REG - Smiths Group PLC - Final Results <Origin Href="QuoteRef">SMIN.L</Origin> - Part 6

SmithsAnnouncement

23/09/2015 07:01

- Part 6: For the preceding part double click  ID:nRSW8822Ze 

future claims to the extent that such costs can be reliably estimated. Titeflex
Corporation sells flexible gas piping with extensive installation and safety guidance (revised in 2008) designed to assure
the safety of the product and minimise the risk of damage associated with lightning strikes. 
 
The assumptions made in assessing the appropriate level of provision, which are based on past experience, include: 
 
·  The period over which expenditure can be reliably estimated. 
 
·  The number of future settlements. 
 
·  The average amount of settlements. 
 
The projections use a rolling 10 year time horizon on the basis that there is substantial uncertainty in the US litigation
environment so probable expenditures are not reasonably estimable beyond this time horizon. 
 
The provision of £71m (2014: £61m) 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 7). 
 
                                31 July 2015  31 July 2014  
                                £m            £m            
 Gross provision                77            67            
 Discount                       (6)           (6)           
 Discounted pre-tax provision   71            61            
 Deferred tax                   (27)          (23)          
 Discounted post-tax provision  44            38            
 
 
Titeflex Corporation litigation provision sensitivities 
 
However, because of the significant uncertainty associated with the future level of claims and of the costs arising out of
related litigation, there can be no guarantee that the assumptions used to estimate the provision will result in an
accurate prediction of the actual costs that may be incurred and, as a result, the provision may be subject to potentially
material revision from time to time if new information becomes available as a result of future events. 
 
Titeflex Corporation contingent liabilities 
 
The Group anticipates that litigation might continue beyond the period covered by the provision. However, the uncertainty
surrounding the US litigation environment beyond this point (which reflects factors such as changing approaches on the part
of the plaintiffs' bar; changing attitudes amongst the judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems) is such that the costs cannot be reliably estimated. 
 
Other exceptional and legacy 
 
Legacy provisions comprise provisions relating to former business activities and properties no longer used by Smiths.
Exceptional provisions comprise all provisions which were disclosed as exceptional items when they were charged to the
consolidated income statement. 
 
These provisions cover exceptional reorganisation, vacant properties, disposal indemnities and litigation in respect of old
products and discontinued business activities. 
 
Reorganisation and property 
 
At 31 July 2015 there were provisions of £6m (2014: £6m) related to Fuel for Growth, £6m (2014: £7m) related to onerous
leases and dilapidations provisions, and £1m (2014: £1m) related to actual and potential environmental issues for sites
which were no longer occupied by Smiths operations. 
 
The Fuel for Growth provisions are expected to be spent in 2016. 
 
Disposal 
 
Other provisions include disposal provisions of £3m (2014: £3m) relating to warranties and other obligations in respect of
the disposal of the Marine Systems and Aerospace businesses. Most of the balance is expected to be utilised within the next
four years. 
 
24 Share capital 
 
                                      Number of shares  Issued capital  Consideration  
                                                        £m              £m             
 Ordinary shares of 37.5p each                                                         
 At 31 July 2013                      393,818,510       148                            
 Exercise of share options            637,625                           6              
 At 31 July 2014                      394,456,135       148                            
 Exercise of share options            403,869                           3              
 Total share capital at 31 July 2015  394,860,004       148                            
 
 
At 31 July 2015 all of the issued share capital was in free issue. All issued shares are fully paid. 
 
25 Dividends 
 
The following dividends were declared and paid in the period: 
 
                                                                                  Year ended     Year ended     
                                                                                  31 July 2015   31 July 2014   
                                                                                  £m             £m             
 Ordinary final dividend of 27.50p for 2014 (2013: 27.00p) paid 21 November 2014  108            107            
 Special dividend of 30.00p for 2013 paid 22 November 2013                                       118            
 Ordinary interim dividend of 13.00p for 2015 (2014: 12.75p) paid 24 April 2015   52             50             
                                                                                  160            275            
 
 
The final dividend for the year ended 31 July 2015 of 28.00p per share was recommended by the Board on 22 September 2015
and will be paid to shareholders on 20 November 2015, subject to approval by the shareholders. This dividend has not been
included as a liability in these accounts and is payable to all shareholders on the register of Members at close of
business on 23 October 2015. 
 
26 Reserves 
 
Retained earnings include the value of Smiths Group plc shares held by the Smiths Industries Employee Benefit Trust. In the
year the Company issued nil (2014: nil) shares to the Trust, and the Trust purchased 838,032 shares (2014: 895,489 shares)
in the market. At 31 July 2015 the Trust held 852 (2014: 855) ordinary shares. 
 
The capital redemption reserve, revaluation reserve and merger reserve arose from: share repurchases; revaluations of
property, plant and equipment; and merger accounting for business combinations before the adoption of IFRS, respectively. 
 
Capital management 
 
Capital employed comprises total equity adjusted for goodwill recognised directly in reserves, net post-retirement benefit
related assets and liabilities, net litigation provisions relating to exceptional items and net debt. The efficiency of the
allocation of the capital to the divisions is monitored through the return on capital employed (ROCE). This ratio is
calculated over a rolling 12-month period and is the percentage that headline operating profit comprises of monthly average
capital employed. The ROCE was 16.0% (2014: 15.7%). 
 
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 16% (2014: 15%). 
 
The ratio of net debt to headline EBITDA of 1.4 (2014: 1.4) is close to the medium term target of 1.5 to 2.0. The Group's
robust balance sheet and record of strong cash generation is more than able to fund the immediate investment needs and
other legacy obligations. 
 
As part of its capital management the Group strategy is to maintain a solid investment grade credit rating to ensure access
to the widest possible sources of financing and to minimise the resulting cost of capital. At 31 July 2015 the Group had a
credit rating of BBB+/Baa2 (2014: BBB+/Baa2) with Standard & Poor's and Moody's respectively. The credit rating is managed
through the following cash-flow targets: headline operating cash conversion of greater than 90% and a ratio of net debt to
headline EBITDA of less than two. For the year ended 31 July 2015 these measures were 95% (2014: 97%) and 1.4 (2014: 1.4). 
 
The Board aims for dividend cover of around 2.5 times, to ensure that the Group retains sufficient cash to finance
investment in growth and to meet its legacy liabilities. 
 
Hedge reserve 
 
                                                     31 July 2015  31 July 2014  
                                                     £m            £m            
 The hedge reserve on the balance sheet comprises                                
 - cash-flow hedge reserve                           3                           
 - net investment hedge reserve                      (66)          (58)          
                                                     (63)          (58)          
 
 
See transactional currency exposure risk management disclosures in note 19 for additional details of cash-flow hedges, and
translational currency exposure risk management disclosure also in note 19 for additional details of net investment
hedges. 
 
27 Cash-flow 
 
Cash-flow from operating activities 
 
                                                     Year ended     Year ended     
                                                     31 July 2015   31 July 2014   
                                                     £m             £m             
 Operating profit - continuing                       394            378            
 Amortisation of intangible assets                   71             73             
 Impairment of intangible assets                     27                            
 Loss on disposal of property, plant and equipment   1              2              
 Loss/(profit) on disposal of business               1              (3)            
 Depreciation of property, plant and equipment       49             46             
 Share-based payment expense                         8              9              
 Retirement benefits                                 (85)           (79)           
 (Increase)/decrease in inventories                  (30)           4              
 Decrease/(increase) in trade and other receivables  11             (13)           
 Decrease in trade and other payables                (4)            (9)            
 (Decrease)/increase in provisions                   (22)           19             
 Cash generated from operations                      421            427            
 Interest                                            (64)           (76)           
 Tax paid                                            (91)           (95)           
 Net cash inflow from operating activities           266            256            
 
 
Smiths Group cash-flow measures 
 
The Group uses two non-statutory cash-flow measures to monitor performance: headline operating cash-flow and free
cash-flow. Headline operating cash-flow is net cash inflow from headline operating activities less capital expenditure. See
note 3 for a description of headline profit measures. Free cash-flow is cash-flow after interest and tax but before
acquisitions, financing activities and dividends. The tables below reconcile these two measures to statutory cash-flow
measures. 
 
Headline operating cash-flow 
 
                                                                                                    Year ended     Year ended     
                                                                                                    31 July 2015   31 July 2014   
                                                                                                    £m             £m             
 Net cash inflow from operating activities                                                          266            256            
 Exclude:                                                                                                                         
 Interest                                                                                           64             76             
 Tax paid                                                                                           91             95             
 Cash outflow in respect of exceptional operating items                                             66             74             
 Pension deficit payments                                                                           84             82             
 Include:                                                                                                                         
 Expenditure on capitalised development, other intangible assets and property, plant and equipment  (95)           (94)           
 Disposals of property, plant and equipment in the ordinary course of business                      8              1              
 Headline operating cash-flow                                                                       484            490            
 
 
Free cash-flow 
 
                                                                                                    Year ended     Year ended     
                                                                                                    31 July 2015   31 July 2014   
                                                                                                    £m             £m             
 Net cash inflow from operating activities                                                          266            256            
 Expenditure on capitalised development, other intangible assets and property, plant and equipment  (95)           (94)           
 Disposals of property, plant and equipment                                                         11             5              
 Investment in financial assets relating to pensions financing                                      (24)           (24)           
 Free cash-flow                                                                                     158            143            
 Investment in other financial assets                                                               (3)            (4)            
 Acquisition of businesses                                                                                         (1)            
 Disposal of businesses                                                                             2              3              
 Net cash-flow used in financing activities                                                         147            (313)          
 Net increase/(decrease) in cash and cash equivalents                                               304            (172)          
 
 
This information is provided by RNS
The company news service from the London Stock Exchange