REG - Smiths Group PLC - Final Results <Origin Href="QuoteRef">SMIN.L</Origin> - Part 4
23/09/2015 07:01
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the liabilities of the
schemes as at 31 July 2015. Scheme assets are stated at their market values. Contributions to the schemes are made on the
advice of the actuaries.
The changes in the present value of the net pension liability in the period were:
Year ended Year ended
31 July 2015 31 July 2014
£m £m
At beginning of period (242) (254)
Exchange adjustment (3) 19
Reclassification of small unfunded obligations (2)
Current service cost (3) (3)
Scheme administration costs (8) (6)
Past service cost, curtailments, settlements 14
Finance charges - retirement benefits (8) (9)
Contributions by employer 84 88
Actuarial gain/(loss) 60 (77)
Movement in surplus restriction
Net retirement benefit liability (108) (242)
UK pension schemes
Smiths funded UK pension schemes are subject to a statutory funding objective, as set out in UK pension legislation. Scheme
trustees need to obtain regular actuarial valuations to assess the scheme against this funding objective. The trustees and
sponsoring companies need to agree funding plans to improve the position of a scheme, when it is below the acceptable
funding level.
The UK Pensions Regulator has extensive powers to protect the benefits of members, promote good administration and reduce
the risk of situations arising which may require compensation to be paid from the Pension Protection Fund. These powers
include imposing a schedule of contributions or the calculation of the technical provisions, where a trustee and company
fail to agree appropriate calculations.
Smiths Industries Pension Scheme ("SIPS")
This scheme was closed to future accrual effective 1 November 2009. SIPS provides index-linked pension benefits based on
final earnings at date of closure. SIPS is governed by a corporate trustee (SI Trustee Limited, a wholly owned subsidiary
of Smiths Group plc). The board of trustee directors comprises five company-nominated trustees and four member-nominated
trustees, with an independent chairman selected by Smiths Group plc. Trustee Directors are responsible for the management,
administration, funding and investment strategy of the scheme.
The most recent actuarial valuation of this scheme is being performed using the Projected Unit Method as at 31 March 2015,
and experience gains and losses identified during this valuation have been incorporated into the IAS 19 valuation. Under
the current funding plan for SIPS Smiths pays cash contributions of £3m a month until October 2019. In addition, Smiths
invests £2m a month in index-linked gilts held in an escrow account. The escrow account remains an asset of the Group until
2020, see note 17. At that time, the assets in escrow will be allocated subject to the funding position of SIPS. In
addition, the escrow account may revert to the Group, should there be a surplus at an intervening funding valuation.
SIPS will implement Guaranteed Minimum Pensions equalisation in respect of members contracted out of the State Earnings
Related Pensions Scheme prior to 6 April 1997, once the government has completed its consultations and confirmed an
approach. It is not yet possible to reliably quantify the impact of this adjustment. The liability for Barber equalisation
has been recognised, increasing the deficit at 31 July 2015 by £1m.
The duration of the SIPS liabilities is around 23 years (2014: 23 years) for active deferred members, 23 years (2014: 23
years) for deferred members and 12 years (2014: 11 years) for pensioners and dependants.
TI Group Pension Scheme ("TIGPS")
This scheme was closed to future accrual effective 1 November 2009. TIGPS provides index-linked pension benefits based on
final earnings at the date of closure. TIGPS is governed by a corporate trustee (TI Pension Trustee Limited, an independent
company). The board of trustee directors comprises five company-nominated trustees and four member-nominated trustees, with
an independent trustee director selected by the Trustee. The Trustee is responsible for the management, administration,
funding and investment strategy of the scheme.
The most recent actuarial valuation of this scheme is being performed using the Projected Unit Method as at 5 April 2015.
Under the current funding plan for TIGPS Smiths pays cash contributions of £16m a year until April 2016.
Under the governing documentation of the TIGPS, any future surplus would be returnable to Smiths Group plc by refund,
assuming gradual settlement of the liabilities over the lifetime of the scheme. If TIGPS was wound up while it had members,
the scheme would need to buy out the benefits of all members. The buyouts would cost significantly more than the present
value of the scheme liabilities calculated in accordance with IAS 19 (revised).
TIGPS is compliant with all identified requirements of Barber equalisation. TIGPS will implement Guaranteed Minimum
Pensions equalisation in respect of members contracted out of the State Earnings Related Pensions Scheme prior to 6 April
1997, once the government has completed its consultations and confirmed an approach. It is not yet possible to reliably
quantify the impact of this adjustment.
The duration of the TIGPS liabilities is around 21 years (2014: 23 years) for active deferred members, 19 years (2014: 20
years) for deferred members and 11 years (2014:10 years) for pensioners and dependants.
US pension plans
The most recent valuations of the six principal US pension and post-retirement healthcare plans were performed at 1 January
2014.
The pension plans were closed with effect from 30 April 2009 and benefits were calculated as at that date and are not
revalued. Governance of the US pension plans is managed by a Settlor Committee appointed by Smiths Group Services Corp. The
US pension plans offered deferred members a one-off option to elect to cash out their retirement entitlements rather than
receive a pension at retirement. Lump sum payments of $150m were made in August and September 2014. This programme
generated a settlement gain of £14m.
The duration of the liabilities for the largest US plan is around 14 years (2014: 18 years) for active deferred members, 19
years (2014: 19 years) for deferred members and 10 years (2014: 9 years) for pensioners and dependants.
On 14 August 2015 the US funded plans completed a buy-out of retiree liabilities for $527m, transferring the obligation to
pay pensions to Voya Retirement Insurance and Annuity Company.
Risk management
The pensions schemes are exposed to risks that:
· investment returns are below expectations, leaving the scheme with insufficient assets in future to pay all its pension
obligations;
· members and dependants live longer than expected, increasing the value of the pensions the scheme has to pay;
· inflation rates are higher than expected, so amounts payable under index-linked pensions are higher than expected; and
· increased contributions may be required to meet regulatory funding targets if lower interest rates increase the current
value of liabilities.
These risks are managed separately for each pension scheme. However Smiths has adopted a common approach of closing defined
benefit schemes to cap members' entitlements and supporting trustees in adopting investment strategies which match assets
to future obligations, after allowing for the funding position of the scheme.
TIGPS with a mature member profile, and a strong funding position, has been able to progress its matching strategy to the
point where 50% of liabilities are covered by matching annuities, eliminating investment return, longevity, inflation and
funding risks. In September 2013, the Trustees of the TIGPS invested a further £160m in annuities matched with specific
liabilities of the Scheme.
In August 2014 SIPS adjusted the scheme investment strategy. The scheme is now invested in diversified growth funds and a
synthetic equity mandate with BlackRock, using exchange-traded futures, which are derivative contracts entered into for a
fixed term, to invest in global equity markets. If equity markets rise, the value of the synthetic equity mandate will
increase, whilst if equity markets fall, the value of the synthetic equity mandate will fall. The value of the mandate can
be positive or negative depending upon movement in the global equity markets. The risk and return characteristics of
synthetic equities are similar to physical equities. As at 31 July 2015 the SIPS synthetic equity futures generated a £497m
(2014 £nil) exposure to equities.
The principal assumptions used in updating the valuations are set out below:
2015 2015 2015 2014 2014 2014
UK US Other UK US Other
Rate of increase in salaries n/a n/a 2.6% n/a n/a 2.6%
Rate of increase for active deferred members 4.1% n/a n/a 4.2% n/a n/a
Rate of increase in pensions in payment 3.2% n/a 1.0% 3.3% n/a 0.9%
Rate of increase in deferred pensions 3.2% n/a 0.1% 3.3% n/a 0.1%
Discount rate 3.5% 4.4% 3.3% 4.0% 4.4% 3.8%
Inflation rate 3.2% n/a 1.6% 3.3% n/a 1.6%
Healthcare cost increases 4.7% n/a 2.1% 4.3% n/a 2.3%
The assumptions used in calculating the costs and obligations of the Group's defined benefit pension plans are set by
Smiths after consultation with independent professionally qualified actuaries. The assumptions used are estimates chosen
from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily occur in practice.
For countries outside the UK and USA assumptions are disclosed as a weighted average.
Discount rate assumptions
The UK schemes use a discount rate based on the yield on the iBOXX over 15-year AA-rated corporate bond index, adjusted if
necessary to better reflect the shape of the yield curve considering the Aon Hewitt GBP Select AA curve. For the USA, the
discount rate referenced Moody's Aa annualised yield, the Citigroup High Grade Index, the Merrill Lynch 15+ years High
Quality Index and the Towers Watson cash-flow matching models.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are based on the recent actual mortality experience of members
within each scheme. The assumptions are based on the new SAPS All 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 2014
CMI projections, blended to a long-term rate of 1.25%. The mortality assumptions used in the principal US schemes are based
on the RP-2014 table projected generationally with scale MP-14 as of 31 July 2015. The table selected allows for future
mortality improvements and applies an adjustment for job classification (blue collar versus white collar). The assumptions
give the following:
Expected further years of life UK schemes US schemes
Male Female Male Female Male Female Male Female
31 July 2015 31 July 2015 31 July 2014 31 July 2014 31 July 2015 31 July 2015 31 July 2014 31 July 2014
Member who retires next year at age 65 23 24 23 25 22 24 20 21
Member, currently 45, when they retire 25 27 25 27 23 26 20 21
in 20 years' time
Sensitivity
Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2015 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. 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.
Profit before tax Increase/ (Increase)/ Profit before tax Increase/ (Increase)/
for year ended (decrease) in decrease in for year ended (decrease) in decrease in
31 July 2015 scheme assets scheme 31 July 2014 scheme assets scheme
£m £m liabilities £m £m liabilities
£m £m
Rate of mortality - 1 year increase in life expectancy (4) 47 (157) (3) 45 (131)
Rate of mortality - 1 year decrease in life expectancy 4 (47) 160 4 (45) 133
Rate of inflation - 0.25% increase (3) 13 (89) (3) 12 (87)
Discount rate - 0.25% increase 5 (19) 139 5 (20) 141
Market value of scheme assets - 2.5% increase 3 80 3 73
The effect on profit before tax reflects the impact of current service cost and net interest cost. The value of the scheme
assets is affected by changes in mortality rates, inflation and discounting because they affect the carrying value of the
insurance assets.
Retirement benefit plan assets
31 July 2015 31 July 2014
£m £m
UK US Other Total UK US Other Total
schemes schemes countries schemes schemes countries
Cash and cash equivalents
- Cash 41 17 58 593 593
- Liquidity funds 201 1 202 43 60 103
Equities
- UK funds 123 1 124 178 4 182
- North American funds 129 110 2 241 157 137 2 296
- other regions and global funds 227 47 16 290 269 57 14 340
Government bonds
- index-linked bonds 1,052 1,052 657 657
- fixed-interest bonds 171 71 11 253 92 65 11 168
Corporate bonds 284 199 2 485 267 181 2 450
Insured liabilities 783 783 811 1 812
Property
- UK property 174 174 181 181
- other property
Other 338 17 355 1 17 18
Total market value 3,523 445 49 4,017 3,249 500 51 3,800
SIPS has a synthetic equity investment strategy using exchange-traded futures to invest in global equity markets. At 31
July 2015 the aggregate value of these derivatives was a liability of less than £1m. UK other investments also include
£330m of investments in diversified growth funds held by SIPS. At 31 July 2014 SIPS was changing investment strategy, so it
held £326m cash that was reinvested in diversified growth funds shortly after the year-end.
The scheme assets do not include any property occupied by, or other assets used by, the Group. The only financial
instruments of the Group included in scheme assets are ordinary equity shares in Smiths Group plc held in broad-based
equity investment funds.
Liquidity funds, equities and bonds are valued using quoted market prices in active markets. Insured liabilities comprise
annuity policies matching the scheme obligation to identified groups of pensioners. These assets are valued at the
actuarial valuation of the corresponding liability, reflecting this matching relationship. Property is valued by
specialists applying recognised property valuation methods incorporating current market data on rental yields and
transaction prices.
Present value of funded scheme liabilities and assets for the main UK and US schemes
31 July 2015 31 July 2014
£m £m
SIPS TIGPS US SIPS TIGPS US
schemes schemes
Present value of funded scheme liabilities
- Active deferred members (92) (76) (102) (71) (74) (97)
- Deferred members (756) (625) (130) (714) (589) (221)
- Pensioners (995) (823) (336) (999) (810) (277)
Present value of funded scheme liabilities (1,843) (1,524) (568) (1,784) (1,473) (595)
Market value of scheme assets 1,813 1,693 445 1,639 1,594 500
Surplus/(deficit) (30) 169 (123) (145) 121 (95)
Net retirement benefit obligations
31 July 2015 31 July 2014
£m £m
UK US Other Total UK US Other Total
schemes schemes countries schemes schemes countries
Market value of scheme assets 3,523 445 49 4,017 3,249 500 51 3,800
Present value of funded scheme liabilities (3,385) (568) (57) (4,010) (3,275) (595) (65) (3,935)
Surplus/(deficit) 138 (123) (8) 7 (26) (95) (14) (135)
Unfunded pension plans (52) (7) (37) (96) (50) (6) (33) (89)
Post-retirement healthcare (7) (11) (1) (19) (7) (10) (1) (18)
Present value of unfunded obligations (59) (18) (38) (115) (57) (16) (34) (107)
Net pension liability 79 (141) (46) (108) (83) (111) (48) (242)
Post-retirement assets 169 1 170 121 2 123
Post-retirement liabilities (90) (141) (47) (278) (204) (111) (50) (365)
Net pension liability 79 (141) (46) (108) (83) (111) (48) (242)
Where any individual scheme shows a recoverable surplus under IAS 19, this is disclosed on the balance sheet as a
retirement benefit asset. The IAS 19 surplus of any one scheme is not available to fund the IAS 19 deficit of another
scheme. The retirement benefit asset disclosed arises from the rights of the employers to recover the surplus at the end of
the life of the scheme.
Amounts recognised in the consolidated income statement
Year ended Year ended
31 July 2015 31 July 2014
£m £m
Amounts charged/(credited) to operating profit
Current service cost 3 3
Settlement (gain)/loss (14)
Scheme administration costs 8 6
(3) 9
The operating cost is charged/(credited) as follows:
Cost of sales 1
Sales and distribution costs 1 1
Administrative expenses 9 8
Exceptional operating items (14)
(3) 9
Amounts charged to finance costs
Net interest cost 8 9
Amounts recognised directly in the consolidated statement of comprehensive income
Year ended Year ended
31 July 2015 31 July 2014
£m £m
Actuarial gains/(losses)
Difference between interest credit and return on assets 239 97
Experience gains and losses on scheme liabilities 46 6
Actuarial gains/(losses) arising from changes in demographic assumptions (15) 30
Actuarial gains/(losses) arising from changes in financial assumptions (210) (210)
Movements in surplus restriction
60 (77)
Changes in present value of funded scheme assets
31 July 2015 31 July 2014
£m £m
UK US Other Total UK US Other Total
schemes schemes countries schemes schemes countries
At beginning of period 3,249 500 51 3,800 3,146 501 49 3,696
Interest on assets 128 20 2 150 137 22 2 161
Actuarial gain on scheme assets 242 (6) 3 239 58 32 7 97
Employer contributions 53 23 3 79 53 26 3 82
Assets distributed on settlement (1) (1)
Scheme administration costs (4) (4) (8) (4) (2) (6)
Exchange adjustments 40 (5) 35 (52) (7) (59)
Benefits paid (145) (128) (4) (277) (141) (27) (3) (171)
At end of period 3,523 445 49 4,017 3,249 500 51 3,800
Changes in present value of funded defined benefit obligations
31 July 2015 31 July 2014
£m £m
UK US Other Total UK US Other Total
schemes schemes countries schemes schemes countries
At beginning of period (3,275) (595) (65) (3,935) (3,160) (621) (62) (3,843)
Current service cost (1) (1) (1) (1) (2)
Interest on obligations (128) (23) (3) (154) (136) (27) (3) (166)
Past service gain/(cost)
Actuarial (loss)/gain on liabilities (127) (43) 1 (169) (119) (39) (10) (168)
Liabilities extinguished on settlement 14 14
Exchange adjustments (49) 7 (42) 65 8 73
Benefits paid 145 128 4 277 141 27 3 171
At end of period (3,385) (568) (57) (4,010) (3,275) (595) (65) (3,935)
Changes in present value of unfunded defined benefit pensions and post-retirement healthcare plans
Assets Obligations
Year ended Year ended Year ended Year ended
31 July 2015 31 July 2014 31 July 2015 31 July 2014
£m £m £m £m
At beginning of period (107) (107)
Reclassification of small unfunded obligations (2)
Current service cost (2) (1)
Interest on obligations (4) (4)
Actuarial loss (10) (6)
Employer contributions 6 6
Exchange adjustments 4 5
Benefits paid (6) (6) 6 6
At end of period (115) (107)
Cash contributions
Company contributions to the funded defined benefit pension plans for 2015 totalled £79m (2014: £82m).
In 2016 the following cash contributions to the Group's principal defined benefit schemes are expected: £36m to SIPS; £17m
to TIGPS; and approximately £74m to other plans, including the US defined benefit scheme. Expected cash payments for 2016
total £127m.
In addition, in accordance with the current funding plan for SIPS, £2m a month will be invested in UK government bonds held
in escrow. A new funding plan is being negotiated with the SIPS trustees, following the 31 March 2015 valuation.
10 Employee share schemes
The Group operates share schemes and plans for the benefit of employees. The nature of the principal schemes and plans,
including general conditions, is set out below:
Long-Term Incentive Plan (LTIP)
The LTIP is a share plan under which an award over a capped number of shares will vest after the end of the three-year
performance period if performance conditions are met. Group LTIP awards are made to selected senior corporate executives,
including the executive directors. These awards have three performance conditions: 50% of the award is conditional on
three-year growth of headline EPS adjusted to exclude tax; 30% of the award is conditional on three -year TSR relative to
the FTSE 100 (excluding financial services companies); and 20% of the award is conditional on three -year average annual
headline operating cash conversion.
Divisional LTIP awards are made to selected divisional senior executives. Divisional LTIP awards made in 2014 have six
performance conditions:
· 30% conditional on average underlying revenue growth;
· 30% conditional on either revenue growth from successful acquisitions, where success is evaluated by measuring
performance relative to the acquisition case, or Return on Capital Employed (ROCE), depending on the divisional priorities.
ROCE is defined in note 26;
· 10% conditional on improvements in new product vitality;
· 10% conditional on growth in revenue from China;
· 10% conditional on achievement of an employee engagement target, measured relative to the dynamic IBM Employee
Engagement Index; and
· 10% conditional on improvements in divisional quality metrics.
Divisional LTIP awards made before 2014 have three performance conditions, and the relative significance of the conditions
reflects the strategic priorities for each division. The performance conditions are: 20% to 40% of the awards are
conditional on three -year revenue growth; 30% to 40% of the awards are conditional on three -year average annual headline
operating margins; and 30% to 40% of the awards are conditional on three -year average annual headline operating cash
conversion.
Each performance condition has a threshold below which no shares vest and a maximum performance target at or above which
the award vests in full. For performance between 'threshold' and 'maximum', awards vest on a straight-line sliding scale.
The performance conditions are assessed separately, so performance on one condition does not affect the vesting of the
other elements of the award. To the extent that the performance targets are not met over the three-year performance period,
awards will lapse. There is no re-testing of the performance conditions.
Smiths Group Co-Investment Plan (CIP)
Under the CIP participants are required to invest 50% of their post-tax bonus purchasing the Company's shares at the
prevailing market price. At the end of a three-year period, if the executive is still in office and provided the
performance test is passed, matching shares will be awarded in respect of any invested shares retained for that period. The
number of matching shares to be awarded is determined by the Remuneration Committee at the end of the year in which the
bonus is earned by reference to annual bonus, and other corporate financial criteria. The maximum award will not exceed the
value, before tax, of the bonus or salary invested in shares by the executive.
Vesting of matching shares will occur, and the matching shares will be released, at the end of the three-year period 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. If ROCE exceeds WACC by an
average margin of 3% per annum, the enhanced performance condition is met, and a second matching share will be issued for
every purchased share.
CIP Long-term Other share Total Weighted
incentive schemes average
plans price for
option plans
£
Ordinary shares under option ('000)
1 August 2013 1,874 2,367 2,086 6,327 £2.98
Granted 412 927 398 1,737 £2.27
Update of estimates 6 6 £0.00
Exercised (546) (349) (657) (1,552) £3.87
Lapsed (172) (256) (83) (511) £1.49
31 July 2014 1,568 2,695 1,744 6,007 £2.67
Granted 533 1,240 302 2,075 £1.31
Exercised (580) (258) (418) (1,256) £2.62
Lapsed (152) (1,028) (134) (1,314) £0.97
31 July 2015 1,369 2,649 1,494 5,512 £2.57
Options were exercised on an irregular basis during the period. The average closing share price over the financial year was
1,176.19p (2014: 1,353.95p). There has been no change to the effective option price of any of the outstanding options
during the period.
Range of exercise prices Total shares Weighted Total shares Weighted Options Exercisable Options Exercisable
under option at average under option at average exercisable at weighted exercisable at weighted
31 Jul 2015 remaining 31 Jul 2014 remaining 31 July 2015 average 31 July 2014 average
('000) contractual life at ('000) contractual life at ('000) exercise price ('000) exercise price
31 July 2015 31 July 2014 for options for options
(months) (months) exercisable at exercisable at
31 July 2015 31 July 2014
£0.00 - £2.00 4,018 15 4,263 9
£2.01 - £6.00 18 17 164 9 23 £5.69
£6.01 - £10.00 1,091 27 1,093 30 263 £8.97 463 £8.85
£10.01 - £14.00 385 25 487 34 257 £10.96 289 £10.96
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
key assumptions used in the models for 2015 and 2014 are volatility of 20% to 25% (2014: 25%) and dividend yield of 3.75%
(2014: 3.75%). Assumptions on expected volatility and expected option term have been made on the basis of historical data,
for the period corresponding with the vesting period of the option. These generated a weighted average fair value for CIP
of £12.47 (2014: £14.04), Group long-term incentive plans of £10.78 (2014: £12.26) and divisional long-term incentive plans
of £12.55 (2014: £14.12). The fair value disclosed for the CIP award treats the two matching shares as separate options.
Included within staff costs is an expense arising from share-based payment transactions of £9m (2014: £10m), of which £8m
(2014: £9m) relates to equity-settled share-based payment.
11 Intangible assets
Goodwill Development Acquired Software, Total
£m costs intangibles patents and intellectual property £m
£m (see table £m
below)
£m
Cost
At 1 August 2013 1,553 218 430 156 2,357
Exchange adjustments (156) (22) (42) (9) (229)
Business combinations 1 1
Additions 24 18 42
Disposals (3) (4) (2) (1) (10)
At 31 July 2014 1,395 216 386 164 2,161
Exchange adjustments 26 9 19 2 56
Additions 20 18 38
Disposals (8) (2) (7) (17)
At 31 July 2015 1,421 237 403 177 2,238
Amortisation
At 1 August 2013 98 94 308 111 611
Exchange adjustments (9) (10) (32) (7) (58)
Charge for the year 21 39 13 73
Disposals (3) (3) (2) (1) (9)
At 31 July 2014 86 102 313 116 617
Exchange adjustments 2 4 14 1 21
Charge for the year 23 33 15 71
Impairment charge 27 27
Disposals (8) (2) (6) (16)
At 31 July 2015 115 121 358 126 720
Net book value at 31 July 2015 1,306 116 45 51 1,518
Net book value at 31 July 2014 1,309 114 73 48 1,544
Net book value at 1 August 2013 1,455 124 122 45 1,746
In addition to goodwill, the acquired intangible assets comprise:
Patents, licences Technology Customer Total acquired intangibles
and trademarks £m relationships £m
£m £m
Cost
At 1 August 2013 75 144 211 430
Exchange adjustments (7) (14) (21) (42)
Business combinations
Disposals (2) (2)
At 1 August 2014 68 128 190 386
Exchange adjustments 4 10 5 19
Disposals (2) (2)
At 31 July 2015 72 136 195 403
Amortisation
At 1 August 2013 40 98 170 308
Exchange adjustments (4) (10) (18) (32)
Charge for the year 5 15 19 39
Disposals (2) (2)
At 31 July 2014 41 101 171 313
Exchange adjustments 2 8 4 14
Charge for the year 6 13 14 33
Disposals (2) (2)
At 31 July 2015 49 120 189 358
Net book value at 31 July 2015 23 16 6 45
Net book value at 31 July 2014 27 27 19 73
Net book value at 1 August 2013 35 46 41 122
12 Impairment testing
Goodwill
Goodwill is not amortised but is tested for impairment at least annually. Value in use calculations are used to determine
the recoverable amount of goodwill held allocated to each group of cash generating units (CGU). Value in use is calculated
as the net present value of the projected risk-adjusted cash-flows of the CGU. These forecast cash-flows are based on the
2016 budget, the four-year strategic plan approved by the Board and detailed divisional strategic projections, where these
have been prepared and approved by the Board.
Goodwill is allocated by division as follows:
2015 2015 2014 2014
£m Number of £m Number of
CGUs CGUs
John Crane 92 3 121 4
Smiths Medical 508 1 481 1
Smiths Detection 343 1 369 1
Smiths Interconnect 340 5 317 3
Flex-Tek 23 2 21 2
1,306 12 1,309 11
As required by IAS 36, the allocation of goodwill to CGUs for the Core Rotating Equipment business in John Crane has been
revised following the integration of the manufacturing operations of original equipment and aftermarket businesses.
Scenario tests modelling the previous allocation indicate that there would not have been any impairment under the previous
allocation.
The goodwill allocated to Smiths Interconnect Microwave has been split into three business units: Smiths Interconnect
Microwave Subsystems, Smiths Interconnect Microwave Telecoms and Smiths Interconnect Microwave Components, following a
restructuring of the Smiths Interconnect Microwave operations to increase business flexibility. There would not have been
any impairment if the three new CGUs had been tested on an aggregate basis.
Goodwill impairment
John Crane Production Solutions ("JCPS")
JCPS is a business unit of John Crane focused on the servicing and provision of onshore down-hole 'artificial lift' pumping
hardware and systems. Goodwill of £5m (2014: £30m) is allocated to JCPS. An impairment test was carried out In January 2015
because the significant decline in oil prices since 31 July 2014 had adversely affected JCPS customers. JCPS anticipated
that customers would scale back expansion plans and work to reduce running costs. Following this impairment test, the JCPS
goodwill has been impaired by £27m because JCPS is now expected to have lower operating margins and less growth in the
future, significantly reducing the value in use of the business.
The impairment loss has been recognised in John Crane administration expenses, and excluded from headline operating profit
for the division, as part of "impairment of goodwill and amortisation of acquired intangible assets".
Year ended Year ended
31 July 2015 31 July 2014
Impairment loss recognised £27m
Basis of valuation value in use value in use
Discount rate used for impairment test 12.9% 12.6%
Long-term growth rates 2.2% 2.2%
Sales assumptions for JCPS are based on:
· anticipated levels of maintenance and repair activities based on the current forward curve for oil prices; and
· expected North American drilling activity.
The gross margins included in the projections are lower than historical due to lower levels of activity. As required by
'IAS 36: Impairment of assets', margin projections for JCPS are based on the current fixed cost base, and do not
incorporate any future restructuring.
Impairment testing assumptions
John Crane and Smiths Medical have strong aftermarket and consumables businesses, with consistent sales trends. Smiths
Detection and Smiths Interconnect have greater sales and margin volatility due to lower levels of recurring revenue and
involvement in government-funded programmes, particularly defence, and customer-led technology innovation. The key
assumptions used in value in use calculations are:
· Sales: projected sales are built up with reference to markets and product categories. They incorporate past performance,
historical growth rates and projections of developments in key markets.
· Margins: projected margins reflect historical performance and the impact of all completed projects to improve
operational efficiency and leverage scale. The projections do not include the impact of future restructuring projects to
which the Group is not yet committed.
· Discount rate: the discount rates have been calculated based on the Group's weighted average cost of capital and risks
specific to the CGU being tested. The discount rates disclosed incorporate risk adjustments where the projected sales and
margins are affected by significant delivery risks. Pre-tax rates of 10.7% to 16.2% (2014: 10.7% to 13.6%) have been used
for the impairment testing.
· Long-term growth rates: as required by IAS 36, growth rates for the period after the detailed forecasts are based on the
long-term GDP projections of the primary market for the CGU. The average growth rate used in the testing was 2.16% (2014:
2.03%). These rates do not reflect the long-term assumptions used by the Group for investment planning.
The assumptions used in the impairment testing of significant CGUs are as follows:
Year ended 31 July 2015
John Crane Smiths Smiths Smiths Interconnect
Medical Detection
Core Rotating Equipment Microwave Connectors Power
Subsystems
Net book value of goodwill (£m) 82 508 343 72 85 123
Discount rate 11.9% 10.7% 14.4% 12.6% 15.4% 12.2%
Period covered by management projections 5 years 5 years 5 years 5 years 5 years 5 years
Long-term growth rates 2.0% 2.2% 2.2% 2.5% 1.5% 2.5%
Year ended 31 July 2014
Smiths Smiths Smiths Interconnect
Medical Detection
Microwave Connectors Power
Net book value of goodwill (£m) 481 369 124 79 114
Discount rate 10.7% 12.5% 13.6% 13.2% 11.4%
Period covered by management projections 5 years 5 years 5 years 5 years 5 years
Long-term growth rates 2.0% 2.3% 1.0% 1.5% 2.5%
The remaining balance of the goodwill represents smaller individual amounts which have been allocated to smaller CGUs.
Sensitivity analysis
Smiths Detection
Smiths Detection's value in use exceeds its carrying value by £117m (2014: £165m). Sensitivity analysis performed around
the base case assumptions has indicated that for Smiths Detection, the following changes in assumptions (in isolation),
would cause the value in use to fall below the carrying value:
Year ended 31 July 2015 Year ended 31 July 2014
Change required to trigger impairment Change required to trigger impairment
Forecast operating cash-flow 24% reduction 30% reduction
Discount rate 250 basis points higher 300 basis points higher
Long-term growth rates 670 basis points lower 690 basis points lower
Sales assumptions for Smiths Detection are based on:
· the current order book and tenders in progress, including airport, cargo scanning and military opportunities;
· expected market growth rates. Market growth drivers considered include
- passenger numbers for air transportation;
- global trade for cargo screening;
- increased regulatory standards to detect a wider range of substances at lower threat mass; and
- expected rate of replacement for units initially installed following 11 September 2001.
· expected rate of adoption of new products and technologies, including HI-SCAN 10080 XCT for baggage handling systems,
HI-SCAN 6040-2is for critical infrastructure and Ace-ID and IONSCAN 600 for trace; and
· forecast servicing of the installed product base.
Margin projections for Smiths Detection are based on historical margins, projected margins on tenders in progress and the
current fixed cost base.
Smiths Detection is currently implementing Fuel for Growth restructuring initiatives, see note 4. As a result, the
directors also reviewed the fair value less costs to sell for the division when considering the results of the impairment
testing. This additional work also indicated that the Smiths Detection goodwill was not impaired.
Smiths Interconnect Power
Smiths Interconnect Power's value in use exceeds its carrying value by £14m (2014: £8m). Sensitivity analysis performed
around the base case assumptions has indicated that for Smiths Interconnect Power, the following changes in assumptions (in
isolation), would cause the value in use to fall below the carrying value:
Year ended 31 July 2015 Year ended 31 July 2014
Change required to trigger impairment Change required to trigger impairment
Forecast operating cash-flow 10% reduction 6% reduction
Discount rate 100 basis points higher 40 basis points higher
Long-term growth rates 190 basis points lower 70 basis points lower
Sales assumptions for Smiths Interconnect Power are based on:
· the current order book;
· proportion of recent tenders which have been successful; and
· independent projections of the expected growth of the data centre market in North America.
Margin projections for Smiths Interconnect Power are based on current variable costs and production capacity, and the
expected costs of increasing capacity to support higher levels of sales.
The directors also reviewed the fair value less costs to sell for the division when considering the results of the
impairment testing, which also supported the conclusion that the Smiths Interconnect Power goodwill was not impaired.
Smiths Interconnect Microwave Components
Goodwill of £52m is allocated to Smiths Interconnect Microwave Components. The value in use, calculated using a discount
rate of 15.6% and a growth rate of 2.4%, exceeds its carrying value by £11m. Sensitivity analysis performed around the base
case assumptions has indicated that for Smiths Interconnect Microwave Components, the following changes in assumptions (in
isolation), would cause the value in use to fall below the carrying value:
Year ended 31 July 2015
Change required to trigger impairment
Forecast operating cash-flow 16% reduction
Discount rate 210 basis points higher
Long-term growth rates 490 basis points lower
Sales assumptions for Smiths Interconnect Microwave Components are based on:
· the current order book;
· sales projections from major customers; and
· developments in key customer markets including smartphone testing equipment.
Margin projections for Smiths Interconnect Microwave Components incorporate the variable cost structure of the current
production capacity.
The directors also reviewed the fair value less costs to sell for the division when considering the results of the
impairment testing, which also supported the conclusion that the Smiths Interconnect Microwave Components goodwill was not
impaired.
Other CGUs
For the other CGUs, sensitivity analysis performed around the base case assumptions has indicated that no reasonable
changes in key assumptions would cause the carrying amount of any of the CGUs to exceed their respective recoverable
amounts.
Other intangible assets
The Group has no indefinite life intangible assets other than goodwill. During the year impairment tests were carried out
for development projects which have not yet started to be amortised and acquired intangibles where there were indications
of impairment. Value in use calculations were used to determine the recoverable values of these assets.
No impairment charges have been incurred (2014: £nil).
13 Property, plant and equipment
Land and Plant and Fixtures, Total
buildings machinery fittings, £m
£m £m tools and
equipment
£m
Cost or valuation
At 1 August 2013 199 554 230 983
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