REG - Smiths Group PLC - Smiths Group Interim Results 2023
24/03/2023 07:00
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RNS Number : 1404U Smiths Group PLC 24 March 2023
SMITHS GROUP PLC - HALF YEAR RESULTS FOR 6 MONTHS ENDED 31 JANUARY 2023
Pioneers of progress - improving our world through smarter engineering
Continued progress with record growth and increased FY2023 guidance
· Record growth - organic revenue +13.5%(1), reported revenue +25.6%,
EPS(2) + 52.1%
o Seventh consecutive quarter of growth, equally balanced between volume and
price
o Growth across all divisions, geographic regions, and major customer end
markets
o 200bps of growth from new product launches with a +13.5% increase in R&D
to support future as well as current growth
· Improving execution - Smiths Excellence System ("SES") delivering
clear benefits
o Headline(2) operating profit growth of +27.4% with margin up +20bps to 16.1%
o +£5m operating profit contribution from SES, scaling to +£12m for FY.
Expanding programme with additional resources
o ROCE(3) +120bps to 15.2%, driven by strong profit generation
o Operating cash conversion(3) of 63% reflecting continued investment to
secure supply and support sustainable growth
· Inspiring & empowering our People - advancing our inclusive and
high-performing culture
o Further progress embedding Smiths Leadership Behaviours
o Increased investment in talent development with relaunch of our Accelerate
leadership training programme
o Actively investing in numerous diversity, equity & inclusion and
employee engagement initiatives
o Published inaugural Sustainability Report; introduced ESG targets into
incentive compensation plans; on track to deliver FY2023 ESG targets
· Strong balance sheet - a foundation for sustainable growth and
shareholder returns
o Net debt to EBITDA of 0.8x
o Share buyback c.90% complete
o Proposed interim dividend of 12.9p, +5%
FY2023 Guidance
· Raising FY2023 guidance to at least 8% organic revenue growth, with
moderate margin improvement
Headline(2) HY2023 HY2022 Reported Organic(1)
Revenue £1,497m £1,192m +25.6% +13.5%
Operating profit £241m £189m +27.4% +12.7%
Operating profit margin(3) 16.1% 15.9% +20bps (10)bps
Basic EPS(4) 46.6p 30.6p +52.1%
ROCE(3) 15.2% 14.0% +120bps
Operating cash conversion(3) 63% 93%
Statutory HY2023 HY2022 Reported
Revenue £1,497m £1,192m +25.6%
Operating profit £187m £157m +19.1%
Profit for the half year (after tax) £109m £1,123m (90.2)%
Basic EPS(4) 30.6p 283.9p (89.2)%
Dividend per share 12.9p 12.3p +5%
Paul Keel, Chief Executive Officer, commented:
"We continued to improve our performance in H1, delivering double digit
revenue and earnings growth. While we are still in the early days of
executing our plan, we are pleased with the progress. I congratulate and
thank my 15,000 colleagues around the world for continuing to do what we do
best - improving our world through smarter engineering.
With order books healthy and trading strong, we are again raising our FY2023
organic revenue growth guidance to at least 8%, with moderate margin
improvement."
Upcoming events
Date Event
Friday 19 May 2023 Q3 Trading Update
Tuesday 26 Sept 2023 FY2023 Financial 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) Alternative Performance Measures ("APMs") and Key Performance Indicators
("KPIs") are defined in note 19 to the financial statements.
(4) Basic EPS on a headline basis includes results for Smiths Group, excluding
Smiths Medical in the prior period and includes the impact of the share
buyback. On a statutory basis HY2022 includes the gain on disposal of Smiths
Medical.
Media enquiries
Investor enquiries Tom Steiner, Smiths Group
+44 (0) 7787 415891
Jemma Spalton, Smiths Group
+44 (0)7867 390350 tom.steiner@smiths.com
jemma.spalton@smiths.com
Stephanie Heathers, Smiths Group Alex Le May, FTI Consulting
+44 (0)7702 443312
+44 (0)7584 113633
smiths@fticonsulting.com (mailto:smiths@fticonsulting.com)
stephanie.heathers@smiths.com
Presentation
The webcast presentation and Q&A will begin at 08.30 (UK time) today at:
https://www.smiths.com/investors/results-reports-and-presentations
(https://www.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. We are driving performance in line with our
significant potential by focusing on three top priorities:
1) accelerating growth
2) strengthening execution and
3) doing ever more to inspire and empower our people.
The Smiths Value Engine frames our plan for delivering the medium-term targets
that we have set. We have delivered seven consecutive quarters of growth
since launching our plan, including record growth in HY2023.
The exhibit below summarises our priorities and progress:
Priority Progress
Growth · Record organic revenue growth in HY2023
· Seven consecutive quarters of growth
· 200bps of growth from new product launches with a +13.5% increase
in R&D
Execution · SES continues to build momentum with 50 Black Belt projects
underway
· £5m benefit from SES and £7m from savings projects in HY2023
· Published our inaugural Sustainability Report
People · Further progress embedding Smiths Leadership Behaviours
throughout the organisation
· Increased focus on talent development with relaunch of leadership
training workshops
· Annual incentive plans aligned across the Group and linked to ESG
Targets Medium-Term Target HY2022 HY2023 Progress
Organic revenue growth 4-6% +3.4% +13.5% Record start to the year, FY guidance raised again, with organic revenue
growth of at least +8%
(+ M&A)
EPS growth 7-10% +17.7% +52.1% Strong earnings growth driven by organic profit and further enhanced by share
buyback
(+ M&A)
ROCE 15-17% 14.0% 15.2% ROCE expansion driven by increased profitability
Operating profit margin 18-20% 15.9% 16.1% Moderate margin improvement with continued investment to support sustainable
growth
Operating cash conversion 100%+ 93% 63% Strategic investment in working capital temporarily impacted 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.
HY2023 BUSINESS PERFORMANCE
The commentary below refers to Smiths Group HY2022 performance (the prior year
comparator) excluding Smiths Medical, which was accounted for as 'discontinued
operations' before the sale completed on 6 January 2022.
HY2022 Foreign Organic HY2023
£m exchange movement
Revenue 1,192 127 178 1,497
Headline operating profit 189 25 27 241
Headline operating profit margin 15.9% 16.1%
Smiths delivered record growth in the first half of HY2023 with organic
revenue up +13.5%, equally balanced between volume and price. We also
delivered strong profit growth and moderate margin improvement as we manage
continued supply chain uncertainties and persistent inflation.
GROWTH
Growing faster is the primary driver of unlocking enhanced value for the
Group. In HY2023 we accelerated organic revenue growth to +13.5%.
Organic revenue growth (by business) H1 2022 H2 2022 HY2023
John Crane +5.1% +2.5% +14.6%
Smiths Detection (7.2) % (11.3)% +14.0%
Flex-Tek +10.0% +20.9% +17.0%
Smiths Interconnect +12.9% +14.8% +3.3%
Smiths Group +3.4% +4.1% +13.5%
All businesses grew in the first half. John Crane and Smiths Detection
accelerated organic revenue growth as they scaled supply to convert strong
orderbooks to revenue. Flex-Tek continued to deliver strong growth across all
of its end markets. Smiths Interconnect's growth continued, albeit at a more
moderate pace than last year's record levels.
Revenue grew +25.6% on a reported basis, to £1,497m (HY2022: £1,192m). This
included +£178m organic growth and +£127m of favourable foreign exchange
translation.
Strong execution to access end market opportunity is the first of our four
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 a portfolio balanced both geographically and by end
market is a distinctive long-term advantage for Smiths.
Smiths organic revenue growth in our end markets % of H1 2023 H1 2022 H2 2022 HY2023
Smiths revenue
General Industrial 42% +5.7% +16.5% +15.4%
Safety & Security 31% (3.5)% (8.9)% +9.4%
Energy 21% +7.5% +0.3% +17.1%
Aerospace 6% +16.7% +14.2% +10.1%
Smiths Group 100% +3.4% +4.1% +13.5%
We delivered strong growth across all our end markets. Our largest market,
General Industrial, which accounts for 42% of Group revenue, grew +15.4%
organically in the first half. This was driven by John Crane's products in
sectors such as life sciences, pulp & paper and chemical processing, and
strong demand for Flex-Tek's construction products, although, as expected,
this market has begun to slow during the second half. Safety & Security,
which includes Smiths Detection's portfolio and Smiths Interconnect's defence
products, grew over 9% in H1. Energy was our fastest-growing end market at
+17.1%, with strong demand for both John Crane's original equipment ("OE") and
aftermarket. Aerospace, which includes Smiths Interconnect and Flex-Tek
products, grew +10.1%.
At the start of the fiscal year, we introduced a new operating model for
Smiths China, empowering the local team to move more nimbly to support
fast-changing customer needs. Initial results of this new structure are
encouraging, as results were strong in the period.
Our second lever for faster growth is improving new product development and
commercialisation. During HY2023, we generated an incremental 200bps of
growth from high impact new products including Smith Detection's next
generation smart tray return system, John Crane's next generation diamond
coating product offering for high-speed and high-heat applications, and
Flex-Tek's novel flexible air management system. Gross Vitality, which
measures the proportion of revenues coming from products launched in the last
five years, increased to 29.5% (HY2022: 28.6%), demonstrating our successful
commercialisation of new products.
As an industrial technology leader, new products are our lifeblood. In
HY2023 we increased R&D investment by 13.5%, to support both current and
future growth We invested £59m in R&D (HY2022: £52m), of which £41m
(HY2022: £41m) was an income statement charge, £8m was capitalised (HY2022:
£5m), and £10m (HY2022: £6m) was funded by customers.
Customer demand remains strong across most of our end markets. To service
this demand, as well as to support new product launches, we invested £36m in
capex in the first half (HY2022: £31m) representing 1.4x depreciation and
amortisation (HY2022: 1.3x).
Our third growth lever is building out priority adjacencies. Each of our
four businesses is executing strategies to expand growth beyond their existing
core market positions and ensure we capitalise on the long-term megatrends in
our markets of energy transition and sustainability, increasing security needs
and enhanced connectivity. Examples in HY2023 include John Crane's growing
presence in hydrogen and carbon capture markets, with over 40 active projects,
and Smiths Detection's growth in its Other Security Systems segment, up +22.9%
in the period supported by some notable wins in ports & borders and parcel
delivery markets.
Our fourth growth lever is using disciplined M&A to augment our organic
growth focus. In January, Smiths Interconnect acquired Plastronics, a
leading supplier of burn-in test sockets and patented spring probe contacts,
extending our reach into an attractive Smiths Interconnect adjacency. We are
benefitting from Plastronics' attractive position in ArtificiaI Intelligence,
data centres and automotive end markets, and expanding Plastronics' sales
globally by leveraging Smiths Interconnect's strong presence in Asia.
EXECUTION
Stronger execution is our second key priority.
In HY2023, headline operating profit grew +12.7% (+£27m) on an organic basis,
and +27.4% (+£52m) on a reported basis to £241m (HY2022: £189m).
HY2022 Foreign Organic HY2023
£m exchange movement
Headline operating profit 189 25 27 241
Headline operating profit margin 15.9% 16.1%
Headline operating profit benefited from strong operating leverage in John
Crane where orderbook conversion to revenue increased, driving its +24.6%
profit growth and +9.0% profit growth in Flex-Tek. Smiths Detection delivered
profit growth albeit at a lower margin primarily due to mix, with a very
strong increase in OE sales. Smiths Interconnect's profit was down slightly
against a strong comparable period last year.
Group headline operating profit margin was 16.1%, up from 15.9% in HY2022.
This reflects increased volume, positive pricing more than offsetting cost
inflation, and a growing contribution from SES projects. These positive
effects were partially offset by continued investment in growth, ongoing
supply chain challenges, and the mix effect of particularly strong OE growth.
Headline EPS grew +52.1%, driven by headline operating profit reported growth
(+30.7%), our ongoing share buyback programme (+15.0%) and a reduction in our
effective headline tax rate (+4.6%). The headline tax charge for HY2023 of
£58m (HY2022: £48m) represents an improved effective rate of 26% (HY2022:
28%).
ROCE increased +120bps to 15.2% (HY2022: 14.0%), as the higher profitability
of the Group more than offset the increase in working capital in the half.
For further detail of this calculation, please refer to note 19 of the
financial statements.
Our operating cash conversion was 63% in the first half (HY2022: 93%).
Headline operating cash-flow(3) was £151m (HY2022: £167m). Free
cash-flow(3) generation was £46m (HY2022: £91m) or 19% of headline operating
profit (HY2022: 48%). Smiths has a strong track record of over 100% cash
conversion. The reduced half year cash conversion was principally driven by
inventory investments to support record first half growth and secure supply to
underpin the Group's future growth. Two of the fastest growing business in
the half were Smiths Detection and John Crane, which accounted for over 85% of
the Group's working capital outflow. This investment ensured we could meet
the strong customer demand and underpin the businesses' large orderbooks going
in to the second half. To address the Group's temporarily elevated working
capital, targeted plans and SES projects focused on reducing inventory are
underway.
We continue to make good progress embedding SES throughout our organisation.
There are currently 50 Black Belt projects underway. Projects completed in
the first half generated £5m of incremental operating profit. With the number
of projects scaling across Smiths, we expect SES impact to increase in the
second half, bringing the full year contribution to £12m, or £25m on an
annualised run-rate basis. In addition to this, SES will generate annualised
cash benefit of £20m, supporting operating cash conversion improvement moving
forward.
As communicated at our FY2022 results, we are implementing a number of savings
projects across the Group. These projects are progressing as anticipated
with a £7m benefit in the first half. We continue to expect annualised
benefit of £25-30m, with approximately half of that benefit coming in
FY2023. In John Crane, we are simplifying our organisation to better serve
customers and maximise growth opportunities. In Smiths Detection, we are
improving efficiency to strengthen operating leverage as growth accelerates.
In HY2023 we charged £8m for these savings projects with a further
£27m-£32m expected to be charged in the second half. These charges are
included as non-headline items.
PEOPLE
Inspiring and empowering our people is our third key priority.
The health and safety of our employees is our number one people priority,
building on our world-class safety record. In the first half of the year,
our recordable incident rate improved to 0.4 (HY2022: 0.5) as a result of a
multi-faceted safety programme underway across Smiths.
At the end of FY2022, we launched our Smiths Leadership Behaviours to define
our expectations for an inclusive and high-performance culture. We continued
the rollout of these seven behaviours in the first half, with Smiths Culture
Champions leading workshops to reinforce and embed these leadership behaviours
throughout our organisation, with over 5,000 hours of activities completed.
Along with our Smiths Leadership Behaviours, talent development is a key
priority within our People plan, as talent development is foundational to
achieving our ambitious business goals. We are focused on growing and
promoting talent from within with 80% of open roles now filled internally,
versus 40% in the past. We have relaunched the Accelerate Leadership
Development programme, a group-wide training initiative focused on building
more effective leaders; introduced an Executive Committee mentoring programme
to support the career development of high potential leaders; and continued to
develop our Early Career programme, which includes a number of engineering
apprenticeship programmes.
Diversity, equity, and inclusion also plays a central role. One component of
this is increasing the proportion of women in leadership roles. Women
represent 40% of the Smiths Board and 33% of our Executive Committee, but only
24% of senior leadership. We are investing in initiatives across the
organisation to support and advance the careers of women at Smiths as we
strive for an even more inclusive culture.
OUR ESG APPROACH
Environment, Social and Governance ("ESG") performance is central to our
Purpose, and we are committed to extending our sustainability leadership.
During HY2023 we published our inaugural Sustainability Report, Sustainability
at Smiths (https://www.smiths.com/sustainability) , which describes how we are
embracing and prioritising ESG performance at Smiths to deliver on our Purpose
and create long-term, sustainable value for all our stakeholders. Our ESG
strategy is fully integrated into the Smiths Value Engine with priorities
centred on growth, execution and people.
Growth
Through our significant technological capabilities and our strong customer
relationships, across the Group we are helping provide sustainable solutions
for our customers to enable them to meet their own environmental targets. An
example of this is our partnership with Midrex Technologies Inc ("Midrex") in
Flex-Tek to develop a heating solution to be used in the Direct Reduction of
Iron ("DRI") process to enable the production of commercial scale "green
steel." The Midrex process replaces fossil fuels in traditional DRI steel
production with hydrogen. In John Crane we are well placed to help our
customers in their energy transition journey, from methane abatement through
to the generation of renewable energy. John Crane is currently engaged in
over 40 carbon capture utilisation and storage ("CCUS") and hydrogen projects
worldwide.
Execution
In FY2022, we set and communicated 3 year environmental goals to FY2024
(targets can be found here
(https://www.smiths.com/sustainability/esg-performance) ), which cover
reductions in water, waste, packaging, and Greenhouse Gas ("GHG") emissions as
well as an increase in the use of renewable electricity. These targets support
the delivery of our commitment to Net Zero GHG Emissions for Scope 1 and 2 by
2040, and for Scope 3 by 2050. The development of Science-Based Targets
(SBTs) is also underway.
During the first half we continued to make good progress against our
environmental targets, tracking ahead of our 3-year targets for water, waste,
electricity consumed from renewable sources and GHG emissions reduction.
People
Our people play a pivotal role in the success of our ESG strategy, from the
engineering capabilities required to design new energy transition products to
our robust governance structure. During the first half we established
sustainability leaders in each division to help accelerate our plans and
deliver against our targets.
To further align our ESG commitments with our priorities, we have included ESG
metrics (GHG reductions and energy usage) in both our long-term and our annual
incentive compensation programmes across the Group.
CAPITAL ALLOCATION
With our strong technology, market positions, and financial framework, 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. Thirdly, we have a strong track record of
returning surplus capital to shareholders, as evidenced by the £241m returned
in the first half, on top of the £661m returned in FY22.
Organic investment
In HY2023 we invested £36m in capex projects, including £8m in R&D
investment on programmes such as next generation hold and cabin baggage
screening and further advancements in our defence portfolio. A further £41m
in R&D was charged to the income statement, supporting new product
development.
M&A
In HY2023, Smiths Interconnect acquired Plastronics, a leading supplier of
burn-in test sockets and patented spring probe contacts.
The acquisition supports our strategy to make complementary inorganic
investments which will help 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
Through the first half we continued to repurchase shares under the £742m
share buyback programme which we initiated in November 2021, in connection
with our commitment to return the majority of cash proceeds from the disposal
of Smiths Medical to shareholders. As at 22 March 2023, we had returned
£657m, and have a further £85m remaining under the repurchase authorisation.
In line with our progressive dividend policy and plan to rebuild dividend
cover after the sale of Smiths Medical, the Board is declaring an interim
dividend of 12.9p, a year-on-year increase of +5% (HY2022: 12.3p). The
interim dividend will be paid on 17 May 2023 to shareholders on the register
at close of business on 11 April 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. This 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 25 April 2023 ("the Election Date.")
Elections received after the Election Date will apply to dividends paid after
17 May 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(3) at 31 January 2023 was £429m (FY2022: £150m), an increase of
£279m as we continued to execute our share buyback and paid the final FY2022
dividend. Net debt to headline EBITDA(3) in HY2023 was 0.8x (FY2022: 0.3x).
Borrowings as at 31 January 2023 were £1,208m (FY2022: £1,166m), which
comprises two euro denominated bonds, one of which (€600m) we expect to
repay when it is due in April 2023. The other (€650m) bond matures in
2027. There are no financial covenants associated with these borrowings.
Cash and cash equivalents as at 31 January 2023 were £795m (FY2022:
£1,056m).
A $800m (c.£650m at the period-end exchange rate) revolving credit facility
("RCF") remains undrawn and matures in November 2024. The only financial
covenant relates to interest cover, under which EBITDA must be greater than or
equal to 3 times net interest. Taking cash and the RCF together, total
liquidity was over £1.4bn at the end of the period.
STATUTORY RESULTS
Income Statement
The £54m difference between headline operating profit of £241m and statutory
operating profit of £187m is non-headline items as defined in note 3 of the
financial statements. The largest components include amortisation of
acquired intangible assets of £26m, past service costs for retirement benefit
equalisation, scheme administration costs and pension settlement losses of
£12m, asbestos litigation in John Crane, Inc. of £10m, and restructuring
costs of £8m. Statutory operating profit of £187m was £30m higher than last
year (HY2022: £157m), reflecting the increase in headline operating profit.
Statutory finance costs were £(20)m (HY2022: £3m), the increase relates to
the prior year £22m foreign exchange gain on an intercompany loan with Smiths
Medical which was settled on disposal in January 2022; the matching credit in
discontinued operations netted out to zero in total Group earnings.
Total Group profit after tax and EPS
Statutory profit after tax for the total Group decreased to £109m (HY2022:
£1,123m) with the prior year including the profit on sale of Smiths
Medical. Statutory basic EPS was 30.6p (HY2022: 283.9p).
Statutory Cash-flow
Statutory net cash inflow from operating activities for the total Group was
£100m (HY2022: £182m). See note 16 to the financial statements for a
reconciliation of headline operating cash-flow to statutory cash-flow.
Pensions
Included within free cash-flow is £3m of pension contributions, (HY2022:
£6m). 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 second 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 January 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 Jan 2023 31 Jan 2022 31 Jan 2023 31 Jan 2022
(6 months) (6 months)
USD 1.18 1.36 1.23 1.34
EUR 1.15 1.18 1.13 1.20
OUTLOOK
The Group is raising the guidance for FY2023 again. We now expect at least 8%
organic revenue growth for FY2023, with moderate margin improvement.
Tailwinds · Strong orderbook and trading trends support upgraded guidance
· New product strategy working well; pipeline strong and recent
launches ramping well
· Impact of SES visible in results; will continue to ramp in H2 and
beyond
· Savings projects improving speed and operating leverage
Headwinds · Stronger topline comparators and mix impact on margin
· Geopolitical and macro uncertainty remains high
· Supply chain challenges are stabilising, but still having effects
· Softness in some end markets in Flex-Tek and Smiths Interconnect
(~20% of Smiths Group)
Business review
John Crane
John Crane is a leading provider of mission-critical engineered solutions,
improving our 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 chemicals, life
sciences, mining, water treatment, and pulp & paper. 70% of John Crane
revenue is from aftermarket sales. John Crane represents 35% of Group revenue.
HY2023 HY2022 Reported Organic
£m £m growth growth
Revenue 519 416 +24.6% +14.6%
Original Equipment 83 69 +22.0% +13.3%
Aftermarket 233 179 +29.3% +18.5%
Energy 316 248 +27.3% +17.1%
Original Equipment 73 59 +23.3% +14.1%
Aftermarket 130 109 +19.1% +9.2%
General Industrial 203 168 +20.6% +10.9%
Headline operating profit 114 83 +36.6% +24.6%
Headline operating profit margin 22.0% 20.0% +200bps +190bps
Statutory operating profit 99 81
Return on capital employed 21.7% 20.2%
R&D cash costs as % of sales 2.0% 2.9%
Revenue
HY2022 Foreign Organic HY2023
£m reported exchange movement reported
Revenue 416 36 67 519
John Crane's strong market position, global service network, and trusted
customer relationships underpin its strong first half performance. Organic
revenue was up +14.6%, with growth across all segments as the conversion of
orderbook to revenue increased. On a reported basis, revenue was up +24.6%,
with a £36m favourable foreign exchange impact.
Activity levels remain high across all segments, with +14.2% order growth and
a record orderbook going into the second half.
For the business overall, OE revenue increased +13.7%, and aftermarket revenue
increased +15.0% on an organic basis.
In John Crane's energy segment, customer demand for both OE and aftermarket is
strong, driven by the increasing demand for energy, along with decarbonisation
and the transition to clean energy sources. Revenue from OE sales increased
+13.3% on an organic basis. John Crane's large installed base and leading
service offering positions it well to meet the strong demand for aftermarket
repairs, maintenance and upgrades, and aftermarket revenue grew +18.5% on an
organic basis.
John Crane's OE sales for industrial applications grew +14.1% on an organic
basis, driven by strong demand in sectors such as life sciences, chemical
processing and pulp & paper. Aftermarket revenue increased +9.2% with a
continued strong orderbook.
Across both its market segments, John Crane customers are requiring systems to
be more reliable and energy efficient, interconnected and digitally enabled,
and use diverse low-carbon energy sources. These trends benefit John Crane as
they require significant investment in new infrastructure and retrofits to
existing infrastructure, as well as new technology to reduce cost and
accelerate the deployment of cleaner energy.
John Crane is well positioned to support customers through the energy
transition. John Crane is working closely with customers and stakeholders to
accelerate innovation across several decarbonisation themes to reduce methane
and other GHG emissions, increase asset efficiency, and enable rapid scaling
of low-carbon hydrogen, along with carbon capture, utilisation & storage.
Recent wins include a large CCUS expansion project in Wyoming, USA, a major
blue hydrogen project in Alberta, Canada and multiple green hydrogen projects
in Europe.
Operating profit
HY2022 Foreign Organic HY2023 reported
£m reported exchange movement
Headline operating profit 83 8 23 114
Headline operating profit margin 20.0% 22.0%
Headline operating profit of £114m increased +24.6% on an organic basis,
driven by increased volumes, pricing actions more than offsetting cost
inflation, and management of ongoing supply chain disruption. As a result,
margin expanded 200bps to 22.0% (HY2022: 20.0%).
Headline operating profit increased +36.6% on a reported basis, with +£8m of
favourable foreign exchange translation. The difference between statutory and
headline operating profit includes the net cost in relation to the provision
for John Crane, Inc. asbestos litigation and restructuring costs.
ROCE
ROCE was 21.7%, up 150bps, driven by increased profitability.
R&D
Cash R&D expenditure was 2.0% of sales (HY2022: 2.9%), with £11m spent on
R&D in the first half. John Crane's innovation is primarily focused on
enhancing efficiency, performance and sustainability by using materials
science advancements to reduce friction in high duty wet seals, increase
maximum rotating speed required in next generation hydrogen compressors and
creating state-of-the-art filtration solutions that remove liquids and vapours
while minimising pressure losses. John Crane is also developing advanced,
digital capabilities that enable operators to accurately predict equipment
life, increase asset availability and lower overall cost.
John Crane sealing solutions play a significant role in helping our customers
in their sustainability journeys through reducing leaks. Examples include a
seal for demanding hydrocarbon pipelines with a unique, patented technology
that significantly extends mean time to repair, reducing maintenance,
improving efficiency and protecting the environment from potentially harmful
leaks. John Crane also launched the Seal Gas Recovery System, a technical
solution that recovers the seal leakage and diverts the gas stream back into
the process flow to be used in other applications, reducing GHG emissions and
cutting valuable product losses.
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 aftermarket service. Smiths
Detection represents 26% of Group revenue.
HY2023 HY2022 Reported Organic
£m £m growth growth
Revenue 390 313 +24.8% +14.0%
Original Equipment 110 93 +19.2% +10.3%
Aftermarket 153 126 +21.4% +10.3%
Aviation 263 219 +20.5% +10.3%
Original Equipment 79 52 +52.5% +39.2%
Aftermarket 48 42 +13.1% +2.9%
Other Security Systems 127 94 +34.8% +22.9%
Headline operating profit 41 36 +16.3% +4.5%
Headline operating profit margin 10.5% 11.5% (100)bps (110)bps
Statutory operating profit 24 25
Return on capital employed 7.2% 9.2%
R&D cash costs as % of sales 8.4% 9.4%
Revenue
HY2022 Foreign Organic HY2023
£m reported exchange movement Reported
Revenue 313 29 48 390
Smiths Detection drove accelerated growth across the business as it delivers
against its strong multi-year orderbook, with organic revenue growth of +14.0%
(£48m) in HY2023. On a reported basis this increased to +24.8% with +£29m of
favourable FX translation.
For the business overall, OE revenue increased +20.7%, and aftermarket revenue
increased +8.4% on an organic basis.
Revenue from the Aviation market accounted for 68% of HY2023 revenues and grew
+10.3% on an organic basis, balanced between both OE and aftermarket as the
market continues to recover post the COVID pandemic. The growth in OE is
supported by delivery of Smiths Detection's range of 3D Computed Tomography
("CT") machines combined with continued maintenance and software upgrades in
aftermarket. Tender activity in Aviation continues to be strong as airports
seek to upgrade their security systems to CT technology, in some cases driven
by mandated regulations. Recent key wins include checkpoint screening systems
for New Zealand, Germany, UK and India and air cargo wins with DHL Australia.
Other Security Systems ("OSS") accelerated growth in HY2023, delivering +22.9%
increase on an organic basis. OE growth was particularly strong, up +39.2%
with deliveries across urban security settings, defence and ports &
borders. Building out the OSS segment is a key strategic priority for Smiths
Detection and H1 growth in the segment demonstrates the progress made. Key
wins in the first half include ports & borders screening in Japan and the
US, provision of X-ray scanners for the G20 summit in Indonesia, and provision
of lightweight chemical detectors used in defence settings.
Operating profit
HY2022 Foreign Organic HY2023
£m reported exchange movement reported
Headline operating profit 36 4 1 41
Headline operating profit margin 11.5% 10.5%
Smiths Detection's headline operating profit increased +4.5% on an organic
basis, primarily driven by increased volumes. Headline operating profit of
£41m was up +16.3% on a reported basis, including +£4m favourable foreign
exchange translation.
Headline operating profit margin was 10.5%, down (100)bps. OE deliveries
typically have lower margin than aftermarket services, and this had a 180bps
mix impact year on year as a result of the +20.7% growth in OE. Progress was
made on cost reduction and SES impact is building.
The difference between statutory and headline operating profit primarily
reflects amortisation of acquired intangibles and restructuring costs.
ROCE
ROCE decreased 200bps to 7.2% driven by higher working capital investment to
support sustainable growth.
R&D
Cash R&D expenditure was 8.4% of sales at £33m, up +13.8% on prior year
(HY2022: £29m). This includes an increase in customer funded projects to £9m
(HY2022: £6m).
Smiths Detection continued to invest in the development of next generation
detection devices for the defence market, new algorithms to improve the
detection of dangerous goods, and digital solutions to keep people and
infrastructure safer. Certain programmes are co-funded by strategic
customers seeking next-generation solutions to security challenges. During
HY2023, we launched a next generation dual-view X-ray scanner allowing
increased efficiency with a more compact footprint, and further extensions of
our automated detection algorithm, iCMORE, to enable detection of prohibited
items.
Flex-Tek
Flex-Tek provides innovative solutions to heat and move fluids and gases for
aerospace and industrial applications that support energy efficiency and
improved air quality. 83% of Flex-Tek's revenue is derived from Industrials
and 17% from the Aerospace sector. Flex-Tek represents 26% of Group revenue.
HY2023 HY2022 Reported Organic
£m £m growth Growth
Revenue 395 297 +33.2% +17.0%
General Industrials 326 243 +33.9% +17.5%
Aerospace 69 54 +29.8% +14.8%
Headline operating profit 77 62 +24.9% +9.0%
Headline operating profit margin 19.5% 20.9% (140)bps (150)bps
Statutory operating profit 64 51
Return on capital employed 26.6% 24.1%
R&D cash costs as % of sales 0.4% 0.4%
Revenue
HY2022 Foreign Organic HY2023
£m reported exchange movement reported
Revenue 297 41 57 395
Flex-Tek continued to deliver strong revenue growth in HY2023 with organic
revenue of +17.0%. Revenue grew +33.2% on a reported basis, including +£41m
favourable foreign exchange translation.
Organic revenue from Flex-Tek's Industrial segment was up +17.5%. Growth was
led by strong demand for construction products particularly in heating,
ventilation and air conditioning ("HVAC") applications, supported by further
capacity expansions. Demand also remained strong for industrial heating
products. As expected, Flex-Tek has begun to see a slower rate of growth for
its construction products in the second half.
During the first half, Flex-Tek continued to execute its growth strategy,
ramping up production at a new facility in Houston, Texas, supporting the
geographic expansion of our HVAC product offering. Flex-Tek is also
preparing to add capacity for its heating solution that will be used as part
of the DRI process enabling the production of commercial scale "green steel."
Flex-Tek received its first purchase order for the DRI solution, which is
being developed in partnership with Midrex, and which is expected to generate
revenues from FY24 onwards.
Organic revenue from Flex-Tek's Aerospace segment was up +14.8% as the
aerospace market benefits from an increasing number of aircraft builds.
Operating profit
HY2022 Foreign Organic HY2023
£m reported exchange movement Reported
Headline operating profit 62 9 6 77
Headline operating profit margin 20.9% 19.5%
Headline operating profit increased +9.0% on an organic basis, reflecting
increased volumes and strong pricing more than offsetting cost inflation.
Headline operating profit margin was 19.5%, a decrease of (140)bps as Flex-Tek
invested in the start-up costs of the new facility in Houston and marketing
costs for our new product platform, Python flexible refrigerant line sets.
Headline operating profit was up +24.9% to £77m on a reported basis,
including +£9m favourable foreign exchange translation.
The difference between statutory and headline operating profit is due to
amortisation of acquired intangible assets.
ROCE
ROCE increased +250bps to 26.6% reflecting the strong acceleration in profit
over the last 12 months.
R&D
Cash R&D expenditure remained broadly consistent at 0.4% of sales (HY2022:
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.
HY2023 HY2022 Reported Organic
£m £m growth Growth
Revenue 193 166 +16.2% +3.3%
Headline operating profit 32 28 +12.2% (1.7)%
Headline operating profit margin 16.6% 16.9% (30)bps (80)bps
Statutory operating profit 30 28
Return on capital employed 15.8% 12.0%
R&D cash costs as % of sales 6.5% 5.5%
Revenue
HY2022 Foreign Organic HY2023
£m reported exchange movement reported
Revenue 166 21 6 193
Smiths Interconnect's organic revenue was up +3.3% in H1, an expected
moderation from the double-digit growth of the prior year. Revenue increased
by +16.2% on a reported basis, with +£21m favourable foreign exchange
translation.
Growth in the first half was driven by strong performance in the industrials
sector where demand for Smiths Interconnect's connector solutions remained
high, in particular for the recently introduced medical cable assembly
product. Revenue for semiconductor test sockets continued to grow in HY2023
but demand normalised during the period, with growth slowing in the second
half.
Growth in both aerospace and defence related programmes was impacted by
phasing of large programmes in the prior year. Commercialisation of new
products such as the 28G optical transceivers and newly launched
radio-frequency components offering proven high performance in commercial
applications will contribute to growth for the full year.
During the first half, Smiths Interconnect acquired Plastronics, a leading
supplier of burn-in test sockets and patented spring probe contacts. This is a
good example of how we use M&A to accelerate penetration of priority
adjacencies. The acquisition of Plastronics strengthens Smiths
Interconnect's product portfolio, leveraging Plastronics' attractive positions
in Artificial Intelligence, data centres and automotive end markets while
expanding Plastronics' geographic reach using Smiths Interconnect's strong
presence in Asia.
Operating profit
HY2022 Foreign Organic HY2023
£m reported exchange movement reported
Headline operating profit 28 4 (0) 32
Headline operating profit margin 16.9% 16.6%
Headline operating profit decreased (1.7)% on an organic basis as a result of
increased investments in R&D to support future growth.
Headline operating profit was up +12.2% to £32m on a reported basis,
including £4m favourable FX translation. Headline operating profit margin
was 16.6%, down (30)bps on a reported basis.
The difference between statutory and headline operating profit reflects the
amortisation of acquired intangibles and the integration costs of the
Plastronics acquisition and restructuring costs.
ROCE
ROCE increased +380bps to 15.8%, driven by higher profitability over the last
twelve months compared to the prior period.
R&D
Cash R&D expenditure increased to 6.5% of sales (HY2022: 5.5%). R&D is
focused on bringing to market new products that improve connectivity and
product integrity in demanding operating environments.
Products launched in the first half included the new custom grid array
technology reducing overall size, weight, and cost of connectors for medical
applications; the next generation of high-speed test solutions for data
centres and high-performance computing; and the expanded offering of coaxial
coupler components designed for mission critical space and defence
applications. The business has an expansive new product pipeline, with a
further 10 product introductions planned for the second half.
RISK MANAGEMENT
The Group's principal risks and uncertainties and relevant mitigating
activities were set out on pages 46-53 of the FY2022 Annual Report. In the
view of the Board, the principal risks and uncertainties affecting the Group
for the remaining six months of the financial year continue to be those set
out briefly below and more fully in the Annual Report.
ORGANIC GROWTH: Failing to achieve organic growth in line with market
opportunity, resulting in erosion of shareholder value. Whilst the overall
risk level remains unchanged, our divisions continue to manage supply chain,
macroeconomic demand shifts and inflationary cost pressures.
ESG: Failure to meet stakeholder expectations on increasing ESG obligations
may expose the Group to reputational or financial risk.
TECHNOLOGY: Differentiated products and services are critical to our success.
We may be unable to maintain technological differentiation; to meet customers'
existing needs or anticipate emerging demand trends; and may face disruptive
innovation by a competitor.
PEOPLE: People are our only truly sustainable source of competitive advantage
and competition for key skills is intense, especially around science,
technology, engineering and mathematics (STEM) disciplines. We may not be
successful in attracting, retaining, developing, engaging and inspiring the
right people with the right skills to achieve our growth ambitions.
BUSINESS CONTINUITY: Our manufacturing and supply chain continuity is exposed
to external events that could have significant adverse consequences, including
natural catastrophes, civil or political unrest, changes in regulatory
conditions, terrorist attacks and disease pandemics.
ECONOMY AND GEOPOLITICS: The world continues to experience volatile
macroeconomic conditions. The risk of persistent inflation and the effects of
central bank intervention remain unknown. There is a risk of rising labour and
material costs, as well as regional recessions which would pressure our
revenue growth and profitability. Geopolitical tensions may further impact the
free movement of capital, goods, and people and add volatility to our supply
chains or constrain our market opportunities.
COMMERCIAL: Our markets are evolving at a fast pace, creating potential for
customers to change their business models as they look to deliver products and
services at higher quality, with better service and at lower cost. Failure of
the Group to keep pace with customer changes/requirements (innovation,
go-to-market strategies) could have a materially adverse impact on Group
performance.
PRODUCT QUALITY: The mission-critical nature of many of our products,
services and solutions makes the potential consequences of failure more
serious than for some other businesses. In the ordinary course of business, we
are potentially subject to material product liability claims and lawsuits,
including potential class actions, from customers or third parties.
CYBER SECURITY: Cyber-attacks seeking to compromise the confidentiality,
integrity and availability of IT systems and the data held on them are a
continuing risk. We operate in markets and product areas which are known to be
of interest to cyber criminals. Digitalisation and increased interconnectivity
of our products intensify the risk and the number of areas under potential
attack.
LEGAL AND COMPLIANCE: We have more than 14,700 colleagues in more than 50
countries. Individuals may not all behave in accordance with the Group's
Values and in accordance with ethical and legal requirements. We operate
within increasingly complex legal regimes, often in highly regulated markets
and with governments, customers and suppliers requiring strict adherence to
laws. We may fail to deliver contracted products and services or fail in our
contractual execution due to delays or breaches by our suppliers or other
counterparties.
Statement of directors' responsibilities
The directors confirm that, to the best of our knowledge:
· the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the United
Kingdom and in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006; and
· the interim management report includes a fair review of the information
required by:
a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being
an indication of important events that have occurred during the first six
months of the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months of
the current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last annual report that could
do so.
For and on behalf of the Board of directors:
Clare Scherrer
Paul Keel
Chief Executive Chief Financial Officer
23 March 2023
Independent review report to Smiths Group plc
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
January 2023 which comprises the consolidated income statement, the
consolidated statement of comprehensive income, the consolidated balance
sheet, the consolidated statement of changes in equity, the consolidated cash
flow statement and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 January 2023 is not prepared, in
all material respects, in accordance with IAS 34 Interim Financial Reporting
as adopted for use in the UK and the Disclosure Guidance and Transparency
Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK
FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the UK.
A review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. We read the other
information contained in the half-yearly financial report and consider whether
it contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the group to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the group will continue in operation.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with UK-adopted international accounting standards.
The directors are responsible for preparing the condensed set of financial
statements included in the half-yearly financial report in accordance with IAS
34 as adopted for use in the UK.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the group or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review. Our conclusion, including our conclusions relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the company
those matters we are required to state to it in this report and for no other
purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company for our review work, for this
report, or for the conclusions we have reached.
Mike Barradell
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
23 March 2023
Consolidated income statement (unaudited)
Six months ended 31 January 2023 Six months ended 31 January 2022
Notes Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
(note 3)
£m £m
£m £m
Continuing operations
Revenue 2 1,497 - 1,497 1,192 - 1,192
Operating costs 2 (1,256) (54) (1,310) (1,003) (32) (1,035)
Operating profit/(loss) 241 (54) 187 189 (32) 157
Interest receivable 21 - 21 5 - 5
Interest payable (38) (2) (40) (24) - (24)
Other financing gains/(losses) - (5) (5) - 19 19
Other finance income - retirement benefits - 4 4 - 3 3
Finance (costs)/income (17) (3) (20) (19) 22 3
Profit/(loss) before taxation 224 (57) 167 170 (10) 160
Taxation 5 (58) (6) (64) (48) 4 (44)
Profit/(loss) for the period from continuing operations 166 (63) 103 122 (6) 116
Discontinued operations
Profit for the period from discontinued operations 3 - 6 6 49 958 1,007
PROFIT/(LOSS) FOR THE PERIOD 166 (57) 109 171 952 1,123
Attributable to
Smiths Group shareholders - continuing operations 166 (63) 103 121 (6) 115
Smiths Group shareholders - discontinued operations - 6 6 49 958 1,007
Non-controlling interests - - - 1 - 1
166 (57) 109 171 952 1,123
Earnings per share 4
Basic 30.6p 283.9p
Basic - continuing 28.9p 29.1p
Diluted 30.5p 283.7p
Diluted - continuing 28.9p 29.1p
Dividends per share (declared) 14 12.9p 12.3p
Consolidated statement of comprehensive income (unaudited)
Notes Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Profit for the period 109 1,123
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of post-retirement benefits assets and obligations (109) 18
Taxation on post-retirement benefits movements 14 (5)
Fair value movements on financial assets at fair value through OCI 27 (29)
(68) (16)
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges (13) (24)
- reclassified to income statement on cash-flow hedges 3 5
(10) (19)
Foreign exchange movements net of recycling:
Exchange gains on translation of foreign operations 2 72
Exchange gains recycled to the income statement on disposal of business - (196)
2 (124)
Total other comprehensive expenditure for the period, net of taxation (76) (159)
Total comprehensive income 33 964
Attributable to
Smiths Group shareholders 33 963
Non-controlling interests - 1
33 964
Total comprehensive income attributable to Smiths Group shareholders arising
from
Continuing operations 27 161
Discontinued operations 6 803
33 964
Consolidated balance sheet (unaudited)
Notes 31 January 31 July
2023
2022
£m
£m
Non-current assets
Intangible assets 7 1,594 1,588
Property, plant and equipment 8 252 243
Right of use assets 9 101 106
Financial assets - other investments 10 427 395
Retirement benefit assets 6 193 309
Deferred tax assets 94 95
Trade and other receivables 76 69
2,737 2,805
Current assets
Inventories 690 570
Current tax receivable 50 50
Trade and other receivables 711 738
Cash and cash equivalents 11 795 1,056
Financial derivatives 11 17 4
2,263 2,418
Total assets 5,000 5,223
Current liabilities
Financial liabilities:
- short-term borrowings 11 (574) (538)
- financial derivatives 11 (2) (27)
Provisions 13 (69) (88)
Trade and other payables (689) (682)
Current tax payable (72) (64)
(1,406) (1,399)
Non-current liabilities
Financial liabilities:
- long-term borrowings 11 (634) (628)
- financial derivatives 11 (20) (20)
Provisions 13 (237) (247)
Retirement benefit obligations 6 (118) (115)
Corporation tax payable (3) (3)
Deferred tax liabilities (44) (44)
Trade and other payables (41) (46)
(1,097) (1,103)
Total liabilities (2,503) (2,502)
Net assets 2,497 2,721
Shareholders' equity
Share capital 18 133 136
Share premium account 18 365 365
Capital redemption reserve 22 19
Merger reserve 235 235
Cumulative translation adjustments 489 487
Retained earnings 1,443 1,659
Hedge reserve (212) (202)
Total shareholders' equity 2,475 2,699
Non-controlling interest equity 22 22
Total equity 2,497 2,721
Consolidated statement of changes in equity (unaudited)
Notes Share capital Other Cumulative Retained earnings Hedge Equity Non-controlling Total
and share
reserves
£m
reserve
shareholders'
Interest
equity
premium
£m translation
£m
funds
£m
£m
£m
£m
adjustments
£m
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
Profit for the period - - - 109 - 109 - 109
Other comprehensive income:
- foreign exchange movements net of recycling - - 2 - - 2 - 2
- re-measurement of post-retirement benefits and related tax - - - (95) - (95) - (95)
- fair value gains/(losses) and related tax - - - 27 (10) 17 - 17
Total comprehensive income for the period - - 2 41 (10) 33 - 33
Transactions relating to ownership interests
Purchase of shares by Employee Benefit Trust - - - (24) - (24) - (24)
Share buybacks 18 (3) 3 - (144) - (144) - (144)
Dividends:
- equity shareholders 14 - - - (97) - (97) - (97)
Share-based payment - - - 8 - 8 - 8
At 31 January 2023 498 257 489 1,443 (212) 2,475 22 2,497
Notes Share capital Other Cumulative Retained earnings Hedge Equity shareholders' Non-controlling Total
and share
reserves
£m
reserve
funds
Interest
equity
premium
£m translation
£m
£m
£m
£m
£m
adjustments
£m
At 31 July 2021 512 242 509 1,367 (228) 2,402 21 2,423
Profit for the period - - - 1,122 - 1,122 1 1,123
Other comprehensive income:
- foreign exchange movements net of recycling - (1) (227) 1 103 (124) - (124)
- re-measurement of post-retirement benefits and related tax - - - 13 - 13 - 13
- fair value losses and related tax - - - (29) (19) (48) - (48)
Total comprehensive income for the period - (1) (227) 1,107 84 963 1 964
Transactions relating to ownership interests
Issue of new equity shares 18 2 - - - - 2 - 2
Purchase of shares by Employee Benefit Trust - - - (16) - (16) - (16)
Share buybacks (3) 3 - (111) - (111) - (111)
Dividends:
- equity shareholders 14 - - - (103) - (103) - (103)
Share-based payment - - - 8 - 8 - 8
At 31 January 2022 511 244 282 2,252 (144) 3,145 22 3,167
Consolidated cash-flow statement (unaudited)
Notes Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Net cash inflow from operating activities 16 100 182
Cash-flows from investing activities
Expenditure on capitalised development (7) (14)
Expenditure on other intangible assets (3) (4)
Purchase of property, plant and equipment (26) (30)
Disposals of property, plant and equipment - 1
Investment in financial assets - (4)
Acquisition of businesses (22) -
(Payments)/proceeds on disposal of subsidiaries, net of cash disposed (7) 1,348
Net cash-flow used in investing activities (65) 1,297
Cash-flows from financing activities
Proceeds from issue of new equity shares - 2
Share buybacks 18 (144) (103)
Purchase of shares by Employee Benefit Trust (24) (16)
Settlement of share awards in cash - (1)
Dividends paid to equity shareholders and non-controlling interests (97) (103)
Cash inflow/(outflow) from matured derivative financial instruments (10) 4
Lease payments (18) (19)
Net cash-flow used in financing activities (293) (236)
(Decrease)/increase in cash and cash equivalents (258) 1,243
Cash and cash equivalents at beginning of the period 1,055 405
Movement in cash held in disposal group - 48
Exchange differences (2) 14
Cash and cash equivalents at end of the period 795 1,710
Cash and cash equivalents at end of the period comprise:
- cash at bank and in hand 197 208
- short-term deposits 598 1,502
795 1,710
Notes to the condensed interim financial statements (unaudited)
1 Basis of preparation
The financial information for the period ended 31 January 2023 does not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. A copy of the statutory accounts for the year ended 31 July 2022 has
been delivered to the Registrar of Companies. The auditor's report on those
accounts was not qualified, did not include a reference to any matters to
which the auditor drew attention by way of emphasis without qualifying the
report, and did not contain statements under section 498(2) or (3) of the
Companies Act 2006.
The condensed consolidated interim financial report for the half-year
reporting period ended 31 January 2023 included in this announcement has been
prepared on a going concern basis using accounting policies consistent with
UK-adopted International Accounting Standards, in accordance with IAS 34
Interim Financial Reporting, and in accordance with the Disclosure Guidance
and Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim report does not include all of the notes of the type normally
included in an annual financial report. Accordingly, this report is to be read
in conjunction with the annual report for the year ended 31 July 2022, which
has been prepared in accordance with UK-adopted International Accounting
Standards.
The interim financial statements are prepared on a going concern basis. The
Directors have assessed the principal risks discussed on page 19. The
Directors believe that the Group is well placed to manage its financing and
other business risks satisfactorily, and 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 condensed consolidated interim
financial statements. They therefore consider it appropriate to adopt the
going concern basis of accounting in preparing the financial statements.
The interim financial information was approved by the Board on 23 March 2023.
Accounting policies
The same accounting policies, estimates, presentation and methods of
computation are followed in the condensed interim financial statements as
applied in the Group's latest annual audited financial statements.
New standards and interpretations not yet adopted
No 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.
Presentation of results
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 a form consistent with the prior
year.
Judgement is required in determining which items should be included as
non-headline. The amortisation 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.
Performance measures for the Group's ongoing trading activity are described as
'headline' and used by management to measure and monitor performance. See note
2 for disclosures of headline operating profit and note 19 for more
information about the alternative performance measures ('APMs') used by the
Group.
In addition, the Group reports organic growth rates for revenue and underlying
growth rates for profit where the determination of adjustments requires
judgement. See note 19 for more information about the key performance
indicators (KPIs) used by the Group.
2 Analysis of revenue, operating costs and segment information
Analysis by operating segment
The Group is organised into four divisions: John Crane, Flex-Tek, Smiths
Detection and Smiths Interconnect. These divisions design and manufacture 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 is 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 divisional results and
operating assets to monitor divisional position. See note 3 and note 19 for
more information on which items are excluded from headline profit measures.
Intersegment sales and transfers are charged at arm's-length prices.
Segment trading performance
Six months ended 31 January 2023
John Crane Smiths Flex-Tek Smiths Interconnect Corporate Total
£m
Detection
costs
£m
£m £m £m
£m
Revenue 519 390 395 193 - 1,497
Divisional headline operating profit 114 41 77 32 - 264
Corporate headline operating costs - - - - (23) (23)
Headline operating profit/(loss) 114 41 77 32 (23) 241
Items excluded from headline measures (note 3) (15) (17) (13) (2) (7) (54)
Operating profit/(loss) for the period 99 24 64 30 (30) 187
Headline operating margin 22.0% 10.5% 19.5% 16.6% 16.1%
Six months ended 31 January 2022
John Crane Smiths Flex-Tek Smiths Interconnect Corporate Total
£m
Detection
£m
£m
costs
£m
£m
£m
Revenue 416 313 297 166 - 1,192
Divisional headline operating profit 83 36 62 28 - 209
Corporate headline operating costs - - - - (20) (20)
Headline operating profit/(loss) 83 36 62 28 (20) 189
Items excluded from headline measures (note 3) (2) (11) (11) - (8) (32)
Operating profit/(loss) for the period 81 25 51 28 (28) 157
Headline operating margin 20.0% 11.5% 20.9% 16.9% 15.9%
Segment assets and liabilities
Segment assets
31 January 2023
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£m
£m
£m
Property, plant, equipment, right of use assets, development projects, other 168 128 85 62 431 874
intangibles and investments
Inventory, trade and other receivables 459 587 241 172 18 1,477
Segment assets 627 715 326 234 449 2,351
31 July 2022
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£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 January 2023
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
£m
£m
non-headline
£m
Detection
£m
£m
Divisional liabilities (144) (356) (103) (74) - (677)
Corporate and non-headline liabilities (359) (359)
Segment liabilities (144) (356) (103) (74) (359) (1,036)
31 July 2022
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£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 January 31 July 31 January 31 July
2023
2022
2023
2022
£m
£m
£m
£m
Segment assets and liabilities 2,351 2,208 (1,036) (1,063)
Goodwill and acquired intangibles 1,500 1,501 - -
Derivatives 17 4 (22) (47)
Current and deferred tax 144 145 (119) (111)
Retirement benefit assets and obligations 193 309 (118) (115)
Cash and borrowings 795 1,056 (1,208) (1,166)
Statutory assets and liabilities 5,000 5,223 (2,503) (2,502)
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
(31 July 2022: £478m), and eliminate post-retirement benefit assets and
liabilities and litigation provisions relating to non-headline items, both net
of related tax, and net debt. See note 19 for additional details.
The 12-month rolling average capital employed by division, which Smiths uses
to calculate divisional return on capital employed, is set out below:
31 January 2023
John Crane Smiths Flex-Tek Smiths Interconnect Total
£m
£m
£m
£m
Detection
£m
Average divisional capital employed 1,006 1,088 558 435 3,087
Average corporate capital employed (4)
Average capital employed 3,083
31 January 2022
John Crane Smiths Flex-Tek Smiths Interconnect Total
£m
£m
£m
£m
Detection
£m
Average divisional capital employed 934 986 478 384 2,781
Average corporate capital employed 43
Average capital employed - continuing operations 2,824
Average capital employed - assets held for sale 1,235
Average capital employed - including assets held for sale 4,059
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 six months ended 31 January 2023 156 363 519
Revenue six months ended 31 January 2022 128 288 416
Smiths Detection Aviation Other security Total
£m
systems
£m
£m
Revenue six months ended 31 January 2023 263 127 390
Revenue six months ended 31 January 2022 219 94 313
Flex-Tek Aerospace Industrials Total
£m
£m
£m
Revenue six months ended 31 January 2023 69 326 395
Revenue six months ended 31 January 2022 54 243 297
Smiths Interconnect Components, Connectors & Subsystems
£m
Revenue six months ended 31 January 2023 193
Revenue six months ended 31 January 2022 166
Divisional revenue is analysed by the Smiths Group key global markets as
follows:
John Crane General Industrial Safety & Security Energy Aerospace Total
£m
£m
£m
£m
£m
Revenue six months ended 31 January 2023 203 - 316 - 519
Revenue six months ended 31 January 2022 168 - 248 - 416
Smiths Detection
Revenue six months ended 31 January 2023 - 390 - - 390
Revenue six months ended 31 January 2022 - 313 - - 313
Flex-Tek
Revenue six months ended 31 January 2023 326 - - 69 395
Revenue six months ended 31 January 2022 243 - - 54 297
Smiths Interconnect
Revenue six months ended 31 January 2023 95 71 - 27 193
Revenue six months ended 31 January 2022 72 70 - 24 166
Total
Revenue six months ended 31 January 2023 624 461 316 96 1,497
Revenue six months ended 31 January 2022 483 383 248 78 1,192
The Group's statutory revenue is analysed as follows:
Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Sale of goods recognised at a point in time 1,113 859
Sale of goods recognised over time 31 54
Services recognised over time 353 279
Revenue 1,497 1,192
Operating costs
Headline operating costs are analysed as follows:
Six months ended 31 January 2023 Six months ended 31 January 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 945 - 945 736 - 736
distribution overheads
Selling costs 112 - 112 95 - 95
Administrative expenses 199 54 253 172 32 204
Operating costs 1,256 54 1,310 1,003 32 1,035
3 Non-statutory profit measures
Headline profit measures
The Group seeks to present a measure of performance which is not impacted by
material non-recurring items or items considered non-operational in nature.
This measure of profit is described as 'headline' and is used by management to
measure and monitor 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 are as follows:
Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Post-transaction gains/(losses) and fair value adjustment changes
Fair value gain on contingent consideration 5 -
Unwind of acquisition balance sheet fair value uplift - (1)
Acquisition and disposal related transaction costs
Business acquisition/disposal costs (1) -
Legacy pension scheme arrangements
Past service costs for benefit equalisation (10) (8)
Scheme administration costs (1) -
Settlement losses on post-retirement benefit schemes (1) -
Non-headline litigation provision movements
Provision for John Crane, Inc. asbestos litigation (13) 1
Cost recovery for John Crane, Inc. asbestos litigation 3 -
Movement in provision held against Titeflex Corporation subrogation claims - 2
Other items
Amortisation of acquisition related intangible assets (26) (26)
Restructuring costs (8) -
Irrecoverable VAT on chain export transactions (2) -
Non-headline items in operating profit (54) (32)
Post-acquisition integration costs and fair value adjustment unwind
Following the sale of Smiths Medical to ICU Medical, Inc. (ICU) in FY22, the
Group holds a financial asset for the fair value of $100m additional sales
consideration that is contingent on the future share price performance of
ICU. In HY23 a fair value gain of £5m 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 £1m 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
The £1m (31 January 2022: £nil) business acquisition/disposal costs
represented incremental transaction costs including the acquisition of
Plastronics. 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
In the current year £10m (31 January 2022: £8m) of past service costs have
been recognised in respect of the equalisation of retirement benefits for men
and women. These are treated as non-headline items as they are non-recurring
and relate to legacy pension schemes.
Scheme administration costs of £1m (31 January 2022: £nil) have been
recognised as non-headline as they relate to the administration costs, paid
from cash retained in the scheme, for the TI Group Pension Scheme ('TIGPS'),
where all of the scheme's liabilities have been insured by way of a bulk
annuity buy-in and it is intended to fully buy-out the Scheme as soon as
reasonably practical. 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.
The £1m of settlement losses on post-retirement benefit schemes in the
current period (31 January 2022: £nil) relate to settlement arrangements made
between the Group and former employees of the now disposed Medical business.
These are considered non-headline as they arise wholly from the disposal of
the Medical business that was treated as non-headline activity.
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 £13m charge (31 January 2022: £1m credit) in respect of John Crane,
Inc. asbestos litigation is principally due to litigation management expenses.
The £1m credit in the prior year principally arose from discount rate
movements following an increase in United States of America (US) treasury bond
yields. £3m (31 January 2022: £nil) of costs were recovered via insurer
settlements. See note 13 for further details; and
- In the prior year, a £2m credit recognised by Titeflex Corporation was
prinicipally driven by discount rate movements.
Other items
Acquisition related intangible asset amortisation costs of £26m (31 January
2022: £26m) 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 FY22 Annual Report, a restructuring project is underway
across the Group to better serve our customers, maximise growth opportunities
and improve efficiency. Non-headline charges of £8m have been incurred in the
period and have been treated as non-headline due to being material and part of
a pre-approved programme.
The £2m of irrecoverable VAT (31 January 2022: £nil) relates to a historic
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 German 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 German VAT, which spans FY23 and FY24, so may have a
material impact on the Group's headline cash conversion metric.
Non-headline finance (costs)/income items
The non-headline items included in finance (costs)/income are as follows:
Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Foreign exchange gain on intercompany loan with discontinued operations - 22
Interest on overdue VAT (2) -
Other financing losses (1) (2)
Unwind of discount on provisions (4) (1)
Other finance income - retirement benefits 4 3
Non-headline items in finance (costs)/income (3) 22
Non-headline loss before taxation (57) (10)
In FY22, £22m of foreign exchange gains on intercompany financing between
Smiths Medical and the continuing group were recognised on the face of the
income statement as a non-headline item due to the classification of Smiths
Medical as a discontinued operation. This gain was excluded from headline net
finance costs as these fair value movements are non-operational in nature and
are purely a consequence of the presentational requirements for discontinued
operations.
A £2m loss (31 January 2022: £nil) has been recognised in respect of
interest on the late payment of German VAT, noted above. This is excluded from
headline finance costs because the charges have been recognised as
non-headline and this treatment has been maintained for the interest thereon.
Other financing losses represent fair value movements on financial instruments
and foreign exchange movements on borrowings. The current period loss includes
£1m (31 January 2022: £2m) due to hedge ineffectiveness on the Group's 2027
Eurobonds, which will reverse over the remaining period to maturity. These
fair value movements are excluded from headline net finance costs when the
following requirements are met:
- Fair value gains and losses on the interest element of derivative
financial instruments hedging the Group's net debt exposures are excluded from
headline, as they will either reverse over time or be matched in future
periods by interest charges.
- Fair value gains and losses on the currency element of derivative
financial instruments hedging the Group's net debt and exposures, and exchange
gains and losses on borrowings are excluded, as the relevant foreign exchange
gains and losses on the commercially hedged items are recognised as a separate
component of other comprehensive income, in accordance with the Group's
foreign currencies accounting policy.
The financing elements of non-headline legacy liabilities, including the £4m
(31 January 2022: £1m) unwind of discount on provisions, are 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 £4m (31 January 2022: £3m) of financing
credits relating to retirement benefits. These are excluded from headline
finance costs because the ongoing costs and credits are a legacy of previous
employee pension arrangements.
Non-headline taxation items
The £6m non-headline taxation charge (31 January 2022: £4m credit) comprises
a charge of £14m to adjust non-recognition of a deferred tax asset, where the
offsetting deferred tax liability related to the UK legacy pension scheme
surplus has been taken to OCI. Offsetting this charge are credits for the tax
attributable to the non-headline items above.
ii. DISCONTINUED OPERATIONS
The non-headline items for discontinued operations are as follows:
Six months ended Six months ended
31 January 2023
31 January 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 1,021
Non-headline taxation items
Taxation on non-headline items - 6
Non-headline items in profit from discontinued operations 6 958
Profit for the period - non-headline items for continuing and discontinued (57) 952
operations
In the current period the Group has recognised an additional £6m gain on the
sale of Smiths Medical following the release of provisions that are no longer
required.
4 Earnings per share
Basic earnings per share are calculated by dividing the profit for the period
attributable to equity shareholders of the Company by the average number of
ordinary shares in issue during the period.
Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Profit attributable to equity shareholders for the period
- Continuing 103 115
- Discontinued 6 1,007
Total 109 1,122
Average number of shares in issue during the period (note 18) 356,572,308 395,260,779
Statutory earnings per share continuing operations - basic 28.9p 29.1
Statutory earnings per share continuing operations - diluted 28.9p 29.1
Statutory earnings per share total - basic 30.6p 283.9
Statutory earnings per share total - diluted 30.5p 283.7
Diluted earnings per share are calculated by dividing the profit attributable
to ordinary shareholders by 356,866,804 (31 January 2022: 395,537,378)
ordinary shares, being the average number of ordinary shares in issue during
the year adjusted by the dilutive effect of employee share schemes.
A reconciliation of statutory and headline earnings per share is as follows:
Six months ended 31 January 2023 Six months ended 31 January 2022
£m Basic EPS Diluted EPS £m Basic EPS Diluted EPS
(p)
(p)
(p)
(p)
Basic earnings per share:
Total profit attributable to equity shareholders of the Parent Company 109 30.6 30.5 1,122 283.9 283.7
Exclude: Non-headline items (note 3) 57 (952)
Headline earnings per share 166 46.6 46.5 170 43.0 43.0
Profit from continuing operations attributable to equity shareholders of 103 28.9 28.9 115 29.1 29.1
the Parent Company
Exclude: Non-headline items (note 3) 63 6
Headline earnings per share - continuing operations 166 46.6 46.5 121 30.6 30.6
5 Taxation
The interim tax rate of 38.4% (31 January 2022: 27.8%) is calculated by
applying the estimated effective headline tax rate for continuing operations
of 26.0% (31 January 2022: 28.4%) for the year ended 31 July 2023 to headline
profit before tax and then taking into account the tax effect of non-headline
items in the interim period.
A reconciliation of headline and total tax charge is as follows:
Six months ended 31 January 2023 Six months ended 31 January 2022
Continuing Tax rate Continuing Tax rate
operations
operations
£m
£m
Headline tax rate
Headline profit before taxation 224 170
Taxation on headline profit (58) 26.0% (48) 28.4%
Adjustments
Non-headline items excluded from profit before taxation (note 3) (57) (10)
Taxation on non-headline items and non-headline tax adjustment (6) 4
Total interim tax rate
Profit before taxation 167 160
Taxation (64) 38.4% (44) 27.8%
The changes in the value of the net tax asset in the period were:
Current Deferred Net tax
tax
tax
balance
£m
£m
£m
At 31 July 2022 (17) 51 34
Foreign exchange gains and losses 1 - 1
Charge to income statement (52) (12) (64)
Acquisitions - (3) (3)
Charge to other comprehensive income - 14 14
Tax paid 43 - 43
At 31 January 2023 (25) 50 25
Developments in the Group tax position
In December 2021, the Organisation for Economic Co-operation and Development (
"OECD") published rules relating to global minimum taxation called Pillar 2
rules, currently timetabled to apply in the UK to accounting periods beginning
on or after 1 January 2024. The Group will continue to monitor the development
and future implementation of these rules globally. However, at this time they
are not expected to have a material impact on the Group.
6 Post-retirement benefits
The Group provides post-retirement benefits to employees in a number of
countries throughout the world. The arrangements include defined benefit and
defined contribution plans and, mainly in the United Kingdom (UK) and United
States of America (US), post-retirement healthcare. The principal defined
benefit pension plans are in the UK and US, and these have been closed so that
no future benefits are accrued.
Where any individual scheme shows a post restriction 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 surplus is recognised as a retirement benefit asset to the
extent the employers have the right to recover the surplus at the end of the
life of the scheme, assuming all liabilities have been extinguished. The
schemes are mature with a duration averaged over all scheme participants of 13
years.
The amounts recognised in the balance sheet are as follows:
31 January 31 July
2023
2022
£m
£m
Market value of scheme assets 2,802 3,314
Present value of funded scheme liabilities (2,610) (3,003)
Surplus restriction (18) (20)
Surplus 174 291
Unfunded pension plans (92) (90)
Post-retirement healthcare (7) (7)
Present value of unfunded obligations (99) (97)
Net retirement benefit asset 75 194
Post-retirement assets 193 309
Post-retirement liabilities (118) (115)
Net retirement benefit asset 75 194
Since 31 July 2022 gilt yields have increased significantly resulting in a
significant decrease in the value of the scheme's assets. There has been a
corresponding decrease in the value of scheme liabilities due to an increase
in the discount rate. The change in market conditions has had no impact on any
funding arrangements.
The principal assumptions used in updating the valuations are set out below:
31 January 2023 31 July 2022
UK US UK US
Weighted average rate of increase in benefits for active deferred members 4.0% n/a 4.0% n/a
Rate of increase in pensions in payment 3.3% n/a 3.4% n/a
Rate of increase in deferred pensions 3.3% n/a 3.4% n/a
Discount rate 4.5% 4.9% 3.5% 4.5%
The UK discount rate is now based on the Aon GBP Single Agency AA curve,
previously the Aon GBP Select AA curve was used. This change has increased the
discount rate (when rounded to the nearest 0.1% p.a.) by 0.1% and reduced UK
liabilities by c1.3%. The Single Agency curve is expected to produce a a
better indication of the market yield on high quality corporate bonds. The
methods for setting the mortality assumptions for the UK schemes are
consistent with the 31 July 2022 valuation, however an allowance has been made
for the expected long-term negative impact of Covid-19 on future life
expectancy. The US scheme mortality assumption remains unchanged.
Present value of funded scheme liabilities and assets for the main UK and US
schemes
31 January 2023 - £m 31 July 2022 - £m
SIPS TIGPS US schemes SIPS TIGPS US schemes
Present value of funded scheme liabilities
- Active deferred members (28) (19) (37) (32) (23) (41)
- Deferred members (457) (362) (100) (561) (442) (109)
- Pensioners (900) (597) (83) (1,010) (670) (88)
Present value of funded scheme liabilities (1,385) (978) (220) (1,603) (1,135) (238)
Market value of scheme assets 1,578 996 206 1,912 1,155 225
Surplus restriction - (18) - - (20) -
Surplus/(deficit) 193 - (14) 309 - (13)
Contributions
Group contributions to the pension plans in the period totalled £3m (31
January 2022: £6m), comprising regular contributions of £nil (31 January
2022: £3m) to Smiths Industries Pension Scheme ('SIPS') and £3m (31 January
2022: £3m) to unfunded defined benefit pension schemes and post-retirement
healthcare plans.
The changes in the present value of the net pension balance in the period
were:
Six months ended Year ended
31 January
31 July
2023
2022
£m
£m
At beginning of period 194 413
Foreign exchange rate movements (2) -
Current service cost (1) (2)
Headline scheme administration costs (2) (4)
Non-headline scheme administration costs (1) -
Past service costs - benefit equalisations (10) (43)
Curtailments and settlements - continuing operations (1) (171)
Curtailments and settlements - discontinued operations - (3)
Finance income - retirement benefits 4 7
Contributions by employer 3 9
Actuarial (losses)/gains (111) 3
Retirement benefit obligations disposed of with Smiths Medical - 5
Movement in unrecognised assets due to surplus restriction 2 (20)
Net retirement benefit asset at end of period 75 194
Past service costs, curtailments and settlements
In SIPS, it has been discovered that the method used in the early 1990s to
equalise retirement ages between men and women in some of its smaller benefits
sections was incorrect. An additional liability of £10m has been recognised
within the SIPS defined benefit obligation at 31 January 2023 to reflect
estimated additional liabilities in respect of 4 further sections. The cost of
£10m has been recognised as a past service cost. A wider review is being
undertaken to determine if equalisation was undertaken correctly in other
sections of the Scheme, which is expected to be completed by the FY23
year-end.
7 Intangible assets
Goodwill Development Acquired Software, Total
£m
costs
intangibles
patents and intellectual property
£m
£m
£m
£m
Cost
At 31 July 2022 1,311 174 630 193 2,308
Exchange adjustments 5 3 (5) - 3
Additions - 7 - 3 10
Business combinations 10 - 13 - 23
Disposals - - - (7) (7)
At 31 January 2023 1,326 184 638 189 2,337
Amortisation
At 31 July 2022 67 123 373 157 720
Exchange adjustments - 2 (2) (1) (1)
Charge for the period - 1 26 4 31
Disposals - - - (7) (7)
At 31 January 2023 67 126 397 153 743
Net book value at 31 January 2023 1,259 58 241 36 1,594
Net book value at 31 July 2022 1,244 51 257 36 1,588
Review for impairment assessment trigger events
In accordance with IAS 34 'Interim financial reporting', management has
undertaken a review for indications of impairment and concluded that no
impairment assessment trigger events have occurred in the half year. It was
noted in the FY22 annual report that Smiths Detection was the only Group CGU
where a reasonable change in the impairment testing assumptions could result
in the recognition of impairment charges.
It is management's judgement that in the half year to 31 January 2023 the
Detection CGU has outperformed its impairment model forecast on both revenue
and profit, therefore there are no impairment assessment trigger events at
this time.
8 Property, plant and equipment
Land and Plant and Fixtures, Total
buildings
machinery
fittings,
£m
£m
£m
tools and
equipment
£m
Cost or valuation
At 31 July 2022 176 457 129 762
Exchange adjustments 1 2 2 5
Additions 7 17 2 26
Business combinations - 1 2 3
Disposals (2) (5) (1) (8)
At 31 January 2023 182 472 134 788
Depreciation
At 31 July 2022 108 299 112 519
Exchange adjustments - 2 2 4
Charge for the period 4 12 5 21
Disposals (2) (5) (1) (8)
At 31 January 2023 110 308 118 536
Net book value at 31 January 2023 72 164 16 252
Net book value at 31 July 2022 68 158 17 243
9 Right of use assets
Properties Vehicles Equipment Total
£m
£m
£m
£m
Cost
At 31 July 2022 174 21 1 196
Recognition of right of use assets 8 4 - 12
Derecognition of right of use assets (2) - - (2)
At 31 January 2023 180 25 1 206
Depreciation
At 31 July 2022 75 15 - 90
Charge for the year 14 3 - 17
Derecognition of right of use assets (2) - - (2)
At 31 January 2023 87 18 - 105
Net book value at 31 January 2023 93 7 1 101
Net book value at 31 July 2022 99 6 1 106
10 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
At 31 July 2022 364 19 8 4 395
Fair value change through Profit and Loss - 5 - - 5
Fair value change through Other Comprehensive Income 28 - (1) - 27
At 31 January 2023 392 24 7 4 427
Following the sale of Smiths Medical the Group has recognised a financial
asset for its investment in 10% of the equity in ICU Medical, Inc (ICU) and a
financial asset for the fair value of $100m additional sales consideration
that is contingent on the future share price performance of ICU.
11 Borrowings and net cash/(debt)
This note sets out the calculation of net debt, an important measure in
explaining our financing position. The net debt figure includes accrued
interest and fair value adjustments to debt relating to hedge accounting.
31 January 31 July
2023
2022
£m
£m
Cash and cash equivalents
Net cash and cash equivalents 795 1,056
Short-term borrowings
€600m 1.25% Eurobond 2023 (527) (502)
Overdrafts - (1)
Lease liabilities (30) (29)
Interest accrual (17) (6)
(574) (538)
Long-term borrowings
€650m 2.00% Eurobond 2027 (550) (538)
Lease liabilities (84) (90)
(634) (628)
Borrowings (1,208) (1,166)
Derivatives managing interest rate risk and currency profile of the debt (16) (40)
Net debt (429) (150)
Analysis of financial derivatives on balance sheet
Non-current assets Current Current Non-current liabilities Net
£m
assets
liabilities
balance
£m
£m £m
£m
Derivatives managing interest rate risk and currency profile of the debt - 4 - (20) (16)
Foreign exchange forward contracts - 13 (2) - 11
At 31 January 2023 - 17 (2) (20) (5)
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 net debt
Cash and cash equivalents Short-term borrowings Long-term borrowings Interest rate and cross currency swaps Net
£m
£m
£m
£m debt
£m
At 31 July 2022 1,056 (538) (628) (40) (150)
Foreign exchange gains/(losses) (2) - - - (2)
Net increase in cash and cash equivalents (259) 1 - - (258)
Net movement in lease liabilities - 5 - - 5
Fair value movement from interest rate hedging - (25) (12) - (37)
Revaluation of derivative contracts - - - 24 24
Net movement in finance cost accruals - (11) - - (11)
Reclassification to short-term - (6) 6 - -
At 31 January 2023 795 (574) (634) (16) (429)
12 Fair value of financial instruments
As at 31 January 2023 As at 31 July 2022
Basis for determining fair value At amortised At fair value through profit or loss At fair value through OCI Total Total At amortised cost At fair value through profit or loss At fair value through OCI Total carrying Total
cost
£m
£m
carrying
£m
£m
fair value £m value fair value
£m value
£m £m £m
£m
Financial assets
Other investments A - 4 392 396 396 - 4 364 368 368
Other investments F - 24 7 31 31 - 19 8 27 27
Cash and cash equivalents A 394 401 - 795 795 506 550 - 1,056 1,056
Trade and other financial receivables B/C 787 - - 787 787 807 - - 807 807
Derivative financial instruments C - 17 - 17 17 - 4 - 4 4
Total financial assets 1,181 446 399 2,026 2,026 1,313 577 372 2,262 2,262
Financial liabilities
Trade and other financial payables B (730) - - (730) (730) (728) - - (728) (728)
Short-term borrowings D (544) - - (544) (544) (509) - - (509) (509)
Long-term borrowings D (550) - - (550) (542) (538) - - (538) (544)
Lease liabilities E (114) - - (114) (114) (119) - - (119) (119)
Derivative financial instruments C - (22) - (22) (22) - (47) - (47) (47)
Total financial liabilities (1,938) (22) - (1,960) (1,952) (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 Fair Value
Measurement).
B Carrying value is assumed to be a reasonable approximation to fair value for
all of these assets and liabilities (Level 2 as defined by IFRS 13 Fair Value
Measurement).
C Fair values of derivative financial assets and liabilities and trade
receivables held to collect or sell are estimated by discounting expected
future contractual cash-flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing
at the balance sheet date. These financial instruments are included on the
balance sheet at fair value, derived from observable market prices (Level 2 as
defined by IFRS 13 Fair Value Measurement).
D Borrowings are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of borrowings is estimated using quoted prices (Level 1
as defined by IFRS 13).
E Leases are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of the lease contract is estimated by discounting
contractual future cash-flows (Level 2 as defined by IFRS 13).
F The fair value of instruments is estimated by using unobservable inputs to the
extent that relevant observable inputs are not available. Unobservable
inputs are developed using the best information available in the
circumstances, which may include the Group's own data, taking into account all
information about market participation assumptions that is reliably available
(Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy:
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1 inputs
Level 3 - inputs not based on observable market data
13 Provisions and contingent liabilities
Headline Non-headline and legacy Total
£m John Crane, Inc. Titeflex Other £m
litigation
Corporation
£m
£m
litigation
£m
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 - (3) (1) - (4)
Provision charged 2 11 - 6 19
Provision released (3) - - (10) (13)
Unwind of provision discount - 3 1 - 4
Utilisation (2) (22) (1) (10) (35)
At 31 January 2023 8 218 51 29 306
Current liabilities 6 28 15 20 69
Non-current liabilities 2 190 36 9 237
At 31 January 2023 8 218 51 29 306
The John Crane, Inc. and Titeflex Corporation litigation provisions are the
only provisions which are discounted.
Headline provisions and contingent liabilities:
Warranty provision and product liability
At 31 January 2023 there are warranty and product liability provisions of £6m
(31 July 2022: £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
Alertline', to help it identify potential issues. Such procedures will, from
time to time, give rise to internal investigations, sometimes conducted with
external support, to ensure that the Group properly understands risks and
concerns and can take steps both to manage immediate issues and to improve its
practices and procedures for the future. The Group is not aware of any issues
which are expected to generate material financial exposures.
Non-headline and legacy provisions and contingent liabilities:
John Crane, Inc.
John Crane, Inc. ("JCI") is one of many co-defendants in numerous lawsuits
pending in the US in which plaintiffs are claiming damages arising from
alleged exposure to, or use of, products previously manufactured which
contained asbestos. The JCI products generally referred to in these cases
consist of industrial sealing product, primarily packing and gaskets. The
asbestos was encapsulated within these products in such a manner that causes
JCI to believe, based on tests conducted on its behalf, that the products were
safe. JCI ceased manufacturing products containing asbestos in 1985.
The table below summarises the JCI claims experience over the last 40 years
since the start of this litigation:
31 January 2023 31 July 2022 31 July 2021 31 July 2020 31 July 2019
JCI claims experience
Claims against JCI that have been dismissed 307,000 306,000 305,000 297,000 285,000
Claims in which JCI is currently a defendant 22,000 22,000 22,000 25,000 38,000
Cumulative final judgments, after appeals, against JCI since 1979 153 149 149 149 144
Cumulative value of awards ($m) since 1979 189 175 175 175 168
John Crane, Inc. litigation insurance recoveries
JCI has certain excess liability insurance which may provide coverage for
certain asbestos claims. JCI has also collected recoveries from its insurers
in settlement of now concluded litigation in the US. JCI meets its asbestos
defence costs directly. The calculation of the provision does not take account
of any recoveries from insurers. See table below for the cost recovery
achieved in both the current and prior periods.
John Crane, Inc. litigation provision
The provision is based on past history and published tables of asbestos
incidence projections and is determined using 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
judgments awarded.
The JCI asbestos litigation provision has developed in the period as follows:
Six months ended
31 January 2023
£m Year ended Year ended Year ended Year ended
31 July
31 July
31 July
31 July
2022
2021
2020
2019
£m
£m
£m
£m
John Crane, Inc. litigation provision
Gross provision 256 258 220 235 257
Discount (38) (29) (8) (4) (20)
Discounted provision 218 229 212 231 237
Taxation (57) (57) (54) (59) (50)
Discounted post-tax provision 161 172 158 172 187
Operating profit (credit)/charge
Increased provision for adverse judgments and legal defence costs 20 24 10 14 7
Change in US risk free rates (9) (18) (5) 16 8
Subtotal - items charged to the provision 11 6 5 30 15
Litigation management expense - legal fees in connection with litigation 2 1 1 1 2
against insurers and defence strategy
Recoveries from insurers (3) - (9) (3) (11)
Total operating profit charge/(credit) 10 7 (3) 28 6
Cash-flow
Provision utilisation - legal defence costs and adverse judgements (22) (21) (13) (23) (24)
Litigation management expense (2) (1) - (1) (2)
Recoveries from insurers 3 - 9 3 11
Net cash outflow (21) (22) (4) (21) (15)
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 may be incurred
because of the significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related litigation.
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 £196m and future spend at the 95th percentile of £254m (31 July 2022:
£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 £241m and £268m (31 July 2022: between £239m and
£263m), compared with the gross provision value of £256m (31 July 2022:
£258m).
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 10 year time horizon. Reducing the time horizon by one
year would reduce the discounted pre-tax provision by £17m (31 July 2022:
£18m) and reducing it by five years would reduce the discounted pre-tax
provision by £95m (31 July 2022: £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 discounted
pre-tax provision by £15m (31 July 2022: £15m); extending it by five years
would increase the discounted pre-tax provision by £54m (31 July 2022:
£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 may evolve beyond 10 years is not reasonably
estimable.
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of adverse
judgments expected to occur. JCI's claims experience is significantly impacted
by other factors which influence the US litigation environment. These 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 number of future claims, the nature of such
claims or the cost to resolve them for years beyond the 10 year time horizon.
Titeflex Corporation litigation
In recent years 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. 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 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 (revised in 2008) designed to assure the
safety of the product and minimise the risk of damage associated with
lightning strikes.
The assumptions made in assessing the appropriate level of provision, which
are based on past experience, include: the period over which expenditure can
be reliably estimated; the number of future settlements; the average amount of
settlements; 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 FY21 claims history as the number
of claims arising in this financial year is considered to be artificially
deflated due to the impact of COVID-19 lockdowns.
The provision of £51m (31 July 2022: £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.
31 January 31 July
2023
2022
£m
£m
Gross provision 91 87
Discount (40) (35)
Discounted pre-tax provision 51 52
Taxation (12) (12)
Discounted post-tax provision 39 40
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 may 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
discounted pre-tax provision would be £3m (31 July 2022: £3m) lower, and if
the benefit were 0.5% lower, the discounted pre-tax provision would be £3m
(31 July 2022: £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 discounted
pre-tax provision would rise by £4m (31 July 2022: £5m), with an equivalent
fall for a reduction of 10%. If the assumed amount of those settlements
increased 10%, the discounted pre-tax provision would rise by £3m (31 July
2022: £4m), also with an equivalent fall for a reduction of 10%.
Other non-headline and legacy
Legacy provisions comprise provisions relating to former business activities
and properties no longer used by Smiths. Non-headline provisions comprise all
provisions that were disclosed as non-headline items when they were charged to
the consolidated income statement. These provisions include non-headline
reorganisation, separation expenses, disposal indemnities and litigation in
respect of old products and discontinued business activities.
14 Dividends
The following dividends were declared and paid in the period:
Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Dividends paid in the period 97 103
In the current period an ordinary final dividend of 27.3p (31 January 2022:
26.0p) was paid on 18 November 2022.
An interim dividend of 12.9 pence per share was declared by the Board on 24
March 2023 and will be paid to shareholders on 17 May 2023. This dividend has
not been included as a liability in these accounts and is payable to all
shareholders on the register of members at close of business on 11 April 2023.
15 Acquisitions
On 5 January 2023, the Group's Interconnect division completed the acquisition
of 100% of the share capital of Plastronics. Plastronics is a leading supplier
of burn-in test sockets and patented spring probe contacts for the
semiconductor test market segment. The 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 of £10m
represents the expected synergies from the strategic fit of the acquisition
and the value of the expertise in the assembled workforce and is expected to
be deductible for tax purposes. From the date of acquisition to 31 January
2023, Plastronics contributed £1m to revenue and an immaterial profit before
taxation. If the Group had acquired this business from the beginning of the
financial year, the acquisition would have contributed £8m to revenue and
less than £1m to profit before taxation. The consideration was financed using
the Group's cash resources.
The provisional balance sheet at the date of acquisition is:
Plastronics
£m
Non-current assets - acquired intangible assets 13
- plant and machinery 1
- fixtures and fittings 2
Current assets - inventory 3
- trade and other receivables 2
Current liabilities - trade and other payables (3)
Non-current liabilities - deferred tax (3)
Net assets acquired 15
Goodwill on current period acquisitions 10
Cash paid during the period 22
Deferred consideration 3
Total consideration 25
16 Cash-flow from operating activities
Six months ended 31 January 2023 Six months ended 31 January 2022
Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Operating profit/(loss) - continuing operations 241 (54) 187 189 (32) 157
- - - - 66 (47) 19
discontinued operations
Amortisation of intangible assets 5 26 31 5 26 31
Depreciation of property, plant and equipment 21 - 21 19 - 19
Depreciation of right of use assets 17 - 17 15 - 15
(Gain)/loss on disposal of property, plant and equipment - - - (1) - (1)
(Gain)/loss on fair value of contingent consideration - (5) (5) - - -
Impairment of investment in Ivenix, Inc. - - - - 14 14
Share-based payment expense 8 - 8 5 - 5
Retirement benefits 1 10 11 3 2 5
Recycling of cash flow hedge reserve - - - (3) - (3)
(Increase)/decrease in inventories (116) - (116) (79) 1 (78)
Decrease/(increase) in trade and other receivables 21 - 21 17 - 17
Increase/(decrease) in trade and other payables (8) 2 (6) 22 (43) (21)
(Decrease)/increase in provisions (3) (16) (19) (2) 60 58
Cash generated from operations 187 (37) 150 256 (19) 237
Interest paid (29) - (29) (12) - (12)
Interest received 22 - 22 3 - 3
Tax paid (43) - (43) (46) - (46)
Net cash inflow/(outflow) from operating activities 137 (37) 100 201 (19) 182
- continuing operations 137 (37) 100 155 (19) 136
- discontinued operations - - - 46 - 46
The split of tax payments between headline and non-headline only considers the
nature of payments made. No adjustment has been made for reductions in tax
payments required as a result of tax relief received on non-headline items.
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 19 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:
Six months ended 31 January 2023 Six months ended 31 January 2022
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Net cash inflow/(outflow) from operating activities 137 (37) 100 155 (19) 136
Include:
Expenditure on capitalised development, other intangible assets and property, (36) - (36) (31) - (31)
plant and equipment
Repayment of lease liabilities (18) - (18) (15) - (15)
Disposals of property, plant and equipment - - - 1 - 1
Free cash-flow 46 91
Exclude:
Repayment of lease liabilities 18 - 18 15 - 15
Interest paid 29 - 29 8 - 8
Interest received (22) - (22) (3) - (3)
Tax paid 43 - 43 37 - 37
Operating cash-flow 151 (37) 114 167 (19) 148
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as
follows:
Six months ended 31 January 2023 Six months ended 31 January 2022
As reported Restructuring costs Pro-forma excl. restructuring costs As reported Restructuring costs Pro-forma excl. restructuring costs
£m
£m
£m
£m
£m
£m
Headline operating profit 241 - 241 189 - 189
Headline operating cash-flow 151 - 151 167 8 175
Headline operating cash conversion 63% 63% 88% 93%
Reconciliation of free cash-flow to total movement in cash and cash
equivalents
Six months Six months ended
ended
31 January 2022
31 January 2023
£m
£m
Free cash-flow 46 91
Free cash-flow from discontinued operations - 25
Investment in financial assets and acquisition of businesses (22) (4)
Disposal of businesses and discontinued operations (7) 1,348
Other net cash-flows used in financing activities (note: repayment of lease (275) (217)
liability is included in free cash-flow)
(Decrease)/increase in cash and cash equivalents (258) 1,243
17 Related party transactions
The related party transactions in the period were consistent with the nature
and size of transactions disclosed in the Annual Report for the year ended 31
July 2022.
18 Share capital and share premium
Number of shares Average Share capital and share premium Consideration
number of shares
£m
£m
Ordinary shares of 37.5p each
At 31 July 2021 396,377,114 396,350,586 512
Issue of new equity shares - exercise of share options 131,942 145,402 2 2
Share buybacks (6,404,868) (1,235,209) (3) (111)
At 31 January 2022 390,104,188 395,260,779 511
At 31 July 2022 362,356,159 386,678,211 501
Share buybacks (9,295,685) (30,105,903) (3) (144)
At 31 January 2023 353,060,474 356,572,308 498
Share buybacks
In connection with the sale of Smiths Medical to ICU Medical, Inc., the Group
announced that it intends to return an amount representing 55% of the initial
cash proceeds (equating to $1bn or £742m) to shareholders in the form of a
share buyback programme.
All shares purchased under the programme will be cancelled. This programme was
initiated on 19 November 2021, and as at 31 January 2023 the Group had
contracted to purchase 43,475,348 shares for a total consideration of £655m,
of which 26,766 shares with a value of £0.5m were yet to settle and be
cancelled. Up to 31 January 2022, the average price paid per share for
buybacks during the programme was £14.98.
19 Alternative performance measures
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 APMs which are common across the industry, in both planning and
reporting, 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 8 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 2.
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
and proceeds from the disposal of property, plant and equipment. 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 16.
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. See below for a
reconciliation of headline operating profit to headline EBITDA.
Headline EBITDA before restructuring costs and write-downs Headline EBITDA, as defined above, is adjusted to exclude restructuring costs
from the Group's strategic restructuring programme which concluded in FY22. A
reconciliation of Headline EBITDA to Headline EBITDA before restructuring
costs and write-downs is shown in the note below.
Net debt/(cash) Net debt/(cash) 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 11 for an analysis of net debt/(cash).
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 Operating cash-flow is calculated by adjusting the net cash inflow from
operating activities to include capital expenditure and proceeds from the
disposal of property, plant and equipment and to exclude cash-flows relating
to 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 16.
Operating profit Operating profit is earnings before finance costs and tax. A reconciliation of
operating profit to profit before tax is shown on the consolidated income
statement. This common measure is used by the Group to measure and monitor
performance.
Return on capital Smiths ROCE is calculated over a rolling 12-month period and is the percentage
employed ('ROCE') that headline operating profit represents of the monthly average capital
employed on a rolling 12-month basis. This measure of return on invested
resources is used to monitor performance and capital allocation within the
Group. See below for Group ROCE and note 2 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 4) to
dividend per share (see note 14). 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. The average over a three-year period is used by the Group as a
performance measure for remuneration purposes.
Operating cash conversion Comprises cash-flow from operations before non-headline items, 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 16.
Operating profit margin Headline 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.
R&D cash costs as a This measure is defined as the cash cost of research and development
% of sales activities as a percentage of revenue. Innovation is an important driver of
sustainable growth for the Group and this measures our investment in research
and development to drive innovation.
Ratio of capital expenditure to depreciation and amortisation Represents the amount of capital expenditure as a proportion of the
depreciation and amortisation charge for the period. This measure shows the
level of reinvestment into operations.
Vitality index / Gross vitality The Vitality index or Gross vitality is calculated as the percentage of
revenue over the last 12 months derived from new products and services
launched in the performance period, typically five years. This measure is used
to monitor the effectiveness of the Group's investment into new products and
services.
Working capital Working capital is calculated as the sum of the 12-month rolling average of
inventory, trade receivables, contract assets, trade payables and contract
liabilities.
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
(31 January 2022: £478m), and to eliminate post-retirement benefit assets and
liabilities, litigation provisions relating to John Crane, Inc. and Titeflex
Corporation, both net of related tax, the investment in ICU Medical, Inc.
equity, the deferred consideration contingent on ICU Medical, Inc's share
price and net debt.
Notes 31 January 31 January
2023
2022
£m
£m
Net assets 2,497 3,167
Adjust for:
Goodwill recognised directly in reserves 478 478
Retirement benefit assets and obligations 6 (75) (435)
Tax related to retirement benefit assets and obligations 40 115
John Crane, Inc. litigation provisions and related tax 161 156
Titeflex Corporation litigation provisions and related tax 39 35
Investment in ICU Medical, Inc equity (392) (397)
Deferred contingent consideration (24) (30)
Net debt/(cash) 429 (262)
Capital employed 3,153 2,827
Return on capital employed
Notes 31 January 31 January
2023
2022
£m
£m
Headline operating profit for previous 12 months 469 395
Average capital employed 3,083 2,824
Return on capital employed ("ROCE") 15.2% 14.0%
Credit metrics
The Group monitors the ratio of net debt to headline earnings before interest,
tax, depreciation and amortisation as part of its management of credit
ratings. This ratio is calculated as follows:
Headline earnings before interest, tax, depreciation and amortisation
("headline EBITDA")
Notes Six months ended Six months ended
31 January 2023
31 January 2022
£m
£m
Headline operating profit 2 241 189
Exclude:
- depreciation of property, plant and equipment 8 21 19
- depreciation of right of use assets 9 17 15
- amortisation of development costs 7 1 2
- amortisation of software, patents and intellectual property 7 4 3
Headline EBITDA 284 228
Annualised headline EBITDA
Notes Year ended Year ended
31 January 2023
31 January 2022
£m
£m
Headline EBITDA for the period 284 228
Add: Headline EBITDA for the previous year 495 458
Exclude: Headline EBITDA for the first six (228) (206)
months of the previous year
Annualised headline EBITDA 551 480
Add back: Restructuring costs in past 12 months - 20
Annualised headline EBITDA before restructuring costs 551 500
Ratio of net debt/(cash) to annualised headline EBITDA before restructuring
costs
Year ended Year ended
31 January 2023
31 January 2022
£m
£m
Annualised headline EBITDA before restructuring costs 551 500
Net debt/(cash) 429 (262)
Ratio of net debt/(cash) to headline EBITDA before restructuring costs 0.8 (0.5)
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