REG - Smiths Group PLC - Smiths Group Full Year 24 results
24/09/2024 07:15
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RNS Number : 3261F Smiths Group PLC 24 September 2024
SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHS ENDED 31 JULY 2024
Pioneers of progress - engineering a better future
Continued good delivery against our strategy; well positioned for ongoing
value creation
· Good financial results for the year: +5.4% organic(1) revenue growth,
16.8% headline(2) operating profit margin and +8.3% headline(2) EPS growth
· Headline(2) operating cash conversion of 97%; strong balance sheet
0.3x net debt/EBITDA; proposed final dividend of 30.2p, up +5.2%
· Announcing today two strategic and disciplined acquisitions for up to
£110m, enhancing Flex-Tek's HVAC(3) and industrial heating businesses
· Continued focus on high-performance, purpose-based culture and ESG
initiatives
· Launching a Group-wide Acceleration Plan to enhance profitability and
productivity, for one-off costs totalling £60-65m in the period
FY2025-FY2026; £30-35m of annualised benefits in FY2027
· Expect FY2025 organic revenue growth of 4-6%, with continued margin
expansion
· Reaffirming medium-term financial targets and strategic focus on
growth, people and execution
Roland Carter, Chief Executive Officer, commented:
"I am pleased to report strong organic revenue growth against a record
comparator, continued headline operating profit margin expansion and two new
acquisitions. I am also pleased to guide to further growth and margin
expansion in FY2025 and reaffirm our medium-term financial targets. We are
making good strategic, operational and financial progress, and all our
businesses are well positioned for compelling value creation.
"We have high-quality teams, an incredible breadth of engineering excellence,
and a relentless focus on our customers. Effective strategy execution is
enhancing our performance - and we will build on, and out from, this solid
foundation, enabling us to grow more profitably to make Smiths even better.
This will be delivered through improved prioritisation of investment in
R&D and innovation to power organic growth; the Group-wide Acceleration
Plan, which is designed to drive productivity and profitability - bringing
delivery of our medium-term margin target closer; and disciplined M&A, all
of which offer the opportunity to augment overall performance.
"As a team, we focus on solving our customers' toughest problems and are
united by our purpose of engineering a better future. Thank you to all my
colleagues for a great year. I look forward to achieving even more together,
as we continue to accelerate value creation for all our stakeholders."
Headline(2) FY2024 FY2023 Reported Organic(1)
Revenue £3,132m £3,037m +3.1% +5.4%
Operating profit £526m £501m +5.0% +7.1%
Operating profit margin(4) 16.8% 16.5% +30bps +34bps
Basic EPS 105.5p 97.5p +8.3%
ROCE(4) 16.4% 15.7% +70bps
Operating cash conversion(4) 97% 86% +11pps
Statutory FY2024 FY2023 Reported
Revenue £3,132m £3,037m +3.1%
Operating profit £415m £403m +3.0%
Profit for the year (after tax) £251m £232m +8.2%
Basic EPS 72.3p 65.5p +10.4%
Dividend per share 43.75p 41.6p +5.2%
Statutory reporting and definitions
Statutory reporting takes account of all items excluded from headline
performance. See accounting policies for an explanation of the presentation of
results and note 3 to the financial statements for an analysis of non-headline
items. The following definitions are applied throughout the financial report:
(1) Organic is headline adjusted to exclude the effects of foreign exchange
and acquisitions.
(2) Headline: In addition to statutory reporting, the Group reports on a
headline basis. Definitions of headline metrics, and information about the
adjustments to statutory measures, are provided in note 3 to the financial
statements.
(3) Heating, ventilation and air conditioning.
(4) Alternative Performance Measures (APMs) and Key Performance Indicators
(KPIs) are defined in note 29 to the financial statements.
Presentation
A webcast presentation and Q&A will begin at 08.30 (UK time) today at:
https://smiths.com/investors/results-reports-and-presentations
(https://smiths.com/investors/results-reports-and-presentations) . A recording
will be available from 13.00 (UK time).
Investor enquiries Media enquiries
Siobhán Andrews, Smiths Group Tom Steiner, Smiths Group
+44 (0)7920 230093 +44 (0) 7787 415891
siobhan.andrews@smiths.com (mailto:siobhan.andrews@smiths.com) tom.steiner@smiths.com (mailto:smiths@fticonsulting.com)
Ana Pita da Veiga, Smiths Group Alex Le May, FTI Consulting
+44 (0)7702 443312
+44 (0)7386 689442
smiths@fticonsulting.com (mailto:smiths@fticonsulting.com)
ana.pitadaveiga@smiths.com (mailto:ana.pitadaveiga@smiths.com)
Our Purpose
We are pioneers of progress - engineering a better future. We are focused on
solving the toughest problems for our customers, helping address critical
global needs such as safety and security, decarbonisation and the
ever-increasing demand for connectivity. At the same time, we are building the
long-term strength and resilience of Smiths Group and our global operations.
We are united by our purpose. It is what we do, how we think, and how we will
continue to use our passion for innovative technology and engineering.
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
This document contains certain statements that are forward-looking statements.
They appear in a number of places throughout this document and include
statements regarding the intentions, beliefs and/or current expectations of
Smiths Group plc (the Company) and its subsidiaries (together, the Group) and
those of their respective officers, directors and employees concerning,
amongst other things, the results of operations, financial condition,
liquidity, prospects, growth, strategies, and the businesses operated by the
Group. By their nature, these statements involve uncertainty since future
events and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements reflect
knowledge and information available at the date of preparation of this
document and, unless otherwise required by applicable law, the Company
undertakes no obligation to update or revise these forward-looking statements.
The Company and its directors accept no liability to third parties. This
document contains brands that are trademarks and are registered and/or
otherwise protected in accordance with applicable law.
UPCOMING EVENTS
Date Event
17 October 2024 Final Ex-Dividend Date
18 October 2024 Final Dividend Record Date
13 November 2024 Q1 Trading Update and Annual General Meeting
22 November 2024 Final Dividend Payment Date
SUMMARY
I am pleased to report a good performance at my first set of results as CEO.
We delivered further progress, with organic revenue growth of +5.4% and a
+30bps increase in headline operating profit margin to 16.8%, both in line
with guidance, and headline earnings per share growth of 8.3%. We improved
headline operating cash conversion to 97% through a focus on working capital.
We have announced two highly attractive acquisitions for up to £110m,
deploying capital in a disciplined way whilst maintaining our strong balance
sheet. We are well set for continued delivery in FY2025, and beyond.
During the last six months, we have been reviewing the Group's current
strategy to define our future direction. From my 35-year career at Smiths, I
have a deep appreciation of the Group's compelling attributes. Smiths has many
strengths, and our businesses are well positioned for the future - leading
positions in attractive markets, world-class engineering expertise,
differentiated proprietary technology, strong brands and talented people
united by a purpose-led, innovative and continuous improvement culture.
Effective execution of our strategy has enhanced our performance, but there is
more we can do - and we will build on, and out from, this solid foundation.
Our strategic priorities around growth, people and execution will remain,
although there are a number of important changes:
· We remain resolutely focused on delivering continued profitable
organic growth, but we will work harder to focus our innovation and the
commercialisation of our new products. In addition, we will increase the
importance of moving into new, higher-growth adjacencies with targeted
allocation of our R&D resources. Highly disciplined M&A offers
additional opportunities. This is demonstrated by the acquisitions announced
for Flex-Tek, and we now have a more active acquisition pipeline to accelerate
the pace of strategy execution;
· Our talented people and our purpose-led culture serve us well in
delivering value for our customers, but the recent foundational work in
values, leadership behaviours and culture must make a real long-term
difference to how we operate. We will ensure that talent attraction and
leadership development initiatives permeate through the Group, benefiting all.
We are also taking a more end-to-end approach to improve business-level
processes by implementing a global shared business services model which will
provide improved cost-effective support; and
· The Smiths Excellence System (SES) is our way of working, and Lean
and continuous improvement activities will be driven at the grass roots level,
rather than led 'top-down' from Group. In addition, to deliver our operating
margin target faster, we are launching a Group-wide Acceleration Plan which
identifies a set of business-led transformational initiatives to enhance
margin, improve productivity and build capabilities.
We see significant opportunities within all our businesses to deliver
substantial additional value creation from this approach.
STRATEGY UPDATE
Compelling portfolio of leading businesses
Our portfolio position is compelling - with resilient and competitively
advantaged businesses. Our businesses have independent products, customers and
go-to-market models. Even so, they share similar customer-facing capabilities
and common characteristics, an opportunity we can, and will, take better
advantage of. For example, deep-seated manufacturing and process knowledge,
aftermarket service, digital, automation and material technologies are all
mutual characteristics we can better leverage to enhance how we support our
customers, how we perform, and to create and sustain Group-wide competitive
advantage.
Group functions will continue to provide strong, effective oversight and
governance. We will improve these by developing and expanding the remit of our
global shared business services - to cover all businesses and key support
functions in addition to IT, which it already manages in a cost-effective way.
We will continue to deploy SES, an important element of which is Lean -
reducing waste and improving efficiency to enhance our operations - with Lean
leaders at our major sites, maintaining the pace of continuous improvement.
This common Group approach takes operational excellence to another level of
maturity, alongside talent development and capital allocation, and will ensure
consistent strategy execution, optimal capital allocation and cost-effective
portfolio management.
Positioned in secularly attractive markets
We are positioned in attractive markets that we believe offer significant
opportunities for profitable growth - energy, safety and security, aerospace
and defence, general industrial - where we are helping our customers to make
the world safer, more energy efficient and productive, as well as better
connected. These markets are exposed to positive megatrends:
· Safety and security - in the context of an increasing prevalence of
travel and cross-border trade, alongside increasing threats and greater
geopolitical instability;
· Energy efficiency - the requirement for energy diversification as
well as reductions in emissions, coupled with the rise in infrastructure
development;
· Productivity - within the industrial world, the need to manage the
use of resources and raw materials efficiently is critical, and will support
the development of the circular economy; and
· Better connectivity - the demand for data is continually increasing
as the world becomes more connected and computing power expands, requiring new
technologies across many sectors.
We will continue to focus on accessing the growth that these markets offer,
with a clear view to capturing market share and expanding our addressable
markets.
Participation in attractive new market adjacencies to accelerate growth
As well as driving growth in our existing markets, we will look to build out
priority adjacencies to accelerate our growth, for example into new sealing
solutions and services at John Crane; next generation threat detection at
Smiths Detection; electrical industrial process heat at Flex-Tek; and
high-speed satellite communications at Smiths Interconnect. Accessing these
adjacent opportunities will be done both organically through dedicated R&D
spend, and through disciplined M&A, to augment our organic growth focus.
We have a strong balance sheet and the flexibility to support a range of
growth opportunities and will continue to allocate capital in a disciplined
way for value creation. The priorities here are unchanged - organic investment
(R&D and capex) will remain our primary focus, followed by strategic and
disciplined M&A, and then returning excess capital to shareholders through
our progressive dividend and, when compelling, share buybacks.
As evidenced by the new acquisitions for Flex-Tek, we have a more active
acquisition pipeline than historically, providing us with a greater set of
opportunities through which we can grow our businesses, but will maintain our
strict value creation discipline.
Investing in proprietary technology, differentiated products and service
capability
Innovation takes place on many levels within Smiths: new products and
services, new ways of manufacturing and new ways of exploiting technology. Our
innovation capability and ongoing investment in developing differentiated,
proprietary technologies and solutions ensures that we maintain a robust,
value-oriented approach to commercialising new products. Our new product
pipeline is focused on responding to emerging customers' needs and bringing
next-generation technology to market.
We have a high proportion of recurring revenue through our aftermarket and
services in John Crane and Smiths Detection, and we are looking at additional
ways to improve customer intimacy and capture greater value here; for example
through expanded services, as well as digital and software applications. We
will also partner with customers to develop solutions to demanding
specifications, again leveraging Group-wide skills and experience to better
commercialise these types of growth opportunities.
Launching Acceleration Plan to drive Group-wide productivity and capability
enhancements
We continue to drive productivity and process improvements and further embed
deployment of SES which has delivered tangible benefits and contributed to
recent margin expansion. However, we now need to capture the next level of
improvements to accelerate the realisation of our medium-term margin target
and deliver process improvements for resilience and scalability over the
longer term.
To achieve this, and in addition to our planned SES activity, we are now
launching a Group-wide Acceleration Plan. This comprises a number of discrete
initiatives focused on delivering the next wave of productivity and capability
enhancements across all our businesses.
This proposed programme has identified £30-35m of potential annualised
benefits, of which around a quarter are planned to be realised during FY2026,
with the full benefit in FY2027. Delivering these ongoing savings will result
in one-off costs totalling approximately £60-65m, of which approximately
£30-35m will be spent in FY2025 and £30m in FY2026, plus an additional £10m
of capex in FY2025. Benefits and savings areas are focused on: process,
improving organisational effectiveness through simplifying interaction and
processes for our customers and our colleagues, and property, through a
footprint optimisation review. Where required, we will consult appropriately
with colleagues around the planned changes. It is now the right time to invest
in these ambitions, to drive operating margin expansion and competitiveness
more rapidly as we continue to grow.
Purpose-based and high-performing culture
Delivering on our growth and execution priorities requires the dedication and
commitment of all our colleagues; and we are committed to doing more to
inspire and empower them. Safety will continue to be our highest priority and
we remain committed to maintaining our top quartile performance by elevating
the focus on this around the Group even further. Our purpose-based culture is
strong, and we continue to evolve our approach where talent development,
engagement and inclusion and sustainability all define how we operate. I have
worked with, supported and been supported by many colleagues over the years,
and I am excited about what the future holds and what we can deliver together.
Reaffirming medium-term targets, underpinned by our performance framework
This focused strategic and operational plan is the means through which we will
realise the medium-term financial targets that we previously set. We have
again made solid progress against these targets in FY2024 and continue to
believe these are the right metrics and set the right ambition.
We are reaffirming these financial targets. In FY2024, we are already within
the target range for three of these metrics and are clear on the key actions
needed to achieve them for operating profit margin. Each of our businesses has
a clear roadmap to improve profitability. Given our investment in growth, we
now believe a cash conversion of around 100% through the cycle is more
appropriate than 100%+.
Targets Medium-Term Target FY2024
Organic Revenue Growth 4-6% (+ M&A) +5.4%
Headline EPS Growth 7-10% (+ M&A) +8.3%
ROCE 15-17% 16.4%
Headline Operating Profit Margin 18-20% 16.8%
Headline Operating Cash Conversion ~100% 97%
FY2025 outlook
For FY2025, we expect organic revenue growth to be within our medium-term
target range of 4-6%. A strong demand backdrop and good order book visibility
underpin our positive view for John Crane and Smiths Detection, although
growth is expected to moderate from the strong performance seen in FY2024.
Good demand in aerospace, alongside the pace of market recovery in US
construction, will determine the pace of growth in Flex-Tek, and recovery in
semiconductor test alongside growth in aerospace and defence-related
programmes underpins our expectation for an improving performance in Smiths
Interconnect.
We also expect continued margin expansion in FY2025, reflecting operational
leverage, continued deployment of SES and Lean initiatives, and our
reinvestment to support future sustainable growth. Headline operating cash
conversion is expected to be in the low nineties percent given an increase in
capex to around £110m. This will be weighted towards the second half of the
year, reflecting timing of machining capacity and automation investments,
mainly in John Crane.
FY2024 BUSINESS PERFORMANCE
Smiths delivered organic revenue growth of +5.4% in FY2024. We generated
£526m of headline operating profit, up +7.1% on an organic basis year-on-year
and a +30bps margin improvement as we continue to drive growth, improve
execution, and invest in our people.
Revenue grew +3.1% on a reported basis to £3,132m (FY2023: £3,037m). This
included a (£119m) negative foreign exchange translation impact and +£57m
from the acquisitions of Heating and Cooling Products (HCP) and Plastronics.
FY2023 Foreign Acquisitions Organic FY2024
exchange movement
£m
Revenue 3,037 (119) 57 157 3,132
Headline operating profit 501 (21) 12 34 526
Headline operating profit margin 16.5% 16.8%
Growth
Accelerating growth is key to value creation for the Group. We have now
delivered three years of organic revenue growth, with momentum improving
through FY2024. Organic revenue growth of 3.9% in the first half was followed
by 6.8% in the second half.
Organic revenue growth (by business) H1 2024 H2 2024 FY2024
John Crane +12.7% +7.1% +9.8%
Smiths Detection +8.9% +13.2% +11.1%
Flex-Tek (4.1)% +2.6% (0.8)%
Smiths Interconnect (13.7)% +0.4% (6.5)%
Smiths Group +3.9% +6.8% +5.4%
Strong growth continued for our two larger businesses, with more challenging
end market dynamics in our other two businesses, although both returned to
growth in the second half:
· John Crane's growth was led by energy, especially in aftermarket, as
it executed on its strong order book;
· Smiths Detection's growth reflected strength in aviation,
particularly for computed tomography for airport checkpoints;
· Flex-Tek's performance reflected ongoing US construction market
headwinds, which more than offset strength in aerospace; and
· Smiths Interconnect's performance reflected weakness in connectors
and the semiconductor test end market.
Our business operates across four major global end markets: General
Industrial, Safety & Security, Energy, and Aerospace & Defence.
Organic revenue growth % of Smiths H1 2024 H2 2024 FY2024
(by end market(1))
revenue
General Industrial 39% (5.5)% (1.5)% (3.5)%
Safety & Security 27% +8.9% +13.2% +11.1%
Energy 23% +16.6% +15.3% +15.9%
Aerospace & Defence 11% +2.9% +4.8% +3.9%
Smiths Group 100% +3.9% +6.8% +5.4%
1 Our end market allocations have been revised such that Smiths Interconnect's
revenue related to aerospace and defence has been moved from Safety &
Security into Aerospace & Defence. FY2023 has been restated on this new
basis. See note 1 to the financial statements for further information.
· In General Industrial, the decline reflected weaker demand in
construction for Flex-Tek's heating, ventilation and air conditioning (HVAC)
products and Smiths Interconnect semiconductor test and connectors products,
with John Crane's industrial performance flat year-on-year;
· Safety & Security growth reflected Smiths Detection's continued
strong delivery against its order book;
· Energy growth reflected robust demand at John Crane and execution
against its strong order book; and
· In Aerospace & Defence, new aircraft build programmes drove
demand at Flex-Tek which was partly offset by phasing in some aerospace and
defence-related programmes in Smiths Interconnect.
Organic growth is supported by new product development and commercialisation.
In FY2024, 200bps of growth was delivered from high impact new products
including John Crane's next-generation diamond coating product, Smiths
Detection's iCMORE and the latest generation of high-speed semiconductor test
sockets (DaVinci 112) from Smiths Interconnect. Gross vitality, which measures
the proportion of revenues coming from products launched in the last five
years, was 28.5% (FY2023: 31%), supported by our successful new product
commercialisation.
We also augment our organic growth with disciplined M&A and today have
announced two acquisitions with a combined value of £95m at an EBITDA
multiple of c.8x, enabling expansion in Flex-Tek's HVAC and electrical heating
solutions platforms. An additional amount of up to £15m is payable subject to
the performance of one of the acquisitions over a three-year period.
· Modular Metal Fabricators, Inc. (Modular Metal) is a US-based metal
and flexible ducting manufacturer which expands Flex-Tek's geographical
presence in the western US and broadens its product range to include Modular
Metal's sealed flexible duct solution. This acquisition builds on our August
2023 acquisition of HCP, which expanded our geographical coverage in North
America and added HCP's patented axial and radial seal duct products.
· Through the acquisition of Wattco, Inc. (Wattco), Flex-Tek expands
into medium temperature immersion and circulation heating - an attractive
market adjacency and highly complementary to our existing open coil electrical
heating businesses. This acquisition follows our successful acquisition of
SureHeat in 2017. Wattco also brings additional capability in terms of
supplying vertically integrated heating solutions and will be integrated into
the Flex-Tek heat solutions business.
· The acquisition of Wattco has already completed, while Modular Metal
is expected to complete in Q1 FY2025.
Execution
Stronger execution remains a key priority, with an improving financial
performance again in FY2024. Headline operating profit rose +7.1% (+£34m) on
an organic basis, and +5.0% (+£25m) on a reported basis, to £526m (FY2023:
£501m).
FY2023 Foreign Acquisitions Organic FY2024
exchange movement
£m
Headline operating profit 501 (21) 12 34 526
Headline operating profit margin 16.5% (10)bps 10bps 30bp 16.8%
Headline operating profit margin was 16.8%, up +34bps on an organic and +30bps
on a reported basis, and in line with guidance of continued margin expansion,
reflecting operational leverage and efficiency improvements, alongside
reinvestment to support future growth.
Headline operating profit margin (by business) FY2023 FY2024
John Crane 22.6% 23.2%
Smiths Detection 11.2% 11.9%
Flex-Tek 19.4% 20.5%
Smiths Interconnect 16.0% 13.9%
Smiths Group 16.5% 16.8%
Three of our businesses delivered margin expansion:
· John Crane had good operating leverage on the higher sales volume,
partially offset by mix impacts from higher systems sales and while continuing
to reinvest in capacity expansion, sales and service to support current and
future growth;
· Smith's Detection delivered a 70bps increase in margin, reflecting
higher volumes and improving operational efficiency in the second half;
· Flex-Tek delivered a higher margin, despite the lower organic
revenue, reflecting a positive mix impact and good cost control; and
· Smiths Interconnect posted a margin decline reflecting the lower
year-on-year volumes, despite cost control initiatives.
And at a Group level, we invested in several growth initiatives which were
funded by the benefits from the Smiths Excellence System and other savings
projects, and which offset each other.
ROCE increased +70bps to 16.4% (FY2023: 15.7%) reflecting the higher
profitability of the Group, which also translated to growth in headline EPS of
+8.3% to 105.5p. This reflected a headline tax charge of £122m (FY2023:
£121m) which represents an effective rate of 25.0% (FY2023: 26.0%) and also
benefited from the share buyback programme, partially offset by foreign
exchange impacts.
The focus on execution also enhanced headline operating cash conversion, which
improved to 97% (FY2023: 86%), supported by a year-on-year improvement in
working capital. Headline operating cashflow was £509m (FY2023: £433m) and
free cashflow generation increased +67% to £298m (FY2023: £178m) or 57% of
headline operating profit (FY2023: 35%).
SES is one of our key initiatives to enhance execution and support the
delivery of our medium-term financial targets. SES projects delivered a £23m
benefit to headline operating profit in FY2024 (FY2023: £14m), in line with
expectations. SES is the way we work at Smiths and is supported by our cohort
of Black Belts (BBs) and Master Black Belts (MBBs). As our first cohort return
to leadership roles across the Group, SES learnings are better embedded within
the businesses, and to continue this process, new MBBs and BBs have been
appointed. In addition, our major sites have Lean leaders in place to
continually assess processes and ingrain Lean practices at the local level.
We are also executing well against our ESG framework, with progress against
our sustainability metrics, which are now fully incorporated into both our
annual and long-term incentives. We continue proactively to manage reductions
in the environmental impact of our operations and manufacturing processes.
Environmental metrics FY2023 FY2024 FY2022-2024 FY2022-2024
Target
Energy efficiency(1) 7.9% 5.9% n/a n/a
improvement
improvement
Normalised Scope 1 & 2 GHG(2) emissions reductions(3) 21% reduction 20% reduction 42% reduction 16.4% CAGR 5% CAGR
Absolute Scope 1 & 2 GHG(2) emission reductions 11.8% reduction 10.7% reduction 22% reduction n/a
Proportion of electricity from renewable sources 70% 73% 12% increase 5% increase 3Y
Normalised non-recyclable waste(4) 9.8% reduction 0.1% increase 19% reduction 5% reduction 3Y
Normalised water use in stressed areas(4,5) 13.3% reduction 0.6% increase 17% reduction 5% reduction 3Y
1 The energy efficiency ratio is expressed as the MWh energy consumed
(excluding renewable electricity produced and consumed onsite), divided by
revenue (excluding price growth within the measurement year), and excludes
HCP.
2 Scope 1, 2 and 3 GHG emissions calculated in accordance with the WRI/WBCSD
Greenhouse Gas Protocol.
3 Normalised for revenue excluding price increases and excluding HCP
acquisition.
4 Normalised to reported revenue.
5 Across 10 identified water stressed areas.
We have been tracking our environmental performance since 2007 and set new
three-year targets in FY2022. Over the three-year period FY2022-FY2024, our
Scope 1 and 2 emissions have reduced by 42% - in line with our net zero
Greenhouse Gas (GHG) emission targets which were validated by the Science
Based Targets initiative during the year. Also over this period, we improved
energy efficiency, around 73% of our electricity now comes from renewable
sources and we continue to target additional locations for onsite renewable
energy installation.
We have set out new targets for FY2025-FY2027. These include new metrics on
supplier engagement in support of our ESG commitments and reporting. In
FY2024, we engaged a new third-party supplier management platform - EcoVadis -
and launched a supply chain due diligence policy which, together, will help us
manage supplier relationships to explicitly support our ESG commitments and
reporting.
Environmental Metrics Target FY2025-2027
Energy reduction(1) 2% in FY2025
Renewable energy 80% by FY2027
Absolute Scope 1 & 2 GHG(2) 17.5% reduction by FY2027
Supplier engagement 40% of supplier spend evaluated on EcoVadis by FY2027
Supplier engagement Scope 3 25% of supplier spend committed to SBTi targets by FY2027
1 Year-on-year reduction in absolute MWh consumed (target depending on
revenue).
2 Scope 1 & 2 GHG emissions calculated in accordance with the WRI/WBCSD
Greenhouse Gas Protocol.
People
Safety, alongside health and well-being, is an essential foundation of our
success. Our FY2024 recordable incident rate was 0.44 (FY2023: 0.41), with the
increase primarily reflecting the acquisition of HCP, where its safety culture
is being aligned with that of Smiths following its integration. Our key focus
is on sustainable preventative action including active promotion of a safety
culture and engagement, safety leadership, skills and designing out risk and
this is reinforced on a daily basis through safety leading indicator
activities, comprising peer-to-peer observations and leadership tours. A key
event in the year was our three-day global Health, Safety & Environment
(HSE) conference which covered topics including safety culture, the connection
between SES and HSE, and hazard perception and risk assessment. To supplement
the focus on our physical security, we are developing a mental health and
well-being strategy which will be deployed in FY2025.
To support talent development, the rollout of Accelerate, our bespoke training
programme for senior leaders continued. It is now present in 15 countries,
with 555 participants in FY2024; 50% of our leaders have now been trained
under the programme. Our commitment to fostering diversity, equity and
inclusion with our initiatives on this are further bolstered by active
employee resource groups (ERGs) such as the Black Employee Network, Veterans
Network, Pride Coalition, Women@Work and Neurodiversity ERGs.
Our people are enthused about engaging with and caring for our communities and
in June this year, our annual Smiths Day celebrated our culture and our
communities, with many employees volunteering their support for local causes.
At the Group level, The Smiths Group Foundation has now made its first grants,
totalling c.£1m, to more than 10 charities around the world supporting STEM,
safety and connectedness and environmental sustainability.
In combination, these initiatives help to underpin an engaged workforce and a
healthy culture which we track and measure through the annual My Say Survey.
This survey is used to surface issues and more precisely understand what we
are doing well and where we need to do better, both at a high level and at the
grass roots in individual teams. In FY2024, 85% of employees completed the
survey and it was pleasing to see our overall engagement score of 75 was up
two points on the prior year.
CAPITAL ALLOCATION
Our highest capital priority continues to be organic growth, followed by
strategic and disciplined M&A, and we have a strong track record of
returning capital to shareholders, via dividends and share buybacks. In
FY2024, we invested £109m in R&D (FY2023: £113m), of which £73m
(FY2023: £73m) was an income statement charge, £14m was capitalised (FY2023:
£21m) (primarily next-generation hold and cabin baggage screening and further
advancements in our defence portfolio) and £22m (FY2023: £19m) was funded by
customers. Partly accounting for the marginal year-on-year decline was the
relocation of certain R&D projects to lower-cost jurisdictions, resulting
in more efficient R&D spend. In addition, there was a further £41m spend
on customer-specific engineering-related projects taking the total spend for
FY2024 from 3.5% to 4.8% of sales.
To support new product launches and the strong demand for our existing
solutions, we increased capex +6% to £86m (FY2023: £81m). This equates to
1.7x depreciation and amortisation (FY2023: 1.6x). A key project was
investment in machining capacity and automation at John Crane, which will
continue into FY2025 resulting in Group capex of around £110m for the year.
We spent £64m on the acquisition of HCP in August 2023, a US-based
manufacturer of HVAC solutions and post the FY2024 year-end, in September
2024, we announced the acquisitions of Modular Metal and Wattco for £95
million, with up to an additional £15m subject to the performance of one of
the acquisitions over a three-year period.
We completed the final £29m of the Group's £742m share buyback programme in
the first quarter. In addition, in March, we announced a new share buyback
programme of £100m and initiated buying under the first £50m tranche. As
guided, we completed the first £50m during September 2024, including £41m
during the fiscal year, and £9m during August and September. We have not yet
initiated the second tranche.
In line with our progressive dividend policy, the Board is recommending a
final dividend of 30.2p, a year-on-year increase of +5.2%, bringing the total
dividend for the year to 43.75p (FY2023: 41.6p). The final dividend will be
paid on 22 November 2024 to shareholders on the register at close of business
on 18 October 2024. Our dividend policy aims to increase dividends in line
with growth in earnings and cashflow, with the objective of maintaining
minimum dividend cover of around two times.
The Company offers a Dividend Reinvestment Plan (DRIP) enabling shareholders
to use their cash dividend to buy further shares in the Company - see website
for details. To participate in the DRIP, shareholders must submit their
election notice to be received by 1 November 2024. Elections received after
the Election Date will apply to dividends paid after 22 November 2024.
Purchases under the DRIP are made on, or as soon as practicable after, the
dividend payment date and at prevailing market prices.
Net debt
Net debt at 31 July 2024 was £213m (FY2023: £387m) with a net debt to
headline EBITDA ratio of 0.3x (FY2023: 0.7x). Net headline finance costs for
the year increased by £3m to £38m (FY2023: £35m) principally due to a
reduced level of cash balances over the year generating lower interest
income.
As at 31 July 2024, borrowings were £659m (FY2023: £654m) comprising a
€650m bond which matures in February 2027 and £123m of lease liabilities.
There are no financial covenants associated with these borrowings. Cash and
cash equivalents as at 31 July 2024 were £459m (FY2023: £285m). Together
with our $800m (£623m at the year-end exchange rate) revolving credit
facility, which matures in May 2029, total liquidity was £1.1bn at the end of
the period.
Since the sale of Smiths Medical in January 2022, the Group has held a
financial asset reflecting our equity ownership in ICU Medical, Inc (ICU).
During FY2024, we sold 2,030,000 ICU shares (8.34% of ICU's issued share
capital), with net proceeds of $240m (£187m). After the year end, we sold a
further 415,771 shares (1.70% of ICU's issued share capital) with net proceeds
of $59.8m (£46.2m). We continue to own less than 1% of ICU and will exit over
time.
STATUTORY RESULTS
Income statement and cashflow
The £111m difference (FY2023: £98m) between headline operating profit of
£526m and statutory operating profit of £415m reflects non-headline items.
The largest of these relate to the amortisation of acquired intangible assets
of £49m, a £26m net charge for asbestos litigation in John Crane Inc and
£13m of fair-value loss on the ICU contingent consideration. The statutory
operating profit of £415m was £12m higher than last year (FY2023: £403m),
reflecting the higher headline operating profit. Statutory finance costs were
£43m, flat year-on-year (FY2023: £43m).
The statutory effective tax rate was 32.5% (FY2023 37%) and includes a
non-headline tax credit of £1m (FY2023 £13m expense). Statutory profit after
tax for the Group was £251m (FY2023: £232m) and statutory basic EPS was
72.3p (FY2023: 65.5p).
Statutory net cash inflow from operating activities for the total Group was
£418m (FY2023: £293m).
Pensions
During the year, £16m of pension contributions (FY2023: £5m) were made,
which relate to funded, unfunded and overseas schemes and healthcare
arrangements. Of this, £10m related to the US defined benefit pension plan.
As previously announced, no contributions were made in FY2024 and it is not
anticipated that any further contributions will be made to the TI Group
Pension Scheme (TIGPS), as the liabilities have now been insured via a series
of buy-in annuities. The Group and the TIGPS Trustee are working toward final
buy-out of the scheme. The Smiths Industries Pension Scheme (SIPS) is in
surplus on the Technical Provisions funding basis, and no cash contributions
have been made in the year nor are scheduled to be made. The Group and the
SIPS Trustee continue to work together to progress towards the long-term
funding target of full buy-out funding.
These two UK schemes and the US pension plan are well hedged against changes
in interest and inflation rates. Their assets are invested in third-party
annuities, government bonds, investment grade credit or cash, with no
remaining equity investments. As at 31 July 2024, 60% of the UK liabilities
had been de-risked through the purchase of annuities from third party
insurers.
Foreign exchange
The results of overseas operations are translated into sterling at average
exchange rates. Net assets are translated at period-end rates. The Group is
exposed to foreign exchange movements, mainly US Dollar and Euro. The
principal exchange rates, expressed in terms of the value of Sterling, are as
follows:
Average rates Period-end rates
31 Jul 2024 31 Jul 2023 31 Jul 2024 31 Jul 2023
(12 months) (12 months)
USD 1.26 1.21 1.28 1.29
EUR 1.17 1.15 1.19 1.17
Business review
JOHN CRANE
John Crane is a global leader in mission-critical technologies for the energy
and process industries and an innovator in rotating equipment, encompassing
mechanical seals, couplings, filtration systems and cutting-edge asset
management and digital diagnostics solutions. 64% of revenue is derived from
the energy sector (downstream and midstream oil & gas and power
generation, including renewable and sustainable energy sources). 36% is from
other process industries including chemical, life sciences, mining, water
treatment and pulp & paper. 72% of John Crane revenue is from aftermarket
sales. John Crane represents 36% of Group revenue.
FY2024 FY2023 Reported Organic growth
£m £m growth H1 H2 FY
Revenue 1,133 1,079 +5.0% +12.7% +7.1% +9.8%
Original Equipment (OE) 176 169 +4.8% +0.3% +17.5% + 9.0%
Aftermarket 550 487 +12.8% +22.5% +14.5% +18.3%
Energy 726 656 +10.7% +16.6% +15.3% +15.9%
Original Equipment 145 145 (0.4)% +5.0% +2.7 % +3.8%
Aftermarket 262 278 (5.8)% +7.4% (9.2)% (1.6)%
General Industrial 407 423 (3.9)% +6.5% (5.3)% +0.3%
Headline operating profit 263 244 +7.7% +18.3% +7.4 % +12.4%
Headline operating profit margin 23.2% 22.6% +60bps +110bps +10bps +60bps
Statutory operating profit 229 217 +5.5%
Return on capital employed 25.3% 23.8% +150bps
R&D cash costs as % of sales 1.6% 1.7% (10)bps
Revenue
FY2023 Foreign Organic FY2024
£m reported exchange movement reported
Revenue 1,079 (47) 101 1,133
John Crane delivered organic revenue growth of +9.8% for the year, as it
continued executing against a strong order book. Following double-digit
organic revenue growth in the first half, growth moderated to +7.1% in the
second half, still a healthy level compared to record-high growth in FY2023.
Organic revenue growth was driven by a strong performance in Energy.
Aftermarket organic revenue grew +11.1% to make up 72% of sales (FY2023: 71%),
whilst OE grew +6.6%.
Reported revenue grew +5.0% to £1,133m, having crossed the £1bn mark in
FY2023 for the first time, reflecting the organic growth, partially offset by
a negative foreign exchange impact.
In Energy, organic revenue grew +15.9% benefiting from a continued focus on
energy security and efficiency, as well as emissions reduction solutions.
Regionally, there was a strong performance in the Middle East and Latin
America for our advanced seals and gas compression products, as well as
service contracts, with an +18.3% growth in aftermarket revenue. Notable
contract wins in the year included one with Karachaganak Petroleum Operating
B.V. for the provision, service and repair of dry gas seals featuring triple
seal technology, and another with a major global energy company in Alberta,
Canada to provide industrial seal support services at North America's most
efficient integrated hydrocarbon processing site.
John Crane also won several notable energy transition contracts - including
one to supply dry gas seals for three supercritical CO(2) compressors of a
large-scale blue hydrogen project in the USA, and a significant contract to
supply wet seals for almost 100 pumps to a zero-emission electric vehicle
battery manufacturing facility, also in the USA. The pipeline of opportunities
John Crane is pursuing within energy transition in CCUS, hydrogen and biofuels
continues to expand.
In the General Industrial segment, organic growth moderated to +0.3%, with a
(5.3)% decline in the second half, following a strong FY2023. Growth in OE,
largely driven by water treatment, marine and mining, was partly offset by a
small decline in aftermarket sales.
Order intake growth in FY2024 supports our positive outlook in FY2025.
Operating profit and ROCE
FY2023 Foreign Organic FY2024
reported
reported
£m exchange movement
Headline operating profit 244 (11) 30 263
Headline operating profit margin 22.6% 23.2%
Headline operating profit of £263m grew +12.4% on an organic basis, resulting
in +60bps of margin expansion to 23.2%. This was driven by the increased
volumes and good operating leverage, pricing above inflation, and the benefits
from SES, partly offset by a negative mix impact and higher investment in
growth. This investment to increase capacity and efficiency, including
marketing and commercial, are both key to service the strong current demand
and propel future growth.
On a reported basis, headline operating profit was up +7.7%, including a
negative foreign exchange impact. The difference between statutory and
headline operating profit includes the net cost in relation to the provision
for John Crane, Inc. asbestos litigation.
ROCE was 25.3%, up 150bps, reflecting the headline operating profit growth.
R&D and new product development
Cash R&D expenditure was 1.6% of sales (FY2023: 1.7%), with the decline
reflecting the relocation of certain R&D projects to lower cost
jurisdictions, resulting in more efficient R&D spend. In addition, the
business spent a further 3.6% of sales (FY2023: 3.4%) on customer-specific
engineering-related projects for a total investment in new products of 5.2% of
sales (FY2023: 5.2%). John Crane's continued investment in R&D is
primarily focused on gas compression projects and enhancing the efficiency,
performance and sustainability of heavy-duty seals and hydrogen compressors.
John Crane is well placed to support energy transition projects with its
extreme temperatures and high-pressure sealing solutions and continues to work
with universities and customers to develop and bring to market these
innovative solutions.
SMITHS DETECTION
Smiths Detection is a global leader in threat detection and screening
technologies for aviation, ports and borders, urban security and defence.
Smiths Detection delivers the solutions needed to protect society from the
threat and illegal passage of explosives, prohibited weapons, contraband,
toxic chemicals, biological agents and narcotics - helping make the world a
safer place. 52% of Smiths Detection's sales are derived from the aftermarket.
Smiths Detection represents 28% of Group revenue.
FY2024 FY2023 Reported Organic growth
£m £m growth H1 H2 FY
Revenue 859 803 +7.0% +8.9% +13.2% +11.1%
Original Equipment 272 226 +20.3% +5.7% +42.9% +24.8%
Aftermarket 323 309 +4.6% +8.0% +9.0% +8.5%
Aviation 595 535 +11.2% +7.0% +23.4% +15.4%
Original Equipment 144 164 (12.3)% (0.1)% (15.9)% (8.4)%
Aftermarket 120 104 +15.8% +34.1% +8.2% +20.0%
Other Security Systems (OSS) 264 268 (1.4)% +12.8% (6.3%) +2.6%
Headline operating profit 102 90 +14.1% +10.3% +24.3% +18.0%
Headline operating profit margin 11.9% 11.2% +70bps +20bps +120bps +70bps
Statutory operating profit 83 55 +50.9%
Return on capital employed 9.1% 7.7% +140bps
R&D cash costs as % of sales 7.8% 8.4% (60)bps
Revenue
FY2023 Foreign Organic FY2024
£m reported exchange movement reported
Revenue 803 (30) 86 859
Smiths Detection delivered +11.1% organic revenue growth, converting its
strong order book to revenue, with growth across both market segments, and in
both OE and aftermarket.
Order intake grew strongly during the year, reflecting the ongoing demand for
airport scanner upgrades and the multi-year defence contracts awarded in OSS
which will support revenue growth in FY2025 and beyond.
Reported revenue was up +7.0% reflecting the strong organic growth, partially
offset by an unfavourable foreign exchange impact.
In Aviation, organic revenue grew +15.4%, with OE growth of 24.8%, reflecting
the continued strong demand for Smiths Detection's latest range of 3D-image
computed tomography (CT) machines for cabin baggage, CTiX. Smiths Detection
continues to achieve a strong win rate globally in aviation, and to date, has
now sold c.1,400 CTiX scanners. Notable wins during the year included
Australia, Czech Republic, France, Germany, Japan, Saudi Arabia, the UK and
the USA. Contracts awarded to date support production through FY2025, and it
is expected that airports' upgrade programme will continue for the next three
years.
OSS sales grew +2.6% organically, with a decline in the second half after a
robust first half, reflecting a strong performance in defence and urban
security, partially offset by weaker ports and borders. Order intake in
defence was particularly strong with two multi-year chemical detection
contracts awarded, one from the UK Ministry of Defence (for an initial £88
million), and another from the US Department of Defense.
In urban security, Smiths Detection mobile solutions were deployed at a number
of high-profile events including security screening at COP28, X-ray screening
equipment at the NFL Super Bowl and more than 200 items of equipment at the
UEFA Euro 2024 football tournament.
Operating profit and ROCE
FY2023 Foreign Organic FY2024
reported
£m reported exchange movement
Headline operating profit 90 (3) 15 102
Headline operating profit margin 11.2% 11.9%
Headline operating profit increased +18.0% on an organic basis for the year,
reflecting the strong organic revenue growth and favourable pricing, as well
as the positive benefits of SES and cost actions. This was partly offset by
the expansion in field service engineers to support the high installation
activity and reflecting the complexity of the CTiX installations, although
operational efficiency on this front improved through the second half.
Headline operating profit margin of 11.9% was up 70bps on both an organic and
reported basis.
Over the medium term, higher margin aftermarket revenue associated with the
expanded installed base from new OE sales, continued SES initiatives and a
positive mix impact from the new defence contracts are expected to support
continued margin expansion.
On a reported basis, headline operating profit was up +14.1%, including a
moderate negative foreign exchange translation, with the difference between
statutory and headline operating profit reflecting amortisation of acquired
intangibles.
ROCE increased by +140bps to 9.1%, driven by the headline operating profit
growth.
R&D and new product development
Cash R&D representing 7.8% of sales (FY2023: 8.4%) supports Smiths
Detection investment in next-generation detection capabilities and included
£20m in customer funded projects (FY2023: £18m).
A notable component of recent R&D spend has been on a pioneering X-ray
scanner utilising diffraction technology, which was pre-launched in April. The
SDX 10060 XDi inspection technology allows highly accurate material and
substance identification based on an object's molecular structure. This
scanner can integrate seamlessly with existing baggage handling systems to
support airport customs agencies in screening for a range of contraband items,
including explosives or narcotics, and can also be deployed in cargo
environments. Commercial deployment within aviation requires regulatory
certification, which is currently underway. Modest initial sales are first
expected in FY2026, at the earliest.
Smiths Detection also benefits from external R&D funding, and during
FY2024, was selected for EU funding as part of a consortium to develop new
AI-based algorithms for automatic detection of narcotics in passenger baggage,
and to develop a maritime customs border control screening system for portable
screening technology for shipping containers. It also partnered with the
University of Exeter to explore virtual and immersive technology for training
people, to enhance its training for X-ray screener personnel, a crucial part
of its customer offering.
FLEX-TEK
Flex-Tek is a global provider of engineered components that heat and move
liquids and gases for the construction, industrial and aerospace markets. 80%
of Flex-Tek's revenue is derived from General Industrial and 20% from the
Aerospace sector. Flex-Tek represents 25% of Group revenue.
FY2024 FY2023 Reported Organic growth
£m £m growth H1 H2 FY
Revenue 786 768 +2.3% (4.1)% +2.6% (0.8)%
General Industrial 632 624 +1.2% (7.6)% +0.8% (3.5)%
Aerospace 154 144 +7.0% +12.1% +9.9% +10.9%
Headline operating profit 161 149 +8.1% +2.6% +5.8% +4.2%
Headline operating profit margin 20.5% 19.4% +110bps +140bps +60bps +100bps
Statutory operating profit 135 131 +3.1%
Return on capital employed 26.6% 26.1% +50bps
R&D cash costs as % of sales 0.4% 0.4% 0bps
Revenue
FY2023 Foreign Organic FY2024
£m reported exchange Acquisitions movement reported
Revenue 768 (28) 52 (6) 786
Organic revenue declined (0.8)% in the year, with growth in H2 of +2.6%
showing some recovery following a decline of (4.1)% in H1. Revenue on a
reported basis grew +2.3%, supported by +£52m from the acquisition of HCP,
which was acquired in August 2023, and despite a negative foreign exchange
translation.
In General Industrial, organic revenue was down (3.5)% as a result of a tough
comparator last year and US construction market headwinds, which started in
the second half of last year and continued through FY2024, impacting HVAC
sales. The pace of HVAC revenue recovery in FY2025 will be determined by the
pace of market recovery, as mortgage rates moderate and given the meaningful
housing inventory deficit in the US.
Flex-Tek's energy efficient solutions for industrial applications expand to
the partnership with Midrex to deliver heating solutions that enable the
production of commercial green steel. The business has grown and is well
placed for future energy-efficient industrial heating projects.
In Aerospace, organic revenue grew +10.9% in the year supported by a strong
order book, with the slight moderation in growth in the second half reflecting
a strong comparator last year. Demand was buoyant across the year and is set
to continue into FY2025.
Operating profit and ROCE
FY2023 Foreign Organic FY2024
reported
£m reported exchange Acquisitions movement
Headline operating profit 149 (6) 12 6 161
Headline operating profit margin 19.4% 20.5%
Headline operating profit grew +4.2% on an organic basis. The organic
operating margin improved by +100bps to 20.5% despite the decline in revenue
reflecting tight cost control, especially materials, in the light of the lower
volume in General Industrial and a positive mix impact. On a reported basis,
headline operating profit and margin increased +8.1% and +110bps,
respectively.
The difference between statutory and headline operating profit reflects the
amortisation of acquired intangible assets and the provision for Titeflex
Corporation subrogation claims.
ROCE increased +50bps to 26.6%, reflecting the headline operating profit
growth.
The integration of HCP is progressing ahead of plan, with increased revenue in
the year against the challenging construction market background. The
acquisition expanded Flex-Tek's presence in the North American HVAC market by
extending its customer base, and broadened its product range, including HCP's
patented axial and radial seal duct technology.
In September 2024, we announced two strategic and disciplined acquisitions for
Flex-Tek.
Building on the HCP acquisition, Flex-Tek is acquiring Modular Metal,
expanding its HVAC presence into the western US market and broadening its
product offering to include Modular Metal's sealed flexible duct solution. The
transaction is expected to complete in October 2024.
Flex-Tek acquired Wattco, expanding our heating portfolio into a wider range
of industrial electric heating products, including medium temperature
immersion and circulation heating, which are highly complementary to our
existing open coil electrical heating business.
R&D and new product development
Cash R&D expenditure grew in line with sales, remaining at 0.4% of sales
(FY2023: 0.4%). R&D is focused on developing new products for the
construction and aerospace markets, and new electrification opportunities
within industrial markets.
SMITHS INTERCONNECT
Smiths Interconnect is a leading provider of high reliability connectivity
products and solutions serving segments of aerospace and defence, medical,
semiconductor test and industrial markets. Smiths Interconnect represents 11%
of Group revenue.
FY2024 FY2023 Reported Organic growth
£m £m growth H1 H2 FY
Revenue 354 387 (8.4)% (13.7)% +0.4% (6.5)%
Headline operating profit 49 62 (20.9)% (33.3)% (2.1)% (17.8)%
Headline operating profit margin 13.9% 16.0% (210)bps (370)bps (40)bps (190)bps
Statutory operating profit 46 50 (8.0)%
Return on capital employed 10.4% 13.3% (290)bps
R&D cash costs as % of sales 6.2% 6.3% (10)bps
Revenue
FY2023 Foreign Organic FY2024
£m reported exchange Acquisitions movement reported
Revenue 387 (14) 5 (24) 354
Smiths Interconnect's organic revenue declined (6.5)% in FY2024, reflecting
weakness in the semiconductor market and a slower market in connectors,
resulting in part from customer destocking. Performance improved incrementally
through the year, with a (13.7)% organic decline overall in the first half,
improving to marginal growth in the second half.
Reported revenue decreased (8.4)% reflecting a negative foreign exchange
impact, partially offset by a £5m contribution from Plastronics which has
broadened the semiconductor product portfolio and provided greater exposure to
the US and wider industrial end markets.
The performance in connectors reflected a strong base comparator, customer
destocking and some weakness with medical and industrial customers. In the
semiconductor market, the longer than expected downturn is now reversing, with
increased activity levels and growth in orders. This growth, together with
good growth in aerospace and defence-related programmes and a robust pipeline
of new product introductions underpins our expectation for an improving
performance as we progress through FY2025.
Operating profit and ROCE
FY2023 Foreign Organic FY2024
reported
£m reported exchange Acquisitions movement
Headline operating profit 62 (2) (0) (11) 49
Headline operating profit margin 16.0% 13.9%
Headline operating profit declined (17.8)% on an organic basis, resulting in a
(190)bps reduction in headline operating profit margin to 13.9%. The decline
was primarily driven by the lower volume alongside mix effects, with continued
investment in R&D, which more than offset pricing, SES benefits and the
impact of cost control initiatives. On a reported basis, headline operating
profit declined (20.9)% and statutory operating profit declined (8.0)%.
The difference between statutory and headline operating profit reflects the
amortisation of acquired intangibles and acquisition-related costs.
ROCE reduced (290)bps to 10.4%, driven by the lower operating profit.
R&D and new product development
Cash R&D expenditure as a percentage of sales was 6.2% of sales (FY2023:
6.3%). R&D is focused on developing new products that improve connectivity
and product integrity in demanding operating environments. A recent success
has been the DaVinci 112, the next generation of its high-speed semiconductor
test sockets. It is designed for testing some of the most complex
functionality of integrated circuits at the highest speeds and is used by
leading AI and GPU semiconductor manufacturers.
Product launches during the year included a high-density electrical connector
for the medical market and a new series of fixed attenuators and Thermopad®
products for use in space, defence and aerospace applications.
Smiths Interconnect also launched the Mini-Lock Connector, the next generation
radio-frequency connector which delivers high-reliability performance in
mission-critical sectors such as satellite, aerospace and defence.
To address the critical issue of power loss in electric battery systems and
solutions, Smiths Interconnect launched its new Hypertac Green Connect™
technology which has improved contact points, creating a more efficient and
higher-performing battery.
Space grade products are a key development focus particularly in radio
frequency and optical products. During the year, Smiths Interconnect received
funding of around £2m from the UK Space Agency to help enhance its
Dundee-based Space Qualification Laboratory, which simulates the extreme
conditions of space to assure the quality and durability of space components.
Consolidated income statement
Year ended 31 July 2024 Year ended 31 July 2023
Notes Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Continuing operations
Revenue 1 3,132 - 3,132 3,037 - 3,037
Operating costs 2 (2,606) (111) (2,717) (2,536) (98) (2,634)
Operating profit/(loss) 2 526 (111) 415 501 (98) 403
Interest income 4 26 - 26 36 - 36
Interest expense 4 (64) - (64) (71) (7) (78)
Other financing (losses)/gains 4 - (11) (11) - (8) (8)
Other finance income - retirement benefits 4 - 6 6 - 7 7
Finance (costs)/income 4 (38) (5) (43) (35) (8) (43)
Profit/(loss) before taxation 488 (116) 372 466 (106) 360
Taxation 6 (122) 1 (121) (121) (13) (134)
Profit/(loss) for the year 366 (115) 251 345 (119) 226
Discontinued operations
Profit from discontinued operations 3 - - - - 6 6
Profit/(LOSS) for the year 366 (115) 251 345 (113) 232
Profit/(loss) for the year attributable to:
Smiths Group shareholders - continuing operations 365 (115) 250 344 (119) 225
Smiths Group shareholders - discontinued operations - - - - 6 6
Non-controlling interests 1 - 1 1 - 1
366 (115) 251 345 (113) 232
Earnings per share 5
Basic 72.3p 65.5p
Basic - continuing 72.3p 63.8p
Diluted 72.0p 65.1p
Diluted - continuing 72.0p 63.4p
Consolidated statement of comprehensive income
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Profit for the year 251 232
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of retirement benefit assets and obligations 8 (66) (114)
Taxation on post-retirement benefit movements 6 17 32
Fair value movements on financial assets at fair value through OCI 14 (105) (18)
(154) (100)
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges 4 12
- reclassified to income statement on cash-flow and net investment hedges - 2
4 14
Foreign exchange (FX) movements:
Exchange (losses)/gains on translation of foreign operations (33) (101)
Total other comprehensive income, net of taxation (183) (187)
TOTAL COMPREHENSIVE INCOME 68 45
Attributable to:
Smiths Group shareholders 68 46
Non-controlling interests - (1)
68 45
Total comprehensive income attributable to Smiths Group shareholders arising
from:
Continuing operations 68 39
Discontinued operations - 6
68 45
Consolidated balance sheet
Notes 31 July 2024 31 July 2023 (restated) *
£m
£m
Non-current assets
Intangible assets 10 1,521 1,521
Property, plant and equipment 12 270 247
Right of use assets 13 110 105
Financial assets - other investments 14 53 371
Retirement benefit assets 8 132 195
Deferred tax assets 6 94 121
Trade and other receivables 16 96 75
2,276 2,635
Current assets
Inventories 15 643 637
Current tax receivable 6 24 47
Trade and other receivables 16 826 772
Cash and cash equivalents 18 459 285
Financial derivatives 20 4 5
1,956 1,746
TOTAL ASSETS 4,232 4,381
Current liabilities
Financial liabilities:
- borrowings 18 (2) (3)
- lease liabilities 18 (32) (26)
- financial derivatives 20 (4) (2)
Provisions 23 (75) (70)
Trade and other payables 17 (764) (723)
Current tax payable 6 (70) (74)
(947) (898)
Non-current liabilities
Financial liabilities:
- borrowings 18 (534) (534)
- lease liabilities 18 (91) (91)
- financial derivatives 20 (13) (18)
Provisions 23 (219) (216)
Retirement benefit obligations 8 (103) (106)
Corporation tax payable 6 - (3)
Deferred tax liabilities 6 (32) (69)
Trade and other payables 17 (41) (40)
(1,033) (1,077)
TOTAL LIABILITIES (1,980) (1,975)
NET ASSETS 2,252 2,406
SHAREHOLDERS' EQUITY
Share capital 24 130 131
Share premium account 365 365
Capital redemption reserve 26 25 24
Merger reserve 26 235 235
Cumulative translation adjustments 353 386
Retained earnings 1,306 1,431
Hedge reserve 26 (184) (188)
TOTAL SHAREHOLDER'S EQUITY 2,230 2,384
Non-controlling interest equity 26 22 22
TOTAL EQUITY 2,252 2,406
* The comparatives have been restated after adoption of the amendment to IAS12
'Income Taxes', please see note 6 for further information.
Consolidated statement of changes in equity
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
interest
equity
premium
£m
adjustments
£m
£m shareholders'
£m
£m
£m
£m
funds
£m
At 31 July 2023 496 259 386 1,431 (188) 2,384 22 2,406
Profit for the year - - - 250 - 250 1 251
Other comprehensive income:
- re-measurement of retirement benefits after tax - - - (49) - (49) - (49)
- FX movements net of recycling - - (33) 1 - (32) (1) (33)
- fair value gains and related tax - - - (105) 4 (101) - (101)
Total comprehensive income for the year - - (33) 97 4 68 - 68
Transactions relating to ownership interests:
Purchase of shares by Employee Benefit Trust - - - (20) - (20) - (20)
Proceeds received on exercise of employee share options - - - 4 - 4 - 4
Share buybacks 24 (1) 1 - (70) - (70) - (70)
Dividends:
- equity shareholders 25 - - - (147) - (147) - (147)
Share-based payment 9 - - - 11 - 11 - 11
At 31 July 2024 495 260 353 1,306 (184) 2,230 22 2,252
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
interest
equity
premium
£m
adjustments
£m
£m shareholders'
£m
£m
£m
£m
funds
£m
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
Profit for the year - - - 231 - 231 1 232
Other comprehensive income:
- re-measurement of retirement benefits after tax - - - (82) - (82) - (82)
- FX movements net of recycling - - (101) 2 - (99) (2) (101)
- fair value gains and related tax - - - (18) 14 (4) - (4)
Total comprehensive income for the year - - (101) 133 14 46 (1) 45
Transactions relating to ownership interests:
Purchase of shares by Employee Benefit Trust - - - (24) - (24) - (24)
Share buybacks 24 (5) 5 - (207) - (207) - (207)
Receipt of capital from non-controlling interest - - - - - - 1 1
Dividends:
- equity shareholders 25 - - - (143) - (143) - (143)
Share-based payment 9 - - - 13 - 13 - 13
At 31 July 2023 496 259 386 1,431 (188) 2,384 22 2,406
Consolidated cash-flow statement
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Net cash inflow from operating activities 28 418 293
CASH-FLOWS FROM INVESTING ACTIVITIES
Expenditure on capitalised development (14) (21)
Expenditure on other intangible assets (4) (7)
Purchases of property, plant and equipment (68) (53)
Disposals of property, plant and equipment - 2
Income from / (Investment in) financial assets 190 -
Acquisition of businesses (65) (22)
(Payments)/proceeds on disposal of subsidiaries, net of cash disposed - (7)
Net cash-flow used in investing activities 39 (108)
CASH-FLOWS FROM FINANCING ACTIVITIES
Share buybacks 24 (70) (207)
Purchase of shares by Employee Benefit Trust 26 (20) (24)
Proceeds received on exercise of employee share options 4 -
Settlement of cash-settled options (2) -
Dividends paid to equity shareholders 25 (147) (143)
Receipt of capital from non-controlling interest - 1
Lease payments (39) (36)
Reduction and repayment of borrowings - (527)
Cash (outflow)/inflow from matured derivative financial instruments 5 (9)
Net cash-flow used in financing activities (269) (945)
Net (decrease)/increase in cash and cash equivalents 188 (760)
Cash and cash equivalents at beginning of year 285 1,055
Foreign exchange rate movements (14) (10)
Cash and cash equivalents at end of year 18 459 285
Cash and cash equivalents at end of year comprise:
- cash at bank and in hand 123 175
- short-term deposits 336 110
459 285
Accounting policies
Basis of preparation
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31st July 2024 or 2023 but is derived
from those accounts. Statutory accounts for 2023 have been delivered to the
registrar of companies, and those for 2024 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The Group's statutory financial statements for the year ended 31 July 2024
have been prepared in accordance with UK adopted International Accounting
Standards. The statutory financial statements have been prepared under the
historical cost convention modified to include revaluation of certain
financial instruments, share options and pension assets and liabilities, held
at fair value as described below.
Going concern
The Directors have prepared a going concern assessment, covering a period of
at least 12 months from the date of approval of the financial statements,
which takes into account the current financial projections and the borrowing
facilities available to the Group and then applies a severe but plausible
downside scenario.
This assessment is consistent with the conclusions of the Group's 'Going
concern and viability statement' set out in the Strategic Report within the
Annual Report 2024, which has been based on the Group's strategy, balance
sheet and financing position, including our undrawn US$800m committed
Revolving Credit Facility which matures in May 2029. Having assessed the
principal and emerging risks, especially those most relevant during the going
concern assessment period, stress testing confirmed that the Group will have
adequate headroom over that period.
Consequently, the Directors are satisfied that the Group and Company has
sufficient resources for its operational needs and will be able to meet its
liabilities as they fall due for a period of at least 12 months from the date
of approval of these financial statements. The financial statements
therefore been prepared on a going concern basis.
These financial statements cover the financial year from 1 August 2023 to 31
July 2024 (FY2024) with comparative figures from 1 August 2022 to 31 July 2023
(FY2023).
Key estimates and significant judgements
The preparation of the accounts in conformity with generally accepted
accounting principles requires management to make estimates and judgements
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 sources of estimation uncertainty together with the significant
judgements and assumptions used for these consolidated financial statements
are set out below.
Sources of estimation uncertainty
Impairment reviews of intangible assets
In carrying out impairment reviews of intangible assets, a number of
significant assumptions have to be made when preparing cash-flow projections
to determine the value in use of the asset or cash generating unit (CGU).
These include the future rate of market growth, discount rates, the market
demand for the products acquired, the future profitability of acquired
businesses or products, levels of reimbursement, and success in obtaining
regulatory approvals. If actual results differ or changes in expectations
arise, impairment charges may be required which would adversely impact
operating results.
Critical estimates, and the effect of variances in these estimates, are
disclosed in note 11.
Retirement benefits
Determining the value of the future defined benefit obligation involves
significant estimates in respect of the assumptions used to calculate present
values. These include future mortality, discount rate and inflation. The Group
uses previous experience and independent actuarial advice to select the values
for critical estimates. A portion of UK pension liabilities are insured via
bulk annuity policies that match all or part of the scheme obligation to
identified groups of pensioners. These assets are valued by an external
qualified actuary at the actuarial valuation of the corresponding liability,
reflecting this matching relationship.
The Group's principal defined benefit pension plans are in the UK and the US
and these have been closed so that no future benefits are accrued. Critical
estimates for these plans, and the effect of variances in these estimates, are
disclosed in note 8.
Provisions for liabilities and charges
The Group has made provisions for claims and litigations where it has had to
defend itself against proceedings brought by other parties. These provisions
have been made for the best estimate of the expected expenditure required to
settle each obligation, although there can be no guarantee that such
provisions (which may be subject to potentially material revision from time to
time) will accurately predict the actual costs and liabilities that may be
incurred. The most significant of these litigation provisions is described
below.
John Crane, Inc. (JCI), a subsidiary of the Group, is one of many
co-defendants in litigation relating to products previously manufactured which
contained asbestos. Provision of £220m (FY2023: £204m) has been made for the
future defence costs which the Group is expected to incur and the expected
costs of future adverse judgements against JCI. Whilst well-established
incidence curves can be used to estimate the likely future pattern of
asbestos-related disease, JCI's claims experience is significantly impacted by
other factors which influence the US litigation environment. These can
include: changing approaches on the part of the plaintiffs' bar; changing
attitudes amongst the judiciary at both trial and appellate levels; and
legislative and procedural changes in both the state and federal court
systems. Because of the significant uncertainty associated with the future
level of asbestos claims and of the costs arising out of the 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
will be incurred.
In quantifying the expected costs JCI takes account of the advice of an expert
in asbestos liability estimation. The following estimates were made in
preparing the provision calculation:
- The period over which the expenditure can be reliably estimated is judged to
be ten years, based on past experience regarding significant changes in the
litigation environment that have occurred every few years and on the amount of
time taken in the past for some of those changes to impact the broader
asbestos litigation environment. See note 23 for a sensitivity analysis
showing the impact on the provision of reducing or increasing this time
horizon; and
- The future trend of legal costs, the rate of future claims filed, the rate
of successful resolution of claims, and the average amount of judgements
awarded have been projected based on the past history of JCI claims and
well-established tables of asbestos incidence projections, since this is the
best available evidence. Claims history from other defendants is not used to
calculate the provision because JCI's defence strategy generates a
significantly different pattern of legal costs and settlement expenses. See
note 23 for a sensitivity analysis showing the range of expected future
spend.
Taxation
Taxation liabilities included provisions of £44m (FY2023: £46m), the
majority of which related to the risk of challenge to the geographic
allocation of profits by tax authorities.
In addition to the risks provided for, the Group faces a variety of other tax
risks, which result from operating in a complex global environment, including
the ongoing reform of both international and domestic tax rules, new and
ongoing tax audits in the Group's larger markets and the challenge to fulfil
ongoing tax compliance filing and transfer pricing obligations given the scale
and diversity of the Group's global operations.
The Group anticipates that a number of tax audits are likely to conclude in
the next 12 to 24 months. Due to the uncertainty associated with such tax
items, it is possible that the conclusion of open tax matters may result in a
final outcome that varies significantly from the amounts noted above.
Significant judgements made in applying accounting policies
Business combinations
On the acquisition of a business, the Group has to make judgements on the
identification of specific intangible assets which are recognised separately
from goodwill and then amortised over their estimated useful lives. These
include items such as brand names and customer lists, to which value is first
attributed at the time of acquisition. The capitalisation of these assets and
the related amortisation charges are based on judgements about the value and
economic life of such items.
Where acquisitions are significant, appropriate advice is sought from
professional advisers before making such allocations.
Retirement benefits
At 31 July 2024 the Group has recognised £132m of retirement benefit assets
(FY2023: £195m) and a net pension asset of £29m (FY2023: £89m), principally
relating to the Smiths Industries Pension Scheme (SIPS), which arises from the
rights of the employers to recover the surplus at the end of the life of the
scheme.
The recognition of this surplus is a significant judgement. There is a
judgement required in determining whether an unconditional right of refund
exists based on the provision of the relevant Trust deed and rules. Having
taken legal advice with regard to the rights of the Company under the relevant
Trust deed and rules, it has been determined that an unconditional right of
refund does exist and therefore the surplus is recoverable by the Company and
can be recognised.
Capitalisation of development costs
Expenditure incurred in the development of major new products is capitalised
as internally generated intangible assets only when it has been judged that
strict criteria are met, specifically in relation to the products' technical
feasibility and commercial viability (the ability to generate probable future
economic benefits).
The assessment of technical feasibility and future commercial viability of
development projects requires significant judgement and the use of
assumptions. Key judgements made in the assessment of future commercial
viability include:
- Scope of work to achieve regulatory clearance (where required) - including
the level of testing evidence and documentation;
- Competitor activity - including the impact of potential competitor product
launches on the marketplace and customer demand; and
- Launch timeline - including time and resource required to establish and
support the commercial launch of a new product.
Taxation
As stated in the previous section 'Sources of estimation uncertainty', the
Group has applied judgement in the decisions made to recognise provisions
against uncertain tax positions; please see note 6 for further details.
Presentation of headline profits and organic growth
In order to provide users of the accounts with a clear and consistent
presentation of the performance of the Group's ongoing trading activity, the
income statement is presented in a three-column format with 'headline' profits
shown separately from non-headline items. In addition, the Group reports
organic growth rates for sales and profit measures.
See note 1 for disclosures of headline operating profit and note 29 for more
information about the alternative performance measures ('APMs') used by the
Group.
Judgement is required in determining which items should be included as
non-headline. The amortisation/impairment of acquired intangibles, legacy
liabilities, material one-off items and certain re-measurements are included
in a separate column of the income statement. See note 3 for a breakdown of
the items excluded from headline profit.
Calculating organic growth also requires judgement. Organic growth adjusts the
movement in headline performance to exclude the impact of foreign exchange,
restructuring costs and acquisitions.
Other estimates and judgements
Revenue recognition
Revenue is recognised as the performance obligations to deliver products or
services are satisfied and revenue is recorded based on the amount of
consideration expected to be received in exchange for satisfying the
performance obligations.
Smiths Detection, Smiths Interconnect and Flex-Tek have multi-year contractual
arrangements for the sale of goods and services. Where these contracts have
separately identifiable components with distinct patterns of delivery and
customer acceptance, revenue is accounted for separately for each identifiable
component.
The Group enters into certain contracts for agreed fees that are performed
across more than one accounting period and revenue is recognised over time.
Estimates are required at the balance sheet date when determining the stage of
completion of the contract activity. This assessment requires the expected
total costs of the contract and the remaining costs to complete the contract
to be estimated.
At 31 July 2024, the Group held contracts with a total value of £195m (2023:
£109m), of which £131m (2023: £83m) had been delivered and £64m (2023:
£26m) remains fully or partially unsatisfied. £39m of the unsatisfied amount
is expected to be recognised in the coming year, with the remainder being
recognised within two years. A 20% increase in the remaining cost to complete
the contracts would have reduced Group revenue and operating profit in the
current year by less than £9m (2023: £4m).
Significant accounting policies
Basis of consolidation
The Group's consolidated accounts include the financial statements of Smiths
Group plc (the 'Company') and all entities controlled by the Company (its
subsidiaries). A list of the subsidiaries of Smiths Group plc is provided
within the Annual Report 2024.
The Company controls an entity when it (i) has power over the entity; (ii) is
exposed or has rights to variable returns from its involvement with the
entity; and (iii) has the ability to affect those returns through its power
over the entity. The Group reassesses whether or not it controls a subsidiary
if facts and circumstances indicate that there are changes to one or more of
these three elements of control. Subsidiaries are fully consolidated from the
date on which control is obtained by the Company to the date that control
ceases.
Where the Group loses control of a subsidiary, the assets and liabilities are
derecognised along with any related non-controlling interest and other
components of equity. Any resulting gain or loss is recognised in the income
statement. Any interest retained in the former subsidiary is measured at fair
value when control is lost.
The non-controlling interests in the Group balance sheet represent the share
of net assets of subsidiary undertakings held outside the Group. The movement
in the year comprises the profit attributable to such interests together with
any dividends paid, movements in respect of corporate transactions and related
exchange differences.
Interests in associates are accounted for using the equity method. They are
initially recognised at cost, which includes transaction costs. Subsequent to
initial recognition, the Group financial statements include the Group's share
of the profit or loss and other comprehensive income of equity-accounted
investees, until the date on which significant influence ceases.
All intercompany transactions, balances, and gains and losses on transactions
between Group companies are eliminated on consolidation.
Foreign currencies
The Company's presentational currency and functional currency is sterling. The
financial position of all subsidiaries and associates that have a functional
currency different from sterling are translated into sterling at the rate of
exchange at the date of that balance sheet, and the income and expenses are
translated at average exchange rates for the period. All resulting foreign
exchange rate movements are recognised as a separate component of equity.
Foreign exchange rate movements arising on the translation of non-monetary
assets and liabilities held in hyperinflationary subsidiaries are recognised
in OCI. The amounts taken to the Cumulative Translation Adjustments reserve
represent the combined effect of restatement and translation and are expressed
as a net change for the year.
On consolidation, foreign exchange rate movements 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 foreign exchange rate movements is recognised in the income statement
as part of the gain or loss on sale.
Foreign exchange rate movements 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 is measured at the fair value of the consideration received, net of
trade discounts (including distributor rebates) and sales taxes. Revenue is
discounted only where the impact of discounting is material.
When the Group enters into complex contracts with multiple, separately
identifiable components, the terms of the contract are reviewed to determine
whether or not the elements of the contract should be accounted for
separately. If a contract is being split into multiple components, the
contract revenue is allocated to the different components at the start of the
contract. The basis of allocation depends on the substance of the contract.
The Group considers relative stand-alone selling prices, contractual prices
and relative cost when allocating revenue.
The Group has identified the following different types of revenue:
(i) Sale of goods recognised at a point in time - generic products
manufactured by Smiths
Generic products are defined as either:
- Products that are not specific to any particular customer;
- Products that may initially be specific to a customer but can be
reconfigured at minimal cost, i.e., retaining a margin, for sale to an
alternative customer; or
- Products that are specific to a customer but are manufactured at Smiths
risk, i.e., we have no right to payment of costs plus margin if the customer
refuses to take control of the goods.
For established products with simple installation requirements, revenue is
recognised when control of the product is passed to the customer. The point in
time that control passes is defined in accordance with the agreed shipping
terms and is determined on a case-by-case basis. The time of dispatch or
delivery of the goods to the customer is normally the point at which invoicing
occurs. However for some generic products, revenue is recognised when the
overall performance obligation has been completed, which is often after the
customer has completed its acceptance procedures and has assumed control.
Products that are sold under multiple element arrangements, i.e., contracts
involving a combination of products and services, are bundled into a single
performance obligation unless the customer can benefit from the goods or
services either on their own, or together with other resources that are
readily available to the customer and are distinct within the context of the
contract.
For contracts that pass control of the product to the customer only on
completion of installation services, revenue is recognised upon completion of
the installation.
An obligation to replace or repair faulty products under the standard warranty
terms is recognised as a provision. If the contract includes terms that either
extend the warranty beyond the standard term or imply that maintenance is
provided to keep the product working, these are service warranties and revenue
is deferred to cover the performance obligation in an amount equivalent to the
relative stand-alone selling price of that service.
(ii) Sale of goods recognised over time - customer-specific products where the
contractual terms include rights to payment for work performed to date
Customer-specific products are defined as being:
- Products that cannot be reconfigured economically such that it remains
profitable to sell to another customer;
- Products that cannot be sold to another customer due to contractual
restrictions; and
- Products that allow Smiths to charge for the work performed to date in an
amount that represents the costs incurred to date plus a margin, should the
customer refuse to take control of the goods.
For contracts that meet the terms listed above, revenue is recognised over the
period that the Group is engaged in the manufacture of the product, calculated
using the input method based on the amount of costs incurred to date compared
to the overall costs of the contract. This is considered to be a faithful
depiction of the transfer of the goods to the customer as the costs incurred,
total expected costs and total order value are known. The time of dispatch or
delivery of the goods to the customer is normally the point at which invoicing
occurs.
An obligation to provide a refund for faulty products under the standard
warranty terms is recognised as a provision. If the contract includes terms
that either extend the warranty beyond the standard term or imply that
maintenance is provided to keep the product working, these are service
warranties and revenue is deferred to cover the performance obligation in an
amount equivalent to the relative stand-alone selling price of that service.
(iii) Services recognised over time - services relating to the installation,
repair and ongoing maintenance of equipment
Services include installation, commissioning, testing, training, software
hosting and maintenance, product repairs and contracts undertaking extended
warranty services.
For complex installations where the supply of services cannot be separated
from the supply of product, revenue is recognised upon acceptance of the
combined performance obligation (see Sale of goods (i) above).
For services that can be accounted for as a separate performance obligation,
revenue is recognised over time, assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Depending on the nature of the contract, revenue is recognised as follows:
- Installation, commissioning and testing services (when neither linked to the
supply of product nor subject to acceptance) are recognised rateably as the
services are provided;
- Training services are recognised on completion of the training course;
- Software hosting and maintenance services are recognised rateably over the
life of the contract;
- Product repair services, where the product is returned to Smiths premises
for remedial action, are recognised when the product is returned to the
customer and they regain control of the asset;
- Onsite ad hoc product repair services are recognised rateably as the
services are performed;
- Long-term product repair and maintenance contracts are recognised rateably
over the contract term; and
- Extended service warranties are recognised rateably over the contract term.
Invoicing for services depends on the nature of the service provided with some
services charged in advance and others in arrears.
Where contracts are accounted for under the revenue recognised over time
basis, the proportion of costs incurred is used to determine the percentage of
contract completion.
Contracts for the construction of substantial assets, which normally last in
excess of one year, are accounted for under the revenue recognised over time
basis, using an input method.
For fixed-price contracts, revenue is recognised based upon an assessment of
the amount of cost incurred under the contract, compared to the total expected
costs that will be incurred under the contract. This calculation is applied
cumulatively with any over/under recognition being adjusted in the current
period.
For cost-plus contracts, revenue is recognised based upon costs incurred to
date plus any agreed margin.
For both fixed-price and cost-plus contracts, invoicing is normally based on a
schedule with milestone payments.
Customer funded R&D
Customer funded R&D relates to specific contracts whereby a third party,
e.g. government or commercial customer, has requested for the development of a
new product and they will fund the project.
The work carried out for the customer is expensed through cost of sales. Once
the performance obligations have been recognised as per IFRS 15, this is
classified as revenue.
Contract costs
The Group has taken the practical expedient of not capitalising contract costs
as they are expected to be expensed within one year from the date of signing.
Leases
Lease liabilities are initially measured at the present value of the future
lease payments at the commencement date, discounted by using either the rate
implicit in the lease, or if not observable, the Group's incremental borrowing
rate. Lease payments comprise contractual lease payments; variable lease
payments that depend on an index or rate, initially measured using the index
or rate at the commencement date; and the amount expected to be payable under
residual value guarantees.
Right of use assets are measured at commencement date at the amount of the
corresponding lease liability and initial direct costs incurred. Right of use
assets are depreciated over the shorter of the lease term and the useful life
of the right of use assets, unless there is a transfer of ownership or
purchase option which is reasonably certain to be exercised at the end of the
lease term, in which case depreciation is charged over the useful life of the
underlying asset. Right of use assets are subject to impairment.
When a lease contract is modified, either from a change to the duration of the
lease or a change to amounts payable, the Group remeasures the lease liability
by discounting the revised future lease payments at a revised discount rate. A
corresponding adjustment is made to the carrying value of the related right of
use asset.
Leases of buildings typically have lease terms between one and seven years,
while plant and machinery generally have lease terms between one and three
years. The Group also has certain leases of machinery with lease terms of 12
months or less and leases of office equipment with low value (typically below
£5,000). The Group applies the 'short-term lease' and 'lease of low-value
assets' recognition exemptions for these leases and recognises the lease
payments associated with these leases as an expense on a straight-line basis
over the lease term.
Interest on lease liabilities is presented as a financing activity in the
Consolidated Cash-Flow Statement, included under the heading lease payments.
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.
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. Tax benefits are not
recognised unless it is likely that the tax positions are sustainable. Tax
positions taken are then reviewed to assess whether a provision should be made
based on prevailing circumstances. Tax provisions are included in current tax
liabilities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted, at the reporting date in the
countries where the Group operates and generates taxable income.
The Group operates and is subject to taxation in many countries. Tax
legislation is different in each country, is often complex and is subject to
interpretation by management and government authorities. These matters of
judgement give rise to the need to create provisions for uncertain tax
positions which are recognised when it is considered more likely than not that
there will be a future outflow of funds to a taxing authority. Provisions are
made against individual exposures and take into account the specific
circumstances of each case, including the strength of technical arguments,
recent case law decisions or rulings on similar issues and relevant external
advice.
The amounts are measured using one of the following methods, depending on
which of the methods the Directors expect will better reflect the amount the
Group will pay to the tax authority:
- The single best estimate method is used where there is a single outcome that
is more likely than not to occur. This will happen, for example, where the tax
outcome is binary or the range of possible outcomes is very limited; or
- Alternatively, a probability weighted expected value is used where, on the
balance of probabilities, there will be a payment to the tax authority but
there are a number of possible outcomes. In this case, a probability is
assigned to each of the outcomes and the amount provided is the sum of these
risk-weighted amounts. In assessing provisions against uncertain tax
positions, management uses in-house tax experts, professional firms and
previous experience of the taxing authority to evaluate the risk.
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. 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.
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.
IAS 12 International Tax Reform: Pillar Two Model Rules.
On 19 July 2023, the UK Endorsement Board adopted the Amendments to IAS
12 International Tax Reform: Pillar Two Model Rules, issued by the IASB in
May 2023. The Amendments introduce a temporary mandatory exception from
accounting for deferred taxes arising from the Pillar Two model rules and the
Group has applied this exception to recognising and disclosing information
about deferred tax assets and liabilities related to Pillar Two income taxes.
Employee benefits
Share-based compensation
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.
Pension obligations and post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under
IAS 19. The retirement benefit obligation in respect of the defined benefit
plans is the liability (the present value of all expected future obligations)
less the fair value of the plan assets.
The income statement expense is allocated between current service costs,
reflecting the increase in liability due to any benefit accrued by employees
in the current period, any past service costs/credits and settlement losses or
gains which are recognised immediately, and the scheme administration costs.
Actuarial gains and losses are recognised in the statement of comprehensive
income in the year in which they arise. These comprise the impact on the
liabilities of changes in demographic and financial assumptions compared with
the start of the year, actual experience being different to assumptions and
the return on plan assets being above or below the amount included in the net
pension interest cost.
Payments to defined contribution schemes are charged as an income statement
expense as they fall due.
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.
The 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.
The 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. Should the test indicate
that the net realisable value of the CGU is less than current carrying value,
an impairment loss will be 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 over the estimated period of sale for each product, commencing
in the year that the product is ready for sale. Amortisation is charged
straight line or based on the units produced, depending on the nature of the
product and the availability of reliable estimates of production volumes.
The cost of development projects which are expected to take a substantial
period of time to complete includes attributable borrowing costs.
Intangible assets acquired in business combinations
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 useful lives as follows:
Patents, licences and trademarks up to 20 years
Technology up to 13 years
Customer relationships up to 15 years
The assets' useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to seven years
Patents and intellectual property shorter of the economic life and the period the right is legally enforceable
The assets' useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
Property, plant and equipment
Property, plant and equipment are 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% per annum
Short leasehold property over the period of the lease
Plant, machinery, etc. 10% to 20% per annum
Fixtures, fittings, tools and other equipment 10% to 33% per annum
The cost of any assets which are expected to take a substantial period of time
to complete includes attributable borrowing costs.
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.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out 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).
The cost of items of inventory which take a substantial period of time to
complete includes attributable borrowing costs.
The net realisable value of inventories is the estimated selling price in the
ordinary course of business, less applicable variable selling expenses.
Provisions are made for any slow-moving, obsolete or defective inventories.
Trade and other receivables
Trade receivables and contract assets are either classified as 'held to
collect' and initially recognised at fair value and subsequently measured at
amortised cost, less any appropriate provision for expected credit losses or
as 'held to collect and sell' and measured at fair value through other
comprehensive income (FVOCI).
A provision for expected credit losses is established when there is objective
evidence that it will not be possible to collect all amounts due according to
the original payment terms. Expected credit losses are determined using
historical write-offs as a basis, adjusted for factors that are specific to
the debtor, general economic conditions of the industry in which the debtor
operates and with a default risk multiplier applied to reflect country risk
premium. The Group applies the IFRS 9 simplified lifetime expected credit loss
approach for trade receivables and contract assets which do not contain a
significant financing component.
Provisions
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of the
obligation. Where the Group expects some or all of a provision to be
reimbursed, for example under an insurance contract, the reimbursement is
recognised as a separate asset but only when the reimbursement is virtually
certain.
Provisions for warranties and product liability, disposal indemnities,
restructuring costs, property dilapidations 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 is a number of similar obligations, for example where a warranty
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.
Discontinued operations
A discontinued operation is either:
- 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; or
- A business acquired solely for the purpose of selling it.
Discontinued operations are presented on the income statement as a separate
line and are shown net of tax.
In accordance with IAS 21, gains and losses on intra-group monetary assets and
liabilities are not eliminated. Therefore foreign exchange rate movements on
intercompany loans with discontinued operations are presented on the income
statement as non-headline finance cost items.
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.
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: measured at amortised cost, fair value
through other comprehensive income or fair value through profit and loss.
Financial assets primarily include trade receivables, cash and cash
equivalents (comprising cash at bank, money-market funds, and short-term
deposits), short-term investments, derivatives (foreign exchange contracts and
interest rate derivatives) and unlisted investments.
- Trade receivables are classified either as 'held to collect' and measured at
amortised cost or as 'held to collect and sell' and measured at fair value
through other comprehensive income (FVOCI). The Group may sell trade
receivables due from certain customers before the due date. Any trade
receivables from such customers that are not sold at the reporting date are
classified as 'held to collect and sell'.
- Cash and cash equivalents (consisting of balances with banks and other
financial institutions, money-market funds and short-term deposits) and
short-term investments are subject to low market risk. Cash balances,
short-term deposits and short-term investments are measured at amortised cost.
Money market funds are measured at fair value through profit and loss (FVPL).
- Derivatives are measured at FVPL.
- Listed and unlisted investments are measured at FVOCI.
- Deferred contingent consideration are measured at FVPL.
Financial assets are derecognised when the right to receive cash-flows from
the assets has expired, or has been transferred, and the Group has transferred
substantially all of the risks and rewards of ownership.
On initial recognition, the Group may make an irrevocable election to
designate certain investments as FVOCI, if they are not held for trading or
relate to contingent consideration on a business combination. When securities
measured at FVOCI are sold or impaired, the accumulated fair value adjustments
remain in reserves.
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 interest rate
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
The Group uses derivative financial instruments to hedge its exposures to
foreign exchange and interest rates arising from its operating and financing
activities.
Derivative financial instruments are initially recognised at fair value on the
date a derivative contract is entered into and are subsequently re-measured at
their fair value. The method of recognising any resulting gain or loss depends
on whether the derivative financial instrument is designated as a hedging
instrument and, if so, the nature of the item being hedged.
Where derivative financial instruments are designated into hedging
relationships, the Group formally documents the following:
- The risk management objective and strategy for entering the hedge;
- The nature of the risks being hedged and the economic relationship between
the hedged item and the hedging instrument; and
- Whether the change in cash-flows of the hedged item and hedging instrument
are expected to offset each other.
Changes in the fair value of any derivative financial instruments that do not
qualify for hedge accounting are recognised immediately in the income
statement.
Fair value hedge
The Group uses derivative financial instruments to convert part of its fixed
rate debt to floating rate in order to hedge the risks arising from its
external borrowings.
The Group designates these as fair value hedges of interest rate risk. Changes
in the hedging instrument 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 to the extent that the hedge is effective.
Gains or losses relating to any ineffectiveness are immediately recognised in
the income statement.
Cash-flow hedge
Cash-flow hedging is used by the Group to hedge certain exposures to
variability in future cash-flows.
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 the hedge reserve are recycled in the
income statement in the periods when the hedged items will affect profit or
loss (for example, 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 the hedge reserve are transferred from the
reserve 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 the hedge reserve at that time remains in the reserve 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 other comprehensive income 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 other comprehensive income;
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 for that period.
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.
IFRS 13: 'Fair value measurement' requires fair value measurements to be
classified according to the following hierarchy:
- Level 1 - quoted prices in active markets for identical assets or
liabilities;
- Level 2 - valuations in which all inputs are observable either directly
(i.e., as prices) or indirectly (i.e., derived from prices); and
- Level 3 - valuations in which one or more inputs that are significant to the
resulting value are not based on observable market data.
See note 21 for information on the methods which the Group uses to estimate
the fair values of its financial instruments.
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.
New accounting standards effective 2024
The accounting policies adopted in the preparation of these consolidated
financial statements are consistent with those followed in the previous
financial year, except for the adoption of the following amendment to IAS 12
'Income Taxes' that is applicable for the year ended 31 July 2024.
The International Accounting Standards Board (IASB) issued amendments to IAS
12, which narrow the scope of the initial recognition exemption (IRE). These
amendments clarify that the IRE does not apply to transactions that give rise
to equal and offsetting temporary differences, such as leased buildings.
As a result of the amendments, we now recognise deferred tax assets and
liabilities for temporary differences arising on the initial recognition of
all leased buildings.
The amendments are applied retrospectively and comparative figures for the
previous period have been restated to conform with the current period's
presentation. The adoption of the amendments to IAS 12 have resulted in a
£26m increase to both the deferred tax assets and the deferred tax
liabilities balances on the 31 July 2023 comparative balance sheet, with no
impact on profit or net assets.
New standards and interpretations not yet adopted
No other new standards, new interpretations or amendments to standards or
interpretations have been published which are expected to have a significant
impact on the Group's financial statements.
Parent Company
The ultimate Parent Company of the Group is Smiths Group plc, a company
incorporated in England and Wales and listed on the London Stock Exchange.
The accounts of the Parent Company, Smiths Group plc, have been prepared in
accordance with the Companies Act 2006 and Financial Reporting Standard 101,
'Reduced Disclosure Framework'.
The Company accounts are presented in separate financial statements in the
Annual Report 2024. The principal subsidiaries of the Parent Company are
listed in the above accounts.
NOTES TO THE ACCOUNTS
1. Segment information
Analysis by operating segment
The Group is organised into four major business segments: John Crane; Smiths
Detection; Flex-Tek; and Smiths Interconnect. These business segments design,
manufacture and support the following products:
- John Crane - mechanical seals, seal support systems, power transmission
couplings and specialised filtration systems;
- Smiths Detection - sensors and systems that detect and identify explosives,
narcotics, weapons, chemical agents, biohazards and contraband;
- Flex-Tek - engineered components, flexible hosing and rigid tubing that heat
and move fluids and gases; and
- Smiths Interconnect - specialised electronic and radio frequency board-level
and waveguide devices, connectors, cables, test sockets and sub-systems used
in high-speed, high-reliability, secure connectivity applications.
The position and performance of each business segment are reported at each
Board meeting to the Board of Directors. This information is prepared using
the same accounting policies as the consolidated financial information except
that the Group uses headline operating profit to monitor the segmental results
and operating assets to monitor the segmental position. See note 3 and note 29
for an explanation of which items are excluded from headline measures.
Intersegment sales and transfers are charged at arm's length prices.
Segment trading performance
Year ended 31 July 2024
John Crane Smiths Flex-Tek Smiths Corporate Total
£m Detection £m Interconnect costs £m
£m £m £m
Revenue 1,133 859 786 354 - 3,132
Segmental headline operating profit 263 102 161 49 - 575
Corporate headline operating costs - - - - (49) (49)
Headline operating profit/(loss) 263 102 161 49 (49) 526
Items excluded from headline measures (note 3) (34) (19) (26) (3) (29) (111)
Operating profit/(loss) 229 83 135 46 (78) 415
Headline operating margin 23.2% 11.9% 20.5% 13.9% 16.8%
Year ended 31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate Total
£m Detection £m Interconnect costs £m
£m £m £m
Revenue 1,079 803 768 387 - 3,037
Segmental headline operating profit 244 90 149 62 - 545
Corporate headline operating costs - - - - (44) (44)
Headline operating profit/(loss) 244 90 149 62 (44) 501
Items excluded from headline measures (note 3) (27) (35) (18) (12) (6) (98)
Operating profit/(loss) 217 55 131 50 (50) 403
Headline operating margin 22.6% 11.2% 19.4% 16.0% 16.5%
Operating profit is stated after charging (crediting) the following items:
Year ended 31 July 2024
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Depreciation - property, plant and equipment 17 11 8 9 - 45
Depreciation - right of use assets 15 8 3 7 1 34
Amortisation of capitalised development costs - 2 - - - 2
Amortisation of software, patents and intellectual property 1 1 2 - 1 5
Amortisation of acquired intangibles - - - - 49 49
Share-based payment 3 2 2 2 5 14
Year ended 31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Depreciation - property, plant and equipment 17 10 8 6 1 42
Depreciation - right of use assets 15 7 6 3 1 32
Amortisation of capitalised development costs - 2 - - - 2
Amortisation of software, patents and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 52 52
Share-based payment 3 1 2 2 6 14
Transition services cost reimbursement - - - - (10) (10)
The corporate and non-headline column comprises central information
technology, human resources and headquarters costs and non-headline expenses
(see note 3).
Segment assets and liabilities
Segment assets
31 July 2024
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Property, plant, equipment, right of use assets, development projects, other 168 153 103 65 61 550
intangibles and investments
Inventory, trade and other receivables 528 612 254 153 18 1,565
Segment assets 696 765 357 218 79 2,115
31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Property, plant, equipment, right of use assets, development projects, other 162 142 84 66 375 829
intangibles and investments
Inventory, trade and other receivables 489 599 226 160 10 1,484
Segment assets 651 741 310 226 385 2,313
Non-headline assets comprise receivables relating to non-headline items,
acquisitions and disposals.
Segment liabilities
31 July 2024
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Segmental liabilities 202 398 99 59 - 758
Corporate and non-headline liabilities - - - - 341 341
Segment liabilities 202 398 99 59 341 1,099
31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Segmental liabilities 200 357 91 62 - 710
Corporate and non-headline liabilities - - - - 339 339
Segment liabilities 200 357 91 62 339 1,049
Non-headline liabilities comprise provisions and accruals relating to
non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory assets and
liabilities
Assets Liabilities
31 July 31 July 31 July 31 July
2024
2023
2024
2023
£m
£m
(restated) (restated)
£m
£m
Segment assets and liabilities 2,115 2,313 (1,099) (1,049)
Goodwill and acquired intangibles 1,404 1,415 - -
Derivatives 4 5 (17) (20)
Current and deferred tax 118 168 (102) (146)
Retirement benefit assets and obligations 132 195 (103) (106)
Cash and borrowings 459 285 (659) (654)
Statutory assets and liabilities 4,232 4,381 (1,980) (1,975)
Segment capital expenditure
The capital expenditure on property, plant and equipment, capitalised
development and other intangible assets for each business segment is:
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Capital expenditure year ended 31 July 2024 34 28 10 11 3 86
Capital expenditure year ended 31 July 2023 19 36 10 16 - 81
Segment capital employed
Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets adjusted to add goodwill recognised directly in
reserves in respect of subsidiaries acquired before 1 August 1998 of £478m
(FY2023: £478m) and eliminate retirement benefit assets and obligations and
litigation provisions relating to non-headline items, both net of related tax,
and net debt. See note 29 for a reconciliation of net assets to capital
employed.
The 12-month rolling average capital employed by business segment, which
Smiths uses to calculate segmental return on capital employed, is:
31 July 2024
John Crane Smiths Flex-Tek Smiths Total
£m
Detection
£m
Interconnect
£m
£m
£m
Average segmental capital employed 1,035 1,124 606 472 3,237
Average corporate capital employed (31)
Average total capital employed - continuing operations 3,206
31 July 2023
John Crane Smiths Flex-Tek Smiths Total
£m
Detection
£m
Interconnect
£m
£m
£m
Average segmental capital employed 1,022 1,154 570 466 3,212
Average corporate capital employed (16)
Average total capital employed - continuing operations 3,196
Analysis of revenue
The revenue for the main product and service lines for each business segment
is:
John Crane Original Aftermarket Total
equipment
£m
£m
£m
Revenue year ended 31 July 2024 321 812 1,133
Revenue year ended 31 July 2023 314 765 1,079
Smiths Detection Aviation Other security Total
£m
systems
£m
£m
Revenue year ended 31 July 2024 595 264 859
Revenue year ended 31 July 2023 535 268 803
Flex-Tek Aerospace Industrials Total
£m
£m
£m
Revenue year ended 31 July 2024 154 632 786
Revenue year ended 31 July 2023 144 624 768
Smiths Interconnect Components, connectors & subsystems
£m
Revenue year ended 31 July 2024 354
Revenue year ended 31 July 2023 387
Aftermarket sales contributed £1,587m (FY2023: £1,545m) of Group revenue:
John Crane aftermarket sales were £812m (FY2023: £765m); Smiths Detection
aftermarket sales were £443m (FY2023: £413m); Flex-Tek aftermarket sales
were £332m (FY2023: £367m); and Smiths Interconnect aftermarket sales were
£nil (FY2023: £nil).
Segmental revenue is analysed by the Smiths Group key global markets as
follows:
General Industrial Safety & Security Energy Aerospace & Defence Total
£m
£m
£m
£m
£m
John Crane revenue
Revenue year ended 31 July 2024 407 - 726 - 1,133
Revenue year ended 31 July 2023 423 - 656 - 1,079
Smiths Detection revenue
Revenue year ended 31 July 2024 - 859 - - 859
Revenue year ended 31 July 2023 - 803 - - 803
Flex-Tek revenue
Revenue year ended 31 July 2024 632 - - 154 786
Revenue year ended 31 July 2023 624 - - 144 768
Smiths Interconnect revenue
Revenue year ended 31 July 2024 166 - - 188 354
Revenue year ended 31 July 2023 190 141 - 56 387
Total revenue
Revenue year ended 31 July 2024 1,205 859 726 342 3,132
Revenue year ended 31 July 2023 1,237 944 656 200 3,037
* Following a review of the Smiths Interconnect segmental revenue reporting,
the Group has reanalysed this segment's revenue by key global market. The
driver of this reanalysis is to better align Smiths Interconnect's reporting
with how the business is run and the revenue reporting of Smiths
Interconnect's peer group.
The updated revenue analysis has been applied prospectively for FY2024.
The Aerospace key global market has been renamed Aerospace & Defence and
£143m of revenue that would have previously been reported as Safety &
Security revenue is now reported as Aerospace & Defence revenue.
The Group's statutory revenue is analysed as follows:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Sale of goods recognised at a point in time 2,275 2,244
Sale of goods recognised over time 45 36
Services recognised over time 812 757
3,132 3,037
Analysis by geographical areas
The Group's revenue by destination and non-current operating assets by
location are shown below:
Revenue Intangible assets, right of use assets and property, plant and equipment
Year ended Year ended 31 July 2024 31 July 2023
31 July 2024
31 July 2023
£m
£m
£m £m
Americas 1,694 1,641 1,046 1,254
Europe 622 563 461 519
Asia Pacific 475 493 14 71
Rest of World 341 340 - 29
3,132 3,037 1,521 1,873
Revenue by destination attributable to the United Kingdom was £128m (FY2023:
£87m). Other revenue found to be significant included, the United States of
America, totalling £1,411m (FY2023: £1,383m), China (excluding Hong Kong)
£144m (FY2023: £150m) and Germany £130m (FY2023: £143m). Revenue by
destination has been selected as the basis for attributing revenue to
geographical areas as this was the geographic attribution of revenue used by
management to review business performance.
Non-current assets located in the United Kingdom total £113m (FY2023:
£123m). Significant non-current assets held in the United States of America
£1.024m (FY2023: £1,181m) and Germany £330m (FY2023: £345m).
2. Operating costs
The Group's operating costs for continuing operations are analysed as follows:
Year ended 31 July 2024 Year ended 31 July 2023
Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Cost of sales - direct materials, labour, production and distribution 1,964 - 1,964 1,919 - 1,919
overheads
Selling costs 219 - 219 221 - 221
Administrative expenses 425 111 536 406 98 504
Research and development tax credits (2) - (2) - - -
Transition services cost reimbursement - - - (10) - (10)
Total 2,606 111 2,717 2,536 98 2,634
Operating profit is stated after charging (crediting):
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Research and development expense 73 73
Depreciation of property, plant and equipment 45 42
Depreciation of right of use assets 34 32
Amortisation of intangible assets 56 61
Transition services cost reimbursement - (10)
Research and development (R&D) cash costs were £109m (FY2023: £113m)
comprising £73m (FY2023: £73m) of R&D expensed to the income statement,
£14m (FY2023: £21m) of capitalised costs and £22m (FY2023: £19m) of
customer-funded R&D.
Administrative expenses include £1m (FY2023: £2m) in respect of lease
payments for short-term and low-value leases which were not included within
right of use assets and lease liabilities.
Auditors' remuneration
The following fees were paid or are payable to the Company's auditors, KPMG
LLP and other firms in the KPMG network, for the year ended 31 July 2024.
Year ended Year ended
31 July 2024
31 July 2023 (represented)
£m
£m
Audit services
Fees payable to the Company's auditors for the audit of the Company's annual 2.8 2.7
financial statements
Fees payable to the Company's auditors and its associates for other services:
- the audit of the Company's subsidiaries 3.7 5.5
6.5 8.2
All other services 0.5 0.5
Other services comprise audit-related assurance services of £0.5m (FY2023:
£0.5m).
Audit-related assurance services include the review of the Interim Report and
the limited assurance of the Group's Scope 1-3 Greenhouse Gas emissions
metrics. Total fees for non-audit services comprise 8% (FY2023: 6%) of audit
fees.
In the current year, the Group has agreed £0.1m of additional fees with the
Group auditors relating to the audit of the prior year financial statements.
3. Non-statutory profit measures
Headline profit measures
The Group has identified and defined a 'headline' measure of performance which
is not impacted by material non-recurring items or items considered
non-operational/trading in nature. This non-GAAP measure of profit is not
intended to be a substitute for any IFRS measures of performance, but is a key
measure used by management to understand and manage performance. See the
disclosures on presentation of results in accounting policies for an
explanation of the adjustments. The items excluded from 'headline' are
referred to as 'non-headline' items.
Non-headline operating profit items
i. Continuing operations
The non-headline items included in statutory operating profit for continuing
operations were as follows:
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Acquisition and disposal related costs
Post-acquisition integration costs and fair value adjustment unwind (3) -
Fair value loss on contingent consideration (13) (6)
Loss on disposal of financial asset (9) -
Business acquisition/disposal costs and related expenses (5) (1)
Legacy pension scheme arrangements
Past service costs for benefit equalisation 8 (4) 4
Scheme administration costs 8 (6) (2)
Retirement benefit scheme settlement loss 8 - (1)
Non-headline litigation provision movements
Movement in provision held against Titeflex Corporation 23 5 7
subrogation claims
Provision for John Crane, Inc. asbestos litigation 23 (29) (16)
Cost recovery for John Crane, Inc. asbestos litigation 3 7
Other items
Amortisation of acquired intangible assets 10 (49) (52)
Funding of charitable foundation (1) -
Restructuring costs - (36)
Irrecoverable VAT on chain export transaction - (2)
Non-headline items in operating profit - continuing operations (111) (98)
Acquisition and disposal related costs
The £3m (FY2023: £nil) of post-acquisition integration costs and fair value
adjustment unwind principally relate to Flex-Tek's acquisitions of HCP and
Burns Machine. These include £2m of defined project costs for the integration
of these businesses into the existing Flex-Tek business and a £1m expense for
the unwinding the acquisition balance sheet fair value adjustments required by
IFRS 3 'Business combinations'. These have been recognised as non-headline as
the charge did not relate to trading activity.
The £13m fair value loss (FY2023: £6m loss) on contingent consideration
represents the full write down of the remaining fair value of the Group's
contingent consideration from the sale of Smiths Medical to ICU Medical, Inc.
(ICU). Since FY2022 the Group has held a financial asset for 10% of the equity
in ICU and a financial asset for the fair value of US$100m additional
consideration contingent on the future share performance of ICU. During FY2024
the Group has sold 2,030,000 shares in ICU reducing Smiths' equity investment
in ICU to approximately 1.9% of ICU's issued share capital. The Group's
reduced investment in ICU has resulted in the contingent consideration no
longer being payable. This is considered to be a non-headline item on the
basis that these fair value charges do not relate to trading activity.
The £9m loss (FY2023: £nil) on disposal of financial asset relates to the
block sale discount on the disposal of 2,030,000 ICU shares. This is
considered a non-headline charge as it did not relate to trading activity.
The £5m (FY2023: £1m) of business acquisition/disposal costs and related
expenses represent incremental costs related to the Group's Mergers &
Acquisitions (M&A) activity. These items do not include the cost of
employees working on transactions and are reported as non-headline because
they are dependent on the level of M&A activity being undertaken and do
not relate to trading activity.
Legacy pension scheme arrangements
The £4m charge (FY2023: £4m credit) for past service costs for benefit
equalisation represents the recognition of additional Smith Industries Pension
Scheme (SIPS) liabilities following the agreement of new methodologies to
achieve Guaranteed Minimum Pension (GMP) equalisation retirement benefits for
men and women, see note 8 for further details. These past service
(costs)/credits are reported as non-headline as they are non-recurring and
relate to legacy pension liabilities.
Scheme administration costs of £6m (FY2023: £2m) relate to the TIGPS legacy
pension scheme and SIPS 'path to buy-in' costs. As the Group has no
expectation of receiving a refund from the scheme, an economic benefit value
of zero has been placed on the TIGPS surplus. These are non-headline charges
as the Smiths Group effectively has no economic exposure to these costs and
they are paid from cash retained in the scheme.
Non-headline litigation provision movements
The following litigation costs and recoveries have been treated as
non-headline items because the provisions were treated as non-headline when
originally recognised and the subrogation claims and litigation relate to
products that the Group no longer sells in these markets:
- The £5m credit (FY2023: £7m credit) recognised by Titeflex Corporation was
principally driven by a reduction in the number of expected claims. See note
23 for further details; and
- The £29m charge (FY2023: £16m) in respect of John Crane, Inc. asbestos
litigation is driven primarily by adverse judgements impacting the future
expected indemnity costs. See note 23 for further details; and
- In FY2024 £3m (FY2023: £7m) of asbestos litigation costs were recovered by
John Crane, Inc. via insurer settlements.
Other items
Acquisition related intangible asset amortisation costs of £49m (FY2023:
£52m) were recognised in the current period. This is considered to be a
non-headline item on the basis that these charges result from acquisition
accounting and do not relate to current trading activity.
The £1m funding of charitable foundation charge is the FY2024 funding of the
Smiths Group Foundation, charitable giving foundation with a committed initial
£10m of funding linked to engineering-related good causes. This is recognised
as non-headline as the charge did not relate to trading activity.
Non-headline finance costs items
The non-headline items included in finance costs for continuing operations
were as follows:
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Unwind of discount on provisions 23 (9) (7)
Other finance income - retirement benefits 8 6 7
Interest payable on overdue VAT - (7)
Other sundry financing losses (2) (1)
Non-headline items in finance costs - continuing operations (5) (8)
Continuing operations - non-headline loss before taxation (116) (106)
The financing elements of non-headline legacy liabilities, including the £9m
(FY2023: £7m) unwind of discount on provisions, were excluded from headline
finance costs because these provisions were originally recognised as
non-headline and this treatment has been maintained for ongoing costs and
credits.
Other finance income comprises £6m (FY2023: £7m) of financing credits
relating to retirement benefits. These were excluded from headline finance
costs because the ongoing costs and credits are a legacy of previous employee
pension arrangements.
The prior year £7m of interest payable on overdue VAT related to a historic
classification error on chain export transactions.
Non-headline taxation (charge)/credit
The non-headline items included in taxation for continuing operations were as
follows:
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Tax credit on non-headline loss 6 20 18
Increase in unrecognised UK deferred tax asset 6 (19) (31)
Non-headline taxation (charge)/credit - continuing operations 1 (13)
Continuing operations - non-headline loss for the year (115) (119)
Movement in unrecognised UK deferred tax asset
These movements are reported as non-headline because the original credit was
reported as non-headline.
ii. Discontinued operations
In the prior year the Group has recognised an additional £6m gain on
transactions related to the sale of Smiths Medical. These items are considered
to be non-headline as they relate to discontinued former business activities.
4. Net finance costs
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Interest income 26 36
Interest expense:
- bank loans and overdrafts, including associated fees (47) (50)
- other loans (12) (17)
- interest on leases (5) (4)
Interest expense (64) (71)
Headline net finance costs (38) (35)
Other financing (losses)/gains:
- valuation movements on fair value hedged debt 5 (9)
- valuation movements on fair value derivatives (5) 9
- foreign exchange and ineffectiveness on net investment hedges (2) (3)
- retranslation of foreign currency bank balances - 2
- unwind of discount on provisions 3 (9) (7)
Other financing (losses)/gains (11) (8)
Other non-headline finance cost items:
Interest expense - interest on overdue VAT - (7)
Other finance income - Interest on retirement benefits 8 6 7
Other non-headline finance cost items 6 -
Net finance costs (43) (43)
5. Earnings per share
Basic earnings per share are calculated by dividing the profit for the year
attributable to equity shareholders of the Company by the average number of
ordinary shares in issue during the year.
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Profit attributable to equity shareholders for the year:
- continuing 250 225
- discontinued - 6
Total 250 231
Year ended Year ended
31 July 2024
31 July 2023
Number of shares
Number of shares
Number of shares in issue, net of shares held in Employee Benefit Trust:
Weighted average number for basic earnings per share 345,901,957 352,891,120
Adjustment for potentially dilutive shares 1,389,223 1,790,699
Weighted average number for diluted earnings per share 347,291,180 354,681,819
No options (FY2023: nil) were excluded from this calculation because their
effect was anti‑dilutive.
Year ended Year ended
31 July 2024
31 July 2023
pence
pence
Statutory earnings per share total - basic 72.3p 65.5p
Statutory earnings per share total - diluted 72.0p 65.1p
Statutory earnings per share continuing operations - basic 72.3p 63.8p
Statutory earnings per share continuing operations - diluted 72.0p 63.4p
A reconciliation of statutory and headline earnings per share is as follows:
Year ended 31 July 2024 Year ended 31 July 2023
£m Basic EPS Diluted EPS £m Basic EPS Diluted EPS
(p)
(p)
(p)
(p)
Total profit attributable to equity shareholders 250 72.3p 72.0p 231 65.5 65.1
of the Parent Company
Exclude: Non-headline items (note 3) 115 113
Headline earnings per share 365 105.5p 105.2p 344 97.5 97.0
Profit from continuing operations attributable to 250 72.3p 72.0p 225 63.8 63.4
equity shareholders of the Parent Company
Exclude: Non-headline items (note 3) 115 119
Headline earnings per share - continuing operations 365 105.5p 105.2p 344 97.5 97.0
6. Taxation
This note only provides information about corporate income taxes under IFRS.
Smiths companies operate in over 50 countries across the world. They pay and
collect many different taxes in addition to corporate income taxes including:
payroll taxes; value added and sales taxes; property taxes; product-specific
taxes; and environmental taxes. The costs associated with these other taxes
are included in profit before tax.
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
The taxation charge in the consolidated income statement for the year
comprises:
Continuing operations
Current taxation:
- current income tax charge 114 112
- current tax adjustments in respect of prior periods 1 (7)
Current taxation 115 105
Deferred taxation 6 29
Total taxation expense - continuing operations 121 134
Analysed as:
Headline taxation expense 122 121
Non-headline taxation charge/(credit) (1) 13
Total taxation expense in the consolidated income statement 121 134
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Tax on items charged/(credited) to equity
Deferred tax:
- retirement benefit schemes (17) (32)
Taxation on retirement benefit movements (17) (32)
The £17m credit (FY2023: £32m credit) to equity for retirement benefit
schemes principally related to UK retirement schemes.
Current taxation liabilities
Current tax
£m
At 31 July 2022 (17)
Charge to income statement (105)
Tax paid 92
At 31 July 2023 (30)
Comprising:
Current tax receivable 47
Current tax payable within one year (74)
Corporation tax payable after more than one year (3)
At 31 July 2023 (30)
Charge to income statement (115)
Tax paid 99
At 31 July 2024 (46)
Comprising:
Current tax receivable 24
Current tax payable within one year (70)
At 31 July 2024 (46)
Provisions for tax liabilities amount to £44m (FY2023: £46m) the majority of
which relates to the risk of challenge from tax authorities to the geographic
allocation of profits across the Group.
In addition to the risks provided for, the Group faces a variety of other tax
risks, which result from operating in a complex global environment, including
the ongoing reform of both international and domestic tax rules, new and
ongoing tax audits in the Group's larger markets and the challenge to fulfil
ongoing tax compliance filing and transfer pricing obligations given the scale
and diversity of the Group's global operations.
The Group anticipates that a number of tax audits are likely to conclude in
the next 12 to 24 months for which provisions are recognised based on best
estimates and management's judgements concerning the ultimate outcome of the
audit. Due to the uncertainty associated with such items, it is possible at a
future date, on conclusion of open tax matters, the final outcome may vary
significantly from the amounts noted above.
Reconciliation of the tax charge
The headline tax charge for the year of £122m (FY2023: £121m) represents an
effective rate of 25.0% (FY2023: 26.0%).
The tax charge on the profit for the year for continuing operations is
different from the standard rate of corporation tax in the UK, with a rate for
FY2024 of 25.0% (FY2023: 21.0%). The differences are reconciled as follows:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Profit before taxation 372 366
Notional taxation expense at UK corporate rate of 25% (FY2023: 21%) 93 77
Different tax rates on non-UK profits and losses (4) 13
Non-deductible expenses and other charges 20 24
Tax credits and non-taxable income (7) (10)
Non-headline UK deferred tax asset recognition adjustment 19 31
Other adjustments to unrecognised deferred tax (3) 2
Prior year true-up 3 (3)
Total taxation expense in the consolidated income statement 121 134
Comprising:
Taxation on headline profit 122 121
Non-headline taxation items:
- Tax credit on non-headline loss (20) (18)
- UK deferred tax asset recognition adjustment 19 31
Taxation on non-headline items (1) 13
Total taxation expense in the consolidated income statement 121 134
The table above reconciles the notional taxation charge calculated at the UK
tax rate, to the actual total tax charge. As a group operating in multiple
countries, the actual tax rates applicable to profits in those countries are
different from the UK tax rate. The impact is shown above as different tax
rates on non-UK profits and losses. The Group's worldwide business leads to
the consideration of a number of important factors which may affect future tax
charges, such as: the levels and mix of profitability in different
jurisdictions, transfer pricing regulations, tax rates imposed and tax regime
reforms, acquisitions, disposals, restructuring activities, and settlements or
agreements with tax authorities.
Deferred taxation assets/(liabilities)
Property, plant, Employment Losses Provisions Other Total
equipment and
benefits
carried
£m
£m
£m
intangible
£m
forward
assets
£m
£m
At 31 July 2022 (76) (51) 103 79 (4) 51
Reallocations - (2) 6 (4) - -
Charge to income statement - continuing operations 13 (3) (32) (5) (2) (29)
Credit to equity - 32 - - - 32
Foreign exchange rate movements 3 (1) (2) (4) 2 (2)
At 31 July 2023 (60) (25) 75 66 (4) 52
IAS 12 amendment - Initial recognition exemption (26) - - - 26 -
At 31 July 2023 (restated) (86) (25) 75 66 22 52
Comprising:
Deferred tax assets (2) (27) 50 60 40 121
Deferred tax liabilities (84) 2 25 6 (18) (69)
At 31 July 2023 (86) (25) 75 66 22 52
Reallocations (9) (1) 5 - 5 -
Charge to income statement - continuing operations 16 (2) (15) 4 (9) (6)
Credit to equity - 17 - - - 17
Foreign exchange rate movements - (1) - 1 (1) (1)
At 31 July 2024 (79) (12) 65 71 17 62
Comprising:
Deferred tax assets (9) (15) 31 63 24 94
Deferred tax liabilities (70) 3 34 8 (7) (32)
At 31 July 2024 (79) (12) 65 71 17 62
Of the amounts included within 'Other', shown in the above table, as at 31
July 2024, amounts relating to tax on unremitted earnings were £22 m (FY2023:
£19m). The aggregate amount of temporary differences associated with
investments in subsidiaries for which deferred tax liabilities have not been
recognised is immaterial.
The deferred tax asset relating to losses has been recognised on the basis of
strong evidence of future taxable profits against which the unutilised tax
losses can be relieved or it is probable that they will be recovered against
the reversal of deferred tax liabilities. The closing net deferred tax asset
balance attributable to UK activities and included in the balance at 31 July
2024 amounted to £nil (FY2023: £nil). Deferred tax attributable to
provisions includes £54m (FY2023: £51m) relating to John Crane Inc
litigation provision, and £9m (FY2023: £9m) relating to Titeflex
Corporation. See note 23 for additional information on provisions.
The International Accounting Standards Board issued amendments to IAS 12,
which narrow the scope of the initial recognition exemption (IRE). These
amendments clarify that the IRE does not apply to transactions that give rise
to equal and offsetting temporary differences, such as leases. As a result of
the amendments, we now recognise deferred tax assets and liabilities for
temporary differences arising on the initial recognition of all leases. The
amendments are applied retrospectively, and comparative figures for previous
periods have been restated to conform with the current period's presentation.
Losses with unrecognised deferred tax
The Group does not recognise deferred tax on losses of £603m (FY2023:
£521m).
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 in respect of which deferred tax has not been recognised is set out
below:
2024 Expiry of 2023 Expiry of
£m
losses
£m
losses
Unrestricted losses - operating losses 603 No expiry 521 No expiry
Losses with deferred tax unrecognised have increased by £82m (FY2023: £186m
increase). This is mainly due to an increase in unrecognised UK losses of
£63m. This movement is explained by the reduction in the related UK deferred
tax asset as offset by the deferred tax liability on the UK pension scheme
surplus.
Developments in the Group tax position
Pillar Two legislation has been enacted or substantively enacted in certain
jurisdictions in which the Group operates and the legislation will be
effective for the Group's financial year beginning 1 August 2024. On 11 July
2023, the UK enacted the BEPS Pillar Two global minimum taxes legislation for
accounting periods beginning on or after 1 January 2024 (Year Ended 31 July
2025 for Smiths).
We carried out a Pillar Two impact assessment on 2023 financial data for the
constituent entities within Smiths Group. We consider that implementation of
qualified domestic minimum top-up taxes and the income inclusion rule in the
UK will not have a material impact on the Group's FY2025 ETR.
The Group is continuing to assess the impact of the Pillar Two income taxes
legislation on future financial performance.
7. Employees
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Staff costs during the period
Wages and salaries 844 802
Social security 99 92
Share-based payment (note 9) 14 14
Pension costs (including defined contribution schemes) (note 8) 35 31
Total 992 939
The average number of persons employed, including employees on permanent,
fixed term and temporary contracts, rounded to the nearest 50 employees, was:
Year ended Year ended
31 July 2024
31 July 2023
John Crane 6,200 6,050
Smiths Detection 3,400 3,250
Flex-Tek 4,050 3,750
Smiths Interconnect 2,600 2,800
Corporate (including central/shared IT services) 300 300
Total 16,550 16,150
Key management
The key management of the Group comprises Smiths Group plc Board Directors and
Executive Committee members. Their aggregate compensation is shown below.
Further information for the Executive Directors is available in the single
figure renumeration table within the Annual Report 2024. Further information
for the Non-executive Directors is available in the single figure remuneration
table in the report of Renumeration & People Committee within the Annual
Report 2024.
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Key management compensation
Salaries and short-term employee benefits 12.6 12.0
Cost of retirement benefits 0.7 0.7
Cost of share-based incentive plans 3.4 4.9
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 2024 Year ended 31 July 2023
Number of Weighted average Number of Weighted average
instruments
exercise
instruments
exercise
'000
price
'000
price
LTIP 1,389 1,580
SAYE 11 £13.06 16 £11.45
Related party transactions
The only related party transactions in FY2024 were key management compensation
(FY2023: key management compensation).
8. Retirement benefits
The Group provides retirement benefits to employees in a number of countries.
This includes defined benefit and defined contribution plans and, mainly in
the United Kingdom (UK) and United States of America (US), post-retirement
healthcare.
Defined contribution plans
The Group operates defined contribution plans across many countries. In the UK
a defined contribution plan has been offered since the closure of the UK
defined benefit pension plans. In the US a 401(k) defined contribution plan
operates. The total expense recognised in the consolidated income statement in
respect of all these plans was £31m (FY2023: £31m).
Defined benefit and post-retirement healthcare plans
The principal defined benefit pension plans are in the UK and in the US and
these have been closed so that no future benefits are accrued.
For all schemes, pension costs are assessed in accordance with the advice of
independent, professionally qualified actuaries. These valuations have been
updated by independent qualified actuaries in order to assess the liabilities
of the schemes as at 31 July 2024. Contributions to the schemes are made on
the advice of the actuaries, in accordance with local funding requirements.
The changes in the present value of the net pension asset in the period were:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
At beginning of period 89 194
Foreign exchange rate movements 1 1
Current service cost (4) (2)
Headline scheme administration costs (3) (4)
Non-headline scheme administration costs (6) (2)
Past service cost, curtailments, settlements - continuing operations (4) 4
Finance income - retirement benefits 6 7
Contributions by employer 16 5
Actuarial (losses)/gains (66) (114)
Net retirement benefit asset 29 89
UK pension schemes
The Group's 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 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 (to applicable caps) pension benefits based on final
earnings at date of closure. SIPS is governed by a corporate trustee (S.I.
Pension Trustees Limited, a wholly owned subsidiary of Smiths Group plc). The
board of trustee directors currently comprises four 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 has been performed using
the Projected Unit Method as at 31 March 2023. The valuation showed a surplus
of £26m on the Technical Provisions funding basis at the valuation date and
the funding position has improved since then. As part of the valuation
agreement, no contributions are currently being paid to SIPS and the Group's
current expectation is that contributions will not recommence. The next
actuarial valuation is due as at 31 March 2026.
The duration of SIPS liabilities is around 20 years (FY2023: 18 years) for
active deferred members, 17 years (FY2023: 19 years) for deferred members and
10 years (FY2023: 10 years) for pensioners and dependants.
Under the governing documentation of SIPS, any future surplus would be
returnable to Smiths Group plc by refund, assuming gradual settlement of the
liabilities over the lifetime of the scheme.
In SIPS, as part of ongoing data cleansing work being undertaken to prepare
the scheme for a potential full buy-out in the future, a wider review is being
carried out to determine if the method used in the early 1990s to equalise
retirement ages between men and women was implemented correctly. In FY2022, an
additional liability of £19m was recognised as a past service cost to reflect
the expected impact of correcting this issue for certain sections of the
scheme. In FY2023, a further liability of £12m was recognised and £16m of
liabilities recognised in previous years was released following the
identification of additional evidence of the obligation for equalisation,
resulting in a net credit to the income statement of £4m. In the current
year, a further liability of £3m has been recognised as a past service cost,
to reflect the expected impact of correcting this issue for the remaining
sections of the scheme of £0.4m, as well as an updated cost estimate for the
impact of GMP equalisation of £2.6m. Prior to the current year, additional
costs of £29m in FY2019 and £6m FY2021 were recognised in respect of GMP
equalisation. Whilst the wider review of scheme data remains on-going, no
further liabilities are expected in respect of retirement age equalisation or
GMP equalisation.
SIPS uses a Liability Driven Investment (LDI) strategy to hedge against
interest and inflation rate changes. During the significant volatility that
followed the UK Government's mini budget in September 2022, like most other
pension schemes with LDI assets, this hedging policy meant that SIPS asset
values fell, as did the value of its obligations, although the funding
position quickly recovered. All of SIPS's collateral requirements in respect
of the LDI assets were met, with no support required from the Group. The SIPS
trustee, in consultation with the Group, has since reduced the leverage in the
LDI portfolio, strengthened its ongoing monitoring and shock tests and moved
significant non-LDI assets into more liquid alternatives. As a result, the
scheme is in a stronger position to withstand any further shocks to gilt
yields.
TI Group Pension Scheme (TIGPS)
This scheme was closed to future accrual effective 1 November 2009. TIGPS
provides index-linked (to applicable caps) 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 three 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.
In June 2022 the TIGPS trustee completed a deal to secure its remaining
uninsured pension liabilities, by way of a bulk annuity buy-in with Rothesay
Life plc. This means all of the scheme's liabilities are insured via seven
buy-in policies. The final buy-in has been secured with an intention to fully
buy-out the Scheme as soon as reasonably practical and within a period of four
years. The FY2022 income statement recognised a settlement loss of £171m in
relation to the buy-in.
In terms agreed between the Group and the TIGPS trustee prior to the
transaction, when TIGPS converts all of its buy-in policies to buy-out
policies and subsequently winds up, the trustee is expected to use any surplus
remaining, after the costs of buying-out and winding up the scheme have been
met, to improve member benefits. The FY 2022 income statement recognised a
past service cost of £24m in relation to the derecognition of the remaining
surplus. The Group currently has no expectation of receiving a refund from the
scheme and has placed an economic benefit value of zero on the TIGPS surplus
from 10 June 2022.
As TIGPS currently retains the legal obligation to pay all scheme benefits,
TIGPS liabilities remain part of the retirement benefit obligations on the
balance sheet alongside the corresponding buy-in assets. These liabilities and
assets will be derecognised at the point the buy-in policies are converted to
buy-outs and the legal obligation for payment of benefits is transferred to
the relevant insurers.
The most recent actuarial valuation of this scheme has been performed using
the Projected Unit Method as at 5 April 2023. The valuation showed a surplus
of £44m on the Technical Provisions funding basis at the valuation date and
the funding position remains in surplus. Given TIGPS's circumstances, the
Group's current expectation is that no further contributions to TIGPS will be
required. The next actuarial valuation is due as at 5 April 2026.
The duration of the TIGPS liabilities is around 18 years (FY2023: 20 years)
for active deferred members, 16 years (FY2023: 18 years) for deferred members
and 9 years (FY2023: 10 years) for pensioners and dependants.
US pension plans
The valuations of the principal US pension and post-retirement healthcare
plans were performed using census data at 1 January 2024.
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 overseen by a Settlor Committee appointed by Smiths Group Services
Corp, a wholly owned subsidiary of the Group.
The duration of the liabilities for the largest US plan is around 15 years
(FY2023: 15 years) for active deferred members, 14 years (FY2023: 14 years)
for deferred members and 9 years (FY2023: 10 years) for pensioners and
dependants.
Risk management
In respect of uninsured liabilities, the pensions schemes are exposed to risks
that:
- Investment returns are below expectations, leaving the schemes with
insufficient assets in future to pay all their pension obligations;
- Members and dependants live longer than expected, increasing the value of
the pensions which the schemes have to pay;
- Inflation rates are higher than expected, causing amounts payable under
index-linked pensions to be higher than expected; and
- Increased contributions are required to meet funding targets if lower
interest rates increase the current value of liabilities.
These risks are managed separately for each pension scheme. However, the Group
has adopted a common approach of closing defined benefit schemes to cap
members' entitlements and of supporting trustees in adopting investment
strategies which aim to hedge the value of assets against changes in the value
of liabilities caused by changes in interest and inflation rates.
Across SIPS and TIGPS, approximately 60% of all liabilities are now de-risked
through 11 bulk annuities.
TIGPS
TIGPS has covered roughly 100% of liabilities with matching annuities,
eliminating investment return, longevity, inflation and funding risks in
respect of those liabilities.
SIPS
SIPS has covered roughly 33% of liabilities with matching annuities,
eliminating investment return, longevity, inflation and funding risks in
respect of those liabilities. It has also adopted a LDI strategy to hedge
interest and inflation risks of the scheme's uninsured liabilities by
investment in gilts together with the use of gilt repurchase arrangements,
total return swaps, inflation swaps and interest rate swaps. The strategy also
takes into account the scheme's corporate bond investments.
The critical estimates and principal assumptions used in updating the
valuations are set out below:
2024 2024 2024 2023 2023 2023
UK
US
Other
UK
US
Other
Rate of increase in salaries n/a n/a 2.8% n/a n/a 2.5%
Rate of increase for active deferred members 4.0% n/a n/a 4.0% n/a n/a
Rate of increase in pensions in payment 3.3% n/a 0.5% 3.3% n/a 1.6%
Rate of increase in deferred pensions 3.3% n/a n/a 3.3% n/a n/a
Discount rate 5.0% 5.2% 2.8% 5.1% 5.2% 2.8%
Inflation rate 3.3% n/a 2.1% 3.3% n/a 0.4%
The assumptions used in calculating the costs and obligations of the Group's
defined benefit pension plans are set by the Group 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 the US, assumptions are disclosed as a weighted average.
Inflation rate assumptions
The RPI inflation assumption of 3.3% has been derived using the Aon UK
Government Gilt Prices Only Curve with an Inflation Risk Premium of 0.1% p.a.
(FY2023: 0.2%). The impact of changing the Inflation Risk Premium was to
increase the UK liabilities by £16m.
The Government's response to its consultation on RPI reform was published on
25 November 2020, and strongly implied that RPI will become aligned with CPI-H
from 2030. No specific allowance (beyond anything already priced into markets)
has been factored into the RPI assumptions for potential changes. The
assumption for the long-term gap between RPI and CPI is 0.5% p.a.
(FY2023: 0.5%) reflecting the Group's view on the market pricing of this gap
over the lifetime of the UK schemes' liabilities, i.e., 0.9% p.a. (FY2023:
0.9%) pre-2030 and 0.1% p.a. post-2030 (FY2023: 0.1%).
Short-term inflation has reduced from its peak in FY2023 following the Bank of
England's measures to combat high inflation. Consequently, the long-term
inflation assumptions are similar to the prior year. The full impact of high
inflation is mitigated to an extent by the caps in place on index-linked
increases. The Board considered and declined a request from the Trustee of
SIPS to recommend an additional discretionary increase to pensions in payment.
However, there is no change in the Group's constructive obligations and
allowance for the possibility for certain discretionary increases in future
continues to be included in the defined benefit obligations shown below, as
well as being included in the Trustee's ongoing approach to funding SIPS.
Furthermore, all of the annuity policies that currently back part of the SIPS
obligations include allowance for the possibility of these discretionary
increases to be paid in future, where applicable.
Discount rate assumptions
The UK schemes use a discount rate based on the annualised yield on the Aon
GBP Single Agency Select AA Curve, using the expected cash-flows from a
notional scheme with obligations of the same duration as that of the UK
schemes. This is the same approach as was adopted for FY2023.
The US Plan uses a discount rate based on the annualised yield derived from
Willis Towers Watson's RATE:Link (10th - 90th) model using the Plan's expected
cash-flows.
The discount rate assumptions are similar to the prior year.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are based on the
latest 'SAPS S3' birth year tables with relevant scaling factors based on the
recent experience of the schemes. The assumption allows for future
improvements in life expectancy in line with the latest 2023 CMI projections,
with a smoothing factor of 7.0 and 'A' parameter of 0.5%/0.25% (SIPS/TIGPS)
and blended to a long-term rate of 1.5%. The latest CMI projections
incorporate allowance for the impact of COVID-19 by placing a weighting of 0%
on 2020 and 2021 mortality data and a weighting of 15% on 2022 and 2023
mortality data.
The mortality assumptions used in the principal US schemes are based on
generational mortality using the latest Pri-2012 sex-distinct,
employee/non-disabled annuitant table, with a 2012 base year, projected
forward generationally with the latest MP-2021 mortality scale. No explicit
adjustment has been made to mortality assumptions in respect of COVID-19. The
impact of COVID-19 remains uncertain and further data studies are underway to
better predict the impact on future mortality.
Expected further years of life UK schemes
Male Female Male Female
31 July 2024
31 July 2024
31 July 2023
31 July 2023
Member who retires next year at age 65 22 24 21 23
Member, currently 45, when they retire in 20 years' time 23 25 20 24
Expected further years of life US schemes
Male Female Male Female
31 July 2024
31 July 2024
31 July 2023
31 July 2023
Member who retires next year at age 65 21 22 21 22
Member, currently 45, when they retire in 20 years' time 22 24 22 24
Sensitivity
Sensitivities in respect of the key assumptions used to measure the principal
pension schemes as at 31 July 2024 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. In practice, such
assumptions rarely change in isolation.
Profit before tax Increase/ (Increase)/ Profit before tax Increase/ (Increase)/
for year ended
(decrease) in
decrease in
for year
(decrease) in
decrease in
31 July 2024
scheme
scheme
scheme
scheme
£m
assets
liabilities ended
assets
liabilities
31 July 2024
31 July 2024
31 July 2023
31 July 2023
31 July 2023
£m
£m
£m
£m
£m
Rate of mortality - one year increase in life expectancy (2) 66 (108) (2) 60 (88)
Rate of mortality - one year decrease in life expectancy 2 (67) 110 2 (62) 89
Rate of inflation - 0.25% increase (1) 21 (39) (1) 23 (43)
Discount rate - 0.25% increase 2 (33) 65 2 (36) 60
Market value of scheme assets - 2.5% increase 2 30 - 2 30 -
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.
Asset valuation
The pension schemes hold assets in a variety of pooled funds, in which the
underlying assets typically are invested in credit and cash assets. These
funds are valued. The price of the funds is set by administrators/custodians
employed by the investment managers and based on the value of the underlying
assets held in the funds. Prices are generally updated daily, weekly or
quarterly depending upon the frequency of the fund's dealing.
Bonds are valued using observable broker quotes. Gilt repurchase obligations
are valued by the relevant manager, which derives the value using an industry
recognised model with observable inputs.
Total return, interest and inflation swaps and forward FX contracts are
bilateral agreements between counterparties and do not have observable market
prices. These derivative contracts are valued using observable inputs.
Insured liabilities comprise annuity policies that match all or part of the
scheme obligation to identified groups of members. These assets are valued by
an external qualified actuary at the actuarial valuation of the corresponding
liability, reflecting this matching relationship.
The insurance policies are treated as qualifying insurance policies as none of
the insurers are related parties of the Group, and the proceeds of the
policies can only be used to pay or fund employee benefits for the respective
schemes, are not available to the Group's creditors and cannot be paid to the
Group.
Retirement benefit plan assets
31 July 2024 - £m
UK US Other Total
schemes
schemes
countries
Cash and cash equivalents 63 8 1 72
Pooled funds:
- Pooled equity - - 5 5
- Pooled Diversified Growth - - 12 12
- Pooled credit 337 - - 337
Corporate bonds 208 141 - 349
Government bonds/LDI 427 41 3 471
Insured liabilities 1,337 - - 1,337
Total market value 2,372 190 21 2,583
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
Cash and cash equivalents 93 1 1 95
Pooled funds:
- Pooled equity - - 3 3
- Pooled Diversified Growth - - 13 13
- Pooled credit 320 - - 320
Corporate bonds 203 141 - 344
Government bonds/LDI 421 44 3 468
Insured liabilities 1,323 - - 1,323
Property 7 - - 7
Total market value 2,367 186 20 2,573
The UK Government bonds/LDI portfolios contain £691m (FY2023: £717m) of UK
Government bonds (gilts), £270m (FY2023: £276m) of gilt repurchase
obligations and £5m of interest and inflation swap obligations (FY2023: £18m
assets) and forward FX contracts with a net obligation of £nil (FY2023: £2m
asset). These are held to hedge against foreign currency risk. The pooled
funds, insured liabilities and property assets are unquoted. The scheme assets
do not include any property occupied by, or other assets used by, the Group.
The asset valuations are effective as at the end of the period, consistent
with the calculations determining the obligations, except for a small legacy
commercial property investment which was sold in the current year. This
investment was only valued at the end of each calendar quarter, so no
valuation was available as at FY2023. The Group considered taking the most
recent available valuation to be appropriate given the size of the commercial
property investment relative to the overall value of invested assets and wider
commercial property market returns since the most recent valuation.
The Group acknowledges that responsibility for the effective management of the
schemes' assets lies primarily with the trustees, but also accepts that any
risks inherent in the investment strategy, including ESG and climate risk, are
ultimately underwritten by the Group. Consequently, the Group ensures that the
trustees' investment strategy and statements of investment principles are
compatible with the Group's wider sustainability strategy. For TIGPS, where
all benefits are now secured by way of annuity purchase, all investment risks
including ESG and climate risk, have effectively now been eliminated. For
SIPS, a significant portion of investment risks have already been eliminated
through annuity purchase and the scheme's time horizon to full buy-in, hence
exposure to investment risks including ESG and climate risk, continues to
reduce.
Present value of funded scheme liabilities and assets for the main UK and US
schemes
31 July 2024 - £m
SIPS TIGPS US
schemes
Present value of funded scheme liabilities:
- Active deferred members (13) (9) (28)
- Deferred members (379) (304) (80)
- Pensioners (915) (609) (93)
Present value of funded scheme liabilities (1,307) (922) (201)
Market value of scheme assets 1,439 933 190
Surplus restriction - (11) -
Surplus/(deficit) 132 - (11)
31 July 2023 - £m
SIPS TIGPS US
schemes
Present value of funded scheme liabilities:
- Active deferred members (25) (18) (31)
- Deferred members (388) (326) (86)
- Pensioners (838) (561) (85)
Present value of funded scheme liabilities (1,251) (905) (202)
Market value of scheme assets 1,446 921 186
Surplus restriction - (16) -
Surplus/(deficit) 195 - (16)
Net retirement benefit obligations
31 July 2024 - £m
UK US Other Total
schemes
schemes
countries
Market value of scheme assets 2,372 190 21 2,583
Present value of funded scheme liabilities (2,229) (201) (26) (2,456)
Surplus restriction (11) - - (11)
Surplus/(deficit) 132 (11) (5) 116
Unfunded pension plans (37) (6) (38) (81)
Post-retirement healthcare (2) (1) (3) (6)
Present value of unfunded obligations (39) (7) (41) (87)
Net pension asset/(liability) 93 (18) (46) 29
Comprising:
Retirement benefit assets 132 - - 132
Retirement benefit liabilities (39) (18) (46) (103)
Net pension asset/(liability) 93 (18) (46) 29
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
Market value of scheme assets 2,367 186 20 2,573
Present value of funded scheme liabilities (2,156) (202) (25) (2,383)
Surplus restriction (16) - - (16)
Surplus/(deficit) 195 (16) (5) 174
Unfunded pension plans (37) (6) (36) (79)
Post-retirement healthcare (3) (1) (2) (6)
Present value of unfunded obligations (40) (7) (38) (85)
Net pension asset/(liability) 155 (23) (43) 89
Comprising:
Retirement benefit assets 195 - - 195
Retirement benefit liabilities (40) (23) (43) (106)
Net pension asset/(liability) 155 (23) (43) 89
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,
i.e., when the last beneficiary's obligation has been met.
Amounts recognised in the consolidated income statement
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Amounts charged to operating profit
Current service cost 4 2
Past service costs - benefit equalisations 4 (5)
Settlement loss - 1
Headline scheme administration costs 3 4
Non-headline scheme administration costs 6 2
17 4
The operating cost is charged as follows:
Headline administrative expenses 7 6
Non-headline settlement loss - 1
Non-headline administrative expenses 10 (3)
17 4
Amounts credited to finance costs
Non-headline other finance income - retirement benefits (6) (7)
Amounts recognised directly in the consolidated statement of comprehensive
income
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Re-measurements of retirement defined benefit assets and liabilities
Difference between interest credit and return on assets 54 (660)
Experience gains/(losses) on scheme liabilities (103) (54)
Actuarial gains arising from changes in demographic assumptions 4 48
Actuarial gains/(losses) arising from changes in financial assumptions (26) 548
Movement in surplus restriction 5 4
(66) (114)
Changes in present value of funded scheme assets
31 July 2024 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period 2,367 186 20 2,573
Interest on assets 117 9 1 127
Actuarial movement on scheme assets 54 (1) 1 54
Employer contributions - 10 - 10
Scheme administration costs (7) (2) - (9)
Benefits paid (159) (12) (1) (172)
At end of period 2,372 190 21 2,583
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period 3,067 225 22 3,314
Interest on assets 105 10 1 116
Actuarial movement on scheme assets (638) (21) (1) (660)
Scheme administration costs (5) (1) - (6)
Foreign exchange rate movements - (10) - (10)
Assets distributed on settlements - (4) - (4)
Benefits paid (162) (13) (2) (177)
At end of period 2,367 186 20 2,573
Changes in present value of funded defined benefit obligations
31 July 2024 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period (2,156) (202) (25) (2,383)
Past service costs (3) - (1) (4)
Interest on obligations (106) (11) (1) (118)
Actuarial movement on liabilities (123) - (1) (124)
Foreign exchange rate movements - - 1 1
Benefits paid 159 12 1 172
At end of period (2,229) (201) (26) (2,456)
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period (2,738) (238) (27) (3,003)
Past service costs 4 - - 4
Interest on obligations (94) (10) (1) (105)
Actuarial movement on liabilities 510 19 1 530
Foreign exchange rate movements - 11 - 11
Liabilities extinguished on settlements - 3 - 3
Benefits paid 162 13 2 177
At end of period (2,156) (202) (25) (2,383)
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 2024
31 July 2023
31 July 2024
31 July 2023
£m
£m
£m
£m
At beginning of period - - (85) (98)
Current service cost - - (4) (1)
Interest on obligations - - (3) (3)
Actuarial movement - - (1) 12
Employer contributions 6 5 - -
Benefits paid (6) (5) 6 5
At end of period - - (87) (85)
Changes in the effect of the asset ceiling over the year
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Irrecoverable asset at beginning of period (16) (20)
Actuarial movement on scheme assets 5 4
At end of period (11) (16)
Cash contributions
Company contributions to the defined benefit pension plans and post-retirement
healthcare plans totalled £16m (FY2023: £5m). This comprised a planned £5m
contribution plus a one-off additional £5m contribution to the US funded
scheme (FY2023: £nil) and £6m (FY2023: £5m) on providing benefits under
unfunded defined benefit pension and post-retirement healthcare plans.
In FY2025, cash contributions to the Group's schemes are expected to be up to
£11m in total.
Recent legal rulings
In July 2024, the UK Court of Appeal upheld the High Court's ruling in the
Virgin Media v NTL Pension Trustees II court case relating to section 37 of
the pension Schemes Act 1993 and amendments to benefits for contracted-out
defined benefit schemes, such as SIPS and TIGPS. The ruling confirmed the need
for an actuarial certificate where such schemes made changes to benefits
between 6 April 1997 and 5 April 2016, and any amendments that affected
relevant benefits were void without the appropriate certificate.
The Trustees of SIPS and TIGPS are currently seeking additional legal advice
on what actions, if any, should be taken, which is unlikely to be progressed
until later in 2024. In the meantime, SIPS and TIGPS will continue to be
administered on the current basis until the legal position has been clarified.
9. 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 a three-year performance period if performance
conditions are met. LTIP awards are made to selected senior executives,
including the Executive Directors.
LTIP performance conditions
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 lapse. There is no
re-testing of the performance conditions.
LTIP awards have performance conditions relating to organic revenue growth,
growth in headline EPS, ROCE, free cash-flow and meeting ESG targets.
Restricted stock
Restricted stock is used by the Remuneration & People Committee, as a part
of recruitment strategy, to make awards in recognition of incentive
arrangements forfeited on leaving a previous employer. If an award is
considered appropriate, the award will take account of relevant factors
including the fair value of awards forfeited, any performance conditions
attached, the likelihood of those conditions being met and the proportion of
the vesting period remaining.
Save as you earn (SAYE)
The SAYE scheme is an HM Revenue & Customs approved all-employee
savings-related share option scheme which is open to all UK employees.
Participants enter into a contract to save a fixed amount per month of up to
£500 in aggregate for three years and are granted an option over shares at a
fixed option price, set at a discount to market price at the date of
invitation to participate. The number of shares 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.
Ordinary shares under option/award ('000) Long-term Restricted Save as you earn Total Weighted average
incentive plans
stock
scheme
exercise price
31 July 2022 5,310 83 885 6,278 £1.45
Granted 2,023 24 253 2,300 £1.47
Exercised (309) (20) (109) (438) £2.88
Lapsed (2,196) - (71) (2,267) £0.33
31 July 2023 4,828 87 958 5,873 £1.78
Granted 1,919 45 243 2,207 £1.34
Exercised (1,140) (10) (437) (1,587) £2.54
Lapsed (1,218) (8) (79) (1,305) £0.73
31 July 2024 4,389 114 685 5,188 £1.62
Options and awards were exercised on an irregular basis during the period. The
average closing share price over the financial year was 1,656.2p (FY2023:
1,629.8p). There has been no change to the effective option price of any of
the outstanding options during the period. The number of exercisable share
options at 31 July 2024 was nil (31 July 2023: nil).
Range of exercise prices Total shares under Weighted average Total shares under Weighted average
options/awards
remaining contractual
options/awards
remaining contractual
at 31 July 2024
life at 31 July 2024
at 31 July 2023
life at 31 July 2023
('000)
(months)
('000)
(months)
£0.00 - £2.00 4,503 17 4,915 17
£6.01 - £10.00 2 - 444 6
£10.01 - £12.00 683 29 514 33
For the purposes of valuing options to arrive at the share-based payment
charge, the binomial option pricing model has been used. The key assumptions
used in the model were volatility of 25% to 20% (FY2023: 25% to 20%) and
dividend yield of 2.6% (FY2023: 2.4%), based on historical data, for the
period corresponding with the vesting period of the option. These generated a
weighted average fair value for LTIP of £15.73 (FY2023: £15.03), and
restricted stock of £15.29 (FY2023: £14.60). Staff costs included £14m
(FY2023: £14m) for share-based payments, of which £11m (FY2023: £13m)
related to equity-settled share-based payments.
10. Intangible assets
Goodwill Development Acquired Software, Total
£m
costs
intangibles
patents and
£m
£m
(see table
intellectual
below)
property
£m
£m
Cost
At 31 July 2022 1,311 174 630 193 2,308
Foreign exchange rate movements (45) (2) (31) (3) (81)
Business combinations 7 - 13 - 20
Additions - 21 - 7 28
Disposals - - - (38) (38)
At 31 July 2023 1,273 193 612 159 2,237
Foreign exchange rate movements (7) (2) (1) - (10)
Business combinations 10 - 34 - 44
Additions - 14 - 4 18
Disposals - - - (1) (1)
At 31 July 2024 1,276 205 645 162 2,288
Amortisation and impairments
At 31 July 2022 67 123 373 157 720
Foreign exchange rate movements (3) (1) (19) (4) (27)
Amortisation charge for the year - 2 52 7 61
Disposals - - - (38) (38)
At 31 July 2023 64 124 406 122 716
Foreign exchange rate movements - (2) (2) - (4)
Amortisation charge for the year - 2 49 5 56
Disposals - - - (1) (1)
At 31 July 2024 64 124 453 126 767
Net book value at 31 July 2024 1,212 81 192 36 1,521
Net book value at 31 July 2023 1,209 69 206 37 1,521
Net book value at 31 July 2022 1,244 51 257 36 1,588
The charge associated with the amortisation of intangible assets is included
in operating costs on the consolidated income statement.
In addition to goodwill, acquired intangible assets comprise:
Patents, Technology Customer Total
licences
£m
relationships
acquired
and
£m
intangibles
trademarks
£m
£m
Cost
At 31 July 2022 19 152 459 630
Foreign exchange rate movements - (9) (22) (31)
Business combinations 1 2 10 13
At 31 July 2023 20 145 447 612
Foreign exchange rate movements - - (1) (1)
Business combinations 3 - 31 34
At 31 July 2024 23 145 477 645
Amortisation
At 31 July 2022 8 87 278 373
Foreign exchange rate movements - (6) (13) (19)
Charge for the year 1 11 40 52
At 31 July 2023 9 92 305 406
Foreign exchange rate movements - - (2) (2)
Charge for the year 2 10 37 49
At July 2024 11 102 340 453
Net book value at 31 July 2024 12 43 137 192
Net book value at 31 July 2023 11 53 142 206
Net book value at 31 July 2022 11 65 181 257
Individually material intangible assets comprise:
- £38m of customer-related intangibles attributable to United Flexible
(remaining amortisation period: 3 years);
- £38m of customer-related intangibles attributable to Morpho Detection
(remaining amortisation period: 4 years);
- £28m of customer-related intangibles attributable to Heating & Cooling
Products (remaining amortisation period: 9 years);
- £21m of customer-related intangibles attributable to Royal Metal (remaining
amortisation period: 4 years);
- £30m of development cost intangibles attributable to a computed tomography
programme in Detection that is currently under development; and
- £24m of development cost intangibles attributable to an X-ray diffraction
programme in Detection that is currently under development.
11. Impairment testing
Goodwill
Goodwill is tested for impairment at least annually or whenever there is an
indication that the carrying value may not be recoverable.
Further details of the impairment review process and judgements are included
in the 'Sources of estimation uncertainty' section of the 'Basis of
preparation' for the consolidated financial statements.
For the purpose of impairment testing, assets are grouped at the lowest levels
for which there are separately identifiable cash-flows, known as cash
generating units (CGUs), taking into consideration the commonality of
reporting, policies, leadership and intra-segmental trading relationships.
Goodwill acquired through business combinations is allocated to groups of CGUs
at a segmental (or operating segment) level, being the lowest level at which
management monitors performance separately.
The carrying value of goodwill at 31 July is allocated by business segment as
follows:
2024 2024 2023 2023
£m
Number of
£m
Number of
CGUs
CGUs
John Crane 130 1 131 1
Smiths Detection 625 1 630 1
Flex-Tek 193 1 183 1
Smiths Interconnect 264 1 265 1
1,212 4 1,209 4
Critical estimates used in impairment testing
The recoverable amount for impairment testing is determined from the higher of
fair value less costs of disposal and value in use of the CGU. In assessing
value in use, the estimated future cash-flows are discounted to their present
value using a post-tax discount rate that reflects current market assessments
of the time value of money, from which pre-tax discount rates are determined.
Fair value less costs of disposal is calculated using available information on
past and expected future profitability, valuation multiples for comparable
quoted companies and similar transactions (adjusted as required for
significant differences) and information on costs of similar transactions.
Fair value less costs to sell models are used when trading projections in the
strategic plan cannot be adjusted to eliminate the impact of a major
restructuring.
The value in use of CGUs is calculated as the net present value of the
projected risk-adjusted cash-flows of each CGU. These cash-flow forecasts are
based on the FY2025 business plan and the five-year detailed segmental
strategic plan projections which have been prepared by segmental management
and approved by the Board.
The principal assumptions used in determining the value in use were:
- Revenue: Projected sales were built up with reference to markets and product
categories. They incorporated past performance, historical growth rates and
projections of developments in key markets;
- Average earnings before interest and tax margin: Projected margins reflect
historical performance, our expectations for future cost inflation and the
impact of all completed projects to improve operational efficiency and
leverage scale. The projections did not include the impact of future
restructuring projects to which the Group was not yet committed;
- Projected capital expenditure: The cash-flow forecasts for capital
expenditure were based on past experience and included committed ongoing
capital expenditure consistent with the FY2025 budget and the segmental
strategic projections. The forecast did not include any future capital
expenditure that improved/enhanced the operation/asset in excess of its
current standard of performance;
- Discount rate: The discount rates have been determined with reference to
illustrative weighted average cost of capital (WACC) for each CGU. In
determining these discount rates, management have considered systematic risks
specific to each of the Group's CGUs. These risk-adjusted discount rates have
then been validated against the Group's WACC, the WACCs of the CGU's peer
group and an average of discount rates used by other companies for the
industries in which Smiths business segments operate. Pre-tax rates of 11.9%
to 12.8% (FY2023: 11.4% to 13.0%) have been used for the impairment testing;
and
- Long-term growth rates: For the purposes of the Group's value in use
calculations, a long-term growth rate into perpetuity was applied immediately
at the end of the five-year detailed forecast period. CGU-specific long-term
growth rates have been calculated by revenue weighting the long-term GDP
growth rates of the markets that each CGU operates in. The long-term growth
rates used in the testing ranged from 2.1% to 2.6% (FY2023: 2.2% to 2.7%).
These rates do not reflect the long-term assumptions used by the Group for
investment planning.
Of the principal assumptions above, the key assumptions that the impairment
models are most sensitive to are: the revenue growth assumption; the average
earnings before interest and tax margin assumption; and the discount rate
assumption.
The assumptions used in the impairment testing of CGUs with significant
goodwill balances were as follows:
As at 31 May 2024
John Crane Smiths Flex-Tek Smiths
Detection
Interconnect
Net book value of goodwill (£m) 135 649 191 279
Basis of valuation Value in use Value in use Value in use Value in use
Discount rate - pre-tax 11.9% 12.8% 12.6% 12.5%
- post-tax 9.4% 9.5% 10.0% 10.1%
Period covered by management projections 5 years 5 years 5 years 5 years
Capital expenditure - annual average over projection period (£m) 31 19 10 12
Revenue - compound annual growth rate over projection period 6.1% 3.8% 3.6% 4.4%
Average earnings before interest and tax margin 22.2% 12.9% 20.5% 15.8%
Long-term growth rates 2.6% 2.3% 2.1% 2.5%
As at 31 May 2023
John Crane Smiths Flex-Tek Smiths
Detection
Interconnect
Net book value of goodwill (£m) 135 649 191 279
Basis of valuation Value in use Value in use Value in use Value in use
Discount rate - pre-tax 13.0% 12.2% 11.8% 11.5%
- post-tax 9.7% 9.3% 9.4% 9.4%
Period covered by management projections 5 years 5 years 5 years 5 years
Capital expenditure - annual average over projection period (£m) 27 27 10 20
Revenue - compound annual growth rate over projection period 5.3% 4.5% 3.4% 4.7%
Average earnings before interest and tax margin 24.6% 14.5% 19.5% 18.6%
Long-term growth rates 2.7% 2.4% 2.2% 2.5%
Forecast earnings before interest and tax have been projected using:
- Expected future sales based on the strategic plan, which was constructed at
a market level with input from key account managers, product line managers,
business development and sales teams. An assessment of the market and existing
contracts/programmes was made to produce the sales forecast; and
- Current cost structure and production capacity, which include our
expectations for future cost inflation. The projections did not include the
impact of future restructuring projects to which the Group was not yet
committed.
Sensitivity analysis
Smiths Detection is the only CGU of the Group that has limited goodwill
impairment testing headroom. For all of the Group's other CGUs the recoverable
amount of the CGU exceeded the carrying value, on the basis of the assumptions
set out in the preceding tables and any reasonably possible changes thereof.
The estimated recoverable amount of the Smiths Detection CGU exceeded its 31
July 2024 carrying value by £254m. Any decline in estimated value in use in
excess of this amount would result in the recognition of impairment charges.
Management recognise that the goodwill impairment testing headroom of the
Smiths Detection CGU is most sensitive to movements in the revenue growth
rate, the EBIT margin and the discount rate assumptions. Of these key
assumptions, management consider that the EBIT margin assumption is the most
sensitive.
The Smiths Detection financial model assumes that EBIT margins grow from 11.9%
in FY2024 to an average of 13.6% over the five-year financial model period.
This increase in EBIT margin is principally driven by a change in revenue and
profit mix, with proportion of higher margin aftermarket revenue growing over
the five-year projection period.
Management considers that it is plausible that this margin growth may not be
fully captured by the business. For the CGU to be impaired, the average EBIT
margin over the five-year financial model would have to be less than 11.5%;
management does not believe this to be a reasonably plausible scenario.
If the assumptions used in the impairment review were changed to a greater
extent than as presented in the following table, the changes would, in
isolation, lead to impairment losses being recognised for the year ended 31
July 2024:
Change required for carrying value to equal recoverable amount - FY2024 Smiths Detection
Revenue - compound annual growth rate (CAGR) over five-year projection period -470 bps decrease
Average earnings before interest and tax margin -220 bps decrease
Post-tax discount rate +150 bps increase
Change required for carrying value to equal recoverable amount - FY2023 Smiths Detection
Revenue - compound annual growth rate (CAGR) over five-year projection period -460 bps decrease
Average earnings before interest and tax margin -220 bps decrease
Post-tax discount rate +140 bps increase
Note: The information in the sensitivity table above has been provided
voluntarily to aid the users of the accounts. Projected capital expenditure
and long-term growth rates are not included in the table above as management
consider that there is no reasonably possible change in the projected capital
expenditure or long-term growth rate that would result in an impairment.
The Smiths Interconnect CGU's revenue and headline operating profit for FY2024
declined versus the prior year, reflecting weaknesses in the semiconductor
market and a slower market in connectors. This underperformance has driven a
reduction in the CGU's impairment headroom, as its strategic plan growth is
now projected off a new lower base. The detailed assumptions and calculation
basis of Interconnect's strategic plan and impairment model have been stress
tested and management have concluded that there are no reasonably possible
changes in the key impairment testing assumptions that could result an
impairment.
Property, plant and equipment, right of use assets and finite-life
intangible assets
At each reporting period date, the Group reviews the carrying amounts of its
property, plant, equipment, right of use assets and finite-life intangible
assets to determine whether there is any indication that those assets have
suffered an impairment loss.
The Group has no indefinite life intangible assets other than goodwill. During
the year, impairment tests were carried out for capitalised development costs
that 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.
12. Property, plant and equipment
Land and Plant and Fixtures, Total
buildings
machinery
fittings,
£m
£m
£m
tools and
equipment
£m
Cost or valuation
At 31 July 2022 176 457 129 762
Foreign exchange rate movements (6) (14) (2) (22)
Business combinations - 2 - 2
Additions 10 33 10 53
Disposals (2) (15) (17) (34)
At 31 July 2023 178 463 120 761
Foreign exchange rate movements (3) (7) (2) (12)
Business combinations - 7 - 7
Additions 10 50 8 68
Disposals (4) (17) (12) (33)
At 31 July 2024 181 496 114 791
Depreciation
At 31 July 2022 108 299 112 519
Foreign exchange rate movements (4) (8) (2) (14)
Charge for the year 8 25 9 42
Disposals (2) (14) (17) (33)
At 31 July 2023 110 302 102 514
Foreign exchange rate movements (1) (3) (1) (5)
Charge for the year 8 32 5 45
Disposals (4) (17) (12) (33)
At July 2024 113 314 94 521
Net book value at 31 July 2024 68 182 20 270
Net book value at 31 July 2023 68 161 18 247
Net book value at 31 July 2022 68 158 17 243
13. Right of use assets
Properties Vehicles Equipment Total
£m
£m
£m
£m
Cost or valuation
At 31 July 2022 174 21 1 196
Foreign exchange rate movements (6) (1) - (7)
Recognition of right of use asset 27 7 1 35
Derecognition of right of use asset (5) - - (5)
At 31 July 2023 190 27 2 219
Foreign exchange rate movements (3) (1) - (4)
Business combinations 12 - - 12
Recognition of right of use asset 18 10 - 28
Derecognition of right of use asset (5) - - (5)
At 31 July 2024 212 36 2 250
Depreciation
At 31 July 2022 75 15 - 90
Foreign exchange rate movements (4) - - (4)
Charge for the year 27 4 1 32
Derecognition of right of use asset (4) - - (4)
At 31 July 2023 94 19 1 114
Foreign exchange rate movements (2) (1) - (3)
Charge for the year 29 5 - 34
Derecognition of right of use asset (5) - - (5)
At 31 July 2024 116 23 1 140
Net book value at 31 July 2024 96 13 1 110
Net book value at 31 July 2023 96 8 1 105
Net book value at 31 July 2022 99 6 1 106
14. Financial assets - other investments
Investment in ICU Medical, Inc equity Deferred contingent consideration Investments in early stage businesses Cash collateral deposit Total
£m
£m
£m
£m
£m
Cost or valuation
At 31 July 2022 364 19 8 4 395
Fair value change through profit and loss - (6) - - (6)
Fair value change through other comprehensive income (17) - (1) - (18)
At 31 July 2023 347 13 7 4 371
Fair value change through profit and loss - (13) - - (13)
Fair value change through other comprehensive income (103) - (2) - (105)
Disposals (197) - - (3) (200)
At 31 July 2024 47 - 5 1 53
Following the sale of Smiths Medical the Group has held a financial asset for
its investment in ICU Medical, Inc (ICU) equity and a financial asset for the
fair value of US$100m additional sales consideration that is contingent on the
future share price performance of ICU. During FY2024 the Group has sold
2,030,000 shares in ICU reducing Smiths' equity investment in ICU to
approximately 1.9% of ICU's issued share capital. The Group's reduced
investment in ICU has resulted in the contingent consideration no longer being
payable.
Since the year end during August 2024 the Group disposed of 415,771 ICU
shares, which further reduced the Group's equity stake in ICU to approximately
0.2% of ICU's issued share capital.
The Group's investments in early-stage businesses are in businesses that are
developing or commercialising related technology. Cash collateral deposits
represent amounts held on deposit with banks as security for liabilities or
letters of credit.
15. Inventories
31 July 2024 31 July 2023
£m
£m
Raw materials and consumables 192 201
Work in progress 148 130
Finished goods 303 306
Total inventories 643 637
In FY2024, operating costs included £1,629m (FY2023: £1,622m) of inventory
consumed, £13m (FY2023: £26m) was charged for the write-down of inventory
and £11m (FY2023: £16m) was released from provisions no longer required.
Inventory provisioning
31 July 2024 31 July 2023
£m
£m
Gross inventory carried at full value 560 545
Gross value of inventory partly or fully provided for 146 158
706 703
Inventory provision (63) (66)
Inventory after provisions 643 637
16. Trade and other receivables
31 July 2024 31 July 2023
£m
£m
Non-current
Trade receivables - 2
Prepayments 1 -
Contract assets 86 65
Other receivables 9 8
96 75
Current
Trade receivables 544 493
Prepayments 58 40
Contract assets 123 121
Other receivables 101 118
826 772
Trade receivables do not carry interest. Management considers that the
carrying value of trade and other receivables approximates to the fair value.
Trade and other receivables, including accrued income and other receivables
qualifying as financial instruments, are accounted for at amortised cost. The
maximum credit exposure arising from these financial assets was £788m
(FY2023: £744m).
Contract assets comprise unbilled balances not yet due on contracts, where
revenue recognition does not align with the agreed payment schedule. The main
movements in the year arose from increases in contract asset balances of £23m
(FY2023: £19m) principally within John Crane and Smiths Detection, offset by
a £1m (FY2023: £7m) decrease due to foreign currency translation losses.
A number of Flex-Tek's and Interconnect's customers provide supplier finance
schemes which allow their suppliers to sell trade receivables, without
recourse, to banks. This is commonly known as invoice discounting or
factoring. During FY2024 the Group collected £146m of receivables through
these schemes (FY2023: £128m). The impact of invoice discounting on the
FY2024 balance sheet was that trade receivables were reduced by £23m (2023:
£26m). Costs of discounting were £2m (FY2023: £2m), charged to the income
statement within financing costs. The cash received via these schemes was
classified as an operating cash inflow as it had arisen from operating
activities.
Trade receivables are disclosed net of provisions for expected credit loss,
with historical write-offs used as a basis, adjusted for factors that are
specific to the debtor, general economic conditions of the industry in which
the debtor operates and a default risk multiplier applied to reflect country
risk premium. 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. The Group has no
significant concentration of credit risk, with exposure spread over a large
number of customers. The largest single customer was the US Federal
Government, representing 8% (FY2023: 7%) of Group revenue.
Ageing of trade receivables
31 July 2024 31 July 2023
£m
£m
Trade receivables which are not yet due 436 389
Trade receivables which are between 1-30 days overdue 56 52
Trade receivables which are between 31-60 days overdue 17 19
Trade receivables which are between 61-90 days overdue 13 12
Trade receivables which are between 91-120 days overdue 5 8
Trade receivables which are more than 120 days overdue 46 45
573 525
Expected credit loss allowance provision (29) (30)
Trade receivables 544 495
Movement in expected credit loss allowance
31 July 2024 31 July 2023
£m
£m
Brought forward loss allowance at the start of the period 30 36
Exchange adjustments 1 (1)
Increase in allowance recognised in the income statement 4 4
Amounts written off or recovered during the year (6) (9)
Carried forward loss allowance at the end of the year 29 30
17. Trade and other payables
31 July 2024 31 July 2023
£m
£m
Non-current
Other payables 15 13
Contract liabilities 26 27
41 40
Current
Trade payables 274 247
Other payables 35 51
Other taxation and social security costs 60 66
Accruals 204 200
Contract liabilities 191 159
764 723
Trade and other payables, including accrued expenses and other payables
qualifying as financial instruments, are accounted for at amortised cost and
are categorised as 'Trade and other financial payables' in note 21.
Contract liabilities comprise deferred income balances of £217m (FY2023:
£186m) in respect of payments being made in advance of revenue recognition.
The movement in the year arises primarily from the long-term contracts of the
Smiths Detection business segment where invoicing under milestones precedes
the delivery of the programme performance obligations. Revenue recognised in
the year includes £166m (FY2023: £97m) that was included in the opening
contract liabilities balance. This revenue primarily relates to the delivery
of performance obligations in the Smiths Detection business.
18. Borrowings and net debt
This note sets out the calculation of net debt, an important measure in
explaining our financing position. Net debt includes accrued interest and
fair value adjustments relating to hedge accounting.
31 July 2024 31 July 2023
£m
£m
Cash and cash equivalents
Net cash and deposits 459 285
Short-term borrowings
Lease liabilities (32) (26)
Interest accrual (2) (3)
(34) (29)
Long-term borrowings
€650m 2.00% Eurobond 2027 (534) (534)
Lease liabilities (91) (91)
(625) (625)
Borrowings/gross debt (659) (654)
Derivatives managing interest rate risk and currency profile of the debt (13) (18)
Net debt (213) (387)
Cash and cash equivalents
31 July 2024 31 July 2023
£m
£m
Cash at bank and in hand 123 175
Short-term deposits 336 110
Cash and cash equivalents 459 285
Cash and cash equivalents include highly liquid investments with maturities of
three months or less. Borrowings are accounted for at amortised cost and are
categorised as other financial liabilities. See note 18 for a maturity
analysis of borrowings. Interest of £12m (FY2023: £17m) was charged to the
consolidated income statement in the period in respect of public bonds.
Analysis of financial derivatives on balance sheet
Non-current Current Current Non-current Net balance
assets
assets
liabilities
£m
liabilities
£m £m
£m
£m
Derivatives managing interest rate risk and currency profile of the debt - - - (13) (13)
Foreign exchange forward contracts - 4 (4) - -
At 31 July 2024 - 4 (4) (13) (13)
Derivatives managing interest rate risk and currency profile of the debt - - - (18) (18)
Foreign exchange forward contracts - 5 (2) - 3
At 31 July 2023 - 5 (2) (18) (15)
Movements in assets/(liabilities) arising from financing activities
Changes in net debt Changes in other financing items: Total liabilities
FX contracts
from financing
£m
activities
£m
Cash Other Long-term Interest rate and cross-currency Net debt
and cash
short-term
borrowings
swaps
£m
equivalents
borrowings
£m
£m
£m
£m
At 31 July 2023 285 (29) (625) (18) (387) 3 (384)
Foreign exchange gains/(losses) (14) 1 10 - (3) - (3)
Net cash inflow from continuing operations 188 - - - 188 - 188
Lease payments - 39 - - 39 - 39
Interest paid - 57 - - 57 - 57
Interest expense* - (63) - - (63) - (63)
Cash inflow from matured derivative contracts - - - - - 5 5
Fair value movements - - (9) 5 (4) (8) (12)
Lease liabilities acquired - - (12) - (12) - (12)
Net movement from new leases and modifications - (28) - - (28) - (28)
Reclassifications - (11) 11 - - - -
At 31 July 2024 459 (34) (625) (13) (213) - (213)
* Interest expense presented in note 4 also includes a £1m accrual movement
that does not form part of net debt.
Changes in net debt Changes in other financing items: Total liabilities from financing
FX contracts
activities
£m
£m
Cash Other Long-term Interest rate and cross-currency Net debt
and cash
short-term
borrowings
swaps
£m
equivalents
borrowings
£m
£m
£m
£m
At 31 July 2022 1,056 (538) (628) (40) (150) (3) (153)
Foreign exchange gains/(losses) (10) (21) (10) - (41) # (4,031) (4,072)
Net cash inflow from continuing operations (761) 564 - 8 (189) # 4,031 3,842
Net movement from new leases and modifications - (34) - - (34) - (34)
Interest rate hedge fair value movements - (2) 16 - 14 - 14
Revaluation of derivative contracts - - - 14 14 6 20
Interest expense taken to income statement - 28 - - 28 - 28
Interest paid - (29) - - (29) - (29)
Reclassifications - 3 (3) - - - -
At 31 July 2023 285 (29) (625) (18) (387) 3 (384)
* These amounts relate to the cash settlement of foreign exchange contracts.
In the current year, these are with the same financial institution therefore
have not been shown gross.
Cash pooling
Cash and overdraft balances in interest compensation cash pooling systems are
reported gross on the balance sheet. The cash pooling agreements incorporate a
legally enforceable right of net settlement. However, as there is no
intention to settle the balances net, these arrangements do not qualify for
net presentation. At 31 July 2024 the total value of overdrafts on accounts in
interest compensation cash pooling systems was £nil (FY2023: £nil). The
balances held in zero balancing cash pooling arrangements have daily
settlement of balances. Therefore netting is not relevant.
Change of control
The Company has in place credit facility agreements under which a change of
control would trigger prepayment clauses. The Company has one bond in issue,
the terms of which would allow bondholders to exercise put options and require
the Company to buy back the bonds at their principal amount plus interest if a
rating downgrade occurs at the same time as a change of control takes effect.
Lease liabilities
Lease liabilities have been measured at the present value of the remaining
lease payments. The weighted average incremental borrowing rate applied to
lease liabilities in FY2024 was 4.42% (FY2023: 4.01%).
19. Financial risk management
The Group's international operations and debt financing expose it to financial
risks which include the effects of changes in foreign exchange rates, debt
market prices, interest rates, credit risks and liquidity risks. The
management of operational credit risk is discussed in note 16.
Treasury Risk Management Policy
The Board maintains a Treasury Risk Management Policy, which governs the
treasury operations of the Group and its subsidiary companies and the
consolidated financial risk profile to be maintained. A report on treasury
activities, financial metrics and compliance with the Policy is circulated to
the Chief Financial Officer each month and key elements to the Audit &
Risk Committee on a semi-annual basis.
The Policy maintains a treasury control framework within which counterparty
risk, financing and debt strategy, cash and liquidity, interest rate risk and
currency translation management are reserved for Group Treasury, while
currency transaction management is devolved to operating divisions.
Centrally directed cash management systems exist globally to manage overall
liquid resources efficiently across the divisions. The Group uses financial
instruments to raise financing for its global operations, to manage related
interest rate and currency financial risk, and to hedge transaction risk
within subsidiary companies.
The Group does not speculate in financial instruments. All financial
instruments hedge existing business exposures and all are recognised on the
balance sheet.
The Policy defines four treasury risk components and for each component a set
of financial metrics to be measured and reported monthly against pre-agreed
objectives.
1) Credit quality
The Group's strategy is to maintain a solid investment-grade rating to ensure
access to the widest possible sources of financing at the right time and to
optimise the resulting cost of debt capital. The credit ratings at the end of
July 2024 were BBB+ / Baa2 (both stable) from Standard & Poor's and
Moody's respectively. An essential element of an investment-grade rating is
consistent and robust cash-flow metrics. The Group's objective is to maintain
a net debt/headline EBITDA ratio of two times or lower over the medium term.
Capital management is discussed in more detail in note 26.
2) Debt and interest rate
The Group's risk management objectives are to ensure that the majority of
funding is drawn from the public debt markets, the average maturity profile of
gross debt is to be at or greater than three years, and between 40-60% of
gross debt (excluding leases) is at fixed rates. At 31 July 2024 these
measures were 100% (FY2023: 100%), 2.6 years (FY2023: 3.6 years) and 54%
(FY2023: 54%).
The Group has no financial covenants in its external debt agreements. Interest
rate risk management is discussed in note 19(b).
3) Liquidity management
The Group's objective is to ensure that at any time undrawn committed
facilities, net of short-term overdraft financing, are at least £300m and
that committed facilities have at least 12 months to run until maturity. At 31
July 2024, these measures were £623m (FY2023: £622m) and 57 months (FY2023:
57 months) until maturity. At 31 July 2024, net cash resources were £459m
(FY2023: £285m). Liquidity risk management is discussed in note 19(d).
4) Currency management
The Group is an international business with the majority of its net assets
denominated in foreign currency. It protects the balance sheet and reserves
from adverse foreign exchange movements by financing foreign currency assets
where appropriate in the same currency. The Group's objective for managing
transaction currency exposure is to reduce medium-term volatility to
cash-flow, margins and earnings. Foreign exchange risk management is discussed
in note 19(a) below.
(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 the net foreign exchange exposure to known future sales and
purchases is material, this 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.
The following table shows the currency of financial instruments. It excludes
loans and derivatives designated as net investment hedges.
At 31 July 2024
Sterling US$ Euro Other Total
£m
£m
£m
£m
£m
Financial assets and liabilities
Financial instruments included in trade and other receivables 38 417 147 195 797
Financial instruments included in trade and other payables (45) (222) (117) (111) (495)
Cash and cash equivalents 139 222 19 79 459
Borrowings not designated as net investment hedges (26) (61) (14) (22) (123)
106 356 35 141 638
Exclude balances held in operations with the same functional currency. (108) (305) (38) (153) (604)
Exposure arising from intra-Group loans - 65 37 (71) 31
Future forward foreign exchange contract cash-flows 13 (93) 6 74 -
11 23 40 (9) 65
At 31 July 2023
Sterling US$ Euro Other Total
£m
£m
£m
£m
£m
Financial assets and liabilities
Financial instruments included in trade and other receivables 43 372 127 184 726
Financial instruments included in trade and other payables (64) (216) (93) (103) (476)
Cash and cash equivalents 50 115 29 91 285
Borrowings not designated as net investment hedges (27) (54) (12) (24) (117)
2 217 51 148 418
Exclude balances held in operations with the same functional currency. (7) (287) (57) (153) (504)
Exposure arising from intra-Group loans - 127 28 (73) 82
Future forward foreign exchange contract cash-flows (63) (23) (48) 133 (1)
(68) 34 (26) 55 (5)
Financial instruments included in trade and other receivables comprise trade
receivables, accrued income and other receivables which qualify as financial
instruments. Similarly, financial instruments included in trade and other
payables comprise trade payables, accrued expenses and other payables that
qualify as financial instruments.
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:
Impact on profit Gain/(loss) Impact on profit Gain/(loss)
for the year
recognised in reserves
for the year
recognised in reserves
FY2024
FY2024
FY2023
FY2023
£m
£m
£m
£m
US dollar 1 2 - 1
Euro (1) (3) 1 -
Sterling (2) - - (1)
These sensitivities were calculated before adjusting for tax and exclude the
effect of quasi-equity intra-Group loans.
Cash-flow hedging
The Group uses forward foreign exchange contracts to hedge future foreign
currency sales and purchases. At 31 July 2024, contracts with a nominal value
of £178m (FY2023: £123m) were designated as hedging instruments. In
addition, the Group had outstanding foreign currency contracts with a nominal
value of £315m (FY2023: £252m) which were being used to manage transactional
foreign exchange exposures, but were not accounted for as cash-flow hedges.
The fair value of the contracts is disclosed in note 20.
The majority of hedged transactions will be recognised in the consolidated
income statement in the same period that the cash-flows are expected to occur,
with the only differences arising because of normal commercial credit terms on
sales and purchases. It is the Group's policy to hedge 80% of certain
exposures for the next two years and 50% of highly probable exposures for the
next 12 months.
Hedge effectiveness is determined at the inception of the hedge relationship,
and through periodic prospective effectiveness assessments to ensure that an
economic relationship exists between the hedged item and hedging instrument.
The foreign exchange forward contracts have similar critical terms to the
hedged items, such as the notional amounts and maturities. Therefore, there is
an economic relationship and the hedge ratio is established as 1:1.
The main sources of hedge ineffectiveness in these hedging relationships are
the effect of the Group's and the counterparty credit risks on the fair value
of the foreign exchange forward contracts, which is not reflected in the fair
value of the hedged item and the risk of over-hedging where the hedge
relationship requires re-balancing. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness is
recognised immediately in the income statement in the period that it occurs.
Of the foreign exchange contracts designated as hedging instruments, 100% are
for periods of 12 months or less (FY2023: 98%).
The following table presents a reconciliation by risk category of the
cash-flow hedge reserve and analysis of other comprehensive income in relation
to hedge accounting:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Brought forward cash-flow hedge reserve at start of year - (3)
Foreign exchange forward contracts: Net fair value gains on effective hedges - 1
Amount reclassified to income statement - finance costs - 2
Carried forward cash-flow hedge reserve at end of year - -
The following tables set out information regarding the change in value of the
hedged item used in calculating hedge ineffectiveness as well as the impacts
on the cash-flow hedge reserve:
Hedged item Hedged exposure Hedging instrument Financial year Changes in value of the hedged item for calculating ineffectiveness Changes in value of the hedging instrument for calculating ineffectiveness Cash-flow hedge reserve
£m
£m
£m
Sales and purchases Foreign Foreign exchange contracts FY2024 - - -
currency risk
FY2023 1 (1) 1
Cash-flow hedges generated £nil of ineffectiveness in FY2024 (FY2023: £nil)
which was recognised in the income statement through finance costs.
Translational currency exposure
The Group has significant investments in overseas operations, particularly in
the US and Europe. As a result, the sterling value of the Group's balance
sheet can be significantly 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 primarily in the relevant currency
or in some cases indirectly using cross-currency swaps.
Net investment hedges
The table below sets out the currency of loans and swap contracts designated
as net
investment hedges:
At 31 July 2024 At 31 July 2023
US$ Euro Total US$ Euro Total
£m
£m
£m
£m
£m
£m
Loans designated as net investment hedges - (288) (288) - (293) (293)
Cross-currency swap (248) - (248) (247) - (247)
(248) (288) (536) (247) (293) (540)
At 31 July 2024, cross-currency swaps hedged the Group's exposure to US
dollars and euros (FY2023: US dollars and euros). All the cross-currency swaps
designated as net investment hedges were non-current (FY2023: non-current).
Swaps generating £248m of the US dollar exposure (FY2023: £247m) will mature
in February 2027.
In addition, non-swapped borrowings were also used to hedge the Group's
exposure to euros (FY2023: euros). Borrowings generating £288m of the euro
exposure (FY2023: £293m) will mature in February 2027.
Hedge effectiveness is determined at the inception of the hedge relationship,
and through periodic prospective effectiveness assessments to ensure that an
economic relationship exists between the hedged item and hedging instrument.
The swaps and borrowings have the same notional amount as the hedged items
and, therefore, there is an economic relationship with the hedge ratio
established as 1:1.
The main sources of hedge ineffectiveness in these hedging relationships are
the effect of the counterparty and the Group's own credit risk on the fair
value of the foreign exchange forward contracts which is not reflected in the
fair value of the hedged item and the risk of over-hedging where the hedge
relationship requires re-balancing. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness is
recognised immediately in the income statement in the period that it occurs.
The following table presents a reconciliation by risk category of the net
investment hedge reserve and analysis of other comprehensive income in
relation to hedge accounting:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Brought forward net investment hedge reserve at start of year (196) (207)
Cross-currency swaps Net fair value gains on effective hedges - 40
Bonds Net fair value gains on effective hedges 5 (29)
Carried forward net investment hedge reserve at end of year (191) (196)
The following table sets out information regarding the change in value of the
hedged item used in calculating hedge ineffectiveness as well as the impacts
on the net investment hedge reserve as at 31 July 2024 and 31 July 2023:
Hedged item Hedged exposure Hedging instrument Financial year Changes in value of the hedged item for calculating ineffectiveness Changes in value of the hedging instrument for calculating ineffectiveness Net investment hedge reserve
£m
£m
£m
Overseas operation Foreign currency risk Bonds FY2024 (5) 5 -
Overseas operation Foreign currency risk Cross-currency swaps FY2023 (40) 40 40
Bonds FY2023 29 (29) (29)
(11) 11 11
Net investment hedges generated £nil of ineffectiveness in FY2024 (FY2023:
£1m) which was recognised in the income statement through finance costs.
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, if
the specified currencies were to strengthen 10% while all other market rates
remained constant, it would have the following effect:
Loss Loss
recognised
recognised
in hedge
in hedge
reserve
reserve
31 July 2024
31 July 2023
£m
£m
US dollar 28 27
Euro 32 33
These movements would be 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.
(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 current policy is to
require interest rates to be fixed within a band of between 40% and 60 % of
the level of gross debt (excluding leases). This is achieved through fixed
rate borrowings and interest rate swaps. At 31 July 2024 54% (FY2023: 54%) of
the Group's gross borrowings (excluding leases) were at fixed interest rates,
after adjusting for interest rate swaps and the impact of short maturity
derivatives designated as net investment hedges.
The Group monitors its fixed rate risk profile against both gross and net
debt. For medium-term planning, it focuses on gross debt to eliminate the
fluctuations of variable cash levels over the cycle. The weighted average
interest rate on borrowings and cross-currency swaps at 31 July 2024, after
interest rate swaps, was 4.60% (FY2023: 4.53%).
Interest rate profile of financial assets and liabilities and the fair value
of borrowings
The following table shows the interest rate risk exposure of investments, cash
and borrowings, with the borrowings adjusted for the impact of interest rate
hedging. Other financial assets and liabilities do not earn or bear interest,
and for all financial instruments except borrowings, the carrying value is not
materially different from their fair value.
As at 31 July 2024
At fair value Cash and Borrowings Fair value of
through
cash
£m
borrowings
profit or loss
equivalents
£m
£m
£m
Fixed interest
Less than one year - - (34) (34)
Between one and five years - - (351) (343)
Greater than five years - - (33) (33)
Total fixed interest financial liabilities - - (418) (410)
Floating rate interest financial assets/(liabilities) 1 393 (241) (244)
Total interest-bearing financial assets/(liabilities) 1 393 (659) (654)
Non-interest-bearing assets in the same category - 66 - -
Total 1 459 (659) (654)
As at 31 July 2023
At fair value through profit or loss Cash and Borrowings Fair value of
£m
cash
£m
borrowings
equivalents
£m
£m
Fixed interest
Less than one year - - (29) (29)
Between one and five years - - (365) (347)
Greater than five years - - (24) (24)
Total fixed interest financial liabilities - - (418) (400)
Floating rate interest financial assets/(liabilities) 4 215 (236) (240)
Total interest-bearing financial assets/(liabilities) 4 215 (654) (640)
Non-interest-bearing assets in the same category - 70 - -
Total 4 285 (654) (640)
Interest rate hedging
The Group also has exposures to the fair values of non-derivative financial
instruments such as EUR fixed rate borrowings. To manage the risk of changes
in these fair values, the Group has entered into fixed-to-floating interest
rate swaps and cross-currency interest rate swaps, which for accounting
purposes are designated as fair value hedges.
At 31 July 2024, the Group had designated the following hedge against
variability on the fair value of borrowings arising from fluctuations in base
rates:
- €300m of the fixed/floating and € exchange exposure of EUR/USD interest
rate swaps maturing on 23 February 2027 partially hedging the € 2027
Eurobond.
At 31 July 2023, the Group had designated the following hedges against
variability on the fair value of borrowings arising from fluctuations in base
rates:
- €300m of the fixed/floating and € exchange exposure of EUR/USD interest
rate swaps maturing on 23 February 2027 partially hedging the € 2027
Eurobond; and
- €400m of the fixed/floating element of the EUR/USD interest rate swaps
that partially hedged the € 2023 Eurobond was repaid on 28 April 2023.
The fair values of the hedging instruments are disclosed in note 20. The
effect of the swaps was to convert £253m (FY2023: £257m) debt from fixed
rate to floating rate. The swaps have similar critical terms to the hedged
items, such as the reference rate, reset dates, notional amounts, payment
dates and maturities. Therefore, there is an economic relationship and the
hedge ratio is established as 1:1. Hedge effectiveness is determined at the
inception of the hedge relationship, and through periodic prospective
effectiveness assessments to ensure that an economic relationship exists
between the hedged item and hedging instrument.
The main source of hedge ineffectiveness in these hedging relationships is the
effect of the currency basis risk on cross-currency interest rate swaps which
are not reflected in the fair value of the hedged item. No other sources of
ineffectiveness emerged from these hedging relationships. Any hedge
ineffectiveness was recognised immediately in the income statement in the
period in which it occurred.
The following table sets out the details of the hedged exposures covered by
the Group's fair value hedges:
Hedged item Hedged exposure Financial year Changes in value of hedged item for calculating ineffectiveness Changes in value of the hedging instrument for calculating ineffectiveness
£m
£m
Carrying amount Accumulated fair value
adjustments on hedged item
Assets Liabilities Assets Liabilities
£m
£m
£m
£m
Fixed rate bonds (a) Interest rate and currency rate risk FY2024 (9) 9 - 253 - (12)
Fixed rate bonds (a) Interest rate risk FY2023 (2) 2 - - - -
Interest rate and currency rate risk FY2023 16 (16) - 233 - (21)
14 (14) - 233 - (21)
(a) Classified as borrowings.
Fair value hedges generated a £nil ineffectiveness in FY2024 (FY2023: £nil)
which was recognised in the income statement through finance costs.
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 investments at 31 July 2024, 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 £2m impact (FY2023: £2m 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 currently expect any
counterparties to fail to meet their obligations. Credit risk is mitigated by
the Board-approved policy of only placing cash deposits with highly rated
relationship bank counterparties within counterparty limits established by
reference to their Standard & Poor's long-term debt rating. In the normal
course of business, the Group operates 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 and derivatives, totals £465m at
31 July 2024 (FY2023: £296m).
31 July 2024 31 July 2023
£m
£m
Cash in AAA liquidity funds 196 78
Cash at banks with at least a AA- credit rating 26 31
Cash at banks with all other A credit ratings 185 170
Cash at other banks 52 6
Investments in bank deposits 1 4
Other investments 5 7
465 296
At 31 July 2024, the maximum exposure with a single bank for deposits and cash
was £128m (FY2023: £65m). The bank has a credit rating of A+. The maximum
mark to market exposure with a single bank for derivatives was out of the
money in both the current and prior year and does not represent a credit risk.
(d) Liquidity risk
Borrowing facility
Board policy specifies the maintenance of an unused committed credit facility
of at least £300m at all times to ensure that the Group has sufficient
available funds for operations and planned development. The Group has a
Revolving Credit Facility of US$800m maturing 5 May 2029. At the balance
sheet date, the Group had the following undrawn credit facility:
31 July 2024 31 July 2023
£m
£m
Expiring after more than four years (FY2023: four years) 623 622
Cash deposits
As at 31 July 2024, £336m (FY2023: £110m) of cash and cash equivalents was
on deposit with various banks of which £196m (FY2023: £78m) was in liquidity
funds. £1m (FY2023: £4m) of investments comprised bank deposits held to
secure liabilities and letters of credit.
Gross contractual cash-flows for borrowings
As at 31 July 2024
Borrowings Fair value Contractual Total
£m
adjustments
interest
contractual
£m
payments
cash-flows
£m
£m
Less than one year (34) - (11) (45)
Between one and two years (21) - (11) (32)
Between two and three years (18) - (11) (29)
Between three and four years (11) - - (11)
Between four and five years (554) 12 - (542)
Greater than five years (33) - - (33)
Total (671) 12 (33) (692)
As at 31 July 2023
Borrowings Fair value Contractual Total
£m
adjustments
interest
contractual
£m
payments
cash-flows
£m
£m
Less than one year (29) - (11) (40)
Between one and two years (27) - (11) (38)
Between two and three years (20) - (11) (31)
Between three and four years (13) - (11) (24)
Between four and five years (561) 21 - (540)
Greater than five years (24) - - (24)
Total (674) 21 (44) (697)
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
As at 31 July 2024
Receipts Payments Net cash-flow
£m
£m
£m
Assets
Less than one year 260 (256) 4
Greater than one year 4 (4) -
Liabilities
Less than one year 223 (227) (4)
Greater than one year 254 (267) (13)
Total 741 (754) (13)
As at 31 July 2023
Receipts Payments Net cash-flow
£m
£m
£m
Assets
Less than one year 209 (204) 5
Greater than one year 6 (6) -
Liabilities
Less than one year 159 (161) (2)
Greater than one year 252 (270) (18)
Total 626 (641) (15)
This table above 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 20.
Gross contractual cash-flows for other financial liabilities
The contractual cash-flows for financial liabilities included in trade and
other payables were £481m (FY2023: £463m) due in less than one year, £14m
(FY2023: £13m) due between one and five years.
20. Derivative financial instruments
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.
At 31 July 2024
Contract or Fair value
underlying
nominal amount
£m
Assets Liabilities Net
£m
£m
£m
Foreign exchange contracts (cash-flow hedges) 178 2 (2) -
Foreign exchange contracts (not hedge accounted) 315 2 (2) -
Total foreign exchange contracts 493 4 (4) -
Cross-currency swaps (fair value and net investment hedges) 248 - (13) (13)
Total financial derivatives 741 4 (17) (13)
Balance sheet entries:
Non-current 255 - (13) (13)
Current 486 4 (4) -
Total financial derivatives 741 4 (17) (13)
At 31 July 2023
Contract or Fair value
underlying
nominal amount
£m
Assets Liabilities Net
£m
£m
£m
Foreign exchange contracts (cash-flow hedges) 123 1 (1) -
Foreign exchange contracts (not hedge accounted) 252 4 (1) 3
Total foreign exchange contracts 375 5 (2) 3
Cross-currency swaps (fair value and net investment hedges) 247 - (18) (18)
Total financial derivatives 622 5 (20) (15)
Balance sheet entries:
Non-current 256 - (18) (18)
Current 366 5 (2) 3
Total financial derivatives 622 5 (20) (15)
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.
Netting
International Swaps and Derivatives Association (ISDA) master netting
agreements are in place with derivative counterparties except for contracts
traded on a dedicated international electronic trading platform used for
operational foreign exchange hedging. Under these agreements if a credit event
occurs, all outstanding transactions under the ISDA are terminated and only a
single net amount per counterparty is payable in settlement of all
transactions. The ISDA agreements do not meet the criteria for offsetting,
since the offsetting is enforceable only if specific events occur in the
future, and there is no intention to settle the contracts on a net basis.
Assets Liabilities Assets Liabilities
31 July 2024
31 July 2024
31 July 2023
31 July 2023
£m
£m
£m
£m
Gross value of assets and liabilities 4 (17) 5 (20)
Related assets and liabilities subject to master netting agreements (4) 4 (5) 5
Net exposure - (13) - (15)
The maturity profile, average interest and foreign currency exchange rates of
the hedging instruments used in the Group's hedging strategies are as follows:
Hedged exposure Hedging instrument Maturity at 31 July 2024 Maturity at 31 July 2023
Up to One to five years More than Up to One to five years More than
one year
five years
one year
five years
Fair value hedges
Interest rate/ Cross-currency swaps (EUR:GBP) - Notional amount (£m) - 254 - - 254 -
foreign currency risk
- Average exchange rate - 0.845 - - 0.845 -
- Average spread over three-month GBP SONIA - 1.860% - - 1.860% -
Net investment hedges
Foreign currency risk Cross-currency swaps (GBP:USD) - Notional amount (£m) - 248 - - 247 -
- Average exchange rate - 1.2534 - - 1.2534 -
Cash-flow hedges
Foreign currency risk Foreign exchange contracts (EUR:GBP) - Notional amount (£m) 66 - - 41 8 -
- Average exchange rate 0.8588 - - 0.7842 0.8893 -
Foreign exchange contracts (USD:GBP) - Notional amount (£m) 41 - - 18 - -
- Average exchange rate 1.2593 - - 1.2269 - -
Foreign exchange contracts (EUR:USD) - Notional amount (£m) 24 - - 30 - -
- Average exchange rate 0.9277 - - 1.0939 - -
Foreign exchange contracts (GBP:CZK) - Notional amount (£m) 25 - - 10 - -
- Average exchange rate 28.6952 - - 27.7919 - -
Foreign exchange contracts (EUR:AUD) - Notional amount (£m) 9 - - 7 - -
- Average exchange rate 1.6564 - - 1.6603 - -
At 31 July 2024, the Group had forward foreign exchange contracts with a
nominal value of £178m (FY2023: £123m) designated as cash-flow hedges. These
forward foreign exchange contracts are in relation to sale and purchase of
multiple currencies with varying maturities up to 28 July 2025. The largest
single currency pairs are disclosed above and make up 93% of the notional
hedged exposure. The notional and fair values of these foreign exchange
forward derivatives are shown in the nominal amount and fair value of
derivative contracts table above.
21. Fair value of financial instruments
As at 31 July 2024 Notes Basis for determining fair value At amortised At fair value through profit or loss At fair value through OCI Total Total
cost
£m
£m
carrying
fair value
£m
value
£m
£m
Financial assets
Other investments 14 A - 1 47 48 48
Other investments 14 F - - 5 5 5
Cash and cash equivalents 18 B 459 - - 459 459
Trade and other financial receivables B/C 797 - - 797 797
Derivative financial instruments 20 C - 4 - 4 4
Total financial assets 1,256 5 52 1,313 1,313
Financial liabilities
Trade and other financial payables B (495) - - (495) (495)
Short-term borrowings 18 B/D (2) - - (2) (2)
Long-term borrowings 18 D (534) - - (534) (529)
Lease liabilities 18 E (123) - - (123) (123)
Derivative financial instruments 20 C - (17) - (17) (17)
Total financial liabilities (1,154) (17) - (1,171) (1,166)
The fair value of a financial instrument is the price at which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties
in an arm's-length transaction. Fair values have been determined with
reference to available market information at the balance sheet date, using the
methodologies described below:
A Carrying value is assumed to be a reasonable approximation to fair value
for all of these assets and liabilities (Level 1 as defined by IFRS 13).
B Carrying value is assumed to be a reasonable approximation to fair value
for all of these assets and liabilities (Level 2 as defined by IFRS 13).
C Fair values of derivative financial assets and liabilities, and trade
receivables held to collect or sell, are estimated by discounting expected
future contractual cash-flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing
at the balance sheet date. These financial instruments are included on the
balance sheet at fair value, derived from observable market prices (Level 2 as
defined by IFRS 13).
Notes Basis for determining fair value At amortised At fair value through profit or loss At fair value through OCI Total Total
cost
£m
£m
carrying
fair value
£m
value
£m
£m
As at 31 July 2023
Financial assets
Other investments 14 A - 4 347 351 351
Other investments 14 F - 13 7 20 20
Cash and cash equivalents 18 A 285 - - 285 285
Trade and other financial receivables B/C 726 - - 726 726
Derivative financial instruments 20 C - 5 - 5 5
Total financial assets 1,011 22 354 1,387 1,387
Financial liabilities
Trade and other financial payables B (476) - - (476) (476)
Short-term borrowings 18 D (3) - - (3) (3)
Long-term borrowings 18 D (534) - - (534) (520)
Lease liabilities 18 E (117) - - (117) (117)
Derivative financial instruments 20 C - (20) - (20) (20)
Total financial liabilities (1,130) (20) - (1,150) (1,136)
D Borrowings are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of borrowings is estimated using quoted prices (Level 1
as defined by IFRS 13).
E Leases are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of the lease contract is estimated by discounting
contractual future cash-flows (Level 2 as defined by IFRS 13).
F The fair value of instruments is estimated by using unobservable inputs
to the extent that relevant observable inputs are not available. Unobservable
inputs are developed using the best information available in the
circumstances, which may include the Group's own data, taking into account all
information about market participation assumptions that is reliably available
(Level 3 as defined by IFRS 13).
IFRS 13 defines a three-level valuation hierarchy:
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1 inputs
Level 3 - inputs not based on observable market data
22. Commitments
At 31 July 2024, commitments, comprising bonds and guarantees arising in the
normal course of business, amounted to £187m (FY2023: £207m), including
pension commitments of £44m (FY2023: £56m) and charitable funding
commitments for the Smiths Group Foundation of £9m (FY2023: £10m). In
addition, the Group has committed expenditure on capital projects amounting
to £14m (FY2023: £13m).
23. Provisions and contingent liabilities
Trading Non-headline and legacy Total
£m John Crane, Inc. Titeflex Other £m
litigation
Corporation
£m
£m
litigation
£m
At 31 July 2022 11 229 52 43 335
Foreign exchange rate movements - (12) (3) - (15)
Provision charged 5 13 - 18 36
Provision released (4) - (7) (14) (25)
Unwind of provision discount - 6 1 - 7
Utilisation (4) (32) (2) (14) (52)
At 31 July 2023 8 204 41 33 286
Comprising:
Current liabilities 6 27 13 24 70
Non-current liabilities 2 177 28 9 216
At 31 July 2023 8 204 41 33 286
Business combinations 1 - - - 1
Provision charged 12 29 - 5 46
Provision released (2) - (5) (5) (12)
Unwind of provision discount - 8 1 - 9
Utilisation (6) (21) (1) (8) (36)
At 31 July 2024 13 220 36 25 294
Comprising:
Current liabilities 10 32 13 20 75
Non-current liabilities 3 188 23 5 219
At 31 July 2024 13 220 36 25 294
The John Crane, Inc. and Titeflex Corporation litigation provisions were the
only provisions that were discounted; other provisions have not been
discounted as the impact would be immaterial.
Trading
The provisions included as trading represent amounts provided for in the
ordinary course of business. Trading provisions are charged and released
through headline profit.
Warranty provision and product liability
At 31 July 2024, the Group had warranty and product liability provisions of
£9m (FY2023: £6m). Warranties over the Group's products typically cover
periods of between one and three years. Provision is made for the likely cost
of after-sales support based on the recent past experience of individual
businesses.
Commercial disputes and litigation in respect of ongoing business activities
The Group has on occasion been required to take legal action to protect its
intellectual property and other rights against infringement. It has also had
to defend itself against proceedings brought by other parties, including
product liability and insurance subrogation claims. Provision is made for any
expected costs and liabilities in relation to these proceedings where
appropriate, although there can be no guarantee that such provisions (which
may be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to commercial
disputes and litigation such as government price audits, product liability
claims, employee disputes and other kinds of lawsuits, and faces different
types of legal issues in different jurisdictions. The high level of activity
in the US, for example, exposes the Group to the likelihood of various types
of litigation commonplace in that country, such as 'mass tort' and 'class
action' litigation, legal challenges to the scope and validity of patents, and
product liability and insurance subrogation claims. These types of proceedings
(or the threat of them) are also used to create pressure to encourage
negotiated settlement of disputes. Any claim brought against the Group (with
or without merit) could be costly to defend. These matters are inherently
difficult to quantify. In appropriate cases a provision is recognised based on
best estimates and management judgement but there can be no guarantee that
these provisions (which may be subject to potentially material revision from
time to time) will result in an accurate prediction of the actual costs and
liabilities that may be incurred. There are also contingent liabilities in
respect of litigation for which no provisions are made.
The Group operates in some markets where the risk of unethical or corrupt
behaviour is material and has procedures, including an employee ethics alert
line, to help it identify potential issues. Such procedures will, from time to
time, give rise to internal investigations, sometimes conducted with external
support, to ensure that the Group properly understands risks and concerns and
can take steps both to manage immediate issues and to improve its practices
and procedures for the future. The Group is not aware of any issues which are
expected to generate material financial exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. (JCI) is one of many co-defendants in numerous lawsuits
pending in the United States in which plaintiffs are claiming damages arising
from alleged exposure to, or use of, products previously manufactured which
contained asbestos. 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.
Provision is made in respect of the expected costs of defending known and
predicted future claims and of adverse judgements in relation thereto, to the
extent that such costs can be reliably estimated.
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 causes JCI to understand, based on
tests conducted on its behalf, that the products were safe. JCI ceased
manufacturing products containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its current and
expected asbestos litigation, including the most efficacious presentation of
its 'safe product' defence, and intends to continue to resist these asbestos
claims based upon this defence. The table below summarises the JCI claims
experience over the last 40 years since the start of this litigation:
Year ended Year ended Year ended Year ended Year ended
31 July 2024
31 July 2023
31 July 2022
31 July 2021
31 July 2020
JCI claims experience
Claims against JCI that have been dismissed 312,000 310,000 306,000 305,000 297,000
Claims JCI is currently a defendant in 20,000 20,000 22,000 22,000 25,000
Cumulative final judgements, after appeals, against JCI since 1979 156 154 149 149 149
Cumulative value of awards (US$m) since 1979 191 190 175 175 175
The number of claims outstanding at 31 July 2024 reflected the benefit of
2,000 (FY2023: 4,000) claims being dismissed in the year.
JCI has also incurred significant additional defence costs. The litigation
involves claims for a number of allegedly asbestos-related diseases, with
awards, when made, for mesothelioma tending to be larger than those for the
other diseases. JCI's ability to defend mesothelioma cases successfully is,
therefore, likely to have a significant impact on its annual aggregate adverse
judgement and defence costs.
John Crane, Inc. litigation provision
The provision is based on past history of JCI claims and well-established
tables of asbestos-related disease incidence projections. The provision is
determined using advice from asbestos valuation experts, Bates White LLC. The
assumptions made in assessing the appropriate level of provision include: the
period over which the expenditure can be reliably estimated; the future trend
of legal costs; the rate of future claims filed; the rate of successful
resolution of claims; and the average amount of judgements awarded. Trial
delays arising from the COVID-19 pandemic have largely abated and trial
activity has returned to pre-pandemic levels.
Established incidence curves can be used to estimate the likely future pattern
of asbestos-related disease. However, JCI's claims experience is also
significantly impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of the
plaintiffs' bar; changing attitudes amongst the judiciary at both trial and
appellate levels in specific jurisdictions which move the balance of risk and
opportunity for claimants; and legislative and procedural changes in both the
state and federal court systems.
The projections use a limited time horizon on the basis that Bates White LLC
consider that there is substantial uncertainty in the asbestos litigation
environment. So probable expenditures are not reasonably estimable beyond
this time horizon. Asbestos is the longest-running mass tort litigation in
American history and is constantly evolving in ways that cannot be
anticipated. JCI's defence strategy also generates a significantly different
pattern of legal costs and settlement expenses from other defendants. Thus JCI
is in an extremely rare position, and evidence from other litigation cannot be
used to improve the reliability of the projections. A ten-year (FY2023:
ten-year) time horizon has been used based on past experience regarding
significant changes in the litigation environment that have occurred every few
years and on the amount of time taken in the past for some of those changes to
impact the broader asbestos litigation environment.
The rate of future claims filed has been estimated using well-established
tables of asbestos incidence projections to determine the likely population of
potential claimants, and JCI's past experience to determine what proportion of
this population will make a claim against JCI. The JCI products generally
referred to in claims had industrial and marine applications. As a result, the
incidence curve used for JCI projections excludes construction workers, and
is a composite of the curves that predict asbestos exposure-related disease
from shipyards and other occupations. This is consistent with JCI's litigation
history.
The rate of successful resolution of claims and the average amount of any
judgements awarded are projected based on the past history of JCI claims,
since this is the best available evidence, given JCI's strategy of defending
all claims.
The future trend of legal costs is estimated based on JCI's past experience,
adjusted to reflect the assumed levels of claims and trial activity, since the
number of trials is a key driver of legal costs.
John Crane, Inc. litigation insurance recoveries
While JCI has certain excess liability insurance, JCI has met defence costs
directly. The calculation of the provision does not take account of any
potential recoveries from insurers.
John Crane, Inc. litigation provision sensitivities
The provision may be subject to potentially material revision from time to
time if new information becomes available as a result of future events. There
can be no guarantee that the assumptions used to estimate the provision will
result in an accurate prediction of the actual costs that will be incurred
because of the significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related litigation, including
the unpredictability of jury verdicts.
John Crane, Inc. statistical reliability of projections over the ten-year time
horizon
In order to evaluate the statistical reliability of the projections, a
population of outcomes is modelled using randomised verdict outcomes. This
generated a distribution of outcomes with future spend at the 5th percentile
of £200m and future spend at the 95th percentile of £258m (FY2023: £180m
and £245m, respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total future spend
will fall between £245m and £271m (FY2023: between £228m and £257m),
compared to the gross provision value of £261m (FY2023: £246m).
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision of £220m (FY2023: £204m) 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).
The JCI asbestos litigation provision has developed over the last five years
as follows:
Year ended Year ended Year ended Year ended Year ended
31 July 2024
31 July 2023
31 July 2022
31 July 2021
31 July 2020
£m
£m
£m
£m
£m
John Crane, Inc. litigation provision
Gross provision 261 246 258 220 235
Discount (41) (42) (29) (8) (4)
Discounted pre-tax provision 220 204 229 212 231
Deferred tax (54) (51) (57) (54) (59)
Discounted post-tax provision 166 153 172 158 172
Operating profit charge/(credit)
Increased provisions for adverse judgements and legal defence costs 28 28 24 10 14
Change in US risk-free rates 1 (15) (18) (5) 16
Subtotal - items charged to the provision 29 13 6 5 30
Litigation management, legal fees in connection with litigation against - 2 1 1 1
insurers and defence strategy
Recoveries from insurers (3) (7) - (9) (3)
Total operating profit charge/(credit) 26 8 7 (3) 28
Cash-flow
Provision utilisation - legal defence costs and adverse judgements (21) (32) (21) (13) (23)
Litigation management expense - (2) (1) - (1)
Recoveries from insurers 3 7 - 9 3
Net cash outflow (18) (27) (22) (4) (21)
John Crane, Inc. sensitivity of the projections to changes in the time horizon
used
If the asbestos litigation environment becomes more volatile and uncertain,
the time horizon over which the provision can be calculated may reduce.
Conversely, if the environment became more stable, or JCI changed approach and
committed to long-term settlement arrangements, the time period covered by the
provision might be extended.
The projections use a ten-year time horizon. Reducing the time horizon by one
year would reduce the provision by £16m (FY2023: £16m) and reducing it by
five years would reduce the provision by £87m (FY2023: £87m).
We consider, after obtaining advice from Bates White LLC, that to forecast
beyond ten years requires that the litigation environment remains largely
unchanged with respect to the historical experience used for estimating future
asbestos expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If one assumed
that the asbestos litigation environment would remain unchanged for longer and
extended the time horizon by one year, it would increase the pre-tax provision
by £13m (FY2023: £13m) and extending it by five years would increase the
pre-tax provision by £47m (FY2023: £48m). However, there are also
reasonable scenarios that, given certain recent events in the US asbestos
litigation environment, would result in no additional asbestos litigation for
JCI beyond ten years. At this time, how the asbestos litigation environment
will evolve beyond ten years is not reasonably estimable.
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of adverse
judgements expected to occur. JCI's claims experience is significantly
impacted by other factors which influence the US litigation environment. These
can include: changing approaches on the part of the plaintiffs' bar; changing
attitudes amongst the judiciary at both trial and appellate levels; and
legislative and procedural changes in both the state and federal court
systems. As a result, whilst the Group anticipates that asbestos litigation
will continue beyond the period covered by the provision, the uncertainty
surrounding the US litigation environment beyond this point is such that the
costs cannot be reliably estimated.
Although the methodology used to calculate the JCI litigation provision can in
theory be applied to show claims and costs for longer periods, the Directors
consider, based on advice from Bates White LLC, that the level of uncertainty
regarding the factors used in estimating future costs is too great to provide
for reasonable estimation of the numbers of future claims, the nature of such
claims or the cost to resolve them for years beyond the ten-year time horizon.
Titeflex Corporation
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek business
segment, has received a number of claims in the US from insurance companies
seeking recompense on a subrogated basis for the effects of damage allegedly
caused by lightning strikes in relation to its flexible gas piping product. It
has also received product liability claims regarding this product in the US,
some in the form of purported class actions. Titeflex Corporation believes
that its products are a safe and effective means of delivering gas when
installed in accordance with the manufacturer's instructions and local and
national codes. However, some claims have been settled on an individual basis
without admission of liability. Equivalent third-party products in the US
marketplace face similar challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement, together with
recent marketplace activity, provide sufficient evidence to recognise a
liability in the accounts. Therefore provision has been made for the costs
which the Group is expected to incur in respect of future claims to the extent
that such costs can be reliably estimated. Titeflex Corporation sells flexible
gas piping with extensive installation and safety guidance designed to assure
the safety of the product and minimise the risk of damage associated with
lightning strikes.
The assumptions made in assessing the appropriate level of provision, which
are based on past experience, include: the period over which expenditure can
be reliably estimated; the number of future settlements; the average amount of
settlements; and the impact of statutes of repose and safe installation
initiatives on the expected number of future claims. The assumptions relating
to the number of future settlements exclude the use of recent claims history
due to the uncertain impact that the COVID-19 lockdown has had on the number
of claims.
The provision of £36m (FY2023: £41m) 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).
31 July 2024 31 July 2023
£m
£m
Gross provision 69 78
Discount (33) (37)
Discounted pre-tax provision 36 41
Deferred tax (9) (9)
Discounted post-tax provision 27 32
Titeflex Corporation litigation provision history
A credit of £5m (FY2023: £8m credit) has been recognised by Titeflex
Corporation in respect of changes to the estimated cost of future claims from
insurance companies seeking recompense for damage allegedly caused by
lightning strikes. The lower gross provision value has been principally driven
by a reduction in the number of claims.
Titeflex Corporation litigation provision sensitivities
The significant uncertainty associated with the future level of claims and of
the costs arising out of related litigation means that there can be no
guarantee that the assumptions used to estimate the provision will result in
an accurate prediction of the actual costs that will be incurred. Therefore
the provision may be subject to potentially material revision from time to
time, if new information becomes available as a result of future events.
The projections incorporate a long-term assumption regarding the impact of
safe installation initiatives on the level of future claims. If the assumed
annual benefit of bonding and grounding initiatives were 0.5% higher, the
provision would be £2m (FY2023: £2m) lower, and if the benefit were 0.5%
lower, the provision would be £2m (FY2023: £2m) higher.
The projections use assumptions of future claims that are based on both the
number of future settlements and the average amount of those settlements. If
the assumed average number of future settlements increased 10%, the provision
would rise by £2m (FY2023: £3m), with an equivalent fall for a reduction of
10%. If the assumed amount of those settlements increased 10%, the provision
would rise by £2m (FY2023: £2m), also with an equivalent fall for a
reduction of 10%.
Other non-headline and legacy provisions
Non-headline provisions comprise all provisions that were disclosed as
non-headline items when they were charged to the consolidated income
statement. Legacy provisions comprise non-material provisions relating to
former business activities and discontinued operations and properties no
longer used by Smiths.
These non-material provisions include non-headline reorganisation, disposal
indemnities, litigation and arbitration in respect of old products and
discontinued business activities, which includes claims received in connection
with the disposal of Smiths Medical. Provision is made for the best estimate
of the expected expenditure related to the defence and/or resolution of such
matters. There is an inherent risk in legal proceedings that the outcome may
be unfavourable to the Group, and as such there can be no guarantee that such
provisions (which may be subject to potentially material revision from time to
time) will be sufficient.
Reorganisation
At 31 July 2024, there were reorganisation provisions of £1m (FY2023: £7m)
relating to the various restructuring programmes that are expected to be
utilised in the next 18 months.
Property
At 31 July 2024, there were provisions of £6m (FY2023: £10m) related to
actual and potential environmental issues for sites currently or previously
occupied by Smiths operations.
24. Share capital
Number of shares Issued Consideration
capital
£m
£m
Ordinary shares of 37.5p each
Total share capital at 31 July 2022 362,356,159 136
Share buybacks (13,053,169) (5) (207)
Total share capital at 31 July 2023 349,302,990 131
Share buybacks (4,205,196) (1) (70)
Total share capital at 31 July 2024 345,097,794 130
Share capital structure
As at 31 July 2024, the Company's issued share capital was 345,097,794
ordinary shares with a nominal value of 37.5p per share. All of the issued
share capital was in free issue and all issued shares are fully paid.
The Company's ordinary shares are listed and admitted to trading on the Main
Market of the London Stock Exchange. The Company has an American Depositary
Receipt (ADR) programme and one ADR equates to one ordinary share. As at 31
July 2024, 3,020,289 ordinary shares were held by the nominee of the programme
in respect of the same number of ADRs in issue.
The holders of ordinary shares are entitled to receive the Company's Reports
and Accounts, to attend and speak at General Meetings of the Company, to
appoint proxies and to exercise voting rights. None of the ordinary shares
carry any special rights with regard to control of the Company or
distributions made by the Company.
There are no known agreements relating to, or restrictions on, voting rights
attached to the ordinary shares (other than the 48-hour cut-off for casting
proxy votes prior to a General Meeting). There are no restrictions on the
transfer of shares, and there is no requirement to obtain approval for a share
transfer. There are no known arrangements under which financial rights are
held by a person other than the holder of the ordinary shares. There are no
known limitations on the holding of shares.
Powers of Directors
The Directors are authorised to issue and allot shares and to buy back shares
subject to receiving shareholder approval at the General Meeting. Such
authorities were granted by shareholders at the 2023 Annual General Meeting.
At the 2024 AGM, it will be proposed that the Directors be granted new
authorities to allot and buy back shares.
Share buybacks
As at 12 September 2024 (the latest practicable date for inclusion in this
report), the Company had an unexpired authority to repurchase ordinary shares
up to a maximum of 31.8 million ordinary shares (FY2023: 10.7 million). As at
12 September 2024, the Company did not hold any shares in treasury. Any
ordinary shares purchased may be cancelled or held in treasury.
As previously reported, the Company undertook a share buyback programme in
November 2021 that completed in September 2023, under which a total of
48,970,726 shares were purchased for a consideration of £742m. During the
current period, the Company purchased 1,764,660 shares for a consideration of
£29m under this scheme.
On 26 March 2024, the Company announced a £100m share buyback programme to
purchase ordinary shares in the capital of the Company. The first £50m
tranche completed on 6 September 2024. The timing for initiating the second
£50m tranche has not been determined. The ordinary shares purchased under the
programme will be cancelled. Under this new scheme, 2,478,536 ordinary shares
of 37.5p each were repurchased during the period, for a total consideration of
£41,551,369, of which 38,000 shares with a value of £678,713 were yet to
settle and be cancelled.
A further 496,006 ordinary shares have been repurchased during the period of 1
August 2024 to 6 September 2024. In total since the start of the Programme,
2,974,542 shares have been repurchased, for a total consideration of £50m,
representing 1% of the called-up ordinary share capital outstanding at the
start of the Programme.
Employment share schemes
Shares acquired through Company share schemes and plans rank pari passu with
the shares in issue and have no special rights. The Company operates an
Employee Benefit Trust, with an independent trustee, to hold shares pending
employees becoming entitled to them under the Company's share schemes and
plans. On 31 July 2024, the Trust held 1,388,730 (FY2023: 1,742,929) ordinary
shares in the Company. The Trust waived its dividend entitlement on its
holding during the year, and the Trust abstains from voting any shares held at
General Meetings.
25. Dividends
The following dividends were declared and paid in the period:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Ordinary final dividend of 28.70p (FY2023: 27.3p) paid 24 November 2023 100 97
Ordinary interim dividend of 13.55p (FY2023: 12.9p) paid 13 May 2024 47 46
147 143
In the current year a final dividend of 28.7p was paid in respect of FY2023
and an interim dividend of 13.55p was paid in respect of FY2024. In the prior
year a total dividend of 40.2p was paid, comprising a final dividend of 27.3p
paid in respect of FY2022 and an interim dividend of 12.9p paid in respect of
FY2023.
The final dividend for the year ended 31 July 2024 of 30.2p per share was
recommended by the Board on 23 September 2024 and will be paid to shareholders
on 22 November 2024, subject to approval by the shareholders. This dividend is
payable to all shareholders on the register of members at 6.00pm on 18 October
2024 (the record date).
Waiver of dividends
Winterflood Client Nominees Limited (Buck Trustees Dividend Waived Ltd) waived
all dividends payable in the year, and all future dividends, on their
shareholdings in the Company.
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
(FY2023: nil) shares to the Trust, the Trust purchased 1,251,530 shares
(FY2023: 1,553,558 shares) in the market for a consideration of £20m (FY2023:
£25m) and redeemed 1,605,729 shares (FY2023: 429,291) to employees for a
cumulative option cost of £4m (FY2023: £1m). At 31 July 2024, the Trust
held 1,388,730 (FY2023: 1,742,929) ordinary shares.
Other reserves comprise the capital redemption reserve, revaluation reserve
and merger reserve, which 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 retirement benefit-related assets and liabilities,
net litigation provisions relating to non-headline items and net debt. The
efficiency of the allocation of 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. In FY2024 ROCE was 16.4% (FY2023: 15.7%);
see note 29.
Capital structure is based on the Directors' judgement of the balance required
to maintain flexibility, whilst achieving an efficient cost of capital.
The FY2024 ratio of net debt to headline EBITDA of 0.3 (FY2023: 0.7) is within
the Group's stated policy of 2.0 or less over the medium term. The Group's
robust balance sheet and record of strong cash generation are more than able
to fund immediate investment needs and legacy obligations. See note 29 for the
definition of headline EBITDA and the calculation of this ratio.
As part of its capital management, the Group maintains a solid investment
grade credit rating to ensure access to the widest possible sources of
financing and to optimise the resulting cost of capital. At 31 July 2024, the
Group had a credit rating of BBB+/Baa2 (FY2023: BBB+/Baa2) with Standard
& Poor's and Moody's respectively.
The Board has a progressive dividend policy for future payouts, with the aim
of increasing dividends in line with the long-term underlying growth in
earnings. In setting the level of dividend payments, the Board will take into
account prevailing economic conditions and future investment plans, along with
the objective to maintain a minimum dividend cover of at least two times.
Hedge reserve
The hedge reserve on the balance sheet records the cumulative gain or loss on
designated hedging instruments, and comprises:
31 July 2024 31 July 2023
£m
£m
Net investment hedge reserve (net of £7m of deferred tax (FY2023: £8m)) (184) (188)
Hedge reserve total (184) (188)
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.
Non-controlling interest
The Group has recorded non-controlling interests of £22m (FY2023: £22m), of
which the most significant balance is in John Crane Japan Inc., which
represented £20m (FY2023: £19m) of the total non-controlling interests.
The non-controlling interest in John Crane Japan Inc. represents a 30%
interest. John Crane Japan Inc. generated operating profits of £4m in the
period (FY2023: £5m), and cash inflows from operating activities of £4m
(FY2023: £2m). It paid dividends of £1m (FY2023: £1m) and tax of £1m
(FY2023: £2m). At 31 July 2024, the company contributed £53m (FY2023: £53m)
of net assets to the Group.
27. Acquisitions
On 30 August 2023, the Group acquired 100% of the share capital of Heating
& Cooling Products (HCP), for consideration of £64m, financed using the
Group's own cash resources. HCP is a US-based manufacturer of Heating,
Ventilation & Air Conditioning (HVAC) solutions. This acquisition will
further expand the Flex-Tek business segment's presence in the North American
HVAC market, enabling Smiths to serve customers with an even broader product
range.
The intangible assets recognised on acquisition comprise customer
relationships, intellectual property and technology. Goodwill represents the
expected synergies from the strategic fit of the acquisition and the value of
the expertise in the assembled workforce. From the date of acquisition to 31
July 2024, HCP contributed £52m to revenue and £11m to profit before
taxation and amortisation. If the Group had acquired this business at the
beginning of the financial year, the acquisition would have contributed an
additional £4m to revenue and £1m to profit before taxation.
On 27 October 2023, the Group's Flex-Tek business segment acquired 100% of the
share capital of Burns Machine (Burns) for consideration of approximately
£1m, financed using the Group's own cash resources.
Provisional balances at the date of acquisition have been provided in the
table below. The amounts remain provisional due to the fair value of the
acquisition balance sheets not being finalised.
HCP Burns Total
£m £m £m
Non-current assets - acquired intangible assets 34 - 34
- plant and machinery 6 1 7
- right of use assets 12 - 12
Current assets - inventory 10 - 10
- trade and other receivables 7 - 7
Current liabilities - trade and other payables (3) - (3)
Non-current liabilities - lease liability (12) - (12)
Net assets acquired 54 1 55
Goodwill on current period acquisitions 10 - 10
Total consideration 64 1 65
Post balance sheet date acquisitions
During September 2024, the Group acquired 100% of the share capital of Wattco,
Inc. (19th September 2024) and exchanged on the acquisition of 100% of the
share capital of Modular Metal Fabricators, Inc. (10th September 2024), with
completion anticipated for Q1 FY2025.
Wattco is a manufacturer of industrial heating solutions and control panels
which will expand Flex-Tek's industrial heat business, and Modular Metal
Fabricators is a manufacturer of metal and flexible duct which will expand
Flex-Tek's HVAC business.
Total cash consideration for these acquisitions was £95m, with deferred
consideration being up to circa £15m. Due to the short time between
completion of the acquisition and the announcement date, it has not been
possible to determine the fair value of the deferred consideration. Payment of
the deferred consideration is contingent on future business performance.
In the last twelve months these businesses have delivered £38m of revenue and
£7m of net earnings (twelve months to 31 March 2024 for Modular Metal
Fabricators and twelve months to 30 June 2024 for Wattco). These acquisitions
have been financed using the Group's own cash resources. Due to the short time
between the completion of the acquisition and the announcement date, it has
not been possible to complete the determination of the fair values of the
acquired balance sheet.
28. Cash-flow
Cash-flow from operating activities
Year ended 31 July 2024 Year ended 31 July 2023
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Operating profit:
- continuing operations 526 (111) 415 501 (98) 403
- discontinued operations - - - - 6 6
Amortisation of intangible assets 7 49 56 9 52 61
Depreciation of property, plant and equipment 44 1 45 42 - 42
Depreciation of right of use assets 34 - 34 32 - 32
(Gain)/loss on disposal of property, plant and equipment 1 - 1 - - -
(Gain)/loss on fair value of contingent consideration - 13 13 - 6 6
Share-based payment expense 13 - 13 13 - 13
Retirement benefits* 7 (8) (1) 5 (7) (2)
Loss on disposal of financial asset - 9 9 - - -
Decrease/(increase) in inventories (4) - (4) (88) (1) (89)
Decrease/(increase) in trade and other receivables (107) 26 (81) (10) (53) (63)
Increase/(decrease) in trade and other payables 71 (21) 50 10 39 49
Increase/(decrease) in provisions 3 (5) (2) (2) (32) (34)
Cash generated from operations 595 (47) 548 512 (88) 424
Interest paid (57) - (57) (73) (2) (75)
Interest received 26 - 26 36 - 36
Tax paid (99) - (99) (92) - (92)
Net cash inflow from operating activities 465 (47) 418 383 (90) 293
* The retirement benefits within non-headline operating activities
principally relate to employer contributions to legacy defined benefit and
post-retirement healthcare plans.
Headline cash measures - continuing operations
The Group measure of headline operating cash excludes interest and tax, and
includes capital expenditure supporting organic growth. The Group uses
operating cash-flow for the calculation of cash conversion and free cash-flow
for management of capital purposes. See note 29 for additional details.
The table below reconciles the Group's net cash-flow from operating activities
to headline operating cash-flow and free cash-flow:
Year ended 31 July 2024 Year ended 31 July 2023
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Net cash inflow from operating activities 465 (47) 418 383 (90) 293
Include:
Expenditure on capitalised development, other intangible assets and property, (86) - (86) (81) - (81)
plant and equipment
Repayment of lease liabilities (39) - (39) (36) - (36)
Disposals of property, plant and equipment - - - 2 - 2
Funding of charitable foundation - 1 1
Movement in cash collateral 4 - 4 - - -
Free cash-flow 298 178
Exclude:
Repayment of lease liabilities 39 - 39 36 - 36
Interest paid 57 - 57 73 - 73
Interest received (26) - (26) (36) - (36)
Tax paid 99 - 99 92 - 92
Funding of charitable foundation - (1) (1) - - -
Movement in cash collateral (4) - (4) - - -
Operating cash-flow 509 (47) 462 433 (90) 343
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as
follows:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Headline operating profit 526 501
Headline operating cash-flow 509 433
Headline operating cash conversion 97% 86%
Reconciliation of free cash-flow to net movement in cash and cash equivalents:
Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Free cash-flow 298 178
Disposal of/(investment in) financial assets 186 (22)
Disposal of businesses and discontinued operations - (7)
Acquisition of businesses (65) -
Funding of charitable foundation (1) -
Other net cash-flows used in financing activities (note: repayment of lease (230) (909)
liabilities is included in free cash-flow)
Net increase/(decrease) in cash and cash equivalents 188 (760)
29. Alternative performance measures and key performance indicators
The Group uses several alternative performance measures (APMs) in order to
provide additional useful information on underlying trends and the performance
and position of the Group. APMs are non-GAAP and not defined by IFRS;
therefore, they may not be directly comparable with other companies' APMs and
should not be considered a substitute for IFRS measures.
The Group uses these measures, which are common across the industry, for
planning and reporting purposes, to enhance the comparability of information
between reporting periods and business units. The measures are also used in
discussions with the investment analyst community and by credit rating
agencies.
We have identified and defined the following key measures which are used
within the business by management to assess the performance of the Group's
businesses:
APM term Definition and purpose
Capital employed Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets and is adjusted as follows:
- To add goodwill recognised directly in reserves in
respect of subsidiaries acquired before 1 August 1998;
- To eliminate the Group's investment in ICU Medical,
Inc. equity and deferred consideration contingent on the future share price
performance of ICU Medical, Inc; and
- To eliminate post-retirement benefit assets and
liabilities and non-headline litigation provisions related to John Crane, Inc.
and Titeflex Corporation, both net of deferred tax, and net debt.
It is used to monitor capital allocation within the Group. See below for a
reconciliation from net assets to capital employed.
Capital expenditure Comprises additions to property, plant and equipment, capitalised development
and other intangible assets, excluding assets acquired through business
combinations: see note 1 for an analysis of capital expenditure. This measure
quantifies the level of capital investment into ongoing operations.
Divisional headline operating profit (DHOP) DHOP comprises divisional earnings before central costs, finance costs and
taxation. DHOP is used to monitor divisional performance. A reconciliation of
DHOP to operating profit is shown in note 1.
Free cash-flow Free cash-flow is calculated by adjusting the net cash inflow from operating
activities to include capital expenditure, the repayment of lease liabilities,
the proceeds from the disposal of property, plant and equipment and the
investment in financial assets relating to operating activities and pensions
financing outstanding at the balance sheet date. The measure shows cash
generated by the Group before discretionary expenditure on acquisitions and
returns to shareholders. A reconciliation of free cash-flow is shown in note
28.
Gross debt Gross debt is total borrowings (bank, bonds and lease liabilities). It is used
to provide an indication of the Group's overall level of indebtedness. See
note 18 for an analysis of gross debt.
Headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This measure is used by the Group to measure and monitor performance excluding
material non-recurring items or items considered non-operational. See note 3
for an analysis of non-headline items.
Headline EBITDA EBITDA is a widely used profit measure, not defined by IFRS, being earnings
before interest, taxation, depreciation and amortisation. A reconciliation of
headline operating profit to headline EBITDA is shown in the note below.
Net debt Net debt is total borrowings (bank, bonds and lease liabilities) less cash
balances and derivatives used to manage the interest rate risk and currency
profile of the debt. This measure is used to provide an indication of the
Group's overall level of indebtedness and is widely used by investors and
credit rating agencies. See note 18 for an analysis of net cash/(debt).
Non-headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This is used by the Group to measure and monitor material non-recurring items
or items considered non-operational. See note 3 for an analysis of
non-headline items.
Operating cash-flow Comprises free cash-flow and excludes cash-flows relating to the repayment of
lease liabilities, interest and taxation. The measure shows how cash is
generated from operations in the Group. A reconciliation of operating
cash-flow is shown in note 28.
Operating profit Operating profit is earnings before finance costs and tax. A reconciliation of
operating profit to profit before tax is shown on the income statement. This
common measure is used by the Group to measure and monitor performance.
Return on capital employed (ROCE) Smiths ROCE is calculated over a rolling 12-month period and is the percentage
that headline operating profit represents of the monthly average capital
employed on a rolling 12-month basis. This measure of return on invested
resources is used to monitor performance and capital allocation within the
Group. See below for Group ROCE and note 1 for divisional headline operating
profit and divisional capital employed.
The key performance indicators (KPIs) used by management to assess the
performance of the Group's businesses are as follows:
KPI term Definition and purpose
Dividend cover - headline Dividend cover is the ratio of headline earnings per share (see note 5) to
dividend per share (see note 25). This commonly used measure indicates the
number of times the dividend in a financial year is covered by headline
earnings.
Earnings per share (EPS) growth EPS growth is the growth in headline basic EPS (see note 5), on a reported
basis. EPS growth is used to measure and monitor performance.
Free cash-flow (as a % of operating profit) This measure is defined as free cash-flow divided by headline operating profit
averaged over a three-year performance period. This cash generation measure is
used by the Group as a performance measure for remuneration purposes.
Greenhouse gas (GHG) emissions reduction GHG reduction is calculated as the percentage change in normalised Scope 1
& 2 GHG emissions. Normalised is calculated as tCO2e per £m of revenue.
This measure is used to monitor environmental performance.
Gross vitality Gross vitality is calculated as the percentage of revenue derived from new
products and services launched in the last five years. This measure is used to
monitor the effectiveness of the Group's new product development and
commercialisation.
My Say engagement score The overall score in our My Say employee engagement survey. The biannual
survey is undertaken Group-wide. This measure is used by the Group to monitor
employee engagement.
Operating cash conversion Comprises headline operating cash-flow, excluding restructuring costs, as a
percentage of headline operating profit. This measure is used to show the
proportion of headline operating profit converted into cash-flow from
operations before investment, finance costs, non-headline items and taxation.
The calculation is shown in note 28.
Operating profit margin Operating profit margin is calculated by dividing headline operating profit by
revenue. This measure is used to monitor the Group's ability to drive
profitable growth and control costs.
Organic growth Organic growth adjusts the movement in headline performance to exclude the
impact of foreign exchange and acquisitions. Organic growth is used by the
Group to aid comparability when monitoring performance.
Organic revenue growth (remuneration) Organic revenue growth (remuneration) is compounded annualised growth in
revenue after excluding the impact of foreign exchange and acquisitions. The
measure used for remuneration differs from organic revenue growth in that it
is calculated on a compounded annualised basis. This measure has historically
been used by the Group for aligning remuneration with business performance.
Percentage of senior leadership positions taken by females Percentage of senior leadership positions taken by females is calculated as
the percentage of senior leadership roles (G14+ group) held by females. This
measure is used by the Group to monitor diversity performance.
R&D cash costs as a % of sales This measure is defined as the cash cost of research and development
activities (including capitalised R&D, R&D directly charged to the
P&L and customer-funded projects) as a percentage of revenue. Innovation
is an important driver of sustainable growth for the Group and this measures
our investment in research and development to drive innovation.
Recordable Incident Rate (RIR) Recordable Incident Rate is calculated as the number of recordable incidents -
where an incident requires medical attention beyond first aid - per 100
colleagues, per year across Smiths. This measure is used by the Group to
monitor health and safety performance.
Capital employed
Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets adjusted to add goodwill recognised directly in
reserves in respect of subsidiaries acquired before 1 August 1998 of £478m
(FY2023: £478m), to eliminate the Group's investment in ICU Medical, Inc.
equity and deferred consideration contingent on the future share price
performance of ICU Medical, Inc. and to eliminate post-retirement benefit
assets and liabilities and non-headline litigation provisions related to John
Crane, Inc. and Titeflex Corporation, both net of related tax, and net debt.
Notes 31 July 2024 31 July 2023
£m
£m
Net assets 2,252 2,406
Adjust for:
Goodwill recognised directly in reserves 478 478
Retirement benefit assets and obligations 8 (29) (89)
Tax related to retirement benefit assets and obligations 17 31
John Crane, Inc. litigation provisions and related tax 23 166 153
Titeflex Corporation litigation provisions and related tax 23 27 32
Investment in ICU Medical, Inc. equity 14 (47) (347)
Deferred contingent consideration 14 - (13)
Net debt 18 213 387
Capital employed 3,077 3,038
Return on capital employed (ROCE)
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Headline operating profit for previous 12 months - continuing operations 526 501
Average capital employed - continuing operations (excluding investment in ICU 1 3,206 3,196
Medical, Inc. equity)
ROCE 16.4% 15.7%
Credit metrics
Smiths Group monitors the ratio of net debt to headline EBITDA as part of its
management of credit ratings; see note 26 for details. This ratio is
calculated as follows:
Headline earnings before interest, tax, depreciation and amortisation
(headline EBITDA)
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Headline operating profit 526 501
Exclude:
- depreciation of property, plant and equipment 12 44 42
- depreciation of right of use assets 13 34 32
- amortisation and impairment of development costs 10 2 2
- amortisation of software, patents and intellectual property 10 5 7
Headline EBITDA 611 584
Ratio of net debt to headline EBITDA
Notes Year ended Year ended
31 July 2024
31 July 2023
£m
£m
Headline EBITDA 611 584
Net debt 18 213 387
Ratio of net debt to headline EBITDA 0.3 0.7
30. Post balance sheet events
Details of the proposed final dividend announced since the end of the
reporting period are given in note 25. Details of post balance sheet date
acquisitions are given in note 27.
31. Audit exemption taken for subsidiaries
The following subsidiaries are exempt from the requirements of the Companies
Act 2006 relating to the audit of individual accounts by virtue of Section
479A of that Act for FY2024.
Company name Company number
EIS Group Plc 61407
Flexibox International Limited 394688
Flex-Tek Group Limited 11545405
Graseby Limited 894638
SI Properties Limited 160881
SITI 1 Limited 4257042
Smiths Detection Group Limited 5138140
Smiths Detection Investments Limited 5146644
Smiths Finance Limited 7888063
Smiths Group Finance EU Limited 10440573
Smiths Group Finance US Limited 10440608
Smiths Group Innovation Limited 10953689
Smiths Interconnect Group Limited 6641403
Smiths Pensions Limited 2197444
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