequent remeasurements are included in the
income statement. No depreciation is charged on assets and
businesses classified as held for sale.
Assets and businesses are classified as held for sale if their
carrying amount will be recovered or settled principally through a
sale transaction rather than through continuing use. The asset or
business must be available for immediate sale and the sale must be
highly probable within one year.
Discontinued operations
A discontinued operation is either:
- a component of the Group's business that represents a separate
major line of business or geographical area of operations that has
been disposed of, has been abandoned or meets the criteria to be
classified as held for sale; or
- a business acquired solely for the purpose of selling it.
Discontinued operations are presented on the income statement as
a separate line and are shown net of tax.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with maturities of three
months or less.
In the cash-flow statement, cash and cash equivalents are shown
net of bank overdrafts, which are included as current borrowings in
liabilities on the balance sheet.
Financial assets
The classification of financial assets depends on the purpose
for which the assets were acquired. Management determines the
classification of an asset at initial recognition and re-evaluates
the designation at each reporting date. Financial assets are
classified as: loans and receivables, available for sale financial
assets or financial assets where changes in fair value are charged
(or credited) to the income statement.
Financial assets are initially recognised at transaction price
when the Group becomes party to contractual obligations. The
transaction price used includes transaction costs unless the asset
is being fair valued through the income statement.
The subsequent measurement of financial assets depends on their
classification. Loans and receivables are measured at amortised
cost using the effective interest rate method. Available for sale
financial assets are subsequently measured at fair value, with
unrealised gains and losses being recognised in other comprehensive
income. Financial assets where changes in fair value are charged
(or credited) to the income statement are subsequently measured at
fair value. Realised and unrealised gains and losses arising from
changes in the fair value of the 'financial assets at fair value
through the income statement' category are included in the income
statement in the period in which they arise.
Financial assets are derecognised when the right to receive
cash-flows from the assets has expired, or has been transferred,
and the Company has transferred substantially all of the risks and
rewards of ownership. When securities classified as available for
sale are sold or impaired, the accumulated fair value adjustments
previously taken to reserves are included in the income
statement.
Financial assets are classified as current if they are expected
to be realised within 12 months of the balance sheet date.
Financial liabilities
Borrowings are initially recognised at the fair value of the
proceeds, net of related transaction costs. These transaction
costs, and any discount or premium on issue, are subsequently
amortised under the effective interest rate method through the
income statement as interest over the life of the loan, and added
to the liability disclosed in the balance sheet. Related accrued
interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least one year after the balance sheet date.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured
at their fair value. The method of recognising any resulting gain
or loss depends on whether the derivative is designated as a
hedging instrument and, if so, the nature of the item being
hedged.
Changes in the fair value of any derivative instruments that do
not qualify for hedge accounting are recognised immediately in the
income statement.
Fair value hedge
Changes in the fair values of derivatives that are designated
and qualify as fair value hedges are recorded in the income
statement, together with any changes in the fair values of the
hedged assets or liabilities that are attributable to the hedged
risk.
Cash-flow hedge
The effective portions of changes in the fair values of
derivatives that are designated and qualify as cash-flow hedges are
recognised
in equity. The gain or loss relating to any ineffective portion
is recognised immediately in the income statement.
Amounts accumulated in the hedge reserve are recycled in the
income statement in the periods when the hedged items will affect
profit or loss (for instance when the forecast sale that is hedged
takes place). If a forecast transaction that is hedged results in
the recognition of a non-financial asset (for example, inventory)
or a liability, the gains and losses previously deferred in the
hedge reserve are transferred from the reserve and included in the
initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in the hedge reserve at that time remains in the
reserve and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or
loss that was reported in other comprehensive income is immediately
transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted
for similarly to cash-flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is
recognised in other comprehensive income; the gain or loss relating
to any ineffective portion is recognised immediately in the income
statement.
When a foreign operation is disposed of, gains and losses
accumulated in equity related to that operation are included in the
income statement.
Fair value of financial assets and liabilities
The fair values of financial assets and financial liabilities
are the amounts at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
or liquidation sale.
'IFRS 13: Fair value measurement' requires fair value
measurements to be classified according to the following
hierarchy:
- level 1 - quoted prices in active markets for identical assets
or liabilities;
- level 2 - valuations in which all inputs are observable either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
- level 3 - valuations in which one or more inputs that are
significant to the resulting value are not based on observable
market data.
See note 20 for information on the methods the Group uses to
estimate the fair values of its financial instruments.
Dividends
Dividends are recognised as a liability in the period in which
they are authorised. The interim dividend is recognised when it is
paid and the final dividend is recognised when it has been approved
by shareholders at the Annual General Meeting.
Recent accounting developments
A number of new standards and amendments to standards and
interpretations have been issued but are not yet effective for the
current accounting period. Certain standards which could be
expected to have an impact on the consolidated financial statements
are discussed in further detail below.
The Group conducted an impact assessment of the new standards
which are effective next year based on the Group's current
activities and have quantified the impact. The results of the
impact assessment confirm that the new standards will lead to
limited changes to presentation and disclosure.
IFRS 9: Financial instruments (effective year ending 31 July
2019)
The new standard addresses the classification and measurement of
financial assets.
The alignment of the classification and measurement model under
IFRS 9 will result in changes in the classification of all
financial assets excluding derivatives. These changes will not have
a quantitative impact on the financial statements.
IFRS 9 introduces an expected credit loss model, requiring an
expected credit loss to be recognised on all financial assets held
at amortised cost. The Group has previously provided against bad
and doubtful debts within trade and other receivables based on
specific risk assessments and reference to past default experience.
The resulting reassessment of existing provisions is not expected
to have a material impact on the net assets of the Group.
IFRS 9 also introduces changes to the qualifying criteria for
hedge accounting and expands the financial and non-financial
instruments which may be designated as hedged items and hedging
instruments in order to align hedge accounting with business
strategy. The changes to hedge accounting under IFRS 9 will result
in qualitative enhancements to the interest rate and foreign
currency risk management disclosures but will not have a
quantitative impact on the consolidated financial statements of the
Group.
IFRS 15: Revenue from contracts with customers (effective year
ending 31 July 2019)
IFRS 15 replaces IAS 18: Revenue and IAS 11: Construction
contracts. The new standard combines a number of previous
standards, sets out a five step model for the recognition of
revenue and establishes principles for reporting useful information
to users of financial statements about the nature, timing and
uncertainty of revenue and cash-flows arising from an entity's
contracts with customers.
A detailed assessment has been undertaken for the expected
impact of IFRS 15 on how the Group currently recognises revenue and
a summary of the results of this assessment is shown below. The
Group will utilise the full retrospective application with
practical expedients option for the adoption of IFRS 15.
The assessment summary represents a reasonable estimate of the
expected impact on the reported results for the year ended 31 July
2018 and on the net assets at that date but is subject to revision
during the coming half year as the Group completes its analysis,
particularly for those contracts on which revenue was recognised in
the latter part of the financial year under current IFRS.
The principal areas of impact for the Group's revenue
recognition include:
- Customer specific products - rephasing of revenue recognition
for certain customer specific products that have no alternative use
and for which the Group has the right to receive payment;
- Customer specific rights - rephasing of revenue recognition
for contractual Customer specific rights;
- Variable selling costs - certain expenses currently classified
as variable selling costs will be reclassified as offsets to
revenue. This classification change reduces revenue and cost of
sales but has no impact on profit; and
- Contract assets and liabilities - certain assets and
liabilities current included within trade receivables, accrued
income and deferred revenue will be reclassified as contract assets
and liabilities.
Revenue
GBPm
------------------------------------------------ -----
As reported 3,213
Expected impacts (16)
------------------------------------------------ -----
IFRS 15 revenue for the year ended 31 July 2018 3,197
------------------------------------------------ -----
Headline operating profit
GBPm
------------------------------------------------------------------ ----
As reported 544
Expected impacts nil
------------------------------------------------------------------ ----
IFRS 15 headline operating profit for the year ended 31 July 2018 544
------------------------------------------------------------------ ----
Net Assets
GBPm
-------------------------------------- -----
As reported 2,288
Expected impacts (1)
-------------------------------------- -----
IFRS 15 net assets as at 31 July 2018 2,287
-------------------------------------- -----
IFRS 16: Leases (effective year ending 31 July 2020)
The standard fundamentally changes the accounting treatment of
leased assets, requiring all material lease liabilities and
corresponding 'right of use' assets to be recognised on the balance
sheet. The operating lease rental expense currently charged to
operating profit in the income statement will be replaced by a
depreciation charge for the 'right of use' assets recognised in
operating profit and an interest charge on the lease liabilities
recognised in finance costs.
The Group is mid-way through an IFRS 16 adoption project and the
preliminary assessment indicates the impact of adoption will not
have a material impact on net assets. The total value of operating
lease commitments at 31 July 2018 was GBP155m (FY2017:
GBP140m).
NOTES TO THE ACCOUNTS
1 Segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These
divisions design, manufacture and support the following
products:
- John Crane - mechanical seals, seal support systems, power
transmission couplings and specialised filtration systems;
- Smiths Medical - infusion systems, vascular access products,
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; and
- Flex-Tek - engineered components, flexible hosing and rigid
tubing that heat and move fluids and gases.
The position and performance of each division is reported at
each Board meeting to the Board of Directors. This information is
prepared using the same accounting policies as the consolidated
financial information except that the Group uses headline operating
profit to monitor divisional results and operating assets to
monitor divisional position. See note 3 for an explanation of which
items are excluded from headline measures.
Intersegment sales and transfers are charged at arm's length
prices.
Segment trading performance
Year ended 31 July 2018
----------------------------------- ---------------------------------------------------------------------------------
Smiths Smiths Corporate
John Crane Medical Detection Smiths Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ---------- -------- ---------- ------------------- -------- --------- -----
Revenue 881 885 793 300 354 3,213
----------------------------------- ---------- -------- ---------- ------------------- -------- --------- -----
Divisional headline operating
profit 202 156 134 42 67 601
Corporate headline operating costs (57) (57)
----------------------------------- ---------- -------- ---------- ------------------- -------- --------- -----
Headline operating profit/(loss) 202 156 134 42 67 (57) 544
Items excluded from headline
measures (note 3) (12) (4) (40) (4) 1 2 (57)
Profit/(loss) on disposal of
businesses 9 (1) (1) 7
----------------------------------- ---------- -------- ---------- ------------------- -------- --------- -----
Operating profit/(loss) 199 152 93 37 68 (55) 494
----------------------------------- ---------- -------- ---------- ------------------- -------- --------- -----
Year ended 31 July 2017
--------------------------------- -----------------------------------------------------------------------
John Smiths Smiths Smiths Corporate
Crane Medical Detection Interconnect Flex-Tek costs Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------ -------- ---------- ------------- -------- --------- -----
Revenue 885 951 687 419 338 3,280
--------------------------------- ------ -------- ---------- ------------- -------- --------- -----
Divisional headline operating
profit 204 209 103 56 65 637
Corporate headline operating
costs (48) (48)
--------------------------------- ------ -------- ---------- ------------- -------- --------- -----
Headline operating profit/(loss) 204 209 103 56 65 (48) 589
Items excluded from headline
measures (note 3) (17) (23) (33) (4) 3 (16) (90)
Profit on disposal of businesses 3 100 72 175
--------------------------------- ------ -------- ---------- ------------- -------- --------- -----
Operating profit/(loss) 190 286 70 124 68 (64) 674
--------------------------------- ------ -------- ---------- ------------- -------- --------- -----
Divisional headline operating profit is stated after charging
the following items:
Year ended 31 July 2018
------------------------------------- ---------------------------------------------------------------------------
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Depreciation 13 20 10 7 4 1 55
Amortisation of capitalised
development 14 10 24
Amortisation of software, patents
and intellectual property 3 4 5 2 4 18
Amortisation of acquired intangibles 29 29
Share-based payment 3 2 1 1 1 6 14
------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Year ended 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
------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Depreciation 15 21 8 8 4 1 57
Amortisation of capitalised
development 14 13 27
Amortisation of software, patents
and intellectual property 2 5 4 2 5 18
Amortisation of acquired intangibles 17 17
Share-based payment 3 2 1 1 1 7 15
------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Corporate and non-headline items are central costs and charges
that are treated as non-headline (see note 3).
Segment assets and liabilities
Segment assets
31 July 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 94 242 101 35 37 21 530
Inventory, trade and other receivables 361 266 372 120 117 22 1,258
--------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Segment assets 455 508 473 155 154 43 1,788
--------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
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
--------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Non-headline assets comprise receivables relating to
non-headline items, acquisitions and disposals.
Segment liabilities
31 July 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 (138) (116) (257) (43) (46) (600)
Corporate and non-headline liabilities (370) (370)
--------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Segment liabilities (138) (116) (257) (43) (46) (370) (970)
--------------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
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 July 31 July 31 July 31 July
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
------------------------------------------ ------- ------- ------- -------
Segment assets and liabilities 1,788 1,762 (970) (970)
Goodwill and acquired intangibles 1,867 1,820
Derivatives 57 69 (11) (12)
Current and deferred tax 218 334 (149) (156)
Retirement benefit assets and obligations 526 390 (145) (166)
Cash and borrowings 717 782 (1,610) (1,749)
------------------------------------------ ------- ------- ------- -------
Statutory assets and liabilities 5,173 5,157 (2,885) (3,053)
------------------------------------------ ------- ------- ------- -------
Segment capital expenditure
The capital expenditure on property, plant and equipment,
capitalised development and other intangible assets for each
division is:
Corporate
John Smiths Smiths Smiths and
Crane Medical Detection Interconnect Flex-Tek non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Capital expenditure year ended
31 July 2018 17 48 22 10 7 4 108
Capital expenditure year ended
31 July 2017 12 58 22 10 6 1 109
------------------------------- ------ -------- ---------- ------------- -------- ------------- -----
Corporate and non-headline items include corporate capital
expenditure through Smiths Business Information Services on IT
equipment and software.
Segment capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP787m (31 July 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 30 for a reconciliation of net
assets to capital employed.
The 12-month rolling average capital employed by division, which
Smiths use to calculate divisional return on capital employed,
is:
31 July 2018
------------------------------------ ------------------------------------------------------------
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------ -------- ---------- ------------- -------- -----
Average divisional capital employed 881 1,195 1,108 356 191 3,731
Average corporate capital employed 4
------------------------------------ ------ -------- ---------- ------------- -------- -----
Average total capital employed 3,735
------------------------------------ ------ -------- ---------- ------------- -------- -----
31 July 2017
John Smiths Smiths Smiths
Crane Medical Detection Interconnect Flex-Tek Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------ -------- ---------- ------------- -------- -----
Average divisional capital employed 890 1,257 820 492 182 3,641
Average corporate capital employed (2)
------------------------------------ ------ -------- ---------- ------------- -------- -----
Average total capital employed 3,639
------------------------------------ ------ -------- ---------- ------------- -------- -----
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original
equipment Aftermarket Total
John Crane GBPm GBPm GBPm
-------------------------------- ---------- ----------- -----
Revenue year ended 31 July 2018 292 589 881
Revenue year ended 31 July 2017 314 571 885
-------------------------------- ---------- ----------- -----
Infusion Vascular Vital Specialty
systems access care products Total
Smiths Medical GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- -------- ----- --------- -----
Revenue year ended 31 July 2018 302 294 248 41 885
Revenue year ended 31 July 2017 302 318 273 58 951
-------------------------------- -------- -------- ----- --------- -----
Ports
Air and Urban
transportation borders Defence security Total
Smiths Detection GBPm GBPm GBPm GBPm GBPm
-------------------------------- --------------- -------- ------- --------- -----
Revenue year ended 31 July 2018 540 56 33 164 793
Revenue year ended 31 July 2017 355 100 65 167 687
-------------------------------- --------------- -------- ------- --------- -----
Connectors Microwave Power Total
Smiths Interconnect GBPm GBPm GBPm GBPm
-------------------------------- ----------- --------- ----- -----
Revenue year ended 31 July 2018 215 85 300
Revenue year ended 31 July 2017 177 195 47 419
-------------------------------- ----------- --------- ----- -----
Fluid Flexible Heat Construction
Management Solutions Solutions Products Total
Flex-Tek GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----------- ---------- ---------- ------------ -----
Revenue year ended 31 July 2018 87 66 93 108 354
Revenue year ended 31 July 2017 81 64 84 109 338
-------------------------------- ----------- ---------- ---------- ------------ -----
The Group's statutory revenue is analysed as follows:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
----------------------------------------------- -------- --------
Sale of goods 2,734 2,865
Services 462 394
Contracts qualifying as construction contracts 17 21
----------------------------------------------- -------- --------
3,213 3,280
----------------------------------------------- -------- --------
Analysis by geographical areas
The Group's revenue by destination and non-current operating
assets by location are shown below:
Intangible assets
and
property plant
and
Revenue equipment
---------------------------- ------------------ -------------------
Year Year
ended ended
31 July 31 July 31 July 31 July
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
---------------------------- -------- -------- --------- --------
United Kingdom 142 118 92 92
Germany 170 160 410 363
France 96 96 16 16
Other European 362 355 70 72
---------------------------- -------- -------- --------- --------
Total European 770 729 588 543
---------------------------- -------- -------- --------- --------
United States of America 1,414 1,531 1,633 1,627
Canada 132 114 11 13
Other North American 35 33 13 12
---------------------------- -------- -------- --------- --------
Total North American 1,581 1,678 1,657 1,652
---------------------------- -------- -------- --------- --------
Japan 122 119 19 19
China (excluding Hong Kong) 122 93 51 49
Rest of the World 618 661 66 67
---------------------------- -------- -------- --------- --------
3,213 3,280 2,381 2,330
---------------------------- -------- -------- --------- --------
2 Operating profit is stated after charging
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
---------------------------------------------- -------- --------
Research and development expense 107 98
Depreciation of property, plant and equipment 55 57
Amortisation of intangible assets 71 62
Operating leases:
- land and buildings 33 34
- other 9 8
---------------------------------------------- -------- --------
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
---------------------------------------------------------- -------- --------
Audit services
Fees payable to the Company's auditors for the audit of
the Company's annual financial statements 4 4
Fees payable to the Company's auditors and its associates
for other services:
- the audit of the Company's subsidiaries 2 2
---------------------------------------------------------- -------- --------
6 6
All other services 1
---------------------------------------------------------- -------- --------
Other services comprise audit-related assurance services GBP0.2m
(FY2017: GBP0.2m), other services GBP0.1m (FY2017: GBP0.1m), tax
advisory services GBPnil (FY2017: GBP0.1m) and one-off IT and
consulting projects GBPnil (FY2017: GBP0.2m). Total fees for
non-audit services comprise 5% (FY2017: 8%) of audit fees.
Audit-related assurance services include the review of the Interim
Report.
3 Non-statutory profit measures
Headline profit measures
The Company seeks to present a measure of 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:
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
------------------------------------------------------------ ----- -------- --------
Morpho Detection - integration and fair value adjustment
unwind
Integration programme costs (19) (4)
Unwind of fair value uplift of inventory on the acquisition
balance sheet (2) (3)
Non-headline litigation provision movements
Net release of provision held against Titeflex Corporation
subrogation claims 22 2 4
Provision for John Crane, Inc. asbestos litigation 22 (10) (15)
Cost recovery for John Crane, Inc. asbestos litigation 6
Legacy pension scheme arrangements
Administration costs for post-retirement benefit schemes 8 (7)
Settlement gain/(losses) on post-retirement benefit
schemes 8 4 (2)
Other items
Restructuring programmes (33)
Amortisation of acquisition related intangible assets 10 (29) (17)
Acquisition costs and provision releases (3) (19)
Profit on disposal of businesses 28 7 175
------------------------------------------------------------ ----- -------- --------
Non-headline items in operating profit (50) 85
------------------------------------------------------------ ----- -------- --------
Morpho Detection - integration and fair value adjustment
unwind
Integration programmes comprise GBP19m (FY2017: GBP4m) in
respect of the integration of the Morpho Detection acquisition into
the existing Smiths Detection business. This item includes site
rationalisation costs, IT system harmonisation expenses,
organisational change and severance costs. This integration
programme has been included as a non-headline item as it is
non-operational in nature and non-recurring.
The impact of unwinding the business combination fair value
adjustment on the inventory held on Morpho Detection's acquisition
balance sheet is included in non-headline items as this charge is a
result of acquisition accounting and does not relate to current
trading activity.
Non-headline litigation provision movements
The following litigation costs and recoveries have been treated
as non-headline items because the provisions were treated as
non-headline when originally recognised and the subrogation claims
and litigation relate to products that the Group no longer sells in
these markets:
- A provision release of GBP2m (FY2017: GBP4m) has been
recognised by Titeflex Corporation in respect of changes to the
estimated cost of future claims. The release is principally related
to a decrease in the expected number of claims. See note 22 for
further details; and
- The GBP10m (FY2017: GBP15m) charge in respect of John Crane,
Inc. asbestos litigation is principally due to an increased
provision for legal defence costs. The costs recovered via insurer
settlements in the current year were GBPnil (FY2017: GBP6m). See
note 22 for further details.
Legacy pension scheme arrangement
A GBP4m settlement gain (FY2017: GBP2m loss) was recognised in
the current year when US funded plan members opted to take lump
sums in lieu of annuities. This is included in non-headline as it
relates to legacy pension liabilities. See note 8 for further
details.
Pension administration costs are included as headline items in
the current year. In the prior year GBP7m of pension administration
costs were treated as non-headline.
Other items
In the prior year GBP33m of costs for the Fuel for Growth
restructuring programme were recognised as non-headline items. No
costs have been recognised in respect of this programme in the
current year.
Acquisition related intangible asset amortisation costs of
GBP29m (FY2017: GBP17m) were recognised in the current year. This
is considered to be a non-headline item on the basis that these
charges result from acquisition accounting and do not relate to
current trading activity.
Acquisition costs and provision releases comprise GBP3m (FY2017:
GBP19m) of directly linked incremental transaction costs. These
costs do not include the cost of employees working on transactions
and are reported as non-headline because they are dependent on the
level of acquisition activity in the year.
The profit on disposal of businesses of GBP7m (FY2017: GBP175m)
principally relates to the sale of John Crane Bearings. See note 28
for further details. It is considered to be a non-headline item
since the proceeds and cash impact are material and
non-recurring.
Non-headline finance costs items
The non-headline items included in finance costs are as
follows:
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
------------------------------------------- ----- -------- --------
Unwind of discount on provisions 22 (7) (6)
Other financing losses (2) (8)
Other finance income - retirement benefits 8 7 2
------------------------------------------- ----- -------- --------
Non-headline items in finance costs (2) (12)
------------------------------------------- ----- -------- --------
Non-headline (loss)/profit before taxation (52) 73
------------------------------------------- ----- -------- --------
The unwind of discount on provisions has been excluded from
headline finance costs because these provisions were originally
recognised as non-headline and this treatment has been maintained
for ongoing costs and credits.
Other financing gains and losses represent the potentially
volatile gains and losses on derivatives, loans inside the group
and other financial instruments which are not hedge accounted under
IAS 39. They have been excluded from headline finance costs because
they do not accurately reflect the aggregate risks of the group,
since offsetting gains have been recognised in reserves or deferred
in assets and liabilities which are not held at fair value.
Other finance income comprises financing credits relating to
retirement benefits. These are excluded from headline finance costs
because the ongoing costs and credits are a legacy of previous
employee pension arrangements.
Non-headline taxation items
A non-headline tax charge of GBP30m (FY2017: GBP111m credit) has
been taken in the year. See note 6 for further details.
4 Net finance costs
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
------------------------------------------------------- ----- -------- --------
Interest receivable 7 5
------------------------------------------------------- ----- -------- --------
Interest payable:
- bank loans and overdrafts, including associated fees (8) (9)
- other loans (56) (57)
------------------------------------------------------- ----- -------- --------
Interest payable (64) (66)
------------------------------------------------------- ----- -------- --------
Other financing gains/(losses):
- fair value gains on hedged debt 3 6
- losses on fair value hedges (3) (6)
- net foreign exchange losses (3) (8)
- adjustment to discounted provisions (6) (6)
------------------------------------------------------- ----- -------- --------
Other financing gains/(losses) (9) (14)
------------------------------------------------------- ----- -------- --------
Net interest income on retirement benefit obligations 8 7 2
------------------------------------------------------- ----- -------- --------
Net finance costs (59) (73)
------------------------------------------------------- ----- -------- --------
GBP2.8m (FY2017: GBP2.4m) interest was capitalised as part of
the costs of development projects. GBP0.8m (FY2017: GBP0.6m) of tax
relief has been recognised as current tax relief in the period.
5 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the year attributable to equity shareholders of the Parent
Company by the average number of ordinary shares in issue during
the year.
Year ended Year ended
31 July 2018 31 July 2017
GBPm GBPm
----------------------------------------------- ------------- -------------
Profit attributable to equity shareholders for
the year:
- continuing 277 570
- total 277 562
----------------------------------------------- ------------- -------------
Average number of shares in issue during the
year 395,723,069 395,422,421
----------------------------------------------- ------------- -------------
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 400,999,220 (FY2017:
400,518,049) ordinary shares, being the average number of ordinary
shares in issue during the year adjusted by the dilutive effect of
employee share schemes. For the year ended 31 July 2018, zero
options (FY2017: zero) were excluded from this calculation because
their effect was anti--dilutive for continuing operations.
A reconciliation of basic and headline earnings per share -
continuing is as follows:
Year ended 31 Year ended 31
July 2018 July 2017
--------------- ---------------
EPS EPS
GBPm (p) GBPm (p)
---------------------------------------------------- ------- ------ ------ -------
Profit attributable to equity shareholders of
the Parent Company 277 70.0 570 144.1
Exclude:
Non-headline items and related tax (note 3) 82 20.7 (184) (46.5)
---------------------------------------------------- ------- ------ ------ -------
Headline profit attributable to equity shareholders
for the year 359 90.7 386 97.6
---------------------------------------------------- ------- ------ ------ -------
Statutory earnings per share - diluted (p) 69.1 142.3
---------------------------------------------------- ------- ------ ------ -------
Headline earnings per share - diluted (p) 89.5 96.3
---------------------------------------------------- ------- ------ ------ -------
6 Taxation
This note only provides information about corporate income taxes
under IFRS. Smiths companies operate in over 50 countries across
the world. They pay and collect many different taxes in addition to
corporate income taxes including: payroll taxes; value added and
sales taxes; property taxes; product-specific taxes and
environmental taxes. The costs associated with these other taxes
are included in profit before tax.
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------------------------ -------- --------
The taxation charge in the consolidated income statement
for the year comprises:
Continuing operations
- current income tax charge 109 58
- current tax adjustments in respect of prior periods 6 3
------------------------------------------------------------ -------- --------
Current taxation 115 61
- deferred taxation 41 (32)
------------------------------------------------------------ -------- --------
Total taxation expense - continuing operations 156 29
------------------------------------------------------------ -------- --------
Discontinued operations
- current income tax credit (9)
- deferred taxation 6
------------------------------------------------------------ -------- --------
Total taxation expense in the consolidated income statement 156 26
------------------------------------------------------------ -------- --------
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------ -------- --------
Tax on items charged/(credited) to equity
Deferred tax charge/(credit):
- retirement benefit schemes 18 13
- cash-flow hedge accounting (1) 1
- share options 1 (3)
------------------------------------------ -------- --------
18 11
------------------------------------------ -------- --------
Of the GBP18m charge to equity for retirement benefits, a GBP17m
charge relates to UK retirement schemes and GBP1m to US pension
schemes.
Reconciliation of the tax charge
The tax expense on the profit for the year for continuing
operations is different from the standard rate of corporation tax
in the UK of 19.0% (FY2017: 19.7%). The difference is reconciled as
follows:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
---------------------------------------------------------------- -------- --------
Profit before taxation 435 602
Notional taxation expense at UK rate of 19.0% (FY2017: 19.7%) 83 118
Different tax rates on non-UK profits and losses 33 55
Non-deductible expenses 9 14
Tax credits and non-taxable income (13) (15)
Non-headline recognition of UK deferred tax (69)
Other adjustments to unrecognised deferred tax (1) (23)
Non-headline impact of US tax reform - deferred tax revaluation 34
Non-headline impact of US tax reform - deemed repatriation
tax 18
Current and deferred benefits from closed financing arrangement (19)
Effect of non-taxable profits on business disposals (1) (35)
Prior year true-up (6) 3
Tax on discontinued activities (3)
---------------------------------------------------------------- -------- --------
156 26
---------------------------------------------------------------- -------- --------
Comprising:
- taxation on headline profit 126 140
- tax on non-headline loss (22) (27)
- non-headline impact of US tax reform 52
- change in deferred tax recognition treated as non-headline (84)
- taxation on discontinued operation (3)
---------------------------------------------------------------- -------- --------
Taxation expense in the consolidated income statement 156 26
---------------------------------------------------------------- -------- --------
The head office of Smiths Group is domiciled in the UK so the
tax charge has been reconciled to UK tax rates.
US Tax Reform
The Tax Cuts and Jobs Act (the 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 GBP34m. In addition there is a one-time deemed
repatriation tax charge of GBP18m related to unremitted foreign
earnings.
Current taxation
Current
tax
GBPm
------------------------------------------ -------
At 31 July 2016 (10)
Foreign exchange gains and losses 2
Charge to income statement - continuing (61)
Credit to income statement - discontinued 9
Business combinations (1)
Business disposals (4)
Tax paid 82
------------------------------------------ -------
At 31 July 2017 17
Foreign exchange gains and losses (1)
Charge to income statement (115)
Tax paid 65
------------------------------------------ -------
At 31 July 2018 (34)
------------------------------------------ -------
Current tax receivable 38
Current tax payable (72)
------------------------------------------ -------
At 31 July 2018 (34)
------------------------------------------ -------
Provisions included in current tax liabilities are established
based on reasonable estimates of the possible consequences of tax
authority audits in the various countries in which the Group
operates. Management judgement is used to determine the amount of
such provisions based on an understanding of the relevant local tax
law, taking into account the differences of interpretation that can
arise on a wide variety of issues, depending on the prevailing
circumstances, including the nature of current tax audits and the
experience of previous enquiries.
Deferred taxation
Property,
plant
and equipment Losses
and intangible Employment carried
assets benefits forward Provisions Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------------- ---------- -------- ---------- ----- -----
At 31 July 2016 (145) 8 87 140 61 151
Reallocation 4 (4)
(Charge)/credit to income statement
- continuing 11 (9) 43 (7) (6) 32
(Charge)/credit to income statement
- discontinued (6) (6)
Charge to equity (10) (1) (11)
Business combinations (6) 2 (4)
Business disposals (3) (3)
Exchange adjustments 1 1 (1) 1 2
------------------------------------ --------------- ---------- -------- ---------- ----- -----
At 31 July 2017 (148) (10) 129 138 52 161
------------------------------------ --------------- ---------- -------- ---------- ----- -----
Deferred tax assets (4) (10) 127 133 26 272
Deferred tax liabilities (144) 2 5 26 (111)
------------------------------------ --------------- ---------- -------- ---------- ----- -----
At 31 July 2017 (148) (10) 129 138 52 161
------------------------------------ --------------- ---------- -------- ---------- ----- -----
Reallocation 2 (2)
(Charge)/credit to income statement
- continuing 60 (21) (7) (55) (18) (41)
(Charge)/credit to income statement
- discontinued 2 (1) (1)
Charge to equity (18) (18)
Business combinations 1 1
Exchange adjustments 1 (1) (1) 1
------------------------------------ --------------- ---------- -------- ---------- ----- -----
At 31 July 2018 (84) (50) 121 84 32 103
------------------------------------ --------------- ---------- -------- ---------- ----- -----
Deferred tax assets 3 (56) 120 80 33 180
Deferred tax liabilities (87) 6 1 4 (1) (77)
------------------------------------ --------------- ---------- -------- ---------- ----- -----
At 31 July 2018 (84) (50) 121 84 32 103
------------------------------------ --------------- ---------- -------- ---------- ----- -----
The deferred tax asset relating to losses has been recognised on
the basis that evidence demonstrates a consistent pattern of
improving results and the Group has implemented plans to support
continuing improvements, or the losses relate to specific,
identified non-recurring events.
The closing net deferred tax asset balance related to UK
activities and included in the balance at 31 July 2018 amounted to
GBP41m.
The net deferred tax asset has reduced significantly from
previous year. This is mainly due to the two following items:
- US Tax reform, resulting in a GBP34m reduction in net US
deferred tax assets
- Increase in the deferred tax liability of GBP30m related to an
increase in the UK retirement benefits surplus
Deferred tax on provisions includes GBP48m (FY2017:GBP79m)
relating to John Crane Inc litigation provision, and GBP19m
(FY2017: GBP33m) relating to Titeflex Corporation. See note 22 for
additional information on provisions.
Included in other deferred tax balances above are deferred tax
assets related to inventory of GBP8m (FY2017: GBP14m), deferred
revenue of GBP9m (FY2017: GBP14m) and rebate reserve of GBP6m
(FY2017: GBP9m).
Unrecognised Deferred Tax
The Group has unrecognised deferred tax relating to non-UK
losses amounting to GBP73m (FY2017:GBP67m).
The expiry date of operating losses carried forward is dependent
upon the law of the various territories in which the losses arise.
A summary of expiry dates for losses in respect of which deferred
tax has not been recognised is set out below:
Expiry Expiry
2018 of 2017 of
GBPm losses GBPm losses
--------------------------------------- ----- --------- ----- ---------
Restricted losses - Asia 16 2019-2025 12 2018-2024
--------------------------------------- ----- --------- ----- ---------
Unrestricted losses - operating losses 57 No expiry 55 No expiry
--------------------------------------- ----- --------- ----- ---------
Total losses 73 67
--------------------------------------- ----- --------- ----- ---------
Franked Investment Income Group Litigation Order (FII GLO)
Smiths Group 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 Smiths' recoveries that amount to around GBP22m
(computed on a simple interest basis and after deducting 45%
withholding tax).
Claims related to the impact of the Foreign Income Dividends
(FID) regime are included in the FII GLO litigation claims Smiths
issued in 2009. Under the final relevant ECJ decision, FID claims
are now conclusively successful and accordingly Smiths Group made
its claim in respect of FID's and received GBP2.1m in August 2017.
This amount was calculated using simple interest and has been paid
under deduction of 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 FID.
EU Commission Investigation re Claims for Partial (75%)
Exemption for Profits from qualifying loan relationships
The European Commission has opened a state aid investigation
into the Group Financing Exemption in the UK controlled foreign
company (CFC) 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, Smiths Group may be affected by
this investigation and is monitoring developments. If the European
Commission's investigation is upheld, the estimated maximum
potential liability is approximately GBP14m. Based on our current
assessment, no provision is being made in respect of this
issue.
7 Employees
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------------------------- -------- --------
Staff costs during the period
Wages and salaries 839 833
Social security 97 94
Share-based payment (note 9) 16 15
Pension costs (including defined contribution schemes) (note
8) 37 36
------------------------------------------------------------- -------- --------
989 978
------------------------------------------------------------- -------- --------
The average number of persons employed, rounded to the nearest
50 employees, was:
Year Year
ended ended
31 July 31 July
2018 2017
-------------------- -------- --------
John Crane 6,100 6,050
Smiths Medical 8,050 7,700
Smiths Detection 2,750 2,450
Smiths Interconnect 2,300 3,250
Flex-Tek 2,150 2,100
Corporate 350 350
-------------------- -------- --------
21,700 21,900
-------------------- -------- --------
Key management
The key management of the Group comprises Smiths Group plc Board
Directors and Executive Committee members. Their aggregate
compensation is shown below. Details of Directors' remuneration are
contained in the report of the Remuneration Committee within the
Annual Report 2018.
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------ -------- --------
Key management compensation
Salaries and short-term employee benefits 11.4 13.2
Cost of post-retirement benefits 0.1 0.1
Cost of share-based incentive plans 5.4 5.3
------------------------------------------ -------- --------
No member of key management had any material interest during the
period in a contract of significance (other than a service contract
or a qualifying third-party indemnity provision) with the Company
or any of its subsidiaries. Options and awards held at the end of
the period by key management in respect of the Company's
share-based incentive plans were:
Year ended 31 Year ended 31
July 2018 July 2017
----------------------- -----------------------
Number Weighted Number Weighted
of average of average
instruments exercise instruments exercise
'000 price '000 price
----------------- ------------ --------- ------------ ---------
CIP / SMP 88 204
SEP 309 134
LTIP 1,455 1,041
Restricted stock 296 254
SAYE 9 GBP10.48 7 GBP10.87
----------------- ------------ --------- ------------ ---------
Related party transactions
The only related party transactions in the year ended 31 July
2018 were key management compensation (31 July 2017: key management
compensation).
8 Post-retirement benefits
Smiths provides post-retirement benefits to employees in a
number of countries. This includes defined benefit and defined
contribution plans and, mainly in the United Kingdom (UK) and
United States of America (US), post-retirement healthcare.
Defined contribution plans
The Group operates a number of defined contribution plans across
many countries. In the UK a defined contribution plan has been
offered since the closure of the UK defined benefit pension plans.
In the US a 401(k) defined contribution plan operates. The total
expense recognised in the consolidated income statement in respect
of all these plans was GBP34m (FY2017: GBP33m).
Defined benefit and post-retirement healthcare plans
The principal defined benefit pension plans are in the UK and in
the US and these have been closed so that no future benefits are
accrued.
For all schemes, pension costs are assessed in accordance with
the advice of independent, professionally qualified actuaries.
These valuations have been updated by independent qualified
actuaries in order to assess the liabilities of the schemes as at
31 July 2018. Scheme assets are stated at their market values.
Contributions to the schemes are made on the advice of the
actuaries, in accordance with local funding requirements.
The changes in the present value of the net pension asset in the
period were:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
--------------------------------------------- -------- --------
At beginning of period 224 80
Exchange adjustment (6)
Current service cost (3) (4)
Scheme administration costs (5) (7)
Past service cost, curtailments, settlements 5 (1)
Finance income - retirement benefits 7 2
Contributions by employer 49 105
Actuarial gain 104 55
--------------------------------------------- -------- --------
Net retirement benefit asset 381 224
--------------------------------------------- -------- --------
UK pension schemes
Smiths funded UK pension schemes are subject to a statutory
funding objective, as set out in UK pension legislation. Scheme
trustees need to obtain regular actuarial valuations to assess the
scheme against this funding objective. The trustees and sponsoring
companies need to agree funding plans to improve the position of a
scheme when it is below the acceptable funding level.
The UK Pensions Regulator has extensive powers to protect the
benefits of members, promote good administration and reduce the
risk of situations arising which may require compensation to be
paid from the Pension Protection Fund. These include imposing a
schedule of contributions or the calculation of the technical
provisions, where a trustee and company fail to agree appropriate
calculations.
Smiths Industries Pension Scheme ("SIPS")
This scheme was closed to future accrual effective 1 November
2009. SIPS provides index-linked pension benefits based on final
earnings at date of closure. SIPS is governed by a corporate
trustee (SI Pension Trustees Limited, a wholly owned subsidiary of
Smiths Group plc). The board of trustee directors currently
comprises four company-nominated trustees and four member-nominated
trustees, with an independent chairman selected by Smiths Group
plc. Trustee Directors are responsible for the management,
administration, funding and investment strategy of the scheme.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 31 March 2017, and
experience gains and losses identified during this valuation have
been incorporated into the IAS 19 valuation. Under the funding plan
for SIPS agreed in
UK pension schemes continued
June 2018 Smiths pays cash contributions of GBP1m a month until
the Scheme reaches full funding on a 'gilts + 0%' basis. Under the
governing documentation of the SIPS, any future surplus would be
returnable to Smiths Group plc by refund, assuming gradual
settlement of the liabilities over the lifetime of the scheme.
Subject to clarification of the legal position, SIPS expects to
implement Guaranteed Minimum Pensions equalisation in respect of
members contracted out of the State Earnings Related Pensions
Scheme prior to 6 April 1997, once the government has completed its
consultations and confirmed an approach. It is not yet possible to
reliably quantify the impact of this adjustment.
The duration of SIPS liabilities is around 23 years (FY2017: 23
years) for active deferred members, 22 years (FY2017: 22 years) for
deferred members and 11 years (FY2017: 11 years) for pensioners and
dependants.
On 31 August 2017, SIPS bought in a tranche of the scheme's
pension population with Canada Life for a premium of GBP207m. An
actuarial loss of GBP26m was recognised as a result of this buy-in
agreement.
TI Group Pension Scheme ("TIGPS")
This scheme was closed to future accrual effective 1 November
2009. TIGPS provides index-linked pension benefits based on final
earnings at the date of closure. TIGPS is governed by a corporate
trustee (TI Pension Trustee Limited, an independent company). The
board of trustee directors comprises four company-nominated
trustees and four member-nominated trustees, with an independent
trustee director selected by the Trustee. The Trustee is
responsible for the management, administration, funding and
investment strategy of the scheme.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 5 April 2017. Under
the funding plan for TIGPS agreed in June 2018, Smiths pays cash
contributions of GBP1m a month until the Scheme is fully funded on
a solvency basis. Under the governing documentation of the TIGPS,
any future surplus would be returnable to Smiths Group plc by
refund, assuming gradual settlement of the liabilities over the
lifetime of the scheme.
Subject to clarification of the legal position, TIGPS will
implement Guaranteed Minimum Pensions equalisation in respect of
members contracted out of the State Earnings Related Pensions
Scheme prior to 6 April 1997, once the government has completed its
consultations and confirmed an approach. It is not yet possible to
reliably quantify the impact of this adjustment.
The duration of the TIGPS liabilities is around 24 years
(FY2017: 24 years) for active deferred members, 22 years (FY2017:
22 years) for deferred members and ten years (FY2017: 11 years) for
pensioners and dependants.
US pension plans
The valuations of the principal US pension and post-retirement
healthcare plans were performed using census data at 1 January
2018.
The pension plans were closed with effect from 30 April 2009 and
benefits were calculated as at that date and are not revalued.
Governance of the US pension plans is managed by a Settlor
Committee appointed by Smiths Group Services Corp, a wholly-owned
subsidiary.
The duration of the liabilities for the largest US plan is
around 19 years (FY2017: 19 years) for active deferred members, 19
years (FY2017: 19 years) for deferred members and 12 years (FY2017:
12 years) for pensioners and dependants.
On 26 December 2017, the US funded plans paid $36m to members
who opted to take lump sums in lieu of annuities. A settlement gain
of GBP4m was recognised on this transaction (see note 3).
Risk management
The pensions schemes are exposed to risks that:
- investment returns are below expectations, leaving the scheme
with insufficient assets in future to pay all its pension
obligations;
- members and dependants live longer than expected, increasing
the value of the pensions the scheme has to pay;
- inflation rates are higher than expected, causing amounts
payable under index-linked pensions to be higher than expected;
and
- increased contributions may be required to meet regulatory
funding targets if lower interest rates increase the current value
of liabilities.
These risks are managed separately for each pension scheme.
However Smiths has adopted a common approach of closing defined
benefit schemes to cap members' entitlements and supporting
trustees in adopting investment strategies which aim to match
assets to future obligations, after allowing for the funding
position of the scheme.
TI Group Pension Scheme ("TIGPS")
TIGPS with a mature member profile, and a strong funding
position, has been able to progress its matching strategy to the
point where roughly 50% of liabilities are covered by matching
annuities, eliminating investment return, longevity, inflation and
funding risks.
Smiths Industries Pension Scheme ("SIPS")
The trustees of SIPS have adopted a leveraged liability matching
strategy. The scheme uses repurchase arrangements, total return
swaps, inflation swaps and interest rate swaps to hedge the
interest and inflation risks of the scheme liabilities. Repurchase
agreements exchange government bonds held by the scheme for cash
with an obligation to buy back the asset at a fixed future date and
price. The cash is invested in liability matching assets, reducing
funding risk. A total return swap exchanges the return on a
specified asset (for example an index-linked bond) and an interest
payment (fixed or floating). Contracts are spread across a panel of
banks. To minimise the risk that counterparties fail to settle
obligations, positions are collateralised.
At 31 July 2018, SIPS assets were net of GBP866m (FY2017:
GBP773m) repurchase obligations, and included GBP12m gains (FY2017:
GBP4m gains) on interest rate swaps, GBP3m gains (FY2017: GBP8m
gains) on inflation swaps and GBP2m gain (FY2017: GBP1m gain) on
total return assets. The scheme was holding GBP67m (FY2017: GBP1m)
in liquidity funds to meet potential future obligations to
collateralise repurchase arrangements or swap agreements.
The principal assumptions used in updating the valuations are
set out below:
2018 2018 2018 2017 2017 2017
UK US Other UK US Other
---------------------------------------- ---- ----- ------ ---- ----- ------
Rate of increase in salaries n/a n/a 3.1% n/a n/a 2.8%
Rate of increase for active deferred
members 4.1% n/a n/a 4.1% n/a n/a
Rate of increase in pensions in payment 3.2% n/a 2.5% 3.2% n/a 1.5%
Rate of increase in deferred pensions 3.2% n/a n/a 3.2% n/a 0.1%
Discount rate 2.8% 4.15% 3.4% 2.6% 3.85% 2.6%
Inflation rate 3.2% n/a 3.3% 3.2% n/a 2.2%
Healthcare cost increases 4.7% n/a n/a 4.2% n/a 1.8%
---------------------------------------- ---- ----- ------ ---- ----- ------
The assumptions used in calculating the costs and obligations of
the Group's defined benefit pension plans are set by Smiths after
consultation with independent professionally qualified actuaries.
The assumptions used are estimates chosen from a range of possible
actuarial assumptions which, due to the timescale covered, may not
necessarily occur in practice. For countries outside the UK and USA
assumptions are disclosed as a weighted average.
Discount rate assumptions
The UK schemes use a discount rate based on the yield on the
iBOXX over 15-year AA-rated corporate bond index, adjusted if
necessary to better reflect the shape of the yield curve
considering the Aon Hewitt GBP Select AA curve. For the USA, the
discount rate is based on the Towers Watson cash-flow matching
models and set with reference to Moody's Aa annualised yield, the
Citigroup High Grade Index and the Merrill Lynch 15+ years High
Quality Index.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are
based on the "SAPS S2" All Birth year tables with relevant scaling
factors based on the recent experience of the schemes. The
assumption allows for future improvements in life expectancy in
line with the 2017 CMI projections, with a smoothing factor of 7.5,
blended to a long-term rate of 1.25%. The mortality assumptions
used in the principal US schemes are based on the RP-2014 table
adjusted backward to 2006 with MP-2014 and projected forward using
MP-2017 as of 31 July 2017. The table selected allows for future
mortality improvements and applies an adjustment for job
classification (blue collar versus white collar).
UK schemes US schemes
------------------------ -------------------------------------- --------------------------------------
Male Female Male Female Male Female Male Female
Expected further years 31 July 31 July 31 July 31 July 31 July 31 July 31 July 31 July
of life 2018 2018 2017 2017 2018 2018 2017 2017
------------------------ -------- -------- -------- -------- -------- -------- -------- --------
Member who retires next
year at age 65 22 24 23 24 21 23 21 23
Member, currently 45,
when they retire
in 20 years' time 24 25 24 25 22 24 23 24
------------------------ -------- -------- -------- -------- -------- -------- -------- --------
Sensitivity
Sensitivities in respect of the key assumptions used to measure
the principal pension schemes as at 31 July 2018 are set out below.
These sensitivities show the hypothetical impact of a change in
each of the listed assumptions in isolation, with the exception of
the sensitivity to inflation which incorporates the impact of
certain correlating assumptions. In practice, such assumptions
rarely change in isolation.
Profit Profit
before Increase/ (Increase)/ before Increase/ (Increase)/
tax (decrease) decrease tax (decrease) decrease
for in in for in in
year scheme scheme year scheme scheme
ended assets liabilities ended assets liabilities
31 July 31 July 31 July 31 July 31 July 31 July
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- -------- ----------- ------------ -------- ----------- ------------
Rate of mortality - 1 year increase
in life expectancy (3) 70 (166) (3) 67 (177)
Rate of mortality - 1 year decrease
in life expectancy 3 (71) 166 3 (66) 177
Rate of inflation - 0.25% increase (2) 22 (94) (2) 20 (97)
Discount rate - 0.25% increase 5 (28) 135 4 (27) 151
Market value of scheme assets - 2.5%
increase 2 74 2 79
------------------------------------- -------- ----------- ------------ -------- ----------- ------------
The effect on profit before tax reflects the impact of current
service cost and net interest cost. The value of the scheme assets
is affected by changes in mortality rates, inflation and
discounting because they affect the carrying value of the insurance
assets.
Asset valuation
Liquidity funds, equities and bonds are valued using quoted
market prices in active markets. Exchange traded equity index
futures are valued at market prices.
Total return, interest and inflation swaps are bilateral
agreements between counterparties and do not have observable market
prices. These derivative contracts are valued using observable
market inputs.
Insured liabilities comprise annuity policies matching the
scheme obligation to identified groups of pensioners. These assets
are valued at the actuarial valuation of the corresponding
liability, reflecting this matching relationship. Property is
valued by specialists applying recognised property valuation
methods incorporating current market data on rental yields and
transaction prices.
Retirement-benefit plan assets
31 July 2018 31 July 2017
GBPm GBPm
------------------------------ ------------------------------------- -------------------------------------
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
------------------------------ -------- -------- ---------- ----- -------- -------- ---------- -----
Cash and cash equivalents:
- cash 26 1 1 28 33 1 1 35
- liquidity funds 32 32 271 271
- cash collateral and
liquidity funds held
to support exchange traded
futures 4 4
Equities:
- UK funds 1 1 2 1 3 4
- North American funds
- other regions and global
funds 79 3 82 94 1 95
Government bonds:
- index-linked bonds 1,679 72 4 1,755 1,298 1,298
- fixed-interest bonds 393 81 3 477
Corporate bonds 1,097 166 1,263 1,048 184 1,232
Insured liabilities 1,154 1 1,155 1,050 1 1,051
Property 121 121 133 1 134
Other:
- diversified growth
funds and scheme receivables 544 23 567 407 24 431
- repurchase obligations (866) (866) (773) (773)
------------------------------ -------- -------- ---------- ----- -------- -------- ---------- -----
Total market value 3,867 239 33 4,139 3,959 266 34 4,259
------------------------------ -------- -------- ---------- ----- -------- -------- ---------- -----
UK other investments at 31 July 2018 included GBP192m (FY2017:
GBP184m) of investments in leveraged index linked UK government
bond funds held by TIGPS and GBP19m (FY2017: GBP12m) of interest
and inflation swaps held by SIPS. At 31 July 2017 SIPS also held
GBP70m of investments in diversified growth funds.
The scheme assets do not include any property occupied by, or
other assets used by, the Group. Equities include investments in
broad-based equity indices, some of which hold ordinary equity
shares in Smiths Group plc.
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 July 2018 31 July 2017
GBPm GBPm
-------------------------- --------------------------
US US
SIPS TIGPS schemes SIPS TIGPS schemes
-------------------------------------------- ------- ------- -------- ------- ------- --------
Present value of funded scheme liabilities:
- Active deferred members (57) (56) (88) (81) (92) (101)
- Deferred members (784) (550) (115) (891) (625) (160)
- Pensioners (1,070) (804) (47) (1,053) (809) (31)
-------------------------------------------- ------- ------- -------- ------- ------- --------
Present value of funded scheme liabilities (1,911) (1,410) (250) (2,025) (1,526) (292)
Market value of scheme assets 2,214 1,633 239 2,238 1,703 266
-------------------------------------------- ------- ------- -------- ------- ------- --------
Surplus/(deficit) 303 223 (11) 213 177 (26)
-------------------------------------------- ------- ------- -------- ------- ------- --------
Net retirement benefit obligations
31 July 2018 31 July 2017
GBPm GBPm
------------------------------ --------------------------------------- ---------------------------------------
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Market value of scheme
assets 3,867 239 33 4,139 3,959 266 34 4,259
Present value of funded
scheme liabilities (3,342) (250) (41) (3,633) (3,571) (292) (42) (3,905)
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Surplus/(deficit) 525 (11) (8) 506 388 (26) (8) 354
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Unfunded pension plans (53) (7) (49) (109) (55) (8) (48) (111)
Post-retirement healthcare (5) (9) (2) (16) (6) (11) (2) (19)
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Present value of unfunded
obligations (58) (16) (51) (125) (61) (19) (50) (130)
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Unrecognised asset due
to surplus restriction
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Net pension asset/(liability) 467 (27) (59) 381 327 (45) (58) 224
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Post-retirement assets 526 526 390 390
Post-retirement liabilities (59) (27) (59) (145) (63) (45) (58) (166)
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Net pension asset/(liability) 467 (27) (59) 381 327 (45) (58) 224
------------------------------ -------- -------- ---------- ------- -------- -------- ---------- -------
Where any individual scheme shows a recoverable surplus under
IAS 19, this is disclosed on the balance sheet as a retirement
benefit asset. The IAS 19 surplus of any one scheme is not
available to fund the IAS 19 deficit of another scheme. The
retirement benefit asset disclosed arises from the rights of the
employers to recover the surplus at the end of the life of the
scheme.
Amounts recognised in the consolidated income statement
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------ -------- --------
Amounts charged to operating profit
Current service cost 3 4
Settlement (gain)/loss (4) 1
Scheme administration costs 5 7
------------------------------------------ -------- --------
4 12
------------------------------------------ -------- --------
The operating cost is charged as follows:
Cost of sales 1 1
Sales and distribution costs 1 1
Headline administrative expenses 6 2
Non-headline settlement gains (4) 1
Non-headline administrative expenses 7
------------------------------------------ -------- --------
4 12
------------------------------------------ -------- --------
Amounts credited to finance costs
Net interest income (7) (2)
------------------------------------------ -------- --------
Amounts recognised directly in the consolidated statement of
comprehensive income
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
---------------------------------------------------------------- -------- --------
Actuarial gains/(losses)
Difference between interest credit and return on assets (18) (31)
Experience (losses)/gains on scheme liabilities (10) 22
Actuarial gains arising from changes in demographic assumptions 5 69
Actuarial gains/(losses) arising from changes in financial
assumptions 127 (6)
Movements in surplus restriction 1
---------------------------------------------------------------- -------- --------
104 55
---------------------------------------------------------------- -------- --------
Changes in present value of funded scheme assets
31 July 2018 31 July 2017
GBPm GBPm
----------------------- ------------------------------------- -------------------------------------
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
----------------------- -------- -------- ---------- ----- -------- -------- ---------- -----
At beginning of period 3,959 266 34 4,259 4,034 216 62 4,312
Interest on assets 101 9 1 111 91 9 2 102
Actuarial movement on
scheme assets (6) (12) (1) (19) (15) (14) (2) (31)
Employer contributions 28 12 1 41 27 67 5 99
Assets distributed on
settlement (27) (27) (32) (32)
Scheme administration
costs (3) (1) (4) (5) (2) (7)
Exchange adjustments 1 1 (1) 2 1
Benefits paid (212) (9) (2) (223) (173) (9) (3) (185)
----------------------- -------- -------- ---------- ----- -------- -------- ---------- -----
At end of period 3,867 239 33 4,139 3,959 266 34 4,259
----------------------- -------- -------- ---------- ----- -------- -------- ---------- -----
Changes in present value of funded defined benefit
obligations
31 July 2018 31 July 2017
GBPm GBPm
------------------------- --------------------------------------- ---------------------------------------
UK US Other UK US Other
schemes schemes countries Total schemes schemes countries Total
------------------------- -------- -------- ---------- ------- -------- -------- ---------- -------
At beginning of period (3,571) (292) (42) (3,905) (3,709) (315) (70) (4,094)
Current service cost (1) (1) (2) (2)
Interest on obligations (90) (10) (2) (102) (83) (11) (3) (97)
Actuarial movement on
liabilities 107 13 1 121 48 27 1 76
Liabilities extinguished
on settlement 31 31 31 31
Exchange adjustments (2) (2) (4)
Benefits paid 212 9 2 223 173 9 3 185
------------------------- -------- -------- ---------- ------- -------- -------- ---------- -------
At end of period (3,342) (249) (42) (3,633) (3,571) (292) (42) (3,905)
------------------------- -------- -------- ---------- ------- -------- -------- ---------- -------
Changes in present value of unfunded defined benefit pensions
and post-retirement healthcare plans
Assets Obligations
----------------------------------------------- ------------------ ------------------
Year Year Year Year
ended ended ended ended
31 July 31 July 31 July 31 July
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
----------------------------------------------- -------- -------- -------- --------
At beginning of period (130) (137)
Reclassification of small unfunded obligations
Liabilities transferred on disposals 1
Current service cost (2) (2)
Interest on obligations (3) (3)
Actuarial movement 2 9
Employer contributions 7 6
Exchange adjustments (3)
Benefits paid (7) (6) 7 6
----------------------------------------------- -------- -------- -------- --------
At end of period (125) (130)
----------------------------------------------- -------- -------- -------- --------
Cash contributions
Company contributions to the defined benefit pension plans and
post-retirement healthcare plans for 2018 totalled GBP49m (FY2017:
GBP105m). This comprised regular contributions to funded schemes of
GBP24m (FY2017: GBP24m) to SIPS, GBP5m (FY2017: GBP3m) to TIGPS, a
one-off GBP12m contribution (FY2017: GBP67m) to funded US Schemes
and contributions to other schemes of GBP2m (FY2017: GBP5m, of
which GBP3m of additional contributions were made to fund the
closure of a scheme in Canada). In addition, GBP7m (FY2017: GBP6m)
was spent on providing benefits under unfunded defined benefit
pension and post-retirement healthcare plans.
In 2019 the cash contributions to the Group's schemes are
expected to total about GBP45m, including GBP12m to SIPS and GBP12m
to TIGPS, with the balance relating mainly to the US scheme. Group
contributions in respect of the unfunded schemes and
post-retirement healthcare are expected to be in line with
2018.
9 Employee share schemes
The Group operates share schemes and plans for the benefit of
employees. The nature of the principal schemes and plans, including
general conditions, is set out below:
Long-Term Incentive Plan (LTIP)
The LTIP is a share plan under which an award over a capped
number of shares will vest after the end of the three-year
performance period if performance conditions are met. LTIP awards
are made to selected senior executives, including the executive
directors. Awards made prior to 2016 were made with different
targets for corporate executives and divisional executives. Since
2016 all LTIP awards have had one set of targets.
LTIP performance conditions
Each performance condition has a threshold below which no shares
vest and a maximum performance target at or above which the award
vests in full. For performance between 'threshold' and 'maximum',
awards vest on a straight-line sliding scale. The performance
conditions are assessed separately so performance on one condition
does not affect the vesting of the other elements of the award. To
the extent that the performance targets are not met over the
three-year performance period, awards will lapse. There is no
re-testing of the performance conditions.
Both Group and Divisional LTIP awards have performance
conditions relating to underlying revenue growth, growth in
headline EPS adjusted to exclude tax, ROCE and cash conversion.
Smiths Share Matching Plan (SMP)
Under the scheme participants are required to invest between 25%
and 50% of their post-tax bonus purchasing the Company's shares at
the prevailing market price. At the end of a three-year period, if
the executive is still in office and provided the performance test
is passed, matching shares will be awarded in respect of any
invested shares retained for that period. The number of matching
shares to be awarded is determined by the Remuneration Committee at
the end of the year in which the bonus is earned by reference to
annual bonus, and other corporate financial criteria. The maximum
award will not exceed the value, before tax, of the bonus or salary
invested in shares by the executive.
Vesting of matching shares will occur, and the matching shares
will be released, at the end of the three-year period depending on
the performance of the Group LTIP issued for the same performance
period. The first matching share is awarded if the Group LTIP vests
under any performance condition.
No future awards will be made under the SMP.
Smiths Excellence Plan (SEP)
In September 2016 the Smiths Excellence plan (SEP) was
introduced. The SEP is designed to reinforce value creation over
the medium term by focusing on specific objectives in key areas of
operational performance. Awards vest after two years, depending on
performance on the operational objectives during the first year and
continued employment with the Group. There is no retesting of
performance. However the Remuneration Committee has discretion to
adjust vesting rates if material misstatements in reported
performance are subsequently identified and awards are subject to
clawback provisions in the event of misconduct.
Directors are not eligible to participate in the SEP.
Restricted stock
The restricted stock is used by the Remuneration Committee, as a
part of the recruitment strategy, to make awards in recognition of
incentive arrangements forfeited on leaving a previous employer. If
an award is considered appropriate, the award will take account of
relevant factors including the fair value of awards forfeited, any
performance conditions attached, the likelihood of those conditions
being met and the proportion of the vesting period remaining.
Weighted
average
Long-term exercise
incentive Restricted Other share price
SEP SMP plans stock schemes Total GBP
------------------------------------ ----- ----- ---------- ---------- ----------- ------- ---------
Ordinary shares under option ('000)
31 July 2016 1,439 3,354 273 1,221 6,287 GBP1.83
Granted 817 1,581 58 218 2,674 GBP1.06
Exercised (339) (198) (119) (259) (915) GBP2.77
Lapsed (69) (174) (939) (7) (70) (1,259) GBP0.51
------------------------------------ ----- ----- ---------- ---------- ----------- ------- ---------
31 July 2017 748 926 3,798 205 1,110 6,787 GBP1.64
Granted 857 1,600 283 268 3,008 GBP1.07
Exercised (55) (424) (444) (178) (298) (1,399) GBP2.12
Lapsed (191) (89) (1,043) (6) (118) (1,447) GBP0.86
------------------------------------ ----- ----- ---------- ---------- ----------- ------- ---------
31 July 2018 1,359 413 3,911 304 962 6,949 GBP1.46
------------------------------------ ----- ----- ---------- ---------- ----------- ------- ---------
Options were exercised on an irregular basis during the period.
The average closing share price over the financial year was
1,589.60p (FY2017: 1,499.95p). There has been no change to the
effective option price of any of the outstanding options during the
period.
Weighted Weighted Exercisable Exercisable
average average weighted weighted
remaining remaining average average
Total Total exercise exercise
shares contractual shares contractual Options price Options price
under under
option life option life exercisable for exercisable for
at at at at at options at options
31 July 31 July 31 July 31 July 31 July exercisable 31 July exercisable
2018 2018 2017 2017 2018 at 2017 at
31 July 31 July
Range of exercise prices ('000) (months) ('000) (months) ('000) 2018 ('000) 2017
------------------------- --------- ------------- --------- ------------- ------------- ------------- ------------- -------------
GBP0.00 - GBP2.00 5,986 13 5,677 17
GBP2.01 - GBP6.00
GBP6.01 - GBP10.00 504 17 791 24 42 GBP9.20
GBP10.01 - GBP14.00 459 40 319 32 90 GBP10.96
------------------------- --------- ------------- --------- ------------- ------------- ------------- ------------- -------------
For the purposes of valuing options to arrive at the share-based
payment charge, the Binomial option-pricing model has been used.
The key assumptions used in the models for 2018 and 2017 are
volatility of 25% to 20% (FY2017: 25% to 20%) and dividend yield of
3% (FY2017: 3.50%), based on historical data, for the period
corresponding with the vesting period of the option. These
generated a weighted average fair value for SEP of GBP14.87
(FY2017: GBP12.86), LTIP of GBP13.48 (FY2017: GBP12.68), and
restricted stock of GBP12.73 (FY2017: GBP12.59).
Included within staff costs is an expense arising from
share-based payment transactions of GBP16m (FY2017: GBP15m), of
which GBP14m (FY2017: GBP14m) relates to equity-settled share-based
payment.
10 Intangible assets
Acquired
intangibles Software,
(see patents
Development table and intellectual
Goodwill costs below) property Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- ----------- ------------ ----------------- -----
Cost
At 31 July 2016 1,679 302 477 199 2,657
Exchange adjustments 23 4 (2) 1 26
Business combinations 210 240 6 456
Additions 39 8 47
Disposals (15) (5) (20)
Business disposals (254) (141) (3) (398)
-------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2017 1,658 330 574 206 2,768
Exchange adjustments 1 1 1 1 4
Business combinations (note 26) 46 29 1 76
Additions 29 11 40
Disposals (11) (11)
Business disposals (note 28) (1) (22) (1) (24)
-------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2018 1,704 360 582 207 2,853
-------------------------------- -------- ----------- ------------ ----------------- -----
Amortisation
At 31 July 2016 162 166 438 149 915
Exchange adjustments 5 2 9 1 17
Charge for the year 27 17 18 62
Disposals (15) (5) (20)
Business disposals (79) (140) (2) (221)
-------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2017 88 180 324 161 753
Exchange adjustments 1 1 2
Charge for the year 24 29 18 71
Disposals (11) (11)
Business disposals (note 28) (22) (1) (23)
-------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2018 88 205 331 168 792
-------------------------------- -------- ----------- ------------ ----------------- -----
Net book value at 31 July 2018 1,616 155 251 39 2,061
Net book value at 31 July 2017 1,570 150 250 45 2,015
Net book value at 31 July 2016 1,517 136 39 50 1,742
-------------------------------- -------- ----------- ------------ ----------------- -----
In addition to goodwill, the acquired intangible assets
comprise:
Patents,
licences Total
and Customer acquired
trademarks Technology relationships intangibles
GBPm GBPm GBPm GBPm
-------------------------------- ----------- ---------- -------------- ------------
Cost
At 31 July 2016 85 160 232 477
Exchange adjustments 2 (3) (1) (2)
Business combinations 103 137 240
Business disposals (30) (49) (62) (141)
-------------------------------- ----------- ---------- -------------- ------------
At 31 July 2017 57 211 306 574
Exchange adjustments 1 1
Business combinations (note 26) 2 27 29
Business disposals (note 28) (22) (22)
-------------------------------- ----------- ---------- -------------- ------------
At 31 July 2018 57 214 311 582
-------------------------------- ----------- ---------- -------------- ------------
Amortisation
At 31 July 2016 61 149 228 438
Exchange adjustments 1 2 6 9
Charge for the year 3 8 6 17
Business disposals (29) (49) (62) (140)
-------------------------------- ----------- ---------- -------------- ------------
At 31 July 2017 36 110 178 324
Charge for the year 3 11 15 29
Business disposals (note 28) (22) (22)
-------------------------------- ----------- ---------- -------------- ------------
At 31 July 2018 39 121 171 331
-------------------------------- ----------- ---------- -------------- ------------
Net book value at 31 July 2018 18 93 140 251
Net book value at 31 July 2017 21 101 128 250
Net book value at 31 July 2016 24 11 4 39
-------------------------------- ----------- ---------- -------------- ------------
11 Impairment testing
Goodwill
Goodwill is tested for impairment at least annually or when
there is an indication that the carrying value may not be
recoverable.
Recoverable amount is determined by value in use or fair value
less cost to sell calculations for each group of cash generating
units (CGU) that goodwill is allocated to.
Value in use is calculated as the net present value of the
projected risk-adjusted cash-flows of the CGU. These forecast
cash-flows are based on the 2018 budget, the five-year strategic
plan approved by the Board and detailed divisional strategic
projections, where these have been prepared and approved by the
Board.
Fair value less cost to sell is calculated using available
information on past and expected future profitability, valuation
multiples for comparable quoted companies and similar transactions
(adjusted as required for significant differences) and information
on costs of similar transactions. Fair value less costs to sell
models are used when trading projections in the strategic plan
cannot be adjusted to eliminate the impact of a major
restructuring.
Goodwill is allocated by division as follows:
2018 2017
Number Number
2018 of 2017 of
GBPm CGUs GBPm CGUs
-------------------- ----- ------- ----- -------
John Crane 133 1 111 1
Smiths Medical 563 1 561 1
Smiths Detection 642 1 629 2
Smiths Interconnect 243 2 242 2
Flex-Tek 35 2 27 2
-------------------- ----- ------- ----- -------
1,616 7 1,570 8
-------------------- ----- ------- ----- -------
Smiths Detections acquired Morpho Detection in April 2017 and a
single management team was in place covering Smiths Detection and
Morpho Detection. As discussed and anticipated in the 2017 Annual
Report, the integration of the two businesses during the current
year has been such that they are now considered to be a single CGU
for impairment testing.
Goodwill continued
Impairment testing assumptions
John Crane and Smiths Medical have strong aftermarket and
consumables businesses, with consistent sales trends. Smiths
Detection and Smiths Interconnect have greater sales and margin
volatility due to lower levels of recurring revenue and involvement
in government-funded programmes, particularly defence, and
customer-led technology innovation. The key assumptions used in
value in use calculations are:
- Sales: projected sales are built up with reference to markets
and product categories. They incorporate past performance,
historical growth rates and projections of developments in key
markets;
- Margins: projected margins reflect historical performance and
the impact of all completed projects to improve operational
efficiency and leverage scale. The projections do not include the
impact of future restructuring projects to which the Group is not
yet committed;
- Discount rate: the discount rates have been calculated based
on the Group's weighted average cost of capital and risks specific
to the CGU being tested. The discount rates disclosed incorporate
risk adjustments where the projected sales and margins are affected
by significant delivery risks. Pre-tax rates of 12.0% to 14.9%
(FY2017: 12.2% to 16.9%) have been used for the impairment testing;
and
- Long-term growth rates: as required by IAS 36, growth rates
for the period after the detailed forecasts are based on the
long-term GDP projections of the primary market for the CGU. The
average growth rate used in the testing was 2.0% (FY2017: 2.1%).
These rates do not reflect the long-term assumptions used by the
Group for investment planning.
The assumptions used in the impairment testing of CGUs with
significant goodwill balances are as follows:
Year ended 31 July 2018
----------------------------------------- --------------------------------------------------------------
Smiths Smiths
John Crane Medical Detection Smiths Interconnect
---------- -------- ---------- ----------------------------
Microwave Connectors
Subsystems and Components
----------------------------------------- ---------- -------- ---------- ----------- ---------------
Net book value of goodwill (GBPm) 133 563 642 75 168
----------------------------------------- ---------- -------- ---------- ----------- ---------------
Value Value Value Value Value
Basis of valuation in use in use in use in use in use
----------------------------------------- ---------- -------- ---------- ----------- ---------------
Discount rate 14.0% 12.0% 13.5% 12.4% 14.9%
Period covered by management projections 5 years 5 years 5 years 5 years 5 years
Long-term growth rates 2.2% 1.9% 1.8% 2.0% 2.0%
----------------------------------------- ---------- -------- ---------- ----------- ---------------
The discount rate for Smiths Interconnect Connectors and
Components includes a risk adjustment. The remaining balance of the
goodwill represents smaller individual amounts which have been
allocated to smaller CGUs.
Year ended 31 July 2017
----------------------------- ---------------------------------------------------------------------------
Smith
John Crane Medical Smiths Detection Smiths Interconnect
---------- -------- ----------------------- ----------------------------
Original
Smiths Morpho Microwave Connectors
Detection Detection Subsystems and Components
----------------------------- ---------- -------- ---------- ----------- ----------- ---------------
Net book value of goodwill
(GBPm) 111 561 429 200 75 167
----------------------------- ---------- -------- ---------- ----------- ----------- ---------------
Fair value
Value Value Value less costs Value Value
Basis of valuation in use in use in use to sell in use in use
----------------------------- ---------- -------- ---------- ----------- ----------- ---------------
Discount rate 14.9% 12.2% 14.1% n/a 12.2% 16.9%
Period covered by management
projections 5 years 5 years 5 years 1 year 5 years 5 years
Long-term growth rates 2.2% 2.1% 2.0% n/a 2.2% 2.1%
----------------------------- ---------- -------- ---------- ----------- ----------- ---------------
Sensitivity analysis
Smiths Interconnect - Microwave Subsystems business
Microwave Subsystems' value in use exceeds its carrying value by
GBP11m. Sensitivity analysis performed around the base case
assumptions has indicated that for Microwave Subsystems, the
following changes in assumptions (in isolation), would cause the
value in use to fall below the carrying value:
Year ended 31 Year ended 31
July 2018 July 2017
Change required Change required
to trigger impairment to trigger impairment
----------------------------------------------------- ---------------------- ----------------------
Forecast earnings before interest, tax, depreciation
and amortisation -11.3% -33.3%
Discount rate +8.2% +26.5%
----------------------------------------------------- ---------------------- ----------------------
Forecast earnings before interest, tax, depreciation and
amortisation have been projected using:
- expected future sales based on the strategic plan, which was
constructed at a market level with input from key account managers,
product line managers, business development and sales teams. An
assessment of the market and existing contracts / programmes was
made to produce the sales forecast; and
- current cost structure and production capacity. The
projections do not include the impact of future restructuring
projects to which the Group is not yet committed.
Other CGUs
For the other CGUs, sensitivity analysis performed around the
base case assumptions has indicated that no reasonable changes in
key assumptions would cause the carrying amount of any of the CGUs
to exceed their respective recoverable amounts.
Goodwill impairment
No impairment charges have been incurred (FY2017: GBPnil).
Revised CGU structure for year ended 31 July 2019 - Impairment
testing
Following a re-organisation and rationalisation of management
and reporting structures within the Interconnect and Flex-Tek
divisions, the CGU structures used for the testing of goodwill has
been reassessed. Given the commonality of reporting, policies,
leadership and intra-divisional trading relationships, it is
considered that the Interconnect and Flex-Tek divisions are now
single CGUs for impairment testing.
Impairment testing and sensitivity analysis has been undertaken
for the revised Interconnect CGU and Flex-Tek CGU structures, which
have indicated that no reasonable change in key assumptions would
cause an impairment of goodwill in either CGU. The assumptions used
in this impairment testing were as follows:
- Interconnect: Discount rate: 14.9%; Period covered by
management projections 5 years; Long-term growth rates 2.0%
- Flex-Tek: Discount rate: 12.1%; Period covered by management
projections 5 years; Long-term growth rates 2.2%
Other intangible assets
The Group has no indefinite life intangible assets other than
goodwill. During the year impairment tests were carried out for
development projects which have not yet started to be amortised and
acquired intangibles where there were indications of impairment.
Value in use calculations were used to determine the recoverable
values of these assets.
No impairment charges have been incurred (FY2017: GBPnil).
12 Property, plant and equipment
Fixtures,
fittings,
Land and Plant and tools and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
-------------------------------- ---------- ---------- ---------- -----
Cost or valuation
At 31 July 2016 223 631 220 1,074
Exchange adjustments 5 10 5 20
Business combinations 7 1 8
Additions 6 44 12 62
Disposals (24) (42) (24) (90)
Business disposals (6) (15) (5) (26)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2017 204 635 209 1,048
Exchange adjustments 1 (1)
Business combinations (note 26) 2 1 3
Additions 8 47 13 68
Disposals (6) (28) (24) (58)
Business disposals (note 28) (1) (19) (3) (23)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2018 207 637 194 1,038
-------------------------------- ---------- ---------- ---------- -----
Depreciation
At 31 July 2016 119 466 174 759
Exchange adjustments 2 8 4 14
Charge for the year 9 34 14 57
Disposals (18) (36) (23) (77)
Business disposals (5) (11) (4) (20)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2017 107 461 165 733
Exchange adjustments 1 (1)
Charge for the year 7 35 13 55
Disposals (6) (24) (23) (53)
Business disposals (note 28) (1) (14) (2) (17)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2018 107 459 152 718
-------------------------------- ---------- ---------- ---------- -----
Net book value at 31 July 2018 100 178 42 320
Net book value at 31 July 2017 97 174 44 315
Net book value at 31 July 2016 104 165 46 315
-------------------------------- ---------- ---------- ---------- -----
13 Inventories
31 July 31 July
2018 2017
GBPm GBPm
------------------------------ ------- -------
Inventories comprise
Raw materials and consumables 149 148
Work in progress 94 86
Finished goods 223 218
------------------------------ ------- -------
466 452
------------------------------ ------- -------
The Group consumed GBP1,424m (FY2017: GBP1,470m) of inventories
during the period. In the year to 31 July 2018, GBP13m (FY2017:
GBP17m) was charged for the write-down of inventory and GBP7m
(FY2017: GBP6m) was released from inventory provisions no longer
required.
Inventory provisioning
31 July 2018 31 July 2017
GBPm GBPm
------------------------------------------------------ ------------ ------------
Gross inventory carried at full value 391 414
Gross value of inventory partly or fully provided for 129 93
------------------------------------------------------ ------------ ------------
520 507
Inventory provision (54) (55)
------------------------------------------------------ ------------ ------------
Inventory after provisions 466 452
------------------------------------------------------ ------------ ------------
14 Trade and other receivables
31 July 31 July
2018 2017
GBPm GBPm
------------------ ------- -------
Non-current
Trade receivables 45 41
Accrued income 1 2
Other receivables 11 14
------------------ ------- -------
57 57
------------------ ------- -------
Current
Trade receivables 656 642
Accrued income 11 11
Prepayments 31 28
Other receivables 35 41
------------------ ------- -------
733 722
------------------ ------- -------
Trade receivables include balances not yet due of GBP84m
(FY2017: GBP75m) relating to multi-year Smiths Detection contracts,
where revenue recognition does not align with the agreed payment
schedule. The Group also has cash received of GBP87m (FY2017:
GBP78m) deferred in trade and other payables relating to Smiths
Detection contracts.
Trade receivables do not carry interest. Management considers
that the carrying value of trade and other receivables approximates
to the fair value. Trade and other receivables, including
prepayments, accrued income and other receivables qualifying as
financial instruments are classified as 'loans and receivables'.
The maximum credit exposure arising from these financial assets is
GBP688m (FY2017: GBP720m).
Trade receivables are disclosed net of provisions for bad and
doubtful debts. The provisions for bad and doubtful debts are based
on specific risk assessment and reference to past default
experience.
Credit risk is managed separately for each customer and, where
appropriate, a credit limit is set for the customer based on
previous experience of the customer and third party credit ratings.
The Group has no significant concentration of credit risk, with
exposure spread over a large number of customers. The largest
single customer is the US Federal Government, representing less
than 5% (FY2017: less than 5%) of Group revenue.
Ageing of trade receivables
31 July 2018 31 July 2017
GBPm GBPm
---------------------------------------------------------------------------- ------------ ------------
Trade receivables which are not impaired and not yet due 566 539
Trade receivables which are not impaired and less than three months overdue 97 104
Trade receivables which are not impaired and more than three months overdue 27 30
Gross value of partially and fully provided receivables 43 43
---------------------------------------------------------------------------- ------------ ------------
733 716
Provision for bad and doubtful debts (32) (33)
---------------------------------------------------------------------------- ------------ ------------
Trade receivables 701 683
---------------------------------------------------------------------------- ------------ ------------
15 Trade and other payables
31 July 31 July
2018 2017
GBPm GBPm
----------------------------------------- ------- -------
Non-current
Other payables 27 26
----------------------------------------- ------- -------
Current
Trade payables 244 202
Other payables 23 17
Other taxation and social security costs 22 27
Accruals 225 247
Deferred income 92 83
----------------------------------------- ------- -------
606 576
----------------------------------------- ------- -------
Trade and other payables, including accrued expenses and other
payables qualifying as financial instruments, are accounted for at
amortised cost and are categorised as other financial
liabilities.
16 Financial assets
At 31 July 2018 GBP13m (FY2017: GBP11m) was held on deposit with
banks as security for liabilities or letters of credit.
The remaining balance of financial assets relate to the Group's
investments in early stage businesses that are developing or
commercialising related technology.
17 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments relating
to hedge accounting.
31 July 31 July
2018 2017
GBPm GBPm
--------------------------------------- ------- -------
Cash and cash equivalents
Net cash and deposits 717 782
--------------------------------------- ------- -------
Short-term borrowings
Bank overdrafts (1)
$175m 7.37% US$ Private placement 2018 (133)
$250m 7.20% US$ Guaranteed notes 2019 (190)
Bank and other loans (1) (1)
Interest accrual (12) (16)
--------------------------------------- ------- -------
(203) (151)
--------------------------------------- ------- -------
Long-term borrowings
$250m 7.20% US$ Guaranteed notes 2019 (189)
$400m 3.625% US$ Guaranteed notes 2022 (298) (301)
EUR600m 1.25% Eurobond 2023 (533) (533)
EUR650m 2.00% Eurobond 2027 (575) (574)
Bank and other loans (1) (1)
(1,407) (1,598)
--------------------------------------- ------- -------
Borrowings (1,610) (1,749)
--------------------------------------- ------- -------
Net debt (893) (967)
--------------------------------------- ------- -------
Cash and cash equivalents include highly liquid investments with
maturities of three months or less.
Borrowings are accounted for at amortised cost and are
categorised as other financial liabilities. See note 18 for a
maturity analysis of borrowings.
Interest of GBP42m (FY2017: GBP45m) was charged to the
consolidated income statement in this period in respect of public
bonds.
Secured loans
Loans amounting to GBP2m (FY2017: GBP2m) were secured on plant
and equipment with a book value of GBP3m (FY2017: GBP3m).
Net cash and cash equivalents
31 July 31 July
2018 2017
GBPm GBPm
------------------------------ ------- -------
Cash at bank and in hand 287 226
Short-term deposits 430 556
------------------------------ ------- -------
Cash and cash equivalents 717 782
Bank overdrafts (1)
------------------------------ ------- -------
Net cash and cash equivalents 717 781
------------------------------ ------- -------
Netting
Cash and overdraft balances in interest compensation cash
pooling systems are reported gross on the balance sheet. The cash
pooling agreements incorporate a legally enforceable right of net
settlement. However, as there is no intention to settle the
balances net, these arrangements do not qualify for net
presentation. At 31 July 2018 the total value of overdrafts on
accounts in interest compensation cash pooling systems was GBPnil
(FY2017: GBPnil). The balances held in zero balancing cash pooling
arrangements have daily settlement of balances, therefore netting
is not relevant.
Movements in net debt
Net cash
and Other
cash short-term Long-term
equivalents borrowings borrowings Net debt
GBPm GBPm GBPm GBPm
----------------------------------------------- ------------ ----------- ----------- --------
At 31 July 2017 781 (150) (1,598) (967)
Foreign exchange gains and losses (8) (2) 3 (7)
Net cash outflow (56) (1) (57)
Repayment of borrowings 135 135
Capitalisation, interest accruals and unwind
of capitalised fees 4 (2) 2
Fair value movement from interest rate hedging 1 1
Change in maturity analysis (190) 190
----------------------------------------------- ------------ ----------- ----------- --------
At 31 July 2018 717 (203) (1,407) (893)
----------------------------------------------- ------------ ----------- ----------- --------
Change of control
The Company has in place credit facility agreements under which
a change in control would trigger prepayment clauses. The Company
also has bonds in issue, the terms of which would allow bondholders
to exercise put options and require the Company to buy back the
bonds at their principal amount plus interest if a rating downgrade
occurs at the same time as a change of control takes effect.
18 Financial risk management
The Group's international operations and debt financing expose
it to financial risks which include the effects of changes in
foreign exchange rates, changes in debt market prices, interest
rates, credit risks and liquidity risks. The management of
operational credit risk is discussed in note 14.
Treasury Risk Management Policy
The Board maintains a Treasury Risk Management Policy, which
governs the treasury operations of the Group and its subsidiary
companies and the consolidated financial risk profile to be
maintained. A report on treasury activities, financial metrics and
compliance with the Policy is prepared monthly. This is circulated
to the Chief Financial Officer each month and to the Audit
Committee on a semi-annual basis.
The Policy maintains a treasury control framework within which
counterparty risk, financing and debt strategy, cash and liquidity,
interest rate risk and currency translation management are reserved
for Group Treasury, while currency transaction management is
devolved to operating divisions.
Centrally directed cash management systems exist globally to
manage overall liquid resources efficiently across the divisions.
The Group uses financial instruments to raise financing for its
global operations, to manage related interest rate and currency
financial risk and to hedge transaction risk within subsidiary
companies.
The Group does not speculate in financial instruments. All
financial instruments hedge existing business exposures and all are
recognised on the balance sheet.
The Policy defines four treasury risk components and for each
component a set of financial metrics to be measured and reported
monthly compared against pre-agreed objectives.
Credit quality
The Group's strategy is to maintain a solid investment-grade
rating to ensure access to the widest possible sources of financing
at the right time and to minimise the resulting cost of debt
capital. The credit ratings at the end of July 2018 were BBB+ /
Baa2 (both stable) from Standard & Poor's and Moody's
respectively. An essential element of an investment-grade rating is
consistent and robust cash-flow metrics. The Group's objective is
to maintain a net debt/headline EBITDA ratio at two times or lower
over the medium term. Capital management is discussed in more
detail in note 25.
Debt and interest rate
The Group's risk management objectives are to ensure that over
time funding drawn from the bank market is less than 30% of net
debt, the average maturity profile of gross debt is at or greater
than four years and over 55% of gross debt is at fixed rates. At 31
July 2018, these measures were 0.1% (FY2017: 0%); 5.5 years
(FY2017: 5.9 years) and 55% (FY2017: 57%).
The Group remains in full compliance with all covenants within
its external debt agreements. Interest rate risk management is
discussed in note 18(b).
Liquidity management
The Group's objective is to ensure that at any time undrawn
committed facilities, net of short-term overdraft financing, are
greater than GBP200m and that committed facilities have at least 18
months to run until maturity. At 31 July 2018, these measures were
GBP609m (FY2017: GBP607m) and 51 months (FY2017: 43 months). At 31
July 2018, cash resources were GBP717m (FY2017: GBP782m). Liquidity
risk management is discussed in note 18(d).
The Group aims to ensure that cash resources are placed on
deposit with highly-rated relationship bank counterparties at
short-notice availability. Financial credit risk management is
discussed in note 18(c).
Currency management
The Group is an international business with the majority of its
net assets denominated in foreign currency. We protect our balance
sheet and reserves from adverse foreign exchange movements by
financing our foreign currency assets where appropriate in the same
currency and targets that, where the value of net asset exposure is
over GBP30m equivalent, over 50% of those assets are matched with
the same currency liability. The Group's objective for managing
transaction currency exposure is to reduce medium-term volatility
to cash-flow, margins and earnings. Foreign exchange risk
management is discussed in note 18(a) below.
(a) Foreign exchange risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from
sales or purchases by businesses in currencies other than their
functional currency. It is Group policy that, when the net foreign
exchange exposure to known future sales and purchases is material,
this exposure is hedged using forward foreign exchange contracts.
The net exposure is calculated by adjusting the expected cash-flow
for payments or receipts in the same currency linked to the sale or
purchase. This policy minimises the risk that the profits generated
from the transaction will be affected by foreign exchange movements
which occur after the price has been determined. Hedge accounting
documentation and effectiveness testing are only undertaken if it
is cost effective.
The following table shows the currency of financial instruments.
It excludes loans and derivatives designated as net investment
hedges.
At 31 July 2018
-------------------------------------------- ------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- ----- ----- ----- -----
Financial assets and liabilities
Financial instruments included in trade
and other receivables 42 375 106 165 688
Financial instruments included in trade
and other payables (49) (237) (77) (78) (441)
Cash and cash equivalents 53 444 58 162 717
Cross currency swaps (not hedge accounted) (242) 267 25
Borrowings not designated as net investment
hedges (1) (2) (271) (2) (276)
-------------------------------------------- -------- ----- ----- ----- -----
45 338 83 247 713
Exclude balances held in operations with
the same functional currency (40) (195) (63) (227) (525)
Exposure arising from intra-group loans (307) (65) (38) (410)
Forward foreign exchange contracts (100) (6) 41 65
-------------------------------------------- -------- ----- ----- ----- -----
(95) (170) (4) 47 (222)
-------------------------------------------- -------- ----- ----- ----- -----
At 31 July 2017
-------------------------------------------- ------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- ----- ----- ----- -----
Financial assets and liabilities
Financial instruments included in trade
and other receivables 55 351 143 171 720
Financial instruments included in trade
and other payables (57) (214) (69) (72) (412)
Cash and cash equivalents 5 512 80 184 781
Borrowings not designated as net investment
hedges 1 (12) (275) (2) (288)
-------------------------------------------- -------- ----- ----- ----- -----
4 637 (121) 281 801
Exclude balances held in operations with
the same functional currency (5) (220) (102) (195) (522)
Exposure arising from intra-group loans (352) (85) (83) (520)
Impact of fair value hedging of exchange
exposure (269) 269
Forward foreign exchange contracts (88) 19 50 19
-------------------------------------------- -------- ----- ----- ----- -----
(358) 84 11 22 (241)
-------------------------------------------- -------- ----- ----- ----- -----
Financial instruments included in trade and other receivables
comprise trade receivables, accrued income and other receivables
which qualify as financial instruments. Similarly, financial
instruments included in trade and other payables comprise trade
payables, accrued expenses and other payables that qualify as
financial instruments.
Based on the assets and liabilities held at the year-end, if the
specified currencies were to strengthen 10% while all other market
rates remained constant, the change in the fair value of financial
instruments not designated as net investment hedges would have the
following effect:
Impact Impact
on profit Gain/(loss) on profit Gain/(loss)
for recognised for recognised
the year in reserves the year in reserves
31 July 31 July 31 July 31 July
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
US dollar 19 (4) (5) (5)
Euro (1) 2 (3) 2
Sterling (32) (6) 1 (1)
---------- ---------- ------------ ---------- ------------
These sensitivities were calculated before adjusting for tax and
exclude the effect of quasi-equity intra-group loans. During the
current year cross-currency swaps related to the 2027 Eurobond were
de-designated from net investment hedge relationships, increasing
the notional US Dollar exposure at 31 July 2018 by $318m. This
additional notional US Dollar exposure is the driver of GBP24m of
the US dollar and Sterling profit sensitivity in the table above.
These swaps have since been re-designated as net investment
hedges.
Cash-flow hedging
The Group uses foreign currency contracts to hedge future
foreign currency sales and purchases. At 31 July 2018 contracts
with a nominal value of GBP385m (FY2017: GBP407m) were designated
as hedging instruments. In addition, the Group had outstanding
foreign currency contracts with a nominal value of GBP275m (FY2017:
GBP243m) which were being used to manage transactional foreign
exchange exposures, but were not accounted for as cash-flow hedges.
The fair value of the contracts is disclosed in note 19.
The majority of hedged transactions will be recognised in the
consolidated income statement in the same period that the cash
flows are expected to occur, with the only differences arising
because of normal commercial credit terms on sales and purchases.
Of the foreign exchange contracts designated as hedging instruments
81% are for periods of 12 months or less (FY2017: 86%).
The movements in the cash-flow hedge reserve during the period
are summarised in the table below:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
--------------------------------------------------------- -------- --------
Brought forward cash-flow hedge reserve at start of year 1 (7)
Gains on effective cash-flow hedges recognised in equity 2 3
Amounts removed from the hedge reserve and recognised in
the following lines on the income statement:
- revenue 1 9
- cost of sales (2) (4)
--------------------------------------------------------- -------- --------
Carried forward cash-flow hedge reserve at end of year 2 1
--------------------------------------------------------- -------- --------
Translational currency exposure
The Group has significant investments in overseas operations,
particularly in the United States and Europe. As a result, the
sterling value of the Group's balance sheet can be significantly
affected by movements in exchange rates. The Group seeks to
mitigate the effect of these translational currency exposures by
matching the net investment in overseas operations with borrowings
denominated in their functional currencies, except where
significant adverse interest differentials or other factors would
render the cost of such hedging activity uneconomic. This is
achieved by borrowing primarily in the relevant currency or in some
cases indirectly using forward foreign exchange contracts and
cross-currency swaps.
Net investment hedges
The table below sets out the currency of loans and swap
contracts designated as net investment hedges:
At 31 July 2018
--------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- ----- ----- ----- -------
Loans designated as net investment hedges (491) (836) (1,327)
Cross-currency swap contracts (329) 357 28
Currency swap contracts 110 (110)
------------------------------------------ -------- ----- ----- ----- -------
110 (820) (479) (110) (1,299)
------------------------------------------ -------- ----- ----- ----- -------
At 31 July 2017
------------------------------------------ ----------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- ------- ----- ----- -------
Loans designated as net investment hedges (621) (840) (1,461)
Cross-currency swap contracts 254 (568) 359 45
Currency swap contracts 109 (109)
------------------------------------------ -------- ------- ----- ----- -------
363 (1,189) (481) (109) (1,416)
------------------------------------------ -------- ------- ----- ----- -------
At 31 July 2018 swap contracts hedged the Group's exposure to
Canadian dollars, Japanese yen and Chinese renminbi (31 July 2017:
Canadian dollars, Japanese yen and Chinese renminbi). All the
currency swap contracts designated as net investment hedges are
current (FY2017: current). The cross-currency swap contracts are
non-current.
Swaps generating GBP329m of the US dollar exposure (FY2017:
GBP327m) will mature in April 2023 and swaps generating GBP241m of
the US dollar exposure during 2017, maturing in February 2027, have
been de-designated during the current year.
The gains and losses that have been deferred in the net
investment hedge reserve, and recycled in the period, are shown in
the table below:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------------------------ -------- --------
Brought forward net investment hedge reserve at start of
year (291) (294)
Amounts removed from the hedge reserve and recognised in
the income statement (5) 20
Amounts deferred in the period on effective net investment
hedges (8) (17)
------------------------------------------------------------ -------- --------
Carried forward net investment hedge reserve at end of year (304) (291)
------------------------------------------------------------ -------- --------
The fair values of these net investment hedges are subject to
exchange rate movements. Based on the hedging instruments in place
at the year-end, if the specified currencies were to strengthen 10%
while all other market rates remained constant, it would have the
following effect:
Loss Loss
recognised recognised
in hedge in hedge
reserve reserve
31 July 31 July
2018 2017
GBPm GBPm
---------- ------------ -----------
US dollar 91 132
Euro 53 53
---------- ------------ -----------
These movements would be fully offset by an opposite movement on
the retranslation of the net assets of the overseas subsidiaries.
These sensitivities were calculated before adjusting for tax.
(b) Interest rate risk
The Group operates an interest rate policy designed to optimise
interest cost and reduce volatility in reported earnings. The
Group's current policy is to require interest rates to be fixed for
greater than 55% of the level of gross debt. This is achieved
through fixed rate borrowings and interest rate swaps. At 31 July
2018 55% (FY2017: 57%) of the Group's gross borrowings were at
fixed interest rates, after adjusting for interest rate swaps and
the impact of short maturity derivatives designated as net
investment hedges. The Group monitors its fixed rate risk profile
against both gross and net debt. For medium-term planning, it now
focuses on gross debt to eliminate the fluctuations of variable
cash levels over the cycle.
The weighted average interest rate on borrowings and
cross-currency swaps at 31 July 2018, after interest rate swaps, is
3.69% (FY2017: 3.52%).
Interest rate profile of financial assets and liabilities and
the fair value of borrowings
The following table shows the interest rate risk exposure of
investments, cash and borrowings, with the borrowings adjusted for
the impact of interest rate hedging. The other financial assets and
liabilities do not earn or bear interest and for all financial
instruments except for borrowings the carrying value is not
materially different from their fair value.
Available Cash Fair Available Cash Fair
for and value for and value
sale cash of sale cash of
investments equivalents Borrowings borrowings investments equivalents Borrowings borrowings
31 July 31 July 31 July 31 July 31 July 31 July 31 July 31 July
2018 2018 2018 2018 2017 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Fixed interest
Less than one year (190) (196) (134) (140)
Between one and five
years (365) (368) (190) (206)
Greater than five
years (307) (314) (672) (693)
--------------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total fixed interest
financial
liabilities (862) (878) (996) (1,039)
Floating rate
interest financial
assets/(liabilities) 4 657 (748) (758) 6 711 (753) (753)
--------------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total
interest-bearing
financial
assets/(liabilities) 4 657 (1,610) (1,636) 6 711 (1,749) (1,792)
Non-interest-bearing
assets
in the same category 14 60 15 71
--------------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total 18 717 (1,610) (1,636) 21 782 (1,749) (1,792)
--------------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Interest rate hedging
At 31 July 2018 and 31 July 2017 the Group had designated the
following hedges against variability in the fair value of
borrowings arising from fluctuations in base rates:
- US$150m interest rate swap which matures on 12 October 2022
partially hedging the US$ 2022 Guaranteed notes; and
- the fixed/floating element of EUR400m of EUR/US$ interest rate
swaps which mature on 28 April 2023 partially hedging the EUR 2023
Eurobond.
At 31 July 2017 the Group had designated the following hedge
against variability in the fair value of borrowings arising from
fluctuations in base rates and exchange rates:
- the fixed/floating and EUR exchange exposure of EUR300m of
EUR/US$ interest rate swaps which mature on 23 February 2027
partially hedging the EUR 2027 Eurobond.
The above hedge was de-designated in the year to 31 July
2018.
The fair values of the hedging instruments are disclosed in note
19. The effect of the swaps is to convert GBP471m (FY2017: GBP741m)
debt from fixed rate to floating rate.
Sensitivity of interest charges to interest rate movements
The Group has exposure to sterling, US dollar and euro interest
rates. However the Group does not have a significant exposure to
interest rate movements for any individual currency. Based on the
composition of net debt and investments at 31 July 2018, and taking
into consideration all fixed rate borrowings and interest rate
swaps in place, a one percentage point (100 basis points) change in
average floating interest rates for all three currencies would have
less than GBP3m impact (FY2017: GBP1m impact) on the Group's profit
before tax.
(c) Financial credit risk
The Group is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but
does not currently expect any counterparties to fail to meet their
obligations. Credit risk is mitigated by the Board-approved policy
of only placing cash deposits with highly rated relationship bank
counterparties within counterparty limits established by reference
to their Standard & Poor's long-term debt rating. In the normal
course of business, the Group operates cash pooling systems, where
a legal right of set-off applies.
The maximum credit risk exposure in the event of other parties
failing to perform their obligations under financial assets,
excluding trade and other receivables and derivatives, totals
GBP735m at 31 July 2018 (FY2017: GBP803m).
31 July 31 July
2018 2017
GBPm GBPm
------------------------------------------------ ------- -------
Cash in AAA liquidity funds 200 376
Cash at banks with at least a AA- credit rating 306 226
Cash at banks with a A+ credit rating 74 98
Cash at other banks 137 82
Investments in bank deposits 13 11
Other investments 5 10
------------------------------------------------ ------- -------
735 803
------------------------------------------------ ------- -------
At 31 July 2018 the maximum exposure with a single bank for
deposits and cash is GBP127m (FY2017: GBP126m), whilst the maximum
mark to market exposure with a single bank for derivatives is
GBP17m (FY2017: GBP20m). Both these banks have AA- credit ratings
(FY2017: Both AA-).
(d) Liquidity risk
Borrowing facilities
The Board policy specifies the maintenance of unused committed
credit facilities of at least GBP200m at all times to ensure it has
sufficient available funds for operations and planned development,
which is provided by a multi-currency revolving credit
facility.
Smiths has a $800m Revolving Credit Facility that matures on 1
November 2022. At the balance sheet date, the Group had the
following undrawn credit facilities:
31 July 31 July
2018 2017
GBPm GBPm
----------------------------------- ------- -------
Expiring within one year
Expiring between one and two years
Expiring after more than two years 609 607
----------------------------------- ------- -------
609 607
----------------------------------- ------- -------
Cash deposits
As at 31 July 2018, GBP430m (FY2017: GBP556m) of cash and cash
equivalents was on deposit with various banks of which GBP71m
(FY2017: GBP83m) was on deposit with UK banks, GBP200m (FY2017:
GBP375m) was in liquidity funds and GBP13m (FY2017: GBP11m) of
investments comprised bank deposits held to secure liabilities and
letters of credit.
Gross contractual cash-flows for borrowings
Contractual Total Contractual Total
Fair Fair
Borrowings value interest contractual Borrowings value interest contractual
(Note (Note
17) adjustments payments cash-flows 17) adjustments payments cash-flows
31 July 31 July 31 July 31 July 31 July 31 July 31 July 31 July
2018 2018 2018 2018 2017 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ---------- ------------- ----------- ------------- ---------- ------------- ----------- -------------
Less
than
one
year (203) (43) (246) (151) 1 (38) (188)
Between
one and
two
years (29) (29) (190) (43) (233)
Between
two and
three
years (29) (29) (29) (29)
Between
three
and
four
years (29) (29) (29) (29)
Between
four
and
five
years (832) (5) (24) (861) (29) (29)
Greater
than
five
years (575) (46) (621) (1,408) (1) (71) (1,480)
-------- ---------- ------------- ----------- ------------- ---------- ------------- ----------- -------------
Total (1,610) (5) (200) (1,815) (1,749) (239) (1,988)
-------- ---------- ------------- ----------- ------------- ---------- ------------- ----------- -------------
The figures presented in the borrowings column include the
non-cash adjustments which are highlighted in the adjacent
column.
The contractual interest reported for borrowings is before the
effect of interest rate swaps.
Gross contractual cash-flows for derivative financial
instruments
Receipts Payments Net cash-flow Receipts Payments Net cash-flow
31 July 31 July 31 July 31 July 31 July 31 July
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- -------- -------- ------------- -------- -------- -------------
Assets
Less than one year 379 (386) (7) 315 (310) 5
Greater than one year 726 (657) 69 710 (642) 68
Liabilities
Less than one year 319 (324) (5) 279 (287) (8)
Greater than one year 36 (42) (6) 51 (54) (3)
---------------------- -------- -------- ------------- -------- -------- -------------
Total 1,460 (1,409) 51 1,355 (1,293) 62
---------------------- -------- -------- ------------- -------- -------- -------------
This table presents the undiscounted future contractual
cash-flows for all derivative financial instruments. For this
disclosure, cash-flows in foreign currencies are translated using
the spot rates at the balance sheet date. The fair values of these
financial instruments are presented in note 20.
Gross contractual cash-flows for other financial liabilities
The contractual cash-flows for financial liabilities included in
trade and other payables are: GBP432m (FY2017: GBP400m) due in less
than one year, GBP6m (FY2017: GBP8m) due between one and five years
and GBP3m (FY2017: GBP4m) due after more than five years.
19 Derivative financial instruments
The tables below set out the nominal amount and fair value of
derivative contracts held by the Group, identifying the derivative
contracts which qualify for hedge accounting treatment:
At 31 July 2018
---------------------------------------------------- ------------------------------------------
Fair value
--------------------------
Contract
or underlying
nominal
amount Assets Liabilities Net
GBPm GBPm GBPm GBPm
---------------------------------------------------- -------------- ------ ----------- -----
Foreign exchange contracts (cash-flow hedges) 385 6 (4) 2
Foreign exchange contracts (not hedge accounted) 275 2 2
---------------------------------------------------- -------------- ------ ----------- -----
Total foreign exchange contracts 660 8 (4) 4
---------------------------------------------------- -------------- ------ ----------- -----
Currency swaps (net investment hedges) 110
---------------------------------------------------- -------------- ------ ----------- -----
Cross currency swaps (fair value and net investment
hedges) 328 28 28
Cross currency swaps (not hedge accounted) 242 21 21
Interest rate swaps (fair value hedges) 114 (6) (6)
---------------------------------------------------- -------------- ------ ----------- -----
Total financial derivatives 1,454 57 (10) 47
---------------------------------------------------- -------------- ------ ----------- -----
Balance sheet entries
Non-current 760 50 (6) 44
Current 694 7 (4) 3
---------------------------------------------------- -------------- ------ ----------- -----
Total financial derivatives 1,454 57 (10) 47
---------------------------------------------------- -------------- ------ ----------- -----
At 31 July 2017
---------------------------------------------------- ------------------------------------------
Fair value
Contract
or underlying
nominal
amount Assets Liabilities Net
GBPm GBPm GBPm GBPm
---------------------------------------------------- -------------- ------ ----------- -----
Foreign exchange contracts (cash-flow hedges) 407 11 (10) 1
Foreign exchange contracts (not hedge accounted) 243 2 (1) 1
---------------------------------------------------- -------------- ------ ----------- -----
Total foreign exchange contracts 650 13 (11) 2
---------------------------------------------------- -------------- ------ ----------- -----
Currency swaps (net investment hedges) 109
---------------------------------------------------- -------------- ------ ----------- -----
Cross currency swaps (fair value and net investment
hedges) 569 56 56
Interest rate swaps (fair value hedges) 113 (1) (1)
---------------------------------------------------- -------------- ------ ----------- -----
Total financial derivatives 1,441 69 (12) 57
---------------------------------------------------- -------------- ------ ----------- -----
Balance sheet entries
Non-current 745 56 (2) 54
Current 696 13 (10) 3
---------------------------------------------------- -------------- ------ ----------- -----
Total financial derivatives 1,441 69 (12) 57
---------------------------------------------------- -------------- ------ ----------- -----
Currency swaps not hedge accounted
These contracts comprise derivatives which were previously part
of the net investment hedging programme and matching contracts to
eliminate this exposure. There is no further net exposure arising
from these contracts.
Accounting for other derivative contracts
Any foreign exchange contracts which are not formally designated
as hedges and tested are classified as 'held for trading' and not
hedge accounted.
Netting
International Swaps and Derivatives Association (ISDA) master
netting agreements are in place with derivative counterparties
except for contracts traded on a dedicated international electronic
trading platform used for operational foreign exchange hedging.
Under these agreements if a credit event occurs, all outstanding
transactions under the ISDA are terminated and only a single net
amount per counterparty is payable in settlement of all
transactions. The ISDA agreements do not meet the criteria for
offsetting, since the offsetting is enforceable only if specific
events occur in the future, and there is no intention to settle the
contracts on a net basis.
Assets Liabilities Assets Liabilities
31 July 31 July 31 July 31 July
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
------------------------------------------------- -------- ----------- -------- -----------
Gross value of assets and liabilities 57 (10) 69 (12)
Related assets and liabilities subject to master
netting agreements (1) (1) 1
------------------------------------------------- -------- ----------- -------- -----------
Net exposure 56 (10) 68 (11)
------------------------------------------------- -------- ----------- -------- -----------
20 Fair value of financial instruments
Carrying Fair Carrying Fair
value value value value
31 July 31 July 31 July 31 July
2018 2018 2017 2017
Notes GBPm GBPm GBPm GBPm
------------------------------------- ----- -------- -------- -------- --------
Level 2 valuations
Financial assets - other investments 16 13 13 11 11
Financial derivatives - assets 19 57 57 69 69
Borrowings 17 (1,610) (1,636) (1,749) (1,792)
Financial derivatives - liabilities 19 (10) (10) (12) (12)
Level 3 valuations
Financial assets - other investments 16 4 4 10 10
------------------------------------- ----- -------- -------- -------- --------
Investments in bank deposits are valued at the bank balance,
adjusted for accrued interest.
Derivatives, including forward exchange contracts, currency
swaps, interest rate instruments, and embedded derivatives, are
valued at the net present value of the future cash-flows calculated
using market data at the balance sheet date (principally exchange
rates and yield curves).
Borrowings are valued at the net present value of the future
cash-flows using credit spreads and yield curves derived from
market data. Borrowings are carried on the balance sheet at
amortised cost adjusted for fair value interest rate hedging. The
fair value of fixed rate borrowings is only used for supplementary
disclosures.
Cash, trade receivables and trade payables are excluded from
this table because carrying value is a reasonable approximation to
fair value for all these assets and liabilities.
21 Commitments
Operating lease commitments - minimum lease payments
The minimum uncancellable lease payments which the Group is
committed to make are:
31 July 2018 31 July 2017
----------------- -----------------
Land Land
and and
buildings Other buildings Other
GBPm GBPm GBPm GBPm
---------------------------------------------- ---------- ----- ---------- -----
Payments due:
- not later than one year 34 7 34 7
- later than one year and not later than five
years 83 8 68 7
- later than five years 23 24
---------------------------------------------- ---------- ----- ---------- -----
140 15 126 14
---------------------------------------------- ---------- ----- ---------- -----
Other commitments
At 31 July 2018, commitments, comprising bonds and guarantees
arising in the normal course of business, amounted to GBP184m
(FY2017: GBP186m), including pension commitments of GBP54m
(FY2017: GBP54m).
22 Provisions and contingent liabilities
Non-headline and
Trading 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 (1) 1
Provision charged 19 7 6 9 41
Provision released (11) (8) (3) (22)
Unwind of provision discount 5 2 7
Utilisation (15) (27) (6) (8) (56)
----------------------------- ------- ----------- ------------ ----- -----
At 31 July 2018 23 223 78 14 338
----------------------------- ------- ----------- ------------ ----- -----
Current liabilities 21 29 20 6 76
Non-current liabilities 2 194 58 8 262
----------------------------- ------- ----------- ------------ ----- -----
At 31 July 2018 23 223 78 14 338
----------------------------- ------- ----------- ------------ ----- -----
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions that are discounted.
Trading
Warranty provision and product liability
At 31 July 2018 there are warranty and product liability
provisions of GBP22m (FY2017: 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 Smiths Group properly understands risks and concerns
and can take steps both to manage immediate issues and to improve
its practices and procedures for the future. The Group also
co-operates with relevant authorities in investigating business
conduct issues whenever requested to. The Group is not aware of any
issues which are expected to generate material financial
exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in
numerous lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. Until
2006, the awards, the related interest and all material defence
costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product
liability. Provision is made in respect of the expected costs of
defending known and predicted future claims and of adverse
judgments in relation thereto, to the extent that such costs can be
reliably estimated.
The JCI products generally referred to in these cases consist of
industrial sealing product, primarily packing and gaskets. The
asbestos was encapsulated within these products in such a manner
that causes JCI to believe, based on tests conducted on its behalf,
that the products were safe. JCI ceased manufacturing products
containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its
current and expected asbestos litigation, including the most
efficacious presentation of its 'safe product' defence, and intends
to continue to resist these asbestos claims based upon this
defence. The table below summarises the JCI claims experience over
the last 39 years since the start of this litigation:
Year Year Year Year Year
ended ended ended ended ended
31 July 31 July 31 July 31 July 31 July
2018 2017 2016 2015 2014
-------------------------------------------- -------- -------- -------- -------- --------
JCI claims experience
Claims against JCI that have been dismissed 277,000 273,000 247,000 242,000 235,000
Claims JCI is currently a defendant in 43,000 50,000 74,000 76,000 80,000
Cumulative final judgments, after appeals,
against JCI since 1979 140 138 137 133 131
Cumulative value of awards ($'m) since
1979 164 160 158 153 149
-------------------------------------------- -------- -------- -------- -------- --------
The number of claims outstanding at 31 July 2018 reflects the
benefit of 4,000 claims being dismissed in the year.
JCI has also incurred significant additional defence costs. The
litigation involves claims for a number of allegedly asbestos
related diseases, with awards, when made, for mesothelioma tending
to be larger than those for the other diseases. JCI's ability to
defend mesothelioma cases successfully is, therefore, likely to
have a significant impact on its annual aggregate adverse judgment
and defence costs.
John Crane, Inc. litigation provision
The provision is based on past history of JCI claims and
well-established tables of asbestos-related disease incidence
projections. The provision is determined using advice from asbestos
valuation experts, Bates White LLC. The assumptions made in
assessing the appropriate level of provision include: the period
over which the expenditure can be reliably estimated; the future
trend of legal costs; the rate of future claims filed; the rate of
successful resolution of claims; and the average amount of
judgments awarded.
Established incidence curves can be used to estimate the likely
future pattern of asbestos related disease. However, JCI's claims
experience is also significantly impacted by other factors which
influence the US litigation environment. These can include:
changing approaches on the part of the plaintiffs' bar; changing
attitudes amongst the judiciary at both trial and appellate levels
in specific jurisdictions which move the balance of risk and
opportunity for claimants; and legislative and procedural changes
in both the state and federal court systems. The build-up of assets
in trusts established by asbestos defendants in Chapter 11
restructuring ("524(g) trusts") will increase the influence of
these trusts on the behaviour of claimants. Developments in the
Garlock Sealing Technologies LLC Chapter 11 proceedings have
provided additional data on plaintiff claims to 524 (g) trusts.
Given the evidence that emerged of inconsistent duplicate claims,
there is a significant likelihood that this will lead to changes in
the pattern of claims made in the future, and the costs arising
from claims.
The projections use a limited time horizon on the basis that
Bates White LLC consider that there is substantial uncertainty in
the asbestos litigation environment so probable expenditures are
not reasonably estimable beyond this time horizon. Asbestos is the
longest running mass tort litigation in American history which is
constantly evolving in ways that cannot be anticipated. JCIs
defence strategy also generates a significantly different pattern
of legal costs and settlement expenses from other defendants, thus
JCI is in an extremely rare position, and evidence from other
litigation cannot be used to improve the reliability of the
projections. A ten year (FY2017: ten year) time horizon has been
used based on past experience regarding significant changes in the
litigation environment that have occurred every few years and on
the amount of time taken in the past for some of those changes to
impact the broader asbestos litigation environment, and recent
events, like the Garlock Sealing Technologies LLC Chapter 11
proceedings, which may lead to further major changes.
The rate of future claims filed has been estimated using
well-established tables of asbestos incidence projections to
determine the likely population of potential claimants, and JCI's
past experience to determine what proportion of this population
will make a claim against JCI. The JCI products generally referred
to in claims had industrial and marine applications. As a result,
the incidence curve used for JCI projections excludes construction
workers, and is a composite of the curves that predict asbestos
exposure-related disease from shipyards and other occupations. This
is consistent with JCI's litigation history.
The rate of successful resolution of claims and the average
amount of any judgments awarded are projected based on the past
history of JCI claims, since this is the best available evidence,
given JCI's unusual strategy of defending all claims.
The future trend of legal costs is estimated based on JCI's past
experience, adjusted to reflect the assumed levels of claims and
trial activity, since the number of trials is a key driver of legal
costs.
John Crane, Inc. litigation insurance recoveries
While JCI has excess liability insurance, the availability of
such insurance and scope of the cover are currently the subject of
litigation in the United States. Pending the outcome of that
litigation, JCI has met defence costs directly. The calculation of
the provision does not take account of any potential recoveries
from insurers.
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision has developed over the
last five years as follows:
Year Year Year Year Year
ended ended ended ended ended
31 July 31 July 31 July 31 July 31 July
2018 2017 2016 2015 2014
GBPm GBPm GBPm GBPm GBPm
------------------------------------------------ -------- -------- -------- -------- --------
John Crane, Inc. litigation provision
Gross provision 251 260 267 236 227
Discount (28) (23) (15) (20) (23)
------------------------------------------------ -------- -------- -------- -------- --------
Discounted provision 223 237 252 216 204
------------------------------------------------ -------- -------- -------- -------- --------
Operating profit charge/(credit)
Increased provisions for adverse judgments
and legal defence costs 13 17 8 14 49
Change in US risk free rates (6) (13) 7 1 (2)
Litigation management, legal fees in connection
with litigation against insurers and defence
strategy 3 11 8 4 1
Recoveries from insurers (6) (16)
------------------------------------------------ -------- -------- -------- -------- --------
Operating profit charge 10 9 7 19 48
------------------------------------------------ -------- -------- -------- -------- --------
Cash-flow
Provision utilisation (27) (24) (22) (24) (36)
John Crane, Inc. litigation spend 30 32 32 27 25
------------------------------------------------ -------- -------- -------- -------- --------
The reduction in 2018 is due to increasing US dollar discount
rates, with no material movement in the gross provision.
The operating charge for John Crane, Inc. litigation
comprises:
- a charge of GBP13m (FY2017: GBP17m) in respect of the net
increased provision for adverse judgments and legal defence
costs;
- a credit of GBP6m arising from an increase in US risk free
rates (FY2017: credit of GBP13m); and
- GBP3m (FY2017: GBP11m) costs for litigation management,
defence strategy and legal fees in connection with litigation
against insurers.
In the year ended 31 July 2017 JCI recognised the recovery of
GBP6m through a settlement with an insurer. This agreement does not
provide any cover for future costs so there is no material impact
on the closing litigation provision.
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 GBP230m and future spend at
the 95th percentile of GBP290m (FY2017: 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 GBP238m and GBP263m (FY2017: between
GBP243m and GBP272m), compared to the gross provision value of
GBP251m (FY2017: 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 GBP15m (FY2017:
GBP17m) and reducing it by five years would reduce the provision by
GBP91m (FY2017: 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 GBP13m
(FY2017: GBP14m) and extending it by five years would increase
the provision by GBP52m (FY2017: 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
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 GBP78m (FY2017: 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
(note 6).
31 July 31 July
2018 2017
GBPm GBPm
------------------------------ ------- -------
Gross provision 129 136
Discount (51) (52)
------------------------------ ------- -------
Discounted pre-tax provision 78 84
Deferred tax (19) (33)
------------------------------ ------- -------
Discounted post-tax provision 59 51
------------------------------ ------- -------
Titeflex Corporation litigation provision history
An additional provision of GBP6m (FY2017: GBP8m) has been
recognised by Titeflex Corporation in respect of changes to the
estimated cost of future claims from insurance companies seeking
recompense for damage allegedly caused by lightning strikes. An
offsetting provision release of GBP8m is principally driven by a
reduction in subrogation payments.
Titeflex Corporation litigation provision sensitivities
The significant uncertainty associated with the future level of
claims and of the costs arising out of related litigation means
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 (FY2017:
GBP5m) lower, and if the benefit were 0.5% lower, the provision
would increase by GBP5m (FY2017: GBP5m).
Other non-headline and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by Smiths.
Non-headline provisions comprise all provisions that were disclosed
as non-headline items when they were charged to the consolidated
income statement.
These provisions cover non-headline reorganisation, vacant
properties, disposal indemnities and litigation in respect of old
products and discontinued business activities.
Reorganisation and property
At 31 July 2018 there were reorganisation provisions of GBP7m
relating to the integration of the Morpho business into the
Detection division (FY2017: GBP8m related to Fuel for Growth),
GBP2m (FY2017: GBP3m) related to onerous leases and dilapidations
provisions, and GBP2m (FY2017: GBP2m) related to actual and
potential environmental issues for sites which were no longer
occupied by Smiths operations. The Morpho integration provision is
expected to be utilised in the next 1 - 2 years.
Disposal
Other provisions include disposal provisions of GBP3m (FY2017:
GBP3m) relating to warranties and other obligations in respect of
the disposal of the Marine Systems and Aerospace businesses. Most
of the balance is expected to be utilised within the next five
years.
23 Share capital
Issued
Number of capital Consideration
shares GBPm GBPm
------------------------------------ ----------- -------- -------------
Ordinary shares of 37.5p each
Total share capital at 31 July 2016 395,223,072 148
Exercise of share options 253,590 3
------------------------------------ ----------- -------- -------------
Total share capital at 31 July 2017 395,476,662 148
Exercise of share options 284,565 3
------------------------------------ ----------- -------- -------------
Total share capital at 31 July 2018 395,761,227 148
------------------------------------ ----------- -------- -------------
Share capital structure
As at 31 July 2018 the Company's issued share capital was
395,761,227 ordinary shares with a nominal value of 37.5p per
share, all of the issued share capital was in free issue and all
issued shares are fully paid.
The Company's ordinary shares are listed and admitted to trading
on the Main Market of the London Stock Exchange. The Company has an
American Depositary Receipt (ADR) programme and one ADR equates to
one ordinary share. As at 31 July 2018, 10,125,054 ordinary shares
were held by the nominee of the programme in respect of the same
number of ADRs in issue.
The holders of ordinary shares are entitled to receive the
Company's Reports and Accounts, to attend and speak at general
meetings of the Company, to appoint proxies and to exercise voting
rights. None of the ordinary shares carry any special rights with
regards to control of the Company.
There are no known agreements relating to, or restrictions on,
voting rights attached to the ordinary shares (other than the 48
hour cut-off for casting proxy votes prior to a general meeting).
There are no restrictions on the transfer of shares, and there is
no requirement to obtain approval for a share transfer. There are
no known arrangements under which financial rights are held by a
person other than the holder of the ordinary shares. There are no
known limitations on the holding of shares.
Powers of Directors
The Directors are authorised to issue and allot shares and to
buy back shares subject to annual shareholder approval at the AGM.
Such authorities were granted by shareholders at the 2017 AGM, and
at the 2018 AGM it will be proposed that the Directors be granted
new authorities to allot and buy back shares.
Repurchase of shares
The Company did not purchase any of its own shares during the
financial year ended 31 July 2018. As at 14 September 2018 (the
latest practicable date for inclusion in this report) the Company
had an unexpired authority to repurchase ordinary shares up to a
maximum of GBP40m ordinary shares. As at 14 September 2018, the
Company did not hold any shares in treasury. Any ordinary shares
purchased may be cancelled or held in treasury.
Employment share schemes
Shares acquired through Company share schemes and plans rank
pari passu with the shares in issue and have no special rights. The
Company operates an Employee Benefit Trust, with an independent
trustee, to hold shares pending employees becoming entitled to them
under the Company's share schemes and plans. On 31 July 2018 the
trust held 766 ordinary shares in the Company. The trust waived its
dividend entitlement on its holding during the year, and the trust
abstains from voting the shares at general meetings.
24 Dividends
The following dividends were declared and paid in the
period:
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
-------------------------------------------------------------- -------- --------
Ordinary final dividend of 29.70p for FY2017 (FY2016: 28.75p)
paid 17 November 2017 117 114
Ordinary interim dividend of 13.80p for FY2018 (FY2017:
13.55p) paid 23 April 2018 55 53
-------------------------------------------------------------- -------- --------
172 167
-------------------------------------------------------------- -------- --------
The final dividend for the year ended 31 July 2018 of 30.75p per
share was recommended by the Board on 20 September 2018 and will be
paid to shareholders on 16 November 2018, subject to approval by
the shareholders. This dividend has not been included as a
liability in these accounts and is payable to all shareholders on
the register of Members at close of business on 19 October
2018.
Waiver of dividends
The following waived all dividends payable in the year, and all
future dividends, on their shareholdings in the Company:
- Wealth Nominees Limited (Smiths Industries Employee Share
Trust)
- Reuter File Limited
25 Reserves
Retained earnings include the value of Smiths Group plc shares
held by the Smiths Industries Employee Benefit Trust. In the year
the Company issued nil (FY2017: nil) shares to the Trust, and the
Trust purchased 952,111 shares (FY2017: 658,217 shares) in the
market for a consideration of GBP15m (FY2017: GBP10m). At 31 July
2018 the Trust held 766 (FY2017: 766) ordinary shares.
The capital redemption reserve, revaluation reserve and merger
reserve arose from: share repurchases; revaluations of property,
plant and equipment; and merger accounting for business
combinations before the adoption of IFRS, respectively.
Capital management
Capital employed comprises total equity adjusted for goodwill
recognised directly in reserves, net post-retirement benefit
related assets and liabilities, net litigation provisions relating
to non-headline items and net debt. The efficiency of the
allocation of the capital to the divisions is monitored through the
return on capital employed (ROCE). This ratio is calculated over a
rolling 12-month period and is the percentage that headline
operating profit comprises of monthly average capital employed. The
ROCE was 14.6% (FY2017: 16.2%), see note 30.
The capital structure is based on the directors' judgement of
the balance required to maintain flexibility while achieving an
efficient cost of capital.
The ratio of net debt to headline EBITDA of 1.4 (FY2017: 1.4) is
within the Group's stated policy of 2.0 or less over the medium
term. The Group's robust balance sheet and record of strong cash
generation is more than able to fund the immediate investment needs
and other legacy obligations. See note 30 for the definition of
headline EBITDA and the calculation of this ratio.
As part of its capital management the Group strategy is to
maintain a solid investment grade credit rating to ensure access to
the widest possible sources of financing and to minimise the
resulting cost of capital. At 31 July 2018 the Group had a credit
rating of BBB+/Baa2 (FY2017: BBB+/Baa2) with Standard & Poor's
and Moody's respectively.
The Board has a progressive dividend policy for future payouts,
with the aim of increasing dividends in line with the long-term
underlying growth in earnings. In setting the level of dividend
payments, the Board will take into account prevailing economic
conditions and future investment plans, along with the objective to
maintain minimum dividend cover of around 2.0.
Hedge reserve
31 July 31 July
2018 2017
GBPm GBPm
-------------------------------------------------- ------- -------
The hedge reserve on the balance sheet comprises:
- cash-flow hedge reserve 2 1
- net investment hedge reserve (304) (291)
-------------------------------------------------- ------- -------
(302) (290)
-------------------------------------------------- ------- -------
See transactional currency exposure risk management disclosures
in note 18 for additional details of cash-flow hedges, and
translational currency exposure risk management disclosure also in
note 18 for additional details of net investment hedges.
26 Acquisitions
On 1 November 2017, Tutco LLC, part of the Group's Flex-Tek Heat
Solutions business, completed the acquisition of the heating
element division of Osram Sylvania Inc. 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 July 2018, Tutco Sureheat
contributed GBP4m to revenue and GBP1m to profit before taxation.
If the Group had acquired this business at the beginning of the
financial year, the acquisition would have contributed GBP6m to
revenue and GBP2m to profit before taxation.
On 13 June 2018, the Group's John Crane division completed the
acquisition of Seebach GmbH, a provider of highly-engineered
filtration solutions, from Avedon Capital Partners. The intangible
assets recognised on this acquisition comprise technology, customer
relationships and branding. Goodwill represents the expected
synergies from the strategic fit of the acquisition 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 July 2018, Seebach GmbH
contributed GBP2m to revenue and less than GBP1m to profit before
taxation. If the Group had acquired this business at the beginning
of the financial year, the acquisition would have contributed
GBP17m to revenue and GBP2m to profit before taxation.
The provisional balance sheets at the date of acquisition
are:
Tutco Seebach
Sureheat GmbH Total
GBPm GBPm GBPm
------------------------------------------------ --------- ------- -----
Non-current assets
- acquired intangible assets 6 23 29
- land and buildings 2 2
- plant and equipment 1 1
- deferred tax asset 1 1
Current assets
- inventory 1 6 7
- trade and other receivables 1 4 5
Current liabilities
- net debt (1) (1)
- trade and other payables (4) (4)
------------------------------------------------ --------- ------- -----
Net assets acquired 8 32 40
------------------------------------------------ --------- ------- -----
Goodwill on current year acquisitions 7 24 31
------------------------------------------------ --------- ------- -----
Total consideration - cash paid during the year 15 56 71
------------------------------------------------ --------- ------- -----
Acquisitions in previous years
The Group acquired the Morpho Detection business from Safran
S.A. in the prior year. 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 current year.
27 Discontinued operations
There were no discontinued operations in the current year. In
the prior year, the Group acquired the Morpho Detection explosive
trace detection business after making commitments to the European
Commission and the US Department of Justice to sell this business
to an approved purchaser. The Group began marketing this business
for sale once the terms of the competition clearance were
known.
The sale was completed on 7 July 2017 for a cash consideration
of GBP63m. In the year ended 31 July 2017 a loss after tax of GBP8m
was generated by discontinued operations, giving a loss per share
from discontinued operations, basic and diluted, of 2.0p.
28 Disposals
During the year the Group received GBP29m consideration for
business disposals, including the sale of the John Crane Bearings
business for an enterprise value of $35m, the John Crane Bearings
sale completed on 31 May 2018.
Total
John Crane Bearings GBPm
---------------------------------------- -----
Consideration 26
Less: transaction costs (1)
--------------------------------------------- -----
Net consideration received 25
Net assets disposed of:
- Intangible assets 1
- Non-current tangible assets 6
- Inventories 9
- Trade and other receivables 7
- Trade and other payables (2)
--------------------------------------------- -----
Net assets 21
Recycling of foreign exchange 5
--------------------------------------------- -----
Profit on John Crane Bearings disposals 9
--------------------------------------------- -----
Loss on other disposals (2)
--------------------------------------------- -----
Total 7
--------------------------------------------- -----
29 Cash-flow
Cash-flow from operating activities
Year ended 31 July Year ended 31 July
2018 2017
------------------------------------------ ----------------------------- -----------------------------
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Operating profit 544 (50) 494 589 85 674
Amortisation of intangible assets 39 32 71 44 18 62
Depreciation of property, plant and
equipment 55 55 57 57
(Profit)/loss on disposal of property,
plant and equipment (1) (1) 4 4
Profit on disposal of business (7) (7) (175) (175)
Share-based payment expense 14 2 16 13 1 14
Retirement benefits 5 (49) (44) 1 (94) (93)
Decrease/(increase) in inventories (19) 2 (17) 52 52
Decrease/(increase) in trade and
other receivables (17) (17) 31 8 39
Increase/(decrease) in trade and
other payables 26 (5) 21 8 8 16
Decrease in provisions (6) (30) (36) (6) (34) (40)
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Cash generated from operations 640 (105) 535 793 (183) 610
Interest paid (71) (1) (72) (65) (65)
Interest received 7 7 5 11 16
Tax paid (65) (65) (82) (82)
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Net cash inflow from operating activities 511 (106) 405 651 (172) 479
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Interest paid includes GBP1m of cash outflows from foreign
exchange hedging of intra-group loan exposures (FY2017: interest
received included GBP6m cash inflows from hedging of intra-group
loans exposures and GBP5m exchange gains realised on internal
interest).
The split of tax payments between headline and non-headline only
considers the nature of payments made. No adjustment has been made
for reductions in tax payments due to tax relief received on
non-headline items.
Headline cash measures
The Group measure of headline operating cash includes capital
expenditure supporting organic growth and excludes interest and
tax.
Year ended 31 July Year ended 31 July
2018 2017
------------------------------------------ ----------------------------- -----------------------------
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Net cash inflow from operating activities 511 (106) 405 651 (172) 479
Include:
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (106) (106) (107) (107)
Disposals of property, plant and
equipment 4 4 9 9
Investment in financial assets relating
to operating activities and pensions
financing (1) (1) (5) (6) (11)
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Free cash-flow 302 370
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Exclude:
Investment in financial assets relating
to operating activities and pensions
financing outstanding at the balance
sheet 1 1 5 6 11
Interest paid 71 1 72 65 65
Interest received (7) (7) (5) (11) (16)
Tax paid 65 65 82 82
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Headline operating cash-flow 538 (105) 433 695 (183) 512
------------------------------------------ -------- ------------ ----- -------- ------------ -----
Reconciliation of headline free cash-flow to total movement in
cash and cash-equivalents
Year Year
ended ended
31 July 31 July
2018 2017
GBPm GBPm
--------------------------------------------------- -------- --------
Free cash-flow 302 370
Investment in other financial assets (7)
Acquisition of businesses (71) (580)
Disposal of businesses and discontinued operations 29 462
Net cash-flow used in financing activities (316) 116
--------------------------------------------------- -------- --------
Net (decrease)/increase cash and cash equivalents (56) 361
--------------------------------------------------- -------- --------
30 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 excluded items.
Return on capital employed (ROCE)
Smiths ROCE is calculated over a rolling 12-month period and is
the percentage that headline operating profit comprises of monthly
average capital employed.
See note 1 for the divisional headline operating profit and
average divisional capital employed used to calculate divisional
ROCE.
Capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP787m (31 July 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.
31 July 31 July
2018 2017
Notes GBPm GBPm
-------------------------------------------------------------- ----- ------- -------
Net assets 2,288 2,104
Adjust for:
Goodwill recognised directly in reserves 787 787
Post-retirement benefit assets and liabilities 8 (381) (224)
Tax related to post retirement benefit assets and liabilities 62 22
John Crane, Inc. litigation provisions and related
tax 22 175 158
Titeflex Corporation litigation provisions and related
tax 22 59 51
Net debt 17 893 967
-------------------------------------------------------------- ----- ------- -------
Capital employed 3,883 3,865
-------------------------------------------------------------- ----- ------- -------
Return on capital employed
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
----------------------------------------------------- ----- -------- --------
Headline operating profit for previous twelve months 544 589
Average capital employed 1 3,735 3,639
----------------------------------------------------- ----- -------- --------
ROCE 14.6% 16.2%
----------------------------------------------------- ----- -------- --------
Credit metrics
Smiths Group monitors the ratio of net debt to Headline EBITDA
as part of its management of credit ratings, see note 25 for
details.
This ratio is calculated as follows.
Headline earnings before interest, tax, depreciation and
amortisation (Headline EBITDA)
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
----------------------------------------------------- ----- -------- --------
Headline operating profit 544 589
Exclude:
- depreciation 12 55 57
- amortisation of development costs 10 24 27
- amortisation of software, patents and intellectual
property 10 18 17
----------------------------------------------------- ----- -------- --------
Headline EBITDA 641 690
----------------------------------------------------- ----- -------- --------
GBP1m of software amortisation was charged to restructuring
projects and treated as a non-headline cost.
Ratio of net debt to headline EBITDA
Year Year
ended ended
31 July 31 July
2018 2017
Notes GBPm GBPm
------------------------------------- ----- -------- --------
Headline EBITDA 641 690
Net debt 17 893 967
------------------------------------- ----- -------- --------
Ratio of net debt to headline EBITDA 1.4 1.4
------------------------------------- ----- -------- --------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EAENEAENPEAF
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