REG - Smiths Group PLC - Smiths Group - FY22 Full Year Results
23/09/2022 07:00
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RNS Number : 4306A Smiths Group PLC 23 September 2022
SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHS ENDED 31 JULY 2022
Pioneers of progress - improving our world through smarter engineering
A year of accelerating growth and stronger execution
· ACCELERATING GROWTH - +3.8% organic revenue growth, fastest in nearly
a decade
o Organic revenue growth ahead of expectations, +3.8%(1) (H1: +3.4%; H2:
+4.1%);
5 consecutive quarters of growth; reported growth of +6.7%
o Headline(2) EPS growth +17.8%
o High demand across most end markets with strong order growth of +11%(3)
o £51m of revenue from new products launched in FY2022; R&D investment
increased +14%
o Targeted M&A contributed +1.8% of reported growth
o Increasing returns to shareholders with proposed total dividend of 39.6p,
+5%
· STRONGER EXECUTION - Smiths Excellence System fully embedded
o Resilient operating margin of 16.3% with operating profit(2) of £417m
o Price offsetting inflation and mitigating other supply chain impacts
o Solid operating cash conversion(4) of 80%; investment in working capital and
capex to support growth and mitigate supply chain impacts
o More focused portfolio following completion of Smiths Medical sale and rapid
return of proceeds with share buyback programme now 76% complete
o Smiths Excellence System now fully embedded, with high impact projects
underway and targeted savings actions to drive enhanced efficiency
· INSPIRING & EMPOWERING OUR PEOPLE - an energised and focused team
o A refreshed leadership team with new senior appointments throughout the year
o Introduced Smiths Leadership Behaviours to build on our strong culture
o Driving an even more dynamic and inclusive culture with greater focus on
diversity
o Continuing to translate our commitment to ESG leadership into action
· STRONG BALANCE SHEET - well positioned to execute our growth
strategy
o £380m reduction in gross debt; leverage of 0.3x net debt/headline EBITDA(4)
o Final buy-in of the TI Group Pension Scheme, delivering certainty for scheme
members and shareholders
Headline(2) FY2022 FY2021 Reported Organic(1)
Revenue £2,566m £2,406m +6.7% +3.8%
Operating profit £417m £372m +12.0% +1.7%
Operating profit margin(4) 16.3% 15.5% +80bps (30)bps
Basic EPS 69.8p 59.3p +17.8%
Operating cash conversion(4) 80% 129% (49)%
ROCE(4,5) 14.2% 13.9% +30bps
Statutory FY2022 FY2021 Reported
Revenue £2,566m £2,406m +6.7%
Operating profit £117m £326m (64.1)%
Profit for the year (after tax) £1,035m £285m +263.2%
Basic EPS 267.1p 71.7p +272.5%
Dividend per share 39.6p 37.7p +5.0%
FY2023 OUTLOOK
· Expect to deliver 4.0-4.5% organic revenue growth with moderate
margin improvement
· Strong order books and leading market positions support sustained
momentum
· Cost inflation being actively managed through productivity programmes
and pricing actions
· Macroeconomic and geopolitical uncertainty as well as supply chain
challenges continue
Paul Keel, Chief Executive Officer, commented:
"We continued to demonstrate strong progress in FY2022, executing at pace on
our growth strategy. We delivered growth ahead of expectations, our fastest
organic growth in nearly a decade. Along with accelerating growth, we
further strengthened our company through increased investments in innovation,
commercialisation and supply chain. Still more, we returned £661m of cash to
our shareholders through dividends and share repurchases.
All of this gives us confidence for continued progress in FY2023. Despite an
uncertain macro environment, we expect to deliver 4.0-4.5% organic revenue
growth with moderate margin improvement. By focusing on our top priorities
of growth, execution, and people, we are creating value for our customers,
colleagues, communities and investors. Together, we're building an
ever-stronger future for Smiths.
Many thanks to my colleagues around the world for doing what we do best -
improving our world through smarter engineering."
UPCOMING EVENTS
Date Event
Wednesday 9 November 2022 Q1 Trading Update
Thursday 10 November 2022 Capital Markets Event
Wednesday 16 November 2022 Annual General Meeting
Statutory reporting
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.
Definitions
The following definitions are applied throughout the financial report:
(1) Organic is headline adjusted to exclude the effects of foreign exchange,
acquisitions and restructuring.
(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. Headline performance is on a Smiths Group basis, excluding the
results of Smiths Medical.
(3) Order growth excludes the effects of foreign exchange and includes John
Crane, Smiths Detection and Smiths Interconnect
(4) Alternative Performance Measures ("APMs") and Key Performance Indicators
("KPIs") are defined in note 29 to the financial statements.
(5) Excludes the impact of restructuring charges
Media enquiries
Investor enquiries Alex Le May, FTI Consulting
+44 (0)7702 443312
Jemma Spalton, Smiths Group
+44 (0)7867 390350 smiths@fticonsulting.com (mailto:smiths@fticonsulting.com)
jemma.spalton@smiths.com
Stephanie Heathers, Smiths Group
+44 (0)7584 113633
stephanie.heathers@smiths.com
Presentation
The 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).
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.
OUR PURPOSE
We are pioneers of progress - improving our world through smarter
engineering. Smarter engineering means helping to solve the toughest
problems, for our customers, our communities and ourselves. We help to
create a safer, more efficient and better-connected world.
OUR PRIORITIES AND TARGETS
Smiths is intrinsically strong with world-class engineering, leading positions
in critical markets, and distinctive global capabilities, all underpinned by a
strong financial framework. At our Capital Markets Event
(https://www.smiths.com/capital-markets-event-2021) in November 2021, we set
out how Smiths will deliver performance in line with our significant potential
by focusing on three top priorities:
1) accelerating growth
2) strengthening execution and
3) doing even more to inspire and empower our people.
Our focused plan, the Smiths Value Engine, is the means through which we will
deliver the medium-term targets that we have set. In FY2022, we made
meaningful progress towards these commitments.
Priority Progress
Growth · Five consecutive quarters of organic revenue growth
· £51m of revenue from new products launched in FY2022
· R&D investment increased +14% to 4.2% of sales (+30bps vs
FY2021)
· +1.8% additional growth from targeted M&A
Execution · Price offsetting inflation and mitigating other supply chain
impacts
· Smiths Excellence System ("SES") fully embedded across the
company with a well resourced team and 25 high impact projects underway
· New sustainability strategy launched
People · Refreshed senior leadership team leading a faster pace
· Introduced Smiths Leadership Behaviours to accelerate cultural
change
· More ambitious diversity goals in place
· >1,000 Lean Six Sigma qualifications through our SES Academy
Targets Medium-Term Target FY2021 FY2022 Progress
Organic Revenue Growth 4-6% (2.2)% +3.8% Accelerated growth towards target range
(+ M&A)
EPS Growth(4) 7-10% +19.3% +17.8% Strong growth enhanced by ongoing share buyback programme
(+ M&A)
ROCE 15-17% 13.9% 14.2% Reflecting higher profitability
Operating Profit Margin 18-20% 15.5% 16.3% Resilient margins amidst challenging macro environment, while continuing to
invest in future growth
Operating Cash Conversion 100%+ 129% 80% Solid operating cash conversion while navigating supply chain disruption
These targets are underpinned by Smiths operational KPIs and environmental
targets, including a commitment to Net Zero for Scope 1 and 2 emissions by
2040 and Net Zero for Scope 3 emissions by 2050.
FY2022 BUSINESS PERFORMANCE
The commentary below refers to Smiths Group performance excluding Smiths
Medical, which was accounted for as 'discontinued operations' before the sale
completed on 6 January 2022.
FY2021 FY2021 restructuring charges Foreign Acquisitions Organic FY2022
exchange movement
£m
Revenue 2,406 - 26 42 92 2,566
Headline operating profit 372 21 5 11 8 417
Headline operating profit margin 15.5% +90bps +0bps +20bps (30)bps 16.3%
Smiths delivered growth ahead of expectations with organic revenue up +3.8%.
Growth accelerated to +4.1% in the second half, which built on the momentum we
had achieved in the first half of +3.4%. We executed well in a challenging
environment with positive pricing action covering the impact of elevated input
costs and maintained close management of our supply chain to mitigate other
impacts.
As we strive to continually inspire and empower our great people, we launched
our enhanced sustainability strategy, and set out new Smiths Leadership
Behaviours. These behaviours provide a unified description of what leadership
means at Smiths and a shared commitment to how we will act as employees.
GROWTH
Growing faster is the primary driver of unlocking enhanced value creation for
the Group. Through the year we delivered growth in each quarter and FY organic
revenue growth of +3.8%, our best performance in nearly a decade.
Organic revenue growth (by business) H1 2022 H2 2022 FY2022
John Crane +5.1% +2.5% +3.7%
Smiths Detection (7.2)% (11.3)% (9.4)%
Flex-Tek +10.0% +20.9% +16.1%
Smiths Interconnect +12.9% +14.8% +13.9%
Smiths Group +3.4% +4.1% +3.8%
Growth accelerated in the second half for both Flex-Tek (+20.9%) and Smiths
Interconnect (+14.8%). John Crane delivered +2.5% growth in the second half,
impacted by cessation of sales into Russia and supply chain disruption, which
impacted our ability to convert strong order intake into revenue. As expected,
Smiths Detection continued to be affected by the softer Aviation OE market
through the second half, but good order growth underpins our confidence in the
medium-term prospects for this segment.
Revenue grew +6.7% on a reported basis, to £2,566m (FY2021: £2,406m). This
included +£26m of favourable foreign exchange translation, and +£42m from
the acquisition of Royal Metal Products LLC ("Royal Metal") in February
2021. Since February 2022, Royal Metal results have been accounted for as
organic growth.
Strong execution to maximise market recovery opportunity is the first of the
four actionable levers for accelerating growth.
Our business operates across four major global end markets: General
Industrial, Safety & Security, Energy, and Aerospace. Our strong market
positions, coupled with the balanced market exposure we have across our
businesses, are distinctive long-term advantages for Smiths.
Smiths organic revenue growth in our end markets % of Smiths H1 2022 H2 2022 FY2022
revenue
General Industrial 42% +5.7% +16.5% +11.4%
Safety & Security 31% (3.5)% (8.9)% (6.4)%
Energy 21% +7.5% +0.3% +3.5%
Aerospace 6% +16.7% +14.2% +15.4%
Smiths Group 100% +3.4% +4.1% +3.8%
Smiths organic revenue growth in our largest end market, General Industrial,
was +11.4% in FY2022, with growth accelerating in the second half. This was
driven by John Crane's growth in segments like chemical processing, water
treatment and life sciences, demand for Flex-Tek's construction products and
Smiths Interconnect's semiconductor test solutions which remained strong
throughout the year. Smiths organic revenue in Safety & Security was
(6.4)%, reflecting continued contraction of the Aviation OE market. This was
partially offset by growth in Smith Detection's other segments as well as
growth from Smiths Interconnect's defence related products. The +3.5% growth
in the Energy segment reflected strong demand in John Crane. As mentioned
above, second half growth was impacted by cessation of sales into Russia and
supply chain disruptions. Our fastest growth in FY2022 came in Aerospace,
+15.4%, as increasing aircraft builds drove strong demand for Flex-Tek and
Smiths Interconnect's aerospace solutions.
As part of our growth strategy we have introduced a new approach for our
business in China. From the start of FY2023, the Smiths China leadership
team now has lead responsibility for our operations in the country (excluding
Smiths Interconnect's semiconductor business unit which will continue to
report globally). To reflect this, Ted Wan, President of Smiths China, has
joined the Smiths Group Executive Committee.
Our second lever for faster growth is improved new product development and
commercialisation. During FY2022, we launched 21 high impact new products
including Flex-Tek's Python line sets, a flexible, multi-layer pipe used in
various heating, ventilation and air conditioning ("HVAC") applications;
Smiths Detection's iCMORE automated detection algorithms; and Smiths
Interconnect's space qualified connectors. Gross Vitality, which measures the
contribution of products launched in the last five years increased to 31%
(FY2021: 25%), demonstrating our successful commercialisation of new products.
As an industrial technology leader, continuing to invest in R&D ensures we
capitalise on the wealth of opportunities in our pipeline, with increasing
demand for our sustainability-related products. During FY2022, we invested
£92m in R&D (FY2021: £84m), of which £80m (FY2021: £76m) was an income
statement charge and £12m capitalised (FY2021: £8m). Our customers and third
parties contributed a further £15m (FY2021: £10m).
To support new product launches, and the strong demand for existing solutions,
we increased capex +14.5% in FY2022 to £(71)m (FY2021: £(62)m). This
represents 1.5x depreciation and amortisation (FY2021: 1.2x).
Our third growth lever is building out priority adjacencies. Each of our four
businesses are executing strategies to expand their growth beyond their
existing core market positions. Examples in FY2022 include the launch of
Smiths Interconnect's medical cable assemblies, and John Crane's multi-purpose
filter; an efficient water-saving solution for the treatment of process water
in pulp & paper, mining, power generation plants and refineries.
Our fourth growth lever is using disciplined M&A to augment our organic
growth focus. Flex-Tek's acquisition of Royal Metal in February 2021 is an
excellent example of this. Acquired for $107 million (7.6x trailing EBITDA),
FY2022 revenue and profit growth were +48% and +70%. During H1 2022, the
acquisition contributed £42m of revenue and £11m of operating profit, adding
1.8% on top of organic revenue growth for FY2022. For H2 2022, contribution
from Royal Metal was included in our organic results. Royal Metal brought a
complementary HVAC portfolio, distribution synergies, and positive pricing.
While driving sustained organic growth remains our priority, we continue to
explore value accretive M&A opportunities across the Group.
In January 2022, we successfully completed the sale of Smiths Medical to ICU
Medical, Inc. ("ICU"), several months earlier than expected. This was our
largest portfolio move in over a decade and positions the Group even more
strongly to access the growth available in our industrial technology core.
The sale generated a profit on disposal of £1.0bn, with immediate net cash
proceeds of £1.3bn and further value to come from a potential $0.1bn earnout
and our stake in ICU, which is recognised as a £0.4bn asset on our balance
sheet. For more information on the divestment, please see note 27 of the
financial statements.
EXECUTION
Stronger execution is our second key priority.
In FY2022, headline operating profit grew +1.7% (+£8m) on an organic basis,
and +12.0% (+£45m) on a reported basis to £417m (FY2021: £372m).
FY2021 FY2021 restructuring charges Foreign Acquisitions Organic FY2022
exchange movement
£m
Headline operating profit 372 21 5 11 8 417
Headline operating profit margin 15.5% +90bps +0bps +20bps (30)bps 16.3%
Headline operating profit benefited from strong profit leverage in Flex-Tek
and Smiths Interconnect. This was partially offset by the impact of supply
chain disruption on John Crane and Smiths Detection, lower volumes in the
Aviation OE segment of Smiths Detection, and our continued investment in
growth. On a reported basis headline operating profit increased given £21m of
restructuring costs booked in FY2021, favourable FX translation of £5m and H1
2022 contribution from Royal Metal.
Headline operating profit margin was 16.3%, down (30)bps on an organic basis
and up +80bps on a reported basis.
Headline EPS grew +17.8%, driven by headline operating profit growth, a
reduction in the effective headline tax rate and the benefit from the ongoing
share buyback programme.
The headline tax charge for FY2022 of £104m (FY2021: £96m) represents an
effective rate of 27.6% (FY2021: 28.9%).
ROCE increased +30bps to 14.2% (FY2021: 13.9%). This reflects the higher
profitability of the Group, more than offsetting the temporary increase in
working capital. For further detail of the calculation, please refer to note
29 to the financial statements.
Smiths has a strong track record of operating cash conversion, having averaged
100% over the last five years. This year, we delivered solid operating cash
conversion of 80% (FY2021: 129%) while navigating supply chain disruption and
the associated investment in working capital. Headline operating
cash-flow(4) was £332m (FY2021: £510m).
In FY2022, we embedded our Smiths Excellence System across the company. SES
is a step change in approach and operating rhythm; executing with greater
pace, urgency and consistency in support of our priorities.
SES is well resourced with 6 full-time Master Black Belts ("MBB") and 23 Black
Belts ("BB") in place and the first high impact Black Belt projects now
underway. Both the MBBs and BBs are dedicated resources leading continuous
improvement projects across the organisation. Their current projects are
focused on improving lead times, order book conversion, increasing capacity
and cost reduction which are helping to both navigate the immediate short-term
disruptions and support more efficient margin expansion as we grow the top
line. SES links our actions to our strategy, prioritises for high impact and
creates full-time continuous improvement career paths.
We have also identified some targeted savings projects to drive enhanced
efficiency and agility in responding to our end markets. In John Crane, the
focus is to simplify the organisation to better serve our customers and
maximise growth opportunities. In Smiths Detection, we are restructuring the
operations to be more resilient and improve efficiency in response to market
conditions. The non-headline charge for these savings projects is expected to
be £35-40m in FY2023, with annualised benefits of £25-30m, of which
approximately 50% is expected to be delivered in FY2023.
PEOPLE
Inspiring and empowering our people is our third key priority.
Safety and wellbeing are always foremost of our priorities. We have a strong
and robust safety culture and strive for a zero-harm workplace, with safety
considerations integrated into all of our activities. Our Recordable
Incident Rate for FY2022 was 0.54 and continued to track below the industry
average and in the top quartile of industry performance, reflecting the
importance of safety in everything we do.
We continue to support our colleagues in the Ukraine/Russia region amidst the
ongoing conflict. As communicated at the interim results we stopped all sales
into Russia following the invasion and are in the process of exiting our
operations in Russia. An associated non-headline charge of £19m is included
in the accounts, further details can be found in note 3 of the financial
statements. We made a Group-wide donation to the Red Cross to support the
vital work they are doing for the people of Ukraine, and implemented a
donation matching scheme for our colleagues.
During FY2022 a number of senior appointments were made to the leadership team
including Clare Scherrer as Chief Financial Officer, Bernard Cicut as
President of John Crane, Vera Kirikova as Chief People Officer and John
Ostergren as Chief Sustainability Officer. All of these individuals bring a
wealth of experience which will help accelerate our progress in executing our
strategy.
Under this refreshed leadership as we continue to strengthen our culture, we
have introduced a set of behaviours; the Smiths Leadership Behaviours, to
bring our values to life. These seven behaviours describe how we work with one
another and take ownership and accountability for our actions. They apply to
everyone at Smiths - from the shop floor to senior executives.
We developed the Smiths Leadership Behaviours through a robust process of
focus groups, which gathered the views of colleagues from 21 countries and 72
sites across the organisation. These were followed by workshops with our
Executive Committee to create and refine a set of behaviours that would be
relevant and compelling for the whole organisation and support future growth.
The behaviours will become foundational to processes including recruitment,
development, career progression and reward. We believe that they will enable
the Smiths culture to be even more dynamic and inclusive.
An important step in embedding an inclusive and diverse culture is increasing
our gender diversity. We are focused on proactively increasing the number of
women in leadership roles at Smiths. We have 45% female representation on the
Smiths Board, and we welcomed three new female members to our Executive
Committee in FY2022 (31% female). Women make up 28% of our global employee
population, but only 24% of our senior leaders are female. We are working to
change this with a programme of activities designed to identify, support and
advance the careers of women at Smiths.
OUR ESG APPROACH
Environment, Social and Governance ("ESG") performance is at the very centre
of our Purpose, and fundamental to each of our priorities.
During FY2022, we established a Science, Sustainability & Excellence
Committee of the Board, chaired by Dame Ann Dowling, to provide guidance and
supervision of our sustainability strategy. We put in place the company's
first Chief Sustainability Officer who is leading our sustainability strategy
and targets throughout the business. This strategy (which will be set out in
full in our inaugural Sustainability at Smiths Report in October), describes
how we are embracing and prioritising ESG performance at Smiths to deliver on
our Purpose and create genuine and significant value for all our stakeholders.
To support the delivery of our strategy, executive compensation is now linked
to our sustainability targets, with ESG metrics (GHG reductions and energy
usage) included in our annual and our long-term incentive compensation
programmes beginning in FY2023.
Delivering sustainable growth means leveraging our unique capabilities to
develop and commercialise green technology that will help transform industries
and provide our customers with solutions for their operations, enabling them
to meet their own environmental targets across climate risk, energy transition
and other environmental needs. Examples include methane abatement; more energy
efficient critical safety infrastructure; electrical heating solutions;
transmission and storage of alternative fuels; carbon capture; and next
generation electrical connectors that will safely and reliably support the
digitisation and electrification of infrastructure.
Delivering our ESG commitments which include targets for reduction in water,
waste and packaging, and our Net Zero GHG emissions commitments for Scope 1,2
and 3, will improve the environmental execution of our operations, our
products and our supply chain. In FY2022 we made further progress against
these targets reducing normalised GHG emissions by (7.2)%, normalised water
usage by (4.5)% and normalised non-recyclable waste by (11.5)%. These
reductions are on top of significant progress already made since FY2007, when
we first implemented environmental targets.
We have set and communicated FY2024 environmental goals, an important step to
support the delivery of our commitment to Net Zero GHG Emissions for Scope 1
and 2 by 2040. We have a clear roadmap for how we will achieve this (as
published on our website
(https://www.smiths.com/responsible-business/our-net-zero-2040-commitment) ).
It details the path we are taking to achieve Net Zero Scope 1 and 2 emissions
by 2040 and, furthermore, our ambition to achieve Net Zero Scope 1, 2 and 3
emissions by 2050.
Our people are a key asset in delivering our ESG commitments. We know that
great things happen when we protect, respect, and support our teams. We
nurture our people and develop their talents so that they flourish and can
help build the Smiths of tomorrow. We are supporting our teams to strengthen
our local communities and we are working every day with our unwavering
commitment to strong governance and ethical practice.
FINANCIAL FRAMEWORK
Smiths simple and effective framework translates business strengths into
financial strengths resulting in strong cash generation that in turn fuels
reinvestment in organic growth, complementary M&A and shareholder
returns.
Free cash-flow
In FY2022, free cash-flow(4) generation was £130m (FY2021: £284m) or 31% of
headline operating profit (FY2021: 76%), reflecting an increased investment in
inventory and capital expenditure.
Pensions
Included within free cash-flow was £9m of pension contributions, (FY2021:
£30m). The significant reduction in pension contributions reflects no
contributions needed to the TI Group Pension Scheme ("TIGPS") and £3m to the
Smiths Industries Pension Scheme ("SIPS") given the well-funded position of
both schemes. For FY2023, we expect total cash contributions to be around
£(12)m (including a funded US plan, unfunded schemes and post-retirement
healthcare plans).
In June 2022, the TIGPS Trustee completed a deal to secure its remaining
uninsured pension liabilities, by way of a £640 million bulk annuity buy-in
with Rothesay Life plc. This means that all of the Scheme's liabilities are
now insured, with a final buy-out of the scheme to be completed as soon as
reasonably practical, delivering certainty for the Scheme's 21,000 members and
removing future risk for Smiths. As a result of the buy-in a £171m
non-headline charge was recognised in the FY2022 accounts and the net
accounting pension surplus decreased to £194m (FY2021: £413m).
SIPS is estimated to be in surplus on the Technical Provisions funding
basis. Given the funding position, no further cash contributions are
currently being made. The Group and the SIPS Trustee continue to work
together to progress towards full buy-out funding.
The two main UK pension schemes and the US pension plan are well hedged
against changes in interest and inflation rates. Over 90% of their assets
are invested in third-party annuities, government bonds, investment grade
credit or cash, with no remaining equity investments. As at 31 July 2022,
over 60% of the UK liabilities had been de-risked through the purchase of
annuities from third party insurers.
Capital allocation
Net debt(4) at 31 July 2022 was £150m (FY2021: £1,018m), £868m stronger as
a result of the proceeds received from the sale of Smiths Medical in January
2022. Net debt to headline EBITDA(4) has improved to 0.3x (FY2021: 1.6x).
Given our strong balance sheet position and capital allocation approach, we
initiated a £742m share buyback in November 2021. As at 16 September 2022, we
had completed 76% of the programme. At the current run-rate and share price,
we would complete the programme in early CY2023, with an anticipated reduction
in shares to ~346m (a 13% reduction).
In line with our progressive dividend policy the Board is recommending a final
dividend of 27.3p, bringing the total dividend for the year to 39.6p, a
year-on-year increase of +5% (FY2021: 37.7p). The final dividend will be
paid on 18 November 2022 to shareholders on the register at close of business
on 21 October 2022. Our dividend policy aims to increase dividends in line
with growth in earnings and cash-flow with the objective of maintaining
minimum dividend cover of around 2 times. The policy enables us to retain
sufficient cash-flow to finance investment in growth and meet our financial
obligations. In setting the level of dividend payments, the Board considers
prevailing economic conditions and future investment plans.
The Company offers a Dividend Reinvestment Plan ("DRIP") enabling shareholders
to use their cash dividend to buy further shares in the Company - see our
website for details. To participate in the DRIP, shareholders must submit
their election notice to be received by 28 October 2022 ("the Election Date").
Elections received after the Election Date will apply to dividends paid after
18 November 2022. Purchases under the DRIP are made on, or as soon as
practicable after, the dividend payment date and at prevailing market
prices.
We also applied proceeds from the sale of Smith Medical to reduce debt by
redeeming early a $400m bond on 17 February 2022 which was due to be repaid in
October 2022. This resulted in gross debt(4) of £1,166m (FY2021: £1,546m) as
at 31 July 2022. There are no financial covenants associated with the gross
debt. As at 31 July 2022, the weighted average maturity was 2.5 years, with
the next maturity due in April 2023. Cash increased to £1,056m (FY2021:
£405m).
An $800m (c.£656m at the period-end exchange rate) revolving credit facility
("RCF") remains undrawn and matures in November 2024. The only financial
covenant relates to interest cover, under which EBITDA must be greater than or
equal to 3 times net interest. Taking cash and the RCF together, total
liquidity was over £1.7bn at the end of the period.
STATUTORY RESULTS
Income Statement
The £300m difference between headline operating profit of £417m and
statutory operating profit of £117m is non-headline items as defined in note
3 of the financial statements. The largest constituents relate to the TIGPS
buy-in which resulted in an accounting charge of £171m, amortisation of
acquired intangible assets of £51m, Russia-related impairment and closure
costs of £19m, past service costs for benefit equalisation and improvements
of £43m, asbestos litigation in John Crane, Inc, and subrogation claims in
Titeflex Corporation. Statutory operating profit of £117m was £209m lower
than last year (FY2021: £326m), reflecting higher non-headline charges
offsetting the increase in headline operating profit.
Statutory finance costs were £(14)m (FY2021: £(86)m), mainly due to a £22m
foreign exchange gain on an intercompany loan with Smiths Medical (FY2021:
£(50)m) which was settled on disposal; the matching credit in discontinued
operations nets out to zero in total Group earnings.
Non-headline taxation items of £14m relate to amortisation of
acquisition-related intangible assets, legacy pension scheme arrangements,
litigation provisions and non-headline finance items. The statutory
effective tax rate was 87% (FY2021: 35%), driven principally by the
non-headline settlement loss from the TIGPS buy-in for which there was no
associated deferred tax. Please refer to notes 3 and 6 of the financial
statements for further details.
Discontinued operations - Smiths Medical
On 6 January 2022, the Group completed the sale of Smiths Medical to ICU
Medical, Inc. ("ICU") at an enterprise value of $2.7bn and an equity value of
$2.4bn after adjustments for debt, liabilities and working capital.
For the five months that Smiths Medical remained in the Group, it delivered
headline profit after tax of £49m.
The difference between statutory and headline profit after tax is £973m,
which includes £1,036m gain on disposal, £(33)m of regulatory remediation
costs, £(14)m from the impairment of investments, £(22)m of foreign exchange
losses on the intercompany loan with Smiths Group (continuing operations), and
+£6m of tax credit on these non-headline items. Please refer to notes 3 and
27 of the financial statements for further details.
Total Group profit after tax and EPS
Statutory profit after tax for the total Group increased by +263% to £1,035m
(FY2021: £285m) which included the profit on sale of Smiths Medical.
Statutory basic EPS was up +273% to 267.1p (FY2021: 71.7p).
Statutory Cash-flow
Statutory net cash inflow from operating activities for the total Group was
£279m (FY2021: £535m). See note 28 to the financial statements for a
reconciliation of headline operating cash-flow to statutory cash-flow.
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 the US Dollar and the Euro.
The principal exchange rates, expressed in terms of the value of Sterling, are
shown in the following table.
Average rates Period-end rates
31 Jul 2022 31 Jul 2021 31 Jul 2022 31 Jul 2021
(12 months) (12 months)
USD 1.32 1.36 1.22 1.39
EUR 1.18 1.13 1.19 1.17
Business review
JOHN CRANE
John Crane is a leading provider of mission-critical engineered solutions,
improving our customers' reliability and sustainability in process industries.
59% of revenue is derived from the energy sector (downstream and midstream oil
& gas and power generation, including renewable and sustainable energy
sources). 41% is from other process industries including chemical, life
sciences, mining, water treatment, and pulp & paper. 69% of John Crane
revenue is from aftermarket sales. John Crane represents 35% of Group revenue.
FY2022 FY2021 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 901 865 +4.2% +5.1% +2.5% +3.7%
Original Equipment 279 273 +2.2% +1.8% +2.7% +2.3%
Aftermarket 622 592 +5.1% +6.6% +2.4% +4.3%
Energy 530 510 +3.9% +7.5% +0.3% +3.5%
Industrials 371 355 +4.5% +1.7% +5.8% +3.9%
Headline operating profit 188 187 +0.2% +6.3% (8.9)% (2.8)%
Headline operating profit margin 20.9% 21.6% (70)bps +20bps (270)bps (140)bps
Statutory operating profit 167 184 (9.2)%
Return on capital employed 19.4% 20.0% (60)bps
R&D cash costs as % of sales 2.5% 2.1% +40bps
Revenue
FY2021 Foreign Organic FY2022
£m reported exchange movement reported
Revenue 865 4 32 901
John Crane's strong market position, global service network, and collaborative
customer relationships underpin its performance. Organic revenue was up +3.7%
for the year, with growth across both of John Crane's segments; Energy up
+3.5% and Industrial up +3.9%. On a reported basis, revenue was up +4.2%, with
a £4m favourable foreign exchange impact.
Activity levels remained high through FY2022 with +10.5% order growth and a
record order book. Organic revenue growth in H2 of +2.5% (H1: +5.1%) was
tempered by the cessation of sales into Russia from March 2022, a (110)bps
impact for H2 and (60)bps for FY2022. Extended lead times on certain materials
also impacted order book conversion.
Aftermarket represents 69% of John Crane's revenue (FY2021: 68%).
Aftermarket revenue was up +4.3% on an organic basis. John Crane's large
installed base and leading service offering positions it well to meet the
strong demand for aftermarket repairs, maintenance and upgrades. Organic
revenue from Original Equipment ("OE") was up +2.3%. The rate of new orders
continues to improve, with strong OE order growth in the second half.
Customer demand across both OE and aftermarket is strong, driven by the
increasing demand for energy, along with decarbonisation and the transition to
clean energy sources. Customers are requiring systems to be more reliable and
energy efficient, interconnected and digitally enabled, and use diverse
low-carbon energy sources. These trends benefit John Crane as they require
significant investment in new infrastructure and retrofits to existing
infrastructure, as well as new technology to reduce cost and accelerate the
deployment of cleaner energy.
John Crane is well positioned to support customers through the energy
transition. John Crane is working closely with customers and stakeholders to
accelerate innovation across several decarbonisation themes to reduce methane
and other GHG emissions, increase asset efficiency, and enable rapid scaling
of low-carbon hydrogen, along with carbon capture, utilisation & storage.
As an example, the John Crane Sense® digital platform monitors the condition
and effectiveness of equipment and helps customers optimise maintenance
schedules and minimise downtime. John Crane's upstream pumping seals, used
in water intensive industries save an average of one million gallons of water
per seal per year.
John Crane secured multiple new contracts in sustainability and hydrogen
including from NatureWorks, one of the largest producers of biopolymers and
the NEOM Green Hydrogen Project, further cementing John Crane's leadership in
these major environmental themes.
Operating profit
FY2021 reported FY2021 Restructuring costs Foreign Organic FY2022 reported
£m exchange movement
Headline operating profit 187 4 2 (5) 188
Headline operating profit margin 21.6% +50bps +10bps (140)bps 20.9%
Headline operating profit of £188m decreased by (2.8)% on an organic basis,
as pricing offset cost inflation but was impacted by increased costs
associated with supply chain disruption, and increased R&D investment for
future growth. To further strengthen John Crane's position for these
significant growth opportunities and to better serve customers a number of
targeted actions have been identified. These actions are focused on
simplifying the end-to-end value chain resulting in an even more agile and
efficient business.
Headline operating profit was up +0.2% on a reported basis, with +£2m of
favourable foreign exchange and £4m of restructuring costs charged in FY2021.
The difference between statutory and headline operating profit includes the
net cost in relation to the provision for John Crane, Inc. asbestos litigation
and Russia-related impairment and closure costs.
ROCE
ROCE was 19.4%, down (60)bps, due to investment in working capital through
FY2022.
R&D
Cash R&D expenditure increased to 2.5% of sales (FY2021: 2.1%). John
Crane's innovation is primarily focused on enhancing efficiency, performance
and sustainability by using materials science advancements to reduce friction
in high duty wet seals or increase maximum rotating speed required in next
generation hydrogen compressors. John Crane is also investing in faster
modelling to reduce development time and increase seal performance.
John Crane sealing solutions have a significant role in helping our customers
in their sustainability journeys through reducing leaks. Examples of such
products include a seal for demanding hydrocarbon pipelines with a unique,
patented seal technology that significantly extends the mean time between
repair, reducing maintenance, improving efficiency and protecting the
environment from potentially harmful leaks. We also launched John Crane
Sense® Turbo, which includes a first to market sensor-enabled dry gas seal.
This ground-breaking technology introduces the John Crane Sense® platform,
providing real-time monitoring and machine learning diagnostics on equipment,
helping customers to prevent leaks and reduce downtime.
SMITHS DETECTION
Smiths Detection is a global leader in the detection and identification of
threats and contraband, supporting safety, security and freedom of movement.
It produces equipment for customers in the Aviation market and Other Security
Systems for ports & borders, defence and urban security markets. 54% of
Smiths Detection's sales are derived from the aftermarket. Smiths Detection
represents 26% of Group revenue.
FY2022 FY2021 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 655 721 (9.1)% (7.2)% (11.3)% (9.4)%
Original Equipment 300 390 (23.1)% (17.5)% (26.7)% (22.6)%
Aftermarket 355 331 +7.3% +4.0% +7.7% +5.9%
Aviation 467 546 (14.5)% (12.5)% (16.5)% (14.7)%
Other Security Systems 188 175 +7.4% +8.1% +6.2% +7.1%
Headline operating profit 73 99 (26.8)% (13.0)% (42.0)% (30.7)%
Headline operating profit margin 11.1% 13.7% (260)bps (80)bps (570)bps (340)bps
Statutory operating profit 36 77 (53.2)%
Return on capital employed 7.1% 9.7% (260)bps
R&D cash costs as % of sales 9.3% 7.4% +190bps
Revenue
FY2021 Foreign Organic FY2022
£m reported exchange movement reported
Revenue 721 2 (68) 655
Smiths Detection grew in all segments except for Aviation original equipment
("OE") which, as anticipated, was impacted by its challenging end market.
Organic revenue declined (9.4)% or (9.1)% on a reported basis, including £2m
of favourable foreign exchange. The cessation of sales to Russia resulted in a
headwind of (70)bps in H2 and (40)bps for the full year.
OE represented 46% of FY2022 revenues. Organic OE revenues were down (22.6)%.
Good growth in OE sales for Other Security Systems ("OSS") were more than
offset by lower Aviation OE sales as customers continue to stabilise
operations post the COVID pandemic.
54% of Smiths Detection's sales were derived from the aftermarket. The
underlying trend in aftermarket revenues across both Aviation and Other
Security Systems continued to improve, accelerating in H2 to deliver +5.9%
growth in FY2022, reflecting the benefit of a large installed base and a
return to more typical operating patterns.
Organic revenue from Aviation decreased (14.7)% reflecting the slowdown in the
Aviation OE market. Although we expect continued market challenges in the
near-term, we are increasingly well positioned for recovery when it comes.
Tender activity in Aviation has started to increase, and Smiths Detection
continues to secure new contracts with order intake growing. Recent wins
include contracts for hold baggage in the US; checkpoint security in Italy,
Japan, Ireland; and for both hold baggage and checkpoint in Mexico and South
Korea.
Organic revenue from OSS grew by +7.1%, driven by demand for Ports &
Borders solutions. Expanding the OSS segment is a key tenet of Smiths
Detection's strategy to expand into attractive market adjacencies. This is
demonstrated by key OSS contract wins in FY2022 including high-energy X-ray
systems for customers in Japan and the US; this year's Commonwealth Games
where Smiths Detection were the official security provider; radiation
solutions to transportation customers in the US; and defence equipment
development projects for the US Department of Defense.
Given the new contract wins across Aviation and OSS and the strong order
intake through FY2022 we expect a return to growth in FY2023.
Operating profit
FY2021 FY2021 Restructuring cost Foreign Organic FY2022 reported
£m reported exchange movement
Headline operating profit 99 6 (1) (31) 73
Headline operating profit margin 13.7% +90bps (10)bps (340)bps 11.1%
Smiths Detection's headline operating profit was down (30.7)% on an organic
basis, impacted by lower volumes and supply chain challenges, particularly the
scarcity of electronic components and increased logistics costs. Headline
operating profit of £73m was down (26.8)% on a reported basis, including
£(1)m adverse foreign exchange translation and £6m of restructuring charges
in FY2021.
Headline operating profit margin was 11.1%, down (340)bps on an organic basis
and (260)bps on a reported basis. A number of restructuring initiatives are
underway that will enable Smiths Detection to be more resilient in responding
to changes in its end markets and deliver improved margins.
The difference between statutory and headline operating profit primarily
reflects amortisation of acquired intangibles and a charge for write-downs
associated with Smiths Detection's exit from Russia.
ROCE
ROCE decreased by (260)bps to 7.1%, due to lower profitability in FY2022.
R&D
Cash R&D expenditure was 9.3% of sales, +190bps higher than last year.
This includes an increase in customer funded projects to £14m (FY2021: £9m).
Smiths Detection continued to invest in the development of next generation
detection devices for the defence market, new algorithms to improve the
detection of dangerous goods, and digital solutions to strengthen our
aftermarket proposition to make people and infrastructure safer. Certain
programmes are co-funded by strategic customers seeking next-generation
solutions to security challenges. During FY2022, we launched a new high volume
air cargo screening technology, as well as an extension of our automated
detection algorithm, iCMORE, to enable currency detection, supporting the
fight against global money laundering, weapons detection, lithium batteries
and dangerous goods.
FLEX-TEK
Flex-Tek provides innovative solutions to heat and move fluids and gases for
aerospace and industrial applications that support energy efficiency and
improved air quality. 82% of Flex-Tek's revenue is derived from Industrials
and 18% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.
FY2022 FY2021 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 647 508 +27.4% +10.0% +20.9% +16.1%
Industrials 531 409 +29.8% +8.5% +22.6% +16.3%
Aerospace 116 99 +17.5% +16.1% +13.4% +14.6%
Headline operating profit 133 97 +37.1% +18.3% +24.3% +21.7%
Headline operating profit margin 20.6% 19.1% +150bps +150bps +60bps +90bps
Statutory operating profit 106 83 +27.7%
Return on capital employed 25.6% 21.6% +400bps
R&D cash costs as % of sales 0.4% 0.5% (10)bps
Revenue
FY2021 Foreign Acquisitions Organic FY2022
£m reported exchange movement reported
Revenue 508 14 42 83 647
Flex-Tek's agile operating model and close customer relationships contributed
to a record year for the business. Organic revenue increased +16.1%, with
record growth in the second half of +20.9%. Revenue grew +27.4% on a
reported basis, including +£14m favourable foreign exchange translation and
+£42m from acquisitions.
Organic revenue from Flex-Tek's Industrial segment was up +16.3%. Strong
growth was driven by demand for its construction related products in the US,
particularly for HVAC applications, where Flex-Tek continued to outperform the
underlying market. Other drivers included good growth of its industrial heat
applications and active price management. Demand remained strong throughout
the second half, and the business remains vigilant of key market indicators.
During the second half, Flex-Tek continued to execute its growth strategy,
launching the Python line sets product, a multi-layer pipe used in various
HVAC applications, replacing the traditional and more costly copper pipes. It
also expanded its metal ducting offering which was introduced to the portfolio
as part of the Royal Metals acquisition, with the opening of a dedicated green
field facility in Texas.
Organic revenue from Flex-Tek's Aerospace segment was up +14.6% as the
aerospace market benefits from an increasing number of aircraft builds.
Operating profit
FY2021 Foreign Acquisitions Organic FY2022
£m reported exchange movement reported
Headline operating profit 97 3 11 22 133
Headline operating profit margin 19.1% +10bps +50bps +90bps 20.6%
Headline operating profit increased +21.7% on an organic basis, reflecting
increased volumes and strong cost management. Headline operating profit was up
+37.1% at £133m on a reported basis, including +£3m favourable foreign
exchange translation and +£11m from acquisitions. Headline operating profit
margin was up +150bps to 20.6%, on a reported basis. The difference between
statutory and headline operating profit is due to amortisation of acquired
intangible assets and provision for Titeflex Corporation subrogation claims.
In February 2021, the Group acquired Royal Metal, a leading manufacturer of
residential and light commercial HVAC products for $107m. During H1 2022 the
acquisition contributed £42m of revenue and £11m of operating profit.
Since February 2022, Royal Metal results have been accounted for as organic
growth.
Royal Metal complements the organic growth that Flex-Tek is already driving
through the development of innovative air distribution products that support
improved energy efficiency and indoor air quality. The acquisition provides
the benefits of complementary HVAC portfolios, synergies in distribution, and
positive pricing, demonstrating the value that we can create through our
highly disciplined and selective M&A process.
ROCE
ROCE increased +400bps to 25.6% reflecting the record profit growth in FY2022.
R&D
Cash R&D expenditure remained broadly consistent at 0.4% of sales (FY2021:
0.5%). R&D is focused on developing new products for the construction
market, and an expanded product offering in aerospace.
SMITHS INTERCONNECT
Smiths Interconnect designs cutting-edge connectivity solutions for demanding
applications in the aerospace and defence, semiconductor test, and industrial
end-markets. Smiths Interconnect represents 14% of Group revenue.
FY2022 FY2021 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 363 312 +16.3% +12.9% +14.8% +13.9%
Headline operating profit 65 35 +88.2% +58.7% +28.0% +39.7%
Headline operating profit margin 18.0% 11.2% +680bps +490bps +190bps +330bps
Statutory operating profit 64 34 +88.2%
Return on capital employed 16.3% 8.8% +750bps
R&D cash costs as % of sales 5.6% 6.3% (70)bps
Revenue
FY2021 Foreign Organic FY2022
£m reported exchange movement reported
Revenue 312 6 45 363
Smiths Interconnect's cutting-edge solutions and strong positions in its
market subsegments underpinned a very strong FY2022 performance with organic
revenue up +13.9%. Revenue growth in H2 2022 accelerated to +14.8% reflecting
ongoing momentum from a growing order book and new product launches. Revenue
increased by +16.3% on a reported basis, with +£6m favourable foreign
exchange translation.
This strong performance reflects growth across the semiconductor test business
with continued high demand, coupled with new product launches and new customer
wins. Smiths Interconnect's space and defence products also delivered good
growth in particular coming from the launch of 28G fibre-optic transceivers
for satellite communications and from space -qualified connectors. During the
second half, Smiths Interconnect progressed its growth into adjacencies with
the successful introduction of its first medical cable assembly product.
Smiths Interconnect enters FY2023 with significant orders for its
space-qualified products for commercial satellite constellations, next
generation chip testing solutions and for medical cable assemblies.
Operating profit
FY2021 reported FY2021 restructuring costs Foreign Organic FY2022 reported
exchange movement
£m
Headline operating profit 35 10 1 19 65
Headline operating profit margin 11.2% +330bps +10bps +330bps 18.0%
Headline operating profit increased +39.7% on an organic basis, with growth
driven by strong revenue performance, positive pricing actions and good supply
chain management. Headline operating profit was up +88.2% to £65m on a
reported basis, including £10m of restructuring costs in FY2021. Headline
operating profit margin was 18.0%, up +680bps on a reported basis and +330bps
on an organic basis.
The difference between statutory and headline operating profit reflects the
amortisation of acquired intangibles.
ROCE
ROCE increased +750bps to 16.3%, driven by higher profitability.
R&D
Cash R&D expenditure represented 5.6% of sales (FY2021: 6.3%), with the
absolute spend year on year remaining the same. R&D is focused on bringing
to market new products that improve connectivity and product integrity in
demanding operating environments. Product launches included the new space
qualified connectors and optical transceivers, which enable high-speed,
reliable data processing for communication satellites and GPS navigation
systems; medical connectors used in critical care; and upgrades of semi-test
products.
Consolidated income statement
Year ended 31 July 2022 Year ended 31 July 2021
Notes Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Continuing operations
Revenue 1 2,566 - 2,566 2,406 - 2,406
Operating costs 2 (2,149) (300) (2,449) (2,034) (46) (2,080)
Operating profit/(loss) 2 417 (300) 117 372 (46) 326
Interest receivable 4 14 - 14 9 - 9
Interest payable 4 (55) - (55) (49) - (49)
Other financing gains/(losses) 4 - 20 20 - (52) (52)
Other finance income - retirement benefits 4 - 7 7 - 6 6
Finance costs 4 (41) 27 (14) (40) (46) (86)
Profit/(loss) before taxation 376 (273) 103 332 (92) 240
Taxation 6 (104) 14 (90) (96) 13 (83)
Profit/(loss) for the year 272 (259) 13 236 (79) 157
Discontinued operations
Profit from discontinued operations 27 49 973 1,022 134 (6) 128
Profit/(LOSS) for the year 321 714 1,035 370 (85) 285
Profit/(loss) for the year attributable to:
Smiths Group shareholders - continuing operations 270 (259) 11 235 (79) 156
Smiths Group shareholders - discontinued operations 49 973 1,022 134 (6) 128
Non-controlling interests 2 - 2 1 - 1
321 714 1,035 370 (85) 285
Earnings per share 5
Basic 267.1p 71.7p
Basic - continuing 2.8p 39.4p
Diluted 266.0p 71.3p
Diluted - continuing 2.8p 39.1p
Consolidated statement of comprehensive income
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
represented*
£m
Profit for the year 1,035 285
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of retirement benefits assets and obligations 8 (17) 13
Taxation on post-retirement benefits movements 6 - (6)
Fair value movements on financial assets at fair value through OCI 14 (63) 4
(80) 11
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges (82) 82
- reclassified to income statement on cash-flow and net investment hedges 5 2
(77) 84
Foreign exchange (FX) movements net of recycling:
Exchange gains/(losses) on translation of foreign operations 276 (166)
Exchange gains recycled to the income statement on disposal of business (196) -
80 (166)
Total other comprehensive income, net of taxation (77) (71)
Total comprehensive income 958 214
Attributable to:
Smiths Group shareholders 957 214
Non-controlling interests 1 -
958 214
Total comprehensive income attributable to Smiths Group shareholders arising
from:
Continuing operations 131 152
Discontinued operations 827 62
958 214
* The comparative year has been represented to include 'Fair value movements
on financial assets at fair value through OCI' within the 'OCI which will not
be reclassified to the income statement' subtotal rather than within the 'OCI
which will be reclassified and reclassifications' subtotal. This
reclassification has no impact on total other comprehensive income in the
comparative year ended 31 July 2021.
Consolidated balance sheet
Notes 31 July 2022 31 July 2021
£m
£m
Non-current assets
Intangible assets 10 1,588 1,498
Property, plant and equipment 12 243 212
Right of use assets 13 106 108
Financial assets - other investments 14 395 11
Retirement benefit assets 8 309 546
Deferred tax assets 6 95 92
Trade and other receivables 16 69 59
Financial derivatives 20 - 75
2,805 2,601
Current assets
Inventories 15 570 381
Current tax receivable 6 50 75
Trade and other receivables 16 738 630
Cash and cash equivalents 18 1,056 405
Financial derivatives 20 4 2
Assets held for sale 27 - 1,243
2,418 2,736
TOTAL ASSETS 5,223 5,337
Current liabilities
Financial liabilities:
- borrowings 18 (509) (9)
- lease liabilities 18 (29) (27)
- financial derivatives 20 (27) (3)
Provisions 23 (88) (46)
Trade and other payables 17 (682) (530)
Current tax payable 6 (64) (89)
Liabilities held for sale 27 - (283)
(1,399) (987)
Non-current liabilities
Financial liabilities:
- borrowings 18 (538) (1,372)
- lease liabilities 18 (90) (94)
- financial derivatives 20 (20) -
Provisions 23 (247) (241)
Retirement benefit obligations 8 (115) (128)
Corporation tax payable 6 (3) (5)
Deferred tax liabilities 6 (44) (28)
Trade and other payables 17 (46) (59)
(1,103) (1,927)
TOTAL LIABILITIES (2,502) (2,914)
NET ASSETS 2,721 2,423
Shareholders' equity
Share capital 24 136 149
Share premium account 365 363
Capital redemption reserve 26 19 6
Revaluation reserve 26 - 1
Merger reserve 26 235 235
Cumulative translation adjustments 487 509
Retained earnings 1,659 1,367
Hedge reserve 26 (202) (228)
Total shareholders' equity 2,699 2,402
Non-controlling interest equity 26 22 21
TOTAL EQUITY 2,721 2,423
Consolidated statement of changes in equity
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
shareholders'
interest
equity
premium
£m
adjustments
£m
£m
funds
£m
£m
£m
£m
£m
At 31 July 2021 512 242 509 1,367 (228) 2,402 21 2,423
Profit for the year - - - 1,033 - 1,033 2 1,035
Other comprehensive income:
- re-measurement of retirement benefits - - - (17) - (17) - (17)
after tax
- FX movements net of recycling - (1) (22) 1 103 81 (1) 80
- fair value gains and related tax - - - (63) (77) (140) - (140)
Total comprehensive income for the year - (1) (22) 954 26 957 1 958
Transactions relating to ownership interests:
Issue of new equity shares 24 2 - - - - 2 - 2
Purchase of shares by Employee Benefit Trust - - - (16) - (16) - (16)
Proceeds from exercise of share options - - - 1 - 1 - 1
Share buybacks 24 (13) 13 - (511) - (511) - (511)
Dividends:
- equity shareholders 25 - - - (150) - (150) - (150)
Share-based payment 9 - - - 14 - 14 - 14
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
shareholders'
interest
equity
premium
£m
adjustments
£m
£m
funds
£m
£m
£m
£m
£m
At 31 July 2020 510 242 674 1,259 (312) 2,373 21 2,394
Profit for the year - - - 284 - 284 1 285
Other comprehensive income:
- re-measurement of retirement benefits - - - 7 - 7 - 7
after tax
- FX movements net of recycling - - (165) - - (165) (1) (166)
- fair value gains and related tax - - - 4 84 88 - 88
Total comprehensive income for the year - - (165) 295 84 214 - 214
Transactions relating to ownership interests:
Exercises of share options 24 2 - - - - 2 - 2
Receipt of capital from non-controlling interest - - - - - - 1 1
Purchase of own shares 24 - - - (16) - (16) - (16)
Dividends:
- equity shareholders 25 - - - (185) - (185) - (185)
- non-controlling interest - - - - - - (1) (1)
Share-based payment 9 - - - 14 - 14 - 14
At 31 July 2021 512 242 509 1,367 (228) 2,402 21 2,423
Consolidated cash-flow statement
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Net cash inflow from operating activities 28 279 535
Cash-flows from investing activities
Expenditure on capitalised development (22) (27)
Expenditure on other intangible assets (8) (12)
Purchases of property, plant and equipment (58) (78)
Disposals of property, plant and equipment 3 2
Capital returned by other investments - 7
Acquisition of businesses - (83)
Investment in financial asset - discontinued operations - (14)
Proceeds on disposal of subsidiaries, net of cash disposed 1,331 -
Net cash-flow used in investing activities 1,246 (205)
Cash-flows from financing activities
Proceeds from exercise of share options 24 2 2
Share buybacks 24 (511) -
Purchase of shares by Employee Benefit Trust 26 (16) (16)
Proceeds received on exercise of employee share options 1 -
Settlement of cash-settled options (1) -
Dividends paid to equity shareholders 25 (150) (185)
Lease payments (38) (44)
Reduction and repayment of borrowings (295) -
Cash inflow from matured derivative financial instruments 23 4
Net cash-flow used in financing activities (985) (239)
Net increase in cash and cash equivalents 540 91
Cash and cash equivalents at beginning of year 405 366
Movement in net cash held in disposal group 48 (28)
Foreign exchange rate movements 62 (24)
Cash and cash equivalents at end of year 18 1,055 405
Cash and cash equivalents at end of year comprise:
- cash at bank and in hand 242 219
- short-term deposits 814 186
1,056 405
- bank overdrafts (1) -
1,055 405
Accounting policies
Basis of preparation
The financial information set out above does not constitute the Company's
statutory accounts for the financial years ended 31 July 2022 or 2021, but are
derived from those accounts. Statutory accounts for 2021 have been delivered
to the Registrar of Companies and those for 2022 will be delivered following
the Company's Annual General Meeting. Those accounts have been reported on
by the company's auditor; the report of the auditor was (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 accounts have been prepared in accordance with International Accounting
Standards in conformity with the requirements of the Companies Act 2006. The
consolidated 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 are satisfied that the Group has adequate resources to continue
to operate for a period not less than 12 months from the date of approval of
the financial statements and that there are no material uncertainties around
their assessment. Accordingly, the Directors continue to adopt the going
concern basis of accounting.
The Group's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the Strategic
Report within the Annual Report 2022. The Group's financial position,
cash-flows, liquidity and borrowing facilities are described in the Strong
Financial Framework section within the Annual Report 2022.
Other factors considered by the Board as part of their going concern
assessment included the inherent uncertainties in cash-flow forecasts. Based
on the above, the Directors have concluded that the Group is well placed to
manage its financing and other business risks satisfactorily, and they have a
reasonable expectation that the Group will have adequate resources to continue
in operation for at least 12 months from the signing date of these financial
statements. They therefore consider it appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
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 which broadly match 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 are 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 £229m (FY2021: £212m) 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
showing the impact on the provision of reducing or increasing this time
horizon;
· 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 showing the range of expected future spend.
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has
received a number of claims 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 a
number of product liability claims regarding this product, 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. Provision of £52m (FY2021: £47m) has been made for the costs
which the Group is expected to incur in respect of these claims. In preparing
the provision calculation, key estimates have been made about the impact of
safe installation initiatives on the level of future claims. See note 23 for a
sensitivity showing the impact on the provision of reducing or increasing the
expected impact. However, because of the significant uncertainty associated
with the future level of claims, there can be no guarantee that the
assumptions used to estimate the provision will result in an accurate
prediction of the actual costs that may be incurred.
Taxation
The Group has recognised deferred tax assets of £103m (FY2021: £144m)
relating to losses and £69m (FY2021: £65m) relating to the John Crane, Inc.
and Titeflex Corporation litigation provisions. The recognition of assets
pertaining to these items requires management to make significant estimates as
to the likelihood of realisation of these deferred tax assets and the phasing
and attribution of future taxable profits. This is based on a number of
factors, which management use to assess the expectation that the benefit of
these assets will be realised, including expected future levels of operating
profit, expenditure on litigation, pension contributions and the timing of the
unwind of other tax positions.
Taxation liabilities included provisions of £38m (FY2021: £34m), 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.
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 and Smiths Interconnect 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 2022, the Group held contracts with a total value of £181m (2021:
£166m), of which £135m (2021: £99m) had been delivered and £47m (2021:
£67m) remains fully or partially unsatisfied. £37m of the unsatisfied amount
is expected to be recognised in the coming year, with the remainder being
recognised within two years. A 5% increase in the remaining cost to complete
the contracts would have reduced Group operating profit in the current year by
less than £2m (2021: less than £2m).
Valuation of financial assets
Following the sale of Smiths Medical the Group has recognised a financial
asset for the fair value of the $100m additional sales consideration that is
contingent on the future share price performance of the enlarged ICU Medical,
Inc (ICU) business.
The earnout requires the Group to retain beneficial ownership of at least
1.25m ICU shares and for the ICU share price to average $300 or more for any
30-day period during the first three years post-completion, or for any 45-day
period in the fourth year post-completion.
An external valuation firm has been engaged to undertake Monte Carlo valuation
simulations in order to estimate the probability of the future ICU share price
exceeding $300. These valuation simulations have determined a fair value of
£19m (US$23m).
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.
Where the Group has a contractual option to acquire a business in the future,
management have applied judgement in determining whether it has substantive
voting rights in the business and whether the business should be accounted for
as a subsidiary or associate. In applying these judgements, management have
reviewed whether the option and any related legal/commercial agreements
provide the Group with power or significant influence over the business and
have assessed whether there are any barriers that prevent the Group from
exercising these rights.
Retirement benefits
At 31 July 2022 the Group has recognised £309m of retirement benefit assets
(FY2021: £546m) and a net pension asset of £194m (FY2021: £413m),
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 judgement
required in determining whether an unconditional right of refund exists based
on the provisions of the relevant trust deed and rules. Having taken legal
advice with regard to the rights of the Group under the relevant Trust deed
and rules, it has been determined that the surplus is recoverable by the Group
and therefore can be recognised. In particular, in the ordinary course of
business, the trustees of the scheme do not have a unilateral power to
terminate and wind-up the scheme or augment benefits. If the pension scheme
was wound up while it still had members, the scheme would need to buy out the
benefits of all members. The buyout would cost significantly more than the
carrying value of the scheme liabilities within these financial statements
which are calculated in accordance with IAS 19: Employee benefits.
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 market place 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 recognised deferred tax assets of £103m (FY2021: £144m) relating
to losses and £69m (FY2021: £65m) relating to the John Crane, Inc. and
Titeflex Corporation litigation provisions. The decision to recognise deferred
tax assets requires judgement in determining whether the Group will be able to
utilise historical tax losses in future periods. It has been concluded that
there are sufficient taxable profits in future periods to support recognition.
The Group has also 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. This definition of organic growth is the
same as that used for underlying growth in previous accounting periods.
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 2022.
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.
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 despatch 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
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 despatch 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 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;
· On-site 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.
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
The Group recognises right of use assets at the commencement date of the
lease. Right of use assets are measured at cost including the amount of lease
liabilities recognised and initial direct costs incurred, less any incentives
granted by the lessor. 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.
Leases of buildings typically have lease terms between 1 and 6 years, while
plant and machinery generally have lease terms between 1 and 3 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.
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;
· 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. Tax is charged or
credited to the income statement except when it relates to items charged or
credited directly to equity, in which case the tax is also dealt with in
equity.
Deferred tax is provided on temporary differences arising on investments in
subsidiaries and associates, except where the timing of the reversal of the
temporary differences is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred tax liabilities and assets are not discounted.
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 11 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 7 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 (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labour, other
direct costs and related production overheads (based on normal operating
capacity). 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 initially recognised at fair value
and subsequently measured at amortised cost, less any appropriate provision
for expected credit losses.
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, 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.
Businesses held for sale
Businesses classified as held for sale are measured at the lower of carrying
amount and fair value less costs to sell. Impairment losses on initial
classification as held for sale and gains or losses on subsequent
remeasurements are included in the income statement. No depreciation is
charged on assets and businesses classified as held for sale.
Businesses are classified as held for sale if their carrying amount will be
settled principally through a sale rather than through continuing use and the
following criteria are met:
· The business must be a separate major line of business, available
for immediate sale in its present condition;
· Management is committed to the plan to sell the business and an
active programme to locate a buyer and complete the plan must have been
initiated;
· The disposal group must be actively marketed for sale at a price
that is reasonable in relation to its current fair value;
· Shareholder and regulatory approval is highly probable and the
plan is unlikely to be significantly changed or withdrawn; and
· Sale is expected to be completed within 12 months of the balance
sheet date.
The assets and liabilities of businesses held for sale are presented as
separate lines on the balance sheet.
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 and
short-term investments are measured at amortised cost. Money market funds and
short-term deposits are measured at fair value through profit and loss (FVPL);
· Derivatives are measured at FVPL;
· Listed and unlisted investments are measured at FVOCI; and
· 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. When securities
classified as available for sale are sold or impaired, the accumulated fair
value adjustments previously taken to reserves are included in the income
statement.
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 2022
No new accounting standards have been adopted in the financial year. The
accounting policies adopted in the preparation of these consolidated financial
statements are consistent with those followed in the previous financial year.
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.
Notes to the accounts
1 SEGMENT INFORMATION
Analysis by operating segment
The Group is organised into four divisions: John Crane, Smiths Detection,
Flex-Tek and Smiths Interconnect. These divisions 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 division 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 divisional results and
operating assets to monitor the divisional position. See note 3 and note 29
for an explanation of which items are excluded from headline measures.
The sale of the Group's Smiths Medical business was completed on 6 January
2022 and the results of Smiths Medical are disclosed as a discontinued
operation in note 27. Intersegment sales and transfers are charged at arm's
length prices.
Segment trading performance
Year ended 31 July 2022
John Smiths Flex-Tek Smiths Corporate Total
Crane
Detection
£m
Interconnect
costs
£m
£m
£m
£m
£m
Revenue 901 655 647 363 - 2,566
Divisional headline operating profit 188 73 133 65 - 459
Corporate headline operating costs - - - - (42) (42)
Headline operating profit/(loss) 188 73 133 65 (42) 417
Items excluded from headline measures (note 3) (21) (37) (27) (1) (214) (300)
Operating profit/(loss) 167 36 106 64 (256) 117
Year ended 31 July 2021
John Smiths Flex-Tek Smiths Corporate Total
Crane
Detection
£m
Interconnect
costs
£m
£m
£m
£m
£m
Revenue 865 721 508 312 - 2,406
Divisional headline operating profit 187 99 97 35 - 418
Corporate headline operating costs - - - - (46) (46)
Headline operating profit/(loss) 187 99 97 35 (46) 372
Items excluded from headline measures (note 3) (3) (22) (14) (1) (6) (46)
Operating profit/(loss) 184 77 83 34 (52) 326
Operating profit is stated after charging (crediting) the following items:
Year ended 31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate and non-headline Total
£m
Detection
£m
Interconnect
£m
£m
£m
£m
Depreciation - property, plant and equipment 15 10 7 5 1 38
Depreciation - right of use assets 15 7 5 2 1 30
Amortisation of capitalised development costs - 3 - - - 3
Amortisation of software, patents and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 51 51
Share-based payment 3 2 2 1 4 12
Russia impairment charges and related closure costs 9 10 - - - 19
Transition services cost reimbursement - - - - (7) (7)
Year ended 31 July 2021
John Crane Smiths Flex-Tek Smiths Corporate Total
£m
Detection
£m
Interconnect
and non-headline
£m
£m
£m
£m
Depreciation - property, plant and equipment 15 12 6 6 1 40
Depreciation - right of use assets 14 7 4 5 2 32
Amortisation of capitalised development costs - 7 - - - 7
Amortisation of software, patents and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 53 53
Share-based payment 3 2 1 1 6 13
Strategic restructuring costs 4 6 - 10 1 21
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 2022
John Crane Smiths Flex-Tek Smiths Corporate and non-headline Total
£m
Detection
£m
Interconnect
£m
£m
£m
£m
Property, plant, equipment, right of use assets, development projects, other 167 127 84 54 399 831
intangibles and investments
Inventory, trade and other receivables 429 524 244 167 13 1,377
Segment assets 596 651 328 221 412 2,208
31 July 2021
John Crane Smiths Flex-Tek Smiths Corporate Total
£m
Detection
£m
Interconnect
and non-headline
£m
£m
£m
£m
Property, plant, equipment, right of use assets, development projects, other 152 117 75 44 18 406
intangibles and investments
Inventory, trade and other receivables 356 417 160 127 10 1,070
Segment assets 508 534 235 171 28 1,476
Non-headline assets comprise receivables relating to non-headline items,
acquisitions and disposals.
Segment liabilities
31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate and non-headline Total
£m
Detection
£m
Interconnect
£m
£m
£m
£m
Divisional liabilities (155) (347) (91) (85) - (678)
Corporate and non-headline liabilities - - - - (385) (385)
Segment liabilities (155) (347) (91) (85) (385) (1,063)
31 July 2021
John Crane Smiths Flex-Tek Smiths Corporate Total
£m
Detection
£m
Interconnect
and non-headline
£m
£m
£m
£m
Divisional liabilities (137) (276) (66) (61) - (540)
Corporate and non-headline liabilities - - - - (336) (336)
Segment liabilities (137) (276) (66) (61) (336) (876)
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
2022
2021
2022
2021
£m
£m
£m
£m
Segment assets and liabilities 2,208 1,476 (1,063) (876)
Goodwill and acquired intangibles 1,501 1,423 - -
Derivatives 4 77 (47) (3)
Current and deferred tax 145 167 (111) (122)
Retirement benefit assets and obligations 309 546 (115) (128)
Cash and borrowings 1,056 405 (1,166) (1,502)
Assets and liabilities held for sale - 1,243 - (283)
Statutory assets and liabilities 5,223 5,337 (2,502) (2,914)
Segment capital expenditure
The capital expenditure on property, plant and equipment, capitalised
development and other intangible assets for each division is:
John Crane Smiths Flex-Tek Smiths Corporate Total
£m
Detection
£m
Interconnect
and non-headline
£m
£m
£m
£m
Capital expenditure year ended 31 July 2022 24 23 11 12 1 71
Capital expenditure year ended 31 July 2021 19 23 9 9 2 62
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
(FY2021: £787m) 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 division, which Smiths uses
to calculate divisional return on capital employed, is:
31 July 2022
John Crane Smiths Flex-Tek Smiths Total
£m
Detection
£m
Interconnect
£m
£m
£m
Average divisional capital employed 970 1,019 520 400 2,909
Average corporate capital employed 31
Average total capital employed - continuing operations 2,940
31 July 2021
John Crane Smiths Flex-Tek Smiths Total
£m
Detection
£m
Interconnect
£m
£m
£m
Average divisional capital employed 937 1,018 449 395 2,799
Average corporate capital employed 31
Average total capital employed - continuing operations 2,830
Analysis of revenue
The revenue for the main product and service lines for each division is:
John Crane Original Aftermarket Total
equipment
£m
£m
£m
Revenue year ended 31 July 2022 279 622 901
Revenue year ended 31 July 2021 273 592 865
Smiths Detection Aviation Other security Total
£m
systems
£m
£m
Revenue year ended 31 July 2022 467 188 655
Revenue year ended 31 July 2021 546 175 721
Flex-Tek Aerospace Industrials Total
£m
£m
£m
Revenue year ended 31 July 2022 116 531 647
Revenue year ended 31 July 2021 99 409 508
Smiths Interconnect Components, connectors & subsystems
£m
Revenue year ended 31 July 2022 363
Revenue year ended 31 July 2021 312
Aftermarket sales contributed £1,238m (FY2021: £1,198m) of Group revenue:
John Crane aftermarket sales were £622m (FY2021: £592m); Smiths Detection
aftermarket sales were £355m (FY2021: £331m); Flex-Tek aftermarket sales
were £261m (FY2021: £270m); and Smiths Interconnect aftermarket sales were
£nil (FY2021: £5m).
Divisional revenue is analysed by the Smiths Group key global markets as
follows:
General Industrial Safety & Security Energy Aerospace Total
£m
£m
£m
£m
£m
John Crane
Revenue year ended 31 July 2022 371 - 530 - 901
Revenue year ended 31 July 2021 355 - 510 - 865
Detection
Revenue year ended 31 July 2022 - 655 - - 655
Revenue year ended 31 July 2021 - 721 - - 721
Flex Tek
Revenue year ended 31 July 2022 531 - - 116 647
Revenue year ended 31 July 2021 409 - - 99 508
Interconnect
Revenue year ended 31 July 2022 166 144 - 53 363
Revenue year ended 31 July 2021 139 128 - 45 312
Total
Revenue year ended 31 July 2022 1,068 799 530 169 2,566
Revenue year ended 31 July 2021 903 849 510 144 2,406
The Group's statutory revenue is analysed as follows:
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Sale of goods recognised at a point in time 1,849 1,723
Sale of goods recognised over time 99 94
Services recognised over time 618 589
2,566 2,406
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 2022 31 July 2021
31 July 2022
31 July 2021
£m
£m
£m
£m
Americas 1,423 1,244 1,324 1,195
Europe 480 522 498 512
Asia-Pacific 421 390 76 70
Rest of the World 242 250 39 41
2,566 2,406 1,937 1,818
Revenue by destination attributable to the United Kingdom was £75m (FY2021:
£69m). Other revenue found to be significant included, the United States of
America, totalling £1,206m (FY2021: £1,047m), China (excluding Hong Kong)
£132m (FY2021: £123m) and Germany £123m (FY2021: £130m). 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 £108m (FY2021:
£110m). Significant non-current assets held in the United States of America
£1,260m (FY2021: £1,138m) and Germany £340m (FY2021: £350m).
2 OPERATING COSTS
The Group's operating costs for continuing operations are analysed as follows:
Year ended 31 July 2022 Year ended 31 July 2021
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 1,605 - 1,605 1,491 - 1,491
distribution overheads
Selling costs 200 - 200 188 - 188
Administrative expenses 351 300 651 355 46 401
Transition services cost reimbursement (7) - (7) - - -
Total 2,149 300 2,449 2,034 46 2,080
Following the sale of the Smiths Medical business, the Group has provided
transition services to the Smiths Medical Group, which is disclosed above as
transition services cost reimbursement.
Operating profit is stated after charging (crediting):
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Research and development expense 80 76
Depreciation of property, plant and equipment 38 40
Depreciation of right of use assets 30 32
Amortisation of intangible assets 61 67
Strategic restructuring programme and write-downs - 21
Russia impairment and related closure costs (see note 11) 19 -
Transition services cost reimbursement (7) -
Research and development (R&D) cash costs were £107m (FY2021: £94m)
comprising £80m (FY2021: £76m) of R&D expensed to the income statement,
£12m (FY2021: £8m) of capitalised costs and £15m (FY2021: £10m) of
customer funded R&D.
Administrative expenses include £3m (FY2021: £1m) 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 2022.
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Audit services
Fees payable to the Company's auditors for the audit of the Company's annual 2.8 2.3
financial statements
Fees payable to the Company's auditors and its associates for other services:
- the audit of the Company's subsidiaries 4.6 4.2
7.4 6.5
All other services 0.8 0.9
Other services comprise audit-related assurance services £0.5m (FY2021:
£0.4m) and fees for reporting accountant services in connection with a class
1 disposal £0.3m (FY2021: £0.5m). Audit-related assurance services include
the review of the Interim Report. Total fees for non audit services comprise
11% (FY2021: 13%) of audit fees.
In the current year, the Group has additionally agreed £0.5m 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 2022
31 July 2021
£m
£m
Post-acquisition integration costs and fair value adjustment unwind
Unwind of acquisition balance sheet fair value uplift (2) (1)
Integration programme costs - (1)
Acquisition and disposal related transaction costs and provision releases
Business acquisition/disposal costs (5) (1)
Legacy pension scheme arrangements
Past service costs for benefit equalisation and improvements 8 (43) (6)
Retirement benefit scheme settlement loss 8 (171) -
Non-headline litigation provision movements
Movement in provision held against Titeflex Corporation subrogation claims 23 (2) 13
Provision for John Crane, Inc. asbestos litigation 23 (7) (6)
Cost recovery for John Crane, Inc. asbestos litigation - 9
Other items
Russia impairment charges and related closure costs 11 (19) -
Amortisation of acquired intangible assets 10 (51) (53)
Non-headline items in operating profit - continuing operations (300) (46)
Post-acquisition integration costs and fair value adjustment unwind
The impact of unwinding the acquisition balance sheet fair value adjustments
required by IFRS 3 'Business combinations' was recognised as non-headline as
the charge did not relate to trading activity. The £2m (FY2021: £1m) charge
was due to the unwind of fair value uplifts on the acquisition of Royal Metal
Products.
The £1m of integration programme costs in FY2021 principally related to
defined projects for the integration of United Flexible into the existing
Flex-Tek business. Integration programme costs included the direct costs of
organisational change, site rationalisation and entity closure costs. The
United Flexible integration programme concluded in the current year.
Integration costs were recognised as non-headline items because they were
considered material and bear no relation to the ongoing performance of the
acquired businesses.
Acquisition and disposal related transaction costs and provision releases
The £5m of business acquisition/disposal costs (FY2021: £1m) principally
relate to a provision for potential litigation expenses relating to an
acquired business that were unknown at the time of the acquisition. These
costs are recognised as non-headline items because they entirely relate to an
acquisition transaction and are considered to be non-trading in nature.
Legacy pension scheme arrangements
The current year past service costs of £43m (FY2021: £6m) comprises the
following:
· £19m of costs (FY2021: £6m) that were recognised in respect of
the historic equalisation of retirement benefits for men and women (see note 8
for further details); and
· £24m of costs (FY2021: £nil) that were recognised following
the TI Group Pension Scheme (TIGPS) executing an insurance buy-in policy. This
reflects the expectation that the TIGPS Trustee will use any surplus,
remaining after the costs of buying-out and winding-up the scheme have been
met, to improve member benefits (see note 8 for further details).
These past service costs are reported as non-headline as they are
non-recurring and relate to legacy pension liabilities.
A £171m retirement benefit scheme settlement loss has been recognised in the
current year (FY2021: £nil) following TIGPS executing an insurance buy-in
policy for its remaining uninsured liabilities (see note 8 for further
details). This item is reported as non-headline as it is non-recurring and
relates to legacy pension liabilities.
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 £2m charge (FY2021: £13m credit) recognised by Titeflex
Corporation is principally in respect of an increase in the estimated cost of
future claims. See note 23 for further details; and
· The £7m charge (FY2021: £6m charge) recognised for John Crane,
Inc. asbestos litigation provision was principally due to an increased
provision for adverse judgements and legal defence costs. The costs recovered
via insurer settlements in FY2021 were £9m. See note 23 for further details.
Other items
Following the decision in March 2022 to suspend sales into Russia the Group
has recognised £19m (FY2021: £nil) of Russia impairment charges and related
closure costs (see note 11 for further details). These expenses are recognised
as non-headline items as they are both non-recurring and material in size.
Acquired intangible asset amortisation costs of £51m (FY2021: £53m) were
recognised in the current year. This was considered to be a non-headline item
on the basis that these charges resulted from acquisition accounting and were
non-operational in nature.
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 2022
31 July 2021
£m
£m
Unwind of discount on provisions 23 (3) (2)
Other finance income - retirement benefits 8 7 6
Fair value gain on investment in early stage business 14 1 -
Foreign exchange gain (loss) on intercompany loan with discontinued operations 22 (50)
Non-headline items in finance costs - continuing operations 27 (46)
Continuing operations - non-headline loss before taxation (273) (92)
The financing elements of non-headline legacy liabilities, including the £3m
(FY2021: £2m) 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 £7m (FY2021: £6m) 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.
Foreign exchange gains or losses on intercompany financing between Smiths
Medical and the continuing Group were recognised on the face of the income
statement as a non-headline item due to the classification of the Smiths
Medical division as a discontinued operation. The £22m foreign exchange gain
in continuing operations (FY2021: £50m loss) matches the foreign exchange
loss in discontinued operations. This was excluded from headline net finance
costs as these fair value movements were non-operational in nature and were
purely a consequence of the presentational requirements for discontinued
operations.
Non-headline taxation items
The non-headline items included in taxation for continuing operations were as
follows:
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Tax credit on non-headline loss 6 19 9
(Increase)/decrease in unrecognised UK deferred tax asset 6 (5) 4
Non-headline items in taxation - continuing operations 14 13
Continuing operations - non-headline loss for the year (259) (79)
Movement in unrecognised UK deferred tax asset
These movements are reported as non-headline because the prior year charge was
reported as non-headline. In FY2019 £36m of deferred tax was derecognised
following the decision to separate Smiths Medical which reduces the Group's
profitability in the UK. This year, following sale of Medical there is an
additional non-headline charge for UK losses.
ii. DISCONTINUED OPERATIONS
The non-headline items for discontinued operations were as follows:
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Non-headline operating profit items
Medfusion documentation remediation costs (33) -
Impairment of investment in Ivenix, Inc convertible debt (14) -
Medical separation costs - (18)
Impairment of capitalised development costs and related assets - (61)
Non-headline finance costs items
Foreign exchange (loss) gain on intercompany loan with parent (22) 50
Gain on sale of discontinued operation
Gain on the sale of Smiths Medical to ICU Medical, Inc 27 1,036 -
Non-headline taxation items
Tax on non-headline loss 27 6 23
Non-headline items in profit from discontinued operations 973 (6)
Profit for the year - non-headline items for continuing and discontinued 714 (85)
operations
In the current year Smiths Medical recognised a provision of £33m against the
expected costs of the remediation actions required to address each of the
observations and discussion items contained in the US Food and Drug
Administration (FDA) 'for-cause' audit findings on the Medfusion product
range.
In the current period a decision was taken by Smiths Medical to exit their
commercial agreement with Ivenix, Inc. These circumstances have resulted in a
change in strategy and have triggered an indicator of impairment to the
carrying value of the Smiths Medical investment in Ivenix, Inc. As this change
in circumstances indicates that it is not currently probable that the
investment will realise economic benefits, management have impaired the entire
£14m value of Smiths Medical's Ivenix, Inc. investment.
In the prior year the £18m of Medical separation costs represented
incremental costs incurred by the Group to separate Smiths Medical. This cost
has been reported as non-headline as the full year effect of the transaction
on the Group's financial statements is both material and non-recurring. In the
current year separation and transaction costs incurred on the sale of the
Smiths Medical business to ICU Medical, Inc have been included within the
'Gain on sale of discontinued operation' calculation (see note 27).
The £22m foreign exchange loss on intercompany loan with parent (FY2021:
£50m gain) directly offsets the foreign exchange gain in continuing
operations. This is excluded from headline net finance costs as these fair
value movements are non-operational in nature and are purely a consequence of
the presentational requirements for discontinued operations.
4 NET FINANCE COSTS
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Interest receivable 14 9
Interest payable:
- bank loans and overdrafts, including associated fees (12) (7)
- other loans (40) (39)
- interest on leases (3) (3)
Interest payable (55) (49)
Headline net finance costs (41) (40)
Other financing gains/(losses):
- valuation movements on fair value hedged debt (32) 22
- valuation movements on fair value derivatives 33 (25)
- foreign exchange and ineffectiveness on net investment hedges (2) 3
- retranslation of foreign currency bank balances (1) (3)
- other items including counterparty credit risk adjustments and non-hedge 2 3
accounted derivatives
Other financing gains - -
Non-headline finance cost items:
Foreign exchange gain on intercompany loan with discontinued operations 3 22 (50)
Unwind of discount on provisions 3 (3) (2)
Fair value gain on investment in early stage business 14 1 -
Net interest income on retirement benefit obligations 8 7 6
Non-headline finance cost items 27 (46)
Net finance costs (14) (86)
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 2022
31 July 2021
£m
£m
Profit attributable to equity shareholders for the year:
- continuing 11 156
- discontinued 1,022 128
Total 1,033 284
Average number of shares in issue during the year (note 24) 386,678,211 396,350,586
Statutory earnings per share total - basic 267.1p 71.7p
Statutory earnings per share total - diluted 266.0p 71.3p
Statutory earnings per share continuing operations - basic 2.8p 39.4p
Statutory earnings per share continuing operations - diluted 2.8p 39.1p
Diluted earnings per share are calculated by dividing the profit attributable
to ordinary shareholders by 388,349,758 (FY2021: 398,576,502) ordinary shares,
being the average number of ordinary shares in issue during the year adjusted
by the dilutive effect of employee share schemes. No options (FY2021: nil)
were excluded from this calculation because their effect was anti‑dilutive.
A reconciliation of statutory and headline earnings per share is as follows:
Year ended 31 July 2022 Year ended 31 July 2021
£m Basic EPS Diluted EPS £m Basic EPS Diluted EPS
(p)
(p)
(p)
(p)
Total profit attributable to equity shareholders of the Parent Company 1,033 267.1 266.0 284 71.7 71.3
Exclude: Non-headline items (note 3) (714) 85
Headline earnings per share 319 82.5 82.1 369 93.1 92.6
Profit from continuing operations attributable to equity shareholders of the 11 2.8 2.8 156 39.4 39.1
Parent Company
Exclude: Non-headline items (note 3) 259 79
Headline earnings per share - continuing operations 270 69.8 69.5 235 59.3 59.0
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 2022
31 July 2021
£m
£m
The taxation charge in the consolidated income statement for the year
comprises:
Continuing operations
- current income tax charge 68 71
- current tax adjustments in respect of prior periods 5 7
Current taxation 73 78
Deferred taxation 17 5
Total taxation expense - continuing operations 90 83
Analysed as:
Headline taxation expense 104 96
Non-headline taxation credit (14) (13)
Total taxation expense in the consolidated income statement 90 83
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Tax on items charged/(credited) to equity
Deferred tax:
- retirement benefit schemes - 6
- foreign exchange - (5)
- share-based payment (1) (1)
(1) -
The £nil (FY2021: £6m) charge to equity for retirement benefits related to
UK retirement schemes.
Current taxation liabilities
Current tax
£m
At 31 July 2020 (38)
Foreign exchange gain 1
Charge to income statement (78)
Tax paid 96
At 31 July 2021 (19)
Current tax receivable 75
Current tax payable within one year (89)
Corporation tax payable after more than one year (5)
At 31 July 2021 (19)
Foreign exchange gain (4)
Charge to income statement (73)
Tax paid 79
At 31 July 2022 (17)
Current tax receivable 50
Current tax payable within one year (64)
Corporation tax payable after more than one year (3)
At 31 July 2022 (17)
Taxation liabilities included provisions of £38m (FY2021: £34m), 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.
Reconciliation of the tax charge
The headline tax charge for the year of £104m (FY2021: £96m) represented an
effective rate of 27.6% (FY2021: 28.9%). The headline effective tax rate for
the total Group including discontinued operations was 27.2% (FY2021: 27.1%).
The tax charge on the profit for the year for continuing operations was
different from the standard rate of corporation tax in the UK of 19% (FY2021:
19.0%). The difference is reconciled as follows:
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Profit before taxation 103 240
Notional taxation expense at UK corporate rate of 19.0% (FY2021: 19.0%) 20 46
Different tax rates on non-UK profits and losses 13 16
Non-deductible expenses and other charges 11 30
Tax credits and non-taxable income (6) (8)
Non-headline UK deferred tax asset recognition adjustment 5 (4)
Other adjustments to unrecognised deferred tax 10 (4)
Non-tax relievable loss on UK pensions schemes 41 -
Tax on Smiths Medical consolidation adjustments 2 8
Prior year true-up (6) (1)
Total taxation expense in the consolidated income statement 90 83
Comprising:
Taxation on headline profit 104 96
Non-headline taxation items:
- Tax on non-headline loss (19) (9)
- UK deferred tax asset recognition adjustment 5 (4)
Taxation on non-headline items (14) (13)
Total taxation expense in the consolidated income statement 90 83
The head office of Smiths Group is domiciled in the UK; so the tax charge has
been reconciled to UK tax rates.
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 2020 (74) (66) 128 86 1 75
Reallocations 11 (1) (14) 2 2 -
Charge to income statement - continuing operations 4 (31) 27 (5) - (5)
Credit to equity - (6) 5 - - (1)
Foreign exchange rate movements 3 (1) (2) (5) - (5)
At 31 July 2021 (56) (105) 144 78 3 64
Deferred tax assets 2 (113) 126 62 15 92
Deferred tax liabilities (58) 8 18 16 (12) (28)
At 31 July 2021 (56) (105) 144 78 3 64
Reallocations (15) 1 9 1 4 -
Charge to income statement - continuing operations 4 50 (54) (10) (7) (17)
Credit to equity - 3 - - (4) (1)
Foreign exchange rate movements (9) - 4 10 - 5
At 31 July 2022 (76) (51) 103 79 (4) 51
Deferred tax assets (1) (56) 76 65 11 95
Deferred tax liabilities (75) 5 27 14 (15) (44)
At 31 July 2022 (76) (51) 103 79 (4) 51
Reallocations in FY2022 include £10m where attributes used to shelter PDCF
assessments have been reallocated from losses to capital allowances, following
the conclusion of the Group's PDCF audit with UK HMRC covering FY2015 to
FY2020.
Of the amounts included within 'Other' in the table above as at 31 July 2022,
liabilities relating to tax on unremitted earnings were £19m (FY2021: £14m).
The aggregate amount of temporary differences associated with investments in
subsidiaries for which deferred tax liabilities have not been recognised was
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 because it is probable that they will be recovered
against the reversal of deferred tax liabilities. Deferred tax relating to
provisions includes £57m (FY2021: £54m) relating to John Crane Inc.
litigation provision, and £12m (FY2021: £11m) relating to Titeflex
Corporation litigation provision. See note 23 for additional information on
provisions.
Unrecognised Deferred Tax
The Group has unrecognised deferred tax relating to losses amounting to £335m
(FY2021: £107m).
The expiry date of operating losses carried forward is dependent upon the law
of the various territories in which the losses arise. A summary of expiry
dates for the unrecognised deferred tax on losses is set out below:
2022 Expiry of 2021 Expiry of
£m
losses
£m
losses
Restricted losses - Asia - n/a 30 2022-2027
Unrestricted losses - operating losses 335 No expiry 77 No expiry
Total unrecognised deferred tax on losses 335 107
Unrecognised deferred tax relating to losses has increased by £228m (FY2021:
increased by £13m). Changes to unrecognised losses include an increase of
£226m, mainly related to UK deferred tax on losses that were being recognised
to offset the deferred tax liability related to the TI Pension surplus, now
written off following the bulk annuity buy-in with Rothesay Life plc, other
increases of £39m and a reduction of £37m related to the sale of Smiths
Medical.
Sale of Smiths Medical
The sale of 100% of the share capital of the UK Smiths Medical holding company
completed on the 6 January 2022. The profit on sale was exempt from tax under
the Substantial Shareholding Exemption.
Developments in the Group tax position
In December 2021, the Organisation for Economic Co-operation and Development
('OECD') published rules relating to global minimum taxation - the so-called
Pillar 2 rules, scheduled to apply from 2023, regarding the future taxation of
large multinationals such as Smiths. The Group will continue to monitor the
development and future implementation of these rules. However, at this time
and as currently drafted, they are not expected to have a material impact on
the Group.
7 EMPLOYEES
Year ended 31 July 2022 Year ended 31 July 2021
Continuing Discontinued Total Continuing Discontinued Total
operations
operations
£m
operations
operations
£m
£m
£m
£m
£m
Staff costs during the period
Wages and salaries 700 91 791 627 234 861
Social security 81 9 90 85 22 107
Share-based payment (note 9) 13 2 15 13 1 14
Pension costs (including defined contribution schemes) (note 8) 29 5 34 26 11 37
823 107 930 751 268 1,019
The average number of persons employed, rounded to the nearest 50 employees,
was:
Year ended 31 July 2022 Year ended
31 July 2021
John Crane 6,050 5,950
Smiths Detection 3,100 3,000
Flex-Tek 3,300 3,000
Smiths Interconnect 2,500 2,300
Corporate (including central/shared IT services) 300 300
Continuing operations 15,250 14,550
Discontinued operations - Smiths Medical (in period to 6 January 2022) 6,700 7,500
Total 21,950 22,050
Key management
The key management of the Group comprises Smiths Group plc Board Directors and
Executive Committee members. Their aggregate compensation is shown below.
Details of Directors' remuneration are contained in the report of the
Remuneration and People Committee within the Annual Report 2022.
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Key management compensation
Salaries and short-term employee benefits 10.3 12.8
Cost of retirement benefits 0.7 0.9
Cost of share-based incentive plans 4.7 3.9
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 2022 Year ended 31 July 2021
Number of Weighted Number of Weighted
instruments
average
instruments
average
'000
exercise
'000
exercise
price
price
SEP - 169
LTIP 1,411 1,645
Restricted stock 8 82
SAYE 16 £11.43 11 £10.11
Related party transactions
The only related party transactions in FY2022 were key management compensation
(FY2021: key management compensation).
8 RETIREMENT BENEFITS
Smiths 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 £34m (FY2021: £36m).
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 2022. 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 2022
31 July 2021
£m
£m
At beginning of period 413 372
Foreign exchange rate movements - 5
Current service cost (2) (2)
Scheme administration costs (4) (5)
Past service cost, curtailments, settlements - continuing operations (214) (6)
Settlements - discontinued operations (3) -
Finance income - retirement benefits 7 6
Contributions by employer 9 30
Actuarial gain 3 13
Retirement benefit obligations disposed of with Smiths Medical (note 27) 5 -
Unrecognised assets due to surplus restriction (20) -
Net retirement benefit asset 194 413
The £413m net retirement benefit asset for FY2021 included £5m of pension
obligations disclosed within liabilities held for sale.
UK pension schemes
Smiths funded UK pension schemes are subject to a statutory funding objective,
as set out in UK pension legislation. Scheme trustees need to obtain regular
actuarial valuations to assess the scheme against this funding objective. The
trustees and sponsoring companies need to agree funding plans to improve the
position of a scheme when it is below the acceptable funding level.
The UK Pensions Regulator has extensive powers to protect the benefits of
members, promote good administration and reduce the risk of situations
arising which may require compensation to be paid from the Pension Protection
Fund. These 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 2020. The valuation showed a surplus
of £34m 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 these contributions will not recommence (although
there are circumstances relating to the Scheme's funding level in which
contributions could be due to SIPS).
The duration of SIPS liabilities is around 20 years (FY2021: 23 years) for
active deferred members, 20 years (FY2021: 22 years) for deferred members and
11 years (FY2021: 12 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, it has been discovered
that the method used in the early 1990s to equalise retirement ages between
men and women in two of its smaller benefits sections was incorrect. An
additional liability of £19m has been recognised as a past service cost to
reflect the correction of this issue. A wider review is being undertaken to
determine if equalisation was undertaken correctly in other sections of the
Scheme. Should any issues arise from this review, any additional liability is
expected to be accounted for at the point the legal investigations are
completed and there is clarity on the legally effective dates that
equalisation of retirement ages was implemented in respective sections.
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 four 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. Consequently, the income statement recognises 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. A past
service cost of £24m has been recognised for this in the income statement.
The Group 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 de-recognised 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 2020. The valuation showed a surplus
of £22m on the Technical Provisions funding basis at the valuation date and
the funding position has improved since then. Given TIGPS's circumstances, the
Group's current expectation is that no further contributions to TIGPS will be
required.
The duration of the TIGPS liabilities is around 21 years (FY2021: 23 years)
for active deferred members, 19 years (FY2021: 21 years) for deferred members
and 10 years (FY2021: 11 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 2022.
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 16 years
(FY2021: 18 years) for active deferred members, 15 years (FY2021: 18 years)
for deferred members and 10 years (FY2021: 12 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 30% of liabilities with matching annuities,
eliminating investment return, longevity, inflation and funding risks in
respect of those liabilities. It has also adopted a Liability Driven
Investment (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:
2022 2022 2022 2021 2021 2021
UK
US
Other
UK
US
Other
Rate of increase in salaries n/a n/a 2.2% n/a n/a 2.5%
Rate of increase for active deferred members 4.0% n/a n/a 4.2% n/a n/a
Rate of increase in pensions in payment 3.4% n/a 1.2% 3.3% n/a 1.5%
Rate of increase in deferred pensions 3.4% n/a n/a 3.3% n/a n/a
Discount rate 3.5% 4.5% 1.1% 1.7% 2.7% 0.7%
Inflation rate 3.4% n/a 1.3% 3.3% n/a 1.5%
Healthcare cost increases 4.4% n/a n/a 4.4% n/a n/a
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 USA, assumptions are disclosed as a weighted average.
Inflation rate assumptions
The RPI inflation assumption of 3.4% has been derived using the Aon UK
Government Gilt Prices Only Curve with an Inflation Risk Premium (IRP) of 0.2%
p.a., whereas in previous years the Aon UK Government RPI Curve was used. It
is estimated that the impact of this change in RPI methodology is to increase
the RPI assumption by 0.1% at 31 July 2022 and this is expected to increase
the balance sheet liabilities, for both SIPS and TIGPS, by 1.0% of DBO at 31
July 2022.
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 0.6% p.a.
(FY2021:0.6%) reflecting the Group's view on the market pricing of this gap
over the lifetime of the UK schemes' liabilities, i.e. 1.0% p.a. (FY2021:
1.0%) pre-2030 and 0.2% p.a. post-2030 (FY2021:0.1%).
Discount rate assumptions
The UK schemes use a discount rate based on the annualised yield on the Aon
GBP Select AA Curve, using the expected cash-flows from a notional scheme with
obligations of the same duration as that of the UK schemes. 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.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are based on the
'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 2021 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 1.25%.
The mortality assumptions used in the principal US schemes are based on
generational mortality using Pri-2012 sex-distinct, employee/ non-disabled
annuitant table, with a 2012 base year, projected forward generationally with
the MP-2021 mortality scale. No explicit adjustment has been made to mortality
assumptions in respect of COVID-19.
Expected further years of life UK schemes US schemes
Male Female Male Female Male Female Male Female
31 July 2022
31 July 2022
31 July 2021
31 July
31 July 2022
31 July 2022
31 July 2021
31 July
2021
2021
Member who retires next year at age 65 22 24 22 24 21 22 20 22
Member, currently 45, when they retire in 20 years' time 23 25 23 25 22 24 22 24
Sensitivity
Sensitivities in respect of the key assumptions used to measure the principal
pension schemes as at 31 July 2022 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 for year ended Increase/ (Increase)/ Profit before tax for year ended Increase/ (Increase)/
31 July 2022
(decrease) in scheme
decrease in scheme
31 July 2021
(decrease) in scheme
decrease in scheme
£m
assets
liabilities
£m
assets
liabilities
31 July 2022
31 July 2022
31 July 2021
31 July 2021
£m
£m
£m
£m
Rate of mortality - 1 year increase in life expectancy (2) 84 (135) (2) 99 (209)
Rate of mortality - 1 year decrease in life expectancy 2 (84) 136 2 (97) 206
Rate of inflation - 0.25% increase (1) 34 (69) (1) 30 (98)
Discount rate - 0.25% increase 2 (49) 97 3 (38) 146
Market value of scheme assets - 2.5% increase 1 40 - 1 73 -
The effect on profit before tax reflects the impact of current service cost
and net interest cost. The value of the scheme assets is affected by changes
in mortality rates, inflation and discounting because they affect the carrying
value of the insurance assets.
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. Details of pricing methodology are set out within
internal control reports provided for each fund. Prices are updated daily,
weekly or monthly 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.
Property is valued by specialists applying recognised property valuation
methods incorporating current market data on rental yields and transaction
prices.
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 broadly matching 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 Smiths 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 Smiths Group's creditors and cannot be paid to
Smiths Group.
Retirement benefit plan assets
31 July 2022 - £m 31 July 2021 - £m
UK US Other Total UK US Other Total
schemes
schemes
countries
schemes
schemes
countries
Cash and cash equivalents 90 1 1 92 71 1 - 72
Pooled funds:
- Pooled equity - - 3 3 - - 3 3
- Pooled Diversified Growth - - 15 15 - - 19 19
- Pooled credit 379 - - 379 420 - - 420
Corporate bonds 412 167 - 579 791 192 - 983
Government bonds/LDI 498 57 3 558 1,298 79 3 1,380
Insured liabilities 1,649 - - 1,649 1,462 - - 1,462
Property 39 - - 39 62 - - 62
Other - - - - - - 5 5
Total market value 3,067 225 22 3,314 4,104 272 30 4,406
The assets are unquoted. Government bonds/LDI portfolios contain £960m
(FY2021: £1,929m) of UK Government bonds (gilts), £476m (FY2021: £626m) of
gilt repurchase obligations and £9m (FY2021: £5m) of interest and inflation
swap obligations.
The UK bond portfolios include forward FX contracts with a net value of £5m
(FY2021: £1m). These are held to hedge against foreign currency risk in
respect of overseas bonds.
The scheme assets do not include any property occupied by, or other assets
used by, the Group.
Present value of funded scheme liabilities and assets for the main UK and US schemes
31 July 2022 - £m 31 July 2021 - £m
SIPS TIGPS US SIPS TIGPS US
schemes
schemes
Present value of funded scheme liabilities:
- Active deferred members (32) (23) (41) (42) (29) (73)
- Deferred members (561) (442) (109) (810) (632) (119)
- Pensioners (1,010) (670) (88) (1,226) (809) (81)
Present value of funded scheme liabilities (1,603) (1,135) (238) (2,078) (1,470) (273)
Market value of scheme assets 1,912 1,155 225 2,410 1,684 272
Surplus restriction - (20) - - - -
Surplus/(deficit) 309 - (13) 332 214 (1)
Net retirement benefit obligations
31 July 2022 - £m 31 July 2021 - £m
UK US Other Total UK US Other Total
schemes
schemes
countries
schemes
schemes
countries
Market value of scheme assets 3,067 225 22 3,314 4,104 272 30 4,406
Present value of funded scheme liabilities (2,738) (238) (27) (3,003) (3,558) (273) (38) (3,869)
Surplus restriction (20) - - (20) - - - -
Surplus/(deficit) 309 (13) (5) 291 546 (1) (8) 537
Unfunded pension plans (43) (7) (40) (90) (54) (7) (55) (116)
Post-retirement healthcare (4) (1) (2) (7) (4) (1) (3) (8)
Present value of unfunded obligations (47) (8) (42) (97) (58) (8) (58) (124)
Net pension asset/(liability) 262 (21) (47) 194 488 (9) (66) 413
Retirement benefit assets 309 - - 309 546 - - 546
Retirement benefit liabilities (47) (21) (47) (115) (58) (9) (61) (128)
Liabilities held for sale - - - - - - (5) (5)
Net pension asset/(liability) 262 (21) (47) 194 488 (9) (66) 413
Liabilities held for sale in FY2021 comprise £4m of unfunded pension plans
and £1m deficit on defined benefit schemes within the Smiths Medical
division.
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 2022
31 July 2021
£m
£m
Amounts charged to operating profit
Current service cost 2 2
Past service costs - benefit equalisations 43 6
Settlement loss 171 -
Scheme administration costs 4 5
220 13
The operating cost is charged as follows:
Headline administrative expenses 6 7
Non-headline settlement loss 171 -
Non-headline administrative expenses 43 6
220 13
Amounts credited to finance costs
Non-headline other finance income - retirement benefits (7) (6)
Amounts recognised directly in the consolidated statement of comprehensive income
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Re-measurements of retirement defined benefit assets and liabilities
Difference between interest credit and return on assets (835) (57)
Experience gains on scheme liabilities (31) 44
Actuarial gains arising from changes in demographic assumptions 1 10
Actuarial gains/(losses) arising from changes in financial assumptions 868 16
Movement in surplus restriction (20) -
(17) 13
Changes in present value of funded scheme assets
31 July 2022 - £m 31 July 2021 - £m
UK US Other Total UK US Other Total
schemes
schemes
countries
schemes
schemes
countries
At beginning of period 4,104 272 30 4,406 4,240 311 31 4,582
Interest on assets 70 8 1 79 58 7 1 66
Actuarial movement on scheme assets (773) (62) - (835) (40) (17) - (57)
Employer contributions 3 - 1 4 20 4 1 25
Scheme administration costs (3) (1) - (4) (4) (1) - (5)
Foreign exchange rate movements - 33 - 33 - (17) - (17)
Assets transferred on business disposal - - (5) (5) - - - -
Assets distributed on settlements (180) - - (180) - - - -
Curtailment gains/(losses) - (9) - (9) - - - -
Benefits paid (154) (16) (5) (175) (170) (15) (3) (188)
At end of period 3,067 225 22 3,314 4,104 272 30 4,406
Changes in present value of funded defined benefit obligations
31 July 2022 - £m 31 July 2021 - £m
UK US Other Total UK US Other Total
schemes
schemes
countries
schemes
schemes
countries
At beginning of period (3,558) (273) (38) (3,869) (3,724) (314) (40) (4,078)
Current service cost - - - - - - (1) (1)
Past service costs (43) - - (43) (6) - - (6)
Interest on obligations (61) (8) (1) (70) (51) (7) (2) (60)
Actuarial movement on liabilities 761 54 2 817 53 16 - 69
Foreign exchange rate movements - (33) - (33) - 17 2 19
Liabilities transferred on business disposal - - 5 5 - - - -
Curtailment gains/(losses) - 6 - 6 - - - -
Liabilities extinguished on settlements 9 - - 9 - - - -
Benefits paid 154 16 5 175 170 15 3 188
At end of period (2,738) (238) (27) (3,003) (3,558) (273) (38) (3,869)
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 2022
31 July 2021
31 July 2022
31 July 2021
£m
£m
£m
£m
At beginning of period - - (124) (132)
Current service cost - - (1) (1)
Interest on obligations - - (2) (1)
Actuarial movement - - 21 2
Employer contributions 5 5 - -
Foreign exchange rate movements - - - 3
Liabilities transferred on business disposal - - 4 -
Benefits paid (5) (5) 5 5
At end of period - - (97) (124)
Changes in the effect of the asset ceiling over the year
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Irrecoverable asset at beginning of period - -
Actuarial movement on scheme assets (20) -
At end of period (20) -
Cash contributions
Company contributions to the defined benefit pension plans and post-retirement
healthcare plans totalled £9m (FY2021: £30m). This comprised regular
contributions to funded schemes of £3m (FY2021: £12m) to SIPS, £nil
(FY2021: £8m) to TIGPS, £nil (FY2021: £4m) to funded US schemes and
contributions to other schemes of £1m (FY2021: £1m). In addition, £5m
(FY2021: £5m) was spent on providing benefits under unfunded defined benefit
pension and post-retirement healthcare plans.
In FY2023, cash contributions to the Group's schemes are expected to be up to
£12m in total.
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.
Smiths Excellence Plan (SEP)
The last Smiths Excellence plan (SEP) grant was issued in October 2019, vested
on 31 July 2021 and exercised in October 2021. No further SEP awards have been
made.
Restricted stock
Restricted stock is used by the Remuneration and 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.
Long-term SEP Restricted Save as you earn Total Weighted
incentive
stock
scheme
average
plans
exercise
price
Ordinary shares under option/award ('000)
31 July 2020 3,937 1,295 131 1,207 6,570 £1.89
Granted 2,143 358 11 139 2,651 £0.68
Exercised (346) (411) (60) (165) (982) £2.03
Lapsed (819) (391) (18) (96) (1,324) £0.75
31 July 2021 4,915 851 64 1,085 6,915 £1.63
Reclassification 348 (348) - - - -
Granted 2,255 - 212 167 2,634 £0.71
Exercised (224) (313) (163) (138) (838) £1.90
Lapsed (1,984) (190) (30) (229) (2,433) £0.97
31 July 2022 5,310 - 83 885 6,278 £1.45
Options and awards were exercised on an irregular basis during the period. The
average closing share price over the financial year was 1,476.3p (FY2021:
1,508.6p). 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 2022 was nil (31 July 2021: 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 2022
life at 31 July 2022
at 31 July 2021
life at 31 July 2021
('000)
(months)
('000)
(months)
£0.00 - £2.00 5,393 19 5,830 15
£6.01 - £10.00 490 18 655 30
£10.01 - £12.00 395 29 430 24
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% (FY2021: 25% to 20%) and
dividend yield of 2.6% (FY2021: 2.8%), 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 £14.81 (FY2021: £14.10), and
restricted stock of £14.59 (FY2021: £14.63). Staff costs included £15m
(FY2021: £14m) for share-based payments, of which £14m (FY2021: £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 2020 1,254 155 546 174 2,129
Foreign exchange rate movements (68) (7) (30) (6) (111)
Business combinations 21 - 46 - 67
Additions - 8 - 10 18
Disposals - - - (1) (1)
At 31 July 2021 1,207 156 562 177 2,102
Foreign exchange rate movements 104 6 68 10 188
Additions - 12 - 6 18
At 31 July 2022 1,311 174 630 193 2,308
Amortisation and impairments
At 31 July 2020 62 112 249 142 565
Foreign exchange rate movements (3) (5) (15) (4) (27)
Amortisation charge for the year - 7 53 7 67
Disposals - - - (1) (1)
At 31 July 2021 59 114 287 144 604
Foreign exchange rate movements 4 6 35 6 51
Amortisation charge for the year - 3 51 7 61
Impairment charge for the year 4 - - - 4
At 31 July 2022 67 123 373 157 720
Net book value at 31 July 2022 1,244 51 257 36 1,588
Net book value at 31 July 2021 1,148 42 275 33 1,498
Net book value at 31 July 2020 1,192 43 297 32 1,564
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 2020 15 139 392 546
Foreign exchange rate movements (1) (7) (22) (30)
Business combinations 3 2 41 46
At 31 July 2021 17 134 411 562
Foreign exchange rate movements 2 18 48 68
At 31 July 2022 19 152 459 630
Amortisation
At 31 July 2020 4 60 185 249
Foreign exchange rate movements - (3) (12) (15)
Charge for the year 1 10 42 53
At 31 July 2021 5 67 215 287
Foreign exchange rate movements 1 10 24 35
Charge for the year 2 10 39 51
At 31 July 2022 8 87 278 373
Net book value at 31 July 2022 11 65 181 257
Net book value at 31 July 2021 12 67 196 275
Net book value at 31 July 2020 11 79 207 297
Individually material intangible assets comprise £71m of customer related
intangibles attributable to United Flexible (remaining amortisation period: 4
years), £61m of customer relationship intangibles attributable to Morpho
Detection (remaining amortisation period: 6 years), £35m of customer-related
intangibles attributable to Royal Metal (remaining amortisation period:
6 years), and £19m of development cost intangibles attributable to a computed
tomography programme in Detection that is currently under development.
The charge associated with the amortisation of intangible assets is included
in operating costs on the consolidated income statement.
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-divisional trading relationships.
Goodwill acquired through business combinations is allocated to groups of CGUs
at a divisional (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 division as follows:
2022 2022 2021 2021
£m
Number of
£m
Number of
CGUs
CGUs
John Crane 132 1 129 1
Smiths Detection* 644 2 610 1
Flex-Tek 194 1 169 1
Smiths Interconnect 274 1 240 1
Smiths Medical - - - 1
1,244 5 1,148 5
* In FY2022 the Smiths Detection CGU has been restructured and the Detection
Russia business split into a separate CGU, see the 'Russia impairment charges
and related closure costs' section below for further details.
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 FY2023 business plan (as approved by the Board) and the five-year
detailed divisional strategic projections which have been prepared by
divisional management and approved by the Chief Financial Officer.
The key 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 FY2023 budget and the
divisional 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 calculated based on
the Group's weighted average cost of capital and risks specific to the CGU
being tested. In determining the risk adjusted discount rate, management
considered the systematic risk to each of the Group's CGUs and applied an
average of discount rates used by other companies for the industries in which
Smiths divisions operate. Pre-tax rates of 11.3% to 12.3% (FY2021: 9.9% to
13.2%) 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 forecast period. Growth rates for the
period after the detailed forecasts were based on the long-term GDP
projections of the primary market for each CGU. The average growth rate used
in the testing was 2.0% (FY2021: 2.1%). These rates did not reflect the
long-term assumptions used by the Group for investment planning.
The assumptions used in the impairment testing of CGUs with significant
goodwill balances were as follows:
As at 31 May 2022
John Crane Smiths Flex-Tek Smiths
Detection
Interconnect
Net book value of goodwill (£m) 132 640 187 266
Basis of valuation Value in use Value in use Value in use Value in use
Discount rate - pre-tax 12.3% 11.3% 11.7% 11.5%
- post-tax 9.1% 8.7% 9.2% 9.3%
Period covered by management projections 5 years 5 years 5 years 5 years
Revenue - average annual growth rate over projection period 5.3% 3.8% 3.8% 6.0%
Average earnings before interest and tax margin 24.9% 14.1% 19.7% 17.8%
Long-term growth rates 1.9% 2.4% 1.7% 2.1%
As at 31 July 2021
John Crane Smiths Flex-Tek Smiths Smiths
Detection
Interconnect
Medical
Net book value of goodwill (£m) 129 610 169 240 535
Basis of valuation Value in use Value in use Value in use Value in use Value in use
Discount rate - pre-tax 13.2% 10.3% 11.4% 11.1% 9.9%
- post-tax 9.5% 8.2% 9.1% 9.0% 8.0%
Period covered by management projections 5 years 5 years 5 years 5 years 5 years
Revenue - average annual growth rate over projection period 6.4% 2.8% 5.0% 5.9% 5.9%
Average earnings before interest and tax margin 25.4% 13.4% 20.0% 19.0% 18.8%
Long-term growth rates 2.1% 1.8% 1.9% 2.4% 2.2%
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
With the exception of the Smiths Detection CGU, the recoverable amount of all
CGUs exceeded their carrying value, on the basis of the assumptions set out in
the table above and any reasonably possible changes thereof.
The estimated recoverable amount of the Smiths Detection CGU exceeded the
carrying value by £110m. Any decline in estimated value in use in excess of
this amount would result in the recognition of impairment charges. 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 2022:
Change required for carrying value to equal recoverable amount - FY2022 Smiths Detection
Revenue - compound annual growth rate (CAGR) over 5-year projection period -240 bps decrease
Average earnings before interest and tax margin over 5-year projection period -130 bps decrease
Post-tax discount rate +70 bps increase
Note: Long-term growth rates are not included in the sensitivity table
above as management consider that there is no reasonably possible change in
long-term growth rate that would result in an impairment.
Change required for carrying value to equal recoverable amount - FY2021 Smiths Detection
Revenue - compound annual growth rate (CAGR) over 5-year projection period -560 bps decrease
Post-tax discount rate +220 bps increase
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.
In the current year the Group has recognised £17m of impairment charges
against its Russia related net balance sheet exposure (FY2021: £nil), see
below.
Russia impairment charges and related closure costs
As announced in March 2022, in the current year the Group suspended sales into
Russia. Following this decision the Smiths Detection reporting structure has
been restructured and the Detection Russia business split into a separate CGU,
£4m of the Detection CGU has been apportioned to the Detection Russia CGU and
fully impaired.
Management has assessed all Group operations for their exposure to Russia and
the value of these Russia related net assets has been fully impaired in
FY2022. The Group has recognised £19m of Russia related impairment charges
and closure costs through non-headline operating expenses in FY2022 (see note
3), which are analysed as follows:
John Crane Smiths Detection Total
£m
£m
£m
Goodwill - 4 4
Working capital balances 9 4 13
Net impairment charge 9 8 17
Related closure costs - 2 2
Russian impairment and related closure costs 9 10 19
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 2020 175 383 133 691
Foreign exchange rate movements (6) (21) (6) (33)
Business combinations - 2 - 2
Additions 6 38 - 44
Disposals (3) (14) (5) (22)
At 31 July 2021 172 388 122 682
Foreign exchange rate movements 14 37 6 57
Additions 4 42 6 52
Disposals (14) (10) (5) (29)
At 31 July 2022 176 457 129 762
Depreciation
At 31 July 2020 102 261 110 473
Foreign exchange rate movements (3) (15) (6) (24)
Charge for the year 10 26 4 40
Disposals (3) (12) (4) (19)
At 31 July 2021 106 260 104 470
Foreign exchange rate movements 9 25 5 39
Charge for the year 7 24 7 38
Disposals (14) (10) (4) (28)
At 31 July 2022 108 299 112 519
Net book value at 31 July 2022 68 158 17 243
Net book value at 31 July 2021 66 128 18 212
Net book value at 31 July 2020 73 122 23 218
13 RIGHT OF USE ASSETS
Properties Vehicles Equipment Total
£m
£m
£m
£m
Cost or valuation
At 31 July 2020 110 14 1 125
Foreign exchange rate movements (5) (1) - (6)
Business combinations 9 1 - 10
Recognition of right of use asset 44 3 - 47
Derecognition of right of use asset (12) - - (12)
At 31 July 2021 146 17 1 164
Foreign exchange rate movements 12 1 - 13
Recognition of right of use asset 18 4 - 22
Derecognition of right of use asset (2) (1) - (3)
At 31 July 2022 174 21 1 196
Depreciation
At 31 July 2020 26 5 - 31
Foreign exchange rate movements (2) - - (2)
Charge for the year 27 5 - 32
Derecognition of right of use asset (5) - - (5)
At 31 July 2021 46 10 - 56
Foreign exchange rate movements 5 1 - 6
Charge for the year 25 5 - 30
Derecognition of right of use asset (1) (1) - (2)
At 31 July 2022 75 15 - 90
Net book value at 31 July 2022 99 6 1 106
Net book value at 31 July 2021 100 7 1 108
Net book value at 31 July 2020 84 9 1 94
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 2020 - - 8 11 19
Disposals - - - (7) (7)
Fair value change through Other Comprehensive Income - - (1) - (1)
At 31 July 2021 - - 7 4 11
Foreign exchange rate movements - - 1 - 1
Additions 426 30 4 - 460
Disposal - - (4) - (4)
Fair value change through Profit and Loss - (11) 1 - (10)
Fair value change through Other Comprehensive Income (62) - (1) - (63)
At 31 July 2022 364 19 8 4 395
Following the sale of Smiths Medical the Group has recognised a financial
asset for its investment in 10% of the equity in ICU Medical, Inc (ICU) and a
financial asset for the fair value of $100m additional sales consideration
that is contingent on the future share price performance of ICU.
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 2022 31 July 2021
£m
£m
Raw materials and consumables 187 117
Work in progress 106 81
Finished goods 277 183
Total inventories 570 381
In FY2022, operating costs for continuing operations included £1,323m
(FY2021: £1,233m) of inventory consumed, £12m (FY2021: £8m) was charged for
the write-down of inventory and £12m (FY2021: £4m) was released from
provisions no longer required.
Discontinued operations consumed £95m (FY2021: £218m) of inventory, £nil
(FY2021: £4m) was charged for the write-down of inventory and £nil (FY2021:
£1m) was released from provisions no longer required. Further details of
discontinued operations are disclosed in note 27.
Inventory provisioning
31 July 2022 31 July 2021
£m
£m
Gross inventory carried at full value 492 324
Gross value of inventory partly or fully provided for 131 104
623 428
Inventory provision (53) (47)
Inventory after provisions 570 381
16 TRADE AND OTHER RECEIVABLES
31 July 2022 31 July 2021
£m
£m
Non-current
Trade receivables 1 -
Contract assets 58 49
Other receivables 10 10
69 59
Current
Trade receivables 506 431
Prepayments 33 26
Contract assets 127 131
Other receivables 72 42
738 630
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 prepayments, 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
£726m (FY2021: £629m).
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 £19m
(FY2021: £18m) principally within Smiths Detection, offset by £15m of
foreign currency translation losses (FY2021: £6m loss).
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 FY2022 the Group collected £92m of receivables through
these schemes (FY2021: £90m). The impact of invoice discounting on the FY2022
balance sheet was that trade receivables were reduced by £19m (2021: £14m).
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 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 7% (FY2021: 7%) of Group revenue.
Ageing of trade receivables
31 July 2022 31 July 2021
£m
£m
Trade receivables which are not yet due 396 338
Trade receivables which are between 1-30 days overdue 51 45
Trade receivables which are between 31-60 days overdue 24 15
Trade receivables which are between 61-90 days overdue 11 8
Trade receivables which are between 91-120 days overdue 7 5
Trade receivables which are more than 120 days overdue 54 52
543 463
Expected credit loss allowance provision (36) (32)
Trade receivables 507 431
Movement in expected credit loss allowance
31 July 2022 31 July 2021
£m
£m
Brought forward loss allowance at the start of the period 32 35
Exchange adjustments 4 (2)
Increase in allowance recognised in the income statement 8 6
Amounts written off or recovered during the year (8) (7)
Carried forward loss allowance at the end of the year 36 32
17 TRADE AND OTHER PAYABLES
31 July 2022 31 July 2021
£m
£m
Non-current
Other payables 13 13
Contract liabilities 33 46
46 59
Current
Trade payables 282 188
Other payables 57 39
Other taxation and social security costs 30 28
Accruals 183 188
Contract liabilities 130 87
682 530
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 £163m (FY2021:
£133m) 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 division where invoicing under milestones precedes the
delivery of the programme performance obligations. Revenue recognised in the
year includes £113m (FY2021: £94m) 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 2022 31 July 2021
£m
£m
Cash and cash equivalents
Net cash and deposits 1,056 405
Short-term borrowings
€600m 1.25% Eurobond 2023 (502) -
Overdrafts (1) -
Lease liabilities (29) (27)
Interest accrual (6) (9)
(538) (36)
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022 - (289)
€600m 1.25% Eurobond 2023 - (516)
€650m 2.00% Eurobond 2027 (538) (567)
Lease liabilities (90) (94)
(628) (1,466)
Borrowings / Gross debt (1,166) (1,502)
Derivatives managing interest rate risk and currency profile of the debt (40) 75
Net cash/(debt) (31 July 2021 comparative excludes £4m of net cash in (150) (1,022)
businesses held for sale)
Cash and cash equivalents
31 July 2022 31 July 2021
£m
£m
Cash at bank and in hand 242 219
Short-term deposits 814 186
Cash and cash equivalents 1,056 405
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 £30m (FY2021: £30m) was charged to the
consolidated income statement in the period in respect of public bonds.
Analysis of financial derivatives on balance sheet
Non-current assets Current Current Non-current liabilities Net balance
£m
assets
Liabilities
£m
£m
£m
£m
Derivatives managing interest rate risk and currency profile of the debt - - (20) (20) (40)
Foreign exchange forward contracts - 4 (7) - (3)
At 31 July 2022 - 4 (27) (20) (43)
Derivatives managing interest rate risk and currency profile of the debt 75 - - - 75
Foreign exchange forward contracts - 2 (3) - (1)
At 31 July 2021 75 2 (3) - 74
Movements in assets/(liabilities) arising from financing activities
Changes in net debt Changes in other financing items: FX contracts Total liabilities from financing activities
£m
£m
Cash Other Long-term Interest rate & cross-currency Net debt
and cash
short-term
borrowings
swaps
£m
equivalents
borrowings
£m
£m
£m
£m
At 31 July 2020 366 (41) (1,520) 82 (1,113) (2) (1,115)
Foreign exchange gains/(losses) (24) 2 79 - 57 (3,200) (3,143)
Net cash inflow from continuing operations * 63 33 - - 96 3,200 3,296
Lease liabilities acquired - (1) (10) - (11) - (11)
Net movement from lease modifications - (46) - - (46) - (46)
Fair value movement from interest rate hedging - - 8 - 8 - 8
Revaluation of derivative contracts - - - (7) (7) 3 (4)
Interest expense taken to income statement** - (4) (31) - (35) - (35)
Interest paid - - 29 - 29 - 29
Reclassification to short-term borrowings - 21 (21) - - - -
At 31 July 2021 405 (36) (1,466) 75 (1,022) 1 (1,021)
Foreign exchange gains/(losses) 62 (3) 4 - 63 (6,799) (6,736)
Net cash inflow from continuing operations * 589 34 295 - 918 6,799 7,717
Net movement from lease modifications - (22) - - (22) - (22)
Fair value movement from interest rate hedging - 2 27 - 29 - 29
Revaluation of derivative contracts - - - (115) (115) (4) (119)
Interest expense taken to income statement** - (35) - - (35) - (35)
Interest paid - - 34 - 34 - 34
Reclassification to short-term borrowings - (478) 478 - - - -
At 31 July 2022 1,056 (538) (628) (40) (150) (3) (153)
* In FY21, the net cash inflow for the total Group including discontinued
operations was £91m. £63m from continuing operations and £28m from
discontinued operations. In FY22, the net cash inflow for the total Group
including discontinued operations was £589m, £57m of which related to the
cash held by the Smiths Medical at the time of disposal.
** The Group has also incurred £8m (FY2021: £9m) of bank
charges that were expensed when paid and were not included in net debt.
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 2022 the total value of overdrafts on accounts in
interest compensation cash pooling systems was £nil (FY2021: £nil). The
balances held in zero balancing cash pooling arrangements have daily
settlement of balances. Therefore netting is not relevant.
Secured loans
Loans amounting to £nil (FY2021: £nil) were secured on plant and equipment
with a book value of £nil (FY2021: £nil).
Change of control
The Company has in place credit facility agreements under which a change in
control would trigger prepayment clauses. The Company also has bonds 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 FY2022 was 3.63% (FY2021: 3.3%).
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 and 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 2022 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 with the average maturity
profile of gross debt to be at or greater than three years, and between 40-60%
of gross debt is at fixed rates. At 31 July 2022 these measures were 100%
(FY2021: 100%), 2.7 years (FY2021: 3.2 years) and 50% (FY2021: 54%). The
average maturity profile of gross debt is below the target of three years
because the net cash resources of £1,055m are sufficient to cover the
short-term borrowings of £538m.
The Group remains in full compliance with all covenants within 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 2022, these measures were £657m (FY2021: £575m) and 27 months (FY2021:
39 months). At 31 July 2022, net cash resources were £1,055m (FY2021:
£405m). 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 18(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 2022
Sterling US$ Euro Other Total
£m
£m
£m
£m
£m
Financial assets and liabilities
Financial instruments included in trade and other receivables 41 423 114 169 747
Financial instruments included in trade and other payables (52) (239) (98) (101) (490)
Cash and cash equivalents 355 506 74 120 1,055
Borrowings not designated as net investment hedges (28) (58) (14) (19) (119)
316 632 76 169 1,193
Exclude balances held in operations with the same functional currency. (322) (149) (80) (142) (693)
Exposure arising from intra-group loans - (419) (27) (89) (535)
Future forward foreign exchange contract cash flows (42) (40) (38) 120 -
(48) 24 (69) 58 (35)
At 31 July 2021
Sterling US$ Euro Other Total
£m
£m
£m
£m
£m
Financial assets and liabilities
Financial instruments included in trade and other receivables 28 326 113 177 644
Financial instruments included in trade and other payables (49) (167) (79) (64) (359)
Cash and cash equivalents 46 187 80 92 405
Borrowings not designated as net investment hedges (31) (55) (12) (21) (119)
(6) 291 102 184 571
Exclude balances held in operations with the same functional currency 7 (110) (80) (183) (366)
Exposure arising from intra-group loans - (182) (19) (75) (276)
Future forward foreign exchange contract cash flows (51) (67) 22 96 -
(50) (68) 25 22 (71)
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
FY2022
FY2022
FY2021
FY2021
£m
£m
£m
£m
US dollar (3) 1 3 2
Euro 8 (1) 2 (5)
Sterling 4 - (1) 2
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 2022, contracts with a nominal value
of £141m (FY2021: £107m) were designated as hedging instruments. In
addition, the Group had outstanding foreign currency contracts with a nominal
value of £226m (FY2021: £251m) 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, 98% are
for periods of 12 months or less (FY2021: 89%).
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 2022
31 July 2021
£m
£m
Brought forward cash-flow hedge reserve at start of year 2 -
Foreign exchange forward contracts: Net fair value gains on effective hedges (6) 1
Amount reclassified to income statement - cost of sales - 1
Amount reclassified to income statement - finance costs 1 -
Carried forward cash-flow hedge reserve at end of year (3) 2
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 currency risk Foreign exchange contracts FY2022 (6) 6 (6)
FY2021 1 (1) 1
Cash-flow hedges generated £nil of ineffectiveness in FY2022 (FY2021: £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 2022 At 31 July 2021
US$ Euro Total US$ Euro Total
£m
£m
£m
£m
£m
£m
Loans designated as net investment hedges - (451) (451) (285) (459) (744)
Cross-currency swap (615) - (615) (539) - (539)
(615) (451) (1,066) (824) (459) (1,283)
At 31 July 2022, cross-currency swaps hedged the Group's exposure to US
dollars and euros (31 July 2021: US dollars and euros). All the cross-currency
swaps designated as net investment hedges were current and non-current
(FY2021: non-current).
Swaps generating £354m of the US dollar exposure (FY2021: £310m) will mature
in April 2023 and swaps generating £261m of the US dollar exposure (FY2021:
£229m) will mature in February 2027.
In addition, non-swapped borrowings were also used to hedge the Group's
exposure to US dollars and euros (31 July 2021 US dollars and euros).
Borrowings generating £285m of the US dollar exposure (FY2021: £285m) have
been prepaid in February 2022.
Borrowings generating £500m of the euro exposure (FY2021: £508m) will mature
in April 2023 and borrowings generating £287m of the euro exposure (FY2021:
£292m) 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 is
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 2022
31 July 2021
£m
£m
Brought forward net investment hedge reserve at start of year (238) (314)
Cross-currency swaps Net fair value gains on effective hedges (82) 14
Bonds Net fair value gains on effective hedges 5 62
Amounts removed from the hedge reserve and recognised in the income statement Profit/(loss) on business disposal 103 -
Carried forward net investment hedge reserve at end of year (212) (238)
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 2022 and 31 July 2021:
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 Foreign currency Cross-currency swaps FY2022 82 (82) (82)
operation
risk
Bonds FY2022 (5) 5 5
77 (77) (77)
Overseas Foreign currency Cross-currency swaps FY2021 (14) 17 14
operation
risk
Bonds FY2021 (62) 62 62
(76) 79 76
Net investment hedges generated £1m of ineffectiveness in FY2022 (FY2021:
£3m) 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 2022
31 July 2021
£m
£m
US dollar 68 92
Euro 50 51
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. This is achieved through fixed rate borrowings and
interest rate swaps. At 31 July 2022, 50% (FY2021: 54%) of the Group's gross
borrowings 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 2022, after
interest rate swaps, was 3.06% (FY2021: 2.06%).
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 2022 As at 31 July 2021
At fair value through Cash and Borrowings Fair value of At fair value Cash and Borrowings Fair value of
profit or loss
cash
£m
borrowings
through profit
cash
£m
borrowings
£m
equivalents
£m
or loss
equivalents
£m
£m
£m
£m
Fixed interest
Less than one year - - (203) (203) - - (36) (36)
Between one and five years - - (357) (359) - - (418) (434)
Greater than five years - - (24) (24) - - (321) (353)
Total fixed interest financial liabilities - - (584) (586) - - (775) (823)
Floating rate interest financial assets/(liabilities)* 390 970 (582) (586) 4 333 (727) (736)
Total interest-bearing financial assets/(liabilities) 390 970 (1,166) (1,172) 4 333 (1,502) (1,559)
Non-interest-bearing assets in the same category 4 86 - - 7 72 - -
Total 394 1,056 (1,166) (1,172) 11 405 (1,502) (1,559)
* Fair value gains and losses in this category of assets are recognised in
other comprehensive income.
Interest rate hedging
The Group also has exposures to the fair values of non-derivative financial
instruments such as EUR and USD 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 2022 and 31 July 2021, the Group had designated the following
hedges against variability in the fair value of borrowings arising from
fluctuations in base rates:
· €400m of the fixed/floating element of the EUR/USD interest
rate swaps that mature on 28 April 2023 partially hedging the € 2023
Eurobond;
· €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
· The $150m interest rate swap which matures on 12 October 2022,
partially hedging the USD 2022 Guaranteed notes, was early redeemed in
February 2022.
The fair values of the hedging instruments are disclosed in note 20. The
effect of the swaps was to convert £588m (FY2021: £705m) 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 sources 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:
Changes in value of hedged item for calculating ineffectiveness Changes in value of the hedging instrument for calculating ineffectiveness Carrying amount Accumulated fair value adjustments on hedged item
£m
£m
Hedged item Hedged exposure Financial year Assets Liabilities Assets Liabilities
£m
£m
£m
£m
Fixed rate bonds (a) Interest rate risk FY2022 8 (8) - 336 - (2)
Interest rate & currency rate risk FY2022 21 (20) - 252 - (5)
29 (28) - 588 - (7)
Fixed rate bonds (a) Interest rate risk FY2021 5 (5) - 449 - 6
Interest rate & currency rate risk FY2021 4 (7) - 256 - 16
9 (12) - 705 - 22
(a) Classified as borrowings
Fair value hedges generated a £1m ineffectiveness in FY2022 (FY2021: £3m)
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 2022, 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 (FY2021: £5m impact) on the Group's profit before
tax.
Impact of LIBOR transition
The UK Financial Conduct Authority announced on 5 March 2021 that LIBOR
benchmark rates will be discontinued after 31 December 2021 except the
majority of US dollar settings which will be discontinued after 30 June 2023.
The Group is exposed to interest rate benchmark reform on its interest rate
swaps and cross-currency interest rate swaps which reference 3-month and
6-month USD LIBOR, have an aggregate nominal value of USD 749m, and mature
between April 2023 and February 2027. In April 2021 the Group confirmed
adherence to the ISDA 2020 IBOR Fallbacks Protocol as published by the
International Swaps and Derivatives Association, Inc. (ISDA) on 23 October
2021 (the Protocol), ensuring that appropriate fallbacks can apply to these
derivatives in the event of LIBOR discontinuation.
(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 £1,067m at 31 July 2022 (FY2021: £416m).
31 July 2022 31 July 2021
£m
£m
Cash in AAA liquidity funds 551 116
Cash at banks with at least a AA- credit rating 104 46
Cash at banks with all other A credit ratings 397 237
Cash at other banks 4 6
Investments in bank deposits 4 4
Other investments 7 7
1,067 416
At 31 July 2022, the maximum exposure with a single bank for deposits and cash
was £339m (FY2021: £79m), whilst the maximum mark to market exposure with a
single bank for derivatives was £15m (FY2021: £26m). These banks have AAA
and AA- credit ratings respectively (FY2021: Both AAA and AA-).
(d) Liquidity risk
Borrowing facilities
Board policy specifies the maintenance of unused committed credit facilities
of at least £300m at all times to ensure that the Group has sufficient
available funds for operations and planned development. The Group has
Revolving Credit Facilities of $800m maturing 1 November 2024. At the balance
sheet date, the Group had the following undrawn credit facilities:
31 July 2022 31 July 2021
£m
£m
Expiring after more than two years 657 575
Cash deposits
As at 31 July 2022, £814m (FY2021: £186m) of cash and cash equivalents was
on deposit with various banks of which £558m (FY2021: £116m) was in
liquidity funds. £4m (FY2021: £4m) of investments comprised bank deposits
held to secure liabilities and letters of credit.
Gross contractual cash-flows for borrowings
As at 31 July 2022 As at 31 July 2021
Borrowings Fair value Contractual Total Borrowings Fair value Contractual Total
(note 18)
adjustments
interest
contractual
(note 18)
adjustments
interest
contractual
£m
£m
payments
cash-flows
£m
£m
payments
cash-flows
£m
£m
£m
£m
Less than one year (539) 2 (17) (554) (36) - (28) (64)
Between one and two years (23) - (11) (34) (823) (6) (23) (852)
Between two and three years (20) - (11) (31) (20) - (11) (31)
Between three and four years (14) - (11) (25) (14) - (11) (25)
Between four and five years (552) 5 (11) (558) (10) - (11) (21)
Greater than five years (24) - - (24) (577) (16) (11) (604)
Total (1,172) 7 (61) (1,226) (1,480) (22) (95) (1,597)
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 2022 As at 31 July 2021
Receipts Payments Net Receipts Payments Net
£m
£m
cash-flow
£m
£m
cash-flow
£m
£m
Assets
Less than one year 495 (521) (26) 142 (144) (2)
Greater than one year 270 (290) (20) 642 (568) 74
Liabilities
Less than one year 212 (209) 3 220 (219) 1
Greater than one year 8 (8) - 3 (2) 1
Total 985 (1,028) (43) 1,007 (933) 74
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 £474m (FY2021: £351m) due in less than one year and
£13m (FY2021: £8m) 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 2022
Contract or Fair value
underlying
nominal
amount
£m
Assets Liabilities Net
£m
£m
£m
Foreign exchange contracts (cash-flow hedges) 141 3 (5) (2)
Foreign exchange contracts (not hedge accounted) 226 1 (2) (1)
Total foreign exchange contracts 367 4 (7) (3)
Cross-currency swaps (fair value and net investment hedges) 615 - (40) (40)
Total financial derivatives 982 4 (47) (43)
Balance sheet entries:
Non-current 269 - (20) (20)
Current 713 4 (27) (23)
Total financial derivatives 982 4 (47) (43)
At 31 July 2021
Contract or Fair value
underlying
nominal
amount
£m
Assets Liabilities Net
£m
£m
£m
Foreign exchange contracts (cash-flow hedges) 107 1 (2) (1)
Foreign exchange contracts (not hedge accounted) 251 1 (1) -
Total foreign exchange contracts 358 2 (3) (1)
Cross-currency swaps (fair value and net investment hedges) 539 72 - 72
Interest rate swaps (fair value hedges) 108 3 - 3
Total financial derivatives 1,005 77 (3) 74
Balance sheet entries:
Non-current 655 75 - 75
Current 350 2 (3) (1)
Total financial derivatives 1,005 77 (3) 74
The maturity profile, average interest and foreign currency exchange rates of
the hedging instruments used in the Group's hedging strategies are as follows:
Maturity at 31 July 2022 Maturity at 31 July 2021
Hedged exposure Hedging instrument 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 risk Interest rate swaps - USD - Notional amount (£m) - - - - 108 -
- Average spread over - - - - 1.797% -
6 month USD LIBOR
Interest rate swaps - EUR - Notional amount (£m) 336 - - - 341 -
- Average spread over 1.015% - - - 1.015% -
3 month EUR LIBOR
Interest rate risk/Foreign currency risk Cross-currency swaps (EUR:GBP) - Notional amount (£m) - 254 - - - 254
- Average exchange rate - 0.845 - - - 0.845
- Average spread over - 1.750% - - - 1.750%
3 month GBP LIBOR
Net investment hedges
Foreign currency risk Cross-currency swaps (EUR:USD) - Notional amount (£m) 354 - - - 310 -
- Average exchange rate 1.0773 - - - 1.0773 -
Cross-currency swaps (GBP:USD) - Notional amount (£m) - 261 - - - 229
- Average exchange rate - 1.2534 - - - 1.2534
Cash-flow hedges
Foreign currency risk Foreign exchange contracts (EUR:USD) - Notional amount (£m) 77 - - 47 5 -
- Average exchange rate 4.1785 - - 1.1915 1.2205 -
Foreign exchange contracts (EUR:GBP) - Notional amount (£m) 28 8 - 31 3 -
- Average exchange rate 0.8323 1.1676 - 0.8996 0.9094 -
Foreign exchange contracts (EUR:AUD) - Notional amount (£m) 6 - - 7 - -
- Average exchange rate 1.5226 - - 1.5832 - -
Foreign exchange contracts (USD:GBP) - Notional amount (£m) 16 - - 8 - -
- Average exchange rate 1.3273 - - 1.3577 - -
Foreign exchange contracts (GBP:CZK) - Notional amount (£m) 6 - - 6 - -
- Average exchange rate 30.2988 - - 29.7028 - -
At 31 July 2022, the Group had forward foreign exchange contracts with a
nominal value of £141m (FY2021: £107m) 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 20 July 2023. The largest
single currency pairs are disclosed above and make up 100% 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.
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 2022
31 July 2022
31 July 2021
31 July 2021
£m
£m
£m
£m
Gross value of assets and liabilities 4 (47) 77 (3)
Related assets and liabilities subject to master netting agreements (4) 4 (1) 1
Net exposure - (43) 76 (2)
21 FAIR VALUE OF FINANCIAL INSTRUMENTS
As at 31 July 2022 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 - 4 364 368 368
Other investments 14 F - 19 8 27 27
Cash and cash equivalents 18 A 506 550 - 1,056 1,056
Trade and other financial receivables 16 B/C 807 - - 807 807
Derivative financial instruments 20 C - 4 - 4 4
Total financial assets 1,313 577 372 2,262 2,262
Financial liabilities
Trade and other financial payables 17 B (728) - - (728) (728)
Short-term borrowings 18 D (509) - - (509) (509)
Long-term borrowings 18 D (538) - - (538) (544)
Lease liabilities 18 E (119) - - (119) (119)
Derivative financial instruments 20 C - (47) - (47) (47)
Total financial liabilities (1,894) (47) - (1,941) (1,947)
As at 31 July 2021 Notes Basis for determining fair value At At fair value through profit or loss At fair value through OCI Total Total
amortised
£m
£m
carrying
fair value
cost
value
£m
£m
£m
Financial assets
Other investments 14 A - 4 - 4 4
Other investments 14 F - - 7 7 7
Cash and cash equivalents 18 A 289 116 - 405 405
Trade and other financial receivables 16 B/C 689 - - 689 689
Derivative financial instruments 20 C - 77 - 77 77
Total financial assets 978 197 7 1,182 1,182
Financial liabilities
Trade and other financial payables 17 B (589) - - (589) (589)
Short-term borrowings 18 D (9) - - (9) (9)
Long-term borrowings 18 D (1,372) - - (1,372) (1,429)
Lease liabilities 18 E (121) - - (121) (121)
Derivative financial instruments 20 C - (3) - (3) (3)
Total financial liabilities (2,091) (3) - (2,094) (2,151)
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
Fair Value Measurement).
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
Fair Value Measurement).
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 Fair Value Measurement).
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 2022, commitments, comprising bonds and guarantees arising in the
normal course of business, amounted to £234m
(FY2021: £210m), including pension commitments of £56m (FY2021: £54m). In
addition, the Group has committed expenditure on capital projects amounting
to £15m (FY2021: £4m).
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 2020 14 231 66 20 331
Foreign exchange rate movements (1) (12) (4) (1) (18)
Provision charged 7 5 - - 12
Provision released (4) - (13) - (17)
Unwind of provision discount - 1 1 - 2
Utilisation (6) (13) (3) (2) (24)
Business combinations 1 - - - 1
At 31 July 2021 11 212 47 17 287
Current liabilities 10 26 8 2 46
Non-current liabilities 1 186 39 15 241
At 31 July 2021 11 212 47 17 287
Foreign exchange rate movements 1 30 6 2 39
Provision charged 6 6 2 26 40
Provision released (3) - - - (3)
Unwind of provision discount - 2 1 - 3
Utilisation (4) (21) (4) (2) (31)
At 31 July 2022 11 229 52 43 335
Current liabilities 10 34 14 30 88
Non-current liabilities 1 195 38 13 247
At 31 July 2022 11 229 52 43 335
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 2022, the Group had warranty and product liability provisions of
£7m (FY2021: £9m). 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
Alertline', 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 product, primarily packing and gaskets. The asbestos was encapsulated
within these products in such a manner that causes JCI to believe, 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 2022
31 July 2021
31 July 2020
31 July 2019
31 July 2018
JCI claims experience
Claims against JCI that have been dismissed 306,000 305,000 297,000 285,000 277,000
Claims JCI is currently a defendant in 22,000 22,000 25,000 38,000 43,000
Cumulative final judgements, after appeals, against JCI since 1979 149 149 149 144 140
Cumulative value of awards ($'m) since 1979 175 175 175 168 164
The number of claims outstanding at 31 July 2022 reflected the benefit of
1,000 (FY2021: 8,000) 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. The
provision utilised in the period is lower than previous periods, principally
due to court closures and trial delays arising from the COVID-19 pandemic.
Management believes this reduction in utilisation is temporary until after the
effects of the pandemic subside and trial activity returns 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 (FY2021: 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 unusual 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 history
The JCI asbestos litigation provision of £229m (FY2021: £212m) 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 2022
31 July 2021
31 July 2020
31 July 2019
31 July 2018
£m
£m
£m
£m
£m
John Crane, Inc. litigation provision
Gross provision 258 220 235 257 251
Discount (29) (8) (4) (20) (28)
Discounted pre-tax provision 229 212 231 237 223
Deferred tax (57) (54) (59) (50) (48)
Discounted post-tax provision 172 158 172 187 175
Operating profit charge/(credit)
Increased provisions for adverse judgements and legal defence costs 24 10 14 7 13
Change in US risk-free rates (18) (5) 16 8 (6)
Subtotal - items charged to the provision 6 5 30 15 7
Litigation management, legal fees in connection with litigation against 1 1 1 2 3
insurers and defence strategy
Recoveries from insurers - (9) (3) (11) -
Total operating profit charge/(credit) 7 (3) 28 6 10
Cash-flow
Provision utilisation - legal defence costs and adverse judgements (21) (13) (23) (24) (27)
Litigation management expense (1) - (1) (2) (3)
Recoveries from insurers - 9 3 11 -
Net cash outflow (22) (4) (21) (15) (30)
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.
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 £203m and future spend at the 95th percentile of £268m (FY2021: £191m
and £246m, respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total future spend
will fall between £239m and £263m (FY2021: between £209m and £230m),
compared to the gross provision value of £258m (FY2021: £220m).
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 £18m (FY2021: £17m) and reducing it by
five years would reduce the provision by £97m (FY2021: £93m).
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 £15m (FY2021: £14m) and extending it by five years would increase the
pre-tax provision by £56m (FY2021: £58m). 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 division, 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 market-place
face similar challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement, together with
recent market-place 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 £52m (FY2021: £47m) 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 2022 31 July 2021
£m
£m
Gross provision 87 69
Discount (35) (22)
Discounted pre-tax provision 52 47
Deferred tax (12) (11)
Discounted post-tax provision 40 36
Titeflex Corporation litigation provision history
A charge of £2m (FY2021: £13m 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 higher gross provision value has been driven by foreign
exchange rate movements and an increase in the average cost per claim. The
increase in the discount factor derives from increasing US dollar discount
rates.
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 £3m (FY2021: £4m) lower, and if the benefit were 0.5%
lower, the provision would be £4m (FY2021: £4m) 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 £5m (FY2021: £4m), with an equivalent fall for a reduction of
10%. If the assumed amount of those settlements increased 10%, the provision
would rise by £4m (FY2021: £3m), 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 in the year. 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 2022, there were reorganisation provisions of £1m (FY2021: £2m)
relating to the various restructuring programmes that are expected to be
utilised in the next 18 months.
Property
At 31 July 2022, there were provisions of £10m (FY2021: £11m) related to
actual and potential environmental issues for sites currently or previously
occupied by Smiths operations.
24 SHARE CAPITAL
Number of shares Average number Issued Consideration
of shares
capital
£m
£m
Ordinary shares of 37.5p each
Total share capital at 31 July 2020 396,211,180 396,193,310 149
Issue of new equity shares - exercise of share options 165,934 157,276 - 2
Total share capital at 31 July 2021 396,377,114 396,350,586 149
Issue of new equity shares - exercise of share options 131,942 125,354 - 2
Share buybacks (34,152,897) (9,797,729) (13) (511)
Total share capital at 31 July 2022 362,356,159 386,678,211 136
Share capital structure
As at 31 July 2022, the Company's issued share capital was 362,356,159
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 2022, 4,274,704 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 2021 Annual General Meeting
and the buy back authority was superseded by the shareholder authority
provided at the General Meeting held in November 2021. At the 2022 AGM, it
will be proposed that the Directors be granted new authorities to allot and
buy back shares.
Share buybacks
As at 16 September 2022 (the latest practicable date for inclusion in this
report), the Company had an unexpired authority to repurchase ordinary shares
up to a maximum of 59m ordinary shares (FY2021: 40m). As at 16 September 2022,
the Company did not hold any shares in treasury. Any ordinary shares purchased
may be cancelled or held in treasury.
In connection with the sale of Smiths Medical to ICU Medical, Inc. (see note
27 for details), and in the light of our strong balance sheet and cash-flows,
the Group announced that it intended to return an amount representing 55% of
the initial cash proceeds (equating to an aggregate purchase price of up to
$1bn or £742m) to shareholders in the form of a Share Buyback Programme. All
shares purchased under the Programme will be cancelled. This Programme was
initiated on 19 November 2021 as announced to the London Stock Exchange on 11
November 2021 and following shareholder approval at the General Meeting held
on 17 November 2021.
A total number of 34,281,929 ordinary shares of 37.5 pence each were
repurchased during the period, for a total consideration of £512,796,999, of
which 129,032 shares with a value of £1,972,602 were yet to settle and be
cancelled. These 34,281,929 shares represented 9.46% of the called up ordinary
share capital as at 31 July 2022. A further 3,361,599 ordinary shares have
been repurchased during the period of 1 August 2022 to 16 September 2022. All
repurchased shares have been cancelled with the exception of 128,919 shares
that were yet to settle and be cancelled as at 16 September 2022. Since 1
August 2022, the number of shares in issue has reduced by 3,361,712 as at 16
September 2022.
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 2022, the trust held 618,662 (FY2021: 326,364) 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 2022
31 July 2021
£m
£m
Ordinary final dividend of 26.0p (FY2021: 24.0p) paid 19 November 2021 103 94
Ordinary delayed interim dividend of nil (FY2021: 11.0p) paid 19 November 2021 - 44
Ordinary interim dividend of 12.3p (FY2021: 11.7p) paid 13 May 2022 47 47
150 185
In the current year a total dividend of 38.3p has been paid, comprising a
final dividend of 26.0p paid in respect of FY2021 and an interim dividend of
12.3p paid in respect of FY2022. In the prior year a total dividend of 46.7p
was paid, comprising a delayed interim dividend of 11.0p and a final dividend
of 24.0p paid in respect of FY2020 and an interim dividend of 11.7p paid in
respect of FY2021.
The final dividend for the year ended 31 July 2022 of 27.3p per share was
recommended by the Board on 22 September 2022 and will be paid to shareholders
on 18 November 2022, subject to approval by the shareholders. This dividend is
payable to all shareholders on the register of members at 6.00pm on 21 October
2022 (the record date).
Waiver of dividends
The following waived all dividends payable in the year, and all future
dividends, on their shareholdings in the Company:
· Numis Nominees Limited (Smiths Industries Employee Share Trust)
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
(FY2021: 800,606) shares to the Trust, and the Trust purchased 1,069,998
shares (FY2021: 1,126,970 shares) in the market for a consideration of £16m
(FY2021: £16m). At 31 July 2022, the Trust held 618,662 (FY2021: 326,364)
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 FY2022 ROCE was 14.2% (FY2021: 13.2%);
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 FY2022 ratio of net debt to headline EBITDA of 0.3 (FY2021: 1.6) 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 2022, the
Group had a credit rating of BBB+/Baa2 (FY2021: BBB+/Baa2) with Standard
& Poor's and Moody's respectively.
The Board has a progressive dividend policy for future pay-outs, 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 2022 31 July 2021
£m
£m
Net investment hedge reserve (net of £8m of deferred tax (FY2021: £8m) (205) (230)
Cash-flow hedge reserve 3 2
(202) (228)
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 (FY2021: £21m), of
which the most significant balance is in John Crane Japan Inc., which
represented £20m (FY2021: £20m) 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 £5m in the
period (FY2021: £5m), and cash inflows from operating activities of £5m
(FY2021: £6m). It paid dividends of £1m (FY2021: £2m) and tax of £1m
(FY2021: £3m). At 31 July 2022, the company contributed £57m (FY2021: £57m)
of net assets to the Group.
27 DISCONTINUED OPERATIONS AND BUSINESSES HELD FOR SALE
Following the Board decision in July 2021 to pursue a sale process, the Smiths
Medical business was classified as a discontinued operation and a business
held for sale. On 8 September 2021, the Group announced that it had agreed the
sale of Smiths Medical to ICU Medical, Inc., and the approval of Smiths
shareholders was received at the General Meeting on 17 November 2021.
The sale was completed on 6 January 2022 and the results of the discontinued
operation and the effect of the disposal on the financial position of the
Group were as follows:
Discontinued operations
The financial performance of the Smiths Medical business in the current and
prior years is presented below:
Year ended 31 July 2022 Year ended 31 July 2021
Headline Non-headline Total Headline Non- Total
£m
(note 3)
£m
£m
headline
£m
£m
(note 3)
£m
Revenue 356 - 356 849 - 849
Direct materials, labour, production and distribution overheads (193) - (193) (385) - (385)
Selling costs (46) - (46) (117) - (117)
Administrative expenses (51) (47) (98) (170) (79) (249)
Operating costs (290) (47) (337) (672) (79) (751)
Operating profit 66 (47) 19 177 (79) 98
Finance costs (1) (22) (23) (1) 50 49
Gain on sale of discontinued operation - 1,036 1,036 - - -
Taxation (16) 6 (10) (42) 23 (19)
Profit from discontinued operations 49 973 1,022 134 (6) 128
Interest capitalised as part of the costs of Smiths Medical development
projects amounted to £1m (FY2021: £3m). £nil (FY2021: £1m) of tax relief
has been recognised as current tax relief in the period. The gain on sale of
the Smiths Medical discontinued operations qualified for the Substantial
Shareholding Exemption and consequently was not subject to corporation tax.
Additional segmental information for discontinued operations
Headline operating profit for discontinued operations was stated after
charging share-based payments £2m (FY2021: £1m).
Revenue for the Smiths Medical discontinued operation is analysed by the
following product lines: Infusion Systems £116m (FY2021: £303m), Vascular
Access £134m (FY2021: £272m) and Vital Care/Other £106m (FY2021: £274m).
Revenue by destination for the Smiths Medical for discontinued operations is
analysed as follows: Americas £176m (FY2021: £456m), Europe, Middle East
& Africa £91m (FY2021: £228m), and Asia-Pacific £89m (FY2021: £165m).
Revenue by destination has been selected as the basis for attributing revenue
to geographical areas as this is the attribution used by management to review
the performance of the business.
Revenue by destination attributable to the United Kingdom was £12m (FY2021:
£26m). Revenue earned in the United States of America was material totalling
£161m (FY2021: £411m).
Cash-flow from discontinued operations
Cash-flows from discontinued operations included in the consolidated cash-flow
statement are as follows:
31 July 2022 31 July 2021
£m
represented*
£m
Net cash inflow from operating activities 47 163
Net cash-flow used in investing activities (17) (67)
Net cash-flow used in financing activities (14) (68)
Net increase in cash and cash equivalents 16 28
Opening cash and cash equivalents in disposal group 48 20
Foreign exchange movements (7) -
Cash and cash equivalents disposed of (57) -
Cash and cash equivalents at close of period - 48
* £15m of intra-group royalty charges paid by discontinued operations to
continuing operations in FY2021, that were previously netted down, have been
represented on a gross up basis within net cash inflow from operating
activities and net cash-flow used in financing activities, as this represents
a complete view of the operating cash flows attributable to Smiths Medical.
Effect of disposal on the financial position of the Group
Year ended
31 July 2022
£m
Intangible assets 695
Property, plant and equipment 170
Right of use assets 64
Inventories 166
Deferred tax assets 20
Current tax receivable 3
Trade and other receivables 110
Cash and cash equivalents 57
Financial derivatives 4
Lease liabilities (41)
Trade and other payables (167)
Current tax payable (13)
Deferred tax liabilities (56)
Retirement benefit obligations (5)
Provisions (39)
Net assets disposed of 968
Consideration received:
Cash and cash equivalents 1,421
Transaction costs (31)
Cash and cash equivalents, net of transaction costs 1,390
ICU Medical, Inc shares 426
Deferred contingent consideration - contingent on ICU Medical, Inc future
share price:
- Fair value at date of disposal 30
- Movement in fair value to 31 July 2022 (11)
19
Separation expenses - arising from contractual and commercial obligations due (32)
to the separation recognised in year
Gain on sale before reclassification of foreign currency translation reserve 835
Exchange movements recycled to the income statement 196
Cash-flow hedge reserve recycled to the income statement 5
Gain on sale of discontinued operation 1,036
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents 1,421
Transaction costs and separation expenses paid in period (33)
Less cash and cash equivalents disposed of (57)
1,331
28 CASH-FLOW
Cash-flow from operating activities
Year ended 31 July 2022 Year ended 31 July 2021
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Operating profit - continuing operations 417 (300) 117 372 (46) 326
- discontinued operations 66 (47) 19 177 (79) 98
Amortisation of intangible assets 10 51 61 14 53 67
Impairment of intangible assets - 4 4 1 52 53
Impairment of tangible assets - - - - 6 6
Impairment of investment within discontinued operations - 14 14 - - -
Depreciation of property, plant and equipment 38 - 38 39 1 40
Depreciation of right of use assets 30 - 30 32 - 32
(Gain)/loss on disposal of property, plant and equipment (2) - (2) 1 - 1
Share-based payment expense 13 - 13 13 - 13
Retirement benefits** 5 207 212 6 (23) (17)
Distribution from trading investment - - - 5 - 5
Recycling of cash-flow hedge reserve - - - (5) - (5)
Decrease/(increase) in inventories (173) 4 (169) 62 4 66
Decrease/(increase) in trade and other receivables (87) 4 (83) (14) 4 (10)
Increase/(decrease) in trade and other payables 131 (2) 129 46 (10) 36
Increase/(decrease) in provisions (1) 22 21 (4) (26) (30)
Cash generated from operations 447 (43) 404 745 (64) 681
Interest paid (51) - (51) (40) - (40)
Interest received 13 1 14 2 1 3
Tax paid (88) - (88) (109) - (109)
Net cash inflow from operating activities 321 (42) 279 598 (63) 535
- continuing operations* 274 (42) 232 430 (58) 372
- discontinued operations* 47 - 47 168 (5) 163
* £15m of intra-group royalty charges paid by
discontinued operations to continuing operations in FY2021 have been
represented as cash inflows from discontinued operations, as this represents a
complete view of the operating cash flows attributable to Smiths Medical.
** The retirement benefits 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 2022 Year ended 31 July 2021
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Net cash inflow from operating activities 274 (42) 232 430 (58) 372
Include:
Expenditure on capitalised development, other intangible assets (71) - (71) (62) - (62)
and property, plant and equipment
Repayment of lease liabilities (34) - (34) (33) - (33)
Disposals of property, plant and equipment 3 - 3 - - -
Investment in financial assets relating to operating activities and pensions - - - 7 - 7
financing outstanding at the balance sheet date
Free cash-flow 130 284
Exclude:
Investment in financial assets relating to operating activities and pensions - - - (7) - (7)
financing outstanding at the balance sheet date
Repayment of lease liabilities 34 - 34 33 - 33
Interest paid 46 - 46 24 - 24
Interest received (13) - (13) (2) - (2)
Tax paid 79 - 79 96 - 96
Operating cash-flow 318 (42) 276 486 (58) 428
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as
follows:
Year ended 31 July 2022 Year ended 31 July 2021
As reported Restructuring costs Pro-forma excluding restructuring costs As reported Restructuring costs Pro-forma excluding restructuring costs
£m
£m
£m
£m
£m
£m
Headline operating profit 417 - 417 372 21 393
Headline operating cash-flow 318 14 332 486 24 510
Headline operating cash conversion 76% 80% 130% 129%
Reconciliation of free cash-flow to net movement in cash and cash-equivalents:
Year ended Year ended
31 July 2022
31 July 2021
£m
£m
Free cash-flow 130 284
Investment in financial assets and acquisition of businesses - (83)
Disposal of businesses and discontinued operations 1,331 -
Other net cash-flows used in financing activities (note: repayment of lease (937) (138)
liabilities is included in free cash-flow)
Net decrease in cash and cash equivalents for discontinued operations 16 28
Net increase/(decrease) in cash and cash equivalents 540 91
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. Following the
completion of the sale of Smiths Medical, headline EBITDA for FY2022 has been
presented on a continuing operations basis. A reconciliation of headline
operating profit to headline EBITDA is shown in the note below.
Headline EBITDA before restructuring costs Headline EBITDA, as defined above, is adjusted to exclude restructuring costs
from the Group's strategic restructuring programme which commenced in FY2020.
Following the completion of the sale of Smiths Medical, headline EBITDA before
restructuring costs for FY2022 has been presented on a continuing operations
basis. A reconciliation of headline EBITDA to headline EBITDA before
restructuring costs and write-downs is shown in the note below.
Headline operating profit excluding restructuring Headline operating profit is adjusted for strategic restructuring programme
costs and write-downs. See note 2 for a reconciliation. This measure of
profitability is used by the Group to measure and monitor performance.
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 Smiths ROCE is calculated over a rolling 12-month period and is the percentage
employed ('ROCE') 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 Emissions (GHG) GHG reduction is calculated as the percentage change in normalised Scope 1
reduction & 2 GHG emissions. Normalised is calculated as tCO(2)e per £million 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 bi-annual
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, restructuring costs 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 calculated on an underlying basis. 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 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.
Ratio of capital expenditure Represents the amount of capital expenditure as a proportion of the
depreciation and amortisation charge for the period. This measure shows the
to depreciation and amortisation level of reinvestment into operations.
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
(FY2021: £787m), 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 2022 31 July 2021
£m
£m
Net assets 2,721 2,423
Adjust for:
Goodwill recognised directly in reserves 478 787
Retirement benefit assets and obligations 8 (194) (413)
Tax related to retirement benefit assets and obligations 57 108
John Crane, Inc. litigation provisions and related tax 23 172 158
Titeflex Corporation litigation provisions and related tax 23 40 36
Investment in ICU Medical, Inc equity 14 (364) -
Deferred contingent consideration 14 (19) -
Net debt (FY2021: includes £4m of net cash in discontinued operations) 18 150 1,018
Capital employed 3,041 4,117
Return on capital employed ('ROCE')
Notes Year ended Year ended
31 July 2022
31 July 2021
£m
represented*
£m
Headline operating profit for previous 12 months - continuing operations 417 372
Restructuring costs - 21
Headline operating profit before restructuring costs - continuing operations 417 393
Average capital employed - continuing operations (excluding investment in ICU 1 2,940 2,830
Medical, Inc equity)
ROCE 14.2% 13.9%
* Following the completion of the sale of Smiths Medical,
ROCE for 31 July 2021 has been represented to exclude restructuring costs and
discontinued operations from headline operating profit and average capital
employed. The 31 July 2021 figures have been represented to aid the period on
period comparability for this forward-looking measure.
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 presented
for the whole Group, including discontinued operations, and is calculated as
follows:
Headline earnings before interest, tax, depreciation and amortisation (headline EBITDA)
Notes Year ended Year ended
31 July 2022
31 July 2021
Continuing
Total operations*
operations
£m
£m
Headline operating profit 417 372
Headline operating profit of discontinued operations 27 - 177
Exclude:
- depreciation of property, plant and equipment 12 38 40
- depreciation of right of use assets 13 30 32
- amortisation and impairment of development costs 10 3 7
- amortisation of software, patents and intellectual property 10 7 7
Headline EBITDA 495 635
Add back: restructuring costs and write-downs (FY2021 comparative includes 2 - 30
£9m in discontinued operations)
Headline EBITDA before restructuring costs and write-downs 495 665
Ratio of net debt to headline EBITDA - total Group including discontinued operations
Notes Year ended Year ended
31 July 2022
31 July 2021
Continuing
Total
operations
operations*
£m
£m
Headline EBITDA 495 635
Net debt (FY2021 comparative includes £4m of net cash in discontinued 18 150 1,018
operations)
Ratio of net debt to headline EBITDA 0.3 1.6
* The figures for the comparative period in the credit metrics tables above
include discontinued operations.
30 POST BALANCE SHEET EVENTS
Details of the proposed final dividend announced since the end of the
reporting period are given in note 25.
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 FY2022.
Company name Company number Company name Company number
EIS Group Plc 61407 Smiths Detection Investments Limited 5146644
Flexibox International Limited 394688 Smiths Finance Limited 7888063
Flex-Tek Group Limited 11545405 Smiths Group Finance EU Limited 10440573
Graseby Limited 894638 Smiths Group Finance US Limited 10440608
SI Properties Limited 160881 Smiths Group Innovation Limited 10953689
SITI 1 Limited 4257042 Smiths Interconnect Group Limited 6641403
Smiths Detection Group Limited 5138140 Smiths Pensions Limited 2197444
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