Preliminary Results Announcem
News Release
London, 24 September 2008
For immediate release
Smiths reports strong growth in sales and profit
Preliminary results for the year ended 31 July 2008
|
£m |
Headline* |
|
|
Statutory |
||
|
Continuing activities |
2008 |
2007 |
growth |
**underlying |
2008 |
2007 |
|
Sales |
2,321 |
2,161 |
7% |
6% |
2,321 |
2,161 |
|
Operating profit |
381 |
348 |
10% |
6% |
326 |
257 |
|
Operating margin |
16.4% |
16.1% |
- |
- |
14.0% |
11.9% |
|
Pre-tax profit |
380 |
344 |
10% |
8% |
319 |
256 |
|
Basic EPS (p) |
74.5 |
47.0 |
|
|
63.0 |
36.9 |
|
Dividend |
34.0p |
34.0p |
|
|
34.0p |
34.0p |
* In addition to statutory reporting, Smiths Group reports its continuing operations on a headline basis. Headline profit is before exceptional items (incl. impairment of assets and income and expenditure relating to John Crane litigation), amortisation of acquired intangible assets, profit/loss on disposal of businesses and financing gains/losses from currency hedging. ** Organic growth at constant currency.
Philip Bowman, Smiths Group Chief Executive, said:
'We have delivered strong sales and profit growth driven by good performances from John Crane, Smiths Detection and Smiths Interconnect. A performance improvement programme is underway to address the operational issues that have held back Smiths Medical over the past two years.
'The portfolio has been strengthened through one divestment and seven acquisitions which bring new technologies and extend Smiths geographic footprint - particularly in developing markets.
'Our focus is on top-line growth and margin enhancement while there are significant opportunities to improve performance and generate value across the Group. We have begun a substantial restructuring programme that will deliver operating efficiencies and improve customer service. The scale of the opportunities is demonstrated by the new divisional targets set out here for the first time.
'The sustained upheaval in the world economy is creating uncertainty in many markets and may disrupt government spending patterns - particularly in the US and India where there are forthcoming elections. However, Smiths Group is well placed among global businesses to meet these challenges.'
KEY ACHIEVEMENTS*
-
Group sales up 6% to £2,321; headline operating profit up 6% to £381m
-
Reorganised into five divisions with disbanding of Specialty Engineering
-
Divisional restructuring programmes underway to reduce costs and improve customer service
-
Rationalisation of corporate HQ to reduce cost and increase divisional focus on delivering returns
-
Target ranges for sales growth and margins established for each of the divisions
-
New incentive plans introduced to reinforce performance improvement and delivery
-
Strengthened portfolio mix through seven acquisitions in John Crane, Interconnect and FlexߛTek
-
Increased R&D investment up 8% to £86m
BUSINESS HIGHLIGHTS*
-
Smiths Detection: Sales up 12% and headline operating profit up 2%
-
Strong sales of checkpoint explosive detection systems to UK and US customers
-
Customs and border cargo screening continues to grow
-
Roll-out of joint chemical agent detector (JCAD) to the US military
-
Margins adversely affected by currency transaction (£9m)
-
-
John Crane: Sales up 8% and headline operating profit up 12%
-
Growth driven by high demand from the petrochemical sector
-
Beginning to benefit from recent acquisitions: Sartorius, Indufil, Fiberod and Japan JV
-
Major restructuring underway with the formation of a global John Crane business
-
-
Smiths Medical: Sales flat and headline operating profit up 2%
-
Operational improvements have reduced customer backorders by 90%
-
24-month performance improvement programme underway
-
R&D up 6%: several new product launches
-
-
Smiths Interconnect: Good growth in sales and profit
-
Strong sales of lightning and surge protection equipment for 4G wireless broadband
-
Good progress on several programmes with the US military
-
Connectors group win several new contracts in military, medical, aerospace and rail sectors
-
-
Flex-Tek: Showing resilience in the face of challenging markets
-
Growth in sales of components to the aircraft industry has helped offset the slowdown in US housing and the household appliance market
-
Established new manufacturing facilities in China, India and the Philippines
-
Figures are at constant currency and exclude the impact of acquisitions and disposals. CONTACT DETAILS
Investor enquiries:
Peter Durman, Smiths Group +44 (0)20 8457 8343 peter.durman@smiths.com
Media enquiries:
Chris Fox, Smiths Group +44 (0)20 8457 8403 chris.fox@smiths.com
Anthony Cardew, Cardew Group +44 (0)20 7930 0777 anthony.cardew@cardewgroup.com
Presentation
The presentation slides and a live webcast of the presentation to analysts is available at www.smiths.com/results at 09.00 (UK time) on Wednesday 24 September. A recording of the webcast is available later that day. A live audio broadcast of the presentation is also available by dialling:
UK: 0800 358 7034
International: +44 (0)20 8609 1270
US/Canada: 1 703 621 9128
Photography
Original high-resolution photography is available to the media, please contact:
Laura Guerin, Smiths Group +44 (0)20 8457 8403 laura.guerin@smiths.com
This press release contains certain forward-looking statements with respect to the operations, performance and financial condition of 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 the Annual Report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this press release should be construed as a profit forecast.
Statutory reporting
Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, pre-tax profit from continuing operations was £319m (2007: £256m) and earnings per share were 63.0p (2007: 36.9p). The items excluded from headline performance comprise amortisation of acquired intangible assets of £19m (2007: £15m), £4m on respect of restructuring corporate and divisional headquarters, profit on disposal of businesses of £27m (2007: loss of £5m), acquisition integration costs of £9m (2007: £9m), financing losses of £2m (2007: £1m gain) and £54m (2007: £101m) in connection with John Crane Inc asbestos litigation, including a £40m provision for adverse judgments.
CHIEF EXECUTIVE'S REVIEW
Since joining Smiths some nine months ago, I have undertaken a thorough review of operations. It is a Group with a strong set of technology-based businesses applying some of the world's most advanced industrial sciences - from airport X-ray scanning machines to mechanical seals for the oil industry. In addition, the businesses operate in markets sustained by long-term secular growth: Smiths Medical's market is growing as populations age and increase in prosperity, John Crane by energy consumption, and Interconnect by the need for increased bandwidth and upgraded wireless infrastructure. Smiths Detection is driven by demand for increased security and protection. Although Flex-Tek is exposed to more cyclical markets such as US housing, it has a portfolio of high-performance products that supply the aerospace market.
My review of operations identified significant opportunities to improve performance progressively over a two-year period and maximise value for shareholders. To deliver these benefits, the Board has already taken some key decisions:
-
manage the Group as five divisions from 1 August 2008 and restructure each to improve customer service and deliver efficiencies;
-
restructure and reduce the corporate centre to cut cost and focus it on delivering returns from the business;
-
improve business systems and data-flow which, over time, will support data-driven decision-making and enable the Group to be more responsive to changing market conditions and opportunities;
-
build the business through acquisitions which will add complementary technologies, expand the geographic footprint or leverage existing scale;
-
increase investment in research and development and focus it more intensely on higher growth areas that will deliver greater returns; and
-
introduce an incentive scheme for senior management that reinforces our new culture of performance improvement and delivery against recently established divisional targets.
In June, we announced that the Specialty Engineering division would be disbanded so that its three constituent businesses - John Crane, Interconnect and Flex-Tek - report directly to me. This reduces cost and gives greater accountability to each of the businesses. In addition, all Smiths divisions will now be managed from divisional headquarters that are closer to their operations, key markets and customers.
We also aim to realise value by restructuring the divisions themselves. For example, John Crane which had historically been managed as two separate operations from the UK and US, is now combined under the leadership of Paul Cox and headquartered at Morton Grove, near Chicago. In Smiths Medical, the management structure in the US will be simplified and we will introduce a global approach to R&D. There are also further opportunities to re-organise Flex-Tek's portfolio of businesses to drive efficiencies and improve operational effectiveness.
At the same time, we have defined more clearly the roles of the divisions and their interface with the corporate centre. These changes will reduce substantially the size of the corporate office and improve the way we work by introducing better defined governance and decision-making. The small head office will concentrate on three areas: setting the Group's strategic direction and capital allocation; leveraging the Group's scale where appropriate; and ensuring compliance as a UK-listed company. In future, we will report the corporate centre costs separately which will give greater clarity to the underlying margins of the divisions and provide a clear incentive to minimise corporate costs.
Taken together, these restructuring programmes are expected to deliver annual cost savings of £47m once they are complete in three years time. The cost of delivering these programmes will be £48m which will be treated as an exceptional item. Further details are given in the divisional reviews.
We are also investing more to improve data-flow and speed up decision-making through the implementation of better information systems. For example, ERP systems are currently being deployed in Detection, John Crane and Medical. At a Group level, a new information platform is being introduced which will help capture operational data from the divisions. This creates opportunities to leverage the scale of the Group for the first time by group-wide procurement of travel, IT, and other services. We have already launched a programme to consolidate IT service delivery across the Group, improving service quality and cutting costs. We have also signed a deal with AT&T to supply a range of communication services such as mobile telephones, remote access, etc. which will deliver annual savings of at least $5m.
Our management team has also been strengthened. Reflecting the importance of the IT investment, Brian Jones has joined us as Chief Information Officer. He brings many years' experience in implementing ERP systems and improving information flow within large organisations. Michael Herlihy has been appointed General Counsel and is also a member of the Executive Committee and Peter Durman has joined to lead an invigorated investor relations programme. The mix of talent at Smiths will continue to be refreshed and reinforced with external appointments bringing different competencies and innovative ideas to the Group.
There are valuable opportunities to build Smiths through bolt-on acquisitions - particularly in John Crane, Interconnect and Detection. Such acquisitions bring complementary technologies, support geographic expansion or leverage existing infrastructure. John Crane acquired Indufil, a specialist in filtration systems, and Sartorius Bearing Technology, a leading provider of high performance rotating equipment for the oil and gas industry; both have added valuable new technologies that can be leveraged through John Crane's global network of more than 220 sales and service centres. John Crane also acquired Fiberod which further extends our upstream energy services capability and complements the CDI acquisition made last year. In addition, John Crane expanded its presence in Japan, the world's second largest market for OEM pump manufacturers, by increasing its ownership share of John Crane Japan from 49% to 70%. In Interconnect, the acquisitions of Shanghai-based Allrizon Tongguang and Brisbane-based Triasx Pty Ltd have strengthened its position in the growing Asian market. Flex-Tek's acquisition of Fast Heat has extended its range of specialty heating solutions.
We are also driving higher levels of revenue growth organically through an increase in research and development (R&D) investment focused more tightly on growth areas that can deliver the most attractive returns. R&D investment for the Group increased by 8%, or £7m, to £86m. In Detection, our spend has been focused on X-ray detection systems for both airports and cargo screening, while we have extended our portfolio of chemical and trace detectors. We are at the cutting edge of a number of technologies - X-ray screening, millimetre wave imaging and biological detection. In Medical, we have launched a number of new products during the year as we begin to benefit from the introduction of a streamlined product development process. It has resulted in a 50% increase in the number of product launches this year.
|
|
|
|
Target |
|
Sales |
2008* |
2008 growth** |
Growth range** |
|
Detection |
509 |
12% |
10-12% |
|
John Crane |
626 |
8% |
6-8% |
|
Medical |
703 |
0% |
3-5% |
|
Interconnect |
261 |
13% |
6-10% |
|
Flex-Tek |
206 |
(4)% |
0-7% |
|
|
2,305 |
|
|
|
Headline operating profit |
|
2008 margin |
Margin range |
|
Detection |
93 |
18% |
17-20% |
|
John Crane |
104 |
17% |
17-22% |
|
Medical |
140 |
20% |
20-24% |
|
Interconnect |
54 |
21% |
21-23% |
|
Flex-Tek |
24 |
12% |
11-16% |
|
Corporate Centre |
(35) |
|
|
|
|
380 |
|
|
*The above analysis reflects the revised operating structure for 2008/09, see Note 1, and excludes three months of trading for Marine Systems which was sold in November 2007.
**Organic growth at constant currency
To reinforce our new culture of performance improvement, we have established targets for sales growth and margins for each of the divisions. These are the ranges we anticipate the divisions will operate within over the next three years. They are based on organic growth at constant currency and assume a financial and macro-economic environment consistent with that of recent years. Alongside this, we have introduced a new incentive plan for senior management and divisional leadership. It more closely links remuneration with performance and, ultimately, value creation and places much greater accountability on the divisional leadership for the performance of their businesses. The new incentive plan means that each division will have its own targets to meet, reward will be bound together by one common currency, the Smiths share price. In that way we will reflect the value-creating performance of each division.
Delivering these returns will be a team effort and I would like to thank our 22,000 employees around the world for their hard work and support during a time of very real change both within Smiths Group and the wider economy.
In summary, I believe that most divisions have the opportunity to improve margins significantly. The greater responsibility, accountability and incentivisation of the divisional management teams, combined with the availability of better data to underpin management decisions, should progressively unlock value for the benefit of shareholders.
Outlook
Although the world economy is facing sustained upheaval and continued uncertainties, Smiths Group is well placed among global businesses to meet the challenges. Smiths Detection is expected to deliver growth although there is likely to be some variability in the timing and pattern of order flow particularly in the US and India where there are forthcoming elections. John Crane and Smiths Interconnect will continue to benefit from their strong market positions. The creation of a unified John Crane also offers cost benefits and enhanced customer service in the future. The performance improvement programme in Smiths Medical is a key part of delivering better results. Flex-Tek will be held back by the recession in the US construction market.
Sales
Sales increased by £160m to £2,321m. Currency translation on overseas sales contributed £46m of this increase while the net impact of acquisitions and disposals lowered sales by £6m.
On an underlying basis, excluding the effects of currency translation and acquisitions and disposals, sales increased by £120m or 6%. This £120m increase was driven by:
-
Smiths Detection (£55m) reflecting the new contracts for airport checkpoint detection systems; high energy cargo screening and the Joint Chemical Agent Detector (JCAD);
-
John Crane (£43m) as a result of strong demand from the petrochemical industry;
-
Specialty - Other (£23m) - driven by Smiths Interconnect and its new contracts for USA 4G wireless broadband and new military programmes; and
-
A decline of £1m in Smiths Medical reflects the operational challenges of supply chain disruption and product recalls.
Profit
Headline operating profit increased by £33m to £381m. Headline operating margin increased to 16.4% (2007: 16.1%). The £33m increase in headline operating profit comprises £7m from favourable currency translation, £3m from the net impact of acquisitions and disposals made during the year and a £23m, or 6%, increase in underlying headline operating profit. The main drivers of the £23m underlying growth in operating profit are:
-
John Crane (£10m) reflecting strong volume growth and price increases;
-
Specialty - Other - comprising Interconnect and Flex-Tek (£9m) driven by volume and price;
-
Smiths Medical (£2m) benefited from positive mix partly offset by higher costs as a result of supply chain problems and product recalls; and
-
Detection (£2m) as a result of strong volume growth offset by adverse currency transaction and mix.
Operating profit on a statutory basis, after taking account of the items excluded from the headline figures was £326m (2007: £256m).
The net interest charge increased from £36m to £41m reflecting the prior year benefit of £18m of interest income from the proceeds of the Aerospace sale. There was a pensions financing gain of £42m (2007: £34m) which reflected the funding position of the company's retirement benefit schemes at July 2007.
Headline profit before tax increased by £36m to £380m. The Group's tax rate on headline profit for the period was 24.0% (2007: 25.1%). Headline earnings per share were 74.5p (2007: 47.0p). The comparison in earnings per share is distorted by the share consolidation carried out in June last year as part of the Aerospace disposal; on a pro-forma basis, earnings per share grew by 15%.
Cash generation
Headline operating cash flow totalled £273m, representing 72% of headline operating profit, and reflects investment in capital projects and increased working capital to support business growth. The working capital investment was particularly driven by the timing and nature of contracts in Detection and John Crane. Net debt has increased since July 2007 by £181m to £771m as a result of acquisitions and investment in fixed and working capital to support growth.
OPERATIONAL REVIEW
Smiths Detection
|
|
|
|
Growth |
|
|
£m |
2008 |
2007 |
Reported |
Underlying |
|
Sales |
509 |
438 |
16% |
12% |
|
Headline operating profit |
86 |
79 |
9% |
2% |
|
Headline operating margin |
16.8% |
18.0% |
|
|
|
Statutory operating profit |
85 |
65 |
|
|
Reported sales grew by 16% and headline operating profit increased by 9%. Currency translation benefited sales by £17m and headline operating profit by £5m. On an underlying basis, excluding the impact of currency translation, sales grew by 12% and headline operating profit increased by 2%. The key drivers of growth were contract wins for airport checkpoint explosive detection systems, for cargo screening systems and for JCAD, the advanced chemical point detector. Headline operating margin declined from 18.0% to 16.8% reflecting the impact of currency transaction and the timing and mix of new contracts compared to last year. We also incurred additional costs associated with the scaling-up of our manufacturing to meet the strong customer demand for new products. The year-on-year impact of adverse currency transaction amounted to some £9m which, if excluded, would give an underlying operating profit margin of 18%.
The year had a very strong start with underlying sales growth of 21% compared with 6% in the second half. This is a result of winning some particularly large contracts in the first half of the year and some delays to contracts at the year end. It demonstrates the increasingly volatile nature of the order flow of this government contracting business. In addition, the strong growth in Detection, coupled with the increasing size and changing payment terms of the new contracts, has raised its working capital requirements.
In transportation, we have benefited from the introduction of a new generation of airport checkpoint explosive detection systems. Unlike conventional X-ray systems, this equipment captures multiple views of carry-on bags in a single sweep. The system also includes powerful software that helps the system operator detect potential threats and it can easily be upgraded to meet future threats. Smiths Detection has won substantial contracts in the UK and US for this new equipment which is helping airports to speed up passenger security checks. To support future demand, a new 4,000 square metre high-tech production plant was completed in Wiesbaden, Germany, in July. Overall, Wiesbaden produced a record 5,000 X-ray scanning units during the year.
Our results also benefited from strong demand in the ports and borders segment for advanced, high-energy cargo screening solutions to inspect inbound and outbound shipping containers and trucks. Deliveries to the Russian authorities from the St Petersburg facility were completed in December, while a major order from US Customs and Border Protection is now being fulfilled.
In the military segment, the recently developed JCAD programme has begun to roll-out with further orders received from the US Department of Defense. Orders totalling $52.3m were received during the year. The JCAD is an advanced chemical point detector designed to help safeguard troops by automatically detecting, identifying and quantifying both chemical warfare agents and toxic industrial chemicals. We have begun to expand production in the US with an extension of our facility at Edgewood. Construction began during the year and is expected to be completed by January 2009.
The implementation of a new ERP system began during the second half following 18 months of planning and preparation. This single system will replace 14 legacy business software systems and provide a common information platform to support data-driven decision making. Nine sites in the military and emergency responder area went live with the new system in May 2008. The project is expected to conclude by the end of calendar year 2009. Investment to date has been £15m, with a total budget of £22m. We anticipate that once complete the project will generate efficiencies in working capital of £11m and annual cost savings of £8m.
Research and development
Smiths leadership in the sector is maintained by ongoing product innovation developed by in-house R&D, government-funded research and through partnerships and licences. Company-funded R&D increased by 10% to some £29m or 5.6% of sales (2007: 5.9% of sales). This includes £8m of capitalised projects. Smiths Detection actively seeks customer and government support for R&D which totalled £9m in the period (2007: £7m). Total R&D spend was £38m (2007: £33m) or 7% of sales.
Key R&D projects:
X-ray screening continues to be a focus for our investment. This has supported the development of a new generation of cargo screening which will be launched in the coming year. We have also continued to invest in the development of our airport checkpoint explosive detection systems particularly to address new threats.
We have continued to invest heavily in chemical and trace detection. In September 2008, we launched two new handheld detectors for the military and emergency responder markets. High-Performance Radioisotope Identifier (HPRID) is our first portable handheld radiation detector which can be used for highly enriched uranium, plutonium and other radioactive substances. We also launched the Multi-Mode Threat Detector (MMTD), a portable device that detects a range of explosives including the materials most commonly used in homemade bombs.
Smiths Detection is developing technology that detects weapons, explosives and other potentially dangerous items concealed under layers of clothing without physical contact. The new system is based on patented millimetre-wave technology and creates video images that reveal a far wider range of concealed weapons and hazards than is possible with traditional people screening technologies. With trials and testing underway, the system will offer a fast and efficient way of scanning people as they enter airport checkpoints, high profile buildings or other facilities that require protection.
Diagnostics has also been an area of focus with the development of a portable biological detection system that enables veterinarians to carry out on-site diagnosis of animal diseases such as foot-and-mouth and avian flu. The technology is now being developed for clinical applications such as the detection and identification of MRSA, sepsis or other medical conditions.
Outlook
Looking ahead, the sector is set for continued growth and Smiths Detection should benefit from its leadership position and the roll-out of new technologies. We are well-positioned for future growth although the increasing size of contracts coupled with the irregular timing of government contracting - particularly where there are elections - may cause variability in the pattern of contract wins and working capital requirements from period to period.
John Crane
|
|
|
|
Growth |
|
|
£m |
2008 |
2007 |
Reported |
Underlying |
|
Sales |
626 |
532 |
18% |
8% |
|
Headline operating profit |
96 |
75 |
27% |
12% |
|
Headline operating margin |
15.3% |
14.1% |
|
|
|
Statutory operating profit |
39 |
1 |
|
|
John Crane grew reported sales by 18% and headline operating profit by 27%. Sales benefited from currency translation (£20m) and from acquisitions (£30m) giving underlying sales growth of 8%. Similarly, headline operating profit benefited from currency translation (£4m) and from acquisitions (£7m) leaving an underlying growth rate of 12%. Margins increased by 120 basis points to 15.3%. This strong growth has been driven by high levels of investment by the petrochemical industry, reflecting the strong global demand for oil and gas.
The growth in the petrochemical sector has increased original equipment orders to record levels. To help meet these requirements John Crane has invested over £5m worldwide to increase manufacturing capacity by over 20%.
The provision of maintenance and repair services to customers through the aftermarket represents two-thirds of John Crane's sales. The sale of original equipment for new production facilities creates subsequent aftermarket service opportunities that are delivered via John Crane's network of service centres, and the business has continued to build its global service base. Local service centres are now sited in 52 countries worldwide. This capability allows us to provide a range of added value services including repair, root cause analysis, alignment and condition monitoring, all designed to improve the performance of our customers' rotating equipment and reduce downtime. Current developments are focused on key growth markets. For example, in Saudi Arabia, we have a new service centre in Jubail and are building a new service, sales, training and manufacturing facility in Dammam. The Dammam facility features an upgraded gas seals test capability and adds significant service capacity in an area where extensive investment is planned by the petrochemical industry over the next 10 years.
Production capacity has been increased by the creation of a new 5,600 square metre, 60 person manufacturing facility in Mexico. This factory provides machining of seal parts, seal welding and assembly in support of the markets throughout the Americas. The increased capacity takes advantage of the low cost base and availability of skilled machinists in the Mexico City area, and is well positioned for future expansion.
Another growth opportunity is China where we expect to complete a new facility in Tianjin by the end of 2009. This will support further growth and enable the relocation and consolidation of two existing businesses to a single site. This new facility will accommodate sophisticated manufacturing including assembly, testing and enhanced product development, as well as providing a sales and service centre for the vast domestic Chinese market.
Major oil companies are making significant investments to develop the Canadian oil sands in northern Alberta and Saskatchewan, where the oil reserves are thought to equal those of Saudi Arabia. John Crane continues to add manufacturing capacity and support capabilities throughout its Canadian operations, particularly in Edmonton, to service the construction and maintenance of the refineries that bring this oil to market.
Business developments
Our customers are increasingly demanding larger and higher pressure gas seals so we have invested in dry gas seal facilities in Slough, UK and Morton Grove, USA to support our customers' objectives. At the same time one of the world's most advanced high-pressure test rigs has come onstream.
In pursuit of its policy to increase its technological footprint, John Crane completed a number of bolt-on acquisitions. The acquisition of Sartorius Bearing Technology in November 2007 expands John Crane's offering into the area of rotating bearings for turbo machinery, while the acquisition of Indufil in March 2008 adds specialist filtration systems.
The bearing business is a leading provider of engineered bearings for high performance rotating equipment for the oil and gas industry based in Goettingen, Germany. The acquisition cost of £13m was satisfied in cash. Indufil was acquired for £71m and had sales of £25m in the financial year ending 31 December 2007. It designs and manufactures filtration systems for rotating equipment in the oil and gas, chemical and power sectors. Both businesses serve similar customers to John Crane with a strong aftermarket for their products, a combination which fits well with John Crane's business model.
The acquisition of CDI Energy Services in March 2007 expanded John Crane's upstream energy services capability. This was boosted in December 2007 with the acquisition of FiberComposite Company Inc (Fiberod) for £46m. In calendar year 2007, Fiberod reported sales of £12m. It is the world's leading manufacturer of fibreglass sucker rods, complementing the CDI service offering.
As a sign of our solid commitment to both the Japanese and the wider Asia Pacific markets, in December 2007 we increased our shareholding in John Crane Japan, a venture with Starlite Co Limited, to become the majority shareholder. The increased shareholding and operational control gives John Crane a greater presence in what is the second largest market after the United States. Our new majority shareholding will help us accelerate the levels of growth and investment in new technologies which we are able to make in Japan
The implementation of a new ERP system is underway across Europe with 10 markets now successfully online. The project will be rolled out across Europe and then into the Middle East and Asia. Investment to date has been £17m out of a total project cost of £22.5m The project is due for completion in June 2010 after which it should generate annual cost savings of £9.5m.
During the second half, we began a restructuring programme to create a global John Crane business by merging the two existing regional businesses. Through the creation of a global operations platform, we can provide better capacity and rapid delivery of products and services. We will also improve our service centre support capabilities and provide distributed global account management teams for greater co-ordination around the world. Going forward, the product line will be managed globally which will enhance service delivery to customers. The project is expected to cost £24m and deliver annual savings of £26m once complete. This initiative comes at a time when John Crane is strong and performing well, an ideal time to build for greater success.
Outlook
Looking ahead, sustained growth in demand for oil and gas is likely to continue to drive investment by petrochemical companies and original equipment manufacturers into new technology and facilities. The addition of adjacent technologies to the portfolio will also support growth.
Investment in equipment for new facilities not only provides short term growth, but provides the foundation for long term aftermarket business. With over 60% of our business derived from the aftermarket, and new equipment having an installed life of over 30 years, we are well placed for continued growth in this area.
Smiths Medical
|
|
|
|
Growth |
|
|
£m |
2008 |
2007 |
Reported |
Underlying |
|
Sales |
703 |
691 |
2% |
0% |
|
Headline operating profit |
128 |
127 |
0% |
2% |
|
Headline operating margin |
18.2% |
18.4% |
|
|
|
Statutory operating profit |
106 |
106 |
|
|
At reported exchange rates, Smiths Medical's sales grew 2% while headline operating profit remained in line with last year. Excluding the impact of currency translation, the underlying growth in profit was 2% on flat sales. Operating profit margins reduced slightly by 20 basis points. Performance has been severely affected by three product recalls and by supply chain disruption caused by several long-term initiatives. The simultaneous relocation of manufacturing to lower cost regions, the integration of the Medex acquisition, and the implementation of a new ERP system have all posed operational challenges over the past two years. These factors combined to disrupt deliveries which in turn have had an adverse impact on relationships with major customers. A 24-month performance improvement programme has begun and a new global operations team recruited to address these issues. Unfulfilled customer orders peaked in June 2007 but, as a result of the performance improvement initiatives, have since fallen by 90% back to normal levels. Our immediate priority is the rebuilding of relationships with customers and the delivery of the performance improvement programme.
While overall underlying sales growth was flat, Medication Delivery grew by 3.4% but was offset by declines in Vital Care of 1% and Safety Devices of 2.9%.
Medication Delivery benefited from good growth in its infusion product range, particularly outside the US. Its performance in the US was held back temporarily ahead of the launch of CADD Solis which began in April. The access franchise, which includes some new product launches such as POWER ports and Gripper Micro, grew well. Cozmore, which serves the diabetes market, delivered strong growth outside the US but sales were held back in the US by a product recall caused by a faulty motor from a supplier. The pain management franchise grew well outside the US but supply chain problems and restructuring in the US constrained overall growth.
Vital Care's performance was affected by supply chain disruption and by a product recall in temperature management. The airway franchise grew well in spite of supply chain problems and the assisted reproduction area also delivered strong growth reflecting the growing global demand. However, these performances were offset by declines in temperature management, caused by a product recall and aggressive competitor pricing; and declines in pressure monitoring caused by supply chain disruption.
The performance of Safety Devices was affected by declines in our peripheral intravenous catheter franchise. These declines were caused largely by disruption to production schedules as a result of a problem with resin from a supplier. The problem was quickly identified and no faulty products entered the supply chain, but supplies to our customers were interrupted. Sales of safety needles also fell within the US market but saw growth outside the US. The decline in US sales was caused by the conclusion of some large OEM contracts during the year.
On a geographic basis, our largest market is the US which accounts for 49% of sales, and has experienced a 2.6% fall in sales as a result of the supply chain disruption and product recall issues. In Europe, sales have grown by 2.4%. We have seen double digit growth, albeit from a low base, in emerging markets served via our distributors, particularly in Latin America, and Saudi Arabia. Last year's investment in new infrastructure for Greater China contributed to a 30% growth in sales in that territory.
In the US, a number of significant two- or three-year contracts were agreed across the product portfolio during the period. These include a three-year Group Purchasing Organisation (GPO) contract with Premier Purchasing Partners, to supply PORT-A-CATH® implantable access systems to Premier's 1,700 hospitals and almost 50,000 other healthcare sites across the US. A new three-year agreement has also been signed with MedAssets for five categories of anaesthesia products and a contract has been secured with Amerinet, for respiratory products. We secured major GPO contracts with HPG and Broadlane for syringe pumps. In addition, we signed a number of agreements from across the portfolio with Cardinal Health which includes a ground-breaking initiative for the co-branding of Smiths EDGE safety needles. Over the past year, these and other GPO contracts totalling $32m have been secured.
There is an ongoing focus on margin improvement through cost control and efficiencies. The manufacturing rationalisation programme has resulted in site closures at Hythe, UK; and Duluth, Georgia, USA. Over the past two years, the proportion of all employees working in low-cost countries has increased from 24% in July 2006 to 35%. Of our direct manufacturing employees, 62% are now working in Mexico, compared with 44% in July 2006.
The implementation of an ERP system was restarted in June 2008 after a period of stabilisation since the project was halted in 2007. The Benelux markets successfully went live in August 2008 such that more than 50% of global sites are now operating on the new system. The project, due for completion in March 2010, will improve the quality of management information and support inventory reductions, global sourcing and deliver savings. The total budget is £32m, of which £18m has been spent to date. Once complete, the project is expected to deliver annual cost saving of £15m.
Business developments
We have announced a restructuring programme that will merge the two existing operational units in the US. This will create a more efficient organisational structure and a single route to market, giving a more coherent customer-facing organisation. The project is expected to cost £4m and, once complete, generate annualised savings of £2m.
Research and development
Total R&D investment has risen by 6%, and as a proportion of sales has increased from 3.5% to 3.7%. Looking forward, we expect this commitment to increase further. We are now focusing our investment more tightly on product areas and segments which will deliver higher growth. For example, the largest increase benefited Medication Delivery where our R&D investment in infusion pumps is typically much higher at around 7% of sales. In contrast, our R&D investment in Safety remained constant at 1.5% of sales which is in line with many of competitors. However, we have invested in automated machinery to drive capacity. In summary, we have increased the number of new product launches by about 50% in the current year.
We have increased the rate of product launches with an improved new product development process. Over the past year, we have launched several new products. CADD®-Solis, a next generation ambulatory pump system, replaces a 10 year old platform and features error detection software and data connectivity to hospital IT systems. We also launched the Saf-T Closed Blood Collection System® Devices, the dual-lumen implantable access systems (P.A.S. PORT® T2 POWER P.A.C. and PORT-A-CATH® II POWER P.A.C), the Theraheat heated humidification system and the GRIPPER® Micro Safety Needle. A full range of EDGE safety needles was also launched, together with the latest closed blood sampling product, Hemodraw, which is already winning market share in the US. Since the year end, we have launched SmartX®, a wireless blood pressure monitoring system; UniPercTM, a tracheostomy tube for patients with large necks; SACETT, which helps to reduce hospital acquired infections and two lower cost intubation devices for the Chinese market.
Outlook
The key priority for Smiths Medical is to improve customer service and implement the performance improvement programme. The division will focus on growth in developing markets and globally through the launch of new products. The performance improvement programme will support a return to sales growth in line with its end markets. The focus in the short term will be on margin improvement through restructuring and operating efficiencies. A planned review of portfolio profitability may lead to the rationalisation of certain product lines and a short term impact on revenue growth.
Specialty - Other
|
|
|
|
Growth |
|
|
Interconnect and Flex-Tek* |
2008 |
2007 |
Reported |
Underlying |
|
Sales |
483 |
500 |
(4)% |
5% |
|
Headline operating profit |
71 |
66 |
7% |
13% |
|
Headline operating margin |
14.8% |
13.3% |
|
|
|
Statutory operating profit |
96 |
61 |
|
|
*The reported figures include three months of trading for Marine Systems and a full year in the comparative period.
Smiths Interconnect
Smiths Interconnect delivered strong underlying sales and profit growth. Sales growth was driven primarily by three technology areas: Protection, Microwave Sub-Systems and Connectors.
The performance of the Protection technology group was enhanced by sales of lightning and surge protection solutions supplied to major US 4G wireless broadband providers for mobile internet access. It benefited from sales of protection solutions to medical and telecommunications customers. The division has also made key wins in the defence sector for protection of ground mobile communication systems.
Microwave Sub-Systems saw strong sales growth through several US military programmes including the three-frequency band data link (MDAS) which supports multiple unmanned aircraft systems. Positions on three new satellite communications programmes for US forces were also secured: one is a shipboard communications programme and the other two are Satellite Communications On The Move (SOTM) programmes and Warfighter Information Network-Tactical (WIN T), the US army system for reliable, secure and seamless high bandwidth mobile communications in areas of conflict.
The Connector group delivered good sales growth but profit was held back by a slowdown in Italy. Key wins were secured on several major defence programmes and our connectors were selected as the high reliability standard for future NASA space applications. Major product orders were also received for medical MRI scanners, civil aerospace and rail traction.
The Microwave Components group delivered a small underlying increase in sales as a result of a lower than expected demand from Chinese and North American telecom operators. However, we have seen continued strong demand for filters used to combat improvised explosive devices and other components for a variety of applications including commercial satellite programmes.
Smiths Interconnect successfully expanded its global capacity, particularly in lower manufacturing cost environments. During the year operations were opened in Tunisia and India while we continued to build our operating base in China, Mexico and Costa Rica. Over the last year, the proportion of Smiths Interconnect products manufactured in low cost countries has more than doubled.
Business developments
Over the course of the past six months Smiths Interconnect has acquired Shanghai-based Allrizon Tongguang and Brisbane-based Triasx Pty Ltd. These strengthen our position in the growing Asian market. Allrizon offers first-class technology, providing new channels to market and enhanced relationships with the rapidly growing Chinese telecoms manufacturers. In the 2007 calendar year, Allrizon posted sales of £5.3m. Triasx has in-depth knowledge of the telecommunications radio frequency market and an excellent R&D capability. Its strong filter capabilities complement our existing products, particularly those from Allrizon, while the Triasx interference testing devices fit well with our existing Summitek test and measurement business. In the year to 30 June 2008, Triasx reported sales of £12.5m.
Outlook
There are good opportunities for Smiths Interconnect to grow organically - particularly in developing markets - and scope exists to improve the portfolio and extend its geographic reach through bolt-on acquisitions. Military communications is anticipated to be an area of continued investment by governments and the further roll-out of wireless networks is expected with the highest growth in developing markets. Smiths Interconnect's markets remain robust and are set for continued growth.
Flex-Tek
Flex-Tek experienced declines in sales and profit as a result of the recession in the US residential construction markets and household appliances market. However, these declines were offset in part by the strong growth in sales of components and services to the aerospace market and by the benefit from the acquisition of Fast Heat in January.
Smiths Tubular Systems Aerospace delivered strong growth in sales and profit. This technology group benefited from the high demand for fluid distribution components and services for commercial and military aircraft. For example, Flex-Tek secured an $18m contract for the provision of flexible and rigid fuel and hydraulic hoses on the Boeing 787 Dreamliner. Through a combination of price rises to offset raw material cost increases and a focus on cost management, we were able to improve margins.
Flexible Solutions experienced declines in sales and profit as a result of continued pressure in the household appliance and general industrial sectors. The domestic appliance market has fallen by some 6% over the past year while the general industrial market is tied to GDP.
The Heat Solutions group supplies heating components for tumble dryers and HVAC ducting and related equipment to the US construction market, primarily to the residential sector. The recession in the US construction market saw a 30% decline year-on-year in building permits and a 28% fall in housing starts. Similarly, the US electric dryer appliance market declined by around 6%. Against this background, sales and profit fell - although the impact on profit was partly mitigated through careful cost management. At the beginning of the year, the group completed a reorganisation and consolidation of manufacturing in Tennessee which has cut costs and improved customer service.
Business developments
In January 2008, to extend Flex-Tek's range of specialty heating solutions, Smiths acquired Fast Heat for $18m. Now integrated into the Heat Solutions group, this business manufactures heating elements and controls used for plastic injection moulding and packaging equipment employed in the manufacture of medical products and semi-conductors.
Flex-Tek is broadening its global footprint particularly in Asia, where its existing plant in Malaysia continues to expand. Over the past year it has added new manufacturing facilities in Bangalore, India, the Clark Freeport Zone, Philippines, and Changzhou, China. The facilities in India and Philippines are aimed at better serving its aerospace customers, following increased demand due to the growth of air traffic in Asia. The facility in Changzhou is focused on the growing HVAC and household appliance market in China.
As part of the Group restructuring, Flex-Tek has also announced a programme to reorganise its operations to drive efficiency improvements. The programme will cost £5m in total and once complete will deliver annualised savings of £7m.
Outlook
Flex-Tek is facing continued uncertainty in the US residential construction and household appliance markets. It will continue to rationalise its portfolio of sites and reduce costs in order to deliver future value when these markets improve. The growth opportunities in aerospace and developing markets will also be a focus.
FINANCIAL REVIEW
Changes in Group composition
We continued to improve the portfolio and business mix through a number of acquisitions and disposals during the year. In November, Sartorius Bearing Technology, a leading provider of high performance rotating equipment for the oil and gas industry, was acquired for £13m. In November, Smiths sold its Marine Systems business for £44m, after a working capital adjustment. In December, Smiths acquired the majority ownership of the John Crane business in Japan for a consideration of £5m, increasing its ownership share from 49% to 70%. In February, the Heating Element division of Fast Heat was acquired for £9m: it manufactures a wide range of specialty heating elements for HVAC, industrial and medical applications. In April, John Crane acquired Indufil BV for £71m, a Dutch-based specialist in filters for the petrochemical and process industries. In May, Smiths Interconnect acquired Allrizon Tongguang, a communications equipment firm based in Shanghai which designs and manufactures radio frequency filters and products for the wireless telecommunications market. The acquisition of Fiber Composite Company Inc. (Fiberod), a Texas-based specialist provider of lifting equipment for the oil and gas industry, was completed in May. In July, Smiths Interconnect acquired Triasx Pty Ltd, a firm based in Brisbane that designs and manufactures complex radio frequency filter products for the wireless communications market.
Earnings per share
Basic headline earnings per share from continuing activities were 74.5p (2007: 47.0p) a rise of 59%. On a statutory basis, the basic earnings per share from continuing activities were 63.0p (2007: 36.9p). These comparisons are distorted by the effect of the share consolidation in June 2007 following the disposal of the Aerospace business. The average number of shares in issue during that year was a reflection of the capital structure appropriate to both the continuing and the discontinued business.
Exceptional and other items relating to continuing activities excluded from headline profits
These items amounted to £59m, compared to £88m in 2007. They comprised:
-
£4m in respect of restructuring corporate and divisional headquarters; this cost is the initial part of a programme expected to cost approximately £48m;
-
£9m for integration costs associated with the Medex acquisition (2007: £9m);
-
£54m (2007: £101m) in connection with John Crane, Inc. asbestos litigation, including a £40m provision for adverse judgments (see litigation paragraph on page 23);
-
Amortisation of intangible assets acquired in business combinations of £19m (2007: £15m). The amortisation relates principally to technology and customer relationships; and
-
Profit on disposal of businesses of £27m (2007: loss of £5m).
-
Exceptional items in 2007 included insurance commutation proceeds (£43m); profit on sales of TI Automotive shares (£24m) and other costs of £26m.
Financing losses amounted to £2m (2007: gain of £1m). These represent the results of derivatives and other financing instruments which are not hedge accounted under IFRS. Of this sum, nil (2007: £1.5m) was charged to operating profit.
Cash generation
Headline operating cash-flow was £273m, representing 72% of headline operating profit. This compares to operating cash of £259m in 2007 and cash generation of 75%. The cash generation outcome this year reflects investment in capital projects and increased working capital to support business growth in the new year.
On a statutory basis, net cash inflow from continuing operations was £198m (2007: £205m).
Cash expenditure on exceptional items was £26m, compared with an £8m inflow in the previous year. The Group made special pension contributions of £34m (2007: £56m). Free cash-flow from continuing operations (after interest and tax but before acquisitions and dividends) was £91m.
Dividends paid in the year on ordinary shares amounted to £131m, compared with £182m in 2007.
Interest and other financing costs
For continuing operations, interest payable on debt, less interest on cash deposits, was £41m, compared with £36m in 2007. Net interest costs were 9.3 times covered by headline operating profits.
The Group accounts for pensions using IAS19. As required by this standard, a finance credit is recognised reflecting the expected return on pension scheme assets and a finance charge is recognised reflecting the unwinding of the discount on the future pension liability. The net financing income for continuing operations was £42m in 2008, compared with £34m in 2007. As a result of the reduction in pension surplus, the amount in the coming year is likely to be approximately £35m lower.
Net debt
Net debt at year end was £771m, up from £590m at the start.
Research and development
Investment in research and development (R&D) drives future performance and is a measure of the Group's commitment to the future organic growth of the business.
Smiths invested a total of £86m in R&D on continuing operations, equivalent to 4% of sales. Of that total, £13m was funded by customers. The comparative figures for 2007 were £79m and £8m. Under IFRS, certain of these development costs are capitalised. The gross capitalisation is shown as an intangible asset. Where customers contribute to the costs of development, the contribution is included as deferred income and disclosed within trade and other payables.
Taxation
The tax charge for the year represented an effective rate for continuing operations of 24.0% on the headline profit before taxation, compared to 25.1% in 2007. The rate reduced due to taking advantage of global tax incentives, the tax-efficient use of capital and active tax compliance management. On a statutory basis, the tax charge on continuing activities was £75m.
Cost of capital and return on shareholders' funds
Smiths uses its weighted average cost of capital as one measure to appraise both internally-generated investment opportunities and acquisitions. During 2007, the Company's weighted average cost of capital (WACC) decreased from 9% to 8% as a result of the lower cost of equity.
The after-tax headline return on shareholders' funds for continuing operations, including goodwill set-off against reserves, was 16.7% (2007: 14.9%).
Retirement benefits
As required by IFRS the balance sheet reflects the net surplus or deficit in retirement benefit plans, taking assets at their market values at 31 July 2008 and evaluating liabilities at year-end AA corporate bond interest rates.
The year-end retirement benefit position was:
|
|
2008 |
2007 |
|
Funded plans: |
|
|
|
UK plans - funding status |
106% |
113% |
|
US plans - funding status |
89% |
92% |
|
Other plans - funding status |
81% |
83% |
|
|
£m |
£m |
|
Surplus/(deficit): |
|
|
|
Funded plans |
102 |
297 |
|
Unfunded plans |
(113) |
(114) |
|
Total surplus/(liability) |
(11) |
183 |
Company contributions to the funded pension plans were £56m (2007: £103m including discontinued operations). In 2008, special contributions were made totalling £17m, including £4m in respect of the Aerospace disposal. In 2007, special payments of £56m were made including £21m in respect of the Aerospace disposal. During the year, the trustees of the TI Group Pension Scheme invested £250m in annuities from Legal & General which are matched with specific liabilities of the Scheme thereby mitigating the longevity risk in respect of specific pensioners.
Full details of the retirement benefits are shown in note 10.
Exchange rates
The results of overseas operations are translated into sterling at average exchange rates. The net assets are translated at year-end rates. The principal exchange rates, expressed in terms of the value of sterling, are shown in the following table.
|
|
2008 |
2007 |
|
|
Average rates: |
|
|
|
|
US Dollar |
2.00 |
1.95 |
Dollar weakened 2.5% |
|
Euro |
1.35 |
1.48 |
Euro strengthened 8.8% |
|
Year-end rates: |
|
|
|
|
US Dollar |
1.98 |
2.04 |
Dollar strengthened 2.9% |
|
Euro |
1.27 |
1.49 |
Euro strengthened 14.7% |
Dividend policy
An interim dividend of 10.5p per share was paid on 25 April 2008. A final dividend of 23.5p per share is proposed. Subject to approval at the AGM, the final dividend will be paid on 21 November 2008 to ordinary shareholders on the register of members as at 24 October 2008. The ex-dividend date will be 22 October 2008. The AGM will be held at 2.30 pm on Tuesday 18 November 2008.
The Board intends to grow dividends consistent with increasing cover to around 2.5 times in the medium term. Dividend cover relative to headline earnings for the year ending 31 July 2008 was 2.2 times.
John Crane, Inc. litigation
John Crane, Inc. (JCI) an indirect subsidiary of the Company, is one of many co-defendants in numerous lawsuits pending in the USA in which plaintiffs are claiming damages arising from alleged exposure to, or use of, products containing asbestos. The JCI products generally referred to in these cases consist of industrial sealing products, primarily packing and gaskets. The asbestos was encapsulated within these products in such a manner that, according to tests conducted on behalf of JCI, the products were safe. John Crane ceased manufacturing products containing asbestos in 1985.
JCI has resisted every case in which it has been named and intends to continue its robust defence of asbestos-related claims based upon this 'safe product' defence. As a result of its defence policy, JCI has been dismissed before trial from cases involving approximately 159,000 claims over the last 29 years. JCI is currently a defendant in cases involving approximately 136,000 claims. Despite these large numbers of claims, JCI has had final judgments against it, after appeals, in only 70 cases, amounting to awards of some US$70m over the 29 year period.
The 2007 Annual Report noted that JCI had secured the commutation of certain liability insurance policies, resulting in proceeds of £43m. While substantial excess liability insurance remains in place the exact scope of the cover is currently the subject of litigation in the United States in the Circuit Court of Cook County, Illinois. In the meantime JCI has begun to meet defence costs directly, and intends to recover appropriate contribution from insurers in accordance with the terms of the remaining policies in due course. The 2007 Annual report noted that JCI has made a provision for defence costs of £101m based upon an assessment of the probable costs of defending known and expected future claims. In establishing this provision no account has been taken of recoveries from insurers as their nature and timing are not yet sufficiently certain to permit recognition.
During the current year, JCI has charged £5m in respect of adverse legal judgments delivered. Despite JCI's commitment to its safe product defence, history shows that juries will occasionally return adverse verdicts which can be difficult to overturn on appeal. A further £40m has, therefore, been charged to establish a provision for future adverse judgments. In deciding upon this amount, JCI has relied on expert advice from a specialist in asbestos liability estimation.
Financial information
The financial information in this preliminary announcement which comprises the consolidated income statement, consolidated statement of recognised income and expense, consolidated balance sheet, consolidated cash-flow statement, accounting policies and related notes does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985.
The auditors have reported on the Group's statutory accounts for the year ended 31 July 2008 and period ended 31 July 2007 under s235 of the Companies Act 1985, which do not contain statements under s237(2) or s237(3) of the Companies Act 1985 and are unqualified. The Group's statutory accounts for the period ended 31 July 2007 have been delivered to the Registrar of Companies and the Group statutory accounts for the year ended 31 July 2008 will be filed with the Registrar in due course.
____________________
Consolidated income statement
|
|
|
Year ended |
Period ended |
||
|
|
|
31 July 2008 |
31 July 2007 |
||
|
|
Notes |
£m |
£m |
||
|
Continuing operations |
|
|
|
||
|
Revenue |
1 |
2,321.2 |
2,160.9 |
||
|
Cost of sales |
|
(1,265.5) |
(1,159.1) |
||
|
Gross profit |
|
1,055.7 |
1,001.8 |
||
|
Sales and distribution costs |
|
(311.8) |
(311.5) |
||
|
Administrative expenses |
|
|
|
||
|
- |
normal activities |
|
(396.4) |
(394.2) |
|
|
- |
provision for John Crane, Inc. litigation |
4 |
(49.0) |
(100.7) |
|
|
Other operating income |
2 |
|
66.9 |
||
|
Profit/(loss) on disposal of businesses |
4 |
27.2 |
(5.2) |
||
|
Operating profit |
2 |
325.7 |
257.1 |
||
|
Interest receivable |
|
2.2 |
21.4 |
||
|
Interest payable |
|
(43.2) |
(57.8) |
||
|
Other financing (losses)/gains |
3 |
(6.1) |
2.1 |
||
|
Other finance income - retirement benefits |
|
41.7 |
33.7 |
||
|
Finance costs |
5 |
(5.4) |
(0.6) |
||
|
Share of post-tax losses of associated companies |
14 |
(1.0) |
(0.5) |
||
|
Profit before taxation |
|
319.3 |
256.0 |
||
|
Comprising |
|
|
|
||
|
- |
headline profit before taxation |
3 |
380.3 |
344.4 |
|
|
- |
exceptional items |
4 |
|
|
|
|
|
• |
profit/(loss) on disposal of businesses |
|
27.2 |
(5.2) |
|
|
• |
commutation of insurance policies |
|
|
42.9 |
|
|
• |
provision for John Crane, Inc. litigation |
|
(53.7) |
(100.7) |
|
|
• |
other |
|
(13.6) |
(35.2) |
|
- |
amortisation of acquired intangible assets |
|
(19.2) |
(14.8) |
|
|
- |
other financing (losses)/gains |
|
(1.7) |
0.6 |
|
|
- |
profit on sale of financial asset |
|
|
24.0 |
|
|
|
|
319.3 |
256.0 |
||
|
Taxation |
6 |
(75.0) |
(53.1) |
||
|
Profit after taxation - continuing operations |
|
244.3 |
202.9 |
||
|
Profit after taxation - discontinued operations |
7 |
24.5 |
1,525.2 |
||
|
Profit for the period |
|
268.8 |
1,728.1 |
||
|
Attributable to: |
|
|
|
||
|
Smiths Group shareholders |
|
268.5 |
1,728.1 |
||
|
Minority interests |
|
0.3 |
|
||
|
|
|
268.8 |
1,728.1 |
||
|
Earnings per share |
9 |
|
|
||
|
Basic |
|
69.3p |
314.7p |
||
|
Basic - continuing operations |
|
63.0p |
36.9p |
||
|
Diluted |
|
68.5p |
310.3p |
||
|
Diluted - continuing operations |
|
62.3p |
36.4p |
||
Consolidated statement of recognised income and expense
|
|
|
Year ended |
Period ended |
|
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
Notes |
£m |
£m |
|
|
Exchange gain/(loss) |
|
89.5 |
(72.2) |
|
|
Cumulative exchange losses recycled on disposals |
|
|
49.2 |
|
|
Fair value gain on acquisition of former associate |
|
0.4 |
|
|
|
Taxation recognised on exchange losses |
|
|
|
|
|
- |
current |
|
|
2.4 |
|
Taxation recognised on share-based payment |
|
|
|
|
|
- |
current |
6 |
5.2 |
10.3 |
|
- |
deferred |
6 |
(3.8) |
(9.4) |
|
Actuarial (losses)/gains on retirement benefits |
10 |
(254.5) |
70.3 |
|
|
Taxation recognised on actuarial (losses)/gains - deferred |
6 |
75.5 |
(30.1) |
|
|
Fair value (losses)/gains: |
|
|
|
|
|
- |
on cash-flow hedges |
21 |
(0.5) |
(11.9) |
|
- |
on net investment hedges |
21 |
(47.5) |
8.2 |
|
Net (expense)/income recognised directly in equity |
|
(135.7) |
16.8 |
|
|
Profit for the period |
|
268.8 |
1,728.1 |
|
|
Total recognised income and expense |
27 |
133.1 |
1,744.9 |
|
|
Attributable to: |
|
|
|
|
|
Smiths Group shareholders |
|
132.8 |
1,744.9 |
|
|
Minority interests |
|
0.3 |
|
|
|
|
|
133.1 |
1,744.9 |
|
Consolidated balance sheet
|
|
|
2008 |
2007 |
|
|
|
Notes |
£m |
£m |
|
|
Non-current assets |
|
|
|
|
|
Intangible assets |
12 |
1,253.2 |
1,021.3 |
|
|
Property, plant and equipment |
13 |
296.3 |
260.9 |
|
|
Investments accounted for using the equity method |
14 |
9.1 |
12.0 |
|
|
Financial assets - other investments |
|
3.6 |
0.7 |
|
|
Retirement benefit assets |
10 |
174.2 |
333.7 |
|
|
Deferred tax assets |
6 |
96.2 |
94.0 |
|
|
Trade and other receivables |
16 |
14.6 |
14.7 |
|
|
Financial derivatives |
22 |
1.4 |
0.4 |
|
|
|
|
1,848.6 |
1,737.7 |
|
|
Current assets |
|
|
|
|
|
Inventories |
15 |
380.3 |
319.7 |
|
|
Trade and other receivables |
16 |
565.4 |
489.8 |
|
|
Cash and cash equivalents |
17 |
132.5 |
186.2 |
|
|
Financial derivatives |
22 |
6.5 |
13.5 |
|
|
|
|
1,084.7 |
1,009.2 |
|
|
Assets of businesses held for sale |
18 |
|
31.3 |
|
|
Total assets |
|
2,933.3 |
2,778.2 |
|
|
Non-current liabilities |
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
- |
borrowings |
20 |
(720.7) |
(567.1) |
|
- |
financial derivatives |
22 |
(0.1) |
(2.5) |
|
Provisions for liabilities and charges |
23 |
(200.6) |
(143.4) |
|
|
Retirement benefit obligations |
10 |
(184.7) |
(150.1) |
|
|
Deferred tax liabilities |
6 |
(64.3) |
(118.0) |
|
|
Trade and other payables |
19 |
(27.5) |
(22.5) |
|
|
|
|
(1,197.9) |
(1,003.6) |
|
|
Current liabilities |
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
- |
borrowings |
20 |
(182.4) |
(212.1) |
|
- |
financial derivatives |
22 |
(21.5) |
(2.8) |
|
Provisions for liabilities and charges |
23 |
(70.0) |
(90.1) |
|
|
Trade and other payables |
19 |
(420.7) |
(412.6) |
|
|
Current tax payable |
|
(122.6) |
(137.5) |
|
|
|
|
(817.2) |
(855.1) |
|
|
Liabilities of businesses held for sale |
18 |
|
(16.2) |
|
|
Total liabilities |
|
(2,015.1) |
(1,874.9) |
|
|
Net assets |
|
918.2 |
903.3 |
|
|
Shareholders' equity |
|
|
|
|
|
Share capital |
26 |
145.5 |
144.6 |
|
|
Share premium account |
27 |
303.6 |
289.0 |
|
|
Capital redemption reserve |
27 |
5.8 |
5.7 |
|
|
Revaluation reserve |
27 |
1.7 |
1.7 |
|
|
Merger reserve |
27 |
234.8 |
234.8 |
|
|
Retained earnings |
27 |
253.7 |
208.9 |
|
|
Hedge reserve |
27 |
(29.2) |
18.6 |
|
|
Total shareholders' equity |
|
915.9 |
903.3 |
|
|
Minority interest equity |
|
2.3 |
|
|
|
Total equity |
|
918.2 |
903.3 |
|
Consolidated cash-flow statement
|
|
|
Year ended |
Period ended |
||
|
|
|
31 July 2008 |
31 July 2007 |
||
|
|
Notes |
£m |
£m |
||
|
Net cash inflow from operating activities |
28 |
198.1 |
246.0 |
||
|
Cash-flows from investing activities |
|
|
|
||
|
Expenditure on capitalised development |
|
(19.8) |
(87.4) |
||
|
Expenditure on other intangible assets |
|
(16.1) |
(29.6) |
||
|
Purchases of property, plant and equipment |
|
(64.2) |
(118.3) |
||
|
Disposals of property, plant and equipment |
|
2.7 |
25.6 |
||
|
Investment in financial assets |
|
(3.4) |
|
||
|
Proceeds from sale of financial asset |
|
1.1 |
15.0 |
||
|
Acquisition of businesses |
29 |
(149.7) |
(34.9) |
||
|
Disposal of Aerospace |
7 |
(6.3) |
2,495.0 |
||
|
Disposals of businesses |
30 |
43.2 |
9.1 |
||
|
Net cash-flow (used)/generated in investing activities |
|
(212.5) |
2,274.5 |
||
|
|
|
|
|
||
|
Cash-flows from financing activities |
|
|
|
||
|
Proceeds from exercise of share options |
27 |
21.0 |
77.7 |
||
|
Purchase of own shares |
|
(20.7) |
(7.0) |
||
|
Dividends paid to equity shareholders |
8 |
(131.4) |
(182.4) |
||
|
Cash paid to shareholders under B share scheme |
|
(16.4) |
(2,090.9) |
||
|
Increase in new borrowings |
|
135.9 |
19.0 |
||
|
Reduction and repayment of borrowings |
|
(11.0) |
(284.7) |
||
|
Net cash-flow used in financing activities |
|
(22.6) |
(2,468.3) |
||
|
|
|
|
|
||
|
Net (decrease)/increase in cash and cash equivalents |
|
(37.0) |
52.2 |
||
|
Cash and cash equivalents at beginning of period |
|
3.1 |
(51.1) |
||
|
Exchange differences |
|
(6.1) |
2.0 |
||
|
Cash and cash equivalents at end of period |
17 |
(40.0) |
3.1 |
||
|
Cash and cash equivalents at end of period comprise: |
|
|
|
||
|
- |
cash at bank and in hand |
|
122.5 |
148.5 |
|
|
- |
short-term deposits |
|
10.0 |
40.8 |
|
|
- |
bank overdrafts |
|
(172.5) |
(186.2) |
|
|
|
|
(40.0) |
3.1 |
||
|
Included in cash and cash equivalents per the balance sheet |
17 |
132.5 |
186.2 |
|
Included in overdrafts per the balance sheet |
17 |
(172.5) |
(186.2) |
|
Included in the assets of the disposal group |
18 |
|
3.1 |
|
|
17 |
(40.0) |
3.1 |
The consolidated cash-flow statement includes cash-flows relating to discontinued operations. See note 7 for details of these cash-flows.
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with the Companies Act 1985 applicable to companies reporting under International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations, as adopted by the European Union in response to the IAS regulation (EC 1606/2002), under the historic cost convention modified to include revaluation of certain financial instruments, share options and pension assets and liabilities, held at fair value as described below. For Smiths Group plc there are no differences between IFRS as adopted for use in the European Union and full IFRS as published by the International Accounting Standards Board.
The accounting policies adopted are consistent with those of the previous financial period except that the Group has adopted 'IFRS 7: Financial instruments: Disclosures' and the amendment to 'IAS 1: Presentation of financial statements'. Adoption of these standards has required additional disclosures on the credit quality of trade receivables and capital management.
Significant judgements, key assumptions and estimates
The preparation of the accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The key estimates and assumptions used in these consolidated financial statements are set out below.
Revenue recognition
The timing of revenue recognition on long-term funded contracts depends on the assessed stage of completion of contract activity at the balance sheet date. This assessment requires the expected total contract revenues and costs to be estimated based on the current progress of the contract.
Revenue of £63.3m (2007: £58.1m) has been recognised in respect of contracts in progress at the year end with a total expected value of £197.5m (2007: £141.5m). A 5% increase in the proportion of the contract activity recognised in the current year would have increased operating profit by an estimated £0.6m (2007: £0.5m).
Impairment
Goodwill is tested at least annually for impairment in accordance with the accounting policy for goodwill set out below. The recoverable amounts of cash generating units are determined based on value in use calculations. These calculations require the use of estimates including projected future cash flows and other future events. See note 12 for details of the critical assumptions made and disclosures on the sensitivity of the impairment testing to these key assumptions.
Provisions for liabilities and charges
The consolidated financial statements include a provision for litigation of £163.7m (2007: £121.2m).
As previously reported, John Crane, Inc., a subsidiary of the Company, is one of many co-defendants in litigation relating to products previously manufactured which contain asbestos. Provision has been made for the future legal defence costs which the Group is expected to incur and the expected costs of potential future judgments against John Crane, Inc. The actual future costs could be materially higher or lower than this estimate, depending on the progress of the claims that are ongoing. See note 23 for details.
Retirement benefits
The consolidated financial statements include costs in relation to, and provision for, retirement benefit obligations. The costs and the present value of any related pension assets and liabilities depend on such factors as life expectancy of the members, the salary progression of current employees, the returns that plan assets generate and the discount rate used to calculate the present value of the liabilities. The Group uses previous experience and impartial actuarial advice to select the values of critical estimates. The estimates, and the effect of variances in key estimates, are disclosed in note 10.
Taxation
The Group has recognised deferred tax assets relating to UK losses of £94m. The recognition of assets pertaining to these losses involves judgement by management as to the likelihood of realisation of these deferred tax assets and this is based on a number of factors, which seek to assess the expectation that the benefit of deferred tax assets will be realised, including appropriate taxable temporary timing differences and it has been concluded that there are sufficient taxable profits in future periods to support recognition.
Further detail on the Group's deferred taxation position is included in note 6.
The accounts have been prepared in accordance with the accounting policies, as described below.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings, together with the Group's share of the results of its associates.
Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which this power is transferred to the Company. They are de-consolidated from the date that control ceases.
Associates are entities over which the Group has significant influence but does not control, generally accompanied by a share of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method.
Foreign currencies
The Company's presentational currency is sterling. The results and financial position of all subsidiaries and associates that have a functional currency different from sterling are translated into sterling as follows:
assets and liabilities are translated at the rate of exchange at the date of that balance sheet;
income and expenses are translated at average exchange rates for the period; and
all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, the cumulative amount of such exchange differences is recognised in the income statement as part of the gain or loss on sale.
Exchange differences arising on transactions are recognised in the income statement. Those arising on trading are taken to operating profit; those arising on borrowings are classified as finance income or cost.
Revenue
Revenue from the sale of goods is recognised when the risks and rewards of ownership have been transferred to the customer, which is usually when title passes.
Revenue from services is recognised in accounting periods in which the services are rendered, by reference to completion of the specific transaction, assessed on the basis of the actual service provided as a proportion of the total services to be provided.
Revenue is measured at the fair value of the consideration received, net of trade discounts and sales taxes.
Long-term funded contracts
Where the outcome of a contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. The Group uses the 'percentage of completion method' to determine the appropriate amount to recognise in a given period. The assessment of the stage of completion is dependent on the nature of the contract, but will generally be based on the estimated proportion of the total contract costs which have been incurred to date. If a contract is expected to be loss-making, a provision is recognised for the entire loss.
Employee benefits
Pension obligations and post-retirement benefits
The Group has both defined benefit and defined contribution plans.
For defined benefit plans the liability for each scheme recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full in the period in which they occur, outside of the income statement and are presented in the statement of recognised income and expense. Past service costs are recognised immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Contributions are expensed as incurred.
The Group also has certain post-retirement healthcare schemes which are accounted for on a similar basis to the defined benefit plans.
Share-based compensation
The Group operates a number of equity-settled and cash-settled share-based compensation plans.
The fair value of the shares or share options granted is recognised as an expense over the vesting period to reflect the value of the employee services received.
The fair value of options granted, excluding the impact of any non-market vesting conditions, is calculated using established option pricing models, principally binomial models. The probability of meeting non-market vesting conditions, which include profitability targets, is used to estimate the number of share options which are likely to vest.
For cash-settled share-based payment a liability is recognised based on the fair value of the payment earned by the balance sheet date. For equity-settled share-based payment the corresponding credit is recognised directly in reserves.
In accordance with the transitional provisions of 'IFRS 2: Share-based Payment', no charge has been recognised for grants of equity instruments made before 7 November 2002.
Exceptional items
Items which are material either because of their size or their nature, and which are non-recurring, are presented within their relevant consolidated income statement category, but highlighted separately on the face of the income statement. The separate reporting of exceptional items helps provide a better picture of the Company's underlying performance. Items which may be included within the exceptional category include:
profits/(losses) on disposal of businesses;
spend on the integration of significant acquisitions and other major restructuring programmes;
significant goodwill or other asset impairments;
income and expenditure relating to John Crane, Inc. asbestos litigation; and
other particularly significant or unusual items.
Exceptional items are excluded from the headline profit measures used by the Group. The basis of calculation of these measures is explained in note 3.
Discontinued operations
A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of, has been abandoned or meets the criteria to be classified as held for sale.
Discontinued operations are presented on the income statement as a separate line and are shown net of tax.
Assets and businesses held for sale
Assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and gains or losses on subsequent re-measurements are included in the income statement. No depreciation is charged on assets and businesses classified as held for sale.
Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. The asset or business must be available for immediate sale and the sale must be highly probable within one year.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition.
Goodwill arising from acquisitions of subsidiaries after 1 August 1998 is included in intangible assets, tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill arising from acquisitions of subsidiaries before 1 August 1998 was set against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Any impairment is recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the income statement in the year in which it is incurred with the exception of:
amounts recoverable from third parties; and
expenditure incurred in respect of the development of major new products where the outcome of those projects is assessed as being reasonably certain as regards viability and technical feasibility. Such expenditure is capitalised and amortised straight line over the estimated period of sale for each product, commencing in the year that sales of the product are first made.
Other intangible assets
The identifiable net assets acquired as a result of a business combination may include intangible assets other than goodwill. Any such intangible assets are amortised straight line over their expected future lives.
The estimated useful lives are as follows:
|
Patents, licences and trademarks |
|
up to 20 years |
|
Technology |
|
7 to 12 years |
|
Customer relationships |
|
up to 7 years |
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Property, plant and equipment
Property, plant and equipment is stated at historical cost less accumulated depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other assets estimated to write off the depreciable amount of relevant assets by equal annual instalments over their estimated useful lives. In general, the rates used are: Freehold and long leasehold buildings - 2%; Short leasehold property - over the period of the lease; Plant, machinery, etc. - 10% to 20%; Motor vehicles - 25%; Tools and other equipment - 10% to 33%.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
No borrowing costs are capitalised as part of property, plant and equipment.
Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
Trade and other receivables
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate provision for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment terms will not be collected.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with maturities of three months or less.
In the cash-flow statement cash and cash equivalents are shown net of bank overdrafts, which are included as current borrowings in liabilities on the balance sheet.
Provisions
Provisions for warranties and product liability, disposal indemnities, restructuring costs, vacant leasehold property and legal claims are recognised when: the Company has a legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Provisions are discounted where the time value of money is material.
Where there are a number of similar obligations, for example where a warranty provision has been given, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Where a leasehold property is vacant, or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made for the anticipated future shortfall up to termination of the lease, or the termination payment, if smaller.
Taxation
The charge for taxation is based on profits for the year and takes into account taxation deferred because of temporary differences between the treatment of certain items for taxation and accounting purposes.
Deferred tax is provided in full using the balance sheet liability method. A deferred tax asset is recognised where it is probable that future taxable income will be sufficient to utilise the available relief. Tax is charged or credited to the income statement except when it relates to items charged or credited directly to equity, in which case the tax is also dealt with in equity.
Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax liabilities and assets are not discounted.
Financial assets
The classification of financial assets depends on the purpose for which the assets were acquired. Management determines the classification of an asset at initial recognition and re-evaluates the designation at each reporting date. Financial assets are classified as: loans and receivables or financial assets where changes in fair value are charged (or credited) to the income statement.
Financial assets are initially recognised at transaction price when the Group becomes party to contractual obligations. The transaction price used includes transaction costs unless the asset is being fair valued through the income statement.
The subsequent measurement of financial assets depends on their classification. Loans and receivables are measured at amortised cost using the effective interest method. Financial assets where changes in fair value are charged (or credited) to the income statement are subsequently measured at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the 'financial assets at fair value through the income statement' category are included in the income statement in the period in which they arise.
Financial assets are derecognised when the right to receive cash-flows from the assets has expired, or has been transferred, and the Company has transferred substantially all of the risks and rewards of ownership.
Financial assets are classified as current if they are expected to be realised within 12 months of the balance sheet date.
Financial liabilities
Borrowings are initially recognised at the fair value of the proceeds, net of related transaction costs. These transaction costs, and any discount or premium on issue, are subsequently amortised under the effective yield method through the income statement as interest over the life of the loan, and added to the liability disclosed in the balance sheet. Related accrued interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least one year after the balance sheet date.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising any resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Fair value hedge
Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair values of the hedged assets or liabilities that are attributable to the hedged risk.
Cash-flow hedge
The effective portions of changes in the fair values of derivatives that are designated and qualify as cash-flow hedges are recognised in equity. The gain or loss relating to any ineffective portion is recognised immediately in the income statement.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged items will affect profit or loss (for instance when the forecast sale that is hedged takes place). If a forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity reserves and included in the initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to cash-flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to any ineffective portion is recognised immediately in the income statement.
When a foreign operation is disposed of gains and losses accumulated in equity related to that operation are included in the income statement.
Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at their fair value. Unrealised gains and losses on these embedded derivatives are recognised in the income statement.
Fair value of financial assets and liabilities
The fair values of financial assets and financial liabilities are the amounts at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The following methods are used to estimate the fair values of the financial instruments:
cash, trade receivables and payables and floating rate borrowings - the carrying value is a good approximation of the fair value;
fixed rate borrowings - quoted market prices of equivalent instruments; and
forward exchange contracts, currency swaps, interest rate instruments and embedded derivatives - net present value of the future cash-flows, calculated using market data at the balance sheet date (principally exchange rates and yield curves).
Borrowings are carried on the balance sheet at amortised cost adjusted for fair value interest rate hedging. The fair value of fixed rate borrowings is only used for supplementary disclosures.
Financial guarantees
Financial guarantees are initially recognised at the fair value of the consideration received.
At each subsequent balance sheet date an estimate is made of the payments which will be required under the guarantee in accordance with 'IAS 37: Provisions, contingent liabilities and contingent assets'. The guarantee is then valued at the higher of its initial value less revenue recognised to date and the best estimate of the total payments which will be required under the contract.
Any gains or losses on the contract are recognised in the income statement.
Dividends
Dividends are recognised as a liability in the period in which they are authorised. The interim dividend is recognised when it is paid and the final dividend is recognised when it has been approved by shareholders at the Annual General Meeting.
Recent accounting developments
The following standards and interpretations have been issued by the IASB and are likely to affect future annual reports and accounts.
'IFRS 8: Operating Segments' was issued in February 2007 and will be adopted by Smiths from 1 August 2008. The new standard requires segment information to be prepared on the same basis as information reported to management for decision-making purposes. Following the restructuring of internal reporting from 1 August 2008, five divisions will be reported in the 2009 Annual report. In addition, the operating profit reported will be calculated on the basis used for management reporting and some detailed disclosures will change.
Smiths will determine an appropriate implementation date for the following standards, amendments and interpretations after they have been adopted by the European Union:
An amendment to 'IAS 23: Borrowing costs' was issued in March 2007. This eliminates the option, currently used by the Group, of expensing all borrowing costs when they are incurred. As retrospective adoption is not required, there will be no changes to the information previously reported when this standard is adopted. The impact of the new policy on future reported performance is expected to be limited because the only qualifying assets have short construction periods.
'IFRIC 12: Service concession arrangements' was issued in December 2006 and 'IFRIC 13: Customer Loyalty Programmes' was issued in June 2007. Neither interpretation is expected to have a material impact on the Group because it does not have any material contracts or programmes within the scope of these interpretations.
'IFRIC 14: The limit on a defined benefit asset, minimum funding requirements and their interaction' was issued on 6 July 2007. This interpretation provides guidance on the extent to which a pension scheme surplus should be recognised as an asset. Based on current actuarial advice, this interpretation is not expected to reduce the assets recognised at 31 July 2008 in respect of pension schemes.
'IFRIC 15: Agreements for the construction of real estate' was issued on 3 July 2008. The Group is not involved in the construction or sale of residential real estate. However a review of contract accounting is being undertaken to establish whether or not the same principles apply to any transactions undertaken by the Group. The impact of adopting this interpretation will be determined once this review has been completed.
'IFRIC 16: Hedges of a net investment in a foreign operation' was issued on 3 July 2007. An initial review of the Group's net investment hedging indicated that this interpretation is not likely to affect their accounting treatment. A detailed review of the impact of this interpretation is still in progress.
'IFRS 3: (Revised) business combinations' and 'IAS 27: (Revised) consolidated and separate financial statements' were issued in January 2008. Implementing IFRS 3 (revised) will significantly change the recognition of goodwill, acquisition costs and contingent consideration relating to acquisitions. However it only applies to acquisitions made after it has been adopted. IAS 27 (revised) requires different accounting treatment for minority interest but it is not expected to affect the Group's financial results or position materially.
An amendment to 'IFRS 2: Share based payment' was issued in January 2008. This provides a definition of vesting conditions and specifies the accounting treatment for non-vesting conditions. It is not expected to materially affect the share based payment charge recognised in the Group accounts because only a small proportion of awards under employee share schemes are affected by failures to comply with non-vesting conditions.
'IAS 1: (Revised) Presentation of financial statements' was issued in January 2008. This changes the presentation requirements for other comprehensive income and transactions with shareholders, and requires increased disclosures when there is a restatement of comparatives. Adopting this standard will not affect the recognition, measurement or disclosure of any transactions or events.
In February 2008 amendments to 'IAS 32: Financial Instruments: Presentation' and 'IAS 1: (Revised) Presentation of financial statements' were issued clarifying the treatment of puttable financial instruments. The adoption of these amendments is not expected to have any impact on the Group.
Notes to the accounts
Segment information
Analysis by business segments
For management purposes, the Group has been organised into three business segments - Detection, Medical and Specialty Engineering. These business segments are the basis on which the Group reported its primary segment information. For reporting purposes Specialty Engineering is analysed into two segments: John Crane and Specialty - Other.
|
|
Year ended 31 July 2008 |
||||
|
|
|
|
Specialty Engineering |
|
|
|
|
|
|
|
Specialty |
|
|
|
Detection |
Medical |
John Crane |
- Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Revenue |
509.3 |
703.4 |
625.8 |
482.7 |
2,321.2 |
|
Headline operating profit |
85.6 |
127.8 |
95.9 |
71.3 |
380.6 |
|
Exceptional operating items (note 4) |
(0.3) |
(10.0) |
(51.5) |
26.4 |
(35.4) |
|
Amortisation of acquired intangible assets |
(0.4) |
(11.3) |
(5.5) |
(2.0) |
(19.2) |
|
Financing losses |
0.1 |
(0.4) |
(0.1) |
0.1 |
(0.3) |
|
Operating profit |
85.0 |
106.1 |
38.8 |
95.8 |
325.7 |
|
Exceptional finance costs - adjustment to discounted provision (note 4) |
|
|
(4.7) |
|
(4.7) |
|
Net finance costs - other |
|
|
|
|
(0.7) |
|
Share of post-tax (losses)/profits of associated companies |
(1.4) |
|
0.4 |
|
(1.0) |
|
Profit before taxation |
|
|
|
|
319.3 |
|
Taxation |
|
|
|
|
(75.0) |
|
Profit for the period - continuing operations |
|
|
|
|
244.3 |
|
|
Period ended 31 July 2007 |
||||
|
|
|
|
Specialty Engineering |
|
|
|
|
|
|
|
Specialty |
|
|
|
Detection |
Medical |
John Crane |
- Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Revenue |
437.5 |
690.6 |
532.4 |
500.4 |
2,160.9 |
|
Headline operating profit |
78.6 |
127.3 |
75.3 |
66.4 |
347.6 |
|
Exceptional operating items (note 4) |
(13.0) |
(9.6) |
(73.2) |
(2.4) |
(98.2) |
|
Amortisation of acquired intangible assets |
(0.4) |
(11.5) |
(0.6) |
(2.3) |
(14.8) |
|
Financing losses |
(0.1) |
(0.2) |
(0.2) |
(1.0) |
(1.5) |
|
|
65.1 |
106.0 |
1.3 |
60.7 |
233.1 |
|
Profit on sale of financial assets |
|
|
|
|
24.0 |
|
Operating profit |
|
|
|
|
257.1 |
|
Net finance costs |
|
|
|
|
(0.6) |
|
Share of post-tax (losses)/profits of associated companies |
(1.1) |
|
0.6 |
|
(0.5) |
|
Profit before taxation |
|
|
|
|
256.0 |
|
Taxation |
|
|
|
|
(53.1) |
|
Profit for the period - continuing operations |
|
|
|
|
202.9 |
The Group's revenue is analysed as follows:
|
|
|
|
|
Year ended |
Period ended |
|
Sale of goods |
|
|
|
2,077.8 |
1,965.2 |
|
Contracts |
|
|
|
132.1 |
98.4 |
|
Services |
|
|
|
111.3 |
97.3 |
|
|
|
|
|
2,321.2 |
2,160.9 |
The non-cash expenditure included in operating costs by division is shown below:
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||||
|
|
|
|
|
Other non-cash |
|
|
|
Other non-cash |
|
|
|
|
Goodwill and |
expenses |
|
|
Goodwill and |
expenses |
|
|
|
|
other asset |
(excluding |
|
|
other asset |
(excluding |
|
|
Depreciation |
Amortisation |
impairments |
impairments) |
Depreciation |
Amortisation |
impairments |
impairments) |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Detection |
7.8 |
4.4 |
|
2.7 |
6.2 |
2.5 |
|
1.8 |
|
Medical |
26.5 |
16.6 |
0.3 |
4.1 |
18.3 |
18.9 |
|
3.6 |
|
Specialty Engineering: |
|
|
|
|
|
|
|
|
|
John Crane |
10.0 |
7.2 |
|
3.5 |
8.3 |
2.1 |
|
2.6 |
|
Specialty - Other |
8.9 |
2.8 |
|
2.6 |
11.0 |
2.4 |
10.3 |
2.4 |
|
Continuing operations |
53.2 |
31.0 |
0.3 |
12.9 |
43.8 |
25.9 |
10.3 |
10.4 |
|
Discontinued operations |
|
|
|
|
8.4 |
3.8 |
|
3.5 |
|
Total |
53.2 |
31.0 |
0.3 |
12.9 |
52.2 |
29.7 |
10.3 |
13.9 |
Included in goodwill and other asset impairments in 2007 is £8.1m relating to disposal group impairment of assets on re-measurement to fair value less costs of sale.
Capital expenditure
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Detection |
32.3 |
25.9 |
|
Medical |
37.8 |
42.5 |
|
Specialty Engineering: |
|
|
|
John Crane |
21.8 |
17.3 |
|
Specialty - Other |
8.2 |
14.7 |
|
Continuing operations |
100.1 |
100.4 |
|
Discontinued operations |
|
127.7 |
|
|
100.1 |
228.1 |
Included in discontinued operations for the period ended 31 July 2007 is capital expenditure of £90.9m, incurred during the period after being classified as a disposal group.
Balance sheet
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Assets |
|
|
|
Detection |
711.7 |
604.8 |
|
Medical |
912.1 |
899.9 |
|
Specialty Engineering: |
|
|
|
John Crane |
490.5 |
336.0 |
|
Specialty - Other |
375.1 |
357.6 |
|
Operating assets by segment - continuing operations |
2,489.4 |
2,198.3 |
|
Unallocated corporate assets |
311.4 |
393.7 |
|
Cash and cash equivalents |
132.5 |
186.2 |
|
Total assets |
2,933.3 |
2,778.2 |
|
Liabilities |
|
|
|
Detection |
143.6 |
164.2 |
|
Medical |
93.0 |
136.2 |
|
Specialty Engineering: |
|
|
|
John Crane |
282.1 |
253.4 |
|
Specialty - Other |
77.6 |
93.2 |
|
Operating liabilities by segment |
596.3 |
647.0 |
|
Unallocated corporate liabilities |
515.7 |
448.7 |
|
Borrowings |
903.1 |
779.2 |
|
Total liabilities |
2,015.1 |
1,874.9 |
Unallocated corporate assets and liabilities include net taxation liabilities of £90.7m, retirement benefit assets of £174.2m, retirement benefit obligations of £184.7m and property, plant and equipment of £16.8m. All these assets and liabilities are not directly attributable to the operating activities.
Analysis by geographical location
The Group's revenue by destination is shown below:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
United Kingdom |
148.3 |
134.6 |
|
North America |
1,107.5 |
1,038.4 |
|
Europe |
586.3 |
546.2 |
|
Other overseas |
479.1 |
441.7 |
|
|
2,321.2 |
2,160.9 |
The following analysis shows the carrying amounts of the Group's assets, and additions to intangible assets and property, plant and equipment.
|
|
|
Additions to intangible |
||
|
|
Segment |
assets and property, |
||
|
|
assets |
plant and equipment |
||
|
|
|
|
Year ended |
Period ended |
|
|
2008 |
2007 |
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
£m |
£m |
|
United Kingdom |
393.8 |
583.6 |
16.6 |
76.9 |
|
North America |
1,405.5 |
1,276.4 |
53.4 |
118.8 |
|
Europe |
746.3 |
554.0 |
20.0 |
13.3 |
|
Other overseas |
255.2 |
178.0 |
10.1 |
19.1 |
|
|
2,800.8 |
2,592.0 |
100.1 |
228.1 |
|
Cash and cash equivalents |
132.5 |
186.2 |
|
|
|
|
2,933.3 |
2,778.2 |
100.1 |
228.1 |
Included in additions to intangible assets and property, plant and equipment above were the following in relation to discontinued operations: United Kingdom £nil (2007: £53.4m), North America £nil (2007: £66.7m), Europe £nil (2007: £0.6m), and Other overseas £nil (2007: £7.0m). Of the additions relating to discontinued operations in 2007, the following amounts were incurred during the period after being classified as a disposal group: United Kingdom £37.5m, North America £47.0m, Europe £nil, and Other overseas £6.4m.
Additional voluntary segment disclosure of the impact of the restructuring
As set out in the Chief Executive's statement, the roles of the divisions and the corporate centre are being restructured with the new management structure in place from 1 August 2008. The following information, which is presented with no comparatives, illustrates how the result would have been reported if the new structure had been in place for the year ended 31 July 2008.
|
|
|
|
Year ended 31 July 2008 |
|||||
|
|
Detection |
John Crane |
Medical |
Interconnect |
Flex-Tek |
Other |
Corporate |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Revenue |
509.3 |
625.8 |
703.4 |
260.6 |
206.1 |
16.0 |
|
2,321.2 |
|
Headline operating profit |
93.3 |
103.8 |
139.6 |
54.0 |
24.3 |
0.8 |
(35.2) |
380.6 |
|
Exceptional operating items (note 4) |
0.1 |
(51.0) |
(9.4) |
(1.3) |
(0.1) |
28.3 |
(2.0) |
(35.4) |
|
Amortisation of acquired intangible assets |
(0.4) |
(5.5) |
(11.3) |
(2.0) |
|
|
|
(19.2) |
|
Financing losses |
|
|
(0.4) |
|
0.1 |
|
|
(0.3) |
|
Operating profit |
93.0 |
47.3 |
118.5 |
50.7 |
24.3 |
29.1 |
(37.2) |
325.7 |
|
Exceptional finance costs - adjustment to |
|
|
|
|
|
|
|
|
|
discounted provision (note 4) |
|
(4.7) |
|
|
|
|
|
(4.7) |
|
Net finance costs - other |
|
|
|
|
|
|
|
(0.7) |
|
Share of post tax (losses)/profits of |
|
|
|
|
|
|
|
|
|
associated companies |
(1.4) |
0.4 |
|
|
|
|
|
(1.0) |
|
Profit before taxation |
|
|
|
|
|
|
|
319.3 |
|
Taxation |
|
|
|
|
|
|
|
(75.0) |
|
Profit for the period - continuing operations |
|
|
|
|
|
|
|
244.3 |
The assets and liabilities of the five new operating segments are set out below:
|
|
|
|
Year ended 31 July 2008 |
|||||
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
unallocated & |
Cash & |
|
|
|
Detection |
John Crane |
Medical |
Interconnect |
Flex-Tek |
corporate |
borrowings |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Assets |
711.7 |
490.5 |
912.1 |
267.4 |
106.2 |
312.9 |
132.5 |
2,933.3 |
|
Liabilities |
(143.6) |
(282.1) |
(93.0) |
(47.0) |
(29.2) |
(517.1) |
(903.1) |
(2,015.1) |
|
Net assets |
568.1 |
208.4 |
819.1 |
220.4 |
77.0 |
(204.2) |
(770.6) |
918.2 |
2 Operating profit is stated after charging
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Cost of inventories recognised as an expense |
1,776.4 |
1,582.1 |
|
|
Employee costs (note 11) |
662.4 |
645.2 |
|
|
Depreciation of property, plant and equipment including impairment of £0.3m (2007 : £8.1m) |
53.5 |
51.9 |
|
|
Amortisation of intangible assets including impairment of £nil (2007 : £2.2m) |
31.0 |
28.1 |
|
|
Impairment losses recognised in the period on receivables |
0.6 |
1.3 |
|
|
Research and development expense |
52.7 |
52.3 |
|
|
Operating leases |
|
|
|
|
- |
land and buildings |
20.2 |
18.9 |
|
- |
other |
7.9 |
7.2 |
|
Fair value movements on derivatives |
|
|
|
|
- |
embedded |
|
0.8 |
|
- |
held for trading |
0.3 |
0.7 |
For the period ending 31 July 2007 other operating income comprises the income received following the commutation of insurance policies (£42.9m - see note 4) and the profit on sale of a financial asset.
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Audit services |
|
|
|
|
Fees payable to the Company's auditors for the audit of the parent company and consolidated accounts |
0.5 |
0.4 |
|
|
Fees payable to the Company's auditors and its associates for other services: |
|
|
|
|
- |
the audit of the Company's subsidiaries, pursuant to legislation |
3.5 |
3.6 |
|
- |
other services pursuant to legislation |
|
0.1 |
|
|
4.0 |
4.1 |
|
|
Tax services |
|
|
|
|
- |
compliance services |
0.1 |
0.1 |
|
- |
advisory services |
0.1 |
0.7 |
|
Services in relation to corporate acquisition and disposal transactions |
|
|
|
|
- |
sale of Aerospace |
|
1.8 |
|
- |
aborted transaction |
|
1.1 |
|
- |
B-share issue |
|
0.3 |
|
- |
due diligence |
0.1 |
0.9 |
|
All other services |
0.2 |
0.2 |
|
Other services relate to one-off projects.
3 Headline profit measures
The Company seeks to present a measure of underlying performance which is not impacted by exceptional 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.
The following items have been excluded from the headline measure:
exceptional items, including income and expenditure relating to John Crane, Inc. asbestos litigation;
amortisation of intangible assets acquired in a business combination - the amortisation charge is a non-cash item, and the directors believe that it should be added back to give a clearer picture of underlying performance; and
other financing gains and losses, which represent the potentially volatile gains and losses on derivatives and other financial instruments which do not fall to be hedge accounted under IAS 39.
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Other financing gains and losses |
|
|
|
Financing gains and losses on financial instruments |
(1.4) |
2.1 |
|
Exceptional finance costs - adjustment to discounted provision (note 4) |
(4.7) |
|
|
|
(6.1) |
2.1 |
|
Financing gains and losses reported in operating profit |
|
|
|
Financing gains and losses on financial instruments |
(0.3) |
(1.5) |
|
|
(6.4) |
0.6 |
4 Exceptional items
An analysis of the amounts presented as exceptional items in these financial statements is given below:
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Operating items |
|
|
|
|
Restructuring of corporate and divisional headquarters |
(4.5) |
|
|
|
Integration of acquisitions |
(9.1) |
(9.0) |
|
|
Impairment of goodwill and other assets |
|
(10.3) |
|
|
Profit/(loss) on disposal of businesses (note 30) |
27.2 |
(5.2) |
|
|
Aborted transaction costs |
|
(12.7) |
|
|
Litigation: |
|
|
|
|
- |
Commutation of insurance policies (note 23) |
|
42.9 |
|
- |
Provision for John Crane, Inc. asbestos litigation (note 23) |
(49.0) |
(100.7) |
|
- |
Provision for other litigation (note 23) |
|
(8.6) |
|
- |
Class action settlement |
|
5.4 |
|
|
(35.4) |
(98.2) |
|
|
Financing items |
|
|
|
|
Exceptional finance costs - adjustment to discounted provision (note 23) |
(4.7) |
|
|
|
|
(40.1) |
(98.2) |
|
Year ended 31 July 2008
On 3 June 2008 the Company announced a number of changes to its corporate centre and divisional headquarters. The total cost of this restructuring, including redundancy, relocation and consolidation of manufacturing, is considered exceptional by virtue of its size. It is expected to amount to approximately £48m over the period to 2010, of which £4.5m has been charged in the current year.
In addition, restructuring costs in connection with the integration of Medex amounting to £9.1m have been incurred in the period. No further costs relating to this restructuring are anticipated.
The operating charge of £49.0m in respect of John Crane, Inc. asbestos litigation comprises a £40.0m provision for the expected costs of future asbestos judgments, £5.2m in respect of adverse legal judgments (net of insurer contributions previously lodged as collateral) and £3.8m arising from movements in the discounting due to changes in US interest rates (see note 23).
Period ended 31 July 2007
Restructuring costs in connection with the integration of Medex amounting to £9.0m were incurred in the period.
Impairment of goodwill and other assets includes £8.1m in respect of the impairment of a disposal group (John Crane Automotive) prior to its eventual sale.
Costs of £12.7m in relation to the proposed joint venture with GE were written off in the light of the decision not to proceed with the joint venture.
John Crane, Inc. commuted certain insurance policies and received £42.9m in cash for the period. At the same time, a provision of £100.7m in respect of legal defence costs for asbestos cases was established (note 23).
The progression of other litigation cases arising in 2007 gave rise to an exceptional charge.
The exceptional charge recognised in 2006 in respect of the class action settlement has now been finalised. That element of the provision which was surplus was therefore released.
5 Net finance costs
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Interest receivable |
2.2 |
21.4 |
|
|
Interest payable |
|
|
|
|
- |
bank loans and overdrafts |
(19.6) |
(28.5) |
|
- |
other loans |
(23.6) |
(29.3) |
|
Interest payable |
(43.2) |
(57.8) |
|
|
Other financing (losses)/gains |
|
|
|
|
- |
fair value losses on hedged debt |
(4.0) |
(1.0) |
|
- |
fair value gains on fair value hedge |
4.0 |
1.0 |
|
- |
net foreign exchange (losses)/gains |
(1.4) |
2.1 |
|
- |
exceptional finance costs - adjustment to discounted provision |
(4.7) |
|
|
Other financing (losses)/gains |
(6.1) |
2.1 |
|
|
Retirement benefits |
|
|
|
|
- |
return on plan assets |
217.3 |
191.2 |
|
- |
interest cost |
(175.6) |
(157.5) |
|
Retirement benefits |
41.7 |
33.7 |
|
|
Net finance costs |
(5.4) |
(0.6) |
|
6 Taxation
|
|
Continuing |
Continuing |
Discontinued |
Discontinued |
|
|
|
Year ended |
Period ended |
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
£m |
£m |
|
|
The taxation charge for the year comprises |
|
|
|
|
|
|
- |
current income taxation |
67.0 |
13.6 |
|
87.6 |
|
- |
deferred taxation |
8.0 |
39.5 |
2.3 |
0.6 |
|
Total taxation expense in the income statement |
75.0 |
53.1 |
2.3 |
88.2 |
|
|
Current income taxation |
|
|
|
|
|
|
- |
UK corporation tax |
|
|
|
|
|
- |
foreign tax |
67.0 |
13.6 |
|
62.6 |
|
- |
discontinued tax |
|
|
|
25.0 |
|
|
67.0 |
13.6 |
|
87.6 |
|
Reconciliation of the total tax charge
The tax expense on the profit for the period is different from the standard rate of corporation tax in the UK of 29.3% (2007: 30%). The difference is reconciled as follows:
|
|
Continuing |
Continuing |
Discontinued |
Discontinued |
|
|
|
Year ended |
Period ended |
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
£m |
£m |
|
|
Profit before tax |
319.3 |
256.0 |
26.8 |
1,613.4 |
|
|
Notional taxation expense at UK rate of 29.3% (2007 : 30%) |
93.7 |
76.8 |
7.9 |
484.0 |
|
|
Effect of overseas taxation |
8.2 |
15.7 |
|
5.0 |
|
|
Compliance benefits |
(12.4) |
(16.5) |
|
(4.0) |
|
|
Local incentives |
(16.1) |
(16.1) |
|
(7.0) |
|
|
Sale of investment |
|
(7.2) |
|
|
|
|
Tax effect of other non-headline items |
1.6 |
0.4 |
|
|
|
|
Tax effect of Aerospace sale |
|
|
(5.6) |
(389.8) |
|
|
|
75.0 |
53.1 |
2.3 |
88.2 |
|
|
Comprising |
|
|
|
|
|
|
- |
taxation on headline profit |
91.3 |
86.4 |
|
|
|
- |
tax relief on non-headline loss |
(16.3) |
(33.3) |
|
|
|
- |
taxation on discontinued profit |
|
|
|
36.9 |
|
- |
tax on sale of discontinued operations |
|
|
2.3 |
51.3 |
|
Total taxation expense in the income statement |
75.0 |
53.1 |
2.3 |
88.2 |
|
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Tax on items charged/(credited) to equity |
|
|
|
|
Current tax credit |
|
|
|
|
- |
share-based payment |
(5.2) |
(10.3) |
|
- |
exchange gains |
|
(2.4) |
|
|
(5.2) |
(12.7) |
|
|
Deferred tax (credit)/charge |
|
|
|
|
- |
retirement benefit schemes |
|
30.1 |
|
- |
share-based payment |
|
9.4 |
|
|
(76.9) |
26.8 |
|
Deferred taxation
|
|
Excess tax |
|
|
|
|
|
|
|
depreciation |
|
Retirement |
Capitalised |
|
|
|
|
on fixed assets |
Share-based |
benefit |
development |
|
|
|
|
and goodwill |
payment |
obligations |
expenditure |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
|
At 5 August 2006 |
(45.9) |
24.5 |
32.7 |
(11.8) |
43.1 |
42.6 |
|
(Charge)/credit to income statement |
(41.3) |
2.3 |
(55.6) |
22.8 |
31.7 |
(40.1) |
|
Charge to equity |
|
(9.4) |
(30.1) |
|
|
(39.5) |
|
Other |
|
|
|
|
(1.5) |
(1.5) |
|
Disposals |
12.0 |
|
|
(22.0) |
27.4 |
17.4 |
|
Exchange adjustments |
3.1 |
(1.7) |
(2.2) |
0.8 |
(2.9) |
(2.9) |
|
At 31 July 2007 |
(72.1) |
15.7 |
(55.2) |
(10.2) |
97.8 |
(24.0) |
|
Deferred tax assets |
11.1 |
|
12.7 |
(4.4) |
74.6 |
94.0 |
|
Deferred tax liabilities |
(83.2) |
15.7 |
(67.9) |
(5.8) |
23.2 |
(118.0) |
|
At 31 July 2007 |
(72.1) |
15.7 |
(55.2) |
(10.2) |
97.8 |
(24.0) |
|
Credit/(charge) to income statement |
9.7 |
0.3 |
(31.3) |
(1.6) |
12.6 |
(10.3) |
|
Charge to equity |
|
(3.8) |
75.5 |
|
|
71.7 |
|
Other |
|
|
|
|
6.0 |
6.0 |
|
Disposals |
|
|
|
|
(12.8) |
(12.8) |
|
Exchange adjustments |
(1.9) |
|
0.5 |
(0.2) |
2.9 |
1.3 |
|
At 31 July 2008 |
(64.3) |
12.2 |
(10.5) |
(12.0) |
106.5 |
31.9 |
|
Deferred tax assets |
(2.6) |
0.3 |
19.7 |
(4.6) |
83.4 |
96.2 |
|
Deferred tax liabilities |
(61.7) |
11.9 |
(30.2) |
(7.4) |
23.1 |
(64.3) |
|
At 31 July 2008 |
(64.3) |
12.2 |
(10.5) |
(12.0) |
106.5 |
31.9 |
Included in Other above is a deferred tax liability of £9.3m (2007: £10m) relating to unremitted overseas earnings. No additional tax liabilities have been recognised because the Group is in a position to control the timing of other temporary differences and it is probable that such differences will not reverse in the future. Other deferred tax also includes the tax benefits of losses carried forward amounting to £26.7m (2007: £15.4m).
The Group has not recognised deferred tax assets relating to tax losses of £102.2m (2007 : £17.9m), due to uncertainty as to their recoverability. The expiry date of operating losses carried forward is dependent upon the law of the various territories in which the losses arise. A summary of expiry dates for losses in respect of which restrictions apply is set out below.
Restricted losses
|
|
2008 |
|
2007 |
|
|
|
|
£m |
Expiry of losses |
£m |
Expiry of losses |
|
|
Territory |
|
|
|
|
|
|
- |
Americas |
10.7 |
2019-2025 |
10.6 |
2019-2025 |
|
- |
Europe |
|
|
5.0 |
2014 |
|
Total restricted losses |
10.7 |
|
15.6 |
|
|
|
Unrestricted losses: |
|
|
|
|
|
|
- |
operating losses |
91.5 |
No expiry |
2.3 |
No expiry |
|
Total |
102.2 |
|
17.9 |
|
|
7 Discontinued operations
On 5 May 2007, the Company sold its Aerospace operations to General Electric Company. The Aerospace operations sold comprised the Aerospace business segment as reported in previous annual reports and accounts plus the US microwave company previously reported in Specialty - Other. The revenue and profit before taxation of the US microwave company in the period ended 31 July 2007 were £32.2m and £7.6m respectively. As the Aerospace operations represented a separate business segment, the disposal group was treated as a discontinued operation in the 2007 Annual report and accounts. The post-tax result of the Aerospace operations was disclosed as a discontinued operation in the consolidated income statement. In the cash-flow statement, the operating cash-flows of the Aerospace Group for the period ended 31 July 2007 were aggregated with those of the continuing operations, but are shown separately in the note below.
Profit on disposal of operation
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Total consideration |
6.1 |
2,585.4 |
|
Foreign exchange recycled to the income statement on disposal |
|
(48.4) |
|
Provisions and disposal costs |
17.1 |
(76.0) |
|
Pension curtailment gains |
|
63.3 |
|
Provision for settlement loss |
3.6 |
(24.3) |
|
|
26.8 |
2,500.0 |
|
Net assets disposed |
|
(1,030.4) |
|
Pre-tax profit on disposal |
26.8 |
1,469.6 |
|
|
|
|
|
|
|
£m |
|
Cash received from disposal of Aerospace operations |
3.0 |
2,585.4 |
|
Disposal costs |
(9.3) |
(31.9) |
|
Cash and cash equivalents of subsidiaries disposed |
|
(62.5) |
|
Borrowings of subsidiaries disposed |
|
4.0 |
|
Net cash (outflow)/inflow on disposal |
(6.3) |
2,495.0 |
The £6.1m consideration recognised in the year ended 31 July 2008 arises from the finalisation of the working capital adjustment.
The provisions and disposal costs movement for the year ended 31 July 2008 include £4.3m other finance income relating to retirement benefits and £12.7m relating to the reassessment of the carrying value of other assets and liabilities
Assets and liabilities of discontinued operations at the date of disposal
|
|
£m |
|
|
Assets |
|
|
|
Intangible assets |
553.0 |
|
|
Property, plant and equipment |
256.1 |
|
|
Retirement benefit assets |
6.8 |
|
|
Inventories |
297.0 |
|
|
Trade and other receivables |
1,357.1 |
|
|
Inter-company receivables |
1,024.5 |
|
|
Cash and cash equivalents |
62.5 |
|
|
Financial derivatives |
12.1 |
|
|
Total assets |
3,569.1 |
|
|
Liabilities |
|
|
|
Financial liabilities |
|
|
|
- |
borrowings |
(4.0) |
|
- |
financial derivatives |
(2.5) |
|
Provisions for liabilities and charges |
(20.6) |
|
|
Retirement benefit obligations |
(0.5) |
|
|
Deferred tax liabilities |
(17.4) |
|
|
Trade and other payables |
(2,493.7) |
|
|
Total liabilities |
(2,538.7) |
|
|
Net assets |
1,030.4 |
|
Financial information for the Aerospace operations after Group eliminations is presented below.
Results from discontinued operations
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Revenue |
|
955.6 |
|
Cost of sales |
|
(667.9) |
|
Gross profit |
|
287.7 |
|
Sales and distribution costs |
|
(29.9) |
|
Administrative expenses |
|
(116.6) |
|
Loss on disposal of business |
|
|
|
Operating profit |
|
141.2 |
|
Interest payable |
|
(1.2) |
|
Other financing gains |
|
0.7 |
|
Other finance income - retirement benefits |
|
3.1 |
|
Profit before taxation |
|
143.8 |
|
Taxation relating to performance of discontinued operations (note 6) |
|
(36.9) |
|
Profit on disposal |
26.8 |
1,469.6 |
|
Attributable tax charge (note 6) |
(2.3) |
(51.3) |
|
Profit for the period |
24.5 |
1,525.2 |
|
|
|
|
|
Earnings per share from discontinued operations - pence |
|
|
|
Basic |
6.3p |
277.8p |
|
Diluted |
6.2p |
273.9p |
The profit before taxation for the period ended 31 July 2007 represents the results of the operations for the period to the date of disposal.
Analysis by geographical location
The Group's revenue from discontinued operations by destination is shown below:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Revenue |
|
|
|
United Kingdom |
|
125.7 |
|
North America |
|
688.6 |
|
Europe |
|
95.0 |
|
Other overseas |
|
46.3 |
|
|
|
955.6 |
The Group operating profit from discontinued operations was after charging:
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Cost of inventories recognised as an expense |
|
594.6 |
|
|
Employee costs (note 11) |
|
342.5 |
|
|
Depreciation of property, plant and equipment |
|
8.4 |
|
|
Amortisation of intangible assets |
|
3.8 |
|
|
Impairment losses recognised in the period on receivables |
|
0.1 |
|
|
Research and development costs |
|
29.4 |
|
|
Operating leases |
|
|
|
|
- |
land and buildings |
|
4.1 |
|
- |
other |
|
1.0 |
|
Fair value movements on derivatives |
|
|
|
|
- |
embedded |
|
(0.1) |
|
- |
held for trading |
|
0.7 |
Cash-flows from discontinued operations
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Profit before taxation (including profit on disposal of Aerospace operations) |
26.8 |
1,613.4 |
|
|
Net interest payable |
|
1.2 |
|
|
Financing (gains)/losses |
|
|
|
|
- |
charged to financing |
|
(0.7) |
|
Other finance income - retirement benefits |
|
(3.1) |
|
|
Profit on disposal of discontinued operations |
(26.8) |
(1,469.6) |
|
|
|
|
141.2 |
|
|
Amortisation of intangible assets |
|
3.8 |
|
|
Profit on disposal of property, plant and equipment |
|
0.2 |
|
|
Profit on disposal of business |
|
|
|
|
Depreciation of property, plant and equipment |
|
8.4 |
|
|
Share-based payment expense |
|
3.5 |
|
|
Retirement benefits |
|
(22.6) |
|
|
Increase in inventories |
|
(51.0) |
|
|
(Increase)/decrease in trade and other receivables |
|
(17.3) |
|
|
(Decrease)/increase in trade and other payables |
|
(16.4) |
|
|
(Decrease)/increase in provisions |
|
(1.1) |
|
|
Cash generated from operations |
|
48.7 |
|
|
Interest |
|
(1.2) |
|
|
Tax paid |
|
(6.9) |
|
|
Net cash inflow from operating activities |
|
40.6 |
|
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Operating activities |
|
40.6 |
|
Investing activities |
(6.3) |
2,373.1 |
|
Financing activities |
|
14.2 |
|
|
(6.3) |
2,427.9 |
8 Dividends
The following dividends were declared and paid in the period:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Ordinary final dividend of 23.5p for 2007 (2006:21.5p) paid 23 November 2007 |
90.8 |
122.3 |
|
Ordinary interim dividend of 10.5p for 2008 (2007:10.5p) paid 25 April 2008 |
40.6 |
60.1 |
|
|
131.4 |
182.4 |
The final dividend for the year ended 31 July 2008 of 23.5p per share was declared by the Board on 23 September 2008 and will be paid to shareholders on 21 November 2008. This dividend has not been included as a liability in these accounts and is payable to all shareholders on the register of Members at close of business on 24 October 2008.
9 Earnings per share
Basic earnings per share are calculated by dividing the profit for the period attributable to equity shareholders of the Parent Company by the average number of ordinary shares in issue during the year.
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Profit attributable to equity shareholders for the year |
|
|
|
|
- |
continuing |
244.0 |
202.9 |
|
- |
total |
268.5 |
1,728.1 |
|
Average number of shares in issue during the year |
387,446,186 |
549,153,733 |
|
Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 391,851,712 (2007: 556,934,401) ordinary shares, being the average number of ordinary shares in issue during the period adjusted by the dilutive effect of employee share schemes. For the year ended 31 July 2008 options over 1,376,331 (2007: 847,762) shares were excluded from this calculation because their effect was anti-dilutive for continuing operations.
The average number of shares in issue has reduced as a result of the share consolidation in June 2007 following the disposal of the Aerospace business. The average number of shares in issue during the period ended 31 July 2007 was a reflection of the capital structure appropriate to both the continuing and the discontinued business.
A reconciliation of basic and headline earnings per share - continuing is as follows:
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||
|
|
|
EPS |
|
EPS |
||
|
|
£m |
(p) |
£m |
(p) |
||
|
Profit attributable to equity shareholders of the Parent Company |
244.0 |
63.0 |
202.9 |
36.9 |
||
|
Exclude |
|
|
|
|
||
|
- |
exceptional operating items (note 4) |
35.4 |
|
98.2 |
|
|
|
- |
(profit on sale)/impairment of financial asset |
|
|
(24.0) |
|
|
|
- |
amortisation of acquired intangible assets |
19.2 |
|
14.8 |
|
|
|
- |
Financing gains |
- charged to administrative expenses |
0.3 |
|
1.5 |
|
|
|
|
- exceptional finance cost - adjustment to discounted provision (note 4) |
4.7 |
|
|
|
|
|
|
- charged to financing |
1.4 |
|
(2.1) |
|
|
|
61.0 |
|
88.4 |
|
||
|
- |
Less tax |
(16.3) |
|
(33.3) |
|
|
|
|
44.7 |
11.5 |
55.1 |
10.1 |
||
|
Headline |
288.7 |
74.5 |
258.0 |
47.0 |
||
|
Headline EPS - diluted (p) |
|
73.7 |
|
46.3 |
||
10 Post-retirement benefits
Smiths operates a number of defined benefit plans throughout the world. The principal schemes are in the United Kingdom and in the United States and assets held in separate trustee-administered funds. The Group also provides a defined contribution (401K) plan for its US employees.
Pension costs are assessed in accordance with the advice of independent, professionally-qualified actuaries. The most recent actuarial valuations of the two principal UK schemes were performed using the Projected Unit Method as at 31 March 2006. The most recent valuations of the six principal US pension and post-retirement healthcare plans were performed at 1 January 2008. These valuations have been updated by independent qualified actuaries in order to assess the liabilities of the schemes as at 31 July 2008. Scheme assets are stated at their market values.
Contributions to the schemes are made on the advice of the actuaries with the objective that the benefits be fully funded during the scheme members' average working lives.
The principal assumptions used in updating the valuations are set out below:
|
|
|
|
2008 |
|
|
2007 |
|
|
UK |
US |
Other |
UK |
US |
Other |
|
Rate of increase in salaries |
4.1% |
3.8% |
3.7% |
4.1% |
3.8% |
3.0% |
|
Rate of increase in pensions in payment |
3.6% |
n/a |
1.4% |
3.1% |
n/a |
1.0% |
|
Rate of increase in deferred pensions |
3.5% |
n/a |
0.7% |
3.1% |
n/a |
0.6% |
|
Discount rate |
6.6% |
6.8% |
6.0% |
5.8% |
6.4% |
5.1% |
|
Inflation rate |
3.6% |
3.3% |
2.5% |
3.1% |
2.8% |
1.6% |
|
Healthcare cost increases |
5.0% |
* |
3.8% |
5.0% |
** |
2.7% |
*8% p.a. reducing 0.5% p.a. to 5% in 2014
**9% p.a. reducing 1% p.a. to 5% in 2012
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily occur in practice. For countries outside the UK and USA these are disclosed as a weighted average.
The mortality assumptions used in the UK schemes are based on the recent actual mortality experience of members within each scheme. The assumptions are based on the PA92 birth year tables with relevant scaling factors based on the experience of the schemes. The assumption also allows for future improvements in life expectancy in line with the medium cohort and a 1% underpin. The assumptions are that a member who retires next year at age 65 will live on average for a further 22 years after retirement if they are male and for a further 25 years if they are female. For a member who is currently 45, when they retire in 20 years' time they are assumed to live on average for a further 23 years after retirement if they are male and for a further 27 years if they are female.
The mortality assumptions used in the principal US schemes are based on the most recent mortality study table produced for retired pensioners in the US (RP 2000 table). The table selected allows for future mortality improvements and applies an adjustment for job classification (blue collar versus white collar). The assumptions are that a member who retires at age 65 will live on average for a further 18 years after retirement if they are male and for a further 20 years after retirement if they are female. For a member who is currently 45, when they retire in 20 years time they are assumed to live on average for a further 19 years after retirement if they are male and for a further 21 years if they are female.
The assets in the scheme and the expected rates of return as at 31 July 2008 were:
|
|
|
|
|
|
|
2008 |
|
|
UK schemes |
US Schemes |
Other countries |
|||
|
|
Long- term |
Value |
Long-term |
Value |
Long-term |
Value |
|
|
rate of return |
£m |
rate of return |
£m |
rate of return |
£m |
|
Equities |
8.2% |
1,165.8 |
8.8% |
187.5 |
8.8% |
7.1 |
|
Government bonds |
4.8% |
445.1 |
5.3% |
83.8 |
6.6% |
4.9 |
|
Corporate bonds |
6.6% |
258.4 |
6.8% |
25.8 |
7.1% |
1.8 |
|
Insured liabilities |
6.6% |
271.4 |
6.8% |
1.5 |
n/a |
|
|
Property |
7.2% |
188.7 |
7.2% |
|
3.2% |
0.2 |
|
Other |
5.8% |
289.0 |
6.0% |
17.9 |
5.0% |
11.0 |
|
Total market value |
|
2,618.4 |
|
316.5 |
|
25.0 |
|
Present value of funded scheme liabilities |
|
(2,468.8) |
|
(357.0) |
|
(30.7) |
|
Surplus/(deficit) |
|
149.6 |
|
(40.5) |
|
(5.7) |
|
Unfunded pension plans |
|
(34.3) |
|
(3.7) |
|
(16.4) |
|
Post-retirement healthcare |
|
(15.2) |
|
(42.0) |
|
(0.8) |
|
Unrecognised asset due to surplus restriction |
|
|
|
|
|
(1.5) |
|
Net pension asset/(liability) |
|
100.1 |
|
(86.2) |
|
(24.4) |
During the year, the Trustees of the TI pension scheme invested £250.0m in annuities which are matched with specific liabilities of the fund, As a result, this investment category is separately analysed.
Other assets in the UK and US comprise cash and current assets.
|
|
|
|
|
|
|
2007 |
|
|
UK schemes |
US Schemes |
Other countries |
|||
|
|
Long- term |
Value |
Long-term |
Value |
Long-term |
Value |
|
|
rate of return |
£m |
rate of return |
£m |
rate of return |
£m |
|
Equities |
8.2% |
1,624.1 |
8.8% |
202.9 |
8.2% |
7.1 |
|
Government bonds |
4.9% |
591.6 |
5.0% |
94.9 |
6.4% |
3.6 |
|
Corporate bonds |
5.8% |
364.9 |
6.4% |
23.8 |
7.7% |
2.5 |
|
Property |
7.2% |
201.8 |
n/a |
|
n/a |
|
|
Other |
6.0% |
186.7 |
5.0% |
6.0 |
4.1% |
9.0 |
|
Total market value |
|
2,969.1 |
|
327.6 |
|
22.2 |
|
Present value of funded scheme liabilities |
|
(2,637.6) |
|
(355.0) |
|
(26.6) |
|
Surplus/(deficit) |
|
311.5 |
|
(27.4) |
|
(4.4) |
|
Unfunded pension plans |
|
(33.6) |
|
(3.8) |
|
(14.1) |
|
Post-retirement healthcare |
|
(15.9) |
|
(45.4) |
|
(0.9) |
|
Unrecognised asset due to surplus restriction |
|
|
|
|
|
(2.4) |
|
Net pension asset/(liability) |
|
282.0 |
|
(76.6) |
|
(21.8) |
The scheme assets do not include any of the Group's own financial instruments, nor any property occupied by, nor other assets used by, the Group. The expected rates of return on individual categories of scheme assets are determined by reference to relevant industries. The overall rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the scheme's investment portfolios.
Amounts recognised in the income statement - continuing and discontinued operations
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||||
|
|
|
Unfunded |
|
Unfunded |
||||
|
|
|
pension post- |
|
pension/post- |
||||
|
|
|
retirement |
|
retirement |
||||
|
|
Funded defined benefit pension schemes |
healthcare plans |
Funded defined benefit pension schemes |
healthcare plans |
||||
|
|
UK |
US |
Other |
|
UK |
US |
Other |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Current service cost |
11.3 |
7.6 |
1.3 |
2.4 |
28.2 |
10.6 |
1.2 |
2.6 |
|
Past service cost |
|
1.0 |
0.1 |
|
0.7 |
0.2 |
|
0.4 |
|
Settlement losses/(gains) |
20.7 |
|
|
|
(0.4) |
2.8 |
|
|
|
Curtailment gains |
(1.1) |
|
|
|
(36.5) |
(20.6) |
|
(9.3) |
|
Total charge/(credit) |
30.9 |
8.6 |
1.4 |
2.4 |
(8.0) |
(7.0) |
1.2 |
(6.3) |
|
|
|
|
|
|
|
|
|
|
|
Expected return on pension scheme assets |
(199.5) |
(24.5) |
(1.5) |
|
(179.6) |
(24.2) |
(1.2) |
|
|
Interest on pension scheme liabilities |
148.3 |
23.0 |
1.5 |
6.7 |
136.3 |
23.5 |
1.4 |
7.0 |
|
Net return |
(51.2) |
(1.5) |
|
6.7 |
(43.3) |
(0.7) |
0.2 |
7.0 |
|
Total (credited)/charged to income statement |
(20.3) |
7.1 |
1.4 |
9.1 |
(51.3) |
(7.7) |
1.4 |
0.7 |
The actual return on scheme assets was a loss of £124.5m (2007: gain of £300.7m).
The operating cost is charged as follows:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Cost of sales |
6.6 |
7.3 |
|
Sales and distributions costs |
5.0 |
4.4 |
|
Administrative expenses |
12.1 |
11.3 |
|
Discontinued operations |
20.7 |
20.5 |
|
Exceptional operating items |
|
(0.3) |
|
Profit on disposal of business/curtailment gain |
(1.1) |
(63.3) |
Actuarial losses of £254.5m (2007: gains of £70.3m) have been reported in the statement of recognised income and expense. This includes a gain of £0.9m (2007: loss of £1.9m) in respect of unrecognised assets owing to surplus restriction. Cumulative actuarial losses from 1 August 2004 reported in the statement of recognised income and expense are £113.1m (2007: cumulative gain of £141.4m).
During the year, the pension settlement relating to the active Aerospace employees was completed, resulting in a £20.7m settlement charge to discontinued operations. In 2007 a provision of £24.3m was made to cover the expected costs of this settlement. The balance of the provision has been released in the current year.
Amounts recognised in the balance sheet
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||||
|
|
|
Unfunded |
|
Unfunded |
||||
|
|
|
pension/post- |
|
pension/post- |
||||
|
|
|
retirement |
|
retirement |
||||
|
|
Funded defined benefit pension schemes |
healthcare plans |
Funded defined benefit pension schemes |
healthcare plans |
||||
|
|
UK |
US |
Other |
|
UK |
US |
Other |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Present value of funded obligations |
(2,468.8) |
(357.0) |
(30.7) |
|
(2,637.6) |
(355.0) |
(26.6) |
|
|
Fair value of scheme assets |
2,618.4 |
316.5 |
25.0 |
|
2,969.1 |
327.6 |
22.2 |
|
|
|
149.6 |
(40.5) |
(5.7) |
|
331.5 |
(27.4) |
(4.4) |
|
|
Present value of unfunded obligations |
|
|
|
(112.4) |
|
|
|
(113.7) |
|
Irrecoverable surplus |
|
|
(1.5) |
|
|
|
(2.4) |
|
|
Net asset/(liability) recognised in the balance |
|
|
|
|
|
|
|
|
|
sheet |
149.6 |
(40.5) |
(7.2) |
(112.4) |
331.5 |
(27.4) |
(6.8) |
(113.7) |
Changes in present value of defined benefit obligations
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||||
|
|
|
Unfunded |
|
Unfunded |
||||
|
|
|
pension/ |
|
pension/post- |
||||
|
|
|
post-retirement |
|
retirement |
||||
|
|
Funded defined benefit pension schemes |
healthcare plans |
Funded defined benefit pension schemes |
healthcare plans |
||||
|
|
UK |
US |
Other |
|
UK |
US |
Other |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
At beginning of period |
(2,637.6) |
(355.0) |
(26.6) |
(113.7) |
(2,630.1) |
(394.3) |
(11.4) |
(126.8) |
|
Transfers in of territories outside UK and USA |
|
|
|
(0.1) |
|
|
(5.2) |
(7.1) |
|
Liabilities assumed on acquisitions |
|
|
(0.1) |
(1.3) |
|
|
|
(0.2) |
|
Liabilities transferred on disposal |
|
|
|
0.3 |
|
|
|
|
|
Current service cost |
(11.3) |
(7.6) |
(1.3) |
(2.4) |
(28.2) |
(10.6) |
(1.2) |
(2.6) |
|
Interest on obligations |
(148.3) |
(23.0) |
(1.5) |
(6.7) |
(136.3) |
(23.5) |
(1.4) |
(7.0) |
|
Employee contributions |
(0.2) |
|
(0.2) |
|
(0.4) |
|
(0.2) |
|
|
Past service cost |
|
(1.0) |
(0.1) |
|
(0.7) |
(0.2) |
|
(0.4) |
|
Actuarial gain/(loss) on liabilities |
66.7 |
20.3 |
0.9 |
6.7 |
(14.0) |
(10.4) |
(9.3) |
10.2 |
|
Curtailment gain |
1.1 |
|
|
|
36.5 |
20.6 |
|
9.3 |
|
Liabilities extinguished on settlements |
131.3 |
|
|
|
12.7 |
23.6 |
|
|
|
Exchange adjustments |
(1.3) |
(9.7) |
(2.7) |
(3.8) |
|
24.0 |
0.8 |
3.7 |
|
Benefits paid |
130.8 |
19.0 |
0.9 |
8.6 |
122.9 |
15.8 |
1.3 |
7.2 |
|
At end of period |
(2,468.8) |
(357.0) |
(30.7) |
(112.4) |
(2,637.6) |
(355.0) |
(26.6) |
(113.7) |
Changes in present value of scheme assets
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||||||
|
|
|
Unfunded |
|
Unfunded |
||||
|
|
|
pension/ |
|
pension/post- |
||||
|
|
|
post-retirement |
|
retirement |
||||
|
|
Funded defined benefit pension schemes |
healthcare plans |
Funded defined benefit pension schemes |
healthcare plans |
||||
|
|
UK |
US |
Other |
|
UK |
US |
Other |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
At beginning of period |
2,969.1 |
327.6 |
22.2 |
|
2,770.4 |
332.8 |
7.8 |
|
|
Transfers in of territories outside UK and USA |
|
|
|
|
|
|
5.1 |
|
|
Expected return on assets |
199.5 |
24.5 |
1.5 |
|
179.6 |
24.2 |
1.2 |
|
|
Actuarial (losses)/gains on scheme assets |
(312.1) |
(35.4) |
(2.5) |
|
67.2 |
20.4 |
8.1 |
|
|
Employer contributions |
43.5 |
10.0 |
2.6 |
8.6 |
86.7 |
13.9 |
1.9 |
7.2 |
|
Employee contributions |
0.2 |
|
0.2 |
|
0.4 |
|
0.2 |
|
|
Assets distributed on settlements |
(152.0) |
|
|
|
(12.3) |
(26.4) |
|
|
|
Exchange adjustments |
1.0 |
8.8 |
1.9 |
|
|
(21.5) |
(0.8) |
|
|
Benefits paid |
(130.8) |
(19.0) |
(0.9) |
(8.6) |
(122.9) |
(15.8) |
(1.3) |
(7.2) |
|
At end of period |
2,618.4 |
316.5 |
25.0 |
|
2,969.1 |
327.6 |
22.2 |
|
Cash contributions
Company contributions to the funded defined benefit pension plans for 2008 totalled £56.1m (2007: £102.5m). 2008 included special UK contributions of £17.1m (2007: £55.9m) including: £13.1 (2007: £13.1m) for special covenant payments; £4.0m (2007: £20.6m) arising from the sale of Aerospace; and £nil (2007: £22.2m) in respect of back-dated payments resulting from trustee valuations. Cash payments in 2009 are expected to be £51.7m.
History of schemes
|
|
2008 |
2007 |
2006 |
2005 |
|
|
£m |
£m |
£m |
£m |
|
Balance sheet |
|
|
|
|
|
Present value of defined benefit obligation |
(2,968.9) |
(3,132.9) |
(3,162.6) |
(3,127.4) |
|
Fair value of scheme assets |
2,959.9 |
3,318.9 |
3,111.0 |
2,890.8 |
|
Unrecognised asset due to surplus restriction |
(1.5) |
(2.4) |
(0.5) |
|
|
(Deficit)/surplus |
(10.5) |
183.6 |
(52.1) |
(236.6) |
|
Post-retirement assets |
174.2 |
333.7 |
183.7 |
134.6 |
|
Post-retirement liabilities |
(184.7) |
(150.1) |
(235.8) |
(371.2) |
|
(Deficit)/surplus |
(10.5) |
183.6 |
(52.1) |
(236.6) |
|
|
Year ended |
Period ended |
Period ended |
Year ended |
|
|
31 July 2008 |
31 July 2007 |
5 August 2006 |
31 July 2005 |
|
|
£m |
£m |
£m |
£m |
|
Experience gains/(losses) |
|
|
|
|
|
Experience gains/(losses) on scheme liabilities |
(6.4) |
(57.6) |
17.6 |
0.5 |
|
Experience (losses)/gains on scheme assets |
(350.0) |
95.7 |
76.6 |
242.9 |
|
Movement on restricted surplus |
0.9 |
(1.9) |
(0.5) |
|
The disclosures above are determined prospectively from 2005. The experience gains and losses on scheme liabilities have been represented to exclude gains and losses arising from changes in actuarial assumptions.
Balance sheet reconciliation
The balance sheet records the retirement assets and liabilities as follows:
|
|
|
2008 |
2007 |
|
|
|
£m |
£m |
|
UK surplus |
|
149.6 |
331.5 |
|
US deficit |
|
(40.5) |
(27.4) |
|
Other countries deficit |
|
(7.2) |
(6.8) |
|
Unfunded |
|
(112.4) |
(113.7) |
|
(Deficit)/surplus |
|
(10.5) |
183.6 |
|
Post-retirement assets |
|
174.2 |
333.7 |
|
Post-retirement liabilities |
|
(184.7) |
(150.1) |
|
(Deficit)/surplus |
|
(10.5) |
183.6 |
At 31 July 2008 the net UK funded pension surplus of £149.6m (2007: £331.5m) represented individual plan surpluses of £174.2m (2007: £333.7m) and deficits of £24.6m (2007: £2.2m).
Sensitivity
Valuation of post-retirement schemes involves judgements about uncertain future events. Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2008 are set out below. These sensitivities show the hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which incorporates the impact of certain correlating assumptions such as salary increases. While each of these sensitivities holds all other assumptions constant, in practice such assumptions rarely change in isolation and the impacts may offset to some extent.
|
|
Period before tax |
Increase/ |
(Increase)/ |
|
|
for year ended |
(decrease) in |
decrease in |
|
|
31 July 2009 |
scheme assets |
scheme liabilities |
|
|
£m |
£m |
£m |
|
Rate of mortality - 1 year increase in life expectancy |
(6.0) |
|
(86.8) |
|
Rate of mortality - 1 year decrease in life expectancy |
6.3 |
|
89.8 |
|
Rate of inflation - 0.25% increase |
(5.0) |
|
(65.8) |
|
Discount rate - 0.25% increase |
1.3 |
|
100.7 |
|
Expected return on scheme assets - 0.25% increase |
7.4 |
|
|
|
Market value of scheme assets - 2.5% increase |
5.0 |
73.9 |
|
|
Healthcare cost trends - 1% increase |
(0.6) |
|
(5.4) |
|
Healthcare cost trends - 1% decrease |
0.5 |
|
4.7 |
The effect on profit before tax reflects the impact of current service cost, interest cost and expected return on assets.
Defined contribution plans
The Group operates a number of defined contribution plans. The total expense recognised in the income statement in respect of these plans was £13.7m (2007: £19.1m).
11 Employees
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
|||
|
|
|
Total |
|
|
|
|
|
|
(all continuing) |
Continuing |
Discontinued |
Total |
|
|
|
£m |
£m |
£m |
£m |
|
Staff costs during the period |
|
|
|
|
|
|
Wages and salaries |
|
545.8 |
528.1 |
295.6 |
823.7 |
|
Social security |
|
67.3 |
62.4 |
25.4 |
87.8 |
|
Share-based payment (note 31) |
|
12.9 |
10.4 |
3.5 |
13.9 |
|
Pension costs (including defined contribution schemes) (note 10) |
|
36.4 |
44.3 |
18.0 |
62.3 |
|
|
|
662.4 |
645.2 |
342.5 |
987.7 |
The average number of persons employed was:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
Detection |
2,300 |
2,100 |
|
Medical |
8,400 |
8,000 |
|
Specialty Engineering: |
|
|
|
John Crane |
6,400 |
5,600 |
|
Specialty - Other |
5,500 |
5,100 |
|
Continuing operations |
22,600 |
20,800 |
|
Discontinued operations |
|
8,300 |
|
|
22,600 |
29,100 |
Key management
The key management of the Group comprises Smiths Group plc Board directors and Group Managing Directors who are not Board members during the year and their aggregate compensation is shown below. Details of directors' remuneration are contained in the report of the Remuneration Committee.
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Key management compensation |
|
|
|
Salaries and short-term employee benefits |
7.6 |
6.6 |
|
Cost of post-retirement benefits |
1.0 |
1.2 |
|
Cost of share-based incentive plans |
5.6 |
2.8 |
No member of key management had any material interest during the period in a contract of significance (other than a service contract or a qualifying third party indemnity provision) with the Company or any of its subsidiaries. Options and awards held at the end of the period by key management in respect of the Company's share-based incentive plans were:
|
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
||
|
|
Number of |
|
Number of |
|
|
|
instruments |
Weighted |
instruments |
Weighted |
|
|
'000 |
average price |
'000 |
average price |
|
CIP |
306 |
£0.00 |
425 |
£0.00 |
|
DSS |
|
|
109 |
£0.00 |
|
ESOS |
177 |
£8.06 |
413 |
£8.57 |
|
PSP |
795 |
£0.00 |
1,067 |
£0.00 |
|
SAYE |
9 |
£8.32 |
14 |
£6.96 |
The disclosure above does not include options held by individuals who retired before the year end.
12 Intangible assets
|
|
|
|
Acquired |
|
|
|
|
|
|
intangibles |
|
|
|
|
|
Development |
(see table on |
|
|
|
|
Goodwill |
costs |
next page) |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Cost |
|
|
|
|
|
|
At 6 August 2006 |
1,241.6 |
293.7 |
139.1 |
112.5 |
1,786.9 |
|
Exchange adjustments |
(39.2) |
(1.9) |
(8.5) |
(1.7) |
(51.3) |
|
Business combinations |
16.8 |
|
12.1 |
|
28.9 |
|
Adjustments to prior year business combinations |
0.9 |
|
(0.9) |
|
|
|
Additions * |
2.2 |
44.1 |
|
18.0 |
64.3 |
|
Transfers to disposal group held for sale at year end |
|
(1.2) |
|
(1.1) |
(2.3) |
|
Transfer to disposal group sold by the year end |
(301.0) |
(283.5) |
(10.4) |
(50.2) |
(645.1) |
|
Disposals |
|
|
(0.1) |
(1.2) |
(1.3) |
|
At 31 July 2007 |
921.3 |
51.2 |
131.3 |
76.3 |
1,180.1 |
|
Exchange adjustments |
65.4 |
2.5 |
5.7 |
3.3 |
76.9 |
|
Business combinations |
87.0 |
|
74.5 |
0.7 |
162.2 |
|
Adjustments to prior year business combinations |
(1.7) |
|
1.3 |
(1.3) |
(1.7) |
|
Additions |
|
19.8 |
|
16.1 |
35.9 |
|
Disposals |
(0.2) |
|
|
(0.8) |
(1.0) |
|
At 31 July 2008 |
1,071.8 |
73.5 |
212.8 |
94.3 |
1,452.4 |
|
Amortisation |
|
|
|
|
|
|
At 6 August 2006 |
133.7 |
39.5 |
20.2 |
62.9 |
256.3 |
|
Exchange adjustments |
(2.9) |
(0.4) |
(1.3) |
(1.6) |
(6.2) |
|
Charge for the period * |
|
6.6 |
15.0 |
8.1 |
29.7 |
|
Impairment |
2.2 |
|
|
|
2.2 |
|
Transfers to disposal groups held for sale at year end |
|
|
|
(0.4) |
(0.4) |
|
Transfer to disposal group sold by the year end |
(56.0) |
(33.2) |
(4.8) |
(28.7) |
(122.7) |
|
Disposals |
|
|
|
(0.1) |
(0.1) |
|
At 31 July 2007 |
77.0 |
12.5 |
29.1 |
40.2 |
158.8 |
|
Exchange adjustments |
5.3 |
0.7 |
1.8 |
2.5 |
10.3 |
|
Adjustments to prior year business combinations |
|
|
0.5 |
(0.5) |
|
|
Charge for the year |
|
5.6 |
19.2 |
6.2 |
31.0 |
|
Disposals |
(0.2) |
|
|
(0.7) |
(0.9) |
|
At 31 July 2008 |
82.1 |
18.8 |
50.6 |
47.7 |
199.2 |
|
Net book value at 31 July 2008 |
989.7 |
54.7 |
162.2 |
46.6 |
1,253.2 |
|
Net book value at 31 July 2007 |
844.3 |
38.7 |
102.2 |
36.1 |
1,021.3 |
|
Net book value at 6 August 2006 |
1,107.9 |
254.2 |
118.9 |
49.6 |
1,530.6 |
* For the period ending 31 July 2007 the additions and amortisation include the respective costs and charge for discontinued operations and disposal groups for the period prior to becoming a disposal group.
In addition to goodwill, the acquired intangible assets comprise:
|
|
Patents, licences |
|
Customer |
Total acquired |
|
|
and trademarks |
Technology |
relationships |
intangibles |
|
|
£m |
£m |
£m |
£m |
|
Cost |
|
|
|
|
|
At 6 August 2006 |
38.9 |
58.6 |
41.6 |
139.1 |
|
Exchange adjustments |
(2.8) |
(3.7) |
(2.0) |
(8.5) |
|
Business combinations |
3.6 |
|
8.5 |
12.1 |
|
Adjustments to prior year business combinations |
0.6 |
0.2 |
(1.7) |
(0.9) |
|
Transfer to disposal group sold by the year end |
|
|
(10.4) |
(10.4) |
|
Disposals |
(0.1) |
|
|
(0.1) |
|
At 31 July 2007 |
40.2 |
55.1 |
36.0 |
131.3 |
|
Exchange adjustments |
1.1 |
1.9 |
2.7 |
5.7 |
|
Business combinations (note 29) |
12.0 |
18.8 |
43.7 |
74.5 |
|
Adjustments to prior year business combinations |
|
1.3 |
|
1.3 |
|
At 31 July 2008 |
53.3 |
77.1 |
82.4 |
212.8 |
|
Amortisation |
|
|
|
|
|
At 6 August 2006 |
3.4 |
6.9 |
9.9 |
20.2 |
|
Exchange adjustments |
(0.1) |
(0.6) |
(0.6) |
(1.3) |
|
Charge for the period |
2.3 |
5.6 |
7.1 |
15.0 |
|
Transfer to disposal group sold by the year end |
|
|
(4.8) |
(4.8) |
|
At 31 July 2007 |
5.6 |
11.9 |
11.6 |
29.1 |
|
Exchange adjustments |
0.2 |
0.7 |
0.9 |
1.8 |
|
Adjustments to prior year business combinations |
|
0.5 |
|
0.5 |
|
Charge for the year |
2.7 |
6.1 |
10.4 |
19.2 |
|
At 31 July 2008 |
8.5 |
19.2 |
22.9 |
50.6 |
|
Net book value at 31 July 2008 |
44.8 |
57.9 |
59.5 |
162.2 |
|
Net book value at 31 July 2007 |
34.6 |
43.2 |
24.4 |
102.2 |
|
Net book value at 6 August 2006 |
35.5 |
51.7 |
31.7 |
118.9 |
Significant cash generating units
Goodwill is not amortised but is tested for impairment at least annually. Value in use calculations are utilised to determine the recoverable amount of goodwill held within each cash generating unit (CGU). Value in use is calculated as the net present value of the projected risk-adjusted post-tax cash-flows of the CGU in which the goodwill is contained, applying a discount rate based on the Group's post-tax weighted average cost of capital of 8% adjusted where appropriate for risks specific to the CGU. This approximates to applying a pre-tax discount rate to pre-tax cash-flows. These forecast cash-flows are based on approved budgets and represent a best estimate of future performance.
The goodwill held in the Smiths Medical Critical Care and Smiths Detection Civil CGUs, with net book values of £291.5m (2007: £283.7m) and £288.8m (2007: £252.0m) respectively, is considered significant in comparison to the total carrying value of goodwill. Following a reorganisation of the management of the Detection business the allocation of goodwill to CGUs was updated. The Detection Civil CGU incorporates the business activities reported as Smiths Detection Imaging Systems in 2007. The comparative net book value has been restated to reflect the new allocation.
The following key assumptions were used in the discounted cash-flow projections for the Critical Care and Detection Civil CGUs:
growth rates of 2.25% (2007: 2.00%) have been used for the Critical Care and Detection Civil CGUs to extrapolate beyond the most recent forecasts, representing a view of the long-term average growth rates for the industries in which the businesses operate. The growth rates used to estimate future performance beyond the periods covered by our annual planning and strategic planning processes do not exceed the long-term average growth rates for similar projects and do not reflect long-term planning assumptions used by the Group for investment planning; and
in addition to discount rates and long-term growth rates, the key assumptions used to determine the recoverable amounts of the Critical Care and Detection Civil CGUs include future sales prices and volumes (with reference to specific customer relationships and product lines), operating margins, the cost structure of each CGU and the ability to realise planned productivity improvements.
The assumptions used in the discounted cash-flow forecasts incorporate past performance and historical growth rates and margins achievable in our key markets as a guide.
Sensitivity analysis performed around the base case assumptions has indicated that no reasonable changes in key assumptions would cause the carrying amount of the Critical Care and Detection Civil CGUs to exceed their respective recoverable amount.
The balance of the goodwill represents smaller individual amounts which have been allocated to specific operating companies and smaller CGUs. These amounts are tested for impairment at this level.
13 Property, plant and equipment
|
|
|
|
Fixtures, |
|
|
|
|
|
fittings |
|
|
|
Land and |
Plant and |
tools and |
|
|
|
buildings |
machinery |
equipment |
Total |
|
|
£m |
£m |
£m |
£m |
|
Cost or valuation |
|
|
|
|
|
At 6 August 2006 |
245.1 |
653.0 |
337.3 |
1,235.4 |
|
Exchange adjustments |
(5.0) |
(13.8) |
(4.6) |
(23.4) |
|
Reclassification |
|
14.6 |
(14.6) |
|
|
Business combinations |
|
1.0 |
1.0 |
2.0 |
|
Additions * |
9.4 |
40.3 |
23.2 |
72.9 |
|
Transfers to disposal groups held for sale at year end |
(0.7) |
|
(6.6) |
(7.3) |
|
Transfer to disposal group sold by the year end |
(89.1) |
(338.5) |
(161.5) |
(589.1) |
|
Disposals |
(4.2) |
(13.7) |
(14.7) |
(32.6) |
|
At 31 July 2007 |
155.5 |
342.9 |
159.5 |
657.9 |
|
Exchange adjustments |
8.4 |
18.1 |
10.8 |
37.3 |
|
Reclassification |
1.0 |
(1.8) |
0.8 |
|
|
Business combinations |
2.8 |
2.9 |
2.2 |
7.9 |
|
Additions |
9.9 |
31.2 |
23.1 |
64.2 |
|
Disposals |
(4.8) |
(10.1) |
(7.2) |
(22.1) |
|
Adjustments to acquisitions and disposals in prior years |
(1.4) |
6.7 |
|
5.3 |
|
At 31 July 2008 |
171.4 |
389.9 |
189.2 |
750.5 |
|
Depreciation |
|
|
|
|
|
At 6 August 2006 |
78.3 |
407.0 |
252.3 |
737.6 |
|
Exchange adjustments |
(2.3) |
(8.2) |
(3.5) |
(14.0) |
|
Reclassification |
|
10.4 |
(10.4) |
|
|
Charge for the period * |
5.4 |
28.6 |
18.2 |
52.2 |
|
Impairment charge |
5.9 |
2.2 |
|
8.1 |
|
Transfers to disposal groups held for sale at year end |
(0.2) |
|
(4.2) |
(4.4) |
|
Transfer to disposal group sold by the year end |
(23.7) |
(210.7) |
(128.5) |
(362.9) |
|
Disposals |
(0.3) |
(10.1) |
(9.2) |
(19.6) |
|
At 31 July 2007 |
63.1 |
219.2 |
114.7 |
397.0 |
|
Exchange adjustments |
2.6 |
12.1 |
7.7 |
22.4 |
|
Reclassification |
0.8 |
(1.1) |
0.3 |
|
|
Charge for the year |
5.4 |
28.9 |
18.9 |
53.2 |
|
Impairment charge |
0.3 |
|
|
0.3 |
|
Disposals |
(3.7) |
(7.3) |
(6.6) |
(17.6) |
|
Adjustments to acquisitions and disposals in prior years |
(7.8) |
6.7 |
|
(1.1) |
|
At 31 July 2008 |
60.7 |
258.5 |
135.0 |
454.2 |
|
Net book value at 31 July 2008 |
110.7 |
131.4 |
54.2 |
296.3 |
|
Net book value at 31 July 2007 |
92.4 |
123.7 |
44.8 |
260.9 |
|
Net book value at 6 August 2006 |
166.8 |
246.0 |
85.0 |
497.8 |
* For the period ending 31 July 2007 the additions and the depreciation charge include the respective costs and charge for discontinued operations and disposal groups for the period prior to becoming a disposal group.
The impairment charge of £8.1m in the period ended 31 July 2007 arose when property, plant and equipment was written down to fair value less costs to sell prior to being classified as being held for sale. The charge has been recognised in the results of John Crane.
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Capital expenditure commitments - contracted but not provided for |
11.5 |
16.9 |
14 Investments accounted for using the equity method
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Investments in associated companies |
|
|
|
At start of period |
12.0 |
14.0 |
|
Exchange adjustment |
2.3 |
(0.3) |
|
Share of results after tax |
(1.0) |
(0.5) |
|
Dilution of interest |
(0.9) |
(1.2) |
|
Acquisition of a controlling interest |
(3.3) |
|
|
At end of period |
9.1 |
12.0 |
The Group acquired a controlling interest in an associate on 21 December 2007, and it has been consolidated as a subsidiary since that date.
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Group share of results of associated companies |
|
|
|
Revenue |
17.6 |
25.3 |
|
Operating costs and other income |
(18.8) |
(25.0) |
|
Profit/(loss) before taxation |
(1.2) |
0.3 |
|
Taxation |
0.2 |
(0.8) |
|
Share of post-tax result from associated companies |
(1.0) |
(0.5) |
Net assets and liabilities of associated companies
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Non-current assets |
20.1 |
9.9 |
|
Current assets |
24.8 |
36.9 |
|
Total assets |
44.9 |
46.8 |
|
Non-current liabilities |
(6.2) |
(5.0) |
|
Current liabilities |
(7.9) |
(16.5) |
|
Total liabilities |
(14.1) |
(21.5) |
|
Net assets |
30.8 |
25.3 |
The above table principally represents the assets and liabilities of Cross Match Technologies, Inc. The Group share of those assets and liabilities attributable to Smiths Group is 34% (2007: 37%).
In 2007 the interest in Cross Match Technologies, Inc. was diluted as a result of warrants and options being exercised in the period.
15 Inventories
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Inventories comprise |
|
|
|
Raw materials and consumables |
149.7 |
114.2 |
|
Work in progress |
68.0 |
58.0 |
|
Finished goods |
173.5 |
158.5 |
|
|
391.2 |
330.7 |
|
Less: payments on account |
(10.9) |
(11.0) |
|
|
380.3 |
319.7 |
The Group consumed £1,776.4m (2007: £2,176.7m) of inventories during the period. £11.8m (2007: £13.4m) was recognised as an expense resulting from the write-down of inventory and £1.5m (2007: £4.0m) was released to the income statement from inventory provisions charged in earlier years but no longer required.
16 Trade and other receivables
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Non-current |
|
|
|
Trade receivables |
8.8 |
8.9 |
|
Prepayments and accrued income |
1.6 |
0.8 |
|
Other debtors |
4.2 |
5.0 |
|
|
14.6 |
14.7 |
|
Current |
|
|
|
Amounts due from customers for contract work |
|
5.3 |
|
Trade receivables |
509.1 |
427.2 |
|
Other debtors |
19.8 |
16.6 |
|
Prepayments and accrued income |
36.5 |
40.7 |
|
|
565.4 |
489.8 |
Trade receivables do not carry interest. Management considers that the carrying value of trade and other receivables approximates the fair value.
Trade and other receivables, including prepayments, accrued income and other debtors qualifying as financial instruments are classified as 'loans and receivables'. The maximum credit exposure arising from these financial assets is £536.7m (2007: £450.1m).
Credit risk is managed separately for each customer and, where appropriate, a credit limit is set for the customer based on previous experience of the customer and third party credit ratings.
Provision for bad and doubtful debts
Trade receivables are disclosed net of a provision for bad and doubtful debts. Movement on the provision is as follows:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Balance at the beginning of the period |
10.5 |
16.3 |
|
Exchange differences |
0.8 |
(0.3) |
|
Charged |
4.4 |
3.0 |
|
Utilised |
(1.4) |
(2.8) |
|
Released |
(3.1) |
(2.9) |
|
Disposal of businesses |
|
(2.8) |
|
Balance at the end of the period |
11.2 |
10.5 |
The provision for bad and doubtful debts is based on specific risk assessment and reference to past default experience.
The Group has no significant concentration of credit risk, with exposure spread over a large number of customers. The largest single customer is the US Federal Government representing less than 7% (2007: 4%) of group turnover.
Ageing of trade receivables
|
|
2008 |
2007 |
|
|
|
£m |
£m |
|
|
Trade receivables which are not impaired and not yet due |
412.4 |
313.1 |
|
|
Ageing analysis of trade receivables which are overdue but not impaired: |
|
|
|
|
- |
less than three months |
79.2 |
93.4 |
|
- |
more than three months |
22.6 |
24.1 |
|
Gross value of partially and fully provided debtors |
14.9 |
16.0 |
|
|
|
529.1 |
446.6 |
|
|
Provision for bad and doubtful debts |
(11.2) |
(10.5) |
|
|
Trade receivables |
517.9 |
436.1 |
|
17 Cash and cash equivalents
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Cash at bank and in hand - including impact of cash pooling gross up: £100.6m (2007: £123.2m) |
122.5 |
148.5 |
|
Short-term deposits |
10.0 |
40.8 |
|
Cash and cash equivalents |
132.5 |
189.3 |
|
Cash included in assets of disposal group (note 18) |
|
(3.1) |
|
Cash and cash equivalents per balance sheet |
132.5 |
186.2 |
|
Cash and cash equivalents |
132.5 |
189.3 |
|
Bank overdrafts |
(172.5) |
(186.2) |
|
Net cash and cash equivalents |
(40.0) |
3.1 |
Cash and cash equivalents include highly liquid investments with maturities of three months or less.
18 Disposal group
During the second half of 2007, the Company invited offers for the purchase of its marine operations, which formed part of Specialty Engineering - Other. These operations were disposed of on 8 November 2007. The assets and liabilities of this operation were disclosed as held for sale in the consolidated balance sheet as at 31 July 2007. No impairment loss was recorded when the assets were revalued to fair value less disposal costs.
|
|
2008 |
2007 |
|
|
|
£m |
£m |
|
|
Non-current assets |
|
|
|
|
Intangible assets |
|
1.9 |
|
|
Property, plant and equipment |
|
2.9 |
|
|
Deferred tax assets |
|
0.1 |
|
|
|
|
4.9 |
|
|
Current assets |
|
|
|
|
Inventories |
|
7.4 |
|
|
Trade and other receivables |
|
15.7 |
|
|
Cash and cash equivalents |
|
3.1 |
|
|
Financial derivatives |
|
0.2 |
|
|
Total assets of disposal group |
|
31.3 |
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Financial derivatives |
|
(0.8) |
|
|
Provisions for liabilities and charges |
|
(0.6) |
|
|
|
|
(1.4) |
|
|
Current liabilities |
|
|
|
|
Financial liabilities: |
|
|
|
|
- |
financial derivatives |
|
(0.5) |
|
Provisions for liabilities and charges |
|
(0.6) |
|
|
Trade and other payables |
|
(12.7) |
|
|
Current tax payable |
|
(1.0) |
|
|
Total liabilities of disposal group |
|
(16.2) |
|
19 Trade and other payables
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Non-current |
|
|
|
Other creditors |
27.5 |
22.5 |
|
Current |
|
|
|
Trade creditors |
156.7 |
164.8 |
|
Bills of exchange payable |
1.1 |
1.7 |
|
Other creditors |
51.0 |
38.0 |
|
Other taxation and social security costs |
23.1 |
20.5 |
|
Accruals and deferred income |
188.8 |
187.6 |
|
|
420.7 |
412.6 |
Trade and other payables, including accrued expenses and other creditors qualifying as financial instruments, are accounted for at amortised cost and are categorised as other financial liabilities.
20 Borrowings and net debt
This note sets out the calculation of net debt, a measure considered important in explaining our financing position. The net debt figure includes accrued interest and the fair value adjustments relating to hedge accounting.
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Cash and cash equivalents |
|
|
|
Net cash and deposits including assets of disposal group (note 17) |
132.5 |
189.3 |
|
Short-term borrowings |
|
|
|
Bank overdrafts including impact of cash pooling gross up: £100.6m (2007: £123.2m) |
(172.5) |
(186.2) |
|
Bank loans |
(0.3) |
(0.2) |
|
Other loans |
(3.5) |
(3.1) |
|
B shares (note 26) |
(1.7) |
(18.1) |
|
Interest accrual |
(4.4) |
(4.5) |
|
|
(182.4) |
(212.1) |
|
Long-term borrowings |
|
|
|
7.875% Sterling Eurobond 2010 |
(149.6) |
(149.5) |
|
7.25% Sterling Eurobond 2016 |
(148.8) |
(148.7) |
|
5.45% US$ Private Placement 2013 |
(127.4) |
(120.0) |
|
Floating Rate Revolving Credit Facility 2012 (multi-currency) |
(210.2) |
(67.2) |
|
EIB Sterling R. & D. Loan 2010 |
(70.0) |
(70.0) |
|
Bank and other loans |
(14.7) |
(11.7) |
|
|
(720.7) |
(567.1) |
|
Borrowings |
(903.1) |
(779.2) |
|
Net debt |
(770.6) |
(589.9) |
Borrowings are accounted for at amortised cost and are categorised as other financial liabilities.
See note 21 for a maturity analysis of borrowings. The repayment dates on borrowings repayable after five years range from 2014 to 2022.
Interest of £22.5m (2007: £22.5m) was charged to the consolidated income statement in this period in respect of public bonds.
Secured loans
Loans amounting to £13.2m (2007: £11.5m) were secured by charges on freehold properties with a book value of £11.0m (2007: £9.8m).
21 Financial risk management
The Group's international operations and debt financing expose it to financial risks including the effects of changes in foreign exchange rates, changes in debt market prices, interest rates, credit risks and liquidity risks.
Risk management policies are set by the Board. The treasury policy sets out specific guidelines to manage foreign exchange risk, interest rate risk, credit risk and the use of financial instruments to manage risk. The instruments and techniques used to manage risk exposures include foreign currency derivatives, debt and other interest rate derivatives. The central treasury function monitors financial risks and compliance with risk management policies using regular reports from all the businesses.
The management of operational credit risk is discussed in note 16.
(a) Foreign exchange risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency. It is Group policy that, when such a sale or purchase is certain or highly probable, the net foreign exchange exposure is hedged using forward foreign exchange contracts. The net exposure is calculated by adjusting the expected cash-flow for payments or receipts in the same currency linked to the sale or purchase. This policy minimises the risk that the profits generated from the transaction will be affected by foreign exchange movements which occur after the price has been determined.
Hedge accounting documentation and effectiveness testing are only undertaken if it is cost effective. At 31 July 2008 the Group had outstanding foreign currency contracts with a nominal value of £130m (2007: £131m) which were being used to manage transactional foreign exchange exposures, but were not accounted for as cash-flow hedges.
The following table shows the currency of financial instruments. It excludes loans and derivatives designated as net investment hedges.
|
|
At 31 July 2008 |
||||
|
|
Sterling |
US$ |
Euro |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Financial assets and liabilities |
|
|
|
|
|
|
Financial instruments included in trade and other receivables |
40.6 |
237.4 |
162.2 |
96.5 |
536.7 |
|
Financial instruments included in trade and other payables |
(49.9) |
(121.4) |
(86.9) |
(40.1) |
(298.3) |
|
Cash and cash equivalents |
32.7 |
16.5 |
48.0 |
35.3 |
132.5 |
|
Borrowings not designated as net investment hedges |
(412.1) |
(163.2) |
(13.8) |
(103.8) |
(692.9) |
|
|
(388.7) |
(30.7) |
109.5 |
(12.1) |
(322.0) |
|
Exclude balances held in operations with the same functional currency |
389.3 |
56.4 |
(35.6) |
(62.0) |
348.1 |
|
Exposure arising from intra-group loans |
|
(15.5) |
|
(11.2) |
(26.7) |
|
Forward foreign exchange contracts |
48.9 |
(50.0) |
(1.9) |
3.0 |
|
|
|
49.5 |
(39.8) |
72.0 |
(82.3) |
(0.6) |
|
|
At 31 July 2007 |
||||
|
|
Sterling |
US$ |
Euro |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Financial assets and liabilities |
|
|
|
|
|
|
Financial instruments included in trade and other receivables |
43.6 |
198.0 |
122.5 |
86.0 |
450.1 |
|
Financial instruments included in trade and other payables |
(21.9) |
(94.3) |
(59.7) |
(21.0) |
(196.9) |
|
Cash and cash equivalents |
68.3 |
11.6 |
62.5 |
46.9 |
189.3 |
|
Borrowings not designated as net investment hedges |
(439.2) |
(140.2) |
(101.6) |
(30.9) |
(711.9) |
|
|
(349.2) |
(24.9) |
23.7 |
81.0 |
(269.4) |
|
Exclude balances held in operations with the same functional currency |
350.8 |
54.8 |
(22.1) |
(73.9) |
309.6 |
|
Exposure arising from intra-group loans |
|
(5.5) |
|
(18.4) |
(23.9) |
|
Forward foreign exchange contracts |
(2.4) |
(39.6) |
14.6 |
27.4 |
|
|
|
(0.8) |
(15.2) |
16.2 |
16.1 |
16.3 |
Financial instruments included in trade and other receivables comprise trade receivables, accrued income and other debtors which qualify as financial instruments. Similarly, financial instruments included in trade and other payables comprise trade payables, accrued expenses and other creditors which qualify as financial instruments.
In the period ended 31 July 2007 Smiths entered into a one-off hedge contract to fix the sterling equivalent of the projected net proceeds arising from the Aerospace disposal (note 7). This hedge contract had a nominal value of US$4.2 billion, a maturity date of 8 May 2007, and an effective exchange rate of 1.9791. The gain of £18.5m realised on this contract was recognised in calculating the fair value of the consideration.
Based on the assets and liabilities held at the year end, if the specified currencies were to strengthen 10% while all other market rates remained constant, the change in the fair value of financial instruments not designated as net investment hedges would have the following effect:
|
|
|
Gain/(loss) |
|
Gain/(Loss) |
|
|
Impact on profit |
recognised in |
Impact on profit |
recognised in |
|
|
for the year |
reserves |
for the year |
reserves |
|
|
31 July 2008 |
31 July 2008 |
31 July 2007 |
31 July 2007 |
|
|
£m |
£m |
£m |
£m |
|
US dollar |
(0.1) |
(3.3) |
1.5 |
(1.7) |
|
Euro |
4.8 |
(1.0) |
(0.7) |
2.6 |
|
Sterling |
2.1 |
2.8 |
1.1 |
2.3 |
These sensitivities were calculated before adjusting for tax and do not include the effect of intra-group loans which have been designated as quasi-equity.
Cash-flow hedging
The Group uses foreign currency contracts to hedge future foreign currency sales and purchases. At 31 July 2008 contracts with a nominal value of £222.2m (2007: £211.0m) were designated as hedging instruments. The fair value of the hedging instruments is disclosed in note 22.
The majority of hedged transactions will be recognised in the income statement in the same period that the cash-flows are expected to occur, with the only differences arising as a result of normal commercial credit terms on sales and purchases. Of the foreign exchange contracts designated as hedging instruments 99% are for periods of 12 months or less (2007: 93%).
The movements in the cash-flow hedge reserve during the period are summarised in the table below:
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Brought forward cash-flow hedge reserve at start of period |
1.4 |
13.3 |
|
|
Exchange adjustments |
0.2 |
|
|
|
Gains and losses on effective cash-flow hedges recognised in equity |
(1.0) |
4.8 |
|
|
Amounts removed from the hedge reserve and recognised in the following lines on the income statement: |
|
|
|
|
- |
Revenue |
0.2 |
(2.7) |
|
- |
Cost of sales |
0.3 |
1.1 |
|
- |
Profit after taxation - discontinued operations |
|
(15.1) |
|
Carried forward cash-flow hedge reserve at end of period |
1.1 |
1.4 |
|
Translational currency exposure
The Group has a significant investment in overseas operations, particularly in America and Europe. As a result, the sterling value of the Group's balance sheet can be affected by movements in exchange rates. The Group seeks to mitigate the effect of these translational currency exposures by matching the net investment in overseas operations with borrowings denominated in their functional currencies, except where significant adverse interest differentials or other factors would render the cost of such hedging activity uneconomic. This is achieved by borrowing either directly in the local currency or indirectly through the use of rolling annual forward foreign exchange contracts.
The table below sets out the currency of loans designated as net investment hedges and cross-currency swap contracts:
|
|
At 31 July 2008 |
||||
|
|
Sterling |
US$ |
Euro |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Loans designated as net investment hedges |
|
(139.6) |
(70.6) |
|
(210.2) |
|
Cross currency swap contracts |
371.4 |
(150.6) |
(163.0) |
(57.8) |
|
|
|
371.4 |
(290.2) |
(233.6) |
(57.8) |
(210.2) |
|
|
At 31 July 2007 |
||||
|
|
Sterling |
US$ |
Euro |
Other |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
|
Loans designated as net investment hedges |
|
|
(67.3) |
|
(67.3) |
|
Cross currency swap contracts |
255.9 |
(89.5) |
(125.0) |
(41.4) |
|
|
|
255.9 |
(89.5) |
(192.3) |
(41.4) |
(67.3) |
The fair values of these net investment hedges are subject to exchange rate movements. Based on the hedging instruments in place at the year end a 10% increase in the value of the US dollar while all other market rates remained constant would lead to a fair value loss of £14.9m (2007: £8.2m) and a 10% increase in the value of the euro while all other market rates remained constant would lead to a fair value loss of £17.4m (2007: £19.0m). These movements would be recognised in equity and fully offset by an opposite movement on the retranslation of the net assets of the overseas subsidiaries. These sensitivities were calculated before adjusting for tax.
Net investment hedges
Cross-currency swap contracts for US dollars, Euros, Yen, Renminbi and Canadian dollars with a nominal value of £371m (2007: £238m) and foreign currency borrowings of US $277m (2007: $nil) and €90m (2007: €100m) have been designated as net investment hedges in respect of the currency translation risk arising on foreign operations. The contracts mature within twelve months. See note 22 for the fair value of the contracts.
The gains and losses that have been deferred in the net investment hedge reserve are shown in the table below:
|
|
Year ended |
Period ended |
|
|
31 July 2008 |
31 July 2007 |
|
|
£m |
£m |
|
Brought forward net investment hedge reserve at start of period |
17.2 |
13.2 |
|
Amounts deferred in the period on effective net investment hedges |
(47.5) |
8.2 |
|
Amounts removed from the hedge reserve and recognised in the income statement |
|
(4.2) |
|
Carried forward net investment hedge reserve at end of period |
(30.3) |
17.2 |
(b) Interest rate risk
The Group operates an interest rate policy designed to optimise interest cost and reduce volatility in reported earnings. The Group's normal policy is to require interest rates to be fixed for 30% to 70% of the level of underlying borrowings forecast to arise over a three-year horizon. This is achieved partly through fixed rate borrowings, and partly through the use of interest rate swaps. Excluding the cash pool gross up, at 31 July 2008 46% (2007: 55%) of the Group's borrowings were at fixed interest rates, after adjusting for interest rate swaps.
The weighted average interest rate on borrowings and cross currency swaps at 31 July 2008, after interest rate swaps, is 4.6% (2007: 5.3%).
Interest rate profile of financial assets and liabilities and the fair value of borrowings
The following table shows the interest rate risk exposure of cash and borrowings. The other financial assets and liabilities do not earn or bear interest and for all financial instruments except for borrowings the carrying value is not materially different from their fair value.
|
|
Cash and |
|
|
|
|
|
|
|
cash |
|
Fair value of |
Cash and |
|
Fair value of |
|
|
equivalents |
Borrowings |
borrowings |
cash equivalents |
Borrowings |
borrowings |
|
|
31 July 2008 |
31 July 2008 |
31 July 2008 |
31 July 2007 |
31 July 2007 |
31 July 2007 |
|
|
£m |
£m |
£m |
£m |
$m |
$m |
|
Fixed interest (adjusted for interest rate hedging): |
|
|
|
|
|
|
|
Less than one year |
|
(3.8) |
(4.0) |
14.1 |
(3.0) |
(3.0) |
|
Between one and five years |
|
(203.5) |
(207.1) |
|
(151.1) |
(157.3) |
|
Greater than five years |
|
(160.1) |
(166.2) |
|
(207.9) |
(216.8) |
|
Total fixed interest financial assets/(liabilities) (adjusted for interest |
|
|
|
|
|
|
|
rate hedging |
|
(367.4) |
(377.3) |
14.1 |
(362.0) |
(377.1) |
|
Floating rate interest financial assets/(liabilities) |
122.1 |
(535.7) |
(535.7) |
165.6 |
(417.2) |
(417.2) |
|
Total interest bearing financial assets/(liabilities) |
122.1 |
(903.1) |
(913.0) |
179.7 |
(779.2) |
(794.3) |
|
Non-interest bearing assets/(liabilities) in the same category |
10.4 |
|
|
9.6 |
|
|
|
Total |
132.5 |
(903.1) |
(913.0) |
189.3 |
(779.2) |
(794.3) |
Interest rate hedging
The Group has designated US$150m interest rate swaps which mature on 28 January 2013 as fair value hedges on the US private placement which matures on the same date. This hedges the risk of variability in the fair value of borrowings arising from interest rate fluctuations. The fair value of the hedging instrument is disclosed in note 22. The effect of the interest rate swap is to convert £75.7m (2007: £73.7m) debt from fixed rate to floating rate.
Sensitivity of interest charges to interest rate movements
The Group has exposure to sterling, US dollar and Euro interest rates. However the Group does not have a significant exposure to interest rate movements for any individual currency. Based on the composition of net debt and foreign exchange rates at 31 July 2008, and taking into consideration all fixed rate borrowings and interest rate swaps in place, a one percentage point (100 basis points) change in average floating interest rates for all three currencies would have a £4.3m (2007: 3.9m) impact on the Group's profit before tax.
(c) Financial credit risk
The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations. Credit risk is mitigated by the Group's Board-approved policy of only selecting counterparties with a strong investment graded long-term credit rating for cash deposits, normally at least AA- or equivalent, and assigning financial limits to individual counterparties. In the normal course of business, the Group operates notional cash pooling systems, where a legal right of set-off applies.
The maximum credit risk exposure in the event of other parties failing to perform their obligations under financial assets, excluding trade and other receivables, totals £132.5m at 31 July 2008 (2007: £189.3m). This includes cash of £100.6m (2007: £123.2m) held in interest compensation pools where Smiths has a legal right of set-off and the net pool balance at the year end was a creditor.
The maximum exposure with a single bank for deposits and cash is £12.4m (2007: £27.8m), whilst the maximum mark to market exposure for foreign exchange contracts at 31 July 2008 to a single bank is £1.5m (2007: £4.6m). These banks had credit ratings of AA and AA+ respectively.
(d) Liquidity risk
Borrowing facilities
The Group actively maintains committed unused credit facilities of at least £200m (or equivalent free cash) at all times to ensure it has sufficient available funds for operations and planned expansions. In 2007 the principal £660m revolving credit facility was extended to 2012. At the balance sheet date the Group had the following undrawn credit facilities:
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Expiring within one year |
|
50.0 |
|
Expiring between one and two years |
|
|
|
Expiring after two years |
449.8 |
593.0 |
|
|
449.8 |
643.0 |
Cash deposits
As at 31 July 2008, £10.0m (2007: £40.8m) of cash and cash equivalents was on deposit with various banks and in money market funds of which £7.2m (2007: £32.2m) was on deposit in the UK.
Gross contractual cash-flows for borrowings
|
|
|
|
Contractual |
Total |
|
|
Contractual |
Total |
|
|
Borrowings |
Fair value |
interest |
contractual |
Borrowings |
Fair value |
interest |
contractual |
|
|
(Note 20) |
adjustments |
payments |
cash flows |
(Note 20) |
adjustments |
payments |
cash flows |
|
|
31 July 20089 |
31 July 2008 |
31 July 2008 |
31 July 2008 |
31 July 2007 |
31 July 2007 |
31 July 2007 |
31 July 2007 |
|
|
£m |
£m |
£m |
3m |
£m |
£m |
£m |
£m |
|
Less than one year |
(182.4) |
|
(42.3) |
(224.7) |
(212.1) |
|
(37.7) |
(249.8) |
|
Between one and two years |
(150.9) |
(0.4) |
(41.5) |
(192.8) |
(0.5) |
|
(37.0) |
(37.5) |
|
Between two and three years |
(71.3) |
|
(26.4) |
(97.7) |
(149.9) |
(0.5) |
(36.3) |
(186.7) |
|
Between three and four years |
(210.7) |
(0.5) |
(25.0) |
(236.2) |
(70.3) |
|
(21.2) |
(91.5) |
|
Between four and five years |
(127.7) |
1.2 |
(14.6) |
(141.1) |
(67.6) |
(0.6) |
(20.4) |
(88.6) |
|
Greater than five years |
(160.1) |
(1.2) |
(34.4) |
(195.7) |
(278.8) |
(4.1) |
(48.6) |
(331.5) |
|
Total |
(903.1) |
(0.9) |
(184.2) |
(1,088.2) |
(779.2) |
(5.2) |
(201.2) |
(985.6) |
The figures presented in the borrowings column include the non-cash adjustments which are highlighted in the adjacent column. The contractual interest reported for borrowings is before the effect of interest rate swaps.
Gross contractual cash-flows for derivative financial instruments
|
|
Receipts |
Payments |
Net cash-flow |
Receipts |
Payments |
Net cash-flow |
|
|
31 July 2008 |
31 July 2008 |
31 July 2008 |
31 July 2007 |
31 July 2007 |
31 July 2007 |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
|
Assets |
|
|
|
|
|
|
|
Less than one year |
256.4 |
(247.7) |
8.7 |
398.1 |
(382.8) |
15.3 |
|
Greater than one year |
63.9 |
(60.1) |
3.8 |
44.4 |
(43.6) |
0.8 |
|
Liabilities |
|
|
|
|
|
|
|
Less than one year |
379.8 |
(400.6) |
(20.8) |
109.3 |
(112.5) |
(3.2) |
|
Greater than one year |
28.1 |
(28.4) |
(0.3) |
42.4 |
(45.6) |
(3.2) |
|
Total |
728.2 |
(736.8) |
(8.6) |
594.2 |
(584.5) |
9.7 |
This table presents the undiscounted future contractual cash-flows for all derivative financial instruments. For this disclosure, cash-flows in foreign currencies are translated using the spot rates at the balance sheet date. The fair values of these financial instruments are presented in note 22.
Gross contractual cash-flows for other financial liabilities
The contractual cash-flows for financial liabilities included in trade and other payables are: £285.8m (2007: £192.3m) due in less than one year, £10.9m (2007: £4.6m) due between one and five years and £1.6m (2007: £nil) due after more than five years.
22 Financial derivatives
The tables below set out the nominal amount and fair value of derivative contracts held by the Group, identifying the derivative contracts which qualify for hedge accounting treatment:
|
|
Contract or underlying |
|
|||
|
|
nominal amount |
Fair value |
|||
|
|
|
|
Assets |
Liabilities |
Net |
|
At 31 July 2008 |
|
£m |
£m |
£m |
£m |
|
Foreign exchange contracts (cash-flow hedges) |
|
222.2 |
3.8 |
(2.9) |
0.9 |
|
Foreign exchange contracts (not hedge accounted) |
|
130.1 |
1.4 |
(0.7) |
0.7 |
|
Total foreign exchange contracts |
|
352.3 |
5.2 |
(3.6) |
1.6 |
|
Cross-currency swaps (net investment hedges) |
|
371.4 |
1.5 |
(18.0) |
(16.5) |
|
Interest rate swaps (fair value hedges) |
|
75.7 |
1.2 |
|
1.2 |
|
Total financial derivatives |
|
799.4 |
7.9 |
(21.6) |
(13.7) |
|
Balance sheet entries: |
|
|
|
|
|
|
Non-current |
|
|
1.4 |
(0.1) |
1.3 |
|
Current |
|
|
6.5 |
(21.5) |
(15.0) |
|
Total financial derivatives |
|
|
7.9 |
(21.6) |
(13.7) |
|
|
Contract or underlying |
|
|||
|
|
nominal amount |
Fair value |
|||
|
|
|
|
Assets |
Liabilities |
Net |
|
At 31 July 2007 |
|
£m |
£m |
£m |
£m |
|
Foreign exchange contracts (cash-flow hedges) |
|
211.0 |
2.6 |
(0.8) |
1.8 |
|
Foreign exchange contracts (not hedge accounted) |
|
131.4 |
0.9 |
(1.7) |
(0.8) |
|
Total foreign exchange contracts |
|
342.4 |
3.5 |
(2.5) |
1.0 |
|
Cross-currency swaps (net investment hedges) |
|
238.2 |
9.0 |
|
9.0 |
|
Cross-currency swaps (not hedge accounted) |
|
17.7 |
1.4 |
|
1.4 |
|
Total cross-currency swaps |
|
255.9 |
10.4 |
|
10.4 |
|
Interest rate swaps (fair value hedges) |
|
73.7 |
|
(2.8) |
(2.8) |
|
Embedded derivatives |
|
15.8 |
0.2 |
(1.3) |
(1.1) |
|
Total financial derivatives |
|
687.8 |
14.1 |
(6.6) |
7.5 |
|
Balance sheet entries: |
|
|
|
|
|
|
Non-current |
|
|
0.4 |
(2.5) |
(2.1) |
|
Included in assets/(liabilities) of disposal group |
|
|
0.2 |
(1.3) |
(1.1) |
|
Current |
|
|
13.5 |
(2.8) |
10.7 |
|
Total financial derivatives |
|
|
14.1 |
(6.6) |
7.5 |
Accounting for other derivative contracts
Any foreign exchange contracts which are not formally designated as hedges and tested are classified as 'held for trading' and not hedge accounted.
Amounts recognised in 2007 in respect of embedded derivatives primarily represent the value of currency terms in commercial contracts between Smiths European subsidiaries and customers and suppliers outside the USA which are denominated in US dollars.
23 Provisions for liabilities and charges
|
|
|
|
|
|
|
Unwind of |
|
|
|
|
|
At |
Exchange |
Provisions |
Provisions |
provision |
|
At |
|
|
|
31 July 2007 |
adjustments |
charged |
released |
discount |
Utilisation |
31 July 2008 |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Warranty provision and product liability |
|
34.5 |
3.8 |
30.0 |
(5.5) |
|
(16.6) |
46.2 |
|
Reorganisation |
|
10.8 |
0.3 |
5.2 |
(0.2) |
|
(6.3) |
9.8 |
|
Property |
|
6.7 |
|
0.6 |
(3.3) |
|
(0.5) |
3.5 |
|
Disposal |
|
60.3 |
|
11.4 |
(3.6) |
|
(20.7) |
47.4 |
|
Litigation |
|
121.2 |
3.3 |
46.8 |
(2.2) |
4.7 |
(10.1) |
163.7 |
|
|
|
233.5 |
7.4 |
94.0 |
(14.8) |
4.7 |
(54.2) |
270.6 |
Analysed as:
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Current liabilities |
70.0 |
90.1 |
|
Non-current liabilities |
200.6 |
143.4 |
|
|
270.6 |
233.5 |
Warranty provision and product liability
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.
Reorganisation
On 3 June 2008 the Company announced a number of changes to its corporate centre and divisional headquarters. The total cost of this restructuring, including redundancy, relocation and consolidation of manufacturing, is expected to amount to approximately £48m over the period to 2010, of which £4.5m has been charged in the current year.
Reorganisation provisions include £4.7m (2007: £6.0m) costs relating to restructuring supply arrangements following the automotive seals disposal. These costs are expected to be spread over the next six years. The residual balance at 31 July 2007 related mainly to Medical, and was utilised during 2008.
Property
Where a property is vacant, or sub-let under terms such that rental income is insufficient to meet all outgoings, the Group provides for the expected future shortfall up to termination of the lease. Provision is also made for the cost of reinstatement work on leased properties where there is an obligation under the lease, and the costs can be reasonably estimated. Where evidence of contamination is found on property in the Group's occupation, provision is made for estimated remedial costs pending action on the affected site. Most of the balance is expected to be utilised within the next five years.
Disposal
A provision has been made in 2008 in respect of obligations arising from the disposal of the Group's Marine Systems business. See note 30 for details of this disposal.
The terms of the disposal of the Aerospace operations included certain obligations for which provision was made in 2007, including £24.3m in respect of costs of transferring aerospace active pensioners. In 2008 the pensioners were transferred, utilising £20.7m of this provision. The balance of £3.6m has been released to the income statement.
Most of the balance is expected to be utilised within the next five years.
Litigation
John Crane, Inc.
John Crane, Inc. ('JCI') is one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. Until 2006, the awards, the related interest and all material defence costs were met directly by insurers. In 2007, JCI secured the commutation of certain insurance policies in respect of product liability. While substantial insurance remains in place, JCI has begun to meet defence costs directly, seeking appropriate contribution from insurers thereafter. Provision is made in respect of the expected costs of defending known and predicted future claims and of adverse judgments in relation thereto, to the extent that such costs can be reliably estimated. No account has been taken of recoveries from insurers as their nature and timing are not yet sufficiently certain to permit recognition as an asset for these purposes.
The JCI products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of JCI, the products were safe. JCI ceased manufacturing products containing asbestos in 1985. JCI has resisted every case in which it has been named and will continue its robust defence of all asbestos-related claims based upon this 'safe product' defence. As a result of its defence policy, JCI has been dismissed before trial from cases involving approximately 159,000 claims over the last 29 years. JCI is currently a defendant in cases involving approximately 136,000 claims. JCI has had final judgments against it, after appeals, in only 70 cases, amounting to awards of some US$70m over the 29 year period.
The assumptions made in assessing the appropriate level of provision include:
The periods over which the expenditure can be reliably estimated. Projections used range between 10 and 20 years.
The future trend of legal costs allowing for 3% cost inflation.
The rate of future claims.
The rate of successful resolution of claims.
The average level of judgments.
The provision is based on past history and allows for decreasing costs based on published tables of asbestos incidence projections. In the light of the significant uncertainty associated with asbestos claims, there can be no guarantee that the assumptions used to estimate the provision will be an accurate prediction of the actual costs that may be incurred and, as a result, the provision may be subject to revision from time to time as more information becomes available.
The provision shown in the table above is a discounted pre-tax provision using discount rates, being the risk-free rate on US debt instruments for the appropriate period. The deferred tax asset related to this provision is shown within the deferred tax balance (note 6). Set out below is the gross, discounted and post-tax information relating to this provision:
|
|
2008 |
2007 |
|
|
£m |
£m |
|
Gross provision |
185.9 |
142.2 |
|
Discount |
(47.0) |
(45.8) |
|
Discounted pre-tax provision |
138.9 |
96.4 |
|
Deferred tax |
(37.5) |
(36.6) |
|
Discounted post-tax provision |
101.4 |
59.8 |
Other litigation
The Group has on occasion been required to take legal action to protect its patents and other business intellectual property rights against infringement, and similarly to defend itself against proceedings brought by other parties. Provision is made for the expected fees and associated costs, based on professional advice as to the likely duration of each case. Provisions totalling £2.2m (2007: £8.9m) were released relating to litigation settled at less than the expected cost. Most of the balance is expected to be utilised within the next five years.
Apart from that relating to JCI, none of the other provisions is discounted.
24 Operating lease commitments - minimum lease payments
The minimum uncancellable lease payments which the Group is committed to make are:
|
|
2008 |
2007 |
|||
|
|
Land and |
|
Land and |
|
|
|
|
buildings |
Other |
buildings |
Other |
|
|
|
£m |
£m |
£m |
£m |
|
|
Payments due |
|
|
|
|
|
|
- |
not later than one year |
20.5 |
7.8 |
17.5 |
7.3 |
|
- |
later than one year and not later than five years |
47.0 |
8.1 |
43.1 |
8.0 |
|
- |
later than five years |
20.3 |
0.1 |
24.7 |
0.1 |
|
|
87.8 |
16.0 |
85.3 |
15.4 |
|
25 Contingent liabilities and commitments
John Crane, Inc.
As stated in note 23, John Crane, Inc. ('JCI') is involved in numerous law suits pending in the United States in which plaintiffs are claiming damages arising from exposure to, or use of, products containing asbestos. The JCI products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of JCI, the products were safe. JCI ceased manufacturing products containing asbestos in 1985.
Provision has been made for the cost of adverse judgements expected to occur. The Group anticipates that asbestos litigation will continue beyond the period covered by this provision; however, because of the uncertainty surrounding the outcome of litigation beyond this period, the cost of adverse judgments cannot be reliably estimated.
Other contingent liabilities and commitments
At 31 July 2008, contingent liabilities, comprising bonds and guarantees arising in the normal course of business, amounted to £75m (2007: £88m).
The Group is currently co-operating with the relevant authorities in investigating certain allegations of improper business conduct. Based on the work completed to date, these are not expected to give rise to any material financial exposure.
The Parent Company has arranged two letters of credit to support the Group's pension plans, one for £100.0m and one for £50.0m. At 31 July 2008, total usage of the two facilities was £124.9m (2007: £132.8m).
26 Share capital
|
|
|
Issued |
|
|
|
|
capital |
Consideration |
|
|
Number of shares |
£m |
£m |
|
Ordinary shares |
|
|
|
|
At 31 July 2007 |
385,498,273 |
144.6 |
|
|
Exercise of share options |
2,380,908 |
0.9 |
15.5 |
|
At 31 July 2008 |
387,879,181 |
145.5 |
|
|
|
|
|
|
|
B shares |
|
|
|
|
At 31 July 2007 |
4,926,594 |
0.1 |
|
|
Purchased and cancelled |
(4,467,437) |
(0.1) |
|
|
At 31 July 2008 |
459,157 |
|
|
|
|
|
|
|
|
Share capital classified as equity at 31 July 2008 |
|
145.5 |
|
|
Share capital classified as debt at 31 July 2008 |
|
|
|
|
Total share capital at 31 July 2008 |
|
145.5 |
|
On 17 April 2008 4.5 million B shares were purchased and cancelled. The remaining B shares carry annual interest of 75% of 12 month LIBOR, payable in arrears in April. Smiths may redeem and cancel the remaining B shares up to November 2008 for a consideration of 365p per share in cash or convert them to ordinary shares. B shares have no voting rights.
In 2007 the Group issued 577.6 million B shares with a nominal value of £5.8m. £4.2m of associated costs were charged to the share premium account. Of these shares 572.6 million were redeemed on 25 June 2007 for a consideration of 365p per share including 348.2 million B shares which had been converted into deferred shares.
After the allotment of the B shares in 2007 a capital reorganisation was undertaken. The shareholders received two new 37.5p ordinary shares for every three 25p ordinary shares which they previously held.
The authorised capital at 31 July 2008 consisted of:
533,333,333 (2007: 533,333,333) ordinary shares of 37.5p each; and
600,000,000 (2007: 600,000,000) non-cumulative B shares of 1p each.
At 31 July 2008 all of the issued share capital was in free issue. All issued shares are fully paid.
27 Reconciliation of movements in equity
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Share premium |
Other |
|
Retained |
shareholders' |
Minority |
Total |
|
|
Share capital |
account |
reserves |
Hedge reserve |
earnings |
funds |
interest |
equity |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
At 5 August 2006 |
141.8 |
224.1 |
236.5 |
26.5 |
734.0 |
1,362.9 |
|
1,362.9 |
|
Exercises of share options |
2.8 |
74.9 |
|
|
|
77.7 |
|
77.7 |
|
Purchase of own shares |
|
|
|
|
(7.0) |
(7.0) |
|
(7.0) |
|
Return of capital to shareholders and |
|
|
|
|
|
|
|
|
|
redemption of B shares |
|
(10.0) |
5.7 |
|
(2,104.6) |
(2,108.9) |
|
(2,108.9) |
|
Total recognised income and expenses for |
|
|
|
|
|
|
|
|
|
the period |
|
|
|
(7.9) |
1,752.8 |
1,744.9 |
|
1,744.9 |
|
Dividends paid to equity shareholders |
|
|
|
|
(182.4) |
(182.4) |
|
(182.4) |
|
Dilution of interest in associated company |
|
|
|
|
(1.2) |
(1.2) |
|
(1.2) |
|
Share-based payment |
|
|
|
|
17.3 |
17.3 |
|
17.3 |
|
At 31 July 2007 |
144.6 |
289.0 |
242.2 |
18.6 |
208.9 |
903.3 |
|
903.3 |
|
Exercises of share options |
0.9 |
14.6 |
|
|
5.5 |
21.0 |
|
21.0 |
|
Purchase of own shares |
|
|
|
|
(20.7) |
(20.7) |
|
(20.7) |
|
Redemption of B shares |
|
|
0.1 |
|
(0.1) |
|
|
|
|
Acquisition (note 29) |
|
|
|
|
|
|
2.0 |
2.0 |
|
Total recognised income and expenses for |
|
|
|
|
|
|
|
|
|
the period |
|
|
|
(47.8) |
180.6 |
132.8 |
0.3 |
133.1 |
|
Dividends paid to equity shareholders |
|
|
|
|
(131.4) |
(131.4) |
|
(131.4) |
|
Dilution of interest in associated company |
|
|
|
|
(0.9) |
(0.9) |
|
(0.9) |
|
Share-based payment |
|
|
|
|
11.8 |
11.8 |
|
11.8 |
|
At 31 July 2008 |
145.5 |
303.6 |
242.3 |
(29.2) |
253.7 |
915.9 |
2.3 |
918.2 |
Other reserves comprise a capital redemption reserve of £5.8m (2007: £5.7m), a revaluation reserve of £1.7m (2007: £1.7m) and a merger reserve of £234.8m (2007: £234.8m). The movements in other reserves relate to the recognition of transfers to the capital redemption reserve required following the redemption of the B shares.
The retained earnings include the purchase of Smiths Group plc shares by the Smiths Industries Employee Benefit Trust. The consideration paid was £20.7m (2007: £7.0m). At 31 July 2008 the trust held 1,095,965 (2007: 634,274) ordinary shares with a nominal value of £0.4m (2007: £0.2m) and a market value of £11.5m (2007: £6.6m).
Capital management
Capital comprises shareholders' equity adjusted for goodwill recognised directly in reserves. For the period ended 31 July 2008 the average Group capital was £1,728.1m (2007: £1,732.3m).
The capital structure is based on the directors' judgement of the balance required to maintain flexibility while achieving an efficient cost of capital. The Group has a target gearing, calculated on a market value basis, of approximately 20%. At the balance sheet date the Group had gearing of 18% (2007: 15%). This generated a weighted average cost of capital of 8% (2007: 9%).
As part of this process the Group maintains its target of a solid investment grade credit rating by monitoring the factors utilised by ratings agencies and evaluating the impact of potential distributions and future funding requirements. At the 31 July 2008 the Group had a credit rating of BBB+/Baa2 (2007: BBB+/Baa2) with Standard & Poor's and Moody's respectively.
Hedge reserve
|
|
|
2008 |
2007 |
|
|
|
£m |
£m |
|
The hedge reserve on the balance sheet comprises |
|
|
|
|
Cash-flow hedge reserve |
|
1.1 |
1.4 |
|
Net investment hedge reserve |
|
(30.3) |
17.2 |
|
|
|
(29.2) |
18.6 |
See transactional currency exposure risk management disclosures in note 21 for additional details of cash-flow hedges and translational currency exposure risk management disclosure also in note 21 for additional details of net investment hedges.
28 Cash-flow from operating activities
|
|
Year ended |
Period ended |
|
|
|
31 July 2008 |
31 July 2007 |
|
|
|
£m |
£m |
|
|
Profit before taxation - continuing and discontinued |
346.1 |
1,869.4 |
|
|
Net interest payable |
41.0 |
37.6 |
|
|
Financing losses/(gains) |
|
|
|
|
- |
charged to administrative expenses |
0.3 |
1.5 |
|
- |
charged to financing |
6.1 |
(2.8) |
|
Share of post-tax loss from associate |
1.0 |
0.5 |
|
|
Other finance income - retirement benefits |
(41.7) |
(36.8) |
|
|
(Profit on sale)/impairment of financial asset |
|
(24.0) |
|
|
Profit on disposal of discontinued operation |
(26.8) |
(1,469.6) |
|
|
|
326.0 |
375.8 |
|
|
Amortisation of intangible assets |
31.0 |
29.7 |
|
|
Impairment of intangible assets |
|
2.2 |
|
|
Profit on disposal of property, plant and equipment |
(0.3) |
(0.4) |
|
|
(Profit)/loss on disposal of business |
(27.2) |
5.2 |
|
|
Depreciation of property, plant and equipment |
53.2 |
52.2 |
|
|
Impairment of property, plant and equipment |
0.3 |
8.2 |
|
|
Share-based payment expense |
12.9 |
13.9 |
|
|
Retirement benefits |
(37.0) |
(66.2) |
|
|
Increase in inventories |
(21.4) |
(84.2) |
|
|
Increase in trade and other receivables |
(10.0) |
(84.8) |
|
|
(Decrease)/increase in trade and other payables |
(56.9) |
29.7 |
|
|
Increase in provisions |
49.9 |
84.5 |
|
|
Cash generated from operations |
320.5 |
365.8 |
|
|
Interest |
(48.6) |
(27.0) |
|
|
Tax paid |
(73.8) |
(92.8) |
|
|
Net cash inflow from operating activities |
198.1 |
246.0 |
|
29 Acquisitions
During the period ended 31 July 2008, the Group made a number of acquisitions: Sartorius Bearing Technology (15 October 2007), a controlling interest over an associate John Crane Japan Limited (21 December 2007), Indufil BV (28 April 2008) and Fiber Composite Company Inc. ('Fiberod') (2 May 2008), all on behalf of John Crane, Fast Heat (4 February 2008), Allrizon Tongguang (7 May 2008) and Triasx Pty. Ltd. (1 July 2008) on behalf of Specialty - Other.
From the date of acquisition to 31 July 2008, the acquisitions contributed £38.1m to revenue, £5.9m to headline profit before taxation and £1.4m to profit before taxation. If Smiths had acquired the businesses at the beginning of the financial period, the acquisitions would have contributed £92.4m to revenue and £13.8m to headline profit before tax.
The fair value adjustments in respect of intangible assets are due to the recognition of £43.7m in respect of customer relationships, £18.8m in respect of technology and £12.0m in respect of patents, licenses and trademarks. Goodwill represents the value of synergies arising from the acquisitions and the acquirees' assembled workforces. The adjustments to current assets and liabilities relate to valuation adjustments and are provisional, based on management's best estimates.
The values set out below are provisional pending finalisation of the fair values attributable, and will be finalised in the year ending 31 July 2009. Goodwill and other net assets in respect of prior year acquisitions, as previously reported, have been adjusted as a result of finalising their attributable fair values and changes in the estimated value of contingent considerations. Accordingly, goodwill has increased by £0.5m on one transaction and reduced by £2.2m on another.
The minority interest and assets accounted for using the equity method adjustment represents assets not acquired by Smiths Group plc when a controlling interest in an associate was acquired. The asset revaluation surplus represents fair value gains and losses on the associate's net assets.
|
|
Indufil BV |
Other acquisitions |
Total |
|||||
|
|
|
Fair value |
Provisional |
|
Fair value |
Provisional |
Provisional |
|
|
|
Book value |
adjustments |
fair value |
Book value |
adjustments |
fair value |
fair value |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
- |
intangible assets |
0.2 |
31.2 |
31.4 |
0.5 |
43.3 |
43.8 |
75.2 |
|
- |
property, plant and equipment |
1.3 |
|
1.3 |
6.8 |
(0.2) |
6.6 |
7.9 |
|
Current assets |
|
|
|
|
|
|
|
|
|
- |
cash and cash equivalents |
|
|
|
4.0 |
|
4.0 |
4.0 |
|
- |
other current assets |
14.5 |
|
14.5 |
29.0 |
(0.6) |
28.4 |
42.9 |
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
- |
other liabilities |
|
(8.1) |
(8.1) |
0.1 |
(5.5) |
(5.4) |
(13.5) |
|
Current liabilities |
|
|
|
|
|
|
|
|
|
- |
overdrafts |
(2.5) |
|
(2.5) |
|
|
|
(2.5) |
|
- |
other current liabilities |
(4.5) |
|
(4.5) |
(20.4) |
(0.8) |
(21.2) |
(25.7) |
|
Minority interest and assets accounted for using |
|
|
|
|
|
|
|
|
|
the equity method |
|
|
|
|
(5.1) |
(5.1) |
(5.1) |
|
|
Net assets acquired |
9.0 |
23.1 |
32.1 |
20.0 |
31.1 |
51.1 |
83.2 |
|
|
Asset revaluation surplus |
|
|
|
|
|
(0.4) |
(0.4) |
|
|
Goodwill on current year acquisitions |
|
|
38.7 |
|
|
48.3 |
87.0 |
|
|
Goodwill adjustments on prior year acquisitions |
|
|
|
|
|
(1.7) |
(1.7) |
|
|
Total consideration |
|
|
70.8 |
|
|
97.3 |
168.1 |
|
|
Cash paid during the period - current year acquisitions |
|
|
70.5 |
|
|
76.8 |
147.3 |
|
|
Direct costs relating to current year acquisitions |
|
|
0.3 |
|
|
2.5 |
2.8 |
|
|
Deferred consideration accrued on current year acquisitions |
|
|
|
|
|
19.7 |
19.7 |
|
|
Deferred consideration and costs paid/(released) on prior |
|
|
|
|
|
|
|
|
|
year acquisitions |
|
|
|
|
|
(1.7) |
(1.7) |
|
|
Total consideration |
|
|
70.8 |
|
|
97.3 |
168.1 |
|
30 Disposals
The most significant disposal transaction during the year was the sale of the Group's Marine Systems business to K H Finance Limited, a company owned by ECI Partners LLP, on 8 November 2007. In addition to the consideration recognised there is a deferred payment of £4m contingent on the terms of any future disposal of K H Finance Limited by the purchaser. The assets and liabilities held for sale at 31 July 2007 relate to the Marine Systems business.
The Group has adjusted provisions held in respect of disposals made in prior years, following determination of the warranties and other liabilities provided for at the time of disposal.
|
|
£m |
|
|
Consideration |
46.8 |
|
|
Less: transaction costs |
(3.2) |
|
|
Less: disposal provisions |
(2.8) |
|
|
Net consideration received |
40.8 |
|
|
Net assets disposed of: |
|
|
|
- |
intangible assets |
2.2 |
|
- |
property, plant and equipment |
4.2 |
|
- |
inventory |
9.5 |
|
- |
trade and other receivables |
15.5 |
|
- |
cash and cash equivalents |
0.9 |
|
- |
liabilities |
(18.1) |
|
Net assets |
14.2 |
|
|
Profit on disposals in the current year |
26.6 |
|
|
Other disposal adjustments |
0.6 |
|
|
Profit on disposal of businesses |
27.2 |
|
31 Employee share schemes
The Group operates share schemes and plans for the benefit of employees. The nature of the principal schemes and plans, including general conditions, is set out below:
Smiths Group Sharesave Scheme (SAYE)
The SAYE scheme is an HM Revenue & Customs-approved all-employee savings-related share option scheme which is open to all UK employees, including directors, with 12 months' service or more. Participants enter into a contract to save a fixed amount per month of up to £250 in aggregate for three or five years and are granted an option over shares at a fixed option price, set at a 20% discount to market price at the date of invitation to participate. In the case of five-year savings contracts, participants can elect to delay maturity of the contract until its seventh anniversary. The number of shares comprising the option is determined by the monthly amount saved and the bonus paid on maturity of the savings contract. Options granted under the SAYE scheme are not subject to any performance conditions.
Smiths Group US Sharesave Scheme (US Sharesave)
The US Sharesave scheme is a savings-related share appreciation rights scheme which is open to all US employees with 12 months' service or more. Participants enter into a contract to save a fixed amount per month for two years and are granted share appreciation rights based on a fixed initial price determined using the market price and the US dollar exchange rate at the date of invitation to participate. The number of shares used in the calculation is based on the monthly amount saved and the bonus paid on maturity of the savings contract. Rights granted under the US Sharesave scheme are not subject to any performance conditions.
Smiths Industries 1995 Executive Share Option Scheme (95 ESOS)
Options granted under the 95 ESOS can only be exercised after three years if a performance requirement, determined by the Remuneration Committee, has been met. Options granted under the 95 ESOS up to 2001 are subject to performance testing based on total shareholder return of the Group versus the total return of the General Industrials Sector of the FTSE All-Share Index. Options granted from 2002 are subject to a performance test based on growth in the Group's earnings per share. If the performance requirement is not satisfied at the end of the third year, the performance period may be extended for up to two further years so that performance is tested over a four-year period at the end of the fourth year and a five-year period at the end of the fifth year. The performance requirement is that the growth in the Group's normalised earnings per share over the three/four/five financial years beginning immediately prior to the option grant must exceed the increase in the UK Retail Prices Index over the same period by 3% per annum (for options up to one times base salary) and by 4% per annum (for the excess up to two times base salary). Executive directors received their final grants of options under the 95 ESOS in October 2003. From 2004 senior executives, including directors, have received awards under the PSP (see below). Grants under the 95 ESOS continue to be made to other executives.
Smiths Group Performance Share Plan (PSP)
The PSP was introduced in 2004 and replaced the 95 ESOS for executive directors and senior executives. Conditional awards of up to 1.5 times salary (and exceptionally three times salary) are granted annually. The awards will be released following the third anniversary of the date of grant to the extent the PSP's performance tests have been met. One-third of the award is subject to a total shareholder return ('TSR') target relative to other FTSE 100 companies (excluding financial companies and investment trusts). For full vesting, the company's TSR must be at or above the 75th percentile over the three year performance period. 25% of the award will vest if the company's TSR is at median. Awards will vest on a straight-line pro-rata basis between median and 75th percentile. The remaining two-thirds of the award is subject to an earnings per share ('EPS') growth target (measured before exceptional items). Full vesting will occur if the compound annual growth in EPS is equivalent to 12% per annum. 25% vesting will occur if the compound annual growth in EPS is equivalent to 5% per annum, with vesting on a straight-line basis between 5% and 12%. The PSP has been replaced by the VSP (see below).
Value Sharing Plan (VSP)
The VSP is a one-off long-term incentive plan approved by the shareholders in July 2008 rewarding executives for value creation at Group and Divisional levels over three-year and four-year periods commencing with the financial year 2008/09. Corporate participants will be rewarded under the VSP for value creation at a Group level, whereas the executives with divisional responsibilities will be rewarded for value creation within the division for which they are responsible. For the Group scheme, one-third of the award will depend on the growth in Smiths' TSR over and above the median for the companies comprising the FTSE-100 (excluding financial services companies) and the remaining twoߛthirds of each award will be determined by the growth in internal value in excess of 9.5% a year. The growth in internal value is calculated as follows: adjusted profit before tax ('PBT') times the ratio of PBT to market capitalisation determined at the date of grant plus net equity cash-flows to shareholders. The divisional awards will depend on meeting an internal value growth target set for the division in which the participant works.
The participants in the VSP will not be eligible for awards under the Performance Share Plan in 2008/09 or 2009/10.
Smiths Group Co-Investment Plan (CIP)
Under the CIP, as introduced in October 2005, the executive directors and senior executives are able, if invited, to use their after tax bonus or 25% of their basic salary after tax, whichever is the greater, to invest in the Company's shares at the prevailing market price. At the end of a three year period, if the executive is still in office and provided the performance test is passed, he will be awarded matching shares in respect of any invested shares retained for that period. The number of matching shares to be awarded is determined by the Remuneration Committee at the end of the year in which the bonus is earned by reference to annual bonus, and other corporate financial criteria. The maximum award will not exceed the value, before tax, of the bonus or salary invested in shares by the executive. Vesting of matching shares will occur and the matching shares will be released at the end of the three year period if the Group's Return on Capital Employed ('RoCE') over the Performance Period exceeds the Group's weighted average cost of capital ('WACC') over the Performance Period by an average margin of at least 1% per annum.
In July 2008 the CIP was amended. From 2009 participants will be required to invest 50% of their post tax bonus in purchased shares. The performance conditions have been expanded to include an enhanced performance condition of RoCE exceeding WACC by an average margin of 3% per annum. If the enhanced performance condition is met, two matching shares will be issued for every purchased share.
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Weighted |
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average |
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price for |
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SAYE and |
ESOS |
DSS and |
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option plans |
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Sharesave |
(inc SARS) |
CIP |
PSP |
Total |
£ |
|
Ordinary shares under option ('000) |
|
|
|
|
|
|
|
6 August 2006 |
4,283 |
19,307 |
1,363 |
1,934 |
26,887 |
£6.50 |
|
Granted |
917 |
2,795 |
459 |
1,070 |
5,241 |
£6.23 |
|
Exercised |
(599) |
(11,789) |
(363) |
|
(12,751) |
£7.03 |
|
Lapsed |
(573) |
(963) |
(53) |
(72) |
(1,661) |
£7.18 |
|
31 July 2007 |
4,028 |
9,350 |
1,406 |
2,932 |
17,716 |
£5.98 |
|
Granted |
639 |
1,838 |
245 |
743 |
3,465 |
£7.32 |
|
Exercised |
(2,159) |
(1,455) |
(235) |
(645) |
(4,494) |
£5.67 |
|
Lapsed |
(992) |
(1,101) |
(9) |
(369) |
(2,471) |
£7.32 |
|
31 July 2008 |
1,516 |
8,632 |
1,407 |
2,661 |
14,216 |
£6.23 |
Options were exercised on an irregular basis during the period. The average closing share price over the financial year was 1,014.32p (2007: 1,012.15p). There has been no change to the effective option price of any of the outstanding options during the period.
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Exercisable |
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weighted |
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Weighted |
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average |
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average |
Options |
Options |
exercise price |
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Total shares |
remaining |
exercisable at |
exercisable at |
for options |
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|
under option |
contractual life |
31 July 2008 |
31 July 2007 |
exercisable at |
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Range of exercise prices |
('000) |
(months) |
('000) |
('000) |
31 July 2008 |
|
£0.00 - £2.00 |
4,068 |
14 |
19 |
1 |
£0.00 |
|
£2.01 - £4.00 |
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|
|
|
|
|
£4.01 - £6.00 |
234 |
18 |
2 |
956 |
£5.25 |
|
£6.01 - £8.00 |
2,518 |
57 |
1,735 |
2,236 |
£7.40 |
|
£8.01 - £10.00 |
5,505 |
73 |
587 |
633 |
£8.77 |
|
£10.01 - £12.00 |
1,891 |
108 |
129 |
185 |
£2.42 |
|
£12.01 - £14.00 |
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|
|
175 |
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For the purposes of valuing options to arrive at the share-based payment charge, the Binomial option pricing model has been used for most schemes and the Monte Carlo method is used for schemes with total shareholder return performance targets. The assumptions used in the models for 2008 and 2007 are as follows:
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Period ended 31 July 2008 |
Period ended 31 July 2007 |
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SAYE |
95 ESOS |
DSS/CIP |
PSP |
SAYE |
95 ESOS |
DSS/CIP |
PSP |
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Weighted average fair value (£) |
2.48 |
1.73 |
8.60 |
7.14 |
2.19 |
1.94 |
7.81 |
6.40 |
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Key assumptions used: |
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Weighted average share price |
9.14 |
8.69 |
9.61 |
9.51 |
8.25 |
8.32 |
8.72 |
8.66 |
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Range of exercise prices (£) |
5.25-9.12 |
6.69-10.97 |
|
|
5.25-8.68 |
6.69-9.01 |
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Range of expected volatility |
17%-33% |
18%-30% |
|
17%-20% |
17%-36% |
18%-34% |
|
16%-18% |
|
Risk-free interest rate |
3.9%-5.6% |
4.3%-5.2% |
|
4.3%-4.8% |
3.7%-5.6% |
4.3%-5.5% |
|
4.3%-4.8% |
|
Range of expected option term (life) |
2.2-7.2 yrs |
5 yrs |
3 yrs |
3 yrs |
2.2-7.2 yrs |
5 yrs |
3 yrs |
3 yrs |
|
Dividend yield |
3.75% |
3.75% |
3.75% |
3.75% |
3.75% |
3.75% |
3.75% |
3.75% |
Assumptions on expected volatility and expected option term have been made on the basis of historical data, wherever available, for the period corresponding with the vesting period of the option. Best estimates have been used where historical data is not available in this respect.
Included within staff costs is an expense arising from share-based payment transactions of £12.9m (2007: £19.3m), of which £11.8m (2007: £17.3m) relates to equity-settled share-based payment. The charge in respect of continuing operations is £12.9m (2007: £10.4m). The total share-based payment charge includes £nil (2007: £3.5m) relating to discontinued operations and £nil (2007: £5.4m) relating to the accelerated vesting of share options on business disposals.
At 31 July 2008 the creditor relating to cash-settled schemes is £1.5m (2007: £1.9m).
32 Events after the balance sheet date
On 1 September 2008 the Company completed the sale of land in Basingstoke for £16m in cash. A further amount of up to £12m will be paid depending on the final terms of such amended planning permission as may be granted.
On 8 September 2008 the Trustees of the TI Pension Scheme invested £250m in annuities which are matched with specific liabilities of the fund.
This information is provided by RNS
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