REG - Smiths Group PLC - Smiths Group FY23 Full Year Results
26/09/2023 07:00
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RNS Number : 5940N Smiths Group PLC 26 September 2023
SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHS ENDED 31 JULY 2023
Pioneers of progress - improving our world through smarter engineering
A year of record organic revenue and headline EPS growth
· Record annual growth - organic(1) revenue growth of +11.6%;
headline(2) EPS growth of +39.6%
o Full year growth delivered ahead of guidance, balanced between price and
volume
o +310bps of growth from new products, demonstrating the impact of innovation
o Well positioned for FY2024 growth within our medium-term targets, with
orders(3) up +6.7%
· Continued improvement in execution - Smiths Excellence System ("SES")
delivering benefits
o Headline operating profit growth of +20.0%; with margin expansion of +20bps
to 16.5%
o ROCE up +150bps to 15.7%, benefiting from strong profit growth
o Cash conversion(2) up 6 percentage points to 86%; with improvement in
working capital
o Advancing our Sustainability strategy with significant progress across our
environmental metrics
· Empowering our people - increasing engagement with our colleagues and
communities
o Continued improvement in our safety record, with a 26% reduction in
Recordable Incident Rate
o Successful rollout of Smiths Leadership Behaviours, driving our
high-performance workforce
o High employee engagement reflected in 310bps reduction in voluntary turnover
o Launched Smiths Foundation, committing an initial £10m towards charitable
STEM-related causes
· Strong balance sheet - providing flexibility on capital allocation
o Successful acquisition of Plastronics in Jan 2023 and Heating & Cooling
Products in Aug 2023
o Net debt to EBITDA of 0.7x; £387m net debt
o £350m returned to shareholders through dividends and share buyback, which
is now complete
o Proposed final dividend of 28.7p, up 5.1%, bringing the full year to 41.6p
FY2024 Outlook
· Expect FY2024 organic revenue growth within our medium-term target
range of 4-6%, with continued margin expansion
Headline(2) FY2023 FY2022 Reported Organic(1)
Revenue £3,037m £2,566m +18.3% +11.6%
Operating profit £501m £417m +20.0% +12.7%
Operating profit margin(4) 16.5% 16.3% +20bps +10bps
Basic EPS 97.5p 69.8p +39.6%
ROCE(4) 15.7% 14.2% +150bps
Operating cash conversion(4) 86% 80% +600bps
Statutory FY2023 FY2022 Reported
Revenue £3,037m £2,566m +18.3%
Operating profit £403m £117m +244.4%
Profit for the year (after tax)(5) £232m £1,035m (77.6)%
Basic EPS(5) 65.5p 267.1p (75.5)%
Dividend per share 41.6p 39.6p +5.1%
Paul Keel, Chief Executive Officer, commented:
"We had another strong year of progress in fiscal 2023 as we further
accelerated our growth, sharpened our execution, and developed our talented
people. We delivered year-on-year improvement against all five of our
medium-term financial commitments, including record organic sales and EPS
growth.
"Innovation is central to our purpose of improving our world through smarter
engineering, and new product launches contributed more than three percentage
points to our growth. We continued to invest in R&D as artificiaI
intelligence and other digital technologies are playing an increasingly
important role in enabling us to support our customers more effectively. We
are also further building our capabilities to capitalise on the growing
megatrends we are exposed to across the major markets we serve, including
energy transition and the world's ever-increasing need for better security.
"Looking forward to our next fiscal year, we expect to deliver 4-6% organic
revenue growth, in line with our medium-term financial commitment. I applaud
my 15,000 colleagues around the world who live Smiths' purpose each and every
day. We are encouraged by our progress, proud of our accomplishments in
FY2023, and even more excited by all we see ahead for Smiths."
UPCOMING EVENTS
Date Event
16 November 2023 Q1 Trading Update
16 November 2023 Annual General Meeting
30 November 2023 John Crane Deep Dive
22 March 2024 HY2024 Interim Results
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
and acquisitions.
(2) Headline: In addition to statutory reporting, the Group reports on a
headline basis. Definitions of headline metrics, and information about the
adjustments to statutory measures, are provided in note 3 to the financial
statements. Headline performance is on a
Smiths Group basis, excluding the results of Smiths Medical.
(3) Order intake growth excludes the effects of foreign exchange.
(4) Alternative Performance Measures ("APMs") and Key Performance Indicators
("KPIs") are defined in note 29 to the financial statements.
(5) FY2022 statutory profit and EPS includes the proceeds from the sale of
Medical.
Media enquiries
Investor enquiries Tom Steiner, Smiths Group
Stephanie Heathers, Smiths Group Siobhán Andrews, Smiths Group +44 (0) 7787 415891
+44 (0)7584 113633 +44 (0)7920 230093 tom.steiner@smiths.com (mailto:smiths@fticonsulting.com)
stephanie.heathers@smiths.com (mailto:stephanie.heathers@smiths.com) siobhan.andrews@smiths.com (mailto:siobhan.andrews@smiths.com)
Ahmed Ammori, Smiths Group Alex Le May, FTI Consulting
+44 (0)7702 443312
+44 (0)7384 901695
smiths@fticonsulting.com (mailto:smiths@fticonsulting.com)
ahmed.ammori@smiths.com (mailto:ahmed.ammori@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. In November 2021, we set out how Smiths will
deliver performance in line with our significant potential by focusing on
three top priorities of accelerating growth, strengthening execution and 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 FY2023, we have continued
to make meaningful progress towards these targets, outperforming on several
metrics.
Targets Medium-Term Target FY2022 FY2023 Progress
Organic Revenue Growth 4-6% +3.8% +11.6% Accelerated, record organic revenue growth ahead of medium-term target
(+ M&A)
Headline EPS Growth 7-10% +17.8% +39.6% Record earnings growth, driven by organic operating profit and benefit of
share buyback
(+ M&A)
ROCE 15-17% 14.2% 15.7% Improvement in ROCE into target range with strong operating profit performance
Operating Profit Margin 18-20% 16.3% 16.5% Margin improvement benefiting from SES with continued investment in growth
Operating Cash Conversion 100%+ 80% 86% Working capital improvement in H2 2023 to deliver solid cash conversion
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.
FY2023 Business Performance
Smiths delivered record organic revenue growth of +11.6%, ahead of our
guidance. We generated £501m of operating profit, up +20.0% on FY2022 as we
continue to make significant progress on our strategy.
FY2022 Foreign Acquisitions Organic FY2023
exchange movement
£m
Revenue 2,566 146 8 317 3,037
Headline operating profit 417 27 0 57 501
Headline operating profit margin 16.3% 16.5%
GROWTH
Accelerating growth is the primary driver of unlocking enhanced value creation
for the Group. We grew in every quarter of FY2023 and raised our guidance
three times during the year, delivering record organic revenue growth of
+11.6%. We have now delivered nine consecutive quarters of organic revenue
growth.
Organic revenue growth (by business) H1 2023 H2 2023 FY2023
John Crane +14.6% +15.8% +15.2%
Smiths Detection +14.0% +18.8% +16.4%
Flex-Tek +17.0% +3.6% +10.1%
Smiths Interconnect +3.3% (8.4)% (2.8)%
Smiths Group +13.5% +9.9% +11.6%
Strong growth continued in the second half for our two largest businesses;
with both John Crane and Smiths Detection delivering double digit growth
throughout the year. Flex-Tek continued to grow in the second half, with
growth moderating to +3.6% reflecting anticipated softness in the US
construction market. Smiths Interconnect declined (8.4)% in the second half,
as anticipated, impacted by a weakening semiconductor test market as well as
delays in some large defence and aerospace programmes.
Revenue grew +18.3% on a reported basis, to £3,037m (FY2022: £2,566m). This
included +£146m of favourable foreign exchange translation, and +£8m from
the acquisition of Plastronics in January 2023.
Strong execution to access end market 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 2023 H2 2023 FY2023
revenue
General Industrial 40% +15.4% +1.0% +7.8%
Safety & Security 31% +9.4% +14.4% +11.9%
Energy 22% +17.1% +21.8% +19.5%
Aerospace 7% +10.1% +10.8% +10.5%
Smiths Group 100% +13.5% +9.9% +11.6%
Smiths organic revenue in our largest end market, General Industrial, grew
+7.8% in FY2023, supported by strong demand for John Crane's industrial
products in chemical processing, water treatment and life sciences. Slower H2
growth of +1.0% reflects a strong prior year performance, and a softening in
demand for Flex-Tek's heating, ventilation and air conditioning ("HVAC")
products and Smiths Interconnect semiconductor test solutions. Organic revenue
growth in Safety & Security was +11.9%, accelerating in the second half
due to Smiths Detection's strong delivery against its orderbook, partially
offset by a decline in Smiths Interconnect from the timing of defence
programmes. The +19.5% growth in Energy reflected strong demand in John Crane.
Growth in Aerospace of +10.5% continued throughout the year driven by aircraft
build demand benefiting Flex-Tek and helping to offset the impact of delays in
aerospace programmes in Smiths Interconnect.
Our second lever for faster growth is improved new product development and
commercialisation. During FY2023, +310bps of growth was delivered from high
impact new products including John Crane's next-generation diamond coating
product offering for high-speed and high-heat applications, Smiths Detection's
next-generation 3D Computed Tomography ("CT") machines installed with threat
recognition software, and Flex-Tek's ducting in energy efficient Rheia air
management systems. Gross vitality, which measures the proportion of revenues
coming from products launched in the last five years, was 31% (FY2022: 31%),
supported by our successful new product commercialisation.
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 FY2023, we invested
£113m in R&D (FY2022: £107m), of which £73m (FY2022: £80m) was an
income statement charge, £21m was capitalised (FY2022: £12m) and £19m
(FY2022: £15m) was funded by customers.
To support new product launches, and the strong demand for our existing
solutions, we increased capex +14.1% in FY2023 to £81m (FY2022: £71m). This
represents 1.6x depreciation and amortisation
(FY2022: 1.5x).
Our third growth lever is building out priority adjacencies. Each of our four
businesses are executing strategies to expand beyond their existing core
markets and ensure we capitalise on the long-term megatrends of energy
transition and sustainability, increasing security needs and enhanced
connectivity. Examples in FY2023 include Flex-Tek's high temperature heating
solution for the world's first green steel production facility; and Smiths
Detection's +34.9% revenue growth in its Other Security Systems segment,
supported by key wins in ports and borders and parcel delivery markets.
Our fourth growth lever is using disciplined M&A to augment our organic
growth focus. In January 2023, Smiths Interconnect acquired Plastronics, a
leading supplier of burn-in test sockets and patented spring probe contacts,
extending our reach into an attractive market adjacency. We will benefit from
Plastronics' attractive position in artificial intelligence, data centres and
automotive end markets, and expanding Plastronics' sales globally by
leveraging Smiths Interconnect's strong presence in Asia.
Following the year end, in August 2023, we acquired Heating & Cooling
Products ("HCP") in our Flex-Tek business. This further expands the Group's
presence in the North American HVAC market, enabling Smiths to serve more
customers with an even broader product range. Acquired for $82m (approximately
£65m), at less than 7x estimated 2023 EBITDA, this acquisition further
demonstrates our disciplined and targeted approach to M&A.
EXECUTION
Stronger execution is our second key priority.
In FY2023, headline operating profit grew +12.7% (+£57m) on an organic basis,
and +20.0% (+£84m) on a reported basis to £501m (FY2022: £417m). Headline
operating profit benefited from strong profit growth in John Crane and Smiths
Detection, and a solid contribution in Flex-Tek, partially offset by a decline
in Smiths Interconnect.
FY2022 Foreign Acquisitions Organic FY2023
exchange movement
£m
Headline operating profit 417 27 0 57 501
Headline operating profit margin 16.3% +10bps +10bps 16.5%
Headline operating profit margin was 16.5%, up +20bps on a reported basis
supported by volume growth, pricing more than offsetting inflation, and the
benefits of SES and savings actions; all of which offset the impact of product
mix and investment in growth. By division, strong operating leverage in John
Crane reflected improved execution and supply chain conditions. Smiths
Detection also improved its margin despite higher Original Equipment ("OE")
sales mix. Flex-Tek and Smiths Interconnect contracted from their record prior
year high margins, with Flex-Tek continuing to invest in new product
development and commercialisation, and Smiths Interconnect seeing lower
volumes.
Headline EPS grew +39.6%, driven by headline operating profit growth which
contributed over a third of the growth, the share buyback programme which
contributed another third, with the remainder of the growth coming from FX and
a reduction in both the effective headline tax rate and interest expense. The
headline tax charge for FY2023 of £121m (FY2022: £104m) represents an
effective rate of 26.0%
(FY2022: 27.6%).
ROCE increased +150bps to 15.7% (FY2022: 14.2%) reflecting the higher
profitability of the Group. For further detail, please refer to note 29 of the
financial statements.
Headline operating cash conversion for FY2023 was 86% (FY2022: 80%), with
stronger conversion in the second half supported by improvement in working
capital. This was delivered through targeted and disciplined working capital
management helped by focused SES projects. Headline operating cash-flow(4) was
£433m (FY2022: £332m). In FY2023, free cash-flow(4) generation was £178m
(FY2022: £130m) or 35% of headline operating profit (FY2022: 31%).
During FY2023 we continued to make good progress on SES. There are currently
71 Black Belt projects completed or underway being driven by our 6 Master
Black Belt and 31 Black Belt employees across the Group. Projects completed in
the year contributed £14m of profit, ahead of our plan of £12m. For FY2024,
we expect a contribution of £20m from SES as our hopper of new projects
continues to scale.
We implemented some targeted savings projects across the Group through FY2023.
These projects were focused on simplification and improving efficiency. Costs
amounting to £36m in respect of these projects have been charged to
non-headline in the year, with no further charges anticipated. In line with
our previous communications, £11m of benefit was realised in FY2023 from
these projects, with the annualised benefits expected to be £25m.
PEOPLE
Inspiring and empowering our people is our third key priority and our people
plan is focused around four key areas of safety, leadership development,
diversity, equity and inclusion, and engagement.
The first area, safety, is at the forefront of everything we do. Our
Recordable Incident Rate ("RIR") for FY2023 improved to 0.41 (FY2022: 0.56),
and we delivered a record low lost time injury rate of 0.14. This improvement
in safety has been achieved through continuous reinforcement of our safety
culture with over 13,000 Safety Leadership Tours and Safety Observations
undertaken in the year. Of particular focus was our Royal Metal site, acquired
in 2021, which delivered an 80% reduction in the number of incidents through
changes to manufacturing, new risk management processes and leveraging
technology to make safety easier.
Our biggest people initiative this year was the continued rollout of our
Smiths Leadership Behaviours to define our expectations for an inclusive and
high-performance culture. We continued the rollout of these seven behaviours
to fully embed them throughout the organisation. We completed 94 workshops,
attended by over 1,600 leaders and the behaviours are now used in our annual
performance assessment process.
Alongside Smiths Leadership Behaviours, talent development is a key priority
within our People plan. We are focused on growing and promoting talent from
within and in FY2023, 70% of open roles for manager level and above were
filled internally, versus 39% in the past. To support our talent development,
we have relaunched the Accelerate Leadership Development programme having
trained our first 300 leaders in FY2023, introduced mentoring programmes with
the Executive Committee for our high potential leaders and continued to
develop our Early Career Programme, which includes several engineering
apprenticeship programmes.
Promoting diversity, equity and inclusion is another key part of our people
strategy. We are specifically focused on increasing gender diversity at all
levels of the organisation and we have ramped up our initiatives this year,
including introducing women's support networks and flexible working
arrangements. As at 31 July 2023, 25% of our senior leaders, 25% of our
Executive Committee and 40% of our Board of directors are women. With the help
of the multiple initiatives throughout the organisation, we expect to continue
to drive improvement in these metrics.
Overall, through our focus on inspiring and empowering our people we have seen
a year-on-year improvement in our voluntary attrition, down 310bps to 12% for
our global employees and down 410bps for our engineering employees.
OUR ESG APPROACH
Environment, Social and Governance ("ESG") performance is at the very centre
of our Purpose, and fundamental to each of our three key priorities.
Growth
ESG at Smiths is approached with a growth mindset. Our R&D is focused on
commercialising high-value green technology. Our progress is evident through
John Crane's growing presence in hydrogen and carbon capture markets with over
70 active projects and in Flex-Tek supporting the development of the world's
first green steel production facility. Our proven ability to serve these
customers positions us well today and in the future as the world increasingly
relies upon smart engineering to achieve Net Zero.
Execution
Environmental metrics FY2022 FY2023
Absolute Scope 1 & 2 GHG emissions reductions 0.9% reduction 11.8% reduction
Energy efficiency(6) n/a 7.9% improvement
Proportion of electricity from renewable sources 63% 70%
Non-recyclable waste(7) 11.5% reduction 9.8% reduction
Water use in stressed areas(7) 4.5% reduction 13.3% reduction
(6) Normalised to local currency revenue, excluding growth from price. Data
not available prior to 2022 I (7) Normalised to reported revenue
We are executing well against our ESG strategy, with significant progress
against our sustainability metrics, which are now fully incorporated into both
our annual and long-term incentives. In the year, we launched our first
Sustainability report, submitted our Science Based Targets for review and
validated our framework through completion of our first-ever ESG double
materiality assessment in accordance with applicable guidance under the
Corporate Sustainability Reporting Directive ("CSRD"). We also extended the
scope of the limited assurance work carried out by KPMG to follow the more
rigorous ISAE3000/3410 standard for FY2022 and FY2023 data.
People
Engagement with our communities has long been a strength of Smiths. This year
we have gone one step further with the launch of our new charitable
foundation, "The Smiths Group Foundation". The foundation committed an initial
£10m of funding linked to engineering-related good causes. The mission of the
foundation is central to Smiths purpose of "Improving our world through
smarter engineering." We also launched our global volunteering policy,
amplifying the multitude of grass-roots efforts already in place across the
organisation.
CAPITAL ALLOCATION
With our strong technology, market positions, and financial frameworks, our
highest capital priority continues to be organic growth. Accretive M&A,
either to strengthen core positions or to accelerate penetration of priority
adjacencies comes second. Third, we have a strong track record of returning
capital to shareholders, as evidenced by the £350m returned in FY2023, on top
of the £661m returned in FY2022.
Organic investment
In FY2023 we invested £81m in capex projects, including £21m in capitalised
R&D on programmes such as next-generation hold and cabin baggage screening
and further advancements in our defence portfolio. A further £73m in R&D
was charged to the income statement, supporting new product development.
M&A
In January 2023, Smiths Interconnect acquired Plastronics, a leading supplier
of burn-in test sockets and patented spring probe contacts. In August 2023,
following the year end close, Flex-Tek acquired HCP, a manufacturer of HVAC
solutions in North America.
These acquisitions support our strategy to make complementary inorganic
investments to accelerate our presence in adjacent markets or expand our
product offering. We have an active acquisition pipeline and disciplined
M&A approach across the Group.
Shareholder returns
During the year we continued to repurchase shares under the £742m share
buyback programme initiated in November 2021, in connection with our
commitment to return the majority of cash proceeds from the disposal of Smiths
Medical to shareholders. We have now completed the share buyback programme.
In line with our progressive dividend policy and plan to rebuild dividend
cover after the sale of
Smiths Medical, the Board is recommending a final dividend of 28.7p, bringing
the total dividend for the year to 41.6p, a year-on-year increase of +5.1%
(FY2022: 39.6p). The final dividend will be paid on
24 November 2023 to shareholders on the register at close of business on 20
October 2023. 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 3 November 2023 ("the Election Date").
Elections received after the Election Date will apply to dividends paid after
24 November 2023. Purchases under the DRIP are made on, or as soon as
practicable after, the dividend payment date and at prevailing market
prices.
Net debt
Net debt(4) at 31 July 2023 was £387m (FY2022: £150m), an increase of £237m
as we paid £143m in dividends and returned £207m to shareholders via our
share buyback during the year. Net debt to headline EBITDA(4) was 0.7x
(FY2022: 0.3x).
As at 31 July 2023, borrowings were £654m (FY2022: £1,166m) comprising a
€650m bond which matures in February 2027 and £117m of lease liabilities.
The £512m reduction in borrowings is due to repayment of a €600m bond in
April 2023. There are no financial covenants associated with these borrowings.
Cash and cash equivalents as at 31 July 2023 were £285m (FY2022: £1,056m).
In May 2023, we refinanced our $800m (c.£620m at the period-end exchange
rate) revolving credit facility ("RCF") which was due to mature in November
2024. The new RCF is for the same amount, with the same lenders, on
substantially the same terms and matures in May 2028. There are no financial
covenants attached to the new facility and it remains undrawn. Taking cash and
the RCF together, total liquidity was over £0.9bn at the end of the period.
ICU Medical stake
Since the sale of Smiths Medical in January 2022 the Group holds a financial
asset reflecting our investment in 10% of the equity in ICU Medical, Inc
("ICU"). See note 14 of the financial statements for further detail.
STATUTORY RESULTS
Income Statement
The £98m difference between headline operating profit of £501m and statutory
operating profit of £403m is non-headline items as defined in note 3 of the
financial statements. The largest constituents relate to the amortisation of
acquired intangible assets of £52m, costs from savings projects of £36m,
acquisition related costs of £7m, £9m in costs for asbestos litigation in
John Crane, Inc and a provision reduction of £7m for subrogation claims in
Titeflex Corporation. Statutory operating profit of £403m was £286m higher
than last year (FY2022: £117m), reflecting higher headline operating profit
and lower non-headline charges.
Statutory finance costs were £43m (FY2022: £14m), mainly due to a prior year
non-headline £22m foreign exchange gain on an intercompany loan with Smiths
Medical.
Non-headline taxation items of £13m 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 37% (FY2022: 87%). Please refer to notes 3 and 6 of the financial
statements for further details.
Total Group profit after tax and EPS
Statutory profit after tax for the total Group decreased by 77.6% to £232m
(FY2022: £1,035m) as the prior year included the profit on sale and results
of Smiths Medical of £1,022m. Statutory basic EPS was 65.5p (FY2022: 267.1p).
Statutory cash-flow
Statutory net cash inflow from operating activities for the total Group was
£293m (FY2022: £279m).
See note 28 of the financial statements for a reconciliation of headline
operating cash-flow to statutory cash-flow.
Pensions
Included within free cash-flow was £5m of pension contributions (FY2022:
£9m). These contributions relate to unfunded, overseas schemes and healthcare
arrangements.
It is not anticipated that any further contributions will be made to the TI
Group Pension Scheme ("TIGPS"), the liabilities of which have now been insured
via a series of buy-in annuities. Smiths and the TIGPS Trustee are working
toward final buy-out of the scheme in order to deliver certainty for the
Scheme's
21,000 members and remove future risk for Smiths.
The other major pension scheme, Smiths Industries Pension Scheme ("SIPS") is
estimated to be in surplus on the Technical Provisions funding basis, and no
cash contributions are currently being made. The Group and the SIPS Trustee
continue to work together to progress towards the long-term funding target of
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 2023, over 60% of
the UK liabilities had been de-risked through the purchase of annuities from
third party insurers.
Foreign exchange
The results of overseas operations are translated into sterling at average
exchange rates. Net assets are translated at period-end rates. The Group is
exposed to foreign exchange movements, mainly 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 2023 31 Jul 2022 31 Jul 2023 31 Jul 2022
(12 months) (12 months)
USD 1.21 1.32 1.29 1.22
EUR 1.15 1.18 1.17 1.19
Outlook
In FY2024, we expect organic revenue growth within our medium-term target
range of 4-6%, with growth weighted towards the second half of the year. Our
strong orderbooks in John Crane and Smiths Detection, along with our new
product pipeline, give us confidence in delivering this growth despite a
record comparator, moderating pricing environment, and the challenging market
conditions facing parts of
Flex-Tek and Smiths Interconnect. We also expect continued margin expansion in
FY2024, as we continue to scale the Smiths Excellence System and reinvest to
support future sustainable growth.
Business review
JOHN CRANE
John Crane is a leading provider of mission-critical engineered solutions,
improving customers' reliability and sustainability in process industries. 61%
of revenue is derived from the energy sector (downstream and midstream oil
& gas and power generation, including renewable and sustainable energy
sources). 39% is from other process industries including chemical, life
sciences, mining, water treatment, and pulp & paper. 71% of John Crane
revenue is from aftermarket sales. John Crane represents 36% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 1,079 901 +19.8% +14.6% +15.8% +15.2%
Original Equipment 169 148 +14.3% +13.3% +6.8% +9.9%
Aftermarket 487 382 +27.5% +18.5% +27.8% +23.2%
Energy 656 530 +23.8% +17.1% +21.8% +19.5%
Original Equipment 145 131 +10.5% +14.1% (0.9)% +6.0%
Aftermarket 278 240 +16.0% +9.2% +12.3% +10.9%
General Industrial 423 371 +14.0% +10.9% +7.6% +9.2%
Headline operating profit 244 188 +29.7% +24.6% +25.7% +25.2%
Headline operating profit margin 22.6% 20.9% +170bps +190bps +180bps +180bps
Statutory operating profit 217 167 +29.9%
Return on capital employed 23.8% 19.4% +440bps
R&D cash costs as % of sales 1.7% 2.5% (80)bps
Revenue
FY2022 Foreign Organic FY2023
£m reported exchange movement reported
Revenue 901 36 142 1,079
John Crane delivered record organic revenue growth of +15.2% for the year,
accelerating to +15.8% in H2 executing well against strong demand, with orders
up +15%. Organic revenue grew across all segments and geographies. Aftermarket
organic revenue grew +18.4% to make up 71% of sales
(FY2022: 69%) and OE grew +8.1%.
Reported revenue grew to record levels at over £1bn for the first time, which
was up +19.8% reflecting the organic growth and a favourable foreign exchange
impact.
In Energy, organic revenue grew +19.5% benefiting from an increased focus on
energy security and higher demand for energy efficiency and emissions
reduction solutions. John Crane is well positioned to support customers with
their decarbonisation goals as they look to become more efficient and reduce
leakage within existing facilities or invest in new infrastructure for low
carbon alternatives. Notable contract wins in the year included one of the
world's largest offshore Carbon Capture and Storage ("CCS") facilities in
Malaysia and compressor seals for use in an innovative energy storage solution
for a customer in Europe. John Crane's leadership in this area was recognised
by the UK government through a £925k grant awarded for its innovative high
temperature sealing solution, which is designed to improve customer efficiency
through reduced emissions.
The Industrial segment grew +9.2% organically, driven by strong demand across
chemical processing, water treatment and life sciences. Efficiency in
industrial processes is as important as it is to John Crane's
Energy customers, evidenced by multiple wins across all markets.
Operating profit and ROCE
FY2022 reported Foreign Organic FY2023 reported
£m exchange movement
Headline operating profit 188 7 49 244
Headline operating profit margin 20.9% 22.6%
Headline operating profit of £244m grew a record +25.2% on an organic basis,
resulting in +170bps of margin expansion. This was driven by the increased
volumes and improving plant efficiency, pricing offsetting inflation and
benefits from SES and savings projects, while continuing to invest in growth
to service the strong demand.
On a reported basis, headline operating profit was up +29.7%, including a
favourable foreign exchange impact. The difference between statutory and
headline operating profit includes the net cost in relation to the provision
for John Crane, Inc. asbestos litigation and charges from savings projects.
ROCE was 23.8%, up 440bps, reflecting the record headline operating profit
growth.
R&D
Cash R&D expenditure was 1.7% of sales (FY2022: 2.5%). John Crane's
continued investment in R&D is primarily focused on reducing product lead
times and enhancing the efficiency, performance and sustainability of high
duty seals and hydrogen compressors.
John Crane plays a significant role in its customers' sustainability journeys
through reducing leaks, including for demanding hydrocarbon pipelines. John
Crane's recently launched Safematic Upstream Pumping System product nearly
eliminates cooling water requirements, delivering significant energy and
emissions reductions in liquid sealing.
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. 51% of
Smiths Detection's sales are derived from the aftermarket. Smiths Detection
represents 26% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 803 655 +22.6% +14.0% +18.8% +16.4%
Original Equipment 226 198 +14.2% +10.3% +8.6% +9.4%
Aftermarket 309 269 +14.6% +10.3% +7.0% +8.6%
Aviation 535 467 +14.5% +10.3% +7.7% +8.9%
Original Equipment 164 102 +60.2% +39.2% +64.4% +51.3%
Aftermarket 104 86 +21.5% +2.9% +28.3% +15.2%
Other Security Systems 268 188 +42.7% +22.9% +47.9% +34.9%
Headline operating profit 90 73 +23.1% +4.5% +26.8% +15.4%
Headline operating profit margin 11.2% 11.1% +10bps (110)bps +70bps 0bps
Statutory operating profit 55 36 +52.8%
Return on capital employed 7.7% 7.1% +60bps
R&D cash costs as % of sales 8.4% 9.3% (90)bps
Revenue
FY2022 Foreign Organic FY2023
£m reported exchange movement reported
Revenue 655 34 114 803
Smiths Detection returned firmly to growth in FY2023 with organic revenue
growth of +16.4%, executing well against the multi-year orderbook. Growth was
delivered across all segments with particularly strong growth in lower margin
OE, up +23.9% organically. Aftermarket revenue grew +10.2% organically, making
up 51% of sales (FY2022: 54%). Orders grew +6% in the year, supporting revenue
growth in FY2024, which due to the expected timing of order delivery will be
weighted towards the second half. Reported revenue was up +22.6% reflecting
the organic growth and a favourable foreign exchange impact.
In Aviation, organic revenue grew +8.9% with continued strong demand for Smith
Detection's latest range of 3D CT machines for cabin baggage, CTIX, with over
1,000 now sold, supported by regulatory requirements in many countries
mandating upgrades. Smiths Detection continues to achieve a good win rate in
Aviation with key contract wins in all regions of the world across the year
including provision of CTIX machines to Birmingham and Edinburgh airports in
the UK and JAL Airline in Japan, and full-sized lane configurations to the US
Transportation Security Administration.
Other Security Systems ("OSS") grew +34.9% driven by high growth in all three
sub-segments of urban security, ports and borders and defence, demonstrating
good progress in these attractive market adjacencies. Order intake in defence
was very strong for both current and future chemical and biological detection
requirements, including for the US DoD on their next-generation programme.
Smiths Detection has also been contracted to provide security screening at
COP28 in November this year.
Operating profit and ROCE
FY2022 Foreign Organic FY2023 reported
£m Reported exchange movement
Headline operating profit 73 5 12 90
Headline operating profit margin 11.1% 11.2%
Headline operating profit was up +15.4% on an organic basis for the year,
supported by the strong organic revenue growth, SES benefits and targeted
actions on cost. On a reported basis, headline operating profit was up +23.1%
including favourable foreign exchange translation.
Headline operating profit margin of 11.2% was up 10bps on a reported basis as
the benefits of SES and cost actions offset the mix impact of lower margin OE.
These OE deliveries will secure longer-term, high margin aftermarket revenue,
which together with a building SES impact, will support future margin
expansion.
The difference between statutory and headline operating profit primarily
reflects amortisation of acquired intangibles and charges from savings
projects.
ROCE increased by +60bps to 7.7%, driven by the headline operating profit
growth.
R&D
Cash R&D increased +9.8% representing 8.4% of sales (FY2022: 9.3%). This
includes an increase in customer funded projects to £18m (FY2022: £14m).
Smiths Detection continued to invest in next-generation detection devices, new
algorithms to improve the detection of dangerous goods, and digital solutions
to strengthen the aftermarket proposition. During the year Smiths Detection
launched a new high volume air cargo screening technology and an extension of
their automated detection algorithm.
FLEX-TEK
Flex-Tek provides innovative solutions to heat and move fluids and gases for
industrial and aerospace applications that support energy efficiency and
improved air quality. 81% of Flex-Tek's revenue is derived from Industrials
and 19% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 768 647 +18.6% +17.0% +3.6% +10.1%
General Industrial 624 531 +17.5% +17.5% +0.9% +9.0%
Aerospace 144 116 +24.4% +14.8% +16.4% +15.6%
Headline operating profit 149 133 +11.9% +9.0% (2.0)% +3.4%
Headline operating profit margin 19.4% 20.6% (120)bps (150)bps (110)bps (130)bps
Statutory operating profit 131 106 +23.6%
Return on capital employed 26.1% 25.6% +50bps
R&D cash costs as % of sales 0.4% 0.4% 0bps
Revenue
FY2022 Foreign Organic FY2023
£m reported exchange movement reported
Revenue 647 50 71 768
Organic revenue grew +10.1% in the year, with growth in H2 of +3.6%. Revenue
on a reported basis grew +18.6%, supported by a favourable foreign exchange
translation.
In Industrial, organic revenue was up +9.0% in the year reflecting strong
demand for Flex-Tek's products, primarily in HVAC applications. These products
include energy efficiency solutions such as the Rheia air distribution system
and the partnership with Midrex to deliver heating solutions that enable the
production of commercial "green steel". As expected, demand slowed in the
second half reflecting a softer US HVAC market. In Aerospace, organic revenue
grew +15.6% in the year, with growth in the second half accelerating to +16.4%
supported by an increasing number of aircraft builds.
Operating profit and ROCE
FY2022 Foreign Organic FY2023
£m reported exchange movement reported
Headline operating profit 133 11 5 149
Headline operating profit margin 20.6% 19.4%
Headline operating profit grew +3.4% on an organic basis, driven by the
revenue growth which was partly offset by higher costs including starting up a
new facility in Houston to expand capacity. This increase in costs, together
with continued investments in new product development and a product mix
impact, contributed to a 19.4% headline operating margin, (120)bps lower than
the record prior year comparator.
The difference between statutory and headline operating profit is due to
amortisation of acquired intangible assets and the provision for Titeflex
Corporation subrogation claims.
ROCE increased +50bps to 26.1% reflecting the continued profit growth in
FY2023.
In August 2023, Flex-Tek acquired HCP expanding its presence in the North
American HVAC market and broadening its product range and customer base.
R&D
Cash R&D expenditure grew in-line with sales remaining at 0.4% of sales
(FY2022: 0.4%). R&D is focused on developing new products for the
construction market, and an expanded product offering in aerospace.
SMITHS INTERCONNECT
Smiths Interconnect designs high performance connectivity solutions for
demanding applications in the aerospace and defence, semiconductor test, and
industrial end-markets. Smiths Interconnect represents 13% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
£m £m growth H1 H2 FY
Revenue 387 363 +6.5% +3.3% (8.4)% (2.8)%
Headline operating profit 62 65 (4.6)% (1.7)% (20.7)% (11.9)%
Headline operating profit margin 16.0% 18.0% (200)bps (80)bps (250)bps (170)bps
Statutory operating profit 50 64 (21.9)%
Return on capital employed 13.3% 16.3% (300)bps
R&D cash costs as % of sales 6.3% 5.6% +70bps
Revenue
FY2022 Foreign Organic FY2023
£m reported exchange Acquisitions movement Reported
Revenue 363 26 8 (10) 387
Smith Interconnect's organic revenue declined (2.8)% for the year following
the strong +13.9% growth last year, with +3.3% growth in H1 more than offset
by the (8.4)% decline in H2. Reported revenue grew +6.5% in the year including
a favourable foreign exchange impact and an £8m contribution from the
acquisition of Plastronics.
The performance in the year reflected a weakening in the semiconductor market
and delayed timing on large aerospace and defence related programmes, partly
offset by strong demand for industrial connector products such as a new
medical cable assembly product. Contraction into FY2024 is expected with
FY2023 orders down 17%, continued weakness in the semiconductor market and a
slowing in connectors.
During the first half, Smiths Interconnect acquired Plastronics to strengthen
the product portfolio and leverage Plastronics' attractive positions in
artificial intelligence, data centres and automotive end markets.
Operating profit and ROCE
FY2022 reported Foreign Organic FY2023 reported
£m exchange Acquisitions movement
Headline operating profit 65 5 0 (8) 62
Headline operating profit margin 18.0% 16.0%
Headline operating profit declined (11.9)% on an organic basis, resulting in a
(200)bps reduction in operating profit margin to 16.0%. This decline was
driven by the lower volumes and continued investment in R&D. Headline
operating profit was down (4.6)% on a reported basis, reflecting the organic
decline, partly offset by a favourable foreign exchange impact.
The difference between statutory and headline operating profit reflects the
amortisation of acquired intangibles, acquisition costs and charges from
savings projects.
ROCE reduced (300)bps to 13.3% driven by the lower operating profit.
R&D
Cash R&D expenditure increased to 6.3% of sales (FY2022: 5.6%). R&D is
focused on bringing to market new products that improve connectivity and
product integrity in demanding operating environments. Product launches
include the next-generation of radio frequency components and transceivers.
Consolidated income statement
Year ended 31 July 2023 Year ended 31 July 2022
Notes Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
CONTINUING OPERATIONS
Revenue 1 3,037 - 3,037 2,566 - 2,566
Operating costs 2 (2,536) (98) (2,634) (2,149) (300) (2,449)
OPERATING PROFIT/(LOSS) 2 501 (98) 403 417 (300) 117
Interest income 4 36 - 36 14 - 14
Interest expense 4 (71) (7) (78) (55) - (55)
Other financing (losses)/gains 4 - (8) (8) - 20 20
Other finance income - retirement benefits 4 - 7 7 - 7 7
Finance (costs)/income 4 (35) (8) (43) (41) 27 (14)
Profit/(loss) before taxation 466 (106) 360 376 (273) 103
Taxation 6 (121) (13) (134) (104) 14 (90)
Profit/(loss) for the year 345 (119) 226 272 (259) 13
DISCONTINUED OPERATIONS
Profit from discontinued operations 3 - 6 6 49 973 1,022
PROFIT/(LOSS) FOR THE YEAR 345 (113) 232 321 714 1,035
Profit/(loss) for the year attributable to:
Smiths Group shareholders - continuing operations 344 (119) 225 270 (259) 11
Smiths Group shareholders - discontinued operations - 6 6 49 973 1,022
Non-controlling interests 1 - 1 2 - 2
345 (113) 232 321 714 1,035
EARNINGS PER SHARE 5
Basic 65.5p 267.1p
Basic - continuing 63.8p 2.8p
Diluted 65.1p 266.0p
Diluted - continuing 63.4p 2.8p
Consolidated statement
of comprehensive income
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
PROFIT FOR THE YEAR 232 1,035
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of retirement benefit assets and obligations 8 (114) (17)
Taxation on post-retirement benefit movements 6 32 -
Fair value movements on financial assets at fair value through OCI 14 (18) (63)
(100) (80)
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges 12 (82)
- reclassified to income statement on cash-flow and net investment hedges 2 5
14 (77)
Foreign exchange (FX) movements net of recycling:
Exchange (losses)/gains on translation of foreign operations (101) 276
Exchange gains recycled to the income statement on disposal of business - (196)
(101) 80
Total other comprehensive income, net of taxation (187) (77)
Total comprehensive income 45 958
Attributable to:
Smiths Group shareholders 46 957
Non-controlling interests (1) 1
45 958
Total comprehensive income attributable to Smiths Group shareholders arising
from:
Continuing operations 39 131
Discontinued operations 6 827
45 958
Consolidated balance sheet
Notes 31 July 2023 31 July 2022
£m
£m
NON-CURRENT ASSETS
Intangible assets 10 1,521 1,588
Property, plant and equipment 12 247 243
Right of use assets 13 105 106
Financial assets - other investments 14 371 395
Retirement benefit assets 8 195 309
Deferred tax assets 6 95 95
Trade and other receivables 16 75 69
2,609 2,805
CURRENT ASSETS
Inventories 15 637 570
Current tax receivable 6 47 50
Trade and other receivables 16 772 738
Cash and cash equivalents 18 285 1,056
Financial derivatives 20 5 4
1,746 2,418
TOTAL ASSETS 4,355 5,223
CURRENT LIABILITIES
Financial liabilities:
- borrowings 18 (3) (509)
- lease liabilities 18 (26) (29)
- financial derivatives 20 (2) (27)
Provisions 23 (70) (88)
Trade and other payables 17 (723) (682)
Current tax payable 6 (74) (64)
(898) (1,399)
NON-CURRENT LIABILITIES
Financial liabilities:
- borrowings 18 (534) (538)
- lease liabilities 18 (91) (90)
- financial derivatives 20 (18) (20)
Provisions 23 (216) (247)
Retirement benefit obligations 8 (106) (115)
Corporation tax payable 6 (3) (3)
Deferred tax liabilities 6 (43) (44)
Trade and other payables 17 (40) (46)
(1,051) (1,103)
TOTAL LIABILITIES (1,949) (2,502)
NET ASSETS 2,406 2,721
SHAREHOLDERS' EQUITY
Share capital 24 131 136
Share premium account 365 365
Capital redemption reserve 26 24 19
Merger reserve 26 235 235
Cumulative translation adjustments 386 487
Retained earnings 1,431 1,659
Hedge reserve 26 (188) (202)
Total shareholders' equity 2,384 2,699
Non-controlling interest equity 26 22 22
TOTAL EQUITY 2,406 2,721
Consolidated statement of changes in equity
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
interest
equity
premium
£m
adjustments
£m
£m shareholders'
£m
£m
£m
£m
funds
£m
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
Profit for the year - - - 231 - 231 1 232
Other comprehensive income:
- re-measurement of retirement benefits after tax - - - (82) - (82) - (82)
- FX movements net of recycling - - (101) 2 - (99) (2) (101)
- fair value gains and related tax - - - (18) 14 (4) - (4)
Total comprehensive income for the year - - (101) 133 14 46 (1) 45
Transactions relating to ownership interests:
Purchase of shares by Employee Benefit Trust - - - (24) - (24) - (24)
Share buybacks 24 (5) 5 - (207) - (207) - (207)
Receipt of capital from non-controlling interest - - - - - - 1 1
Dividends:
- equity shareholders 25 - - - (143) - (143) - (143)
Share-based payment 9 - - - 13 - 13 - 13
At 31 July 2023 496 259 386 1,431 (188) 2,384 22 2,406
Notes Share capital Other Cumulative Retained Hedge Equity Non-controlling Total
and share
reserves
translation
earnings
reserve
interest
equity
premium
£m
adjustments
£m
£m shareholders'
£m
£m
£m
£m
funds
£m
At 31 July 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 after tax - - - (17) - (17) - (17)
- 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
Consolidated cash-flow statement
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Net cash inflow from operating activities 28 293 279
Cash-flows from investing activities
Expenditure on capitalised development (21) (22)
Expenditure on other intangible assets (7) (8)
Purchases of property, plant and equipment (53) (58)
Disposals of property, plant and equipment 2 3
Acquisition of businesses (22) -
(Payments)/proceeds on disposal of subsidiaries, net of cash disposed (7) 1,331
Net cash-flow used in investing activities (108) 1,246
Cash-flows from financing activities
Proceeds from exercise of share options 24 - 2
Share buybacks 24 (207) (511)
Purchase of shares by Employee Benefit Trust 26 (24) (16)
Proceeds received on exercise of employee share options - 1
Settlement of cash-settled options - (1)
Dividends paid to equity shareholders 25 (143) (150)
Receipt of capital from non-controlling interest 1 -
Lease payments (36) (38)
Reduction and repayment of borrowings (527) (295)
Cash (outflow)/inflow from matured derivative financial instruments (9) 23
Net cash-flow used in financing activities (945) (985)
Net (decrease)/increase in cash and cash equivalents (760) 540
Cash and cash equivalents at beginning of year 1,055 405
Movement in net cash held in disposal group - 48
Foreign exchange rate movements (10) 62
Cash and cash equivalents at end of year 18 285 1,055
Cash and cash equivalents at end of year comprise:
- cash at bank and in hand 175 242
- short-term deposits 110 814
285 1,056
- bank overdrafts - (1)
285 1,055
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with UK adopted 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 2023. The Group's financial position,
cash-flows, liquidity and borrowing facilities are described in the CFO review
section within the Annual Report 2023.
Other factors considered by the Board as part of its 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 that match all or part of the scheme obligation to
identified groups of pensioners. These assets are valued by an external
qualified actuary at the actuarial valuation of the corresponding liability,
reflecting this matching relationship.
The Group's principal defined benefit pension plans are in the UK and the US
and these have been closed so that no future benefits are accrued. Critical
estimates for these plans, and the effect of variances in these estimates, are
disclosed in note 8.
Provisions for liabilities and charges
The Group has made provisions for claims and litigations where it has had to
defend itself against proceedings brought by other parties. These provisions
have been made for the best estimate of the expected expenditure required to
settle each obligation, although there can be no guarantee that such
provisions (which may be subject to potentially material revision from time to
time) will accurately predict the actual costs and liabilities that may be
incurred. The most significant of these litigation provisions 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 £204m (FY2022: £229m) has been made for the
future defence costs which the Group is expected to incur and the expected
costs of future adverse judgements against JCI. Whilst well-established
incidence curves can be used to estimate the likely future pattern of
asbestos-related disease, JCI's claims experience is significantly impacted by
other factors which influence the US litigation environment. These can
include: changing approaches on the part of the plaintiffs' bar; changing
attitudes amongst the judiciary at both trial and appellate levels; and
legislative and procedural changes in both the state and federal court
systems. Because of the significant uncertainty associated with the future
level of asbestos claims and of the costs arising out of the related
litigation, there can be no guarantee that the assumptions used to estimate
the provision will result in an accurate prediction of the actual costs that
will be incurred.
In quantifying the expected costs JCI takes account of the advice of an expert
in asbestos liability estimation. The following estimates were made in
preparing the provision calculation:
- The period over which the expenditure can be reliably estimated is judged to
be ten years, based on past experience regarding significant changes in the
litigation environment that have occurred every few years and on the amount of
time taken in the past for some of those changes to impact the broader
asbestos litigation environment. See note 23 for a sensitivity analysis
showing the impact on the provision of reducing or increasing this time
horizon; and
- The future trend of legal costs, the rate of future claims filed, the rate
of successful resolution of claims, and the average amount of judgements
awarded have been projected based on the past history of JCI claims and
well-established tables of asbestos incidence projections, since this is the
best available evidence. Claims history from other defendants is not used to
calculate the provision because JCI's defence strategy generates a
significantly different pattern of legal costs and settlement expenses. See
note 23 for a sensitivity analysis showing the range of expected future
spend.
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 £41m (FY2022: £52m) 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 analysis 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 £75m (FY2022: £103m)
relating to losses and £60m (FY2022: £69m) 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 £46m (FY2022: £38m), 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 2023, the Group held contracts with a total value of £109m (2022:
£181m), of which £83m (2022: £135m) had been delivered and £26m (2022:
£47m) remains fully or partially unsatisfied. £24m 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 £1m (2022: 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 US$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 1.25
million ICU shares and for the ICU share price to average US$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 US$300. These valuation simulations have determined a fair value of
£13m (US$17m).
Significant judgements made in applying accounting policies
Business combinations
On the acquisition of a business, the Group has to make judgements on the
identification of specific intangible assets which are recognised separately
from goodwill and then amortised over their estimated useful lives. These
include items such as brand names and customer lists, to which value is first
attributed at the time of acquisition. The capitalisation of these assets and
the related amortisation charges are based on judgements about the value and
economic life of such items.
Where acquisitions are significant, appropriate advice is sought from
professional advisers before making such allocations.
Retirement benefits
At 31 July 2023 the Group has recognised £195m of retirement benefit assets
(FY2022: £309m) and a net pension asset of £89m (FY2022: £194m),
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 marketplace and customer demand; and
- Launch timeline - including time and resource required to establish and
support the commercial launch of a new product.
Taxation
As stated in the previous section 'Sources of estimation uncertainty', the
Group has recognised deferred tax assets of £75m (FY2022: £103m) relating
to losses and £60m (FY2022: £69m) 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.
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 2023.
The Company controls an entity when it (i) has power over the entity; (ii) is
exposed or has rights to variable returns from its involvement with the
entity; and (iii) has the ability to affect those returns through its power
over the entity. The Group reassesses whether or not it controls a subsidiary
if facts and circumstances indicate that there are changes to one or more of
these three elements of control. Subsidiaries are fully consolidated from the
date on which control is obtained by the Company to the date that control
ceases.
Where the Group loses control of a subsidiary, the assets and liabilities are
derecognised along with any related non-controlling interest and other
components of equity. Any resulting gain or loss is recognised in the income
statement. Any interest retained in the former subsidiary is measured at fair
value when control is lost.
The non-controlling interests in the Group balance sheet represent the share
of net assets of subsidiary undertakings held outside the Group. The movement
in the year comprises the profit attributable to such interests together with
any dividends paid, movements in respect of corporate transactions and related
exchange differences.
Interests in associates are accounted for using the equity method. They are
initially recognised at cost, which includes transaction costs. Subsequent to
initial recognition, the Group financial statements include the Group's share
of the profit or loss and other comprehensive income of equity-accounted
investees, until the date on which significant influence ceases.
All intercompany transactions, balances, and gains and losses on transactions
between Group companies are eliminated on consolidation.
Foreign currencies
The Company's presentational currency and functional currency is sterling. The
financial position of all subsidiaries and associates that have a functional
currency different from sterling are translated into sterling at the rate of
exchange at the date of that balance sheet, and the income and expenses are
translated at average exchange rates for the period. All resulting foreign
exchange rate movements are recognised as a separate component of equity.
Foreign exchange rate movements arising on the translation of non-monetary
assets and liabilities held in hyperinflationary subsidiaries are recognised
in OCI. The amounts taken to the CTA reserve represent the combined effect of
restatement and translation and are expressed as a net change for the year.
On consolidation, foreign exchange rate movements arising from the translation
of the net investment in foreign entities, and of borrowings and other
currency instruments designated as hedges of such investments, are taken to
shareholders' equity. When a foreign operation is sold, the cumulative amount
of such foreign exchange rate movements is recognised in the income statement
as part of the gain or loss on sale.
Foreign exchange rate movements arising on transactions are recognised in the
income statement. Those arising on trading are taken to operating profit;
those arising on borrowings are classified as finance income or cost.
Revenue
Revenue is measured at the fair value of the consideration received, net of
trade discounts (including distributor rebates) and sales taxes. Revenue is
discounted only where the impact of discounting is material.
When the Group enters into complex contracts with multiple, separately
identifiable components, the terms of the contract are reviewed to determine
whether or not the elements of the contract should be accounted for
separately. If a contract is being split into multiple components, the
contract revenue is allocated to the different components at the start of the
contract. The basis of allocation depends on the substance of the contract.
The Group considers relative stand-alone selling prices, contractual prices
and relative cost when allocating revenue.
The Group has identified the following different types of revenue:
(i) Sale of goods recognised at a point in time - generic products
manufactured by Smiths
Generic products are defined as either:
- Products that are not specific to any particular customer;
- Products that may initially be specific to a customer but can be
reconfigured at minimal cost, i.e. retaining a margin, for sale to an
alternative customer; or
- Products that are specific to a customer but are manufactured at Smiths
risk, i.e. we have no right to payment of costs plus margin if the customer
refuses to take control of the goods.
For established products with simple installation requirements, revenue is
recognised when control of the product is passed to the customer. The point in
time that control passes is defined in accordance with the agreed shipping
terms and is determined on a case-by-case basis. The time of dispatch or
delivery of the goods to the customer is normally the point at which invoicing
occurs. However for some generic products, revenue is recognised when the
overall performance obligation has been completed, which is often after the
customer has completed its acceptance procedures and has assumed control.
Products that are sold under multiple element arrangements, i.e. contracts
involving a combination of products and services, are bundled into a single
performance obligation unless the customer can benefit from the goods or
services either on their own, or together with other resources that are
readily available to the customer and are distinct within the context of the
contract.
For contracts that pass control of the product to the customer only on
completion of installation services, revenue is recognised upon completion of
the installation.
An obligation to replace or repair faulty products under the standard warranty
terms is recognised as a provision. If the contract includes terms that either
extend the warranty beyond the standard term or imply that maintenance is
provided to keep the product working, these are service warranties and revenue
is deferred to cover the performance obligation in an amount equivalent to the
stand-alone selling price of that service.
(ii) Sale of goods recognised over time - customer-specific products where the
contractual terms include rights to payment for work performed to date
Customer-specific products are defined as being:
- Products that cannot be reconfigured economically such that it remains
profitable to sell to another customer;
- Products that cannot be sold to another customer due to contractual
restrictions; and
- Products that allow Smiths to charge for the work performed to date in an
amount that represents the costs incurred to date plus a margin, should the
customer refuse to take control of the goods.
For contracts that meet the terms listed above, revenue is recognised over the
period that the Group is engaged in the manufacture of the product, calculated
using the input method based on the amount of costs incurred to date compared
to the overall costs of the contract. This is considered to be a faithful
depiction of the transfer of the goods to the customer as the costs incurred,
total expected costs and total order value are known. The time of dispatch or
delivery of the goods to the customer is normally the point at which invoicing
occurs.
An obligation to provide a refund for faulty products under the standard
warranty terms is recognised as a provision. If the contract includes terms
that either extend the warranty beyond the standard term or imply that
maintenance is provided to keep the product working, these are service
warranties and revenue is deferred to cover the performance obligation in an
amount equivalent to the stand-alone selling price of that service.
(iii) Services recognised over time - services relating to the installation,
repair and ongoing maintenance of equipment
Services include installation, commissioning, testing, training, software
hosting and maintenance, product repairs and contracts undertaking extended
warranty services.
For complex installations where the supply of services cannot be separated
from the supply of product, revenue is recognised upon acceptance of the
combined performance obligation (see Sale of goods (i) above).
For services that can be accounted for as a separate performance obligation,
revenue is recognised over time, assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Depending on the nature of the contract, revenue is recognised as follows:
- Installation, commissioning and testing services (when neither linked to the
supply of product nor subject to acceptance) are recognised rateably as the
services are provided;
- Training services are recognised on completion of the training course;
- Software hosting and maintenance services are recognised rateably over the
life of the contract;
- Product repair services, where the product is returned to Smiths premises
for remedial action, are recognised when the product is returned to the
customer and they regain control of the asset;
- Onsite ad hoc product repair services are recognised rateably as the
services are performed;
- Long-term product repair and maintenance contracts are recognised rateably
over the contract term; and
- Extended service warranties are recognised rateably over the contract term.
Invoicing for services depends on the nature of the service provided with some
services charged in advance and others in arrears.
Where contracts are accounted for under the revenue recognised over time
basis, the proportion of costs incurred is used to determine the percentage of
contract completion.
Contracts for the construction of substantial assets, which normally last in
excess of one year, are accounted for under the revenue recognised over time
basis, using an input method.
For fixed-price contracts, revenue is recognised based upon an assessment of
the amount of cost incurred under the contract, compared to the total expected
costs that will be incurred under the contract. This calculation is applied
cumulatively with any over/under recognition being adjusted in the current
period.
For cost-plus contracts, revenue is recognised based upon costs incurred to
date plus any agreed margin.
For both fixed-price and cost-plus contracts, invoicing is normally based on a
schedule with milestone payments.
Contract costs
The Group has taken the practical expedient of not capitalising contract costs
as they are expected to be expensed within one year from the date of signing.
Leases
Lease liabilities are initially measured at the present value of the future
lease payments at the commencement date, discounted by using either the rate
implicit in the lease, or if not observable, the Group's incremental borrowing
rate. Lease payments comprise contractual lease payments; variable lease
payments that depend on an index or rate, initially measured using the index
or rate at the commencement date; and the amount expected to be payable under
residual value guarantees.
Right of use assets are measured at commencement date at the amount of the
corresponding lease liability and initial direct costs incurred. Right of use
assets are depreciated over the shorter of the lease term and the useful life
of the right of use assets, unless there is a transfer of ownership or
purchase option which is reasonably certain to be exercised at the end of the
lease term, in which case depreciation is charged over the useful life of the
underlying asset. Right of use assets are subject to impairment.
When a lease contract is modified, either from a change to the duration of the
lease or a change to amounts payable, the Group remeasures the lease liability
by discounting the revised future lease payments at a revised discount rate. A
corresponding adjustment is made to the carrying value of the related right of
use asset.
Leases of buildings typically have lease terms between one and seven years,
while plant and machinery generally have lease terms between one and three
years. The Group also has certain leases of machinery with lease terms of 12
months or less and leases of office equipment with low value (typically below
£5,000). The Group applies the 'short-term lease' and 'lease of low-value
assets' recognition exemptions for these leases and recognises the lease
payments associated with these leases as an expense on a straight-line basis
over the lease term.
Interest on lease liabilities is presented as a financing activity in the
Consolidated Cash-Flow Statement, included under the heading lease payments.
Taxation
The charge for taxation is based on profits for the year and takes into
account taxation deferred because of temporary differences between the
treatment of certain items for taxation and accounting purposes.
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. Tax benefits are not
recognised unless it is likely that the tax positions are sustainable. Tax
positions taken are then reviewed to assess whether a provision should be made
based on prevailing circumstances. Tax provisions are included in current tax
liabilities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted, at the reporting date in the
countries where the Group operates and generates taxable income.
The Group operates and is subject to taxation in many countries. Tax
legislation is different in each country, is often complex and is subject to
interpretation by management and government authorities. These matters of
judgement give rise to the need to create provisions for uncertain tax
positions which are recognised when it is considered more likely than not that
there will be a future outflow of funds to a taxing authority. Provisions are
made against individual exposures and take into account the specific
circumstances of each case, including the strength of technical arguments,
recent case law decisions or rulings on similar issues and relevant external
advice.
The amounts are measured using one of the following methods, depending on
which of the methods the Directors expect will better reflect the amount the
Group will pay to the tax authority:
- The single best estimate method is used where there is a single outcome that
is more likely than not to occur. This will happen, for example, where the tax
outcome is binary or the range of possible outcomes is very limited; or
- Alternatively, a probability weighted expected value is used where, on the
balance of probabilities, there will be a payment to the tax authority but
there are a number of possible outcomes. In this case, a probability is
assigned to each of the outcomes and the amount provided is the sum of these
risk-weighted amounts. In assessing provisions against uncertain tax
positions, management uses in-house tax experts, professional firms and
previous experience of the taxing authority to evaluate the risk.
Deferred tax is provided in full using the balance sheet liability method. A
deferred tax asset is recognised where it is probable that future taxable
income will be sufficient to utilise the available relief. 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.
IAS 12 International Tax Reform: Pillar Two Model Rules.
On 19th July 2023, the UK Endorsement Board adopted the Amendments to IAS
12 International Tax Reform: Pillar Two Model Rules, issued by the IASB in
May 2023. The Amendments introduce a temporary mandatory exception from
accounting for deferred taxes arising from the Pillar Two model rules and the
Group has applied this exception to recognising and disclosing information
about deferred tax assets and liabilities related to Pillar Two income taxes.
Employee benefits
Share-based compensation
The fair value of the shares or share options granted is recognised as an
expense over the vesting period to reflect the value of the employee services
received. The fair value of options granted, excluding the impact of any
non-market vesting conditions, is calculated using established option pricing
models, principally binomial models. The probability of meeting non-market
vesting conditions, which include profitability targets, is used to estimate
the number of share options which are likely to vest.
For cash-settled share-based payment, a liability is recognised based on the
fair value of the payment earned by the balance sheet date. For equity-settled
share-based payment, the corresponding credit is recognised directly in
reserves.
Pension obligations and post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under
IAS 19. The retirement benefit obligation in respect of the defined benefit
plans is the liability (the present value of all expected future obligations)
less the fair value of the plan assets.
The income statement expense is allocated between current service costs,
reflecting the increase in liability due to any benefit accrued by employees
in the current period, any past service costs/credits and settlement losses or
gains which are recognised immediately, and the scheme administration costs.
Actuarial gains and losses are recognised in the statement of comprehensive
income in the year in which they arise. These comprise the impact on the
liabilities of changes in demographic and financial assumptions compared with
the start of the year, actual experience being different to assumptions and
the return on plan assets being above or below the amount included in the net
pension interest cost.
Payments to defined contribution schemes are charged as an income statement
expense as they fall due.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Group's share of the identifiable net assets of the acquired
subsidiary at the date of acquisition.
The goodwill arising from acquisitions of subsidiaries after 1 August 1998 is
included in intangible assets, tested annually for impairment and carried at
cost less accumulated impairment losses. Gains and losses on the disposal of
an entity include the carrying amount of goodwill relating to the entity sold.
The goodwill arising from acquisitions of subsidiaries before 1 August 1998
was set against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Should the test indicate
that the net realisable value of the CGU is less than current carrying value,
an impairment loss will be recognised immediately in the income statement.
Subsequent reversals of impairment losses for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the income statement in
the year in which it is incurred with the exception of:
- Amounts recoverable from third parties; and
- Expenditure incurred in respect of the development of major new products
where the outcome of those projects is assessed as being reasonably certain as
regards viability and technical feasibility. Such expenditure is capitalised
and amortised over the estimated period of sale for each product, commencing
in the year that the product is ready for sale. Amortisation is charged
straight line or based on the units produced, depending on the nature of the
product and the availability of reliable estimates of production volumes.
The cost of development projects which are expected to take a substantial
period of time to complete includes attributable borrowing costs.
Intangible assets acquired in business combinations
The identifiable net assets acquired as a result of a business combination may
include intangible assets other than goodwill. Any such intangible assets are
amortised straight line over their expected useful lives as follows:
Patents, licences and trademarks up to 20 years
Technology up to 13 years
Customer relationships up to 15 years
The assets' useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to seven years
Patents and intellectual property shorter of the economic life and the period the right is legally enforceable
The assets' useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated
depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other assets estimated to
write off the depreciable amount of relevant assets by equal annual
instalments over their estimated useful lives. In general, the rates used are:
Freehold and long leasehold buildings 2% per annum
Short leasehold property over the period of the lease
Plant, machinery, etc. 10% to 20% per annum
Fixtures, fittings, tools and other equipment 10% to 33% per annum
The cost of any assets which are expected to take a substantial period of time
to complete includes attributable borrowing costs.
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date. An asset's carrying amount is written
down immediately to its recoverable amount if the asset's carrying amount is
greater than its estimated recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out method. The cost of finished goods
and work in progress comprises raw materials, direct labour, other direct
costs and related production overheads (based on normal operating capacity).
The cost of items of inventory which take a substantial period of time to
complete includes attributable borrowing costs.
The net realisable value of inventories is the estimated selling price in the
ordinary course of business, less applicable variable selling expenses.
Provisions are made for any slow-moving, obsolete or defective inventories.
Trade and other receivables
Trade receivables and contract assets are either classified as 'held to
collect' and initially recognised at fair value and subsequently measured at
amortised cost, less any appropriate provision for expected credit losses or
as 'held to collect and sell' and measured at fair value through other
comprehensive income (FVOCI).
A provision for expected credit losses is established when there is objective
evidence that it will not be possible to collect all amounts due according to
the original payment terms. Expected credit losses are determined using
historical write-offs as a basis, adjusted for factors that are specific to
the debtor, general economic conditions of the industry in which the debtor
operates and with a default risk multiplier applied to reflect country risk
premium. The Group applies the IFRS 9 simplified lifetime expected credit loss
approach for trade receivables and contract assets which do not contain a
significant financing component
Provisions
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of the
obligation. Where the Group expects some or all of a provision to be
reimbursed, for example under an insurance contract, the reimbursement is
recognised as a separate asset but only when the reimbursement is virtually
certain.
Provisions for warranties and product liability, disposal indemnities,
restructuring costs, property dilapidations and legal claims are recognised
when: the Company has a legal or constructive obligation as a result of a past
event; it is probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated. Provisions are not
recognised for future operating losses.
Provisions are discounted where the time value of money is material.
Where there is a number of similar obligations, for example where a warranty
has been given, the likelihood that an outflow will be required in settlement
is determined by considering the class of obligations as a whole. A provision
is recognised even if the likelihood of an outflow with respect to any one
item included in the same class of obligations may be small.
Discontinued operations
A discontinued operation is either:
- A component of the Group's business that represents a separate major line of
business or geographical area of operations that has been disposed of, has
been abandoned or meets the criteria to be classified as held for sale; or
- A business acquired solely for the purpose of selling it.
Discontinued operations are presented on the income statement as a separate
line and are shown net of tax.
In accordance with IAS 21, gains and losses on intra-group monetary assets and
liabilities are not eliminated. Therefore foreign exchange rate movements on
intercompany loans with discontinued operations are presented on the income
statement as non-headline finance cost items.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid
interest-bearing securities with maturities of three months or less.
In the cash-flow statement, cash and cash equivalents are shown net of bank
overdrafts, which are included as current borrowings in liabilities on the
balance sheet.
Financial assets
The classification of financial assets depends on the purpose for which the
assets were acquired. Management determines the classification of an asset at
initial recognition and re-evaluates the designation at each reporting date.
Financial assets are classified as: measured at amortised cost, fair value
through other comprehensive income or fair value through profit and loss.
Financial assets primarily include trade receivables, cash and cash
equivalents (comprising cash at bank, money-market funds, and short-term
deposits), short-term investments, derivatives (foreign exchange contracts and
interest rate derivatives) and unlisted investments.
- Trade receivables are classified either as 'held to collect' and measured at
amortised cost or as 'held to collect and sell' and measured at fair value
through other comprehensive income (FVOCI). The Group may sell trade
receivables due from certain customers before the due date. Any trade
receivables from such customers that are not sold at the reporting date are
classified as 'held to collect and sell'.
- Cash and cash equivalents (consisting of balances with banks and other
financial institutions, money-market funds and short-term deposits) and
short-term investments are subject to low market risk. Cash balances,
short-term deposits and short-term investments are measured at amortised cost.
Money market funds are measured at fair value through profit and loss (FVPL).
- Derivatives are measured at FVPL.
- Listed and unlisted investments are measured at FVOCI.
- Deferred contingent consideration are measured at FVPL.
Financial assets are derecognised when the right to receive cash-flows from
the assets has expired, or has been transferred, and the Group has transferred
substantially all of the risks and rewards of ownership.
On initial recognition, the Group may make an irrevocable election to
designate certain investments as FVOCI, if they are not held for trading or
relate to contingent consideration on a business combination. When securities
measured at FVOCI are sold or impaired, the accumulated fair value adjustments
remain in reserves.
Financial assets are classified as current if they are expected to be realised
within 12 months of the balance sheet date.
Financial liabilities
Borrowings are initially recognised at the fair value of the proceeds, net of
related transaction costs. These transaction costs, and any discount or
premium on issue, are subsequently amortised under the effective interest rate
method through the income statement as interest over the life of the loan and
added to the liability disclosed in the balance sheet. Related accrued
interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least one year
after the balance sheet date.
Derivative financial instruments and hedging activities
The Group uses derivative financial instruments to hedge its exposures to
foreign exchange and interest rates arising from its operating and financing
activities.
Derivative financial instruments are initially recognised at fair value on the
date a derivative contract is entered into and are subsequently re-measured at
their fair value. The method of recognising any resulting gain or loss depends
on whether the derivative financial instrument is designated as a hedging
instrument and, if so, the nature of the item being hedged.
Where derivative financial instruments are designated into hedging
relationships, the Group formally documents the following:
- The risk management objective and strategy for entering the hedge;
- The nature of the risks being hedged and the economic relationship between
the hedged item and the hedging instrument; and
- Whether the change in cash-flows of the hedged item and hedging instrument
are expected to offset each other.
Changes in the fair value of any derivative financial instruments that do not
qualify for hedge accounting are recognised immediately in the income
statement.
Fair value hedge
The Group uses derivative financial instruments to convert part of its fixed
rate debt to floating rate in order to hedge the risks arising from its
external borrowings.
The Group designates these as fair value hedges of interest rate risk. Changes
in the hedging instrument are recorded in the income statement, together with
any changes in the fair values of the hedged assets or liabilities that are
attributable to the hedged risk to the extent that the hedge is effective.
Gains or losses relating to any ineffectiveness are immediately recognised in
the income statement.
Cash-flow hedge
Cash-flow hedging is used by the Group to hedge certain exposures to
variability in future cash-flows.
The effective portions of changes in the fair values of derivatives that are
designated and qualify as cash-flow hedges are recognised in equity. The gain
or loss relating to any ineffective portion is recognised immediately in the
income statement. Amounts accumulated in the hedge reserve are recycled in the
income statement in the periods when the hedged items will affect profit or
loss (for example, when the forecast sale that is hedged takes place).
If a forecast transaction that is hedged results in the recognition of a
non-financial asset (for example, inventory) or a liability, the gains and
losses previously deferred in the hedge reserve are transferred from the
reserve and included in the initial measurement of the cost of the asset or
liability. When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain or loss
existing in the hedge reserve at that time remains in the reserve and is
recognised when the forecast transaction is ultimately recognised in the
income statement.
When a forecast transaction is no longer expected to occur, the cumulative
gain or loss that was reported in other comprehensive income is immediately
transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to
cash-flow hedges. Any gain or loss on the hedging instrument relating to the
effective portion of the hedge is recognised in other comprehensive income;
the gain or loss relating to any ineffective portion is recognised immediately
in the income statement. When a foreign operation is disposed of, gains and
losses accumulated in equity related to that operation are included in the
income statement for that period.
Fair value of financial assets and liabilities
The fair values of financial assets and financial liabilities are the amounts
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
IFRS 13: 'Fair value measurement' requires fair value measurements to be
classified according to the following hierarchy:
- Level 1 - quoted prices in active markets for identical assets or
liabilities;
- Level 2 - valuations in which all inputs are observable either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
- Level 3 - valuations in which one or more inputs that are significant to the
resulting value are not based on observable market data.
See note 21 for information on the methods which the Group uses to estimate
the fair values of its financial instruments.
Dividends
Dividends are recognised as a liability in the period in which they are
authorised. The interim dividend is recognised when it is paid and the final
dividend is recognised when it has been approved by shareholders at the Annual
General Meeting.
New accounting standards effective 2023
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.
Intersegment sales and transfers are charged at arm's length prices.
Segment trading performance
Year ended 31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate Total
£m Detection £m Interconnect costs £m
£m £m £m
Revenue 1,079 803 768 387 - 3,037
Divisional headline operating profit 244 90 149 62 - 545
Corporate headline operating costs - - - - (44) (44)
Headline operating profit/(loss) 244 90 149 62 (44) 501
Items excluded from headline measures (note 3) (27) (35) (18) (12) (6) (98)
Operating profit/(loss) 217 55 131 50 (50) 403
Headline operating margin 22.6% 11.2% 19.4% 16.0% 16.5%
Year ended 31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate Total
£m Detection £m Interconnect costs £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
Headline operating margin 20.9% 11.1% 20.6% 18.0% 16.3%
Operating profit is stated after charging (crediting) the following items:
Year ended 31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Depreciation - property, plant and equipment 17 10 8 6 1 42
Depreciation - right of use assets 15 7 6 3 1 32
Amortisation of capitalised development costs - 2 - - - 2
Amortisation of software, patents and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 52 52
Share-based payment 3 1 2 2 6 14
Transition services cost reimbursement - - - - (10) (10)
Year ended 31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £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)
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 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m Detection £m Interconnect non-headline £m
£m £m £m
Property, plant, equipment, right of use assets, development projects, other 162 142 84 66 375 829
intangibles and investments
Inventory, trade and other receivables 489 599 226 160 10 1,484
Segment assets 651 741 310 226 385 2,313
31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Property, plant, equipment, right of use assets, development projects, other 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
Non-headline assets comprise receivables relating to non-headline items,
acquisitions and disposals.
Segment liabilities
31 July 2023
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Divisional liabilities 200 357 91 62 - 710
Corporate and non-headline liabilities - - - - 339 339
Segment liabilities 200 357 91 62 339 1,049
31 July 2022
John Crane Smiths Flex-Tek Smiths Corporate and Total
£m
Detection
£m
Interconnect
non-headline
£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)
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
2023
2022
2023
2022
£m
£m
£m
£m
Segment assets and liabilities 2,313 2,208 (1,049) (1,063)
Goodwill and acquired intangibles 1,415 1,501 - -
Derivatives 5 4 (20) (47)
Current and deferred tax 142 145 (120) (111)
Retirement benefit assets and obligations 195 309 (106) (115)
Cash and borrowings 285 1,056 (654) (1,166)
Statutory assets and liabilities 4,355 5,223 (1,949) (2,502)
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 and Total
£m
Detection
£m
Interconnect
non-headline
£m
£m
£m
£m
Capital expenditure year ended 31 July 2023 19 36 10 16 - 81
Capital expenditure year ended 31 July 2022 24 23 11 12 1 71
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
(FY2022: £478m) and eliminate retirement benefit assets and obligations and
litigation provisions relating to non-headline items, both net of related tax,
and net debt. See note 29 for a reconciliation of net assets to capital
employed.
The 12-month rolling average capital employed by division, which Smiths uses
to calculate divisional return on capital employed, is:
31 July 2023
John Crane Smiths Flex-Tek Smiths Total
£m
Detection
£m
Interconnect
£m
£m
£m
Average divisional capital employed 1,022 1,154 570 466 3,212
Average corporate capital employed (16)
Average total capital employed - continuing operations 3,196
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
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 2023 314 765 1,079
Revenue year ended 31 July 2022 279 622 901
Smiths Detection Aviation Other security Total
£m
systems
£m
£m
Revenue year ended 31 July 2023 535 268 803
Revenue year ended 31 July 2022 467 188 655
Flex-Tek Aerospace Industrials Total
£m
£m
£m
Revenue year ended 31 July 2023 144 624 768
Revenue year ended 31 July 2022 116 531 647
Smiths Interconnect Components, connectors & subsystems
£m
Revenue year ended 31 July 2023 387
Revenue year ended 31 July 2022 363
Aftermarket sales contributed £1,545m (FY2022: £1,238m) of Group revenue:
John Crane aftermarket sales were £765m (FY2022: £622m); Smiths Detection
aftermarket sales were £413m (FY2022: £355m); Flex-Tek aftermarket sales
were £367m (FY2022: £261m); and Smiths Interconnect aftermarket sales were
£nil (FY2022: £nil).
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 2023 423 - 656 - 1,079
Revenue year ended 31 July 2022 371 - 530 - 901
Smiths Detection
Revenue year ended 31 July 2023 - 803 - - 803
Revenue year ended 31 July 2022 - 655 - - 655
Flex Tek
Revenue year ended 31 July 2023 624 - - 144 768
Revenue year ended 31 July 2022 531 - - 116 647
Smiths Interconnect
Revenue year ended 31 July 2023 190 141 - 56 387
Revenue year ended 31 July 2022 166 144 - 53 363
Total
Revenue year ended 31 July 2023 1,237 944 656 200 3,037
Revenue year ended 31 July 2022 1,068 799 530 169 2,566
The Group's statutory revenue is analysed as follows:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Sale of goods recognised at a point in time 2,244 1,849
Sale of goods recognised over time 36 99
Services recognised over time 757 618
3,037 2,566
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 2023 31 July 2022
31 July 2023
31 July 2022
£m
£m
£m
£m
Americas 1,641 1,423 1,254 1,324
Europe 563 480 519 498
Asia Pacific 493 421 71 76
Rest of World 340 242 29 39
3,037 2,566 1,873 1,937
Revenue by destination attributable to the United Kingdom was £87m (FY2022:
£75m). Other revenue found to be significant included, the United States of
America, totalling £1,383m (FY2022: £1,206m), China (excluding Hong Kong)
£150m (FY2022: £132m) and Germany £143m (FY2022: £123m). 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 £123m (FY2022:
£108m). Significant non-current assets held in the United States of America
£1,181m (FY2022: £1,260m) and Germany £345m (FY2022: £340m).
2 Operating costs
The Group's operating costs for continuing operations are analysed as follows:
Year ended 31 July 2023 Year ended 31 July 2022
Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Cost of sales - direct materials, labour, production and distribution 1,919 - 1,919 1,605 - 1,605
overheads
Selling costs 221 - 221 200 - 200
Administrative expenses 406 98 504 351 300 651
Transition services cost reimbursement (10) - (10) (7) - (7)
Total 2,536 98 2,634 2,149 300 2,449
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 2023
31 July 2022
£m
£m
Research and development expense 73 80
Depreciation of property, plant and equipment 42 38
Depreciation of right of use assets 32 30
Amortisation of intangible assets 61 61
Russia impairment and related closure costs - 19
Transition services cost reimbursement (10) (7)
Research and development (R&D) cash costs were £113m (FY2022: £107m)
comprising £73m (FY2022: £80m) of R&D expensed to the income statement,
£21m (FY2022: £12m) of capitalised costs and £19m (FY2022: £15m) of
customer funded R&D.
Administrative expenses include £2m (FY2022: £3m) 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 2023.
Year ended Year ended
31 July 2023
31 July 2022
£m
(represented)
£m
Audit services
Fees payable to the Company's auditors for the audit of the Company's annual 2.6 3.0
financial statements
Fees payable to the Company's auditors and its associates for other services:
- the audit of the Company's subsidiaries 5.5 4.7
8.1 7.7
All other services 0.5 0.8
Other services comprise audit-related assurance services of £0.5m (FY2022:
£0.5m) and fees for reporting accountant services in connection with a class
1 disposal of £nil (FY2022: £0.3m). Audit-related assurance services include
the review of the Interim Report and the limited assurance of the Group's
Scope 1-3 Greenhouse Gas emissions metrics. Total fees for non-audit services
comprise 6% (FY2022: 10%) of audit fees.
In the current year, the Group has agreed £0.3m 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 2023
31 July 2022
£m
£m
Post-acquisition integration costs and fair value
adjustment unwind
Fair value loss on contingent consideration (6) -
Unwind of acquisition balance sheet fair value uplift - (2)
Acquisition and disposal related transaction costs and provision releases
Business acquisition/disposal costs (1) (5)
Legacy pension scheme arrangements
Past service credit/(costs) for benefit equalisation and improvements 8 4 (43)
Scheme administration costs 8 (2)
Retirement benefit scheme settlement loss 8 (1) (171)
Non-headline litigation provision movements
Movement in provision held against Titeflex Corporation subrogation claims 23 7 (2)
Provision for John Crane, Inc. asbestos litigation 23 (16) (7)
Cost recovery for John Crane, Inc. asbestos litigation 7 -
Other items
Amortisation of acquired intangible assets 10 (52) (51)
Restructuring costs (36) -
Irrecoverable VAT on chain export transaction (2) -
Russia impairment charges and related closure costs 11 - (19)
Non-headline items in operating profit - continuing operations (98) (300)
Post-acquisition integration costs and fair value adjustment unwind
Following the sale of Smiths Medical to ICU Medical, Inc. (ICU) in FY2022, the
Group holds a financial asset for the fair value of US$100m additional sales
consideration that is contingent on the future share price performance of ICU.
In FY2023 a fair value loss of £6m has been recognised on this financial
asset. This is considered to be a non-headline item on the basis that these
charges result from acquisition accounting and do not relate to current
trading activity.
The impact of unwinding the acquisition balance sheet fair value adjustments
required by IFRS 3 'Business combinations' has been recognised as non-headline
as the charges do not relate to trading activity. The £2m charged in the
prior period was due to the unwind of fair value uplifts on the acquisition of
Royal Metal Products.
Acquisition and disposal related transaction costs and provision releases
The £1m (FY2022: £5m) business acquisition/disposal costs represented
incremental transaction costs including the acquisition of Plastronics in
FY2023. These costs did not include the cost of employees working on
transactions and were reported as non-headline because they are dependent on
the level of acquisition and disposal activity in the year.
Legacy pension scheme arrangements
The past service credit/(costs) comprises the following:
- A net credit of £4m (FY2022: £19m debit) has been recognised in respect of
equalisation charges of retirement benefits for men and women. The net
credit comprises a further liability of £12m and the release of £16m,
recognised in previous years, following the identification of additional
evidence of the obligation for equalisation (see note 8 for further details);
and
- In the prior year £24m of costs were recognised following the TI Group
Pension Scheme (TIGPS) executing an insurance buy-in policy.
These past service credits/(costs) are reported as non-headline as they are
non-recurring and relate to legacy pension liabilities.
Scheme administration costs of £2m (FY2022: £nil) relate to the TIGPS legacy
pension scheme. As the Group has no expectation of receiving a refund from the
scheme, an economic benefit value of zero has been placed on the TIGPS
surplus. These are non-headline charges as the Smiths Group effectively has no
economic exposure to these costs and they are paid from cash retained in the
scheme.
Settlement losses of £1m (31 July 2022: £171m) on post-retirement benefit
schemes relate to settlement arrangements made between the Group and former
employees of the now disposed of Medical business. The prior year losses arose
primarily on the buy-in of the TIGPS scheme. These items are considered
non-headline as they are non-recurring and relate to legacy pension schemes.
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 £7m credit (FY2022: £2m charge) recognised by Titeflex Corporation was
principally driven by discount rate movements and a reduction in the expected
costs to settle future claims. See note 23 for further details; and
- The £16m charge (FY2022: £7m) in respect of John Crane, Inc. asbestos
litigation is principally due to litigation costs of £31m offset by £15m of
discount rate movements following an increase in US treasury bond yields. See
note 23 for further details; and
- In FY23 £7m (FY2022: £nil) of asbestos litigation costs were recovered by
John Crane, Inc. via insurer settlements.
Other items
Acquisition related intangible asset amortisation costs of £52m (FY2022:
£51m) were recognised in the current period. This is considered to be a
non-headline item on the basis that these charges result from acquisition
accounting and do not relate to current trading activity.
As announced in the FY2022 Annual Report, during FY2023 the Group has
completed a restructuring project across the Group to better serve our
customers, maximise growth opportunities and improve efficiency. In FY2023
£36m of non-headline charges have been expensed of which £26m has been paid
to date, the remainder is forecast to be paid within the next 18 months. The
restructuring project is a non-headline expense as the costs are material,
non-recurring and part of a pre-approved programme.
The £2m of irrecoverable VAT (31 July 2022: £nil) relates to a historical
VAT classification error. This error had resulted in certain intercompany
chain export transactions being treated as VAT exempt when they should have
been initially classified as subject to European VAT. This has been treated as
non-headline as it relates to six years of past VAT practice and will involve
payment and recovery of European VAT, which spans FY2023 and FY2024, so may
have a material impact on the Group's headline cash conversion metric.
In the prior year a £19m charge has been recognised in relation to Russia
impairment charges and related closure costs.
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 2023
31 July 2022
£m
£m
Unwind of discount on provisions 23 (7) (3)
Other finance income - retirement benefits 8 7 7
Interest payable on overdue VAT (7) -
Other sundry financing losses (1) -
Fair value gain on investment in early stage business 14 - 1
Foreign exchange gain on intercompany loan with discontinued operations - 22
Non-headline items in finance costs - continuing operations (8) 27
Continuing operations - non-headline loss before taxation (106) (273)
The financing elements of non-headline legacy liabilities, including the £7m
(FY2022: £3m) 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 (FY2022: £7m) of financing credits
relating to retirement benefits. These were excluded from headline finance
costs because the ongoing costs and credits are a legacy of previous employee
pension arrangements.
The £7m of interest payable on overdue VAT (FY2022: £nil) relates to a
historic VAT classification error. This was excluded from headline finance
costs because the underlying issue was recognised as non-headline and this
treatment has been maintained for ongoing costs and credits.
Non-headline taxation (charge)/credit
The non-headline items included in taxation for continuing operations were as
follows:
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Tax credit on non-headline loss 6 18 19
Increase in unrecognised UK deferred tax asset 6 (31) (5)
Non-headline taxation (charge)/credit- continuing operations (13) 14
Continuing operations - non-headline loss for the year (119) (259)
Movement in unrecognised UK deferred tax asset
These movements are reported as non-headline because the original credit,
related to non-headline charges was reported as non-headline.
ii. DISCONTINUED OPERATIONS
The non-headline items for discontinued operations were as follows:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Non-headline operating profit items
Medfusion documentation remediation costs - (33)
Impairment of investment in Ivenix, Inc. convertible debt - (14)
Non-headline finance costs items
Foreign exchange loss on intercompany loan with parent - (22)
Gain on sale of discontinued operation
Gain on the sale of Smiths Medical to ICU Medical, Inc. 6 1,036
Non-headline taxation items
Tax on non-headline loss - 6
Non-headline items in profit from discontinued operations 6 973
Profit for the year - non-headline items for continuing and discontinued (113) 714
operations
In the current year the Group has recognised an additional £6m gain on
transactions related to the sale of Smiths Medical. An £11m credit was
released in respect of disposal and restructuring provisions, that are no
longer required, and an offsetting additional £5m of provisions were charged
in respect of potential indemnity, litigation and arbitration costs. These
items are considered to be non-headline as they relate to discontinued former
business activities.
In the prior period:
- Smiths Medical recognised a £33m provision against the costs of the
remediation actions required to address each of the observations and
discussion items contained in the US Food and Drug Administration 'for-cause'
audit findings on the Medfusion product range; and
- The decision by Smiths Medical to exit its commercial agreement with Ivenix,
Inc. triggered an indicator of impairment to the carrying value of the Smiths
Medical investment in Ivenix, Inc. and management impaired the entire £14m
value of Smiths Medical's investment; and
- The £22m foreign exchange loss on intercompany loan with parent directly
offsets the foreign exchange gain in continuing operations.
4 Net finance costs
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Interest income 36 14
Interest expense:
- bank loans and overdrafts, including associated fees (50) (12)
- other loans (17) (40)
- interest on leases (4) (3)
Interest expense (71) (55)
Headline net finance costs (35) (41)
Other financing gains/(losses):
- valuation movements on fair value hedged debt (9) (32)
- valuation movements on fair value derivatives 9 33
- foreign exchange and ineffectiveness on net investment hedges (3) (2)
- retranslation of foreign currency bank balances 2 (1)
- interest on overdue VAT (7) -
- other items including counterparty credit risk adjustments and non-hedge - 2
accounted derivatives
Other financing gains/(losses) (8) -
Non-headline finance cost items:
Foreign exchange gain on intercompany loan with discontinued operations 3 - 22
Unwind of discount on provisions 3 (7) (3)
Fair value gain on investment in early stage business 14 - 1
Net interest income on retirement benefit obligations 8 7 7
Non-headline finance cost items - 27
Net finance costs (43) (14)
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 2023
31 July 2022
£m
£m
Profit attributable to equity shareholders for the year:
- continuing 225 11
- discontinued 6 1,022
Total 231 1,033
Average number of shares in issue during the year (note 24) 352,891,120 386,678,211
Statutory earnings per share total - basic 65.5p 267.1p
Statutory earnings per share total - diluted 65.1p 266.0p
Statutory earnings per share continuing operations - basic 63.8p 2.8p
Statutory earnings per share continuing operations - diluted 63.4p 2.8p
Diluted earnings per share are calculated by dividing the profit attributable
to ordinary shareholders by 354,681,819 (FY2022: 388,349,758) 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 (FY2022: 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 2023 Year ended 31 July 2022
£m Basic EPS Diluted EPS £m Basic EPS Diluted EPS
(p)
(p)
(p)
(p)
Total profit attributable to equity shareholders of the Parent Company 231 65.5 65.1 1,033 267.1 266.0
Exclude: Non-headline items (note 3) 113 (714)
Headline earnings per share 344 97.5 97.0 319 82.5 82.1
Profit from continuing operations attributable to equity shareholders of the 225 63.8 63.4 11 2.8 2.8
Parent Company
Exclude: Non-headline items (note 3) 119 259
Headline earnings per share - continuing operations 344 97.5 97.0 270 69.8 69.5
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 2023
31 July 2022
£m
£m
The taxation charge in the consolidated income statement for the year
comprises:
Continuing operations
- current income tax charge 112 68
- current tax adjustments in respect of prior periods (7) 5
Current taxation 105 73
Deferred taxation 29 17
Total taxation expense - continuing operations 134 90
Analysed as:
Headline taxation expense 121 104
Non-headline taxation charge/(credit) 13 (14)
Total taxation expense in the consolidated income statement 134 90
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Tax on items charged/(credited) to equity
Deferred tax:
- retirement benefit schemes 32 -
- share-based payment - (1)
32 (1)
The £32m (FY2022: £nil) charge to equity for retirement benefit schemes
principally related to UK retirement schemes.
Current taxation liabilities
Current tax
£m
At 31 July 2021 (19)
Foreign exchange loss (4)
Charge to income statement (73)
Tax paid 79
At 31 July 2022 (17)
Comprising:
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)
Charge to income statement (105)
Tax paid 92
At 31 July 2023 (30)
Comprising:
Current tax receivable 47
Current tax payable within one year (74)
Corporation tax payable after more than one year (3)
At 31 July 2023 (30)
Provisions for tax liabilities amount to £46m (FY2022: £38m) the majority of
which relates to the risk of challenge from tax authorities to the geographic
allocation of profits across the Group.
In addition to the risks provided for, the Group faces a variety of other tax
risks, which result from operating in a complex global environment, including
the ongoing reform of both international and domestic tax rules, new and
ongoing tax audits in the Group's larger markets and the challenge to fulfil
ongoing tax compliance filing and transfer pricing obligations given the scale
and diversity of the Group's global operations.
The Group anticipates that a number of tax audits are likely to conclude in
the next 12 to 24 months for which provisions are recognised based on best
estimates and management's judgements concerning the ultimate outcome of the
audit. Due to the uncertainty associated with such items, it is possible at a
future date, on conclusion of open tax matters, the final outcome may vary
significantly from the amounts noted above.
Reconciliation of the tax charge
The headline tax charge for the year of £121m (FY2022: £104m) represents an
effective rate of 26.0% (FY2022: 27.6%).
The tax charge on the profit for the year for continuing operations is
different from the standard rate of corporation tax in the UK, with a rate for
FY2023 of 21.0% (FY2022: 19.0%). The differences are reconciled as follows:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Profit before taxation 366 103
Notional taxation expense at UK corporate rate of 21% (FY2022: 19.0%) 77 20
Different tax rates on non-UK profits and losses 13 13
Non-deductible expenses and other charges 24 11
Tax credits and non-taxable income (10) (6)
Non-headline UK deferred tax asset recognition adjustment 31 5
Other adjustments to unrecognised deferred tax 2 10
Non-tax relievable loss on UK pensions schemes - 41
Tax on Smiths Medical consolidation adjustments - 2
Prior year true-up (3) (6)
Total taxation expense in the consolidated income statement 134 90
Comprising:
Taxation on headline profit 121 104
Non-headline taxation items:
- Tax credit on non-headline loss (18) (19)
- UK deferred tax asset recognition adjustment 31 5
Taxation on non-headline items 13 (14)
Total taxation expense in the consolidated income statement 134 90
The table above reconciles the notional taxation charge calculated at the UK
tax rate, to the actual total tax charge. As a group operating in multiple
countries, the actual tax rates applicable to profits in those countries are
different from the UK tax rate. The impact is shown above as different tax
rates on non-UK profits and losses. The Group's worldwide business leads to
the consideration of a number of important factors which may affect future tax
charges, such as: the levels and mix of profitability in different
jurisdictions; transfer pricing regulations; tax rates imposed and tax regime
reforms; acquisitions; disposals; restructuring activities; and settlements or
agreements with tax authorities.
Deferred taxation assets/(liabilities)
Property, plant, Employment Losses Provisions Other Total
equipment and
benefits
carried
£m
£m
£m
intangible
£m
forward
assets
£m
£m
At 31 July 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
Comprising:
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 - (2) 6 (4) - -
Charge to income statement - continuing operations 13 (3) (32) (5) (2) (29)
Credit to equity - 32 - - - 32
Foreign exchange rate movements 3 (1) (2) (4) 2 (2)
At 31 July 2023 (60) (25) 75 66 (4) 52
Comprising:
Deferred tax assets (2) (27) 50 60 14 95
Deferred tax liabilities (58) 2 25 6 (18) (43)
At 31 July 2023 (60) (25) 75 66 (4) 52
Of the amounts included within 'Other', shown in the above table, as at 31
July 2023, amounts relating to tax on unremitted earnings were £19m (FY2022:
£19m). The aggregate amount of temporary differences associated with
investments in subsidiaries for which deferred tax liabilities have not been
recognised is immaterial.
The deferred tax asset relating to losses has been recognised on the basis of
strong evidence of future taxable profits against which the unutilised tax
losses can be relieved or it is probable that they will be recovered against
the reversal of deferred tax liabilities. The closing net deferred tax asset
balance related to UK activities and included in the balance at 31 July 2023
amounted to £nil (FY2022: £nil). The deferred tax asset balance for
provisions includes £51m (FY2022: £57m) relating to John Crane Inc.
litigation provision, and £9m (FY2022: £12m) relating to Titeflex
Corporation. See note 23 for additional information on provisions.
Unrecognised deferred tax
The Group has £521m of unrecognised deferred tax relating to losses (FY2022:
£335m).
The expiry date of operating losses carried forward is dependent upon the law
of the various territories in which the losses arise. A summary of expiry
dates in respect of which deferred tax has not been recognised is set out
below:
2023 Expiry of 2022 Expiry of
£m
losses
£m
losses
Unrestricted losses - operating losses 521 No expiry 335 No expiry
Total unrecognised deferred tax on losses 521 335
Unrecognised deferred tax relating to losses has increased by £186m (FY2022:
£228m). This comprises an increase of £78m that principally matches the
reduction in the UK pensions deferred tax liability, an increase of £75m
relating to Detection and Interconnect USA current year losses and £33m from
a FY2022 change in local accounting method for tax purposes resulting in
additional losses being booked in FY2023.
Developments in the Group tax position
In December 2021, the Organisation for Economic Co-operation and Development
published rules relating to global minimum taxation called 'Pillar 2 rules',
currently timetabled to apply in the UK to accounting periods beginning on or
after 1 January 2024 (year ended 31 July 2025 for Smiths). The Group will
continue to monitor the development and future implementation of these rules
globally.
Smiths is actively working to fully understand the impact of the new rules and
developing processes to enable compliance. Based upon our latest
understanding, the current estimate of additional tax payable is not expected
to have a material impact on the Group.
7 Employees
Year ended 31 July 2023 Year ended 31 July 2022
Continuing Discontinued Total Continuing Discontinued Total
operations
operations
£m
operations
operations
£m
£m
£m
£m
£m
Staff costs during the period
Wages and salaries 802 - 802 700 91 791
Social security 92 - 92 81 9 90
Share-based payment (note 9) 14 - 14 13 2 15
Pension costs (including defined contribution schemes) (note 8) 31 - 31 29 5 34
939 - 939 823 107 930
The average number of persons employed, including employees on permanent,
fixed term and temporary contracts, rounded to the nearest 50 employees was:
Year ended Year ended
31 July 2023
31 July 2022
John Crane 6,050 6,050
Smiths Detection 3,250 3,100
Flex-Tek 3,750 3,300
Smiths Interconnect 2,800 2,500
Corporate (including central/shared IT services) 300 300
Continuing operations 16,150 15,250
Discontinued operations - Smiths Medical (in period to 6 January 2022) - 6,700
Total 16,150 21,950
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 & People Committee within the Annual Report 2023.
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Key management compensation
Salaries and short-term employee benefits 12.0 10.3
Cost of retirement benefits 0.7 0.7
Cost of share-based incentive plans 4.9 4.7
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 2023 Year ended 31 July 2022
Number of Weighted Number of Weighted
instruments
average
instruments
average
'000
exercise
'000
exercise
price
price
LTIP 1,580 1,411
Restricted stock - 8
SAYE 16 £11.45 16 £11.43
Related party transactions
The only related party transactions in FY2023 were key management compensation
(FY2022: 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 £31m (FY2022: £34m).
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 2023. 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 2023
31 July 2022
£m
£m
At beginning of period 194 413
Foreign exchange rate movements 1 -
Current service cost (2) (2)
Headline scheme administration costs (4) (4)
Non-headline scheme administration costs (2)
Past service cost, curtailments, settlements - continuing operations 4 (214)
Settlements - discontinued operations - (3)
Finance income - retirement benefits 7 7
Contributions by employer 5 9
Actuarial (losses)/gains (114) 3
Retirement benefit obligations disposed of with Smiths Medical - 5
Unrecognised assets due to surplus restriction - (20)
Net retirement benefit asset 89 194
The £413m net retirement benefit asset at the start of FY2022 included £5m
of pension obligations disclosed within liabilities held for sale.
UK pension schemes
Smiths Group's funded UK pension schemes are subject to a statutory funding
objective, as set out in UK pension legislation. Scheme trustees need to
obtain regular actuarial valuations to assess the scheme against this funding
objective. The trustees and sponsoring companies need to agree funding plans
to improve the position of a scheme when it is below the acceptable funding
level.
The UK Pensions Regulator has extensive powers to protect the benefits of
members, promote good administration and reduce the risk of situations
arising which may require compensation to be paid from the Pension Protection
Fund. These include imposing a schedule of contributions or the calculation
of the technical provisions, where a trustee and company fail to agree
appropriate calculations.
Smiths Industries Pension Scheme (SIPS)
This scheme was closed to future accrual effective 1 November 2009. SIPS
provides index-linked (to applicable caps) pension benefits based on final
earnings at date of closure. SIPS is governed by a corporate trustee (S.I.
Pension Trustees Limited, a wholly owned subsidiary of Smiths Group plc). The
board of trustee directors currently comprises four Company-nominated trustees
and four member-nominated trustees, with an independent chairman selected by
Smiths Group plc. Trustee directors are responsible for the management,
administration, funding and investment strategy of the scheme.
The most recent actuarial valuation of this scheme has been performed using
the Projected Unit Method as at 31 March 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 next actuarial valuation, due as at
31 March 2023, is currently in progress, with the results expected later in
2023.
The duration of SIPS liabilities is around 18 years (FY2022: 20 years) for
active deferred members, 19 years (FY2022: 20 years) for deferred members and
10 years (FY2022: 11 years) for pensioners and dependants. Durations have
reduced primarily due to the increase in discount rate assumption, which
reduces the average time it takes to receive all future pension payments when
weighted by the present value of those future pension payments.
Under the governing documentation of SIPS, any future surplus would be
returnable to Smiths Group plc by refund, assuming gradual settlement of the
liabilities over the lifetime of the scheme.
In SIPS, as part of ongoing data cleansing work being undertaken to prepare
the scheme for a potential full buy-out in the future, a wider review is being
carried out to determine if the method used in the early 1990s to equalise
retirement ages between men and women was implemented correctly. In FY2022, an
additional liability of £19m was recognised as a past service cost to reflect
the expected impact of correcting this issue for certain sections of the
scheme. In the current year, a further liability of £12m has been recognised
and £16m recognised in previous years has been released following the
identification of additional evidence of the obligation for equalisation,
resulting in a net credit to the income statement of £4m. The review remains
ongoing however, no further material additional liabilities are expected.
SIPS uses a Liability Driven Investment (LDI) strategy to hedge against
interest and inflation rate changes. During the significant volatility that
followed the UK Government's mini budget in September 2022, this hedging
policy meant that SIPS asset values fell, as did the value of its obligations.
All of SIPS's collateral requirements in respect of the LDI assets were met,
with no support required from the Group.
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. The FY2022 income statement recognised a settlement loss of £171m in
relation to the buy-in.
In terms agreed between the Group and the TIGPS trustee prior to the
transaction, when TIGPS converts all of its buy-in policies to buy-out
policies and subsequently winds up, the trustee is expected to use any surplus
remaining, after the costs of buying-out and winding up the scheme have been
met, to improve member benefits. The FY 2022 income statement recognised a
past service cost of £24m in relation to the derecognition of the remaining
surplus. The Group has no expectation of receiving a refund from the scheme
and has placed an economic benefit value of zero on the TIGPS surplus from 10
June 2022.
As TIGPS currently retains the legal obligation to pay all scheme benefits,
TIGPS liabilities remain part of the retirement benefit obligations on the
balance sheet alongside the corresponding buy-in assets. These liabilities and
assets will be derecognised at the point the buy-in policies are converted to
buy-outs and the legal obligation for payment of benefits is transferred to
the relevant insurers.
The most recent actuarial valuation of this scheme has been performed using
the Projected Unit Method as at 5 April 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 next actuarial valuation, due as at 5 April 2023, is currently
in progress, with the results expected later in 2023.
The duration of the TIGPS liabilities is around 20 years (FY2022: 21 years)
for active deferred members, 18 years (FY2022: 19 years) for deferred members
and 10 years (FY2022: 10 years) for pensioners and dependants.
US pension plans
The valuations of the principal US pension and post-retirement healthcare
plans were performed using census data at 1 January 2023.
The pension plans were closed with effect from 30 April 2009 and benefits were
calculated as at that date and are not revalued. Governance of the US pension
plans is overseen by a Settlor Committee appointed by Smiths Group Services
Corp, a wholly owned subsidiary of the Group.
The duration of the liabilities for the largest US plan is around 15 years
(FY2022: 16 years) for active deferred members, 14 years (FY2022: 15 years)
for deferred members and 10 years (FY2022: 10 years) for pensioners and
dependants.
Risk management
In respect of uninsured liabilities, the pensions schemes are exposed to risks
that:
- Investment returns are below expectations, leaving the schemes with
insufficient assets in future to pay all their pension obligations;
- Members and dependants live longer than expected, increasing the value of
the pensions which the schemes have to pay;
- Inflation rates are higher than expected, causing amounts payable under
index-linked pensions to be higher than expected; and
- Increased contributions are required to meet funding targets if lower
interest rates increase the current value of liabilities.
These risks are managed separately for each pension scheme. However, the Group
has adopted a common approach of closing defined benefit schemes to cap
members' entitlements and of supporting trustees in adopting investment
strategies which aim to hedge the value of assets against changes in the value
of liabilities caused by changes in interest and inflation rates.
Across SIPS and TIGPS, approximately 60% of all liabilities are now de-risked
through 11 bulk annuities.
TIGPS
TIGPS has covered roughly 100% of liabilities with matching annuities,
eliminating investment return, longevity, inflation and funding risks in
respect of those liabilities.
SIPS
SIPS has covered roughly 33% of liabilities with matching annuities,
eliminating investment return, longevity, inflation and funding risks in
respect of those liabilities. It has also adopted a LDI strategy to hedge
interest and inflation risks of the scheme's uninsured liabilities by
investment in gilts together with the use of gilt repurchase arrangements,
total return swaps, inflation swaps and interest rate swaps. The strategy also
takes into account the scheme's corporate bond investments.
The critical estimates and principal assumptions used in updating the
valuations are set out below:
2023 2023 2023 2022 2022 2022
UK
US
Other
UK
US
Other
Rate of increase in salaries n/a n/a 2.5% n/a n/a 2.2%
Rate of increase for active deferred members 4.0% n/a n/a 4.0% n/a n/a
Rate of increase in pensions in payment 3.3% n/a 1.6% 3.4% n/a 1.2%
Rate of increase in deferred pensions 3.3% n/a n/a 3.4% n/a n/a
Discount rate 5.1% 5.2% 2.8% 3.5% 4.5% 1.1%
Inflation rate 3.3% n/a 0.4% 3.4% n/a 1.3%
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 3.3% has been derived using the Aon UK
Government Gilt Prices Only Curve with an Inflation Risk Premium of 0.2% p.a.
The Government's response to its consultation on RPI reform was published on
25 November 2020, and strongly implied that RPI will become aligned with CPI-H
from 2030. No specific allowance (beyond anything already priced into markets)
has been factored into the RPI assumptions for potential changes. The
assumption for the long-term gap between RPI and CPI is 0.5% p.a.
(FY2022: 0.6%) reflecting the Group's view on the market pricing of this gap
over the lifetime of the UK schemes' liabilities, i.e. 0.9% p.a. (FY2022:
1.0%) pre-2030 and 0.1% p.a. post-2030 (FY2022: 0.2%).
Short-term inflation has continued at rates higher than the Government's
targets, though future inflation is expected to fall in the short term as the
Bank of England increases interest rates to combat high inflation.
Consequently, the long-term inflation assumptions are similar to the prior
year. The full impact of current high inflation is mitigated to an extent by
the caps in place on index-linked increases. The Board considered and declined
a request from the Trustee of SIPS to recommend an additional discretionary
increase to pensions in payment. However, there is no change in the Group's
constructive obligations and allowance for certain discretionary increases in
future continues to be included in the defined benefit obligations shown
below.
Discount rate assumptions
The UK schemes use a discount rate based on the annualised yield on the Aon
GBP Single Agency Select AA Curve, using the expected cash-flows from a
notional scheme with obligations of the same duration as that of the UK
schemes, whereas in previous years the Aon GBP Select AA Curve was used. The
increase in the discount rate assumption at 31 July 2023 arises from market
conditions and is not impacted by the change in discount rate methodology.
The US Plan uses a discount rate based on the annualised yield derived from
Willis Towers Watson's RATE:Link (10th - 90th) model using the Plan's expected
cash-flows.
The discount rate assumptions have increased significantly since the prior
year, largely due to the significant volatility that followed the UK
Government's mini budget in September 2022, though other factors have
contributed to the continued rise in bond yields since then, including
heightened political uncertainty, increases to interest rates to combat
persistent high inflation and market illiquidity. A higher discount rate has
led to a lower value being placed on the retirement benefit obligations,
though there has also been a corresponding reduction in the value of assets.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are based on the
latest 'SAPS S3' birth year tables with relevant scaling factors based on the
recent experience of the schemes. The assumption allows for future
improvements in life expectancy in line with the 2021 latest 2022 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 latest CMI
projections incorporate allowance for the impact of COVID-19, equivalent to a
reduction in life expectancy of around 0.5 years.
The mortality assumptions used in the principal US schemes are based on
generational mortality using the latest Pri-2012 sex-distinct,
employee/non-disabled annuitant table, with a 2012 base year, projected
forward generationally with the latest MP-2021 mortality scale. No explicit
adjustment has been made to mortality assumptions in respect of COVID-19. The
impact of COVID-19 remains uncertain and further data studies are underway to
better predict the impact on future mortality.
Expected further years of life UK schemes
Male Female Male Female
31 July 2023
31 July 2023
31 July 2022
31 July 2022
Member who retires next year at age 65 21 23 22 24
Member, currently 45, when they retire in 20 years' time 20 24 23 25
Expected further years of life US schemes
Male Female Male Female
31 July 2023
31 July 2023
31 July 2022
31 July 2022
Member who retires next year at age 65 21 22 21 22
Member, currently 45, when they retire in 20 years' time 22 24 22 24
Sensitivity
Sensitivities in respect of the key assumptions used to measure the principal
pension schemes as at 31 July 2023 are set out below. These sensitivities show
the hypothetical impact of a change in each of the listed assumptions in
isolation, with the exception of the sensitivity to inflation which
incorporates the impact of certain correlating assumptions. In practice, such
assumptions rarely change in isolation.
Profit before tax Increase/ (Increase)/ Profit before tax Increase/ (Increase)/
for year ended
(decrease) in
decrease in
for year
(decrease) in
decrease in
31 July 2023
scheme
scheme
scheme
scheme
£m
assets
liabilities ended
assets
liabilities
31 July 2023
31 July 2023
31 July 2022
31 July 2022
31 July 2022
£m
£m
£m
£m
£m
Rate of mortality - one year increase in life expectancy (2) 60 (88) (2) 84 (135)
Rate of mortality - one year decrease in life expectancy 2 (62) 89 2 (84) 136
Rate of inflation - 0.25% increase (1) 23 (43) (1) 34 (69)
Discount rate - 0.25% increase 2 (36) 60 2 (49) 97
Market value of scheme assets - 2.5% increase 2 30 - 1 40 -
The effect on profit before tax reflects the impact of current service cost
and net interest cost. The value of the scheme assets is affected by changes
in mortality rates, inflation and discounting because they affect the carrying
value of the insurance assets.
Asset valuation
The pension schemes hold assets in a variety of pooled funds, in which the
underlying assets typically are invested in credit and cash assets. These
funds are valued. The price of the funds is set by administrators/custodians
employed by the investment managers and based on the value of the underlying
assets held in the funds. Prices are generally updated daily, weekly or
quarterly depending upon the frequency of the fund's dealing.
Bonds are valued using observable broker quotes. Gilt repurchase obligations
are valued by the relevant manager, which derives the value using an industry
recognised model with observable inputs.
Total return, interest and inflation swaps and forward FX contracts are
bilateral agreements between counterparties and do not have observable market
prices. These derivative contracts are valued using observable inputs.
Insured liabilities comprise annuity policies that match all or part of the
scheme obligation to identified groups of members. These assets are valued by
an external qualified actuary at the actuarial valuation of the corresponding
liability, reflecting this matching relationship.
The insurance policies are treated as qualifying insurance policies as none of
the insurers are related parties of 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 2023 - £m
UK US Other Total
schemes
schemes
countries
Cash and cash equivalents 93 1 1 95
Pooled funds:
- Pooled equity - - 3 3
- Pooled Diversified Growth - - 13 13
- Pooled credit 320 - - 320
Corporate bonds 203 141 - 344
Government bonds/LDI 421 44 3 468
Insured liabilities 1,323 - - 1,323
Property 7 - - 7
Total market value 2,367 186 20 2,573
31 July 2022 - £m
UK US Other Total
schemes
schemes
countries
Cash and cash equivalents 90 1 1 92
Pooled funds:
- Pooled equity - - 3 3
- Pooled Diversified Growth - - 15 15
- Pooled credit 379 - - 379
Corporate bonds 412 167 - 579
Government bonds/LDI 498 57 3 558
Insured liabilities 1,649 - - 1,649
Property 39 - - 39
Total market value 3,067 225 22 3,314
The UK Government bonds/LDI portfolios contain £717m (FY2022: £960m) of UK
Government bonds (gilts), £276m (FY2022: £476m) of gilt repurchase
obligations and £18m of interest and inflation swap obligations (FY2022: £9m
assets) and forward FX contracts with a net obligation of £2m (FY2022: £5m
asset). These are held to hedge against foreign currency risk. The pooled
funds, insured liabilities and property assets are unquoted. The scheme assets
do not include any property occupied by, or other assets used by, the Group.
The asset valuations are effective as at the end of the period, consistent
with the calculations determining the obligations, except for a small legacy
commercial property investment which is due to be sold down over 2023. This
investment is only valued at the end of each calendar quarter, so no valuation
is available as at the period end. The Group considers taking the most recent
available valuation to be appropriate given the size of the commercial
property investment relative to the overall value of invested assets and wider
commercial property market returns since the most recent valuation.
The Group acknowledges that responsibility for the effective management of the
schemes' assets lies primarily with the trustees, but also accepts that any
risks inherent in the investment strategy, including ESG and climate risk, are
ultimately underwritten by the Group. Consequently, the Group ensures that the
trustees' investment strategy and statements of investment principles are
compatible with the Group's wider sustainability strategy. For TIGPS, where
all benefits are now secured by way of annuity purchase, all investment risks
including ESG and climate risk, have effectively now been eliminated. For
SIPS, a significant portion of investment risks have already been eliminated
through annuity purchase and the scheme's time horizon to full buy-in, hence
exposure to investment risks including ESG and climate risk, continues to
reduce.
Present value of funded scheme liabilities and assets for the main UK and US
schemes
31 July 2023 - £m
SIPS TIGPS US
schemes
Present value of funded scheme liabilities:
- Active deferred members (25) (18) (31)
- Deferred members (388) (326) (86)
- Pensioners (838) (561) (85)
Present value of funded scheme liabilities (1,251) (905) (202)
Market value of scheme assets 1,446 921 186
Surplus restriction - (16) -
Surplus/(deficit) 195 - (16)
31 July 2022 - £m
SIPS TIGPS US
schemes
Present value of funded scheme liabilities:
- Active deferred members (32) (23) (41)
- Deferred members (561) (442) (109)
- Pensioners (1,010) (670) (88)
Present value of funded scheme liabilities (1,603) (1,135) (238)
Market value of scheme assets 1,912 1,155 225
Surplus restriction - (20) -
Surplus/(deficit) 309 - (13)
Net retirement benefit obligations
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
Market value of scheme assets 2,367 186 20 2,573
Present value of funded scheme liabilities (2,156) (202) (25) (2,383)
Surplus restriction (16) - - (16)
Surplus/(deficit) 195 (16) (5) 174
Unfunded pension plans (37) (6) (36) (79)
Post-retirement healthcare (3) (1) (2) (6)
Present value of unfunded obligations (40) (7) (38) (85)
Net pension asset/(liability) 155 (23) (43) 89
Comprising:
Retirement benefit assets 195 - - 195
Retirement benefit liabilities (40) (23) (43) (106)
Net pension asset/(liability) 155 (23) (43) 89
31 July 2022 - £m
UK US Other Total
schemes
schemes
countries
Market value of scheme assets 3,067 225 22 3,314
Present value of funded scheme liabilities (2,738) (238) (27) (3,003)
Surplus restriction (20) - - (20)
Surplus/(deficit) 309 (13) (5) 291
Unfunded pension plans (43) (7) (40) (90)
Post-retirement healthcare (4) (1) (2) (7)
Present value of unfunded obligations (47) (8) (42) (97)
Net pension asset/(liability) 262 (21) (47) 194
Comprising:
Retirement benefit assets 309 - - 309
Retirement benefit liabilities (47) (21) (47) (115)
Net pension asset/(liability) 262 (21) (47) 194
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 2023
31 July 2022
£m
£m
Amounts charged to operating profit
Current service cost 2 2
Past service costs - benefit equalisations (5) 43
Settlement loss 1 171
Headline scheme administration costs 4 4
Non-headline scheme administration costs 2 -
4 220
The operating cost is charged as follows:
Headline administrative expenses 6 6
Non-headline settlement loss 1 171
Non-headline administrative expenses (3) 43
4 220
Amounts credited to finance costs
Non-headline other finance income - retirement benefits (7) (7)
Amounts recognised directly in the consolidated statement of comprehensive
income
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Re-measurements of retirement defined benefit assets and liabilities
Difference between interest credit and return on assets (660) (835)
Experience gains on scheme liabilities (54) (31)
Actuarial gains arising from changes in demographic assumptions 48 1
Actuarial gains/(losses) arising from changes in financial assumptions 548 868
Movement in surplus restriction 4 (20)
(114) (17)
Changes in present value of funded scheme assets
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period 3,067 225 22 3,314
Interest on assets 105 10 1 116
Actuarial movement on scheme assets (638) (21) (1) (660)
Scheme administration costs (5) (1) - (6)
Foreign exchange rate movements - (10) - (10)
Assets distributed on settlements - (4) - (4)
Benefits paid (162) (13) (2) (177)
At end of period 2,367 186 20 2,573
31 July 2022 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period 4,104 272 30 4,406
Interest on assets 70 8 1 79
Actuarial movement on scheme assets (773) (62) - (835)
Employer contributions 3 - 1 4
Scheme administration costs (3) (1) - (4)
Foreign exchange rate movements - 33 - 33
Assets transferred on business disposal - - (5) (5)
Assets distributed on settlements (180) - - (180)
Curtailment gains/(losses) - (9) - (9)
Benefits paid (154) (16) (5) (175)
At end of period 3,067 225 22 3,314
Changes in present value of funded defined benefit obligations
31 July 2023 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period (2,738) (238) (27) (3,003)
Past service costs 4 - - 4
Interest on obligations (94) (10) (1) (105)
Actuarial movement on liabilities 510 19 1 530
Foreign exchange rate movements - 11 - 11
Liabilities extinguished on settlements - 3 - 3
Benefits paid 162 13 2 177
At end of period (2,156) (202) (25) (2,383)
31 July 2022 - £m
UK US Other Total
schemes
schemes
countries
At beginning of period (3,558) (273) (38) (3,869)
Past service costs (43) - - (43)
Interest on obligations (61) (8) (1) (70)
Actuarial movement on liabilities 761 54 2 817
Foreign exchange rate movements - (33) - (33)
Liabilities transferred on business disposal - - 5 5
Curtailment gains/(losses) - 6 - 6
Liabilities extinguished on settlements 9 - - 9
Benefits paid 154 16 5 175
At end of period (2,738) (238) (27) (3,003)
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 2023
31 July 2022
31 July 2023
31 July 2022
£m
£m
£m
£m
At beginning of period - - (98) (124)
Current service cost - - (1) (1)
Interest on obligations - - (3) (2)
Actuarial movement - - 12 21
Employer contributions 5 5 - -
Liabilities transferred on business disposal - - - 4
Benefits paid (5) (5) 5 5
At end of period - - (85) (97)
Changes in the effect of the asset ceiling over the year
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Irrecoverable asset at beginning of period (20) -
Actuarial movement on scheme assets 4 (20)
At end of period (16) (20)
Cash contributions
Company contributions to the defined benefit pension plans and post-retirement
healthcare plans totalled £5m (FY2022: £9m). No contributions were made to
funded schemes in the year (FY2022: £3m to SIPS, £1m to Other). During the
year, £5m (FY2022: £5m) was spent on providing benefits under unfunded
defined benefit pension and post-retirement healthcare plans.
In FY2024, cash contributions to the Group's schemes are expected to be up to
£10m 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 & People Committee, as a part
of recruitment strategy, to make awards in recognition of incentive
arrangements forfeited on leaving a previous employer. If an award is
considered appropriate, the award will take account of relevant factors
including the fair value of awards forfeited, any performance conditions
attached, the likelihood of those conditions being met and the proportion of
the vesting period remaining.
Save as you earn (SAYE)
The SAYE scheme is an HM Revenue & Customs approved all-employee
savings-related share option scheme which is open to all UK employees.
Participants enter into a contract to save a fixed amount per month of up to
£500 in aggregate for three years and are granted an option over shares at a
fixed option price, set at a discount to market price at the date of
invitation to participate. The number of shares is determined by the monthly
amount saved and the bonus paid on maturity of the savings contract. Options
granted under the SAYE scheme are not subject to any performance conditions.
Ordinary shares under option/award ('000) Long-term SEP Restricted Save as you earn Total Weighted
incentive
stock
scheme
average
plans
exercise
price
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
Granted 2,023 - 24 253 2,300 £1.47
Exercised (309) - (20) (109) (438) £2.88
Lapsed (2,196) - - (71) (2,267) £0.33
31 July 2023 4,828 - 87 958 5,873 £1.78
Options and awards were exercised on an irregular basis during the period. The
average closing share price over the financial year was 1,629.8p (FY2022:
1,476.3p). 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 2023 was nil (31 July 2022: nil).
Range of exercise prices Total shares under Weighted average Total shares under Weighted
options/awards
remaining contractual
options/awards
average
at 31 July 2023
life at 31 July 2023
at 31 July 2022
remaining contractual
('000)
(months)
('000)
life at 31 July 2022
(months)
£0.00 - £2.00 4,915 17 5,393 19
£6.01 - £10.00 444 6 490 18
£10.01 - £12.00 514 33 395 29
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% (FY2022: 25% to 20%) and
dividend yield of 2.4% (FY2022: 2.6%), based on historical data, for the
period corresponding with the vesting period of the option. These generated a
weighted average fair value for LTIP of £15.03 (FY2022: £14.81), and
restricted stock of £14.60 (FY2022: £14.59). Staff costs included £14m
(FY2022: £15m) for share-based payments, of which £13m (FY2022: £14m)
related to equity-settled share-based payments.
10 Intangible assets
Goodwill Development Acquired Software, patents and intellectual Total
£m
costs
intangibles (see table below)
property
£m
£m
£m
£m
Cost
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
Foreign exchange rate movements (45) (2) (31) (3) (81)
Business combinations 7 - 13 - 20
Additions - 21 - 7 28
Disposals - - - (38) (38)
At 31 July 2023 1,273 193 612 159 2,237
Amortisation and impairments
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
Foreign exchange rate movements (3) (1) (19) (4) (27)
Amortisation charge for the year - 2 52 7 61
Disposals - - - (38) (38)
At 31 July 2023 64 124 406 122 716
Net book value at 31 July 2023 1,209 69 206 37 1,521
Net book value at 31 July 2022 1,244 51 257 36 1,588
Net book value at 31 July 2021 1,148 42 275 33 1,498
In addition to goodwill, acquired intangible assets comprise:
Patents, licences Technology Customer Total
and trademarks
£m
relationships
acquired
£m
£m
intangibles
£m
Cost
At 31 July 2021 17 134 411 562
Foreign exchange rate movements 2 18 48 68
At 31 July 2022 19 152 459 630
Foreign exchange rate movements - (9) (22) (31)
Business combinations 1 2 10 13
At 31 July 2023 20 145 447 612
Amortisation
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
Foreign exchange rate movements - (6) (13) (19)
Charge for the year 1 11 40 52
At 31 July 2023 9 92 305 406
Net book value at 31 July 2023 11 53 142 206
Net book value at 31 July 2022 11 65 181 257
Net book value at 31 July 2021 12 67 196 275
Individually material intangible assets comprise:
- £53m of customer-related intangibles attributable to United Flexible
(remaining amortisation period: 4 years);
- £48m of customer-related intangibles attributable to Morpho Detection
(remaining amortisation period: 6 years);
- £27m of customer-related intangibles attributable to Royal Metal (remaining
amortisation period: 5 years),;
- £24m of development cost intangibles attributable to a computed tomography
programme in Detection that is currently under development; and
- £18m of development cost intangibles attributable to a X-ray diffraction
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:
2023 2023 2022 2022
£m
Number of
£m
Number of
CGUs
CGUs
John Crane 131 1 132 1
Smiths Detection* 630 1 644 2
Flex-Tek 183 1 194 1
Smiths Interconnect 265 1 274 1
1,209 4 1,244 5
* In FY2022 the Smiths Detection CGU was restructured. The Detection
Russia business split into a separate CGU and subsequently fully impaired.
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 FY2024 business plan and the five-year detailed divisional
strategic projections which have been prepared by divisional management and
approved by the Board.
The principal assumptions used in determining the value in use were:
- Revenue: Projected sales were built up with reference to markets and product
categories. They incorporated past performance, historical growth rates and
projections of developments in key markets;
- Average earnings before interest and tax margin: Projected margins reflect
historical performance, our expectations for future cost inflation and the
impact of all completed projects to improve operational efficiency and
leverage scale. The projections did not include the impact of future
restructuring projects to which the Group was not yet committed;
- Projected capital expenditure: The cash-flow forecasts for capital
expenditure were based on past experience and included committed ongoing
capital expenditure consistent with the FY2024 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 determined with reference to
illustrative weighted average cost of capital (WACC) for each CGU. In
determining these discount rates, management have considered systematic risks
specific to each of the Group's CGUs. These risk adjusted discount rates have
then been validated against the Group's WACC, the WACCs of the CGU's peer
group and an average of discount rates used by other companies for the
industries in which Smiths divisions operate. Pre-tax rates of 11.4% to 13.0%
(FY2022: 11.3% to 12.3%) have been used for the impairment testing; and
- Long-term growth rates: For the purposes of the Group's value in use
calculations, a long-term growth rate into perpetuity was applied immediately
at the end of the five-year detailed forecast period. CGU-specific long-term
growth rates have been calculated by revenue weighting the long-term GDP
growth rates of the markets that each CGU operates in. The long-term growth
rates used in the testing ranged from 2.2% to 2.7% (FY2022: 1.7% to 2.4%).
These rates do not reflect the long-term assumptions used by the Group for
investment planning.
Of the principal assumptions above, the key assumptions that the impairment
models are most sensitive to are: the revenue growth assumption; the average
earnings before interest and tax margin assumption; and the discount rate
assumption.
The assumptions used in the impairment testing of CGUs with significant
goodwill balances were as follows:
As at 31 May 2023
John Crane Smiths Flex-Tek Smiths
Detection
Interconnect
Net book value of goodwill (£m) 135 649 191 279
Basis of valuation Value in use Value in use Value in use Value in use
Discount rate - pre-tax 13.0% 12.2% 11.8% 11.5%
- post-tax 9.7% 9.3% 9.4% 9.4%
Period covered by management projections 5 years 5 years 5 years 5 years
Capital expenditure - annual average over projection period (£m) 27 27 10 20
Revenue - compound annual growth rate over projection period 5.3% 4.5% 3.4% 4.7%
Average earnings before interest and tax margin 24.6% 14.5% 19.5% 18.6%
Long-term growth rates 2.7% 2.4% 2.2% 2.5%
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 - compound 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%
Forecast earnings before interest and tax have been projected using:
- Expected future sales based on the strategic plan, which was constructed at
a market level with input from key account managers, product line managers,
business development and sales teams. An assessment of the market and existing
contracts/programmes was made to produce the sales forecast; and
- Current cost structure and production capacity, which include our
expectations for future cost inflation. The projections did not include the
impact of future restructuring projects to which the Group was not yet
committed.
Sensitivity analysis
Smiths Detection is the only CGU of the Group that has limited goodwill
impairment testing headroom. For all of the Group's other CGUs the recoverable
amount of the CGU exceeded the carrying value, on the basis of the assumptions
set out in the preceding tables and any reasonably possible changes thereof.
The estimated recoverable amount of the Smiths Detection CGU exceeded the
carrying value by £225m. Any decline in estimated value in use in excess of
this amount would result in the recognition of impairment charges.
Management recognise that the goodwill impairment testing headroom of the
Smiths Detection CGU is most sensitive to movements in the revenue growth
rate, the EBIT margin and the discount rate assumptions. Of these key
assumptions, management consider that the EBIT margin assumption is the most
sensitive.
The Smiths Detection financial model assumes that EBIT margins grow from 11.2%
in FY2023 to an average of 14.5% over the five-year financial model period.
This increase in EBIT margin is principally driven by a change in revenue and
profit mix, with the proportion of higher margin aftermarket revenue growing
over the five-year projection period.
Management considers that it is plausible that this margin growth may not be
fully captured by the business. For the CGU to be impaired, the average EBIT
margin over the five-year financial model would have to be less than 12.3%;
management recognises this to be a reasonably plausible downside scenario.
If the assumptions used in the impairment review were changed to a greater
extent than as presented in the following table, the changes would, in
isolation, lead to impairment losses being recognised for the year ended 31
July 2023:
Change required for carrying value to equal recoverable amount - FY2023 Smiths Detection
Revenue - compound annual growth rate (CAGR) over five-year projection period -460 bps decrease
Average earnings before interest and tax margin -220 bps decrease
Post-tax discount rate +140 bps increase
Change required for carrying value to equal recoverable amount - FY2022 Smiths Detection
Revenue - compound annual growth rate (CAGR) over five-year projection period -240 bps decrease
Average earnings before interest and tax margin -130 bps decrease
Post-tax discount rate +70 bps increase
Note: Long-term growth rates are not included in the sensitivity tables above
as management consider that there is no reasonably possible change in
long-term growth rate that would result in an impairment.
Property, plant and equipment, right of use assets and finite-life
intangible assets
At each reporting period date, the Group reviews the carrying amounts of its
property, plant, equipment, right of use assets and finite-life intangible
assets to determine whether there is any indication that those assets have
suffered an impairment loss.
The Group has no indefinite life intangible assets other than goodwill. During
the year, impairment tests were carried out for capitalised development costs
that have not yet started to be amortised and acquired intangibles where there
were indications of impairment. Value in use calculations were used to
determine the recoverable values of these assets.
12 Property, plant and equipment
Land and Plant and Fixtures, Total
buildings
machinery
fittings,
£m
£m
£m
tools and
equipment
£m
Cost or valuation
At 31 July 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
Foreign exchange rate movements (6) (14) (2) (22)
Business combinations - 2 - 2
Additions 10 33 10 53
Disposals (2) (15) (17) (34)
At 31 July 2023 178 463 120 761
Depreciation
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
Foreign exchange rate movements (4) (8) (2) (14)
Charge for the year 8 25 9 42
Disposals (2) (14) (17) (33)
At 31 July 2023 110 302 102 514
Net book value at 31 July 2023 68 161 18 247
Net book value at 31 July 2022 68 158 17 243
Net book value at 31 July 2021 66 128 18 212
13 Right of use assets
Properties Vehicles Equipment Total
£m
£m
£m
£m
Cost or valuation
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
Foreign exchange rate movements (6) (1) - (7)
Recognition of right of use asset 27 7 1 35
Derecognition of right of use asset (5) - - (5)
At 31 July 2023 190 27 2 219
Depreciation
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
Foreign exchange rate movements (4) - - (4)
Charge for the year 27 4 1 32
Derecognition of right of use asset (4) - - (4)
At 31 July 2023 94 19 1 114
Net book value at 31 July 2023 96 8 1 105
Net book value at 31 July 2022 99 6 1 106
Net book value at 31 July 2021 100 7 1 108
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 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
Fair value change through profit and loss - (6) - - (6)
Fair value change through other comprehensive income (17) - (1) - (18)
At 31 July 2023 347 13 7 4 371
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 US$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 2023 31 July 2022
£m
£m
Raw materials and consumables 201 187
Work in progress 130 106
Finished goods 306 277
Total inventories 637 570
In FY2023, operating costs included £1,622m (FY2022: £1,323m) of inventory
consumed, £26m (FY2022: £12m) was charged for the write-down of inventory
and £16m (FY2022: £12m) was released from provisions no longer required.
Inventory provisioning
31 July 2023 31 July 2022
£m
£m
Gross inventory carried at full value 545 492
Gross value of inventory partly or fully provided for 158 131
703 623
Inventory provision (66) (53)
Inventory after provisions 637 570
16 Trade and other receivables
31 July 2023 31 July 2022
£m
£m
Non-current
Trade receivables 2 1
Contract assets 65 58
Other receivables 8 10
75 69
Current
Trade receivables 493 506
Prepayments 40 33
Contract assets 121 127
Other receivables 118 72
772 738
Trade receivables do not carry interest. Management considers that the
carrying value of trade and other receivables approximates to the fair value.
Trade and other receivables, including accrued income and other receivables
qualifying as financial instruments are accounted for at amortised cost. The
maximum credit exposure arising from these financial assets was £744m
(FY2022: £726m).
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
(FY2022: £19m) principally within Smiths Interconnect and Smiths Detection,
offset by £9m decreases in John Crane and £7m (FY2022: £15m) decrease due
to foreign currency translation losses.
A number of Flex-Tek's and Interconnect's customers provide supplier finance
schemes which allow their suppliers to sell trade receivables, without
recourse, to banks. This is commonly known as invoice discounting or
factoring. During FY2023 the Group collected £128m of receivables through
these schemes (FY2022: £92m). The impact of invoice discounting on the FY2023
balance sheet was that trade receivables were reduced by £26m (2022: £19m).
Costs of discounting were £2m (FY2022: less than £1m), charged to the income
statement within financing costs. The cash received via these schemes was
classified as an operating cash inflow as it had arisen from operating
activities.
Trade receivables are disclosed net of provisions for expected credit loss,
with historical write-offs used as a basis, adjusted for factors that are
specific to the debtor, general economic conditions of the industry in which
the debtor operates and a default risk multiplier applied to reflect country
risk premium. Credit risk is managed separately for each customer and, where
appropriate, a credit limit is set for the customer based on previous
experience of the customer and third-party credit ratings. The Group has no
significant concentration of credit risk, with exposure spread over a large
number of customers. The largest single customer was the US Federal
Government, representing 7% (FY2022: 7%) of Group revenue.
Ageing of trade receivables
31 July 2023 31 July 2022
£m
£m
Trade receivables which are not yet due 389 396
Trade receivables which are between 1-30 days overdue 52 51
Trade receivables which are between 31-60 days overdue 19 24
Trade receivables which are between 61-90 days overdue 12 11
Trade receivables which are between 91-120 days overdue 8 7
Trade receivables which are more than 120 days overdue 45 54
525 543
Expected credit loss allowance provision (30) (36)
Trade receivables 495 507
Movement in expected credit loss allowance
31 July 2023 31 July 2022
£m
£m
Brought forward loss allowance at the start of the period 36 32
Exchange adjustments (1) 4
Increase in allowance recognised in the income statement 4 8
Amounts written off or recovered during the year (9) (8)
Carried forward loss allowance at the end of the year 30 36
17 Trade and other payables
31 July 2023 31 July 2022
£m
£m
Non-current
Other payables 13 13
Contract liabilities 27 33
40 46
Current
Trade payables 247 282
Other payables 51 57
Other taxation and social security costs 66 30
Accruals 200 183
Contract liabilities 159 130
723 682
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 £186m (FY2022:
£163m) 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 £97m (FY2022: £113m) 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 2023 31 July 2022
£m
£m
Cash and cash equivalents
Net cash and deposits 285 1,056
Short-term borrowings
€600m 1.25% Eurobond 2023 - (502)
Overdrafts - (1)
Lease liabilities (26) (29)
Interest accrual (3) (6)
(29) (538)
Long-term borrowings
€650m 2.00% Eurobond 2027 (534) (538)
Lease liabilities (91) (90)
(625) (628)
Borrowings/gross debt (654) (1,166)
Derivatives managing interest rate risk and currency profile of the debt (18) (40)
Net debt (387) (150)
Cash and cash equivalents
31 July 2023 31 July 2022
£m
£m
Cash at bank and in hand 175 242
Short-term deposits 110 814
Cash and cash equivalents 285 1,056
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 £17m (FY2022: £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
assets
£m
£m
liabilities £m
£m
£m
Derivatives managing interest rate risk and currency profile of the debt - - - (18) (18)
Foreign exchange forward contracts - 5 (2) - 3
At 31 July 2023 - 5 (2) (18) (15)
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)
Movements in assets/(liabilities) arising from financing activities
Changes in net debt Changes in other financing items: FX contracts Total liabilities from financing
£m
activities
£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 2022 1,056 (538) (628) (40) (150) (3) (153)
Foreign exchange gains/(losses) (10) (21) (10) - (41) (4,031) (4,072)
Net cash inflow from continuing operations (761) 564 - 8 (189) 4,031 3,842
Net movement from new leases and modifications - (34) - - (34) - (34)
Interest rate hedge fair value movements - (2) 16 - 14 - 14
Revaluation of derivative contracts - - - 14 14 6 20
Interest expense taken to income statement* - 28 - - 28 - 28
Interest paid - (29) - - (29) - (29)
Reclassifications - 3 (3) - - - -
At 31 July 2023 285 (29) (625) (18) (387) 3 (384)
* The Group has also incurred £9m (FY2022: £8m) of bank charges that were
expensed when paid and were not included in net debt.
Changes in net debt Changes in other financing items: FX contracts Total liabilities from financing
£m
activities
£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 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)
Interest rate hedge fair value movements - 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
Reclassifications - (478) 478 - - - -
At 31 July 2022 1,056 (538) (628) (40) (150) (3) (153)
* In FY22, the net cash inflow for the total Group including discontinued
operations was £589m, £57m of which related to the cash held by Smiths
Medical at the time of disposal.
** The Group has also incurred £9m (FY2022: £8m) 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 2023 the total value of overdrafts on accounts in
interest compensation cash pooling systems was £nil (FY2022: £nil). The
balances held in zero balancing cash pooling arrangements have daily
settlement of balances. Therefore netting is not relevant.
Change of control
The Company has in place credit facility agreements under which a change of
control would trigger prepayment clauses. The Company has one bond in issue,
the terms of which would allow bondholders to exercise put options and require
the Company to buy back the bonds at their principal amount plus interest if a
rating downgrade occurs at the same time as a change of control takes effect.
Lease liabilities
Lease liabilities have been measured at the present value of the remaining
lease payments. The weighted average incremental borrowing rate applied to
lease liabilities in FY2023 was 4.01% (FY2022: 3.63%).
19 Financial risk management
The Group's international operations and debt financing expose it to financial
risks which include the effects of changes in foreign exchange rates, debt
market prices, interest rates, credit risks and liquidity risks. The
management of operational credit risk is discussed in note 16.
Treasury Risk Management Policy
The Board maintains a Treasury Risk Management Policy, which governs the
treasury operations of the Group and its subsidiary companies and the
consolidated financial risk profile to be maintained. A report on treasury
activities, financial metrics and compliance with the Policy is circulated to
the Chief Financial Officer each month and key elements to the Audit &
Risk Committee on a semi-annual basis.
The Policy maintains a treasury control framework within which counterparty
risk, financing and debt strategy, cash and liquidity, interest rate risk and
currency translation management are reserved for Group Treasury, while
currency transaction management is devolved to operating divisions.
Centrally directed cash management systems exist globally to manage overall
liquid resources efficiently across the divisions. The Group uses financial
instruments to raise financing for its global operations, to manage related
interest rate and currency financial risk, and to hedge transaction risk
within subsidiary companies.
The Group does not speculate in financial instruments. All financial
instruments hedge existing business exposures and all are recognised on the
balance sheet.
The Policy defines four treasury risk components and for each component a set
of financial metrics to be measured and reported monthly against pre-agreed
objectives.
1) Credit quality
The Group's strategy is to maintain a solid investment-grade rating to ensure
access to the widest possible sources of financing at the right time and to
optimise the resulting cost of debt capital. The credit ratings at the end of
July 2023 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 (excluding leases) is at fixed rates. At 31 July 2023 these
measures were 100% (FY2022: 100%), 3.6 years (FY2022: 2.7 years) and 54%
(FY2022: 44%).
The Group has no financial covenants in its external debt agreements. Interest
rate risk management is discussed in note 19(b).
3) Liquidity management
The Group's objective is to ensure that at any time undrawn committed
facilities, net of short-term overdraft financing, are at least £300m and
that committed facilities have at least 12 months to run until maturity. At 31
July 2023, these measures were £622m (FY2022: £657m) and 57 months (FY2022:
27 months). At 31 July 2023, net cash resources were £285m (FY2022:
£1,055m). Liquidity risk management is discussed in note 19(d).
4) Currency management
The Group is an international business with the majority of its net assets
denominated in foreign currency. It protects the balance sheet and reserves
from adverse foreign exchange movements by financing foreign currency assets
where appropriate in the same currency. The Group's objective for managing
transaction currency exposure is to reduce medium-term volatility to
cash-flow, margins and earnings. Foreign exchange risk management is discussed
in note 19(a) below.
(a) Foreign exchange risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases
by businesses in currencies other than their functional currency. It is Group
policy that, when the net foreign exchange exposure to known future sales and
purchases is material, this exposure is hedged using forward foreign exchange
contracts. The net exposure is calculated by adjusting the expected cash-flow
for payments or receipts in the same currency linked to the sale or purchase.
This policy minimises the risk that the profits generated from the transaction
will be affected by foreign exchange movements which occur after the price has
been determined. Hedge accounting documentation and effectiveness testing are
only undertaken if it is cost-effective.
The following table shows the currency of financial instruments. It excludes
loans and derivatives designated as net investment hedges.
At 31 July 2023
Sterling US$ Euro Other Total
£m
£m
£m
£m
£m
Financial assets and liabilities
Financial instruments included in trade and other receivables 43 372 127 184 726
Financial instruments included in trade and other payables (64) (216) (93) (103) (476)
Cash and cash equivalents 50 115 29 91 285
Borrowings not designated as net investment hedges (27) (54) (12) (24) (117)
2 217 51 148 418
Exclude balances held in operations with the same functional currency. (7) (287) (57) (153) (504)
Exposure arising from intra-Group loans - 127 28 (73) 82
Future forward foreign exchange contract cash-flows (63) (23) (48) 133 (1)
(68) 34 (26) 55 (5)
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)
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
FY2023
FY2023
FY2022
FY2022
£m
£m
£m
£m
US dollar - 1 (3) 1
Euro 1 - 8 (1)
Sterling - (1) 4 -
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 2023, contracts with a nominal value
of £123m (FY2022: £141m) were designated as hedging instruments. In
addition, the Group had outstanding foreign currency contracts with a nominal
value of £252m (FY2022: £226m) 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 (FY2022: 98%).
The following table presents a reconciliation by risk category of the
cash-flow hedge reserve and analysis of other comprehensive income in relation
to hedge accounting:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Brought forward cash-flow hedge reserve at start of year (3) 2
Foreign exchange forward contracts: Net fair value gains on effective hedges 1 (6)
Amount reclassified to income statement - finance costs 2 1
Carried forward cash-flow hedge reserve at end of year - (3)
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 FY2023 1 (1) 1
FY2022 (6) 6 (6)
Cash-flow hedges generated £nil of ineffectiveness in FY2023 (FY2022: £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 2023 At 31 July 2022
US$ Euro Total US$ Euro Total
£m
£m
£m
£m
£m
£m
Loans designated as net investment hedges - (293) (293) - (451) (451)
Cross-currency swap (247) - (247) (615) - (615)
(247) (293) (540) (615) (451) (1,066)
At 31 July 2023, cross-currency swaps hedged the Group's exposure to US
dollars and euros (31 July 2022: US dollars and euros). All the
cross-currency swaps designated as net investment hedges were non-current
(FY2022: current and non-current). Swaps generating £247m of the US dollar
exposure (FY2022: £261m) will mature in February 2027.
In addition, non-swapped borrowings were also used to hedge the Group's
exposure to euros (31 July 2022: US dollars and euros). Borrowings generating
£293m of the euro exposure (FY2022: £287m) will mature in February 2027.
Hedge effectiveness is determined at the inception of the hedge relationship,
and through periodic prospective effectiveness assessments to ensure that an
economic relationship exists between the hedged item and hedging instrument.
The swaps and borrowings have the same notional amount as the hedged items
and, therefore, there is an economic relationship with the hedge ratio
established as 1:1.
The main sources of hedge ineffectiveness in these hedging relationships are
the effect of the counterparty and the Group's own credit risk on the fair
value of the foreign exchange forward contracts which is not reflected in the
fair value of the hedged item and the risk of over-hedging where the hedge
relationship requires re-balancing. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness is
recognised immediately in the income statement in the period that it occurs.
The following table presents a reconciliation by risk category of the net
investment hedge reserve and analysis of other comprehensive income in
relation to hedge accounting:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Brought forward net investment hedge reserve at start of year (207) (238)
Cross-currency swaps * Net fair value gains on effective hedges 40 (77)
Bonds Net fair value gains on effective hedges (29) 5
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 (196) (207)
* The FY2022 reported amount for net fair value losses on effective
hedges of cross-currency swaps was incorrectly presented as £82m rather than
£77m. The total reserve balances and net assets for FY2022 are not impacted
by the correction to this table.
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 operation Foreign currency risk Cross-currency swaps FY2023 (40) 40 40
Bonds FY2023 29 (29) (29)
(11) 11 11
Overseas operation Foreign currency risk Cross-currency swaps FY2022 82 (82) (82)
Bonds FY2022 (5) 5 5
77 (77) (77)
Net investment hedges generated £1m of ineffectiveness in FY2022 (FY2022:
£1m) which was recognised in the income statement through finance costs.
The fair values of these net investment hedges are subject to exchange rate
movements. Based on the hedging instruments in place at the year-end, if the
specified currencies were to strengthen 10% while all other market rates
remained constant, it would have the following effect:
Loss Loss
recognised
recognised
in hedge
in hedge
reserve
reserve
31 July 2023
31 July 2022
£m
£m
US dollar 27 68
Euro 33 50
These movements would be fully offset by an opposite movement on the
retranslation of the net assets of the overseas subsidiaries. These
sensitivities were calculated before adjusting for tax.
(b) Interest rate risk
The Group operates an interest rate policy designed to optimise interest cost
and reduce volatility in reported earnings. The Group's current policy is to
require interest rates to be fixed within a band of between 40% and 60 % of
the level of gross debt (excluding leases). This is achieved through fixed
rate borrowings and interest rate swaps. At 31 July 2023 54% (FY2022: 44%) of
the Group's gross borrowings (excluding leases) were at fixed interest rates,
after adjusting for interest rate swaps and the impact of short maturity
derivatives designated as net investment hedges.
The Group monitors its fixed rate risk profile against both gross and net
debt. For medium-term planning, it focuses on gross debt to eliminate the
fluctuations of variable cash levels over the cycle. The weighted average
interest rate on borrowings and cross-currency swaps at 31 July 2023, after
interest rate swaps, was 4.53% (FY2022: 3.06%).
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 2023
At fair value Cash and Borrowings Fair value of
through
cash
£m
borrowings
profit or loss
equivalents
£m
£m
£m
Fixed interest
Less than one year - - (29) (29)
Between one and five years - - (365) (347)
Greater than five years - - (24) (24)
Total fixed interest financial liabilities - - (418) (400)
Floating rate interest financial assets/(liabilities) 4 215 (236) (240)
Total interest-bearing financial assets/(liabilities) 4 215 (654) (640)
Non-interest-bearing assets in the same category - 70 - -
Total 4 285 (654) (640)
As at 31 July 2022
At fair value through profit or loss Cash and Borrowings Fair value of
£m
cash
£m
borrowings
equivalents
£m
£m
Fixed interest
Less than one year - - (203) (203)
Between one and five years - - (357) (359)
Greater than five years - - (24) (24)
Total fixed interest financial liabilities - - (584) (586)
Floating rate interest financial assets/(liabilities)* 4 970 (582) (586)
Total interest-bearing financial assets/(liabilities) 4 970 (1,166) (1,172)
Non-interest-bearing assets in the same category - 86 - -
Total 4 1,056 (1,166) (1,172)
* Floating rate interest financial assets in the prior year have been
amended to remove the investments in ICU Medical Inc., contingent
consideration and investments in early-stage business that were incorrectly
reported as having interest rate exposure.
Interest rate hedging
The Group also has exposures to the fair values of non-derivative financial
instruments such as EUR fixed rate borrowings. To manage the risk of changes
in these fair values, the Group has entered into fixed-to-floating interest
rate swaps and cross-currency interest rate swaps, which for accounting
purposes are designated as fair value hedges.
At 31 July 2023 and 31 July 2022, the Group had designated the following
hedges against variability in the fair value of borrowings arising from
fluctuations in base rates:
- €300m of the fixed/floating and € exchange exposure of EUR/USD interest
rate swaps maturing on 23 February 2027 partially hedging the € 2027
Eurobond; and
- €400m of the fixed/floating element of the EUR/USD interest rate swaps
that partially hedged the € 2023 Eurobond was repaid on 28 April 2022.
The fair values of the hedging instruments are disclosed in note 20. The
effect of the swaps was to convert £257m (FY2022: £588m) debt from fixed
rate to floating rate. The swaps have similar critical terms to the hedged
items, such as the reference rate, reset dates, notional amounts, payment
dates and maturities. Therefore, there is an economic relationship and the
hedge ratio is established as 1:1. Hedge effectiveness is determined at the
inception of the hedge relationship, and through periodic prospective
effectiveness assessments to ensure that an economic relationship exists
between the hedged item and hedging instrument.
The main source of hedge ineffectiveness in these hedging relationships is the
effect of the currency basis risk on cross-currency interest rate swaps which
are not reflected in the fair value of the hedged item. No other sources of
ineffectiveness emerged from these hedging relationships. Any hedge
ineffectiveness was recognised immediately in the income statement in the
period in which it occurred.
The following table sets out the details of the hedged exposures covered by
the Group's fair value hedges:
Hedged item Hedged exposure Financial year Changes in value of hedged item for calculating ineffectiveness Changes in value of the hedging instrument for calculating ineffectiveness
£m
£m
Carrying amount Accumulated fair value
adjustments on hedged item
Assets Liabilities Assets Liabilities
£m
£m
£m
£m
Fixed rate Interest rate risk FY2023 (2) 2 - - - -
bonds (a)
Interest rate & FY2023 16 (16) - 233 - (21)
currency rate risk
14 (14) - 233 - (21)
Fixed rate bonds (a) Interest rate risk FY2022 8 (8) - 336 - (2)
Interest rate & FY2022 21 (20) - 252 - (5)
currency rate risk
29 (28) - 588 - (7)
(a) Classified as borrowings.
Fair value hedges generated a £nil ineffectiveness in FY2023 (FY2022: £1m)
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 2023, 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 (FY2022: £2m impact) on the Group's profit before
tax.
(c) Financial credit risk
The Group is exposed to credit-related losses in the event of non-performance
by counterparties to financial instruments, but does not currently expect any
counterparties to fail to meet their obligations. Credit risk is mitigated by
the Board-approved policy of only placing cash deposits with highly rated
relationship bank counterparties within counterparty limits established by
reference to their Standard & Poor's long-term debt rating. In the normal
course of business, the Group operates cash pooling systems, where a legal
right of set-off applies.
The maximum credit risk exposure in the event of other parties failing to
perform their obligations under financial assets, excluding trade and other
receivables and derivatives, totals £295m at 31 July 2023 (FY2022: £1,067m).
31 July 2023 31 July 2022
£m
£m
Cash in AAA liquidity funds 78 551
Cash at banks with at least a AA- credit rating 31 104
Cash at banks with all other A credit ratings 170 397
Cash at other banks 6 4
Investments in bank deposits 4 4
Other investments 7 7
296 1,067
At 31 July 2023, the maximum exposure with a single bank for deposits and cash
was £65m (FY2022: £339m). The bank has a credit rating of A+. The maximum
mark to market exposure with a single bank for derivatives was out of the
money in both the current and prior year and does not represent a credit risk.
(d) Liquidity risk
Borrowing 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 US$800m maturing 5 May 2028. At the balance
sheet date, the Group had the following undrawn credit facilities:
31 July 2023 31 July 2022
£m
£m
Expiring after more than four years (FY 2022: two years) 622 657
Cash deposits
As at 31 July 2023, £110m (FY2022: £814m) of cash and cash equivalents was
on deposit with various banks of which £78m (FY2022: £558m) was in liquidity
funds. £4m (FY2022: £4m) of investments comprised bank deposits held to
secure liabilities and letters of credit.
Gross contractual cash-flows for borrowings
As at 31 July 2023
Borrowings Fair value Contractual Total
£m
adjustments
interest
contractual
£m
payments
cash-flows
£m
£m
Less than one year (29) - (11) (40)
Between one and two years (27) - (11) (38)
Between two and three years (20) - (11) (31)
Between three and four years (13) - (11) (24)
Between four and five years (561) 21 - (540)
Greater than five years (24) - - (24)
Total (674) 21 (44) (697)
As at 31 July 2022
Borrowings Fair value Contractual Total
£m
adjustments
interest
contractual
£m
payments
cash-flows
£m
£m
Less than one year (539) 2 (17) (554)
Between one and two years (23) - (11) (34)
Between two and three years (20) - (11) (31)
Between three and four years (14) - (11) (25)
Between four and five years (552) 5 (11) (558)
Greater than five years (24) - - (24)
Total (1,172) 7 (61) (1,226)
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 2023
Receipts Payments Net
£m
£m
cash-flow
£m
Assets
Less than one year 209 (204) 5
Greater than one year 6 (6) -
Liabilities
Less than one year 159 (161) (2)
Greater than one year 252 (270) (18)
Total 626 (641) (15)
As at 31 July 2022
Receipts Payments Net
£m
£m
cash-flow
£m
Assets
Less than one year 495 (521) (26)
Greater than one year 270 (290) (20)
Liabilities
Less than one year 212 (209) 3
Greater than one year 8 (8) -
Total 985 (1,028) (43)
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
£463m (FY2022: £474m) due in less than one year, £13m (FY2022: £13m) due
between one and five years and £1m (FY 2022: £nil) due after more than 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 2023
Contract or Fair value
underlying
nominal
amount
£m
Assets Liabilities Net
£m
£m
£m
Foreign exchange contracts (cash-flow hedges) 123 1 (1) -
Foreign exchange contracts (not hedge accounted) 252 4 (1) 3
Total foreign exchange contracts 375 5 (2) 3
Cross-currency swaps (fair value and net investment hedges) 247 - (18) (18)
Total financial derivatives 622 5 (20) (15)
Balance sheet entries:
Non-current 256 - (18) (18)
Current 366 5 (2) 3
Total financial derivatives 622 5 (20) (15)
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)
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 2023
31 July 2023
31 July 2022
31 July 2022
£m
£m
£m
£m
Gross value of assets and liabilities 5 (20) 4 (47)
Related assets and liabilities subject to master netting agreements (5) 5 (4) 4
Net exposure - (15) - (43)
The maturity profile, average interest and foreign currency exchange rates of
the hedging instruments used in the Group's hedging strategies are as follows:
Hedged exposure Hedging instrument Maturity at 31 July 2023 Maturity at 31 July 2022
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 - EUR - Notional amount (£m) - - - 336 - -
- Average spread over three-month EURIBOR - - - 1.015% - -
Interest rate/ Cross-currency swaps (EUR:GBP) - Notional amount (£m) - 254 - - 254 -
foreign currency
risk
- Average exchange rate - 0.845 - - 0.845 -
- Average spread over three-month GBP SONIA - 1.860% - - 1.860% -
Net investment hedges
Foreign currency risk Cross-currency swaps (EUR:USD) - Notional amount (£m) - - - 354 - -
- Average exchange rate - - - 1.0773 - -
Cross-currency swaps (GBP:USD) - Notional amount (£m) - 247 - - 261 -
- Average exchange rate - 1..2534 - - 1.2534 -
Cash-flow hedges
Foreign currency risk Foreign exchange contracts (EUR:GBP) - Notional amount (£m) 41 8 - 28 8 -
- Average exchange rate 0.7842 0.8893 - 0.8323 1.1676 -
Foreign exchange contracts (EUR:USD) - Notional amount (£m) 30 - - 77 - -
- Average exchange rate 1.0939 - - 4.1785 - -
Foreign exchange contracts (USD:GBP) - Notional amount (£m) 18 - - 16 - -
- Average exchange rate 1.2269 - - 1.3273 - -
Foreign exchange contracts (GBP:CZK) - Notional amount (£m) 10 - - 6 - -
- Average exchange rate 27.7919 - - 30.2988 - -
Foreign exchange contracts (EUR:AUD) - Notional amount (£m) 7 - - 6 - -
- Average exchange rate 1.6603 - - 1.5226 - -
At 31 July 2023, the Group had forward foreign exchange contracts with a
nominal value of £123m (FY2022: £141m) 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 19 September 2024. 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.
21 Fair value of financial instruments
As at 31 July 2023 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 - 4 347 351 351
Other investments 14 F - 13 7 20 20
Cash and cash equivalents 18 B 285 - - 285 285
Trade and other financial receivables 16 B/C 726 - - 726 726
Derivative financial instruments 20 C - 5 - 5 5
Total financial assets 1,011 22 354 1,387 1,387
Financial liabilities
Trade and other financial payables B (476) - - (476) (476)
Short-term borrowings 18 B/D (3) - - (3) (3)
Long-term borrowings 18 E (534) - - (534) (520)
Lease liabilities 18 E (117) - - (117) (117)
Derivative financial instruments 20 C - (20) - (20) (20)
Total financial liabilities (1,130) (20) - (1,150) (1,136)
Notes Basis for determining fair value At amortised At fair value through profit or loss At fair value through OCI Total Total
cost
£m
£m
carrying
fair value
£m
value
£m
£m
As at 31 July 2022
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)
The fair value of a financial instrument is the price at which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties
in an arm's-length transaction. Fair values have been determined with
reference to available market information at the balance sheet date, using the
methodologies described below:
A Carrying value is assumed to be a reasonable approximation to fair
value for all of these assets and liabilities (Level 1 as defined by IFRS 13).
B Carrying value is assumed to be a reasonable approximation to fair
value for all of these assets and liabilities (Level 2 as defined by IFRS 13).
C Fair values of derivative financial assets and liabilities, and trade
receivables held to collect or sell are estimated by discounting expected
future contractual cash-flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing
at the balance sheet date. These financial instruments are included on the
balance sheet at fair value, derived from observable market prices (Level 2 as
defined by IFRS 13).
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 2023, commitments, comprising bonds and guarantees arising in the
normal course of business, amounted to £207m (FY2022: £234m), including
pension commitments of £56m (FY2022: £56m) and charitable funding
commitments for the Smiths Group Foundation of £10m (FY2022: Nil). In
addition, the Group has committed expenditure on capital projects amounting
to £13m (FY2022: £15m).
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 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
Comprising:
Current liabilities 10 34 14 30 88
Non-current liabilities 1 195 38 13 247
At 31 July 2022 11 229 52 43 335
Foreign exchange rate movements - (12) (3) - (15)
Provision charged 5 13 - 18 36
Provision released (4) - (7) (14) (25)
Unwind of provision discount - 6 1 - 7
Utilisation (4) (32) (2) (14) (52)
At 31 July 2023 8 204 41 33 286
Comprising:
Current liabilities 6 27 13 24 70
Non-current liabilities 2 177 28 9 216
At 31 July 2023 8 204 41 33 286
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 2023, the Group had warranty and product liability provisions of
£6m (FY2022: £7m). Warranties over the Group's products typically cover
periods of between one and three years. Provision is made for the likely cost
of after-sales support based on the recent past experience of individual
businesses.
Commercial disputes and litigation in respect of ongoing business activities
The Group has on occasion been required to take legal action to protect its
intellectual property and other rights against infringement. It has also had
to defend itself against proceedings brought by other parties, including
product liability and insurance subrogation claims. Provision is made for any
expected costs and liabilities in relation to these proceedings where
appropriate, although there can be no guarantee that such provisions (which
may be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to commercial
disputes and litigation such as government price audits, product liability
claims, employee disputes and other kinds of lawsuits, and faces different
types of legal issues in different jurisdictions. The high level of activity
in the US, for example, exposes the Group to the likelihood of various types
of litigation commonplace in that country, such as 'mass tort' and 'class
action' litigation, legal challenges to the scope and validity of patents, and
product liability and insurance subrogation claims. These types of proceedings
(or the threat of them) are also used to create pressure to encourage
negotiated settlement of disputes. Any claim brought against the Group (with
or without merit) could be costly to defend. These matters are inherently
difficult to quantify. In appropriate cases a provision is recognised based on
best estimates and management judgement but there can be no guarantee that
these provisions (which may be subject to potentially material revision from
time to time) will result in an accurate prediction of the actual costs and
liabilities that may be incurred. There are also contingent liabilities in
respect of litigation for which no provisions are made.
The Group operates in some markets where the risk of unethical or corrupt
behaviour is material and has procedures, including an employee ethics alert
line, to help it identify potential issues. Such procedures will, from time to
time, give rise to internal investigations, sometimes conducted with external
support, to ensure that the Group properly understands risks and concerns and
can take steps both to manage immediate issues and to improve its practices
and procedures for the future. The Group is not aware of any issues which are
expected to generate material financial exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. (JCI) is one of many co-defendants in numerous lawsuits
pending in the United States in which plaintiffs are claiming damages arising
from alleged exposure to, or use of, products previously manufactured which
contained asbestos. Until 2006, the awards, the related interest and all
material defence costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product liability.
Provision is made in respect of the expected costs of defending known and
predicted future claims and of adverse judgements in relation thereto, to the
extent that such costs can be reliably estimated.
The JCI products generally referred to in these cases consist of industrial
sealing products, primarily packing and gaskets. The asbestos was encapsulated
within these products in such a manner that causes JCI to understand, based on
tests conducted on its behalf, that the products were safe. JCI ceased
manufacturing products containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its current and
expected asbestos litigation, including the most efficacious presentation of
its 'safe product' defence, and intends to continue to resist these asbestos
claims based upon this defence. The table below summarises the JCI claims
experience over the last 40 years since the start of this litigation:
Year ended Year ended Year ended Year ended Year ended
31 July 2023
31 July 2022
31 July 2021
31 July 2020
31 July 2019
JCI claims experience
Claims against JCI that have been dismissed 310,000 306,000 305,000 297,000 285,000
Claims JCI is currently a defendant in 20,000 22,000 22,000 25,000 38,000
Cumulative final judgements, after appeals, against JCI since 1979 154 149 149 149 144
Cumulative value of awards (US$m) since 1979 190 175 175 175 168
The number of claims outstanding at 31 July 2023 reflected the benefit of
4,000 (FY2022: 1,000) 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 higher than previous periods, principally
due to the resolution of outstanding verdicts from previous periods. Trial
delays arising from the COVID-19 pandemic have largely abated and trial
activity has returned to pre-pandemic levels.
Established incidence curves can be used to estimate the likely future pattern
of asbestos-related disease. However, JCI's claims experience is also
significantly impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of the
plaintiffs' bar; changing attitudes amongst the judiciary at both trial and
appellate levels in specific jurisdictions which move the balance of risk and
opportunity for claimants; and legislative and procedural changes in both the
state and federal court systems.
The projections use a limited time horizon on the basis that Bates White LLC
consider that there is substantial uncertainty in the asbestos litigation
environment. So probable expenditures are not reasonably estimable beyond this
time horizon. Asbestos is the longest running mass tort litigation in American
history and is constantly evolving in ways that cannot be anticipated. JCI's
defence strategy also generates a significantly different pattern of legal
costs and settlement expenses from other defendants. Thus JCI
is in an extremely rare position, and evidence from other litigation cannot be
used to improve the reliability of the projections.
A ten-year (FY2022: 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 sensitivities
The provision may be subject to potentially material revision from time to
time if new information becomes available as a result of future events. There
can be no guarantee that the assumptions used to estimate the provision will
result in an accurate prediction of the actual costs that will be incurred
because of the significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related litigation, including
the unpredictability of jury verdicts.
John Crane, Inc. statistical reliability of projections over the ten-year time
horizon
In order to evaluate the statistical reliability of the projections, a
population of outcomes is modelled using randomised verdict outcomes. This
generated a distribution of outcomes with future spend at the 5th percentile
of £180m and future spend at the 95th percentile of £245m (FY2022: £203m
and £268m, respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total future spend
will fall between £228m and £257m (FY2022: between £239m and £263m),
compared to the gross provision value of £246m (FY2022: £258m).
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision of £204m (FY2022: £229m) 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 2023
31 July 2022
31 July 2021
31 July 2020
31 July 2019
£m
£m
£m
£m
£m
John Crane, Inc. litigation provision
Gross provision 246 258 220 235 257
Discount (42) (29) (8) (4) (20)
Discounted pre-tax provision 204 229 212 231 237
Deferred tax (51) (57) (54) (59) (50)
Discounted post-tax provision 153 172 158 172 187
Operating profit charge/(credit)
Increased provisions for adverse judgements and legal defence costs 28 24 10 14 7
Change in US risk-free rates (15) (18) (5) 16 8
Subtotal - items charged to the provision 13 6 5 30 15
Litigation management, legal fees in connection with litigation against 2 1 1 1 2
insurers and defence strategy
Recoveries from insurers (7) - (9) (3) (11)
Total operating profit charge/(credit) 8 7 (3) 28 6
Cash-flow
Provision utilisation - legal defence costs and adverse judgements (32) (21) (13) (23) (24)
Litigation management expense (2) (1) - (1) (2)
Recoveries from insurers 7 - 9 3 11
Net cash outflow (27) (22) (4) (21) (15)
John Crane, Inc. sensitivity of the projections to changes in the time horizon
used
If the asbestos litigation environment becomes more volatile and uncertain,
the time horizon over which the provision can be calculated may reduce.
Conversely, if the environment became more stable, or JCI changed approach and
committed to long-term settlement arrangements, the time period covered by the
provision might be extended.
The projections use a ten-year time horizon. Reducing the time horizon by one
year would reduce the provision by £16m (FY2022: £18m) and reducing it by
five years would reduce the provision by £87m (FY2022: £97m).
We consider, after obtaining advice from Bates White LLC, that to forecast
beyond ten years requires that the litigation environment remains largely
unchanged with respect to the historical experience used for estimating future
asbestos expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If one assumed
that the asbestos litigation environment would remain unchanged for longer and
extended the time horizon by one year, it would increase the pre-tax provision
by £13m (FY2022: £15m) and extending it by five years would increase the
pre-tax provision by £48m (FY2022: £56m). 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 marketplace
face similar challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement, together with
recent marketplace activity, provide sufficient evidence to recognise a
liability in the accounts. Therefore provision has been made for the costs
which the Group is expected to incur in respect of future claims to the extent
that such costs can be reliably estimated. Titeflex Corporation sells flexible
gas piping with extensive installation and safety guidance designed to assure
the safety of the product and minimise the risk of damage associated with
lightning strikes.
The assumptions made in assessing the appropriate level of provision, which
are based on past experience, include: the period over which expenditure can
be reliably estimated; the number of future settlements; the average amount of
settlements; and the impact of statutes of repose and safe installation
initiatives on the expected number of future claims. The assumptions relating
to the number of future settlements exclude the use of recent claims history
due to the uncertain impact that the COVID-19 lockdown has had on the number
of claims.
The provision of £41m (FY2022: £52m) 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 2023 31 July 2022
£m
£m
Gross provision 78 87
Discount (37) (35)
Discounted pre-tax provision 41 52
Deferred tax (9) (12)
Discounted post-tax provision 32 40
Titeflex Corporation litigation provision history
A credit of £8m (FY2022: £2m charge) has been recognised by Titeflex
Corporation in respect of changes to the estimated cost of future claims from
insurance companies seeking recompense for damage allegedly caused by
lightning strikes. The lower gross provision value has been principally driven
by an increase in the discount factor deriving 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 £2m (FY2022: £3m) lower, and if the benefit were 0.5%
lower, the provision would be £2m (FY2022: £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 £3m (FY2022: £5m), with an equivalent fall for a reduction of
10%. If the assumed amount of those settlements increased 10%, the provision
would rise by £2m (FY2022: £4m), 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 prior 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 2023, there were reorganisation provisions of £7m (FY2022: £1m)
relating to the various restructuring programmes that are expected to be
utilised in the next 18 months.
Property
At 31 July 2023, there were provisions of £10m (FY2022: £10m) 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 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 buybacks (13,053,169) (32,555,024) (5) (207)
Shares held in Employee Benefit Trust - (1,232,067)
Total share capital at 31 July 2023 349,302,990 352,891,120 131
Share capital structure
As at 31 July 2023, the Company's issued share capital was 349,302,990
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 2023, 3,335,964 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 2022 Annual General Meeting.
At the 2023 AGM, it will be proposed that the Directors be granted new
authorities to allot and buy back shares.
Share buybacks
As at 15 September 2023 (the latest practicable date for inclusion in this
report), the Company had an unexpired authority to repurchase ordinary shares
up to a maximum of 10.7 million ordinary shares (FY2022: 59 million). As at 15
September 2023, 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., 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 US$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 13,008,032 ordinary shares of 37.5p each were repurchased
during the period, for a total consideration of £206,142,265, of which 84,195
shares with a value of £1,430,464 were yet to settle and be cancelled. In
total since the start of the Programme, 47,290,261 shares have been
repurchased, for a total consideration of £718,939,264, representing 11.93%
of the called-up ordinary share capital outstanding at the start of the
Programme.
A further 1,379,697 ordinary shares have been repurchased during the period of
1 August 2023 to 15 September 2023, bringing the total number of shares
repurchased to 48,669,958. At 15 September 2023, the Group had paid £737m of
the expected £742m payable under the Programme, with the remaining £5m
expected to be utilised within the next two weeks.
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 2023, the Trust held 1,742,929 (FY2022: 618,662) 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 2023
31 July 2022
£m
£m
Ordinary final dividend of 27.3p (FY2022: 26.0p) paid 19 November 2022 97 103
Ordinary interim dividend of 12.9p (FY2022: 12.3p) paid 17 May 2023 46 47
143 150
In the current year a total dividend of 40.2p has been paid, comprising a
final dividend of 27.3p paid in respect of FY2022 and an interim dividend of
12.9p paid in respect of FY2023. In the prior year a total dividend of 38.3p
was 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.
The final dividend for the year ended 31 July 2023 of 28.7p per share was
recommended by the Board on 25 September 2023 and will be paid to shareholders
on 24 November 2023, subject to approval by the shareholders. This dividend is
payable to all shareholders on the register of members at 6.00pm on 20 October
2023 (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:
- Winterflood Client Nominees Limited (Buck Trustees Dividend Waived Ltd)
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
(FY2022: nil) shares to the Trust, the Trust purchased 1,553,558 shares
(FY2022: 1,069,998 shares) in the market for a consideration of £25m (FY2022:
£16m) and redeemed 429,291 shares (FY2022: 777,700) to employees for a
cumulative option cost of £1m (FY2022: £nil). At 31 July 2023, the Trust
held 1,742,929 (FY2022: 618,662 ) 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 FY2023 ROCE was 15.7% (FY2022: 14.2);
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 FY2023 ratio of net debt to headline EBITDA of 0.7 (FY2022: 0.3) 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 2023, the
Group had a credit rating of BBB+/Baa2 (FY2022: BBB+/Baa2) with Standard
& Poor's and Moody's respectively.
The Board has a progressive dividend policy for future payouts, with the aim
of increasing dividends in line with the long-term underlying growth in
earnings. In setting the level of dividend payments, the Board will take into
account prevailing economic conditions and future investment plans, along with
the objective to maintain a minimum dividend cover of at least two times.
Hedge reserve
The hedge reserve on the balance sheet records the cumulative gain or loss on
designated hedging instruments, and comprises:
31 July 2023 31 July 2022
£m
£m
Net investment hedge reserve (net of £8m of deferred tax (FY2022: £8m)) (188) (205)
Cash-flow hedge reserve - 3
(188) (202)
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 (FY2022: £22m), of
which the most significant balance is in John Crane Japan Inc., which
represented £19m (FY2022: £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 (FY2022: £5m), and cash inflows from operating activities of £2m
(FY2022: £5m). It paid dividends of £1m (FY2022: £1m) and tax of £2m
(FY2022: £1m). At 31 July 2023, the company contributed £53m (FY2022: £57m)
of net assets to the Group.
27 Acquisitions
On 5 January 2023, the Group's Interconnect division acquired 100% of the
share capital of Plastronics Sockets & Connectors (Plastronics) for
consideration of £25m. The acquisition was financed using the Group's own
cash resources. Plastronics is a leading supplier of burn-in test sockets and
patented spring probe contacts for the semiconductor test market segment. This
acquisition strengthens the existing portfolio of Smiths Interconnect and
provides cross-selling opportunities in Asia and the US.
The intangible assets recognised on acquisition comprise customer
relationships, intellectual property and technology. Goodwill represents the
expected synergies from the strategic fit of the acquisition and the value of
the expertise in the assembled workforce. From the date of acquisition to 31
July 2023, Plastronics contributed £8m to revenue and less than £1m to
profit before taxation and amortisation. If the Group had acquired this
business from the beginning of the financial year, the acquisition would have
contributed £15m to revenue and less than £1m to profit before taxation.
Provisional balances at the date of acquisition have been provided in the
table below. The amounts remain provisional due to the fair value of the
deferred consideration not being finalised.
Plastronics
£m
Non-current assets - acquired intangible assets 13
- plant and machinery 2
Current assets - inventory 3
- trade and other receivables 3
Current liabilities - trade and other payables (3)
Net assets acquired 18
Goodwill on current period acquisitions 7
Cash paid during the period 22
Deferred consideration 3
Total consideration 25
Post balance sheet date acquisition
On 30 August 2023, the Group acquired the business of Heating & Cooling
Products (HCP), for consideration of approximately £65m, financed using the
Group's own cash resources. HCP is a US-based manufacturer of Heating,
Ventilation & Air Conditioning (HVAC) solutions. This acquisition will
further expand the Flex-Tek division's presence in the North American HVAC
market, enabling Smiths to serve customers with an even broader product range.
The acquisition has historically contributed £47m of annualised revenue and
£6m of annualised profit before taxation. Due to the short time between the
completion of the acquisition and the announcement date, it has not been
possible to complete the determination of the fair values of the acquired
balance sheet.
28 Cash-flow
Cash-flow from operating activities
Year ended 31 July 2023 Year ended 31 July 2022
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Operating profit:
- continuing operations 501 (98) 403 417 (300) 117
- discontinued operations - 6 6 66 (47) 19
Amortisation of intangible assets 9 52 61 10 51 61
Impairment of intangible assets - - - - 4 4
Impairment of investment within discontinued operations - - - - 14 14
Depreciation of property, plant and equipment 42 - 42 38 - 38
Depreciation of right of use assets 32 - 32 30 - 30
(Gain)/loss on disposal of property, plant and equipment - - - (2) - (2)
(Gain)/loss on fair value of contingent consideration - 6 6 - - -
Share-based payment expense 13 - 13 13 - 13
Retirement benefits* 5 (7) (2) 5 207 212
Decrease/(increase) in inventories (88) (1) (89) (173) 4 (169)
Decrease/(increase) in trade and other receivables (10) (53) (63) (87) 4 (83)
Increase/(decrease) in trade and other payables 10 39 49 131 (2) 129
Increase/(decrease) in provisions (2) (32) (34) (1) 22 21
Cash generated from operations 512 (88) 424 447 (43) 404
Interest paid (73) (2) (75) (51) - (51)
Interest received 36 - 36 13 1 14
Tax paid (92) - (92) (88) - (88)
Net cash inflow from operating activities 383 (90) 293 321 (42) 279
- continuing operations 383 (90) 293 274 (42) 232
- discontinued operations - - - 47 - 47
* 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 2023 Year ended 31 July 2022
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Net cash inflow from operating activities 383 (90) 293 274 (42) 232
Include:
Expenditure on capitalised development, other intangible assets and property, (81) - (81) (71) - (71)
plant and equipment
Repayment of lease liabilities (36) - (36) (34) - (34)
Disposals of property, plant and equipment 2 - 2 3 - 3
Free cash-flow 178 130
Exclude:
Repayment of lease liabilities 36 - 36 34 - 34
Interest paid 73 - 73 46 - 46
Interest received (36) - (36) (13) - (13)
Tax paid 92 - 92 79 - 79
Operating cash-flow 433 (90) 343 318 (42) 276
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as
follows:
Year ended 31 July 2023 Year ended 31 July 2022
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 501 - 501 417 - 417
Headline operating cash-flow 433 - 433 318 14 332
Headline operating cash conversion 86% 86% 76% 80%
Reconciliation of free cash-flow to net movement in cash and cash equivalents:
Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Free cash-flow 178 130
Investment in financial assets and acquisition of businesses (22) -
Disposal of businesses and discontinued operations (7) 1,331
Other net cash-flows used in financing activities (note: repayment of lease (909) (937)
liabilities is included in free cash-flow)
Net decrease in cash and cash equivalents for discontinued operations - 16
Net increase/(decrease) in cash and cash equivalents (760) 540
29 Alternative performance measures and key performance indicators
The Group uses several alternative performance measures (APMs) in order to
provide additional useful information on underlying trends and the performance
and position of the Group. APMs are non-GAAP and not defined by IFRS;
therefore, they may not be directly comparable with other companies' APMs and
should not be considered a substitute for IFRS measures.
The Group uses these measures, which are common across the industry, for
planning and reporting purposes, to enhance the comparability of information
between reporting periods and business units. The measures are also used in
discussions with the investment analyst community and by credit rating
agencies.
We have identified and defined the following key measures which are used
within the business by management to assess the performance of the Group's
businesses:
APM term Definition and purpose
Capital employed Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets and is adjusted as follows:
- To add goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998;
- To eliminate the Group's investment in ICU Medical, Inc. equity and
deferred consideration contingent on the future share price performance of ICU
Medical, Inc; and
- To eliminate post-retirement benefit assets and liabilities and
non-headline litigation provisions related to John Crane, Inc. and Titeflex
Corporation, both net of deferred tax, and net debt.
It is used to monitor capital allocation within the Group. See below for a
reconciliation from net assets to capital employed.
Capital expenditure Comprises additions to property, plant and equipment, capitalised development
and other intangible assets, excluding assets acquired through business
combinations: see note 1 for an analysis of capital expenditure. This measure
quantifies the level of capital investment into ongoing operations.
Divisional headline operating profit (DHOP) DHOP comprises divisional earnings before central costs, finance costs and
taxation. DHOP is used to monitor divisional performance. A reconciliation of
DHOP to operating profit is shown in note 1.
Free cash-flow Free cash-flow is calculated by adjusting the net cash inflow from operating
activities to include capital expenditure, the repayment of lease liabilities,
the proceeds from the disposal of property, plant and equipment and the
investment in financial assets relating to operating activities and pensions
financing outstanding at the balance sheet date. The measure shows cash
generated by the Group before discretionary expenditure on acquisitions and
returns to shareholders. A reconciliation of free cash-flow is shown in note
28.
Gross debt Gross debt is total borrowings (bank, bonds and lease liabilities). It is used
to provide an indication of the Group's overall level of indebtedness. See
note 18 for an analysis of gross debt.
Headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This measure is used by the Group to measure and monitor performance excluding
material non-recurring items or items considered non-operational. See note 3
for an analysis of non-headline items.
Headline EBITDA EBITDA is a widely used profit measure, not defined by IFRS, being earnings
before interest, taxation, depreciation and amortisation. A reconciliation of
headline operating profit to headline EBITDA is shown in the note below.
Net debt Net debt is total borrowings (bank, bonds and lease liabilities) less cash
balances and derivatives used to manage the interest rate risk and currency
profile of the debt. This measure is used to provide an indication of the
Group's overall level of indebtedness and is widely used by investors and
credit rating agencies. See note 18 for an analysis of net cash/(debt).
Non-headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This is used by the Group to measure and monitor material non-recurring items
or items considered non-operational. See note 3 for an analysis of
non-headline items.
Operating cash-flow Comprises free cash-flow and excludes cash-flows relating to the repayment of
lease liabilities, interest and taxation. The measure shows how cash is
generated from operations in the Group. A reconciliation of operating
cash-flow is shown in note 28.
Operating profit Operating profit is earnings before finance costs and tax. A reconciliation of
operating profit to profit before tax is shown on the income statement. This
common measure is used by the Group to measure and monitor performance.
Return on capital employed (ROCE) Smiths ROCE is calculated over a rolling 12-month period and is the percentage
that headline operating profit represents of the monthly average capital
employed on a rolling 12-month basis. This measure of return on invested
resources is used to monitor performance and capital allocation within the
Group. See below for Group ROCE and note 1 for divisional headline operating
profit and divisional capital employed.
The key performance indicators (KPIs) used by management to assess the
performance of the Group's businesses are as follows:
KPI term Definition and purpose
Dividend cover - headline Dividend cover is the ratio of headline earnings per share (see note 5) to
dividend per share (see note 25). This commonly used measure indicates the
number of times the dividend in a financial year is covered by headline
earnings.
Earnings per share (EPS) growth EPS growth is the growth in headline basic EPS (see note 5), on a reported
basis. EPS growth is used to measure and monitor performance.
Free cash-flow (as a % of operating profit) This measure is defined as free cash-flow divided by headline operating profit
averaged over a three-year performance period. This cash generation measure is
used by the Group as a performance measure for remuneration purposes.
Greenhouse gas (GHG) emissions reduction GHG reduction is calculated as the percentage change in normalised Scope 1
& 2 GHG emissions. Normalised is calculated as tCO(2)e per £m of revenue.
This measure is used to monitor environmental performance.
Gross Vitality Gross Vitality is calculated as the percentage of revenue derived from new
products and services launched in the last five years. This measure is used to
monitor the effectiveness of the Group's new product development and
commercialisation.
My Say engagement score The overall score in our My Say employee engagement survey. The biannual
survey is undertaken Group-wide. This measure is used by the Group to monitor
employee engagement.
Operating cash conversion Comprises headline operating cash-flow, excluding restructuring costs, as a
percentage of headline operating profit. This measure is used to show the
proportion of headline operating profit converted into cash-flow from
operations before investment, finance costs, non-headline items and taxation.
The calculation is shown in note 28.
Operating profit margin Operating profit margin is calculated by dividing headline operating profit by
revenue. This measure is used to monitor the Group's ability to drive
profitable growth and control costs.
Organic growth Organic growth adjusts the movement in headline performance to exclude the
impact of foreign exchange and acquisitions. Organic growth is used by the
Group to aid comparability when monitoring performance.
Organic revenue growth (remuneration) Organic revenue growth (remuneration) is compounded annualised growth in
revenue after excluding the impact of foreign exchange and acquisitions. The
measure used for remuneration differs from organic revenue growth in that it
is calculated on a compounded annualised basis. This measure has historically
been used by the Group for aligning remuneration with business performance.
Percentage of senior leadership positions taken by females Percentage of senior leadership positions taken by females is calculated as
the percentage of senior leadership roles (G14+ group) held by females. This
measure is used by the Group to monitor diversity performance.
R&D cash costs as a % of sales This measure is defined as the cash cost of research and development
activities (including capitalised R&D, R&D directly charged to the
P&L and customer-funded projects) as a percentage of revenue. Innovation
is an important driver of sustainable growth for the Group and this measures
our investment in research and development to drive innovation.
Recordable Incident Rate (RIR) Recordable Incident Rate is calculated as the number of recordable incidents -
where an incident requires medical attention beyond first aid - per 100
colleagues, per year across Smiths. This measure is used by the Group to
monitor health and safety performance.
Capital employed
Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets adjusted to add goodwill recognised directly in
reserves in respect of subsidiaries acquired before 1 August 1998 of £478m
(FY2022: £478m), to eliminate the Group's investment in ICU Medical, Inc.
equity and deferred consideration contingent on the future share price
performance of ICU Medical, Inc. and to eliminate post-retirement benefit
assets and liabilities and non-headline litigation provisions related to John
Crane, Inc. and Titeflex Corporation, both net of related tax, and net debt.
Notes 31 July 2023 31 July 2022
£m
£m
Net assets 2,406 2,721
Adjust for:
Goodwill recognised directly in reserves 478 478
Retirement benefit assets and obligations 8 (89) (194)
Tax related to retirement benefit assets and obligations 31 57
John Crane, Inc. litigation provisions and related tax 23 153 172
Titeflex Corporation litigation provisions and related tax 23 32 40
Investment in ICU Medical, Inc. equity 14 (347) (364)
Deferred contingent consideration 14 (13) (19)
Net debt 18 387 150
Capital employed 3,038 3,041
Return on capital employed (ROCE)
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Headline operating profit for previous 12 months - continuing operations 501 417
Average capital employed - continuing operations (excluding investment in ICU 1 3,196 2,940
Medical, Inc. equity)
ROCE 15.7% 14.2%
Credit metrics
Smiths Group monitors the ratio of net debt to headline EBITDA as part of its
management of credit ratings; see note 26 for details. This ratio is
calculated as follows:
Headline earnings before interest, tax, depreciation and amortisation
(headline EBITDA)
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Headline operating profit 501 417
Exclude:
- depreciation of property, plant and equipment 12 42 38
- depreciation of right of use assets 13 32 30
- amortisation and impairment of development costs 10 2 3
- amortisation of software, patents and intellectual property 10 7 7
Headline EBITDA 584 495
Ratio of net debt to headline EBITDA
Notes Year ended Year ended
31 July 2023
31 July 2022
£m
£m
Headline EBITDA 584 495
Net debt 18 387 150
Ratio of net debt to headline EBITDA 0.7 0.3
30 Post Balance Sheet Events
Details of the proposed final dividend announced since the end of the
reporting period are given in note 25.
On 30 August 2023, the Group completed the acquisition of HCP, see note 27 for
details.
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 FY2023.
Company name Company number
EIS Group Plc 61407
Flexibox International Limited 394688
Flex-Tek Group Limited 11545405
Graseby Limited 894638
SI Properties Limited 160881
SITI 1 Limited 4257042
Smiths Detection Group Limited 5138140
Smiths Detection Investments Limited 5146644
Smiths Finance Limited 7888063
Smiths Group Finance EU Limited 10440573
Smiths Group Finance US Limited 10440608
Smiths Group Innovation Limited 10953689
Smiths Interconnect Group Limited 6641403
Smiths Pensions Limited 2197444
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