TIDMSMIN
RNS Number : 8164I
Smiths Group PLC
06 April 2020
Smiths Group plc Interim Results for the half year ended 31
January 2020
London, Monday 6 April 2020
Strength & Resilience
-- Good growth that continued into the first 2 months of the second half.
-- Excellent cash conversion.
-- Strong balance sheet.
-- Increasing trend of weakening demand with the exception of Smiths Medical.
-- Resilient business model and actions in place to respond to market changes.
Headline(1) Statutory
HY 2020 HY 2019(2) Reported Underlying HY 2020 HY 2019(2) Reported
GBPm GBPm growth growth(3) GBPm GBPm growth
---------------------------- -------- ----------- --------- -------- ----------- ---------
Continuing Operations(4)
Revenue 1,240 1,143 +8% +3% 1,240 1,143 +8%
Operating profit 186 175 +6% +1% 145 127 +14%
Pre-tax profit 160 146 +10% +4% 46 89 (48)%
Cash conversion 109% 63% +46%
Discontinued Operations(5)
Profit after tax 70 54 +30% 133 67 +99%
Total Group
Profit for the half
year 187 160 +17% 145 121 +20%
Basic EPS 46.9p 40.2p +17% +3% 36.3p 30.3p +20%
Cash conversion 98% 74% +24%
-------- ----------- --------- ----------- -------- ----------- ---------
The differences between headline and statutory operating profit
are non-headline items as defined in note 3 to the accounts, of
which the largest constituents are the offsetting impact of foreign
exchange on an intercompany loan between the continuing and
discontinued operations, amortisation of acquisition related
intangible assets and provision for asbestos litigation in John
Crane, Inc.
Smiths Continuing Operations: strong results
-- 4(th) consecutive half of good growth with underlying revenue
up +3%, and United Flexible acquisition adding a further 5% of
growth. As a result, reported revenue increased +8%.
-- Strong profit growth across John Crane, Smiths Detection and
Flex-Tek, held back by market weakness in Smiths Interconnect.
-- Excellent cash generation; 109% cash conversion.
Smiths Medical discontinued operations: excellent further
progress
-- Another period of revenue and profit growth, both up +1% on an underlying basis.
-- As previously announced, separation delayed due to uncertain conditions.
-- A strong start to the second half with increasing demand for critical care products globally.
Financial strength
-- Free Cash Flow GBP132m, up 86%.
-- Net debt of GBP1.3bn (including leases) and EBITDA
(Continuing and Discontinued) of GBP699m; a ratio of 1.8x.
-- Issued debt has average maturity of 4.6 years, no maturities
until October 2022 & no covenants.
-- Cash of c.GBP250m and undrawn RCF of c.GBP600m; total
liquidity headroom in excess of GBP850m.
-- Based on credit rating, eligible for up to GBP600m in funding via the CCFF.
-- Pension plans well hedged, well funded and well invested.
COVID-19 update
-- In HY2020 only the Chinese operations of John Crane and Interconnect were disrupted.
-- Trading to the end of March was affected to some extent by
early COVID-19 disruption; this is now accelerating with impact on
both demand and supply in the near-term.
-- Resilient characteristics: capex-light, flexible cost base,
significant aftermarket activity serving critical industries and
strong cash generation.
-- Actions to reduce costs and protect cash in place.
Attractive strategic fundamentals
-- Well-positioned in long term, attractive growth markets.
-- Highly-differentiated, market-leading products and services.
-- Organic growth complemented by disciplined M&A.
-- World-class operational excellence.
-- A culture of innovation, entrepreneurship and relentless execution.
Andy Reynolds Smith , Group Chief Executive, commented:
"We started the year strongly, delivering good growth and cash
across the Group. This positive start has also continued during the
first two months of the second half, demonstrating the quality and
financial strength of our business.
Over the coming months, COVID-19 presents significant
uncertainty and our number one priority is to keep our people safe
and well. We enter this period confident in our resilience and
preparedness; financially, operationally and strategically. We have
clear plans underway to contain costs, flex our operations,
maximise business continuity and conserve cash. This combined with
the significant built-in resilience and our diverse critical end
markets with long term structural drivers, will deliver the very
best performance through this period and position us well for the
future. I'm deeply grateful to our incredible people who are
handling this terrible situation with real grit and determination
in these challenging times."
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance. On a statutory basis, total Group profit for
the half year was GBP145m (HY 2019: GBP121m) and basic earnings per
share were 36.3p (HY 2019: 30.3p).
See accounting policies for an explanation of the presentation
of results and note 3 to the financial statements for an analysis
of non-headline items.
Definitions
The following definitions are applied throughout the
document:
(1) Headline: In addition to statutory reporting, the Group
reports 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) HY 2019 has been restated for the reclassification of Smiths
Medical as discontinued operations.
(3) Underlying modifies headline performance to adjust prior
year to reflect an equivalent period of ownership for divested
businesses, excludes the effects of foreign exchange and
acquisitions, and adds back the depreciation and amortisation of
discontinued operations for comparability purposes.
(4) Continuing operations exclude Smiths Medical which is
accounted for as 'discontinued operations - businesses held for
distribution to owners'.
(5) Discontinued operations are defined in note 17 to the
financial statements.
Contact details
Investor enquiries Media enquiries Alex Le May, FTI Consulting
Marion Le Bot, Smiths Group Deborah Scott, FTI +44 (0)20 3727 1308
+44 (0)20 7004 1672 Consulting +44 (0)770 244 3312
+44 (0)75 8315 4386 +44 (0)20 3727 1459 smiths@fticonsulting.com
marion.lebot@smiths.com +44 (0)797 953 7449
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.
COVID-19
As communicated in a trading statement on 31 March 2020, Smiths
activated its central crisis management team in January 2020 to
drive the Smiths response, first in China and now globally.
People
The health and safety of our people is our number one priority
and we have put measures in place to ensure that they remain safe.
These include working from home for employees who can, alternating
shift schedules and infection controls in manufacturing sites.
Impact on trading year-to-date
Group trading to the end of March was affected to some extent by
early COVID-19 disruption, which is now accelerating. In HY2020
only the Chinese operations of John Crane and Interconnect were
disrupted. All our sites in China have now reopened and are
operating at close to normal levels.
For the 8 weeks ended 28 March 2020, percentage underlying
revenue growth for continuing operations and for Smiths Medical was
mid-single digit.
All measures are in place to flex cost and conserve cash
including hiring freezes, cancellation of discretionary expenditure
and, postponement of non-critical capex. We have reinforced
controls around receivables and payables, including cash tax
(corporate, indirect and payroll).
Demand
We are now seeing generally weaker demand with the exception of
Medical, but with some mitigating factors;
-- Some customers have temporarily closed their facilities and
have not been able to accept delivery of equipment and
services.
-- Together with lower oil prices, energy customers have
announced reductions in capital expenditure. John Crane is not
exposed to upstream oil & gas and has a very strong order book,
two thirds of which is aftermarket.
-- Many airports are closing or operating at significantly
reduced capacity, with delays impacting both OE and aftermarket
revenue. As a counter balance some customers are starting to pull
forward installation, service and software activity in order to use
the downtime effectively and enable instant restart when required.
Smiths Detection has a record order book to meet global regulatory
changes.
-- Smiths is responding to a significant increase in demand
globally for critical care devices including ventilators. Smiths
Medical is contracting with the UK government and is in discussion
with other governments around the world for a significant ramp-up
in production of its paraPAC plus(TM) ventilator.
Supply
We are experiencing increasing disruption to supply chain and
production;
-- As of 3 April 2020, sites accounting for more than 90% of
manufacturing capacity were open but a large number of sites and
service centres continue to be affected and this is changing
daily.
-- We are pre-emptively obtaining government authorisation for
sites supplying critical products to remain operational.
-- A group team is working daily with operating units and
suppliers, to identify and resolve potential operations and supply
chain issues.
Forward guidance
We are moving decisively on all fronts to address the near-term
challenges. Although we believe that we are in a strong position as
we enter this period of high uncertainty, it is too early to assess
the full impact of COVID-19. Therefore we are withdrawing forward
guidance for FY2020.
Results overview
Continuing operations Foreign Acquisitions Underlying
(GBPm) HY 2019 exchange & disposals* movement HY 2020
========================= ======= ========= ============= ========== =======
Group revenue 1,143 5 56 36 1,240
========================= ======= ========= ============= ========== =======
Group headline operating
profit 175 1 9 1 186
========================= ======= ========= ============= ========== =======
* Includes disposals and FY2019 performance from acquisitions
that do not have comparators for the prior year
Underlying revenue Variance in operating
HY 2020 - Headline growth Operating margin margin
John Crane +6% 21.3% (40)bps
Smiths Detection +4% 15.0% (20)bps
Flex-Tek +3% 18.4% +40bps
Smiths Interconnect (7)% 6.5% (540)bps
Group +3% 15.0% (30)bps
==================== ================== ================ =====================
Smiths continuing operations
The commentary below refers to continuing operations (excluding
Smiths Medical), unless otherwise stated.
Revenue
The Group has delivered four consecutive halves of good
underlying growth. Underlying revenue growth for the half was +3%.
John Crane, Smiths Detection and Flex-Tek delivered good
performances, whilst Smiths Interconnect was impacted by previously
communicated market weakness.
The United Flexible acquisition added a further +5% (GBP56m) of
growth. The impact of foreign exchange translation (GBP5m) was
marginal. As a result, reported revenue increased to GBP1,240m (HY
2019: GBP1,143m), up +8% or GBP97m.
Operating profit and margin
Underlying headline operating profit growth of +1% was driven by
growth in John Crane, Smiths Detection and Flex-Tek, offset by
Smiths Interconnect. Headline operating margin decreased (30)bps to
15.0% on a reported basis. The reduction was mainly driven by
Smiths Interconnect. The favourable impact of foreign exchange
translation (+GBP1m) was marginal. The United Flexible acquisition
(+GBP9m) added a further +5% to profit growth. Central costs
reduced by +GBP1m to GBP(27)m (HY 2019: GBP(28)m). As a result,
reported headline operating profit increased to GBP186m (HY 2019:
GBP175m), up +6% or GBP11m.
The GBP(41)m difference between headline and statutory operating
profit is non-headline items as defined in note 3 to the financial
statements. The largest constituents relate to amortisation of
acquisition related intangible assets and provision for asbestos
litigation in John Crane, Inc. On a statutory basis, after taking
into account all items excluded from headline performance,
operating profit of GBP145m was +GBP18m higher than last year (HY
2019: GBP127m).
Finance costs
Headline finance costs of GBP(26)m (HY 2019: GBP(29)m) were
lower than last year. This reflects the early repayment of higher
coupon debt, which more than offset the inclusion of lease interest
following the adoption of IFRS16. Statutory finance costs were
GBP(99)m (HY 2019: GBP(38)m) due to a GBP(68)m foreign exchange
loss on an intercompany loan with Smiths Medical; the corresponding
credit in discontinued operations nets out to zero in total Group
earnings.
Taxation
The headline tax charge for the half year of GBP(43)m (HY 2019:
GBP(40)m) represents an effective rate of 27.0%
(HY 2019: 27.0%).
Non-headline taxation items of GBP9m (HY 2019: GBP5m) related to
tax on non-headline profit, including tax relief on acquired
intangibles, and legacy provisions. Therefore, the statutory tax
rate is 74.3% (HY 2019: 39.3%). Please refer to notes 3 and 5 of
the financial statements for further details.
The headline tax rate for continuing operations is expected to
be c.27% for the year ending 31 July 2020.
R&D and capex
The income statement cost of R&D was broadly in line with
last year, being GBP(46)m for HY 2020 (HY 2019: GBP(45)m). The cash
cost increased to GBP(62)m or 5.0% of sales (HY 2019: GBP(55)m or
4.8%).
Capex at GBP(37)m (HY 2019: GBP(29)m) represented 1.4x
depreciation and amortisation (HY 2019: 1.1x), excluding the first
time adoption impact of IFRS16.
Cash generation
Strong cash generation is a central feature of our business.
Headline operating cash-flow was GBP202m (HY 2019: GBP109m). This
strong performance was achieved in spite of higher inventory levels
which reflect good order books in John Crane and Smiths Detection.
Operating cash conversion was 109% (HY 2019: 63%), with the
adoption of IFRS16 providing a tailwind of 9%.
Statutory net cash inflow from operating activities was GBP143m
(HY 2019: GBP43m). See note 15 to the financial statements for a
reconciliation of headline operating cash to statutory cash-flow
measures.
Portfolio
In October 2019, Smiths Interconnect completed the acquisition
of Reflex Photonics ("Reflex") for an enterprise value of CAD$40m.
Reflex's technological leadership in ruggedized fibre optics
significantly strengthens Smiths Interconnect's product offering in
defence, space, aerospace and industrial market segments.
For more information, please read note 13 of the financial
statements.
Smiths Medical discontinued operations
Smiths Medical continued its return to growth in the first half
and has started the second half strongly. Revenue was up +1% on an
underlying basis to GBP434m, in line with expectations. The result
reflects good growth in ambulatory pumps and vascular access as
well as the contribution of new products like convective warming,
partially offset by disruption of supply for our syringe pump.
Reported revenue was up +1% after inclusion of GBP4m favourable
foreign exchange translation and GBP(3)m revenue from prior year's
disposals.
Headline operating profit of GBP94m was up +1% on an underlying
basis. Operating profit benefitted from volume growth, offset by
restructuring costs (now recorded in headline operating costs) and
one-off costs. The costs associated with the Notified Body
transition and implementation of the new EU Medical Device
Regulation were GBP(4)m, as anticipated. For FY2020 we continue to
expect costs of c.GBP(10)m. Underlying headline operating margin
was broadly in line with last year at 16.4%, after including full
proforma depreciation and amortisation. The difference between
statutory and headline operating profit mainly comprised separation
costs.
Accounting standards require the Group to stop charging
depreciation and amortisation within Smiths Medical, since it has
been reclassified as discontinued operations. For comparability
purposes, depreciation and amortisation have been included in the
calculation of underlying measures.
As disclosed on 31 March 2020, the Board has decided to delay
the previously announced separation of Smiths Medical until
conditions improve. It is simply not practicable to complete the
separation in current circumstances. Moreover, Smiths and Smiths
Medical need to focus on navigating the external challenges -
including the delivery of ventilators and other critical care
devices.
Total Group
The commentary below refers to Total Group, unless otherwise
stated.
Total profit and EPS
Total headline profit after tax increased by +17% on a reported
basis. Headline basic EPS was up +3% on an underlying basis and up
+17% on a reported basis, excluding amortisation and depreciation
for discontinued operations and including the United Flexible
acquisition. Total statutory profit after tax increased by +20% to
GBP145m (HY 2019: GBP121m), driven by the headline performance and
lower non-headline items. Statutory basic EPS was also up +20% to
36.3p (HY 2019: 30.3p).
Cash-flow
Headline operating cash conversion for the Group was 98% (HY
2019: 74%), with the adoption of IFRS16 providing a tailwind of 8%.
Free cash-flow of GBP132m (HY 2019: GBP71m) increased by GBP61m,
underpinned by the strong operating cash-flow. See note 15 to the
financial statements for a reconciliation of headline operating
cash to statutory cash-flow measures.
Debt
Net debt at 31 January 2020 was GBP(1,270)m, an increase of
GBP(73)m in the period, driven by the adoption of IFRS16 (GBP134m).
Annualised EBITDA (continuing and discontinued operations) was
GBP699m. Hence net debt to EBITDA was 1.8x after inclusion of
leases.
Gross debt was GBP(1,517)m (FY2019: GBP1,512m), including
leases. There are no covenants associated with this debt. The
weighted average maturity was 4.6 years and there are no maturities
before October 2022.
Cash reserves were GBP247m (FY2019: GBP315m).
An $800m (c.GBP600m at the period-end exchange rate) revolving
credit facility ('RCF') remains undrawn. $160m of the RCF extends
until November 2023 and $640m until November 2024. The only
covenant relates to interest cover which must be greater than or
equal to 3 times, compared with 13 times at the half year.
Taking cash and the RCF together, total liquidity was in excess
of GBP850m at the half year.
It is our understanding that the Group should also be eligible
to access up to GBP600m in funding via the Bank of England's Covid
Corporate Financing Facility ('CCFF').
Together with high cash conversion, a conservative balance sheet
means that we are very well placed to withstand external
shocks.
Pension
The net accounting pension surplus increased to GBP343m (FY2019:
GBP311m), driven by lower inflation expectations, asset returns and
experience gains, partially offset by a lower discount rate. Taken
together, the two UK schemes are fully funded on a technical
provisions basis.
Pension contributions for the half were GBP(16)m (HY 2019:
GBP(15)m). For the year, we expect total cash contributions of up
to GBP40m across all schemes (FY2019: GBP36m).
The two UK pension schemes are well positioned to withstand the
current market environment. The schemes are well hedged, so that a
movement in liabilities is largely reflected in the movement in
assets. Approximately 35% of the liabilities have been de-risked
through the purchase of annuities from third party insurers.
Approximately 90% of assets are invested in third-party annuities,
government bonds and investment grade credit. Only around 1% of
assets is invested in equities.
Dividend
We remain confident in the strength of the Group's financial
position. However, as announced on 31 March 2020 and at this time
of unprecedented uncertainty, the Board considers it prudent not to
declare an interim dividend for HY2020. Recognising the importance
of the dividend to shareholders, the Board will review this
decision again later in the financial year as trading conditions
become clearer.
ROCE
ROCE was 14.7% (HY 2019: 14.5%). The increase reflects the
absence of depreciation and amortisation in discontinued
operations, partially offset by recent investments (such as the
acquisition of United Flexible, which are expected to generate
superior returns over the longer-term) and the adoption of
IFRS16.
IFRS 16 - Leases
The Group has adopted IFRS 16 from 1 August 2019 and has elected
to apply the modified retrospective transition approach, requiring
no restatement of the comparative period. The main changes include
recognition of right of use assets and lease liabilities with a
value of GBP134m (of which GBP43m relates to discontinued
operations), and a marginal increase in operating profit due to
reclassification of the financing charges inherent in operating
lease costs to finance costs.
Foreign exchange
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.
Average rates Period-end rates
-------------------------------- -------------------------------
31 January 31 January 31 July
2020 (6 2019 (6 2019 (1 31 January 31 January 31 July
months) months) year) 2020 2019 2019
---- ---------- ---------- -------- ---------- ---------- -------
USD 1.27 1.29 1.29 1.32 1.31 1.22
EUR 1.15 1.12 1.13 1.19 1.15 1.10
---- ---------- ---------- -------- ---------- ---------- -------
With over 95% of revenue originating outside the UK, the Group
is exposed to foreign exchange movements, mainly the US Dollar and
the Euro.
Business review
John Crane
John Crane is a leading provider of mission-critical engineered
solutions for global energy and process industries. c.63% of
revenue is derived from the energy sector (downstream and midstream
oil & gas and power generation) and c.37% comes from other
process industries (including chemical, pharmaceutical, mining,
water treatment, and pulp & paper). 67% of John Crane revenue
comes from aftermarket sales. John Crane represents 38% of
continuing Group revenue.
HY 2020 HY 2019 Reported Underlying
GBPm GBPm growth growth
------------------------------- ------- ------- -------- ----------
Revenue 474 449 +6% +6%
Original Equipment 154 142 +8%
Aftermarket 320 307 +5%
Headline operating profit 101 97 +4% +4%
Headline operating margin 21.3% 21.7% (40)bps
Statutory operating profit 94 94 Flat
Return on capital employed 23.3% 23.0% +30bps
R&D cash costs % sales 1.9% 1.9% Flat
------------------------------- ------- ------- -------- ----------
Revenue
John Crane delivered another good performance, with revenue up
+6% on an underlying basis. Reported revenue was also up +6%, as
foreign exchange translation had a neutral impact.
Underlying revenue from John Crane's Energy segment was up
around +11%. Revenue from Industrial activities was down around
(2)% due to a strong comparator and the phasing of orders. John
Crane continued to invest in Original Equipment ('OE') projects and
expansion of the installed base; OE sales grew +8% overall in the
period. Multiple new contracts were secured, including oil and gas
expansion projects in the Middle East, Africa and APAC, an oil
field development project in Brazil, large petrochemical plants in
APAC and the United States, as well as new power, pulp and paper,
and chemical contracts across all regions.
John Crane's large installed base and leading service offering
position it well to satisfy aftermarket demand for repairs,
maintenance and upgrades; underlying aftermarket revenue grew +5%
during the year and represents 67% of John Crane's revenue (HY
2019: 68%).
Operating profit
Headline operating profit of GBP101m increased +4% on an
underlying basis, mainly driven by good volumes. Headline operating
profit margin was 21.3%, down (40)bps, with the positive impact of
volume growth being offset by the higher mix of OE. The difference
between statutory and headline operating profit includes the net
cost in relation to the provision for John Crane, Inc. asbestos
litigation.
ROCE
ROCE was up +30bps at 23.3%, despite the adverse impact of
IFRS16 adoption.
R&D
Cash R&D expenditure during the period represented 1.9% of
sales, in line with last year. John Crane's innovation is primarily
focused on enhancing efficiency, performance and sustainability by
using materials science advancements, coatings and additive
manufacturing. John Crane is also leveraging the Group's digital
expertise to support the development of predictive diagnostic
platforms and other innovative digital technologies.
During the half, John Crane introduced a standby gas booster to
provide constant supply of clean seal gas, at a pressure above that
of the process during "off conditions", such as standby or shut
down. The advanced seal for crude oil pipeline pumps, launched last
year, has been complemented by an equivalent product for light end
hydrocarbon applications.
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 Aviation market and Other Security
Systems for ports & borders, defence and urban security
markets. 48% of Smiths Detection's sales are derived from the
aftermarket. Smiths Detection represents 31% of continuing Group
revenue.
HY 2020 HY 2019 Reported Underlying
GBPm GBPm growth growth
----------------------------------- ------- ------- -------- ----------
Revenue 378 361 +5% +4%
Aviation 254 241 +5%
Other Security Systems 124 120 +3%
Headline operating profit 57 55 +4% +4%
Headline operating margin 15.0% 15.2% (20)bps
Statutory operating profit 44 43 +2%
Return on capital employed 11.5% 11.8% (30)bps
R&D cash costs % sales 10.5% 8.8% +170bps
----------------------------------- ------- ------- -------- ----------
Revenue
Smiths Detection's underlying revenue increased by +4%. The
delivery of previously announced contract wins drove Original
Equipment ('OE') up +8% on an underlying basis. Aftermarket revenue
grew +1% on an underlying basis, accounting for 48% of the
division's revenue (HY 2019: 50%). Reported revenue was up +5%,
including GBP2m of favourable impact from foreign exchange
translation.
Revenue from Aviation activities increased +5% on an underlying
basis. Aviation is Smiths Detection's largest segment, representing
67% of total revenue. We continued to see strong demand for
hold-baggage systems ('HBS') across Europe, as a result of the ECAC
standard-3 regulation, and globally, as airports upgrade their
fleets. Demand is also driven by Computed Tomography ('CT') based
screening systems for cabin baggage, which allow laptops and
liquids to remain in bags. Deliveries in the half included part of
the previously announced contracts with Aena in Spain, Airports
Authority India (AAI) and with the TSA in the US. Additionally,
Smiths Detection secured in the half a large order for HBS at
Singapore's airport and orders for cabin baggage screening for
airports in Australia, contributing to a record order book for the
division.
Revenue from Other Security Systems grew by +3%, reflecting an
improved focus in Smiths Detection's other core vertical markets,
particularly ports and borders which grew by +4%. Additionally,
Smiths Detection secured contracts to deliver inspection systems to
improve border infrastructure in Pakistan and Azerbaijan.
Operating profit
Headline operating profit increased +4% on an underlying basis,
reflecting good volume growth but also a higher proportion of OE
sales (where pricing pressures continued) and increased investment
in R&D. As a result, headline reported operating margin
decreased (20)bps to 15.0%. The difference between statutory and
headline operating profit primarily reflects amortisation of
acquired intangibles.
ROCE
ROCE decreased by (30)bps to 11.5%, impacted by the adoption of
IFRS16.
R&D
Cash R&D expenditure during the period was 10.5% of sales
(excluding customer funded R&D, HY 2020: 7.9%, HY 2019: 6.8%).
We continue to invest in the development of the next generation of
detection devices for the defence market, new algorithms to improve
the detection of dangerous goods for cargo applications and
operational efficiency, and digital solutions to strengthen our
aftermarket proposition to make people and infrastructure safer.
Certain programmes are co-funded by strategic customers seeking
next-generation solutions to security challenges.
Flex-Tek
Flex-Tek provides innovative components to heat and move fluids
and gases for aerospace and industrial applications. 31% of
Flex-Tek's revenue is derived from the Aerospace sector and 69%
from Industrials. 41% of Flex-Tek's revenue comes from aftermarket
sales. Flex-Tek represents 20% of continuing Group revenue.
HY 2020 HY 2019 Reported Underlying
GBPm GBPm growth growth
--------------------------- ------- ------- ---------- ----------
Revenue 248 184 +35% +3%
Aerospace 77 44 +5%
Industrials 171 140 +2%
Headline operating profit 46 33 +39% +9%
Headline operating margin 18.4% 18.0% +40bps
Statutory operating profit 25 32 (22)%
Return on capital employed 20.6% 33.3% (1,270)bps
R&D cash costs % sales 0.5% 0.7% (20)bps
--------------------------- ------- ------- ---------- ----------
Revenue
Flex-Tek delivered another good half, with revenue up +3% on an
underlying basis, driven by growth in both Aerospace and
Industrials. On a reported basis, revenue increased +34%, including
+GBP56m incremental revenue associated with the acquisition of
United Flexible (where integration is progressing well), and +GBP2m
favourable foreign exchange translation.
Aerospace revenue was up +5% on an underlying basis, driven by
growth in engine and airframe platforms including GEnx, Airbus 320,
and LEAP engines, as well as good growth in the overhaul and repair
aftermarket business and higher levels of development work for new
engine platforms. Industrials revenue was up +2% driven by product
innovation in flexible gas tubing and strong growth in flexible
duct for construction applications, offset by weakness in some core
industrial markets. In the half, Flex-Tek also secured a 2-year
$25m contract for heat application products for the aerospace
market.
Operating profit
On an underlying basis headline operating profit increased +9%
to GBP46m, driven by revenue growth, strong cost management and the
non-repeat of one-off costs. As a result, headline operating margin
increased +40bps to 18.4%. The difference between statutory and
headline operating profit is due to amortisation of acquired
intangible assets, provision for Titeflex Corporation subrogation
claims, and acquisition costs.
ROCE
ROCE decreased (1,270)bps to 20.6%, driven by the acquisition of
United Flexible in the prior year. Excluding this, ROCE improved by
+150bps as a result of improved profitability.
R&D
Cash R&D expenditure remained consistent at 0.5% of sales,
focused on developing new products to meet specific customer needs
for improved efficiency.
Smiths Interconnect
Smiths Interconnect designs solutions for high-speed, secure
connectivity in demanding applications for various end markets
including defence, semiconductor test, medical, space, commercial
aerospace, and rail. Smiths Interconnect represents 11% of
continuing Group revenue.
HY 2020 HY 2019 Reported Underlying
GBPm GBPm growth growth
--------------------------- ------- ------- -------- ----------
Revenue 140 149 (6)% (7)%
Headline operating profit 9 18 (50)% (50)%
Headline operating margin 6.5% 11.9% (540)bps
Statutory operating profit 7 17 (59)%
Return on capital employed 10.1% 12.9% (280)bps
R&D cash costs % sales 8.2% 7.4% +80bps
--------------------------- ------- ------- -------- ----------
Revenue
Revenue on an underlying basis was down (7)% reflecting the
previously communicated slowdown in the market and a strong
comparator. On a reported basis, revenue decreased by (6)%
including GBP1m favourable foreign exchange translation.
The volume decline reflects a general slowdown in Interconnect's
markets, which were impacted by the China-US trade dispute. This
was combined with a strong comparator in the prior year driven by
first-half weighted defence and semiconductor programmes.
Operating profit
Headline operating profit decreased (50)% on an underlying basis
to GBP9m, reflecting lower volumes and also costs to relocate and
rationalise production capacity. As a result, headline operating
margin of 6.5% decreased (540)bps. We continue to optimise the
operational footprint and to strengthen the product portfolio,
through organic R&D and selective acquisition. The difference
between statutory and headline operating profit reflects
adjustments for amortisation of acquired intangibles and
acquisition costs.
Portfolio
In October 2019, Smiths Interconnect completed the acquisition
of Reflex Photonics ("Reflex") for an enterprise value of CAD$40m.
Reflex's technological leadership in shock-resistant fibre optics
significantly strengthens Smiths Interconnect's product offering in
defence, space, aerospace and industrial market segments.
ROCE
ROCE decreased (280)bps to 10.1%, driven by lower
profitability.
R&D
Cash R&D expenditure increased to 8.2% of sales (7.4%
excluding customer funded R&D, HY 2019: 6.4%), as we continued
to invest in technology-led growth. R&D is focused on bringing
to market new products that improve connectivity in difficult
operating environments. Product launches in the half included
connectors for power transmission in harsh environments and
efficient probe heads for the semiconductor packaging industry.
Smiths Medical - Discontinued operations
Smiths Medical supplies high-quality, cost-effective medical
devices and consumables vital to patient care globally. Its
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.
HY 2020 HY 2019 Reported Underlying
GBPm GBPm growth growth
--------------------------- ------- ------- -------- ----------
Revenue 434 430 +1% +1%
Headline operating profit 94 71 +32% +1%
Headline operating margin 21.7% 16.5% +520bps (10)bps
Statutory operating profit 83 86 (3)%
Return on capital employed 13.2% 11.9% +130bps
R&D cash costs % sales 6.1% 5.8% +30bps
--------------------------- ------- ------- -------- ----------
Accounting standards require the Group to stop charging
depreciation and amortisation within Smiths Medical, since it has
been reclassified as discontinued operations. For comparability
purposes, depreciation and amortisation have been included in the
calculation of underlying measures.
Update on separation
As disclosed on 31 March 2020, the Board has decided to delay
the previously announced separation of Smiths Medical until
conditions improve. It is simply not practicable to complete the
separation in current circumstances. Moreover, Smiths and Smiths
Medical need to focus on navigating the external challenges -
including the delivery of ventilators and other critical care
devices.
Revenue
Smiths Medical continued its return to growth in the first half.
Revenue was up +1% on an underlying basis to GBP434m, in line with
expectations. The result reflects good growth in ambulatory pumps
and vascular access as well as the contribution of new products
like convective warming, partially offset by disruption of supply
for our syringe pump. Reported revenue was up +1% after inclusion
of GBP4m favourable foreign exchange translation and GBP(3)m
revenue from prior year's disposals.
Underlying revenue was down (3)% year-on-year in Infusion
Systems, with good growth in ambulatory pumps offset by the syringe
pump. Vascular Access underlying revenue increased by +3% as a
result of strong performance in sharps safety and catheters, with
successful account conversions to active safety catheters.
Underlying revenue from Vital Care and Specialty Products grew +2%,
with good growth in the COPD product line, which is now being sold
directly, and temperature management, supported by a new
product.
Operating profit
Headline operating profit of GBP94m was up +32% on a reported
basis (excluding depreciation and amortisation) and up +1% on an
underlying basis. Operating profit benefitted from volume growth,
offset by restructuring costs (now recorded in headline operating
costs) and one-off costs. The costs associated with the Notified
Body transition and implementation of the new EU Medical Device
Regulation were GBP(4)m, as anticipated. For FY2020 we continue to
expect costs of c. GBP(10)m. Underlying headline operating margin
was broadly in line with last year at 16.4%, after including full
proforma depreciation and amortisation. The difference between
statutory and headline operating profit mainly comprised separation
costs.
ROCE
ROCE increased by +130bps to 13.2% due to the absence of
depreciation and amortisation, partially offset by the adoption of
IFRS16.
R&D
Cash R&D expenditure was 6.1% of sales. Smiths Medical
continues to invest in the development of innovative, commercially
focused products across the portfolio to support long-term,
sustainable growth. Product launches in the half included: wireless
radio connectivity enhancements to CADD(TM) Solis ambulatory pumps,
enhancements to PharmGuard software for infusion systems, next
generation range of tracheostomy free from DEHP chemical, an
enhanced basic percutaneous kit, and a full component procedural
tray. One of the division's most significant new product
investments, the large volume pump, has been submitted for approval
to the US regulator and to the European Notified Body. The large
volume pump market represents a c.GBP2bn extension to Smiths
Medical's addressable market.
Other financial matters
Risk management
The principal risks and uncertainties which may affect the Group
during the second half of FY2020 are set out below.
COVID-19: The Group is closely monitoring the fast-moving global
spread of COVID-19 and taking prudent steps to mitigate any
potential impacts to the health and safety of employees, customers
and suppliers, and to the successful operation of our business.
More information on how Smiths is being impacted by and responding
to COVID-19 is set out in page 4 and note 1 to the condensed
interim financial statements of this release.
Technology: Differentiated new products and services are
critical to our success. We may be unable to maintain technological
differentiation or to meet customers' needs and may face disruptive
innovation by a competitor.
Economy and geopolitics: Economic and financial market
conditions may cause adverse effects on customers or suppliers with
consequential capacity or cash-flow implications for Smiths
Group.
Acquisitions / integration and divestment / separation:
Acquisitions bring risk as well as opportunity. We may invest
substantial funds and resources in acquisitions which fail to
deliver on expectations - due to incorrect appraisal of the target
and/or poor execution. Divestments also carry risk. We may divest
an asset at the wrong time or may not realise the appropriate value
for the asset. Separation may be complex and, if poorly executed,
may impact the wider business.
Product quality: Manufacturing flaws, component failures, damage
to persons / property, and / or design defects could require us to
recall products causing damage to our reputation and reduction in
market acceptance of, and demand for, our products. Also, we are
potentially subject to product liability claims and lawsuits,
including potential class actions. The mission-critical nature of
many of our solutions makes the potential consequences of failure
more serious than may otherwise be the case. This includes
potential exposure to losses in the event of a cyber security
breach relating to the Group's products.
Ethical breach: We have more than 22,000 employees in more than
50 countries. Individuals may not all behave in accordance with the
Group's values and ethical standards. We operate in highly
regulated markets requiring strict adherence to laws with risk
areas including: bribery and corruption , anti-trust matters,
international trade laws and sanctions, human rights, modern
slavery and international labour standards, General Data Protection
Regulation (GDPR), and government contracting regulations.
Cyber security: Cyber-attacks seeking to compromise the
confidentiality, integrity and availability of IT systems and the
data held on them are a continuing risk. We operate in markets and
product areas which are known to be of interest to cyber
criminals.
Integrated supply chain: Timely , efficient supply of raw
materials and purchased components is critical to our ability to
deliver to our customers. Manufacturing continues to be exposed to
external events which could have significant adverse consequences ,
including natural catastrophes, disease pandemics and terrorist
attacks. We are also affected by the social, economic, regulatory
and political conditions where we operate. This applies to our own
manufacturing sites and those of our key component suppliers.
Markets: A significant proportion of our revenue comes from the
US and European markets, with a notable proportion coming from
governments. In addition to geographical markets, there is a risk
we do not focus on attractive market sectors where we have, or
could have, a sustainable position.
Customers : Our markets are evolving at a fast pace, creating
potential for customers to change their business models as they
look to deliver products and services at higher quality, with
better service and at lower cost. Failure to keep pace with
customer changes / requirements (innovation, go to market,
strategies) could have a materially adverse impact on Group
performance.
Contractual obligations: We may fail to deliver the products and
services we are obliged to deliver , or fail in our contractual
execution due to delays or breaches by our suppliers or other
counterparties. This may result in significant expenses due to
disputes and claims, loss of customers, damage to reputation and
adversely impact our financial performance.
People: People are our only truly sustainable source of
competitive advantage and competition for key skills is intense,
especially around science, technology, engineering and mathematics
(STEM) disciplines. We may not be successful in attracting,
retaining, developing, engaging and inspiring the right people with
the right skills to achieve our growth ambitions.
Statement of directors' responsibilities
The directors confirm that, to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU;
-- the interim management report includes a fair review of the information required by:
a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
For and on behalf of the Board of directors:
Andy Reynolds Smith John Shipsey
Chief Executive Chief Financial Officer
5 April 2020 5 April 2020
Independent review report to Smiths Group plc
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 31 January 2020 which comprises the consolidated
income statement, the consolidated statement of comprehensive
income, the consolidated balance sheet, the consolidated statement
of changes in equity, the consolidated cash-flow statement and the
related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
January 2020 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Michael Maloney
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
5 April 2020
Consolidated income statement (unaudited)
Six months ended
Six months ended 31 January 2019 -
31 January 2020 restated*
============================= =============================
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ===== ======== ============ ===== ======== ============ =====
Continuing operations
Revenue 2 1,240 1,240 1,143 1,143
Cost of sales (731) (731) (652) (652)
========================================= ===== ======== ============ ===== ======== ============ =====
Gross profit 509 509 491 491
Sales and distribution costs (138) (138) (130) (130)
Administrative expenses (185) (41) (226) (186) (48) (234)
Operating profit/(loss) 186 (41) 145 175 (48) 127
========================================= ===== ======== ============ ===== ======== ============ =====
Interest receivable 4 4 4 4
Interest payable (30) (30) (33) (33)
Other financing losses (77) (77) (15) (15)
Other finance income - retirement
benefits 4 4 6 6
========================================= ===== ======== ============ ===== ======== ============ =====
Finance costs (26) (73) (99) (29) (9) (38)
========================================= ===== ======== ============ ===== ======== ============ =====
Continuing operations - profit
before taxation 160 (114) 46 146 (57) 89
========================================= ===== ======== ============ ===== ======== ============ =====
Taxation 5 (43) 9 (34) (40) 5 (35)
========================================= ===== ======== ============ ===== ======== ============ =====
Continuing operations - profit
for the period 117 (105) 12 106 (52) 54
========================================= ===== ======== ============ ===== ======== ============ =====
Discontinued operations
Profit from discontinued operations 17 70 63 133 54 13 67
========================================= ===== ======== ============ ===== ======== ============ =====
PROFIT FOR THE PERIOD 187 (42) 145 160 (39) 121
Attributable to:
Smiths Group shareholders - continuing
operations 116 (105) 11 105 (52) 53
Smiths Group shareholders - discontinued
operations 70 63 133 54 13 67
Non-controlling interests in respect
of continuing operations 1 1 1 1
187 (42) 145 160 (39) 121
========================================= ===== ======== ============ ===== ======== ============ =====
Earnings per share 4
Basic 36.3p 30.3p
Basic - continuing 2.8p 13.4p
Diluted 36.2p 29.9p
13.2
Diluted - continuing 2.8p p
========================================= ===== ======== ============ ===== ======== ============ =====
Dividends per share (declared) 14 14.1p
========================================= ===== ======== ============ ===== ======== ============ =====
* Results for the period ended 31 January 2019 have been
restated to reflect the reclassification of the Smiths Medical
business as a discontinued operation.
Consolidated statement of comprehensive income (unaudited)
Six months Six months
ended ended
31 January 31 January
2020 2019
Notes GBPm GBPm
================================================================ ====== =========== ===========
Profit for the period 145 121
================================================================ ====== =========== ===========
Other comprehensive income:
Actuarial gains/(losses) on retirement benefits 6 1 (117)
Taxation 20
================================================================ ====== =========== ===========
Other comprehensive income/(expenditure) which will
not be reclassified to the consolidated
income statement 1 (97)
Other comprehensive income/(expenditure) which will
be, or has been, reclassified:
Exchange losses (257) (14)
Fair value gains and reclassification adjustments:
- on financial assets at fair value through other comprehensive
income 1
- deferred in the period on cash-flow and net investment
hedges 112 7
- reclassified to income statement on cash-flow and
net investment hedges (1) (1)
Total other comprehensive expenditure (144) (105)
Total comprehensive income 1 16
================================================================ ====== =========== ===========
Attributable to:
Smiths Group shareholders 1 15
Non-controlling interests 1
================================================================ ====== =========== ===========
1 16
================================================================ ====== =========== ===========
Consolidated balance sheet (unaudited)
31 January 31 July
2020 2019
Notes GBPm GBPm
============================================ ===== ========== =======
Non-current assets
Intangible assets 7 1,560 1,684
Property, plant and equipment 8 218 232
Right of use assets 9 92
Financial assets - other investments 21 19
Retirement benefit assets 6 486 469
Deferred tax assets 106 115
Trade and other receivables 53 52
Financial derivatives 40 47
============================================ ===== ========== =======
2,576 2,618
Current assets
Inventories 470 417
Current tax receivable 30 11
Trade and other receivables 613 764
Cash and cash equivalents 10 206 289
Financial derivatives 2 3
Assets held for distribution to owners 17 1,219 1,216
============================================ ===== ========== =======
2,540 2,700
============================================ ===== ========== =======
Total assets 5,116 5,318
============================================ ===== ========== =======
Current liabilities
Financial liabilities:
- borrowings 10 (18) (9)
- lease liabilities 10 (26)
- financial derivatives (3) (5)
Provisions for liabilities and charges 12 (62) (66)
Trade and other payables (498) (569)
Current tax payable (62) (56)
Liabilities held for distribution to owners 17 (253) (213)
============================================ ===== ========== =======
(922) (918)
Non-current liabilities
Financial liabilities:
- borrowings 10 (1,386) (1,500)
- lease liabilities 10 (67)
- financial derivatives (1)
Provisions for liabilities and charges 12 (265) (285)
Retirement benefit obligations 6 (138) (152)
Corporation tax payable (5) (6)
Deferred tax liabilities (44) (45)
Trade and other payables (49) (30)
============================================ ===== ========== =======
(1,954) (2,019)
============================================ ===== ========== =======
Total liabilities (2,876) (2,937)
============================================ ===== ========== =======
Net assets 2,240 2,381
============================================ ===== ========== =======
Shareholders' equity
Share capital 149 148
Share premium account 361 360
Capital redemption reserve 6 6
Revaluation reserve 1 1
Merger reserve 235 235
Retained earnings 1,740 1,993
Hedge reserve (272) (383)
============================================ ===== ========== =======
Total shareholders' equity 2,220 2,360
Non-controlling interest equity 20 21
============================================ ===== ========== =======
Total equity 2,240 2,381
============================================ ===== ========== =======
Consolidated statement of changes in equity (unaudited)
Share
capital
and Equity
share Other Retained Hedge shareholders' Non-controlling Total
premium reserves earnings reserve funds Interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 1 August 2019 508 242 1,993 (383) 2,360 21 2,381
Impact of adopting IFRS
16 (1) (1) (1)
Impact of adopting IFRIC
23 (4) (4) (4)
========================== ====== ======== ========= ========= ======== ============== =============== =======
Profit for the period 144 144 1 145
Other comprehensive
income:
- exchange losses net of
recycling (256) (256) (1) (257)
- actuarial losses on
retirement
benefits and tax 1 1 1
- fair value gains 1 111 112 112
========================== ====== ======== ========= ========= ======== ============== =============== =======
Total comprehensive income
for the period (110) 111 1 1
Transactions relating to
ownership interests:
Exercises of share options 2 2 2
Purchase of own shares (18) (18) (18)
Dividends:
- equity shareholders 14 (126) (126) (126)
- non-controlling
interests (1) (1)
Share-based payment 6 6 6
========================== ====== ======== ========= ========= ======== ============== =============== =======
At 31 January 2020 510 242 1,740 (272) 2,220 20 2,240
========================== ====== ======== ========= ========= ======== ============== =============== =======
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 1 August 2018 506 242 1,826 (302) 2,272 16 2,288
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Profit for the period 120 120 1 121
Other comprehensive income:
- exchange losses net of
recycling (14) (14) (14)
- actuarial losses on
retirement
benefits and tax (97) (97) (97)
- fair value gains 6 6 6
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Total comprehensive income
for the period 9 6 15 1 16
Transactions relating to
ownership interests:
Exercises of share options 2 2 2
Purchase of own shares (19) (19) (19)
Dividends - equity
shareholders 14 (122) (122) (122)
Share-based payment 4 4 4
=========================== ===== ======== ========= ========= ======== ============== =============== =======
At 31 January 2019 508 242 1,698 (296) 2,152 17 2,169
=========================== ===== ======== ========= ========= ======== ============== =============== =======
Consolidated cash-flow statement (unaudited)
Six months Six months
ended ended
31 January 31 January
2020 2019
Notes GBPm GBPm
============================================================= ====== =========== ===========
Net cash inflow from operating activities 15 187 123
Cash-flows from investing activities
Expenditure on capitalised development (18) (12)
Expenditure on other intangible assets (8) (7)
Purchase of property, plant and equipment (29) (35)
Disposal of property, plant and equipment 1
Net movement in investment in financial assets 1
Acquisition of businesses (24)
Disposal of businesses - continuing operations 29
Net cash-flow used in investing activities (79) (23)
Cash-flows from financing activities
Proceeds from exercise of share options 2 2
Purchase of own shares (18) (19)
Dividends paid to equity shareholders (126) (122)
Settlement of cash share awards (1)
Cash (outflow) from matured derivative financial instruments (1) (4)
Principal elements of lease payments (22)
Reduction and repayment of borrowings (194)
============================================================= ====== =========== ===========
Net cash-flow used in financing activities (166) (337)
Decrease in cash and cash equivalents (58) (237)
Cash and cash equivalents at beginning of the period 289 717
Net debt/ (cash) held in disposal group 4
Exchange differences (29)
============================================================= ====== =========== ===========
Cash and cash equivalents at end of the period 206 480
============================================================= ====== =========== ===========
Cash and cash equivalents at end of the period comprise:
- cash at bank and in hand 179 203
- short-term deposits 27 277
206 480
============================================================= ====== =========== ===========
Reconciliation of net cash-flow to movement in net debt
Six months Six months
ended ended
31 January 31 January
2020 2019
Notes GBPm GBPm
=============================================================== ====== =========== ===========
Net debt at start of period (as previously reported) 10 (1,220) (893)
=============================================================== ====== =========== ===========
Fair value of derivatives used to hedge net debt 45 43
Adoption of IFRS 16 (148)
=============================================================== ====== =========== ===========
Net debt at start of period (represented) (1,323) (850)
=============================================================== ====== =========== ===========
Net decrease in cash and cash equivalents (58) (237)
Net cash held in disposal group 42 (29)
Repayment of lease liabilities 22
Reduction and repayment of borrowings 194
=============================================================== ====== =========== ===========
Movement in net debt resulting from cash-flows 6 (72)
Increase in lease liabilities in the period (11)
Capitalisation, interest accruals and unwind of capitalisation
of fees (12) (6)
Fair value movement from interest rate hedging (4) (20)
Foreign exchange gains 93 21
=============================================================== ====== =========== ===========
Movement in net debt in the period 72 (77)
=============================================================== ====== =========== ===========
Net debt at end of period 10 (1,251) (927)
=============================================================== ====== =========== ===========
Notes to the condensed interim financial statements
(unaudited)
1 Basis of preparation
The financial information for the period ended 31 January 2020
does not constitute statutory accounts as defined in section 434 of
the Companies Act 2006. A copy of the statutory accounts for the
year ended 31 July 2019 has been delivered to the Registrar of
Companies. The auditor's report on those accounts was not
qualified, did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying the
report, and did not contain statements under section 498(2) or (3)
of the Companies Act 2006.
This condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU.
The annual financial statements of the Group are prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the EU. As required by the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority, this
condensed set of financial statements has been prepared applying
the accounting policies and presentation that were applied in the
preparation of the company's published consolidated financial
statements for the year ended 31 July 2019, except for the changes
detailed in the accounting policies section below.
The Directors have assessed the principal risks discussed on
page 13, including by modelling a severe but plausible downside
scenario for COVID-19, whereby the Group experiences:
- a closure of operating plants for 2 months across all
countries, except China where activities have already begun to
recover;
- ongoing supply chain disruption due to availability of suppliers;
- a significant reduction in demand over the next six months
across all its continuing divisions, which in conjunction with
plant closures, depresses revenue by 20-40% versus prior year;
and
- a further period of depressed activity into the next financial
year which reduces revenue by 15-35% versus prior year;
Furthermore, this downside scenario assumes;
- no material cost mitigation, including staff reductions or government subsidies; and
- the Medical division remains under the Group's control and
continues to operate all its factories with smaller reductions than
the other divisions due to continued (and in some instances
increased) demand for its critical products.
Throughout this severe but plausible downside scenario, the
Group continues to have significant liquidity headroom on existing
facilities and against the RCF financial covenant. Moreover, based
on its credit rating, the Group should be eligible to participate
in the Bank of England's Covid Corporate Financing Facility
("CCFF"); however participation has not been incorporated into the
downside scenario.
The Directors believe that the Group is well placed to manage
its financing and other business risks satisfactorily, and have a
reasonable expectation that the Group will have adequate resources
to continue in operation for at least 12 months from the signing
date of these condensed consolidated interim financial statements.
They therefore consider it appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
The interim financial information was approved by the Board on 5
April 2020.
Accounting policies
The same accounting policies, estimates, presentation and
methods of computation are followed in the condensed interim
financial statements as applied in the Group's latest annual
audited financial statements, with the exception of updating
accounting policies to reflect changes required by the adoption of
IFRS 16 and IFRIC 23.
Newly adopted accounting policies - IFRS 16 - Leases
The Group adopted IFRS 16 - Leases with effect from 1 August
2019. The standard fundamentally changed the accounting treatment
of leased assets, requiring that all material lease liabilities and
corresponding 'right of use' assets are recognised on the balance
sheet. The operating lease rental expense previously charged to
operating profit in the income statement has been 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 has adopted IFRS 16 using the modified retrospective
transition approach, which does not require the restatement of
comparative figures. Adoption of IFRS 16 resulted in right of use
assets totalling GBP106m being recognised, together with lease
liabilities of GBP105m and a net GBP1m increase in net assets
within continuing operations. The weighted average incremental
borrowing rate (IBR) was 4.0%. Discounting the operating lease
commitments at 31 July 2019 at the IBR reduced the lease
liabilities by GBP11m, which was largely offset by increases in the
lease liability arising from revised lease extension and
termination assumptions.
Within continuing operations during the period, lease interest
of GBP2m has been recognised within finance costs and GBP16m of
depreciation has been charged to the income statement. In total,
payments of GBP18m were made under leasing contracts, of which
GBP16m was made to repay the principal portion of the lease.
Additionally, administrative expenses include GBP3m in respect of
variable lease payments for short term and low value leases which
are not included in the lease liabilities and payments disclosed
above.
On transition the Group applied the following available
practical expedients permitted by the standard:
- the exclusion of leases relating to low-value assets (less than GBP5,000 when new);
- the exclusion of short-term leases, being those with a lease term of 12 months or less; and
- applying the new definition of a lease only to contracts
entered into after the transition date.
Newly adopted interpretations IFRIC 23 - Uncertainty over Income
Tax Treatments
The Group adopted IFRIC 23 - Uncertainty over Income Tax
Treatments on 1 August 2019. This interpretation clarifies how to
recognise and measure uncertainties over income tax treatments. The
Group already provides for tax uncertainties and the net impact on
the Group of implementing IFRIC 23 did not have a material impact
on the financial statements.
New standards and interpretations not yet adopted
Certain new standards, amendments to standards and
interpretations are not yet effective for the period ended 31
January 2020 and have, therefore, not been applied in preparing
these condensed consolidated interim financial statements. These
standards are not expected to have a material impact on the Group
in the current or future reporting periods.
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 in a form consistent with the prior year.
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 2 for disclosures of headline
operating profit and note 18 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 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; and
- retranslate the comparative to current year exchange rates
before calculating growth measures.
2 Segment information
Analysis by operating segment
The Group is organised into five divisions: John Crane, Smiths
Detection, Flex-Tek, Smiths Interconnect and Smiths Medical. These
divisions design and manufacture the following products:
- John Crane - mechanical seals, seal support systems, power
transmission couplings and specialised filtration systems;
- Smiths Detection - sensors and systems that detect and
identify explosives, narcotics, weapons, chemical agents,
biohazards and contraband;
- Flex-Tek - engineered components, flexible hosing and rigid
tubing which heat and move fluids and gases;
- 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
- Smiths Medical - infusion systems, vascular access products,
patient airway and temperature management equipment and specialised
devices in areas of diagnostics and emergency patient
transport.
The position and performance of each division is reported at
each Board meeting to the Board of Directors. This information is
prepared using the same accounting policies as the consolidated
financial information, except that the Group uses headline
operating profit to monitor divisional results and operating assets
to monitor divisional position. See note 3 for an explanation of
which items are excluded from headline profit measures.
Following the reclassification of the Smiths Medical business as
a discontinued operation, the segmental information for the Smiths
Medical division is disclosed in note 17.
Intersegment sales and transfers are charged at arm's length
prices.
Segment trading performance
Six months ended 31 January 2020
=============================================================
John Smiths Smiths Corporate
Crane Detection Flex-Tek Interconnect costs Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ========== ======== ============= ========= =====
Revenue 474 378 248 140 1,240
================================== ====== ========== ======== ============= ========= =====
Divisional headline operating
profit 101 57 46 9 213
Corporate headline operating
costs (27) (27)
================================== ====== ========== ======== ============= ========= =====
Headline operating profit/(loss) 101 57 46 9 (27) 186
Items excluded from headline
measures (note 3) (7) (13) (21) (2) 2 (41)
Operating profit/(loss) for the
period 94 44 25 7 (25) 145
================================== ====== ========== ======== ============= ========= =====
Headline operating margin 21.3% 15.0% 18.4% 6.5% 15.0%
================================== ====== ========== ======== ============= ========= =====
Six months ended 31 January 2019 -
restated
=================================================================
John Smiths Smiths Corporate Total
Crane Detection Flex-Tek Interconnect costs Restated
GBPm GBPm GBPm GBPm GBPm GBPm
================================= ====== ========== ======== ============= ========= =========
Revenue 449 361 184 149 1,143
================================== ====== ========== ======== ============= ========= =========
Divisional headline operating
profit 97 55 33 18 203
Corporate headline operating
costs (28) (28)
================================== ====== ========== ======== ============= ========= =========
Headline operating profit/(loss) 97 55 33 18 (28) 175
Items excluded from headline
measures (note 3) (3) (12) (1) (1) (31) (48)
Operating profit/(loss) for the
period 94 43 32 17 (59) 127
================================== ====== ========== ======== ============= ========= =========
Headline operating margin 21.7% 15.2% 18.0% 11.9% 15.3%
================================== ====== ========== ======== ============= ========= =========
Segment assets and liabilities
Segment assets
31 January 2020
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= =====
Property, plant, equipment, right
of use assets, development projects,
other intangibles and investments 144 132 60 46 27 409
Inventory, trade and other receivables 394 461 151 113 17 1,136
======================================== ====== ========== ======== ============= ============= =====
Segment assets 538 593 211 159 44 1,545
======================================== ====== ========== ======== ============= ============= =====
31 July 2019
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================== ====== ========== ======== ============= ============= =====
Property, plant, equipment, development
projects, other intangibles and
investments 113 106 52 38 20 329
Inventory, trade and other receivables 428 485 171 132 17 1,233
========================================= ====== ========== ======== ============= ============= =====
Segment assets 541 591 223 170 37 1,562
========================================= ====== ========== ======== ============= ============= =====
Non-headline assets comprise receivables relating to
non-headline items, acquisitions and disposals.
Segment liabilities
31 January 2020
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= =====
Divisional liabilities (166) (321) (71) (47) (605)
Corporate and non-headline liabilities (362) (362)
======================================== ====== ========== ======== ============= ============= =====
Segment liabilities (166) (321) (71) (47) (362) (967)
======================================== ====== ========== ======== ============= ============= =====
31 July 2019
==================================================================
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= ============= =====
Divisional liabilities (158) (287) (63) (56) (564)
Corporate and non-headline liabilities (386) (386)
======================================== ====== ========== ======== ============= ============= =====
Segment liabilities (158) (287) (63) (56) (386) (950)
======================================== ====== ========== ======== ============= ============= =====
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
=================== ===================
31 January 31 July 31 January 31 July
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
============================================= ========== ======= ========== =======
Segment assets and liabilities 1,545 1,562 (967) (950)
Goodwill and acquired intangibles 1,482 1,606
Derivatives 42 50 (3) (6)
Current and deferred tax 136 126 (111) (107)
Retirement benefit assets and obligations 486 469 (138) (152)
Cash and borrowings 206 289 (1,404) (1,509)
Assets and liabilities held for distribution
to owners 1,219 1,216 (253) (213)
Statutory assets and liabilities 5,116 5,318 (2,876) (2,937)
============================================== ========== ======= ========== =======
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 2019: 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 18 for additional details.
The 12-month rolling average capital employed by division, which
Smiths uses to calculate divisional return on capital employed, is
set out below:
31 January 2020
===================================================
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= =====
Average divisional capital employed 962 1,125 469 380 2,936
Average capital employed - assets held
for distribution to owners 1,290
Average corporate capital employed (70)
========================================= ====== ========== ======== ============= =====
Average total capital employed 4,156
========================================= ====== ========== ======== ============= =====
Return on capital employed 23.3% 11.5% 20.6% 10.1% 14.7%
========================================= ====== ========== ======== ============= =====
31 January 2019
===================================================
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
======================================= ====== ========== ======== ============= =====
Average divisional capital employed 905 1,099 206 357 2,567
Average capital employed - assets held
for distribution to owners 1,222
Average corporate capital employed (43)
========================================= ====== ========== ======== ============= =====
Average total capital employed 3,746
========================================= ====== ========== ======== ============= =====
Return on capital employed 23.0% 11.8% 33.3% 12.9% 14.5%
========================================= ====== ========== ======== ============= =====
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 six months ended 31 January
2020 154 320 474
Revenue six months ended 31 January
2019 142 307 449
======================================== ========== =========== =====
Other
Aviation security
security systems Total
Smiths Detection GBPm GBPm GBPm
==================================== ========= ========= =====
Revenue six months ended 31 January
2020 254 124 378
Revenue six months ended 31 January
2019 241 120 361
======================================== ========= ========= =====
Aerospace Industrials Total
Flex-Tek GBPm GBPm GBPm
==================================== ========= =========== =====
Revenue six months ended 31 January
2020 77 171 248
Revenue six months ended 31 January
2019 44 140 184
======================================== ========= =========== =====
Components,
Connectors
& Subsystems
Smiths Interconnect GBPm
==================================== =============
Revenue six months ended 31 January
2020 140
Revenue six months ended 31 January
2019 149
========================================== =============
Following a review, the Group has rationalised the analysis of
divisional revenue to focus on the key markets of each division and
to reflect the measures of revenue performance that are reported to
and reviewed by the chief operating decision maker of the business.
This review resulted in the following changes to the analysis of
revenue, and comparatives have been updated accordingly:
- Smiths Detection - Air Transportation has been renamed as
Aviation, whilst Urban Security, Defence and Ports & Borders
have been aggregated and reported as Other Security Systems;
- Flex-Tek - revenue is now analysed by end market, Aerospace
and Industrials. Previously revenue was analysed by product line;
and
- Smiths Interconnect - the Connectors and Microwave sectors
have been aggregated and reported as Components, Connectors &
Subsystems.
The Group's statutory revenue is analysed as follows:
Six months
Six months ended
ended 31 January
31 January 2019
2020 Restated
GBPm GBPm
======================================= =========== ===========
Sale of goods recognised as a point in
time 979 899
Sale of goods recognised over time 23 15
Services 238 229
Revenue - continuing operations 1,240 1,143
=========================================== =========== ===========
3 Non-statutory profit measures
Headline profit measures
The Group 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
for continuing operations are as follows:
Six months
ended
Six months 31 January
ended 2019
31 January Restated
2020 *
GBPm GBPm
============================================================= =========== ===========
Post-acquisition integration costs and fair value adjustment
unwind
Integration programmes (3) (5)
Acquisition and disposal related transactions costs
and provision releases
Business acquisition / disposal costs (2) (6)
Release of acquisition related provisions 4
Legacy pension scheme arrangements
Settlement gains on post-retirement benefit schemes 8
Guaranteed Minimum Pensions (GMP) equalisation (29)
Non-headline litigation provision movements
Provision for John Crane, Inc. asbestos litigation (11) (2)
Cost recovery for John Crane, Inc. asbestos litigation 4
Movement in provision held against Titeflex Corporation
subrogation claims (5) 2
Other items
Amortisation of acquisition related intangible assets (28) (16)
============================================================== =========== ===========
Non-headline items in operating profit - continuing
operations (41) (48)
============================================================== =========== ===========
* The comparatives for the period to 31 January 2019 have been
restated to reflect the reclassification of Smiths Medical as a
discontinued operation.
Post-acquisition integration costs and fair value adjustment
unwind
The GBP3m (31 January 2019: GBP5m) of integration programme
costs relate to defined projects for the integration of Morpho
Detection into the existing Smiths Detection business and United
Flexible into the existing Flex-Tek business. Integration programme
costs include the direct costs of organisational change, IT system
harmonisation expenses, site rationalisation and entity closure
costs. The Morpho Detection integration programme is due to
conclude in the current financial year and the United Flexible
integration programme is due to conclude in 2021. Integration costs
are recognised as non-headline items because they are considered
material and non-recurring.
Acquisition and disposal transaction costs and provision
releases
The GBP2m of business acquisition / disposal costs (31 January
2019: GBP6m) comprise GBP1m of directly linked incremental
transaction costs, principally related to the acquisition of Reflex
Photonic Inc. which completed in October 2019, and GBP1m of
litigation settlement costs relating to a prior year disposal.
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 and disposal activity in the
year.
The GBP4m release of acquisition related provisions in the prior
period represents the release of excess accruals for deferred
consideration on business acquisitions. These are reported as
non-headline as the initial provision accrual was recognised as a
non-headline expense.
Legacy pension scheme arrangement
The GBP8m settlement gain on post-retirement benefit schemes (31
January 2019: GBPnil) is due to changes to the US post-retirement
healthcare plans as a result of the US Patient Protection and
Affordable Care Act.
In the prior period GBP29m of past service costs were recognised
following the UK High Court ruling that Guaranteed Minimum Pension
equalisation is required. This was included in non-headline as it
is material, non-recurring and relates to legacy pension
liabilities.
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:
- The GBP11m (31 January 2019: GBP2m) charge in respect of John
Crane, Inc. asbestos litigation is principally due to litigation
management expenses and discount rate movements following a
reduction in US treasury bond yields. The costs recovered via
insurer settlements in the prior period were GBP4m. See note 12 for
further details; and
- A GBP5m charge (31 January 2019: GBP2m credit) has been
recognised by Titeflex Corporation in respect of changes to the
estimated cost of future claims. The additional charge is driven by
discount rate movements following a reduction in US treasury bond
yields. See note 12 for further details.
Other items
Acquisition related intangible asset amortisation costs of
GBP28m (31 January 2019: GBP16m) were recognised in the current
period. 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.
Non-headline finance costs items
The non-headline items included in finance costs for continuing
operations are as follows:
Six months
Six months ended
ended 31 January
31 January 2019
2020 Restated
GBPm GBPm
=============================================================== =========== ===========
Unwind of discount on provisions (3) (4)
Other finance income - retirement benefits 4 6
Foreign exchange (loss) on intercompany loan with discontinued
operations (68)
Other financing losses (6) (11)
Non-headline items in finance costs - continuing operations (73) (9)
================================================================ =========== ===========
Continuing operations - non-headline loss before taxation (114) (57)
================================================================ =========== ===========
The financing elements of non-headline legacy liabilities,
including the GBP3m (31 January 2019: GBP4m) unwind of discount on
provisions, are 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 finance income comprises GBP4m (31 January 2019: GBP6m) of
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.
Following the reclassification of Smiths Medical as a
discontinued operation, foreign exchange gains or losses on
intercompany financing between Smiths Medical and the continuing
group are recognised on the face of the income statement as a
non-headline item. The GBP68m foreign exchange loss in continuing
operations (31 January 2019: GBPnil) directly offsets the foreign
exchange gain in discontinued operations. This is excluded from
headline net finance costs as these fair value movements are
non-operational in nature and are purely a consequence of the
presentational requirements for discontinued operations.
Other financing losses represent fair value movements on
financial instruments and foreign exchange movements on borrowings,
which the Group excludes from headline net finance costs. The
current period loss of GBP6m (31 January 2019: GBP11m) is
principally due to hedge ineffectiveness on the Group's 2023 and
2027 Eurobonds, which will reverse over the remaining period to
maturity. These fair value movements are excluded from headline net
finance costs when the following requirements are met:
- Fair value gains and losses on the interest element of
derivative financial instruments hedging the Group's net debt
exposures are excluded from headline, as they will either reverse
over time or be matched in future periods by interest charges.
- Fair value gains and losses on the currency element of
derivative financial instruments hedging the Group's net debt and
exposures, and exchange gains and losses on borrowings are
excluded, as the relevant foreign exchange gains and losses on the
commercially hedged items are recognised as a separate component of
other comprehensive income, in accordance with the Group's foreign
currencies accounting policy.
Non-headline taxation items
The GBP9m of non-headline taxation for continuing operations (31
January 2019: GBP5m) represents the tax attributable to the
non-headline items above.
Non-headline items for discontinued operations
The non-headline items for discontinued operations are as
follows:
Six months Six months
ended ended
31 January 31 January
2020 2019
GBPm GBPm
========================================================== =========== ===========
Acquisition and disposal related transactions costs
and provision releases
Medical separation costs (11) (1)
Other items
Amortisation of acquisition related intangible assets (1)
Profit on disposal of businesses 17
Non-headline finance costs items
Foreign exchange gain on intercompany loan with parent 68
Non-headline taxation items
Taxation on non-headline profit 6 (2)
Non-headline items in profit from discontinued operations 63 13
=========================================================== =========== ===========
Profit for the period - non-headline items for continuing
and discontinued operations (42) (39)
=========================================================== =========== ===========
The GBP11m of Medical separation costs (31 January 2019: GBP1m)
represent incremental costs incurred by the Group to demerge Smiths
Medical. This cost has been reported as non-headline as the full
year effect of the transaction on the Group's financial statements
is both material and non-recurring.
Profit on disposal of businesses in the prior period of GBP17m
relates to the sale of Medical's sterile water bottling and EMEA
kitting businesses. These are considered to be non-headline items
since the profit and cash impact are material and non-recurring
arising from the sale of a business.
The GBP68m foreign exchange gain on intercompany loan with
parent (31 January 2019: GBPnil) directly offsets the foreign
exchange loss in continuing operations. This is excluded from
headline net finance costs as these fair value movements are
non-operational in nature and are purely a consequence of the
presentational requirements for discontinued operations.
4 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the period attributable to equity shareholders of the Company
by the average number of ordinary shares in issue during the
period.
Six months
Six months ended
ended 31 January
31 January 2019
2020 Restated
GBPm GBPm
============================================================= =========== ===========
Profit attributable to equity shareholders for the period
- Continuing 11 53
- Discontinuing 133 67
Total 144 120
============================================================= =========== ===========
Average number of shares in issue during the period 396,181,277 395,924,559
============================================================= =========== ===========
Statutory earnings per share continuing operations - basic 2.8 13.4
Statutory earnings per share continuing operations - diluted 2.8 13.2
============================================================= =========== ===========
Statutory earnings per share total - basic 36.3 30.3
Statutory earnings per share total - diluted 36.2 29.9
============================================================= =========== ===========
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 397,160,603 (31 January
2019: 400,943,218) ordinary shares, being the average number of
ordinary shares in issue during the year adjusted by the dilutive
effect of employee share schemes.
A reconciliation of statutory and headline earnings per share is
as follows:
Six months ended
Six months ended 31 January 2019 -
31 January 2020 Restated
======================
Basic Diluted Basic Diluted
EPS EPS EPS EPS
GBPm (p) (p) GBPm (p) (p)
========================================= ==== ===== ======= ===== ====== =======
Basic earnings per share:
Total profit attributable to equity
shareholders of the Parent Company 144 36.3 36.2 120 30.3 29.9
Exclude: Non-headline items (note
3) 42 10.6 10.6 39 9.9 9.7
----------------------------------------- ---- ----- ------- ----- ------ -------
Headline earnings per share 186 46.9 46.8 159 40.2 39.6
----------------------------------------- ---- ----- ------- ----- ------ -------
Profit from continuing operations
attributable to equity shareholders
of
the Parent Company 11 2.8 2.8 53 13.4 13.2
Exclude: Non-headline items (note
3) 105 26.5 26.4 52 13.1 13.0
----------------------------------------- ---- ----- ------- ----- ------ -------
Headline earnings per share - continuing
operations 116 29.3 29.2 105 26.5 26.2
----------------------------------------- ---- ----- ------- ----- ------ -------
5 Taxation
The interim tax rate of 74.3% (31 January 2019: 39.3%) is
calculated by applying the estimated effective headline tax rate
for continuing operations of 27.0% (31 January 2019: 27.0%) for the
year ended 31 July 2020 to headline profit before tax and then
taking into account the tax effect of non-headline items in the
interim period.
A reconciliation of headline and total tax charge is as
follows:
Six months Six months
ended 31 January ended 31 January
2020 2019 - Restated
===================== =====================
Continuing Continuing
operations operations
GBPm Tax rate GBPm Tax rate
================================================ =========== ======== =========== ========
Headline tax rate
Headline profit before taxation 160 146
Taxation on headline profit (43) 27.0% (40) 27.0%
================================================ =========== ======== =========== ========
Adjustments
Non-headline items excluded from profit before
taxation (note 3) (114) (57)
Taxation on non-headline items and non-headline
tax adjustment 9 5
================================================ =========== ======== =========== ========
Total interim tax rate
Profit before taxation 46 89
Taxation (34) 74.3% (35) 39.3%
------------------------------------------------ ----------- -------- ----------- --------
The changes in the value of the net tax asset/(liability) in the
period were:
Current Deferred Net tax
tax tax balance
GBPm GBPm GBPm
==================================== ======= ======== ========
At 31 July 2019 (51) 70 19
Foreign exchange gains and losses 2 (7) (5)
Business combinations (note 13) (3) (3)
(Charge)/credit to income statement (36) 2 (34)
Tax paid 48 48
======================================= ======= ======== ========
At 31 January 2020 (37) 62 25
======================================= ======= ======== ========
Developments in the Group tax position
Franked Investment Income Group Litigation Order (FII GLO)
Smiths Group is one of the companies enrolled in the FII GLO
litigation against the UK's HM Revenue and Customs ("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 approximately GBP28m (31 January 2019:
GBP28m), after deducting the 45% withholding tax. The Group has not
recognised any impact to the financial statements in the current
period or in prior years, due to the uncertainty of the eventual
outcome.
EU Commission Investigation regarding Claims for Partial (75%)
Exemption for Profits from qualifying loan relationships under
Chapter 9 FA2012
In April 2019, the European Commission issued its decision in
respect of a state aid investigation into the Group Financing
Exemption under the UK controlled foreign company ("CFC") rules.
The European Commission's decision found that part of the Group
Financing Exemption constitutes state aid. 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 the then UK CFC legislation, Smiths
Group may be affected by the ultimate outcome of this decision.
In June 2019 the UK government appealed to the General Court of
the European Union against the decision. Many UK based
International companies have also appealed the decision, including
Smiths in October 2019. Nonetheless, the UK Government is required
to commence recovery from beneficiaries of the alleged aid in line
with the European Commission's decision. As the first step in this
recovery process, HMRC have written to beneficiaries, including
Smiths, for information.
In December 2019 HMRC issued general guidance on reliefs which
can be taken into account in computing the amount of State Aid. If
the European Commission's decision is ultimately upheld, Smiths
should be able to use tax attributes, including tax losses,
resulting in no material cash outlay for Smiths. Nevertheless, the
use of these attributes is not certain and the estimated maximum
potential liability (which includes both tax and interest) remains
at GBP15m. Based on our current assessment, no provision is being
made in respect of this issue.
6 Post retirement benefits
The Group provides post-retirement benefits to employees in a
number of countries throughout the world. The arrangements include
defined benefit and defined contribution plans and, mainly in the
United Kingdom (UK) and United States of America (US),
post-retirement healthcare. The principal defined benefit pension
plans are in the UK and US, and these have been closed so that no
future benefits are accrued.
Where any individual scheme shows a surplus under IAS 19, this
is disclosed on the balance sheet as a retirement benefit asset.
The IAS 19 surplus of any one scheme is not available to fund the
IAS 19 deficit of another scheme. The retirement benefit asset
arises from the rights of the employers to recover the surplus at
the end of the life of the scheme. The schemes in surplus are
mature, with a duration averaged over all scheme participants, of
17 years. However 33% of the liabilities of these schemes are
expected to be paid after 2040.
The amounts recognised in the balance sheet are as follows:
31 January 31 July
2020 2019
GBPm GBPm
================================================= ========== =======
Market value of scheme assets 4,422 4,424
Present value of funded scheme liabilities (3,953) (3,973)
-------------------------------------------------- ---------- -------
Surplus 469 451
-------------------------------------------------- ---------- -------
Unfunded pension plans (118) (123)
Post-retirement healthcare (8) (17)
-------------------------------------------------- ---------- -------
Present value of unfunded obligations (126) (140)
-------------------------------------------------- ---------- -------
Net retirement benefit asset 343 311
================================================== ========== =======
Post-retirement assets 486 469
Post-retirement liabilities (138) (152)
Liabilities held for distribution to owners (see
note 17) (5) (6)
-------------------------------------------------- ---------- -------
Net retirement benefit asset 343 311
================================================== ========== =======
The principal assumptions used in updating the valuations are
set out below:
31 January
2020 31 July 2019
============ ==============
UK US UK US
============================================= ===== ===== ====== ======
Rate of increase for active deferred members 3.8% n/a 4.2% n/a
Rate of increase in pensions in payment 2.9% n/a 3.3% n/a
Rate of increase in deferred pensions 2.9% n/a 3.3% n/a
Discount rate 1.7% 2.95% 2.1% 3.5%
============================================= ===== ===== ====== ======
The methods for setting the mortality assumptions for the UK
schemes are consistent with the 31 July 2019 valuation. The US
schemes have adopted the mortality improvement scale MP-2019 (31
July 2019: MP-2018).
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 January 2020 -
GBPm 31 July 2019 - GBPm
============================ ============================
SIPS TIGPS US schemes SIPS TIGPS US schemes
=========================================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme liabilities
- Active deferred members (42) (60) (96) (42) (60) (95)
- Deferred members (928) (582) (129) (930) (587) (123)
- Pensioners (1,139) (851) (64) (1,142) (857) (72)
=========================================== ======= ======= ========== ======= ======= ==========
Present value of funded scheme liabilities (2,109) (1,493) (289) (2,114) (1,504) (290)
Market value of scheme assets 2,379 1,709 281 2,377 1,710 282
=========================================== ======= ======= ========== ======= ======= ==========
Surplus/(deficit) 270 216 (8) 263 206 (8)
=========================================== ======= ======= ========== ======= ======= ==========
Contributions
Group contributions to the funded defined benefit pension plans
in the period totalled GBP12m (31 January 2019: GBP12m), comprising
regular contributions of GBP6m to SIPS and GBP6m to TIGPS. In
addition, GBP4m (31 January 2019: GBP3m) was spent on providing
benefits under unfunded defined benefit pension and post-retirement
healthcare plans. No additional contributions to support risk
reduction programmes were made in the current period.
The changes in the present value of the net pension balance in
the period were:
Six months Year
ended ended
31 January 31 July
2020 2019
GBPm GBPm
================================================= =========== ========
At beginning of period 311 381
Exchange adjustment 7 (4)
Current service cost (2) (3)
Scheme administration costs (2) (4)
Finance income - retirement benefits 4 11
Contributions by employer 16 36
Past service costs, curtailments and settlements 8 (30)
Actuarial gain/(loss) 1 (76)
Net retirement benefit asset at end of period 343 311
=================================================== =========== ========
Past service costs, curtailments and settlements
In the current period the Group recognised a curtailment gain of
GBP8m due to changes to the US post-retirement healthcare plans, as
a result of the US Patient Protection and Affordable Care Act, that
mean over 65s will no longer be covered by the healthcare plans. In
the prior period the Group recognised a past service cost of GBP29m
in respect of Guaranteed Minimum Pension equalisation.
7 Intangible assets
Software,
patents
Development Acquired and intellectual
Goodwill costs intangibles property Total
GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ============ ================= =====
Cost
At 31 July 2019 1,312 144 565 171 2,192
Exchange adjustments (98) (10) (43) (7) (158)
Business combinations 13 9 14 23
Additions 8 5 13
At 31 January 2020 1,223 142 536 169 2,070
================================== ======== =========== ============ ================= =====
Amortisation
At 31 July 2019 66 99 205 138 508
Exchange adjustments (5) (7) (17) (4) (33)
Charge for the period 3 28 4 35
At 31 January 2020 61 95 216 138 510
================================== ======== =========== ============ ================= =====
Net book value at 31 January 2020 1,162 47 320 31 1,560
Net book value at 31 July 2019 1,246 45 360 33 1,684
================================== ======== =========== ============ ================= =====
8 Property, plant and equipment
Fixtures,
fittings,
Land Plant tools
and and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
================================== ========== ========== ========== =====
Cost or valuation
At 31 July 2019 186 396 138 720
Exchange adjustments (13) (29) (9) (51)
Business combinations (note 13) 2 2
Additions 4 14 5 23
Disposals (4) (8) (1) (13)
At 31 January 2020 173 375 133 681
================================== ========== ========== ========== =====
Depreciation
At 31 July 2019 104 271 113 488
Exchange adjustments (7) (18) (7) (32)
Charge for the period 5 10 5 20
Disposals (4) (8) (1) (13)
At 31 January 2020 98 255 110 463
================================== ========== ========== ========== =====
Net book value at 31 January 2020 75 120 23 218
================================== ========== ========== ========== =====
Net book value at 31 July 2019 82 125 25 232
================================== ========== ========== ========== =====
9 Right of use assets
Properties Vehicles Equipment Total
GBPm GBPm GBPm GBPm
===================================== ========== ======== ========= =====
Cost
Right of use assets on transition 95 10 1 106
Exchange adjustments (6) (1) (7)
Business combinations (note 13) 1 1
Recognition of right of use assets 6 3 9
Derecognition of right of use assets (1) (1)
At 31 January 2020 95 12 1 108
===================================== ========== ======== ========= =====
Depreciation
Charge for the period 13 3 16
At 31 January 2020 13 3 16
===================================== ========== ======== ========= =====
Net book value at 31 January 2020 82 9 1 92
===================================== ========== ======== ========= =====
10 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. The net debt figure
includes accrued interest and the fair value adjustments to debt
relating to hedge accounting.
31 July
31 January 2019
2020 represented*
GBPm GBPm
============================================================= ========== =============
Cash and cash equivalents
Cash and cash equivalents 206 289
------------------------------------------------------------- ---------- -------------
Short-term borrowings
Lease liabilities (26)
Interest accrual (18) (9)
============================================================= ========== =============
(44) (9)
------------------------------------------------------------- ---------- -------------
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022 (306) (329)
EUR600m 1.25% Eurobond 2023 (520) (564)
EUR650m 2.00% Eurobond 2027 (560) (607)
Lease liabilities (67)
(1,453) (1,500)
============================================================= ========== =============
Borrowings (1,497) (1,509)
------------------------------------------------------------- ---------- -------------
Derivatives managing interest rate risk and currency profile
of the debt 40 45
------------------------------------------------------------- ---------- -------------
Net debt (1,251) (1,175)
============================================================= ========== =============
* The 31 July 2019 comparatives have been represented to include
the fair value of the derivatives used for the management of net
debt interest rate and currency risks as part of the net debt
balance.
Movements in net debt
Interest
Cash rate
and and cross
cash Short-term Long-term currency
equivalents borrowings borrowings swaps Net debt
GBPm GBPm GBPm GBPm GBPm
========================================== ============ =========== =========== ========== ========
At 31 July 2019 289 (9) (1,500) 45 (1,175)
Adoption of IFRS 16 (37) (111) (148)
=========================================== ============ =========== =========== ========== ========
Net debt at start of period (represented) 289 (46) (1,611) 45 (1,323)
Foreign exchange gains and losses (29) 122 93
Decrease in cash and cash equivalents (58) (58)
Net movement on lease liabilities 11 11
Capitalisation, interest accruals
and unwind of capitalised fees (8) (4) (12)
Fair value movement from interest
rate hedging 1 (5) (4)
Movement in discontinued operations
cash, loans and lease liabilities 4 10 28 42
=========================================== ============ =========== =========== ========== ========
At 31 January 2020 206 (44) (1,453) 40 (1,251)
=========================================== ============ =========== =========== ========== ========
11 Fair value of financial instruments
As at 31 January 2020 As at 31 July 2019**
========================================== ==========================================
At fair At fair
Basis value value
for through Total Total through Total Total
determining At amortised profit carrying fair At amortised profit carrying fair
fair cost or loss value value cost or loss value value
value GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------------- ------------ -------- --------- ------- ------------ -------- --------- -------
Financial
assets
Other
investments A 11 11 11 13 13 13
Other
investments* E 10 10 10 6 6 6
Cash and cash
equivalents A 138 68 206 206 153 136 289 289
Trade and
other
financial
receivables A/B 666 666 666 816 816 816
Derivative
financial
instruments B 42 42 42 50 50 50
Total f inancial
assets 804 131 935 935 969 205 1,174 1,174
============================ ============ ======== ========= ======= ============ ======== ========= =======
Financial
liabilities
Trade and
other
financial
payables A (547) (547) (547) (599) (599) (599)
Short-term
borrowings C (18) (18) (18) (9) (9) (9)
Long-term
borrowings C (1,386) (1,386) (1,434) (1,500) (1,500) (1,535)
Lease
liabilities D (93) (93) (93)
Derivative
financial
instruments B (3) (3) (3) (6) (6) (6)
============= ============= ============ ======== ========= ======= ============ ======== ========= =======
Total financial liabilities (2,044) (3) (2,047) (2,095) (2,108) (6) (2,114) (2,149)
============================ ============ ======== ========= ======= ============ ======== ========= =======
* Fair value gains and losses in this category of financial
assets are recognised in other comprehensive income.
** Amounts as at 31 July 2019 have been represented to include
non-current trade receivables and trade payables.
The fair value of a financial instrument is the price at which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's-length transaction. Fair
values have been determined with reference to available market
information at the balance sheet date, using the methodologies
described below:
A Carrying value is assumed to be a reasonable approximation to fair
value for all of these assets and liabilities (Level 2 as defined
by IFRS 13 Fair Value Measurement).
B Fair values of derivative financial assets and liabilities and
trade receivables held to collect or sell are estimated by discounting
expected future contractual cash-flows using prevailing interest
rate curves. Amounts denominated in foreign currencies are valued
at the exchange rate prevailing at the balance sheet date. These
financial instruments are included on the balance sheet at fair
value, derived from observable market prices (Level 2 as defined
by IFRS 13 Fair Value Measurement).
C Borrowings are carried at amortised cost. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. The fair value of borrowings is estimated
using quoted prices (Level 1 as defined by IFRS 13).
D Leases are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance
sheet date. The fair value of the lease contract is estimated by
discounting contractual future cash-flows (Level 2 as defined by
IFRS 13).
E The fair value of instruments is estimated by using unobservable
inputs to the extent that relevant observable inputs are not available.
Unobservable inputs are developed using the best information available
in the circumstances, which may include the Group's own data, taking
into account all information about market participation assumptions
that is reliably available. (Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1
inputs
Level 3 - inputs not based on observable market data
12 Provisions and contingent liabilities
Non-headline and
Headline legacy Total
======== ================================ =====
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
============================= ======== =========== ============ ===== =====
Current liabilities 17 29 16 4 66
Non-current liabilities 1 208 58 18 285
============================== ======== =========== ============ ===== =====
At 31 July 2019 18 237 74 22 351
Exchange adjustments (1) (18) (6) (1) (26)
Provision charged 4 10 5 3 22
Provision released (3) (3)
Unwind of provision discount 2 1 3
Utilisation (5) (9) (4) (2) (20)
At 31 January 2020 13 222 70 22 327
============================== ======== =========== ============ ===== =====
Current liabilities 13 30 14 5 62
Non-current liabilities 192 56 17 265
============================== ======== =========== ============ ===== =====
At 31 January 2020 13 222 70 22 327
============================== ======== =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions are the only provisions which are discounted.
Headline provisions and contingent liabilities:
Warranty provision and product liability
At 31 January 2020 there are warranty and product liability
provisions of GBP11m (31 July 2019: GBP17m). 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,
although there can be no guarantee that such provisions (which may
be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to
commercial disputes and litigation such as government price audits,
product liability claims, employee disputes and other kinds of
lawsuits, and faces different types of legal issues in different
jurisdictions. The high level of activity in the US, for example,
exposes the Group to the likelihood of various types of litigation
commonplace in that country, such as 'mass tort' and 'class action'
litigation, legal challenges to the scope and validity of patents,
and product liability and insurance subrogation claims. These types
of proceedings (or the threat of them) are also used to create
pressure to encourage negotiated settlement of disputes. Any claim
brought against the Group (with or without merit), could be costly
to defend. These matters are inherently difficult to quantify. In
appropriate cases a provision is recognised based on best estimates
and management judgement, but there can be no guarantee that these
provisions (which may be subject to potentially material revision
from time to time) will result in an accurate prediction of the
actual costs and liabilities that may be incurred. There are also
contingent liabilities in respect of litigation for which no
provisions are made.
The Group operates in some markets where the risk of unethical
or corrupt behaviour is material and has procedures, including an
employee 'Ethics Alertline', to help it identify potential issues.
Such procedures will, from time to time, give rise to internal
investigations, sometimes conducted with external support, to
ensure that the Group properly understands risks and concerns and
can take steps both to manage immediate issues and to improve its
practices and procedures for the future. The Group also co-operates
with relevant authorities in investigating business conduct issues
whenever requested to. The Group is not aware of any issues which
are expected to generate material financial exposures.
Non-headline and legacy provisions and contingent
liabilities:
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in
numerous lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. The JCI
products generally referred to in these cases consist of industrial
sealing product, primarily packing and gaskets. The asbestos was
encapsulated within these products in such a manner that causes JCI
to believe, based on tests conducted on its behalf, that the
products were safe. JCI ceased manufacturing products containing
asbestos in 1985.
The table below summarises the JCI claims experience over the
last 40 years since the start of this litigation:
31 January 31 July
2020 2019
============================================ ========== =======
JCI claims experience
Claims against JCI that have been dismissed 287,000 285,000
Claims which JCI is currently a defendant
in 37,000 38,000
Cumulative final judgments, after appeals,
against JCI since 1979 145 144
Cumulative value of awards ($m) since
1979 169 168
=============================================== ========== =======
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. See note 3 for the cost recovery achieved in both
the current and prior periods.
John Crane, Inc. litigation provision
The provision is based on past history and published tables of
asbestos incidence projections and is determined using asbestos
valuation experts, Bates White LLC. The assumptions made in
assessing the appropriate level of provision include: the period
over which the expenditure can be reliably estimated; the future
trend of legal costs; the rate of future claims filed; the rate of
successful resolution of claims; and the average amount of
judgments awarded.
The JCI asbestos litigation provision has developed in the
period as follows:
Six months
ended Year ended
31 January 31 July
2020 2019
GBPm GBPm
============================================================ =========== ==========
John Crane, Inc. litigation provision
Gross provision 236 257
Discount (14) (20)
============================================================ =========== ==========
Discounted provision 222 237
============================================================ =========== ==========
Operating profit charge
Increased provision for adverse judgments and legal defence
costs 6 7
Change in US risk free rates 4 8
------------------------------------------------------------ ----------- ----------
Subtotal - items charged to the provision 10 15
Litigation management expense - legal fees in connection
with litigation against insurers and defence strategy 1 2
Recoveries from insurers (11)
============================================================ =========== ==========
Total operating profit charge 11 6
============================================================ =========== ==========
Cash-flow
Provision utilisation (9) (24)
John Crane, Inc. litigation spend 9 26
============================================================ =========== ==========
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 GBP225m and future spend at
the 95th percentile of GBP284m (31 July 2019: GBP234m and GBP297m,
respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total
future spend will fall between GBP224m and GBP246m (31 July 2019:
between GBP242m and GBP267m), compared with the gross provision
value of GBP236m (31 July 2019: GBP257m).
Sensitivity of the projections to changes in the time horizon
used
If the asbestos litigation environment becomes more volatile and
uncertain, for example if defendants are successful in legal cases
against plaintiff law firms and this impacts the nature of claims
filed, the time horizon over which the provision can be calculated
may reduce. Conversely, if the environment became more stable, or
JCI changed approach and committed to long term settlement
arrangements, the time period covered by the provision might be
extended.
The projections use a 10 year time horizon. Reducing the time
horizon by one year would reduce the provision by GBP17m (31 July
2019: GBP17m) and reducing it by five years would reduce the
provision by GBP98m (31 July 2019: GBP100m).
We consider, after obtaining advice from Bates White LLC, that
to forecast beyond ten years requires that the litigation
environment remains largely unchanged with respect to the
historical experience used for estimating future asbestos
expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If
one assumed that the asbestos litigation environment would remain
unchanged for longer and extended the time horizon by one year it
would increase the provision by GBP14m (31 July 2019: GBP14m);
extending it by five years would increase the provision by GBP58m
(31 July 2019: GBP59m). 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 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 number of future claims, the nature of such
claims or the cost to resolve them for years beyond the 10 year
time horizon.
Titeflex Corporation litigation
In recent years Titeflex Corporation, a subsidiary of the Group
in the Flex-Tek division, has received a number of claims from
insurance companies seeking recompense on a subrogated basis for
the effects of damage allegedly caused by lightning strikes in
relation to its flexible gas piping product. It has also received a
number of product liability claims regarding this product, some in
the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas
when installed in accordance with the manufacturer's instructions
and local and national codes; however some claims have been settled
on an individual basis without admission of liability. Equivalent
third-party products in the US marketplace face similar
challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement
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 GBP70m (31 July 2019: GBP74m) is a discounted
pre-tax provision using discount rates, being the risk-free rate on
US debt instruments for the appropriate period. The deferred tax
asset related to this provision is shown within the deferred tax
balance.
31 January 31 July
2020 2019
GBPm GBPm
============================== ========== =======
Gross provision 105 118
Discount (35) (44)
============================== ========== =======
Discounted pre-tax provision 70 74
Deferred tax (17) (18)
============================== ========== =======
Discounted post-tax provision 53 56
============================== ========== =======
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 GBP5m (31 July
2019: GBP5m) lower, and if the benefit were 0.5% lower, the
provision would be GBP6m (31 July 2019: GBP6m) higher.
Other non-headline and legacy
Legacy provisions comprise provisions relating to former
business activities and properties no longer used by the Group.
Non-headline provisions comprise all provisions which were
disclosed as non-headline items when they were charged to the
income statement.
These provisions cover non-headline reorganisation, vacant
properties, disposal indemnities, and litigation in respect of old
products and discontinued business activities.
13 Acquisitions
In October 2019, Interconnect completed the acquisition of 100%
of the share capital of Reflex Photonics Inc. for an enterprise
value of CAD$40m. Reflex Photonics is a business that manufactures
ruggedised high-speed optics products for space, aerospace,
defence, avionics, and industrial applications. The acquisition
strengthens Interconnect's position in these markets.
The intangible assets recognised on acquisition comprise
customer relationships, intellectual property and technology.
Goodwill represents the expected synergies from the strategic fit
of the acquisition and the value of the expertise in the assembled
workforce. From the date of acquisition to 31 January 2020, Reflex
Photonics contributed GBP2m to revenue and less than GBP1m to
profit before taxation. If the Group had acquired this business
from the beginning of the financial year, the acquisition would
have contributed GBP5m to revenue and less than GBP1m to profit
before taxation.
The provisional balance sheet at the date of acquisition is:
Reflex
Photonic
Inc.
GBPm
======================== ============================== =========
Non-current assets - acquired intangible assets 14
- plant and machinery 2
- right of use assets 1
Current assets - inventory 2
- trade and other receivables 2
Current liabilities - trade and other payables (1)
Non-current liabilities - lease liabilities (1)
- deferred tax (3)
Net assets acquired 16
======================================================== =========
Goodwill on current period acquisitions 8
======================================================== =========
Cash paid during
the period 24
======================================================== =========
Total consideration 24
======================================================== =========
Acquisitions in previous years
The Group acquired United Flexible 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 GBP1m increase in
the goodwill associated with this acquisition in the current
year.
14 Dividends
The following dividends were declared and paid in the
period:
Six months Six months
ended ended
31 January 31 January
2020 2019
GBPm GBPm
========================================================== =========== ===========
Ordinary final dividend of 31.80p for 2019 (2018: 30.75p)
paid 15 November 2019 126 122
========================================================== =========== ===========
15 Cash-flow from operating activities
Six months ended Six months ended
31 January 2020 31 January 2019
============================= ================================
Non-headline Non-headline
(note Headline (note Total
Headline 3) Total Restated 3) Restated
GBPm GBPm GBPm GBPm GBPm GBPm
================================================ ======== ============ ===== ======== ============ ========
Operating profit/(loss) - continuing
operations 186 (41) 145 175 (48) 127
- discontinued
operations 94 (11) 83 71 15 86
Amortisation of intangible assets 7 28 35 17 17 34
Depreciation of property, plant
and equipment 20 20 27 27
Depreciation of right of use
assets 16 16
Loss on disposal of property,
plant and equipment 1 1 1 1
Loss/(profit) on disposal of
businesses 1 1 (17) (17)
Share-based payment expense 8 8 7 7
Retirement benefits 4 (24) (20) 3 15 18
(Increase) in inventories (98) (98) (50) (50)
Decrease(increase) in trade
and other receivables 149 149 (2) 3 1
(Decrease) in trade and other
payables (78) (78) (10) (6) (16)
(Decrease)/increase in provisions (2) 3 1 (6) (12) (18)
================================================= ======== ============ ===== ======== ============ ========
Cash generated from operations 307 (44) 263 233 (33) 200
Interest paid (17) (17) (29) (29)
Interest received 1 1 4 4
Tax paid (60) (60) (52) (52)
================================================= ======== ============ ===== ======== ============ ========
Net cash inflow/(outflow) from
operating activities 231 (44) 187 156 (33) 123
================================================= ======== ============ ===== ======== ============ ========
- continuing operations 177 (34) 143 75 (32) 43
- discontinued operations 54 (10) 44 81 (1) 80
================================================= ======== ============ ===== ======== ============ ========
The split of tax payments between headline and non-headline only
considers the nature of payments made. No adjustment has been made
for reductions in tax payments required as a result of tax relief
received on non-headline items.
Headline cash measures - continuing operations
The Group measure of headline operating cash excludes interest
and tax, and includes capital expenditure supporting organic
growth.
Six months ended Six months ended
31 January 2020 31 January 2019
============================= =============================
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
============================================ ======== ============ ===== ======== ============ =====
Net cash inflow/(outflow) from operating
activities 177 (34) 143 75 (32) 43
============================================ ======== ============ ===== ======== ============ =====
Include:
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (37) (37) (29) (29)
Investment in financial assets relating
to operating activities and pensions
financing 1 1
============================================ ======== ============ ===== ======== ============ =====
Free cash-flow 106 15
============================================ ======== ============ ===== ======== ============ =====
Exclude:
Investment in financial assets relating
to operating activities and
pensions financing outstanding at
the balance sheet (1) (1)
Interest paid 14 14 28 28
Interest received (4) (4)
Tax paid 48 48 39 39
============================================ ======== ============ ===== ======== ============ =====
Operating cash-flow - continuing operations 202 (34) 168 109 (32) 77
============================================ ======== ============ ===== ======== ============ =====
Headline cash conversion - continuing operations
Headline operating cash conversion for the Group's continuing
operations is calculated as follows:
Six months Six months
ended ended
31 January 31 January
2020 2019
GBPm GBPm
=================================== =========== ===========
Headline operating profit 186 175
Headline operating cash-flow 202 109
Headline operating cash conversion 109% 63%
=================================== =========== ===========
Reconciliation of free cash-flow to total movement in cash and
cash equivalents
Six months Six months
ended ended
31 January 31 January
2020 2019
GBPm GBPm
=========================================== =========== ===========
Free cash-flow - continuing operations 106 15
Free cash-flow - discontinued operations 26 56
=========================================== =========== ===========
Free cash-flow - total Group 132 71
Disposal of businesses 29
Acquisition of business (24)
Net cash-flow used in financing activities (166) (337)
=========================================== =========== ===========
Net decrease in cash and cash equivalents (58) (237)
=========================================== =========== ===========
16 Related party transactions
The related party transactions in the period were consistent
with the nature and size of transactions disclosed in the Annual
Report for the year ended 31 July 2019.
17 Discontinued operations and businesses held for distribution to owners
The Group is currently pursuing the demerger of the Smiths
Medical business to list it separately on the UK Stock Exchange;
accordingly the Smiths Medical business has been accounted for as a
discontinued operation and as a business held for distribution to
owners at 31 January 2020.
The previously announced separation of Smiths Medical was on
track to be delivered by the end of the first half of 2020.
However, it is simply not practicable to complete the separation in
current circumstances. Therefore, the Board has decided to delay
separation until conditions improve. See page 6 for further
information.
Discontinued operations
The financial performance of the Smiths Medical business in the
current and prior period is presented below:
Six months ended Six months ended
31 January 2020 31 January 2019
============================= ==================================
Non-headline Non-headline
(note Headline (note Total
Headline 3) Total Restated 3) Restated
GBPm GBPm GBPm GBPm GBPm GBPm
==================================== ======== ============ ===== ========= ============ =========
Revenue 434 434 430 430
Cost of sales (186) (186) (204) (204)
------------------------------------- -------- ------------ ----- --------- ------------ ---------
Gross profit 248 248 226 226
Sales and distribution costs (89) (89) (89) (89)
Administrative expenses (65) (11) (76) (66) (2) (68)
Profit on business disposal 17 17
Operating profit 94 ( 11) 83 71 15 86
Finance costs (2) 68 66 (1) (1)
Taxation (22) 6 (16) (16) (2) (18)
===================================== ======== ============ ===== ========= ============ =========
Profit from discontinued operations 70 63 133 54 13 67
------------------------------------- -------- ------------ ----- --------- ------------ ---------
Following the adoption of discontinued operations accounting for
Smiths Medical, the Group has ceased depreciating or amortising the
Smiths Medical business assets in the consolidated results. This
has increased Smiths Medical headline operating profits by GBP23m
in the current half year.
Cash-flow from discontinued operations included in the
consolidated cash-flow statement is as follows:
Six months Six months
ended ended
31 January 31 January
2020 2019
GBPm GBPm
=========================================== =========== ===========
Net cash inflow from operating activities 44 80
Net cash-flow used in investing activities (18) (7)
Net cash-flow used in financing activities (48) (78)
=========================================== =========== ===========
Net decrease in cash and cash equivalents (22) (5)
=========================================== =========== ===========
Businesses held for distribution to owners
The carrying value of the assets and liabilities of the Smiths
Medical business as at 31 January 2020 and 31 July 2019 are as
follows:
31 January 31 July
2020 2019
GBPm GBPm
====================================================== ========== =======
Assets classified as held for distribution to owners:
Intangible assets 703 746
Property, plant and equipment 132 135
Right of use assets 43
Inventories 153 151
Deferred tax assets 12 13
Current tax receivable 4 2
Trade and other receivables 126 138
Cash and cash equivalents 41 26
Financial derivatives 5 5
======================================================= ========== =======
Assets classified as held for distribution to owners 1,219 1,216
======================================================= ========== =======
Liabilities classified as held for distribution to
owners:
Financial liabilities
- borrowings (19)
- lease liabilities (41) (3)
- financial derivatives (2) (2)
Trade and other payables (114) (137)
Current tax payable (15) (11)
Deferred tax liabilities (51) (48)
Retirement benefit obligations (5) (6)
Provisions for liabilities and charges (6) (6)
======================================================= ========== =======
Liabilities classified as held for distribution to
owners (253) (213)
======================================================= ========== =======
Additional segmental information for discontinued operations
The capital expenditure on property, plant and equipment,
capitalised development and other intangible assets for
discontinued operations is GBP18m (31 January 2019: GBP24m).
Revenue for the Smiths Medical discontinued operation is
analysed by the following product lines: Infusion Systems GBP148m
(31 January 2019: GBP151m), Vascular Access GBP145m (31 January
2019: GBP140m) and Vital Care/Other GBP141m (31 January 2019:
GBP139m).
Pro-forma balance sheet of the Group excluding Smiths
Medical
31 January
2020
GBPm
======================================= ==========
Non-current assets
Intangible assets 1,560
Property, plant and equipment 218
Right of use assets 92
Financial assets - other investments 21
Retirement benefit assets 486
Deferred tax assets 106
Trade and other receivables 53
Financial derivatives 40
========================================= ==========
2,576
Current assets
Inventories 470
Current tax receivable 30
Trade and other receivables 613
Cash and cash equivalents 206
Financial derivatives 2
========================================= ==========
1,321
======================================= ==========
Total assets 3,897
========================================= ==========
Current liabilities
Financial liabilities
- borrowings (18)
- lease liabilities (26)
- financial derivatives (3)
Provisions for liabilities and charges (62)
Trade and other payables (498)
Current tax payable (62)
========================================= ==========
(669)
Non-current liabilities
Financial liabilities
- borrowings (1,386)
- lease liabilities (67)
Provisions for liabilities and charges (265)
Retirement benefit obligations (138)
Corporation tax payable (5)
Deferred tax liabilities (44)
Trade and other payables (49)
========================================= ==========
(1,954)
======================================= ==========
Total liabilities (2,623)
========================================= ==========
Net assets 1,274
========================================= ==========
18 Non-statutory capital and credit metrics
In addition to the non-statutory profit measures explained in
note 3, the Group calculates credit metrics and return on capital
employed incorporating the same adjustments. See the disclosures on
presentation of results in accounting policies for an explanation
of the adjustments.
Return on capital employed (ROCE)
The Group's ROCE is calculated over a rolling 12-month period
and is the percentage which headline operating profit comprises of
monthly average capital employed.
See note 2 for the divisional headline operating profit and
average divisional capital employed used to calculate divisional
ROCE.
Capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP787m (31 January 2019: GBP787m)
and eliminates post-retirement benefit assets and liabilities and
litigation provisions relating to non-headline items, both net of
related tax, and net debt.
31 January 31 January
2020 2019
Notes GBPm GBPm
============================================================== ===== ========== ==========
Net assets 2,240 2,169
Adjust for:
Goodwill recognised directly in reserves 787 787
Post-retirement benefit assets and liabilities 6 (343) (252)
Tax related to post-retirement benefit assets and liabilities 61 62
John Crane, Inc. litigation provision and related tax 174 172
Titeflex Corporation litigation provision and related
tax 53 55
Net debt (including GBP19m of net debt in discontinued
operations) 1,270 938
============================================================== ===== ========== ==========
Capital employed 4,242 3,931
============================================================== ===== ========== ==========
Return on capital employed
31 January 31 January
2020 2019
Notes GBPm GBPm
===================================================== ===== ========== ==========
Headline operating profit for previous twelve months 608 542
Monthly average capital employed 2 4,156 3,746
===================================================== ===== ========== ==========
ROCE 14.7% 14.5%
===================================================== ===== ========== ==========
Credit metrics - Total Group including discontinued
operations
The Group monitors the ratio of net debt to headline earnings
before interest, tax, depreciation and amortisation as part of its
management of credit ratings. This ratio is calculated as
follows:
Headline earnings before interest, tax, depreciation and
amortisation ("headline EBITDA") - Total Group including
discontinued operations
Six months
Six months ended
ended 31 January
31 January 2019
2020 Restated
Notes GBPm GBPm
======================================================= ===== =========== ===========
Headline operating profit 2 186 175
Include:
- headline operating profit of discontinued operations 17 94 71
Exclude:
- depreciation of property, plant and equipment 8 20 27
- depreciation of right of use assets 9 16
- amortisation of development costs 7 3 11
- amortisation of software, patents and intellectual
property 7 4 6
======================================================= ===== =========== ===========
Headline EBITDA 323 290
======================================================= ===== =========== ===========
Annualised headline EBITDA - Total Group including discontinued
operations
Six months
Six months ended
ended 31 January
31 January 2019
2020 Restated
Notes GBPm GBPm
=========================================================== ====== =========== ===========
Headline EBITDA for the period 323 290
Add:
- headline EBITDA for the previous year 666 641
Exclude:
- headline EBITDA for the first six months of the previous
year (290) (298)
=================================================================== =========== ===========
Annualised headline EBITDA 699 633
=================================================================== =========== ===========
Ratio of net debt to annualised headline EBITDA - Total Group
including discontinued operations
31 January
31 January 2019
2020 Restated
GBPm GBPm
======================================================= ========== ==========
Annualised headline EBITDA 699 633
Net debt (including GBP19m of net debt in discontinued
operations) 1,270 938
======================================================== ========== ==========
Ratio of net debt to headline EBITDA 1.8 1.5
======================================================== ========== ==========
19 COVID-19 subsequent event
The impact of the COVID-19 pandemic on the Group's operations
and trading is discussed in the results overview section on page 4
and the principal risks section on page 13. The basis of
preparation section in note 1 to these condensed interim financial
statements summarises the severe but plausible downside scenario
for COVID--19 that the Group has modelled.
Management have concluded that COVID-19 is a non-adjusting post
balance sheet event as at 31 January 2020 on the basis that at that
date:
- the World Health Organisation had not declared a global health emergency; and
- there was no significant spread of the virus outside China.
As a non-adjusting event, no adjustment has been made in respect
of COV#ID-19 over and above what was known as at 31 January
2020.
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
IR UVSWRROUSRAR
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