Final Results

Smiths Group PLC 24 September 2003 Smiths Group: Preliminary results for the 12 months ended 31 July 2003 Highlights: • Pre-tax profit of £384m* (-3%) and EPS of 50.1p* (-2%) incl. discont. activities • Operating profit* up 2% to £372m on continuing activities • Operating cash-flow (after capital expenditure) at 90% of profit* • Annual dividend increased by 2% to 26p • New divisional structure focuses on growth opportunities • Good progress on disposals of non-core activities • R&D increased by 18% to £251m • Statutory EPS of 20.0p (33.3p) after goodwill write-down on Polymer disposal *(before goodwill amortisation and exceptionals) Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: 'We achieved an increase in operating profit and held earnings close to last year's on a continuing basis, while absorbing the commercial aerospace downturn, the impact of a weaker dollar and higher pension costs. Meanwhile, we have been successfully re-shaping the company to focus on strong, long-term growth opportunities, including establishing Smiths Detection as a separate entity and making sizeable disposals. This marks the 33rd year of consecutive dividend increases by Smiths Group.' Media Investors Bernard Carey Russell Plumley +44 (0) 20 8457 8403 +44 (0) 20 8457 8203 bernard.carey@smiths-group.com russell.plumley@smiths-group.com A live audio webcast of the meeting with analysts at 9.00am UK time can be accessed on www.smiths-group.com/prelim2003, and the meeting can be heard live by dialling in to +44 (0) 20 7019 0810. Statutory reporting For the year ended 31 July 2003, Smiths Group recorded consolidated sales of £3.1 billion, including discontinued activities, compared with £3.2 billion in 2002. On a statutory basis, after goodwill amortisation and exceptional charges, operating profit was £380m (2002: £334m), pre-tax profit was £217m (£277m), including non-operational exceptional charges of £123m (£24m) relating to disposals. Consolidated earnings per share on this basis were 20.0p (33.3p). Retirement benefits are now reported under FRS 17 and the prior year has been restated. Before goodwill amortisation and exceptionals, pre-tax profit was £384m (£396m) and earnings per share were 50.1p, including 4.5p per share from discontinued activities, compared with 51.0p a year earlier. The Board is recommending a final dividend of 17.25p, bringing the total for the year to 26.0p, an increase of 2%. Continuing activities, before goodwill amortisation and exceptionals £m 2003 2002 (restated) Turnover 2,629 2,588 Operating profit 372 364 Pre-tax profit 349 364 Earnings per share 45.6p 46.9p During 2003, Smiths Group made significant progress in refocusing on markets offering the best potential for long-term growth, with over 70% of profits coming from detection, medical and aerospace activities. At the same time, the company delivered a consistent year-on-year performance despite a sharp slowdown in the commercial aerospace sector. Turnover from continuing activities of £2.6 billion was similar to a year earlier. Operating profit of £372m was up by 2% after £20m adverse currency translation and a £14m increase in company-funded R& D. The operating margin was unchanged at 14%. Underlying productivity improved as a result of continued cost cutting, and gross margins rose one point, to 40%. Pre-tax profit of £349m was 4% down, impacted by an increase of £28m in pension financing costs. Earnings per share of 45.6p were 3% down, benefiting from a tax rate of 27% compared with 28% a year earlier. The return on total shareholder investment, including goodwill previously set off against reserves, was 12% after tax, well above the company's cost of capital. Total cash generation (including discontinued operations) remained a strong feature of Smiths' performance, with 90% of operating profit converted into operating cash after capital expenditure. Free cash-flow, net of interest, tax and restructuring costs was £270m, or 48.4 pence per share. Timing of deliveries led to a £42m working capital outflow during the year. The company's net debt at year end was £715m compared with £725m a year earlier, and will drop sharply following receipt of proceeds from the disposal of Polymer Seals. Total interest cost on debt for the year was £38m, down from £58m last year as a result of lower average borrowing levels and reduced interest rates. Action to refocus the company led to disposals during the year which realised net proceeds of £137m. Agreement to sell Polymer Seals for £495m was announced in July, with completion at the end of September. Turnover and profits of these businesses are recorded as discontinued. The non-operating exceptional charges relating to disposals comprise goodwill impairment of £137m on the assets of Polymer Seals, offset by a book gain of £14m on the other disposals. In December, the German detection company Heimann was acquired for £236m. It has grown strongly since joining Smiths, and now forms a significant part of the newly-established Smiths Detection division. A strong commitment to product development helps Smiths maintain its competitive edge, and new products in all four divisions will boost growth in the years ahead. Research and development spending increased by 18% to £251m, of which £130m (2002 : £116m) was directly charged against profits for the year and the balance recovered from customers. Also charged to operating profit before exceptionals were reorganisation costs of £11m. Gross capital expenditure of £94m was ahead of depreciation. The company has voluntarily adopted the retirement benefits accounting standard FRS 17. The 2003 accounts have been prepared on this basis and the prior year restated. This provides more transparent disclosure of the cost of retirement benefits. Operating profit bears the £48m (2002 : £50m) service cost of those benefits earned in the year. Profit before tax also bears a pensions financing charge of £2m (compared with a credit of £26m in 2002 when the schemes' funding position was stronger). The balance sheet now includes net retirement benefit liabilities of £308m after tax, up from £129m last year, due principally to lower discount rates for assessing long-term pension commitments. Company contributions to the funded schemes rose to £46m in 2003 (£14m in 2002), broadly matching the regular service cost, and these are included in operating cash-flow. The company expects to make increased contributions in 2004. The company provides full disclosure in the Annual Review regarding lawsuits involving John Crane Inc, a US subsidiary that once used encapsulated asbestos in certain products. With the benefit of its 'safe product' defence, and having contested every case in which it has been named, the subsidiary has been dismissed before trial from cases involving approximately 90,000 claimants over the last 24 years. It is currently a defendant in cases involving approximately 174,000 claims. Despite this large number of claims, final judgments, after appeals, have been made against John Crane Inc in only 28 cases, with awards amounting to $17.8m to date. Awards and legal costs are covered by insurance. There has been no change in the company's view that the litigation does not represent a material contingent liability, and no provision has been made in the Accounts. The company retains an investment of £325m in preference shares of TI Automotive Ltd. Entitlement to dividends is cumulative. No dividend has been received or accrued during the year. As a result of disposals and reorganisation, the number of employees in the continuing activities of Smiths Group is now 26,000, of whom 13,600 are in North America and 7,100 in the UK. Approximately half of the company's sales originated in North America and 30% in the UK. Exports from the UK were £460m in 2003, or 60% of UK production. A new divisional organisation was implemented on 1 August 2003. This focuses on the opportunities for growth in particular market sectors and will drive the businesses towards their full potential. The results for 2003 are presented in this format, and 2002 has been restated. Smiths Detection, which generated 19% of operating profits from continuing activities in 2003, has been established as a separate division. Smiths Medical (24%) remains unchanged by this reorganisation. Smiths Aerospace (28%) is now focused on systems and equipment for aircraft. Specialty Engineering (29%) combines John Crane, the former activities of the Industrial division, and marine and tubular systems, both previously part of Aerospace. Smiths Detection £m 2003 2002 (restated) Turnover 273 119 Operating profit 71 29 Margin 26% 24% Sales of detection equipment have grown rapidly in the past year, both organically and through acquisition. The principal driver of growth is international concern over terrorist threats and the consequent need for greater security in vulnerable locations. Smiths Detection is in a strong competitive position in that it alone offers both ion mobility spectrometry (trace) and X-ray technologies. The trace technologies encompass detection of chemical, biological and other toxic agents, explosives and narcotics. Protection for soldiers on the battlefield was the initial application, and military sales continue to grow. But this has been overtaken by use in civil applications, of which airports have been the most prominent. In the early part of the year, Smiths Detection supplied 3,000 Ionscan explosive detectors to the US Transportation Security Agency (TSA) to screen passengers and their hand luggage. While this order will not be replicated, there are other opportunities to sustain growth, including providing equipment to protect the US Postal Service from the threat of anthrax in the mail. New products include the Sentinel II explosive detection portal, already finding its first applications in airports and elsewhere, including Toronto's CN Tower. The acquisition of Heimann not only doubled the size of Smiths Detection but brought complementary technologies and market access around the world. It has performed better than expected and is already achieving close to the company's average rate of return on invested capital. Heimann is a leader in X-ray systems for identifying dangerous objects such as weapons and explosives, as well as narcotics and contraband. Whilst airports are significant customers, there is a broad spread of applications wherever security is an issue. In particular, the inspection of bulk freight containers during trans-shipment is recognised as an effective means of preventing threats to national security. As an example, all road freight travelling on Channel Tunnel trains is now examined using Heimann equipment located at the French and UK entry points. Heimann's latest explosive detection system is so far the only one efficient enough to be installed in-line with automated baggage handling at busy airports. Already in use in Europe, it awaits certification by the TSA, which will give access to a significant market in the US. In the current year, Smiths Detection will benefit from closer integration of its activities and the introduction of important new products. Activity is expected to build through the year, whereas in 2003 activity was skewed to the first half due to the TSA deliveries. Smiths Medical £m 2003 2002 (restated) Turnover 486 480 Operating profit 88 93 Margin 18% 19% During 2003, the world market for medical devices continued to grow steadily, in line with increased healthcare spending in the advanced economies, driven by the ageing of their populations and strong demand for new technology. Smiths Medical benefited from these trends, although its underlying performance was masked by the impact of currency translation, mainly from a weaker US dollar, which reduced reported sales by £20m and profits by £5m. Over half of the division's sales are generated in the US. The decline in operating margin was limited to the first half and was largely due to the one-off costs of launching the new Cozmo insulin delivery pump. Margins in the first half dipped to 16%, recovering to 20% in the second half, so averaging 18% for the year. The company aims to maintain Medical's margin while progressively increasing investment in R&D to the industry norm of 5 - 6% of sales. Currently, approximately 20% of products are less than three years old, and there is a pipeline of new products, which secure the highest margins. The Cozmo pump has been well received since its introduction in December. This device enables people with the more serious, Type 1, form of diabetes to receive their insulin without the need for frequent injections. Over 3,000 have been sold already and the company is establishing a strong position in the market. Ambulatory pumps for medication delivery and pain management have also been selling well. Smiths Medical has been organised around two broad product categories : Medication Delivery & Patient Monitoring, which includes the infusion pumps already described, patient temperature management and pulse oximetry; and Anaesthesia & Safety Devices, including single-use devices for anaesthesia and airway management during surgery or other intensive care procedures. Specialised salesforces have been assigned to each of these sectors and a team established to manage relationships with the big hospital group purchasing organisations in the US. Smiths Medical International now co-ordinates sales through a worldwide distributor network. In single-use devices, needle protection has been an area of strong growth for the division, and the company's range has been greatly expanded to cover all types of needles, although it has not yet been possible to introduce a retractable device. Smiths Medical's highly automated plant at Keene, New Hampshire is making the needle protection range at an annual rate of 250 million units. Further growth is expected, as compliance by US hospitals with the Needlestick Injury Prevention Act continues to increase. New airway products introduced during the year include a single-use laryngeal mask. This and similar product innovations have helped achieve steady growth in the anaesthesia and respiratory care business. The drive to reduce costs whilst maintaining high quality has led to the enlargement of the company's global assembly facility in Tijuana, Mexico, which now accounts for close to half of Smiths Medical's output of high volume devices. With the benefit of lower cost production, gross margin improved by 1%, helping to fund the increased R&D. Japan is an important element of the division's performance, and Smiths has a strong position in this market. There has been government pressure on re-imbursement of healthcare costs and this, together with an increased regulatory burden, held back the growth of the Japanese subsidiary. Greater efficiency in the distribution network is being implemented to counter this effect. The outlook for Smiths Medical is for sales growth from recent new product launches, further benefit from the additional R&D spending, and with the traditionally high margin sustained. Smiths Aerospace £m 2003 2002 (restated) Turnover 998 1,079 Operating profit 105 139 Margin 11% 13% Smiths Aerospace is a £1 billion business now focused on systems and equipment for all types of aircraft. Defence equipment accounts for 60% of sales, and the remainder is supplied to commercial customers. Smiths is in the privileged position of being a Tier One supplier with close links to the prime manufacturers, with a commitment to the development of the integrated systems which form the building blocks of any modern aircraft. It is among a small group of companies which can offer a combination of avionics, actuation and aerostructures in an industry sector which is still consolidating. The drop in divisional profits in 2003 was due to the continued downturn in commercial aerospace, an increase in R&D and an adverse US dollar translation effect. The number of new passenger jets with more than 100 seats built annually will have declined from a peak of over 900 four years ago to fewer than 600 this year, and there is no sign of an upturn before 2006. With restructuring early in the year, the commercial business remained profitable. Air travel remained at depressed levels through 2003 and airline finances are in poor shape. This has affected not just the demand for new aircraft, but also the aftermarket. Smiths' maintenance, spares and repairs activity declined and there has not yet been any noticeable recovery. Smiths continues to invest for an eventual upturn in the commercial aerospace sector. Significant business has been secured on the Airbus A380 and products are in current development. The company has also been chosen by Boeing to bid for a number of key programmes on the new mid-size jetliner, currently designated B7E7. Meanwhile, defence business continued to grow in 2003. The company is a key supplier and systems integrator on the principal US and European platforms. In particular, business on the F-18E/F, F-22, Apache Longbow, C-130 AMP, C-130J, C-17 and Eurofighter Typhoon has held up well. Development of equipment for new programmes is also well in hand: the F-35 Joint Strike Fighter is government-funded, while the Boeing 767 Global Tanker is a company-funded initiative. These aircraft are expected to generate sizeable revenues for Smiths in the latter part of this decade. The trend of the company's defence sales growth is expected to average 6% per annum or more over the decade, although individual military contracts may affect the growth pattern of the business from one year to the next. Overall, the mix of commercial and military business is expected to lead to a year of stable performance for Smiths Aerospace in 2004. Specialty Engineering £m 2003 2002 (restated) Turnover 872 910 Operating profit 108 103 Margin 12% 11% Specialty Engineering brings together a number of Smiths' strongly performing activities which are focused on providing highly engineered solutions to customers' specific requirements. It includes John Crane, the world leader in rotating seals, Interconnect, providing electrical connection and protection, Flexible Technologies, Marine and Tubular Systems. Sales declined by 4% and profits improved by 5%, leading to a one point improvement in margins to 12%. Specialty Engineering's cash conversion exceeded 100%. John Crane, the largest of the division's activities, recorded sales of £445m (2002 : £452m) and profits up 9% at £58m (£53m), which raised its margin to 13%. It benefited from an improving investment trend in oil and gas production, resulting from higher energy prices. John Crane's strong position in dry gas seal technology helped it secure a significant role in the joint venture to upgrade Gazprom's pipelines in Russia. It is also extending its facilities in China to support its major customer Shell, which is developing a huge oil refinery near Shanghai. Interconnect, which designs and engineers connectors and electronics for a wide range of applications including defence and telecoms, maintained a steady performance year to year. Although there is little sign of an upturn in the wireless infrastructure sector, the business benefited from reorganisation and from securing a wider range of applications for its products. Flex Tek, making innovative tubing and electrical components for air-conditioning and domestic appliances, had a flat year, due to low consumer demand in the US. Kelvin Hughes, the marine electronics and charts business, was more profitable as a result of earlier restructuring. The prospects for Smiths Group Smiths Group continues to refocus its activities on areas of greatest opportunity for growth. The strength of the balance sheet, combined with high operational cash-flow, provides a strong platform for developing this strategy. The markets served by Detection, Medical, and Smiths' defence business all have a positive outlook, while significant recovery in commercial aerospace is not expected until 2006. In the current year, the company is confident it can achieve a steady performance from the continuing activities, with reduced profits from commercial aerospace balanced by gains elsewhere. Looking further ahead, the focus on growth markets and operational efficiency will drive performance improvement. The Annual General Meeting of the company will be held at the offices of JP Morgan, 10 Aldermanbury, London EC2V 7RF, on Tuesday, 11 November at 12.00 noon. If approved at the meeting, the recommended final dividend on the ordinary shares will be paid on 14 November to shareholders registered at the close of business on 17 October. The ex-dividend date will be 15 October. Tables attached - Profit & loss account - Statement of total recognised gains and losses - Summarised balance sheet - Cash-flow statement - Notes to the accounts The financial statements attached have been prepared in accordance with the accounting policies set out in the company's accounts for the year ended 31 July 2002, except that the company has adopted FRS 17 (Retirement Benefits) in its 2003 financial statements. The financial statements do not constitute the full financial statements within the meaning of S240 of the Companies Act 1985. Figures relating to the year ended 31 July 2002 are abridged. Full accounts for Smiths Group plc for that period have been delivered to the Registrar of Companies. The auditors' report on these accounts was unqualified and did not contain a statement under S237(2) or S237(3) of the Companies Act 1985. PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2003 Ordinary Discontinued Goodwill Exceptional activities businesses amortisation items Total Note £m £m £m £m £m Continuing operations 2,505.6 2,505.6 Acquisitions 123.6 123.6 Discontinued businesses 426.9 426.9 _____________________________________________________________________ Turnover 2 2,629.2 426.9 3,056.1 _____________________________________________________________________ Continuing operations 346.4 (24.6) 321.8 Acquisitions 25.5 (7.8) 17.7 Discontinued businesses 51.9 (11.7) 40.2 _____________________________________________________________________ Operating profit 2 371.9 51.9 (44.1) 379.7 Exceptional items - 3 Profit on disposal of businesses 14.5 14.5 Write-down of goodwill on anticipated future disposal (137.0) (137.0) _____________________________________________________________________ Profit before interest and tax 371.9 51.9 (44.1) (122.5) 257.2 Net interest payable (20.3) (17.3) (37.6) Other finance (costs)/ income - retirement benefits (2.2) (2.2) _____________________________________________________________________ Profit/(loss) before taxation 349.4 34.6 (44.1) (122.5) 217.4 Taxation 9 (94.3) (9.4) 3.9 (5.3) (105.1) _____________________________________________________________________ Profit/(loss) after taxation 255.1 25.2 (40.2) (127.8) 112.3 Minority interests (0.5) (0.3) (0.8) _____________________________________________________________________ Profit/(loss) for the period 254.6 24.9 (40.2) (127.8) 111.5 Dividends 4 (145.4) (145.4) _____________________________________________________________________ Retained profit/(loss) 109.2 24.9 (40.2) (127.8) (33.9) _____________________________________________________________________ Earnings per share 5 Basic 45.6p 4.5p (7.2)p (22.9)p 20.0p Diluted 45.5p 4.5p (7.2)p (22.9)p 19.9p PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2002 (restated) Ordinary Discontinued Goodwill Exceptional activities businesses amortisation items Total Note £m £m £m £m £m Continuing operations 2,588.4 2,588.4 Discontinued businesses 635.1 635.1 _____________________________________________________________________ Turnover 2 2,588.4 635.1 3,223.5 _____________________________________________________________________ Continuing operations 364.1 (38.8) (43.7) 281.6 Discontinued businesses 64.0 (11.9) 52.1 _____________________________________________________________________ Operating profit 2 364.1 64.0 (50.7) (43.7) 333.7 Exceptional items - 3 Loss on disposal of businesses (24.3) (24.3) _____________________________________________________________________ Profit before interest and tax 364.1 64.0 (50.7) (68.0) 309.4 Net interest payable (25.7) (31.8) (57.5) Other finance (costs)/ income-retirement benefits 25.5 25.5 _____________________________________________________________________ Profit/(loss) before taxation 363.9 32.2 (50.7) (68.0) 277.4 Taxation 9 (101.9) (9.0) 3.8 16.1 (91.0) _____________________________________________________________________ Profit/(loss) after taxation 262.0 23.2 (46.9) (51.9) 186.4 Minority interests (1.1) (0.2) (1.3) _____________________________________________________________________ Profit/(loss) for the period 260.9 23.0 (46.9) (51.9) 185.1 Dividends 4 (142.2) (142.2) _____________________________________________________________________ Retained profit/(loss) 118.7 23.0 (46.9) (51.9) 42.9 _____________________________________________________________________ Earnings per share 5 Basic 46.9p 4.1p (8.4p) (9.3p) 33.3p Diluted 46.8p 4.1p (8.4p) (9.3p) 33.2p Results for the year ended 31 July 2002 have been restated following the adoption of FRS17 - Retirement Benefits. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (unaudited) Year ended Year ended 31 July 2003 31 July 2002 (restated) £m £m Profit for the financial year attributable to shareholders 111.5 185.1 Exchange adjustments 14.7 (56.4) Taxation recognised on exchange gains/losses: Current - UK 5.3 (1.2) Deferred - USA 3.7 4.5 FRS 17 - Retirement Benefits Actuarial losses on retirement benefit schemes - gross (258.6) (427.0) Deferred tax credit related thereto 73.4 131.7 _______ _______ Total recognised gains and losses for the financial year (50.0) (163.3) _______ Prior year adjustment: FRS17 - Retirement Benefits (157.6) _______ (207.6) _______ The statement of total recognised gains and losses for the year ended 31 July 2002 has been restated following the adoption of FRS 17 - Retirement Benefits. SUMMARISED BALANCE SHEET (unaudited) 31 July 31 July Note 2003 2002 (restated) £m £m Fixed assets Intangible assets 830.2 638.3 Tangible assets 557.6 563.9 Investments: TI Automotive Ltd 325.0 325.0 Other 8.2 11.6 ________ ________ 1,721.0 1,538.8 Stocks 10 489.5 474.5 Debtors 11 673.4 613.1 Creditors 12 (870.0) (806.2) ________ ________ 2,013.9 1,820.2 Net debt 13 (715.1) (725.2) Provisions for liabilities and charges 16 (116.0) (113.8) ________ ________ Net assets excluding retirement benefits 1,182.8 981.2 Retirement benefits - net liabilities 15 (308.4) (128.7) ________ ________ Net assets 874.4 852.5 ________ ________ Capital and reserves Share capital 139.8 139.6 Share premium 170.0 163.7 Reserves 552.8 537.3 ________ ________ Shareholders' equity 14 862.6 840.6 Minority equity interests 11.8 11.9 ________ ________ Capital employed 874.4 852.5 ________ ________ The balance sheet as at 31 July 2002 has been restated following the adoption of FRS17- Retirement Benefits. SUMMARY CASH-FLOW STATEMENT SHOWING CONTINUING ACTIVITIES (unaudited) Year ended Year ended 31 July 2003 31 July 2002 (restated) Continuing activities Total Total £m £m £m Operating profit before goodwill amortisation and exceptional restructuring costs 371.9 423.8 428.1 Depreciation 72.2 88.9 91.5 Retirement benefits (4.6) (4.6) 29.0 Working capital (32.8) (41.6) 34.4 ______ ______ ________ Net cash inflow from ordinary activities before capital expenditure and restructuring 406.7 466.5 583.0 Capital expenditure (70.1) (86.3) (100.0) ______ ______ ________ Net cash inflow from ordinary activities after capital expenditure and before restructuring 336.6 380.2 483.0 ______ Interest paid (26.1) (56.5) Tax paid (60.8) (52.8) Exceptional restructuring expenditure (22.8) (59.2) ______ ________ Free cash-flow 270.5 314.5 Acquisitions (including term debt acquired) and disposals (105.1) 180.9 Dividends (142.5) (139.1) Other (12.8) 38.3 ______ ________ Decrease in net debt 10.1 394.6 Net debt at beginning of period (725.2) (1,119.8) ______ ________ Net debt at end of period (715.1) (725.2) ______ ________ The cash flow statement for the year ended 31 July 2002 has been restated following the adoption of FRS17 - Retirement Benefits. CASH-FLOW STATEMENT (unaudited) Year ended Year ended 31 July 2003 31 July 2002 (restated) £m £m Operating Profit (before exceptional restructuring costs) 379.7 377.4 Goodwill amortisation and impairment 44.1 50.7 Depreciation 88.9 91.5 Retirement benefits (4.6) 29.0 (Increase)/decrease in stocks (1.6) 18.7 (Increase)/decrease in debtors (55.8) 48.5 Increase/(decrease) in creditors 15.8 (32.8) ________ ________ Net cash inflow from normal operating activities 466.5 583.0 Exceptional restructuring expenditure (22.8) (59.2) ________ ________ Net cash inflow from operating activities 443.7 523.8 Returns on investments and servicing of finance (26.1) (56.5) Tax paid (60.8) (52.8) Capital expenditure and financial investment (86.3) (100.0) Acquisitions and disposals (92.0) 180.9 Equity dividends paid (142.5) (139.1) Management of liquid resources 2.3 0.1 Financing (68.7) (124.3) ________ ________ (Decrease)/increase in cash (30.4) 232.1 Decrease in short-term deposits (2.3) (0.1) Decrease in other borrowings 73.4 139.8 Loan note issues (net of repayments) 1.2 2.0 Term loans acquired with acquisitions (13.1) Exchange variations (18.7) 20.8 ________ ________ Decrease in net debt 10.1 394.6 Net debt at beginning of period (725.2) (1,119.8) ________ ________ Net debt at end of period (715.1) (725.2) ________ ________ The cash flow statement for the year ended 31 July 2002 has been restated following the adoption of FRS17 - Retirement Benefits. NOTES TO THE ACCOUNTS (unaudited) 1) Accounting Policies With the exception of the adoption of the accounting requirements of Financial Reporting Standard 17 - Retirement Benefits 'FRS17' (note 15), there have been no changes to the accounting policies used in preparing these financial statements from those used in the annual report and accounts for 2002. 2) Analyses of turnover and profit - continuing ordinary activities Market Turnover Profit 2003 2002 2003 2002 £m £m £m £m Detection 273.3 119.4 70.6 28.8 Medical 486.1 479.9 87.9 93.2 Aerospace 998.2 1,078.8 105.5 139.3 Specialty Engineering: 871.6 910.3 107.9 102.8 John Crane 445.1 451.5 58.1 53.2 Industrial 298.8 321.3 44.5 48.4 Marine/Tubular Systems 127.7 137.5 5.3 1.2 ____________________ __________________ 2,629.2 2,588.4 371.9 364.1 ____________________ Net interest (20.3) (25.7) Other finance (costs)/income (2.2) 25.5 __________________ Profit before taxation from continuing ordinary activities 349.4 363.9 __________________ Geographical origin Turnover Profit 2003 2002 2003 2002 £m £m £m £m United Kingdom 762.3 760.7 52.6 66.5 North America * 1,513.3 1,623.6 241.4 252.1 Continental Europe 399.6 278.0 58.0 25.3 Other overseas 165.1 137.2 19.9 20.2 Inter-company (211.1) (211.1) ____________________ _________________ 2,629.2 2,588.4 371.9 364.1 ____________________ _________________ * Includes USA, Canada and Mexico 3) Exceptional items 2003 2002 £m £m Restructuring and closure costs (43.7) Profit/(loss) on disposal of businesses (note 7) 14.5 (24.3) Write-down of goodwill on anticipated future disposal (note 7) (137.0) _______ _______ (122.5) (68.0) _______ _______ 4) Dividends A final dividend of 17.25p per share (2002 16.75p) has been recommended and, if approved, will be paid on 14 November 2003 to holders of all ordinary shares whose names are registered at close of business on 17 October 2003. 5) Earnings per share Separate figures are given for earnings per share related to the average number of shares in issue for each year: Year ended Year ended 31 July 2003 31 July 2002 Basic 558,610,819 556,496,716 Effect of dilutive share options 838,286 1,267,591 Diluted 559,449,105 557,764,307 6) Acquisitions During the year ended 31 July 2003 the company acquired the businesses set out below. The fair values are provisional and will be finalised in the 2004 accounts. Consideration Businesses acquired (including associated costs) Goodwill Net Assets £m £m £m Heimann Systems GmbH 236.1 221.4 14.7 Other 7.2 7.0 0.2 ___________________________________________________________ 243.3 228.4 14.9 ___________________________________________________________ Consistency of accounting Assets acquired Book value policy Fair value £m £m £m Fixed assets 19.3 19.3 Stocks 28.1 28.1 Debtors 39.4 39.4 Creditors (42.4) (0.6) (43.0) Loans (13.1) (13.1) Provisions (12.3) (1.7) (14.0) Taxation (1.8) (1.8) _______ _______ _______ Net assets acquired 17.2 (2.3) 14.9 _______ _______ Goodwill 228.4 _______ Consideration - total 243.3 _______ satisfied in cash 239.6 deferred 3.7 In accordance with the provisions of FRS 10, the Group amortises goodwill arising on acquisitions after 1 August 1998 on a straight-line basis over a period of up to 20 years. 7) Disposals The principal disposal during the year was the Air Movement and Cable Management businesses, which were sold on 3 December 2002. The table below sets out the details of this transaction and other disposals. Air Movement Other Total £m £m £m Consideration, net of expenses and retained liabilities 117.1 20.2 137.3 Net assets sold (43.1) (5.2) (48.3) _________________________________ Surplus over net assets/retained liabilities 74.0 15.0 89.0 Goodwill previously set directly against reserves (66.8) (7.7) (74.5) _________________________________ Profit on disposal 7.2 7.3 14.5 _________________________________ In connection with the anticipated disposal of the Polymer business, the company has written off £137m of goodwill previously set directly against reserves. 8) Operating profit is after charging 2003 2002 £m £m Depreciation of fixed assets 88.9 91.5 Research and development expenditure 129.7 116.5 9) Taxation 2003 2002 £m £m Taxation on the profit for the year: UK Corporation tax at 30% (2002 - 30%) 27.8 62.8 Double taxation relief (13.8) (7.7) _______ _______ 14.0 55.1 Overseas taxation 76.4 61.0 _______ _______ 90.4 116.1 Tax relief on exceptional items (16.1) _______ _______ Current taxation 90.4 100.0 Deferred taxation on ordinary and discontinued activities 9.4 (9.0) on exceptional items 5.3 _______ _______ 105.1 91.0 _______ _______ 10) Stocks 2003 2002 £m £m Stocks comprise: Raw materials and consumables 142.3 133.4 Work in progress 142.9 149.2 Finished goods 244.9 216.9 _______ _______ 530.1 499.5 Less: payments on account (40.6) (25.0) _______ _______ 489.5 474.5 _______ _______ 11) Debtors 2003 2002 £m £m Amounts falling due within one year: Trade debtors 533.7 486.5 Amounts recoverable on contracts 61.6 52.9 Other debtors 23.2 28.3 Prepayments and accrued income 44.1 30.0 _______ _______ 662.6 597.7 Amount falling due after more than one year: Other debtors 10.8 15.4 _______ _______ Total debtors 673.4 613.1 _______ _______ 12) Creditors 2003 2002 £m £m Amounts falling due within one year: Trade creditors 191.5 196.0 Bills of exchange payable 2.7 3.3 Other creditors 25.1 39.4 Proposed dividend 96.5 93.6 Corporate taxation 145.8 119.0 Other taxation and social security costs 37.4 31.6 Accruals and deferred income 295.4 265.4 _______ _______ 794.4 748.3 Amount falling due after more than one year: 75.6 57.9 _______ _______ Total creditors (excluding borrowings) 870.0 806.2 _______ _______ 13) Borrowings and net debt Fixed rate borrowings Weighted average Floating Interest Years rate Total Total Rate Fixed Amount borrowings 2003 2002 £m £m £m £m Currencies: Sterling 7.15% 12 157.8 170.2 328.0 328.9 US Dollar 5.98% 8 75.0 129.3 204.3 240.4 Euro 4.03% 2 164.7 85.4 250.1 213.8 Japanese Yen 2.30% 1 7.7 0.3 8.0 40.4 Other 0.1 6.6 6.7 11.2 ___________________________________________ 405.3 391.8 797.1 834.7 Cash and deposits ____________________ (82.0) (109.5) _________________ Net debt 715.1 725.2 _________________ Maturity: On demand/under one year 27.8 90.5 118.3 163.7 One to two years 154.1 58.7 212.8 183.0 Two to five years 1.6 1.6 191.5 Over five years 221.8 242.6 464.4 296.5 ___________________________________________ 405.3 391.8 797.1 834.7 ___________________________________________ 14) Movements in shareholders' equity 2003 2002 £m £m Total recognised gains and losses for the financial year (50.0) (163.3) Dividends (145.4) (142.2) ________ ________ (195.4) (305.5) Write back of goodwill on disposals 211.5 149.2 Share issues 5.9 17.5 ________ ________ Net increase/(decrease) in shareholders' equity 22.0 (138.8) Shareholders' equity: At start of year as previously reported 998.2 839.7 Prior period adjustment - FRS17 (157.6) 139.7 ________ ________ At end of year 862.6 840.6 ________ ________ 15) Post retirement benefits The company has adopted voluntarily the full accounting requirements of FRS17- Retirement Benefits. The FRS17 valuations of the principal pension schemes in the UK and US are summarised below: 2003 2002 UK USA UK US £m £m £m £m Funded pension plans-market value of assets 2,173.8 294.2 2,083.2 261.5 ___________________ ____________________ Funded pension plans surplus/(deficit) (218.9) (89.3) 7.8 (93.4) Unfunded plans and post retirement healthcare (47.2) (97.8) (35.2) (83.2) liabilities ___________________ ____________________ (266.1) (187.1) (27.4) (176.6) Deferred tax asset 73.7 71.1 8.2 67.1 ___________________ ____________________ Retirement benefits - net liabilities (192.4) (116.0) (19.2) (109.5) ___________________ ____________________ The impact of FRS17 on the profit and loss account is summarised below: 2003 2002 Funded schemes Unfunded Funded schemes Unfunded plans plans UK US UK & US UK US UK & US £m £m £m £m £m £m Service cost 32.6 12.7 2.3 34.2 13.2 2.2 ______________________________________________________________ Exceptional item - curtailment gain (1.5) ______________________________________________________________ Expected return on scheme assets (132.7) (20.0) (152.3) (23.9) Interest on scheme liabilities 122.6 24.5 7.8 118.0 25.2 7.5 ______________________________________________________________ Net return (10.1) 4.5 7.8 (34.3) 1.3 7.5 ______________________________________________________________ Total charge to profit and loss account 21.0 17.2 10.1 (0.1) 14.5 9.7 ______________________________________________________________ 16) Provisions for liabilities and charges 2003 2002 £m £m Service guarantees and product liability 49.1 34.7 Reorganisation 14.0 37.1 Property 17.1 20.0 Litigation 22.2 18.3 _______ _______ 102.4 110.1 Deferred tax 13.6 3.7 _______ _______ Total provisions for liabilities and charges 116.0 113.8 _______ _______ -ends- This information is provided by RNS The company news service from the London Stock Exchange EAPNDALADEFE

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