TIDMSMIN
RNS Number : 5940N
Smiths Group PLC
26 September 2023
SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHSED 31 JULY
2023
Pioneers of progress - improving our world through smarter
engineering
A year of record organic revenue and headline EPS growth
-- Record annual growth - organic(1) revenue growth of +11.6%; headline(2) EPS growth of +39.6%
o Full year growth delivered ahead of guidance, balanced between
price and volume
o +310bps of growth from new products, demonstrating the impact
of innovation
o Well positioned for FY2024 growth within our medium-term
targets, with orders(3) up +6.7%
-- Continued improvement in execution - Smiths Excellence System ("SES") delivering benefits
o Headline operating profit growth of +20.0%; with margin
expansion of +20bps to 16.5%
o ROCE up +150bps to 15.7%, benefiting from strong profit
growth
o Cash conversion(2) up 6 percentage points to 86%; with
improvement in working capital
o Advancing our Sustainability strategy with significant
progress across our environmental metrics
-- Empowering our people - increasing engagement with our colleagues and communities
o Continued improvement in our safety record, with a 26%
reduction in Recordable Incident Rate
o Successful rollout of Smiths Leadership Behaviours, driving
our high-performance workforce
o High employee engagement reflected in 310bps reduction in
voluntary turnover
o Launched Smiths Foundation, committing an initial GBP10m
towards charitable STEM-related causes
-- Strong balance sheet - providing flexibility on capital allocation
o Successful acquisition of Plastronics in Jan 2023 and Heating
& Cooling Products in Aug 2023
o Net debt to EBITDA of 0.7x; GBP387m net debt
o GBP350m returned to shareholders through dividends and share
buyback, which is now complete
o Proposed final dividend of 28.7p, up 5.1%, bringing the full
year to 41.6p
FY2024 Outlook
-- Expect FY2024 organic revenue growth within our medium-term
target range of 4-6%, with continued margin expansion
Headline(2) FY2023 FY2022 Reported Organic(1)
---------------------------------- ---------- ---------- --------- -----------
Revenue GBP3,037m GBP2,566m +18.3% +11.6%
Operating profit GBP501m GBP417m +20.0% +12.7%
Operating profit margin(4) 16.5% 16.3% +20bps +10bps
Basic EPS 97.5p 69.8p +39.6%
ROCE(4) 15.7% 14.2% +150bps
Operating cash conversion(4) 86% 80% +600bps
---------------------------------- ---------- ---------- --------- -----------
Statutory FY2023 FY2022 Reported
------------------------- ---------- ---------- ---------
Revenue GBP3,037m GBP2,566m +18.3%
Operating profit GBP403m GBP117m +244.4%
Profit for the year
(after tax)(5) GBP232m GBP1,035m (77.6)%
Basic EPS(5) 65.5p 267.1p (75.5)%
Dividend per share 41.6p 39.6p +5.1%
------------------------- ---------- ---------- ---------
Paul Keel, Chief Executive Officer, commented:
"We had another strong year of progress in fiscal 2023 as we
further accelerated our growth, sharpened our execution, and
developed our talented people. We delivered year-on-year
improvement against all five of our medium-term financial
commitments, including record organic sales and EPS growth.
"Innovation is central to our purpose of improving our world
through smarter engineering, and new product launches contributed
more than three percentage points to our growth. We continued to
invest in R&D as artificiaI intelligence and other digital
technologies are playing an increasingly important role in enabling
us to support our customers more effectively. We are also further
building our capabilities to capitalise on the growing megatrends
we are exposed to across the major markets we serve, including
energy transition and the world's ever-increasing need for better
security.
"Looking forward to our next fiscal year, we expect to deliver
4-6% organic revenue growth, in line with our medium-term financial
commitment. I applaud my 15,000 colleagues around the world who
live Smiths' purpose each and every day. We are encouraged by our
progress, proud of our accomplishments in FY2023, and even more
excited by all we see ahead for Smiths. "
UPCOMING EVENTS
Date Event
================ ========================
16 November 2023 Q1 Trading Update
================ ========================
16 November 2023 Annual General Meeting
================ ========================
30 November 2023 John Crane Deep Dive
================ ========================
22 March 2024 HY2024 Interim Results
================ ========================
Statutory reporting
Statutory reporting takes account of all items excluded from
headline performance.
See accounting policies for an explanation of the presentation
of results and note 3 to the financial statements for an analysis
of
non-headline items.
Definitions
The following definitions are applied throughout the financial
report:
(1) Organic is headline adjusted to exclude the effects of
foreign exchange and acquisitions.
(2) Headline: In addition to statutory reporting, the Group
reports on a headline basis. Definitions of headline metrics, and
information about the adjustments to statutory measures, are
provided in note 3 to the financial statements. Headline
performance is on a
Smiths Group basis, excluding the results of Smiths Medical.
(3) Order intake growth excludes the effects of foreign
exchange.
(4) Alternative Performance Measures ("APMs") and Key
Performance Indicators ("KPIs") are defined in note 29 to the
financial statements.
(5) FY2022 statutory profit and EPS includes the proceeds from
the sale of Medical.
Investor enquiries
Stephanie Heathers, Smiths Siobhán Andrews, Media enquiries
Group Smiths Group Tom Steiner, Smiths Group
+44 (0)7584 113633 +44 (0)7920 230093 +44 (0) 7787 415891
stephanie.heathers@smiths.com siobhan.andrews@smiths.com tom.steiner@ smiths.com
Ahmed Ammori, Smiths Group Alex Le May, FTI Consulting
+44 (0)7384 901695 +44 (0)7702 443312
ahmed.ammori@smiths.com smiths@fticonsulting.com
Presentation
The webcast presentation and Q&A will begin at 08.30 (UK
time) today at:
https://smiths.com/investors/results-reports-and-presentations . A
recording will be available from 13.00 (UK time).
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
This document contains certain statements that are
forward-looking statements. They appear in a number of places
throughout this document and include statements regarding the
intentions, beliefs and/or current expectations of Smiths Group plc
(the "Company") and its subsidiaries (together, the "Group") and
those of their respective officers, directors and employees
concerning, amongst other things, the results of operations,
financial condition, liquidity, prospects, growth, strategies, and
the businesses operated by the Group. By their nature, these
statements involve uncertainty since future events and
circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this document and, unless otherwise required by
applicable law, the Company undertakes no obligation to update or
revise these forward-looking statements. The Company and its
directors accept no liability to third parties. This document
contains brands that are trademarks and are registered and/or
otherwise protected in accordance with applicable law.
Our Purpose
We are pioneers of progress - improving our world through
smarter engineering. Smarter engineering means helping to solve the
toughest problems, for our customers, our communities and
ourselves. We help to create a safer, more efficient and
better-connected world.
Our Priorities and Targets
Smiths is intrinsically strong with world-class engineering,
leading positions in critical markets, and distinctive global
capabilities, all underpinned by a strong financial framework. In
November 2021, we set out how Smiths will deliver performance in
line with our significant potential by focusing on three top
priorities of accelerating growth, strengthening execution and
doing even more to inspire and empower our people.
Our focused plan, the Smiths Value Engine, is the means through
which we will deliver the medium-term targets that we have set. In
FY2023, we have continued to make meaningful progress towards these
targets, outperforming on several metrics.
Targets Medium-Term FY2022 FY2023 Progress
Target
===================== =========== ====== ======= ====================================
Accelerated, record organic
Organic Revenue revenue growth ahead of medium-term
Growth 4-6% +3.8% +11.6% target
(+ M&A)
===================== =========== ====== ======= ====================================
Record earnings growth, driven
by organic operating profit
Headline EPS Growth 7-10% +17.8% +39.6% and benefit of share buyback
(+ M&A)
===================== =========== ====== ======= ====================================
Improvement in ROCE into target
range with strong operating
ROCE 15-17% 14.2% 15.7% profit performance
===================== =========== ====== ======= ====================================
Margin improvement benefiting
Operating Profit from SES with continued investment
Margin 18-20% 16.3% 16.5% in growth
===================== =========== ====== ======= ====================================
Working capital improvement
Operating Cash in H2 2023 to deliver solid
Conversion 100%+ 80% 86% cash conversion
===================== =========== ====== ======= ====================================
These targets are underpinned by Smiths operational KPIs and
environmental targets, including a commitment to Net Zero for Scope
1 and 2 emissions by 2040 and Net Zero for Scope 3 emissions by
2050.
FY2023 Business Performance
Smiths delivered record organic revenue growth of +11.6%, ahead
of our guidance. We generated GBP501m of operating profit, up
+20.0% on FY2022 as we continue to make significant progress on our
strategy.
FY2022 Foreign Acquisitions Organic FY2023
exchange movement
GBPm
========================== ====== ========= ============ ========= ======
Revenue 2,566 146 8 317 3,037
========================== ====== ========= ============ ========= ======
Headline operating profit 417 27 0 57 501
========================== ====== ========= ============ ========= ======
Headline operating profit
margin 16.3% 16.5%
========================== ====== ========= ============ ========= ======
GROWTH
Accelerating growth is the primary driver of unlocking enhanced
value creation for the Group. We grew in every quarter of FY2023
and raised our guidance three times during the year, delivering
record organic revenue growth of +11.6%. We have now delivered nine
consecutive quarters of organic revenue growth.
Organic revenue growth (by H1 2023 H2 2023 FY2023
business)
=========================== ======= ======= ======
John Crane +14.6% +15.8% +15.2%
Smiths Detection +14.0% +18.8% +16.4%
Flex-Tek +17.0% +3.6% +10.1%
Smiths Interconnect +3.3% (8.4)% (2.8)%
=========================== ======= ======= ======
Smiths Group +13.5% +9.9% +11.6%
=========================== ======= ======= ======
Strong growth continued in the second half for our two largest
businesses; with both John Crane and Smiths Detection delivering
double digit growth throughout the year. Flex-Tek continued to grow
in the second half, with growth moderating to +3.6% reflecting
anticipated softness in the US construction market. Smiths
Interconnect declined (8.4)% in the second half, as anticipated,
impacted by a weakening semiconductor test market as well as delays
in some large defence and aerospace programmes.
Revenue grew +18.3% on a reported basis, to GBP3,037m (FY2022:
GBP2,566m). This included +GBP146m of favourable foreign exchange
translation, and +GBP8m from the acquisition of Plastronics in
January 2023.
Strong execution to access end market opportunity is the first
of the four actionable levers for accelerating growth.
Our business operates across four major global end markets:
General Industrial, Safety & Security, Energy, and Aerospace.
Our strong market positions, coupled with the balanced market
exposure we have across our businesses, are distinctive long-term
advantages for Smiths.
Smiths organic revenue % of Smiths H1 2023 H2 2023 FY2023
growth in our end revenue
markets
======================= =========== ======= ======= ======
General Industrial 40% +15.4% +1.0% +7.8%
Safety & Security 31% +9.4% +14.4% +11.9%
Energy 22% +17.1% +21.8% +19.5%
Aerospace 7% +10.1% +10.8% +10.5%
======================= =========== ======= ======= ======
Smiths Group 100% +13.5% +9.9% +11.6%
======================= =========== ======= ======= ======
Smiths organic revenue in our largest end market, General
Industrial, grew +7.8% in FY2023, supported by strong demand for
John Crane's industrial products in chemical processing, water
treatment and life sciences. Slower H2 growth of +1.0% reflects a
strong prior year performance, and a softening in demand for
Flex-Tek's heating, ventilation and air conditioning (" HVAC")
products and Smiths Interconnect semiconductor test solutions.
Organic revenue growth in Safety & Security was +11.9%,
accelerating in the second half due to Smiths Detection's strong
delivery against its orderbook, partially offset by a decline in
Smiths Interconnect from the timing of defence programmes. The
+19.5% growth in Energy reflected strong demand in John Crane.
Growth in Aerospace of +10.5% continued throughout the year driven
by aircraft build demand benefiting Flex-Tek and helping to offset
the impact of delays in aerospace programmes in Smiths
Interconnect.
Our second lever for faster growth is improved new product
development and commercialisation. During FY2023, +310bps of growth
was delivered from high impact new products including John Crane's
next-generation diamond coating product offering for high-speed and
high-heat applications, Smiths Detection's next-generation 3D
Computed Tomography ("CT") machines installed with threat
recognition software, and Flex-Tek's ducting in energy efficient
Rheia air management systems. Gross vitality, which measures the
proportion of revenues coming from products launched in the last
five years, was 31% (FY2022: 31%), supported by our successful new
product commercialisation.
As an industrial technology leader, continuing to invest in
R&D ensures we capitalise on the wealth of opportunities in our
pipeline, with increasing demand for our sustainability-related
products. During FY2023, we invested GBP113m in R&D (FY2022:
GBP107m), of which GBP73m (FY2022: GBP80m) was an income statement
charge, GBP21m was capitalised (FY2022: GBP12m) and GBP19m (FY2022:
GBP15m) was funded by customers.
To support new product launches, and the strong demand for our
existing solutions, we increased capex +14.1% in FY2023 to GBP81m
(FY2022: GBP71m). This represents 1.6x depreciation and
amortisation
(FY2022: 1.5x).
Our third growth lever is building out priority adjacencies.
Each of our four businesses are executing strategies to expand
beyond their existing core markets and ensure we capitalise on the
long-term megatrends of energy transition and sustainability,
increasing security needs and enhanced connectivity. Examples in
FY2023 include Flex-Tek's high temperature heating solution for the
world's first green steel production facility; and Smiths
Detection's +34.9% revenue growth in its Other Security Systems
segment, supported by key wins in ports and borders and parcel
delivery markets.
Our fourth growth lever is using disciplined M&A to augment
our organic growth focus. In January 2023, Smiths Interconnect
acquired Plastronics, a leading supplier of burn-in test sockets
and patented spring probe contacts, extending our reach into an
attractive market adjacency. We will benefit from Plastronics'
attractive position in artificial intelligence, data centres and
automotive end markets, and expanding Plastronics' sales globally
by leveraging Smiths Interconnect's strong presence in Asia.
Following the year end, in August 2023, we acquired Heating
& Cooling Products ("HCP") in our Flex-Tek business. This
further expands the Group's presence in the North American HVAC
market, enabling Smiths to serve more customers with an even
broader product range. Acquired for $82m (approximately GBP65m), at
less than 7x estimated 2023 EBITDA, this acquisition further
demonstrates our disciplined and targeted approach to M&A.
EXECUTION
Stronger execution is our second key priority.
In FY2023, headline operating profit grew +12.7% (+GBP57m) on an
organic basis, and +20.0% (+GBP84m) on a reported basis to GBP501m
(FY2022: GBP417m). Headline operating profit benefited from strong
profit growth in John Crane and Smiths Detection, and a solid
contribution in Flex-Tek, partially offset by a decline in Smiths
Interconnect.
FY2022 Foreign Acquisitions Organic FY2023
exchange movement
GBPm
========================== ====== ========= ============ ========= ======
Headline operating profit 417 27 0 57 501
========================== ====== ========= ============ ========= ======
Headline operating profit
margin 16.3% +10bps +10bps 16.5%
========================== ====== ========= ============ ========= ======
Headline operating profit margin was 16.5%, up +20bps on a
reported basis supported by volume growth, pricing more than
offsetting inflation, and the benefits of SES and savings actions;
all of which offset the impact of product mix and investment in
growth. By division, strong operating leverage in John Crane
reflected improved execution and supply chain conditions. Smiths
Detection also improved its margin despite higher Original
Equipment ("OE") sales mix. Flex-Tek and Smiths Interconnect
contracted from their record prior year high margins, with Flex-Tek
continuing to invest in new product development and
commercialisation, and Smiths Interconnect seeing lower
volumes.
Headline EPS grew +39.6%, driven by headline operating profit
growth which contributed over a third of the growth, the share
buyback programme which contributed another third, with the
remainder of the growth coming from FX and a reduction in both the
effective headline tax rate and interest expense. The headline tax
charge for FY2023 of GBP121m (FY2022: GBP104m) represents an
effective rate of 26.0%
(FY2022: 27.6%).
ROCE increased +150bps to 15.7% (FY2022: 14.2%) reflecting the
higher profitability of the Group. For further detail, please refer
to note 29 of the financial statements.
Headline operating cash conversion for FY2023 was 86% (FY2022:
80%), with stronger conversion in the second half supported by
improvement in working capital. This was delivered through targeted
and disciplined working capital management helped by focused SES
projects. Headline operating cash-flow(4) was GBP433m (FY2022:
GBP332m). In FY2023, free cash-flow(4) generation was GBP178m
(FY2022: GBP130m) or 35% of headline operating profit (FY2022:
31%).
During FY2023 we continued to make good progress on SES. There
are currently 71 Black Belt projects completed or underway being
driven by our 6 Master Black Belt and 31 Black Belt employees
across the Group. Projects completed in the year contributed GBP14m
of profit, ahead of our plan of GBP12m. For FY2024, we expect a
contribution of GBP20m from SES as our hopper of new projects
continues to scale.
We implemented some targeted savings projects across the Group
through FY2023. These projects were focused on simplification and
improving efficiency. Costs amounting to GBP36m in respect of these
projects have been charged to non-headline in the year, with no
further charges anticipated. In line with our previous
communications, GBP11m of benefit was realised in FY2023 from these
projects, with the annualised benefits expected to be GBP25m.
PEOPLE
Inspiring and empowering our people is our third key priority
and our people plan is focused around four key areas of safety,
leadership development, diversity, equity and inclusion, and
engagement.
The first area, safety, is at the forefront of everything we do.
Our Recordable Incident Rate ("RIR") for FY2023 improved to 0.41
(FY2022: 0.56), and we delivered a record low lost time injury rate
of 0.14. This improvement in safety has been achieved through
continuous reinforcement of our safety culture with over 13,000
Safety Leadership Tours and Safety Observations undertaken in the
year. Of particular focus was our Royal Metal site, acquired in
2021, which delivered an 80% reduction in the number of incidents
through changes to manufacturing, new risk management processes and
leveraging technology to make safety easier.
Our biggest people initiative this year was the continued
rollout of our Smiths Leadership Behaviours to define our
expectations for an inclusive and high-performance culture. We
continued the rollout of these seven behaviours to fully embed them
throughout the organisation. We completed 94 workshops, attended by
over 1,600 leaders and the behaviours are now used in our annual
performance assessment process.
Alongside Smiths Leadership Behaviours, talent development is a
key priority within our People plan. We are focused on growing and
promoting talent from within and in FY2023, 70% of open roles for
manager level and above were filled internally, versus 39% in the
past. To support our talent development, we have relaunched the
Accelerate Leadership Development programme having trained our
first 300 leaders in FY2023, introduced mentoring programmes with
the Executive Committee for our high potential leaders and
continued to develop our Early Career Programme, which includes
several engineering apprenticeship programmes.
Promoting diversity, equity and inclusion is another key part of
our people strategy. We are specifically focused on increasing
gender diversity at all levels of the organisation and we have
ramped up our initiatives this year, including introducing women's
support networks and flexible working arrangements. As at 31 July
2023, 25% of our senior leaders, 25% of our Executive Committee and
40% of our Board of directors are women. With the help of the
multiple initiatives throughout the organisation, we expect to
continue to drive improvement in these metrics.
Overall, through our focus on inspiring and empowering our
people we have seen a year-on-year improvement in our voluntary
attrition, down 310bps to 12% for our global employees and down
410bps for our engineering employees.
OUR ESG APPROACH
Environment, Social and Governance ("ESG") performance is at the
very centre of our Purpose, and fundamental to each of our three
key priorities.
Growth
ESG at Smiths is approached with a growth mindset. Our R&D
is focused on commercialising high-value green technology. Our
progress is evident through John Crane's growing presence in
hydrogen and carbon capture markets with over 70 active projects
and in Flex-Tek supporting the development of the world's first
green steel production facility. Our proven ability to serve these
customers positions us well today and in the future as the world
increasingly relies upon smart engineering to achieve Net Zero.
Execution
Environmental metrics FY2022 FY2023
========================================= =============== ================
Absolute Scope 1 & 2 GHG emissions 0.9% reduction 11.8% reduction
reductions
========================================= =============== ================
Energy efficiency(6) n/a 7.9% improvement
========================================= =============== ================
Proportion of electricity from renewable
sources 63% 70%
========================================= =============== ================
Non-recyclable waste(7) 11.5% reduction 9.8% reduction
========================================= =============== ================
Water use in stressed areas (7) 4.5% reduction 13.3% reduction
========================================= =============== ================
(6) Normalised to local currency revenue, excluding growth from
price. Data not available prior to 2022 I (7) Normalised to
reported revenue
We are executing well against our ESG strategy, with significant
progress against our sustainability metrics, which are now fully
incorporated into both our annual and long-term incentives. In the
year, we launched our first Sustainability report, submitted our
Science Based Targets for review and validated our framework
through completion of our first-ever ESG double materiality
assessment in accordance with applicable guidance under the
Corporate Sustainability Reporting Directive ("CSRD"). We also
extended the scope of the limited assurance work carried out by
KPMG to follow the more rigorous ISAE3000/3410 standard for FY2022
and FY2023 data.
People
Engagement with our communities has long been a strength of
Smiths. This year we have gone one step further with the launch of
our new charitable foundation, "The Smiths Group Foundation". The
foundation committed an initial GBP10m of funding linked to
engineering-related good causes. The mission of the foundation is
central to Smiths purpose of "Improving our world through smarter
engineering." We also launched our global volunteering policy,
amplifying the multitude of grass-roots efforts already in place
across the organisation.
CAPITAL ALLOCATION
With our strong technology, market positions, and financial
frameworks, our highest capital priority continues to be organic
growth. Accretive M&A, either to strengthen core positions or
to accelerate penetration of priority adjacencies comes second.
Third, we have a strong track record of returning capital to
shareholders, as evidenced by the GBP350m returned in FY2023, on
top of the GBP661m returned in FY2022.
Organic investment
In FY2023 we invested GBP81m in capex projects, including GBP21m
in capitalised R&D on programmes such as next-generation hold
and cabin baggage screening and further advancements in our defence
portfolio. A further GBP73m in R&D was charged to the income
statement, supporting new product development.
M&A
In January 2023, Smiths Interconnect acquired Plastronics, a
leading supplier of burn-in test sockets and patented spring probe
contacts. In August 2023, following the year end close, Flex-Tek
acquired HCP, a manufacturer of HVAC solutions in North
America.
These acquisitions support our strategy to make complementary
inorganic investments to accelerate our presence in adjacent
markets or expand our product offering. We have an active
acquisition pipeline and disciplined M&A approach across the
Group.
Shareholder returns
During the year we continued to repurchase shares under the
GBP742m share buyback programme initiated in November 2021, in
connection with our commitment to return the majority of cash
proceeds from the disposal of Smiths Medical to shareholders. We
have now completed the share buyback programme.
In line with our progressive dividend policy and plan to rebuild
dividend cover after the sale of
Smiths Medical, the Board is recommending a final dividend of
28.7p, bringing the total dividend for the year to 41.6p, a
year-on-year increase of +5.1% (FY2022: 39.6p). The final dividend
will be paid on
24 November 2023 to shareholders on the register at close of
business on 20 October 2023. Our dividend policy aims to increase
dividends in line with growth in earnings and cash-flow, with the
objective of maintaining minimum dividend cover of around 2 times.
The policy enables us to retain sufficient
cash-flow to finance investment in growth and meet our financial
obligations. In setting the level of dividend payments, the Board
considers prevailing economic conditions and future investment
plans.
The Company offers a Dividend Reinvestment Plan ("DRIP")
enabling shareholders to use their cash dividend to buy further
shares in the Company - see our website for details. To participate
in the DRIP, shareholders must submit their election notice to be
received by 3 November 2023 ("the Election Date"). Elections
received after the Election Date will apply to dividends paid after
24 November 2023. Purchases under the DRIP are made on, or as soon
as practicable after, the dividend payment date and at prevailing
market prices.
Net debt
Net debt(4) at 31 July 2023 was GBP387m (FY2022: GBP150m), an
increase of GBP237m as we paid GBP143m in dividends and returned
GBP207m to shareholders via our share buyback during the year. Net
debt to headline EBITDA(4) was 0.7x (FY2022: 0.3x).
As at 31 July 2023, borrowings were GBP654m (FY2022: GBP1,166m)
comprising a EUR650m bond which matures in February 2027 and
GBP117m of lease liabilities. The GBP512m reduction in borrowings
is due to repayment of a EUR600m bond in April 2023. There are no
financial covenants associated with these borrowings. Cash and cash
equivalents as at 31 July 2023 were GBP285m (FY2022:
GBP1,056m).
In May 2023, we refinanced our $800m (c.GBP620m at the
period-end exchange rate) revolving credit facility ("RCF") which
was due to mature in November 2024. The new RCF is for the same
amount, with the same lenders, on substantially the same terms and
matures in May 2028. There are no financial covenants attached to
the new facility and it remains undrawn. Taking cash and the RCF
together, total liquidity was over GBP0.9bn at the end of the
period.
ICU Medical stake
Since the sale of Smiths Medical in January 2022 the Group holds
a financial asset reflecting our investment in 10% of the equity in
ICU Medical, Inc ("ICU"). See note 14 of the financial statements
for further detail.
STATUTORY RESULTS
Income Statement
The GBP98m difference between headline operating profit of
GBP501m and statutory operating profit of GBP403m is non-headline
items as defined in note 3 of the financial statements. The largest
constituents relate to the amortisation of acquired intangible
assets of GBP52m, costs from savings projects of GBP36m,
acquisition related costs of GBP7m, GBP9m in costs for asbestos
litigation in John Crane, Inc and a provision reduction of GBP7m
for subrogation claims in Titeflex Corporation. Statutory operating
profit of GBP403m was GBP286m higher than last year (FY2022:
GBP117m), reflecting higher headline operating profit and lower
non-headline charges.
Statutory finance costs were GBP43m (FY2022: GBP14m), mainly due
to a prior year non-headline GBP22m foreign exchange gain on an
intercompany loan with Smiths Medical.
Non-headline taxation items of GBP13m relate to amortisation of
acquisition-related intangible assets, legacy pension scheme
arrangements, litigation provisions and non-headline finance items.
The statutory effective tax rate was 37% (FY2022: 87%). Please
refer to notes 3 and 6 of the financial statements for further
details.
Total Group profit after tax and EPS
Statutory profit after tax for the total Group decreased by
77.6% to GBP232m (FY2022: GBP1,035m) as the prior year included the
profit on sale and results of Smiths Medical of GBP1,022m.
Statutory basic EPS was 65.5p (FY2022: 267.1p).
Statutory cash-flow
Statutory net cash inflow from operating activities for the
total Group was GBP293m (FY2022: GBP279m).
See note 28 of the financial statements for a reconciliation of
headline operating cash-flow to statutory cash-flow.
Pensions
Included within free cash-flow was GBP5m of pension
contributions (FY2022: GBP9m). These contributions relate to
unfunded, overseas schemes and healthcare arrangements.
It is not anticipated that any further contributions will be
made to the TI Group Pension Scheme ("TIGPS"), the liabilities of
which have now been insured via a series of buy-in annuities.
Smiths and the TIGPS Trustee are working toward final buy-out of
the scheme in order to deliver certainty for the Scheme's
21,000 members and remove future risk for Smiths.
The other major pension scheme, Smiths Industries Pension Scheme
("SIPS") is estimated to be in surplus on the Technical Provisions
funding basis, and no cash contributions are currently being made.
The Group and the SIPS Trustee continue to work together to
progress towards the long-term funding target of full buy-out
funding.
The two main UK pension schemes and the US pension plan are well
hedged against changes in interest and inflation rates. Over 90% of
their assets are invested in third-party annuities, government
bonds, investment grade credit or cash, with no remaining equity
investments. As at 31 July 2023, over 60% of the UK liabilities had
been de-risked through the purchase of annuities from third party
insurers.
Foreign exchange
The results of overseas operations are translated into sterling
at average exchange rates. Net assets are translated at period-end
rates. The Group is exposed to foreign exchange movements, mainly
the
US Dollar and the Euro. The principal exchange rates, expressed
in terms of the value of Sterling, are shown in the following
table.
Average rates Period-end rates
----- ---------------------------- -------------------
31 Jul 2023 31 Jul 31 Jul 31 Jul
2022 2023 2022
(12 months) (12 months)
----- ------------- ------------- --------- --------
USD 1.21 1.32 1.29 1.22
----- ------------- ------------- --------- --------
EUR 1.15 1.18 1.17 1.19
----- ------------- ------------- --------- --------
Outlook
In FY2024, we expect organic revenue growth within our
medium-term target range of 4-6%, with growth weighted towards the
second half of the year. Our strong orderbooks in John Crane and
Smiths Detection, along with our new product pipeline, give us
confidence in delivering this growth despite a record comparator,
moderating pricing environment, and the challenging market
conditions facing parts of
Flex-Tek and Smiths Interconnect. We also expect continued
margin expansion in FY2024, as we continue to scale the Smiths
Excellence System and reinvest to support future sustainable
growth.
Business review
JOHN CRANE
John Crane is a leading provider of mission-critical engineered
solutions, improving customers' reliability and sustainability in
process industries. 61% of revenue is derived from the energy
sector (downstream and midstream oil & gas and power
generation, including renewable and sustainable energy sources).
39% is from other process industries including chemical, life
sciences, mining, water treatment, and pulp & paper. 71% of
John Crane revenue is from aftermarket sales. John Crane represents
36% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
GBPm GBPm growth H1 H2 FY
------------------------------- ------ ------ ----------- ------- ------- -------
Revenue 1,079 901 +19.8% +14.6% +15.8% +15.2%
Original Equipment 169 148 +14.3% +13.3% +6.8% +9.9%
Aftermarket 487 382 +27.5% +18.5% +27.8% +23.2%
------------------------------- ------ ------ ----------- ------- ------- -------
Energy 656 530 +23.8% +17.1% +21.8% +19.5%
Original Equipment 145 131 +10.5% +14.1% (0.9)% +6.0%
Aftermarket 278 240 +16.0% +9.2% +12.3% +10.9%
------------------------------- ------ ------ ----------- ------- ------- -------
General Industrial 423 371 +14.0% +10.9% +7.6% +9.2%
Headline operating
profit 244 188 +29.7% +24.6% +25.7% +25.2%
Headline operating
profit margin 22.6% 20.9% +170bps +190bps +180bps +180bps
Statutory operating
profit 217 167 +29.9%
Return on capital employed 23.8% 19.4% +440bps
R&D cash costs as %
of sales 1.7% 2.5% (80)bps
------------------------------- ------ ------ ----------- ------- ------- -------
Revenue
FY2022 Foreign Organic FY2023
GBPm reported exchange movement reported
======== ========= ========= ========= =========
Revenue 901 36 142 1,079
======== ========= ========= ========= =========
John Crane delivered record organic revenue growth of +15.2% for
the year, accelerating to +15.8% in H2 executing well against
strong demand, with orders up +15%. Organic revenue grew across all
segments and geographies. Aftermarket organic revenue grew +18.4%
to make up 71% of sales
(FY2022: 69%) and OE grew +8.1%.
Reported revenue grew to record levels at over GBP1bn for the
first time, which was up +19.8% reflecting the organic growth and a
favourable foreign exchange impact.
In Energy, organic revenue grew +19.5% benefiting from an
increased focus on energy security and higher demand for energy
efficiency and emissions reduction solutions. John Crane is well
positioned to support customers with their decarbonisation goals as
they look to become more efficient and reduce leakage within
existing facilities or invest in new infrastructure for low carbon
alternatives. Notable contract wins in the year included one of the
world's largest offshore Carbon Capture and Storage ("CCS")
facilities in Malaysia and compressor seals for use in an
innovative energy storage solution for a customer in Europe. John
Crane's leadership in this area was recognised by the UK government
through a GBP925k grant awarded for its innovative high temperature
sealing solution, which is designed to improve customer efficiency
through reduced emissions.
The Industrial segment grew +9.2% organically, driven by strong
demand across chemical processing, water treatment and life
sciences. Efficiency in industrial processes is as important as it
is to John Crane's
Energy customers, evidenced by multiple wins across all
markets.
Operating profit and ROCE
FY2022 reported Foreign Organic FY2023 reported
GBPm exchange movement
========================== =============== ========= ========= ===============
Headline operating profit 188 7 49 244
========================== =============== ========= ========= ===============
Headline operating profit
margin 20.9% 22.6%
========================== =============== ========= ========= ===============
Headline operating profit of GBP244m grew a record +25.2% on an
organic basis, resulting in +170bps of margin expansion. This was
driven by the increased volumes and improving plant efficiency,
pricing offsetting inflation and benefits from SES and savings
projects, while continuing to invest in growth to service the
strong demand.
On a reported basis, headline operating profit was up +29.7%,
including a favourable foreign exchange impact. The difference
between statutory and headline operating profit includes the net
cost in relation to the provision for John Crane, Inc. asbestos
litigation and charges from savings projects.
ROCE was 23.8%, up 440bps, reflecting the record headline
operating profit growth.
R&D
Cash R&D expenditure was 1.7% of sales (FY2022: 2.5%). John
Crane's continued investment in R&D is primarily focused on
reducing product lead times and enhancing the efficiency,
performance and sustainability of high duty seals and hydrogen
compressors.
John Crane plays a significant role in its customers'
sustainability journeys through reducing leaks, including for
demanding hydrocarbon pipelines . John Crane's recently launched
Safematic Upstream Pumping System product nearly eliminates cooling
water requirements, delivering significant energy and emissions
reductions in liquid sealing.
SMITHS DETECTION
Smiths Detection is a global leader in the detection and
identification of threats and contraband, supporting safety,
security and freedom of movement. It produces equipment for
customers in the Aviation market and Other Security Systems for
ports & borders, defence and urban security markets. 51% of
Smiths Detection's sales are derived from the aftermarket. Smiths
Detection represents 26% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
GBPm GBPm growth H1 H2 FY
--------------------------- ------ ------ ------------------- -------- ------ ------
Revenue 803 655 +22.6% +14.0% +18.8% +16.4%
Original Equipment 226 198 +14.2% +10.3% +8.6% +9.4%
Aftermarket 309 269 +14.6% +10.3% +7.0% +8.6%
--------------------------- ------ ------ ------------------- -------- ------ ------
Aviation 535 467 +14.5% +10.3% +7.7% +8.9%
Original Equipment 164 102 +60.2% +39.2% +64.4% +51.3%
Aftermarket 104 86 +21.5% +2.9% +28.3% +15.2%
--------------------------- ------ ------ ------------------- -------- ------ ------
Other Security Systems 268 188 +42.7% +22.9% +47.9% +34.9%
Headline operating profit 90 73 +23.1% +4.5% +26.8% +15.4%
Headline operating profit
margin 11.2% 11.1% +10bps (110)bps +70bps 0bps
Statutory operating
profit 55 36 +52.8%
Return on capital employed 7.7% 7.1% +60bps
R&D cash costs as %
of sales 8.4% 9.3% (90)bps
--------------------------- ------ ------ ------------------- -------- ------ ------
Revenue
FY2022 Foreign Organic FY2023
GBPm reported exchange movement reported
======== ========= ========= ========= =========
Revenue 655 34 114 803
======== ========= ========= ========= =========
Smiths Detection returned firmly to growth in FY2023 with
organic revenue growth of +16.4%, executing well against the
multi-year orderbook. Growth was delivered across all segments with
particularly strong growth in lower margin OE, up +23.9%
organically. Aftermarket revenue grew +10.2% organically, making up
51% of sales (FY2022: 54%). Orders grew +6% in the year, supporting
revenue growth in FY2024, which due to the expected timing of order
delivery will be weighted towards the second half. Reported revenue
was up +22.6% reflecting the organic growth and a favourable
foreign exchange impact.
In Aviation, organic revenue grew +8.9% with continued strong
demand for Smith Detection's latest range of 3D CT machines for
cabin baggage, CTIX, with over 1,000 now sold, supported by
regulatory requirements in many countries mandating upgrades.
Smiths Detection continues to achieve a good win rate in Aviation
with key contract wins in all regions of the world across the year
including provision of CTIX machines to Birmingham and Edinburgh
airports in the UK and JAL Airline in Japan, and full-sized lane
configurations to the US Transportation Security
Administration.
Other Security Systems ("OSS") grew +34.9% driven by high growth
in all three sub-segments of urban security, ports and borders and
defence, demonstrating good progress in these attractive market
adjacencies. Order intake in defence was very strong for both
current and future chemical and biological detection requirements,
including for the US DoD on their next-generation programme. Smiths
Detection has also been contracted to provide security screening at
COP28 in November this year.
Operating profit and ROCE
FY2022 Foreign Organic FY2023 reported
GBPm Reported exchange movement
========================== ========= ========= ========= ===============
Headline operating profit 73 5 12 90
========================== ========= ========= ========= ===============
Headline operating profit
margin 11.1% 11.2%
========================== ========= ========= ========= ===============
Headline operating profit was up +15.4% on an organic basis for
the year, supported by the strong organic revenue growth, SES
benefits and targeted actions on cost. On a reported basis,
headline operating profit was up +23.1% including favourable
foreign exchange translation.
Headline operating profit margin of 11.2% was up 10bps on a
reported basis as the benefits of SES and cost actions offset the
mix impact of lower margin OE. These OE deliveries will secure
longer-term, high margin aftermarket revenue, which together with a
building SES impact, will support future margin expansion.
The difference between statutory and headline operating profit
primarily reflects amortisation of acquired intangibles and charges
from savings projects.
ROCE increased by +60bps to 7.7%, driven by the headline
operating profit growth.
R&D
Cash R&D increased +9.8% representing 8.4% of sales (FY2022:
9.3%). This includes an increase in customer funded projects to
GBP18m (FY2022: GBP14m).
Smiths Detection continued to invest in next-generation
detection devices, new algorithms to improve the detection of
dangerous goods, and digital solutions to strengthen the
aftermarket proposition. During the year Smiths Detection launched
a new high volume air cargo screening technology and an extension
of their automated detection algorithm.
FLEX-TEK
Flex-Tek provides innovative solutions to heat and move fluids
and gases for industrial and aerospace applications that support
energy efficiency and improved air quality. 81% of Flex-Tek's
revenue is derived from Industrials and 19% from the Aerospace
sector. Flex-Tek represents 25% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
GBPm GBPm growth H1 H2 FY
------------------------------- ------ ------ ------------ -------- -------- --------
Revenue 768 647 +18.6% +17.0% +3.6% +10.1%
General Industrial 624 531 +17.5% +17.5% +0.9% +9.0%
Aerospace 144 116 +24.4% +14.8% +16.4% +15.6%
Headline operating profit 149 133 +11.9% +9.0% (2.0)% +3.4%
Headline operating profit
margin 19.4% 20.6% (120)bps (150)bps (110)bps (130)bps
Statutory operating
profit 131 106 +23.6%
Return on capital employed 26.1% 25.6% +50bps
R&D cash costs as %
of sales 0.4% 0.4% 0bps
------------------------------- ------ ------ ------------ -------- -------- --------
Revenue
FY2022 Foreign Organic FY2023
GBPm reported exchange movement reported
======== ========= ========= ========= =========
Revenue 647 50 71 768
======== ========= ========= ========= =========
Organic revenue grew +10.1% in the year, with growth in H2 of
+3.6%. Revenue on a reported basis grew +18.6%, supported by a
favourable foreign exchange translation.
In Industrial, organic revenue was up +9.0% in the year
reflecting strong demand for Flex-Tek's products, primarily in HVAC
applications. These products include energy efficiency solutions
such as the Rheia air distribution system and the partnership with
Midrex to deliver heating solutions that enable the production of
commercial "green steel". As expected, demand slowed in the second
half reflecting a softer US HVAC market. In Aerospace, organic
revenue grew +15.6% in the year, with growth in the second half
accelerating to +16.4% supported by an increasing number of
aircraft builds.
Operating profit and ROCE
FY2022 Foreign Organic FY2023
GBPm reported exchange movement reported
========================== ========= ========= ========= =========
Headline operating profit 133 11 5 149
========================== ========= ========= ========= =========
Headline operating profit
margin 20.6% 19.4%
========================== ========= ========= ========= =========
Headline operating profit grew +3.4% on an organic basis, driven
by the revenue growth which was partly offset by higher costs
including starting up a new facility in Houston to expand capacity.
This increase in costs, together with continued investments in new
product development and a product mix impact, contributed to a
19.4% headline operating margin, (120)bps lower than the record
prior year comparator.
The difference between statutory and headline operating profit
is due to amortisation of acquired intangible assets and the
provision for Titeflex Corporation subrogation claims.
ROCE increased +50bps to 26.1% reflecting the continued profit
growth in FY2023.
In August 2023, Flex-Tek acquired HCP expanding its presence in
the North American HVAC market and broadening its product range and
customer base.
R&D
Cash R&D expenditure grew in-line with sales remaining at
0.4% of sales (FY2022: 0.4%). R&D is focused on developing new
products for the construction market, and an expanded product
offering in aerospace.
SMITHS INTERCONNECT
Smiths Interconnect designs high performance connectivity
solutions for demanding applications in the aerospace and defence,
semiconductor test, and industrial end-markets. Smiths Interconnect
represents 13% of Group revenue.
FY2023 FY2022 FY Reported Organic growth
GBPm GBPm growth H1 H2 FY
--------------------------- ------ ------ ------------ ------- -------- --------
Revenue 387 363 +6.5% +3.3% (8.4)% (2.8)%
Headline operating
profit 62 65 (4.6)% (1.7)% (20.7)% (11.9)%
Headline operating
profit margin 16.0% 18.0% (200)bps (80)bps (250)bps (170)bps
Statutory operating
profit 50 64 (21.9)%
Return on capital employed 13.3% 16.3% (300)bps
R&D cash costs as %
of sales 6.3% 5.6% +70bps
--------------------------- ------ ------ ------------ ------- -------- --------
Revenue
FY2022 Foreign Organic FY2023
GBPm reported exchange Acquisitions movement Reported
======== ========= ========= ============== ========= =========
Revenue 363 26 8 (10) 387
======== ========= ========= ============== ========= =========
Smith Interconnect's organic revenue declined (2.8)% for the
year following the strong +13.9% growth last year, with +3.3%
growth in H1 more than offset by the (8.4)% decline in H2. Reported
revenue grew +6.5% in the year including a favourable foreign
exchange impact and an GBP8m contribution from the acquisition of
Plastronics.
The performance in the year reflected a weakening in the
semiconductor market and delayed timing on large aerospace and
defence related programmes, partly offset by strong demand for
industrial connector products such as a new medical cable assembly
product. Contraction into FY2024 is expected with FY2023 orders
down 17%, continued weakness in the semiconductor market and a
slowing in connectors.
During the first half, Smiths Interconnect acquired Plastronics
to strengthen the product portfolio and leverage Plastronics'
attractive positions in artificial intelligence, data centres and
automotive end markets.
Operating profit and ROCE
FY2022 reported Foreign Organic FY2023 reported
GBPm exchange Acquisitions movement
=================== =============== ========= ============== ========= ===============
Headline operating
profit 65 5 0 (8) 62
=================== =============== ========= ============== ========= ===============
Headline operating
profit margin 18.0% 16.0%
=================== =============== ========= ============== ========= ===============
Headline operating profit declined (11.9)% on an organic basis,
resulting in a (200)bps reduction in operating profit margin to
16.0%. This decline was driven by the lower volumes and continued
investment in R&D. Headline operating profit was down (4.6)% on
a reported basis, reflecting the organic decline, partly offset by
a favourable foreign exchange impact.
The difference between statutory and headline operating profit
reflects the amortisation of acquired intangibles, acquisition
costs and charges from savings projects.
ROCE reduced (300)bps to 13.3% driven by the lower operating
profit.
R&D
Cash R&D expenditure increased to 6.3% of sales (FY2022:
5.6%). R&D is focused on bringing to market new products that
improve connectivity and product integrity in demanding operating
environments. Product launches include the next-generation of radio
frequency components and transceivers.
Consolidated income statement
Year ended 31 July Year ended 31 July
2023 2022
---------------------------------- ------------------------------- -------------------------------
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
CONTINUING OPERATIONS
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Revenue 1 3,037 - 3,037 2,566 - 2,566
Operating costs 2 (2,536) (98) (2,634) (2,149) (300) (2,449)
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
OPERATING PROFIT/(LOSS) 2 501 (98) 403 417 (300) 117
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Interest income 4 36 - 36 14 - 14
Interest expense 4 (71) (7) (78) (55) - (55)
Other financing (losses)/gains 4 - (8) (8) - 20 20
Other finance income - retirement
benefits 4 - 7 7 - 7 7
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Finance (costs)/income 4 (35) (8) (43) (41) 27 (14)
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit/(loss) before taxation 466 (106) 360 376 (273) 103
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Taxation 6 (121) (13) (134) (104) 14 (90)
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit/(loss) for the year 345 (119) 226 272 (259) 13
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
DISCONTINUED OPERATIONS
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit from discontinued
operations 3 - 6 6 49 973 1,022
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
PROFIT/(LOSS) FOR THE YEAR 345 (113) 232 321 714 1,035
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Profit/(loss) for the year
attributable to:
Smiths Group shareholders
- continuing operations 344 (119) 225 270 (259) 11
Smiths Group shareholders
- discontinued operations - 6 6 49 973 1,022
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Non-controlling interests 1 - 1 2 - 2
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
345 (113) 232 321 714 1,035
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
EARNINGS PER SHARE 5
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Basic 65.5p 267.1p
Basic - continuing 63.8p 2.8p
Diluted 65.1p 266.0p
Diluted - continuing 63.4p 2.8p
---------------------------------- ----- -------- ------------ ------- -------- ------------ -------
Consolidated statement
of comprehensive income
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
------------------------------------------------------ ----- ---------- ----------
PROFIT FOR THE YEAR 232 1,035
------------------------------------------------------ ----- ---------- ----------
Other comprehensive income (OCI)
OCI which will not be reclassified to the income
statement:
Re-measurement of retirement benefit assets
and obligations 8 (114) (17)
Taxation on post-retirement benefit movements 6 32 -
Fair value movements on financial assets at
fair value through OCI 14 (18) (63)
------------------------------------------------------ ----- ---------- ----------
(100) (80)
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net
investment hedges 12 (82)
- reclassified to income statement on cash-flow
and net investment hedges 2 5
------------------------------------------------------ ----- ---------- ----------
14 (77)
Foreign exchange (FX) movements net of recycling:
Exchange (losses)/gains on translation of foreign
operations (101) 276
Exchange gains recycled to the income statement
on disposal of business - (196)
------------------------------------------------------ ----- ---------- ----------
(101) 80
------------------------------------------------------ ----- ---------- ----------
Total other comprehensive income, net of taxation (187) (77)
Total comprehensive income 45 958
------------------------------------------------------ ----- ---------- ----------
Attributable to:
Smiths Group shareholders 46 957
Non-controlling interests (1) 1
------------------------------------------------------ ----- ---------- ----------
45 958
------------------------------------------------------ ----- ---------- ----------
Total comprehensive income attributable to Smiths
Group shareholders arising from:
Continuing operations 39 131
Discontinued operations 6 827
------------------------------------------------------ ----- ---------- ----------
45 958
------------------------------------------------------ ----- ---------- ----------
Consolidated balance sheet
31 July 31 July
2023 2022
Notes GBPm GBPm
------------------------------------- ----- ------- -------
NON-CURRENT ASSETS
------------------------------------- ----- ------- -------
Intangible assets 10 1,521 1,588
Property, plant and equipment 12 247 243
Right of use assets 13 105 106
Financial assets - other investments 14 371 395
Retirement benefit assets 8 195 309
Deferred tax assets 6 95 95
Trade and other receivables 16 75 69
------------------------------------- ----- ------- -------
2,609 2,805
------------------------------------- ----- ------- -------
CURRENT ASSETS
------------------------------------- ----- ------- -------
Inventories 15 637 570
Current tax receivable 6 47 50
Trade and other receivables 16 772 738
Cash and cash equivalents 18 285 1,056
Financial derivatives 20 5 4
------------------------------------- ----- ------- -------
1,746 2,418
------------------------------------- ----- ------- -------
TOTAL ASSETS 4,355 5,223
------------------------------------- ----- ------- -------
CURRENT LIABILITIES
------------------------------------- ----- ------- -------
Financial liabilities:
- borrowings 18 (3) (509)
- lease liabilities 18 (26) (29)
- financial derivatives 20 (2) (27)
Provisions 23 (70) (88)
Trade and other payables 17 (723) (682)
Current tax payable 6 (74) (64)
------------------------------------- ----- ------- -------
(898) (1,399)
------------------------------------- ----- ------- -------
NON-CURRENT LIABILITIES
------------------------------------- ----- ------- -------
Financial liabilities:
- borrowings 18 (534) (538)
- lease liabilities 18 (91) (90)
- financial derivatives 20 (18) (20)
Provisions 23 (216) (247)
Retirement benefit obligations 8 (106) (115)
Corporation tax payable 6 (3) (3)
Deferred tax liabilities 6 (43) (44)
Trade and other payables 17 (40) (46)
------------------------------------- ----- ------- -------
(1,051) (1,103)
------------------------------------- ----- ------- -------
TOTAL LIABILITIES (1,949) (2,502)
------------------------------------- ----- ------- -------
NET ASSETS 2,406 2,721
------------------------------------- ----- ------- -------
SHAREHOLDERS' EQUITY
------------------------------------- ----- ------- -------
Share capital 24 131 136
Share premium account 365 365
Capital redemption reserve 26 24 19
Merger reserve 26 235 235
Cumulative translation adjustments 386 487
Retained earnings 1,431 1,659
Hedge reserve 26 (188) (202)
------------------------------------- ----- ------- -------
Total shareholders' equity 2,384 2,699
------------------------------------- ----- ------- -------
Non-controlling interest equity 26 22 22
------------------------------------- ----- ------- -------
TOTAL EQUITY 2,406 2,721
------------------------------------- ----- ------- -------
Consolidated statement of changes in equity
Share
capital
and Cumulative Equity
share Other translation Retained Hedge shareholders' Non-controlling Total
premium reserves adjustments earnings reserve funds interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----- -------- -------- ----------- --------- -------- ------------- --------------- -------
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
---------------- ----- -------- -------- ----------- --------- -------- ------------- --------------- -------
Profit for the
year - - - 231 - 231 1 232
Other
comprehensive
income:
-
re-measurement
of retirement
benefits after
tax - - - (82) - (82) - (82)
- FX movements
net of
recycling - - (101) 2 - (99) (2) (101)
- fair value
gains and
related tax - - - (18) 14 (4) - (4)
---------------- ----- -------- -------- ----------- --------- -------- ------------- --------------- -------
Total
comprehensive
income
for the year - - (101) 133 14 46 (1) 45
Transactions
relating
to ownership
interests:
Purchase of
shares by
Employee
Benefit Trust - - - (24) - (24) - (24)
Share buybacks 24 (5) 5 - (207) - (207) - (207)
Receipt of
capital from
non-controlling
interest - - - - - - 1 1
Dividends:
- equity
shareholders 25 - - - (143) - (143) - (143)
Share-based
payment 9 - - - 13 - 13 - 13
---------------- ----- -------- -------- ----------- --------- -------- ------------- --------------- -------
At 31 July 2023 496 259 386 1,431 (188) 2,384 22 2,406
---------------- ----- -------- -------- ----------- --------- -------- ------------- --------------- -------
Share
capital
and Cumulative Equity
share Other translation Retained Hedge shareholders' Non-controlling Total
premium reserves adjustments earnings reserve funds interest equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
At 31 July 2021 512 242 509 1,367 (228) 2,402 21 2,423
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
Profit for the
year - - - 1,033 - 1,033 2 1,035
Other
comprehensive
income:
-
re-measurement
of retirement
benefits after
tax - - - (17) - (17) - (17)
- FX
movements
net of
recycling - (1) (22) 1 103 81 (1) 80
- fair value
gains and
related tax - - - (63) (77) (140) - (140)
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
Total
comprehensive
income
for the year - (1) (22) 954 26 957 1 958
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
Transactions
relating to
ownership
interests:
Issue of new
equity shares 24 2 - - - - 2 - 2
Purchase of
shares by
Employee
Benefit Trust - - - (16) - (16) - (16)
Proceeds from
exercise
of share
options - - - 1 - 1 - 1
Share buybacks 24 (13) 13 - (511) - (511) - (511)
Dividends:
- equity
shareholders 25 - - - (150) - (150) - (150)
Share-based
payment 9 - - - 14 - 14 - 14
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
At 31 July 2022 501 254 487 1,659 (202) 2,699 22 2,721
--------------- ----- -------- --------- ----------- --------- -------- ------------- --------------- -------
Consolidated cash-flow statement
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
----------------------------------------------------- ----- ---------- ----------
Net cash inflow from operating activities 28 293 279
Cash-flows from investing activities
Expenditure on capitalised development (21) (22)
Expenditure on other intangible assets (7) (8)
Purchases of property, plant and equipment (53) (58)
Disposals of property, plant and equipment 2 3
Acquisition of businesses (22) -
(Payments)/proceeds on disposal of subsidiaries,
net of cash disposed (7) 1,331
----------------------------------------------------- ----- ---------- ----------
Net cash-flow used in investing activities (108) 1,246
Cash-flows from financing activities
Proceeds from exercise of share options 24 - 2
Share buybacks 24 (207) (511)
Purchase of shares by Employee Benefit Trust 26 (24) (16)
Proceeds received on exercise of employee share
options - 1
Settlement of cash-settled options - (1)
Dividends paid to equity shareholders 25 (143) (150)
Receipt of capital from non-controlling interest 1 -
Lease payments (36) (38)
Reduction and repayment of borrowings (527) (295)
Cash (outflow)/inflow from matured derivative
financial instruments (9) 23
----------------------------------------------------- ----- ---------- ----------
Net cash-flow used in financing activities (945) (985)
Net (decrease)/increase in cash and cash equivalents (760) 540
Cash and cash equivalents at beginning of year 1,055 405
Movement in net cash held in disposal group - 48
Foreign exchange rate movements (10) 62
----------------------------------------------------- ----- ---------- ----------
Cash and cash equivalents at end of year 18 285 1,055
----------------------------------------------------- ----- ---------- ----------
Cash and cash equivalents at end of year comprise:
----------------------------------------------------- ----- ---------- ----------
- cash at bank and in hand 175 242
- short-term deposits 110 814
----------------------------------------------------- ----- ---------- ----------
285 1,056
- bank overdrafts - (1)
----------------------------------------------------- ----- ---------- ----------
285 1,055
----------------------------------------------------- ----- ---------- ----------
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with UK adopted
International Accounting Standards in conformity with the
requirements of the Companies Act 2006.
The consolidated financial statements have been prepared under
the historical cost convention modified to include revaluation of
certain financial instruments, share options and pension assets and
liabilities, held at fair value as described below.
Going concern
The Directors are satisfied that the Group has adequate
resources to continue to operate for a period not less than 12
months from the date of approval of the financial statements and
that there are no material uncertainties around their assessment.
Accordingly, the Directors continue to adopt the going concern
basis of accounting.
The Group's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Strategic Report within the Annual Report 2023 .
The Group's financial position, cash-flows, liquidity and borrowing
facilities are described in the CFO review section within the
Annual Report 2023 .
Other factors considered by the Board as part of its going
concern assessment included the inherent uncertainties in cash-flow
forecasts. Based on the above, the Directors have concluded that
the Group is well placed to manage its financing and other business
risks satisfactorily, and they have a reasonable expectation that
the Group will have adequate resources to continue in operation for
at least 12 months from the signing date of these financial
statements. They therefore consider it appropriate to adopt the
going concern basis of accounting in preparing the financial
statements.
Key estimates and significant judgements
The preparation of the accounts in conformity with generally
accepted accounting principles requires management to make
estimates and judgements that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the accounts and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ
from these estimates.
The key sources of estimation uncertainty together with the
significant judgements and assumptions used for these consolidated
financial statements are set out below.
Sources of estimation uncertainty
Impairment reviews of intangible assets
In carrying out impairment reviews of intangible assets, a
number of significant assumptions have to be made when preparing
cash-flow projections to determine the value in use of the asset or
cash generating unit (CGU). These include the future rate of market
growth, discount rates, the market demand for the products
acquired, the future profitability of acquired businesses or
products, levels of reimbursement, and success in obtaining
regulatory approvals. If actual results differ or changes in
expectations arise, impairment charges may be required which would
adversely impact operating results.
Critical estimates, and the effect of variances in these
estimates, are disclosed in note 11.
Retirement benefits
Determining the value of the future defined benefit obligation
involves significant estimates in respect of the assumptions used
to calculate present values. These include future mortality,
discount rate and inflation. The Group uses previous experience and
independent actuarial advice to select the values for critical
estimates. A portion of UK pension liabilities are insured via bulk
annuity policies that match all or part of the scheme obligation to
identified groups of pensioners. These assets are valued by an
external qualified actuary at the actuarial valuation of the
corresponding liability, reflecting this matching relationship.
The Group's principal defined benefit pension plans are in the
UK and the US and these have been closed so that no future benefits
are accrued. Critical estimates for these plans, and the effect of
variances in these estimates, are disclosed in note 8.
Provisions for liabilities and charges
The Group has made provisions for claims and litigations where
it has had to defend itself against proceedings brought by other
parties. These provisions have been made for the best estimate of
the expected expenditure required to settle each obligation,
although there can be no guarantee that such provisions (which may
be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred. The most significant of these litigation provisions are
described below.
John Crane, Inc. (JCI), a subsidiary of the Group, is one of
many co-defendants in litigation relating to products previously
manufactured which contained asbestos. Provision of GBP204m
(FY2022: GBP229m) has been made for the future defence costs which
the Group is expected to incur and the expected costs of future
adverse judgements against JCI. Whilst well-established incidence
curves can be used to estimate the likely future pattern of
asbestos-related disease, JCI's claims experience is significantly
impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of
the plaintiffs' bar; changing attitudes amongst the judiciary at
both trial and appellate levels; and legislative and procedural
changes in both the state and federal court systems. Because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of the related
litigation, there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that will be incurred.
In quantifying the expected costs JCI takes account of the
advice of an expert in asbestos liability estimation. The following
estimates were made in preparing the provision calculation:
- The period over which the expenditure can be reliably
estimated is judged to be ten years, based on past experience
regarding significant changes in the litigation environment that
have occurred every few years and on the amount of time taken in
the past for some of those changes to impact the broader asbestos
litigation environment. See note 23 for a sensitivity analysis
showing the impact on the provision of reducing or increasing this
time horizon; and
- The future trend of legal costs, the rate of future claims
filed, the rate of successful resolution of claims, and the average
amount of judgements awarded have been projected based on the past
history of JCI claims and well-established tables of asbestos
incidence projections, since this is the best available evidence.
Claims history from other defendants is not used to calculate the
provision because JCI's defence strategy generates a significantly
different pattern of legal costs and settlement expenses. See note
23 for a sensitivity analysis showing the range of expected future
spend.
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek
division, has received a number of claims from insurance companies
seeking recompense on a subrogated basis for the effects of damage
allegedly caused by lightning strikes in relation to its flexible
gas piping product. It has also received a number of product
liability claims regarding this product, some in the form of
purported class actions. Titeflex Corporation believes that its
products are a safe and effective means of delivering gas when
installed in accordance with the manufacturer's instructions and
local and national codes; however, some claims have been settled on
an individual basis without admission of liability. Provision of
GBP41m (FY2022: GBP52m) has been made for the costs which the Group
is expected to incur in respect of these claims. In preparing the
provision calculation, key estimates have been made about the
impact of safe installation initiatives on the level of future
claims. See note 23 for a sensitivity analysis showing the impact
on the provision of reducing or increasing the expected impact.
However, because of the significant uncertainty associated with the
future level of claims, there can be no guarantee that the
assumptions used to estimate the provision will result in an
accurate prediction of the actual costs that may be incurred.
Taxation
The Group has recognised deferred tax assets of GBP75m (FY2022:
GBP103m) relating to losses and GBP60m (FY2022: GBP69m) relating to
the John Crane, Inc. and Titeflex Corporation litigation
provisions. The recognition of assets pertaining to these items
requires management to make significant estimates as to the
likelihood of realisation of these deferred tax assets and the
phasing and attribution of future taxable profits. This is based on
a number of factors, which management use to assess the expectation
that the benefit of these assets will be realised, including
expected future levels of operating profit, expenditure on
litigation, pension contributions and the timing of the unwind of
other tax positions.
Taxation liabilities included provisions of GBP46m (FY2022:
GBP38m), the majority of which related to the risk of challenge to
the geographic allocation of profits by tax authorities.
In addition to the risks provided for, the Group faces a variety
of other tax risks, which result from operating in a complex global
environment, including the ongoing reform of both international and
domestic tax rules, new and ongoing tax audits in the Group's
larger markets and the challenge to fulfil ongoing tax compliance
filing and transfer pricing obligations given the scale and
diversity of the Group's global operations.
The Group anticipates that a number of tax audits are likely to
conclude in the next 12 to 24 months. Due to the uncertainty
associated with such tax items, it is possible that the conclusion
of open tax matters may result in a final outcome that varies
significantly from the amounts noted above.
Revenue recognition
Revenue is recognised as the performance obligations to deliver
products or services are satisfied and revenue is recorded based on
the amount of consideration expected to be received in exchange for
satisfying the performance obligations.
Smiths Detection and Smiths Interconnect have multi-year
contractual arrangements for the sale of goods and services. Where
these contracts have separately identifiable components with
distinct patterns of delivery and customer acceptance, revenue is
accounted for separately for each identifiable component.
The Group enters into certain contracts for agreed fees that are
performed across more than one accounting period and revenue is
recognised over time. Estimates are required at the balance sheet
date when determining the stage of completion of the contract
activity. This assessment requires the expected total costs of the
contract and the remaining costs to complete the contract to be
estimated.
At 31 July 2023, the Group held contracts with a total value of
GBP109m (2022: GBP181m), of which GBP83m (2022: GBP135m) had been
delivered and GBP26m (2022: GBP47m) remains fully or partially
unsatisfied. GBP24m of the unsatisfied amount is expected to be
recognised in the coming year, with the remainder being recognised
within two years. A 5% increase in the remaining cost to complete
the contracts would have reduced Group operating profit in the
current year by less than GBP1m (2022: less than GBP2m).
Valuation of financial assets
Following the sale of Smiths Medical the Group has recognised a
financial asset for the fair value of the US$100m additional sales
consideration that is contingent on the future share price
performance of the enlarged ICU Medical, Inc (ICU) business.
The earnout requires the Group to retain beneficial ownership of
at least 1.25 million ICU shares and for the ICU share price to
average US$300 or more for any 30-day period during the first three
years post-completion, or for any 45-day period in the fourth year
post-completion.
An external valuation firm has been engaged to undertake Monte
Carlo valuation simulations in order to estimate the probability of
the future ICU share price exceeding US$300. These valuation
simulations have determined a fair value of GBP13m (US$17m).
Significant judgements made in applying accounting policies
Business combinations
On the acquisition of a business, the Group has to make
judgements on the identification of specific intangible assets
which are recognised separately from goodwill and then amortised
over their estimated useful lives. These include items such as
brand names and customer lists, to which value is first attributed
at the time of acquisition. The capitalisation of these assets and
the related amortisation charges are based on judgements about the
value and economic life of such items.
Where acquisitions are significant, appropriate advice is sought
from professional advisers before making such allocations.
Retirement benefits
At 31 July 2023 the Group has recognised GBP195m of retirement
benefit assets (FY2022: GBP309m) and a net pension asset of GBP89m
(FY2022: GBP194m), principally relating to the Smiths Industries
Pension Scheme (SIPS), which arises from the rights of the
employers to recover the surplus at the end of the life of the
scheme.
The recognition of this surplus is a significant judgement.
There is judgement required in determining whether an unconditional
right of refund exists based on the provisions of the relevant
Trust deed and rules. Having taken legal advice with regard to the
rights of the Group under the relevant Trust deed and rules, it has
been determined that the surplus is recoverable by the Group and
therefore can be recognised. In particular, in the ordinary course
of business, the trustees of the scheme do not have a unilateral
power to terminate and wind up the scheme or augment benefits. If
the pension scheme was wound up while it still had members, the
scheme would need to buy out the benefits of all members. The
buyout would cost significantly more than the carrying value of the
scheme liabilities within these financial statements which are
calculated in accordance with IAS 19: Employee benefits.
Capitalisation of development costs
Expenditure incurred in the development of major new products is
capitalised as internally generated intangible assets only when it
has been judged that strict criteria are met, specifically in
relation to the products' technical feasibility and commercial
viability (the ability to generate probable future economic
benefits).
The assessment of technical feasibility and future commercial
viability of development projects requires significant judgement
and the use of assumptions. Key judgements made in the assessment
of future commercial viability include:
- Scope of work to achieve regulatory clearance (where required)
- including the level of testing evidence and documentation;
- Competitor activity - including the impact of potential
competitor product launches on the marketplace and customer demand;
and
- Launch timeline - including time and resource required to
establish and support the commercial launch of a new product.
Taxation
As stated in the previous section 'Sources of estimation
uncertainty', the Group has recognised deferred tax assets of
GBP75m (FY2022: GBP103m) relating to losses and GBP60m (FY2022:
GBP69m) relating to the John Crane, Inc. and Titeflex Corporation
litigation provisions. The decision to recognise deferred tax
assets requires judgement in determining whether the Group will be
able to utilise historical tax losses in future periods. It has
been concluded that there are sufficient taxable profits in future
periods to support recognition.
The Group has also applied judgement in the decisions made to
recognise provisions against uncertain tax positions; please see
note 6 for further details.
Presentation of headline profits and organic growth
In order to provide users of the accounts with a clear and
consistent presentation of the performance of the Group's ongoing
trading activity, the income statement is presented in a
three-column format with 'headline' profits shown separately from
non-headline items. In addition, the Group reports organic growth
rates for sales and profit measures.
See note 1 for disclosures of headline operating profit and note
29 for more information about the alternative performance measures
('APMs') used by the Group.
Judgement is required in determining which items should be
included as non-headline. The amortisation/impairment of acquired
intangibles, legacy liabilities, material one-off items and certain
re-measurements are included in a separate column of the income
statement. See note 3 for a breakdown of the items excluded from
headline profit.
Calculating organic growth also requires judgement. Organic
growth adjusts the movement in headline performance to exclude the
impact of foreign exchange, restructuring costs and
acquisitions.
Significant accounting policies
Basis of consolidation
The Group's consolidated accounts include the financial
statements of Smiths Group plc (the 'Company') and all entities
controlled by the Company (its subsidiaries). A list of the
subsidiaries of Smiths Group plc is provided within the Annual
Report 2023 .
The Company controls an entity when it (i) has power over the
entity; (ii) is exposed or has rights to variable returns from its
involvement with the entity; and (iii) has the ability to affect
those returns through its power over the entity. The Group
reassesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of
these three elements of control. Subsidiaries are fully
consolidated from the date on which control is obtained by the
Company to the date that control ceases.
Where the Group loses control of a subsidiary, the assets and
liabilities are derecognised along with any related non-controlling
interest and other components of equity. Any resulting gain or loss
is recognised in the income statement. Any interest retained in the
former subsidiary is measured at fair value when control is
lost.
The non-controlling interests in the Group balance sheet
represent the share of net assets of subsidiary undertakings held
outside the Group. The movement in the year comprises the profit
attributable to such interests together with any dividends paid,
movements in respect of corporate transactions and related exchange
differences.
Interests in associates are accounted for using the equity
method. They are initially recognised at cost, which includes
transaction costs. Subsequent to initial recognition, the Group
financial statements include the Group's share of the profit or
loss and other comprehensive income of equity-accounted investees,
until the date on which significant influence ceases.
All intercompany transactions, balances, and gains and losses on
transactions between Group companies are eliminated on
consolidation.
Foreign currencies
The Company's presentational currency and functional currency is
sterling. The financial position of all subsidiaries and associates
that have a functional currency different from sterling are
translated into sterling at the rate of exchange at the date of
that balance sheet, and the income and expenses are translated at
average exchange rates for the period. All resulting foreign
exchange rate movements are recognised as a separate component of
equity.
Foreign exchange rate movements arising on the translation of
non-monetary assets and liabilities held in hyperinflationary
subsidiaries are recognised in OCI. The amounts taken to the CTA
reserve represent the combined effect of restatement and
translation and are expressed as a net change for the year.
On consolidation, foreign exchange rate movements arising from
the translation of the net investment in foreign entities, and of
borrowings and other currency instruments designated as hedges of
such investments, are taken to shareholders' equity. When a foreign
operation is sold, the cumulative amount of such foreign exchange
rate movements is recognised in the income statement as part of the
gain or loss on sale.
Foreign exchange rate movements arising on transactions are
recognised in the income statement. Those arising on trading are
taken to operating profit; those arising on borrowings are
classified as finance income or cost.
Revenue
Revenue is measured at the fair value of the consideration
received, net of trade discounts (including distributor rebates)
and sales taxes. Revenue is discounted only where the impact of
discounting is material.
When the Group enters into complex contracts with multiple,
separately identifiable components, the terms of the contract are
reviewed to determine whether or not the elements of the contract
should be accounted for separately. If a contract is being split
into multiple components, the contract revenue is allocated to the
different components at the start of the contract. The basis of
allocation depends on the substance of the contract. The Group
considers relative stand-alone selling prices, contractual prices
and relative cost when allocating revenue.
The Group has identified the following different types of
revenue:
(i) Sale of goods recognised at a point in time - generic
products manufactured by Smiths
Generic products are defined as either:
- Products that are not specific to any particular customer;
- Products that may initially be specific to a customer but can
be reconfigured at minimal cost, i.e. retaining a margin, for sale
to an alternative customer; or
- Products that are specific to a customer but are manufactured
at Smiths risk, i.e. we have no right to payment of costs plus
margin if the customer refuses to take control of the goods.
For established products with simple installation requirements,
revenue is recognised when control of the product is passed to the
customer. The point in time that control passes is defined in
accordance with the agreed shipping terms and is determined on a
case-by-case basis. The time of dispatch or delivery of the goods
to the customer is normally the point at which invoicing occurs.
However for some generic products, revenue is recognised when the
overall performance obligation has been completed, which is often
after the customer has completed its acceptance procedures and has
assumed control.
Products that are sold under multiple element arrangements, i.e.
contracts involving a combination of products and services, are
bundled into a single performance obligation unless the customer
can benefit from the goods or services either on their own, or
together with other resources that are readily available to the
customer and are distinct within the context of the contract.
For contracts that pass control of the product to the customer
only on completion of installation services, revenue is recognised
upon completion of the installation.
An obligation to replace or repair faulty products under the
standard warranty terms is recognised as a provision. If the
contract includes terms that either extend the warranty beyond the
standard term or imply that maintenance is provided to keep the
product working, these are service warranties and revenue is
deferred to cover the performance obligation in an amount
equivalent to the stand-alone selling price of that service.
(ii) Sale of goods recognised over time - customer-specific
products where the contractual terms include rights to payment for
work performed to date
Customer-specific products are defined as being:
- Products that cannot be reconfigured economically such that it
remains profitable to sell to another customer;
- Products that cannot be sold to another customer due to
contractual restrictions; and
- Products that allow Smiths to charge for the work performed to
date in an amount that represents the costs incurred to date plus a
margin, should the customer refuse to take control of the
goods.
For contracts that meet the terms listed above, revenue is
recognised over the period that the Group is engaged in the
manufacture of the product, calculated using the input method based
on the amount of costs incurred to date compared to the overall
costs of the contract. This is considered to be a faithful
depiction of the transfer of the goods to the customer as the costs
incurred, total expected costs and total order value are known. The
time of dispatch or delivery of the goods to the customer is
normally the point at which invoicing occurs.
An obligation to provide a refund for faulty products under the
standard warranty terms is recognised as a provision. If the
contract includes terms that either extend the warranty beyond the
standard term or imply that maintenance is provided to keep the
product working, these are service warranties and revenue is
deferred to cover the performance obligation in an amount
equivalent to the stand-alone selling price of that service.
(iii) Services recognised over time - services relating to the
installation, repair and ongoing maintenance of equipment
Services include installation, commissioning, testing, training,
software hosting and maintenance, product repairs and contracts
undertaking extended warranty services.
For complex installations where the supply of services cannot be
separated from the supply of product, revenue is recognised upon
acceptance of the combined performance obligation (see Sale of
goods (i) above).
For services that can be accounted for as a separate performance
obligation, revenue is recognised over time, assessed on the basis
of the actual service provided as a proportion of the total
services to be provided.
Depending on the nature of the contract, revenue is recognised
as follows:
- Installation, commissioning and testing services (when neither
linked to the supply of product nor subject to acceptance) are
recognised rateably as the services are provided;
- Training services are recognised on completion of the training
course;
- Software hosting and maintenance services are recognised
rateably over the life of the contract;
- Product repair services, where the product is returned to
Smiths premises for remedial action, are recognised when the
product is returned to the customer and they regain control of the
asset;
- Onsite ad hoc product repair services are recognised rateably
as the services are performed;
- Long-term product repair and maintenance contracts are
recognised rateably over the contract term; and
- Extended service warranties are recognised rateably over the
contract term.
Invoicing for services depends on the nature of the service
provided with some services charged in advance and others in
arrears.
Where contracts are accounted for under the revenue recognised
over time basis, the proportion of costs incurred is used to
determine the percentage of contract completion.
Contracts for the construction of substantial assets, which
normally last in excess of one year, are accounted for under the
revenue recognised over time basis, using an input method.
For fixed-price contracts, revenue is recognised based upon an
assessment of the amount of cost incurred under the contract,
compared to the total expected costs that will be incurred under
the contract. This calculation is applied cumulatively with any
over/under recognition being adjusted in the current period.
For cost-plus contracts, revenue is recognised based upon costs
incurred to date plus any agreed margin.
For both fixed-price and cost-plus contracts, invoicing is
normally based on a schedule with milestone payments.
Contract costs
The Group has taken the practical expedient of not capitalising
contract costs as they are expected to be expensed within one year
from the date of signing.
Leases
Lease liabilities are initially measured at the present value of
the future lease payments at the commencement date, discounted by
using either the rate implicit in the lease, or if not observable,
the Group's incremental borrowing rate. Lease payments comprise
contractual lease payments; variable lease payments that depend on
an index or rate, initially measured using the index or rate at the
commencement date; and the amount expected to be payable under
residual value guarantees.
Right of use assets are measured at commencement date at the
amount of the corresponding lease liability and initial direct
costs incurred. Right of use assets are depreciated over the
shorter of the lease term and the useful life of the right of use
assets, unless there is a transfer of ownership or purchase option
which is reasonably certain to be exercised at the end of the lease
term, in which case depreciation is charged over the useful life of
the underlying asset. Right of use assets are subject to
impairment.
When a lease contract is modified, either from a change to the
duration of the lease or a change to amounts payable, the Group
remeasures the lease liability by discounting the revised future
lease payments at a revised discount rate. A corresponding
adjustment is made to the carrying value of the related right of
use asset.
Leases of buildings typically have lease terms between one and
seven years, while plant and machinery generally have lease terms
between one and three years. The Group also has certain leases of
machinery with lease terms of 12 months or less and leases of
office equipment with low value (typically below GBP5,000). The
Group applies the 'short-term lease' and 'lease of low-value
assets' recognition exemptions for these leases and recognises the
lease payments associated with these leases as an expense on a
straight-line basis over the lease term.
Interest on lease liabilities is presented as a financing
activity in the Consolidated Cash-Flow Statement, included under
the heading lease payments.
Taxation
The charge for taxation is based on profits for the year and
takes into account taxation deferred because of temporary
differences between the treatment of certain items for taxation and
accounting purposes.
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. Tax benefits are not recognised unless it is likely
that the tax positions are sustainable. Tax positions taken are
then reviewed to assess whether a provision should be made based on
prevailing circumstances. Tax provisions are included in current
tax liabilities. The tax rates and tax laws used to compute the
amount are those that are enacted or substantively enacted, at the
reporting date in the countries where the Group operates and
generates taxable income.
The Group operates and is subject to taxation in many countries.
Tax legislation is different in each country, is often complex and
is subject to interpretation by management and government
authorities. These matters of judgement give rise to the need to
create provisions for uncertain tax positions which are recognised
when it is considered more likely than not that there will be a
future outflow of funds to a taxing authority. Provisions are made
against individual exposures and take into account the specific
circumstances of each case, including the strength of technical
arguments, recent case law decisions or rulings on similar issues
and relevant external advice.
The amounts are measured using one of the following methods,
depending on which of the methods the Directors expect will better
reflect the amount the Group will pay to the tax authority:
- The single best estimate method is used where there is a
single outcome that is more likely than not to occur. This will
happen, for example, where the tax outcome is binary or the range
of possible outcomes is very limited; or
- Alternatively, a probability weighted expected value is used
where, on the balance of probabilities, there will be a payment to
the tax authority but there are a number of possible outcomes. In
this case, a probability is assigned to each of the outcomes and
the amount provided is the sum of these risk-weighted amounts. In
assessing provisions against uncertain tax positions, management
uses in-house tax experts, professional firms and previous
experience of the taxing authority to evaluate the risk.
Deferred tax is provided in full using the balance sheet
liability method. A deferred tax asset is recognised where it is
probable that future taxable income will be sufficient to utilise
the available relief. Tax is charged or credited to the income
statement except when it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in
equity.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the timing
of the reversal of the temporary differences is controlled by the
Company and it is probable that the temporary difference will not
reverse in the foreseeable future. Deferred tax liabilities and
assets are not discounted.
IAS 12 International Tax Reform: Pillar Two Model Rules.
On 19th July 2023, the UK Endorsement Board adopted the
Amendments to IAS 12 International Tax Reform: Pillar Two Model
Rules, issued by the IASB in May 2023. The Amendments introduce a
temporary mandatory exception from accounting for deferred taxes
arising from the Pillar Two model rules and the Group has applied
this exception to recognising and disclosing information about
deferred tax assets and liabilities related to Pillar Two income
taxes.
Employee benefits
Share-based compensation
The fair value of the shares or share options granted is
recognised as an expense over the vesting period to reflect the
value of the employee services received. The fair value of options
granted, excluding the impact of any non-market vesting conditions,
is calculated using established option pricing models, principally
binomial models. The probability of meeting non-market vesting
conditions, which include profitability targets, is used to
estimate the number of share options which are likely to vest.
For cash-settled share-based payment, a liability is recognised
based on the fair value of the payment earned by the balance sheet
date. For equity-settled share-based payment, the corresponding
credit is recognised directly in reserves.
Pension obligations and post-retirement benefits
Pensions and similar benefits (principally healthcare) are
accounted for under IAS 19. The retirement benefit obligation in
respect of the defined benefit plans is the liability (the present
value of all expected future obligations) less the fair value of
the plan assets.
The income statement expense is allocated between current
service costs, reflecting the increase in liability due to any
benefit accrued by employees in the current period, any past
service costs/credits and settlement losses or gains which are
recognised immediately, and the scheme administration costs.
Actuarial gains and losses are recognised in the statement of
comprehensive income in the year in which they arise. These
comprise the impact on the liabilities of changes in demographic
and financial assumptions compared with the start of the year,
actual experience being different to assumptions and the return on
plan assets being above or below the amount included in the net
pension interest cost.
Payments to defined contribution schemes are charged as an
income statement expense as they fall due.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the identifiable net
assets of the acquired subsidiary at the date of acquisition.
The goodwill arising from acquisitions of subsidiaries after 1
August 1998 is included in intangible assets, tested annually for
impairment and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold. The goodwill
arising from acquisitions of subsidiaries before 1 August 1998 was
set against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Should the
test indicate that the net realisable value of the CGU is less than
current carrying value, an impairment loss will be recognised
immediately in the income statement. Subsequent reversals of
impairment losses for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the income
statement in the year in which it is incurred with the exception
of:
- Amounts recoverable from third parties; and
- Expenditure incurred in respect of the development of major
new products where the outcome of those projects is assessed as
being reasonably certain as regards viability and technical
feasibility. Such expenditure is capitalised and amortised over the
estimated period of sale for each product, commencing in the year
that the product is ready for sale. Amortisation is charged
straight line or based on the units produced, depending on the
nature of the product and the availability of reliable estimates of
production volumes.
The cost of development projects which are expected to take a
substantial period of time to complete includes attributable
borrowing costs.
Intangible assets acquired in business combinations
The identifiable net assets acquired as a result of a business
combination may include intangible assets other than goodwill. Any
such intangible assets are amortised straight line over their
expected useful lives as follows:
Patents, licences and trademarks up to 20 years
-------------------------------- --------------
Technology up to 13 years
-------------------------------- --------------
Customer relationships up to 15 years
-------------------------------- --------------
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to seven years
------------------------ -------------------------------------------
Patents and intellectual shorter of the economic life and the period
property the right is legally enforceable
------------------------ -------------------------------------------
The assets' useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
Property, plant and equipment
Property, plant and equipment are stated at historical cost less
accumulated depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other
assets estimated to write off the depreciable amount of relevant
assets by equal annual instalments over their estimated useful
lives. In general, the rates used are:
Freehold and long leasehold
buildings 2% per annum
--------------------------- ----------------------------
Short leasehold property over the period of the lease
--------------------------- ----------------------------
Plant, machinery, etc. 10% to 20% per annum
--------------------------- ----------------------------
Fixtures, fittings, tools
and other equipment 10% to 33% per annum
--------------------------- ----------------------------
The cost of any assets which are expected to take a substantial
period of time to complete includes attributable borrowing
costs.
The assets' residual values and useful lives are reviewed, and
adjusted if appropriate, at each balance sheet date. An asset's
carrying amount is written down immediately to its recoverable
amount if the asset's carrying amount is greater than its estimated
recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is determined using the first-in, first-out method. The
cost of finished goods and work in progress comprises raw
materials, direct labour, other direct costs and related production
overheads (based on normal operating capacity). The cost of items
of inventory which take a substantial period of time to complete
includes attributable borrowing costs.
The net realisable value of inventories is the estimated selling
price in the ordinary course of business, less applicable variable
selling expenses. Provisions are made for any slow-moving, obsolete
or defective inventories.
Trade and other receivables
Trade receivables and contract assets are either classified as
'held to collect' and initially recognised at fair value and
subsequently measured at amortised cost, less any appropriate
provision for expected credit losses or as 'held to collect and
sell' and measured at fair value through other comprehensive income
(FVOCI).
A provision for expected credit losses is established when there
is objective evidence that it will not be possible to collect all
amounts due according to the original payment terms. Expected
credit losses are determined using historical write-offs as a
basis, adjusted for factors that are specific to the debtor,
general economic conditions of the industry in which the debtor
operates and with a default risk multiplier applied to reflect
country risk premium. The Group applies the IFRS 9 simplified
lifetime expected credit loss approach for trade receivables and
contract assets which do not contain a significant financing
component
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, and a reliable
estimate can be made of the amount of the obligation. Where the
Group expects some or all of a provision to be reimbursed, for
example under an insurance contract, the reimbursement is
recognised as a separate asset but only when the reimbursement is
virtually certain.
Provisions for warranties and product liability, disposal
indemnities, restructuring costs, property dilapidations and legal
claims are recognised when: the Company has a legal or constructive
obligation as a result of a past event; it is probable that an
outflow of resources will be required to settle the obligation; and
the amount has been reliably estimated. Provisions are not
recognised for future operating losses.
Provisions are discounted where the time value of money is
material.
Where there is a number of similar obligations, for example
where a warranty has been given, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognised even if
the likelihood of an outflow with respect to any one item included
in the same class of obligations may be small.
Discontinued operations
A discontinued operation is either:
- A component of the Group's business that represents a separate
major line of business or geographical area of operations that has
been disposed of, has been abandoned or meets the criteria to be
classified as held for sale; or
- A business acquired solely for the purpose of selling it.
Discontinued operations are presented on the income statement as
a separate line and are shown net of tax.
In accordance with IAS 21, gains and losses on intra-group
monetary assets and liabilities are not eliminated. Therefore
foreign exchange rate movements on intercompany loans with
discontinued operations are presented on the income statement as
non-headline finance cost items.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with maturities of three
months or less.
In the cash-flow statement, cash and cash equivalents are shown
net of bank overdrafts, which are included as current borrowings in
liabilities on the balance sheet.
Financial assets
The classification of financial assets depends on the purpose
for which the assets were acquired. Management determines the
classification of an asset at initial recognition and re-evaluates
the designation at each reporting date. Financial assets are
classified as: measured at amortised cost, fair value through other
comprehensive income or fair value through profit and loss.
Financial assets primarily include trade receivables, cash and
cash equivalents (comprising cash at bank, money-market funds, and
short-term deposits), short-term investments, derivatives (foreign
exchange contracts and interest rate derivatives) and unlisted
investments.
- Trade receivables are classified either as 'held to collect'
and measured at amortised cost or as 'held to collect and sell' and
measured at fair value through other comprehensive income (FVOCI).
The Group may sell trade receivables due from certain customers
before the due date. Any trade receivables from such customers that
are not sold at the reporting date are classified as 'held to
collect and sell'.
- Cash and cash equivalents (consisting of balances with banks
and other financial institutions, money-market funds and short-term
deposits) and short-term investments are subject to low market
risk. Cash balances, short-term deposits and short-term investments
are measured at amortised cost. Money market funds are measured at
fair value through profit and loss (FVPL).
- Derivatives are measured at FVPL.
- Listed and unlisted investments are measured at FVOCI.
- Deferred contingent consideration are measured at FVPL.
Financial assets are derecognised when the right to receive
cash-flows from the assets has expired, or has been transferred,
and the Group has transferred substantially all of the risks and
rewards of ownership.
On initial recognition, the Group may make an irrevocable
election to designate certain investments as FVOCI, if they are not
held for trading or relate to contingent consideration on a
business combination. When securities measured at FVOCI are sold or
impaired, the accumulated fair value adjustments remain in
reserves.
Financial assets are classified as current if they are expected
to be realised within 12 months of the balance sheet date.
Financial liabilities
Borrowings are initially recognised at the fair value of the
proceeds, net of related transaction costs. These transaction
costs, and any discount or premium on issue, are subsequently
amortised under the effective interest rate method through the
income statement as interest over the life of the loan and added to
the liability disclosed in the balance sheet. Related accrued
interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least one year after the balance sheet date.
Derivative financial instruments and hedging activities
The Group uses derivative financial instruments to hedge its
exposures to foreign exchange and interest rates arising from its
operating and financing activities.
Derivative financial instruments are initially recognised at
fair value on the date a derivative contract is entered into and
are subsequently re-measured at their fair value. The method of
recognising any resulting gain or loss depends on whether the
derivative financial instrument is designated as a hedging
instrument and, if so, the nature of the item being hedged.
Where derivative financial instruments are designated into
hedging relationships, the Group formally documents the
following:
- The risk management objective and strategy for entering the
hedge;
- The nature of the risks being hedged and the economic
relationship between the hedged item and the hedging instrument;
and
- Whether the change in cash-flows of the hedged item and
hedging instrument are expected to offset each other.
Changes in the fair value of any derivative financial
instruments that do not qualify for hedge accounting are recognised
immediately in the income statement.
Fair value hedge
The Group uses derivative financial instruments to convert part
of its fixed rate debt to floating rate in order to hedge the risks
arising from its external borrowings.
The Group designates these as fair value hedges of interest rate
risk. Changes in the hedging instrument are recorded in the income
statement, together with any changes in the fair values of the
hedged assets or liabilities that are attributable to the hedged
risk to the extent that the hedge is effective. Gains or losses
relating to any ineffectiveness are immediately recognised in the
income statement.
Cash-flow hedge
Cash-flow hedging is used by the Group to hedge certain
exposures to variability in future cash-flows.
The effective portions of changes in the fair values of
derivatives that are designated and qualify as cash-flow hedges are
recognised in equity. The gain or loss relating to any ineffective
portion is recognised immediately in the income statement. Amounts
accumulated in the hedge reserve are recycled in the income
statement in the periods when the hedged items will affect profit
or loss (for example, when the forecast sale that is hedged takes
place).
If a forecast transaction that is hedged results in the
recognition of a non-financial asset (for example, inventory) or a
liability, the gains and losses previously deferred in the hedge
reserve are transferred from the reserve and included in the
initial measurement of the cost of the asset or liability. When a
hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or
loss existing in the hedge reserve at that time remains in the
reserve and is recognised when the forecast transaction is
ultimately recognised in the income statement.
When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in other comprehensive
income is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted
for similarly to cash-flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is
recognised in other comprehensive income; the gain or loss relating
to any ineffective portion is recognised immediately in the income
statement. When a foreign operation is disposed of, gains and
losses accumulated in equity related to that operation are included
in the income statement for that period.
Fair value of financial assets and liabilities
The fair values of financial assets and financial liabilities
are the amounts at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
or liquidation sale.
IFRS 13: 'Fair value measurement' requires fair value
measurements to be classified according to the following
hierarchy:
- Level 1 - quoted prices in active markets for identical assets
or liabilities;
- Level 2 - valuations in which all inputs are observable either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
- Level 3 - valuations in which one or more inputs that are
significant to the resulting value are not based on observable
market data.
See note 21 for information on the methods which the Group uses
to estimate the fair values of its financial instruments.
Dividends
Dividends are recognised as a liability in the period in which
they are authorised. The interim dividend is recognised when it is
paid and the final dividend is recognised when it has been approved
by shareholders at the Annual General Meeting.
New accounting standards effective 2023
No new accounting standards have been adopted in the financial
year. The accounting policies adopted in the preparation of these
consolidated financial statements are consistent with those
followed in the previous financial year.
New standards and interpretations not yet adopted
No other new standards, new interpretations or amendments to
standards or interpretations have been published which are expected
to have a significant impact on the Group's financial
statements.
Notes to the accounts
1 Segment information
Analysis by operating segment
The Group is organised into four divisions: John Crane; Smiths
Detection; Flex-Tek; and Smiths Interconnect. These divisions
design, manufacture and support the following products:
- John Crane - mechanical seals, seal support systems, power
transmission couplings and specialised filtration systems;
- Smiths Detection - sensors and systems that detect and
identify explosives, narcotics, weapons, chemical agents,
biohazards and contraband;
- Flex-Tek - engineered components, flexible hosing and rigid
tubing that heat and move fluids and gases; and
- Smiths Interconnect - specialised electronic and radio
frequency board-level and waveguide devices, connectors, cables,
test sockets and sub-systems used in high-speed, high-reliability,
secure connectivity applications.
The position and performance of each division are reported at
each Board meeting to the Board of Directors. This information is
prepared using the same accounting policies as the consolidated
financial information except that the Group uses headline operating
profit to monitor the divisional results and operating assets to
monitor the divisional position. See note 3 and note 29 for an
explanation of which items are excluded from headline measures.
Intersegment sales and transfers are charged at arm's length
prices.
Segment trading performance
Year ended 31 July 2023
-------------------------------------- -------------------------------------------------------------
John Smiths Smiths Corporate
Crane Detection Flex-Tek Interconnect costs Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Revenue 1,079 803 768 387 - 3,037
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Divisional headline operating profit 244 90 149 62 - 545
Corporate headline operating costs - - - - (44) (44)
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Headline operating profit/(loss) 244 90 149 62 (44) 501
Items excluded from headline measures
(note 3) (27) (35) (18) (12) (6) (98)
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Operating profit/(loss) 217 55 131 50 (50) 403
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Headline operating margin 22.6% 11.2% 19.4% 16.0% 16.5%
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Year ended 31 July 2022
-------------------------------------- -------------------------------------------------------------
John Smiths Smiths Corporate
Crane Detection Flex-Tek Interconnect costs Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Revenue 901 655 647 363 - 2,566
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Divisional headline operating profit 188 73 133 65 - 459
Corporate headline operating costs - - - - (42) (42)
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Headline operating profit/(loss) 188 73 133 65 (42) 417
Items excluded from headline measures
(note 3) (21) (37) (27) (1) (214) (300)
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Operating profit/(loss) 167 36 106 64 (256) 117
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Headline operating margin 20.9% 11.1% 20.6% 18.0% 16.3%
-------------------------------------- ------ ---------- -------- ------------- --------- -----
Operating profit is stated after charging (crediting) the
following items:
Year ended 31 July 2023
---------------------------------------- -----------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ ---------- -------- ------------- ------------- -----
Depreciation - property, plant and
equipment 17 10 8 6 1 42
Depreciation - right of use assets 15 7 6 3 1 32
Amortisation of capitalised development
costs - 2 - - - 2
Amortisation of software, patents
and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 52 52
Share-based payment 3 1 2 2 6 14
Transition services cost reimbursement - - - - (10) (10)
---------------------------------------- ------ ---------- -------- ------------- ------------- -----
Year ended 31 July 2022
---------------------------------------- -----------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ ---------- -------- ------------- ------------- -----
Depreciation - property, plant and
equipment 15 10 7 5 1 38
Depreciation - right of use assets 15 7 5 2 1 30
Amortisation of capitalised development
costs - 3 - - - 3
Amortisation of software, patents
and intellectual property 3 1 - 2 1 7
Amortisation of acquired intangibles - - - - 51 51
Share-based payment 3 2 2 1 4 12
Russia impairment charges and related
closure costs 9 10 - - - 19
Transition services cost reimbursement - - - - (7) (7)
======================================== ====== ========== ======== ============= ============= =====
The corporate and non-headline column comprises central
information technology, human resources and headquarters costs and
non-headline expenses (see note 3).
Segment assets and liabilities
Segment assets
31 July 2023
--------------------------------------- -----------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
Property, plant, equipment, right
of use assets, development projects,
other intangibles and investments 162 142 84 66 375 829
Inventory, trade and other receivables 489 599 226 160 10 1,484
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
Segment assets 651 741 310 226 385 2,313
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
31 July 2022
======================================= -----------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ------ ---------- -------- ------------- ------------- -----
Property, plant, equipment, right
of use assets, development projects,
other intangibles and investments 167 127 84 54 399 831
Inventory, trade and other receivables 429 524 244 167 13 1,377
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
Segment assets 596 651 328 221 412 2,208
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
Non-headline assets comprise receivables relating to
non-headline items, acquisitions and disposals.
Segment liabilities
31 July 2023
======================================= -----------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ------ ---------- -------- ------------- ------------- -----
Divisional liabilities 200 357 91 62 - 710
Corporate and non-headline liabilities - - - - 339 339
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
Segment liabilities 200 357 91 62 339 1,049
--------------------------------------- ------ ---------- -------- ------------- ------------- -----
31 July 2022
--------------------------------------- -------------------------------------------------------------------
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ------ ---------- -------- ------------- ------------- -------
Divisional liabilities (155) (347) (91) (85) - (678)
Corporate and non-headline liabilities - - - - (385) (385)
--------------------------------------- ------ ---------- -------- ------------- ------------- -------
Segment liabilities (155) (347) (91) (85) (385) (1,063)
--------------------------------------- ------ ---------- -------- ------------- ------------- -------
Non-headline liabilities comprise provisions and accruals
relating to non-headline items, acquisitions and disposals.
Reconciliation of segment assets and liabilities to statutory
assets and liabilities
Assets Liabilities
------------------------------------------ ---------------- ----------------
31 July 31 July 31 July 31 July
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
------------------------------------------ ------- ------- ------- -------
Segment assets and liabilities 2,313 2,208 (1,049) (1,063)
Goodwill and acquired intangibles 1,415 1,501 - -
Derivatives 5 4 (20) (47)
Current and deferred tax 142 145 (120) (111)
Retirement benefit assets and obligations 195 309 (106) (115)
Cash and borrowings 285 1,056 (654) (1,166)
------------------------------------------ ------- ------- ------- -------
Statutory assets and liabilities 4,355 5,223 (1,949) (2,502)
------------------------------------------ ------- ------- ------- -------
Segment capital expenditure
The capital expenditure on property, plant and equipment,
capitalised development and other intangible assets for each
division is:
Corporate
John Smiths Smiths and
Crane Detection Flex-Tek Interconnect non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------ ---------- -------- ------------- ------------- -----
Capital expenditure year ended 31
July 2023 19 36 10 16 - 81
Capital expenditure year ended 31
July 2022 24 23 11 12 1 71
---------------------------------- ------ ---------- -------- ------------- ------------- -----
Segment capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP478m (FY2022: GBP478m) and
eliminate retirement benefit assets and obligations and litigation
provisions relating to non-headline items, both net of related tax,
and net debt. See note 29 for a reconciliation of net assets to
capital employed.
The 12-month rolling average capital employed by division, which
Smiths uses to calculate divisional return on capital employed,
is:
31 July 2023
-------------------------------------------- --------------------------------------------------
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------ ---------- -------- ------------- -----
Average divisional capital employed 1,022 1,154 570 466 3,212
Average corporate capital employed (16)
-------------------------------------------- ------ ---------- -------- ------------- -----
Average total capital employed - continuing
operations 3,196
-------------------------------------------- ------ ---------- -------- ------------- -----
31 July 2022
-------------------------------------------- --------------------------------------------------
John Smiths Smiths
Crane Detection Flex-Tek Interconnect Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------ ---------- -------- ------------- -----
Average divisional capital employed 970 1,019 520 400 2,909
Average corporate capital employed 31
-------------------------------------------- ------ ---------- -------- ------------- -----
Average total capital employed - continuing
operations 2,940
-------------------------------------------- ------ ---------- -------- ------------- -----
Analysis of revenue
The revenue for the main product and service lines for each
division is:
Original
equipment Aftermarket Total
John Crane GBPm GBPm GBPm
-------------------------------- ---------- ----------- -----
Revenue year ended 31 July 2023 314 765 1,079
Revenue year ended 31 July 2022 279 622 901
-------------------------------- ---------- ----------- -----
Other security
Aviation systems Total
Smiths Detection GBPm GBPm GBPm
-------------------------------- -------- -------------- -----
Revenue year ended 31 July 2023 535 268 803
Revenue year ended 31 July 2022 467 188 655
-------------------------------- -------- -------------- -----
Aerospace Industrials Total
Flex-Tek GBPm GBPm GBPm
-------------------------------- --------- ----------- -----
Revenue year ended 31 July 2023 144 624 768
Revenue year ended 31 July 2022 116 531 647
-------------------------------- --------- ----------- -----
Components,
connectors
& subsystems
Smiths Interconnect GBPm
-------------------------------- -------------
Revenue year ended 31 July 2023 387
Revenue year ended 31 July 2022 363
---------------------------------- -------------
Aftermarket sales contributed GBP1,545m (FY2022: GBP1,238m) of
Group revenue: John Crane aftermarket sales were GBP765m (FY2022:
GBP622m); Smiths Detection aftermarket sales were GBP413m (FY2022:
GBP355m); Flex-Tek aftermarket sales were GBP367m (FY2022:
GBP261m); and Smiths Interconnect aftermarket sales were GBPnil
(FY2022: GBPnil).
Divisional revenue is analysed by the Smiths Group key global
markets as follows:
General Safety
Industrial & Security Energy Aerospace Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----------- ----------- ------ --------- -----
John Crane
Revenue year ended 31 July 2023 423 - 656 - 1,079
Revenue year ended 31 July 2022 371 - 530 - 901
-------------------------------- ----------- ----------- ------ --------- -----
Smiths Detection
Revenue year ended 31 July 2023 -803 --803
Revenue year ended 31 July 2022 -655 --655
-------------------------------- --- ---
Flex Tek
Revenue year ended 31 July 2023 624 - -144 768
Revenue year ended 31 July 2022 531 - -116 647
-------------------------------- --- --- --- ---
Smiths Interconnect
Revenue year ended 31 July 2023 190 141 - 56 387
Revenue year ended 31 July 2022 166 144 - 53 363
-------------------------------- --- --- --- ---
Total
Revenue year ended 31 July 2023 1,237 944 656 200 3,037
Revenue year ended 31 July 2022 1,068 799 530 169 2,566
-------------------------------- ----- --- --- --- -----
The Group's statutory revenue is analysed as follows:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
-------------------------------------------- ---------- ----------
Sale of goods recognised at a point in time 2,244 1,849
Sale of goods recognised over time 36 99
Services recognised over time 757 618
-------------------------------------------- ---------- ----------
3,037 2,566
-------------------------------------------- ---------- ----------
Analysis by geographical areas
The Group's revenue by destination and non-current operating
assets by location are shown below:
Intangible
assets, right
of use assets
and property,
Revenue plant and equipment
-------------- ------------------ ----------------------
Year Year
ended ended
31 July 31 July 31 July 31 July
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
-------------- -------- -------- ---------- ----------
Americas 1,641 1,423 1,254 1,324
Europe 563 480 519 498
Asia Pacific 493 421 71 76
Rest of World 340 242 29 39
-------------- -------- -------- ---------- ----------
3,037 2,566 1,873 1,937
-------------- -------- -------- ---------- ----------
Revenue by destination attributable to the United Kingdom was
GBP87m (FY2022: GBP75m). Other revenue found to be significant
included, the United States of America, totalling GBP1,383m
(FY2022: GBP1,206m), China (excluding Hong Kong) GBP150m (FY2022:
GBP132m) and Germany GBP143m (FY2022: GBP123m). Revenue by
destination has been selected as the basis for attributing revenue
to geographical areas as this was the geographic attribution of
revenue used by management to review business performance.
Non-current assets located in the United Kingdom total GBP123m
(FY2022: GBP108m). Significant non-current assets held in the
United States of America GBP1,181m (FY2022: GBP1,260m) and Germany
GBP345m (FY2022: GBP340m).
2 Operating costs
The Group's operating costs for continuing operations are
analysed as follows:
Year ended 31 July Year ended 31 July
2023 2022
----------------------------- -----------------------------
Non-headline Non-headline
(note (note
Headline 3) Total Headline 3) Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- -------- ------------ ----- -------- ------------ -----
Cost of sales - direct materials,
labour, production and distribution
overheads 1,919 - 1,919 1,605 - 1,605
Selling costs 221 - 221 200 - 200
Administrative expenses 406 98 504 351 300 651
Transition services cost reimbursement (10) - (10) (7) - (7)
--------------------------------------- -------- ------------ ----- -------- ------------ -----
Total 2,536 98 2,634 2,149 300 2,449
--------------------------------------- -------- ------------ ----- -------- ------------ -----
Following the sale of the Smiths Medical business, the Group has
provided transition services to the Smiths Medical Group, which is
disclosed above as transition services cost reimbursement.
Operating profit is stated after charging (crediting):
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
---------------------------------------------- ---------- ----------
Research and development expense 73 80
Depreciation of property, plant and equipment 42 38
Depreciation of right of use assets 32 30
Amortisation of intangible assets 61 61
Russia impairment and related closure costs - 19
Transition services cost reimbursement (10) (7)
---------------------------------------------- ---------- ----------
Research and development (R&D) cash costs were GBP113m
(FY2022: GBP107m) comprising GBP73m (FY2022: GBP80m) of R&D
expensed to the income statement, GBP21m (FY2022: GBP12m) of
capitalised costs and GBP19m (FY2022: GBP15m) of customer funded
R&D.
Administrative expenses include GBP2m (FY2022: GBP3m) in respect
of lease payments for short-term and low-value leases which were
not included within right of use assets and lease liabilities.
Auditors' remuneration
The following fees were paid or are payable to the Company's
auditors, KPMG LLP and other firms in the KPMG network, for the
year ended 31 July 2023.
Year ended
31 July
Year ended 2022
31 July
2023 (represented)
GBPm GBPm
---------------------------------------------------------- ---------- ---------------
Audit services
Fees payable to the Company's auditors for the audit
of the Company's annual financial statements 2.6 3.0
Fees payable to the Company's auditors and its associates
for other services:
- the audit of the Company's subsidiaries 5.5 4.7
---------------------------------------------------------- ---------- ---------------
8.1 7.7
All other services 0.5 0.8
---------------------------------------------------------- ---------- ---------------
Other services comprise audit-related assurance services of
GBP0.5m (FY2022: GBP0.5m) and fees for reporting accountant
services in connection with a class 1 disposal of GBPnil (FY2022:
GBP0.3m). Audit-related assurance services include the review of
the Interim Report and the limited assurance of the Group's Scope
1-3 Greenhouse Gas emissions metrics. Total fees for non-audit
services comprise 6% (FY2022: 10%) of audit fees.
In the current year, the Group has agreed GBP0.3m of additional
fees with the Group auditors relating to the audit of the prior
year financial statements.
3 Non-statutory profit measures
Headline profit measures
The Group has identified and defined a 'headline' measure of
performance which is not impacted by material non-recurring items
or items considered non-operational/trading in nature. This
non-GAAP measure of profit is not intended to be a substitute for
any IFRS measures of performance, but is a key measure used by
management to understand and manage performance. See the
disclosures on presentation of results in accounting policies for
an explanation of the adjustments. The items excluded from
'headline' are referred to as 'non-headline' items.
Non-headline operating profit items
i. CONTINUING OPERATIONS
The non-headline items included in statutory operating profit
for continuing operations were as follows:
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
-------------------------------------------------------- ----- ---------- ----------
Post-acquisition integration costs and fair value
adjustment unwind
-------------------------------------------------------- ----- ---------- ----------
Fair value loss on contingent consideration (6) -
Unwind of acquisition balance sheet fair value
uplift - (2)
-------------------------------------------------------- ----- ---------- ----------
Acquisition and disposal related transaction costs
and provision releases
-------------------------------------------------------- ----- ---------- ----------
Business acquisition/disposal costs (1) (5)
-------------------------------------------------------- ----- ---------- ----------
Legacy pension scheme arrangements
-------------------------------------------------------- ----- ---------- ----------
Past service credit/(costs) for benefit equalisation
and improvements 8 4 (43)
Scheme administration costs 8 (2)
Retirement benefit scheme settlement loss 8 (1) (171)
-------------------------------------------------------- ----- ---------- ----------
Non-headline litigation provision movements
-------------------------------------------------------- ----- ---------- ----------
Movement in provision held against Titeflex Corporation
subrogation claims 23 7 (2)
Provision for John Crane, Inc. asbestos litigation 23 (16) (7)
Cost recovery for John Crane, Inc. asbestos litigation 7 -
-------------------------------------------------------- ----- ---------- ----------
Other items
-------------------------------------------------------- ----- ---------- ----------
Amortisation of acquired intangible assets 10 (52) (51)
Restructuring costs (36) -
Irrecoverable VAT on chain export transaction (2) -
Russia impairment charges and related closure costs 11 - (19)
-------------------------------------------------------- ----- ---------- ----------
Non-headline items in operating profit - continuing
operations (98) (300)
-------------------------------------------------------- ----- ---------- ----------
Post-acquisition integration costs and fair value adjustment
unwind
Following the sale of Smiths Medical to ICU Medical, Inc. (ICU)
in FY2022, the Group holds a financial asset for the fair value of
US$100m additional sales consideration that is contingent on the
future share price performance of ICU. In FY2023 a fair value loss
of GBP6m has been recognised on this financial asset. This is
considered to be a non-headline item on the basis that these
charges result from acquisition accounting and do not relate to
current trading activity.
The impact of unwinding the acquisition balance sheet fair value
adjustments required by IFRS 3 'Business combinations' has been
recognised as non-headline as the charges do not relate to trading
activity. The GBP2m charged in the prior period was due to the
unwind of fair value uplifts on the acquisition of Royal Metal
Products.
Acquisition and disposal related transaction costs and provision
releases
The GBP1m (FY2022: GBP5m) business acquisition/disposal costs
represented incremental transaction costs including the acquisition
of Plastronics in FY2023. These costs did not include the cost of
employees working on transactions and were reported as non-headline
because they are dependent on the level of acquisition and disposal
activity in the year.
Legacy pension scheme arrangements
The past service credit/(costs) comprises the following:
- A net credit of GBP4m (FY2022: GBP19m debit) has been
recognised in respect of equalisation charges of retirement
benefits for men and women. The net credit comprises a further
liability of GBP12m and the release of GBP16m, recognised in
previous years, following the identification of additional evidence
of the obligation for equalisation (see note 8 for further
details); and
- In the prior year GBP24m of costs were recognised following
the TI Group Pension Scheme (TIGPS) executing an insurance buy-in
policy.
These past service credits/(costs) are reported as non-headline
as they are non-recurring and relate to legacy pension
liabilities.
Scheme administration costs of GBP2m (FY2022: GBPnil) relate to
the TIGPS legacy pension scheme. As the Group has no expectation of
receiving a refund from the scheme, an economic benefit value of
zero has been placed on the TIGPS surplus. These are non-headline
charges as the Smiths Group effectively has no economic exposure to
these costs and they are paid from cash retained in the scheme.
Settlement losses of GBP1m (31 July 2022: GBP171m) on
post-retirement benefit schemes relate to settlement arrangements
made between the Group and former employees of the now disposed of
Medical business. The prior year losses arose primarily on the
buy-in of the TIGPS scheme. These items are considered non-headline
as they are non-recurring and relate to legacy pension schemes.
Non-headline litigation provision movements
The following litigation costs and recoveries have been treated
as non-headline items because the provisions were treated as
non-headline when originally recognised and the subrogation claims
and litigation relate to products that the Group no longer sells in
these markets:
- The GBP7m credit (FY2022: GBP2m charge) recognised by Titeflex
Corporation was principally driven by discount rate movements and a
reduction in the expected costs to settle future claims. See note
23 for further details; and
- The GBP16m charge (FY2022: GBP7m) in respect of John Crane,
Inc. asbestos litigation is principally due to litigation costs of
GBP31m offset by GBP15m of discount rate movements following an
increase in US treasury bond yields. See note 23 for further
details; and
- In FY23 GBP7m (FY2022: GBPnil) of asbestos litigation costs
were recovered by John Crane, Inc. via insurer settlements.
Other items
Acquisition related intangible asset amortisation costs of
GBP52m (FY2022: GBP51m) were recognised in the current period. This
is considered to be a non-headline item on the basis that these
charges result from acquisition accounting and do not relate to
current trading activity.
As announced in the FY2022 Annual Report, during FY2023 the
Group has completed a restructuring project across the Group to
better serve our customers, maximise growth opportunities and
improve efficiency. In FY2023 GBP36m of non-headline charges have
been expensed of which GBP26m has been paid to date, the remainder
is forecast to be paid within the next 18 months. The restructuring
project is a non-headline expense as the costs are material,
non-recurring and part of a pre-approved programme.
The GBP2m of irrecoverable VAT (31 July 2022: GBPnil) relates to
a historical VAT classification error. This error had resulted in
certain intercompany chain export transactions being treated as VAT
exempt when they should have been initially classified as subject
to European VAT. This has been treated as non-headline as it
relates to six years of past VAT practice and will involve payment
and recovery of European VAT, which spans FY2023 and FY2024, so may
have a material impact on the Group's headline cash conversion
metric.
In the prior year a GBP19m charge has been recognised in
relation to Russia impairment charges and related closure
costs.
Non-headline finance costs items
The non-headline items included in finance costs for continuing
operations were as follows:
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
------------------------------------------------------ ----- ---------- ----------
Unwind of discount on provisions 23 (7) (3)
Other finance income - retirement benefits 8 7 7
Interest payable on overdue VAT (7) -
Other sundry financing losses (1) -
Fair value gain on investment in early stage business 14 - 1
Foreign exchange gain on intercompany loan with
discontinued operations - 22
------------------------------------------------------ ----- ---------- ----------
Non-headline items in finance costs - continuing
operations (8) 27
------------------------------------------------------ ----- ---------- ----------
Continuing operations - non-headline loss before
taxation (106) (273)
------------------------------------------------------ ----- ---------- ----------
The financing elements of non-headline legacy liabilities,
including the GBP7m (FY2022: GBP3m) unwind of discount on
provisions, were excluded from headline finance costs because these
provisions were originally recognised as non-headline and this
treatment has been maintained for ongoing costs and credits.
Other finance income comprises GBP7m (FY2022: GBP7m) of
financing credits relating to retirement benefits. These were
excluded from headline finance costs because the ongoing costs and
credits are a legacy of previous employee pension arrangements.
The GBP7m of interest payable on overdue VAT (FY2022: GBPnil)
relates to a historic VAT classification error. This was excluded
from headline finance costs because the underlying issue was
recognised as non-headline and this treatment has been maintained
for ongoing costs and credits.
Non-headline taxation (charge)/credit
The non-headline items included in taxation for continuing
operations were as follows:
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
-------------------------------------------------- ----- ---------- ----------
Tax credit on non-headline loss 6 18 19
Increase in unrecognised UK deferred tax asset 6 (31) (5)
-------------------------------------------------- ----- ---------- ----------
Non-headline taxation (charge)/credit- continuing
operations (13) 14
-------------------------------------------------- ----- ---------- ----------
Continuing operations - non-headline loss for
the year (119) (259)
-------------------------------------------------- ----- ---------- ----------
Movement in unrecognised UK deferred tax asset
These movements are reported as non-headline because the
original credit, related to non-headline charges was reported as
non-headline.
ii. DISCONTINUED OPERATIONS
The non-headline items for discontinued operations were as
follows:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
----------------------------------------------------- ---------- ----------
Non-headline operating profit items
----------------------------------------------------- ---------- ----------
Medfusion documentation remediation costs - (33)
Impairment of investment in Ivenix, Inc. convertible
debt - (14)
------------------------------------------------------ ---------- ----------
Non-headline finance costs items
----------------------------------------------------- ---------- ----------
Foreign exchange loss on intercompany loan with
parent - (22)
------------------------------------------------------ ---------- ----------
Gain on sale of discontinued operation
----------------------------------------------------- ---------- ----------
Gain on the sale of Smiths Medical to ICU Medical,
Inc. 6 1,036
------------------------------------------------------ ---------- ----------
Non-headline taxation items
----------------------------------------------------- ---------- ----------
Tax on non-headline loss - 6
------------------------------------------------------ ---------- ----------
Non-headline items in profit from discontinued
operations 6 973
------------------------------------------------------ ---------- ----------
Profit for the year - non-headline items for
continuing and discontinued operations (113) 714
------------------------------------------------------ ---------- ----------
In the current year the Group has recognised an additional GBP6m
gain on transactions related to the sale of Smiths Medical. An
GBP11m credit was released in respect of disposal and restructuring
provisions, that are no longer required, and an offsetting
additional GBP5m of provisions were charged in respect of potential
indemnity, litigation and arbitration costs. These items are
considered to be non-headline as they relate to discontinued former
business activities.
In the prior period:
- Smiths Medical recognised a GBP33m provision against the costs
of the remediation actions required to address each of the
observations and discussion items contained in the US Food and Drug
Administration 'for-cause' audit findings on the Medfusion product
range; and
- The decision by Smiths Medical to exit its commercial
agreement with Ivenix, Inc. triggered an indicator of impairment to
the carrying value of the Smiths Medical investment in Ivenix, Inc.
and management impaired the entire GBP14m value of Smiths Medical's
investment; and
- The GBP22m foreign exchange loss on intercompany loan with
parent directly offsets the foreign exchange gain in continuing
operations.
4 Net finance costs
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
------------------------------------------------------ ----- ---------- ----------
Interest income 36 14
------------------------------------------------------ ----- ---------- ----------
Interest expense:
- bank loans and overdrafts, including associated
fees (50) (12)
- other loans (17) (40)
- interest on leases (4) (3)
------------------------------------------------------ ----- ---------- ----------
Interest expense (71) (55)
------------------------------------------------------ ----- ---------- ----------
Headline net finance costs (35) (41)
------------------------------------------------------ ----- ---------- ----------
Other financing gains/(losses):
- valuation movements on fair value hedged debt (9) (32)
- valuation movements on fair value derivatives 9 33
- foreign exchange and ineffectiveness on net
investment hedges (3) (2)
- retranslation of foreign currency bank balances 2 (1)
- interest on overdue VAT (7) -
- other items including counterparty credit risk
adjustments and non-hedge accounted derivatives - 2
------------------------------------------------------ ----- ---------- ----------
Other financing gains/(losses) (8) -
------------------------------------------------------ ----- ---------- ----------
Non-headline finance cost items:
Foreign exchange gain on intercompany loan with
discontinued operations 3 - 22
Unwind of discount on provisions 3 (7) (3)
Fair value gain on investment in early stage business 14 - 1
Net interest income on retirement benefit obligations 8 7 7
------------------------------------------------------ ----- ---------- ----------
Non-headline finance cost items - 27
------------------------------------------------------ ----- ---------- ----------
Net finance costs (43) (14)
------------------------------------------------------ ----- ---------- ----------
5 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the year attributable to equity shareholders of the Company by
the average number of ordinary shares in issue during the year.
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
--------------------------------------------------------- ----------- -----------
Profit attributable to equity shareholders for the year:
- continuing 225 11
- discontinued 6 1,022
--------------------------------------------------------- ----------- -----------
Total 231 1,033
--------------------------------------------------------- ----------- -----------
Average number of shares in issue during the year (note
24) 352,891,120 386,678,211
--------------------------------------------------------- ----------- -----------
Statutory earnings per share total - basic 65.5p 267.1p
Statutory earnings per share total - diluted 65.1p 266.0p
--------------------------------------------------------- ----------- -----------
Statutory earnings per share continuing operations -
basic 63.8p 2.8p
Statutory earnings per share continuing operations -
diluted 63.4p 2.8p
--------------------------------------------------------- ----------- -----------
Diluted earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by 354,681,819 (FY2022:
388,349,758) ordinary shares, being the average number of ordinary
shares in issue during the year adjusted by the dilutive effect of
employee share schemes. No options (FY2022: nil) were excluded from
this calculation because their effect was anti -- dilutive.
A reconciliation of statutory and headline earnings per share is
as follows:
Year ended 31 July Year ended 31 July
2023 2022
----------------------------------------- ---------------------- ----------------------
Basic Diluted Basic Diluted
EPS EPS EPS EPS
GBPm (p) (p) GBPm (p) (p)
----------------------------------------- ----- ------ ------- ------ ----- -------
Total profit attributable to equity
shareholders of the Parent Company 231 65.5 65.1 1,033 267.1 266.0
Exclude: Non-headline items (note
3) 113 (714)
----------------------------------------- ----- ------ ------- ------ ----- -------
Headline earnings per share 344 97.5 97.0 319 82.5 82.1
----------------------------------------- ----- ------ ------- ------ ----- -------
Profit from continuing operations
attributable to equity shareholders
of the Parent Company 225 63.8 63.4 11 2.8 2.8
Exclude: Non-headline items (note
3) 119 259
----------------------------------------- ----- ------ ------- ------ ----- -------
Headline earnings per share - continuing
operations 344 97.5 97.0 270 69.8 69.5
----------------------------------------- ----- ------ ------- ------ ----- -------
6 Taxation
This note only provides information about corporate income taxes
under IFRS. Smiths companies operate in over 50 countries across
the world. They pay and collect many different taxes in addition to
corporate income taxes including: payroll taxes; value added and
sales taxes; property taxes; product-specific taxes; and
environmental taxes. The costs associated with these other taxes
are included in profit before tax.
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------------------------ ---------- ----------
The taxation charge in the consolidated income statement
for the year comprises:
------------------------------------------------------------ ---------- ----------
Continuing operations
------------------------------------------------------------ ---------- ----------
- current income tax charge 112 68
- current tax adjustments in respect of prior periods (7) 5
------------------------------------------------------------ ---------- ----------
Current taxation 105 73
Deferred taxation 29 17
------------------------------------------------------------ ---------- ----------
Total taxation expense - continuing operations 134 90
------------------------------------------------------------ ---------- ----------
Analysed as:
Headline taxation expense 121 104
Non-headline taxation charge/(credit) 13 (14)
------------------------------------------------------------ ---------- ----------
Total taxation expense in the consolidated income statement 134 90
------------------------------------------------------------ ---------- ----------
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------ ---------- ----------
Tax on items charged/(credited) to equity
------------------------------------------ ---------- ----------
Deferred tax:
- retirement benefit schemes 32 -
- share-based payment - (1)
------------------------------------------ ---------- ----------
32 (1)
------------------------------------------ ---------- ----------
The GBP32m (FY2022: GBPnil) charge to equity for retirement
benefit schemes principally related to UK retirement schemes.
Current taxation liabilities
Current
tax
GBPm
------------------------------------------------- -------
At 31 July 2021 (19)
Foreign exchange loss (4)
Charge to income statement (73)
Tax paid 79
------------------------------------------------- -------
At 31 July 2022 (17)
------------------------------------------------- -------
Comprising:
Current tax receivable 50
Current tax payable within one year (64)
Corporation tax payable after more than one year (3)
------------------------------------------------- -------
At 31 July 2022 (17)
------------------------------------------------- -------
Charge to income statement (105)
Tax paid 92
------------------------------------------------- -------
At 31 July 2023 (30)
------------------------------------------------- -------
Comprising:
Current tax receivable 47
Current tax payable within one year (74)
Corporation tax payable after more than one year (3)
------------------------------------------------- -------
At 31 July 2023 (30)
------------------------------------------------- -------
Provisions for tax liabilities amount to GBP46m (FY2022: GBP38m)
the majority of which relates to the risk of challenge from tax
authorities to the geographic allocation of profits across the
Group.
In addition to the risks provided for, the Group faces a variety
of other tax risks, which result from operating in a complex global
environment, including the ongoing reform of both international and
domestic tax rules, new and ongoing tax audits in the Group's
larger markets and the challenge to fulfil ongoing tax compliance
filing and transfer pricing obligations given the scale and
diversity of the Group's global operations.
The Group anticipates that a number of tax audits are likely to
conclude in the next 12 to 24 months for which provisions are
recognised based on best estimates and management's judgements
concerning the ultimate outcome of the audit. Due to the
uncertainty associated with such items, it is possible at a future
date, on conclusion of open tax matters, the final outcome may vary
significantly from the amounts noted above.
Reconciliation of the tax charge
The headline tax charge for the year of GBP121m (FY2022:
GBP104m) represents an effective rate of 26.0% (FY2022: 27.6%).
The tax charge on the profit for the year for continuing
operations is different from the standard rate of corporation tax
in the UK, with a rate for FY2023 of 21.0% (FY2022: 19.0%). The
differences are reconciled as follows:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------------------------ ---------- ----------
Profit before taxation 366 103
------------------------------------------------------------ ---------- ----------
Notional taxation expense at UK corporate rate of 21%
(FY2022: 19.0%) 77 20
Different tax rates on non-UK profits and losses 13 13
Non-deductible expenses and other charges 24 11
Tax credits and non-taxable income (10) (6)
Non-headline UK deferred tax asset recognition adjustment 31 5
Other adjustments to unrecognised deferred tax 2 10
Non-tax relievable loss on UK pensions schemes - 41
Tax on Smiths Medical consolidation adjustments - 2
Prior year true-up (3) (6)
------------------------------------------------------------ ---------- ----------
Total taxation expense in the consolidated income statement 134 90
------------------------------------------------------------ ---------- ----------
Comprising:
Taxation on headline profit 121 104
------------------------------------------------------------ ---------- ----------
Non-headline taxation items:
- Tax credit on non-headline loss (18) (19)
- UK deferred tax asset recognition adjustment 31 5
------------------------------------------------------------ ---------- ----------
Taxation on non-headline items 13 (14)
Total taxation expense in the consolidated income statement 134 90
------------------------------------------------------------ ---------- ----------
The table above reconciles the notional taxation charge
calculated at the UK tax rate, to the actual total tax charge. As a
group operating in multiple countries, the actual tax rates
applicable to profits in those countries are different from the UK
tax rate. The impact is shown above as different tax rates on
non-UK profits and losses. The Group's worldwide business leads to
the consideration of a number of important factors which may affect
future tax charges, such as: the levels and mix of profitability in
different jurisdictions; transfer pricing regulations; tax rates
imposed and tax regime reforms; acquisitions; disposals;
restructuring activities; and settlements or agreements with tax
authorities.
Deferred taxation assets/(liabilities)
Property,
plant,
equipment
and Losses
intangible Employment carried
assets benefits forward Provisions Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
At 31 July 2021 (56) (105) 144 78 3 64
Reallocations (15) 1 9 1 4 -
Charge to income statement - continuing
operations 4 50 (54) (10) (7) (17)
Credit to equity - 3 - - (4) (1)
Foreign exchange rate movements (9) - 4 10 - 5
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
At 31 July 2022 (76) (51) 103 79 (4) 51
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
Comprising:
Deferred tax assets (1) (56) 76 65 11 95
Deferred tax liabilities (75) 5 27 14 (15) (44)
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
At 31 July 2022 (76) (51) 103 79 (4) 51
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
Reallocations - (2) 6 (4) - -
Charge to income statement - continuing
operations 13 (3) (32) (5) (2) (29)
Credit to equity - 32 - - - 32
Foreign exchange rate movements 3 (1) (2) (4) 2 (2)
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
At 31 July 2023 (60) (25) 75 66 (4) 52
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
Comprising:
Deferred tax assets (2) (27) 50 60 14 95
Deferred tax liabilities (58) 2 25 6 (18) (43)
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
At 31 July 2023 (60) (25) 75 66 (4) 52
---------------------------------------- ----------- ---------- -------- ---------- ----- ------
Of the amounts included within 'Other', shown in the above
table, as at 31 July 2023, amounts relating to tax on unremitted
earnings were GBP19m (FY2022: GBP19m). The aggregate amount of
temporary differences associated with investments in subsidiaries
for which deferred tax liabilities have not been recognised is
immaterial.
The deferred tax asset relating to losses has been recognised on
the basis of strong evidence of future taxable profits against
which the unutilised tax losses can be relieved or it is probable
that they will be recovered against the reversal of deferred tax
liabilities. The closing net deferred tax asset balance related to
UK activities and included in the balance at 31 July 2023 amounted
to GBPnil (FY2022: GBPnil). The deferred tax asset balance for
provisions includes GBP51m (FY2022: GBP57m) relating to John Crane
Inc. litigation provision, and GBP9m (FY2022: GBP12m) relating to
Titeflex Corporation. See note 23 for additional information on
provisions.
Unrecognised deferred tax
The Group has GBP521m of unrecognised deferred tax relating to
losses (FY2022: GBP335m).
The expiry date of operating losses carried forward is dependent
upon the law of the various territories in which the losses arise.
A summary of expiry dates in respect of which deferred tax has not
been recognised is set out below:
Expiry Expiry
2023 of 2022 of
GBPm losses GBPm losses
------------------------------------------ ----- --------- ----- ---------
Unrestricted losses - operating losses 521 No expiry 335 No expiry
------------------------------------------ ----- --------- ----- ---------
Total unrecognised deferred tax on losses 521 335
------------------------------------------ ----- --------- ----- ---------
Unrecognised deferred tax relating to losses has increased by
GBP186m (FY2022: GBP228m). This comprises an increase of GBP78m
that principally matches the reduction in the UK pensions deferred
tax liability, an increase of GBP75m relating to Detection and
Interconnect USA current year losses and GBP33m from a FY2022
change in local accounting method for tax purposes resulting in
additional losses being booked in FY2023.
Developments in the Group tax position
In December 2021, the Organisation for Economic Co-operation and
Development published rules relating to global minimum taxation
called 'Pillar 2 rules', currently timetabled to apply in the UK to
accounting periods beginning on or after 1 January 2024 (year ended
31 July 2025 for Smiths). The Group will continue to monitor the
development and future implementation of these rules globally.
Smiths is actively working to fully understand the impact of the
new rules and developing processes to enable compliance. Based upon
our latest understanding, the current estimate of additional tax
payable is not expected to have a material impact on the Group.
7 Employees
Year ended 31 July Year ended 31 July
2023 2022
================================= -------------------------------- --------------------------------
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================= =========== ============ ===== =========== ============ =====
Staff costs during the period
Wages and salaries 802 - 802 700 91 791
Social security 92 - 92 81 9 90
Share-based payment (note 9) 14 - 14 13 2 15
Pension costs (including defined
contribution schemes) (note 8) 31 - 31 29 5 34
--------------------------------- ----------- ------------ ----- ----------- ------------ -----
939 - 939 823 107 930
================================= =========== ============ ===== =========== ============ =====
The average number of persons employed, including employees on
permanent, fixed term and temporary contracts, rounded to the
nearest 50 employees was:
Year ended Year ended
31 July 31 July
2023 2022
------------------------------------------------------- ---------- ----------
John Crane 6,050 6,050
Smiths Detection 3,250 3,100
Flex-Tek 3,750 3,300
Smiths Interconnect 2,800 2,500
Corporate (including central/shared IT services) 300 300
------------------------------------------------------- ---------- ----------
Continuing operations 16,150 15,250
------------------------------------------------------- ---------- ----------
Discontinued operations - Smiths Medical (in period to
6 January 2022) - 6,700
------------------------------------------------------- ---------- ----------
Total 16,150 21,950
------------------------------------------------------- ---------- ----------
Key management
The key management of the Group comprises Smiths Group plc Board
Directors and Executive Committee members. Their aggregate
compensation is shown below. Details of Directors' remuneration are
contained in the report of the Remuneration & People Committee
within the Annual Report 2023 .
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------ ---------- ----------
Key management compensation
------------------------------------------ ---------- ----------
Salaries and short-term employee benefits 12.0 10.3
Cost of retirement benefits 0.7 0.7
Cost of share-based incentive plans 4.9 4.7
------------------------------------------ ---------- ----------
No member of key management had any material interest during the
period in a contract of significance (other than a service contract
or a qualifying third-party indemnity provision) with the Company
or any of its subsidiaries.
Options and awards held at the end of the period by key
management in respect of the Company's share-based incentive plans
were:
Year ended 31 July Year ended 31 July
2023 2022
----------------- ----------------------- -----------------------
Number Weighted Number Weighted
of average of average
instruments exercise instruments exercise
'000 price '000 price
----------------- ------------ --------- ------------ ---------
LTIP 1,580 1,411
Restricted stock - 8
SAYE 16 GBP11.45 16 GBP11.43
----------------- ------------ --------- ------------ ---------
Related party transactions
The only related party transactions in FY2023 were key
management compensation (FY2022: key management compensation).
8 Retirement benefits
Smiths provides retirement benefits to employees in a number of
countries. This includes defined benefit and defined contribution
plans and, mainly in the United Kingdom (UK) and United States of
America (US), post-retirement healthcare.
Defined contribution plans
The Group operates defined contribution plans across many
countries. In the UK a defined contribution plan has been offered
since the closure of the UK defined benefit pension plans. In the
US a 401(k) defined contribution plan operates. The total expense
recognised in the consolidated income statement in respect of all
these plans was GBP31m (FY2022: GBP34m).
Defined benefit and post-retirement healthcare plans
The principal defined benefit pension plans are in the UK and in
the US and these have been closed so that no future benefits are
accrued.
For all schemes, pension costs are assessed in accordance with
the advice of independent, professionally qualified actuaries.
These valuations have been updated by independent qualified
actuaries in order to assess the liabilities of the schemes as at
31 July 2023. Contributions to the schemes are made on the advice
of the actuaries, in accordance with local funding
requirements.
The changes in the present value of the net pension asset in the
period were:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
---------------------------------------------------------- ---------- ----------
At beginning of period 194 413
Foreign exchange rate movements 1 -
Current service cost (2) (2)
Headline scheme administration costs (4) (4)
Non-headline scheme administration costs (2)
Past service cost, curtailments, settlements - continuing
operations 4 (214)
Settlements - discontinued operations - (3)
Finance income - retirement benefits 7 7
Contributions by employer 5 9
Actuarial (losses)/gains (114) 3
Retirement benefit obligations disposed of with Smiths
Medical - 5
Unrecognised assets due to surplus restriction - (20)
---------------------------------------------------------- ---------- ----------
Net retirement benefit asset 89 194
---------------------------------------------------------- ---------- ----------
The GBP413m net retirement benefit asset at the start of FY2022
included GBP5m of pension obligations disclosed within liabilities
held for sale.
UK pension schemes
Smiths Group's funded UK pension schemes are subject to a
statutory funding objective, as set out in UK pension legislation.
Scheme trustees need to obtain regular actuarial valuations to
assess the scheme against this funding objective. The trustees and
sponsoring companies need to agree funding plans to improve the
position of a scheme when it is below the acceptable funding
level.
The UK Pensions Regulator has extensive powers to protect the
benefits of members, promote good administration and reduce the
risk of situations arising which may require compensation to be
paid from the Pension Protection Fund. These include imposing a
schedule of contributions or the calculation of the technical
provisions, where a trustee and company fail to agree appropriate
calculations.
Smiths Industries Pension Scheme (SIPS)
This scheme was closed to future accrual effective 1 November
2009. SIPS provides index-linked (to applicable caps) pension
benefits based on final earnings at date of closure. SIPS is
governed by a corporate trustee (S.I. Pension Trustees Limited, a
wholly owned subsidiary of Smiths Group plc). The board of trustee
directors currently comprises four Company-nominated trustees and
four member-nominated trustees, with an independent chairman
selected by Smiths Group plc. Trustee directors are responsible for
the management, administration, funding and investment strategy of
the scheme.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 31 March 2020. The
valuation showed a surplus of GBP34m on the Technical Provisions
funding basis at the valuation date and the funding position has
improved since then. As part of the valuation agreement, no
contributions are currently being paid to SIPS and the Group's
current expectation is that these contributions will not recommence
(although there are circumstances relating to the Scheme's funding
level in which contributions could be due to SIPS). The next
actuarial valuation, due as at 31 March 2023, is currently in
progress, with the results expected later in 2023.
The duration of SIPS liabilities is around 18 years (FY2022: 20
years) for active deferred members, 19 years (FY2022: 20 years) for
deferred members and 10 years (FY2022: 11 years) for pensioners and
dependants. Durations have reduced primarily due to the increase in
discount rate assumption, which reduces the average time it takes
to receive all future pension payments when weighted by the present
value of those future pension payments.
Under the governing documentation of SIPS, any future surplus
would be returnable to Smiths Group plc by refund, assuming gradual
settlement of the liabilities over the lifetime of the scheme.
In SIPS, as part of ongoing data cleansing work being undertaken
to prepare the scheme for a potential full buy-out in the future, a
wider review is being carried out to determine if the method used
in the early 1990s to equalise retirement ages between men and
women was implemented correctly. In FY2022, an additional liability
of GBP19m was recognised as a past service cost to reflect the
expected impact of correcting this issue for certain sections of
the scheme. In the current year, a further liability of GBP12m has
been recognised and GBP16m recognised in previous years has been
released following the identification of additional evidence of the
obligation for equalisation, resulting in a net credit to the
income statement of GBP4m. The review remains ongoing however, no
further material additional liabilities are expected.
SIPS uses a Liability Driven Investment (LDI) strategy to hedge
against interest and inflation rate changes. During the significant
volatility that followed the UK Government's mini budget in
September 2022, this hedging policy meant that SIPS asset values
fell, as did the value of its obligations. All of SIPS's collateral
requirements in respect of the LDI assets were met, with no support
required from the Group.
TI Group Pension Scheme (TIGPS)
This scheme was closed to future accrual effective 1 November
2009. TIGPS provides index-linked (to applicable caps) pension
benefits based on final earnings at the date of closure. TIGPS is
governed by a corporate trustee (TI Pension Trustee Limited, an
independent company). The board of trustee directors comprises four
Company-nominated trustees and four member-nominated trustees, with
an independent trustee director selected by the trustee. The
trustee is responsible for the management, administration, funding
and investment strategy of the scheme.
In June 2022 the TIGPS trustee completed a deal to secure its
remaining uninsured pension liabilities, by way of a bulk annuity
buy-in with Rothesay Life plc. This means all of the scheme's
liabilities are insured via seven buy-in policies. The final buy-in
has been secured with an intention to fully buy-out the Scheme as
soon as reasonably practical and within a period of four years. The
FY2022 income statement recognised a settlement loss of GBP171m in
relation to the buy-in.
In terms agreed between the Group and the TIGPS trustee prior to
the transaction, when TIGPS converts all of its buy-in policies to
buy-out policies and subsequently winds up, the trustee is expected
to use any surplus remaining, after the costs of buying-out and
winding up the scheme have been met, to improve member benefits.
The FY 2022 income statement recognised a past service cost of
GBP24m in relation to the derecognition of the remaining surplus.
The Group has no expectation of receiving a refund from the scheme
and has placed an economic benefit value of zero on the TIGPS
surplus from 10 June 2022.
As TIGPS currently retains the legal obligation to pay all
scheme benefits, TIGPS liabilities remain part of the retirement
benefit obligations on the balance sheet alongside the
corresponding buy-in assets. These liabilities and assets will be
derecognised at the point the buy-in policies are converted to
buy-outs and the legal obligation for payment of benefits is
transferred to the relevant insurers.
The most recent actuarial valuation of this scheme has been
performed using the Projected Unit Method as at 5 April 2020. The
valuation showed a surplus of GBP22m on the Technical Provisions
funding basis at the valuation date and the funding position has
improved since then. Given TIGPS's circumstances, the Group's
current expectation is that no further contributions to TIGPS will
be required. The next actuarial valuation, due as at 5 April 2023,
is currently in progress, with the results expected later in
2023.
The duration of the TIGPS liabilities is around 20 years
(FY2022: 21 years) for active deferred members, 18 years (FY2022:
19 years) for deferred members and 10 years (FY2022: 10 years) for
pensioners and dependants.
US pension plans
The valuations of the principal US pension and post-retirement
healthcare plans were performed using census data at 1 January
2023.
The pension plans were closed with effect from 30 April 2009 and
benefits were calculated as at that date and are not revalued.
Governance of the US pension plans is overseen by a Settlor
Committee appointed by Smiths Group Services Corp, a wholly owned
subsidiary of the Group.
The duration of the liabilities for the largest US plan is
around 15 years (FY2022: 16 years) for active deferred members, 14
years (FY2022: 15 years) for deferred members and 10 years (FY2022:
10 years) for pensioners and dependants.
Risk management
In respect of uninsured liabilities, the pensions schemes are
exposed to risks that:
- Investment returns are below expectations, leaving the schemes
with insufficient assets in future to pay all their pension
obligations;
- Members and dependants live longer than expected, increasing
the value of the pensions which the schemes have to pay;
- Inflation rates are higher than expected, causing amounts
payable under index-linked pensions to be higher than expected;
and
- Increased contributions are required to meet funding targets
if lower interest rates increase the current value of
liabilities.
These risks are managed separately for each pension scheme.
However, the Group has adopted a common approach of closing defined
benefit schemes to cap members' entitlements and of supporting
trustees in adopting investment strategies which aim to hedge the
value of assets against changes in the value of liabilities caused
by changes in interest and inflation rates.
Across SIPS and TIGPS, approximately 60% of all liabilities are
now de-risked through 11 bulk annuities.
TIGPS
TIGPS has covered roughly 100% of liabilities with matching
annuities, eliminating investment return, longevity, inflation and
funding risks in respect of those liabilities.
SIPS
SIPS has covered roughly 33% of liabilities with matching
annuities, eliminating investment return, longevity, inflation and
funding risks in respect of those liabilities. It has also adopted
a LDI strategy to hedge interest and inflation risks of the
scheme's uninsured liabilities by investment in gilts together with
the use of gilt repurchase arrangements, total return swaps,
inflation swaps and interest rate swaps. The strategy also takes
into account the scheme's corporate bond investments.
The critical estimates and principal assumptions used in
updating the valuations are set out below:
2023 2023 2023 2022 2022 2022
UK US Other UK US Other
--------------------------------------------- ---- ---- ------ ---- ---- ------
Rate of increase in salaries n/a n/a 2.5% n/a n/a 2.2%
Rate of increase for active deferred members 4.0% n/a n/a 4.0% n/a n/a
Rate of increase in pensions in payment 3.3% n/a 1.6% 3.4% n/a 1.2%
Rate of increase in deferred pensions 3.3% n/a n/a 3.4% n/a n/a
Discount rate 5.1% 5.2% 2.8% 3.5% 4.5% 1.1%
Inflation rate 3.3% n/a 0.4% 3.4% n/a 1.3%
--------------------------------------------- ---- ---- ------ ---- ---- ------
The assumptions used in calculating the costs and obligations of
the Group's defined benefit pension plans are set by the Group
after consultation with independent professionally qualified
actuaries. The assumptions used are estimates chosen from a range
of possible actuarial assumptions which, due to the timescale
covered, may not necessarily occur in practice. For countries
outside the UK and USA, assumptions are disclosed as a weighted
average.
Inflation rate assumptions
The RPI inflation assumption of 3.3% has been derived using the
Aon UK Government Gilt Prices Only Curve with an Inflation Risk
Premium of 0.2% p.a.
The Government's response to its consultation on RPI reform was
published on 25 November 2020, and strongly implied that RPI will
become aligned with CPI-H from 2030. No specific allowance (beyond
anything already priced into markets) has been factored into the
RPI assumptions for potential changes. The assumption for the
long-term gap between RPI and CPI is 0.5% p.a. (FY2022: 0.6%)
reflecting the Group's view on the market pricing of this gap over
the lifetime of the UK schemes' liabilities, i.e. 0.9% p.a.
(FY2022: 1.0%) pre-2030 and 0.1% p.a. post-2030 (FY2022: 0.2%).
Short-term inflation has continued at rates higher than the
Government's targets, though future inflation is expected to fall
in the short term as the Bank of England increases interest rates
to combat high inflation. Consequently, the long-term inflation
assumptions are similar to the prior year. The full impact of
current high inflation is mitigated to an extent by the caps in
place on index-linked increases. The Board considered and declined
a request from the Trustee of SIPS to recommend an additional
discretionary increase to pensions in payment. However, there is no
change in the Group's constructive obligations and allowance for
certain discretionary increases in future continues to be included
in the defined benefit obligations shown below.
Discount rate assumptions
The UK schemes use a discount rate based on the annualised yield
on the Aon GBP Single Agency Select AA Curve, using the expected
cash-flows from a notional scheme with obligations of the same
duration as that of the UK schemes, whereas in previous years the
Aon GBP Select AA Curve was used. The increase in the discount rate
assumption at 31 July 2023 arises from market conditions and is not
impacted by the change in discount rate methodology.
The US Plan uses a discount rate based on the annualised yield
derived from Willis Towers Watson's RATE:Link (10th - 90th) model
using the Plan's expected cash-flows.
The discount rate assumptions have increased significantly since
the prior year, largely due to the significant volatility that
followed the UK Government's mini budget in September 2022, though
other factors have contributed to the continued rise in bond yields
since then, including heightened political uncertainty, increases
to interest rates to combat persistent high inflation and market
illiquidity. A higher discount rate has led to a lower value being
placed on the retirement benefit obligations, though there has also
been a corresponding reduction in the value of assets.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are
based on the latest 'SAPS S3' birth year tables with relevant
scaling factors based on the recent experience of the schemes. The
assumption allows for future improvements in life expectancy in
line with the 2021 latest 2022 CMI projections, with a smoothing
factor of 7.0 and 'A' parameter of 0.5%/0.25% (SIPS/TIGPS) and
blended to a long-term rate of 1.25%. The latest CMI projections
incorporate allowance for the impact of COVID-19, equivalent to a
reduction in life expectancy of around 0.5 years.
The mortality assumptions used in the principal US schemes are
based on generational mortality using the latest Pri-2012
sex-distinct, employee/non-disabled annuitant table, with a 2012
base year, projected forward generationally with the latest MP-2021
mortality scale. No explicit adjustment has been made to mortality
assumptions in respect of COVID-19. The impact of COVID-19 remains
uncertain and further data studies are underway to better predict
the impact on future mortality.
UK schemes
---------------------------------------------------- --------------------------------------
Male Female Male Female
31 July 31 July 31 July 31 July
Expected further years of life 2023 2023 2022 2022
---------------------------------------------------- -------- -------- -------- --------
Member who retires next year at age 65 21 23 22 24
Member, currently 45, when they retire in 20 years'
time 20 24 23 25
---------------------------------------------------- -------- -------- -------- --------
US schemes
--------------------------------------------- --------------------------------------
Male Female Male Female
31 July 31 July 31 July 31 July
Expected further years of life 2023 2023 2022 2022
--------------------------------------------- -------- -------- -------- --------
Member who retires next year at age 65 21 22 21 22
Member, currently 45, when they retire in 20
years' time 22 24 22 24
--------------------------------------------- -------- -------- -------- --------
Sensitivity
Sensitivities in respect of the key assumptions used to measure
the principal pension schemes as at 31 July 2023 are set out below.
These sensitivities show the hypothetical impact of a change in
each of the listed assumptions in isolation, with the exception of
the sensitivity to inflation which incorporates the impact of
certain correlating assumptions. In practice, such assumptions
rarely change in isolation.
Profit Profit
before Increase/ (Increase)/ before Increase/ (Increase)/
tax (decrease) decrease tax (decrease) decrease
for in in for in in
year scheme scheme year scheme scheme
ended assets liabilities ended assets liabilities
31 July 31 July 31 July 31 July 31 July 31 July
2023 2023 2023 2022 2022 2022
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------- ----------- ------------ -------- ----------- ------------
Rate of mortality - one year increase
in life expectancy (2) 60 (88) (2) 84 (135)
Rate of mortality - one year decrease
in life expectancy 2 (62) 89 2 (84) 136
Rate of inflation - 0.25% increase (1) 23 (43) (1) 34 (69)
Discount rate - 0.25% increase 2 (36) 60 2 (49) 97
Market value of scheme assets - 2.5%
increase 2 30 - 1 40 -
-------------------------------------- -------- ----------- ------------ -------- ----------- ------------
The effect on profit before tax reflects the impact of current
service cost and net interest cost. The value of the scheme assets
is affected by changes in mortality rates, inflation and
discounting because they affect the carrying value of the insurance
assets.
Asset valuation
The pension schemes hold assets in a variety of pooled funds, in
which the underlying assets typically are invested in credit and
cash assets. These funds are valued. The price of the funds is set
by administrators/custodians employed by the investment managers
and based on the value of the underlying assets held in the funds.
Prices are generally updated daily, weekly or quarterly depending
upon the frequency of the fund's dealing.
Bonds are valued using observable broker quotes. Gilt repurchase
obligations are valued by the relevant manager, which derives the
value using an industry recognised model with observable
inputs.
Total return, interest and inflation swaps and forward FX
contracts are bilateral agreements between counterparties and do
not have observable market prices. These derivative contracts are
valued using observable inputs.
Insured liabilities comprise annuity policies that match all or
part of the scheme obligation to identified groups of members.
These assets are valued by an external qualified actuary at the
actuarial valuation of the corresponding liability, reflecting this
matching relationship.
The insurance policies are treated as qualifying insurance
policies as none of the insurers are related parties of Smiths
Group, and the proceeds of the policies can only be used to pay or
fund employee benefits for the respective schemes, are not
available to Smiths Group's creditors and cannot be paid to Smiths
Group.
Retirement benefit plan assets
31 July 2023 - GBPm
---------------------------- -------------------------------------
UK US Other
schemes schemes countries Total
---------------------------- -------- -------- ---------- -----
Cash and cash equivalents 93 1 1 95
Pooled funds:
- Pooled equity - - 3 3
- Pooled Diversified Growth - - 13 13
- Pooled credit 320 - - 320
Corporate bonds 203 141 - 344
Government bonds/LDI 421 44 3 468
Insured liabilities 1,323 - - 1,323
Property 7 - - 7
Total market value 2,367 186 20 2,573
---------------------------- -------- -------- ---------- -----
31 July 2022 - GBPm
---------------------------- -------------------------------------
UK US Other
schemes schemes countries Total
---------------------------- -------- -------- ---------- -----
Cash and cash equivalents 90 1 1 92
Pooled funds:
- Pooled equity - - 3 3
- Pooled Diversified Growth - - 15 15
- Pooled credit 379 - - 379
Corporate bonds 412 167 - 579
Government bonds/LDI 498 57 3 558
Insured liabilities 1,649 - - 1,649
Property 39 - - 39
Total market value 3,067 225 22 3,314
---------------------------- -------- -------- ---------- -----
The UK Government bonds/LDI portfolios contain GBP717m (FY2022:
GBP960m) of UK Government bonds (gilts), GBP276m (FY2022: GBP476m)
of gilt repurchase obligations and GBP18m of interest and inflation
swap obligations (FY2022: GBP9m assets) and forward FX contracts
with a net obligation of GBP2m (FY2022: GBP5m asset). These are
held to hedge against foreign currency risk. The pooled funds,
insured liabilities and property assets are unquoted. The scheme
assets do not include any property occupied by, or other assets
used by, the Group.
The asset valuations are effective as at the end of the period,
consistent with the calculations determining the obligations,
except for a small legacy commercial property investment which is
due to be sold down over 2023. This investment is only valued at
the end of each calendar quarter, so no valuation is available as
at the period end. The Group considers taking the most recent
available valuation to be appropriate given the size of the
commercial property investment relative to the overall value of
invested assets and wider commercial property market returns since
the most recent valuation.
The Group acknowledges that responsibility for the effective
management of the schemes' assets lies primarily with the trustees,
but also accepts that any risks inherent in the investment
strategy, including ESG and climate risk, are ultimately
underwritten by the Group. Consequently, the Group ensures that the
trustees' investment strategy and statements of investment
principles are compatible with the Group's wider sustainability
strategy. For TIGPS, where all benefits are now secured by way of
annuity purchase, all investment risks including ESG and climate
risk, have effectively now been eliminated. For SIPS, a significant
portion of investment risks have already been eliminated through
annuity purchase and the scheme's time horizon to full buy-in,
hence exposure to investment risks including ESG and climate risk,
continues to reduce.
Present value of funded scheme liabilities and assets for the
main UK and US schemes
31 July 2023 - GBPm
-------------------------------------------- ------------------------
US
SIPS TIGPS schemes
-------------------------------------------- ------- ----- --------
Present value of funded scheme liabilities:
- Active deferred members (25) (18) (31)
- Deferred members (388) (326) (86)
- Pensioners (838) (561) (85)
-------------------------------------------- ------- ----- --------
Present value of funded scheme liabilities (1,251) (905) (202)
Market value of scheme assets 1,446 921 186
Surplus restriction - (16) -
-------------------------------------------- ------- ----- --------
Surplus/(deficit) 195 - (16)
-------------------------------------------- ------- ----- --------
31 July 2022 - GBPm
-------------------------------------------- --------------------------
US
SIPS TIGPS schemes
-------------------------------------------- ------- ------- --------
Present value of funded scheme liabilities:
- Active deferred members (32) (23) (41)
- Deferred members (561) (442) (109)
- Pensioners (1,010) (670) (88)
-------------------------------------------- ------- ------- --------
Present value of funded scheme liabilities (1,603) (1,135) (238)
Market value of scheme assets 1,912 1,155 225
Surplus restriction - (20) -
-------------------------------------------- ------- ------- --------
Surplus/(deficit) 309 - (13)
-------------------------------------------- ------- ------- --------
Net retirement benefit obligations
31 July 2023 - GBPm
------------------------------------------- ---------------------------------------
UK US Other
schemes schemes countries Total
------------------------------------------- -------- -------- ---------- -------
Market value of scheme assets 2,367 186 20 2,573
Present value of funded scheme liabilities (2,156) (202) (25) (2,383)
Surplus restriction (16) - - (16)
------------------------------------------- -------- -------- ---------- -------
Surplus/(deficit) 195 (16) (5) 174
------------------------------------------- -------- -------- ---------- -------
Unfunded pension plans (37) (6) (36) (79)
Post-retirement healthcare (3) (1) (2) (6)
------------------------------------------- -------- -------- ---------- -------
Present value of unfunded obligations (40) (7) (38) (85)
------------------------------------------- -------- -------- ---------- -------
Net pension asset/(liability) 155 (23) (43) 89
------------------------------------------- -------- -------- ---------- -------
Comprising:
Retirement benefit assets 195 - - 195
Retirement benefit liabilities (40) (23) (43) (106)
------------------------------------------- -------- -------- ---------- -------
Net pension asset/(liability) 155 (23) (43) 89
------------------------------------------- -------- -------- ---------- -------
31 July 2022 - GBPm
------------------------------------------- ---------------------------------------
UK US Other
schemes schemes countries Total
------------------------------------------- -------- -------- ---------- -------
Market value of scheme assets 3,067 225 22 3,314
Present value of funded scheme liabilities (2,738) (238) (27) (3,003)
Surplus restriction (20) - - (20)
------------------------------------------- -------- -------- ---------- -------
Surplus/(deficit) 309 (13) (5) 291
------------------------------------------- -------- -------- ---------- -------
Unfunded pension plans (43) (7) (40) (90)
Post-retirement healthcare (4) (1) (2) (7)
------------------------------------------- -------- -------- ---------- -------
Present value of unfunded obligations (47) (8) (42) (97)
------------------------------------------- -------- -------- ---------- -------
Net pension asset/(liability) 262 (21) (47) 194
------------------------------------------- -------- -------- ---------- -------
Comprising:
Retirement benefit assets 309 - - 309
Retirement benefit liabilities (47) (21) (47) (115)
=========================================== ======== ======== ========== =======
Net pension asset/(liability) 262 (21) (47) 194
------------------------------------------- -------- -------- ---------- -------
Where any individual scheme shows a recoverable surplus under
IAS 19, this is disclosed on the balance sheet as a retirement
benefit asset. The IAS 19 surplus of any one scheme is not
available to fund the IAS 19 deficit of another scheme. The
retirement benefit asset disclosed arises from the rights of the
employers to recover the surplus at the end of the life of the
scheme, i.e. when the last beneficiary's obligation has been
met.
Amounts recognised in the consolidated income statement
Year Year
ended ended
31 July 31 July
2023 2022
GBPm GBPm
-------------------------------------------------------- -------- --------
Amounts charged to operating profit
-------------------------------------------------------- -------- --------
Current service cost 2 2
Past service costs - benefit equalisations (5) 43
Settlement loss 1 171
Headline scheme administration costs 4 4
Non-headline scheme administration costs 2 -
-------------------------------------------------------- -------- --------
4 220
-------------------------------------------------------- -------- --------
The operating cost is charged as follows:
-------------------------------------------------------- -------- --------
Headline administrative expenses 6 6
Non-headline settlement loss 1 171
Non-headline administrative expenses (3) 43
======================================================== ======== ========
4 220
-------------------------------------------------------- -------- --------
Amounts credited to finance costs
-------------------------------------------------------- -------- --------
Non-headline other finance income - retirement benefits (7) (7)
-------------------------------------------------------- -------- --------
Amounts recognised directly in the consolidated statement of
comprehensive income
Year Year
ended ended
31 July 31 July
2023 2022
GBPm GBPm
---------------------------------------------------------------- -------- --------
Re-measurements of retirement defined benefit assets and
liabilities
---------------------------------------------------------------- -------- --------
Difference between interest credit and return on assets (660) (835)
Experience gains on scheme liabilities (54) (31)
Actuarial gains arising from changes in demographic assumptions 48 1
Actuarial gains/(losses) arising from changes in financial
assumptions 548 868
Movement in surplus restriction 4 (20)
---------------------------------------------------------------- -------- --------
(114) (17)
---------------------------------------------------------------- -------- --------
Changes in present value of funded scheme assets
31 July 2023 - GBPm
------------------------------------ -------------------------------------
UK US Other
schemes schemes countries Total
------------------------------------ -------- -------- ---------- -----
At beginning of period 3,067 225 22 3,314
Interest on assets 105 10 1 116
Actuarial movement on scheme assets (638) (21) (1) (660)
Scheme administration costs (5) (1) - (6)
Foreign exchange rate movements - (10) - (10)
Assets distributed on settlements - (4) - (4)
Benefits paid (162) (13) (2) (177)
------------------------------------ -------- -------- ---------- -----
At end of period 2,367 186 20 2,573
------------------------------------ -------- -------- ---------- -----
31 July 2022 - GBPm
---------------------------------------- -------------------------------------
UK US Other
schemes schemes countries Total
---------------------------------------- -------- -------- ---------- -----
At beginning of period 4,104 272 30 4,406
Interest on assets 70 8 1 79
Actuarial movement on scheme assets (773) (62) - (835)
Employer contributions 3 - 1 4
Scheme administration costs (3) (1) - (4)
Foreign exchange rate movements - 33 - 33
Assets transferred on business disposal - - (5) (5)
Assets distributed on settlements (180) - - (180)
Curtailment gains/(losses) - (9) - (9)
Benefits paid (154) (16) (5) (175)
---------------------------------------- -------- -------- ---------- -----
At end of period 3,067 225 22 3,314
---------------------------------------- -------- -------- ---------- -----
Changes in present value of funded defined benefit
obligations
31 July 2023 - GBPm
---------------------------------------- ---------------------------------------
UK US Other
schemes schemes countries Total
---------------------------------------- -------- -------- ---------- -------
At beginning of period (2,738) (238) (27) (3,003)
Past service costs 4 - - 4
Interest on obligations (94) (10) (1) (105)
Actuarial movement on liabilities 510 19 1 530
Foreign exchange rate movements - 11 - 11
Liabilities extinguished on settlements - 3 - 3
Benefits paid 162 13 2 177
---------------------------------------- -------- -------- ---------- -------
At end of period (2,156) (202) (25) (2,383)
---------------------------------------- -------- -------- ---------- -------
31 July 2022 - GBPm
============================================= ---------------------------------------
UK US Other
schemes schemes countries Total
============================================= -------- -------- ---------- -------
At beginning of period (3,558) (273) (38) (3,869)
Past service costs (43) - - (43)
Interest on obligations (61) (8) (1) (70)
Actuarial movement on liabilities 761 54 2 817
Foreign exchange rate movements - (33) - (33)
Liabilities transferred on business disposal - - 5 5
Curtailment gains/(losses) - 6 - 6
Liabilities extinguished on settlements 9 - - 9
Benefits paid 154 16 5 175
--------------------------------------------- -------- -------- ---------- -------
At end of period (2,738) (238) (27) (3,003)
--------------------------------------------- -------- -------- ---------- -------
Changes in present value of unfunded defined benefit pensions
and post-retirement healthcare plans
Assets Obligations
--------------------------------------------- ---------------------- ----------------------
Year ended Year ended Year ended Year ended
31 July 31 July 31 July 31 July
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
--------------------------------------------- ---------- ---------- ---------- ----------
At beginning of period - - (98) (124)
Current service cost - - (1) (1)
Interest on obligations - - (3) (2)
Actuarial movement - - 12 21
Employer contributions 5 5 - -
Liabilities transferred on business disposal - - - 4
Benefits paid (5) (5) 5 5
--------------------------------------------- ---------- ---------- ---------- ----------
At end of period - - (85) (97)
--------------------------------------------- ---------- ---------- ---------- ----------
Changes in the effect of the asset ceiling over the year
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------- ---------- ----------
Irrecoverable asset at beginning of period (20) -
Actuarial movement on scheme assets 4 (20)
------------------------------------------- ---------- ----------
At end of period (16) (20)
------------------------------------------- ---------- ----------
Cash contributions
Company contributions to the defined benefit pension plans and
post-retirement healthcare plans totalled GBP5m (FY2022: GBP9m). No
contributions were made to funded schemes in the year (FY2022:
GBP3m to SIPS, GBP1m to Other). During the year, GBP5m (FY2022:
GBP5m) was spent on providing benefits under unfunded defined
benefit pension and post-retirement healthcare plans.
In FY2024, cash contributions to the Group's schemes are
expected to be up to GBP10m in total.
9 Employee share schemes
The Group operates share schemes and plans for the benefit of
employees. The nature of the principal schemes and plans, including
general conditions, is set out below:
Long-Term Incentive Plan (LTIP)
The LTIP is a share plan under which an award over a capped
number of shares will vest after the end of a three-year
performance period if performance conditions are met. LTIP awards
are made to selected senior executives, including the Executive
Directors.
LTIP performance conditions
Each performance condition has a threshold below which no shares
vest and a maximum performance target at or above which the award
vests in full. For performance between 'threshold' and 'maximum',
awards vest on a straight-line sliding scale. The performance
conditions are assessed separately; so performance on one condition
does not affect the vesting of the other elements of the award. To
the extent that the performance targets are not met over the
three-year performance period, awards lapse. There is no re-testing
of the performance conditions.
LTIP awards have performance conditions relating to organic
revenue growth, growth in headline EPS, ROCE, free cash-flow and
meeting ESG targets.
Smiths Excellence Plan (SEP)
The last Smiths Excellence Plan (SEP) grant was issued in
October 2019, vested on 31 July 2021 and exercised in October 2021.
No further SEP awards have been made.
Restricted stock
Restricted stock is used by the Remuneration & People
Committee, as a part of recruitment strategy, to make awards in
recognition of incentive arrangements forfeited on leaving a
previous employer. If an award is considered appropriate, the award
will take account of relevant factors including the fair value of
awards forfeited, any performance conditions attached, the
likelihood of those conditions being met and the proportion of the
vesting period remaining.
Save as you earn (SAYE)
The SAYE scheme is an HM Revenue & Customs approved
all-employee savings-related share option scheme which is open to
all UK employees. Participants enter into a contract to save a
fixed amount per month of up to GBP500 in aggregate for three years
and are granted an option over shares at a fixed option price, set
at a discount to market price at the date of invitation to
participate. The number of shares is determined by the monthly
amount saved and the bonus paid on maturity of the savings
contract. Options granted under the SAYE scheme are not subject to
any performance conditions.
Save Weighted
Long-term as you average
Ordinary shares under option/award incentive Restricted earn exercise
('000) plans SEP stock scheme Total price
----------------------------------- ---------- ----- ---------- ------- ------- ---------
31 July 2021 4,915 851 64 1,085 6,915 GBP1.63
Reclassification 348 (348) - - - -
Granted 2,255 - 212 167 2,634 GBP0.71
Exercised (224) (313) (163) (138) (838) GBP1.90
Lapsed (1,984) (190) (30) (229) (2,433) GBP0.97
----------------------------------- ---------- ----- ---------- ------- ------- ---------
31 July 2022 5,310 - 83 885 6,278 GBP1.45
Granted 2,023 - 24 253 2,300 GBP1.47
Exercised (309) - (20) (109) (438) GBP2.88
Lapsed (2,196) - - (71) (2,267) GBP0.33
----------------------------------- ---------- ----- ---------- ------- ------- ---------
31 July 2023 4,828 - 87 958 5,873 GBP1.78
----------------------------------- ---------- ----- ---------- ------- ------- ---------
Options and awards were exercised on an irregular basis during
the period. The average closing share price over the financial year
was 1,629.8p (FY2022: 1,476.3p). There has been no change to the
effective option price of any of the outstanding options during the
period. The number of exercisable share options at 31 July 2023 was
nil (31 July 2022: nil).
Weighted Weighted
average average
Total shares remaining Total shares remaining
under contractual under contractual
options/awards life at options/awards life at
at 31 31 July at 31 31 July
July 2023 2023 July 2022 2022
Range of exercise prices ('000) (months) ('000) (months)
------------------------- --------------- ------------ --------------- ------------
GBP0.00 - GBP2.00 4,915 17 5,393 19
------------------------- --------------- ------------ --------------- ------------
GBP6.01 - GBP10.00 444 6 490 18
------------------------- --------------- ------------ --------------- ------------
GBP10.01 - GBP12.00 514 33 395 29
------------------------- --------------- ------------ --------------- ------------
For the purposes of valuing options to arrive at the share-based
payment charge, the binomial option pricing model has been used.
The key assumptions used in the model were volatility of 25% to 20%
(FY2022: 25% to 20%) and dividend yield of 2.4% (FY2022: 2.6%),
based on historical data, for the period corresponding with the
vesting period of the option. These generated a weighted average
fair value for LTIP of GBP15.03 (FY2022: GBP14.81), and restricted
stock of GBP14.60 (FY2022: GBP14.59). Staff costs included GBP14m
(FY2022: GBP15m) for share-based payments, of which GBP13m (FY2022:
GBP14m) related to equity-settled share-based payments.
10 Intangible assets
Acquired Software,
intangibles patents
Development (see table and intellectual
Goodwill costs below) property Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------- -------- ----------- ------------ ----------------- -----
Cost
--------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2021 1,207 156 562 177 2,102
Foreign exchange rate movements 104 6 68 10 188
Additions - 12 - 6 18
--------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2022 1,311 174 630 193 2,308
Foreign exchange rate movements (45) (2) (31) (3) (81)
Business combinations 7 - 13 - 20
Additions - 21 - 7 28
Disposals - - - (38) (38)
--------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2023 1,273 193 612 159 2,237
--------------------------------- -------- ----------- ------------ ----------------- -----
Amortisation and impairments
--------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2021 59 114 287 144 604
Foreign exchange rate movements 4 6 35 6 51
Amortisation charge for the year - 3 51 7 61
Impairment charge for the year 4 - - - 4
--------------------------------- -------- ----------- ------------ ----------------- -----
At 31 July 2022 67 123 373 157 720
Foreign exchange rate movements (3) (1) (19) (4) (27)
Amortisation charge for the year - 2 52 7 61
Disposals - - - (38) (38)
At 31 July 2023 64 124 406 122 716
--------------------------------- -------- ----------- ------------ ----------------- -----
Net book value at 31 July 2023 1,209 69 206 37 1,521
Net book value at 31 July 2022 1,244 51 257 36 1,588
Net book value at 31 July 2021 1,148 42 275 33 1,498
--------------------------------- -------- ----------- ------------ ----------------- -----
In addition to goodwill, acquired intangible assets
comprise:
Patents, Total
licences Customer acquired
and trademarks Technology relationships intangibles
GBPm GBPm GBPm GBPm
-------------------------------- --------------- ---------- -------------- ------------
Cost
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2021 17 134 411 562
Foreign exchange rate movements 2 18 48 68
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2022 19 152 459 630
Foreign exchange rate movements - (9) (22) (31)
Business combinations 1 2 10 13
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2023 20 145 447 612
-------------------------------- --------------- ---------- -------------- ------------
Amortisation
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2021 5 67 215 287
Foreign exchange rate movements 1 10 24 35
Charge for the year 2 10 39 51
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2022 8 87 278 373
Foreign exchange rate movements - (6) (13) (19)
Charge for the year 1 11 40 52
-------------------------------- --------------- ---------- -------------- ------------
At 31 July 2023 9 92 305 406
-------------------------------- --------------- ---------- -------------- ------------
Net book value at 31 July 2023 11 53 142 206
Net book value at 31 July 2022 11 65 181 257
Net book value at 31 July 2021 12 67 196 275
-------------------------------- --------------- ---------- -------------- ------------
Individually material intangible assets comprise:
- GBP53m of customer-related intangibles attributable to United
Flexible (remaining amortisation period: 4 years);
- GBP48m of customer-related intangibles attributable to Morpho
Detection (remaining amortisation period: 6 years);
- GBP27m of customer-related intangibles attributable to Royal
Metal (remaining amortisation period: 5 years),;
- GBP24m of development cost intangibles attributable to a
computed tomography programme in Detection that is currently under
development; and
- GBP18m of development cost intangibles attributable to a X-ray
diffraction programme in Detection that is currently under
development.
The charge associated with the amortisation of intangible assets
is included in operating costs on the consolidated income
statement.
11 Impairment testing
Goodwill
Goodwill is tested for impairment at least annually or whenever
there is an indication that the carrying value may not be
recoverable.
Further details of the impairment review process and judgements
are included in the 'Sources of estimation uncertainty' section of
the 'Basis of preparation' for the consolidated financial
statements.
For the purpose of impairment testing, assets are grouped at the
lowest levels for which there are separately identifiable
cash-flows, known as cash generating units (CGUs), taking into
consideration the commonality of reporting, policies, leadership
and intra-divisional trading relationships. Goodwill acquired
through business combinations is allocated to groups of CGUs at a
divisional (or operating segment) level, being the lowest level at
which management monitors performance separately.
The carrying value of goodwill at 31 July is allocated by
division as follows:
2023 2022
Number Number
2023 of 2022 of
GBPm CGUs GBPm CGUs
-------------------- ----- ------- ----- -------
John Crane 131 1 132 1
Smiths Detection* 630 1 644 2
Flex-Tek 183 1 194 1
Smiths Interconnect 265 1 274 1
-------------------- ----- ------- ----- -------
1,209 4 1,244 5
-------------------- ----- ------- ----- -------
* In FY2022 the Smiths Detection CGU was restructured. The
Detection Russia business split into a separate CGU and
subsequently fully impaired.
Critical estimates used in impairment testing
The recoverable amount for impairment testing is determined from
the higher of fair value less costs of disposal and value in use of
the CGU. In assessing value in use, the estimated future cash-flows
are discounted to their present value using a post-tax discount
rate that reflects current market assessments of the time value of
money, from which pre-tax discount rates are determined.
Fair value less costs of disposal is calculated using available
information on past and expected future profitability, valuation
multiples for comparable quoted companies and similar transactions
(adjusted as required for significant differences) and information
on costs of similar transactions. Fair value less costs to sell
models are used when trading projections in the strategic plan
cannot be adjusted to eliminate the impact of a major
restructuring.
The value in use of CGUs is calculated as the net present value
of the projected risk-adjusted cash-flows of each CGU. These
cash-flow forecasts are based on the FY2024 business plan and the
five-year detailed divisional strategic projections which have been
prepared by divisional management and approved by the Board.
The principal assumptions used in determining the value in use
were:
- Revenue: Projected sales were built up with reference to
markets and product categories. They incorporated past performance,
historical growth rates and projections of developments in key
markets;
- Average earnings before interest and tax margin: Projected
margins reflect historical performance, our expectations for future
cost inflation and the impact of all completed projects to improve
operational efficiency and leverage scale. The projections did not
include the impact of future restructuring projects to which the
Group was not yet committed;
- Projected capital expenditure: The cash-flow forecasts for
capital expenditure were based on past experience and included
committed ongoing capital expenditure consistent with the FY2024
budget and the divisional strategic projections. The forecast did
not include any future capital expenditure that improved/enhanced
the operation/asset in excess of its current standard of
performance;
- Discount rate: The discount rates have been determined with
reference to illustrative weighted average cost of capital (WACC)
for each CGU. In determining these discount rates, management have
considered systematic risks specific to each of the Group's CGUs.
These risk adjusted discount rates have then been validated against
the Group's WACC, the WACCs of the CGU's peer group and an average
of discount rates used by other companies for the industries in
which Smiths divisions operate. Pre-tax rates of 11.4% to 13.0%
(FY2022: 11.3% to 12.3%) have been used for the impairment testing;
and
- Long-term growth rates: For the purposes of the Group's value
in use calculations, a long-term growth rate into perpetuity was
applied immediately at the end of the five-year detailed forecast
period. CGU-specific long-term growth rates have been calculated by
revenue weighting the long-term GDP growth rates of the markets
that each CGU operates in. The long-term growth rates used in the
testing ranged from 2.2% to 2.7% (FY2022: 1.7% to 2.4%). These
rates do not reflect the long-term assumptions used by the Group
for investment planning.
Of the principal assumptions above, the key assumptions that the
impairment models are most sensitive to are: the revenue growth
assumption; the average earnings before interest and tax margin
assumption; and the discount rate assumption.
The assumptions used in the impairment testing of CGUs with
significant goodwill balances were as follows:
As at 31 May 2023
---------------------------------- --------------------------------------------
John Smiths Smiths
Crane Detection Flex-Tek Interconnect
-------------------------------------------------------- ------- ---------- -------- -------------
Net book value of goodwill (GBPm) 135 649 191 279
-------------------------------------------------------- ------- ---------- -------- -------------
Value Value Value Value
Basis of valuation in use in use in use in use
---------------------------------- -------------------- ------- ---------- -------- -------------
Discount rate - pre-tax 13.0% 12.2% 11.8% 11.5%
- post-tax 9.7% 9.3% 9.4% 9.4%
Period covered by management projections 5 years 5 years 5 years 5 years
Capital expenditure - annual average over projection
period (GBPm) 27 27 10 20
Revenue - compound annual growth rate over
projection period 5.3% 4.5% 3.4% 4.7%
Average earnings before interest and tax margin 24.6% 14.5% 19.5% 18.6%
Long-term growth rates 2.7% 2.4% 2.2% 2.5%
-------------------------------------------------------- ------- ---------- -------- -------------
As at 31 May 2022
------------------------------- --------------------------------------------
John Smiths Smiths
Crane Detection Flex-Tek Interconnect
--------------------------------------------------- ------- ---------- -------- -------------
Net book value of goodwill (GBPm) 132 640 187 266
--------------------------------------------------- ------- ---------- -------- -------------
Value Value Value Value
Basis of valuation in use in use in use in use
------------------------------- ------------------ ------- ---------- -------- -------------
Discount rate - pre-tax 12.3% 11.3% 11.7% 11.5%
- post-tax 9.1% 8.7% 9.2% 9.3%
Period covered by management projections 5 years 5 years 5 years 5 years
Revenue - compound annual growth rate over
projection period 5.3% 3.8% 3.8% 6.0%
Average earnings before interest and tax margin 24.9% 14.1% 19.7% 17.8%
Long-term growth rates 1.9% 2.4% 1.7% 2.1%
--------------------------------------------------- ------- ---------- -------- -------------
Forecast earnings before interest and tax have been projected
using:
- Expected future sales based on the strategic plan, which was
constructed at a market level with input from key account managers,
product line managers, business development and sales teams. An
assessment of the market and existing contracts/programmes was made
to produce the sales forecast; and
- Current cost structure and production capacity, which include
our expectations for future cost inflation. The projections did not
include the impact of future restructuring projects to which the
Group was not yet committed.
Sensitivity analysis
Smiths Detection is the only CGU of the Group that has limited
goodwill impairment testing headroom. For all of the Group's other
CGUs the recoverable amount of the CGU exceeded the carrying value,
on the basis of the assumptions set out in the preceding tables and
any reasonably possible changes thereof.
The estimated recoverable amount of the Smiths Detection CGU
exceeded the carrying value by GBP225m. Any decline in estimated
value in use in excess of this amount would result in the
recognition of impairment charges.
Management recognise that the goodwill impairment testing
headroom of the Smiths Detection CGU is most sensitive to movements
in the revenue growth rate, the EBIT margin and the discount rate
assumptions. Of these key assumptions, management consider that the
EBIT margin assumption is the most sensitive.
The Smiths Detection financial model assumes that EBIT margins
grow from 11.2% in FY2023 to an average of 14.5% over the five-year
financial model period. This increase in EBIT margin is principally
driven by a change in revenue and profit mix, with the proportion
of higher margin aftermarket revenue growing over the five-year
projection period.
Management considers that it is plausible that this margin
growth may not be fully captured by the business. For the CGU to be
impaired, the average EBIT margin over the five-year financial
model would have to be less than 12.3%; management recognises this
to be a reasonably plausible downside scenario.
If the assumptions used in the impairment review were changed to
a greater extent than as presented in the following table, the
changes would, in isolation, lead to impairment losses being
recognised for the year ended 31 July 2023:
Change required for carrying value to equal recoverable amount
- FY2023 Smiths Detection
-------------------------------------------------------------- ----------------
Revenue - compound annual growth rate (CAGR) over five-year -460 bps
projection period decrease
-220 bps
Average earnings before interest and tax margin decrease
+140 bps
Post-tax discount rate increase
-------------------------------------------------------------- ----------------
Change required for carrying value to equal recoverable amount
- FY2022 Smiths Detection
-------------------------------------------------------------- ----------------
Revenue - compound annual growth rate (CAGR) over five-year -240 bps
projection period decrease
-130 bps
Average earnings before interest and tax margin decrease
Post-tax discount rate +70 bps increase
-------------------------------------------------------------- ----------------
Note: Long-term growth rates are not included in the sensitivity
tables above as management consider that there is no reasonably
possible change in long-term growth rate that would result in an
impairment.
Property, plant and equipment, right of use assets and
finite-life intangible assets
At each reporting period date, the Group reviews the carrying
amounts of its property, plant, equipment, right of use assets and
finite-life intangible assets to determine whether there is any
indication that those assets have suffered an impairment loss.
The Group has no indefinite life intangible assets other than
goodwill. During the year, impairment tests were carried out for
capitalised development costs that have not yet started to be
amortised and acquired intangibles where there were indications of
impairment. Value in use calculations were used to determine the
recoverable values of these assets.
12 Property, plant and equipment
Fixtures,
fittings,
tools
Land and Plant and and
buildings machinery equipment Total
GBPm GBPm GBPm GBPm
-------------------------------- ---------- ---------- ---------- -----
Cost or valuation
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2021 172 388 122 682
Foreign exchange rate movements 14 37 6 57
Additions 4 42 6 52
Disposals (14) (10) (5) (29)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2022 176 457 129 762
Foreign exchange rate movements (6) (14) (2) (22)
Business combinations - 2 - 2
Additions 10 33 10 53
Disposals (2) (15) (17) (34)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2023 178 463 120 761
-------------------------------- ---------- ---------- ---------- -----
Depreciation
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2021 106 260 104 470
Foreign exchange rate movements 9 25 5 39
Charge for the year 7 24 7 38
Disposals (14) (10) (4) (28)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2022 108 299 112 519
Foreign exchange rate movements (4) (8) (2) (14)
Charge for the year 8 25 9 42
Disposals (2) (14) (17) (33)
-------------------------------- ---------- ---------- ---------- -----
At 31 July 2023 110 302 102 514
-------------------------------- ---------- ---------- ---------- -----
Net book value at 31 July 2023 68 161 18 247
Net book value at 31 July 2022 68 158 17 243
Net book value at 31 July 2021 66 128 18 212
-------------------------------- ---------- ---------- ---------- -----
13 Right of use assets
Properties Vehicles Equipment Total
GBPm GBPm GBPm GBPm
------------------------------------ ---------- -------- --------- -----
Cost or valuation
------------------------------------ ---------- -------- --------- -----
At 31 July 2021 146 17 1 164
Foreign exchange rate movements 12 1 - 13
Recognition of right of use asset 18 4 - 22
Derecognition of right of use asset (2) (1) - (3)
------------------------------------ ---------- -------- --------- -----
At 31 July 2022 174 21 1 196
Foreign exchange rate movements (6) (1) - (7)
Recognition of right of use asset 27 7 1 35
Derecognition of right of use asset (5) - - (5)
------------------------------------ ---------- -------- --------- -----
At 31 July 2023 190 27 2 219
------------------------------------ ---------- -------- --------- -----
Depreciation
------------------------------------ ---------- -------- --------- -----
At 31 July 2021 46 10 - 56
Foreign exchange rate movements 5 1 - 6
Charge for the year 25 5 - 30
Derecognition of right of use asset (1) (1) - (2)
------------------------------------ ---------- -------- --------- -----
At 31 July 2022 75 15 - 90
Foreign exchange rate movements (4) - - (4)
Charge for the year 27 4 1 32
Derecognition of right of use asset (4) - - (4)
------------------------------------ ---------- -------- --------- -----
At 31 July 2023 94 19 1 114
------------------------------------ ---------- -------- --------- -----
Net book value at 31 July 2023 96 8 1 105
Net book value at 31 July 2022 99 6 1 106
Net book value at 31 July 2021 100 7 1 108
------------------------------------ ---------- -------- --------- -----
14 Financial assets - other investments
Investment Investments
in ICU Deferred in early Cash
Medical, contingent stage collateral
Inc equity consideration businesses deposit Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------- ----------- -------------- ----------- ----------- -----
Cost or valuation
---------------------------------------------- ----------- -------------- ----------- ----------- -----
At 31 July 2021 - - 7 4 11
Foreign exchange rate movements - - 1 - 1
Additions 426 30 4 - 460
Disposal - - (4) - (4)
Fair value change through profit and loss - (11) 1 - (10)
Fair value change through other comprehensive
income (62) - (1) - (63)
---------------------------------------------- ----------- -------------- ----------- ----------- -----
At 31 July 2022 364 19 8 4 395
Fair value change through profit and loss - (6) - - (6)
Fair value change through other comprehensive
income (17) - (1) - (18)
---------------------------------------------- ----------- -------------- ----------- ----------- -----
At 31 July 2023 347 13 7 4 371
---------------------------------------------- ----------- -------------- ----------- ----------- -----
Following the sale of Smiths Medical the Group has recognised a
financial asset for its investment in 10% of the equity in ICU
Medical, Inc (ICU) and a financial asset for the fair value of
US$100m additional sales consideration that is contingent on the
future share price performance of ICU.
The Group's investments in early-stage businesses are in
businesses that are developing or commercialising related
technology. Cash collateral deposits represent amounts held on
deposit with banks as security for liabilities or letters of
credit.
15 Inventories
31 July 31 July
2023 2022
GBPm GBPm
------------------------------ ------- -------
Raw materials and consumables 201 187
Work in progress 130 106
Finished goods 306 277
------------------------------ ------- -------
Total inventories 637 570
------------------------------ ------- -------
In FY2023, operating costs included GBP1,622m (FY2022:
GBP1,323m) of inventory consumed, GBP26m (FY2022: GBP12m) was
charged for the write-down of inventory and GBP16m (FY2022: GBP12m)
was released from provisions no longer required.
Inventory provisioning
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------------------ ------- -------
Gross inventory carried at full value 545 492
Gross value of inventory partly or fully provided for 158 131
------------------------------------------------------ ------- -------
703 623
Inventory provision (66) (53)
------------------------------------------------------ ------- -------
Inventory after provisions 637 570
------------------------------------------------------ ------- -------
16 Trade and other receivables
31 July 31 July
2023 2022
GBPm GBPm
------------------ ------- -------
Non-current
------------------ ------- -------
Trade receivables 2 1
Contract assets 65 58
Other receivables 8 10
------------------ ------- -------
75 69
------------------ ------- -------
Current
------------------ ------- -------
Trade receivables 493 506
Prepayments 40 33
Contract assets 121 127
Other receivables 118 72
------------------ ------- -------
772 738
------------------ ------- -------
Trade receivables do not carry interest. Management considers
that the carrying value of trade and other receivables approximates
to the fair value. Trade and other receivables, including accrued
income and other receivables qualifying as financial instruments
are accounted for at amortised cost. The maximum credit exposure
arising from these financial assets was GBP744m (FY2022:
GBP726m).
Contract assets comprise unbilled balances not yet due on
contracts, where revenue recognition does not align with the agreed
payment schedule. The main movements in the year arose from
increases in contract asset balances of GBP19m (FY2022: GBP19m)
principally within Smiths Interconnect and Smiths Detection, offset
by GBP9m decreases in John Crane and GBP7m (FY2022: GBP15m)
decrease due to foreign currency translation losses.
A number of Flex-Tek's and Interconnect's customers provide
supplier finance schemes which allow their suppliers to sell trade
receivables, without recourse, to banks. This is commonly known as
invoice discounting or factoring. During FY2023 the Group collected
GBP128m of receivables through these schemes (FY2022: GBP92m). The
impact of invoice discounting on the FY2023 balance sheet was that
trade receivables were reduced by GBP26m (2022: GBP19m). Costs of
discounting were GBP2m (FY2022: less than GBP1m), charged to the
income statement within financing costs. The cash received via
these schemes was classified as an operating cash inflow as it had
arisen from operating activities.
Trade receivables are disclosed net of provisions for expected
credit loss, with historical write-offs used as a basis, adjusted
for factors that are specific to the debtor, general economic
conditions of the industry in which the debtor operates and a
default risk multiplier applied to reflect country risk premium.
Credit risk is managed separately for each customer and, where
appropriate, a credit limit is set for the customer based on
previous experience of the customer and third-party credit ratings.
The Group has no significant concentration of credit risk, with
exposure spread over a large number of customers. The largest
single customer was the US Federal Government, representing 7%
(FY2022: 7%) of Group revenue.
Ageing of trade receivables
31 July 31 July
2023 2022
GBPm GBPm
-------------------------------------------------------- ------- -------
Trade receivables which are not yet due 389 396
Trade receivables which are between 1-30 days overdue 52 51
Trade receivables which are between 31-60 days overdue 19 24
Trade receivables which are between 61-90 days overdue 12 11
Trade receivables which are between 91-120 days overdue 8 7
Trade receivables which are more than 120 days overdue 45 54
-------------------------------------------------------- ------- -------
525 543
Expected credit loss allowance provision (30) (36)
-------------------------------------------------------- ------- -------
Trade receivables 495 507
-------------------------------------------------------- ------- -------
Movement in expected credit loss allowance
31 July 31 July
2023 2022
GBPm GBPm
---------------------------------------------------------- ------- -------
Brought forward loss allowance at the start of the period 36 32
Exchange adjustments (1) 4
Increase in allowance recognised in the income statement 4 8
Amounts written off or recovered during the year (9) (8)
---------------------------------------------------------- ------- -------
Carried forward loss allowance at the end of the year 30 36
---------------------------------------------------------- ------- -------
17 Trade and other payables
31 July 31 July
2023 2022
GBPm GBPm
----------------------------------------- ------- -------
Non-current
----------------------------------------- ------- -------
Other payables 13 13
Contract liabilities 27 33
----------------------------------------- ------- -------
40 46
----------------------------------------- ------- -------
Current
----------------------------------------- ------- -------
Trade payables 247 282
Other payables 51 57
Other taxation and social security costs 66 30
Accruals 200 183
Contract liabilities 159 130
----------------------------------------- ------- -------
723 682
----------------------------------------- ------- -------
Trade and other payables, including accrued expenses and other
payables qualifying as financial instruments, are accounted for at
amortised cost and are categorised as "Trade and other financial
payables" in note 21.
Contract liabilities comprise deferred income balances of
GBP186m (FY2022: GBP163m) in respect of payments being made in
advance of revenue recognition. The movement in the year arises
primarily from the long-term contracts of the Smiths Detection
division where invoicing under milestones precedes the delivery of
the programme performance obligations. Revenue recognised in the
year includes GBP97m (FY2022: GBP113m) that was included in the
opening contract liabilities balance. This revenue primarily
relates to the delivery of performance obligations in the Smiths
Detection business.
18 Borrowings and net debt
This note sets out the calculation of net debt, an important
measure in explaining our financing position. Net debt includes
accrued interest and fair value adjustments relating to hedge
accounting.
31 July 31 July
2023 2022
GBPm GBPm
----------------------------------------------------- ------- -------
Cash and cash equivalents
----------------------------------------------------- ------- -------
Net cash and deposits 285 1,056
----------------------------------------------------- ------- -------
Short-term borrowings
----------------------------------------------------- ------- -------
EUR600m 1.25% Eurobond 2023 - (502)
Overdrafts - (1)
Lease liabilities (26) (29)
Interest accrual (3) (6)
----------------------------------------------------- ------- -------
(29) (538)
----------------------------------------------------- ------- -------
Long-term borrowings
----------------------------------------------------- ------- -------
EUR650m 2.00% Eurobond 2027 (534) (538)
Lease liabilities (91) (90)
----------------------------------------------------- ------- -------
(625) (628)
----------------------------------------------------- ------- -------
Borrowings/gross debt (654) (1,166)
----------------------------------------------------- ------- -------
Derivatives managing interest rate risk and currency
profile of the debt (18) (40)
----------------------------------------------------- ------- -------
Net debt (387) (150)
----------------------------------------------------- ------- -------
Cash and cash equivalents
31 July 31 July
2023 2022
GBPm GBPm
-------------------------- ------- -------
Cash at bank and in hand 175 242
-------------------------- ------- -------
Short-term deposits 110 814
-------------------------- ------- -------
Cash and cash equivalents 285 1,056
-------------------------- ------- -------
Cash and cash equivalents include highly liquid investments with
maturities of three months or less. Borrowings are accounted for at
amortised cost and are categorised as other financial liabilities.
See note 18 for a maturity analysis of borrowings. Interest of
GBP17m (FY2022: GBP30m) was charged to the consolidated income
statement in the period in respect of public bonds.
Analysis of financial derivatives on balance sheet
Non-current Current Current Non-current
assets assets liabilities liabilities Net balance
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ----------- ------- ------------ ------------ -----------
Derivatives managing interest rate risk
and currency profile of the debt - - - (18) (18)
Foreign exchange forward contracts - 5 (2) - 3
---------------------------------------- ----------- ------- ------------ ------------ -----------
At 31 July 2023 - 5 (2) (18) (15)
---------------------------------------- ----------- ------- ------------ ------------ -----------
Derivatives managing interest rate risk
and currency profile of the debt - - (20) (20) (40)
Foreign exchange forward contracts - 4 (7) - (3)
---------------------------------------- ----------- ------- ------------ ------------ -----------
At 31 July 2022 - 4 (27) (20) (43)
---------------------------------------- ----------- ------- ------------ ------------ -----------
Movements in assets/(liabilities) arising from financing
activities
Changes in net debt
------------------ ------------------------------------------------------------------- ============= ============
Changes Total
Cash Interest in other liabilities
and Other rate financing from
cash short-term Long-term & cross-currency items: financing
equivalents borrowings borrowings swaps Net debt FX contracts activities
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------ ----------- ----------- ----------------- -------- ============= ============
At 31 July 2022 1,056 (538) (628) (40) (150) (3) (153)
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
Foreign exchange
gains/(losses) (10) (21) (10) - (41) (4,031) (4,072)
Net cash inflow
from continuing
operations (761) 564 - 8 (189) 4,031 3,842
Net movement from
new leases
and modifications - (34) - - (34) - (34)
Interest rate
hedge fair value
movements - (2) 16 - 14 - 14
Revaluation of
derivative
contracts - - - 14 14 6 20
Interest expense
taken to income
statement* - 28 - - 28 - 28
Interest paid - (29) - - (29) - (29)
Reclassifications - 3 (3) - - - -
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
At 31 July 2023 285 (29) (625) (18) (387) 3 (384)
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
* The Group has also incurred GBP9m (FY2022: GBP8m) of bank
charges that were expensed when paid and were not included in net
debt.
Changes in net debt
------------------ ------------------------------------------------------------------- ------------- ------------
Changes Total
Cash Interest in other liabilities
and Other rate financing from
cash short-term Long-term & cross-currency items: financing
equivalents borrowings borrowings swaps Net debt FX contracts activities
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
At 31 July 2021 405 (36) (1,466) 75 (1,022) 1 (1,021)
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
Foreign exchange
gains/(losses) 62 (3) 4 - 63 (6,799) (6,736)
Net cash inflow
from continuing
operations* 589 34 295 - 918 6,799 7,717
Net movement from
lease
modifications - (22) - - (22) - (22)
Interest rate
hedge fair value
movements - 2 27 - 29 - 29
Revaluation of
derivative
contracts - - - (115) (115) (4) (119)
Interest expense
taken to income
statement** - (35) - - (35) - (35)
Interest paid - - 34 - 34 - 34
Reclassifications - (478) 478 - - - -
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
At 31 July 2022 1,056 (538) (628) (40) (150) (3) (153)
------------------ ------------ ----------- ----------- ----------------- -------- ------------- ------------
* In FY22, the net cash inflow for the total Group including
discontinued operations was GBP589m, GBP57m of which related to the
cash held by Smiths Medical at the time of disposal.
** The Group has also incurred GBP9m (FY2022: GBP8m) of bank
charges that were expensed when paid and were not included in net
debt.
Cash pooling
Cash and overdraft balances in interest compensation cash
pooling systems are reported gross on the balance sheet. The cash
pooling agreements incorporate a legally enforceable right of net
settlement. However, as there is no intention to settle the
balances net, these arrangements do not qualify for net
presentation. At 31 July 2023 the total value of overdrafts on
accounts in interest compensation cash pooling systems was GBPnil
(FY2022: GBPnil). The balances held in zero balancing cash pooling
arrangements have daily settlement of balances. Therefore netting
is not relevant.
Change of control
The Company has in place credit facility agreements under which
a change of control would trigger prepayment clauses. The Company
has one bond in issue, the terms of which would allow bondholders
to exercise put options and require the Company to buy back the
bonds at their principal amount plus interest if a rating downgrade
occurs at the same time as a change of control takes effect.
Lease liabilities
Lease liabilities have been measured at the present value of the
remaining lease payments. The weighted average incremental
borrowing rate applied to lease liabilities in FY2023 was 4.01%
(FY2022: 3.63%).
19 Financial risk management
The Group's international operations and debt financing expose
it to financial risks which include the effects of changes in
foreign exchange rates, debt market prices, interest rates, credit
risks and liquidity risks. The management of operational credit
risk is discussed in note 16.
Treasury Risk Management Policy
The Board maintains a Treasury Risk Management Policy, which
governs the treasury operations of the Group and its subsidiary
companies and the consolidated financial risk profile to be
maintained. A report on treasury activities, financial metrics and
compliance with the Policy is circulated to the Chief Financial
Officer each month and key elements to the Audit & Risk
Committee on a semi-annual basis.
The Policy maintains a treasury control framework within which
counterparty risk, financing and debt strategy, cash and liquidity,
interest rate risk and currency translation management are reserved
for Group Treasury, while currency transaction management is
devolved to operating divisions.
Centrally directed cash management systems exist globally to
manage overall liquid resources efficiently across the divisions.
The Group uses financial instruments to raise financing for its
global operations, to manage related interest rate and currency
financial risk, and to hedge transaction risk within subsidiary
companies.
The Group does not speculate in financial instruments. All
financial instruments hedge existing business exposures and all are
recognised on the balance sheet.
The Policy defines four treasury risk components and for each
component a set of financial metrics to be measured and reported
monthly against pre-agreed objectives.
1) Credit quality
The Group's strategy is to maintain a solid investment-grade
rating to ensure access to the widest possible sources of financing
at the right time and to optimise the resulting cost of debt
capital. The credit ratings at the end of July 2023 were BBB+ /
Baa2 (both stable) from Standard & Poor's and Moody's
respectively. An essential element of an investment-grade rating is
consistent and robust cash-flow metrics. The Group's objective is
to maintain a net debt/headline EBITDA ratio of two times or lower
over the medium term. Capital management is discussed in more
detail in note 26.
2) Debt and interest rate
The Group's risk management objectives are to ensure that the
majority of funding is drawn from the public debt markets with the
average maturity profile of gross debt to be at or greater than
three years, and between 40-60% of gross debt (excluding leases) is
at fixed rates. At 31 July 2023 these measures were 100% (FY2022:
100%), 3.6 years (FY2022: 2.7 years) and 54% (FY2022: 44%).
The Group has no financial covenants in its external debt
agreements. Interest rate risk management is discussed in note
19(b).
3) Liquidity management
The Group's objective is to ensure that at any time undrawn
committed facilities, net of short-term overdraft financing, are at
least GBP300m and that committed facilities have at least 12 months
to run until maturity. At 31 July 2023, these measures were GBP622m
(FY2022: GBP657m) and 57 months (FY2022: 27 months). At 31 July
2023, net cash resources were GBP285m (FY2022: GBP1,055m).
Liquidity risk management is discussed in note 19(d).
4) Currency management
The Group is an international business with the majority of its
net assets denominated in foreign currency. It protects the balance
sheet and reserves from adverse foreign exchange movements by
financing foreign currency assets where appropriate in the same
currency. The Group's objective for managing transaction currency
exposure is to reduce medium-term volatility to cash-flow, margins
and earnings. Foreign exchange risk management is discussed in note
19(a) below.
(a) Foreign exchange risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from
sales or purchases by businesses in currencies other than their
functional currency. It is Group policy that, when the net foreign
exchange exposure to known future sales and purchases is material,
this exposure is hedged using forward foreign exchange contracts.
The net exposure is calculated by adjusting the expected cash-flow
for payments or receipts in the same currency linked to the sale or
purchase. This policy minimises the risk that the profits generated
from the transaction will be affected by foreign exchange movements
which occur after the price has been determined. Hedge accounting
documentation and effectiveness testing are only undertaken if it
is cost-effective.
The following table shows the currency of financial instruments.
It excludes loans and derivatives designated as net investment
hedges.
At 31 July 2023
-------------------------------------------- ------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- ----- ----- ----- -----
Financial assets and liabilities
-------------------------------------------- -------- ----- ----- ----- -----
Financial instruments included in trade
and other receivables 43 372 127 184 726
Financial instruments included in trade
and other payables (64) (216) (93) (103) (476)
Cash and cash equivalents 50 115 29 91 285
Borrowings not designated as net investment
hedges (27) (54) (12) (24) (117)
-------------------------------------------- -------- ----- ----- ----- -----
2 217 51 148 418
Exclude balances held in operations with
the same functional currency. (7) (287) (57) (153) (504)
Exposure arising from intra-Group loans - 127 28 (73) 82
Future forward foreign exchange contract
cash-flows (63) (23) (48) 133 (1)
-------------------------------------------- -------- ----- ----- ----- -----
(68) 34 (26) 55 (5)
-------------------------------------------- -------- ----- ----- ----- -----
At 31 July 2022
-------------------------------------------- ------------------------------------
Sterling US$ Euro Other Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- ----- ----- ----- -----
Financial assets and liabilities
-------------------------------------------- -------- ----- ----- ----- -----
Financial instruments included in trade
and other receivables 41 423 114 169 747
Financial instruments included in trade
and other payables (52) (239) (98) (101) (490)
Cash and cash equivalents 355 506 74 120 1,055
Borrowings not designated as net investment
hedges (28) (58) (14) (19) (119)
-------------------------------------------- -------- ----- ----- ----- -----
316 632 76 169 1,193
Exclude balances held in operations with
the same functional currency. (322) (149) (80) (142) (693)
Exposure arising from intra-Group loans - (419) (27) (89) (535)
Future forward foreign exchange contract
cash-flows (42) (40) (38) 120 -
-------------------------------------------- -------- ----- ----- ----- -----
(48) 24 (69) 58 (35)
-------------------------------------------- -------- ----- ----- ----- -----
Financial instruments included in trade and other receivables
comprise trade receivables, accrued income and other receivables
which qualify as financial instruments. Similarly, financial
instruments included in trade and other payables comprise trade
payables, accrued expenses and other payables that qualify as
financial instruments.
Based on the assets and liabilities held at the year-end, if the
specified currencies were to strengthen 10% while all other market
rates remained constant, the change in the fair value of financial
instruments not designated as net investment hedges would have the
following effect:
Impact Impact
on profit Gain/(loss) on profit Gain/(loss)
for recognised for recognised
the year in reserves the year in reserves
FY2023 FY2023 FY2022 FY2022
GBPm GBPm GBPm GBPm
---------- ---------- ------------ ---------- ------------
US dollar - 1 (3) 1
Euro 1 - 8 (1)
Sterling - (1) 4 -
---------- ---------- ------------ ---------- ------------
These sensitivities were calculated before adjusting for tax and
exclude the effect of quasi-equity intra-Group loans.
Cash-flow hedging
The Group uses forward foreign exchange contracts to hedge
future foreign currency sales and purchases. At 31 July 2023,
contracts with a nominal value of GBP123m (FY2022: GBP141m) were
designated as hedging instruments. In addition, the Group had
outstanding foreign currency contracts with a nominal value of
GBP252m (FY2022: GBP226m) which were being used to manage
transactional foreign exchange exposures, but were not accounted
for as cash-flow hedges. The fair value of the contracts is
disclosed in note 20.
The majority of hedged transactions will be recognised in the
consolidated income statement in the same period that the
cash-flows are expected to occur, with the only differences arising
because of normal commercial credit terms on sales and purchases.
It is the Group's policy to hedge 80% of certain exposures for the
next two years and 50% of highly probable exposures for the next 12
months.
Hedge effectiveness is determined at the inception of the hedge
relationship, and through periodic prospective effectiveness
assessments to ensure that an economic relationship exists between
the hedged item and hedging instrument. The foreign exchange
forward contracts have similar critical terms to the hedged items,
such as the notional amounts and maturities. Therefore, there is an
economic relationship and the hedge ratio is established as
1:1.
The main sources of hedge ineffectiveness in these hedging
relationships are the effect of the Group's and the counterparty
credit risks on the fair value of the foreign exchange forward
contracts, which is not reflected in the fair value of the hedged
item and the risk of over-hedging where the hedge relationship
requires re-balancing. No other sources of ineffectiveness emerged
from these hedging relationships. Any hedge ineffectiveness is
recognised immediately in the income statement in the period that
it occurs. Of the foreign exchange contracts designated as hedging
instruments, 98% are for periods of 12 months or less (FY2022:
98%).
The following table presents a reconciliation by risk category
of the cash-flow hedge reserve and analysis of other comprehensive
income in relation to hedge accounting:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
------------------------- ---------------------------------------- ---------- ----------
Brought forward cash-flow hedge reserve at start of
year (3) 2
Foreign exchange forward Net fair value gains on effective
contracts: hedges 1 (6)
Amount reclassified to income statement
- finance costs 2 1
------------------------------------------------------------------ ---------- ----------
Carried forward cash-flow hedge reserve at end of year - (3)
------------------------------------------------------------------- ---------- ----------
The following tables set out information regarding the change in
value of the hedged item used in calculating hedge ineffectiveness
as well as the impacts on the cash-flow hedge reserve:
Changes Changes
in value in value
of the of the
hedged hedging
item for instrument
calculating for calculating Cash-flow
Hedging Financial ineffectiveness ineffectiveness hedge reserve
Hedged item Hedged exposure instrument year GBPm GBPm GBPm
---------------- ----------------- ----------------- ---------- ---------------- ---------------- --------------
FY2023 1 (1) 1
--------------------------------------------------------------- ---------------- ---------------- --------------
Sales and Foreign currency Foreign exchange
purchases risk contracts FY2022 (6) 6 (6)
---------------- ----------------- ----------------- ---------- ---------------- ---------------- --------------
Cash-flow hedges generated GBPnil of ineffectiveness in FY2023
(FY2022: GBPnil) which was recognised in the income statement
through finance costs.
Translational currency exposure
The Group has significant investments in overseas operations,
particularly in the US and Europe. As a result, the sterling value
of the Group's balance sheet can be significantly affected by
movements in exchange rates. The Group seeks to mitigate the effect
of these translational currency exposures by matching the net
investment in overseas operations with borrowings denominated in
their functional currencies, except where significant adverse
interest differentials or other factors would render the cost of
such hedging activity uneconomic. This is achieved by borrowing
primarily in the relevant currency or in some cases indirectly
using cross-currency swaps.
Net investment hedges
The table below sets out the currency of loans and swap
contracts designated as net investment hedges:
At 31 July 2023 At 31 July 2022
----------------------------------- ------------------- ---------------------
US$ Euro Total US$ Euro Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- ----- ----- ----- ----- -------
Loans designated as net investment
hedges - (293) (293) - (451) (451)
Cross-currency swap (247) - (247) (615) - (615)
----------------------------------- ----- ----- ----- ----- ----- -------
(247) (293) (540) (615) (451) (1,066)
----------------------------------- ----- ----- ----- ----- ----- -------
At 31 July 2023, cross-currency swaps hedged the Group's
exposure to US dollars and euros (31 July 2022: US dollars and
euros). All the cross-currency swaps designated as net investment
hedges were non-current (FY2022: current and non-current). Swaps
generating GBP247m of the US dollar exposure (FY2022: GBP261m) will
mature in February 2027.
In addition, non-swapped borrowings were also used to hedge the
Group's exposure to euros (31 July 2022: US dollars and euros).
Borrowings generating GBP293m of the euro exposure (FY2022:
GBP287m) will mature in February 2027.
Hedge effectiveness is determined at the inception of the hedge
relationship, and through periodic prospective effectiveness
assessments to ensure that an economic relationship exists between
the hedged item and hedging instrument. The swaps and borrowings
have the same notional amount as the hedged items and, therefore,
there is an economic relationship with the hedge ratio established
as 1:1.
The main sources of hedge ineffectiveness in these hedging
relationships are the effect of the counterparty and the Group's
own credit risk on the fair value of the foreign exchange forward
contracts which is not reflected in the fair value of the hedged
item and the risk of over-hedging where the hedge relationship
requires re-balancing. No other sources of ineffectiveness emerged
from these hedging relationships. Any hedge ineffectiveness is
recognised immediately in the income statement in the period that
it occurs.
The following table presents a reconciliation by risk category
of the net investment hedge reserve and analysis of other
comprehensive income in relation to hedge accounting:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
---------------------------------------- -------------------------- ---------- ----------
Brought forward net investment hedge reserve at start
of year (207) (238)
Net fair value gains
Cross-currency swaps * on effective hedges 40 (77)
Net fair value gains
Bonds on effective hedges (29) 5
Amounts removed from the hedge reserve Profit/(loss) on business
and recognised in the income statement disposal - 103
---------------------------------------- -------------------------- ---------- ----------
Carried forward net investment hedge reserve at end of
year (196) (207)
-------------------------------------------------------------------- ---------- ----------
* The FY2022 reported amount for net fair value losses on
effective hedges of cross-currency swaps was incorrectly presented
as GBP82m rather than GBP77m. The total reserve balances and net
assets for FY2022 are not impacted by the correction to this
table.
The following table sets out information regarding the change in
value of the hedged item used in calculating hedge ineffectiveness
as well as the impacts on the net investment hedge reserve as at 31
July 2022 and 31 July 2021:
Changes Changes
in value in value
of the of the
hedged hedging
item for instrument
calculating for calculating Net investment
Hedging Financial ineffectiveness ineffectiveness hedge reserve
Hedged item Hedged exposure instrument year GBPm GBPm GBPm
---------------- ----------------- ----------------- ---------- ---------------- ---------------- --------------
Overseas Foreign currency Cross-currency
operation risk swaps FY2023 (40) 40 40
---------------- -----------------
Bonds FY2023 29 (29) (29)
----------------- --------------------------------------------- ---------------- ---------------- --------------
(11) 11 11
--------------------------------------------------------------- ---------------- ---------------- --------------
Overseas Foreign currency Cross-currency
operation risk swaps FY2022 82 (82) (82)
---------------- -----------------
Bonds FY2022 (5) 5 5
----------------- --------------------------------------------- ---------------- ---------------- --------------
77 (77) (77)
--------------------------------------------------------------- ---------------- ---------------- --------------
Net investment hedges generated GBP1m of ineffectiveness in
FY2022 (FY2022: GBP1m) which was recognised in the income statement
through finance costs.
The fair values of these net investment hedges are subject to
exchange rate movements. Based on the hedging instruments in place
at the year-end, if the specified currencies were to strengthen 10%
while all other market rates remained constant, it would have the
following effect:
Loss Loss
recognised recognised
in hedge in hedge
reserve reserve
31 July 31 July
2023 2022
GBPm GBPm
---------- ------------ -----------
US dollar 27 68
Euro 33 50
---------- ------------ -----------
These movements would be fully offset by an opposite movement on
the retranslation of the net assets of the overseas subsidiaries.
These sensitivities were calculated before adjusting for tax.
(b) Interest rate risk
The Group operates an interest rate policy designed to optimise
interest cost and reduce volatility in reported earnings. The
Group's current policy is to require interest rates to be fixed
within a band of between 40% and 60 % of the level of gross debt
(excluding leases). This is achieved through fixed rate borrowings
and interest rate swaps. At 31 July 2023 54% (FY2022: 44%) of the
Group's gross borrowings (excluding leases) were at fixed interest
rates, after adjusting for interest rate swaps and the impact of
short maturity derivatives designated as net investment hedges.
The Group monitors its fixed rate risk profile against both
gross and net debt. For medium-term planning, it focuses on gross
debt to eliminate the fluctuations of variable cash levels over the
cycle. The weighted average interest rate on borrowings and
cross-currency swaps at 31 July 2023, after interest rate swaps,
was 4.53% (FY2022: 3.06%).
Interest rate profile of financial assets and liabilities and
the fair value of borrowings
The following table shows the interest rate risk exposure of
investments, cash and borrowings, with the borrowings adjusted for
the impact of interest rate hedging. Other financial assets and
liabilities do not earn or bear interest, and for all financial
instruments except borrowings, the carrying value is not materially
different from their fair value.
As at 31 July 2023
------------------------------------------------------ -----------------------------------------------
At fair
value Cash Fair
through and value
profit cash of
or loss equivalents Borrowings borrowings
GBPm GBPm GBPm GBPm
------------------------------------------------------ -------- ------------ ---------- -----------
Fixed interest
------------------------------------------------------ -------- ------------ ---------- -----------
Less than one year - - (29) (29)
Between one and five years - - (365) (347)
Greater than five years - - (24) (24)
------------------------------------------------------ -------- ------------ ---------- -----------
Total fixed interest financial liabilities - - (418) (400)
Floating rate interest financial assets/(liabilities) 4 215 (236) (240)
------------------------------------------------------ -------- ------------ ---------- -----------
Total interest-bearing financial assets/(liabilities) 4 215 (654) (640)
------------------------------------------------------ -------- ------------ ---------- -----------
Non-interest-bearing assets in the same category - 70 - -
------------------------------------------------------ -------- ------------ ---------- -----------
Total 4 285 (654) (640)
------------------------------------------------------ -------- ------------ ---------- -----------
As at 31 July 2022
------------------------------------------------------- -----------------------------------------------
At fair
value Cash Fair
through and value
profit cash of
or loss equivalents Borrowings borrowings
GBPm GBPm GBPm GBPm
------------------------------------------------------- -------- ------------ ---------- -----------
Fixed interest
------------------------------------------------------- -------- ------------ ---------- -----------
Less than one year - - (203) (203)
Between one and five years - - (357) (359)
Greater than five years - - (24) (24)
------------------------------------------------------- -------- ------------ ---------- -----------
Total fixed interest financial liabilities - - (584) (586)
Floating rate interest financial assets/(liabilities)* 4 970 (582) (586)
------------------------------------------------------- -------- ------------ ---------- -----------
Total interest-bearing financial assets/(liabilities) 4 970 (1,166) (1,172)
------------------------------------------------------- -------- ------------ ---------- -----------
Non-interest-bearing assets in the same category - 86 - -
------------------------------------------------------- -------- ------------ ---------- -----------
Total 4 1,056 (1,166) (1,172)
------------------------------------------------------- -------- ------------ ---------- -----------
* Floating rate interest financial assets in the prior year have
been amended to remove the investments in ICU Medical Inc.,
contingent consideration and investments in early-stage business
that were incorrectly reported as having interest rate
exposure.
Interest rate hedging
The Group also has exposures to the fair values of
non-derivative financial instruments such as EUR fixed rate
borrowings. To manage the risk of changes in these fair values, the
Group has entered into fixed-to-floating interest rate swaps and
cross-currency interest rate swaps, which for accounting purposes
are designated as fair value hedges.
At 31 July 2023 and 31 July 2022, the Group had designated the
following hedges against variability in the fair value of
borrowings arising from fluctuations in base rates:
- EUR300m of the fixed/floating and EUR exchange exposure of
EUR/USD interest rate swaps maturing on 23 February 2027 partially
hedging the EUR 2027 Eurobond; and
- EUR400m of the fixed/floating element of the EUR/USD interest
rate swaps that partially hedged the EUR 2023 Eurobond was repaid
on 28 April 2022.
The fair values of the hedging instruments are disclosed in note
20. The effect of the swaps was to convert GBP257m (FY2022:
GBP588m) debt from fixed rate to floating rate. The swaps have
similar critical terms to the hedged items, such as the reference
rate, reset dates, notional amounts, payment dates and maturities.
Therefore, there is an economic relationship and the hedge ratio is
established as 1:1. Hedge effectiveness is determined at the
inception of the hedge relationship, and through periodic
prospective effectiveness assessments to ensure that an economic
relationship exists between the hedged item and hedging
instrument.
The main source of hedge ineffectiveness in these hedging
relationships is the effect of the currency basis risk on
cross-currency interest rate swaps which are not reflected in the
fair value of the hedged item. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness
was recognised immediately in the income statement in the period in
which it occurred.
The following table sets out the details of the hedged exposures
covered by the Group's fair value hedges:
Accumulated fair
value
adjustments on
Carrying amount hedged item
------------------- -------------------
Changes
Changes in value
in value of the
of hedged hedging
item for instrument
calculating for calculating
Hedged Financial ineffectiveness ineffectiveness Assets Liabilities Assets Liabilities
item Hedged exposure year GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------------- ---------- --------------- --------------- ------ ----------- ------ -----------
Interest
rate risk FY2023 (2) 2 - - - -
Interest
Fixed rate rate &
bonds currency
(a) rate risk FY2023 16 (16) - 233 - (21)
----------- --------------- ---------- --------------- --------------- ------ ----------- ------ -----------
14 (14) - 233 - (21)
-------------------------------------- --------------- --------------- ------ ----------- ------ -----------
Interest
rate risk FY2022 8 (8) - 336 - (2)
Interest
rate &
Fixed rate currency
bonds (a) rate risk FY2022 21 (20) - 252 - (5)
----------- --------------- ---------- --------------- --------------- ------ ----------- ------ -----------
29 (28) - 588 - (7)
-------------------------------------- --------------- --------------- ------ ----------- ------ -----------
(a) Classified as borrowings.
Fair value hedges generated a GBPnil ineffectiveness in FY2023
(FY2022: GBP1m) which was recognised in the income statement
through finance costs.
Sensitivity of interest charges to interest rate movements
The Group has exposure to sterling, US dollar and euro interest
rates. However, the Group does not have a significant exposure to
interest rate movements for any individual currency. Based on the
composition of net debt and investments at 31 July 2023, and taking
into consideration all fixed rate borrowings and interest rate
swaps in place, a one percentage point (100 basis points) change in
average floating interest rates for all three currencies would have
a GBP2m impact (FY2022: GBP2m impact) on the Group's profit before
tax.
(c) Financial credit risk
The Group is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but
does not currently expect any counterparties to fail to meet their
obligations. Credit risk is mitigated by the Board-approved policy
of only placing cash deposits with highly rated relationship bank
counterparties within counterparty limits established by reference
to their Standard & Poor's long-term debt rating. In the normal
course of business, the Group operates cash pooling systems, where
a legal right of set-off applies.
The maximum credit risk exposure in the event of other parties
failing to perform their obligations under financial assets,
excluding trade and other receivables and derivatives, totals
GBP295m at 31 July 2023 (FY2022: GBP1,067m).
31 July 31 July
2023 2022
GBPm GBPm
------------------------------------------------ ------- -------
Cash in AAA liquidity funds 78 551
Cash at banks with at least a AA- credit rating 31 104
Cash at banks with all other A credit ratings 170 397
Cash at other banks 6 4
Investments in bank deposits 4 4
Other investments 7 7
------------------------------------------------ ------- -------
296 1,067
------------------------------------------------ ------- -------
At 31 July 2023, the maximum exposure with a single bank for
deposits and cash was GBP65m (FY2022: GBP339m). The bank has a
credit rating of A+. The maximum mark to market exposure with a
single bank for derivatives was out of the money in both the
current and prior year and does not represent a credit risk.
(d) Liquidity risk
Borrowing facilities
Board policy specifies the maintenance of unused committed
credit facilities of at least GBP300m at all times to ensure that
the Group has sufficient available funds for operations and planned
development. The Group has Revolving Credit Facilities of US$800m
maturing 5 May 2028. At the balance sheet date, the Group had the
following undrawn credit facilities:
31 July 31 July
2023 2022
GBPm GBPm
--------------------------------------------------------- ------- -------
Expiring after more than four years (FY 2022: two years) 622 657
--------------------------------------------------------- ------- -------
Cash deposits
As at 31 July 2023, GBP110m (FY2022: GBP814m) of cash and cash
equivalents was on deposit with various banks of which GBP78m
(FY2022: GBP558m) was in liquidity funds. GBP4m (FY2022: GBP4m) of
investments comprised bank deposits held to secure liabilities and
letters of credit.
Gross contractual cash-flows for borrowings
As at 31 July 2023
----------------------------- ---------------------------------------------------
Fair Contractual Total
value interest contractual
Borrowings adjustments payments cash-flows
GBPm GBPm GBPm GBPm
----------------------------- ---------- ------------ ----------- ------------
Less than one year (29) - (11) (40)
Between one and two years (27) - (11) (38)
Between two and three years (20) - (11) (31)
Between three and four years (13) - (11) (24)
Between four and five years (561) 21 - (540)
Greater than five years (24) - - (24)
----------------------------- ---------- ------------ ----------- ------------
Total (674) 21 (44) (697)
----------------------------- ---------- ------------ ----------- ------------
As at 31 July 2022
============================= ---------------------------------------------------
Fair Contractual Total
value interest contractual
Borrowings adjustments payments cash-flows
GBPm GBPm GBPm GBPm
============================= ========== ============ =========== ============
Less than one year (539) 2 (17) (554)
Between one and two years (23) - (11) (34)
Between two and three years (20) - (11) (31)
Between three and four years (14) - (11) (25)
Between four and five years (552) 5 (11) (558)
Greater than five years (24) - - (24)
----------------------------- ---------- ------------ ----------- ------------
Total (1,172) 7 (61) (1,226)
----------------------------- ---------- ------------ ----------- ------------
The figures presented in the borrowings column include the
non-cash adjustments which are highlighted in the adjacent column.
The contractual interest reported for borrowings is before the
effect of interest rate swaps.
Gross contractual cash-flows for derivative financial
instruments
As at 31 July 2023
====================== ==============================
Net
Receipts Payments cash-flow
GBPm GBPm GBPm
====================== ======== ======== ==========
Assets
Less than one year 209 (204) 5
Greater than one year 6 (6) -
Liabilities
Less than one year 159 (161) (2)
Greater than one year 252 (270) (18)
---------------------- -------- -------- ----------
Total 626 (641) (15)
---------------------- -------- -------- ----------
As at 31 July 2022
---------------------- ------------------------------
Net
Receipts Payments cash-flow
GBPm GBPm GBPm
---------------------- -------- -------- ----------
Assets
Less than one year 495 (521) (26)
Greater than one year 270 (290) (20)
Liabilities
Less than one year 212 (209) 3
Greater than one year 8 (8) -
---------------------- -------- -------- ----------
Total 985 (1,028) (43)
---------------------- -------- -------- ----------
This table above presents the undiscounted future contractual
cash-flows for all derivative financial instruments. For this
disclosure, cash-flows in foreign currencies are translated using
the spot rates at the balance sheet date. The fair values of these
financial instruments are presented in note 20.
Gross contractual cash-flows for other financial liabilities
The contractual cash-flows for financial liabilities included in
trade and other payables were
GBP463m (FY2022: GBP474m) due in less than one year, GBP13m
(FY2022: GBP13m) due between one and five years and GBP1m (FY 2022:
GBPnil) due after more than five years.
20 Derivative financial instruments
The tables below set out the nominal amount and fair value of
derivative contracts held by the Group, identifying the derivative
contracts which qualify for hedge accounting treatment.
At 31 July 2023
---------------------------------------------------- ----------------------------------------
Fair
value
----------- ------ ----------- ------
Contract
or
underlying
nominal
amount Assets Liabilities Net
GBPm GBPm GBPm GBPm
---------------------------------------------------- ----------- ------ ----------- ------
Foreign exchange contracts (cash-flow hedges) 123 1 (1) -
Foreign exchange contracts (not hedge accounted) 252 4 (1) 3
---------------------------------------------------- ----------- ------ ----------- ------
Total foreign exchange contracts 375 5 (2) 3
---------------------------------------------------- ----------- ------ ----------- ------
Cross-currency swaps (fair value and net investment
hedges) 247 - (18) (18)
---------------------------------------------------- ----------- ------ ----------- ------
Total financial derivatives 622 5 (20) (15)
---------------------------------------------------- ----------- ------ ----------- ------
Balance sheet entries:
Non-current 256 - (18) (18)
Current 366 5 (2) 3
---------------------------------------------------- ----------- ------ ----------- ------
Total financial derivatives 622 5 (20) (15)
---------------------------------------------------- ----------- ------ ----------- ------
At 31 July 2022
---------------------------------------------------- ----------------------------------------
Fair
value
----------- ------ ----------- ------
Contract
or
underlying
nominal
amount Assets Liabilities Net
GBPm GBPm GBPm GBPm
---------------------------------------------------- ----------- ------ ----------- ------
Foreign exchange contracts (cash-flow hedges) 141 3 (5) (2)
Foreign exchange contracts (not hedge accounted) 226 1 (2) (1)
---------------------------------------------------- ----------- ------ ----------- ------
Total foreign exchange contracts 367 4 (7) (3)
---------------------------------------------------- ----------- ------ ----------- ------
Cross-currency swaps (fair value and net investment
hedges) 615 - (40) (40)
---------------------------------------------------- ----------- ------ ----------- ------
Total financial derivatives 982 4 (47) (43)
---------------------------------------------------- ----------- ------ ----------- ------
Balance sheet entries:
Non-current 269 - (20) (20)
Current 713 4 (27) (23)
---------------------------------------------------- ----------- ------ ----------- ------
Total financial derivatives 982 4 (47) (43)
---------------------------------------------------- ----------- ------ ----------- ------
Accounting for other derivative contracts
Any foreign exchange contracts which are not formally designated
as hedges and tested are classified as 'held for trading' and not
hedge accounted.
Netting
International Swaps and Derivatives Association (ISDA) master
netting agreements are in place with derivative counterparties
except for contracts traded on a dedicated international electronic
trading platform used for operational foreign exchange hedging.
Under these agreements if a credit event occurs, all outstanding
transactions under the ISDA are terminated and only a single net
amount per counterparty is payable in settlement of all
transactions. The ISDA agreements do not meet the criteria for
offsetting, since the offsetting is enforceable only if specific
events occur in the future, and there is no intention to settle the
contracts on a net basis.
Assets Liabilities Assets Liabilities
31 July 31 July 31 July 31 July
2023 2023 2022 2022
GBPm GBPm GBPm GBPm
------------------------------------------------- -------- ----------- -------- -----------
Gross value of assets and liabilities 5 (20) 4 (47)
Related assets and liabilities subject to master
netting agreements (5) 5 (4) 4
------------------------------------------------- -------- ----------- -------- -----------
Net exposure - (15) - (43)
------------------------------------------------- -------- ----------- -------- -----------
The maturity profile, average interest and foreign currency
exchange rates of the hedging instruments used in the Group's
hedging strategies are as follows:
Maturity at 31 July Maturity at 31 July
2023 2022
---------- --------------- ------------------------- --------------------------
More
Up to One to than One to More than
Hedged Hedging one five five Up to five five
exposure instrument year years years one year years years
---------- --------------- -------------- -------- ------- ------ -------- ------ ----------
Fair value
hedges
---------- ---------------- --------------- ------- ------- ----- -------- ------ ----------
Interest Interest rate - Notional
rate risk swaps - EUR amount (GBPm) - - - 336 - -
- Average
spread
over
three-month
EURIBOR - - - 1.015% - -
Interest
rate/
foreign
currency Cross-currency - Notional
risk swaps (EUR:GBP) amount (GBPm) - 254 - - 254 -
==========
- Average
exchange
rate - 0.845 - - 0.845 -
- Average
spread
over
three-month
GBP SONIA - 1.860% - - 1.860% -
---------------- --------------- ------- ------- ----- -------- ------ ----------
Net investment hedges
--------------------------- --------------- ----------------- ----- -------- ------- ---------
Foreign
currency Cross-currency - Notional
risk swaps (EUR:USD) amount (GBPm) - - - 354 - -
----------
- Average
exchange
rate - - - 1.0773 - -
Cross-currency - Notional
swaps (GBP:USD) amount (GBPm) - 247 - - 261 -
----------------
- Average
exchange
rate - 1..2534 - - 1.2534 -
--------------- ------- ------- ----- -------- ------ ----------
Cash-flow
hedges
---------- ---------------- --------------- ------- ------- ----- -------- ------ ----------
Foreign Foreign exchange
currency contracts - Notional
risk (EUR:GBP) amount (GBPm) 41 8 - 28 8 -
----------
- Average
exchange
rate 0.7842 0.8893 - 0.8323 1.1676 -
Foreign exchange
contracts - Notional
(EUR:USD) amount (GBPm) 30 - - 77 - -
- Average
exchange
rate 1.0939 - - 4.1785 - -
Foreign exchange
contracts - Notional
(USD:GBP) amount (GBPm) 18 - - 16 - -
- Average
exchange
rate 1.2269 - - 1.3273 - -
Foreign exchange
contracts - Notional
(GBP:CZK) amount (GBPm) 10 - - 6 - -
- Average
exchange
rate 27.7919 - - 30.2988 - -
Foreign exchange
contracts - Notional
(EUR:AUD) amount (GBPm) 7 - - 6 - -
----------------
- Average
exchange
rate 1.6603 - - 1.5226 - -
--------------- ------- ------- ----- -------- ------ ----------
At 31 July 2023, the Group had forward foreign exchange
contracts with a nominal value of GBP123m (FY2022: GBP141m)
designated as cash-flow hedges. These forward foreign exchange
contracts are in relation to sale and purchase of multiple
currencies with varying maturities up to 19 September 2024. The
largest single currency pairs are disclosed above and make up 100%
of the notional hedged exposure. The notional and fair values of
these foreign exchange forward derivatives are shown in the nominal
amount and fair value of derivative contracts table above.
21 Fair value of financial instruments
At fair
Basis value At fair
for At through value Total Total
determining amortised profit through carrying fair
fair cost or loss OCI value value
As at 31 July 2023 Notes value GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
Financial assets
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
Other investments 14 A - 4 347 351 351
Other investments 14 F - 13 7 20 20
Cash and cash equivalents 18 B 285 - - 285 285
Trade and other financial
receivables 16 B/C 726 - - 726 726
Derivative financial
instruments 20 C - 5 - 5 5
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
Total financial assets 1,011 22 354 1,387 1,387
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
Financial liabilities
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
Trade and other financial
payables B (476) - - (476) (476)
Short-term borrowings 18 B/D (3) - - (3) (3)
Long-term borrowings 18 E (534) - - (534) (520)
Lease liabilities 18 E (117) - - (117) (117)
Derivative financial
instruments 20 C - (20) - (20) (20)
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
( 20
Total financial liabilities (1,130) ) - (1,150) (1,136)
----------------------------- ----- ----------- ----------- -------- -------- --------- ---------
At fair
Basis value At fair
for At through value Total Total
determining amortised profit through carrying fair
fair cost or loss OCI value value
As at 31 July 2022 Notes value GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Financial assets
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Other investments 14 A - 4 364 368 368
Other investments 14 F - 19 8 27 27
Cash and cash equivalents 18 A 506 550 - 1,056 1,056
Trade and other financial
receivables 16 B/C 807 - - 807 807
Derivative financial
instruments 20 C - 4 - 4 4
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Total financial assets 1,313 577 372 2,262 2,262
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Financial liabilities
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Trade and other financial
payables 17 B (728) - - (728) (728)
Short-term borrowings 18 D (509) - - (509) (509)
Long-term borrowings 18 D (538) - - (538) (544)
Lease liabilities 18 E (119) - - (119) (119)
Derivative financial
instruments 20 C - (47) - (47) (47)
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
Total financial liabilities (1,894) (47) - (1,941) (1,947)
----------------------------- ----- ----------- ----------- -------- -------- --------- -------
The fair value of a financial instrument is the price at which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's-length transaction. Fair
values have been determined with reference to available market
information at the balance sheet date, using the methodologies
described below:
A Carrying value is assumed to be a reasonable approximation to
fair value for all of these assets and liabilities (Level 1 as
defined by IFRS 13).
B Carrying value is assumed to be a reasonable approximation to
fair value for all of these assets and liabilities (Level 2 as
defined by IFRS 13).
C Fair values of derivative financial assets and liabilities,
and trade receivables held to collect or sell are estimated by
discounting expected future contractual cash-flows using prevailing
interest rate curves. Amounts denominated in foreign currencies are
valued at the exchange rate prevailing at the balance sheet date.
These financial instruments are included on the balance sheet at
fair value, derived from observable market prices (Level 2 as
defined by IFRS 13).
D Borrowings are carried at amortised cost. Amounts denominated
in foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. The fair value of borrowings is estimated
using quoted prices (Level 1 as defined by IFRS 13).
E Leases are carried at amortised cost. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. The fair value of the lease contract is
estimated by discounting contractual future cash-flows (Level 2 as
defined by IFRS 13).
F The fair value of instruments is estimated by using
unobservable inputs to the extent that relevant observable inputs
are not available. Unobservable inputs are developed using the best
information available in the circumstances, which may include the
Group's own data, taking into account all information about market
participation assumptions that is reliably available (Level 3 as
defined by IFRS 13).
IFRS 13 defines a three-level valuation hierarchy:
Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1
inputs
Level 3 - inputs not based on observable market data
22 Commitments
At 31 July 2023, commitments, comprising bonds and guarantees
arising in the normal course of business, amounted to GBP207m
(FY2022: GBP234m), including pension commitments of GBP56m (FY2022:
GBP56m) and charitable funding commitments for the Smiths Group
Foundation of GBP10m (FY2022: Nil). In addition, the Group has
committed expenditure on capital projects amounting to GBP13m
(FY2022: GBP15m).
23 Provisions and contingent liabilities
Non-headline and
Trading legacy Total
-------------------------------- ------- -------------------------------- -----
John
Crane, Titeflex
Inc. Corporation
litigation litigation Other
GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------- ----------- ------------ ----- -----
At 31 July 2021 11 212 47 17 287
Foreign exchange rate movements 1 30 6 2 39
Provision charged 6 6 2 26 40
Provision released (3) - - - (3)
Unwind of provision discount - 2 1 - 3
Utilisation (4) (21) (4) (2) (31)
-------------------------------- ------- ----------- ------------ ----- -----
At 31 July 2022 11 229 52 43 335
-------------------------------- ------- ----------- ------------ ----- -----
Comprising:
Current liabilities 10 34 14 30 88
Non-current liabilities 1 195 38 13 247
-------------------------------- ------- ----------- ------------ ----- -----
At 31 July 2022 11 229 52 43 335
-------------------------------- ------- ----------- ------------ ----- -----
Foreign exchange rate movements - (12) (3) - (15)
Provision charged 5 13 - 18 36
Provision released (4) - (7) (14) (25)
Unwind of provision discount - 6 1 - 7
Utilisation (4) (32) (2) (14) (52)
-------------------------------- ------- ----------- ------------ ----- -----
At 31 July 2023 8 204 41 33 286
-------------------------------- ------- ----------- ------------ ----- -----
Comprising:
Current liabilities 6 27 13 24 70
Non-current liabilities 2 177 28 9 216
-------------------------------- ------- ----------- ------------ ----- -----
At 31 July 2023 8 204 41 33 286
================================ ======= =========== ============ ===== =====
The John Crane, Inc. and Titeflex Corporation litigation
provisions were the only provisions that were discounted; other
provisions have not been discounted as the impact would be
immaterial.
Trading
The provisions included as trading represent amounts provided
for in the ordinary course of business. Trading provisions are
charged and released through headline profit.
Warranty provision and product liability
At 31 July 2023, the Group had warranty and product liability
provisions of GBP6m (FY2022: GBP7m). Warranties over the Group's
products typically cover periods of between one and three years.
Provision is made for the likely cost of after-sales support based
on the recent past experience of individual businesses.
Commercial disputes and litigation in respect of ongoing
business activities
The Group has on occasion been required to take legal action to
protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings
brought by other parties, including product liability and insurance
subrogation claims. Provision is made for any expected costs and
liabilities in relation to these proceedings where appropriate,
although there can be no guarantee that such provisions (which may
be subject to potentially material revision from time to time) will
accurately predict the actual costs and liabilities that may be
incurred.
Contingent liabilities
In the ordinary course of its business, the Group is subject to
commercial disputes and litigation such as government price audits,
product liability claims, employee disputes and other kinds of
lawsuits, and faces different types of legal issues in different
jurisdictions. The high level of activity in the US, for example,
exposes the Group to the likelihood of various types of litigation
commonplace in that country, such as 'mass tort' and 'class action'
litigation, legal challenges to the scope and validity of patents,
and product liability and insurance subrogation claims. These types
of proceedings (or the threat of them) are also used to create
pressure to encourage negotiated settlement of disputes. Any claim
brought against the Group (with or without merit) could be costly
to defend. These matters are inherently difficult to quantify. In
appropriate cases a provision is recognised based on best estimates
and management judgement but there can be no guarantee that these
provisions (which may be subject to potentially material revision
from time to time) will result in an accurate prediction of the
actual costs and liabilities that may be incurred. There are also
contingent liabilities in respect of litigation for which no
provisions are made.
The Group operates in some markets where the risk of unethical
or corrupt behaviour is material and has procedures, including an
employee ethics alert line, to help it identify potential issues.
Such procedures will, from time to time, give rise to internal
investigations, sometimes conducted with external support, to
ensure that the Group properly understands risks and concerns and
can take steps both to manage immediate issues and to improve its
practices and procedures for the future. The Group is not aware of
any issues which are expected to generate material financial
exposures.
Non-headline and legacy
John Crane, Inc.
John Crane, Inc. (JCI) is one of many co-defendants in numerous
lawsuits pending in the United States in which plaintiffs are
claiming damages arising from alleged exposure to, or use of,
products previously manufactured which contained asbestos. Until
2006, the awards, the related interest and all material defence
costs were met directly by insurers. In 2007, JCI secured the
commutation of certain insurance policies in respect of product
liability. Provision is made in respect of the expected costs of
defending known and predicted future claims and of adverse
judgements in relation thereto, to the extent that such costs can
be reliably estimated.
The JCI products generally referred to in these cases consist of
industrial sealing products, primarily packing and gaskets. The
asbestos was encapsulated within these products in such a manner
that causes JCI to understand, based on tests conducted on its
behalf, that the products were safe. JCI ceased manufacturing
products containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its
current and expected asbestos litigation, including the most
efficacious presentation of its 'safe product' defence, and intends
to continue to resist these asbestos claims based upon this
defence. The table below summarises the JCI claims experience over
the last 40 years since the start of this litigation:
Year ended Year ended Year ended Year ended Year ended
31 July 31 July 31 July 31 July 31 July
2023 2022 2021 2020 2019
JCI claims experience
Claims against JCI that have been dismissed 310,000 306,000 305,000 297,000 285,000
Claims JCI is currently a defendant
in 20,000 22,000 22,000 25,000 38,000
Cumulative final judgements, after
appeals, against JCI since 1979 154 149 149 149 144
Cumulative value of awards (US$m) since
1979 190 175 175 175 168
The number of claims outstanding at 31 July 2023 reflected the
benefit of 4,000 (FY2022: 1,000) claims being dismissed in the
year.
JCI has also incurred significant additional defence costs. The
litigation involves claims for a number of allegedly
asbestos-related diseases, with awards, when made, for mesothelioma
tending to be larger than those for the other diseases. JCI's
ability to defend mesothelioma cases successfully is, therefore,
likely to have a significant impact on its annual aggregate adverse
judgement and defence costs.
John Crane, Inc. litigation provision
The provision is based on past history of JCI claims and
well-established tables of asbestos-related disease incidence
projections. The provision is determined using advice from asbestos
valuation experts, Bates White LLC. The assumptions made in
assessing the appropriate level of provision include: the period
over which the expenditure can be reliably estimated; the future
trend of legal costs; the rate of future claims filed; the rate of
successful resolution of claims; and the average amount of
judgements awarded. The provision utilised in the period is higher
than previous periods, principally due to the resolution of
outstanding verdicts from previous periods. Trial delays arising
from the COVID-19 pandemic have largely abated and trial activity
has returned to pre-pandemic levels.
Established incidence curves can be used to estimate the likely
future pattern of asbestos-related disease. However, JCI's claims
experience is also significantly impacted by other factors which
influence the US litigation environment. These can include:
changing approaches on the part of the plaintiffs' bar; changing
attitudes amongst the judiciary at both trial and appellate levels
in specific jurisdictions which move the balance of risk and
opportunity for claimants; and legislative and procedural changes
in both the state and federal court systems.
The projections use a limited time horizon on the basis that
Bates White LLC consider that there is substantial uncertainty in
the asbestos litigation environment. So probable expenditures are
not reasonably estimable beyond this time horizon. Asbestos is the
longest running mass tort litigation in American history and is
constantly evolving in ways that cannot be anticipated. JCI's
defence strategy also generates a significantly different pattern
of legal costs and settlement expenses from other defendants. Thus
JCI
is in an extremely rare position, and evidence from other
litigation cannot be used to improve the reliability of the
projections.
A ten-year (FY2022: ten-year) time horizon has been used based
on past experience regarding significant changes in the litigation
environment that have occurred every few years and on the amount of
time taken in the past for some of those changes to impact the
broader asbestos litigation environment.
The rate of future claims filed has been estimated using
well-established tables of asbestos incidence projections to
determine the likely population of potential claimants, and JCI's
past experience to determine what proportion of this population
will make a claim against JCI. The JCI products generally referred
to in claims had industrial and marine applications. As a result,
the incidence curve used for JCI projections excludes construction
workers, and is a composite of the curves that predict asbestos
exposure-related disease from shipyards and other occupations. This
is consistent with JCI's litigation history.
The rate of successful resolution of claims and the average
amount of any judgements awarded are projected based on the past
history of JCI claims, since this is the best available evidence,
given JCI's unusual strategy of defending all claims.
The future trend of legal costs is estimated based on JCI's past
experience, adjusted to reflect the assumed levels of claims and
trial activity, since the number of trials is a key driver of legal
costs.
John Crane, Inc. litigation insurance recoveries
While JCI has certain excess liability insurance, JCI has met
defence costs directly. The calculation of the provision does not
take account of any potential recoveries from insurers.
John Crane, Inc. litigation provision sensitivities
The provision may be subject to potentially material revision
from time to time if new information becomes available as a result
of future events. There can be no guarantee that the assumptions
used to estimate the provision will result in an accurate
prediction of the actual costs that will be incurred because of the
significant uncertainty associated with the future level of
asbestos claims and of the costs arising out of related litigation,
including the unpredictability of jury verdicts.
John Crane, Inc. statistical reliability of projections over the
ten-year time horizon
In order to evaluate the statistical reliability of the
projections, a population of outcomes is modelled using randomised
verdict outcomes. This generated a distribution of outcomes with
future spend at the 5th percentile of GBP180m and future spend at
the 95th percentile of GBP245m (FY2022: GBP203m and GBP268m,
respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total
future spend will fall between GBP228m and GBP257m (FY2022: between
GBP239m and GBP263m), compared to the gross provision value of
GBP246m (FY2022: GBP258m).
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision of GBP204m (FY2022:
GBP229m) is a discounted pre-tax provision using discount rates,
being the risk-free rate on US debt instruments for the appropriate
period. The deferred tax asset related to this provision is shown
within the deferred tax balance (note 6).
The JCI asbestos litigation provision has developed over the
last five years as follows:
Year ended Year ended Year ended Year ended Year ended
31 July 31 July 31 July 31 July 31 July
2023 2022 2021 2020 2019
GBPm GBPm GBPm GBPm GBPm
John Crane, Inc. litigation provision
Gross provision 246 258 220 235 257
Discount (42) (29) (8) (4) (20)
Discounted pre-tax provision 204 229 212 231 237
Deferred tax (51) (57) (54) (59) (50)
Discounted post-tax provision 153 172 158 172 187
Operating profit charge/(credit)
Increased provisions for adverse judgements
and legal defence costs 28 24 10 14 7
Change in US risk-free rates (15) (18) (5) 16 8
Subtotal - items charged to the provision 13 6 5 30 15
Litigation management, legal fees in
connection with litigation against
insurers and defence strategy 2 1 1 1 2
Recoveries from insurers (7) - (9) (3) (11)
Total operating profit charge/(credit) 8 7 (3) 28 6
Cash-flow
Provision utilisation - legal defence
costs and adverse judgements (32) (21) (13) (23) (24)
Litigation management expense (2) (1) - (1) (2)
Recoveries from insurers 7 - 9 3 11
Net cash outflow (27) (22) (4) (21) (15)
John Crane, Inc. sensitivity of the projections to changes in
the time horizon used
If the asbestos litigation environment becomes more volatile and
uncertain, the time horizon over which the provision can be
calculated may reduce. Conversely, if the environment became more
stable, or JCI changed approach and committed to long-term
settlement arrangements, the time period covered by the provision
might be extended.
The projections use a ten-year time horizon. Reducing the time
horizon by one year would reduce the provision by GBP16m (FY2022:
GBP18m) and reducing it by five years would reduce the provision by
GBP87m (FY2022: GBP97m).
We consider, after obtaining advice from Bates White LLC, that
to forecast beyond ten years requires that the litigation
environment remains largely unchanged with respect to the
historical experience used for estimating future asbestos
expenditures. Historically, the asbestos litigation environment has
undergone significant changes more often than every ten years. If
one assumed that the asbestos litigation environment would remain
unchanged for longer and extended the time horizon by one year, it
would increase the pre-tax provision by GBP13m (FY2022: GBP15m) and
extending it by five years would increase the pre-tax provision by
GBP48m (FY2022: GBP56m). However, there are also reasonable
scenarios that, given certain recent events in the US asbestos
litigation environment, would result in no additional asbestos
litigation for JCI beyond ten years. At this time, how the asbestos
litigation environment will evolve beyond ten years is not
reasonably estimable.
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of
adverse judgements expected to occur. JCI's claims experience is
significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on
the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. As
a result, whilst the Group anticipates that asbestos litigation
will continue beyond the period covered by the provision, the
uncertainty surrounding the US litigation environment beyond this
point is such that the costs cannot be reliably estimated.
Although the methodology used to calculate the JCI litigation
provision can in theory be applied to show claims and costs for
longer periods, the Directors consider, based on advice from Bates
White LLC, that the level of uncertainty regarding the factors used
in estimating future costs is too great to provide for reasonable
estimation of the numbers of future claims, the nature of such
claims or the cost to resolve them for years beyond the ten-year
time horizon.
Titeflex Corporation
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek
division, has received a number of claims in the US from insurance
companies seeking recompense on a subrogated basis for the effects
of damage allegedly caused by lightning strikes in relation to its
flexible gas piping product. It has also received product liability
claims regarding this product in the US, some in the form of
purported class actions. Titeflex Corporation believes that its
products are a safe and effective means of delivering gas when
installed in accordance with the manufacturer's instructions and
local and national codes. However, some claims have been settled on
an individual basis without admission of liability. Equivalent
third-party products in the US marketplace face similar
challenges.
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement,
together with recent marketplace activity, provide sufficient
evidence to recognise a liability in the accounts. Therefore
provision has been made for the costs which the Group is expected
to incur in respect of future claims to the extent that such costs
can be reliably estimated. Titeflex Corporation sells flexible gas
piping with extensive installation and safety guidance designed to
assure the safety of the product and minimise the risk of damage
associated with lightning strikes.
The assumptions made in assessing the appropriate level of
provision, which are based on past experience, include: the period
over which expenditure can be reliably estimated; the number of
future settlements; the average amount of settlements; and the
impact of statutes of repose and safe installation initiatives on
the expected number of future claims. The assumptions relating to
the number of future settlements exclude the use of recent claims
history due to the uncertain impact that the COVID-19 lockdown has
had on the number of claims.
The provision of GBP41m (FY2022: GBP52m) is a discounted pre-tax
provision using discount rates, being the risk-free rate on US debt
instruments for the appropriate period. The deferred tax asset
related to this provision is shown within the deferred tax balance
(note 6).
31 July 31 July
2023 2022
GBPm GBPm
------------------------------ ------- -------
Gross provision 78 87
Discount (37) (35)
------------------------------ ------- -------
Discounted pre-tax provision 41 52
Deferred tax (9) (12)
------------------------------ ------- -------
Discounted post-tax provision 32 40
------------------------------ ------- -------
Titeflex Corporation litigation provision history
A credit of GBP8m (FY2022: GBP2m charge) has been recognised by
Titeflex Corporation in respect of changes to the estimated cost of
future claims from insurance companies seeking recompense for
damage allegedly caused by lightning strikes. The lower gross
provision value has been principally driven by an increase in the
discount factor deriving from increasing US dollar discount
rates.
Titeflex Corporation litigation provision sensitivities
The significant uncertainty associated with the future level of
claims and of the costs arising out of related litigation means
that there can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the
actual costs that will be incurred. Therefore the provision may be
subject to potentially material revision from time to time, if new
information becomes available as a result of future events.
The projections incorporate a long-term assumption regarding the
impact of safe installation initiatives on the level of future
claims. If the assumed annual benefit of bonding and grounding
initiatives were 0.5% higher, the provision would be GBP2m (FY2022:
GBP3m) lower, and if the benefit were 0.5% lower, the provision
would be GBP2m (FY2022: GBP4m) higher.
The projections use assumptions of future claims that are based
on both the number of future settlements and the average amount of
those settlements. If the assumed average number of future
settlements increased 10%, the provision would rise by GBP3m
(FY2022: GBP5m), with an equivalent fall for a reduction of 10%. If
the assumed amount of those settlements increased 10%, the
provision would rise by GBP2m (FY2022: GBP4m), also with an
equivalent fall for a reduction of 10%.
Other non-headline and legacy provisions
Non-headline provisions comprise all provisions that were
disclosed as non-headline items when they were charged to the
consolidated income statement. Legacy provisions comprise
non-material provisions relating to former business activities and
discontinued operations and properties no longer used by
Smiths.
These non-material provisions include non-headline
reorganisation, disposal indemnities, litigation and arbitration in
respect of old products and discontinued business activities, which
includes claims received in connection with the disposal of Smiths
Medical in the prior year. Provision is made for the best estimate
of the expected expenditure related to the defence and/or
resolution of such matters. There is an inherent risk in legal
proceedings that the outcome may be unfavourable to the Group, and
as such there can be no guarantee that such provisions (which may
be subject to potentially material revision from time to time) will
be sufficient.
Reorganisation
At 31 July 2023, there were reorganisation provisions of GBP7m
(FY2022: GBP1m) relating to the various restructuring programmes
that are expected to be utilised in the next 18 months.
Property
At 31 July 2023, there were provisions of GBP10m (FY2022:
GBP10m) related to actual and potential environmental issues for
sites currently or previously occupied by Smiths operations.
24 Share capital
Average Issued
Number number capital Consideration
of shares of shares GBPm GBPm
-------------------------------------- ------------ ------------ -------- -------------
Ordinary shares of 37.5p each
Total share capital at 31 July 2021 396,377,114 396,350,586 149
Issue of new equity shares - exercise
of share options 131,942 125,354 - 2
Share buybacks (34,152,897) (9,797,729) (13) (511)
Total share capital at 31 July 2022 362,356,159 386,678,211 136
-------------------------------------- ------------ ------------ -------- -------------
Share buybacks (13,053,169) (32,555,024) (5) (207)
Shares held in Employee Benefit Trust - (1,232,067)
-------------------------------------- ------------ ------------ -------- -------------
Total share capital at 31 July 2023 349,302,990 352,891,120 131
-------------------------------------- ------------ ------------ -------- -------------
Share capital structure
As at 31 July 2023, the Company's issued share capital was
349,302,990 ordinary shares with a nominal value of 37.5p per
share. All of the issued share capital was in free issue and all
issued shares are fully paid.
The Company's ordinary shares are listed and admitted to trading
on the Main Market of the London Stock Exchange. The Company has an
American Depositary Receipt (ADR) programme and one ADR equates to
one ordinary share. As at 31 July 2023, 3,335,964 ordinary shares
were held by the nominee of the programme in respect of the same
number of ADRs in issue.
The holders of ordinary shares are entitled to receive the
Company's Reports and Accounts, to attend and speak at General
Meetings of the Company, to appoint proxies and to exercise voting
rights. None of the ordinary shares carry any special rights with
regard to control of the Company or distributions made by the
Company.
There are no known agreements relating to, or restrictions on,
voting rights attached to the ordinary shares (other than the
48-hour cut-off for casting proxy votes prior to a General
Meeting). There are no restrictions on the transfer of shares, and
there is no requirement to obtain approval for a share transfer.
There are no known arrangements under which financial rights are
held by a person other than the holder of the ordinary shares.
There are no known limitations on the holding of shares.
Powers of Directors
The Directors are authorised to issue and allot shares and to
buy back shares subject to receiving shareholder approval at the
General Meeting. Such authorities were granted by shareholders at
the 2022 Annual General Meeting. At the 2023 AGM, it will be
proposed that the Directors be granted new authorities to allot and
buy back shares.
Share buybacks
As at 15 September 2023 (the latest practicable date for
inclusion in this report), the Company had an unexpired authority
to repurchase ordinary shares up to a maximum of 10.7 million
ordinary shares (FY2022: 59 million). As at 15 September 2023, the
Company did not hold any shares in treasury. Any ordinary shares
purchased may be cancelled or held in treasury.
In connection with the sale of Smiths Medical to ICU Medical,
Inc., and in the light of our strong balance sheet and cash-flows,
the Group announced that it intended to return an amount
representing 55% of the initial cash proceeds (equating to an
aggregate purchase price of up to US$1bn or GBP742m) to
shareholders in the form of a Share Buyback Programme. All shares
purchased under the Programme will be cancelled. This Programme was
initiated on 19 November 2021 as announced to the London Stock
Exchange on 11 November 2021 and following shareholder approval at
the General Meeting held on 17 November 2021.
A total number of 13,008,032 ordinary shares of 37.5p each were
repurchased during the period, for a total consideration of
GBP206,142,265, of which 84,195 shares with a value of GBP1,430,464
were yet to settle and be cancelled. In total since the start of
the Programme, 47,290,261 shares have been repurchased, for a total
consideration of GBP718,939,264, representing 11.93% of the
called-up ordinary share capital outstanding at the start of the
Programme.
A further 1,379,697 ordinary shares have been repurchased during
the period of 1 August 2023 to 15 September 2023, bringing the
total number of shares repurchased to 48,669,958. At 15 September
2023, the Group had paid GBP737m of the expected GBP742m payable
under the Programme, with the remaining GBP5m expected to be
utilised within the next two weeks.
Employment share schemes
Shares acquired through Company share schemes and plans rank
pari passu with the shares in issue and have no special rights. The
Company operates an Employee Benefit Trust, with an independent
trustee, to hold shares pending employees becoming entitled to them
under the Company's share schemes and plans. On 31 July 2023, the
Trust held 1,742,929 (FY2022: 618,662) ordinary shares in the
Company. The Trust waived its dividend entitlement on its holding
during the year, and the Trust abstains from voting any shares held
at General Meetings.
25 Dividends
The following dividends were declared and paid in the
period:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
Ordinary final dividend of 27.3p (FY2022: 26.0p) paid
19 November 2022 97 103
Ordinary interim dividend of 12.9p (FY2022: 12.3p) paid
17 May 2023 46 47
-------------------------------------------------------- ---------- ----------
143 150
-------------------------------------------------------- ---------- ----------
In the current year a total dividend of 40.2p has been paid,
comprising a final dividend of 27.3p paid in respect of FY2022 and
an interim dividend of 12.9p paid in respect of FY2023. In the
prior year a total dividend of 38.3p was paid, comprising a final
dividend of 26.0p paid in respect of FY2021 and an interim dividend
of 12.3p paid in respect of FY2022.
The final dividend for the year ended 31 July 2023 of 28.7p per
share was recommended by the Board on 25 September 2023 and will be
paid to shareholders on 24 November 2023, subject to approval by
the shareholders. This dividend is payable to all shareholders on
the register of members at 6.00pm on 20 October 2023 (the record
date).
Waiver of dividends
The following waived all dividends payable in the year, and all
future dividends, on their shareholdings in the Company:
- Winterflood Client Nominees Limited (Buck Trustees Dividend
Waived Ltd)
26 Reserves
Retained earnings include the value of Smiths Group plc shares
held by the Smiths Industries Employee Benefit Trust. In the year
the Company issued nil (FY2022: nil) shares to the Trust, the Trust
purchased 1,553,558 shares (FY2022: 1,069,998 shares) in the market
for a consideration of GBP25m (FY2022: GBP16m) and redeemed 429,291
shares (FY2022: 777,700) to employees for a cumulative option cost
of GBP1m (FY2022: GBPnil). At 31 July 2023, the Trust held
1,742,929 (FY2022: 618,662 ) ordinary shares.
Other reserves comprise the capital redemption reserve,
revaluation reserve and merger reserve, which arose from share
repurchases, revaluations of property, plant and equipment, and
merger accounting for business combinations before the adoption of
IFRS, respectively.
Capital management
Capital employed comprises total equity adjusted for goodwill
recognised directly in reserves, net retirement benefit-related
assets and liabilities, net litigation provisions relating to
non-headline items and net debt. The efficiency of the allocation
of capital to the divisions is monitored through the return on
capital employed (ROCE). This ratio is calculated over a rolling
12-month period and is the percentage that headline operating
profit comprises of monthly average capital employed. In FY2023
ROCE was 15.7% (FY2022: 14.2); see note 29.
Capital structure is based on the Directors' judgement of the
balance required to maintain flexibility, whilst achieving an
efficient cost of capital.
The FY2023 ratio of net debt to headline EBITDA of 0.7 (FY2022:
0.3) is within the Group's stated policy of 2.0 or less over the
medium term. The Group's robust balance sheet and record of strong
cash generation are more than able to fund immediate investment
needs and legacy obligations. See note 29 for the definition of
headline EBITDA and the calculation of this ratio.
As part of its capital management, the Group maintains a solid
investment grade credit rating to ensure access to the widest
possible sources of financing and to optimise the resulting cost of
capital. At 31 July 2023, the Group had a credit rating of
BBB+/Baa2 (FY2022: BBB+/Baa2) with Standard & Poor's and
Moody's respectively.
The Board has a progressive dividend policy for future payouts,
with the aim of increasing dividends in line with the long-term
underlying growth in earnings. In setting the level of dividend
payments, the Board will take into account prevailing economic
conditions and future investment plans, along with the objective to
maintain a minimum dividend cover of at least two times.
Hedge reserve
The hedge reserve on the balance sheet records the cumulative
gain or loss on designated hedging instruments, and comprises:
31 July 31 July
2023 2022
GBPm GBPm
Net investment hedge reserve (net of GBP8m of deferred
tax (FY2022: GBP8m)) (188) (205)
Cash-flow hedge reserve - 3
-------
(188) (202)
------------------------------------------------------- -------
See transactional currency exposure risk management disclosures
in note 19 for additional details of cash-flow hedges, and
translational currency exposure risk management disclosure also in
note 19 for additional details of net investment hedges.
Non-controlling interest
The Group has recorded non-controlling interests of GBP22m
(FY2022: GBP22m), of which the most significant balance is in John
Crane Japan Inc., which represented GBP19m (FY2022: GBP20m) of the
total non-controlling interests.
The non-controlling interest in John Crane Japan Inc. represents
a 30% interest. John Crane Japan Inc. generated operating profits
of GBP5m in the period (FY2022: GBP5m), and cash inflows from
operating activities of GBP2m (FY2022: GBP5m). It paid dividends of
GBP1m (FY2022: GBP1m) and tax of GBP2m (FY2022: GBP1m). At 31 July
2023, the company contributed GBP53m (FY2022: GBP57m) of net assets
to the Group.
27 Acquisitions
On 5 January 2023, the Group's Interconnect division acquired
100% of the share capital of Plastronics Sockets & Connectors
(Plastronics) for consideration of GBP25m. The acquisition was
financed using the Group's own cash resources. Plastronics is a
leading supplier of burn-in test sockets and patented spring probe
contacts for the semiconductor test market segment. This
acquisition strengthens the existing portfolio of Smiths
Interconnect and provides cross-selling opportunities in Asia and
the US.
The intangible assets recognised on acquisition comprise
customer relationships, intellectual property and technology.
Goodwill represents the expected synergies from the strategic fit
of the acquisition and the value of the expertise in the assembled
workforce. From the date of acquisition to 31 July 2023,
Plastronics contributed GBP8m to revenue and less than GBP1m to
profit before taxation and amortisation. If the Group had acquired
this business from the beginning of the financial year, the
acquisition would have contributed GBP15m to revenue and less than
GBP1m to profit before taxation.
Provisional balances at the date of acquisition have been
provided in the table below. The amounts remain provisional due to
the fair value of the deferred consideration not being
finalised.
Plastronics
GBPm
Non-current assets - acquired intangible assets 13
- plant and machinery 2
Current assets - inventory 3
- trade and other receivables 3
Current liabilities - trade and other payables (3)
Net assets acquired 18
Goodwill on current period acquisitions 7
Cash paid during
the period 22
Deferred consideration 3
Total consideration 25
Post balance sheet date acquisition
On 30 August 2023, the Group acquired the business of Heating
& Cooling Products (HCP), for consideration of approximately
GBP65m, financed using the Group's own cash resources. HCP is a
US-based manufacturer of Heating, Ventilation & Air
Conditioning (HVAC) solutions. This acquisition will further expand
the Flex-Tek division's presence in the North American HVAC market,
enabling Smiths to serve customers with an even broader product
range.
The acquisition has historically contributed GBP47m of
annualised revenue and GBP6m of annualised profit before taxation.
Due to the short time between the completion of the acquisition and
the announcement date, it has not been possible to complete the
determination of the fair values of the acquired balance sheet.
28 Cash-flow
Cash-flow from operating activities
Year ended 31 July Year ended 31 July
2023 2022
--------------------------------------------- ----------------------------- -----------------------------
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- -------- ------------ ----- -------- ------------ -----
Operating profit:
- continuing operations 501 (98) 403 417 (300) 117
- discontinued operations - 6 6 66 (47) 19
Amortisation of intangible assets 9 52 61 10 51 61
Impairment of intangible assets - - - - 4 4
Impairment of investment within discontinued
operations - - - - 14 14
Depreciation of property, plant and
equipment 42 - 42 38 - 38
Depreciation of right of use assets 32 - 32 30 - 30
(Gain)/loss on disposal of property,
plant and equipment - - - (2) - (2)
(Gain)/loss on fair value of contingent
consideration - 6 6 - - -
Share-based payment expense 13 - 13 13 - 13
Retirement benefits* 5 (7) (2) 5 207 212
Decrease/(increase) in inventories (88) (1) (89) (173) 4 (169)
Decrease/(increase) in trade and
other receivables (10) (53) (63) (87) 4 (83)
Increase/(decrease) in trade and
other payables 10 39 49 131 (2) 129
Increase/(decrease) in provisions (2) (32) (34) (1) 22 21
--------------------------------------------- -------- ------------ ----- -------- ------------ -----
Cash generated from operations 512 (88) 424 447 (43) 404
Interest paid (73) (2) (75) (51) - (51)
Interest received 36 - 36 13 1 14
Tax paid (92) - (92) (88) - (88)
--------------------------------------------- -------- ------------ ----- -------- ------------ -----
Net cash inflow from operating activities 383 (90) 293 321 (42) 279
--------------------------------------------- -------- ------------ ----- -------- ------------ -----
- continuing operations 383 (90) 293 274 (42) 232
- discontinued operations - - - 47 - 47
-------- ------------ ----- -------- ------------
* The retirement benefits non-headline operating activities
principally relate to employer contributions to legacy defined
benefit and post-retirement healthcare plans.
Headline cash measures - continuing operations
The Group measure of headline operating cash excludes interest
and tax, and includes capital expenditure supporting organic
growth. The Group uses operating cash-flow for the calculation of
cash conversion and free cash-flow for management of capital
purposes. See note 29 for additional details.
The table below reconciles the Group's net cash-flow from
operating activities to headline operating cash-flow and free
cash-flow:
Year ended 31 July Year ended 31 July
2023 2022
----------------------------- -----------------------------
Headline Non-headline Total Headline Non-headline Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------------ ----- -------- ------------ -----
Net cash inflow from operating activities 383 (90) 293 274 (42) 232
-------- ------------ ----- -------- ------------ -----
Include:
Expenditure on capitalised development,
other intangible assets and property,
plant and equipment (81) - (81) (71) - (71)
Repayment of lease liabilities (36) - (36) (34) - (34)
Disposals of property, plant and
equipment 2 - 2 3 - 3
-------- ------------ ----- -------- ------------ -----
Free cash-flow 178 130
-------- ------------ ----- -------- ------------ -----
Exclude:
Repayment of lease liabilities 36 - 36 34 - 34
Interest paid 73 - 73 46 - 46
Interest received (36) - (36) (13) - (13)
Tax paid 92 - 92 79 - 79
-------- ------------ ----- -------- ------------ -----
Operating cash-flow 433 (90) 343 318 (42) 276
-------- ------------ ----- -------- ------------ -----
Headline cash conversion
Headline operating cash conversion for continuing operations is
calculated as follows:
Year ended 31 July Year ended 31 July
2023 2022
------------------------------------------ ------------------------------------------
Pro-forma Pro-forma
excluding excluding
Restructuring restructuring Restructuring restructuring
As reported costs costs As reported costs costs
GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------------- -------------- ----------- ------------- --------------
Headline operating profit 501 - 501 417 - 417
Headline operating cash-flow 433 - 433 318 14 332
----------- ------------- -------------- ----------- ------------- --------------
Headline operating cash
conversion 86% 86% 76% 80%
----------- ------------- -------------- ----------- ------------- --------------
Reconciliation of free cash-flow to net movement in cash and
cash equivalents:
Year ended Year ended
31 July 31 July
2023 2022
GBPm GBPm
--------------------------------------------------------------- ---------- ----------
Free cash-flow 178 130
Investment in financial assets and acquisition of businesses (22) -
Disposal of businesses and discontinued operations (7) 1,331
Other net cash-flows used in financing activities (note:
repayment of lease liabilities is included in free cash-flow) (909) (937)
Net decrease in cash and cash equivalents for discontinued
operations - 16
--------------------------------------------------------------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents (760) 540
--------------------------------------------------------------- ---------- ----------
29 Alternative performance measures and key performance
indicators
The Group uses several alternative performance measures (APMs)
in order to provide additional useful information on underlying
trends and the performance and position of the Group. APMs are
non-GAAP and not defined by IFRS; therefore, they may not be
directly comparable with other companies' APMs and should not be
considered a substitute for IFRS measures.
The Group uses these measures, which are common across the
industry, for planning and reporting purposes, to enhance the
comparability of information between reporting periods and business
units. The measures are also used in discussions with the
investment analyst community and by credit rating agencies.
We have identified and defined the following key measures which
are used within the business by management to assess the
performance of the Group's businesses:
APM term Definition and purpose
Capital employed Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets and
is adjusted as follows:
* To add goodwill recognised directly in reserves in
respect of subsidiaries acquired before 1 August
1998;
* To eliminate the Group's investment in ICU Medical,
Inc. equity and deferred consideration contingent on
the future share price performance of ICU Medical,
Inc; and
* To eliminate post-retirement benefit assets and
liabilities and non-headline litigation provisions
related to John Crane, Inc. and Titeflex Corporation,
both net of deferred tax, and net debt.
It is used to monitor capital allocation within the
Group. See below for a reconciliation from net assets
to capital employed.
Capital expenditure Comprises additions to property, plant and equipment,
capitalised development and other intangible assets,
excluding assets acquired through business combinations:
see note 1 for an analysis of capital expenditure.
This measure quantifies the level of capital investment
into ongoing operations.
Divisional headline DHOP comprises divisional earnings before central
operating profit (DHOP) costs, finance costs and taxation. DHOP is used to
monitor divisional performance. A reconciliation
of DHOP to operating profit is shown in note 1.
Free cash-flow Free cash-flow is calculated by adjusting the net
cash inflow from operating activities to include
capital expenditure, the repayment of lease liabilities,
the proceeds from the disposal of property, plant
and equipment and the investment in financial assets
relating to operating activities and pensions financing
outstanding at the balance sheet date. The measure
shows cash generated by the Group before discretionary
expenditure on acquisitions and returns to shareholders.
A reconciliation of free cash-flow is shown in note
28.
Gross debt Gross debt is total borrowings (bank, bonds and lease
liabilities). It is used to provide an indication
of the Group's overall level of indebtedness. See
note 18 for an analysis of gross debt.
Headline The Group has defined a 'headline' measure of performance
that excludes material non-recurring items or items
considered non-operational/trading in nature. Items
excluded from headline are referred to as non-headline
items. This measure is used by the Group to measure
and monitor performance excluding material non-recurring
items or items considered non-operational. See note
3 for an analysis of non-headline items.
Headline EBITDA EBITDA is a widely used profit measure, not defined
by IFRS, being earnings before interest, taxation,
depreciation and amortisation. A reconciliation of
headline operating profit to headline EBITDA is shown
in the note below.
Net debt Net debt is total borrowings (bank, bonds and lease
liabilities) less cash balances and derivatives used
to manage the interest rate risk and currency profile
of the debt. This measure is used to provide an indication
of the Group's overall level of indebtedness and
is widely used by investors and credit rating agencies.
See note 18 for an analysis of net cash/(debt).
Non-headline The Group has defined a 'headline' measure of performance
that excludes material non-recurring items or items
considered non-operational/trading in nature. Items
excluded from headline are referred to as non-headline
items. This is used by the Group to measure and monitor
material non-recurring items or items considered
non-operational. See note 3 for an analysis of non-headline
items.
Operating cash-flow Comprises free cash-flow and excludes cash-flows
relating to the repayment of lease liabilities, interest
and taxation. The measure shows how cash is generated
from operations in the Group. A reconciliation of
operating cash-flow is shown in note 28.
Operating profit Operating profit is earnings before finance costs
and tax. A reconciliation of operating profit to
profit before tax is shown on the income statement.
This common measure is used by the Group to measure
and monitor performance.
Return on capital Smiths ROCE is calculated over a rolling 12-month
employed (ROCE) period and is the percentage that headline operating
profit represents of the monthly average capital
employed on a rolling 12-month basis. This measure
of return on invested resources is used to monitor
performance and capital allocation within the Group.
See below for Group ROCE and note 1 for divisional
headline operating profit and divisional capital
employed.
The key performance indicators (KPIs) used by management to
assess the performance of the Group's businesses are as
follows:
KPI term Definition and purpose
Dividend cover - headline Dividend cover is the ratio of headline earnings
per share (see note 5) to dividend per share (see
note 25). This commonly used measure indicates the
number of times the dividend in a financial year
is covered by headline earnings.
Earnings per share EPS growth is the growth in headline basic EPS (see
(EPS) growth note 5), on a reported basis. EPS growth is used
to measure and monitor performance.
Free cash-flow (as This measure is defined as free cash-flow divided
a % of operating profit) by headline operating profit averaged over a three-year
performance period. This cash generation measure
is used by the Group as a performance measure for
remuneration purposes.
Greenhouse gas (GHG) GHG reduction is calculated as the percentage change
emissions reduction in normalised Scope 1 & 2 GHG emissions. Normalised
is calculated as tCO(2) e per GBPm of revenue. This
measure is used to monitor environmental performance.
Gross Vitality Gross Vitality is calculated as the percentage of
revenue derived from new products and services launched
in the last five years. This measure is used to monitor
the effectiveness of the Group's new product development
and commercialisation.
My Say engagement The overall score in our My Say employee engagement
score survey. The biannual survey is undertaken Group-wide.
This measure is used by the Group to monitor employee
engagement.
Operating cash conversion Comprises headline operating cash-flow, excluding
restructuring costs, as a percentage of headline
operating profit. This measure is used to show the
proportion of headline operating profit converted
into cash-flow from operations before investment,
finance costs, non-headline items and taxation. The
calculation is shown in note 28.
Operating profit margin Operating profit margin is calculated by dividing
headline operating profit by revenue. This measure
is used to monitor the Group's ability to drive profitable
growth and control costs.
Organic growth Organic growth adjusts the movement in headline performance
to exclude the impact of foreign exchange and acquisitions.
Organic growth is used by the Group to aid comparability
when monitoring performance.
Organic revenue growth Organic revenue growth (remuneration) is compounded
(remuneration) annualised growth in revenue after excluding the
impact of foreign exchange and acquisitions. The
measure used for remuneration differs from organic
revenue growth in that it is calculated on a compounded
annualised basis. This measure has historically been
used by the Group for aligning remuneration with
business performance.
Percentage of senior Percentage of senior leadership positions taken by
leadership positions females is calculated as the percentage of senior
taken by females leadership roles (G14+ group) held by females. This
measure is used by the Group to monitor diversity
performance.
R&D cash costs as This measure is defined as the cash cost of research
a % of sales and development activities (including capitalised
R&D, R&D directly charged to the P&L and customer-funded
projects) as a percentage of revenue. Innovation
is an important driver of sustainable growth for
the Group and this measures our investment in research
and development to drive innovation.
Recordable Incident Recordable Incident Rate is calculated as the number
Rate (RIR) of recordable incidents - where an incident requires
medical attention beyond first aid - per 100 colleagues,
per year across Smiths. This measure is used by the
Group to monitor health and safety performance.
Capital employed
Capital employed is a non-statutory measure of invested
resources. It comprises statutory net assets adjusted to add
goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998 of GBP478m (FY2022: GBP478m), to
eliminate the Group's investment in ICU Medical, Inc. equity and
deferred consideration contingent on the future share price
performance of ICU Medical, Inc. and to eliminate post-retirement
benefit assets and liabilities and non-headline litigation
provisions related to John Crane, Inc. and Titeflex Corporation,
both net of related tax, and net debt.
31 July 31 July
2023 2022
Notes GBPm GBPm
--------------------------------------------------------- ----- ------- -------
Net assets 2,406 2,721
Adjust for:
Goodwill recognised directly in reserves 478 478
Retirement benefit assets and obligations 8 (89) (194)
Tax related to retirement benefit assets and obligations 31 57
John Crane, Inc. litigation provisions and related
tax 23 153 172
Titeflex Corporation litigation provisions and
related tax 23 32 40
Investment in ICU Medical, Inc. equity 14 (347) (364)
Deferred contingent consideration 14 (13) (19)
Net debt 18 387 150
--------------------------------------------------------- ----- ------- -------
Capital employed 3,038 3,041
--------------------------------------------------------- ----- ------- -------
Return on capital employed (ROCE)
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
---------------------------------------------------- ----- ---------- ----------
Headline operating profit for previous 12 months
- continuing operations 501 417
Average capital employed - continuing operations
(excluding investment in ICU Medical, Inc. equity) 1 3,196 2,940
---------------------------------------------------- ----- ---------- ----------
ROCE 15.7% 14.2%
---------------------------------------------------- ----- ---------- ----------
Credit metrics
Smiths Group monitors the ratio of net debt to headline EBITDA
as part of its management of credit ratings; see note 26 for
details. This ratio is calculated as follows:
Headline earnings before interest, tax, depreciation and
amortisation (headline EBITDA)
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
Headline operating profit 501 417
Exclude:
- depreciation of property, plant and equipment 12 42 38
- depreciation of right of use assets 13 32 30
- amortisation and impairment of development costs 10 2 3
- amortisation of software, patents and intellectual
property 10 7 7
----------------------------------------------------- ----- ---------- ----------
Headline EBITDA 584 495
----------------------------------------------------- ----- ---------- ----------
Ratio of net debt to headline EBITDA
Year ended Year ended
31 July 31 July
2023 2022
Notes GBPm GBPm
------------------------------------- ----- ---------- ----------
Headline EBITDA 584 495
------------------------------------- ----- ---------- ----------
Net debt 18 387 150
------------------------------------- ----- ---------- ----------
Ratio of net debt to headline EBITDA 0.7 0.3
------------------------------------- ----- ---------- ----------
30 Post Balance Sheet Events
Details of the proposed final dividend announced since the end
of the reporting period are given in note 25.
On 30 August 2023, the Group completed the acquisition of HCP,
see note 27 for details.
31 Audit exemption taken for subsidiaries
The following subsidiaries are exempt from the requirements of
the Companies Act 2006 relating to the audit of individual accounts
by virtue of Section 479A of that Act for FY2023.
Company
Company name number
EIS Group Plc 61407
--------
Flexibox International Limited 394688
--------
Flex-Tek Group Limited 11545405
--------
Graseby Limited 894638
--------
SI Properties Limited 160881
--------
SITI 1 Limited 4257042
--------
Smiths Detection Group Limited 5138140
--------
Smiths Detection Investments Limited 5146644
--------
Smiths Finance Limited 7888063
--------
Smiths Group Finance EU Limited 10440573
--------
Smiths Group Finance US Limited 10440608
--------
Smiths Group Innovation Limited 10953689
--------
Smiths Interconnect Group Limited 6641403
--------
Smiths Pensions Limited 2197444
--------
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END
FR NKPBPFBKDACB
(END) Dow Jones Newswires
September 26, 2023 02:00 ET (06:00 GMT)
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