REG - Smiths Group PLC - Smiths Group plc - Half Year Results 2022
25/03/2022 07:16
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RNS Number : 0338G Smiths Group PLC 25 March 2022
SMITHS GROUP PLC - HALF YEAR RESULTS FOR 6 MONTHS ENDED 31 JANUARY 2022
Pioneers of progress - improving our world through smarter engineering
Accelerated growth, executing against our strategy
HIGHLIGHTS
· Good growth delivered in H1
o Organic revenue +3.4%(2)
o Strong demand across most end markets with good order growth
· Strong profit conversion and earnings growth
o Underlying operating profit up +11.1%(3) and underlying operating profit
margin +110bps(3)
o Successfully managed cost inflation
o Underlying EPS +13.8%(3,5) for continuing operations
· Good cash generation and strong returns
o 93%(4) operating cash conversion despite the challenging supply chain
environment
o ROCE(7) up +370bps reflecting higher profitability and working capital
discipline
· More focused portfolio following earlier completion of Smiths Medical
sale
o £1bn profit on disposal with further value to come from ICU shareholding
and potential earnout
o Stronger balance sheet enabling continued investment for growth, the early
repayment of a $400m bond and capital returns
o Over 25% of the £742m share buyback already completed
· Demonstrating meaningful progress against our strategic priorities
and targets
o Accelerated organic growth
o Advancing the new phase of the Smiths Excellence System, improving speed and
efficiency
o Heightened focus on sustainability and maximising accompanying growth
opportunities
Headline(1) H1 2022 H1 2021 Reported Underlying(3)
Continuing operations(5)
Revenue £1,192m £1,150m +3.7% +3.4%
Operating profit £189m £166m +13.9% +11.1%
Operating profit margin 15.9% 14.4% +150bps +110bps
Basic EPS 30.6p 26.0p +17.7% +13.8%
Operating cash conversion(4) 93% 158%
ROCE(7) 14.0% 10.3% +370bps
Total Group(6)
Profit for the half year (after tax) £171m £171m 0.0% +10.4%
Basic EPS 43.0p 42.9p +0.2% +10.7%
Statutory H1 2022 H1 2021 Reported
Continuing operations(5)
Revenue £1,192m £1,150m +3.7%
Operating profit £157m £143m +9.8%
Total Group(6)
Profit for the half year (after tax) £1,123m £129m +771%
Basic EPS 283.9p 32.3p +779%
Dividend per share 12.3p 11.7p +5.0%
OUTLOOK
· Strong demand in most customer end markets; but expect more
challenging Aviation OE market in the near-term
· Clear strategy with improving execution
· Continued good operating leverage
· Further new product launches on schedule
· Geopolitical and macroeconomic environment creating uncertainty;
navigating supply chain challenges and increasing inflation
· Maintaining full year guidance of 3% organic revenue growth
Paul Keel, Group Chief Executive, commented:
"We are shocked and appalled by the tragic events in Ukraine. We join with
the broader international community in calling for peace. In response to the
conflict, we have suspended sales into Russia. Our highest priority is
ensuring the safety, security and wellbeing of our colleagues in the region;
all are safe and continue to receive full support from Smiths. Our business
in the region represented less than 1% of Smiths' revenues in FY2021.
Our performance in the first half demonstrates the meaningful progress we are
making against our strategy. We accelerated Smiths' organic revenue growth
to +3.4% and converted that into even stronger profit and earnings growth,
despite supply chain challenges and cost inflation.
Improvement in the first half centred on the levers we are pulling to
accelerate our growth and consistently deliver results, underpinned by our
focus on continuous operational excellence and investment in our people and
culture.
An important milestone for us was completing the sale of Smiths Medical, ahead
of schedule. This has enabled us to simplify our business, focus on our
higher-performing, more strategically-aligned industrial technology core,
whilst investing for growth, deleveraging and returning surplus capital to our
shareholders.
We're encouraged by our good progress and I thank my 14,000 colleagues around
the world who make it happen. Notwithstanding the significant uncertainty in
the geopolitical and macroeconomic environment, we maintain the 3% organic
revenue growth guidance we previously provided for the full year. We are
making good headway towards the medium-term targets set at our Capital Markets
Event last year, as we move with greater pace to realise our significant
potential."
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) 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.
(2) Organic modifies headline revenue to exclude the effects of foreign
exchange and acquisitions.
(3 )Underlying modifies headline performance to exclude the effects of foreign
exchange, acquisitions, restructuring costs, the share buyback and include
depreciation and amortisation of discontinued operations.
(4 )Operating cash conversion excludes the impact of restructuring spend.
(5) Continuing operations exclude Smiths Medical which is accounted for as
'discontinued operations - businesses held for sale'. Discontinued operations
are defined in note 17 to the financial statements.
(6) Total Group comprises continuing operations and discontinued operations.
(7) Alternative Performance Measures ("APMs") are defined in note 19 to the
financial statements.
Media enquiries
Investor enquiries Alex Le May, FTI Consulting
+44 (0)7702 443312
Jemma Spalton, Smiths Group
+44 (0)7867 390350 smiths@fticonsulting.com (mailto:smiths@fticonsulting.com)
jemma.spalton@smiths.com
Presentation
The webcast management presentation and Q&A will begin at 08.30 (UK time)
today at: https://smiths.com/investors/results-reports-and-presentations
(https://smiths.com/investors/results-reports-and-presentations)
A recording will be available from 13.00 (UK time).
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
This document contains certain statements that are forward-looking statements.
They appear in a number of places throughout this document and include
statements regarding the intentions, beliefs and/or current expectations of
Smiths Group plc (the "Company") and its subsidiaries (together, the "Group")
and those of their respective officers, directors and employees concerning,
amongst other things, the results of operations, financial condition,
liquidity, prospects, growth, strategies, and the businesses operated by the
Group. By their nature, these statements involve uncertainty since future
events and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements reflect
knowledge and information available at the date of preparation of this
document and, unless otherwise required by applicable law, the Company
undertakes no obligation to update or revise these forward-looking statements.
Nothing in this document should be construed as a profit forecast. 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. At the heart of
all that we achieved during the first half of FY2022, and all we will continue
to achieve moving forward, is our purpose.
OUR PRIORITIES AND TARGETS
Smiths is intrinsically strong with world-class engineering, leading positions
in critical markets, distinctive global capabilities and underpinned by a
powerful financial framework. At our Capital Markets Event in November 2021,
we set out how Smiths will deliver performance in line with our significant
capabilities and potential by focusing on three priorities:
1) growing faster
2) executing better and
3) doing more to inspire and empower our people.
This is our focused plan, the Smiths Value Engine, through which we will
deliver the medium-term targets that we have set:
Organic Revenue Growth 4-6% (with additional upside from M&A)
EPS Growth 7-10% (with additional upside from M&A)
ROCE 15-17%
Operating Profit Margin 18-20%
Operating Cash Conversion 100%+
These targets are underpinned by Smiths' operational KPIs and environmental
targets, including a commitment to Net Zero emissions from operations by 2040.
H1 2022 BUSINESS PERFORMANCE
The commentary below refers to Smiths Group performance excluding Smiths
Medical, which was accounted for as 'discontinued operations' before the sale
completed on 6 January 2022.
H1 2021 Foreign Lower restructuring charges Acquisitions Underlying H1 2022
exchange movement
£m
Revenue 1,150 (38) 42 38 1,192
Headline operating profit 166 (7) 1 11 18 189
Headline operating profit margin 14.4% (10)bps +10bps +40bps +110bps 15.9%
In H1 we made good progress against our focused plan. We are growing faster,
with organic revenue up +3.4%; executing better, with operating profit margins
up +110bps; and doing more to inspire and empower our people; all whilst
moving swiftly to build on our strong foundation in ESG.
GROWTH
Growth is our biggest upside to value creation, and we demonstrated
encouraging progress in H1.
Organic revenue growth (by division) H1 2022
John Crane +5.1%
Smiths Detection (7.2)%
Flex-Tek +10.0%
Smiths Interconnect +12.9%
Smiths Group +3.4%
In H1, we delivered organic revenue growth of +3.4% (+£38m). Growth
remained strong in Flex-Tek (+10.0%) and Smiths Interconnect (+12.9%) and we
delivered acceleration in John Crane (+5.1% vs (10.4)% in H1 2021). As
expected, Smiths Detection contracted in the period
((7.2)%), reflecting the challenging Aviation OE market.
Revenue grew +3.7% on a reported basis, to £1,192m (H1 2021: £1,150m). This
included £(38)m of adverse foreign exchange translation, and +£42m from the
acquisition of Royal Metal Products LLC ("Royal Metal") in February 2021.
Growth acceleration is being driven by four actionable levers, the first being
strong execution to maximise underlying market expansion that we see across
most of our portfolio.
Our business operates across four major global end markets: General
Industrial, Safety & Security, Energy, and Aerospace.
Smiths H1 2022 growth % of Smiths Smiths organic growth
in our primary end markets revenue H1 2022
General Industrial 40% +5.7%
Safety & Security 32% (3.5)%
Energy 21% +7.5%
Aerospace 7% +16.7%
Smiths Group 100% +3.4%
Smiths' organic revenue growth in our largest end market, General Industrial
(40% of Group revenue), was +5.7% in H1. This was driven by original
equipment ("OE") and aftermarket ("AM") growth for John Crane in segments like
chemical processing, pulp & paper, and mining. Demand for Flex-Tek's
construction products and Smiths Interconnect's semiconductor test solutions
remains strong. Smiths' organic revenue growth in the Safety & Security
market was down (3.5)%, reflecting the performance from Smiths Detection and
growth from Smiths Interconnect's defence related products. We grew +7.5% in
Energy markets as demand continues to ramp quickly. Our fastest growth in
the first half of +16.7% came in Aerospace, as accelerating aircraft builds
drove strong demand for Flex-Tek and Smiths Interconnect's aerospace
solutions. Our strong market positions, coupled with the balanced market
exposure we have across our portfolio are distinctive long-term advantages for
Smiths.
Our second lever for faster growth is improved new product development and
commercialisation. We are focused on bringing our innovations to market more
quickly and commercialising them more effectively. We launched nine
high-impact new products in H1. One example is our space qualified
connectors, which enable high-speed, reliable data processing for
communication satellites and GPS navigation systems. Another example is a new
seal for demanding pipelines that protects the environment from harmful leaks.
In support of our growing new product pipeline, we invested £52m in R&D
in the first half, an increase of 8% over H1 2021. Roughly 90% of this
recorded in the income statement, with the balance being capitalised. In
addition to growing a new product pipeline, we are seeing increased return on
investment. The Vitality Index(7), which measures the percentage of total
revenue derived from products launched in the last five years, was 28.6% for
the period. This measure has been redefined to cover a five-year period to
better reflect the launch profiles of our products.
Investment in capex of £(32)m (H1 2021: £(29)m) remained stable and
represents 1.3x depreciation and amortisation (H1 2021: 1.2x) as we continue
to invest for growth.
Our third growth lever is building out priority adjacencies. Each of our
four businesses has well-scoped plans to grow beyond their strong core market
positions. In H1 we launched John Crane SENSE® Turbo, a sensor enabled dry
gas seal. This ground-breaking product is an extension of the John Crane
SENSE® platform, which uses sensors and machine learning to monitor networks,
helping customers prevent leaks, reduce downtime, and meet their environmental
commitments. In Smiths Detection, we launched iCMORE Currency, an extension of
our automated detection algorithm. The iCMORE software can automatically
find hazards or illicit goods within inspected cargo, baggage or palleted
goods, and is now able to detect multiple currencies, supporting the fight
against global money laundering.
Our fourth growth lever is using disciplined M&A to augment our organic
growth focus. Royal Metal, which we acquired in February 2021 for $107m is a
good example. During H1, the acquisition contributed £42m of revenue and
£11m of operating profit. Since acquisition, the business has grown at an
annualised rate of +45%, a sharp acceleration versus prior ownership. This
strong growth reflects the benefits of complementary HVAC portfolios,
synergies in distribution, and positive pricing. We have converted
accelerated top line growth into even stronger operating profit expansion, up
+109% on an annualised basis, driven by improved operational efficiencies as
well as raw material inflation pass through. We are currently exploring a
number of other M&A opportunities across the Group.
In January, we successfully completed the sale of Smiths Medical to ICU
Medical, Inc. ("ICU"), several months earlier than expected. This was our
largest portfolio move in over a decade and positions the Group even more
strongly to access the growth available in our industrial technology core.
The sale generated a profit on disposal of £1.0bn, with immediate net cash
proceeds of £1.35bn and further value to come from a potential $0.1bn earnout
and our stake in ICU, which is recognised as a £0.4bn asset on the balance
sheet. Net cash stood at £262m at the end of January 2022.
In light of our strong balance sheet and cashflows, we initiated a £742m
share buyback in advance of the transaction completion. As at 24 March
2022, we had completed over 25% of the programme. At the current run-rate
and share price, the average shares in issue for FY2022 would fall from 396m
to 387m and we would complete the programme in early calendar 2023, with ~350m
shares remaining in issue (a 12% reduction). For more information on the
divestment, please see note 17 of the financial statements.
EXECUTION
Improved execution is our second key priority.
In H1, the Group delivered strong profit conversion, with headline operating
profit up +£18m or +11.1% on an underlying basis. Headline operating profit
increased +13.9% on a reported basis, to £189m (H1 2021: £166m). This
included +£14m from improved volumes, +£1m from successful management of
price and inflation, +£8m benefit from the Group's strategic restructuring
programme, +£11m from acquisitions and +£1m benefit of no further
restructuring charges, all of which more than offset a £(7)m impact from
adverse foreign exchange and £(5)m of reinvestment in growth. Headline
operating profit margin increased +150bps on a reported basis.
Operating profit margin H1 2022 Reported Reported change Underlying change
John Crane 20.0% +20bps +20bps
Smiths Detection 11.5% (110)bps (80)bps
Flex-Tek 20.9% +240bps +150bps
Smiths Interconnect 16.9% +570bps +490bps
Smiths Group 15.9% +150bps +110bps
The £(32)m difference between headline operating profit of £189m and
statutory operating profit of £157m is non-headline items as defined in note
3 of the financial statements. The largest constituents relate to amortisation
of acquired intangible assets, pension equalisation, asbestos litigation in
John Crane, Inc and subrogation claims in Titeflex Corporation. Statutory
operating profit of £157m was £14m higher than last year (H1 2021: £143m),
reflecting higher headline profit partially offset by higher non-headline
charges.
We have made good progress on advancing the next phase of the Smiths
Excellence System, "SES 2.0". SES 2.0 represents a step change in pace,
culture and approach to operational excellence. It builds on the
foundations of the Smiths Excellence System that was launched in 2018 and
advances it from operational excellence theory to results focused
execution. In support of this advancement, we have put in place
resourcing across all divisions, rolled out additional training and tools, and
established delivery targets aligned to our external commitments. We are
moving faster, executing better, and doing even more to inspire and empower
our people.
PEOPLE
Our primary focus is always keeping our colleagues safe and well. We have a
strong and robust safety culture and strive for a zero-harm workplace, with
safety considerations fully integrated into all of our activities. Our
Recordable Incident Rate has been at or below 0.41 for the previous five
years, roughly 50% better than US industry averages for the top quartile of
similar manufacturers.
In recent weeks our particular focus has been on ensuring the safety, security
and wellbeing of our colleagues in the Russia/Ukraine region. We remain in
regular contact with this group and continue to pay salaries and benefits.
In response to the tragic events, we have stopped all sales into Russia.
Smiths has also made a donation to the Red Cross to support the vital work
they are doing for the people of Ukraine, and we have implemented a donation
matching scheme for our colleagues who also wish to contribute.
Leveraging the breadth and depth of talent across the Group is a competitive
differentiator for Smiths and we actively promote the cross-pollination of
talent between the divisions and central functions. 18% of appointments made
during the first half were internal candidates and over 20 appointments were
cross-business moves, demonstrating how colleagues build careers at Smiths and
how skills are transferred across the Group.
In support of our focus on diversity and inclusion, we completed diversity and
inclusion workshops with over 800 colleagues in the last 6 months, in 11
languages across 21 countries, and we established an extended leadership team
comprised of the top 200 leaders; 33% of this group is female.
OUR ESG APPROACH
Sustainability is central to each of our priorities.
We are helping our customers meet their environmental targets by developing
products and services targeted at climate risk, energy transition and other
environmental needs. For example, John Crane's long experience of reducing
leaks enables it to play a leading role in customer efficiency including
decarbonisation through its methane reduction initiative. Flex-Tek is
developing new high temperature heaters to support a significant reduction of
CO(2) emissions generated in the production of steel. We are also focused on
making our products more sustainable through attention to raw materials,
supply chain, durability, repairability, circularity and end-of-life
outcomes.
We continue proactively to manage reductions in the environmental impact of
our operations and manufacturing processes. We first implemented
environmental targets in 2007. Since then, we have reduced greenhouse gas
("GHG") emissions in our operations by 60%, water usage by 53% and
non-recyclable waste by 63%. Around 60% of the electricity currently used
in our operations now comes from renewable sources, and we are currently
assessing a promising list of locations for onsite renewable energy
installation.
Building on this strong ESG foundation, we have re-energised our focus on
sustainability to both multiply our sustainability influence and maximise the
accompanying growth opportunities.
During the period, we established a Science, Sustainability & Excellence
Committee of the Board, chaired by Dame Ann Dowling, to provide guidance and
supervision of our sustainability strategy. In addition, we now have a
dedicated Chief Sustainability Officer in place who is driving our
sustainability strategy and targets through the business. To support the
delivery of our sustainability strategy, targets and time horizons, executive
compensation is now linked to our sustainability targets, with an ESG metric
(GHG reductions) included in our long-term incentive programme.
Alongside all of this, we have set and communicated 2024 environmental goals,
an important step to support the delivery of our commitment to Net Zero GHG
Emissions from operations by 2040. We have a clear roadmap for how we will
achieve this (as published on our website
(https://www.smiths.com/responsible-business/our-net-zero-2040-commitment) ).
It details the path we are taking to achieve Net Zero Scope 1 and 2 emissions
from operations by 2040 and, furthermore, our ambition to achieve Net Zero
Scope 1, 2 and 3 emissions by 2050. In H1, we have modelled and mapped our
approach, signing on to the Science Based Targets Initiative and the UN Race
to Zero pledge.
OTHER FINANCIAL MATTERS
Finance income/(costs)
Headline finance costs of £(19)m (H1 2021: £(21)m) were £2m lower than last
year due to lower swap interest rates. Statutory finance costs were £3m
income (H1 2021: £(59)m), mainly due to a £22m foreign exchange gain on an
intercompany loan with Smiths Medical (H1 2021: £(38)m); the matching credit
in discontinued operations nets out to zero in total Group earnings.
Taxation
The headline tax charge for continuing operations for H1 of £48m (H1 2021:
£41m) represents an effective rate of 28% (FY2021: 29%).
Non-headline taxation items of £4m relate to amortisation of acquisition
related intangible assets, legacy pension scheme arrangements, litigation
provisions and non-headline finance items. The statutory effective tax rate
was 28% (FY2021: 35%). Please refer to notes 3 and 5 of the financial
statements for further details.
Profit after tax and EPS(5)
Headline profit after tax increased by +17.3% on a reported basis. Headline
basic EPS was up +13.8% on an underlying basis and +17.7% on a reported basis,
driven by the strong operational performance.
Discontinued operations - Smiths Medical
On 6 January 2022, the Group completed the sale of Smiths Medical to ICU
Medical, Inc. ("ICU Medical") at an enterprise value of $2.7bn and an equity
value of $2.4bn after adjustments for debt, liabilities and working capital.
For the 5 months that Smiths Medical remained in the Group, it delivered
headline profit after tax of £49m.
The difference between statutory and headline profit after tax is £958m,
which includes £1,021m gain on disposal, £(33)m of Medfusion regulatory
remediation costs, £(14)m from the impairment of investments, £(22)m of
foreign exchange losses on the intercompany loan with Smiths Group (continuing
operations), and +£6m of tax credit on these non-headline items. Please refer
to notes 3 and 17 of the financial statements for further details.
Total Group(6) profit after tax and EPS
Statutory profit after tax for the total Group increased by +770.5% to
£1,123m
(H1 2021: £129m) which included the profit on sale of Smiths Medical.
Statutory basic EPS was up +778.9% to 283.9p (H1 2021: 32.3p).
Cash-flow
Headline operating cash-flow(5,7) was £167m (H1 2021: £254m) with operating
cash conversion(4) of 93% (H1 2021: 158%); a good result in the current
challenging supply chain environment.
Free cash-flow(5) was £91m (H1 2021: £163m) a decrease of £72m, reflecting
the lower operating cash performance against a very strong performance in H1
2021. Free cash-flow as a percentage of operating profit was 48% (H1 2021:
98%). This metric has now been added as a key performance measure to our
long-term incentive programmes, to ensure closer alignment with shareholder
interests.
Statutory net cash inflow from operating activities for the total Group(6) was
£182m (H1 2021: £262m). See note 15 to the financial statements for a
reconciliation of headline operating cash-flow to statutory cash-flow.
Debt
Net cash(7) at 31 January 2022 was £262m (FY2021: £(1,018)m(6)) as a result
of the proceeds received from the sale of Smiths Medical. Headline EBITDA(7)
for the 12 months to 31 January 2022 excluding restructuring costs for
continuing operations was £500m.
Gross debt(7) was £1,485m (FY2021: £1,546m). There are no financial
covenants associated with this debt and the weighted average maturity was 2.4
years. On 17 February 2022, we redeemed in full the $400m bond that was due
to mature in October 2022. The next maturity is due in April 2023. Cash
balances increased to £1,710m (FY2021: £405m).
An $800m (c.£597m 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 £2bn at the end of the period.
High operating cash conversion and a strong balance sheet are the foundations
of our financial framework, ensuring we are well positioned to deliver
sustainable, long-term shareholder value.
Pensions
The net accounting pension surplus increased to £435m (FY2021: £413m).
Both main UK schemes (SIPS and TIGPS) are estimated to be in surplus on the
Technical Provisions funding basis. Given the strength of the funding
positions, no cash contributions are currently being made to these schemes.
The Group and the UK Trustees continue to work together to achieve full
buy-out funding for both schemes.
The two main UK pension schemes and the US pension plan are well positioned to
withstand a volatile market environment. They 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 2022, over
40% of the UK liabilities had been de-risked through the purchase of annuities
from third party insurers.
Pension contributions in H1 were £(6)m (H1 2021: £(19)m). For FY2022, we
expect total cash contributions to be around £(12)m (including funded US
schemes, unfunded schemes and post-retirement healthcare plans).
Dividend
The Group maintains a progressive dividend policy, aiming to increase
dividends in line with long-term underlying growth in earnings and cash-flow,
with the objective of maintaining a minimum dividend cover(6) of around 2
times. The policy enables us to retain sufficient cash-flow to finance
investment in the drivers of growth and meet our financial obligations. In
setting the level of dividend payments, the Board considers prevailing
economic conditions and future investment plans.
Reflecting the Group's strong performance and financial position, the Board is
recommending an interim dividend of 12.3p, a year-on-year increase of 5% (H1
2021: 11.7p). The interim dividend will be paid on 13 May 2022 to
shareholders on the register at close of business on 8 April 2022.
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 27 April 2022 ("the Election Date").
Elections received after the Election Date will apply to dividends paid after
13 May 2022. Purchases under the DRIP are made on, or as soon as practicable
after, the dividend payment date and at prevailing market prices.
Return on capital employed (ROCE)(5,)(7)
ROCE increased +370bps to 14.0% (H1 2021: 10.3%). This reflects higher
profitability during the period and continued working capital discipline. For
further detail of its calculation, please refer to note 19 to the financial
statements.
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 2022 31 Jan 2021 31 Jan 2022 31 Jan 2021
(6 months) (6 months)
USD 1.36 1.32 1.34 1.37
EUR 1.18 1.11 1.20 1.13
Business review
JOHN CRANE
John Crane is a leading provider of mission-critical engineered solutions for
global energy and process industries, supporting improved efficiency and
emission reductions. 60% of revenue is derived from the energy sector
(downstream and midstream oil & gas and power generation, including
renewable and sustainable sources of energy). 40% comes from other process
industries (including chemical, pharmaceutical, mining, water treatment, and
pulp & paper). 69% of John Crane revenue comes from aftermarket sales.
John Crane represents 35% of continuing Group revenue.
H1 2022 H1 2021 Reported Underlying
£m
growth
growth
£m
Revenue 416 410 +1.5% +5.1%
Original Equipment 128 130 (1.5)% +1.8%
Aftermarket 288 280 +2.9% +6.6%
Energy 248 240 +3.3% +7.5%
Industrials 168 170 (1.2)% +1.7%
Headline operating profit 83 81 +2.5% +6.3%
Headline operating profit margin 20.0% 19.8% +20bps +20bps
Statutory operating profit 81 82 (1.2)%
Return on capital employed 20.2% 16.9% +330bps
R&D cash costs as % of sales 2.9% 2.1% +80bps
Revenue
H1 2021 Foreign Underlying H1 2022
£m reported exchange movement reported
Revenue 410 (14) 20 416
John Crane's market-leading position and the strength of its global service
network underpinned its performance. Organic revenue was up +5.1%. On a
reported basis, revenue was up +1.5%, with a £(14)m adverse foreign exchange
impact.
Activity levels in both of John Crane's market segments continued to
strengthen during H1. Organic revenue from John Crane's Energy segment was up
+7.5%. Organic revenue from Industrial activities was up +1.7%.
Aftermarket represents 69% of John Crane's revenue (H1 2021: 68%). Organic
aftermarket revenue was up +6.6%. John Crane's large installed base and
leading service offering position it well to meet pent-up demand for
aftermarket repairs, maintenance and upgrades. Customers are increasingly
focused on improving the efficiency of their plants and refineries. This is
driving further interest in John Crane's unique digital solutions, including
John Crane Sense®, which monitors the condition and effectiveness of
equipment and helps to optimise maintenance schedules and minimise downtime.
Organic revenue from Original Equipment ("OE") was +1.8% for the first half.
The rate of new orders continues to improve, with strong growth in the OE
order book. John Crane secured multiple new contracts during the period
including from NatureWorks, one of the largest global producers of sustainable
polymers, a major European Carbon Capture and Storage ("CCS") project, further
cementing John Crane's leadership in CCS, and asset management contracts in
all operating regions.
These contracts draw on John Crane's core capabilities of supporting
customers' enhanced efficiency, performance and sustainability in a variety of
markets. They are examples of where John Crane's leading technology, asset
management capabilities and global footprint drive competitive advantage and
ensure it is well positioned to capture growth opportunities as markets
recover and evolve.
Operating profit
H1 2021 reported Foreign Underlying H1 2022 reported
£m exchange movement
Headline operating profit 81 (3) 5 83
Headline operating profit margin 19.8% (0)bps +20bps 20.0%
Headline operating profit of £83m increased by +6.3% on an underlying basis,
reflecting higher volumes and close management of price in the inflationary
environment. Headline operating profit was up +2.5% on a reported basis, with
£(3)m of adverse foreign exchange.
Headline operating margin was 20.0%, up +20bps on a reported and underlying
basis, despite an 80bps increase in R&D investment and supply chain
challenges. The difference between statutory and headline operating profit
includes the net cost in relation to the provision for John Crane, Inc.
asbestos litigation.
ROCE
ROCE was up +330bps at 20.2%, due to higher profitability.
R&D
Cash R&D expenditure represented 2.9% of sales, +80bps higher than last
year. John Crane's innovation is primarily focused on enhancing efficiency,
performance and sustainability by using materials science advancements,
coatings and additive manufacturing. John Crane is also leveraging the
Group's digital expertise to support the development of predictive diagnostic
platforms and other innovative digital technologies.
John Crane sealing solutions are designed to keep process fluids and gases
within systems and out of the environment. To support our customers in their
environmental sustainability journeys, John Crane introduced multiple new
technologies. These include a new seal for demanding hydrocarbon pipelines
with a unique, patented seal technology that significantly extends the mean
time between repairs, reducing maintenance, improving efficiency and
protecting the environment from potentially harmful leaks, and a separation
seal to minimise gas consumption in compressor applications. We also
introduced John Crane SENSE® Turbo, a sensor-enabled dry gas seal. This
ground-breaking technology extends the John Crane SENSE® platform, providing
real-time monitoring and machine learning diagnostics on equipment, helping
customers to prevent leaks and reduce downtime.
SMITHS DETECTION
Smiths Detection is a global leader in the detection and identification of
threats and contraband, supporting safety, security and freedom of movement.
It produces equipment for customers in the Aviation market and Other
Security Systems for ports & borders, defence and urban security markets.
54% of Smiths Detection's sales are derived from the aftermarket. Smiths
Detection represents 26% of continuing Group revenue.
H1 2022 H1 2021 Reported Underlying
£m
growth
growth
£m
Revenue 313 350 (10.6)% (7.2)%
Original Equipment 145 183 (20.8)% (17.5)%
Aftermarket 168 167 +0.6% +4.0%
Aviation 219 260 (15.8)% (12.5)%
Other Security Systems 94 90 +4.4% +8.1%
Headline operating profit 36 44 (18.2)% (13.0)%
Headline operating profit margin 11.5% 12.6% (110)bps (80)bps
Statutory operating profit 25 33 (24.2)%
Return on capital employed 9.2% 6.3% +290bps
R&D cash costs as % of sales 9.4% 7.6% +180bps
Revenue
H1 2021 Foreign Underlying H1 2022
£m reported exchange movement reported
Revenue 350 (13) (24) 313
The strength of Smiths Detection's market position and its leading technology
supported a strong orderbook as we entered the pandemic. Many of those
orders have now been delivered and subsequent Aviation OE tender activity has
been subdued. This was the primary driver of the organic revenue decline of
(7.2)% in H1. Revenue was down (10.6)% on a reported basis, including
£(13)m of adverse foreign exchange translation.
Original Equipment ("OE") represented 46% of H1 2022 revenues. Organic OE
revenues were down (17.5)% reflecting lower Aviation OE sales, which more than
offset good growth in OE sales for Other Security Systems.
Together, Aviation and Other Security Systems derived 54% of their revenues
from aftermarket services. The underlying trend in aftermarket revenues
continued to improve, growing +4.0% in H1, as customers resumed more typical
operating patterns.
Organic revenue from Aviation decreased (12.5)% reflecting the slowdown in the
Aviation OE market. Although we expect further market challenges in the
near-term, we are increasingly well positioned for recovery when it comes.
Organic revenue from Other Security Systems grew by +8.1%, particularly driven
by demand for Ports & Borders solutions.
Despite a slower rate of tenders, Smiths Detection continues to secure new
contracts and order intake is growing. Recent wins include contracts for
high-energy x-ray equipment to customs organisations in Japan and the US; and
hold baggage and checkpoint solutions for airports in Mexico, Korea, and the
US.
Operating profit
H1 2021 Foreign Underlying H1 2022 reported
£m reported exchange movement
Headline operating profit 44 (3) (5) 36
Headline operating profit margin 12.6% (30)bps (80)bps 11.5%
Smiths Detection's headline operating profit was down (13.0)% on an underlying
basis, impacted by lower volumes and supply chain challenges, particularly for
electronic components. The business continues to manage supply chain
disruptions. Headline operating profit of £36m was down (18.2)% on a
reported basis, including £(3)m adverse foreign exchange translation.
Headline operating profit margin was 11.5%, down (110)bps on a reported basis
and (80)bps on an underlying basis. The difference between statutory and
headline operating profit primarily reflects amortisation of acquired
intangibles.
ROCE
ROCE increased by +290bps to 9.2%, due to lower restructuring charges and
write-downs in H2'2021 compared to the 12 months to H1 2021.
R&D
Cash R&D expenditure was 9.4% of sales, +180bps higher than last year.
Smiths Detection continued to invest in the development of the next generation
of detection devices for the defence market, new algorithms to improve the
detection of dangerous goods, and digital solutions to strengthen our
aftermarket proposition to make people and infrastructure safer. Certain
programmes are co-funded by strategic customers seeking next-generation
solutions to security challenges. During H1, we launched a new high volume
air cargo screening technology, as well as an extension of our automated
detection algorithm, iCMORE, to enable currency detection, supporting the
fight against global money laundering.
FLEX-TEK
Flex-Tek provides innovative components to heat and move fluids and gases for
aerospace and industrial applications that support energy efficiency and
improved air quality. 82% of Flex-Tek's revenue is derived from Industrials
and 18% from the Aerospace sector. 49% of Flex-Tek's revenue comes from
aftermarket sales. Flex-Tek represents 25% of continuing Group revenue.
H1 2022 H1 2021 Reported Underlying
£m
growth
growth
£m
Revenue 297 238 +24.8% +10.0%
Industrials 243 190 +27.9% +8.5%
Aerospace 54 48 +12.5% +16.1%
Headline operating profit 62 44 +40.9% +18.3%
Headline operating profit margin 20.9% 18.5% +240bps +150bps
Statutory operating profit 51 38 +34.2%
Return on capital employed 24.1% 17.9% +620bps
R&D cash costs as % of sales 0.4% 0.5% (10)bps
Revenue
H1 2021 Foreign Acquisitions & disposals Underlying H1 2022
£m reported exchange movement reported
Revenue 238 (6) 42 23 297
Flex-Tek's organic revenue increased +10.0%, with strong growth in both
Industrials and Aerospace. Revenue grew +24.8% on a reported basis,
including £(6)m adverse foreign exchange translation and +£42m from
acquisitions.
Organic revenue from Flex-Tek's Industrial segment was up +8.5%. Strong
growth was driven by demand for its construction related products in the US,
particularly for heating, ventilation and air conditioning ("HVAC")
applications, where Flex-Tek continued to outperform the underlying market.
Other drivers included good growth of its industrial heat applications.
Organic revenue from Flex-Tek's Aerospace segment was up +16.1% reflecting
improving market conditions as aircraft builds begin to recover.
Operating profit
H1 2021 Foreign Acquisitions & disposals Underlying H1 2022
£m reported exchange movement reported
Headline operating profit 44 (1) 11 8 62
Headline operating profit margin 18.5% (0)bps +90bps +150bps 20.9%
Headline operating profit increased +18.3% on an underlying basis, reflecting
improved volumes and strengthened margins. Headline operating profit was up
+40.9% at £62m on a reported basis, including £(1)m adverse foreign exchange
translation and +£11m from acquisitions. Headline operating profit margin
was up +240bps to 20.9%, on a reported basis. The difference between
statutory and headline operating profit is due to amortisation of acquired
intangible assets and provision for Titeflex Corporation subrogation claims.
In February 2021, the Group acquired Royal Metal, a leading manufacturer of
residential and light commercial HVAC products for $107m. During H1 the
acquisition contributed £42m of revenue and £11m of operating profit.
Royal Metal complements the organic growth that Flex-Tek is already driving
through the development of innovative air distribution products that support
improved energy efficiency and indoor air quality. Since acquisition, the
business has grown at an annualised rate of +45%, a sharp acceleration versus
prior ownership. This strong growth reflects the benefits of complementary
HVAC portfolios, synergies in distribution, and positive pricing. We have
converted accelerated top line growth into even stronger operating profit
expansion, up +109% on an annualised basis, driven by improved operational
efficiencies as well as raw material inflation pass through coupled with the
unwind of favourable commodity hedges. Whilst some of the contract pricing
benefits will fade over time, this acquisition demonstrates the value that we
can create through our highly disciplined and selective M&A process.
ROCE
ROCE increased +620bps to 24.1% reflecting the improved profitability.
R&D
Cash R&D expenditure remained broadly consistent at 0.4% of sales.
R&D is focused on developing new products for the construction market,
and an expanded product offering in aerospace.
SMITHS INTERCONNECT
Smiths Interconnect designs solutions for high-speed, secure connectivity in
demanding applications for various end markets including defence,
semiconductor test, medical, space, commercial aerospace, and rail. Smiths
Interconnect represents 14% of continuing Group revenue.
H1 2022 H1 2021 Reported Underlying
£m
growth
growth
£m
Revenue 166 152 +9.2% +12.9%
Headline operating profit 28 17 +64.7% +58.7%
Headline operating profit margin 16.9% 11.2% +570bps +490bps
Statutory operating profit 28 16 +75.0%
Return on capital employed 12.0% 8.2% +380bps
R&D cash costs as % of sales 5.5% 7.1% (160)bps
Revenue
H1 2021 Foreign Underlying H1 2022
£m reported exchange movement reported
Revenue 152 (5) 19 166
Smiths Interconnect delivered a strong performance with organic revenue up
+12.9%, reflecting continued good momentum supported by a growing orderbook
and new products. Revenue increased by +9.2% on a reported basis, including
£(5)m adverse foreign exchange translation.
This strong performance reflects high growth in the semiconductor test
business, as well as new customer wins. There was also good growth in the
space and defence market segments with specific defence sub-system projects
and sales of fibre-optic transceivers and microwave components driving a
strong performance.
During the period, Smiths Interconnect received significant orders for its
space-qualified products for commercial satellite constellations and space
exploration projects, medical cable assemblies and next generation chip
testing solutions.
Operating profit
H1 2021 reported Foreign Lower restructuring costs Underlying H1 2022 reported
exchange movement
£m
Headline operating profit 17 (0) 1 10 28
Headline operating profit margin 11.2% (0)bps +80bps +490bps 16.9%
Headline operating profit increased +58.7% on an underlying basis, reflecting
strong volumes and the benefits of restructuring actions. Headline operating
profit was up +64.7% to £28m on a reported basis, including £1m of
restructuring costs in H1 2021. Headline operating profit margin was 16.9%,
up +570bps on a reported basis and +490bps on an underlying basis. We
feel confident that mid-teens margins are broadly sustainable. The
difference between statutory and headline operating profit reflects the
amortisation of acquired intangibles.
ROCE
ROCE increased +380bps to 12.0%, driven by higher profitability.
R&D
Cash R&D expenditure decreased to 5.5% of sales (H1 2021: 7.1%) due to
project phasing. R&D is focused on bringing to market new products that
improve connectivity and product integrity in demanding operating
environments. Product launches included the new space qualified connectors
and optical transceivers, which enable high-speed, reliable data processing
for communication satellites and GPS navigation systems; and new connectors
for the rail market segment that are significantly smaller and lower weight
than existing solutions.
RISK MANAGEMENT
The Group's principal risks and uncertainties and relevant mitigating
activities were set out on pages 72-79 of the FY2021 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.
COVID-19: COVID-19 is impacting our colleagues, customers, suppliers and
operations to varying degrees across different territories and different parts
of our business. This includes, but is not limited to: risks to the wellbeing
of our people, their families and communities; our customers, who have in many
cases revised their demand forecasts; our suppliers, whose businesses have had
challenges maintaining continuity of supply; and our own operations which have
had to deal with all the combined challenges of the pandemic.
Technology: Differentiated new products and services are critical to our
success. Disruptive technologies may limit our ability to win future business,
achieve operating results, and capitalise on future growth opportunities.
Failure to deliver new product introduction projects on time, within budget,
to technical specifications, or significantly below customer expectations
could have serious financial and reputational consequences.
Economy and geopolitics: The prolonged impact of COVID-19 on supply chains is
driving inflation in developed economies. Persistently high inflation
increases the risk of a wage-price spiral and costs outstripping demand for
our products; conversely, this may create an opportunity for further price
increases. The war between Russia and Ukraine has brought about new trading
sanctions, counter-sanctions and legislation. This presents a moderate risk to
our growth strategy, with further widespread impacts on global supply chains.
Geopolitical tensions continue to rise, which poses threats to the free
movement of goods, capital and people.
Group portfolio: Our strategy is predicated primarily on organic growth.
However, acquisitions/divestments can also play a role in building and/or
strengthening competitive positions. Acquisitions bring risk as well as
opportunity. We may invest substantial funds and resources in acquisitions
which fail to deliver on expectations - due to incorrect appraisal of the
target and/or poor execution. The opposite risk is that (perhaps through an
excess of caution) we miss out on opportunities to build market-leading
positions and growth.
Product quality: In the ordinary course of business, we are potentially
subject to product liability claims and lawsuits, including potential class
actions. The mission-critical nature of many of our solutions makes the
potential consequences of failure more serious than may otherwise be the case.
Customers: 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.
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.
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 criminals.
Integrated Supply chain: Timely, efficient supply of raw materials and
purchased components is critical to our ability to deliver to our customers.
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, sanctions,
terrorist attacks and disease pandemics - this applies to our own
manufacturing sites and those of our key component suppliers.
Markets: A significant proportion of our revenue comes from the US and
European markets, with a notable proportion coming from governments. In
addition to geographical markets, there is a risk we do not focus on
attractive sectors where we have, or could have, a sustainable position.
Ethical breach: We operate in highly regulated markets requiring strict
adherence to laws with risk areas including: Bribery and corruption;
Anti-trust matters; International trade laws and sanctions; Human rights,
modern slavery and international labour standards; General Data Protection
Regulation (GDPR); and Government contracting regulations. There is a risk
that a significant ethical or compliance breach may occur which could
seriously harm our reputation and impact our financial performance, customer
relationships and ability to retain talent.
Contractual obligations: We may fail to deliver the products and services or
fail in our contractual execution due to delays or breaches by our suppliers
or other counterparties.
Emerging risks - Climate change: We recognise the critical nature of the
climate challenge and have committed to achieving net zero carbon emissions
from operations by 2040. The primary risk to meeting these commitments is the
requirement to transition our products and services to a lower-carbon economy.
Failure to transition from carbon-intensive products and services at a rapid
pace may jeopardise our ability to win new business, achieve operating
results, attract and retain talent, secure funding, realise future growth
opportunities, or force government intervention to limit emissions.
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:
John Shipsey
Paul Keel
Chief Executive Chief Financial Officer
24 March 2022
Independent review report to Smiths Group plc
Conclusion
We have been engaged by Smiths Group plc ("the Company") to review the
condensed set of financial statements in the half-yearly financial report for
the six months ended 31 January 2022 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 2022 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").
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board 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.
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 latest annual financial statements of the group
were prepared in accordance with International Financial Reporting Standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union and in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and the next annual financial
statements will be 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.
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.
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.
Michael Maloney
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
24 March 2022
Consolidated income statement (unaudited)
Six months ended 31 January 2022 Six months ended 31 January 2021
Notes Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
(note 3)
£m £m
£m £m
Continuing operations
Revenue 2 1,192 - 1,192 1,150 - 1,150
Operating costs 2 (1,003) (32) (1,035) (984) (23) (1,007)
Operating profit/(loss) 189 (32) 157 166 (23) 143
Interest receivable 5 - 5 5 - 5
Interest payable (24) - (24) (26) - (26)
Other financing gains/(losses) - 19 19 - (41) (41)
Other finance income - retirement benefits - 3 3 - 3 3
Finance income/(costs) (19) 22 3 (21) (38) (59)
Profit/(loss) before taxation 170 (10) 160 145 (61) 84
Taxation 5 (48) 4 (44) (41) (21) (62)
Profit/(loss) for the period from continuing operations 122 (6) 116 104 (82) 22
Discontinued operations
Profit for the period from discontinued operations 17 49 958 1,007 67 40 107
PROFIT/(LOSS) FOR THE PERIOD 171 952 1,123 171 (42) 129
Attributable to
Smiths Group shareholders - continuing operations 121 (6) 115 103 (82) 21
Smiths Group shareholders - discontinued operations 49 958 1,007 67 40 107
Non-controlling interests 1 - 1 1 - 1
171 952 1,123 171 (42) 129
Earnings per share 4
Basic 283.9p 32.3p
Basic - continuing 29.1p 5.3p
Diluted 283.7p 32.2p
Diluted - continuing 29.1p 5.3p
Dividends per share (declared) 14 12.3p 11.7p
Consolidated statement of comprehensive income (unaudited)
Notes Six months ended Six months ended
31 January 2022
31 January 2021
£m
Represented*
£m
Profit for the period 1,123 129
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of post-retirement benefits assets and obligations 18 (94)
Taxation on post-retirement benefits movements (5) 17
Fair value movements on financial assets at fair value through OCI (29) 3
(16) (74)
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges (24) 51
- reclassified to income statement on cash-flow hedges 5 1
(19) 52
Foreign exchange movements net of recycling:
Exchange gains/(losses) on translation of foreign operations 72 (104)
Exchange gains recycled to the income statement on disposal of business (196) -
(124) (104)
Total other comprehensive expenditure for the period, net of taxation (159) (126)
Total comprehensive income 964 3
Attributable to
Smiths Group shareholders 963 3
Non-controlling interests 1 -
964 3
Total comprehensive income attributable to Smiths Group shareholders arising
from
Continuing operations 161 (53)
Discontinued operations 803 56
964 3
* The comparative period has been represented to include 'Fair value movements
on financial assets at fair value through OCI' within the 'OCI which will not
be reclassified to the income statement' subtotal rather than within the 'OCI
which will be reclassified and reclassifications' subtotal. This
reclassification has no impact on total other comprehensive income in the
comparative period ended 31 January 2021.
Consolidated balance sheet (unaudited)
Notes 31 January 31 July
2022
2021
£m
£m
Non-current assets
Intangible assets 7 1,502 1,498
Property, plant and equipment 8 220 212
Right of use assets 9 105 108
Financial assets - other investments 10 439 11
Retirement benefit assets 6 565 546
Deferred tax assets 95 92
Trade and other receivables 61 59
Financial derivatives 11 36 75
3,023 2,601
Current assets
Inventories 447 381
Current tax receivable 69 75
Trade and other receivables 623 630
Cash and cash equivalents 11 1,710 405
Financial derivatives 11 8 2
Assets held for sale - 1,243
2,857 2,736
Total assets 5,880 5,337
Current liabilities
Financial liabilities:
- short-term borrowings 11 (343) (36)
- financial derivatives 11 (8) (3)
Provisions 13 (89) (46)
Trade and other payables (580) (530)
Current tax payable (100) (89)
Liabilities held for sale - (283)
(1,120) (987)
Non-current liabilities
Financial liabilities:
- long-term borrowings 11 (1,142) (1,466)
Provisions 13 (234) (241)
Retirement benefit obligations 6 (130) (128)
Corporation tax payable (5) (5)
Deferred tax liabilities (32) (28)
Trade and other payables (50) (59)
(1,593) (1,927)
Total liabilities (2,713) (2,914)
Net assets 3,167 2,423
Shareholders' equity
Share capital 18 146 149
Share premium account 18 365 363
Capital redemption reserve 9 6
Revaluation reserve - 1
Merger reserve 235 235
Cumulative translation adjustments 282 509
Retained earnings 2,252 1,367
Hedge reserve (144) (228)
Total shareholders' equity 3,145 2,402
Non-controlling interest equity 22 21
Total equity 3,167 2,423
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 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 18 (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
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 2020 510 242 674 1,259 (312) 2,373 21 2,394
Profit for the period - - - 128 - 128 1 129
Other comprehensive income: - - -
- foreign exchange movements net of recycling - - (103) - - (103) (1) (104)
- re-measurement of post-retirement benefits and related tax - - - (77) - (77) - (77)
- fair value gains and related tax - - - 3 52 55 - 55
Total comprehensive income for the period - - (103) 54 52 3 - 3
Transactions relating to ownership interests
Exercises of share options 18 2 - - - - 2 1 3
Purchase of shares by Employee Benefit Trust - - - (16) - (16) - (16)
Dividends:
- equity shareholders 14 - - - (138) - (138) - (138)
- non-controlling interests - - - - - (1) (1)
Share-based payment - - - 6 - 6 - 6
At 31 January 2021 512 242 571 1,165 (260) 2,230 21 2,251
Consolidated cash-flow statement (unaudited)
Notes Six months ended Six months ended
31 January 2022
31 January 2021
£m
£m
Net cash inflow from operating activities 15 182 262
Cash-flows from investing activities
Expenditure on capitalised development (14) (15)
Expenditure on other intangible assets (4) (7)
Purchase of property, plant and equipment (30) (33)
Disposals of property, plant and equipment 1 -
Investment in financial assets (4) -
Income from financial assets - 4
Acquisition of businesses - (5)
Proceeds on disposal of subsidiaries, net of cash disposed 17 1,348 -
Net cash-flow used in investing activities 1,297 (56)
Cash-flows from financing activities
Proceeds from issue of new equity shares 2 2
Share buybacks 18 (103) -
Purchase of shares by Employee Benefit Trust (16) (16)
Settlement of share awards in cash (1) -
Dividends paid to equity shareholders and non-controlling interests (103) (139)
Cash inflow/(outflow) from matured derivative financial instruments 4 (5)
Lease payments (19) (23)
Net cash-flow used in financing activities (236) (181)
Increase in cash and cash equivalents 1,243 25
Cash and cash equivalents at beginning of the period 405 366
Movement in cash held in disposal group 48 (4)
Exchange differences 14 (12)
Cash and cash equivalents at end of the period 1,710 375
Cash and cash equivalents at end of the period comprise:
- cash at bank and in hand 208 193
- short-term deposits 1,502 182
1,710 375
Notes to the condensed interim financial statements (unaudited)
1 Basis of preparation
The financial information for the period ended 31 January 2022 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 2021 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 2022 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.
On 31 December 2020 EU-adopted IFRS was brought into UK law and became
UK-adopted international accounting standards, with future changes to IFRS
being subject to endorsement by the UK Endorsement Board. The Group
transitioned to UK-adopted International Accounting Standards in its
consolidated financial statements on 1 August 2021. This change constitutes a
change in accounting framework; however, there is no impact on recognition,
measurement or disclosure
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 2021, which
has been prepared in accordance with both International Accounting Standards
in conformity with the requirements of the Companies Act 2006 and
International Financial Reporting Standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union, and any public
announcements made by the Group during the interim reporting period.
The interim financial statements are prepared on a going concern basis. The
Directors have assessed the principal risks discussed on page 20. 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 24 March 2022.
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, Smiths Detection,
Flex-Tek 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
which 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.
The sale of the Group's Smiths Medical business was completed on 6 January
2022 and the results of Smiths Medical are disclosed as a discontinued
operation in note 17.
Intersegment sales and transfers are charged at arm's-length prices.
Segment trading performance
Six months ended 31 January 2022
John Crane Smiths Flex-Tek Smiths Interconnect Corporate Total
£m
Detection
costs
£m
£m £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%
Six months ended 31 January 2021
John Crane Smiths Flex-Tek Smiths Interconnect Corporate Total
£m
Detection
£m
£m
costs
£m
£m
£m
Revenue 410 350 238 152 - 1,150
Divisional headline operating profit 81 44 44 17 - 186
Corporate headline operating costs - - - - (20) (20)
Headline operating profit/(loss) 81 44 44 17 (20) 166
Items excluded from headline measures (note 3) 1 (11) (6) (1) (6) (23)
Operating profit/(loss) for the period 82 33 38 16 (26) 143
Headline operating margin 19.8% 12.6% 18.5% 11.2% 14.4%
Segment assets and liabilities
Segment assets
31 January 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 160 116 77 45 444 842
intangibles and investments
Inventory, trade and other receivables 362 423 192 133 21 1,131
Segment assets 522 539 269 178 465 1,973
31 July 2021
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£m
£m
£m
Property, plant, equipment, development projects, other intangibles and 152 117 75 44 18 406
investments
Inventory, trade and other receivables 356 417 160 127 10 1,070
Segment assets 508 534 235 171 28 1,476
Non-headline assets comprise receivables relating to non-headline items,
acquisitions and disposals.
Segment liabilities
31 January 2022
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£m
£m
£m
Divisional liabilities (121) (280) (81) (66) - (548)
Corporate and non-headline liabilities - - - - (405) (405)
Segment liabilities (121) (280) (81) (66) (405) (953)
31 July 2021
John Crane Smiths Flex-Tek Smiths Interconnect Corporate and Total
£m
Detection
£m
£m
non-headline
£m
£m
£m
Divisional liabilities (137) (276) (66) (61) - (540)
Corporate and non-headline liabilities - - - - (336) (336)
Segment liabilities (137) (276) (66) (61) (336) (876)
Non-headline liabilities comprise provisions and accruals relating to
non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory assets and
liabilities
Assets Liabilities
31 January 31 July 31 January 31 July
2022
2021
2022
2021
£m
£m
£m
£m
Segment assets and liabilities 1,973 1,476 (953) (876)
Goodwill and acquired intangibles 1,424 1,423 - -
Derivatives 44 77 (8) (3)
Current and deferred tax 164 167 (137) (122)
Retirement benefit assets and obligations 565 546 (130) (128)
Cash and borrowings 1,710 405 (1,485) (1,502)
Assets and liabilities held for sale - 1,243 - (283)
Statutory assets and liabilities 5,880 5,337 (2,713) (2,914)
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 2021: £787m), 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 2022
John Crane Smiths Flex-Tek Smiths Interconnect Total
£m
Detection
£m
£m
£m
£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
31 January 2021
John Crane Smiths Flex-Tek Smiths Interconnect Total
£m
Detection
£m
£m
£m
£m
Average divisional capital employed 988 1,103 452 415 2,958
Average corporate capital employed 13
Average capital employed - continuing operations 2,971
Average capital employed - assets held for sale 1,355
Average capital employed - including assets held for sale 4,326
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 2022 128 288 416
Revenue six months ended 31 January 2021 130 280 410
Smiths Detection Aviation Other security Total
£m
systems
£m
£m
Revenue six months ended 31 January 2022 219 94 313
Revenue six months ended 31 January 2021 260 90 350
Flex-Tek Aerospace Industrials Total
£m
£m
£m
Revenue six months ended 31 January 2022 54 243 297
Revenue six months ended 31 January 2021 48 190 238
Smiths Interconnect Components, Connectors & Subsystems
£m
Revenue six months ended 31 January 2022 166
Revenue six months ended 31 January 2021 152
The Group's statutory revenue is analysed as follows:
Six months ended Six months ended
31 January 2022
31 January 2021
£m
£m
Sale of goods recognised at a point in time 859 840
Sale of goods recognised over time 54 24
Services recognised over time 279 286
Revenue 1,192 1,150
Operating costs
Headline operating costs are analysed as follows:
Six months ended 31 January 2022 Six months ended 31 January 2021 - represented*
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 736 - 736 721 - 721
distribution overheads
Selling costs 95 - 95 93 - 93
Administrative expenses 172 32 204 170 23 193
Operating costs 1,003 32 1,035 984 23 1,007
* The analysis of operating costs for the comparative period has been
represented to reclassify £12m of agents' commissions from 'Selling costs' to
'Cost of sales'. This representation has no impact on total operating costs in
the comparative period ended 31 January 2021.
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 2022
31 January 2021
£m
£m
Post-acquisition integration costs and fair value adjustment unwind
Integration programmes - (1)
Unwind of acquisition balance sheet fair value uplift (1) -
Legacy pension scheme arrangements
Past service costs for benefit equalisation (8) (6)
Non-headline litigation provision movements
Provision for John Crane, Inc. asbestos litigation 1 (2)
Cost recovery for John Crane, Inc. asbestos litigation - 6
Movement in provision held against Titeflex Corporation subrogation claims 2 7
Other items
Amortisation of acquisition related intangible assets (26) (27)
Non-headline items in operating profit (32) (23)
Post-acquisition integration costs and fair value adjustment unwind
The £1m of integration programme costs in the prior year relate to defined
projects for the integration of United Flexible and Royal Metal into the
existing Flex-Tek business. Integration costs are recognised as non-headline
items because they are considered to be non-operational in nature and bear no
relation to the ongoing performance of the acquired businesses.
The impact of unwinding the acquisition balance sheet fair value adjustments
required by IFRS 3 'Business combinations' was recognised as non-headline as
the charge did not relate to trading activity. The £1m (31 January 2021:
£nil) charge was due to the unwind of fair value uplifts on the acquisition
of Royal Metal Products.
Legacy pension scheme arrangements
In the current year £8m of past service costs have been recognised in respect
of the equalisation of retirement benefits for men and women (see note 6 for
further details). In the prior year £6m of past service costs were recognised
following a further ruling from the UK High Court on GMP equalisation. These
are treated as non-headline items as they are non-recurring and relate to
legacy pension schemes.
Non-headline litigation provision movements
The following litigation costs and recoveries have been treated as
non-headline items because the provisions were treated as non-headline when
originally recognised and the subrogation claims and litigation relate to
products that the Group no longer sells in these markets:
- The £1m credit (31 January 2021: £2m charge) in respect of John Crane,
Inc. asbestos litigation is principally due to litigation management expenses
and discount rate movements following an increase in United States of America
(US) treasury bond yields. In the prior year £6m of costs were recovered via
insurer settlements. See note 12 for further details; and
- A £2m credit (31 January 2021: £7m credit) has been recognised by
Titeflex Corporation in respect of changes to the estimated cost of future
claims. The current year credit is driven by discount rate movements. See note
12 for further details.
Other items
Acquisition related intangible asset amortisation costs of £26m (31 January
2021: £27m) 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.
Non-headline finance income/(costs) items
The non-headline items included in finance income/(costs) are as follows:
Six months ended Six months ended
31 January 2022
31 January 2021
£m
£m
Foreign exchange gain/(loss) on intercompany loan with discontinued operations 22 (38)
Other financing losses (2) (2)
Unwind of discount on provisions (1) (1)
Other finance income - retirement benefits 3 3
Non-headline items in finance income/(costs) 22 (38)
Non-headline loss before taxation (10) (61)
Foreign exchange gains or losses on intercompany financing between Smiths
Medical and the continuing group are recognised on the face of the income
statement as a non-headline item due to the classification of Smiths Medical
as a discontinued operation. The £22m foreign exchange gain above (31 January
2021: £38m loss) matches the foreign exchange loss in discontinued
operations. This is excluded from headline net finance costs as these fair
value movements are non-operational in nature and are purely a consequence of
the presentational requirements for discontinued operations.
Other financing losses represent fair value movements on financial instruments
and foreign exchange movements on borrowings, which the Group excludes from
headline net finance costs. The current period loss of £2m (31 January 2021:
£2m) is principally 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 £1m
(31 January 2021: £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 £3m (31 January 2021: £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 £4m non-headline taxation credit (31 January 2021: £21m charge)
represents 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 2022
31 January 2021
£m
£m
Non-headline operating profit items
Medfusion documentation remediation costs (33) -
Impairment of investment in Ivenix, Inc convertible debt. (14) -
Medical separation costs - (1)
Non-headline finance costs items
Foreign exchange (loss)/gain on intercompany loan with parent (22) 38
Gain on sale of discontinued operation
Gain on the sale of Smiths Medical to ICU Medical, Inc (note 17) 1,021 -
Non-headline taxation items
Taxation on non-headline items 6 3
Non-headline items in profit from discontinued operations 958 40
Profit for the period - non-headline items for continuing and discontinued 952 (42)
operations
In the current period Smiths Medical recognised a provision of £33m against
the expected costs of the remediation actions required to address each of the
observations and discussion items contained in the US Food and Drug
Administration (FDA) 'for-cause' audit findings on the Medfusion product
range.
In the current period a decision was taken by Smiths Medical to exit their
commercial agreement with Ivenix, Inc. These circumstances have resulted in
a change in strategy and have triggered an indicator of impairment to the
carrying value of the Smiths Medical investment in Ivenix, Inc. As this
change in circumstances indicates that it is not currently probable that the
investment will realise economic benefits, management have impaired the entire
£14m value of Smiths Medical's Ivenix, Inc. investment.
In the prior year the £1m of Medical separation costs represented incremental
costs incurred by the Group to separate Smiths Medical. This cost has been
reported as non-headline as the full year effect of the transaction on the
Group's financial statements is both material and non-recurring. In the
current year separation and transaction costs incurred on the sale of the
Smiths Medical business to ICU Medical, Inc have been included within the
'Gain on sale of discontinued operation' calculation (see note 17).
The £22m foreign exchange loss on intercompany loan with parent (31 January
2021: £38m gain) directly offsets the foreign exchange loss in continuing
operations. This is excluded from headline net finance costs as these fair
value movements are non-operational in nature and are purely a consequence of
the presentational requirements for discontinued operations.
4 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 2022
31 January 2021
£m
£m
Profit attributable to equity shareholders for the period
- Continuing 115 21
- Discontinued 1,007 107
Total 1,122 128
Average number of shares in issue during the period (note 18) 395,260,779 396,331,156
Statutory earnings per share continuing operations - basic 29.1 5.3
Statutory earnings per share continuing operations - diluted 29.1 5.3
Statutory earnings per share total - basic 283.9 32.3
Statutory earnings per share total - diluted 283.7 32.2
Diluted earnings per share are calculated by dividing the profit attributable
to ordinary shareholders by 395,537,378 (31 January 2021: 397,355,869)
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 2022 Six months ended 31 January 2021
£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 1,122 283.9 283.7 128 32.3 32.2
Exclude: Non-headline items (note 3) (952) 42
Headline earnings per share 170 43.0 43.0 170 42.9 42.8
Profit from continuing operations attributable to equity shareholders of 115 29.1 29.1 21 5.3 5.3
the Parent Company
Exclude: Non-headline items (note 3) 6 82
Headline earnings per share - continuing operations 121 30.6 30.6 103 26.0 25.9
5 Taxation
The interim tax rate of 27.8% (31 January 2021: 74.4%) is calculated by
applying the estimated effective headline tax rate for continuing operations
of 28.4% (31 January 2021: 28.0%) for the year ended 31 July 2022 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 2022 Six months ended 31 January 2021
Continuing Tax rate Continuing Tax rate
operations
operations
£m
£m
Headline tax rate
Headline profit before taxation 170 145
Taxation on headline profit (48) 28.4% (41) 28.0%
Adjustments
Non-headline items excluded from profit before taxation (note 3) (10) (61)
Taxation on non-headline items and non-headline tax adjustment 4 (21)
Total interim tax rate
Profit before taxation 160 84
Taxation (44) 27.8% (62) 74.4%
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 2021 (19) 64 45
Foreign exchange gains and losses (1) 2 1
(Charge)/credit to income statement, continuing operations (48) 4 (44)
Charge to income statement, discontinued operations (5) - (5)
Charge to other comprehensive income - (7) (7)
Tax paid 37 - 37
At 31 January 2022 (36) 63 27
Sale of Medical
The sale of 100% of the share capital of the UK Smiths Medical holding company
completed on the 6th January 2022. The profit on sale was exempt from tax
under the Substantial Shareholding Exemption.
Developments in the Group tax position
In December 2021, the Organisation for Economic Co-operation and Development
("OECD") published Pillar 2 rules, scheduled to apply from 2023, regarding the
future taxation of large multinationals such as Smiths. The Group will
continue to monitor the development and future implementation of these rules.
However, at this time and as currently drafted, they are not expected to have
a material impact on the Group.
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 surplus under IAS 19, this is disclosed on
the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one
scheme is not available to fund the IAS 19 deficit of another scheme. The
retirement benefit asset arises from the rights of the employers to recover
the surplus at the end of the life of the scheme. The schemes in surplus are
mature, with a duration averaged over all scheme participants, of 16 years.
The amounts recognised in the balance sheet are as follows:
31 January 31 July
2022
2021
£m
£m
Market value of scheme assets 4,155 4,406
Present value of funded scheme liabilities (3,602) (3,869)
Surplus 553 537
Unfunded pension plans (111) (116)
Post-retirement healthcare (7) (8)
Present value of unfunded obligations (118) (124)
Net retirement benefit asset 435 413
Post-retirement assets 565 546
Post-retirement liabilities (130) (128)
Liabilities held for sale (note 17) - (5)
Net retirement benefit asset 435 413
The principal assumptions used in updating the valuations are set out below:
31 January 2022 31 July 2021
UK US UK US
Weighted average rate of increase in benefits for active deferred members 4.4% n/a 4.2% n/a
Rate of increase in pensions in payment 3.6% n/a 3.3% n/a
Rate of increase in deferred pensions 3.6% n/a 3.3% n/a
Discount rate 2.3% 3.2% 1.7% 2.7%
The methods for setting the mortality assumptions for the UK schemes are
consistent with the 31 July 2021 valuation. The US schemes have adopted the
mortality improvement scale MP-2021 (31 July 2021: MP-2020).
Present value of funded scheme liabilities and assets for the main UK and US
schemes
31 January 2022 - £m 31 July 2021 - £m
SIPS TIGPS US schemes SIPS TIGPS US schemes
Present value of funded scheme liabilities
- Active deferred members (39) (27) (53) (42) (29) (73)
- Deferred members (739) (568) (130) (810) (632) (119)
- Pensioners (1,168) (757) (79) (1,226) (809) (81)
Present value of funded scheme liabilities (1,946) (1,352) (262) (2,078) (1,470) (273)
Market value of scheme assets 2,287 1,576 257 2,410 1,684 272
Surplus/(deficit) 341 224 (5) 332 214 (1)
Contributions
Group contributions to the pension plans in the period totalled £6m (31
January 2021: £16m), comprising regular contributions of £3m (31 January
2021: £6m) to Smiths Industries Pension Scheme ('SIPS'), £nil (31 January
2021: £6m) to TI Group Pension Scheme ('TIGPS') and £nil (31 January 2021:
£4m) to funded US Schemes. In addition, £3m (31 January 2021: £3m) was paid
to unfunded defined benefit pension schemes and post-retirement healthcare
plans. No additional contributions to support risk reduction programmes were
made in the current or previous period.
The changes in the present value of the net pension balance in the period
were:
Six months ended Year ended
31 January
31 July
2022
2021
£m
£m
At beginning of period 413 372
Foreign exchange rate movements 2 5
Current service cost (1) (2)
Scheme administration costs (2) (5)
Past service costs (8) (6)
Curtailments and settlements (1) -
Finance income - retirement benefits 3 6
Contributions by employer 6 30
Actuarial gains 18 13
Retirement benefit obligations disposed of with Smiths Medical (note 17) 5 -
Net retirement benefit asset at end of period 435 413
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 one of its smaller benefits
sections was incorrect. An additional liability of £8m has been recognised
within the SIPS defined benefit obligation at 31 January 2022 to reflect the
correction of this issue. The cost of £8m has been recognised as a past
service cost.
7 Intangible assets
Goodwill Development Acquired Software, Total
£m
costs
intangibles
patents and intellectual property
£m
£m
£m
£m
Cost
At 31 July 2021 1,207 156 562 177 2,102
Exchange adjustments 19 - 15 2 36
Additions - 4 - 3 7
Disposals - - - (6) (6)
At 31 January 2022 1,226 160 577 176 2,139
Amortisation
At 31 July 2021 59 114 287 144 604
Exchange adjustments - 1 7 - 8
Charge for the period - 2 26 3 31
Disposals - - - (6) (6)
At 31 January 2022 59 117 320 141 637
Net book value at 31 January 2022 1,167 43 257 35 1,502
Net book value at 31 July 2021 1,148 42 275 33 1,498
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 FY2021 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 Smiths Detection's adverse performance in
HY2022 compared to the prior year is a result of temporary rather than
permanent macro-economic factors and that the negative impact of supply chain
distortions is expected to reverse in the medium term.
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 2021 172 388 122 682
Exchange adjustments 3 6 - 9
Additions 2 20 2 24
Disposals (3) (5) (2) (10)
At 31 January 2022 174 409 122 705
Depreciation
At 31 July 2021 106 260 104 470
Exchange adjustments 2 4 - 6
Charge for the period 4 12 3 19
Disposals (3) (5) (2) (10)
At 31 January 2022 109 271 105 485
Net book value at 31 January 2022 65 138 17 220
Net book value at 31 July 2021 66 128 18 212
9 Right of use assets
Properties Vehicles Equipment Total
£m
£m
£m
£m
Cost
At 31 July 2021 146 17 1 164
Foreign exchange rate movements 2 - - 2
Recognition of right of use assets 5 2 - 7
Modification of right of use assets 4 - - 4
At 31 January 2022 157 19 1 177
Depreciation
At 31 July 2021 46 10 - 56
Foreign exchange rate movements 1 - - 1
Charge for the year 13 2 - 15
At 31 January 2022 60 12 - 72
Net book value at 31 January 2022 97 7 1 105
Net book value at 31 July 2021 100 7 1 108
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 2021 - - 7 4 11
Additions 426 30 4 - 460
Impairment - - (3) - (3)
Fair value change through Other Comprehensive Income (29) - - - (29)
At 31 January 2022 397 30 8 4 439
11 Borrowings and net cash/(debt)
This note sets out the calculation of net cash/(debt), an important measure in
explaining our financing position. The net cash/(debt) figure includes accrued
interest and fair value adjustments to debt relating to hedge accounting.
31 January 31 July
2022
2021
£m
£m
Cash and cash equivalents
Net cash and cash equivalents 1,710 405
Short-term borrowings
$400m 3.625% US$ Guaranteed notes 2022 (299) -
Lease liabilities (26) (27)
Interest accrual (18) (9)
(343) (36)
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022 - (289)
€600m 1.25% Eurobond 2023 (503) (516)
€650m 2.00% Eurobond 2027 (547) (567)
Lease liabilities (92) (94)
(1,142) (1,466)
Borrowings (1,485) (1,502)
Derivatives managing interest rate risk and currency profile of the debt 37 75
Net cash/(debt) (31 July 2021 comparative excludes £18m of net debt in 262 (1,022)
businesses held for sale)
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 36 1 - - 37
Foreign exchange forward contracts - 7 (8) - (1)
At 31 January 2022 36 8 (8) - 36
Derivatives managing interest rate risk and currency profile of the debt 75 - - - 75
Foreign exchange forward contracts - 2 (3) - (1)
At 31 January 2021 75 2 (3) - 74
Movements in net cash/(debt)
Cash and cash equivalents Short-term borrowings Long-term borrowings Interest rate and cross currency swaps Net
£m
£m
£m
£m cash/(debt)
£m
At 31 July 2021 405 (36) (1,466) 75 (1,022)
Foreign exchange gains/(losses) 14 (10) 22 - 26
Net increase in cash and cash equivalents 1,243 - - - 1,243
Movement in net cash held in disposal group 48 - - - 48
Net movement in lease liabilities - 5 - - 5
Fair value movement from interest rate hedging - 1 11 - 12
Revaluation of derivative contracts - - - (38) (38)
Net movement in finance cost accruals - (3) (9) - (12)
Reclassification to short-term - (300) 300 - -
At 31 January 2022 1,710 (343) (1,142) 37 262
12 Fair value of financial instruments
As at 31 January 2022 As at 31 July 2021
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 - 4 397 401 401 - 4 - 4 4
Other investments F - 30 8 38 38 - - 7 7 7
Cash and cash equivalents A 387 1,323 - 1,710 1,710 289 116 - 405 405
Trade and other financial receivables B/C 684 - - 684 684 689 - - 689 689
Derivative financial instruments C - 44 - 44 44 - 77 - 77 77
Total financial assets 1,071 1,401 405 2,877 2,877 978 197 7 1,182 1,182
Financial liabilities
Trade and other financial payables B (630) - - (630) (630) (589) - - (589) (589)
Short-term borrowings D (316) - - (316) (316) (9) - - (9) (9)
Long-term borrowings D (1,050) - - (1,050) (1,075) (1,372) - - (1,372) (1,429)
Lease liabilities E (118) - - (118) (118) (121) - - (121) (121)
Derivative financial instruments C - (8) - (8) (8) - (3) - (3) (3)
Total financial liabilities (2,114) (8) - (2,122) (2,147) (2,091) (3) - (2,094) (2,151)
The fair value of a financial instrument is the price at which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties
in an arm's-length transaction. Fair values have been determined with
reference to available market information at the balance sheet date, using the
methodologies described below:
A Carrying value is assumed to be a reasonable approximation to fair value for
all of these assets and liabilities (Level 1 as defined by IFRS 13 Fair Value
Measurement).
B Carrying value is assumed to be a reasonable approximation to fair value for
all of these assets and liabilities (Level 2 as defined by IFRS 13 Fair Value
Measurement).
C Fair values of derivative financial assets and liabilities and trade
receivables held to collect or sell are estimated by discounting expected
future contractual cash-flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing
at the balance sheet date. These financial instruments are included on the
balance sheet at fair value, derived from observable market prices (Level 2 as
defined by IFRS 13 Fair Value Measurement).
D Borrowings are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of borrowings is estimated using quoted prices (Level 1
as defined by IFRS 13).
E Leases are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of the lease contract is estimated by discounting
contractual future cash-flows (Level 2 as defined by IFRS 13).
F The fair value of instruments is estimated by using unobservable inputs to the
extent that relevant observable inputs are not available. Unobservable
inputs are developed using the best information available in the
circumstances, which may include the Group's own data, taking into account all
information about market participation assumptions that is reliably available
(Level 3 as defined by IFRS 13).
IFRS 13 defines a three level valuation hierarchy:
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1 inputs
Level 3 - inputs not based on observable market data
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 26 8 2 46
Non-current liabilities 1 186 39 15 241
At 31 July 2021 11 212 47 17 287
Foreign exchange rate movements - 7 2 1 10
Provision charged 2 - - 42 44
Provision released (2) (1) (2) (1) (6)
Unwind of provision discount - 1 - - 1
Utilisation (1) (10) (2) - (13)
At 31 January 2022 10 209 45 59 323
Current liabilities 8 26 10 45 89
Non-current liabilities 2 183 35 14 234
At 31 January 2022 10 209 45 59 323
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 2022 there are warranty and product liability provisions of £7m
(31 July 2021: £9m). Warranties over the Group's products typically cover
periods of between one and three years. Provision is made for the likely cost
of after-sales support based on the recent past experience of individual
businesses.
Commercial disputes and litigation in respect of ongoing business activities
The Group has on occasion been required to take legal action to protect its
intellectual property and other rights against infringement. It has also had
to defend itself against proceedings brought by other parties, including
product liability and insurance subrogation claims. Provision is made for any
expected costs and liabilities in relation to these proceedings where
appropriate, although there can be no guarantee that such provisions (which
may be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to commercial
disputes and litigation such as government price audits, product liability
claims, employee disputes and other kinds of lawsuits, and faces different
types of legal issues in different jurisdictions. The high level of activity
in the US, for example, exposes the Group to the likelihood of various types
of litigation commonplace in that country, such as 'mass tort' and 'class
action' litigation, legal challenges to the scope and validity of patents, and
product liability and insurance subrogation claims. These types of proceedings
(or the threat of them) are also used to create pressure to encourage
negotiated settlement of disputes. Any claim brought against the Group (with
or without merit) could be costly to defend. These matters are inherently
difficult to quantify. In appropriate cases a provision is recognised based on
best estimates and management judgement, but there can be no guarantee that
these provisions (which may be subject to potentially material revision from
time to time) will result in an accurate prediction of the actual costs and
liabilities that may be incurred. There are also contingent liabilities in
respect of litigation for which no provisions are made.
The Group operates in some markets where the risk of unethical or corrupt
behaviour is material and has procedures, including an employee 'Ethics
Alertline', to help it identify potential issues. Such procedures will, from
time to time, give rise to internal investigations, sometimes conducted with
external support, to ensure that the Group properly understands risks and
concerns and can take steps both to manage immediate issues and to improve its
practices and procedures for the future. The Group is not aware of any issues
which are expected to generate material financial exposures.
Non-headline and legacy 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 2022 31 July 2021 31 July 2020 31 July 2019 31 July 2018
JCI claims experience
Claims against JCI that have been dismissed 306,000 305,000 297,000 285,000 277,000
Claims in which JCI is currently a defendant 22,000 22,000 25,000 38,000 43,000
Cumulative final judgments, after appeals, against JCI since 1979 149 149 149 144 140
Cumulative value of awards ($m) since 1979 175 175 175 168 164
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 2022
£m Year ended Year ended Year ended Year ended
31 July
31 July
31 July
31 July
2021
2020
2019
2018
£m
£m
£m
£m
John Crane, Inc. litigation provision
Gross provision 225 220 235 257 251
Discount (16) (8) (4) (20) (28)
Discounted provision 209 212 231 237 223
Taxation (53) (54) (59) (50) (48)
Discounted post-tax provision 156 158 172 187 175
Operating profit (credit)/charge
Increased provision for adverse judgments and legal defence costs 7 10 14 7 13
Change in US risk free rates (8) (5) 16 8 (6)
Subtotal - items (credited)/charged to the provision (1) 5 30 15 7
Litigation management expense - legal fees in connection with litigation - 1 1 2 3
against insurers and defence strategy
Recoveries from insurers - (9) (3) (11) -
Total operating profit (credit)/charge (1) (3) 28 6 10
Cash-flow
Provision utilisation - legal defence costs and adverse judgements (10) (13) (23) (24) (27)
Litigation management expense - - (1) (2) (3)
Recoveries from insurers - 9 3 11 -
Net cash outflow (10) (4) (21) (15) (30)
John Crane, Inc. litigation provision sensitivities
The provision may be subject to potentially material revision from time to
time if new information becomes available as a result of future events. There
can be no guarantee that the assumptions used to estimate the provision will
result in an accurate prediction of the actual costs that 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 £190m and future spend at the 95th percentile of £242m (31 July 2021:
£191m and £246m, respectively). Statistical analysis of the distribution of
these outcomes indicates that there is a 50% probability that the total future
spend will fall between £212m and £234m (31 July 2021: between £209m and
£230m), compared with the gross provision value of £225m (31 July 2021:
£220m).
Sensitivity of the projections to changes in the time horizon used
If the asbestos litigation environment becomes more volatile and uncertain,
for example if defendants are successful in legal cases against plaintiff law
firms and this impacts the nature of claims filed, 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 £16m (31 July 2021:
£17m) and reducing it by five years would reduce the discounted pre-tax
provision by £90m (31 July 2021: £93m).
We consider, after obtaining advice from Bates White LLC, that to forecast
beyond ten years requires that the litigation environment remains largely
unchanged with respect to the historical experience used for estimating future
asbestos expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If one assumed
that the asbestos litigation environment would remain unchanged for longer and
extended the time horizon by one year, it would increase the discounted
pre-tax provision by £13m (31 July 2021: £14m); extending it by five years
would increase the discounted pre-tax provision by £54m (31 July 2021:
£58m). However, there are also reasonable scenarios that, given certain
recent events in the US asbestos litigation environment, would result in no
additional asbestos litigation for JCI beyond ten years. At this time, how
the asbestos litigation environment 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 FY2021 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 £45m (31 July 2021: £47m) is a discounted pre-tax provision
using discount rates, being the risk-free rate on US debt instruments for the
appropriate period. The deferred tax asset related to this provision is shown
within the deferred tax balance.
31 January 31 July
2022
2021
£m
£m
Gross provision 67 69
Discount (22) (22)
Discounted pre-tax provision 45 47
Taxation (10) (11)
Discounted post-tax provision 35 36
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 2021: £4m) lower, and if
the benefit were 0.5% lower, the discounted pre-tax provision would be £4m
(31 July 2021: £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 £3m (31 July 2021: £4m), 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
2021: £3m), 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 2022
31 January 2021
£m
£m
Dividends paid in the period 103 138
In the current period an ordinary final dividend of 26.0p, was paid on 19
November 2021. In the comparative period a total dividend of 35.0p, comprising
a delayed interim dividend of 11.0p and an ordinary final dividend of 24.0p,
was paid in respect of FY2020.
An interim dividend of 12.3 pence per share was declared by the Board on 24
March 2022 and will be paid to shareholders on 13 May 2022. 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 8 April 2022.
15 Cash-flow from operating activities
Six months ended 31 January 2022 Six months ended 31 January 2021
Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Operating profit/(loss) - continuing operations 189 (32) 157 166 (23) 143
- 66 (47) 19 89 (1) 88
discontinued operations
Amortisation of intangible assets 5 26 31 6 27 33
Depreciation of property, plant and equipment 19 - 19 19 - 19
Depreciation of right of use assets 15 - 15 15 - 15
(Gain)/loss on disposal of property, plant and equipment (1) - (1) 1 - 1
Impairment of investment in Ivenix, Inc. - 14 14 - - -
Share-based payment expense 5 - 5 6 - 6
Retirement benefits 3 2 5 2 (12) (10)
Distribution from trading investment - - - 4 - 4
Recycling of cash flow hedge reserve (3) - (3) 1 - 1
(Increase)/decrease in inventories (79) 1 (78) 35 - 35
Decrease/(increase) in trade and other receivables 17 - 17 88 (2) 86
Increase/(decrease) in trade and other payables 22 (43) (21) (73) (4) (77)
(Decrease)/increase in provisions (2) 60 58 (3) (14) (17)
Cash generated from operations 256 (19) 237 356 (29) 327
Interest paid (12) - (12) (12) - (12)
Interest received 3 - 3 2 - 2
Tax paid (46) - (46) (55) - (55)
Net cash inflow/(outflow) from operating activities 201 (19) 182 291 (29) 262
- continuing operations 155 (19) 136 230 (26) 204
- discontinued operations 46 - 46 61 (3) 58
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 2022 Six months ended 31 January 2021
Headline Non-headline Total Headline Non-headline Total
£m
£m
£m
£m
£m
£m
Net cash inflow/(outflow) from operating activities 155 (19) 136 230 (26) 204
Include:
Expenditure on capitalised development, other intangible assets and property, (31) - (31) (28) - (28)
plant and equipment
Repayment of lease liabilities (15) - (15) (17) - (17)
Disposals of property, plant and equipment 1 - 1 - - -
Investment in financial assets relating to operating activities and pensions - - - 4 - 4
financing outstanding at the balance sheet date
Free cash-flow 91 163
Exclude:
Investment in financial assets relating to operating activities and pensions - - - (4) - (4)
financing outstanding at the balance sheet date
Repayment of lease liabilities 15 - 15 17 - 17
Interest paid 8 - 8 6 - 6
Interest received (3) - (3) (2) - (2)
Tax paid 37 - 37 48 - 48
Operating cash-flow 167 (19) 148 254 (26) 228
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as
follows:
Six months ended 31 January 2022 Six months ended 31 January 2021
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 189 - 189 166 1 167
Headline operating cash-flow 167 8 175 254 10 264
Headline operating cash conversion 88% 93% 153% 158%
Reconciliation of free cash-flow to total movement in cash and cash
equivalents
Six months Six months ended
ended
31 January 2021
31 January 2022
£m
£m
Free cash-flow 91 171
Free cash-flow from discontinued operations 25 17
Investment in financial assets and acquisition of businesses (4) (5)
Disposal of businesses and discontinued operations 1,348 -
Other net cash-flows used in financing activities (note: repayment of lease (217) (158)
liability is included in free cash-flow)
Net increase in cash and cash equivalents 1,243 25
16 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 2021.
17 Discontinued operations
Following the Board decision in July 2021 to pursue a sale process, the Smiths
Medical business was classified as a discontinued operation and a business
held for sale. On 8 September 2021, the Group announced that it had agreed the
sale of Smiths Medical to ICU Medical, Inc., and the approval of Smiths'
shareholders was received at the General Meeting on 17 November 2021.
The sale was completed on 6 January 2022 and the results of the discontinued
operation and the effect of the disposal on the financial position of the
Group were as follows:
Discontinued operations
The financial performance of the Smiths Medical business in the current and
prior period is presented below:
Six months ended 31 January 2022 Six months ended 31 January 2021
Headline Non-headline Total Headline Non-headline Total
£m
(note 3)
£m
£m
(note 3)
£m
£m
£m
Revenue 356 - 356 427 - 427
Direct materials, labour, production and distribution overheads (193) - (193) (224) - (224)
Selling costs (46) - (46) (58) - (58)
Administrative expenses (51) (47) (98) (56) (1) (57)
Operating costs (290) (47) (337) (338) (1) (339)
Operating profit/(loss) 66 (47) 19 89 (1) 88
Finance costs (1) (22) (23) - 38 38
Gain on sale of discontinued operation - 1,021 1,021 - - -
Taxation (16) 6 (10) (22) 3 (19)
Profit from discontinued operations, net of tax 49 958 1,007 67 40 107
Additional segmental information for discontinued operations
Revenue for the Smiths Medical discontinued operation is analysed by the
following product lines: Infusion Systems £116m (31 January 2021: £152m),
Vascular Access £134m (31 January 2021: £133m) and Vital Care/Other £106m
(31 January 2021: £142m).
Cash-flow from discontinued operations included in the consolidated cash-flow
statement is as follows:
Six months Six months ended
ended
31 January 2021
31 January 2022
£m
£m
Net cash inflow from operating activities 46 50
Net cash-flow used in investing activities (17) (27)
Net cash-flow used in financing activities (13) (15)
Net increase in cash and cash equivalents 16 8
Opening cash and cash equivalents in disposal group 48 20
Foreign exchange movements (7) (4)
Cash and cash equivalents disposed of 57
Cash and cash equivalents at close of period 24
Effect of disposal on the financial position of the Group
Six months
ended
31 January 2022
£m
Intangible assets 695
Property, plant and equipment 170
Right of use assets 64
Inventories 166
Deferred tax assets 20
Current tax receivable 3
Trade and other receivables 110
Cash and cash equivalents 57
Financial derivatives 4
Lease liabilities (41)
Trade and other payables (167)
Current tax payable (13)
Deferred tax liabilities (56)
Retirement benefit obligations (5)
Provisions (39)
Net assets disposed of 968
Consideration received:
Cash and cash equivalents 1,421
Transaction costs (31)
Cash and cash equivalents, net of transaction costs 1,390
ICU Medical, Inc shares 426
Deferred contingent consideration - contingent on ICU Medical, Inc future 30
share price
Separation expenses - arising from contractual and commercial obligations due (58)
to the separation recognised in period
Gain on sale before reclassification of foreign currency translation reserve 820
Exchange movements recycled to the income statement 196
Cash flow hedge reserve recycled to the income statement 5
Gain on sale of discontinued operation 1,021
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents 1,421
Transaction costs and separation expenses paid in period (16)
Less cash and cash equivalents disposed of (57)
1,348
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 2020 396,211,180 396,193,310 510
Issue of new equity shares - exercise of share options 150,362 137,846 2 2
At 31 January 2021 396,361,542 396,331,156 512
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
Share buybacks
In connection with the sale of Smiths Medical to ICU Medical, Inc. (see note
17 for details), 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 2022 the Group had contracted to purchase
7.2m shares for a total consideration of £111m, of which 0.8m shares with a
value of £8m were yet to settle and be cancelled.
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 to add goodwill recognised
directly in reserves in respect of subsidiaries acquired before 1 August 1998
and to eliminate post-retirement benefit assets and liabilities and litigation
provisions related to John Crane, Inc. and Titeflex Corporation, both net of
deferred tax, the investment in ICU Medical, Inc. equity, the deferred
consideration contingent on ICU Medical, Inc's share price, 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 15 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 15.
Gross debt Gross debt is total borrowings (bank, bonds and lease liabilities). It is used
to provide an indication of the Group's overall level of indebtedness. See
below for an analysis of gross debt.
Headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This measure is used by the Group to measure and monitor performance excluding
material non-recurring items or items considered non-operational. See note 3
for an analysis of non-headline items.
Headline EBITDA EBITDA is a widely used profit measure, not defined by IFRS, being earnings
before interest, taxation, depreciation and amortisation. 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 commenced in FY2020.
A reconciliation of Headline EBITDA to Headline EBITDA before restructuring
costs and write-downs is shown in the note below.
Headline operating profit excluding restructuring and write-downs Headline operating profit is adjusted for strategic restructuring programme
costs and write-downs. See note 15 for a reconciliation. This measure of
profitability is used by the Group to measure and monitor performance.
Net cash/(debt) Net cash/(debt) is total borrowings (bank, bonds and lease liabilities) less
cash balances and derivatives used to manage the interest rate risk and
currency profile of the debt. This measure is used to provide an indication of
the Group's overall level of indebtedness and is widely used by investors and
credit rating agencies. See note 11 for an analysis of net cash/(debt).
Non-headline The Group has defined a 'headline' measure of performance that excludes
material non-recurring items or items considered non-operational/trading in
nature. Items excluded from headline are referred to as non-headline items.
This is used by the Group to measure and monitor material non-recurring items
or items considered non-operational. See note 3 for an analysis of
non-headline items.
Operating cash-flow 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 15.
Operating profit Operating profit is earnings before finance costs and tax. A reconciliation of
operating profit to profit before tax is shown on the income statement. This
common measure is used by the Group to measure and monitor performance.
Return on capital Smiths ROCE is calculated over a rolling 12-month period and is the percentage
employed ('ROCE') that headline operating profit represents of the monthly average capital
employed on a rolling 12-month basis. This measure of return on invested
resources is used to monitor performance and capital allocation within the
Group. See below for Group ROCE and note 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
Aftermarket % of sales The aftermarket percentage of sales is defined as the proportion of revenue
derived from aftermarket sales. Aftermarket sales are a core characteristic
of Smiths' businesses and are an indicator of resilient, repeatable revenue
for the Group.
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.
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.
Headline 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 15.
Headline 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.
Portfolio strength Portfolio strength is defined as the percentage of revenue derived from
products that are positioned in the top three in their markets. Portfolio
strength is used to measure the success of the Group's strategy to actively
manage its portfolio of businesses to operate in growing markets where it can
achieve a sustainable top-three leadership position
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.
Stock turns Stock turns during the year is calculated as the last 12 months' cost of sales
divided by the 12 month average inventory. This measure is used by the Group
to measure operational efficiency.
Organic revenue Organic revenue growth is net revenue growth excluding the effects of foreign
growth exchange, acquisitions and disposals (see note 17). Organic revenue growth is
used by the Group to aid comparability when monitoring performance. This
definition of organic revenue growth is the same as that used for underlying
revenue growth in previous accounting periods.
Note: Organic revenue growth was previously defined on a compound annualised
basis and used by the Group for remuneration purposes.
Underlying headline operating profit growth Underlying headline operating profit growth is net headline operating profit
growth excluding the effects of foreign exchange, acquisitions, restructuring
costs and write-downs, and including depreciation and amortisation of
discontinued operations. Underlying headline operating profit growth is used
by the Group to aid comparability when monitoring performance.
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 2021: £787m), 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
2022
2021
£m
£m
Net assets 3,167 2,251
Adjust for:
Goodwill recognised directly in reserves 478 787
Retirement benefit assets and obligations 6 (435) (293)
Tax related to retirement benefit assets and obligations 115 55
John Crane, Inc. litigation provisions and related tax 156 162
Titeflex Corporation litigation provisions and related tax 35 41
Investment in ICU Medical, Inc equity (397) -
Deferred contingent consideration (30) -
Net (cash)/debt (2021 comparative includes £18m of net debt in discontinued (262) 1,075
operations)
Capital employed 2,827 4,078
Return on capital employed
Notes 31 January 31 January
2022
2021 represented*
£m
£m
Headline operating profit for previous 12 months - continuing operations 395 307
Average capital employed - continuing operations (excluding investment in ICU 2,824 2,971
Medical, Inc equity)
Return on capital employed ("ROCE") 14.0% 10.3%
* Following the completion of the sale of Smiths Medical, ROCE for 31 January
2021 has been represented to exclude discontinued operations from headline
operating profit and average capital employed. The 31 January 2021 figures
have been represented to aid the period on period comparability for this
forward looking measure.
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 2022 Continuing
31 January 2021 Total
operations
operations*
£m
£m
Headline operating profit 2 189 166
Headline operating profit of discontinued operations for the comparative 17 - 89
period
Exclude:
- depreciation of property, plant and equipment 8 19 19
- depreciation of right of use assets 9 15 15
- amortisation of development costs 7 2 3
- amortisation of software, patents and intellectual property 7 3 3
Headline EBITDA 228 295
Annualised headline EBITDA
Notes Year ended Year ended
31 January 2022 Continuing
31 January 2021 Total
operations
operations*
£m
£m
Headline EBITDA for the period 228 295
Add:
- headline EBITDA for the previous year 458 610
Exclude:
- headline EBITDA for the first six months of the previous year (206) (323)
Annualised headline EBITDA 480 582
Add back: restructuring costs in past 12 months (2021 comparative includes 20 51
£7m in discontinued operations)
Annualised headline EBITDA before restructuring costs 500 633
Ratio of net (cash)/debt to annualised headline EBITDA before restructuring
costs
Year ended Year ended
31 January 2022
31 January 2021
Continuing
Total
operations
operations*
£m
£m
Annualised headline EBITDA before restructuring costs 500 633
Net (cash)/debt (2021 comparative includes £18m of net debt in discontinued (262) 1,075
operations)
Ratio of net (cash)/debt to headline EBITDA before restructuring costs (0.5) 1.7
* The figures for the comparative period in the credit metrics tables above
include discontinued operations.
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