Annual Report • Jul 31, 2019
Annual Report
Open in ViewerOpens in native device viewer
SMITHS GROUP PLC Annual Report FY2019
REVENUE
UNDERLYING REVENUE GROWTH
HEADLINE OPERATING PROFIT
HEADLINE OPERATING PROFIT MARGIN
DIVIDEND 45.90p FY2018: 44.55p
Figures in this report are for continuing operations unless otherwise stated
OPEN THIS FL A P TO FIND OUT HOW SMITHS IS CRE ATING INNOVATI V E SOLUTIONS FOR THE WORLD
WWW.SMITHS.COM
| In this year's report | IFC |
|---|---|
| Our purpose | 01 |
| FY2019 highlights | 02 |
| Our global business | 04 |
|---|---|
| Our markets | 05 |
| Our divisions | 06 |
| Megatrends | 08 |
| Our business model | 10 |
| Chairman's statement | 12 |
| Chief Executive's update | |
| – Chief Executive's Q&A | 15 |
| – Our Executive Committee | 18 |
| – Our strategy | 19 |
| – Strong financial framework | 22 |
| – Key performance indicators | 26 |
| Divisional review | |
| – John Crane | 28 |
| – Smiths Detection | 32 |
| – Flex-Tek | 36 |
| – Smiths Interconnect | 40 |
| – Smiths Medical | 44 |
| Resources and relationships | 47 |
| Non-financial Information Statement | 61 |
| Risk management | 62 |
| Going Concern and Viability Statement | 71 |
| Chairman's introduction | 74 |
|---|---|
| Leadership and purpose | 76 |
| Division of responsibilities | 84 |
| Composition, succession and evaluation | 88 |
| Audit, risk and internal control | 94 |
| Remuneration Report | 100 |
| Directors' Report | 123 |
| Statement of Directors' Responsibilities | 124 |
| Independent auditors' report | 126 |
|---|---|
| Consolidated primary statements | 134 |
| Accounting policies | 139 |
| Notes to the accounts | 147 |
| Unaudited five-year Group financial record |
193 |
| Unaudited US dollar primary statements | 194 |
| Smiths Group plc company accounts | 200 |
| Subsidiary undertakings | 208 |
| Shareholder information | IBC |
"We believe that achieving above market organic growth is the best way to build a sustainably competitive company. This is clearly our long term goal."
"We made further progress on our strategic plan – delivering continued, sustainable growth on the way to outperforming our markets. In this context of progress and confidence in the future, we announced plans to separate Smiths Medical to create two stronger, industry-leading companies with distinct strategies and focus."
19–27 STRATEGY AND KPIs
"In FY2019 the Group successfully built on its return to growth with continued margin improvement. Our rigorous capital allocation continues, supporting a portfolio that is well positioned to deliver sustainable growth ahead of it markets."
47–60 RESOURCES AND RELATIONSHIPS
Smiths is a world leader in the practical application of advanced technologies.
Our businesses share the same characteristics which embody how we create value, underpinned by our culture and values.
We actively manage our portfolio to target growing markets where we can sustainably achieve top three leadership positions.
We drive excellence and innovation through the Smiths Excellence System, maximising value for all our stakeholders.
44–46 SMITHS MEDICAL
36–39
40–43
SMITHS INTERCONNECT
28–31 JOHN CRANE
32–35
SMITHS DETECTION
FLEX-TEK
| FINANCIAL SUMMARY | |||||||
|---|---|---|---|---|---|---|---|
| Headline1 | Statutory | ||||||
| FY2019 £m |
FY20182 £m |
Reported growth |
Underlying3 growth |
FY2019 £m |
FY20182 £m |
Reported growth |
|
| Continuing Operations4 | |||||||
| Revenue | £2,498m | £2,328m | +7% | +3% | £2,498m | £2,328m | +7% |
| Operating profit | £427m | £388m | +10% | +4% | £326m | £342m | (5)% |
| Operating margin | 17.1% | 16.7% | +40bps | 13.1% | 14.7% | (160)bps | |
| Pre-tax profit | £376m | £333m | +13% | £304m | £287m | +6% | |
| Profit after tax | £273m | £246m | +11% | £142m | £119m | +19% | |
| Discontinued operations5 | |||||||
| Profit after tax | £112m | £115m | (3)% | £85m | £160m | (47)% | |
| Total Group | |||||||
| Profit for the year | £385m | £361m | +7% | £227m | £279m | (19)% | |
| Operating cash-flow | £474m | £538m | (12)% | ||||
| Operating cash conversion6 | 83% | 99% | (1,600)bps | ||||
| Free cash-flow | £234m | £302m | (23)% | ||||
| Net debt | £1,197m | £893m | |||||
| Net debt/EBITDA | 1.8x | 1.4x | |||||
| Return on capital employed | 14.4% | 14.6% | (20)bps | ||||
| Basic EPS | 96.8p | 90.7p | +7% | +3% | 56.8p | 70.0p | (19)% |
| Dividend | 45.90p | 44.55p | +3% |
1 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements.
2 FY2018 has been restated for IFRS 15 and the Smiths Medical re-classification as discontinued operations.
3 Underlying modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses.
4 Continuing operations exclude Smiths Medical which is accounted for as 'discontinued operations – businesses held for distribution to owners', given the intended separation of Smiths Medical by the end of the first half of CY2020.
5 Discontinued operations is defined in note 27 to the financial statements.
6 Operating cash conversion is the ratio measuring total Group headline operating cash over total Group headline
operating profit.
90% of the Group is well positioned in attractive markets, up from ~80% last year, driven by increased organic investment and targeted M&A activity
20%
Revenue from higher-growth regions increased by 9% on an underlying3 basis with strong growth in China, Egypt, Brazil and Mexico.
* Comprised of territories whose real GDP growth exceeds the G7 average
FY2018: 0.39
Health and safety remains a top priority and we are working to create safer and more secure workplaces for our people.
49%
Aftermarket and services, a core characteristic of a Smiths business, increased by 100bps, taking aftermarket sales as a percentage of Group revenue to 49%, driven by Smiths Detection.
* Aftermarket relates to maintenance, repairs and digital upgrades
Stock turns measures speed and efficiency across our operations. Underlying progress was offset by the timing of sales and deferred deliveries in Smiths Detection.
* Average inventory turns during the year
TOTA L GROUP VITALITY INDEX
FY2018: 13%
Vitality measures the effectiveness of our innovation, showing revenue from products launched in the last three years as a percentage of total revenue.
* See definition on page 26
We have operations in more than 50 countries and our products and solutions have a global reach.
We target markets with strong long-term growth prospects.
Our threat detection equipment helps keep people and assets safe. Demand in the security market is driven by persistent and evolving terror threats, changing security regulations, and increased global air travel and trade. Aftermarket opportunities rise as the installed base grows. The defence market is served by Smiths Detection through imaging and sensing detection products and by Smiths Interconnect through secure connectivity solutions. Growth in this market is primarily driven by defence and security spending.
Customers put their trust in our products and services to support a wide range of general industrial applications in sectors including petrochemical, mining, pulp & paper, water treatment, semiconductor testing, heating elements, automotive and rail transportation. These sectors and others are served by John Crane, Smiths Interconnect and Flex-Tek, with growth generally tracking increases in GDP worldwide.
John Crane's mechanical seals and systems support energy operations worldwide including downstream and midstream oil & gas and power generation. Growth is driven by increases in global demand for energy, productivity, and enhanced environmental and safety requirements. There is a growing requirement for aftermarket and service contracts.
Satellite launches, deep space exploration and emerging activities such as asteroid mining are driving demand for high-reliability solutions in the space market. Growth in aerospace is coming from new fuel-efficient aircraft and increasing passenger and freight traffic. Flex-Tek provides hydraulic hoses and fuel lines for airframes and engines and Smiths Interconnect supplies ultra high-quality connectors, microwave components and antenna systems for aircraft and satellite communications.
| Security and defence | 38% |
|---|---|
| General industry | 33% |
| Energy | 23% |
| Space and aerospace | 6% |
| SMITHS GROUP PLC Annual Report FY2019 | 05 |
|---|---|
Our divisions are experts in their chosen markets.
Mission-critical solutions for global energy and process industries
£945m
HEADLINE OPERATING PROFIT MARGIN
23.3%
Detection and screening technologies for the identification of security threats and contraband
REVENUE
HEADLINE OPERATING PROFIT MARGIN
16.0%
28 32
– Long-term customer relationships
Innovative components to heat and move fluids and gases
HEADLINE OPERATING PROFIT MARGIN
Solutions for high-speed, secure connectivity in demanding applications
£319m
14.7%
Quality devices and consumables that are vital to patient care
HEADLINE OPERATING PROFIT MARGIN
16.8%
There are many possible futures for Smiths. We monitor megatrends to inform our strategy, which drives our innovation agenda so we can make a safer, more efficient and better connected world.
learn from past iterations and enhance its capabilities and knowledge – applications can already be found
INCREASED DIGITISATION AND CONNECTIVITY Converting information into digital formats supports connectivity, making products smarter and able to exchange information with other devices and platforms. This is driving new business models and value creative solutions for our customers.
How Smiths is well positioned – Digital solutions are central to many of our products, e.g. software in Smiths Detection equipment, John Crane's predictive diagnostic sensors and Smiths Interconnect's digital networks
for space applications
across the Group
– We are close to our customers and offer cutting edge technological expertise – Our Digital Forge is helping to leverage software expertise
Energy demand is increasing worldwide, with estimated growth of 1.2%* per annum, and a changing mix with gas growing faster than oil. Environmental regulations and the need to reduce harmful emissions are also impacting the energy landscape.
Advances in technology, globalisation, demographic trends and competition are increasing the demand for specialised talent. Our People Plan is focused on building a learning organisation to attract, retain, develop, engage and inspire our people.
The growth of infrastructures supporting travel and trade is creating a smaller world for people and goods. With this comes the need for enhanced security and speed of transaction.
Business models enabled by new technology will emerge and these require agile structures. Trends include customisation, new service models and the sharing economy. We are embracing this evolution to remain competitive and create new value propositions.
Our Group-wide innovation framework is used by the divisions to drive the innovation agenda, enabling us to stay at the cutting edge of knowledge and product development.
We actively manage our portfolio of businesses to ensure they are targeted in growing markets where we can sustainably achieve a top three leadership position. Our businesses share the same characteristics which embody how we create value.
Our shared culture and values guide how we behave. Our values are more than just words, we use them to guide every decision to make Smiths a place where people want to work and an organisation that people want to do business with.
PASSION INTEGRITY RESPECT
As a globally aligned organisation, we are committed to doing business responsibly, maximising value for all our stakeholders.
Lean Awareness training
18,000 colleagues
Safety RIR 0.41 per 100 colleagues
OTIF 84%
On time in full
COPQ
1.4% Cost of poor quality
The Smiths Excellence System (SES) helps us apply best practice across the Group. We work to ensure consistent execution and a culture of continuous improvement.
Our people are vital to achieving a sustainable competitive advantage. We work to attract, retain, develop, engage and inspire the best.
Working closely with our customers to
CUSTOMER
predict and fulfil their needs with our innovative product and value-adding support is central to the success of the Group.
We leverage our years of manufacturing experience to drive for enhanced production efficiency, effectiveness, quality and safety, while minimising our impact on the environment.
TECHNOLOGY
We build strong, strategic supplier relationships to ensure quality, efficiency and flexibility. We apply our shared values to everything we do and ask our suppliers to do the same.
PROGRAMME We aim for consistent and flawless execution in everything we do. Collaboration, consistency and best practice drive the development and implementation of products and solutions that delight customers and
Direct economic contribution
create value.
£2.6bn Tax paid + employee costs + supplier costs
Underlying EPS growth
+3%
See underlying definition on page 02
Dividend growth
In writing these statements each year, I have always tried to make them interesting and informative. Hopefully, I will be successful in continuing that trend in my letter this year.
I think that many of you know my readiness to become the Chairman of Smiths was because I wanted to perform an experiment of sorts. That experiment was to see whether we could use the same approach to revitalising growth in a UK engineering company that had proved so successful in the United States. We believe that achieving above market organic growth is the best way to build a sustainably competitive company. This is clearly our longterm goal.
We all know that if a company participates in a 2% growth market, except with vigorous intervention to alter the outcome, that company will also grow at 2%, or perhaps even a little less as new competitive entrants nibble away at its market share.
As I have set out in previous Chairman's letters, there are only five general ways to achieve above-market growth and three of these require innovation. So, becoming better at innovation was always going to be a key piece to solving this growth puzzle. Although Smiths had innovated here-and-there in a couple of its reporting divisions, for many years we did not innovate very much in Smiths Medical, Flex-Tek and John Crane. Innovation had not been a Company-wide focus for many years. The faster moving electronics markets that our Smiths Interconnect business competes in, naturally required a greater level of innovation than in some other parts of the Company and the same was true in Smiths Detection, where global security threats have continued to present more challenges every year. But even there, the rate of innovation was still not fast enough to secure consistent above-market growth because the core market was eroding faster than we were replacing it.
In any company, establishing a pathway to deliver sustainable organic growth requires a substantial culture change. If that company has not innovated for many years, putting in place the necessary cultural and technological building blocks can be a longer road than most people realise. The natural sequence of new market familiarisation, technology awareness, ideation, invention, innovation, and then product release is almost always a several year process, depending on how technologically advanced the ultimate new product business process is. I'm happy to report that the cultural change necessary for innovation to thrive appears to have taken root in the Company. I see innovation happening now in almost every corner of Smiths.
I SEE INNOVATION HAPPENING NOW IN ALMOST EVERY CORNER OF SMITHS."
Operational excellence was another abiding need to be able to remake Smiths into the company we dreamed of. Every company has a set of underlying KPIs which, although not necessarily reported GAAP measures, are still strong leading indicators of the underlying health of a company. The important underlying KPIs in Smiths case are the new product Vitality Index (VI), the cost of poor quality (COPQ), on time in full delivery (OTIF), working capital as a percent of sales (WC%) and, finally, the operating leverage ratio (OLR), which is the ratio of earnings growth to sales growth. Consistent execution along these KPI vectors had been challenging for the Company going back many years.
We are now publicly reporting VI, WC%, COPQ and OTIF, all of which are showing improvements. We have more work to do on improving the OLR and on WC%, but this is quite normal when companies are trying to restart innovation and are making the necessary upfront investments which understandably reduces operating leverage.
After more than four years of effort on this reinvention task, the Company is reporting organic growth this year in line with its combined markets at about 3%. We see this as an achievement but not as success; rather purely a stepping stone along the road to reporting consistent above market growth in every line of business. That absolutely is our overall longerterm objective.
Many consultants and bankers who advise companies on which ideas to invest in, often believe there is a linear relationship between money invested in R&D and the resultant new product vitality index and time. Nothing could be further from the truth. I have seen this mistake made many times in my career, with occasionally near tragic results for a company, and sometimes its customers. A company has to have the innate creativity and imagination to even begin the innovation process.
That in itself is a difficult cultural change and the resulting new products and business models that bring better financial output, always take time to deliver. Within a reasonable degree of accuracy, once invented, it is possible to mathematically model the way in which new products penetrate and diffuse into a market. The results are often surprising to the unfamiliar, and they are absolutely not linear. The rate of growth is a double or even a triple exponential or a modified Fibonacci series.
In a company whose sales are spread across many relatively low-volume product groupings, the company is required to invest in innovation everywhere because no one or two product categories are large enough to arithmetically alter the growth outcome. In some senses, that fact makes the innovation choices easier, while it simultaneously makes the broader innovation effort harder and more complex because there's just more of it to do.
If a company has a few key products, say like Apple does with its iPhone, as long as it innovates, it can rely on them to deliver above-market organic growth for the entire company. If not, the company must inevitably encourage innovation across its entire portfolio. That's what Smiths has been doing these past few years.
In these circumstances, a company can't pick winners and losers in the innovation game, if for no other reason than the arithmetic doesn't work. For really innovative products there is, anyway, no data on the future. When people say to me that invention and innovation is risky, so why do it, my response to them is always that the alternative of not doing it is much worse. That approach just leads to average products, lower than average market growth and eventual stagnation.
Innovation, no matter how powerful its effect, is only one of the competitive weapons a company uses. For industrial companies there are six or seven competitive platforms the company needs to be good at to be sustainably competitive.
These are cost, technology, people, distribution, customer service, brands and marketing and lastly, industrial design. If you are going to design new products, they may as well look beautiful. Even great products with a large amount of innovation in them still need to pay proper attention to manufactured cost. Ironically, sometimes products with the highest level of technology, can also have the lowest cost. No matter how good a product is, however, without effective distribution and good customer service, it will fail. The entire figurative orchestra of competitive platforms all have to play in tune. For example, a new car cannot be shipped from the factory if it's missing something as simple as a single windscreen wiper blade.
Nevertheless, even with innovative products, low cost is always the ultimate competitive weapon a company has at its disposal. In my former life before Smiths, on one product where we already had the world's leading position, we challenged ourselves to invent a simpler but effective form of that product and reduce the manufactured cost by 95%. We were successful and we shared the bounty with our customers, but it also enabled us to compete better.
Innovation is not always about what features or technology you add, but in how you make a product and what unnecessary things you might take away. In some of our divisions there are big opportunities to be taken with this philosophy.
We have been focusing a lot more this year on the subsurface KPIs and, in particular, a division's OLR. As innovation and growth begins to gather momentum and pay for itself, OLRs should rise, and then operating margins become easier to maintain or improve.
To make sure we do not fall behind on operational excellence, the Company has also placed significant emphasis this year on Lean and Six Sigma training, primarily for use in operations. Five years ago, there were few if any Black Belt or Master Black Belt qualified Six Sigma employees in our operations departments. Companies that are good at Lean and Six Sigma are ultimately better managed companies with lower costs and higher-quality products. These investments in operating efficiency and quality will undoubtedly produce cost reductions and quality improvements going forward. Several hundred of our colleagues have attended Green or Black Belt programmes this year with hundreds more queueing.
The big news of the year was the decision to separate Smiths Medical from the Company. After such a long association, this was a hard decision to have to take, but it will facilitate our emphasis on industrial technology and create two stronger, standalone companies. Smiths Medical is a leader in infusion technologies and the innovation we have driven into that business will ensure its future success.
We have also continued our programme of portfolio streamlining to bring a more cohesive core to the Group's businesses. The largest of these activities, the acquisition of United Flexible, brings real scale to a number of different areas of technology in Flex-Tek and we are very encouraged by its progress.
Nobody in the Company believes that finally getting the Company back onto a growth footing in any way indicates that we have crossed the finish line. Not at all. What we do believe, however, is that it indicates we have crossed the start line and, with your support, we will continue to invest in the future of this fine Company via innovation, operations excellence and the Company's people.
In closing, I again want to thank all our investors for your continued support and we shall do our level best not to let you down.
Respectfully submitted,
Sir George Buckley CHAIRMAN
Q
A
FY2019 was a significant year in the evolution of Smiths. We made further progress on our strategic plan – delivering continued, sustainable growth on the way to outperforming our markets. In this context of progress and confidence in the future, we announced plans to separate Smiths Medical to create two stronger, industry-leading companies with distinct strategies and focus.
In this review of the year I address some of the key questions our stakeholders have been asking us during this important time for the Group, and the exciting value creation potential we have at both Smiths and Smiths Medical.
Back in 2016 we set out our vision to transform Smiths and, since then, we've been through a programme of extensive change and development. We defined the types of businesses we believe we're good at running and targeted them in attractive markets where we can achieve a top three leadership position. We put in place the building blocks that will support sustainable growth above our markets. We focused on driving relentless execution through our Smiths Excellence System (SES) shared operating model, and sustainable competitiveness through targeted investment in innovation. Through our global People Plan, we are investing the right way in our people – our most valuable resource – to deliver best performance.
Last year, we returned Smiths to growth for the first time in five years. We have built on that return to growth this year with underlying revenue growth of 3%. Our growth is now in line with the markets that we serve which, in aggregate, grow around 3% per year; and we are on our way to outperformance.
Importantly, this growth is coupled with enhanced margins. Our margins have improved by 300bps since 2016 and we strongly believe that, in time, Smiths can deliver margins of between 18 and 20%.
It was against this context of progress, and our confidence in the future, that we announced plans to separate Smiths Medical.
There are three fundamental beliefs driving the separation of Smiths Medical.
A
Firstly, it will create two stronger, industry-leading companies with distinct strategies, focus, and management teams. Secondly, it will enable us to concentrate on growing the Smiths business as a leading industrial technology group, united by its shared business characteristics and common operating model. And, thirdly it will allow Smiths Medical to capitalise on its leading positions, large programme of new product launches, and value creating opportunities in what is a rapidly changing market.
Our plan will provide immediate clarity through a separation of the two businesses, with the overriding objective of maximising value for all our stakeholders.
Smiths Medical has some great leading brands, positioned in attractive markets. Approximately 80% of its revenue is recurring; it has gross margins of over 50% in all segments; and it routinely delivers high cash conversion. Its challenge had been underinvestment, but we've been working hard to address that, with average investment in new products up 40% in the last four years.
This targeted innovation spend has driven the launch of 33 new products in the last 24 months, and their increasing contribution is a key factor in Smiths Medical's successful return to growth in the second half of FY2019.
OUR PLAN WILL PROVIDE IMMEDIATE CLARITY THROUGH A CLEAN SEPARATION OF THE TWO BUSINESSES, WITH THE OVERRIDING OBJECTIVE OF MAXIMISING VALUE FOR ALL OUR STAKEHOLDERS."
Returning to growth was a key milestone for Smiths Medical, as was the appointment of JehanZeb Noor as CEO. JehanZeb is an impressive leader, with an intimate understanding of the MedTech industry and a strong track record of delivering growth and enhanced performance. I'm sure that he will be a great success as the company builds a strong, sustainable future.
The other significant point of progress achieved by Smiths Medical this year was the submission of its new large volume pump to the US regulators for first phase review. This has been a long-term project that represents a significant opportunity. Global sales of large volume pumps and dedicated consumables are approximately £2bn per year and Smiths Medical currently does not participate in this segment.
I am sure you can see why I have such a strong conviction in Smiths Medical's attractive future as a standalone business.
Q
A
Our ambition is to count ourselves amongst the world's elite industrial technology companies. Based on the superior quality of our businesses I believe that is eminently achievable.
Over the last four years we've been gradually reshaping the Group, organically and inorganically. Our businesses share the same four characteristics which embody how we create value – differentiated by their technology; with increasing digitisation; that are asset light; have a high proportion of aftermarket and services; and are targeted in growing markets where we can achieve a top three leadership position.
We actively manage our investment decisions with these business characteristics in mind and, over the last three years, we have completed 18 transactions with a total value of £1.4bn, supporting the continued strengthening of the portfolio. As a result of the organic and inorganic actions we have taken, over 90% of the Group is now well positioned.
Having honed the portfolio, we then focus on running our assets as effectively as we can through excellence, innovation and people. Consistent and robust execution is the difference between just a set of good assets and a good set of assets delivering consistently great performance. This is at the heart of SES, which is driving tangible improvements in our working capital, productivity and cost metrics; with significant potential still to come.
CONSISTENT AND ROBUST EXECUTION IS THE DIFFERENCE BETWEEN JUST A SET OF GOOD ASSETS AND A GOOD SET OF ASSETS DELIVERING CONSISTENTLY GREAT PERFORMANCE."
As a technology company, innovation is critical to our sustained success. To support that we've increased Groupwide R&D spend by 25% in the last four years. To be effective and drive higher sales, investment needs to be commercially targeted and quick to market. We use our Vitality Index as a barometer for new product introduction success. The index currently stands at 13% and our ambition is to reach 20% in the medium term.
I PASSIONATELY BELIEVE THAT PEOPLE AND LEADERSHIP IS OUR SINGLE MOST SUSTAINABLE DIFFERENTIATOR. WE'RE BUILDING A LEARNING ORGANISATION AND ARE FOCUSED ON DIVERSITY AND INCLUSION AT ALL LEVELS TO MAKE SURE WE ATTRACT, RETAIN, DEVELOP, ENGAGE AND INSPIRE THE VERY BEST PEOPLE."
As I've said before, I passionately believe that people and leadership is our single most sustainable differentiator. We're building a learning organisation and are focused on diversity and inclusion at all levels to make sure we attract, retain, develop, engage and inspire the very best people. At the end of the day, it is Smiths people who drive excellence and innovation. Without the very best, our strategy just isn't achievable.
Our approach is underpinned by a strong financial framework. We're an asset light business, which is highly cash generative, and has a disciplined approach to leverage, and all capital allocation decisions. This supports our ability to generate long-term sustainable growth and superior returns.
Q
A
Cash generation and a strong balance sheet are both trademarks of Smiths, but they're not ends in themselves. They go hand in hand with disciplined capital allocation, which we apply to all the investment opportunities we have.
Re-investment in organic growth remains priorities one, two and three. We will then complement organic growth with disciplined M&A to create additional value. Our most recent example was the acquisition of United Flexible, which strengthened Flex-Tek's position in aerospace and industrial markets globally. Acquisitions such as United Flexible can help us to access new technologies or new markets which we may not be able to reach as quickly through organic investment channels.
And we will continue to use our cash generation to pay a secure and progressive dividend.
A
A
Our biggest challenge remains pace. We're pulling a lot of levers throughout the Group to enact change but seeing the full effect of that change takes time. I'm very pleased with the progress that we've made so far, and I am excited about our continued trajectory of improvement and the huge potential we still have to go; but, as with any Chief Executive, I'm keen to see the full effect of our transformational strategy coming through as fast as it can.
In FY2020 we expect to make further progress, with year on year growth weighted towards the first half and resulting in a more even balance in overall performance between the first and second halves. At current rates, foreign exchange will provide a tailwind to revenue and profit.
We remain on course to grow faster than our markets over the medium term. Our strategy is to focus the portfolio for growth and deliver world-class competitiveness, within a strong financial framework. The Board remains confident that this will drive long-term sustainable growth and attractive returns.
Andy Reynolds Smith CHIEF EXECUTIVE
Our Executive Committee is responsible for implementing our strategy, ensuring consistent execution and embedding our culture and values.
Joined Smiths in 2015. Background: Chief Executive, Automotive, GKN plc; Ingersoll Rand; Siebe plc and Delphi Automotive Systems. For full biography see page 76.
Joined Smiths in 1991. Appointed President of Asia Pacific in 2017 and President of Smiths Detection in 2018; previously President of Smiths Interconnect and Managing Director for Smiths Connectors.
Joined Smiths in 2019. Background: Vice President and General Manager of Healthcare for Amcor Flexibles Americas; Partner at McKinsey & Company.
President, John Crane Joined Smiths in 2017. Background: CFO of Expro; Grid Net and Formfactor; Director of Risk at Rio Tinto Alcan; Schlumberger.
Joined Smiths in 2017. Background: CFO at Dyson for 12 years; 13 years in senior finance and strategy roles at Diageo plc. For full biography see page 76.
Joined Smiths in 2013 as Group Financial Controller. Appointed Group Strategy and M&A Director in 2017. Appointed President of Flex-Tek in 2019. Background: Royal Caribbean Cruises; Procter & Gamble; PwC.
Joined Smiths in 2016. Background: Group Purchasing, Supply Chain and IT Director at GKN plc; Global Operations Director at GKN Driveline; Faurecia; Valéo; PSA; Deloitte Consulting.
President, Smiths Interconnect Joined Smiths in 2017. Background: President and CEO of Morpho Detection; CEO of Labinal; COO of Zoltek; CEO of Messier-Bugatti, USA.
Joined Smiths in 2016. Background: Group HR Director at Aggreko plc, BBA Aviation plc and SSL International plc, and HR roles at GEC plc.
Joined Smiths in 2013. Appointed Group General Counsel in 2018. Previously Company Secretary and Deputy Group General Counsel. Background: BG Group plc; Linde AG; Edwards Group; Centrica plc.
SES ensures that we focus on continuous improvement, speed and efficiency
and integration
We maximise growth through organic investment and a highly disciplined approach to acquisitions, disposals
The acquisition of the industrial division of Advanced Diamond Technologies (ADT) in John Crane expanded our technology into diamond coatings, improving the performance and reliability of our products.
INNOVATE TO EXCEED CUSTOMER EXPECTATIONS
ENGAGE OUR PEOPLE TO DRIVE BEST PERFORMANCE EXECUTE CONSISTENTLY
– Globalise our finance graduate programme and launch our engineering programme
– Progress our People Plan and diversity & inclusion strategy
– Launch our enhanced leadership programme
Smiths Detection developed a new CT hand baggage scanner which enables passengers to keep their liquid and laptops in their bags and enhances security.
STRATEGIC REPORT
In FY2019 the Group successfully built on its return to growth. Underlying revenue growth of 3% was in line with expectations and marks another important milestone on our journey towards sustained outperformance versus our markets. All divisions delivered growth, except for Smiths Detection where some large orders were deferred into the first half of FY2020. The net impact of acquisitions and disposals (£43m), and favourable foreign exchange translation (£57m) each added a further 2% to revenue growth. As a result, reported revenue increased to £2,498m (FY2018: £2,328m), up 7% or £170m. Revenue from higher-growth regions, which now represents 20% of Group sales, grew 9% on an underlying basis.
The net impact of acquisitions and disposals (£13m), and favourable foreign exchange translation (£11m) each added a further 3% to profit growth. As a result, reported headline operating profit increased to £427m (FY2018: £388m), up 10% or £39m.
Central costs reduced by £6m to £(51)m (FY2018: £(57)m), reflecting continued focus on central cost efficiencies.
The £(101)m difference between headline and statutory operating profit is nonheadline items as defined in note 3 to the financial statements. The two largest constituents relate to amortisation of acquired intangibles and GMP equalisation. On a statutory basis, after taking into account all items excluded from headline performance, operating profit of £326m was £(16)m lower than last year (FY2018: £342m).
Headline operating margin increased 40bps to 17.1% on a reported basis. This improvement was driven by a continued focus on operational excellence, as well as good volume growth, partially offset by mix and pricing in Smiths Detection and re-investment for future growth in John Crane. Since 2016 the Group's operating margin has increased 300bps, evidencing good progress towards our medium-term ambition of achieving Group operating margins of 18-20%.
Headline finance costs of £(51)m (FY2018: £(55)m) were lower than last year driven by early repayment of higher coupon bonds. Statutory finance costs were £(22)m (FY2018: £(55)m) with the £33m reduction driven by a £39m foreign exchange gain on an intercompany loan with discontinued operations, (which is
neutral on a Group basis), partially offset by hedge ineffectiveness on fair value hedges, which are treated as non-headline.
The Group's investment in R&D grew, with income statement costs up by £8m or 9% on a reported basis, to £93m (FY2018: £85m). This translated into cash costs of £111m or 4.5% of sales (FY2018: £96m or 4.1%). Our Vitality Index measures the effectiveness of organic investment, tracking revenue from new products launched in the past three years. Our Total Group Vitality Index was 13% (FY2018: 13%), with an ambition to reach ~20% in the medium-term.
Capex at £(68)m (FY2018: £(60)m) represented 1.3x depreciation and amortisation (FY2018: 1.0x). The increase was driven by planned investment in John Crane to support growth.
We actively manage our portfolio of businesses and review all options to enhance our leadership positions and maximise value for shareholders. We made further progress on portfolio optimisation through organic and inorganic investment; over 90% of the Group is now well positioned in attractive markets.
In February 2019, Flex-Tek completed the acquisition of United Flexible for an enterprise value of \$345m. This acquisition strengthens Flex-Tek's positions in aerospace and industrial end-markets globally. The integration is progressing
well. In April 2019, John Crane completed the acquisition of the industrial division of Advanced Diamond Technologies (ADT) for an enterprise value of \$8m. ADT is a leader in the development and application of diamond films for industrial, electronic, mechanical and medical applications. The acquisition enhances John Crane's technological leadership. For more information, please read notes 26 and 28 of the financial statements.
Smiths Medical returned to growth in the second half with revenue up 2%, delivering flat revenue for the year overall at £874m, in line with expectations. The improved trend reflects an increased contribution from new products and a change in sales channel for our chronic obstructive pulmonary disease (COPD) product, both of which offset the previously announced impact of the transition to a new Notified Body in Europe and associated product re-certifications.
Headline operating profit of £147m was down (6)% on an underlying basis. Operating profit was impacted by the £15m cost associated with recertification in Europe, as anticipated, and some operational inefficiencies. As a result, headline operating margin reduced (110)bps to 16.8%, with margin showing signs of improvement in the second half at 17.0%. Smiths Medical's
The net accounting pension surplus was £311m (FY2018: £381m), driven by actuarial losses arising from the application of a lower discount rate. The Group continues to de-risk the pension schemes, for example through a £176m buy-in agreement with Canada Life for Smiths Industries Pension Scheme (SIPS) in July 2019.
The Group made contributions for the year of £36m (FY2018: £49m). For FY2020, we expect total cash contributions of around £40m across all schemes.
GMP is a portion of UK pension that was accrued by individuals who were contracted out of the UK State Second Pension prior to 6 April 1997. Historically there was an inequality of benefits between male and female members who have GMP, which is
| not unique to Smiths. A total £(29)m past |
|---|
| service cost (FY2018: £nil) was recognised |
| in the current period as a non-headline |
| item following the UK High Court ruling that |
| GMP equalisation is required for all such |
| UK schemes. |
| Accounting valuation | Cash contribution | |||
|---|---|---|---|---|
| FY2019 | FY2018 | Going forward | FY2019 | |
| SIPS scheme | £263m | £303m | £12m | £12m |
| TI scheme | £206m | £223m | £12m | £12m |
| Total UK schemes | £469m | £526m | £24m | £24m |
| Total Group | £311m | £381m | c.£40m | £36m |
headline profit after tax was £112m, as displayed in the Group income statement. The difference between headline and statutory total profit are non-headline items of £(27)m which include a foreign exchange loss on an intercompany loan with the Group and separation costs, partially offset by profit on disposals of non-core assets and tax credits on nonheadline items.
During the year, Smiths Medical completed the disposal of two non-core businesses for a total consideration of c.£30m, further focusing the business on scalable leading positions in its chosen markets.
The separation of Smiths Medical is progressing well; we are on track to complete the demerger by the end of the first half of CY2020, conditional on the approval of Smiths shareholders. The Board of Smiths continues to evaluate all opportunities for value maximisation as the separation process progresses, with the overriding objective of optimising shareholder value. The separation will create two stronger, industry-leading companies with distinct strategies and focus.
Smiths Medical successfully achieved its FY2019 performance milestones supporting the separation process. The division returned to growth in the second half, with the sustainability of this growth underpinned by the ongoing launch of new products. One of the division's most significant new product investments, the large volume pump, has now been submitted to the US regulator for first phase review. The large volume pump market represents a c.£2bn extension to Smiths Medical's addressable market.
In July, JehanZeb Noor joined as Chief Executive Officer of Smiths Medical to oversee the separation and continue building a strong, sustainable future for Smiths Medical. He is focused on accelerating growth and driving enhanced performance to deliver the division's medium-term ambition of growing ahead of its markets, with operating margins in excess of 20% and attractive returns.
The principles of the Group's approach to taxation remain unchanged. The Group manages the cost of taxation in a responsible manner to protect its competitive position. The fundamental principle of our approach to managing our tax affairs is to engage with tax authorities around the world transparently, cooperatively and on the basis of legal compliance. Through this responsible management of our tax affairs we aim to enhance long-term shareholder value while contributing to public expenditure and the overall welfare of the communities in which we operate. The headline tax charge for the year of £(135)m (FY2018: £(126)m) represents an effective rate of 25.9% (FY2018: 25.8%).
Non-headline taxation items of £(52)m included a £(36)m UK deferred tax writeoff as a result of the proposed Medical demerger and a £(18)m US deferred tax write-off. Therefore, the statutory tax rate is 45.1%. Please refer to note 3 of the financial statements for further details.
An effective tax rate in the range of 25-27% is expected for the year ending 31 July 2020.
Total statutory profit after tax decreased by (19)% to £227m (FY2018: £279m). Statutory basic EPS was also down (19)% to 56.8p (FY2018: 70.0p) due to the nonheadline items referred to previously.
During the year stock turns were 3.4x (FY2018: 3.7x) and average working capital as a percentage of sales was stable at 26% (FY2018: 26%). Headline operating cash-flow was £474m (FY2018: £538m). This reflected an increase in year-end working capital of £(104)m (FY2018: £(16)m), caused by higher current receivables following a strong end to the year and higher inventory associated with order phasing in Smiths Detection and John Crane. As a result, operating cash conversion was 83% (FY2018: 99%). Strong cash generation remains a distinguishing feature of Smiths performance and over the last four years the Group has averaged 100% operating cash conversion.
Statutory net cash inflow from operating activities was £346m (FY2018: £405m). Free cash-flow of £234m (FY2018: £302m) decreased by (23)% reflecting lower operating cash. See note 29 to the financial statements for a reconciliation of headline operating cash to statutory cashflow measures.
The Board has a progressive dividend policy, aiming to increase dividends in line with long-term underlying growth in earnings and cash-flow. This policy enables us to retain sufficient cash-flow to finance investment in the drivers of growth and meet our financial obligations. In setting the level of dividend payments, the Board considers prevailing economic
We apply disciplined capital allocation to all investment opportunities. Reinvestment in organic growth remains our priority as measured by the R&D % to sales and our Vitality Index which tracks the effectiveness of our innovation. We complement organic growth with disciplined M&A, to create additional value. We use our cash generation to deliver a secure and progressive dividend to our shareholders.
conditions and future investment plans, along with the objective to maintain minimum dividend cover of around 2.0x.
The Board is recommending a final dividend of 31.80p per share, bringing the total dividend for the year to 45.90p, a year-on-year increase of 3% (FY2018: 44.55p). The final dividend will be paid on 15 November 2019 to shareholders on the register at close of business on 18 October 2019.
Smiths Group faces different types of litigation in different jurisdictions. Please see below an update on the two litigation provisions. For more information, refer to note 22 of the accounts.
John Crane, Inc. (JCI), a subsidiary of the Group, continues to actively monitor the conduct and effect of its current and expected asbestos litigation, including the effective presentation of its 'safe product' defence, and intends to resist asbestos cases based on this defence. Approximately 285,000 claims against JCI have been dismissed before trial over the last 40 years. JCI is currently a defendant in cases involving approximately 38,000 claims. Despite these large numbers of claims, since the inception of asbestos litigation against JCI it has had final judgments against it in 144 cases, and has had to pay awards amounting to approximately \$168m.
At 31 July 2019, the aggregate provision for JCI asbestos litigation, including for adverse judgments and defence costs, amounted to £237m (FY2018: £223m) expressed at the then current exchange rate. In deciding upon the amount of the provision, JCI has relied on independent expert advice from a specialist.
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of claims in recent years from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by its flexible gas piping products being energised by lightning
strikes. It has also received a number of product liability claims relating to 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.
NET DEBT TOTAL GROUP
At 31 July 2019, a provision of £74m (FY2018: £78m) has been made for the costs which the Group expects to incur in respect of these claims.
For both litigation provisions, because of the significant uncertainty associated with the future level of claims and of the costs arising out of the related litigation, there is no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred.
ROCE reduced marginally to 14.4% (FY2018: 14.6%). The ROCE movement reflects recent investments, such as the acquisition of United Flexible, which are expected to generate superior returns over the longer-term.
Net debt at 31 July 2019 was £(1,197)m, an increase of £(304)m in the period. Net debt to EBITDA increased to 1.8x mainly driven by the acquisition of United Flexible. Gross debt was £(1,512)m (FY2018: £1,610m) and cash reserves
were £315m (FY2018: £717m). Of the gross debt, £nil falls due within one year. Our strong balance sheet continues to allow us to deploy significant further investment capacity to support sustainable growth.
2
The maturity profile of the major tranches of the debt in issue is as follows:
2022 – £(329)m (\$400m 3.625% bond) 2023 – £(564)m (€600m 1.25% bond) 2027 – £(607)m (€650m 2.00% bond)
The results of overseas operations are translated into sterling at average exchange rates. The net assets are translated at period-end rates. The principal exchange rates, expressed in terms of the value of sterling, are shown in the following table.
| Average rates | Period-end rates | |||
|---|---|---|---|---|
| 31 July 2019 |
31 July 2018 |
31 July 2019 |
31 July 2018 |
|
| USD | 1.29 | 1.35 | 1.22 | 1.31 |
| EUR | 1.13 | 1.13 | 1.10 | 1.12 |
With over 95% of our revenue originating outside the UK, we are exposed to foreign exchange movements, mainly the US Dollar and the Euro. For each \$0.10 move, the annual operating profit impact is c.£15m. For each €0.10 move, the annual operating profit impact is c.£10m. Current foreign exchange will provide a tailwind to revenue and profit, if current rates prevail.
CHIEF FINANCIAL OFFICER
All operational and financial KPIs above the dotted lines are shown on a continuing operations basis. All operational and financial KPIs below the dotted lines are shown on a total Group basis as they are the key measures of the Group's cash and returns performance.
Our KPIs are aligned with our strategic objectives. Progress against them is monitored by our management processes and they drive our executive remuneration policy.
See page 102 where we show the impact of the operating cash conversion, organic revenue growth and ROCE KPIs from total operations on the FY2019 annual bonus and the LTIP for the three years ending 31 July 2019.
As a result of the planned separation of Smiths Medical, our ambition for Aftermarket has moved from 60%+ to 50%+ as Smiths Medical had over 80% of consumables.
R&D % sales has been removed as a KPI as we are focusing on the effectiveness of R&D using our Vitality Index.
RIR has been added as a measure of safety.
NNOVATE
DELIVER WORLD-CLASS COMPETITIVENESS
OUTPERFORM OUR CHOSEN MARKETS DEFINE FOCUS MAXIMIS STRONG E FINANCIAL FRAMEWORK ENGAGE EXECUTE
OBJECTIVES
STRATEGIC REPORT
Divisional review John Crane
John Crane is a global leader in rotating equipment solutions, supplying engineered technologies and services to process industries including oil & gas, pharmaceutical, chemical, petrochemical, power generation, mining, water treatment, pulp & paper, and turbo machinery.
John Crane designs and manufactures a variety of products including mechanical seals and systems, couplings, filtration systems and predictive digital monitoring technologies. John Crane sales and service is accessed through a global network of more than 200 sales and service facilities in over 50 countries.
£945m +8%*
£220m +6%*
23.3% +40bps
Energy ~61% Industrials ~39%
Original
equipment 34% Aftermarket 66%
Headline operating profit
Headline operating margin
Revenue by sector
Revenue mix
Competitors range from large multinationals to small, more focused companies across the product portfolio. Examples include: Flowserve, EagleBurgmann, AES, Danaher, Hydac, Rexnord
* Underlying change. Underlying modifies headline performance to: adjust prior year to reflect an equivalent period of ownership for divested businesses; and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses.
One of the world's largest gold mines, located in a remote section of Peru, was experiencing high seal failure rates on their slurry pumps (designed for pumping liquid containing solid particles). In addition, the mine's existing seal provider was not producing adequate technical information for seal operation and implementation.
John Crane was asked to conduct a survey of the mine's equipment to understand the failure issues and provide a solution. The team provided first-class customer service and delivered a quick, in-depth analysis. This, paired with a track record of highperforming seals, meant John Crane was chosen as the new slurry seal provider to replace the existing seals, packing rings and bearing isolators on 120 of the mine's pumps.
The mine is now saving \$250,000 per year in purchases of mechanical seals, and the failure rate has improved from an average of once per month to once every six months. And within six months, the team was also able to improve service and product delivery of high rotation equipment from six weeks to one week.
With decades of experience serving the mining and minerals industries, John Crane has the engineering expertise and high-reliability pump solutions needed to solve the most difficult challenges in the harshest environments while delivering maximum performance.
Our strategy is to reinforce our global leadership in technologies and services for rotating equipment, with a competitively differentiated offering that will deliver above-market, longterm growth in the most attractive process industries.
We will maintain differentiation by investing in product development, continuing to diversify into industrial segments and higher-growth regions, and broadening our aftermarket value proposition. We will also evaluate strategic bolt-on acquisitions to accelerate growth.
We will further drive competitiveness through operational improvements based on safety, quality and improved lead times.
Our comprehensive product portfolio includes mechanical seals, seal support systems, power transmission couplings, specialised filtration systems and digital monitoring. These engineered solutions drive improvements in reliability and reduced environmental impact in our customers' operations.
Our large installed base – built over the last century across a number of vertical markets – drives significant aftermarket demand. We have one of the largest networks of global sales and service centres, ensuring proximity and rapid service to customers. These centres provide a range of services, including repair and refurbishment, upgrades and retrofits, root cause analysis, and alignment and condition monitoring to improve equipment performance and reduce operational downtime.
Energy: Following a period of significant downturn, the oil & gas markets continue to recover, driven by underlying energy demand. Customers are investing in growing areas such as liquefied natural gas and pipelines, and we have recently seen increased aftermarket activity in the form of demand for ongoing maintenance and upgrades.
Industrials: We also have a significant and growing presence in other process industries, including pharmaceutical, chemical, power generation, mining, water treatment, and pulp & paper. We expect these verticals will continue to grow in the near-term, helped by increasing demand in highergrowth regions.
Original equipment (OE) is cyclical and is linked to new capacity coming on stream, as well as improved efficiency in existing locations where higher performance seals are installed.
Aftermarket: We continue to expand our footprint through new service centres in selected higher-growth markets, as well as the best-in-class field service teams. We continue to support and partner with our customers, delivering longterm solutions and reliability contracts, focusing on operational efficiencies.
We believe megatrends, such as the global demand for energy and efficiencies and increased digitalisation and connectivity, will continue to generate demand for our products over the longer term.
| Megatrend | Innovation in FY2019 |
|---|---|
| Energy demand and efficiencies |
A new dry gas seal in the Aura™ range which reduces methane emissions |
| An advanced seal for light hydrocarbon pipeline pumps which supports pump efficiency and tolerance of harsh operating environments |
|
| An innovative smaller footprint filtration system to enhance performance |
|
| Increased digitisation and connectivity |
Continued development of John Crane's Sense™ predictive diagnostics systems |
| £m | FY2018 £m |
Reported growth |
Underlying1 growth |
|
|---|---|---|---|---|
| Revenue | 945 | 881 | +7% | +8% |
| Original Equipment | 313 | 292 | +13% | |
| Aftermarket | 632 | 589 | +5% | |
| Headline2 operating profit |
220 | 202 | +9% | +6% |
| Headline2 operating margin |
23.3% | 22.9% | +40bps | |
| Statutory operating profit | 191 | 199 | (4)% | |
| Return on capital employed | 23.4% | 22.9% | +50bps | |
| R&D cash costs % sales | 1.7% | 1.3% | +40bps |
John Crane delivered a continued good performance, with revenue up 8% on an underlying basis. Reported revenue was up 7%, including £(13)m net impact from the disposal of the Bearings business and the acquisition of Seebach GmbH in the prior year and £10m favourable foreign exchange translation.
Underlying revenue from John Crane's Energy and Industrial activities was up c.10% and c.4% respectively, reflecting the improved trend in global energy markets and continued growth in John Crane's industrial sales. These market conditions also drove improved underlying sales of Original Equipment (OE), up 13%. Investment in OE projects and the expansion of the installed base continued during the period. Multiple new project agreements were secured, including oil & gas expansion projects in the Middle East, United States, APAC and Europe, an oil field development project in Brazil, as well as new power, petrochemical, pulp and paper, and chemical contracts across all regions. John Crane's large installed base and leading service offering position it well to satisfy strong aftermarket demand for repairs, maintenance and upgrades; underlying aftermarket revenue grew 5% during the year and now represents 66% of John Crane's revenue.
Headline operating profit of £220m increased 6% on an underlying basis, mainly driven by strong volumes. Headline operating profit margin was 23.3%, up 40bps, with the positive impact of volume growth and the disposal of a lower margin business partially held back by the higher mix of OE, the costs of restarting capacity and increased investment in R&D. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation.
In April 2019, John Crane completed the acquisition of the industrial division of Advanced Diamond Technologies (ADT) for an enterprise value of \$8m. ADT is a leader in the development and application of diamond films for industrial, electronic, mechanical and medical applications. The acquisition enhances John Crane's technological leadership.
ROCE was up 50bps at 23.4% driven by the impact of disposals and increased profitability, partially offset by acquisitions and investments in capex.
Cash R&D expenditure during the period increased by 33% or £(4)m to 1.7% of sales (FY2018: 1.3%). John Crane's innovation is primarily focused on using materials science advancements and coatings to enhance seal performance and efficiency, as well as leveraging the Group's digital expertise to support the development of predictive diagnostic platforms and other innovative digital technologies. During the year John Crane launched a simplified cartridge seal design for process industries, supporting faster and easier installation. The advanced seal for crude oil pipeline pumps, launched last year, saw rapid adoption by some of the world's leading pipeline companies.
John Crane continues to see strong order intake for both OE and aftermarket. This supports our expectations of good growth in FY2020, albeit against a strong comparator.
2 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements
1 Underlying: modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses
Divisional review Smiths Detection
Smiths Detection is a global leader in detection and screening technologies for the protection of people and assets, supporting safety, security and freedom of movement in today's world. We work with customers in a broad range of markets including aviation, ports & borders, defence and urban security, providing complete solutions that address existing and emerging threats. Smiths Detection's reputation is underpinned by extensive experience, differentiated technology, and a strong track record of success.
£127m (7)%*
Headline operating profit
Across the product portfolio, our competitors range from large multinationals through to smaller, single product companies. Examples include: Rapiscan, L-3 SDS, Nuctech
India is projected to be the world's fastest-growing economy for the rest of the decade and will soon become the world's fifth largest economy.
Smiths Detection has continued to expand into India's aviation sector, which is witnessing unprecedented growth. This means it is more important than ever that airports in the country are well equipped and prepared to handle safety and security challenges for the future.
Smiths Detection is presently installing screening and detection solutions in many airports across the country so that they stay ahead of evolving threats. Within the ports & borders market, Smiths Detection is installing a High-Energy X-ray container scanner-portal for Adani, India's largest port operator in Northern Chennai. Additionally, Smiths Detection is supplying 120 chemical warfare agent identifiers, which will be deployed by the Indian armed forces.
Smiths Detection has recently opened a state-of-the-art Service, Training and Experience Centre in Gurugram, India to support its customers across airports, ports and borders, hospitality industries, critical infrastructure, logistics providers and e-commerce platforms in the region.
Smiths Detection's reputation as a trusted, best-in-class partner alongside our ground-breaking detection technologies is helping drive further customer wins in all major markets across the Asia Pacific region.
Our strategy is to maintain our position as a leading technology provider by building high-integrity detection solutions that support our customers' evolving security needs.
We will accelerate growth by working closely with our partners, suppliers and regulatory bodies to deliver a highly agile approach to changing security threats. We will create value by continually improving our hardware and digital solutions, making it easier for customers to engage with us and by becoming more efficient.
Our comprehensive product portfolio comprises x-ray and computed tomography (CT) scanners for hold baggage and checkpoint, people screening scanners, tray handling solutions and trace detection devices for checkpoint secondary screening, as well as digital solutions. We produce portable devices for chemical, explosive and narcotic detection and identification. Our product portfolio also includes stationary and mobile heavy cargo vehicle inspection systems. CORSYSTM, our digital analytics platform, is an integrated security screening management solution that hosts purpose built applications.
Demand for trace and detection equipment and service is forecast to continue to grow over the long term. As ongoing geopolitical unrest and terrorist and criminal threats evolve, so do security measures – but there is variation by geography within our markets.
Aviation, our largest market, has strong, long-term growth drivers. Regulatory changes, combined with growing passenger numbers and increasing global e-commerce, are driving demand for integrated solutions that improve efficiencies and movement, while enhancing the security of people and infrastructure. Digital technological advances will see the continued evolution of this industry.
In Other Security Systems we have three sub-segments:
In ports & borders, the growth of worldwide trade volumes is expected to increase demand for security screening equipment and digital solutions that drive inspection processing speeds. Powerful digital technologies and nextgeneration connected hardware are needed to tackle escalating cross-border smuggling, limit illegal activities and minimise threats – without affecting trade.
In defence, emerging threats are generating global demand for mobile and adaptable detection equipment for chemical warfare agents and other threat-specific sensors in key NATO-orientated markets. This market is affected by the nature of its associated procurement cycles.
Urban security is a large but fragmented and mainly unregulated market. Critical infrastructure, mass transit and crowded spaces have specific customer needs and challenges. Demand is growing – driven by increasing urbanisation and the response by both the public and the private sector to an ever-growing range of threats – for solutions that will allow the public to go about their lives as normal, with the peace of mind that their security and welfare are being protected.
Almost half of our customers are government funded and, consequently, budget constraints affect market revenues. Original equipment (OE) drives the programmatic nature of our business. The lifecycle of OE is typically 7-10 years. Aftermarket as a percentage of revenue is increasingly driven by our growing installed base, advances in our digital capability, and our focus on providing a complete solution to our customers.
Megatrends, such as increasing digitisation and connectivity, artificial intelligence, and mobility and globalisation are likely to continue to generate demand for our products over the longer term.
| Megatrend | Innovation in FY2019 |
|---|---|
| Increasing digitisation and connectivity |
CORSYSTM – a digital platform for advanced security screening management |
| Artificial intelligence | iCMORETM – automated threat/target identification digital applications |
| Mobility and globalisation | HCVM LORRY – next generation mobile high energy inspection system |
| FY2019 £m |
FY2018 £m |
Reported growth |
Underlying1 growth |
|
|---|---|---|---|---|
| Revenue | 798 | 793 | +1% | (2)% |
| Aviation | 522 | 540 | (6)% | |
| Other Security Systems | 276 | 253 | +6% | |
| Headline2 operating profit |
127 | 134 | (5)% | (7)% |
| Headline2 operating margin |
16.0% | 16.9% | (90)bps | |
| Statutory operating profit | 91 | 93 | (2)% | |
| Return on capital employed | 11.5% | 12.1% | (60)bps | |
| R&D cash costs % sales | 8.4% | 7.4% | +100bps |
Smiths Detection's underlying revenue decreased by (2)%. This reflects an improved second half performance but the customer deferral of some large deliveries in to the first half of FY2020. Aftermarket revenue grew 2% on an underlying basis and now accounts for 46% of the division's revenue (FY2018: 44%). Reported revenue was up 1%, including £22m favourable impact from foreign exchange translation.
Revenue from Aviation activities decreased (6)% on an underlying basis against a strong comparator. The compound annual growth rate of Aviation revenue over the past two years is c.6%. Aviation is Smiths Detection's largest segment, representing 65% of total revenue. We continued to see strong demand for hold baggage screening (HBS) systems in EMEA, associated with the ECAC Standard 3 Regulation, and globally as airports upgrade their HBS fleets. Some significant HBS contracts signed recently include a £128m order by Aena in Spain due for delivery through FY2020- 2023. Smiths Detection's Computed Tomography (CT) based screening systems for cabin baggage are being successfully trialled globally. The new scanners enable more efficient detection of threats and eliminate the need to take liquids and laptops out of bags. The CT cabin baggage scanners have already
been purchased by airports in Korea, Japan, Australia and the TSA has recently placed a \$96.8m order for installations, some of which were originally anticipated in FY2019.
Revenues from Other Security Systems grew by 6%, reflecting an improved focus in Smiths Detection's other core vertical markets, particularly ports and borders. Major deliveries during the year included Egypt, India and Azerbaijan. Further wins included a contract with Meridian Port Services Limited (MPS) to provide scanning portals for the major Tema Port Expansion project in Ghana.
Headline operating profit decreased (7)% on an underlying basis, reflecting pricing pressure in the latter stages of the European hold baggage recapitalisation cycle and the mix of programmes delivered. This is partially offset by a higher proportion of aftermarket revenues, which typically have higher margins than original equipment sales. Headline reported operating margin decreased (90)bps to 16.0%. The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles.
ROCE decreased by (60)bps to 11.5% reflecting the division's lower profitability and higher working capital during the period.
Cash R&D expenditure during the period was 8.4% of sales, or 6.6% excluding customer funded R&D (FY2018: 7.4% and 6.3% respectively). We continue to invest in the development of the next generation of detection devices for the defence market, new algorithms to improve the detection of dangerous goods for cargo applications and operational efficiency, and digital solutions to strengthen our aftermarket proposition.
In Smiths Detection, we expect low single digit revenue growth for the year supported by a robust order book, with deliveries weighted towards the first half.
2 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements
1 Underlying: modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses
Divisional review Flex-Tek
Flex-Tek is a global provider of engineered components that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets. Our flexible hosing and rigid tubing provide fluid management for fuel and hydraulic applications on commercial and military aircraft, deliver gas and conditioned air in residential and commercial buildings, and provide respiratory care for medical applications. Flex-Tek heating elements and thermal systems improve the performance of medical and diagnostic equipment as well as that of domestic appliances such as clothes tumble dryers and HVAC equipment.
Headline operating profit
£84m +4%*
Headline operating margin
19.2% +30bps
Competitors range from large multinationals through to small, more focused companies across the product portfolio. Examples include: Parker-Hannifin, Eaton, Omega Flex, Nibe
* Underlying change.
The integration of United Flexible into Flex-Tek is progressing to plan. The rebranding and re-organisation of the United Flexible companies is now complete and cross business and crossfunctional teams are in place, focused on delivering the acquisition synergies and implementing the Smiths Excellence System across the business.
In Aerospace, the combination will help penetrate new markets and expand the existing customer base. Shared capabilities will open up new product opportunities, for example applying United Flexible's capability in hydroforming technologies for the manufacture of larger diameter, complex ducts with greater quality and efficiency than other forming methods.
In the Industrial business there will be benefits from new product capabilities, for example, in the metal bellows and thermal actuator platforms, as well as the opportunity to leverage United Flexible's footprint in Europe to help accelerate Flex-Tek's growth in new geographies.
Our strategy is to outperform our chosen markets through technological differentiation, with the need for safer, more energy-efficient solutions providing opportunities for us to establish leadership positions across our segments.
We aim to do this by developing our product portfolio, expanding in our target regions, growing existing market share and driving operational excellence to increase competitiveness. We also consider the right strategic bolt-on acquisitions to support growth.
Specific focus areas include growing our market share in the US housing market, expanding our international markets for gas tubing and securing positions on nextgeneration aircraft.
We drive competitiveness through operational improvements.
In Aerospace, we are a market-leading provider of specialty tubing assemblies that provide reliable, efficient delivery of hydraulic fluids and jet fuel for commercial and military aircraft globally.
In Industrials, we are one of the world's largest manufacturers of open coil heating elements, supplying electric resistance heating elements for a broad range of applications, including compressors, clothes dryers, duct heaters, heat pumps, window air conditioners, and vending machines. We also provide flexible ducting for commercial and residential HVAC applications, hoses for the automotive market to deliver fuel and brake fluid, as well as corrugated stainless steel tubing that supplies natural gas or low-pressure gas to appliances.
Key markets include US residential and commercial construction, global aerospace tubing and hoses, and electrical heating elements.
Our business performance generally follows macroeconomic indicators such as US GDP, US housing growth, healthcare spending and capital goods expenditure. Population growth drives residential construction and domestic appliance demand in the US, while high-growth markets drive commercial aerospace demand through increasing air passenger and freight volumes and investment in next-generation aircraft. The diverse nature of our markets reduces our reliance on any specific technology, although we are primarily exposed to the US economy.
In Aerospace, the market for commercial aircraft remains strong, with a current strong Original Equipment Manufacturer (OEM) order book.
In Industrials, growth is driven by the US housing market, along with an increasing number of specialty heating applications and flexible gas piping and HVAC ducting in North America and Asia. Our products are also used in the manufacture of medical devices such as sleep apnoea devices, where increasing global healthcare spend is driving growth.
We believe megatrends, such as energy demand and efficiencies, and mobility and globalisation, will continue to generate demand for our products over the longer term.
| Megatrend | Innovation in FY2019 | |
|---|---|---|
| Energy demand and efficiencies |
Energy efficient heating, lower weight aerospace products and more sustainable building practices |
|
| Mobility and globalisation | Expanding in Europe with Gastite and leveraging the United Flexible European footprint |
|
| Expanding product breadth in China to support industrial applications |
| FY2019 £m |
FY2018 £m |
Reported growth |
Underlying1 growth |
|
|---|---|---|---|---|
| Revenue | 436 | 354 | +23% | +3% |
| Aerospace | 121 | 87 | +3% | |
| Industrials | 315 | 267 | +3% | |
| Headline2 operating profit |
84 | 67 | +25% | +4% |
| Headline2 operating margin |
19.2% | 18.9% | +30bps | |
| Statutory operating profit | 68 | 68 | – | |
| Return on capital employed | 23.3% | 35.0% | (1,170)bps | |
| R&D cash costs % sales | 0.6% | 0.6% | – |
Flex-Tek delivered a good performance with revenue up 3% on an underlying basis, driven by growth in both the Industrial and Aerospace segments. On a reported basis, revenue increased 23%, including £56m incremental revenue associated with the acquisition of United Flexible and £14m favourable foreign exchange translation.
Aerospace revenue was up 3% on an underlying basis, driven by growth in new engine and airframe platforms including the Joint Strike Fighter, the GE GEnx engine and Airbus A320 models as well as growth in the aftermarket business. Industrial revenue was up 3% driven by growth in specialty products for process heating solutions and US housing construction, and Gastite penetration in Europe.
On an underlying basis headline operating profit increased 4% to £84m, driven by revenue growth and a £3m credit from a litigation settlement offset by a £(3)m one-off cost relating to a facility closure in Asia. Headline operating margin increased 30bps to 19.2%. The difference between statutory and headline operating profit is primarily due to a reduction in the provision for Titeflex Corporation for subrogation claims, and acquisition costs.
In February 2019, Flex-Tek completed the acquisition of United Flexible for an enterprise value of \$345m. This acquisition strengthens Flex-Tek's positions in aerospace and industrial end markets globally. The integration is progressing well.
ROCE decreased (1,170)bps to 23.3%, driven by the acquisitions of Osram's heating element business in the prior year and United Flexible this year.
Cash R&D expenditure remained consistent at 0.6% of sales (FY2018: 0.6%), focused on marketleading innovative solutions to meet specific customer needs. The most significant product launch was Gastite Flashshield+ which provides easier installation for contractors while maintaining best in class safety performance.
.
In Flex-Tek, we expect to deliver a similar rate of growth in FY2020 bolstered by the impact of the acquisition of United Flexible. Strong demand for aerospace and heating solution components, as well as increased penetration into the European construction markets, is expected to be partially offset by some signs of softening in the US housing construction market.
2
1 Underlying: modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses
2 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements
Smiths Interconnect is a leading provider of technically differentiated electronic components, subsystems, microwave and radio frequency products that provide secure connectivity of critical applications in the defence, aerospace, communications and industrial markets. Our advanced, high-quality solutions ensure high speed connectivity, reliability and safety for demanding applications operating in harsh environments.
Headline operating profit
Headline operating margin
Competitors range from large multinationals through to small, more focused companies across the product portfolio. Examples include: Amphenol, TE Connectivity, Molex, Leeno, Cobham
* Underlying change.
The most mission-critical of aerospace systems are the ones that journey into space, where they encounter the toughest environments. When they leave the Earth's surface they must contend with huge radiation levels, vibration, shock and temperature extremes, making durability and reliability critical features of our connectivity components.
Smiths Interconnect's microwave RF (radio frequency) components, delivering high-reliability and connectivity performance, are used in the data and control transmission systems of the Parker Solar Probe, a NASA robotic spacecraft. It was launched in 2018, with the mission of repeatedly probing and making observations of the outer most part of the sun's atmosphere. In 2024, it is expected to approach to within 3.83 million miles of the centre of the sun, achieving a top speed of about 430,000 miles (700,000km) per hour. That's fast enough to get from Washington D.C. to Tokyo in under a minute.
The Parker Solar Probe has just successfully completed its second close approach to the sun, the closest any other spacecraft has been before. For projects of such significance, Smiths Interconnect's engineering expertise, superior technology and customer service enable our customers to push the limitations of what's possible and help bring the boundaries of the universe a little closer.
Our strategy is to outperform our chosen market segments through customer focus, new technology, operational excellence and targeted geographical investment. We aim to be a supplier of choice to customers that value our broad portfolio of innovative and technically differentiated connectivity solutions by having strong key account partnerships and efficient channels to market.
We will continue to focus on specific market segments including defence and aerospace, communications and industrial applications. We will drive competitiveness through R&D and we will fund our investments through manufacturing efficiency.
We provide technically differentiated electronic components, subsystems, microwave and radio frequency products that connect, protect and control critical applications in harsh environments in a number of focus market segments.
Our products are used in radar, communication and surveillance systems that are mission-critical and operate in extreme environments in aerospace and defence. Our solutions in engine systems, power distribution and avionics ensure reliability in flight-critical systems. Our microwave components and connectors ensure optimal performance, durability and safety in space, including LEO, MEO and GEO (Low, Medium and Geostationary Earth Orbit) satellites.
Our semi-conductor test products are used to test highly sophisticated semiconductors and electronic circuits in use in communication systems, gaming products and computing devices. Our inflight antenna systems give passengers internet connectivity gate-to-gate on planes around the world. Our connectivity solutions are used in surgical and monitoring systems, imaging systems and disposables applications. Our products control the reliable operation of train rolling stock (driver cabin braking systems) and ensure the integrity and speed of data transmission in signalling (train monitoring by satellites).
Increasing geopolitical uncertainty and operations in extreme environments create a platform for growth for defence applications. Increased demand for communication and data transmission requires additional satellites, especially LEO and MEO. Increasing passenger numbers and freight demand, as well as upgrades to aircraft fleets to more efficient models, generate growth for our aerospace business.
The growth in big data, which requires more bandwidth and increased computing power, combined with a high rate of technology refresh with increased functionality and connectivity, creates further opportunities for the growth of Smiths Interconnect products. An ageing population and the rise of chronic diseases continues to drive growth for our products in medical applications. Sophisticated digital train systems that improve safety, security and high datarate connectivity for passengers drives growth in our rail market segment.
Megatrends, such as increased digitisation and connectivity and mobility and globalisation are likely to continue to generate demand for our products over the longer term.
| Megatrend | Innovation in FY2019 |
|---|---|
| Increased digitisation and connectivity |
High speed data, smaller packaging and increased power needs |
| Smart devices, intelligent systems, device to device | |
| Mobility and globalisation | Space constellations, increased bandwidth, big data and 5G |
| FY2019 £m |
FY2018 £m |
Reported growth |
Underlying1 growth |
|
|---|---|---|---|---|
| Revenue | 319 | 300 | +6% | +3% |
| Headline2 operating profit |
47 | 42 | +10% | +6% |
| Headline2 operating margin |
14.7% | 14.1% | +60bps | |
| Statutory operating profit | 45 | 37 | +22% | |
| Return on capital employed | 12.8% | 11.9% | +90bps | |
| R&D cash costs % sales | 7.2% | 7.0% | +20bps |
Smiths Interconnect built on its return to growth with underlying revenue up 3%, reflecting good growth in Asia and North America. On a reported basis, revenue increased by 6% including £11m favourable foreign exchange translation.
Revenue growth was driven by sales associated with large defence and aerospace programmes in the US – notably the Joint Strike Fighter, Next Generation Jammer and B-21 programs, as well as successes in the semiconductor segment in Asia. We are beginning to see benefits from investments we have made in capacity and capabilities in the region, including the joint venture with Sichuan Huafeng Enterprise Group Co. Ltd established in 2018. The joint venture is supporting our growth in the commercial aerospace and high-speed rail segments in Asia.
Headline operating profit increased 6% on an underlying basis to £47m, reflecting the division's sales growth as well as procurement and restructuring savings. Headline operating margin of 14.7% increased 60bps. The difference between statutory and headline operating profit reflects adjustments for amortisation of acquired intangibles.
ROCE increased 90bps to 12.8%, driven by increased profitability.
Cash R&D expenditure was 7.2% of sales (FY2018: 7.0%) (6.4% excluding customer funded R&D, FY2018: 6.0%). Product launches included connectors from our SpaceNXT range for space applications, board level components, cable assemblies and high-speed contact technology for defence and space applications as well as next generation power connectors for rail applications.
Smiths Interconnect is expected to make further progress, with continued growth in our key end markets, partially offset by softening in the semiconductor market.
2 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements
1 Underlying: modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses
Quality medical devices and consumables that are vital to patient care
£874m =*
£147m (6)%*
Headline operating margin
FY2018 performance has been restated for IFRS 15
* Underlying change.
Competitors range from large multinationals through to small, more focused companies across the product portfolio. Examples include: Becton Dickinson, Baxter, B-Braun, Medtronic
Our strategy is to achieve category leadership in the infusion segment and selected vascular access and vital care segments. We will achieve this with commercially focused innovations, differentiation in our customer support model, and delivery of complete solutions that optimise patient outcomes. We will continue to enhance both our own R&D and our external partnerships to execute our strategy in line with healthcare megatrends.
In order to invest in our future, we will continue to improve our efficiency and operational excellence. Part of this investment, besides customer solutions, will include further developing our people.
We will also continue to improve our capabilities in growing markets outside of North America and Western Europe, enhancing our current global footprint and sales reach. In addition, we will continue to pursue channel optimisation and access to care outside of hospitals.
Launched 12 new products in the past year including:
In Infusion Systems, our products deliver medication treatment for conditions including acute and chronic pain, cancer, pulmonary hypertension and Parkinson's disease. Smiths Medical products are used in acute settings, surgery centres, oncology centres, and home settings. We have strong positions in ambulatory infusion and in the syringe market.
In Vascular Access, our products cover a range of venous access methods including drawing blood, peripheral intra-venous catheters, ports and needles for the infusion of fluids and medication, and invasive blood pressure monitoring.
cover a wide range of critical-care and chronic disease management products including tracheostomy, temperature management, general anaesthesia, respiratory and bronchial hygiene.
The medical device industry remains attractive, with strong growth drivers. The global market we serve is estimated to be c.£7.5bn and growing at 3-4% annually, with growth drivers such as expansion of developing markets, ageing populations, increasing need for connected systems and data analytics, and growth of alternate site and homebased healthcare and innovation.
In Infusion Systems, the increasing rate of chronic conditions and outpatient treatment favour ambulatory infusion solutions. Healthcare providers are advancing digital integration between infusion devices and their respective hospital information systems.
In Vascular Access, continued growth is expected due to safety regulations driving to prevent needlestick injuries, blood exposure, and hospitalacquired infections.
key growth drivers include the expansion of enhanced recovery after surgery and the prevalence of chronic obstructive pulmonary disease (COPD).
We believe megatrends, such as ageing populations and healthcare demand and increased digitisation and connectivity will continue to generate demand for our products over the longer term.
| Megatrend | Innovation |
|---|---|
| Ageing populations and healthcare demand |
– Focus on alternate site and home-based healthcare in developing markets |
| – Developing focused technologies targeting chronic conditions |
|
| Increased digitisation and connectivity |
– Smart pump programming with electronic medical record system integration |
| – Launched software subscription and service model | |
| FY2019 £m |
FY20183 £m |
Reported growth |
Underlying1 growth |
|
|---|---|---|---|---|
| Revenue | 874 | 869 | +1% | - |
| Headline2 operating profit |
147 | 156 | (6)% | (6)% |
| Headline2 operating margin |
16.8% | 17.9% | (110)bps | |
| Statutory operating profit | 151 | 152 | (1)% | |
| Return on capital employed | 11.7% | 13.1% | (140)bps | |
| R&D cash costs % sales | 6.0% | 5.9% |
Smiths Medical's underlying revenue was flat year-on-year. The division returned to growth in the second half with revenue up 2%. The improved trend reflects the increased contribution from new products and a change in sales channel for our chronic obstructive pulmonary disease (COPD) product, both of which offset the previously announced impact of the transition to a new Notified Body in Europe. Reported revenue was up 1% including £(16)m impact of divestments and £23m favourable foreign exchange translation.
The costs associated with the Notified Body transition and implementation of the new EU Medical Device Regulation were £15m, as anticipated. For FY2020 we continue to expect costs of £10-15m.
Underlying revenue was flat year-on-year in Infusion Systems, with good growth in ambulatory pumps offset by the delayed release of the new Medfusion syringe pump as a result of component supply issues. Vascular Access underlying revenue declined by (3)% as a result of lower peripheral intravenous catheter (PIVC) sales but showed 1% growth in the second half due to strong performance of ViaValve in the blood control space. Underlying revenue from Vital Care and Specialty Products grew 3%, with strong growth in the COPD product line, which is now being sold directly, offsetting lower volumes in tracheostomy, general anaesthesia and respiratory products.
Headline operating profit declined (6)% on an underlying basis. Operating profit during the year was impacted by the costs associated with the new EU Medical Device Regulation and operational inefficiencies in the first half which are being addressed. Headline operating margin was (110)bps lower than the prior year at 16.8%, with margin showing signs of improvement in the second half at 17.0%. The difference between statutory and headline operating profit included £17m profit on disposals and separation costs.
ROCE decreased (140)bps to 11.7%, reflecting lower profitability during the period.
During the year, Smiths Medical completed the disposal of two non-core businesses for a total consideration of c.£30m.
Cash R&D expenditure was 6.0% of sales (FY2018: 5.9%). Smiths Medical continues to invest in the development of innovative, commercially focused products across the portfolio to support long-term, sustainable growth. In the last 24 months, 33 products have been launched, including 12 in this year.
In March 2019 we announced plans to separate Smiths Medical, to create two stronger, industry-leading companies with distinct strategies and focus. We are on track to complete the demerger of Smiths Medical in the first half of CY2020, conditional on the approval of Smiths shareholders.
Smiths Medical successfully achieved its FY2019 performance milestones supporting the separation process. The division returned to growth in the second half, with the sustainability of this growth underpinned by the ongoing launch of new products. One of the division's most significant new product investments, the large volume pump, has now been submitted to the US regulator for first phase review. The large volume pump market represents a c.£2bn extension to Smiths Medical's addressable market.
In July, JehanZeb Noor joined as Chief Executive Officer of Smiths Medical to oversee the separation and continue building a strong, sustainable future for Smiths Medical. He is focused on accelerating growth and driving enhanced performance to deliver the division's medium-term ambition of growing ahead of its markets, with operating margins in excess of 20% and attractive returns.
The increasing contribution from new products, and the actions being taken by the reinvigorated management team to accelerate growth and enhance margins, support our confidence in Smiths Medical's improving performance in FY2020.
1 Underlying: modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses and excludes the effects of foreign exchange, acquisitions and supplemental sales for divested businesses
2 Headline: In addition to statutory reporting, the Group reports on a headline basis except for balance sheet and cash-flow. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in note 3 to the financial statements
3 FY2018: has been restated for IFRS 15
We regard how we work and interact with our stakeholders as fundamental to our purpose of making a safer, more efficient and better-connected world.
Respecting others and doing things the right way are the essential foundations of being a responsible business and helping ensure the ongoing success of our organisation.
Our values – Respect, Integrity, Customer Focus, Passion and Ownership – underpin the way we operate. They guide how we manage our key resources and relationships, helping ensure we do the right things in the right way as we work to build long-term value for all our stakeholders.
We strive to continuously improve everything we do and here we outline some of our key successes and focus areas.
£2.6bn
Calculated as tax paid + employee costs + supplier costs
Working closely with our customers to predict and fulfil their needs with our innovative products and valueadding support is central to the success of our business.
The Smiths Excellence System (SES) customer pillar introduces common tools, processes and technology to better manage customer relationships and use our resources more efficiently.
Our goal is to continuously enhance the experience for our customers and increase the value we create for them. We take time to integrate customer challenges and requirements into our innovation and technology planning and development, and are dedicated to consistently high product quality and delivery responsiveness.
We are continuing to invest in effective customer relationship management (CRM) tools and training. In FY2019, we expanded the use of CRM solutions globally across the Group, enabling us to more effectively manage the customer experience.
We are committed to our Code of Business Ethics, applying our shared values and complying with all applicable international and local rules and regulations. We encourage customers to contact our 'Speak Out' reporting line if they identify any behaviour that's not in line with our Code.
We drive value by working closely with our customers across the entire product lifecycle, starting with understanding the voice of the customer.
We actively engage with our customers during concept and design stages of our New Product Introduction (NPI) process and provide integrated, full lifecycle support. We deliver value by focusing on five core areas – pricing, deal follow-up, key account management, customer complaint management, and order-to-delivery management – as well as using our futuring process to predict how our customers' needs will evolve.
ON TIME IN FULL (OTIF) FY2019
84%
Figures in this section are for total Group unless otherwise stated
We reduce exposure to bribery through regular review of our policies and procedures, which include the giving and receiving of gifts and hospitality, and how we interact with government officials. We have a gift register to help us monitor compliance.
To help ensure that we know who we're dealing with, and that they operate in line with our expectations, in FY2019 we enhanced our distributor and agent due diligence processes and implemented an audit programme. We also use third-party services to supplement our own due diligence, using investigators on the ground in locations where risks of bribery can be higher.
In FY2020 we will continue to monitor activities and educate colleagues through our ethics and compliance training programmes.
We are committed to competing fairly within the markets where we operate. In FY2019 we refreshed our Antitrust Policy and supporting materials, including establishing our Trade and Industry Event Register. This identifies employees who attend industry events at which competitors may be present so we can make sure that they understand what they may and may not discuss with competitors. We also continued to provide colleagues whose roles may expose them to competition law risks with regular training.
Smiths Interconnect was selected by a major global Original Equipment Manufacturer (OEM) to supply connectivity solutions for a new air and naval tactical radio, offering faster transmission speeds, enhanced security and extended interoperability.
Designed to deliver high levels of security, the tactical radio can communicate precise information in a highly-secured environment.
Smiths Interconnect's customer needed to integrate more functions into a reduced space. Our high reliability spring probe contact technology was selected due to its small size and high performance which met the customer's demanding technical requirements.
Our spring probe contact technology allows high signal density, in a compact size, to be reached in a hi-tech electronic environment and is expected to be a key component for the space and defence market segments.
Our People Plan is a multi-year strategy that is focused on building a learning organisation to attract, retain, develop, engage and inspire our people.
SES helps provide a framework for bringing our People Plan to life, with our recently launched SES People Handbook helping our business make the most of aligned best practice guidance and centrally provided tools, resources and initiatives.
Our 'Smiths Way' of working and our values align our culture, strategy and operating model to help ensure everything we do is pulling in the same direction.
We celebrated our culture with our second annual Smiths Day global event, where colleagues all over the world get together to mark being part of the Smiths family.
We continue to enhance our internal communication activities, including our weekly Smiths Signal newsletter which sets out all of our top company news and our innovative Smiths Now colleague smartphone app that gives all colleagues a common platform on which to hear about our business.
Around Smiths Day, our Smiths Now app received c.10,000 visits to our social wall, where all colleagues, irrespective of role, can post their stories, images and videos for the whole business to see. We have also implemented a new language tool which translates posts into our core ten languages.
Twice a year we run Smiths European Forum meetings, hosted by the Group HR Director with involvement from the Chief Executive and senior leaders. Colleague representatives from across Europe come together to learn more about our strategy, voice their opinions, provide feedback and ask questions on behalf of
their co-workers. Everything is translated live so attendees can listen and respond in their own languages. This is just one of the ways we are building more open and honest two-way communication between employees and leadership.
Engagement with our annual Smiths Excellence Awards which recognise achievement across our six SES pillars; outstanding contributions to HSE, to our communities, and to innovation; and our highest honour, the Smiths Cup – continues to rise, evidenced by a doubling of entries since last year to a new record total of c.600 from across the business.
We track our engagement twice yearly to inform the co-creation of action plans by colleagues and managers to help make Smiths a better place to work. Since launching My Say in 2017, we've improved on all measures.
The latest May 2019 survey maintained a high 87% response rate, with more than 37,000 comments from colleagues; and we maintained an engagement measure of 73.
MAY 2019 SURVEY 37,000 colleague comments 2018: 30,000
73 2018: 73
Health and safety remain our top priorities. We work together across the world to create a safe and secure workplace for our people, customers, suppliers and visitors. This is fully integrated into the way we operate and manage all our key resources and relationships, and underpins our SES.
Safety is discussed at Board and Executive levels. Our safety culture is driven by a cross-divisional network of Health, Safety and Environment (HSE) leaders, who share ideas and best practices, and implement initiatives to help improve our safety performance.
Safety is embraced at every level, as evidenced by our My Say colleague survey where safety is consistently our highest ranked and continually improving response.
As part of our journey towards zero harm, we completed a range of Groupwide initiatives in FY2019, including training all Smiths colleagues on our ten safety Cardinal Behaviours (see below), a hand safety campaign, forklift safety assessments and the celebration of innovative safety initiatives through our
| FY2019 | 0.41 |
|---|---|
| FY2018* | 0.39 |
| FY2017 | 0.38 |
| FY2016 | 0.47 |
| FY2015 | 0.57 |
* FY2018 shows increase vs. FY2018 report due to reclassification of injuries
Group-wide Excellence Awards. We also continued to use safety leading indicator activities to assess initiatives undertaken by individual sites to improve performance.
We monitor our recordable incident rate (RIR) – where incidents require medical attention beyond first aid – and lost-time incident rate (LTIR) – where a colleague is unable to work following an incident – per 100 colleagues, per year across Smiths. In FY2019 we achieved an RIR of 0.41 and an LTIR of 0.18.
We again experienced no work-related workplace fatalities this year, and with our increasing focus on risk factors for serious injuries, our commitment to send everyone home safely from work is stronger than ever.
For FY2020, we are planning to reinvigorate our peer-to-peer safety observation programme, complete machine guarding reviews and upgrades globally, and develop new tools to better track and communicate to our travellers and our colleagues who work remotely.
We also plan to complete driver safety awareness training for all drivers of company vehicles.
| FY2019 | 0.18 | |
|---|---|---|
| FY2018 | 0.17 | |
| FY2017 | 0.19 | |
| FY2016 | 0.16 | |
| FY2015 | 0.23 |
We are building a learning organisation supporting our colleagues to own and drive their careers through formal and informal development programmes.
In FY2019 we launched a new Careers@ Smiths portal, in direct response to My Say survey feedback. It allows colleagues more visibility of their potential next career move by pulling all our vacancies together into one place. The system also gives Smiths managers easy control over their vacancies and recruitment and makes it easier for external candidates to see the opportunities available to join us.
In FY2019 we launched the SES Academy – an online training portal open to all colleagues – through which we have already engaged nearly 18,000 colleagues with Lean Awareness training. We also trained over 250 in our Lean Six Sigma belted programme in partnership with Oxford University, and, at the time of this report, we had 35 graduated Black Belts. Our aim is to graduate around 1,000 belted colleagues by the end of calendar year 2021.
In FY2019 we launched Accelerate, our first Group-wide people leadership capability programme, attended by c.350 people leaders so far. Next year we will increase the number of attendees and include programmes in more languages, with the aim of around 50% of our leaders completing Accelerate by the end of FY2020. We also continued our executive development programme at UCLA, enhancing the strategic leadership capabilities of our most senior leaders.
PEOPLE
Our new SES Academy provides learning opportunities around the knowledge and skills needed to deliver operational excellence across Smiths. It has been crafted alongside our world-class academic and professional partners, and is designed to help develop professional capabilities at all levels of the organisation. It gives colleagues a stronger understanding of operating processes, enabling individuals to lead and deliver our organisation's overall objectives.
The new SES Academy has seen nearly 18,000 colleagues from across Smiths complete Lean Awareness training and has received a 91.2% favourable feedback rating to date.
Hundreds of colleagues from Asia, Europe, the US and Mexico are also taking part in Smiths Lean Six Sigma Belted programmes, and excellence programmes in procurement and supply chain. Together, this is driving a radical increase in the capabilities and skills we have in the company, which is vital to the future success of our business.
In FY2019, around 120 Smiths leaders attended our Global Leadership Conference 'Innovate>Accelerate' to help drive a culture of innovation and accelerate our rate of change as well as aligning understanding of our business strategy.
In FY2019 finance and engineering graduates came together for a development week and to participate in the Graduate Innovation Challenge, with one team design currently being developed into a viable solution for Smiths Interconnect. We continue to develop our graduate offering with a graduate engineering programme in China.
In FY2020 we will launch Learning@ Smiths, a new learning space, to pull together all development programmes available to colleagues across the organisation.
Recognising and rewarding our colleagues in a fair and open way helps them feel valued, supported and driven to succeed. To stay competitive and attract and retain the talented and innovative people we need to drive our growth, it's critical we offer a comprehensive and meaningful approach to reward and recognition.
We have been an accredited living wage employer in the UK since 2018. We are working to build on and increase crossdivisional job movement, align our incentive plans, improve international mobility and make career paths clearer. Creating a shared global job architecture enables greater movement and development opportunities for colleagues to expand and enhance their careers.
Our success depends on the diverse perspectives our people bring to work every day.
Guided by the Smiths Way and our core value of respect, embracing diversity and inclusion is not only the right thing to do, but necessary. It helps us improve our understanding of our diverse markets, territories and stakeholders, unlock new and innovative thinking, outperform our competitors, and help colleagues feel they belong at Smiths.
It is our policy to provide equal employment opportunities. We recruit, select and promote our people on the basis of their qualifications, skills, aptitude and attitude. In employment-related decisions, we comply with all applicable anti-discrimination requirements in the relevant jurisdictions.
People with disabilities are given full consideration for employment and subsequent training (including retraining, if needed, for people who have become disabled), career development and promotion on the basis of their aptitude and ability. We endeavour to find jobs for those who are unable to continue in their existing job because of disability.
In FY2019, we conducted 14 visioning workshops with colleagues about the experiences and challenges they encounter. In FY2020 we are extending these to more languages. Feedback is being used to inform where we focus our efforts now and in the future.
We launched a Career Returners programme aimed at attracting prospective colleagues back in to the workplace after a career break, and have partnered with PwC to use their leading edge blind spots (unconscious bias) training materials for colleague education.
We are currently establishing a crossdivisional Diversity & Inclusion Council to help provide strategic direction, guiding principles and tactical initiatives on behalf of each division.
We report every year on our Gender Pay Gap in the UK in line with UK Government regulations, updating on our continuing efforts to close the pay gap as part of our work to build an inclusive and diverse culture across our entire global business. You can read our most recent report on our website.
Information about the Board Diversity Policy can be found on page 89.
In June, Smiths celebrated International Women in Engineering Day for the second year, an important campaign to raise awareness of the engineering opportunities available to young women and career returners.
Women engineers at Smiths, from all different disciplines and geographies, shared their experiences of working in the industry. Our campaign showcased our colleagues' support for the profession through a collection of stories, videos and photos which were published on our website, social media channels and our Smiths Now internal colleague app. Dame Ann Dowling, one of our Non-executive Directors and an engineer herself (a world authority on combustion and acoustics), recorded a short video explaining what she enjoys about her work and why a career in engineering is an exciting choice for young people today.
and Executive Committee are not included in
these numbers.
Our shared values of Passion, Integrity, Respect, Ownership and Customer Focus are at the heart of what it means to be Smiths and guide our approach to ensuring all colleagues at Smiths feel safe, valued and respected.
Our Code of Business Ethics provides guidance, including through real-life scenarios, to help colleagues address challenging and ethical issues they may encounter at work. In FY2019, we updated our online Code of Conduct ethics training module to take account of updates to the Code.
We also ran Ethics and Compliance symposia in Japan, South Korea, India, Germany and Czech Republic. The symposia were an opportunity for leaders from across Smiths to discuss our ethics and compliance challenges and how best to navigate them.
We continued our 'Speak Out' campaign in FY2019 to remind and encourage colleagues to report behaviour inconsistent with the Code of Business Ethics and our values through their line manager, HR and legal teams, or through our confidential 'Speak Out' reporting line.
The safety and security of colleagues all over the world is of paramount importance to us. All our locations maintain security measures that comply with our comprehensive global security standards which were enhanced this year.
PEOPLE
Our business travellers benefit from 24/7 advice and assistance provided by our travel security partners, with special arrangements in place for those that travel to high risk locations.
All colleagues are trained in security awareness with every Smiths facility assessed annually to determine the level of adherence to Smiths security standards.
In FY2020, we are planning to further enhance our security operations using GPS tools that will enable us to monitor the exact location of colleagues travelling in high risk locations as well as remote workers, and send them appropriate alerts and notices.
We build strong relationships, a sense of pride in our business, and engage our people by getting involved in local communities. This is managed locally, with each business focusing on markets and communities important to them. We celebrate the best of these initiatives at our annual Group-wide Excellence Awards.
We offer Group-level support to charities and organisations that show how a donation will increase wellbeing through improvements to education, health, welfare or environment. In FY2019, the Group made charitable donations of £113,000.
During FY2019, Smiths Interconnect launched a pilot of Smiths Beyond Boundaries that gives colleagues a paid day to volunteer with their local community, donating more than 13,000 hours to good causes and organisations. We plan to adopt Smiths Beyond Boundaries across other divisions in FY2020.
The Smiths Beyond Boundaries outreach programme encourages colleagues to push beyond their work boundaries and better connect with their communities, customers and colleagues. It was piloted by Smiths Interconnect and involved each site organising a community project.
While the scale was global, the impact was intended to be local. The sites could choose any project that was meaningful to them, and volunteers could help however they wanted – donating time, skills, products or money.
This flexible approach optimised the scheme's appeal and it was swiftly adopted around Interconnect, with each site organising at least one activity.
Projects ranged from cleaning up rivers and beaches, constructing veterans' homes and children's play areas to bingo fundraisers and helping at foodbanks.
1,652 employees volunteered more than 13,000 hours to 54 projects around the world and raised funds for community initiatives.
Many projects focused on improving children's lives, particularly through educational activities that encouraged aspiring engineers.
Participants also felt personal benefits such as an increase in confidence because of the skills learnt from planning and leading these projects. Others recorded higher motivation, productivity and creativity on their return to work. Many were so inspired they gave additional personal time, got families and friends involved, and committed to ongoing involvement with their charities.
As a Group, we made contributions to non-EU political parties totalling \$8,500 (£6,600) during FY2019. The political contributions were made on a bipartisan basis in the US, in accordance with US state and federal election laws, in order to raise awareness and to promote Smiths interests.
Shareholder approval is sought each year for donations to registered political parties and other political organisations in the EU, but it is not Company policy to make such donations. The authority is sought to avoid inadvertent infringement of the relevant legislation.
Technology and innovation are what drives Smiths. They help fill our future product pipeline, create new business models, bring value to our customers and drive sustainable growth into the future.
The SES technology pillar provides standard operating mechanisms to support our approach to technology excellence and improve efficiencies throughout the business.
Our Group-wide innovation framework is helping foster a future-focused, customer-centric culture through a disciplined approach to innovation, aligned with our strategy for growth. It's helping us translate our expertise and insight into transformative new products, services and business models.
Our Digital Forge centre of excellence in the San Francisco Bay area, opened in 2018, is accelerating digital projects and providing a co-innovation space for us, our customers and other partners. John Crane Sense™ is one example of the collaboration between the Digital Forge and John Crane.
Sense is a platform utilising sensors and software that allow customers to optimise performance and improve reliability. Working with John Crane experts, the Digital Forge has developed sophisticated machine learning algorithms that monitor seal performance, diagnose root causes of equipment issues, and predict and prevent potential failures.
John Crane experts build sensors into seals and integrate sensors with the surrounding equipment to capture critical data. The Digital Forge developed the technical infrastructure to move this data to a highly secure cloud-based server where it is processed using the latest algorithms and then stored for visualisation and continuous analysis over the life of the asset. Customers can
also access all of their own unique information and gain valuable insights via this secure web browserbased solution.
Our innovation framework is enabling increased collaboration such as this across Smiths and extends to external partnerships. In FY2019 we entered into new partnerships with leading universities to help share ideas and create innovations for the future.
We continue to refine our innovation investment profile and establish targets for R&D spend and our Vitality Index, which measures our percentage of total revenue derived from products launched in the last three years. The tools used to measure Vitality give us a holistic view of the organic pipeline, improving insight and decision-making. This helps to ensure we're investing in the biggest and best ideas that will bring the most value today and for the future.
INVESTMENT IN R&D FY2019* 4.5% FY2018: 4.1% FY2017: 3.8%
Cash costs as % of sales
* continuing operations
Smiths Detection is collaborating with the US Department of Defence to develop an adaptor for the Joint Chemical Agent Detector (JCAD) product that significantly enhances detection capability. The Solid Liquid Adapter will allow JCADs to detect a broader library of explosives, chemicals and narcotics in solid, liquid and vapour phases.
The JCAD is based on Smiths Detection's Lightweight Chemical Detector (LCD) product line of advanced, easy-to-use and lightweight threat detection devices. The LCD protects military personnel, police and hazmat responders by alerting operators to toxic substances and dangerous chemicals detected.
JCAD is a widely-used chemical warfare agent detector and a flagship product for Smiths Detection, having sold over 99,000 units in its lifetime. Expanding its capabilities will provide additional protection for service personnel in the field.
Our products and solutions are used in some of the most highlyregulated markets in the world, requiring compliance with strict regulatory requirements.
Our SES programme pillar brings consistency and best practice to bear on how we develop, implement and validate the success of programmes across the business.
We design new products by thinking holistically, from customer need and problem definition, through product conception to introduction, and from end use to end of life. This approach is collaborative and cross-functional to create solutions that delight customers, create value and make the world safer and more productive.
We have a standard, flexible New Product Introduction (NPI) process across the Group. This scalable methodology is tailored to market and product, ensuring investment is proportionate, and helps maintain our crucial new product innovation pipeline. The methodology is based on a stage-gate approach with regular internal audits to ensure commercial effectiveness and improve our speed and effectiveness of bringing new products to market.
Our products are used in many missioncritical applications in highly-regulated industries. As our focus on digital transformation continues, we remain committed to ensuring the highest standards of cyber security for our products, and within the enterprise environment. We apply a unified, Groupwide approach to cyber security which leverages our scale.
In FY2019 we continued to execute against our cyber security plans with a focus on compliance, controls, product vulnerability and incident management. As part of these efforts, we updated guidance for security and privacy by design throughout the product lifecycle, and introduced new vulnerability and incident reporting standards and procedures. We also gained ISO/IEC 27001 information security management certification for select operations.
Our approach to product lifecycle management includes active consideration of safety at every step – including how the product is designed, manufactured, used and disposed of. We use common quality procedures to minimise product safety and quality issues, and monitor performance through robust quality control processes and systems. Our capabilities in this area will be enhanced in FY2020 through the introduction of a common Electronic Quality Management System (EQMS).
Flex-Tek's recently launched FlashShield+TM is a next generation corrugated stainless steel tubing system, used to supply natural gas and propane in residential and commercial structures. It features a four-layered design that makes installation fast and easy. The new jacketing system means it is the only product in its category to have the highest levels of safety against both lightning and household fault current.
The new product has been developed from customer feedback which said that customers wanted to reduce the time taken for installation. This new product offers superior performance advantages while being easier and more robust to install, and reduces labour costs.
Manufacturing costs have also been reduced by using innovation in material, and by improving our manufacturing processes so that we're able to selectively compete with less expensive products, enabling us to gain market share and remain a market leader in flexible gas piping.
We leverage our years of manufacturing experience and constantly drive for enhanced production efficiency, effectiveness and quality.
We are committed to ensuring every one of our products is manufactured efficiently, to the highest standard of quality and safety, while minimising our impact on the environment.
Our SES production pillar supports the continuous improvement of Smiths global manufacturing operations by providing standards, guidelines, templates and toolkits based on acknowledged best practice and Lean production. SES Model Value Stream application projects also support the focused implementation of manufacturing technologies across our divisions, to improve safety, quality and productivity.
WORKING CAPITAL % OF SALES FY2019
26%
FY2018: 26% FY2017: 27%
Our cross-divisional quality council drives our approach to quality through standardised policies, processes and guidelines, to help our divisions embed quality in their work, supported by a culture of sharing knowledge and continuous improvement.
We focus our broad performance monitoring on two quality metrics – defects per million parts shipped (DPPM) and cost of poor quality (COPQ). COPQ includes the costs of waste, corrective work, warranty claims, returns and penalties, measured as a percentage of annual revenue.
FY2018: 424 FY2017: 459
2
COST OF POOR QUALITY FY2019
1.4%
FY2018: 1.7% FY2017: 2.1%
We incorporate continuous improvement and lean methodology to improve safety, quality, cycle time, delivery performance and productivity. We have certified continuous improvement leaders in all of our divisions that collaborate to standardise our Groupwide approach to Operational Excellence (OPEX) deployment through the Smiths Excellence System.
We continue to transform our manufacturing lines through development of Model Value Streams across our business. This allows us to test the effectiveness of new manufacturing technologies and lean approaches in a live environment. We are already recording significant improvements in HSE, quality, efficiency and lead times.
STOCK TURNS FY2019
3.4x FY2018: 3.7x FY2017: 3.5x
We believe that operating responsibly regarding the environment is simply the right thing to do, and have had annual reduction targets for environmental metrics since 2007.
Environmental performance is reported regularly to the Board and the Executive Committee. In FY2019 we launched an Executive Environmental Roundtable to advise the Board and Executive Committee on environmental matters including goals and targets, strategy, risk, and employee involvement.
We are committed to using energy and natural resources efficiently through advanced production processes that decrease waste and energy consumption, and reduce our greenhouse gas (GHG) emissions, in alignment with sciencebased targets. This is to help minimise the risk of a two degrees centigrade raise in global temperature and the associated potential impacts of global climate change.
We are also investing in low-carbon technologies and environmental management systems that drive improvement in our performance. We have set a long-range target to use more than 75% renewable energy (non-GHG) for all our electrical needs by 2040.
PRODUCTION
Our Health, Safety and Environment (HSE) and Environmental Emissions Reduction (EER) Policies are used by each division to develop tailored strategies, supported by a cross-divisional network of HSE professionals. We closely monitor energy and water use, waste generation and GHG emissions to identify potential improvements, sharing mitigating action plans and best practice across the Group.
In FY2019 we again participated in the Carbon Disclosure Project (CDP) Climate and Water conservation modules, in which we earned a GHG score of A-, putting us in the CDP leadership category for our overall performance, management systems and robust reporting.
Our Supplier Code of Conduct sets out the environmental conditions we require of suppliers. Locally we measure and monitor energy consumption using tracking software that also provides a consolidated view of overall Group performance.
We align our environmental targets with United Nations Sustainable Development Goals 6, 13 and 14 for water conservation and protection, and greenhouse gas targets. We also have targets relating to recycling.
Smiths is aligned with the Task Force on Climate-related Financial Disclosures (TCFD) for our strategic planning and execution around GHG reduction and climate change targets including work on all four elements: Governance, Strategy, Risk Management and Metrics and Targets. In FY2020 we plan to conduct a sensitivity risk analysis around climate change impacts, the results of which will be reported to the Executive Committee and the Board.
In today's data-driven and connected world, it's imperative for businesses to adopt smart management and production systems for optimal operational performance.
An advanced production system (APS) is based on mutual interaction between people, machines and computer networks. Through real-time information and visualisation, an APS helps reduce business waste such as time spent waiting, machine performance and over processing, and facilitates shop floor production management.
John Crane's Lutín site in the Czech Republic installed each of its production machines with touch-screen PCs which allow access to numerical control programme databases, the site's internal network, and machine data collection interfaces.
Paper forms containing standard operation procedures, instructions, guidelines and other manufacturingrelated documents were also replaced by electronic documents making them easy to access and update.
Large monitor screens were also installed in manufacturing halls displaying operators' states, which helps support visual management during shifts. Additional smaller screens were placed in offices to notify shop floor management if a problem were to arise during the production process.
The integration of Lutín's new APS supports on-time delivery, while also reducing production lead time and unplanned downtime, increases efficiency of machinery, and promotes higher production efficiency and quality. Since implementation of the system,
average machine utilisation has grown by more than 25%, with numbers continuing to increase.
We're also aligned with the Global Reporting Initiative (GRI) reporting principles for environmental matters and have developed a comprehensive portfolio of policies including biodiversity protection, emissions reductions and product compliances. Performance against these policies is overseen through various auditing means with third parties, including using certified auditors for all our ISO14001 certified production sites with over 50 colleagues.
All divisions participate in a regular Restricted Substance forum to ensure compliance, share best practices and drive alignment for product compliance and adherence to conflict minerals requirements.
Our divisions are responsible for their products and continued efforts to reduce any lifecycle impacts on the environment.
The organisation's governance around climate-related risk and opportunities
The actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy, and financial planning
The processes used by the organisation to identify, assess and manage climate-related risks
The metrics and targets used to assess and manage relevant climaterelated risks and opportunities
As demand for fresh water grows around the world, and natural resources become increasingly limited, the need for companies to conserve both water and energy is extremely important.
An international pulp & paper packaging producer discovered that high volumes of treated water were being used in its bleaching process. In addition, the mechanical seal mean time between repair (MTBR) on its chlorine dioxide transfer pumps (used to lighten the colour of wood pulp) was far shorter than expected. Engineers needed a quick solution to reduce their water consumption and maintenance costs.
Familiar with the chlorine dioxide bleaching process, John Crane conducted an analysis on four transfer pumps to determine seal performance and discovered seal MTBR was only 14 to 18 months, much less than the two to three years expected by the mill. To help combat this, John Crane installed its Dynamic Lift Up-stream Pumping (USP) seals to achieve dramatic pump performance improvements.
We are on track to meet the new three-year goals we set in FY2018. We are decreasing our GHG emissions and water consumption, increasing our use of renewable energy, and holding flat on recycling. Markets for recycled materials are down due to geopolitical issues and we continue to investigate alternative recycling options.
| FY2019-FY2021 target | FY2019 outcome | |
|---|---|---|
| Use of renewable energy | 5% increase | 0% |
| Greenhouse gas emissions | 5% reduction | (12)% |
| Recycling rate | 5% increase | (2)% |
| Water consumption in stressed areas | 5% reduction | (9)% |
Reduction targets are compared to the FY2018 baseline year and GHG and water are normalised to FY2018 revenue. Renewable energy and recycling are rate-based and therefore are not normalised. Water consumption targets are focused on stressed areas in alignment with the UN Sustainable Development Goals. Renewable energy includes all non-GHG producing sources and covers our electricity demand.
Our GHG emissions calculations and reporting follows the Greenhouse Gas protocol (operational approach) and covers emissions from all sources under our control, grouped under: Scope 1 – direct GHG emissions from owned assets; and Scope 2 – GHG emissions from supplied electricity.
Emissions from company vehicles, production processes and fugitive sources are small and not deemed to be material, and so are not in our reported totals.
| Emissions | FY2019 | FY2018 | FY2017 | FY2016 | |
|---|---|---|---|---|---|
| Absolute values | |||||
| Scope 1 (direct emissions) | t CO2e | 10,963 | 12,241 | 11,143 | 12,088 |
| Scope 2 (indirect emissions) | t CO2e | 47,312 | 55,841 | 62,072 | 81,092 |
| Total | t CO2e | 58,275 | 68,082 | 73,215 | 93,180 |
| Normalised values | |||||
| Scope 1 (direct emissions) | t CO2e/£m revenue | 3.35 | 3.65 | 3.74 | 3.95 |
| Scope 2 (indirect emissions) | t CO2e/£m revenue | 14.47 | 16.63 | 20.83 | 22.56 |
| Total | t CO2e/£m revenue | 17.83 | 20.28 | 24.57 | 26.51 |
We set new three-year environmental improvement targets for the period FY2019 to FY2021 in accordance with our Environmental Emissions Reduction Policy and the 2016 UN Sustainable Development Goals.
By the end of FY2021, we aim to reduce our GHG emissions by a further 5%, normalised to revenue, and increase renewable energy use by an additional 5%. Renewable energy currently accounts for over 43% of our electricity use, with our ambition to achieve 50% by the end of FY2021 by using more energy efficient equipment and green energy contracts.
We will continue to focus on reducing water usage in regions defined as 'stressed' by UNESCO, as well as certain locations in China, India and Mexico where water is constrained. Our goal is an additional 5% reduction in these areas by the end of FY2021, normalised to revenue, through water reduction efforts as well as water reuse programmes in certain locations.
We've also agreed to increase the amount we recycle by 5% to 69% including waste and other materials within our operations and local sites.
With the pending separation of Smiths Medical, we will be establishing adjusted baselines and reviewing targets.
We build strong strategic supplier relationships to ensure quality, efficiency and flexibility. We apply our shared values to everything we do, and ask our suppliers to do the same.
Our SES supply pillar focuses on procurement and supply chain management, drawing on best practices to provide expected standards and operating guidelines in support of our continuous improvement journey. Application projects in supplier development and operational planning help to embed best practice and accelerate process improvements. The professional development of our supply colleagues is supported by the SES Academy, which offers APICS and CIPS accredited procurement and supply chain education programmes.
Our Supplier Code of Conduct, which was updated in FY2019, makes clear our expectations of suppliers when it comes to ethical behaviour, the supply of minerals from socially and environmentally responsible sources, and the environment. Questionnaires covering modern slavery have been sent to more than 120 suppliers located in higherrisk territories.
To grow sustainably, we need strong, smart partnerships to generate and capture value. In FY2019 we held a supplier conference with more than 50 of our key vendors, to ensure they were familiar and in line with our Supplier Code of Conduct and to explain our strategy.
We continue to measure and develop supplier delivery and quality performance. In FY2020 we will increase focus on supplier delivery lead-time, involving our supply base further in the management of upstream inventory.
While supplier contracts and payment terms vary across the Group, our recently refreshed terms and conditions clarify how we want to work with our partners.
Smiths Excellence methodologies have been adopted by Smiths Detection to help deliver supply excellence across the world.
Looking at the six elements of supply, Smiths Detection has been able to break down the supply chain process step-by step and identify areas for improvement. The division has optimised supply chain processes across five manufacturing sites and 36 suppliers, leading to a 25% reduction of inventory associated with these suppliers; equating to a value of £1.3m.
Working alongside suppliers to develop more effective production processes, Smiths Detection has also been able to improve competitiveness and performance.
In addition to these benefits, the division has developed a more agile supply chain to the benefit of our customers.
We continue to deploy best practices across our business, with emphasis on a total value approach to supply chain management; a key component of our SES Supply Chain Handbook.
In FY2019, we developed more robust sales and operation planning (S&OP) processes, with the aim of optimising business revenue and profitability, while improving customer delivery performance. In FY2020 we will pilot the use of advanced planning tools and continue supply chain capability development via the SES Academy.
£20m FY2018: £21m FY2017: £30m
* continuing operations
Doing business the right way means respecting applicable laws wherever we operate.
Our trade compliance policies and procedures set out the necessary controls and provide corporate oversight of transactions. We provide in-person and online training to our trade compliance officers and other relevant colleagues. Our cross-divisional trade compliance working group meets regularly to share best practices and address emerging issues. We also regularly assess trade activities at site level to identify risks and review controls.
We are committed to upholding all internationally recognised human rights standards wherever we do business, and to addressing modern slavery risks in our own operations and our supply chain.
During FY2019, we asked a second wave of Tier 1 suppliers to self-assess using a standardised questionnaire, selected based on a variety of factors, including their Global Slavery Index risk rating in relation to their countries of manufacturing.
We also audited some of our own sites and validated their compliance with our Code of Business Ethics, our Human Rights Policy and local labour laws. During our on-site audits we visited a sample of high-risk local suppliers to assess their compliance with our Supplier Code of Conduct. Any issues identified were investigated and remedial action taken.
We released new mandatory on-line training for our colleagues covering modern slavery. You can read our latest modern slavery statement on our website.
In FY2020, we will continue our due diligence drive with a focus on Tier 1 suppliers and enhance our monitoring capabilities and supplier controls.
The disclosure below, and the information in this Annual Report which it refers to, is intended to assist our stakeholders in understanding our position on the following key non-financial areas: environmental, employee, society, human rights and anti-corruption and anti-bribery.
Our Code of Business Ethics (the Code) underpins everything we do at Smiths. It applies our shared values and ensures we comply with all applicable international and local rules and regulations. It provides guidance, including through real-life scenarios, to help colleagues address challenging and ethical issues they may encounter at work. The Code is available on our website, and our Group policies support and enhance our behaviour in line with the principles set out in the Code.
– Our business model, principal risks and key performance indicators can be found on pages 10, 64 and 26.
We operate across a range of markets and geographies and are prepared to accept certain levels of risk in realising our ambitions, and our purpose to make a safer, more efficient and better connected world.
We are clear about the specific risks we face, and take a proactive approach to risk management in order to maximise opportunities, drive better commercial decisionmaking, and protect our people and our businesses.
The Board and its Committees determine the culture and approve the strategy of the Group. The Board ensures appropriate oversight and monitoring through a number of mechanisms, including strategy reviews, Committee meetings, management reports and focused reviews of selected risk areas.
On behalf of the Board, the Audit & Risk Committee is responsible for reviewing and assessing the effectiveness of the Group's risk management and internal control systems. The review process covers the Group's principal risks, as well as financial, operational and compliance controls.
The Executive Committee is responsible for designing the Enterprise Risk Management (ERM) framework and ensuring that it is effectively deployed throughout the Group. The Executive Committee also ensures that the Board's risk appetite is understood by risk owners and decision-makers, ensures risks are adequately managed, and conducts an annual assessment of strategic risk. All principal risks are owned by a member of the Executive Committee.
Figures in this section are for total Group unless otherwise stated
Running a business involves constant risk management – it is an integral part of day-to-day operations. Our ERM process supports open communication on risk between the Board and Audit & Risk Committee, the Executive Committee, our divisions, functions and sites. It enables us to manage and monitor the risks which threaten successful execution of our Group strategy and ensures our strategic, financial, compliance and operational risks are appropriately considered by the Executive
Committee and by the Board.
Committee each year.
processes and systems.
Internal audit provides independent and objective assurance to both the Audit & Risk and Executive Committees on the adequacy and effectiveness of our risk management and internal control processes. It facilitates the ERM process and provides site-based controls and assurance reviews of key programmes,
Within the ERM framework, we operate a 'three lines of defence approach'. This ensures that the three lines – risk ownership and mitigation, monitoring and compliance, and independent assurance – are clearly defined and work effectively. Our divisional and functional teams are responsible for day-to-day management and reporting of risks. They identify new and emerging risks, escalate where appropriate, and take action to manage risks as required. Our divisions also conduct an annual assessment of the strategic, financial, compliance and operational risks they face and make formal presentations to the Audit & Risk
2
recalibrated by the Executive Committee. The risk management process was further enhanced through the requirement for risk owners to demonstrate how they get assurance that controls are working effectively. Examples are provided in the following tables of principal risks.
During FY2019, ERM was discussed at the Executive Committee in order to agree the ERM timetable and the risks selected for 'deep dive' discussions at the Executive Committee and Audit & Risk Committee. These were: technology; cyber security; people; manufacturing concentration; and sole source of supply. The Group's list of principal risks was also discussed and
The Audit & Risk Committee, on behalf of the Board, reviews the effectiveness of the risk management process; considering the principal risks and uncertainties, actions taken by management to manage those risks, and the Board's risk appetite in respect
of each risk.
In addition, a further 47 risk workshops were facilitated at operational sites during the year to gather a bottom-up view of risk which fed into divisional and functional risk assessments.
The Directors consider the risk management process to be effective. The Audit & Risk Committee recognises that this is an ongoing process and work will continue in FY2020.
We review each risk and rate a number of factors: gross impact, applying the hypothetical assumption there are no mitigating controls in place; residual impact and likelihood, taking into account existing mitigating controls; target impact; the reputational impact of a risk; and its velocity, which reflects the expected time we would have to react should a risk materialise. These, in turn, drive mitigation priorities. A trend metric shows the net position of the risk year-on-year.
We updated our register of principal risks and uncertainties following review by the Executive Committee and approval by the Board. Two risks reported in FY2018 have been merged to form the integrated supply chain risk. Customer has been added as a new principal risk.
While we continue to monitor and manage a wider range of risks, the risk map (right) and the tables that follow summarise those risks considered to have the greatest potential impact if they were to materialise.
OUR STR ATEGIC
| 1 | Technology | 6 | Cyber security | ||||
|---|---|---|---|---|---|---|---|
| 2 | Economy and geopolitics | 7 | Integrated supply chain | ||||
| 3 | Acquisition/integration and | 8 | Markets | ||||
| divestment/separation | 9 | Customers | |||||
| 4 | Product quality | 10 Contractual obligations | |||||
| 5 | Ethical breach | 11 People | |||||
| Residual impact | Likelihood | ||||||
| High | Medium | Low | High | Low | |||
| Trend (net position of risk vs FY2018) |
Velocity | ||||||
| Increase from FY2018 |
No change | Decrease from FY2018 |
High | Medium | Low | ||
Differentiated new products and services are critical to our success. We may be unable to maintain technological differentiation or to meet customers' needs and may face disruptive innovation by a competitor.
| Risk owner | Andy Reynolds Smith |
|---|---|
| Trend | |
| TECHNOLOGY | |
| Link to SES | CUSTOMER |
| PROGRAMME | |
| Included in viability | N/A |
| assessment: | |
| Link to strategic | 1 2 3 |
Focus on building a culture of innovation with a long-range Technology Roadmap for each division
Targets to increase the proportion of spend on next generation and transformational initiatives
There are external indicators that we are in the late stage of the economic cycle. Threats to free trade are increasing.
| John Shipsey |
|---|
| PRODUCTION |
| N/A |
Divisions monitor order flows and other leading indicators so that they may respond quickly to deteriorating trading conditions and tariffs/barriers to free trade
Identification and application of learnings from past downturns through the cycle
Principal risks and uncertainties
Our strategy is predicated primarily on organic growth. However, acquisitions/divestments can also play a role in building and/or strengthening competitive positions.
Acquisitions bring risk as well as opportunity. We may invest substantial funds and resources in acquisitions which fail to deliver on expectations – due to incorrect appraisal of the target and/or poor execution. The opposite risk is that (perhaps through an excess of caution) we miss out on opportunities to build market-leading positions and growth.
Divestments also carry risk. We may divest an asset at the wrong time, or may not realise appropriate value for the asset. Separation may be complex and, if poorly executed, may impact the wider business.
| Risk owner | John Shipsey |
|---|---|
| Trend | |
| Link to SES | PROGRAMME |
| Included in viability assessment: |
N/A |
| Link to strategic 1 objectives |
3 |
Detailed due diligence and integration work in accordance with our acquisitions and disposals policy
Detailed separation planning, in accordance with our acquisitions and disposals policy
In the ordinary course of business we are potentially subject to product liability claims and lawsuits, including potential class actions. The mission-critical nature of many of our solutions makes the potential consequences of failure more serious than may otherwise be the case.
| Risk owner | Divisional Presidents |
|---|---|
| Trend | |
| TECHNOLOGY | |
| Link to SES | PROGRAMME |
| PRODUCTION | |
| Included in viability | |
| assessment: |
Quality assurance processes embedded in manufacturing locations for critical equipment, supporting compliance with industry regulations (e.g. FAA, FDA, API, etc.) 2 new products
Quality development and quality integration built into NPI processes
Material litigation managed under the oversight of the Group General Counsel
Quality KPIs (e.g. DPPM, COPQ) are measured and action plans put in place to drive their improvement – these are regularly reported
| ETHICAL BREACH |
|---|
| ---------------- |
| We have more than 22,000 employees in |
|---|
| more than 50 countries. Individuals may not |
| all behave in accordance with the Group's |
| values and ethical standards. We operate |
| in highly regulated markets requiring strict |
| adherence to laws with risk areas including: |
| Risk owner | Mel Rowlands |
|---|---|
| Trend | |
| Link to SES | PEOPLE CUSTOMER SUPPLY |
| Included in viability assessment: |
|
| Link to strategic objectives |
2 |
Anti-bribery and corruption training for all employees supported by the 'Speak Out' line encouraging the reporting of ethics violations (includes ability to report anonymously and a non-retaliation policy)
Reporting and investigation mechanisms
Multi-functional programme for GDPR compliance
Multiple sources to assess culture including My Say results, 'Speak Out' reports, internal audit findings, exit interviews and ethics questions in performance reviews
| Risk owner | Philippe Roman |
|---|---|
| Trend | |
| Link to SES | TECHNOLOGY PROGRAMME |
| Included in viability assessment: |
|
Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers. Manufacturing continues to be exposed to external events which could have significant adverse consequences, including natural catastrophes, disease pandemics and
We are also affected by the social, economic, regulatory and political conditions where we operate. This applies to our own manufacturing sites and those
of our key component suppliers.
Included in viability assessment:
Link to strategic objectives
Risk owner Philippe Roman
Link to SES SUPPLY
2
Link to strategic objectives
terrorist attacks.
Trend
Group-wide assessment of critical information assets and protection to enhance security
Information Security Awareness programme
– Inability to deliver products/solutions to customers, impacting financial performance and reputation
Business interruption and property damage insurance
Externally provided business interruption risk surveys of operational sites
A significant proportion of our revenue comes from the US and European markets, with a notable proportion coming from governments. In addition to geographical markets, there is a risk we do not focus on attractive market sectors where we have, or could have, a sustainable position.
| Risk owner | Roland Carter |
|---|---|
| Trend | |
| Link to SES | TECHNOLOGY CUSTOMER |
| Included in viability assessment: |
N/A |
| Link to strategic 1 objectives |
|
Strategic process to capture continuing opportunities in current and adjacent markets
Corporate affairs function which collaborates with colleagues across the Group to advise on developments
Our markets are evolving at a fast pace, creating potential for customers to change their business models as they look to deliver products and services at higher quality, with better service and at lower cost.
Failure of the Group to keep pace with customer changes/requirements (innovation, go to market, strategies) could have a materially adverse impact on Group performance.
| Risk owner | Julian Fagge |
|---|---|
| Trend | |
| Link to SES | CUSTOMER PROGRAMME |
| Included in viability assessment: |
N/A |
| Link to strategic 1 objectives |
Developing business models is a core component of the Group-wide training agenda
Megatrend workshops and disruption risks reviewed annually
We may fail to deliver the products and services we are obliged to deliver, or fail in our contractual execution due to delays or breaches by our suppliers or
Risk owner Mel Rowlands
assessment: N/A
other counterparties.
Trend
Link to SES
Included in viability
Link to strategic objectives
growth ambitions.
CUSTOMER SUPPLY PROGRAMME PRODUCTION
2
– Contracts managed and delivered by programme management teams that regularly review risks and take appropriate action
People are our only truly sustainable source of competitive advantage and competition for key skills is intense, especially around science, technology, engineering and mathematics (STEM) disciplines. We may not be successful in attracting, retaining, developing, engaging and inspiring the right people with the right skills to achieve our
| Risk owner | Sheena Mackay |
|---|---|
| Trend | |
| Link to SES | PEOPLE |
| Included in viability assessment: |
N/A |
| Link to strategic objectives |
2 |
Chief Executive assessment of the leadership team
Annual performance management reviews for the majority of employees using best practice processes such as 360-degree feedback surveys
Diversity & Inclusion Plan and initiatives
Participation rates in the Smiths learning and development programmes measured. Capability and performance of alumni are tracked
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 on pages 04 to 72. The financial position of the Company, its cash-flows, liquidity position and borrowing facilities are described on pages 22 to 25. In addition, the notes to the accounts include the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.
At 31 July 2019 the net debt of the Group was £1,197m, a £304m increase from 31 July 2018. At the end of July the Group had available cash and shortterm deposits of £315m. These liquid resources are immediately available with 93% invested with the Group's global banking partners. The Group's debt profile shows an average maturity of 5.2 years (from 5.5 years at 31 July 2018). There are no scheduled repayments of debt due until 2022.
The Group maintains a core US\$800m committed revolving credit facility from these banks which was undrawn at 31 July 2019. This committed facility matures in November 2023. This facility has certain financial covenants however these are not expected to prevent utilisation at the Group's discretion if required.
This financial position and debt maturity profile provides confidence that the Group has sufficient financial resources for the foreseeable future. As a consequence, the Directors believe that the Company is well placed to manage its business and its liabilities as they fall due. In coming to this conclusion, the Directors have taken account of the Group's risk management process described on pages 62 to 63, and have paid particular attention to the financial and pension funding risks and their mitigation (see page 23).
The Directors, having made appropriate enquiries, have a reasonable expectation that the Company and the Group have adequate resources to continue in operation for a period of at least twelve months from the date of this report. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements of the Company and the Group.
In accordance with the requirements of the 2016 UK Corporate Governance Code, the Directors have assessed the longerterm prospects of the Group, taking into account its current position and a range of internal and external factors, including the principal risks detailed on pages 64 to 70 (the 'viability assessment').
The Directors have determined that a three-year period to 31 July 2022 is an appropriate time frame for the viability assessment. The selected period is considered to be appropriate as, based on the historical performance of the Group, a three-year outlook represents an optimum balance of long-term projection and acceptable forecasting accuracy.
This time period also takes into account considerations such as the maturity of the Group's borrowing facilities and the cyclicality of the performance of the Group's underlying markets. In making this viability assessment, the Directors have considered the current financial position and prospects of the Group, including the current year business performance, the detailed Operating Plan for 2020 and the Strategic Plan. Against these financial projections, the Directors took into account the principal risks (as outlined on pages 64 to 70) to develop a set of plausible scenarios as set out overleaf with potentially highimpact outcomes, and where relevant included the loss of revenue arising from the separation of Smiths Medical.
Consideration was then given to the magnitude of the gross risks and their potential impact, directly or indirectly, on the Group's future performance and liquidity. The assessment included stress testing of the Group's financial capacity to absorb the impact of such adverse events, either individually or in combination, and what mitigating actions the Group could take to respond to them in order to protect its business. The Directors also considered the Group's ability to raise additional liquidity. In performing this assessment the Directors have taken comfort from the diversity of the Group's businesses across different markets, industries, geographies, products and customers.
Based on the robust assessment, the Directors confirm that they have a reasonable expectation the Group will remain viable for the period being assessed and will continue to operate and meet its liabilities as they fall due. The Directors have no reason to doubt that the Group will continue in business beyond the period under assessment.
72 See scenarios modelled overleaf
2
SMITHS GROUP PLC Annual Report FY2019 71
| SCENARIOS MODELLED | |
|---|---|
| SCENARIOS | LINK TO PRINCIPAL RISKS |
| Scenario 1: A natural or other disaster destroys key manufacturing facilities resulting in severe disruption to approximately one-quarter of Smiths Medical's production. |
Integrated Supply Chain |
| Scenario 2: A fault in a critical product within Smiths Medical causes the product range to be suspended by global regulatory authorities pending further investigation. Trade licences are subsequently revoked until the products are tested to be safe. |
Product Quality |
| Scenario 3: A corruption scandal leads to global regulatory penalties and damage to the Group's reputation. The corruption scandal also leads to heavy penalties against the Group in its main markets. |
Ethics and Compliance |
| Scenario 4: A major incident at a refinery is judged to be the result of a fault in one of John Crane's mechanical seals. John Crane is held liable for the costs of repair and restoration of the plant in addition to the consequential losses of plant closure. |
Product Quality |
| Scenario 5: A product cyber-attack at a major global hub airport located in North America. Subsequently civil, military and governmental licences are revoked. |
Cyber Security |
| Scenario 6: Combination of scenarios 1 & 4. |
Integrated Supply Chain & Product Quality |
| Scenario 7: Combination of scenarios 2 & 5. |
Product Quality & Cyber Security |
| Scenario 8: Combination of scenarios 4 & 5. |
Product Quality & Cyber Security |
The Strategic Report was approved by the Board on 19 September 2019.
By order of the Board
Andy Reynolds Smith CHIEF EXECUTIVE
A STRONG GOVERNANCE FRAMEWORK IS CRITICAL IF WE ARE TO SUPPORT THE BUSINESS AND ENHANCE THE INTERESTS OF ALL OUR STAKEHOLDERS."
I am pleased to introduce our Corporate Governance Report for the year, in which we describe our governance arrangements, the operation of the Board and its Committees, and how the Board discharged its responsibilities.
Central to everything we do is the Group's purpose. Our culture, values, strategy and business model continue to be aligned to make the world safer, more efficient and better connected. If we continue to achieve this through our great people and relentless execution, our performance demonstrates we can produce stronger and more sustainable results.
Having a strong governance framework that supports the Group's long-term strategic development is critical if we are to support the business and enhance the interests of all our stakeholders for the future. The continued development of the Group's strategic opportunities has been our key area of focus during the year. Most notably this has included the decision to separate Smiths Medical. The Board's succession planning has also been key and more information can be found in the Nomination & Governance Committee Report.
This year has seen significant change with regard to corporate governance in the UK as the new UK Corporate Governance Code came into force. New legislation in respect of the governance arrangements of private companies, including major subsidiaries within listed companies, was also published. The audit market and the role of auditors is currently under review, with the UK Government offering broad support for the recommendations of Sir John Kingman's review. This included the establishment of a new regulator with responsibility for governance in the UK to replace the FRC.
The Board continually keeps its governance arrangements under review and, although the above changes have required us to review and enhance our arrangements, we have not had to make fundamental changes to the way we operate and oversee the business.
During the year the Board agreed the framework for how it wishes to engage with stakeholders. It is essential that this framework is dynamic and we are able to respond as our business and our stakeholders evolve, not to mention as it becomes better embedded, and we learn what works best for us as a Board and for our stakeholders.
I would like to thank all my colleagues who served on the Board during the year. I hope the following pages provide you with an insight into our work on your behalf.
The Board met in Minneapolis in July 2019 and visited Smiths Medical's Oakmount facility.
In FY2019 the Company has applied the main Principles and complied with the relevant Provisions of the 2016 UK Corporate Governance Code (the 2016 Code).
As mentioned in our Annual Report FY2018, we welcome the publication of the 2018 UK Corporate Governance Code (the 2018 Code) which applies to the Company for FY2020. The new Code focuses on culture and purpose, stakeholder engagement and succession planning. Although in this Annual Report we are still required to measure ourselves against the 2016 Code, we have been working to ensure we apply the updated Principles of the 2018 Code with effect from 1 August 2019.
This activity has included:
UK CORPOR ATE 3 The Directors receive a Governance Report from the Company Secretary ahead of each Board meeting and, since the publication of the 2018 Code, they have been updated on progress towards compliance with the new requirements. Copies of the 2016 Code and the 2018 Code are available from the FRC's website at frc.org.uk.
The table on page 123 contains more information about how we have applied the 2016 Code in FY2019.
Leadership and purpose Our Board
The Board is collectively responsible for the longterm success of Smiths and the delivery of sustainable shareholder value.
Chairman Appointed: 1 August 2013 N R I on appointment
Sir George has had a long career in engineering and innovation, holding the role of Chairman and CEO of 3M, a US-based global technology company and Dow Jones 30 component, prior to joining Smiths. Earlier in his career Sir George was Chairman and CEO of Brunswick Corporation and Chief Technology Officer for appliances, motors and controls at Emerson Electric Company. Sir George has a PhD in Electrical Engineering and his extensive experience of large, multiindustry businesses operating in global markets supports his effective Chairmanship of the Board.
Chief Executive Appointed: 25 September 2015
Before joining Smiths Andy spent over a decade at GKN plc, a complex global engineering group, where he held the role of Chief Executive of the Automotive division and was a member of the Board. His previous experience includes senior management roles at Ingersoll Rand, Siebe plc (now Schneider Electric) and Delphi Automotive Systems. Andy's former appointments as Chairman of the CBI Manufacturing Council and as a member of the Government Ministerial Advisory Group for Manufacturing enhance the in-depth industry knowledge he brings to the Board.
Chief Financial Officer Appointed: 1 January 2018
John was Chief Financial Officer for Dyson, a diversified global technology company, prior to joining Smiths. He was part of the team leading Dyson's global growth, particularly in Asia. Prior to that, John spent 13 years at Diageo plc in a number of senior finance and strategy roles, including Finance Director for its Iberia region and Chief Financial Officer of Schieffelin & Somerset, a US joint venture between Diageo and LVMH. John is a Chartered Accountant and has valuable experience leading innovative companies with a global presence.
A Audit & Risk Committee member N Nomination & Governance Committee member R Remuneration Committee member
Bill has had a long and successful career in finance in the engineering sector, gaining an in-depth knowledge of global markets. Bill's extensive experience in global engineering businesses supports the Board's robust decision-making. Bill was Group Finance Director at GKN plc, a global engineering group, until his retirement in 2014. At GKN he also held the roles of CEO of the Propulsion Systems Division, and CFO of the Aerospace Division. Prior to that, Bill spent 28 years at TRW, a US-based automotive and aerospace group, where he held various senior finance positions. Bill has a BA in economics and an MBA.
Non-executive Director Appointed: 1 July 2010 A N R I
Bruno's career has included senior management roles in pharmaceutical and medical device companies. Bruno retired from AstraZeneca in 2010 as Executive Vice President, International, responsible for Europe, Asia Pacific, Latin America and MEA. Bruno's extensive experience brings a deeper understanding of the healthcare environment and industry to the Board. Bruno has an MBA from the Kellogg School of Management and a degree in law from Reims University.
– Non-executive Chairman, Vectura Group plc
Prior to joining Smiths Olivier was Chief Executive at Smith & Nephew plc, a multinational medical equipment manufacturing company. His significant executive experience at global pharmaceutical and MedTech companies, including as CEO at Pierre Fabre Group and President of Abbott Pharmaceuticals, enables different perspectives to be considered during Board discussions. Olivier is a member of the French Academy of Pharmacy and the French Academy of Technologies, and has extensive business and leadership experience. He also has an MBA and a doctorate in Pharmacy.
Other significant appointments
3
Committee Chair I Independent Director
Leadership and purpose Our Board
Non-executive Director Appointed: 19 September 2018 A N R I
Dame Ann has had a distinguished academic career and is currently a Deputy Vice Chancellor and an Emeritus Professor of Mechanical Engineering at the University of Cambridge, where she served as Head of Engineering for five years until 2014. She served as the President and Chairman of Trustees of the Royal Academy of Engineering from 2014 to 2019. Dame Ann's contribution to engineering research is internationally recognised, and her knowledge and background offer a different perspective to Board discussions. Dame Ann has a degree in mathematics and a PhD in engineering.
– Non-executive Director, BP plc
Non-executive Director Appointed: 1 July 2012 A N R I
Tanya has valuable experience in product innovation and sales and marketing across a range of sectors. Until 2010 she was CEO of Diamond Innovations Inc., a manufacturer of products for the material removal industry. Prior to this, Tanya held various senior positions during a successful 20-year career with GE, a multinational conglomerate. Tanya has extensive knowledge of operating in the US, a key region for the Group, is a qualified electrical engineer and has a BSc in electrical engineering.
Mark is a former senior investment banker and has extensive experience in corporate finance and capital markets which supports Board discussions regarding the Group's portfolio management. He held various roles at Credit Suisse during his executive career, including Chairman of UK Investment Banking. Mark also brings non-executive experience to the Board, having served as senior independent director and audit committee chairman at FTSE100 companies. Mark is a Chartered Accountant, and has an MA in philosophy, politics and economics.
A Audit & Risk Committee member N Nomination & Governance Committee member R Remuneration Committee member
A N R I
Noel is the Managing Director of Tata International Limited, a global trading and distribution company and a trading arm of the Tata Group, a privately-owned multinational holding company. He has had a long and successful career in global business with extensive experience of high growth economies, including Asia and Africa which are key markets for Smiths' growth strategy. Noel has a BA in economics.
With the exception of Kansai Nerolac Paints Ltd, each of the following companies form part of the Tata Group.
Non-executive Director Pam will join the Board on 1 March 2020 and will stand for election by shareholders at the 2020 AGM.
Pam is Executive Vice-President, Operations and Information Technology at AstraZeneca. She joined AstraZeneca in 2015, following 14 years in Global Manufacturing and Supply Chain roles at Merck/MSD. Prior to joining Merck, she held various engineering and project management positions at Universal Oil Products, Union Carbide Corporation and GAF Chemicals.
Pam's experience in the areas of manufacturing, supply chain and technology gained with large global businesses in strategically important regions for Smiths will further strengthen the Board's discussions on embedding world class operations. Pam holds Bachelor's and Master's degrees in chemical engineering and an MBA in marketing.
– Non-executive Director, Codexis. Inc.
Company Secretary Appointed: 1 June 2018
John has gained corporate governance and legal experience in a wide range of international businesses. He previously held senior roles in a variety of sectors, most recently at Anglo American plc, RSA Insurance Group plc, and Cadbury plc. He has an LLB and is a Fellow of the ICSA: Governance Institute and a qualified Solicitor.
Sir Kevin retired from the Board and as Senior Independent Director at the conclusion of the 2018 AGM. Sir Kevin's biography can be found in our Annual Report FY2018.
Committee Chair
I Independent Director
Leadership and purpose Engaging with our stakeholders
Our success in making a safer, more efficient and better connected world depends on effective engagement with all our stakeholders.
Our stakeholders include our shareholders, our people, our suppliers, our customers, regulators, our local communities and the wider society. Our Directors are committed to building and maintaining positive relationships with all of them.
Over the past year we have begun to formally track the Board's interaction with our stakeholders. It is necessary for the Directors to understand their interests and concerns in order for them to factor their views into decision-making.
Board engagement with our shareholders is described on page 82. This table summarises Director interaction with other key stakeholders in FY2019. Board engagement will continue to develop, and we have disclosed some of our plans for FY2020.
The annual Smiths Excellence Awards recognise achievement by colleagues across the Group. The award categories are: Customer Excellence, People Excellence, Production Excellence, Technology Excellence, Programme Excellence, Supply Excellence, Health, Safety & Environment, Our Communities, Leadership Excellence, Inspiring Individual, and the Innovation Award. The highest honour is the award of the Smiths Cup.
The awards are hosted by our Chief Executive, and the Non-executive Directors were briefed on the event through regular updates. In FY2019 the number of entries doubled to c.600 from across the Group. At least one Non-executive Director will attend our Excellence Awards in FY2020, to continue to enhance workforce engagement and to gain more insight into the initiatives launched to support our stakeholders.
We work to attract, retain, engage, develop and inspire the best people. Our people are critical to our success and the Board must engage with and understand their views.
– Non-executive Director activity included:
We work closely with our customers, one of the pillars of our shared operating model, the Smiths Excellence System (SES), to deliver innovative products and value-adding support.
We build strong, strategic supplier relationships to deliver quality, efficiency and flexibility.
Our Directors must consider the impact of the Group's operations on communities and the environment. We build strong relationships and engage our people by getting involved in local communities.
Leadership and purpose Relations with our shareholders
A strong relationship with shareholders is essential for the success of any company.
The Board is kept informed of investor views through the distribution of analyst and broker briefings, and after meetings with major or prospective shareholders the Chief Executive circulates written updates to the other Directors to ensure that they are all aware of major shareholders' views.
In FY2019, senior management and the investor relations team had contact with over 125 investors and analysts.
Annual results and investor roadshow DECEMBER 2018
Goldman Sachs Industrials Investor Relations Conference
Paris Investor Relations roadshow
MARCH 2019
Interim results and investor roadshow MAY 2019
Frankfurt Investor Relations roadshow JUNE 2019
Stifel 2019 Cross Sector Insight Conference
JUNE 2019 JPM Capital Goods Conference
SEPTEMBER 2019 Annual results and investor roadshow
The Chief Financial Officer and the Group Treasury Director meet and communicate proactively with committed lending banks and the rating agencies on a regular basis. Committed banks are invited to the results presentations. This enables them to keep informed of business strategy and to meet senior management. Board members are kept informed of the current credit views of debt investors and the rating agencies through regular commentary and financial metric reporting at Board meetings.
The Directors consider our AGM an important opportunity to engage with shareholders, who are invited to ask questions during the meeting, and have the opportunity to meet Directors before and after the formal proceedings. It is also an opportunity for shareholders to vote on certain aspects of Group business in person after hearing from the Chairman, Chief Executive and Chief Financial Officer.
All Directors attended the 2018 AGM and all resolutions were passed with at least 90% of votes in favour apart from the approval of the Remuneration Policy (81.61%) and the re-election of Noel Tata as a Director (82.97%). All resolutions are voted on separately and the final voting results are published after the meeting.
The 2019 AGM will be held on Wednesday 13 November. The Notice of AGM can be found in a separate document which is sent out at least 20 working days before the AGM and made available on our website. All Directors are expected to attend. Shareholders who are not able to attend the AGM in person are encouraged to vote by appointing a proxy and issuing voting instructions. This year, for the first time, the AGM will be webcast and can be viewed by registering on our website.
More information about the AGM and Equiniti, the Company's Share Registrar, can be found on the back page of this Annual Report.
At 31 July 2019, the Company had been notified under the Financial Conduct Authority's Disclosure Guidance & Transparency Rules, or had received disclosures pursuant to the Companies Act 2006, of the following holdings of voting rights in its shares:
| Number of voting rights |
% of total voting rights |
Date of notification |
|---|---|---|
| BlackRock, Inc. | ||
| 23.3m | 5.9% | 31 May 2018 |
| Ameriprise Financial, Inc. | ||
| 20.8m | 5.3% | 3 October 2018 |
| Harris Associates L.P. | ||
| 19.7m | 5.0% | 22 July 2019 |
| Dodge & Cox | ||
| 19.6m | 4.9% | 27 February 2019 |
| Jupiter Asset Management | ||
| 14.8m | 3.8% | 22 September 2016 |
No further notifications were received between 1 August and 16 September 2019.
SMITHS GROUP PLC Annual Report FY2019 83
Our Board is comprised of a majority of independent Directors whose diverse backgrounds and experience enable appropriate challenge at Board and Committee discussions. A biography for each Director can be found on pages 76 to 79.
The Board has approved a governance framework of systems and controls in order to effectively discharge its collective responsibilities. This framework supports our Directors' compliance with their duty to promote the success of the Company under section 172 of the Companies Act 2006 (the Act). Information about how this duty has been performed by our Directors is summarised below. The Board is responsible for creating sustainable value for our shareholders, but in order to ensure the long-term success of the Group the Directors also consider the interests of wider stakeholders.
During the year, in the light of the 2018 Code coming into force, the Board reviewed its governance framework and the delegation of specific authorities to its three principal Committees, the Nomination, Audit and Remuneration Committees. Subsequently the Board determined that the Nomination and Audit Committees should be renamed the Nomination & Governance and the Audit & Risk Committees respectively. The name changes more accurately reflect the remit of those Committees and the Terms of Reference for all Committees, which were reviewed during the year, can be found on our website.
During the year a Transaction Committee was established in order to provide support and oversight of the separation of Smiths Medical in between Board meetings. The members of the Transaction Committee, which is not a formal committee of the Board, are Bill Seeger (Senior Independent Director), Mark Seligman (Chair of the Audit & Risk Committee) and Bruno Angelici. The Committee is supported by the management team responsible for leading the separation process.
The Board is ultimately accountable to our shareholders, and is responsible for ensuring that management actions are aligned with their interests. The Board supports this by setting the Group's purpose, culture, and our shared values of Passion, Integrity, Respect, Ownership and Customer Focus. The Board is responsible for approving the Group strategy, as recommended by the Chief Executive, and overseeing its implementation, while monitoring the internal controls, risk management and the viability of the Company.
The Chief Executive is responsible for the day-to-day management of the Company and for leading the Executive Committee. Our Executive Committee and brief biographies are shown on page 18. Full biographies can be viewed on our website. Executive management implement the Group's strategy and provide the Chief Executive, and the Board as a whole, with the information they need to make decisions that will determine the long-term success of the Group.
A director of a company must act in the way they consider, in good faith, would most likely promote the success of the company for the benefit of its shareholders. In doing so the director must have regard to other matters including:
The Board's engagement with employees, suppliers and customers in FY2019 is explained in the stakeholder engagement model on pages 80-81.
The Directors receive regular reports on Health, Safety and Environment and Security to support their consideration of the impact of their decisions on our community and the environment. Further information can be found on the Board activities pages 86-87.
Ensuring high standards of business conduct is critical for the success of the Group. The Directors receive reports from the Ethics and Compliance team and our Non-Financial Information Statement (on page 61) identifies policies and guidelines governing our approach to anti-corruption, anti-bribery, social matters and human rights.
Consideration of the long-term impact of decisions is integral to the approval of strategy, and our strategic progress in FY2019 is disclosed with the Board activities over the year.
There is a schedule of matters which are considered significant to Smiths and have therefore been reserved for the decision of the Board. This is due to their strategic, financial or reputational implications or consequences. The formal schedule can be found on our website and includes:
The Chairman sets the agenda and determines the style and tone of discussions at Board meetings. At each scheduled Board meeting the Chief Executive and Chief Financial Officer present separate progress reports, detailing business performance and progress against strategy. These are supplemented by monthly performance updates from the Chief Executive to the Board.
To ensure that the Board is kept up to date with management priorities and challenges, invitations to Board meetings are extended to divisional presidents, business managers and heads of functions. The attendance of senior executives also supports executive succession planning. External advisors are invited to attend as necessary. Director attendance at Board and Committee meetings in FY2019 is set out below.
In FY2019, Board meetings were held in the London and Minneapolis offices, and the annual two-day strategy offsite meeting took place in France.
Convening Board meetings in different locations allows the Directors to visit our operations and gain a deeper insight into the culture of our divisions, and to discuss the business with employees directly.
To ensure the continued effectiveness of the Board, the Chairman meets the Nonexecutive Directors without the Executive Directors present after each Board meeting. He also has separate meetings with the Senior Independent Director and the Remuneration Committee and Audit & Risk Committee Chairs. In order to consider the Chairman's performance, at least annually the Senior Independent Director consults with the other Non-executive Directors without the Chairman present.
| Board1 | Nomination & Governance Committee |
Audit & Risk Committee | Remuneration Committee | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Attended | Eligible to attend |
Attended | Eligible to attend |
Attended | Eligible to attend |
Attended | Eligible to attend |
||
| Chairman | |||||||||
| Sir George Buckley | 6 | 6 | 3 | 3 | – | – | 4 | 4 | |
| Executive Directors | |||||||||
| Andy Reynolds Smith | 6 | 6 | – | – | – | – | – | – | |
| John Shipsey | 6 | 6 | – | – | – | – | – | – | |
| Non-executive Directors | |||||||||
| Bruno Angelici | 6 | 6 | 3 | 3 | 4 | 4 | 4 | 4 | |
| Olivier Bohuon2 | 5 | 6 | 2 | 3 | 3 | 4 | 3 | 4 | |
| Dame Ann Dowling3 | 6 | 6 | 3 | 3 | 3 | 3 | 3 | 3 | |
| Tanya Fratto | 6 | 6 | 3 | 3 | 4 | 4 | 4 | 4 | |
| Bill Seeger | 6 | 6 | 3 | 3 | 4 | 4 | 4 | 4 | |
| Mark Seligman | 6 | 6 | 3 | 3 | 4 | 4 | 4 | 4 | |
| Noel Tata | 6 | 6 | 3 | 3 | 4 | 4 | 4 | 4 | |
| Former Directors | |||||||||
| Sir Kevin Tebbit4 | 2 | 2 | 0 | 0 | 2 | 2 | 1 | 1 |
1 In addition to six scheduled Board meetings there were three ad-hoc meetings called at short notice. Tanya Fratto had a pre-existing commitment and was unable to attend one of
2 Olivier Bohuon was unable to attend the March Board and Committee meetings due to a prior commitment arranged before he joined the Board.
3 Dame Ann Dowling joined the Board on 19 September 2018.
4 Sir Kevin Tebbit retired from the Board on 14 November 2018.
those meetings.
Board activity is focused on executing our strategy while ensuring our processes continue to deliver excellence.
– Approval of the Board's stakeholder engagement framework, including the approach to workforce engagement. For more information see pages 80-81
THE DIVERSITY OF THE BOARD AND THE TALENT PIPELINE ARE CRITICAL FOR THE FUTURE SUCCESS OF THE BUSINESS."
The Nomination & Governance Committee reviews and makes recommendations to the Board on the structure, size and composition of the Board and its Committees. In fulfilling this role, the Committee considers the balance of skills, knowledge, experience and the diversity of gender, social and ethnic backgrounds, while having regard to the need to ensure the effective functioning of the Board at all times. The Committee also considers Director and senior management succession planning.
In FY2019 the remit of the Committee was extended to cover oversight of the Group's governance framework and performance against the Diversity & Inclusion Plan. The name of the Committee has been updated accordingly to reflect its expanded role.
The members of the Committee and their meeting attendance during the year is set out on page 85. The Chief Executive is normally invited to attend Committee meetings and has attended each of the meetings in FY2019. Other members of senior management are invited to attend as necessary.
In FY2019, the performance of the Committee was considered as part of the internal Board evaluation process. A number of minor recommendations were made to enhance the Committee's operation, and overall it was confirmed that the Committee continues to operate effectively.
Smiths supports the principles of the Hampton-Alexander and Parker reports on gender and ethnic diversity and will work to achieve a diverse Board and, just as importantly, diverse management teams. Members of the Board and senior management should collectively possess a diverse range of skills, expertise, national birthplace, domain knowledge and ethnic and societal backgrounds. These are important ingredients for the effective operation of the Board and oversight of the Group. As a multinational Group with operations in more than 50 countries and over 95% of revenues originating outside the UK, diversity of thought and background is essential and will remain one of the key criteria by which candidates are selected for the Board and the pipeline for senior leadership positions.
In recognition of the value of diversity, the Board seeks to ensure that at least 50% of its members have a birthplace or
background outside the UK and that no less than 40% of the Board is comprised of female plus historically underrepresented ethnic groups by 2020. The Board will always seek to appoint the best qualified candidate, but between two candidates of equal merit the Board will, in recognition of the policy, give preference to any gender or background disproportionately under-represented on the Board.
In order to help achieve these aspirations Smiths endeavours to only use the services of executive search firms who have signed up to the Voluntary Code of Conduct on gender diversity. Executive search firms will also be required to ensure non-UK nationals, women and candidates from historically under-represented ethnic groups are represented on the shortlist for all Board positions.
The Board Diversity Policy was approved by the Board in September 2018.
At the date of this report 60% of our Directors had a birthplace or background outside the UK, and 30% of our Directors meet the combined measure of gender and ethnic diversity. Pam Cheng will join the Board as a Non-executive Director on 1 March 2020, when birthplace or background will increase to 64% and gender and ethnic diversity will increase to 36%, ensuring good progress towards our 2020 target of 40%. Gender balance will increase to 27% female and 73% male.
Diversity information for the Board, Executive Committee, senior managers and the Group as a whole can be found on page 51. The Committee will look to extend its work on diversity to senior leadership positions in the business and across the Group through oversight of the Smiths Diversity & Inclusion Plan, which is available on our website and is due to be considered by the Committee in FY2020.
The Board keeps the independence of the Non-executive Directors under continuous review. Following Bill Seeger's appointment as CFO on an interim basis during FY2017, the Board determined him to be independent in May 2018, but he did not re-join the Audit & Risk Committee until after the publication of the FY2018 annual results in September 2018. Sir Kevin Tebbit retired as Senior Independent Director at the 2018 AGM, having served on the Board for 12 years.
In July 2019, the Committee assessed the performance and independence of each of the Non-executive Directors, and concluded that each of them contributed effectively to the operation of the Board. In considering the Directors' independence, the Committee reviewed the guidance contained in the 2018 Code.
1-2 years 3 (30%) 3-5 years 3 (30%) Over 5 years 4 (40%)
Bruno Angelici was appointed as a Director on 1 July 2010 and, as he has served on the Board for more than nine years, a particularly rigorous review of his performance and independence was undertaken. The Board concluded that he continued to demonstrate the qualities of objectivity and independence, and contributed to constructive challenge and debate at meetings. It was therefore agreed that his independence had not been impacted by his tenure on the Board and that due to the considerable strategic changes facing the Group, in particular the separation of Smiths Medical, he should continue as an independent Non-executive Director to assist with the successful separation. It is anticipated that Bruno will stand down from the Board at a mutually agreed date when the separation is largely achieved. Tanya Fratto has served on the Board for seven years. As such, her continued objectivity and independence were also subject to rigorous review. It was agreed that she continues to be independent and objective.
All Directors must allocate sufficient time to their work in order to discharge their responsibilities effectively, particularly in a time of significant change for the Group. The expected time commitment of 25 days per annum is set out in the letter of appointment issued to Nonexecutive Directors when they join the Board. This includes time preparing for and attending Board and Committee meetings, attending the AGM and meeting with stakeholders as required, participating in the Board evaluation process and making time to familiarise themselves with business priorities and challenges. Additional time commitment is required during a Director's induction phase. As plans for the separation of Smiths Medical progress, it is likely that the time commitment expected from the Board will be more than usual.
Executive Directors are not permitted to take on more than one non-executive directorship in a FTSE 100 company, or other significant appointment. They are not permitted to take on the chairmanship of a FTSE 100 company.
The Directors' other significant commitments are detailed in their biographies on pages 76-79 and the Board considers these twice a year. In FY2019 the Board concluded that the Chairman and the Non-executive Directors devoted sufficient time to fulfil their commitments to Smiths. Particular consideration was given to Sir George Buckley and Noel Tata's other commitments.
Sir George has several other external appointments. During the year he stepped down from the Board of PepsiCo, Inc. Following due consideration, the other Directors confirmed that he continues to demonstrate commitment to his role as Chairman and as a member of the Board. Sir George attended and fully participated in every scheduled and ad-hoc Board and Committee meeting and is always available for consultation with management when required.
Noel is Managing Director of Tata International Limited, a trading arm of the Tata Group (a privately-owned multinational group of companies). In order to fulfil his executive responsibilities he is also director of various Tata Group companies. The Board believes that these appointments do not prevent him from committing sufficient time to his work as a Director, as evidenced by his full attendance and effective participation at all Board and Committee meetings held in the year. Noel brings valuable and distinct experience to Board discussions, as a current executive with contacts in higher growth countries which are a strategic focus for Smiths.
There was unanimous support from the Board to recommend to shareholders the re-election of Sir George Buckley and Noel Tata.
All of our Directors participate in an induction programme on joining the Board to ensure that they are able to contribute effectively to discussion and decision-making. Each induction programme is tailored to provide the individual Director with the necessary knowledge and understanding of the Group, based on their personal experience and background. Normally a new Director will meet with the Chairman, the Company Secretary, Non-executive Directors and Executive Committee members, including the divisional presidents, and other senior executives. To provide an insight into the Group's strategy, culture and values, extensive information about the Group is made available to new Directors. This includes access to previous Board papers and minutes.
Dame Ann Dowling joined the Board at the start of FY2019 and her induction programme continued throughout the year. Dame Ann Dowling met the Ethics and Compliance and Government Relations teams in Washington and visited our Smiths Detection site in Hemel Hempstead, the John Crane office in Chicago and the Flex-Tek site in Nashville.
The Board recognises the importance of ongoing training and our Directors are given the opportunity to update their skills and experience on a regular basis. Following his appointment as Senior Independent Director at the 2018 AGM, Bill Seeger received formal training on the role and responsibilities of the position. The training covered his duties relating to the Chairman, shareholders and the other Directors. Particular focus was given to the enhanced role he will have during the Smiths Medical separation, including being available to meet with shareholders to develop an understanding of their views and hear any concerns. Bill will also be a sounding board for the Chairman and the Chief Executive during this time of significant change for the Group.
In order for the Directors to remain aware of business priorities and external developments, the Board is provided with formal reports and updates from the divisions and external advisors. The Company Secretary prepared a Governance Report for each scheduled meeting in FY2019, covering topics such as UK Corporate Governance Reform. At the annual performance evaluation any individual development needs are discussed with Directors. The Directors are all obliged to complete online training on the Code of Business Ethics, information security and anti-bribery and corruption.
In order to operate effectively our Directors receive accurate, timely and high-quality information. This supports their ability to make sound decisions and provide appropriate advice and challenge. The Company Secretary and his team assist the Chairman and Chief Executive in ensuring effective information flows and that the Board is provided with all relevant information. There are procedures in place to ensure that information the Board receives is presented in an appropriate format and contains the level of detail required for Directors to fulfil their responsibilities effectively.
Our Directors must avoid situations where they have a direct or indirect interest that conflicts, or may possibly conflict, with the best interests of Smiths. In accordance with the 2018 Code, the Board must now approve any new external appointment before a Director accepts such appointment, whether it amounts to a conflict or not. The Board has the authority to authorise conflicts and potential conflicts in accordance with our Articles of Association and the Act, and as set out in the Matters Reserved to the Board which are available online.
The Company Secretary maintains a Register of Conflicts which forms the record of actual and potential conflicts that exist, and the Board authorisation granted. The Board formally reviews the Register in September and March each year, and retains the power to vary or terminate any authorisation previously provided.
All of our Directors have access to the advice and services of the Company Secretary, and are able to seek independent professional advice at Smiths' expense to enable them to fulfil their obligations as members of the Board. In addition, the Directors and Officers of Smiths and its subsidiaries have the benefit of a Directors' and Officers' liability insurance policy.
During FY2019, and at the date of this report, qualifying third-party indemnity provisions (as defined by section 234 of the Act) have remained in force for the Directors of the Company and certain other employees in respect of their directorships of some subsidiary companies in relation to certain losses and liabilities which they may incur (or may have incurred) to third parties in the course of their professional duties for the Company, or a subsidiary.
Each year our Directors are subject to election or re-election by shareholders at the AGM. Non-executive Directors are appointed for a specified term of three years, subject to annual re-election at the AGM. Re-appointment for a second three-year term is not automatic, and any term for a Non-executive Director beyond six years is subject to a particularly rigorous review.
As noted above, our Chairman, on behalf of the Board, has confirmed that each Non-executive Director standing for re-election at this year's AGM continues to be an effective member of the Board, and has demonstrated the commitment required.
The rules regarding the appointment and replacement of Directors are determined by our Articles of Association and the Act. The Articles of Association can be found on our website and can only be amended by a special resolution of shareholders.
An effective Board is essential to deliver the Group's objectives and long-term sustainable results for all stakeholders.
Each year an evaluation of the Board, its Committees and each individual Director is conducted to monitor the effectiveness of each and to help identify any improvement opportunities. The Board evaluation is externally facilitated at least every three years.
The FY2018 evaluation of the Board was conducted by Independent Audit Limited, who were appointed following a competitive tender. Independent Audit has no other connection to the Group, and the objective was to build on the FY2017 process and enhance the Board's support for the delivery of the Group's growth strategy.
The evaluation was focused on Board and Committee dynamics, strategic development, people and culture, and risk. Independent Audit held interviews with the Board, certain members of the Executive Committee, senior managers and external advisors, and presented their final report to the September 2018 Board meeting.
While there is always different colour and preference in the opinions of Board colleagues, Independent Audit felt that the Board and its Committees were operating effectively and demonstrated many strengths. These included a high level of trust and respectful interaction between the Directors, well run Committees, effective assurance and clear reporting, active and constructive contribution to strategy formulation, and proper attention to the necessary Board processes. The findings are set out in more detail on this page, including areas where Independent Audit felt the Board could be improved.
The suggestions and observations made by Independent Audit were discussed by the Directors who then agreed an action plan to address them. The disclosures made in this section of the Annual Report have been agreed with Independent Audit.
The FY2019 internal review focused on building upon the findings of the FY2018 external review and reviewing how the Board had handled key issues such as the decision to separate the Smiths Medical division.
The evaluation consisted of an externally facilitated questionnaire provided by Independent Audit which was completed by each of the Directors. The questionnaire sought to assess how well the Board handled the fundamental role it plays, its dynamics, and coverage of strategy and risks. Separate parts of the questionnaire covered each of the Board's Committees. The results were considered at the July 2019 Board meeting, and overall the Directors believe that the Board and its Committees continue to function effectively, but there were areas where they agreed process could be enhanced. These centred on continuing to embed and develop succession planning processes, the factors taken into consideration when making strategic decisions, and better communication with Non-executive Directors.
Strategic decisions involve the consideration of many of different factors and the Board wanted to ensure that these factors were all raised in a timely manner and in sufficient detail. Ways to ensure this happens on a consistent basis, and that the general flow of information and exchange of ideas between management and the Board improves, are currently under consideration. Succession planning was a recurring theme from the FY2018 external evaluation and will continue to be an area of focus next year. Shortlists for Board appointments are of good quality, but for management succession planning the Board wanted more insight into the talent pipeline within the Group. This has been addressed though increased oversight of the Group's talent management processes at the Nomination & Governance Committee.
The FY2020 process will be conducted internally and will seek to build on these areas and any other matters the Board may raise during the year.
The principal role of the Committee is to assist the Board in fulfilling its oversight responsibilities in relation to financial reporting, financial controls and audit, risk and internal controls. The Committee also manages the relationship with the external auditor, including making recommendations to the Board and our shareholders in relation to the reappointment of the external auditor.
In addition, the Committee oversees the Group's Ethics and Compliance annual work programme and investigates any material ethics and compliance issues that may arise.
The annual evaluation of the performance of the Committee was conducted as part of the overall annual evaluation of the performance of the Board. The findings relating to the Committee were discussed with the Committee. Overall, the Committee is considered to be performing well, and is rigorous and effective in discharging its responsibilities.
I am pleased to present the Committee's report for FY2019. The Committee fulfils an important oversight role, monitoring the integrity of the Group's financial reporting and the effectiveness of its system of internal control and risk management framework.
A key stakeholder supporting this oversight is the external auditor. During the year, in addition to fulfilling its normal programme of work, the Committee focused on concluding the external audit tender described in last year's Annual Report. This resulted in KPMG being selected as the auditor for FY2020. I would like to thank PwC for their professionalism during this period.
The UK audit industry is the subject of considerable reform with a number of independent reviews being undertaken. The delivery of a high-quality audit is essential and so we welcome these reviews and the opportunity to participate in the debate. During the year, we submitted responses to the Competition and Markets Authority's Statutory Audit Services Market Study Update Paper and also the Call for Views for Sir Donald Brydon's review into the quality and effectiveness of audit. Any changes made to the industry will have a bearing on the operation of the Committee and our auditor, and so we continue to monitor the situation keenly.
During the year, the Committee also discharged its responsibility for oversight of the Group's financial and nonfinancial control environment and the associated risk management framework. More information can be found in this report and the Risk section on pages 62 and 63.
I'd like to thank my colleagues on the Committee for their contribution during the year and I look forward to continuing our work in FY2020.
CHAIR OF THE AUDIT & RISK COMMITTEE
The Committee met four times during FY2019, with three meetings timed to align with the financial reporting and audit cycles of the Group, namely: the approval of the Annual Report and Accounts in September; the approval of the half yearly results in March; and the presentation of the pre-year-end 'early warnings' report from the external auditor, PwC, in July. A meeting was also held in November 2018 at which the Committee undertook, amongst other things, a review of the Group's insurance strategy.
All members of the Committee who served during the year are, in the view of the Board, independent Non-executive Directors and collectively have recent and relevant financial, accounting and sector experience gained from their respective experience. Committee member biographies and attendance at meetings during the year can be found on pages 76-79 and 85. In particular, the Board considers that Mark Seligman, who has a long history in corporate finance and experience of other listed company audit committees, as well as being a qualified accountant, has the recent and relevant financial experience required to Chair the Committee. At the invitation of the Chair of the Committee and in order to maintain effective communications, the Chairman, Chief Executive and Chief Financial Officer and the audit partners of PwC attended all meetings. Other regular attendees included the heads of the finance, internal audit and Ethics & Compliance functions. Divisional senior management were also invited to attend as appropriate. At the conclusion of meetings, PwC and the Director of Internal Audit were each given the opportunity to discuss matters with the Committee without executive management being present.
The heads of internal audit and Ethics & Compliance, together with PwC have direct access to the Committee should they wish to raise any concerns outside formal Committee meetings. The Chair of the Committee reports formally to the Board on the Committee's activities after each Committee meeting.
The Committee is responsible for reviewing the half yearly results announcements and the Annual Report and Accounts before recommending them to the Board for approval. During the year, the Group has had internal control and risk management arrangements in place to support the financial reporting process and provide reasonable assurance that the financial statements are prepared in accordance with applicable standards. These arrangements include seeking divisional confirmation that their reported information gives a true and fair view of the results for the period, and ensuring that record keeping allows an accurate and fair reflection of transactions.
For the period under review, the Committee has considered information presented on significant matters of judgement, accounting estimates, and the interpretation of reporting standards in the adoption of policies. It has discussed with PwC its audit reports and noted the key accounting matters and significant judgements highlighted in respect of the financial statements. The Committee has examined key points of disclosure and presentation to ensure the adequacy, clarity and completeness of the Annual Report and Accounts for FY2019 and the half yearly results announcement. It has also reviewed various materials to support the statements on risk management and internal control; going concern; and the assessment of the Group's long-term viability – see pages 71 and 72 for more details.
In addition, the Committee assessed the fairness, balance and understandability of the Annual Report, and in doing so considered:
Following its review, the Committee agreed that the Annual Report is representative of the year and presents a fair, balanced and understandable overview, providing the necessary information for shareholders to assess the Group's position, performance, business model and strategy.
An important responsibility of the Committee is to review and agree the most significant management judgements and issues which impact the financial statements. The key areas of judgement in the year are set out below. After receiving reports on the significant issues and areas of judgement and after discussion with PwC, the Committee agreed that the judgements made were appropriate and are correctly reflected in the Annual Report. More detailed information on the Group's Accounting Policies can be found on pages 139 to 146.
The Committee reviewed the impact of the adoption of IFRS 15 'Revenue from Contracts with Customers' including the interpretation judgements made in drafting the Group's revenue recognition policies. The Committee also supported simplified presentation of divisional revenue segmentation. See note 1 of the financial statements.
The Committee reviewed the treatment and presentation of a number of transactions including the United Flexible acquisition, an adjustment following completion of the post-acquisition review of Seebach GmbH and the disposal of Smiths Medical's sterile water bottling business. The treatment of Smiths Medical as a discontinued operation held for distribution was also discussed and agreed. The Committee also considered the treatment of acquisition integration costs for Morpho Detection and United Flexible, and disposal and separation costs between headline and non-headline.
The assets and liabilities recognised in income and deferred tax, as well as the treatment of losses in the UK, were assessed. Particular focus was given to the recognition of UK deferred tax assets; deferred tax assets relating to the John Crane, Inc. asbestos provision; and the Titeflex Corporation CSST provision. Following the separation of Smiths Medical the future Smiths UK Group is anticipated to be in a structural loss-making position from a tax perspective. Therefore UK deferred tax assets will be derecognised at the end of F20Y19 save to the extent that accounting rules require them to be recognised. See note 6 of the financial statements.
The intangible assets and the assumptions used to justify their carrying values, including 'value in use' were reviewed. As specifically noted in the Annual Report FY2018, the Smiths Interconnect and Flex-Tek divisions are now considered single cash generating units (CGUs) for impairment testing purposes. The applicable discount rate used for impairment testing purposes was considered particularly where headroom had reduced in the year. This headroom decline was driven by a more conservative impairment model whereby certain forecast cash-flows were removed from future years. The carrying value of capitalised development expenditure was reviewed and the treatment was considered reasonable due to the planned timing of new product launches and projected future cash-flows.
The Committee continued to monitor expert assessments on the Group's exposure to the John Crane, Inc. asbestos litigation and to the Titeflex Corporation CSST claims. In particular, the Committee considered the treatment of potential liabilities and the changes to the assumptions made in calculating the provisions, including the the time period for the Titeflex Corporation CSST provision and the continued appropriateness of the ten-year time period for John Crane, Inc. asbestos litigation. In the case of the John Crane, Inc. asbestos litigation, the Committee also agreed with the judgement that, whilst large numbers of claims are made against John Crane, Inc. and other defendants every year, trials are extremely rare, such that a sufficiently reliable estimate cannot be made to cover the full period over which it is expected that costs will be incurred. In both these cases, it was determined that the assumptions fairly reflect the position. See note 22 of the financial statements.
The Committee reviewed and agreed the methods, assumptions and benchmarks used by the actuaries to calculate the position of the UK and US schemes at 31 July 2019, which have continued to show a net accounting surplus position. The Committee agreed the treatment and the corresponding disclosures on these matters. See note 8 of the financial statements.
Judgements within working capital, including the level of inventory and provisions and overdue receivables were reviewed. Following adoption of IFRS 9: Financial Instruments and the associated necessary accounting policy the Committee also reviewed the impact of introducing an expected credit loss model on the Group's receivables provisioning. See the Accounting Policies section of the financial statements.
The Committee considered the policy, presentation and judgements in relation to the Group's performance, in particular the separation of headline and non-headline items and consideration of which items related to the Group's ongoing trading activity or those which should be recorded as non-headline. Due to its scale and the extent of the disclosures required, the presentation of Smiths Medical as a discontinued operation held for distribution was a particular focus. Other items included the amortisation of intangible assets and the impact of integration activity on acquired entities and material one-off items relating to pensions and other legacy provisions. In addition, the Committee also considered those judgements in connection with items to be reflected or adjusted in underlying performance. See note 3 to the financial statements.
The Committee places great importance on the quality, effectiveness and independence of the external audit process. PwC or a predecessor firm have been the Company's external auditor since 1997. Andrew Kemp, the current audit partner, has led the engagement for five years. In respect of the period, the Committee approved and monitored PwC's execution of the audit plan. The Committee also considered PwC's report on its review of the FY2019 interim results announcement and its 'early warnings' report on the FY2019 audit. It also discussed any significant issues identified, PwC's final report on the FY2019 audit including the key accounting and audit judgements taken by management and management's responses to any audit findings.
The Committee confirms that the Company has complied with the provisions of the the Statutory Audit Services Order 2014 relating to the UK audit market for large companies throughout the year under review and as at the date of this report.
The Committee is responsible for the implementation and monitoring of the Group's policies on external audit, which are designed to maintain the objectivity and safeguard the independence of the external auditor. These policies are reviewed annually. They cover the engagement of the external auditor for non-audit services and the appointment by the Group of former employees of the external auditor. The policies correspond with the European Commission's recommendations on the auditor's independence and with the Revised Ethical Standard issued by the Financial Reporting Council in the UK.
Notwithstanding developing practice being adopted by audit firms not to provide non-audit services to audit clients, the Committee recognises that certain nonaudit services can be completed more efficiently by, and be purchased more costeffectively from, the incumbent auditor
due to the audit firm's existing knowledge of the Group and its systems. Under the policy approved by the Committee, it has delegated its responsibility for authorising the purchase of non-audit services from the external auditor to the Chair of the Committee and/or the Chief Financial Officer within specific limits.
Details of the fees paid to PwC for the year ended 31 July 2019 can be found in note 2 to the financial statements on page 151. Non-audit fees as a percentage of audit fees totalled 4% (FY2018: 5%). The Group would not expect in the ordinary course of business for non-audit fees to exceed 20% of the average of the previous three years' total Group audit fees unless exceptional circumstances existed. The Committee confirms that the non-audit work performed by PwC during the year was properly assessed and authorised in accordance with the Group Policy.
In addition to monitoring compliance with Group policies, the Committee's review of PwC's independence included examining written confirmation from PwC that they remained independent and objective within the context of applicable
As set out in the Annual Report FY2018 the Committee concluded a tender for the external audit in November 2018. Following evaluation of each firm participating in the tender against agreed evaluation criteria, the Committee recommended its first and second choice firms to the Board for appointment. In making its recommendation the Committee agreed that KPMG was likely to deliver a high-quality audit aligned to the Smiths business model and specific risks, facilitated by the greater use of technology. The Committee further noted KPMG's significant commitment to improve audit effectiveness following regulatory criticism, and was assured that the audit would therefore be carried out to the highest possible standard with appropriate levels of challenge and scepticism. The recommendation was free from third party influence and
professional standards, and considering the performance and tenure of the audit engagement partner, who is required to rotate every five years in line with ethical standards.
Audit effectiveness is assessed continually using a number of measures including: reviewing the quality and scope of the proposed audit plan and progress against the plan; responsiveness to changes in our businesses; and monitoring the independence and transparency of the audit. The Committee also reviewed the performance of PwC and the effectiveness of the audit process by conducting a survey of the Board, senior management and divisional finance teams. The survey included questions on independence and objectivity, audit strategy and planning, conduct and communication, audit findings and feedback, and expertise and resourcing. The results were positive and the Committee concluded that PwC and its audit process were effective, and that audit teams continued to provide effective and objective challenge.
no restrictive clauses were imposed on the Committee or the Board. The Board endorsed the Committee's recommendation and a resolution recommending KPMG's appointment will be proposed at the 2019 AGM. During the year the Committee has overseen the activity necessary to transition the audit to KPMG, including establishing independence by exiting pre-existing non-audit services engagements. This allowed KPMG to shadow PwC's audit of the FY2019 results to support an orderly handover. The Committee also discussed the findings of the FRC's 2019 Audit Quality Inspection Report in respect of KPMG with the proposed audit partner, Mike Maloney, and agreed that there was no reason why KPMG's appointment should not be recommended to shareholders.
The Committee also noted the findings in the FRC's 2019 Audit Quality Inspection Report. PwC was provided with an opportunity to describe the activities being undertaken to address the findings.
The Board is responsible for ensuring that there are sound risk management and internal control systems in place. The Executive Committee is responsible for designing the risk management and internal control systems and ensuring they are effectively deployed throughout the Group. The internal control system is a framework to manage risks and monitor compliance with procedures. It is designed to meet the Group's particular needs and the risks to which it is exposed. However, it can provide only reasonable, not absolute, assurance against material loss to the Group or material misstatement in the financial statements. More detail can be found on pages 62 and 63.
In FY2019, the Committee, on behalf of the Board and with the assistance of the Internal Audit function, monitored, reviewed and assessed the effectiveness of the Group's risk management and internal control systems in the context of the Group's strategy, business model and risk appetite. The Committee also carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity. A description of the principal risks facing the Group and how these were reviewed to assess the Group's viability can be found on pages 62 to 70 and 71 and 72.
In fulfilling its responsibilities, the Committee received reports to enable an evaluation of the control environment and risk assurance framework and processes. No significant failings or weaknesses were identified. It also received reports from each of the divisions on the risk management process and an analysis of their own risk registers. This enabled the Committee to understand the risks and
opportunities and assurance processes throughout the business and the potential impact on the Group.
The Committee also undertakes deepdive reviews on a rolling basis of the Group's principal risks. During FY2019, deep-dives were carried out on: not operating in the right markets (with a focus on Asia); supply chain – manufacturing concentration; and supply chain – sole source. The two supply chain risks were subsequently merged to form the new principal risk of 'integrated supply chain'. Separately the full Board considered the people, technology and cyber security principal risks.
Internal Audit is independent of the business, and as such has no responsibility for operational business management. This ensures the integrity and objectivity of its annual Audit Plan, which is approved by the Committee. The authority of the Internal Audit function is derived from the Committee.
The Director of Internal Audit is accountable to the Board through the Chairman of the Committee, although administratively the Director of Internal Audit reports to the Chief Financial Officer. In order to carry out the responsibilities, as set out in a charter approved by the Committee, the Internal Audit function has:
During the period the Committee received progress reports on the execution of the FY2019 Internal Audit Plan and discussed recommendations made by the Internal Auditor. The Committee also considered the remit of Internal Audit, its budget and resources and the nature and extent of any outsourcing to specialist cosource providers. It also approved the FY2020 Internal Audit Plan, including the proposed audit scope, approach, coverage and allocation of resources.
The Committee oversees the performance of the Internal Audit function through the Director of Internal Audit's attendance at Committee meetings and a review of agreed KPIs which are reported to the Committee. In addition, an anonymous survey completed by the Board, management and the external auditor was conducted into the function's effectiveness. As described in the Annual Report FY2018, the Committee also oversaw the implementation of enhancements identified by an independent third party engaged to conduct an effectiveness review of the Internal Audit function. Overall, Internal Audit is deemed to be effective and is seen as a valued assurance function throughout the Group. It is appropriately resourced and conforms with industry standards in its approach.
During the year, the Committee reviewed the Ethics and Compliance work programme, and provided oversight of performance in line with, and investigations into, allegations of noncompliance with the Code of Business Ethics. This included any matters raised through the Group's ethics reporting procedures. During the period, the Committee provided oversight for investigations in respect of three unrelated matters, none of which resulted in material loss to the Group or a detrimental impact on our customers or suppliers. No matters were raised that required the Committee's direct intervention. Accordingly, the Committee considered that the Group's processes and arrangements for employees to report concerns, including anonymously, about any improprieties and any subsequent investigation as necessary, were both appropriate and effective. The Committee receives regular reports on the ratio of anonymous v.s attributed ethics reports. This metric is used to monitor trust in the Group's non-retaliation policy.
Recognising that culture plays a significant role in determining the strength of ethics and compliance performance, the Committee received a report on the Group's framework designed to help monitor culture down to a site level. In particular the framework focuses on monitoring the value of respect. The approach seeks to evaluate the results of various data sets which, when aggregated, may demonstrate low levels of respect. This may then indicate those sites which are at a higher risk of experiencing a serious ethical failure. The Group is then able to target its ethics audits at those sites which are potentially higher risk.
The Committee was also appraised of the results of a third-party audit over the effectiveness of certain Group policies and processes supporting ethics and compliance. The review covered the Group's approach to antitrust compliance and to labour standards. The report concluded that there has been significant progress in strengthening the overall compliance framework and processes around these policy areas from its previous audit conducted in 2016.
In light of its work, the Committee was satisfied that the Group's processes governing financial reporting and controls; its culture; ethical standards; and its relationships with stakeholders continued to be effective. The Committee was also satisfied with the appropriateness and adequacy of the Group's risk management arrangements, internal control framework and three lines of defence model.
OUR OBJECTIVES ARE TO CREATE CLEAR ALIGNMENT BETWEEN REMUNERATION AND SUSTAINABLE, LONG-TERM STAKEHOLDER INTERESTS. WE TAKE ACCOUNT OF SHAREHOLDER VIEWS AND ENSURE THAT PERFORMANCE SUPPORTS THE DELIVERY OF BUSINESS STRATEGY THROUGH TARGETING OUR KEY PERFORMANCE INDICATORS (KPIs)."
Remuneration at a glance p101 Remuneration Policy Report p104 Annual Report on Remuneration (policy implementation) p112 Single Figure Table p113
The Committee is responsible for the Group's overall remuneration strategy and oversees the Group's remuneration policy for Directors and senior management. The Committee seeks to achieve a strategy that attracts, motivates and retains executive management of the quality required to run the Group successfully and that promotes the long-term success of Smiths, while reflecting the views of all stakeholders.
The Committee also approves the service contracts of all Executive Directors and reviews any major changes in Group employee remuneration structures, including the incentive arrangements that apply across the wider population.
I am pleased to present the remuneration report for the year to 31 July 2019.
In the early part of the year we completed our review of how best to align our remuneration policy to the Smiths strategy.
We took the opportunity to introduce a number of changes to the policy, designed to reinforce the alignment between executive remuneration and stakeholder interests and to ensure that performance measures remained closely linked to business strategy. In making these changes we took account of feedback from major investors and shareholder bodies.
The revised Policy was approved by 82% of shareholders at the AGM held on 14 November 2018.
Subsequent to the AGM a number of institutional shareholders and proxy advisers announced new executive remuneration guidelines. We have therefore amended our practice, where applicable, to take account of certain of these new guidelines and other feedback we received from shareholders. As part of this we reviewed and updated our policy relating to withholding and recovery of incentive payments in appropriate circumstances. We are also committing to full consideration of these new guidelines, following consultation with major shareholders, prior to the next Policy review.
There have been no circumstances arising during the year where the Committee felt the need to apply discretion.
Looking forward, we will need to give careful consideration to how the planned separation of Smiths Medical would affect the unvested share plan awards and the incentive plan performance measures.
Bill Seeger CHAIR OF THE REMUNERATION COMMITTEE
| Chief Executive | Chief Financil Officer | |||
|---|---|---|---|---|
| FY2019 | FY2018 | FY2019 | FY20181 | |
| Base salary | 820 | 800 | 525 | 402 |
| Benefits | 54 | 64 | 12 | 9 |
| Retirement allowance | 205 | 200 | 131 | 100 |
| Annual bonus – cash | 405 | 408 | 216 | 177 |
| Annual bonus – deferred shares | 203 | 204 | 108 | 88 |
| Long-term incentives | 2,097 | 1,165 | – | – |
| Performance share award | 346 | 414 | – | – |
| Total | 4,130 | 3,255 | 992 | 776 |
This section of the report sets out our remuneration policy for Directors, which shareholders approved at the AGM held on 14 November 2018 and which is effective for a period of up to three years from this date. Subsequent to the AGM a number of investors and investor advisers introduced new guidelines for executive remuneration. The policy report below sets out where account of these new guidelines has already been taken and where the policy will be reviewed prior to the next shareholder approval of the policy. The remuneration policy can be viewed in the Corporate Governance section of the Company's website.
| Operation | Opportunity | Performance measures |
Response to shareholder feedback and subsequent policy guideline updates |
|---|---|---|---|
| Base salary | |||
| To attract, motivate and retain Executive Directors with the required skills and expertise to deliver the Group's objectives. | |||
| Salaries are reviewed (but not necessarily adjusted) annually and benchmarked against comparable roles at companies of similar market capitalisation, revenues |
Base salaries are adjusted according to the outcome of the annual review and will be disclosed in the Annual Report on Remuneration. |
Not applicable | None required |
| and complexity. The review also takes into account individual performance and experience, the relative performance of the Company and the remuneration policy operated across the Group as a whole. The salary increase date (if applicable) has been changed to 1 October as part of a Group-wide consolidation. |
Salary increases for the Executive Directors will normally be in line with those awarded to Smiths wider employee population. Where increases are awarded in excess of this, for example if there is a material change in the responsibility, size or complexity of the role, or a significant change in the market competitiveness of salary, the Committee will provide the rationale in the relevant year's Annual |
||
| Report on Remuneration. | |||
| Benefits To provide market-competitive benefits to Executive Directors. |
|||
| Benefits comprise car benefit, life assurance and private healthcare |
Benefits vary by role and individual circumstances. |
Not applicable | None required |
| insurance, and other such benefits as the Committee may from time to time determine are appropriate. These |
Benefits in respect of the year under review are disclosed in the Annual Report on Remuneration. |
||
| include, but are not limited to, relocation allowances, as well as any other future benefits made available either to all employees globally or all employees in the region in which the Executive Director is employed. |
It is not anticipated that the costs of benefits provided will increase significantly in the financial years over which this policy will apply, although the Committee retains discretion to approve a higher cost in exceptional circumstances |
(e.g. to facilitate recruitment, relocation, expatriation, etc.) or in circumstances where factors outside the Group's control have changed materially (e.g. market increases in insurance costs).
| Operation | Opportunity | Performance measures |
feedback and subsequent policy guideline updates |
|
|---|---|---|---|---|
| Pensions | ||||
| Enables Executive Directors to save for their retirement in a cost-efficient manner. | ||||
| Executives may choose either to participate in the Company's defined contribution pension plan or to receive a pension allowance in lieu thereof (and |
Pension contributions (or cash allowances in lieu thereof) are set at a level that the Committee considers appropriate having regard to prevailing market practice at |
New maximum level of contribution introduced for any new Executive Directors, in line with general workforce. |
||
| thus arrange their own pension provision). Pension allowances are reviewed periodically to ensure market competitiveness. Base salary is the only element of |
other FTSE 100 companies of similar market capitalisation, revenues and complexity. Pension arrangements for current Executive Directors are set out in the |
The employment contracts of the two Executive Directors provide for a cash allowance of 25% of base salary in lieu of pension provision. Both |
||
| remuneration that is taken into account when determining pension contributions or allowances. |
Annual Report on Remuneration. The maximum level of pension contribution (or allowance in lieu thereof) for new Executive Directors will be in line with the contribution level for the wider workforce in the relevant country. |
Executive Directors have agreed, for FY2020, to freeze the monetary value of the allowance at the FY2019 level, reducing the level of benefit to 24.4% of base salary for FY2020. |
Annual bonus payments are determined based upon performance against measures and targets set by the Committee at the start of each financial year.
After the end of the financial year, to the extent that the performance criteria have been met, up to 67% of the earned annual bonus is paid in cash. The balance is deferred into shares and released after a further period of three years, without further performance or other conditions. Dividends accrue and are payable in cash at the end of the deferral period.
The Committee may use its discretion to adjust payout of the annual bonus to Executive Directors, within the range of the minimum to maximum opportunity, including reducing it down to zero. Such discretion will only be used where the Committee believes that performance against the prescribed targets does not accurately reflect the Company's underlying performance.
Cash payments will be subject to clawback and deferred share bonuses awarded will be subject to malus for a period of three years from the end of the relevant performance year, in case of misconduct or material misstatement in the published results of the Group.
The maximum annual bonus opportunity for Executive Directors is up to 180% of salary.
The annual bonus opportunities for the year under review and the coming year are disclosed in the Annual Report on Remuneration.
Under the financial element of the annual bonus, threshold performance must be exceeded before any annual bonus becomes payable. The percentage payout then increases according to the level of achievement against targets. Payment of 25% of maximum opportunity occurs on achievement of threshold performance and 60% of maximum opportunity on achievement of on-target performance.
Based on a combination of financial and non-financial performance measures linked to short-term objectives. Financial performance will account for no less than 70% of the bonus opportunity and may include, but is not limited to, profit, organic sales growth and cash measures.
Performance against annual bonus targets will now be reported in the report relating to the fiscal year (previously performance was reported the following year).
Response to shareholder
A review of how dividends accrued on deferred bonus awards are payable (shares or cash) will be undertaken as part of the next Policy review.
Withholding and recovery provisions have been reviewed and updated to provide a consistent policy across all share plans.
| Operation | Opportunity | Performance measures |
Response to shareholder feedback and subsequent policy guideline updates |
|---|---|---|---|
| Long-Term Incentive Plan (LTIP) | |||
| Incentivises long-term value creation for shareholders, sustainable growth and effective management of the balance sheet. |
Awards of conditional shares are granted annually and vest after a performance period of at least three years, subject to the achievement of performance targets set by the Committee at the start of each cycle. For awards made in FY2019 onwards, vested shares will be subject to a two year post vesting holding period. Details of such holding period will be disclosed in the Annual Report on Remuneration for the year in which the relevant award is made.
To the extent that the performance targets are not met over the performance period, awards will lapse. No retesting of awards under any performance condition is permitted.
Dividends accrue and are paid in cash at the end of the vesting period, on shares that vest.
The Committee may use its discretion to adjust payout of the LTIP to Executive Directors, within the limits of the Plan rules. Such discretion will only be used where the Committee believes that performance against the prescribed targets does not accurately reflect the Company's underlying performance.
Awards will be subject to malus over the vesting period and clawback from the vesting date for a period of five years from the date of grant, in case of misconduct or material misstatement in the published results of the Group.
The maximum LTIP award opportunity for Executive Directors is up to 400% of salary.
For awards made from FY2019 onwards, the award will be a fixed number of shares. In FY2019 this fixed number of shares was equivalent to 300% of salary for the Chief Executive and 250% of salary for the Chief Financial Officer. In future years for which this policy applies it is intended that the Executive Directors will each be awarded the same fixed number of shares as in FY2019. In the event that the Company share price increases by more than 33% during the three year policy period, the fixed number of shares awarded will be restricted so that the value of the award is no more than 33% greater than the value of the FY2019 award at the date of grant. This will ensure that the maximum LTIP award opportunity is not exceeded.
LTIP award sizes for the year under review and the coming year are disclosed in the Annual Report on Remuneration.
At threshold performance against each measure, up to 25% of the award subject to that measure vests, increasing on a straight-line basis to 100% for achieving stretch targets.
Based on measures of performance that are aligned with the Group's strategy.
To ensure continued alignment with the Company's strategic priorities, the Committee may, at its discretion, vary the measures and their weightings from time to time (but will consult shareholders before making significant changes to the performance measures).
A review of how dividends accrued on LTIP awards are payable (shares or cash) will be undertaken as part of the next Policy review.
Withholding and recovery provisions have been reviewed and updated to provide a consistent policy across all share plans.
| Operation | Performance measures |
Response to shareholder feedback and subsequent policy guideline updates |
|---|---|---|
| Sharesave | ||
| Encourages ownership of shares in the Company and alignment with shareholder interests. | ||
| All UK employees (including Executive Directors) may save up to a maximum monthly savings limit (as determined by UK legislation, or other such lower limit as the Committee may determine at its discretion) for three or five years. |
Not applicable | None required |
| At the end of the savings period, participants may use their savings to exercise options to acquire shares, which may be granted at a discount of up to 20% to the market price on grant. |
||
| Shareholding guidelines | ||
| Encourages ownership of shares in the Company and alignment with shareholder interests. | ||
Executive Directors must build a minimum shareholding of 250% (for the Chief Executive) or 200% (for other Executive Directors) of base salary within five years of appointment to the Board. 50% of any net vested share awards (after sales to meet tax liabilities) must be retained until the minimum shareholding requirements are met.
Not applicable Position on postemployment shareholding guidelines to be kept under review over the life of this Policy.
Shareholding guidelines also exist below Executive Director level.
It is the Company's intention to honour all pre-existing commitments at the date of this report and to honour all future obligations entered into, consistent with the approved Remuneration Policy in force at that time. In the case of internal promotion to the Board, the Committee intends to honour any pre-existing commitments made prior to becoming a member of the Board, including where these differ from the approved Remuneration Policy.
Annual bonus measures are selected to reflect the Company's short-term financial and non-financial priorities. At its discretion, the Committee may vary these measures at the start of each financial year to maintain close alignment between executive incentives and the annual operating plan.
The measures used in the Long-Term Incentive Plan are selected to reflect Smiths' strategy and to reinforce the key drivers of value creation and growth highlighted elsewhere in this Annual Report: earnings per share, cash conversion, organic sales growth and delivering sustainable return on capital.
Annual bonus and LTIP targets are reviewed annually, and take into account the Company's strategic plan, analyst forecasts for Smiths and its sector comparators and external expectations for Smiths' key markets. The Committee sets targets that it considers to be challenging but attainable and aligned to the Company's business objectives over the short term, as reflected in the annual operating plan, and longer term, consistent with the strategic plan. On top of aligning incentives with strategy, targets are designed to ensure that participants are aligned with the interests of shareholders.
The linkage of the performance measures to business strategy is set out in the At A Glance section on page 102.
The reward policy for other senior employees is broadly consistent with that for Executive Directors, and the Company does not currently operate any incentive plans in which only Executive Directors participate. The Committee reviews each year the allemployee pay and incentive trends and takes these into account in setting Executive Director remuneration levels. The principles of remuneration packages being market related, performance sensitive and driven by business needs are applied at all levels and geographies in the Group and the performance measures used in incentive plans apply generally across all levels of the business.
The graphs below provide estimates of the potential future reward opportunity for the Chief Executive and the Chief Financial Officer, and the potential mix between the different elements of remuneration under four different performance scenarios; 'Minimum', 'On-Target' and 'Maximum' and 'Maximum + Share Price growth' (which assumes a 50% increase in share price over the LTIP vesting period and bonus deferral period).
| Minimum | 100% | £1,099 | ||||
|---|---|---|---|---|---|---|
| On-Target | 41% | 22% 11% |
26% £2,695 |
|||
| Maximum | 20% | 20% | 9% | 51% | £5,370 | |
| Maximum + share price growth | 16% | 15% | 11% | 58% | £7,081 |
Fixed Pay (salary, benefits and pension) Cash bonus Deferred bonus LTIP
| Minimum | 100% | £681 | ||||
|---|---|---|---|---|---|---|
| On-Target | 44% | 21% 11% |
24% £1,532 |
|||
| Maximum | 23% | 18% | 9% | 50% | £2,957 | |
| Maximum + share price growth | 18% | 14% | 10% | 58% | £3,826 |
Fixed Pay (salary, benefits and pension) Cash bonus Deferred bonus LTIP
Potential opportunities illustrated above are based on the Policy, applied to the annualised base salaries in force from 1 October 2019. It should be noted that any awards granted under the LTIP in a year do not normally vest until at least the third anniversary of the date of grant. This illustration is intended to provide further information to shareholders on the relationship between executive pay and performance. Please note, however, that actual pay delivered will further be influenced by factors such as share price appreciation or depreciation and the value of dividends paid. The following assumptions have been made in compiling the above charts:
| Minimum | On-Target | Maximum | |
|---|---|---|---|
| Base salary | Annual base salary | ||
| Pension | Company pension allowance | ||
| Other benefits | Taxable value of annual benefits provided | ||
| Cash bonus | 0% of salary | 72% (CEO), 60% (CFO) of salary | 120% (CEO), 100% (CFO) of salary |
| Deferred bonus | 0% of salary | 36% (CEO), 30% (CFO) of salary | 60% (CEO), 50% (CFO) of salary |
| LTIP | 0% of salary | 82% (CEO), 68% (CFO) of salary | 327% (CEO), 272% (CFO) of salary |
| Operation | Opportunity | Performance measures |
|---|---|---|
| Annual fee | ||
| To attract, motivate and retain Non-executive Directors with the required skills and expertise. | ||
| Fees may be paid in cash or a combination of cash and shares and are reviewed annually (but not necessarily |
Fees are adjusted according to the outcome of the annual reviews. |
Not applicable |
| increased) to ensure they compare appropriately to fees payable at companies of similar size and complexity to Smiths. |
The basic fee for Non-executive Directors is subject to the maximum aggregate annual fee of £1,000,000, as approved by shareholders in 2017 in the Company's |
|
| Additional fees are paid to the Chairs of the Nomination & Governance, Audit & Risk, and Remuneration Committees and to the Senior Independent Director to reflect the additional time commitment of these roles. Additional fees may also be paid to members of the Nomination & Governance, Audit & Risk, and Remuneration Committees. |
Articles of Association. | |
| The additional fee paid to the Chairman of the Board is determined by the Committee, absent the Chairman, while the fees for all Non-executive Directors are agreed by the Executive Directors. |
||
| Other |
The Chairman and Non-executive Directors are not eligible for benefits or any pension provision, nor are they eligible for bonuses or participation in share schemes. To reflect the greater time commitments expected of the Non-executive Directors when attending overseas Board meetings, an additional fee is paid to them for each such meeting, and they are reimbursed for actual expenses incurred (transportation, hotels etc.). Modest retirement gifts may be provided for Non-executive Directors in appropriate circumstances.
The Committee approves the remuneration of each Executive Director on their appointment. In setting the remuneration during the recruitment of external appointments, the Committee will apply the following policy:
| Pay element | Policy on recruitment |
|---|---|
| Salary | Salary on recruitment is determined based on the same principles as the annual salary review, as outlined in the policy table. |
| Pension | As described in the policy table. |
| Benefits | As described in the policy table. |
| Annual Bonus | As described in the policy table and typically pro-rated for the proportion of year served. Maximum annual award opportunity: 180% of salary with mandatory deferral of 33% into shares. |
| LTIP | May be considered for an award under the LTIP on similar terms to other executives. Maximum annual award opportunity: 400% of salary. |
| Other | The Committee may make an award in recognition of incentive arrangements forfeited on leaving a previous employer. Any such 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. For the purposes of making such awards, but for no other reason, the Committee may avail itself of Listing Rule 9.4.2R. The Committee may also make payments to cover reasonable expenses in recruitment and relocation, and any other miscellaneous expenses including but not limited to housing, tax and immigration support. |
In cases of appointing a new Executive Director by way of internal promotion, the policy will be consistent with that for external appointees, as detailed above. Any commitments made prior to an individual's promotion will continue to be honoured even if they would not otherwise be consistent with the policy prevailing when the commitment is fulfilled, although the Company may, where appropriate, seek to revise an individual's existing service contract on promotion to ensure it aligns with other Executive Directors and prevailing market best practice.
Disclosure on the remuneration structure of any new Executive Director (external or internal), including details of any exceptional payments, will be disclosed in the RNS notification made at the time of appointment and in the Annual Report on Remuneration for the year in which the recruitment occurred.
Respecting diversity is woven into everything we do. We ensure that equal opportunities are practiced when interviewing, recruiting and promoting employees with decisions made based on skills and expertise first and foremost.
In recruiting a new Non-executive Director, the Committee will use the policy as set out in the table on page 109.
The Company's policy is that Executive Directors are normally employed on terms which include a one-year rolling period of notice from the Company and six months' notice from the individual. The contract includes provision for the payment of a predetermined sum in the event of termination of employment in certain circumstances (but excluding circumstances where the Company is entitled to dismiss without compensation). In addition to payment of basic salary, pension allowance and benefits in respect of the unexpired portion of the one-year notice period, the predetermined sum would include annual bonus and share awards only in respect of the period they have served, payable following the end of the relevant performance period and subject to the normal performance conditions.
Andy Reynolds Smith is employed under a service contract with the Company dated 6 July 2015 and effective from 25 September 2015. John Shipsey is employed under a service contract with the Company dated and effective from 18 October 2017. He became an Executive Director on 1 January 2018.
The service contracts for both Executive Directors may be terminated by 12 months' notice given by the Company or six months' notice given by the Director. The Company may elect to terminate the contract by making a payment in lieu of notice equal to the Director's base salary and benefits (including pension allowance) in respect of any unserved period of notice. The service contracts contain specific provisions enabling a reduction in any phased payments in lieu of notice, in the event that the Director finds alternative employment during the notice period. The service contracts are available for viewing at the Company's Registered Office.
The Chairman and the Non-executive Directors serve the Company under letters of appointment and do not have contracts of service or contracts for services. Except where appointed at a general meeting, Directors stand for election by shareholders at the first AGM following appointment. The Board has resolved that all Directors who are willing to continue in office will stand for reelection by the shareholders each year at the AGM. Either party can terminate the appointment on one month's written notice and no compensation is payable in the event of an appointment being terminated early. The letters of appointment or other applicable agreements are available for viewing at the Company's Registered Office.
| Sir George Buckley 1 August 2013 Bruno Angelici 1 July 2010 Olivier Bohuon 1 July 2018 Dame Ann Dowling 19 September 2018 Tanya Fratto 1 July 2012 Bill Seeger 12 May 2014 Mark Seligman 16 May 2016 Noel Tata 1 January 2017 Sir Kevin Tebbit (until 14 November 2018) 14 June 2006 |
Non-executive Director | Date of appointment |
|---|---|---|
For those individuals regarded as 'bad leavers' (e.g. voluntary resignation or dismissal for cause), annual bonus awards are forfeited, and outstanding awards under the LTIP automatically lapse. Deferred bonus awards are forfeited on dismissal for cause.
A 'good leaver' will typically remain eligible for a pro-rated annual bonus award to be paid after the end of the financial year and deferred bonus awards will be paid out at the normal vesting date. LTIP awards will typically vest at the normal vesting date to the extent that the associated performance conditions are met, but will normally be pro-rated on the basis of actual service within the performance period. In cases of death or disability, individuals are automatically deemed to be good leavers under the plan rules of the LTIP. All other good leavers will be defined at the discretion of the Committee on a case-by-case basis.
In the event of a change of control, LTIP awards will vest to the extent that each of the performance conditions is met based on the Committee's assessment of performance over the performance period to the date of change of control. For internal performance measures, the Committee may exercise its judgement in determining the outcome based on its assessment of whether or not the performance conditions would have been met to a greater or lesser extent at the end of the full performance period. Awards will also normally be pro-rated to reflect the time that has elapsed between the grant of the award and the date of change of control.
The Committee retains discretion to vary these provisions on a case-by-case basis.
In connection with the termination of an Executive Director's contract, the Company may make a payment on account of accrued but untaken leave and may pay outplacement and legal fees for support provided to the individual.
Subject to the overriding requirements of the Company, the Committee allows Executive Directors to accept one external appointment where it considers that such appointment will contribute to the Director's breadth of knowledge and experience. Directors are permitted to retain fees associated with such appointments. Non-executive Directors must obtain the approval of the Board before accepting any additional appointments once they have joined the Board.
The Committee always takes into account pay and employment conditions elsewhere in the Company. We do not consult directly with employees regarding Executive Director pay. However, the Committee is regularly, and at least annually, provided with information on pay trends and ratios of the wider employee population across the Group.
The Committee has taken account of the views expressed by shareholders, both from feedback from the 2018 Policy review and from regular meetings with major shareholders. A number of changes have been implemented in FY2019 and the Committee will keep the Policy and its approach to implementation under review in the context of evolving market practice and investor expectations.
This section of the remuneration report details how our Policy was implemented in the year ended 31 July 2019.
The membership of the Committee and their meeting attendance during the year is set out on page 85 of this report. Bill Seeger had served on a remuneration committee for at least 12 months prior to his appointment as Remuneration Committee Chair.
Sir George Buckley is absent when his own remuneration as Chairman of the Company is under consideration. The Chief Executive attends meetings of the Committee by invitation but he is not involved in the determination of his own remuneration, or present during consideration of any changes to it.
During the year, the Committee received material assistance and advice from the Chief Executive, the Group HR Director, the Executive Reward Director, Mercer | Kepler (the Committee's appointed independent remuneration adviser) and Freshfields Bruckhaus Deringer LLP. The Company Secretary is secretary to the Committee.
The Company paid a total annual fee of £66,850 to Mercer | Kepler in relation to remuneration advice to the Committee during the year. Fees were determined on the basis of time and expenses.
During FY2019, Mercer | Kepler provided the Committee with benchmarking analysis of Executive and Non-executive Directors' pay, information on market trends, drafting support for this and last year's Directors' Remuneration Report, and other relevant assistance on determining Directors' remuneration. Mercer | Kepler is a founding member of the Remuneration Consultants Group and a signatory to its Code of Conduct. Kepler's parent company, Mercer, provides unrelated services to the Group in the areas of all-employee reward and retirement benefits. However, the Committee is satisfied that the advice provided by Mercer | Kepler is objective and independent and that they do not have connections with the Group that may impair their independence.
Mercer | Kepler was re-appointed by the Committee via competitive tender in 2013. A new competitive tender for the role of independent remuneration adviser is planned in autumn 2019.
Freshfields Bruckhaus Deringer LLP was appointed by the Company to advise the Group on various legal matters during the year.
The voting outcome in November 2018 for the Directors' Remuneration Policy was as follows:
| Votes for | % of votes cast for | Votes against | % of votes cast against | Total votes cast | Votes withheld (abstentions) |
|---|---|---|---|---|---|
| 230,167,925 | 81.61% | 51,868,709 | 18.39% | 282,036,634 | 24,949,627 |
The voting outcome in November 2018 for the Directors' Remuneration Report was as follows:
| Votes for | % of votes cast for | Votes against | % of votes cast against | Total votes cast | Votes withheld (abstentions) |
|---|---|---|---|---|---|
| 259,479,657 | 93.93% | 16,764,455 | 6.07% | 276,244,112 | 30,742,150 |
| Payments in | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| lieu of pension | Long-term | Performance | performance | |||||||||||||||
| Salary/fees | Benefits9 | contribution | Total fixed | Annual bonus11 | incentives12 | share award13 | related | Total | ||||||||||
| FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
|
| Andy Reynolds Smith1 |
820 | 800 | 54 | 60 | 205 | 200 1,079 | 1,060 | 608 | 612 | 2,097 | 1,165 | 346 | 414 3,051 | 2,191 4,130 | 3,251 | |||
| John Shipsey1,2 | 525 | 402 | 12 | 9 | 131 | 100 | 668 | 511 | 324 | 265 | – | – | – | – | 324 | 265 | 992 | 776 |
| Bill Seeger3 | – | 498 | – | 112 | – | – | – | 610 | – | – | – | – | – | – | – | – | – | 610 |
| Salary/fees Benefits10 |
Total | |||||
|---|---|---|---|---|---|---|
| FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
FY2019 £000 |
FY2018 £000 |
|
| Sir George Buckley4 | 443 | 433 | 46 | 65 | 489 | 498 |
| Bruno Angelici | 74 | 76 | 14 | 9 | 88 | 85 |
| Olivier Bohuon | 74 | 6 | – | – | 74 | 6 |
| Dame Ann Dowling | 60 | – | – | – | 60 | – |
| Tanya Fratto | 90 | 84 | 49 | 57 | 139 | 141 |
| Anne Quinn5 | – | 96 | – | 5 | – | 111 |
| Bill Seeger6 | 124 | 48 | 89 | 26 | 213 | 74 |
| Mark Seligman7 | 94 | 96 | – | – | 94 | 96 |
| Noel Tata | 94 | 92 | 49 | 27 | 143 | 119 |
| Sir Kevin Tebbit8 | 33 | 96 | 5 | – | 38 | 96 |
1 It is estimated that 9.2% of the FY2019 Long Term Incentives amount for Andy Reynolds Smith is attributable to share price appreciation (FY2018 27.4%). No Long Term Incentives vested for John Shipsey in respect of FY2019 or FY2018. No discretion has been applied to the amounts attributable to share price appreciation.
2 John Shipsey commenced employment on 18 October 2017 and was appointed as a Director and Chief Financial Officer from 1 January 2018.
3 Bill Seeger served as Chief Financial Officer on an interim basis from 19 May 2017 to 31 December 2017 for which he received a fixed fee, having served as a Non-executive Director and chairing the Audit & Risk Committee prior to that date. He did not receive any further fees from Smiths during this period. He resumed his non-executive role from 1 January 2018. Throughout 2017 Bill Seeger was a Non-executive Director of Spectris plc and during the period he served as Chief Financial Officer for Smiths in FY2018 he retained his Non-executive Director fees from Spectris of £37,500.
4 Sir George Buckley's fee comprised his Non-executive Director's fee; an additional fee for being Chairman and his additional fee for chairing the Nomination & Governance Committee. 5 Anne Quinn's fees comprised her Non-executive Director's fee and her additional fee for chairing the Remuneration Committee until 1 July 2018 and benefits include a retirement gift to
recognise her contribution to the Board. 6 Bill Seeger's fees for FY2019 comprised his Non-executive Director's fee, his additional fee for chairing the Remuneration Committee from 1 July 2018 and his additional fee as Senior Independent Director since 14 November 2018.
7 Mark Seligman's fees comprised his Non-executive Director's fee and his additional fee for chairing the Audit & Risk Committee.
8 Sir Kevin Tebbit's fees comprised his Non-executive Director's fee and his additional fee as Senior Independent Director until 14 November 2018 and benefits include a retirement gift to recognise his contribution to the Board.
9 Benefits for Executive Directors include car/chauffeur benefits, life assurance, disability insurance and private healthcare insurance. For comparison purposes these figures have been restated for FY2018 to provide greater disclosure of the car/chauffeur benefit, which previously had not been included in the FY2018 figures.
10 Benefits for the Chairman and Non-executive Directors relates to reimbursed travel-related expenses (including flight costs), which is grossed-up for the UK income tax and National Insurance contributions paid by the Company on their behalf.
11 Andy Reynolds Smith has deferred 33% of his bonuses earned since FY2016 into Smiths shares. John Shipsey deferred 33% of his FY2018 bonus earned into Smiths shares. The total bonus paid during the year, including deferral, is captured under 'annual bonus' above. The deferral is for a three-year period and is not subject to any further performance or other conditions.
12 The Long Term Incentive value for FY2018 for Andy Reynolds Smith has been restated to show the actual amount (rather than the estimated amount in last year's report) and to include a dividend accrual payment of £94,585 which was paid on vesting. The total remuneration is also restated accordingly. The estimated Long Term Incentive value for FY2019 is calculated using the vesting percentage of 75% and the average share price over the 3 months to 31 July 2019 of 1,536.46p; it also a dividend accrual payment of £164,364 payable on vesting.
13 Andy Reynolds Smith was awarded 79,806 Performance Shares in 2015 which vested in October 2018. The value shown for FY2018 is the value on the vesting date of 9 October 2018 and also includes the value of 2,472 dividend equivalent shares (restated from estimated figure in FY2018 report). He was also awarded 26,602 Performance shares which vest in 2019 (the performance criteria for these shares is the same as set out in the FY2017 LTIP Outcome section on page 115). The estimated value shown for FY2019 is calculated using the vesting percentage of 75% and the average share price over the 3 months to 31 July 2019 of 1,536.46p. The FY2019 figure also includes an amount of £39,041 in respect of the value of 2,541 dividend equivalent shares .
FY2019 annual bonus outcome for Andy Reynolds Smith and John Shipsey:
The table below summarises the structure of the FY2019 annual bonus, our performance and the resulting annual bonus payout for each of the Executive Directors.
| Earned bonus | ||||||
|---|---|---|---|---|---|---|
| Director | Measure | Weighting | Maximum Opportunity (% of salary) |
(% of max. bonus) |
(% salary) | £000 |
| Andy Reynolds Smith | EPS after tax 40% 72% 18.0% Op. Cash Conversion 20% 36% 2.5% Organic Sales Growth 30% 54% 11.7% Personal Objectives 10% 18% 9.0% 100% 180% 41.2% EPS after tax 40% 60% 18.0% Op. Cash Conversion 20% 30% 2.5% Organic Sales growth 30% 45% 11.7% Personal Objectives 10% 15% 9.0% |
32.4% | 265 | |||
| 4.5% | 37 | |||||
| 21.1% | 173 | |||||
| 16.2% | 133 | |||||
| Total | 74.2% | 608 | ||||
| John Shipsey | 27.0% | 141 | ||||
| 3.8% | 20 | |||||
| 17.6% | 92 | |||||
| 13.5% | 71 | |||||
| Total | 100% | 150% | 41.2% | 61.9% | 324 |
The table below summarises the financial targets and the Company's actual performance (including relevant Medical performance and re-expressed at budget exchange rates) against these for the FY2019 annual bonus.
| Performance targets and actual performance | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Measure | Threshold 25% payout |
Target Maximum 60% payout 100% payout |
Actual | ||||||
| EPS after tax1 | 89.6p | 96.4p | 102.3p | 93.5p | |||||
| Operating Cash Conversion2 | H1 | 74% | 84% | 94% | 74% | ||||
| FY | 90% | 100% | 105% | 82% | |||||
| Organic Sales Growth3 | 2% | 3% | 5% | 2.4% |
1 An adjustment to the EPS target was agreed by the Remuneration Committee to reflect the effect of business divestments, in line with normal practice. This had the effect of reducing the EPS target from 97.3p to 96.4p. Minor adjustments to the EPS performance achievement in respect of unbudgeted tax impact were agreed by the Remuneration Committee, in line with normal practice. This had the effect of increasing the reported EPS figure at budget exchange rates from 92.5p to 93.5p.
2 50% of the maximum opportunity is available for each of H1 and FY.
3 The 2.4% organic sales growth is based on revenue (including Medical) of £3,372m retranslated at budget exchange rates (£103m) and the removal of impact of FY2019 acquisitions (£54m).
Challenging personal objectives were set for each Executive Director to reinforce the Company's operating and strategic priorities. The weighting applied to personal objectives has been reduced from 30% in previous years to 10% in FY2019.
Overall, Andy Reynolds Smith's performance against his personal objectives for FY2019 was rated at 90%. This reflects the continued delivery of growth for the Group and improvement of the acquisitions pipeline; strong progress in developing Smiths Group vision and future strategy together with the development of a strategic plan to deliver organic growth; positive results in development of the digital forge in support of divisional projects; and significant progress in developing organisational capability and succession planning at leadership level.
Overall, John Shipsey's performance against his personal objectives for FY2019 was rated at 90%. This reflects successful achievement of the development and execution of an agreed revitalised tax strategy; implementation of a process for improving capital allocation in relation to organic and inorganic investments, including qualitative and quantitative criteria to improve targeting of right opportunities; introduction of a next-generation working model for the Group and delivery of a cost-effective result; excellent progress in delivering a strategic solution for the Medical division which realises value for shareholders; and steady progress in development of the Finance function including upgrading talent, improvement of the operating model and execution of technology to demonstrate improvement in cash metrics.
The table below summarises the financial targets and the Company's actual performance, expressed at budgeted exchange rates, against these for the FY2018 annual bonus, which was reported in last year's remuneration report.
| Measure | Weighting | Threshold (25% payment) |
Target (60% payment) |
Maximum (100% payment) |
Actual | Earned bonus (% of max bonus) |
|
|---|---|---|---|---|---|---|---|
| EPS after tax1 | 50% | 93.3p | 98.2p | 103.1p | 94.1p | 15.5% | |
| Operating cash conversion2 | Q1 | 3% | 84% | 91% | 3.0% | ||
| Q2 | 3% | 117% | 106% | 0.0% | |||
| Q3 | 3% | 103% | 89% | 0.0% | |||
| Q4 | 3% | 120% | 108% | 0.0% | |||
| H1 | 4% | 102% | 107% | 97% | 0.0% | ||
| H2 | 4% | 112% | 117% | 97% | 0.0% |
1 The Committee applied discretion to take account of US tax rate changes which provided a beneficial impact on profit during the year. This resulted in a reduction in the actual level of EPS of 98.3p (at budget exchange rates) to an effective level of 94.1p, leading to a reduction in the bonus payment (bonus for Chief Executive was reduced from £828,000 to £612,000 and for CFO from £355,000 to £265,000).
2 Payment was dependent on exceeding target cash conversion for each relevant quarter (each quarter delivering 15% of total). Achievement for each half year performance between threshold (25% payout) and maximum (100% payout) delivered a further payout of up to 20% of total for each half year. The payout was only achieved in Q1 resulting in payout of 15% of the maximum amount under this measure.
Performance against FY2018 personal objectives for each of the Executive Directors was reported in last year's report. When these are added to the above earned bonus percentages, the resulting bonus payments are as reported in last year's remuneration report (Chief Executive 42.5% of maximum bonus, 76.5% of salary, £612,000 and CFO 44.0% of maximum bonus, 66.0% of salary, £265,000).
Awards granted under the LTIP in October 2016 were subject to the following performance conditions:
| Vesting schedule | Actual performance | |||||
|---|---|---|---|---|---|---|
| Measure | Weighting | Performance period | Performance | % vesting | Outturn | % vesting |
| Group EPS growth before tax | 35% | < 3% p.a. | 0% | 7.2% p.a. | 21% | |
| 1 August 2016 | 3% p.a. | 8.75% | ||||
| to 31 July 2019 | ≥ 12% p.a. | 35.0% | ||||
| Straight-line vesting between these points | ||||||
| Average ROCE | 35% | < 15% p.a. | 0% | 16.8% p.a. | 25% | |
| 1 August 2016 | 15% p.a. | 8.75% | ||||
| to 31 July 2019 | ≥ 18% p.a. | 35.0% | ||||
| Straight-line vesting between these points | ||||||
| Average operating cash conversion | 30% | < 85% | 0% | 99.5% p.a. | 29% | |
| 1 August 2016 | 85% | 7.5% | ||||
| to 31 July 2019 | ≥ 100% | 30.0% | ||||
| Straight-line vesting between these points | ||||||
| Total | 75% |
| Interests | Vesting | Interests | Date of | Market | Value | |
|---|---|---|---|---|---|---|
| held | % | vesting | vesting | price1 | £0002 | |
| Andy Reynolds Smith | 167,741 | 75% | 125,805 | Oct 2019 | £15.3646 | 1,933 |
John Shipsey and Bill Seeger did not participate in the FY2017 LTIP.
1 Based on the average share price over the three months to 31 July 2019 of 1,536.46p.
2 In addition an accrued dividend payment of £164,364 is payable at vesting date
| Interests | Vesting | Interests | Date of | Market | Value | |
|---|---|---|---|---|---|---|
| held | % | vesting | vesting | price1 | £0002 | |
| Chris O'Shea3 | 37,886 | 75% | 28,414 | Oct 2019 | £15.3646 | £437 |
1 Based on the average share price over the three months to 31 July 2019 of 1,536.46p.
2 In addition an accrued dividend payment of £37,123 is payable at vesting date.
3 Chris O'Shea was formerly the Chief Financial Officer and an Executive Director of the Company. He ceased to be an employee on 18 November 2017 and his original share award of 90,927 shares was pro-rated as per his termination agreement.
During the year ended 31 July 2019, the Executive Directors were awarded a fixed number of conditional share awards under the LTIP details of which are summarised in the table below. These awards were equivalent to 300% of base salary for Chief Executive and 250% for Chief Financial Officer.
| Number of | Face value | ||||||
|---|---|---|---|---|---|---|---|
| Executive | Form of award | Date of grant | shares awarded |
Award price1 | £000 | % of salary | Date of vesting |
| Andy Reynolds Smith | Conditional shares | 31 Oct 2018 | 179,627 | £13.695 | 2,460 | 300% | Oct 2021 |
| John Shipsey | Conditional shares | 31 Oct 2018 | 95,837 | £13.695 | 1,312 | 250% | Oct 2021 |
1 The closing price on 30 October 2018.
The performance conditions attached to these FY2019 LTIP awards are as follows:
| Vesting schedule | ||||
|---|---|---|---|---|
| Measure | Weighting | Performance period | Performance | % vesting |
| Group EPS growth after tax | 25% | < 4% p.a. | 0% | |
| 1 August 2018 | 4% p.a. | 6.25% | ||
| to 31 July 2021 | ≥ 11% p.a. | 25.0% | ||
| Straight-line vesting between these points | ||||
| Average ROCE | 20% | < 15% p.a. | 0% | |
| 1 August 2018 | 15% p.a. | 5.0% | ||
| to 31 July 2021 | ≥ 18% p.a. | 20.0% | ||
| Straight-line vesting between these points | ||||
| Average operating cash conversion | 25% | < 90% | 0% | |
| 1 August 2018 | 90% | 6.25% | ||
| to 31 July 2021 | ≥ 105% | 25.0% | ||
| Straight-line vesting between these points | ||||
| Organic sales growth | 30% | < 3% | 0% | |
| 1 August 2018 | 3% | 7.5% | ||
| to 31 July 2021 | ≥ 6% | 30.0% | ||
| Straight-line vesting between these points |
During the year ended 31 July 2019, Andy Reynolds Smith and John Shipsey were awarded conditional shares as deferred bonus awards in relation to the FY2018 annual bonus outcome, details of which are summarised in the table below. There are no further performance conditions or other conditions for these awards.
| Number of | Face value | |||||
|---|---|---|---|---|---|---|
| Executive | Form of award | Date of grant | shares awarded |
Award price 1 |
£000 | Date of vesting |
| Andy Reynolds Smith | Conditional shares | 31 Oct 2018 | 14,746 | £13.695 | 202 | Oct 2021 |
| John Shipsey | Conditional shares | 31 Oct 2018 | 6,393 | £13.695 | 88 | Oct 2021 |
1 The closing price on 30 October 2018.
Andy Reynolds Smith became a participant in the Smiths Group Sharesave Scheme in the year ending 31 July 2016. 2,078 share options under this scheme vested on 1 August 2019 at the option price of 866p. As he had chosen to participate at the maximum level he did not participate in the scheme in the years ending 31 July 2017 and 31 July 2018. A further 1,515 share options were granted in May 2019, effective from August 2019, at the option price of 1188p (a discount of 20% to the market price) with a face value of £18,000 and a vesting date of August 2022.
John Shipsey became a participant in the Smiths Group Sharesave Scheme in the year ending 31 July 2019. He has 1,515 share options under the scheme granted in May 2019, effective from August 2019, at the option price of 1188p (a discount of 20% to the market price) with a face value of £18,000 and a vesting date of August 2022.
Andy Reynolds Smith was made certain buyout awards to replicate the structure and fair value of incentives forfeited as a consequence of joining Smiths Group.
He received an award of 86,893 restricted shares, the grant value of which was captured in the 2016 single figure. 30,412 shares vested on the 30 June 2016 and the remaining 56,481 restricted shares vested on 30 June 2017 (at a share price of 1,597p). Andy Reynolds Smith also received awards of 79,806, 26,602 and 26,602 conditional shares which vest, subject to performance conditions, in October 2018, 2019 and 2020 respectively. The estimated value of the award vesting in October 2019 is included in this year's single figure of remuneration table for Andy Reynolds Smith (see note 13 on page 113). To the extent the final award vests, its value will be reflected in the FY2020 single figure of remuneration.
| Salary/Fees | Benefits | Bonus | |
|---|---|---|---|
| Chief Executive remuneration | 2.5% | (10)% | (1)% |
| Chief Financial Officer remuneration | 2.9% | 0% | (4)% |
| Non-executive Director remuneration | 2.5% | 33% | 0% |
| Average of all employees | 2.9% | 2.9% | 12% |
'All employees' is defined as all UK Group employees, 483 employees at all grades.
These ratios set out the comparison between the Chief Executive's remuneration and that for employees in the UK workforce.
| Year | Method | Pay element | 25th percentile ratio | Median pay ratio | 75th percentile ratio |
|---|---|---|---|---|---|
| FY2019 | B | Total pay | 133:1 | 97:1 | 65:1 |
| FY2018 | B | Total pay | 107:1 | 77:1 | 52:1 |
| FY2019 | B | Fixed pay | 36:1 | 26:1 | 18:1 |
| FY2018 | B | Fixed pay | 36:1 | 26:1 | 18:1 |
Pay data for the Chief Executive is taken from the total single figure of remuneration table on page 113. The pay data for employees in the UK workforce is based on the data used for gender pay reporting as the equivalent figures to the single figure table are not available at the time of producing this report. The gender pay reporting basis comprises payments received during FY2019 (FY2019 base salary and benefits, FY2018 incentive payments) and it is assumed that the value of employee benefits is 7.0% of base salary. The workforce remuneration figures are those paid to UK employees whose pay is at the 25th, median and 75th percentile of pay for the Group's UK employees. Figures are shown on both the prescribed basis using total pay and also using fixed pay excluding incentives, which provides a useful ongoing comparison as it is a less volatile basis . The increase in the ratios on a total pay basis is as a result of the increase in the Chief Executive's long-term incentive payments in FY2019 compared to FY2018. The ratios on a fixed pay basis are consistent for FY2019 and FY2018. The Committee will monitor the ratios on an annual basis.
The table below shows shareholder distributions (i.e. dividends and share buybacks) and total employee pay expenditure for the financial years ended 31 July 2018 and 31 July 2019, and the percentage change.
| FY2019 | FY2018 | ||
|---|---|---|---|
| £m | £m | Change | |
| Shareholder distributions | 178 | 172 | 3.5% |
| Employee costs | 1,050 | 989 | 6.2% |
Other than the FY2017 LTIP award for Chris O'Shea vesting in October 2019, disclosed on page 115, and the gifts to retiring Nonexecutive Directors disclosed on page 113, there were no payments to past Directors attributable to FY2019.
There were no payments made for loss of office during the year.
GOVERNANCE
The following graph shows the Company's total shareholder return (TSR) performance over the past ten years compared to the FTSE 100 Index. The FTSE 100 Index, of which the Company has been a member throughout the period, has been selected to reflect the TSR performance of other leading UK-listed companies. The values of hypothetical £100 investments in the FTSE 100 Index and Smiths Group plc shares at 31 July 2019 were £251.90 and £318.13 respectively.
| FY2010 P Bowman |
FY2011 P Bowman |
FY2012 P Bowman |
FY2013 P Bowman |
FY2014 P Bowman |
FY2015 P Bowman |
FY2016 P Bowman |
FY2016 A Reynolds Smith |
FY2017 A Reynolds Smith |
FY2018 A Reynolds Smith |
FY2019 A Reynolds Smith |
|
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total remuneration £000 | 3,399 | 4,776 | 5,026 | 3,864 | 3,912 | 4,195 | 1,602 | 2,964 | 2,320 | 3,251 | 4,130 |
| Annual bonus outcome (% max) |
95% | 64% | 79% | 39% | 43% | 80% | 88% | 89% | 96% | 42% | 41% |
| CIP outcome (% max) | n/a | 100% | 100% | 100% | 100% | 100% | 100% | n/a | n/a | n/a | n/a |
| 2007 Performance Share Plan outcome (% max) |
46% | 33% | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| LTIP outcome (% max) | 18% | 17% | 18% | n/a | n/a | 32% | 75% |
Salaries are reviewed (but not necessarily increased) annually and benchmarked against comparable roles at other FTSE 100 companies of similar market capitalisation, revenues and complexity. The salary review date has been moved from 1 August to 1 October in 2019 as part of a Group-wide exercise.
Having considered a number of important factors including individuals' performance and experience, the relative performance of the Company and the Remuneration Policy within the Company, the Committee has determined to increase the salary of the Chief Executive to £843,780 and of the Chief Financial Officer to £540,225. This represents an annual review of 2.5%, which is in line with the average increase for UK employees, plus an adjustment of 0.4% in respect of the later review date. This results in the following annualised salaries for Executive Directors:
| FY2019 | FY2020 |
|---|---|
| £820,000 | £839,817 |
| £525,000 | £537,688 |
The employment contracts of the two Executive Directors provide for a cash allowance of 25% of base salary in lieu of pension provision. Both Executive Directors have agreed, for FY2020, to freeze the monetary value of the allowance at the FY2019 level, reducing the level of benefit to 24.4% of base salary for FY2020.
For FY2020, Andy Reynolds Smith will continue to have a maximum bonus opportunity of 180% of salary and John Shipsey 150%. 33% of any bonus earned will be deferred into shares for three years. Specific targets are not disclosed at this time due to the commercially sensitive nature of these objectives, but they will be disclosed at such a time as the Committee deems them to no longer affect the commerciality of the Company.
The LTIP is a conventional share plan under which an award over a capped number of shares will vest if demanding performance conditions are met. LTIP awards of conditional shares are granted to selected senior executives (including the Executive Directors) with face values of up to 400% of salary. Under the LTIP, for the FY2020 award, a fixed number of shares will be granted at the same level as in FY2019. This would be equivalent to 327% of salary for the Chief Executive and 272% of salary for the Chief Financial Officer, based on the average share price for the three months to 31 July 2019 (1536.46p).
The LTIP awards granted to Andy Reynolds Smith and John Shipsey in FY2020 will vest on the achievement of the following performance conditions:
| Performance measure | Weighting | Threshold performance target |
Maximum performance target (full vesting of element) |
|---|---|---|---|
| Three-year EPS growth after tax | 25% | 4% p.a. | 11% p.a. |
| Three-year average return on capital employed | 20% | 15% | 18% p.a. |
| Three-year average annual operating cash conversion | 25% | 90% | 105% |
| Three-year average organic sales growth | 30% | 3% | 6% p.a. |
The Committee believes that the proposed structure provides an appropriate balance between earnings growth, returns, cash and sales growth. The Committee recognises that this balance of Group performance measures remains very important for many of our largest shareholders. The scorecard will be reviewed at the start of each future LTIP cycle to ensure it continues to reflect the Group's strategic priorities.
For performance between 'threshold' and 'maximum', awards vest on a straight-line sliding scale.
Non-executive Director fees paid during FY2019 are shown below:
| FY2019 | |
|---|---|
| Non-executive Director base fee | £69,500 |
| Additional fee payable to the Chairman of the Board | £353,675 |
| Additional fee payable to the Senior Independent Director | £20,000 |
| Additional fees for Audit & Risk, Nomination & Governance and Remuneration Committee Chairs | £20,000 |
| Attendance allowance for meetings outside the Non-executive Director's home continent | £4,000 per meeting |
Executive Directors are required, over time, to build up a shareholding with a value equal to at least 250% of base salary for the Chief Executive and 200% for the Chief Financial Officer. Executive Directors are required to retain at least 50% of any net vested share awards (after sales to meet tax liabilities) until those guidelines are achieved. Shares under deferred bonus awards and LTIP awards which have vested but are subject to a further holding period (net of assumed income tax) count towards the requirement. Awards that are still subject to performance conditions do not count towards the requirement.
There is no shareholding policy for Non-executive Directors.
The table below shows the shareholding of each Director and for Executive Directors the shareholding against their respective shareholding requirement as at 31 July 2019.
| Shareholding requirement (% FY2019 salary) |
Shares owned outright |
Shares subject to performance |
Vested shares in holding period |
Shares arising from bonus deferral |
Save As You Earn (SAYE) |
Current shareholding (% FY2019 salary) |
Shareholding requirement met1 |
|
|---|---|---|---|---|---|---|---|---|
| Andy Reynolds Smith | 250% | 201,922 | 553,126 | 0 | 67,910 | 3,593 | 479% | Yes |
| John Shipsey | 200% | 25,048 | 177,306 | 0 | 6,393 | 1,515 | 89% | No |
| Sir George Buckley | 16,461 | |||||||
| Bruno Angelici | 2,000 | |||||||
| Olivier Bohuon | 2,972 | |||||||
| Dame Ann Dowling | 5,813 | |||||||
| Tanya Fratto | 1,500 | |||||||
| Bill Seeger | 10,000 | |||||||
| Mark Seligman | 5,000 | |||||||
| Noel Tata | 2,000 |
1 Shares owned outright (including vested shares in holding period), and the net of income tax value of shares arising from bonus deferral are taken into account for the shareholding requirement. Executive Directors have five years from the date of appointment to meet the required personal shareholding; John Shipsey therefore has until 31 December 2022 to meet the requirement.
In accordance with a binding commitment entered into on 19 July 2017, pursuant to which the Chairman purchases ordinary shares on a quarterly basis using a fixed proportion (20%) of the after-tax fees he receives from the Company, Sir George Buckley acquired 763 ordinary shares on 1 August 2019. There have been no other changes in the interests of the Directors and their connected persons between 31 July 2019 and the date of this report except that 2,078 of the SAYE share options reported above for Andy Reynolds Smith matured on 1 August 2019 (as detailed on p116) and are now shares owned outright.
| DIRECTORS' SHARE OPTIONS AND LONG-TERM SHARE PLANS (AUDITABLE) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options | Options | Option and award data | Awards vested FY2019 | |||||||||
| and awards held on 31 July 2019 |
and awards held on 31 July 2018 |
Performance | Exercise | Grant | Vesting | Expiry | Exercise | Market price at date of |
Market price at date of |
|||
| Director and Plans | Number | Number | test | price | date | date+ | date++Date vested | Number | price | grant | vesting | |
| Andy Reynolds Smith | ||||||||||||
| Performance | 0 | 79,806 | A | n/a 26/11/15 Oct 2018 | 9/10/18 | 28,073 | n/a | 1033p | 1473p | |||
| Share Award | (inc. 2,472 dividend equivalent) |
|||||||||||
| 26,602 | 26,602 | B | n/a 26/11/15 Oct 2019 | |||||||||
| 26,602 | 26,602 | B | n/a 26/11/15 Oct 2020 | |||||||||
| LTIP 2015 | 0 | 226,524 | A | n/a 26/11/15 Oct 2018 | 9/10/18 | 72,668 | n/a | 1033p | 1473p | |||
| 167,741 | 167,741 | B | n/a | 8/11/16 Oct 2019 | ||||||||
| 153,354 | 153,354 | B | n/a 27/10/17 Oct 2020 | |||||||||
| 179,627 | 0 | C | n/a 31/10/18 Oct 2021 | |||||||||
| Deferred bonus award | 24,546 | 24,546 | – | n/a | 8/11/16 | 8/11/19 | ||||||
| 28,618 | 28,618 | – | n/a 27/10/17 27/10/20 | |||||||||
| 14,746 | 0 | – | n/a 31/10/18 31/10/21 | |||||||||
| SAYE | 2,078 | 2,078 | – | 866p 11/05/16 01/08/19 01/02/20 | ||||||||
| 1,515 | 0 | 1188p 10/05/19 01/08/22 01/02/23 | ||||||||||
| John Shipsey | ||||||||||||
| LTIP 2015 | 81,469 | 81,469 | B | n/a 27/10/17 Oct 2020 | ||||||||
| 95,837 | 0 | C | n/a 31/10/18 Oct 2021 | |||||||||
| Deferred bonus award | 6,393 | 0 | – | n/a 31/10/18 31/10/21 | ||||||||
| SAYE | 1,515 | 0 | – | 1188p 10/05/19 01/08/22 01/02/23 | ||||||||
| Key | ||||||||||||
| Performance Share Award |
Under the terms of his contract of employment on joining the Company, Andy Reynolds Smith was granted a buy-out conditional award over 133,010 shares of which the first tranche of up to 60% (subject to the performance tests applicable to awards granted under LTIP 2015 in 2015) vested in October 2018; up to 20% are expected to vest in October 2019 (subject to performance tests applicable to awards granted under long-term incentive plans in 2016); and up to 20% are expected to vest in October 2020 (subject to the performance tests applicable to awards granted under long-term incentive plans in 2017). The terms of the award provide that additional shares are awarded on vesting to a value equivalent to the notional dividends that would have been earned on the number of shares that vest. |
|||||||||||
| LTIP 2015 | The Smiths Group Long-Term Incentive Plan 2015. | |||||||||||
| SAYE | The Smiths Group Sharesave Scheme. | |||||||||||
| + | The vesting dates shown above in respect of awards made under the LTIP are subject to the relevant performance test(s) being passed. | |||||||||||
| ++ | The expiry dates shown above apply in normal circumstances. | |||||||||||
| Performance tests | ||||||||||||
| A | LTIP awards in 2015 - 30% subject to revenue growth; 30% subject to EPS element; 20% subject to cash conversion; 20% subject to return on capital employed | |||||||||||
| B | LTIP awards in 2016 and 2017 – 35% subject to EPS element; 35% subject to ROCE; 30% subject to cash conversion. | |||||||||||
| C | LTIP awards in 2018 – 25% subject to EPS element; 20% subject to ROCE; 25% subject to cash conversion; 30% subject to organic sales growth. | |||||||||||
| – | There are no performance criteria for the Deferred Bonus Shares awards or SAYE. | |||||||||||
| Notes | ||||||||||||
| – The high and low market prices of the ordinary shares during the period 1 August 2018 to 31 July 2019 were 1676.5p and 1256.74p respectively. The mid-market closing price on 31 July 2018 |
was 1614p and on 31 July 2019 was 1642p. – The mid-market closing price of a Smiths Group share on the date of the awards made to Directors in the FY2019 financial year was 1369.5p (31 October 2018).
GOVERNANCE
The Company complies with the guidelines laid down by the Investment Association. These restrict the issue of new shares under all the Company's share schemes in any ten year period to 10% of the issued ordinary share capital and under the Company's discretionary schemes to 5% in any ten year period. As at 31 July 2019, the headroom available under these limits was 8.56% and 4.03%, respectively.
The annual evaluation of the performance of the Committee was conducted as part of the overall annual evaluation of the performance of the Board facilitated by Independent Audit. The findings relating to the Committee were discussed with the Committee Chair. Overall, the Committee is viewed as effective and performing well and is rigorous in discharging its responsibilities.
The Directors' remuneration report has been approved by the Board and signed on its behalf by:
Bill Seeger CHAIR OF THE REMUNERATION COMMITTEE
19 September 2019
The Strategic Report is a requirement of the Companies Act 2006 (the 'Act') and can be found on pages 04 to 72. The Company has chosen, in accordance with section 414 C(11) of the Act, to include certain matters in its Strategic Report that would otherwise be disclosed in this Directors' Report. The Strategic Report and the Directors' Report together are the management report for the purposes of Rule 4.1.8R of the Disclosure Guidance and Transparency Rules. Other information that is relevant to the Directors' Report, and is incorporated by reference, can be found as follows:
| Disclosure | Location |
|---|---|
| Likely future developments | Strategic Report pages 10-46 |
| Directors' dividend recommendation | Strategic Report page 24 |
| Research and development activities | Strategic Report pages 28-46 |
| Employment of disabled persons | Resources and Relationships page 51 |
| Employee involvement | Resources and Relationships pages 48-52 |
| Political donations and expenditure | Resources and Relationships page 53 |
| Greenhouse gas emissions | Resources and Relationships page 58 |
| Corporate governance statement | Corporate Governance Report pages 74-124 |
| Directors during FY2019 | Corporate Governance Report pages 76-79 |
| Director appointment and replacement | Corporate Governance Report page 91 |
| Amendment of Articles of Association | Corporate Governance Report page 91 |
| Indemnities | Corporate Governance Report page 91 |
| Change of control | Remuneration Report page 111 and Borrowings and net debt note page 173 |
| Directors' responsibility statement | Statement of Directors' responsibilities page 124 |
| Disclosure of information to auditor | Statement of Directors' responsibilities page 124 |
| Financial instruments | Financial risk management note pages 173-179 |
| Share capital disclosures | Share capital note page 187 |
| Powers of the Directors | Share capital note page 187 |
| Post-balance sheet events | Post-balance sheet event note page 207 |
| Overseas branches | Subsidiary undertakings note page 216 |
Information required by the Financial Conduct Authority's Listing Rules can be found as set out below. There are no further disclosures required in accordance with Listing Rule 9.8.
| Listing Rule | Disclosure | Location |
|---|---|---|
| 9.8.4(1) | Capitalised interest | Discontinued operations note page 189 |
| 9.8.4(12)(13) | Dividend waivers | Dividend note page 187 |
| 9.8.6(1) | Directors' interests | Remuneration Report page 120 |
| 9.8.6(2) | Major shareholders' interests | Corporate Governance Report page 82 |
| 9.8.6(3)(a)(b) | Going concern and viability statements | Strategic Report pages 71-72 |
| 9.8.6(4)(a) | Purchase of own shares | Share capital note page 187 |
| 9.8.6(5)(6) | UK Corporate Governance Code compliance | Corporate Governance Report page 75 and table below |
| 9.8.6(7) | Unexpired term of service contract | Remuneration Report page 110 |
| Principle | Disclosure | Location |
|---|---|---|
| Leadership | The Board and the Board governance structure | Pages 76-79 and 83-85 |
| Effectiveness | Activities of the Board and its Committees and Board evaluation | Pages 86-87 and 92-93 |
| Accountability | The Audit & Risk Committee Report describes the role of the Board in this area. The Strategic Report contains detail on the principal risks to the business. |
Pages 94-99 Pages 62-70 |
| Remuneration | The Remuneration Committee report, Remuneration Policy and Remuneration Report | Pages 100-122 |
| Relations with shareholders | Relations with our shareholders | Page 82 |
By order of the Board
John Mills COMPANY SECRETARY
19 September 2019
The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare accounts for each financial year. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these accounts, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the accounts and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
Each of the Directors (who are listed on pages 76 to 79) confirms that to the best of his or her knowledge:
Signed on behalf of the Board of Directors:
19 September 2019
CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
Report on the audit of the financial statements
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated balance sheet and Company balance sheet as at 31 July 2019; the consolidated income statement and consolidated statement of comprehensive income for the year then ended; the consolidated cash-flow statement for the year then ended; the consolidated statement of changes in equity and the Company statement of changes in equity for the year then ended; the accounting policies and the notes to the financial statements.
Our opinion is consistent with our reporting to the Audit & Risk Committee.
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Company.
Other than those disclosed in note 2 to the financial statements, we have provided no non-audit services to the Group or the Company in the period from 1 August 2018 to 31 July 2019.
Overview
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of environmental and product quality regulations, data protection regulations including General Data Protection Regulation (GDPR) and unethical and prohibited business practices (see pages 62 to 70 of the Annual Report), and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006 and the listing rules of the Financial Conduct Authority (FCA). We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting journal entries to increase revenue, manipulation of when revenue is recognised and management bias in accounting estimates or the identification of performance obligations. The Group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included:
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Revenue recognition (occurrence & cut-off), together with accounting for complex programmes and contract accounting in Smiths Detection and Smiths Interconnect Divisions (Group)
We focused on revenue recognition for all divisions in the Group to check that revenue has been appropriately recognised upon fulfilment of contractual obligations.
In the Smiths Detection and Smiths Interconnect divisions we focused on the accounting for complex programmes and contract accounting. The recognition of revenue is largely dependent on the terms of the underlying contract with the customer, including the nature of separate performance obligations within the contract, achieving milestones within those contracts and the mechanisms in the contract by which control of goods and services are transferred to the customer.
These contracts are usually long term in nature, sometimes spanning a number of reporting periods. This means that the final profitability of a contract, which will be based upon forecast revenues and costs to complete, can be uncertain during the earlier phases. Judgement must therefore be applied in order to estimate the profit margins applied to recognise the revenue that is allocated to performance obligations.
Changes in conditions and circumstances over time can result in variations to the original contract terms or to the overall profitability of the contract. This can include cost overruns which require further negotiation and settlements resulting in the need for additional provisions.
Refer also to the Significant Judgement and Issues section on page 96 and Accounting Policies section on pages 140 to 141.
For all the divisions we assessed whether the Group's revenue recognition policies complied with IFRSs as adopted by the EU, including IFRS 15: Revenue from contracts with customers, which the Group adopted in the year. Specifically, we considered whether all performance obligations in contracts had been appropriately identified and revenue recognised when they had been satisfied.
Where revenue was recognised at a point in time for the sale of goods we verified that this occurred when control over the goods transferred to the customer or the accounting period in which services were rendered by testing a sample of revenue items to contract and shipping documents, with a specific focus on major programmes where revenue was recorded close to the year end.
Where appropriate, we evaluated the relevant IT systems and tested the operating effectiveness of the internal controls over the recording of revenue in the correct period.
We also tested journal entries posted to revenue accounts to identify any unusual or irregular items, and the reconciliations between the systems used by the Group.
In the case of the Smiths Detection and Smiths Interconnect divisions, for a sample of contracts, we read the relevant customer agreements and tested the accounting for separate deliverables and performance obligations.
This testing included evaluating whether performance obligations had been satisfied, assessing the impact of any ongoing disputes, and assessing the reasonableness of the management's estimates of costs to complete the contract by comparing them to actual historical costs incurred on comparable contracts.
We did not identify any material exceptions from the audit work performed and we found estimates to be in line with our expectations.
John Crane, Inc., a US-based subsidiary of the Group, is currently one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. A provision of £237m has been made for the future defence costs which the Group is expected to incur and the expected costs of future adverse judgements against John Crane, Inc.
Titeflex Corporation, another US-based subsidiary of the Group, 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. A provision of £74m has been made for the costs which the Group is expected to incur in respect of these claims.
We focused on these areas because there is significant judgement involved in the assumptions used to estimate the provisions, in particular those relating to the US litigation environment such as the future level of claims and the cost of defence. As a result the provision may be subject to potentially material revisions from time to time.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies on pages 139 to 140 and note 22.
In John Crane, Inc. we used our own internal experts to challenge management's assumptions underlying the adverse judgment and defence cost provisions. This included an examination of the model maintained by management's valuation expert and evaluation of the work of that expert, by considering the appropriateness of the methodology used, the reasonableness of assumptions (including the use of a rolling 10 year horizon) and considering alternative outcomes, particularly the sensitivity calculations performed. In addition we tested the mathematical accuracy of the underlying calculations and agreed input data to source documents.
We tested management's underlying assumptions supporting its Titeflex provision. This included an evaluation of the valuation model, by testing the mathematical accuracy of the underlying calculations and the input data such as the average amount of settlements, the number of future settlements and the period over which expenditure can be reasonably estimated by benchmarking them to historical claims.
We also discussed these matters with the Group's internal legal counsel, obtained letters from external counsel and evaluated the appropriateness of the disclosures made in the Group financial statements.
We did not identify any material exceptions from our audit work. We also read the disclosures and found them to be consistent with the information we have obtained during the course of our audit.
The Group has recognised £128m (£115m from the continuing business and £13m relating to the business held for distribution) of deferred tax assets, which involves judgement by management as to the likelihood of the realisation of these deferred tax assets. The expectation that the benefit of these assets will be realised is dependent on a number of factors, including appropriate taxable temporary timing differences, and whether there will be sufficient taxable profits in future periods to support recognition.
The Group has recognised provisions against uncertain tax positions, the valuation of which is an inherently judgemental area. The Group has a wide geographic footprint and is subject to tax laws in a number of jurisdictions.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies section on page 140 and note 6.
The Group holds significant amounts of goodwill and intangible assets on the balance sheet, as detailed in note 10 to the financial statements.
The risk is that these balances are materially overstated. Goodwill (£1,246m for the continuing business and £595m held for distribution) must be tested for impairment on at least an annual basis. The determination of recoverable amount, being the higher of value-in-use and fair value less costs to sell, requires judgement in both identifying and then valuing the relevant cash generating units (CGUs).
The impairment assessment for these assets involves subjective judgements about future business performance, with key assumptions including cash-flows, the long-term growth rates and discount rates.
The level at which goodwill impairment reviews have been performed has been reassessed in the year to reflect further integration within the divisions. This has resulted in goodwill being tested for impairment at the divisional level for each CGU across every division.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies section on pages 139 and 140 and notes 10 and 11.
We considered management's assessment as to whether there will be sufficient taxable profits in future periods to support the recognition of deferred tax assets by evaluating management's calculation of future cash-flow forecasts and the process by which they were drawn up, including testing the underlying calculations and comparing forecasts to historical performance. In doing this, we considered whether management's assumptions of the taxable profits for the continuing Group were appropriate.
We used our tax specialists to assess management's methodology underlying the provisions for uncertain tax positions. We discussed with management the known uncertain tax positions and read communications from taxation authorities to identify areas of potential challenge.
We did not identify any material exceptions from our audit work.
We reviewed management's internal reporting to determine the level at which the return on acquired goodwill is monitored by management and therefore determined that it is appropriate for goodwill to be tested for impairment at the divisional level.
We obtained management's goodwill impairment model and tested the reasonableness of key assumptions, including revenue, profit and cash-flow growth rates, terminal growth rates and the selection of discount rates. We agreed the underlying cash-flow projections to management approved budgets and forecasts and assessed how these projections are compiled.
Deploying our valuations experts, we assessed the terminal growth rate and the discount rate applied to each CGU compared with third party information, past performance, the Group's cost of capital and relevant risk factors. We performed our own risk assessment by considering historical performance and management's forecasting accuracy by applying any current year budget shortfalls to future forecasts to highlight the CGUs with either lower headroom or which are more sensitive to changes in key assumptions.
We performed our own independent sensitivity analysis to understand the impact of reasonably possible changes in management's assumptions on the available headroom. We challenged the significant assumptions, specifically relating to revenue and profit growth in light of the individual CGU's past performance to assess whether the forecasts are achievable.
As a result of our work, we determined that it was appropriate not to recognise an impairment charge in the year. We have assessed management's disclosures in light of the impairment testing performed and we considered the disclosures made to be reasonable. Management determined that no additional sensitivity disclosures should be provided and we found that this judgement was supported by reasonable assumptions that would require significant downside changes before any additional impairment was necessary.
The Group holds £172m of capitalised development costs (£127m within assets held for distribution and £45m of capitalised development costs in the continuing business).
There is judgement whether the project is technically feasible and the likelihood that the intangible asset will generate future economic benefits. There is also judgement on what costs associated with the project should be capitalised rather than expensed as incurred.
Management prepares impairment models annually for indevelopment intangible assets to verify that the amount capitalised is recoverable. Judgement is required to ascertain the appropriate cashflow forecasts, especially where products have no trading history, cost to complete the development and the appropriate discount rate.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies section on page 140 and note 10.
We assessed the business cases supporting commercial viability and where applicable discussed the technical feasibility with the product development team. Where relevant we also obtained and reviewed the third party testing. We tested the development costs capitalised in t he year to supporting documentation and verified that the costs were directly attributable to the project and necessary to create, produce and prepare the asset capable of operating in a manner intended by management and therefore were appropriate to capitalise rather than expense as incurred.
We obtained management's models supporting the recoverable value of capitalised development expenditure and evaluated the underlying forecast cash-flows based on the growth rates experienced by the market and comparable products. We performed independent sensitivity analyses to consider if a reasonably possible change in assumptions could result in an impairment.
As a result of our work, we concur with management's view that the costs capitalised at 31 July 2019 are appropriate and recoverable.
In July 2019, the Board of Directors approved plans to pursue a demerger of the Smiths Medical business and separately list the business in the United Kingdom.
At 31 July 2019, the demerger was not completed and, accordingly, the business was presented as held for distribution and as a discontinued operation at and for the year ended 31 July 2019.
The classification of the business as a discontinued operation has a significant impact on the financial statements, including additional disclosure and the requirement to present the results in the current and prior period separate from the continuing business and as profit from discontinued operations.
Judgement was also required in determining whether Smiths Medical met the criteria for classification as a discontinued operation, particularly if it is highly probable shareholders will approve the demerger.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies section on page 141 and note 27.
The Group completed its acquisition of United Flexible, Inc on 19 February 2019, resulting in the recognition of £146m of acquired intangibles and £124m of goodwill.
Judgement was required in identifying and valuing these acquired intangibles and goodwill and determining the valuation of the other assets and liabilities acquired. In addition, the disclosure requirements in respect of acquisitions are extensive.
Refer also to the Significant Judgements and Issues section on page 96, Accounting Policies on pages 139 to 140 and note 26.
We have examined minutes of board meetings, and communications with the Group's investors. We also examined the management's plans detailing how it plans to demerge the business to verify that it is highly probable that shareholder approval will be obtained and that distribution will occur within the next 12 months.
We considered the contribution of the Smiths Medical business to the Group and concur with management that it constitutes a single major line of operations.
As a result of our work, we concur with the conclusion to present the Smiths Medical business as held for distribution and as a discontinued operation.
We also assessed the adequacy of the disclosures in the notes to the consolidated financial statements. We considered that the disclosures are appropriate.
We obtained and read the United Flexible, Inc. Equity Purchase Agreement (EPA) to gain an understanding of the key terms of the acquisition. In testing this acquisition, we considered whether the identified intangible assets were appropriate by reference to the EPA, due diligence reports and other supporting documentation.
Deploying our valuation experts, we worked with management and management's third party expert to assess the methodology employed for calculating the fair values of the assets and liabilities and the appropriateness of the key assumptions used, including discount rates.
We also checked that the material fair value adjustments to the net assets were consistent with the accounting standard requirements.
We read the disclosures in the financial statements to satisfy ourselves that they are in line with the requirements of the relevant accounting standards.
As a result of our work we determined that the acquisition accounting and related disclosures were appropriate.
We determined that there were no key audit matters applicable to the Company to communicate in our report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
The Group is organised into five divisions: John Crane, Smiths Medical, Smiths Detection, Smiths Interconnect and Flex-Tek and is a consolidation of over 250 units. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group Engagement team, or component auditors within PwC UK and from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole.
The Group's operating reporting units vary significantly in size and we identified 21 reporting units that, in our view, required an audit of their complete financial information, due to their size or risk characteristics. Specific audit procedures over certain balances and transactions were performed at a further 12 reporting units, to give appropriate coverage of material balances at both divisional and Group levels. Of these, two reporting units have been determined to be financially significant based on their contribution to the Group's revenue and headline operating profit from continuing operations. In addition, specific audit procedures over certain balances and transactions were performed over reporting units where consolidation adjustments are made.
We conducted work in 11 countries and the Group engagement team visited reporting sites in North America and Europe, and participated in each of the divisional audit clearance meetings. Together, the reporting units subject to audit procedures accounted for 70% (FY2018: 69%) of the Group's revenues from continuing operations and 56% (FY2018: 50%) of the Group's headline operating profit from continuing operations. We have represented the proportion of the Group's revenue and headline operating profit from continuing operations in FY2018 that was subject to audit procedures on a consistent basis with the current year. We reported in FY2018 that units subject to audit procedures accounted for 74% of the Group's revenue and 79% of the Group's operating profit.
Further specific audit procedures over IT controls, central functions such as treasury and areas of judgement, including the accounting for acquisitions and disposals, taxation, goodwill, post-retirement benefits and material litigation, were performed at the local headquarters of each of the divisions and at the Group's Head Office.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Group financial statements | Company financial statements | |
|---|---|---|
| Overall materiality | £15m (FY2018: £20m). | £13m (FY2018: £18m). |
| How we determined it | Based on approximately 3.5% of headline operating profit from continuing operations. |
Based on approximately 0.5% of total assets, capped at a level below overall Group materiality. |
| Rationale for benchmark applied |
We applied this benchmark because, in our view, this is the metric against which the performance of the Group is most commonly measured. We have not taken profit from discontinued operations into account when determining our materiality as Smiths Medical will not contribute to the Group's profits following the demerger. |
Consistent with last year, we applied this benchmark because, in our view, the Company is a holding company and the parent company of the Group, which is not a profit-oriented entity. |
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £1m and £13m. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit & Risk Committee that we would report to them misstatements identified during our audit above £1m (Group audit) (2018: £1m) and £1m (Company audit) (2018: £1m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
In accordance with ISAs (UK) we report as follows:
| Reporting obligation | Outcome |
|---|---|
| We are required to report if we have anything material to add or draw attention to in respect of the Directors' statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors' identification of any material uncertainties to the Group's and the Company's ability to continue as a going concern over a period of at least 12 months from the date of approval of the financial statements. |
We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's and Company's ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group's trade, customers, suppliers and the wider economy. |
| We are required to report if the Directors' statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. |
We have nothing to report. |
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors' Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors' Report for the year ended 31 July 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors' Report. (CA06)
We have nothing material to add or draw attention to regarding:
We have nothing to report having performed a review of the Directors' statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the "Code"); and considering whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
We have nothing to report in respect of our responsibility to report when:
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06)
As explained more fully in the Statement of Directors' Responsibilities set out on page 124, the Directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's and the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors' report.
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Following the recommendation of the Audit Committee, we were appointed by the members on 19 November 1996 to audit the financial statements for the year ended 31 July 1997 and subsequent financial periods. The period of total uninterrupted engagement is 23 years, covering the years ended 31 July 1997 to 31 July 2019.
Chartered Accountants and Statutory Auditors London 19 September 2019
| Year ended 31 July 2019 | Year ended 31 July 2018 - restated* | ||||||
|---|---|---|---|---|---|---|---|
| Non-headline | Non-headline | ||||||
| Notes | Headline £m |
(note 3) £m |
Total £m |
Headline £m |
(note 3) £m |
Total £m |
|
| CONTINUING OPERATIONS | |||||||
| Revenue | 1 | 2,498 | 2,498 | 2,328 | 2,328 | ||
| Cost of sales | (1,429) | (1,429) | (1,327) | (1,327) | |||
| Gross profit | 1,069 | 1,069 | 1,001 | 1,001 | |||
| Sales and distribution costs | (267) | (267) | (258) | (258) | |||
| Administrative expenses | (375) | (101) | (476) | (355) | (53) | (408) | |
| Profit on business disposal | 28 | 7 | 7 | ||||
| OPERATING PROFIT | 2 | 427 | (101) | 326 | 388 | (46) | 342 |
| Interest receivable | 11 | 11 | 10 | 10 | |||
| Interest payable | (62) | (62) | (65) | (65) | |||
| Other financing gains/(losses) | 18 | 18 | (7) | (7) | |||
| Other finance income – retirement benefits | 8 | 11 | 11 | 7 | 7 | ||
| Finance costs | 4 | (51) | 29 | (22) | (55) | (55) | |
| Continuing operations – profit before taxation | 376 | (72) | 304 | 333 | (46) | 287 | |
| Taxation | 6 | (103) | (59) | (162) | (87) | (81) | (168) |
| Continuing operations – profit for the year | 273 | (131) | 142 | 246 | (127) | 119 | |
| Discontinued operations | |||||||
| Profit from discontinued operations | 27 | 112 | (27) | 85 | 115 | 45 | 160 |
| PROFIT FOR THE YEAR | 385 | (158) | 227 | 361 | (82) | 279 | |
| Profit for the year attributable to: | |||||||
| Smiths Group shareholders – continuing operations | 271 | (131) | 140 | 244 | (127) | 117 | |
| Smiths Group shareholders – discontinued operations | 112 | (27) | 85 | 115 | 45 | 160 | |
| Non-controlling interests in respect | |||||||
| of continuing operations | 2 | 2 | 2 | 2 | |||
| 385 | (158) | 227 | 361 | (82) | 279 | ||
| EARNINGS PER SHARE | 5 | ||||||
| Basic | 56.8p | 70.0p | |||||
| Basic – continuing | 35.4p | 29.6p | |||||
| Diluted | 56.5p | 69.1p | |||||
| Diluted – continuing | 35.1p | 29.2p |
* Results for the year ended 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
References in the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity and consolidated cash-flow statement relate to notes on pages 139 to 192, which form an integral part of the consolidated accounts.
| Year ended 31 July 2019 |
Year ended 31 July 2018 |
||
|---|---|---|---|
| Notes | £m | £m | |
| PROFIT FOR THE YEAR | 227 | 279 | |
| Other comprehensive income: | |||
| Actuarial (losses)/gains on retirement benefits | 8 | (76) | 104 |
| Taxation recognised on actuarial movements | 6 | 13 | (18) |
| Other comprehensive income and expenditure which will not be reclassified | |||
| to the consolidated income statement | (63) | 86 | |
| Other comprehensive income which will be reclassified and reclassifications: | |||
| Exchange gains | 191 | 6 | |
| Cumulative exchange gains recycled on business disposals | (5) | ||
| Fair value gains/(losses) and reclassification adjustments: | |||
| – deferred on available for sale financial assets | 2 | 1 | |
| – deferred in the period on cash-flow and net investment hedges | (77) | (6) | |
| – reclassified to income statement on cash-flow and net investment hedges | (4) | (6) | |
| Total other comprehensive income | 49 | 76 | |
| Total comprehensive income | 276 | 355 | |
| Attributable to: | |||
| Smiths Group shareholders | 272 | 353 | |
| Non-controlling interests | 4 | 2 | |
| 276 | 355 | ||
| Total comprehensive income attributable to Smiths Group shareholders arising from: | |||
| Continuing operations | 148 | 191 | |
| Discontinued operations | 124 | 162 | |
| 272 | 353 |
| Notes | 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|---|
| NON-CURRENT ASSETS | |||
| Intangible assets | 10 | 1,684 | 2,061 |
| Property, plant and equipment | 12 | 232 | 320 |
| Financial assets – other investments | 16 | 19 | 18 |
| Retirement benefit assets | 8 | 469 | 526 |
| Deferred tax assets | 6 | 115 | 180 |
| Trade and other receivables | 14 | 52 | 57 |
| Financial derivatives | 19 | 47 | 50 |
| 2,618 | 3,212 | ||
| CURRENT ASSETS | |||
| Inventories | 13 | 417 | 466 |
| Current tax receivable | 6 | 11 | 38 |
| Trade and other receivables | 14 | 764 | 733 |
| Cash and cash equivalents | 17 | 289 | 717 |
| Financial derivatives | 19 | 3 | 7 |
| Assets held for distribution to owners | 27 | 1,216 | |
| 2,700 | 1,961 | ||
| TOTAL ASSETS | 5,318 | 5,173 | |
| CURRENT LIABILITIES | |||
| Financial liabilities | |||
| – borrowings | 17 | (9) | (203) |
| – financial derivatives | 19 | (5) | (4) |
| Provisions for liabilities and charges | 22 | (66) | (76) |
| Trade and other payables | 15 | (569) | (606) |
| Current tax payable | 6 | (56) | (72) |
| Liabilities held for distribution to owners | 27 | (213) | |
| (918) | (961) | ||
| NON-CURRENT LIABILITIES | |||
| Financial liabilities | |||
| – borrowings | 17 | (1,500) | (1,407) |
| – financial derivatives | 19 | (1) | (6) |
| Provisions for liabilities and charges | 22 | (285) | (262) |
| Retirement benefit obligations | 8 | (152) | (145) |
| Corporation tax payable | 6 | (6) | |
| Deferred tax liabilities | 6 | (45) | (77) |
| Trade and other payables | 15 | (30) | (27) |
| (2,019) | (1,924) | ||
| TOTAL LIABILITIES | (2,937) | (2,885) | |
| NET ASSETS | 2,381 | 2,288 | |
| SHAREHOLDERS' EQUITY | |||
| Share capital | 23 | 148 | 148 |
| Share premium account | 360 | 358 | |
| Capital redemption reserve | 25 | 6 | 6 |
| Revaluation reserve | 25 | 1 | 1 |
| Merger reserve | 25 | 235 | 235 |
| Retained earnings | 1,993 | 1,826 | |
| Hedge reserve | 25 | (383) | (302) |
| Total shareholders' equity | 2,360 | 2,272 | |
| Non-controlling interest equity | 21 | 16 | |
| TOTAL EQUITY | 2,381 | 2,288 |
The accounts on pages 134 to 192 were approved by the Board of Directors on 19 September 2019 and were signed on its behalf by:
ANDY REYNOLDS SMITH JOHN SHIPSEY
CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
| Share capital and share premium |
Other reserves |
Retained earnings |
Hedge reserve |
Equity shareholders' funds |
Non controlling Interest |
Total equity |
||
|---|---|---|---|---|---|---|---|---|
| At 31 July 2018 | Notes | £m 506 |
£m 242 |
£m 1,826 |
£m (302) |
£m 2,272 |
£m 16 |
£m 2,288 |
| Profit for the year | 225 | 225 | 2 | 227 | ||||
| Other comprehensive income: | ||||||||
| Actuarial losses on retirement benefits and | ||||||||
| related tax | (63) | (63) | (63) | |||||
| Exchange gains | 189 | 189 | 2 | 191 | ||||
| Fair value gains/(losses) and related tax | 2 | (81) | (79) | (79) | ||||
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR | 353 | (81) | 272 | 4 | 276 | |||
| Transactions relating to ownership interests: | ||||||||
| Exercises of share options | 23 | 2 | 2 | 2 | ||||
| Purchase of own shares | 25 | (19) | (19) | (19) | ||||
| Dividends: | ||||||||
| – equity shareholders | 24 | (178) | (178) | (178) | ||||
| – non-controlling interest | (1) | (1) | ||||||
| Receipt of capital from non-controlling interest | 2 | 2 | ||||||
| Share-based payment | 9 | 11 | 11 | 11 | ||||
| At 31 July 2019 | 508 | 242 | 1,993 | (383) | 2,360 | 21 | 2,381 |
| Share capital and share premium |
Other reserves |
Retained earnings |
Hedge reserve |
Equity shareholders' funds |
Non controlling Interest |
Total equity |
||
|---|---|---|---|---|---|---|---|---|
| Notes | £m | £m | £m | £m | £m | £m | £m | |
| At 31 July 2017 | 503 | 242 | 1,634 | (290) | 2,089 | 15 | 2,104 | |
| Profit for the year | 277 | 277 | 2 | 279 | ||||
| Other comprehensive income: | ||||||||
| Actuarial gains on retirement benefits and | ||||||||
| related tax | 86 | 86 | 86 | |||||
| Exchange gains | 1 | 1 | 1 | |||||
| Fair value gains/(losses) and related tax | 1 | (12) | (11) | (11) | ||||
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR | 365 | (12) | 353 | 2 | 355 | |||
| Transactions relating to ownership interests: | ||||||||
| Exercises of share options | 23 | 3 | 3 | 3 | ||||
| Purchase of own shares | 25 | (15) | (15) | (15) | ||||
| Dividends: | ||||||||
| – equity shareholders | 24 | (172) | (172) | (172) | ||||
| – non-controlling interest | (1) | (1) | ||||||
| Share-based payment | 9 | 14 | 14 | 14 | ||||
| At 31 July 2018 | 506 | 242 | 1,826 | (302) | 2,272 | 16 | 2,288 |
| Notes | 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|---|
| Net cash inflow from operating activities | 29 | 346 | 405 |
| Cash-flows from investing activities | |||
| Expenditure on capitalised development | (27) | (26) | |
| Expenditure on other intangible assets | 10 | (12) | (12) |
| Purchases of property, plant and equipment | 12 | (79) | (68) |
| Disposals of property, plant and equipment | 4 | 4 | |
| Capital returned by/(investment in) financial assets | 16 | 2 | (1) |
| Acquisition of businesses | 26 | (277) | (71) |
| Disposal of businesses – continuing operations | 28 | 29 | |
| Disposal of businesses – discontinued operations | 30 | ||
| Tax paid on disposal of businesses - discontinued operations | (8) | ||
| Net cash-flow used in investing activities | (367) | (145) | |
| Cash-flows from financing activities | |||
| Proceeds from exercise of share options | 23 | 2 | 3 |
| Purchase of own shares | 25 | (19) | (15) |
| Settlement of cash settled share awards | (2) | (1) | |
| Dividends paid to equity shareholders | 24 | (178) | (172) |
| Cash inflow from matured derivative financial instruments | 4 | ||
| Repayment of borrowings | 17 | (194) | (135) |
| Net cash-flow used in financing activities | (391) | (316) | |
| Net (decrease)/increase in cash and cash equivalents | (412) | (56) | |
| Cash and cash equivalents at beginning of year | 717 | 781 | |
| Cash held in disposal group | (26) | ||
| Exchange differences | 10 | (8) | |
| Cash and cash equivalents at end of year | 17 | 289 | 717 |
| Cash and cash equivalents at end of year comprise: | |||
| – cash at bank and in hand | 153 | 287 | |
| – short-term deposits | 136 | 430 | |
| 289 | 717 |
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|---|
| Net debt at start of year | 17 | (893) | (967) |
| Net (decrease)/increase in cash and cash equivalents | (412) | (56) | |
| Net cash held in disposal group | (23) | ||
| Reduction and repayment of borrowings | 194 | 135 | |
| Movement in net debt resulting from cash-flows | (241) | 79 | |
| Capitalisation, interest accruals and unwind of capitalisation fees | 1 | 2 | |
| Movement from fair value hedging | (46) | 1 | |
| Exchange differences | (41) | (8) | |
| Movement in net debt in the year | (327) | 74 | |
| Net debt at end of year | 17 | (1,220) | (893) |
Year ended
Year ended
The accounts have been prepared in accordance with the Companies Act 2006 applicable to companies reporting under International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations, as adopted by the European Union, on a going concern basis and 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.
The accounting policies adopted are consistent with those of the previous financial year.
The preparation of the accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions 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.
When acquiring businesses, the Group has to make assumptions and best estimates to value any identified intangible assets of the acquisition. Where acquisitions are significant, appropriate advice is sought from professional advisers on the identification and valuation of intangible assets. Otherwise valuations are undertaken by management using methodology consistent with that used on prior period acquisitions.
Key sources of estimation uncertainty for the acquisition of the United Flexible business relate to the assumptions used to underpin the valuation of acquired intangibles, particularly customer related (£134m) and tradenames (£13m). The value of these intangibles was determined by cash-flow forecasts discounted at a rate between 11% and 14%. The customer relationship intangible asset was valued by applying an annual attrition factor between 4.1% and 7.9% on base revenue to account for a potential loss of customer orders in the future.
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 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.
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 of critical judgements. The estimates, and the effect of variances in key estimates, are disclosed in note 8.
If the carrying value of any receivable is higher than the fair value, the Group makes provisions to write down the balance to its fair value. The fair value of receivables is considered individually for each customer and incorporates past experience and progress with collecting receivables.
The provision for the allowance for expected credit losses is calculated using historical write-offs as a basis with a default risk multiplier applied to reflect country risk premium. The value assigned to this risk multiplier is a source of estimation uncertainty.
At 31 July 2019 the gross value of receivables partly or fully provided for or more than three months overdue was £64m (FY2018: £70m) and there were provisions of £24m (FY2018: £32m) against these receivables. Consequently, these receivables were carried at a net value of £40m (FY2018: £38m). See note 14 for disclosures on credit risk and ageing of trade receivables.
The calculation of inventory provisions requires judgement by management of the expected value of future sales. If the carrying value of inventory is higher than the expected recoverable value, the Group makes provisions to write inventory down to its net recoverable value. Inventory is initially assessed for impairment by comparing inventory levels to recent utilisation rates and carrying values to historical selling prices. A detailed review is completed for inventory lines identified in the initial assessment considering sales activity, order flow, customer contracts and current selling prices.
At 31 July 2019, there were provisions of £51m (FY2018: £54m) against gross inventory of £468m (FY2018: £520m). See note 13 for a breakdown of inventory.
A 10% increase in the proportion of raw materials provided for would increase the provision by £17m (FY2018: £17m) and a 10% increase in the proportion of finished goods provided for would increase the provision by £17m (FY2018: £23m).
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and 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.
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 £237m (FY2018: £223m) has been made for the future defence costs which the Group is expected to incur and the expected costs of future adverse judgments against JCI. Whilst well-established incidence curves can be used to estimate the likely future pattern of asbestosrelated 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. Therefore, 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 may be incurred.
JCI takes account of the advice of an expert in asbestos liability estimation in quantifying the expected costs. The following judgements were made in preparing the provision calculation:
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 £74m (FY2018: £78m) has been made for the costs which the Group is expected to incur in respect of these claims. In preparing the provision calculation, judgements were made about the impact of safe installation initiatives on the level of future claims. See note 22 for a sensitivity showing the impact on the provision of reducing or increasing the expected impact. However, because of the significant uncertainty associated with the future level of claims, there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred.
All provisions may be subject to potentially material revisions from time to time if new information becomes available as a result of future events.
The Group has recognised deferred tax assets of £106m (FY2018: £121m) relating to losses and £68m (FY2018: £67m) relating to the John Crane, Inc. and Titeflex Corporation litigation provisions. The recognition of assets pertaining to these items involves judgement and estimates by management as to the likelihood of realisation of these deferred tax assets. This is based on a number of factors, which seek 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. It has been concluded that there are sufficient taxable profits in future periods to support recognition.
A 5% reduction in expected future operating profits would reduce the level of deferred tax recognised by £5m (FY2018: £1m), and a 5% increase in expected future operating profits would increase the level of deferred tax recognised by £5m (FY2018: £7m). Further detail on the Group's deferred taxation position is included in note 6.
On the acquisition of a business, the Group has to make judgements in identifying the intangible assets of the business and judgements about the fair value allocation of the purchase price.
Where acquisitions are significant, appropriate advice is sought from professional advisers before making such allocations. Otherwise intangible assets are identified and the purchase price is allocated by management using methodology consistent with that used on prior period acquisitions.
Goodwill is tested at least annually for impairment and other assets, including capitalised development costs and intangible assets acquired in business combinations, are tested if there are any indications of impairment.
Impairment testing is undertaken at the lowest level for which internal performance is monitored. Judgement is required in assessing the appropriate CGU level for impairment testing of each intangible asset.
At 31 July 2019 the Group has recognised a retirement benefit asset of £469m (FY2018: £526m), principally relating to UK schemes, 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. It has been determined that the surplus is recoverable by the Group and therefore can be recognised. If the pension schemes were wound up while they still had members, the schemes would need to buy out the benefits of all members. The buyouts would cost significantly more than the present value of the scheme liabilities calculated in accordance with IAS 19: Employee benefits.
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 probable future economic benefits. The carrying value of intangible assets is amortised over their expected useful lives, commencing in the year that sales are first made.
The assessment of the future viability and technical feasibility of development projects and the determination of the underlying products' useful economic life and amortisation basis require significant judgement and the use of assumptions and estimates.
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 has 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. Judgement is applied in the identification of the performance obligations of the contract and the allocation of contract revenue to each performance obligation.
The Group enters into certain contracts for agreed fees that are performed across more than one accounting period and revenue is recognised over time. Judgement is required to assess the stage of completion of the contract activity at the balance sheet date. This assessment requires the expected total contract revenues and costs to be determined based on the contract progress.
Following the Group's decision to pursue a demerger of the Smiths Medical business, judgement is required to determine the most appropriate financial reporting treatment of the division and its performance.
Management has determined that sufficient progress has been achieved on the demerger project for Smiths Medical to meet the criteria for classification as discontinued and held for distribution to owners.
The key judgement for this reclassification is that the following conditions were met at the balance sheet date:
Following this reclassification, the results of Smiths Medical are presented as profit from discontinued operations in FY2019 and FY2018 and its assets and liabilities reported in assets and liabilities held for distribution to owners in FY2019. The prior year balance sheet has not been restated.
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.
Judgement is required in determining which items should be included as non-headline. The amortisation of acquired intangibles, impairments, legacy liabilities, material one-off items and certain re-measurements are included in a separate column of the income statement. See note 3 for a breakdown of the items excluded from headline profit.
Performance measures for the Group's ongoing trading activity are described as 'headline' and used by management to measure and monitor performance. See note 1 for disclosures of headline operating profit and note 30 for more information about the calculation of return on capital employed and credit metrics.
In addition, the Group reports underlying growth rates for sales and profit measures. Determining which items should be adjusted involves judgement. Underlying growth excludes the impact of acquisitions, divestments, presentational changes and the effects of foreign exchange translation, by making the following adjustments:
The consolidated accounts incorporate the financial statements of Smiths Group plc (the 'Company') and its subsidiary undertakings, together with the Group's share of the results of its associates. A list of the subsidiaries of Smiths Group plc is provided on pages 208 to 216.
Subsidiaries are all entities controlled by the Company. Subsidiaries are fully consolidated from the date on which control is obtained by the Company to the date that control ceases.
Associates are entities which the Group has significant influence over but does not control, generally accompanied by a share of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method.
The Company's presentational 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 exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences 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 exchange differences is recognised in the income statement as part of the gain or loss on sale.
Exchange differences 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 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:
For established products with simple installation requirements, revenue is recognised when the control of the product is passed to the customer. The point in time that control passes is defined in accordance with the agreed shipping terms and is determined on a case by case basis. The time of despatch or delivery of the goods to the customer is normally the point at which invoicing occurs.
For some generic products which are technically innovative and highly configured, 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. For contracts that pass control of the product to the customer only on completion of installation services, revenue will be recognised upon completion of the installation.
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 implies 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.
Customer-specific products are defined as being:
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. The time of despatch or delivery of the goods to the customer is normally the point at which invoicing occurs.
An obligation to provide a refund for faulty products under the standard warranty terms is recognised as a provision. If the contract includes terms that either extend the warranty beyond the standard term or implies that maintenance is provided to keep the product working, these are service warranties and revenue should be deferred to cover the performance obligation in an amount equivalent to the stand-alone selling price of that service.
Services include installation, commissioning, testing, training, software hosting & 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 will be recognised as follows:
Invoicing for services will depend 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, will be accounted for under the revenue recognised over time basis, using an input method.
For fixed-price contracts, revenue will be 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 will be applied cumulatively with any over/ under recognition being adjusted in the current period.
For cost-plus contracts, revenue will be recognised based upon costs incurred to date plus any agreed margin.
For both fixed-price and cost-plus contracts, invoicing will normally be based on a schedule with milestone payments.
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 in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
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. Once considered to be likely, tax benefits are 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.
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.
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.
The Group has defined benefit plans, defined contribution plans and post-retirement healthcare schemes.
For defined benefit plans and post-retirement healthcare schemes the liability for each scheme recognised in the balance sheet is the present value of the obligation at the balance sheet date less the fair value of any plan assets. The obligation is calculated annually by independent actuaries using the projected unit credit method. The present value is determined by discounting the estimated future cash outflows using interest rates of AA-rated corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full in the period in which they occur, outside of the income statement, and are presented in the statement of comprehensive income. Past service costs are recognised immediately in the income statement.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Contributions are expensed as incurred.
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.
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. 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. Any impairment is recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised.
Expenditure on research and development is charged to the income statement in the year in which it is incurred with the exception of:
The cost of development projects which are expected to take a substantial period of time to complete includes attributable borrowing costs.
The identifiable net assets acquired as a result of a business combination may include intangible assets other than goodwill. Any such intangible assets are amortised straight line over their expected useful lives as follows:
| Patents, licences | ||
|---|---|---|
| and trademarks | up to 20 years | |
| Technology | up to 13 years | |
| Customer relationships | up to 11 years | |
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The estimated useful lives are as follows:
| Software | up to 7 years |
|---|---|
| Patents and intellectual | shorter of the economic life |
| property | and the period the right is |
| legally enforceable |
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Property, plant and equipment is 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%; Short leasehold property – over the period of the lease; Plant, machinery, etc. – 10% to 20%; Fixtures, fittings, tools and other equipment – 10% to 33%.
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 are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). The cost of items of inventory which take a substantial period of time to complete includes attributable borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate provision for expected credit losses.
A provision for expected credit losses is established when there is objective evidence that amounts due under the original payment terms will not be collected. Expected credit losses are calculated using historical write-offs as a basis with a default risk multiplier applied to reflect country risk premium.
Provisions for warranties and product liability, disposal indemnities, restructuring costs, vacant leasehold property and legal claims are recognised when: the Company has a legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Provisions are discounted where the time value of money is material.
Where there is a number of similar obligations, for example where a warranty has been given, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Businesses classified as held for distribution to owners are measured at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and gains or losses on subsequent remeasurements are included in the income statement. No depreciation is charged on assets and businesses classified as held for distribution.
Businesses are classified as held for distribution to owners if their carrying amount will be settled principally through a demerger transaction rather than through continuing use and the following criteria are met:
– The business must be a separate major line of business, available for immediate distribution in its present condition;
The assets and liabilities of businesses held for distribution to owners are presented as separate lines on the balance sheet but the prior year has not been restated.
A discontinued operation is either:
Discontinued operations are presented on the income statement as a separate line and are shown net of tax.
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.
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 though 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.
Financial assets are derecognised when the right to receive cashflows from the assets has expired, or has been transferred, and the Company has transferred substantially all of the risks and rewards of ownership. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments previously taken to reserves are included in the income statement.
Financial assets are classified as current if they are expected to be realised within 12 months of the balance sheet date.
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.
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:
Changes in the fair value of any derivative financial instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
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 with changes in the hedging instrument 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 is immediately recognised in the income statement.
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 instance 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.
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.
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:
See note 20 for information on the methods the Group uses to estimate the fair values of its financial instruments.
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.
On 1 August 2018, the Group adopted IFRS 9: Financial Instruments. There was no material impact on adoption of this new standard. The Group's risk management strategies and hedge documentation are aligned with the requirements of IFRS 9 and these relationships are therefore treated as continuing hedges.
The new standard addresses the classification and measurement of financial assets. The alignment of the classification and measurement model under IFRS 9 has resulted in changes in the classification of all financial assets excluding derivatives, see notes 18, 19 and 20 for further details. These changes did not have a quantitative impact on the financial statements.
IFRS 9 has introduced an expected credit loss model, requiring an expected credit loss to be recognised on all financial assets held at amortised cost. The Group has previously provided against bad and doubtful debts within trade and other receivables based on specific risk assessments and reference to past default experience. The reassessment of existing provisions has not had a material impact on the net assets of the Group.
IFRS 9 has also introduced changes to the qualifying criteria for hedge accounting and has expanded the financial and nonfinancial instruments which may be designated as hedged items and hedging instruments in order to align hedge accounting with business strategy. The changes to hedge accounting under IFRS 9 have resulted in qualitative enhancements to the interest rate and foreign currency risk management disclosures but did not have a quantitative impact on the financial statements.
IFRS 15 has replaced IAS 18: Revenue and IAS 11: Construction contracts. The new standard has set out a five-step model for the recognition of revenue and has established principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash-flows arising from an entity's contracts with customers.
The principal areas of impact for the Group's revenue recognition comprise:
The Group has adopted IFRS 15 retrospectively from a transition date of 1 August 2018. The transition to IFRS 15 has not impacted the primary statements for the FY2018 comparative results, but has resulted in the reclassification of £16m of variable selling costs as contras to revenue within the Smiths Medical discontinued operation.
Certain new accounting standards and interpretations have been published that are not mandatory for 31 July 2019 reporting periods and have not been early adopted by the Group. None of these is expected to have a material impact on the financial statements of the Group except as set out below:
IFRS 16 'Leases' introduces, for lessees, a single accounting model for the treatment of both operating and finance leases, replacing the existing standard of IAS 17 and related guidance. The Group will adopt the new standard from 1 August 2019. The new standard will require the Group to recognise the obligation to make future lease payments as lease liabilities on the balance sheet, with a corresponding 'right of use' asset.
The Group has elected to apply the modified retrospective transition approach, requiring no restatement of the comparative period. The Group has also elected to apply the practical expedients of:
A preliminary assessment of the main changes arising on the adoption of IFRS 16 is that, on the 1 August 2019, the Group expects to recognise right of use assets and lease liabilities with a value in the region of £140m - £160m, including £45m - £50m within discontinued operations.
Operating profit for the year ended 31st July 2020 is estimated to increase by approximately £3m - £7m due to the reclassification of the financing charges inherent in operating lease costs being taken to finance costs. The depreciation of the right of use asset will remain as a charge within operating costs.
IFRIC 23 will apply to the Group from 1 August 2019 and clarifies how to recognise and measure uncertainties over income tax treatments. The Group already provides for tax uncertainties and the net impact on the Group of implementing IFRIC 23 is expected to be immaterial.
The ultimate Parent Company of the Group is Smiths Group plc, a company incorporated in England and Wales and listed on the London Stock Exchange.
The accounts of the Parent Company, Smiths Group plc, have been prepared in accordance with UK GAAP, applying Financial Reporting Standard 101, "Reduced Disclosure Framework". The Company accounts are presented in separate financial statements on pages 200 to 207. The principal subsidiaries of the Parent Company are listed in the above accounts.
The Group is organised into five divisions: John Crane, Smiths Detection, Flex-Tek, Smiths Interconnect and Smiths Medical. These divisions design, manufacture and support the following products:
The position and performance of each division is reported at each Board meeting to the Board of Directors. This information is prepared using the same accounting policies as the consolidated financial information except that the Group uses headline operating profit to monitor divisional results and operating assets to monitor divisional position. See note 3 for an explanation of which items are excluded from headline measures.
Following the reclassification of the Smiths Medical business as a discontinued operation, the segmental information of the Smiths Medical division is disclosed in note 27.
Intersegment sales and transfers are charged at arm's length prices.
| Year ended 31 July 2019 | |||||
|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate costs £m |
Total £m |
| 945 | 798 | 436 | 319 | 2,498 | |
| 220 | 127 | 84 | 47 | 478 | |
| (51) | (51) | ||||
| 220 | 127 | 84 | 47 | (51) | 427 |
| (29) | (36) | (16) | (2) | (18) | (101) |
| 191 | 91 | 68 | 45 | (69) | 326 |
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate costs £m |
Total £m |
| 881 | 793 | 354 | 300 | 2,328 | |
| 202 | 134 | 67 | 42 | 445 | |
| (57) | (57) | ||||
| 202 | 134 | 67 | 42 | (57) | 388 |
| (3) | (41) | 1 | (5) | 2 | (46) |
| 199 | 93 | 68 | 37 | (55) | 342 |
| Year ended 31 July 2018 – restated* |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
Headline operating profit is stated after charging the following items:
| Year ended 31 July 2019 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate and non-headline £m |
Total £m |
||
| Depreciation | 14 | 10 | 5 | 6 | 2 | 37 | |
| Amortisation of capitalised development | 9 | 9 | |||||
| Amortisation of software, patents and intellectual property | 3 | 2 | 2 | 2 | 9 | ||
| Amortisation of acquired intangibles | 42 | 42 | |||||
| Share-based payment | 4 | 3 | 1 | 1 | 5 | 14 |
| Year ended 31 July 2018 – restated* | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate and non-headline £m |
Total £m |
||
| Depreciation | 13 | 10 | 4 | 7 | 1 | 35 | |
| Amortisation of capitalised development | 10 | 10 | |||||
| Amortisation of software, patents and intellectual property | 3 | 5 | 2 | 4 | 14 | ||
| Amortisation of acquired intangibles | 26 | 26 | |||||
| Share-based payment | 3 | 1 | 1 | 1 | 6 | 12 |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
Corporate and non-headline items are central costs and charges that are treated as non-headline (see note 3).
| 31 July 2019 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate and non-headline £m |
Total £m |
||
| Property, plant, equipment, development projects, other intangibles and investments |
113 | 106 | 52 | 38 | 20 | 329 | |
| Inventory, trade and other receivables | 428 | 485 | 171 | 132 | 17 | 1,233 | |
| Segment assets | 541 | 591 | 223 | 170 | 37 | 1,562 | |
| 31 July 2018 | |||||||
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Smiths Medical £m |
Corporate and non-headline £m |
Total £m |
|
| Property, plant, equipment, development projects, | |||||||
| other intangibles and investments | 94 | 101 | 37 | 35 | 242 | 21 | 530 |
| Inventory, trade and other receivables | 361 | 372 | 117 | 120 | 266 | 22 | 1,258 |
| Segment assets | 455 | 473 | 154 | 155 | 508 | 43 | 1,788 |
Non-headline assets comprise receivables relating to non-headline items, acquisitions and disposals. Further details of the segmental asset held for distribution to owners is disclosed in note 27.
| 31 July 2019 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate and non-headline £m |
Total £m |
||
| Divisional liabilities | (158) | (287) | (63) | (56) | (564) | ||
| Corporate and non-headline liabilities | (386) | (386) | |||||
| Segment liabilities | (158) | (287) | (63) | (56) | (386) | (950) | |
| 31 July 2018 | |||||||
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Smiths Medical £m |
Corporate and non-headline £m |
Total £m |
|
| Divisional liabilities | (138) | (257) | (46) | (43) | (116) | (600) | |
| Corporate and non-headline liabilities | (370) | (370) | |||||
| Segment liabilities | (138) | (257) | (46) | (43) | (116) | (370) | (970) |
Non-headline liabilities comprise provisions and accruals relating to non-headline items, acquisitions and disposals. Further details of the segmental liabilities held for distribution to owners is disclosed in note 27.
| Assets | Liabilities | |||
|---|---|---|---|---|
| 31 July 2019 £m |
31 July 2018 £m |
31 July 2019 £m |
31 July 2018 £m |
|
| Segment assets and liabilities | 1,562 | 1,788 | (950) | (970) |
| Goodwill and acquired intangibles | 1,606 | 1,867 | ||
| Derivatives | 50 | 57 | (6) | (11) |
| Current and deferred tax | 126 | 218 | (107) | (149) |
| Retirement benefit assets and obligations | 469 | 526 | (152) | (145) |
| Cash and borrowings | 289 | 717 | (1,509) | (1,610) |
| Assets and liabilities held for distribution to owners | 1,216 | (213) | ||
| Statutory assets and liabilities | 5,318 | 5,173 | (2,937) | (2,885) |
The capital expenditure on property, plant and equipment, capitalised development and other intangible assets for each division is:
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Corporate and non-headline £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Capital expenditure year ended 31 July 2019 | 29 | 23 | 6 | 10 | 53 | 121 |
| Capital expenditure year ended 31 July 2018 | 17 | 22 | 7 | 10 | 52 | 108 |
Corporate and non-headline items include corporate capital expenditure through Smiths Business Information Services on IT equipment and software and £52m (FY2018: £48m) of expenditure from businesses held for distribution to owners.
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 £787m (FY2018: £787m) and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt. See note 30 for a reconciliation of net assets to capital employed.
The 12-month rolling average capital employed by division, which Smiths use to calculate divisional return on capital employed, is:
| 31 July 2019 | |||||
|---|---|---|---|---|---|
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Total £m |
|
| Average divisional capital employed | 938 | 1,113 | 359 | 368 | 2,778 |
| Average capital employed – assets held for distribution to owners | 1,253 | ||||
| Average corporate capital employed | (59) | ||||
| Average total capital employed | 3,972 | ||||
| 31 July 2018 | |||||
| John Crane £m |
Smiths Detection £m |
Flex-Tek £m |
Smiths Interconnect £m |
Total £m |
|
| Average divisional capital employed | 881 | 1,108 | 191 | 356 | 2,536 |
| Average capital employed – assets held for distribution to owners | 1,195 | ||||
| Average corporate capital employed | 4 | ||||
| Average total capital employed | 3,735 |
The Smiths Medical division has been accounted for as a business held for distribution to owners. Further details of the segmental asset and liabilities of the Smiths Medical division is disclosed in note 27.
The revenue for the main product and service lines for each division is:
| Original | |||
|---|---|---|---|
| equipment | Aftermarket | Total | |
| John Crane | £m | £m | £m |
| Revenue year ended 31 July 2019 | 313 | 632 | 945 |
| Revenue year ended 31 July 2018 | 292 | 589 | 881 |
| Aviation | Other security | ||
| Smiths Detection | security £m |
systems £m |
Total £m |
| Revenue year ended 31 July 2019 | 522 | 276 | 798 |
| Revenue year ended 31 July 2018 | 540 | 253 | 793 |
| Flex-Tek | Aerospace | Industrials | Total |
| Revenue year ended 31 July 2019 | £m 121 |
£m 315 |
£m 436 |
| Revenue year ended 31 July 2018 | 87 | 267 | 354 |
| Smiths Interconnect | Components, Connectors & Subsystems |
||
| £m | |||
| Revenue year ended 31 July 2019 | 319 | ||
| Revenue year ended 31 July 2018 | 300 | ||
Following a review the Group has rationalised the analysis of divisional revenue to focus on the key markets of each division and to reflect the measures of revenue performance that are reported to and reviewed by the chief operating decision maker of the business. This review has resulted in the following changes to the analysis of revenue, and comparatives have been updated accordingly:
– Smiths Detection – Air Transportation has been renamed as Aviation whilst Urban Security, Defence and Ports & Borders have been aggregated and reported as Other Security Systems;
– Flex-Tek – revenue is now analysed by end market, Aerospace and Industrials. Previously revenue was analysed by product line; and
– Smiths Interconnect – the Connectors and Microwave sectors have been aggregated and reported as Components, Connectors & Subsystems.
The Group's statutory revenue is analysed as follows:
| 2,498 | 2,328 | |
|---|---|---|
| Services | 473 456 |
|
| Sale of goods recognised over time | 41 | 31 |
| Sale of goods recognised at a point in time 1,984 |
1,841 | |
| Year ended 31 July 2019 |
Year ended 31 July 2018 restated* £m |
£m |
* The comparatives for the year to 31 July 2018 have been restated to reflect the adoption of IFRS 15 and the reclassification of the Smiths Medical business as a discontinued operation.
The Group's revenue by destination and non-current operating assets by location are shown below:
| Revenue | Intangible assets and property plant and equipment |
||||
|---|---|---|---|---|---|
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated* £m |
31 July 2019 £m |
31 July 2018 £m |
||
| Americas | 1,243 | 1,158 | 1,299 | 1,676 | |
| Europe | 558 | 545 | 533 | 588 | |
| Asia-Pacific | 409 | 365 | 69 | 104 | |
| Rest of the World | 288 | 260 | 15 | 13 | |
| 2,498 | 2,328 | 1,916 | 2,381 |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated* £m |
|
|---|---|---|
| Research and development expense | 84 | 75 |
| Depreciation of property, plant and equipment | 37 | 35 |
| Amortisation of intangible assets | 60 | 50 |
| Operating leases: | ||
| – land and buildings | 25 | 23 |
| – other | 7 | 7 |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
Research and development (R&D) cash costs were £111m (FY2018: £96m) comprising £84m (FY2018: £75) of R&D expensed to the income statement, £9m (FY2018: £10m) of capitalised costs and £18m (FY2018: £11m) of customer funded R&D.
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|
| Audit services | ||
| Fees payable to the Company's auditors for the audit of the Company's annual financial statements | 4.0 | 4.1 |
| Fees payable to the Company's auditors and its associates for other services: | ||
| – the audit of the Company's subsidiaries | 1.5 | 1.4 |
| 5.5 | 5.5 | |
| All other services | 0.2 | 0.3 |
Other services comprise audit-related assurance services £0.2m (FY2018: £0.2m) and other services £nil (FY2018: £0.1m). Total fees for nonaudit services comprise 4% (FY2018: 5%) of audit fees. Audit-related assurance services include the review of the Interim Report.
The Company seeks to present a measure of performance which is not impacted by material non-recurring items or items considered nonoperational in nature. This measure of profit is described as 'headline' and is used by management to measure and monitor performance. See the disclosures on presentation of results in accounting policies for an explanation of the adjustments. The items excluded from 'headline' are referred to as 'non-headline' items.
The non-headline items included in statutory operating profit for continuing operations are as follows:
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated* £m |
|
|---|---|---|---|
| Post-acquisition integration costs and fair value adjustment unwind | |||
| Integration programme costs | (17) | (19) | |
| Unwind of acquisition balance sheet fair value uplift | (6) | (2) | |
| Acquisition and disposal related transaction costs and provision releases | |||
| Business acquisition / disposal costs | (10) | (2) | |
| Release of acquisition related provisions | 4 | ||
| Legacy pension scheme arrangements | |||
| Guaranteed Minimum Pension (GMP) equalisation | 8 | (29) | |
| Settlement (loss)/gain on post-retirement benefit schemes | 8 | (1) | 4 |
| Non-headline litigation provision movements | |||
| Net release of provision held against Titeflex Corporation subrogation claims | 22 | 6 | 2 |
| Provision for John Crane, Inc. asbestos litigation | 22 | (17) | (10) |
| Cost recovery for John Crane, Inc. asbestos litigation | 11 | ||
| Other items | |||
| Amortisation of acquisition related intangible assets | 10 | (42) | (26) |
| Profit on disposal of businesses | 28 | 7 | |
| Non-headline items in operating profit – continuing operations | (101) | (46) |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
The £17m (FY2018: £19m) of integration programme costs relate to defined projects for the integration of Morpho Detection into the existing Smiths Detection business and United Flexible into the existing Flex-Tek business. Integration programme costs include the direct costs of organisational change, IT system harmonisation expenses, site rationalisation and entity closure costs. The Morpho Detection integration programme is due to conclude in 2020 and the United Flexible integration programme is due to conclude in 2021. Integration costs are recognised as non-headline items because they are considered material and non-recurring.
The impact of unwinding the acquisition balance sheet fair value adjustments required by IFRS 3 'Business combinations' are recognised as non-headline as the charge does not relate to trading activity. The £6m (FY2018: £2m) charge is due to the unwind of fair value uplifts on the United Flexible and Morpho Detection acquisitions.
The £10m of business acquisition / disposal costs (FY2018: £2m) comprise £7m of directly linked incremental transaction costs, principally related to the acquisition of United Flexible which completed in February 2019 and £2m of litigation settlement costs relating to a prior year disposal. These costs do not include the cost of employees working on transactions and are reported as non-headline because they are dependent on the level of acquisition and disposal activity in the year.
The release of acquisition related provisions of £4m (FY2018: £nil) represents the release of excess accruals for deferred consideration on business acquisitions. These are reported as non-headline as the initial provision accrual was not recognised as a headline expense.
In the current year £29m of past service costs (FY2018: £nil) were recognised following the UK High Court ruling that GMP equalisation is required. A £1m settlement loss (FY2018: £4m gain) was recognised when defined benefit pension scheme members opted to take lump sums in lieu of annuities. These items are included in non-headline as they are non-recurring and relate to legacy pension liabilities. See note 8 for further details.
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:
Acquisition related intangible asset amortisation costs of £42m (FY2018: £26m) were recognised in the current year. 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 £7m profit on disposal of businesses in FY2018 principally relates to the sale of John Crane Bearings. This is considered to be a nonheadline item since the proceeds and cash impact are material and non-recurring.
The non-headline items included in finance costs for continuing operations are as follows:
| Continuing operations – non-headline loss before taxation | (72) | (46) | |
|---|---|---|---|
| Non-headline items in finance costs – continuing operations | 29 | ||
| Other financing losses | (13) | (3) | |
| Foreign exchange gain on intercompany loan with discontinued operations | 39 | 2 | |
| Other finance income – retirement benefits | 8 | 11 | 7 |
| Unwind of discount on provisions | 22 | (8) | (6) |
| Notes | 31 July 2019 £m |
31 July 2018 £m |
|
| Year ended | Year ended |
The financing elements of non-headline legacy liabilities, including the £8m (FY2018: £6m) unwind of discount on provisions, are excluded from headline finance costs because these provisions were originally recognised as non-headline and this treatment has been maintained for ongoing costs and credits.
Other finance income comprises £11m (FY2018: £7m) of financing credits relating to retirement benefits. These are excluded from headline finance costs because the ongoing costs and credits are a legacy of previous employee pension arrangements.
Following the reclassification of Smiths Medical division as a discontinued operation, foreign exchange gains or losses on intercompany financing between Smiths Medical and the continuing group are recognised on the face of the income statement as a non-headline item. The £39m foreign exchange gain in continuing operations (FY2018: £2m gain) offsets the foreign exchange loss in discontinued operations. This is excluded from headline net finance costs as these fair value movements are non-operational in nature and are purely a consequence of the presentational requirements for discontinued operations.
Other financing losses represent the fair value movements on financial instruments and foreign exchange movements on borrowings which the Group excludes from headline net finance costs. The current year loss of £13m (FY2018: £3m) is principally due to prior year hedge ineffectiveness following a change in valuation methodology for the bonds designated as fair value hedges, this hedge ineffectiveness will reverse over the remaining period to maturity. These fair value movements are excluded from headline net finance costs when the following requirements are met:
The non-headline items included in taxation for continuing operations are as follows:
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|---|
| Tax on non-headline loss | 6 | 12 | (3) |
| Tax on the repatriation of treasury legacy cash pools | 6 | (17) | |
| Impact of US tax reform | 6 | (78) | |
| US deferred tax asset derecognition | 6 | (18) | |
| UK deferred tax asset derecognition | 6 | (36) | |
| Non-headline items in taxation – continuing operations | (59) | (81) | |
| Continuing operations – non-headline loss for the year | (131) | (127) |
A £17m tax charge on prior year undistributed overseas earnings has been recognised following the adoption of a new Treasury cash repatriation policy. This cost has been reported as non-headline because the impact of the policy change was material and non-recurring.
In the prior year, US tax reform led to the Group recognising a £78m tax charge for continuing operations and a £26m tax credit for discontinued operations, following a reduction in the US Federal tax rate. This cost was reported as non-headline, because the impact of US tax reform was both material and non-recurring.
Smiths Detection US business has generated tax losses from tax-deductible amortisation relating to the acquisition of Morpho in March 2017. The utilisation of these losses has been affected by changes in US tax legislation. As a consequence deferred tax of £18m on tax losses has been derecognised. The losses equated to non-headline amortisation of intangibles and their derecognition has therefore also been treated as non-headline.
In prior years UK deferred tax of £69m was recognised as a non-headline credit. The decision to separate Smiths Medical will reduce Group profitability in the UK. As a consequence, deferred tax of £36m has been derecognised. The derecognition has been reported as nonheadline because the original credit was reported as non-headline.
The non-headline items for discontinued operations are as follows:
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|---|
| Acquisition and disposal related transaction costs and provision releases | |||
| Business acquisition / disposal costs | (2) | (1) | |
| Medical separation costs | (8) | ||
| Other items | |||
| Amortisation of acquisition related intangible assets | (3) | (3) | |
| Profit on disposal of businesses | 17 | ||
| Non-headline finance costs items | |||
| Foreign exchange loss on intercompany loan with parent | (39) | (2) | |
| Other financing gains | 1 | ||
| Non-headline taxation items | |||
| Tax on non-headline loss | 6 | 8 | 25 |
| Tax on the repatriation of treasury legacy cash pools | 6 | (1) | |
| Non headline impact of US tax reform | 6 | 26 | |
| Non-headline items in profit from discontinued operations | (27) | 45 | |
| Profit for the year – non headline items for continuing and discontinued operations | (158) | (82) |
The £2m of Business acquisition / disposal costs (FY2018: £1m) comprise incremental deal costs. These costs do not include the cost of employees working on transactions and are reported as non-headline because they are dependent on the level of activity in the year.
The incremental costs incurred by the Group on the transaction to demerge the Smiths Medical business amounted to £8m in the current year. This cost has been reported as non-headline as the full year effect of the transaction on the Group's financial statements is both material and non-recurring.
The £39m foreign exchange loss on intercompany loan with parent (FY2018: £2m gain) offsets the foreign exchange gain in continuing operations. This is excluded from headline net finance costs as these fair value movements are non-operational in nature and are purely a consequence of the presentational requirements for discontinued operations.
The profit on disposal of businesses of £17m (FY2018: £nil) relates to the sale of Medical's sterile water bottling and EMEA kitting businesses. See note 27. These are considered to be a non-headline items since the profit and cash impact are material and non-recurring arising from the sale of a business.
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated* £m |
|
|---|---|---|---|
| Interest receivable | 11 | 10 | |
| Interest payable: | |||
| – bank loans and overdrafts, including associated fees | (7) | (6) | |
| – other loans | (55) | (59) | |
| Interest payable | (62) | (65) | |
| Headline net finance costs | (51) | (55) | |
| Other financing gains/(losses): | |||
| – valuation movements on fair value hedged debt | (52) | 3 | |
| – valuation movements on fair value derivatives | 42 | (3) | |
| – net foreign exchange losses | (3) | (3) | |
| Other financing losses | 3 | (13) | (3) |
| Foreign exchange gain on intercompany loan with discontinued operations | 3 | 39 | 2 |
| Unwind of discount on provisions | 3 | (8) | (6) |
| Net interest income on retirement benefit obligations | 8 | 11 | 7 |
| Non-headline finance cost items | 29 | ||
| Net finance costs | (22) | (55) |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
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 31 July 2019 |
Year ended 31 July 2018 |
|
|---|---|---|
| £m | £m | |
| Profit attributable to equity shareholders for the year: | ||
| – continuing | 140 | 117 |
| – discontinued | 85 | 160 |
| Total | 225 | 277 |
| Average number of shares in issue during the year | 395,936,520 | 395,723,069 |
| Statutory earnings per share continuing operations – basic | 35.4p | 29.6p |
| Statutory earnings per share continuing operations – diluted | 35.1p | 29.2p |
| Statutory earnings per share total – basic | 56.8p | 70.0p |
| Statutory earnings per share total – diluted | 56.5p | 69.1p |
Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 398,375,376 (FY2018: 400,999,220) ordinary shares, being the average number of ordinary shares in issue during the year adjusted by the dilutive effect of employee share schemes. For the year ended 31 July 2019, zero options (FY2018: zero) were excluded from this calculation because their effect was anti-dilutive for continuing operations.
A reconciliation of statutory and headline earnings per share is as follows:
| Year ended 31 July 2019 | Year ended 31 July 2018 | |||||
|---|---|---|---|---|---|---|
| £m | Basic EPS (p) |
Diluted EPS (p) |
£m | Basic EPS (p) |
Diluted EPS (p) |
|
| Total profit attributable to equity shareholders of the Parent Company | 225 | 56.8 | 56.5 | 277 | 70.0 | 69.1 |
| Exclude: Non-headline items (note 3) | 158 | 82 | ||||
| Headline earnings per share | 383 | 96.8 | 96.1 | 359 | 90.7 | 89.5 |
| Profit from continuing operations attributable to equity shareholders of the Parent Company |
140 | 35.4 | 35.1 | 117 | 29.6 | 29.2 |
| Exclude: Non-headline items (note 3) | 131 | 127 | ||||
| Headline earnings per share | 271 | 68.4 | 68.0 | 244 | 61.7 | 60.8 |
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 2018 | |
| 31 July 2019 £m |
restated* £m |
|
| The taxation charge in the consolidated income statement for the year comprises: | ||
| Continuing operations | ||
| – current income tax charge | 93 | 93 |
| – current tax adjustments in respect of prior periods | 5 | 10 |
| Current taxation | 98 | 103 |
| Deferred taxation | 64 | 65 |
| Total taxation expense – continuing operations | 162 | 168 |
| Discontinued operations | ||
| – current income tax credit | 36 | 11 |
| – deferred taxation | (11) | (23) |
| Total taxation expense – discontinued operations | 25 | (12) |
| Total taxation expense in the consolidated income statement | 187 | 156 |
* The comparatives for the year to 31 July 2018 have been restated to reflect the reclassification of the Smiths Medical business as a discontinued operation.
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|
| Tax on items charged/(credited) to equity | ||
| Deferred tax charge/(credit): | ||
| – retirement benefit schemes | (13) | 18 |
| – cash-flow hedge accounting | (1) | |
| – share-based payments | 3 | 1 |
| (10) | 18 |
Of the £13m credit to equity for retirement benefits, £12m relates to UK retirement schemes and £1m to US pension schemes.
| Current tax £m |
|---|
| 17 |
| (1) |
| (115) |
| 65 |
| (34) |
| 38 |
| (72) |
| (34) |
| (1) |
| (132) |
| 9 |
| 107 |
| (51) |
| 11 |
| (56) |
| (6) |
| (51) |
Provisions included in current tax liabilities are established based on reasonable estimates of the possible consequences of tax authority audits in the various countries in which the Group operates. Management judgement is used to determine the amount of such provisions based on an understanding of the relevant local tax law, taking into account the differences of interpretation that can arise on a wide variety of issues, depending on the prevailing circumstances, including the nature of current tax audits and the experience of previous enquiries.
The tax charge on the profit for the year for continuing operations is different from the standard rate of corporation tax in the UK of 19.0% (FY2018: 19.0%). The difference is reconciled as follows:
| Year ended 31 July 2019 |
Year ended 31 July 2018 restated |
|
|---|---|---|
| £m | £m | |
| Profit before taxation | 304 | 286 |
| Notional taxation expense at UK rate of 19.0% (FY2018: 19.0%) | 58 | 54 |
| Different tax rates on non-UK profits and losses | 22 | 33 |
| Non-deductible expenses | 18 | 9 |
| Tax credits and non-taxable income | (14) | (8) |
| Non-headline derecognition of UK deferred tax asset | 36 | |
| Other adjustments to unrecognised deferred tax | 3 | 15 |
| Non-headline derecognition of US deferred tax asset | 18 | |
| Non-headline impact of US tax reform – deferred tax revaluation | 62 | |
| Non-headline impact of US tax reform – deemed repatriation tax | 17 | |
| Provision for prior year deferred tax on unremitted overseas earnings | 17 | |
| Effect of non-taxable profits on disposal of businesses | (1) | |
| Tax on Medical consolidation adjustments | 7 | (8) |
| Prior Year true-up | (3) | (5) |
| Tax on continuing activities | 162 | 168 |
| Tax on discontinued activities | 25 | (12) |
| Total taxation expense in the consolidated income statement | 187 | 156 |
| Comprising: | ||
| Taxation on headline profit | 103 | 87 |
| Non-headline taxation items: | ||
| – tax on non-headline loss | (12) | 3 |
| – UK deferred tax asset derecognition | 36 | |
| – US deferred tax asset derecognition | 18 | |
| – tax on the repatriation of treasury legacy cash pools | 17 | |
| – Impact of US tax reform | 78 | |
| Taxation on non-headline items | 59 | 81 |
| Taxation on discontinued operation | 25 | (12) |
| Total taxation expense in the consolidated income statement | 187 | 156 |
The head office of Smiths Group is domiciled in the UK; so the tax charge has been reconciled to UK tax rates.
| Property, plant and equipment and intangible |
Employment | Losses carried |
||||
|---|---|---|---|---|---|---|
| assets £m |
benefits £m |
forward £m |
Provisions £m |
Other £m |
Total £m |
|
| At 31 July 2017 | (148) | (10) | 129 | 138 | 52 | 161 |
| Reallocation | 2 | (2) | ||||
| (Charge)/credit to income statement – continuing | 60 | (21) | (7) | (55) | (18) | (41) |
| (Charge)/credit to income statement – discontinued | 2 | (1) | (1) | |||
| (Charge) to equity | (18) | (18) | ||||
| Business combinations | 1 | 1 | ||||
| Exchange adjustments | 1 | (1) | (1) | 1 | ||
| At 31 July 2018 | (84) | (50) | 121 | 84 | 32 | 103 |
| Deferred tax assets | 3 | (56) | 120 | 80 | 33 | 180 |
| Deferred tax liabilities | (87) | 6 | 1 | 4 | (1) | (77) |
| At 31 July 2018 | (84) | (50) | 121 | 84 | 32 | 103 |
| Reallocation | 1 | 3 | (4) | |||
| Charge to income statement – continuing | (19) | (9) | (21) | (2) | (2) | (53) |
| Credit to equity | 10 | 10 | ||||
| Business combinations | (31) | 2 | 1 | (1) | (29) | |
| Reclassified to businesses held for distribution to owners (note 27) | 61 | (1) | (2) | (23) | 35 | |
| Exchange adjustments | (11) | 1 | 4 | 7 | 3 | 4 |
| At 31 July 2019 | (84) | (48) | 106 | 91 | 5 | 70 |
| Deferred tax assets | (20) | (57) | 103 | 66 | 23 | 115 |
| Deferred tax liabilities | (64) | 9 | 3 | 25 | (18) | (45) |
| At 31 July 2019 | (84) | (48) | 106 | 91 | 5 | 70 |
Discontinued operations had net deferred tax liabilities of £35m at 31 July 2019.
In 2017, as a result of improvement in the legacy UK pension position and financing changes UK deferred tax of £69m was recognised as a non-headline gain in the period. The largest contribution to UK profitability derives from the activities of the Medical division and following the decision to separate Medical next year, net deferred tax assets related to non-Medical activities have been de-recognised, generating a non-headline charge of £36m. The closing net deferred tax asset balance related to UK activities and included in the balance at 31 July 2019 amounted to £nil (FY2018: £35m).
The deferred tax asset relating to losses has been recognised on the basis that evidence demonstrates a consistent pattern of improving results and the Group has implemented plans to support continuing improvements, or the losses relate to specific, identified non-recurring events. To the extent that losses have been derecognised, the derecognition has been reported on a consistent basis as the original credit. See note 3 for further details on the deferred tax derecognised in the current year.
Deferred tax relating to provisions includes £50m (FY2018: £48m) relating to John Crane Inc litigation provision, and £18m (FY2018: £19m) relating to Titeflex Corporation litigation provision. See note 22 for additional information on provisions.
Included in other deferred tax balances above is a deferred tax asset related to inventory of £6m (FY2018: £8m), deferred revenue of £9m (FY2018: £9m) and rebate reserve of £nil (FY2018: £6m).
The Group has unrecognised deferred tax relating to non-UK losses amounting to £243m (FY2018: £73m).
The expiry date of operating losses carried forward is dependent upon the law of the various territories in which the losses arise. A summary of expiry dates for losses in respect of which deferred tax has not been recognised is set out below:
| 2019 £m |
Expiry of losses |
2018 £m |
Expiry of losses |
|
|---|---|---|---|---|
| Restricted losses – Asia | 29 | 2020-2026 | 16 | 2019-2025 |
| Restricted losses – Americas | 53 | 2020-2032 | ||
| Unrestricted losses – operating losses | 161 | No expiry | 57 | No expiry |
| Total losses | 243 | 73 |
Smiths Group is one of the companies enrolled in the FII GLO litigation against HMRC. The court actions first filed in 2003 are nearing an end and some claimants with different fact patterns have received payments. Smiths' recoveries are estimated at circa £22m (computed on a simple interest basis and after deducting 45% withholding tax) however there are further relevant legal actions that may impact this estimate.
The Group has not recognised any of this potential tax credit to the financial statements in the current period or the prior year.
In April 2019, the European Commission issued its decision in respect of a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The European Commission's decision found that part of the Group Financing Exemption constitutes state aid. The Group Financing Exemption was introduced in legislation by the UK Government in 2013. In common with other UK-based international companies whose arrangements were in line with the then UK CFC legislation, Smiths Group may be affected by the ultimate outcome of this decision.
In June 2019 the UK government and some other UK-based international companies appealed to the General Court of the European Union against the decision. Smiths is considering whether to appeal itself. Nonetheless, the UK Government is required to commence recovery from beneficiaries of the alleged aid in line with the European Commission's decision. As the first step in this recovery process HMRC have written to beneficiaries, including Smiths, for information. At present it is not possible to determine the amount that the UK government will seek to collect from Smiths.
If the European Commission's decision is ultimately upheld, the estimated maximum potential liability (which includes both tax and interest) is approximately £15m. Based on our current assessment, no provision is being made in respect of this issue.
| Year ended 31 July 2019 | Year ended 31 July 2018 | |||||
|---|---|---|---|---|---|---|
| Continuing operations £m |
Discontinued operations £m |
Total £m |
Continuing operations £m |
Discontinued operations £m |
Total £m |
|
| Staff costs during the period | ||||||
| Wages and salaries | 645 | 245 | 890 | 603 | 236 | 839 |
| Social security | 80 | 25 | 105 | 74 | 23 | 97 |
| Share-based payments (note 9) | 14 | 1 | 15 | 14 | 2 | 16 |
| Pension costs (including defined contribution schemes) (note 8) | 27 | 13 | 40 | 26 | 11 | 37 |
| 766 | 284 | 1,050 | 717 | 272 | 989 |
The average number of persons employed, rounded to the nearest 50 employees, was:
| Year ended 31 July 2019 |
Year ended 31 July 2018 |
|
|---|---|---|
| John Crane | 6,200 | 6,100 |
| Smiths Detection | 2,850 | 2,750 |
| Flex-Tek | 2,550 | 2,150 |
| Smiths Interconnect | 2,350 | 2,300 |
| Corporate (including central/shared IT services) | 300 | 350 |
| Continuing operations | 14,250 | 13,650 |
| Discontinued operations – Smiths Medical | 7,750 | 8,050 |
| Total | 22,000 | 21,700 |
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 Committee on pages 100 to 122.
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|
| Key management compensation | ||
| Salaries and short-term employee benefits | 10.2 | 11.4 |
| Cost of post-retirement benefits | 0.3 | 0.1 |
| Cost of share-based incentive plans | 5.0 | 5.4 |
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 2019 | Year ended 31 July 2018 | |||
|---|---|---|---|---|
| Number of instruments '000 |
Weighted average exercise price |
Number of instruments '000 |
Weighted average exercise price |
|
| CIP / SMP | 88 | |||
| SEP | 231 | 309 | ||
| LTIP | 1,463 | 1,455 | ||
| Restricted stock | 178 | 296 | ||
| SAYE | 12 | £10.63 | 9 | £10.48 |
The only related party transactions in FY2019 were key management compensation (FY2018: key management compensation).
Smiths provides post-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.
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 £37m (FY2018: £34m).
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 2019. Scheme assets are stated at their market values. Contributions to the schemes are made on the advice of the actuaries, in accordance with local funding requirements.
| 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|
| At beginning of period | 381 | 224 |
| Exchange adjustment | (4) | |
| Current service cost | (3) | (3) |
| Scheme administration costs | (4) | (5) |
| Past service cost, curtailments, settlements | (30) | 5 |
| Finance income – retirement benefits | 11 | 7 |
| Contributions by employer | 36 | 49 |
| Actuarial (loss)/gain | (76) | 104 |
| Net retirement benefit asset | 311 | 381 |
The £311m net retirement benefit assets includes £6m of pension obligations disclosed as liabilities held for distribution to owners.
Smiths funded UK pension schemes are subject to a statutory funding objective, as set out in UK pension legislation. Scheme trustees need to obtain regular actuarial valuations to assess the scheme against this funding objective. The trustees and sponsoring companies need to agree funding plans to improve the position of a scheme when it is below the acceptable funding level.
The UK Pensions Regulator has extensive powers to protect the benefits of members, promote good administration and reduce the risk of situations arising which may require compensation to be paid from the Pension Protection Fund. These include imposing a schedule of contributions or the calculation of the technical provisions, where a trustee and company fail to agree appropriate calculations.
This scheme was closed to future accrual effective 1 November 2009. SIPS provides index-linked pension benefits based on final earnings at date of closure. SIPS is governed by a corporate trustee (SI Pension Trustee 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 2017, and experience gains and losses identified during this valuation have been incorporated into the IAS 19 valuation. Under the funding plan for SIPS agreed in June 2018 Smiths pays cash contributions of £1m a month until the Scheme reaches full funding on a 'gilts + 0%' basis. 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.
On 26 October 2018, the High Court of Justice of England and Wales issued a judgment that schemes need to equalise GMP benefits for men and women. We have estimated the financial effect of equalising benefits in respect of GMPs and any conversion of GMPs into non-GMPs to be £21m. This has been recognised as a past service cost in the income statement for the year ended 31 July 2019. The estimate is based on method C2.
The duration of SIPS liabilities is around 23 years (FY2018: 23 years) for active deferred members, 23 years (FY2018: 22 years) for deferred members and 12 years (FY2018: 11 years) for pensioners and dependants. On 3 July 2019 SIPS purchased a buy-in annuity policy with Canada Life for a premium of £176m. An actuarial loss of £14m was recognised as a result of this buy-in agreement.
This scheme was closed to future accrual effective 1 November 2009. TIGPS provides index-linked 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.
The most recent actuarial valuation of this scheme has been performed using the Projected Unit Method as at 5 April 2017. Under the funding plan for TIGPS agreed in June 2018, Smiths pays cash contributions of £1m a month until the Scheme is fully funded on a solvency basis. Under the governing documentation of TIGPS, any future surplus would be returnable to Smiths Group plc by refund, assuming gradual settlement of the liabilities over the lifetime of the scheme.
On 26 October 2018, the High Court of Justice of England and Wales issued a judgment that schemes need to equalise GMP benefits for men and women. We have estimated the financial effect of equalising benefits in respect of GMPs and any conversion of GMPs into non-GMPs to be £8m. This has been recognised as a past service cost in profit and loss in the year ending 31 July 2019. The estimate is based on method C2.
The duration of the TIGPS liabilities is around 25 years (FY2018: 24 years) for active deferred members, 22 years (FY2018: 22 years) for deferred members and 11 years (FY2018: ten years) for pensioners and dependants.
The valuations of the principal US pension and post-retirement healthcare plans were performed using census data at 1 January 2018.
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 managed by a Settlor Committee appointed by Smiths Group Services Corp, a whollyowned subsidiary.
The duration of the liabilities for the largest US plan is around 18 years (FY2018: 19 years) for active deferred members, 18 years (FY2018: 19 years) for deferred members and 11 years (FY2018: 12 years) for pensioners and dependants.
The pensions schemes are exposed to risks that:
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 supporting trustees in adopting investment strategies which aim to match assets to future obligations, after allowing for the funding position of the scheme.
TIGPS has covered roughly 50% of liabilities with matching annuities, eliminating investment return, longevity, inflation and funding risks in respect of those liabilities. It has also adopted a liability matching 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 and total return swaps. The strategy also takes into account the scheme's corporate bond investments.
SIPS has covered roughly 30% of liabilities with matching annuities, eliminating investment return, longevity, inflation and funding risks in respect of those liabilities. It has also adopted a liability matching 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.
| 2019 UK |
2019 | 2019 | 2018 | 2018 | 2018 | ||
|---|---|---|---|---|---|---|---|
| US | Other | UK | US | Other | |||
| Rate of increase in salaries | n/a | n/a | 3.3% | n/a | n/a | 3.1% | |
| Rate of increase for active deferred members | 4.2% | n/a | n/a | 4.1% | n/a | n/a | |
| Rate of increase in pensions in payment | 3.3% | n/a | 3.1% | 3.2% | n/a | 2.5% | |
| Rate of increase in deferred pensions | 3.3% | n/a | n/a | 3.2% | n/a | n/a | |
| Discount rate | 2.1% | 3.5% | 2.8% | 2.8% | 4.15% | 3.4% | |
| Inflation rate | 3.3% | n/a | 2.6% | 3.2% | n/a | 3.3% | |
| Healthcare cost increases | 4.7% | n/a | n/a | 4.7% | n/a | n/a |
The assumptions used in calculating the costs and obligations of the Group's defined benefit pension plans are set by the Group after consultation with independent professionally qualified actuaries. The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily occur in practice. For countries outside the UK and USA; assumptions are disclosed as a weighted average.
The UK schemes use a discount rate based on the annualised yield on the Aon GBP Select AA Curve, using the expected cash-flows from a notional scheme with obligations of the same duration as that of the UK schemes.
The mortality assumptions used in the principal UK schemes are based on the "SAPS S2" All 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 2018 CMI projections, with a smoothing factor of 7.0 and A parameter of 0.5% and blended to a long-term rate of 1.25%. The mortality assumptions used in the principal US schemes are based on the RP-2014 table for healthy employees and healthy annuitants, removing MP-2014 improvement projections from 2006-2014 and applying scale MP-2018 mortality improvements from 2006 on a generational basis.
| UK schemes | US schemes | |||||||
|---|---|---|---|---|---|---|---|---|
| Expected further years of life | Male 31 July 2019 |
Female 31 July 2019 |
Male 31 July 2018 |
Female 31 July 2018 |
Male 31 July 2019 |
Female 31 July 2019 |
Male 31 July 2018 |
Female 31 July 2018 |
| Member who retires next year at age 65 | 22 | 24 | 22 | 24 | 21 | 23 | 21 | 23 |
| Member, currently 45, when they retire in 20 years' time |
23 | 25 | 24 | 25 | 22 | 24 | 22 | 24 |
Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2019 are set out below. These sensitivities show the hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which incorporates the impact of certain correlating assumptions. In practice, such assumptions rarely change in isolation.
| Profit before tax for year ended 31 July 2019 £m |
Increase/ (decrease) in scheme assets 31 July 2019 £m |
(Increase)/ decrease in scheme liabilities 31 July 2019 £m |
Profit before tax for year ended 31 July 2018 £m |
Increase/ (decrease) in scheme assets 31 July 2018 £m |
(Increase)/ decrease in scheme liabilities 31 July 2018 £m |
|
|---|---|---|---|---|---|---|
| Rate of mortality – 1 year increase in life expectancy | (2) | 86 | (195) | (3) | 70 | (166) |
| Rate of mortality – 1 year decrease in life expectancy | 2 | (85) | 193 | 3 | (71) | 166 |
| Rate of inflation – 0.25% increase | (2) | 26 | (109) | (2) | 22 | (94) |
| Discount rate – 0.25% increase | 4 | (33) | 152 | 5 | (28) | 135 |
| Market value of scheme assets – 2.5% increase | 2 | 76 | 2 | 74 |
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.
Liquidity funds, equities and bonds are valued using quoted market prices in active markets. Exchange traded equity index futures are valued at market prices.
Total return, interest and inflation swaps are bilateral agreements between counterparties and do not have observable market prices. These derivative contracts are valued using observable market inputs.
Insured liabilities comprise annuity policies matching the scheme obligation to identified groups of pensioners. These assets are valued at the actuarial valuation of the corresponding liability, reflecting this matching relationship. Property is valued by specialists applying recognised property valuation methods incorporating current market data on rental yields and transaction prices.
| 31 July 2019 – £m | 31 July 2018 – £m | |||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| Cash and cash equivalents: | ||||||||
| – cash | 31 | 1 | 1 | 33 | 26 | 1 | 1 | 28 |
| – liquidity funds | 14 | 14 | 32 | 32 | ||||
| Equities: | ||||||||
| – UK funds | 1 | 1 | 2 | 1 | 1 | 2 | ||
| – other regions and global funds | 60 | 3 | 63 | 79 | 3 | 82 | ||
| Government bonds | 2,230 | 85 | 3 | 2,318 | 1,679 | 72 | 4 | 1,755 |
| Corporate bonds | 1,174 | 196 | 1,370 | 1,097 | 166 | 1,263 | ||
| Insured liabilities | 1,343 | 1 | 1,344 | 1,154 | 1 | 1,155 | ||
| Property | 103 | 1 | 104 | 121 | 121 | |||
| Other: | ||||||||
| – diversified growth funds and scheme | ||||||||
| receivables | 310 | 26 | 336 | 544 | 23 | 567 | ||
| – gilt repurchase obligations | (1,160) | (1,160) | (866) | (866) | ||||
| Total market value | 4,106 | 282 | 36 | 4,424 | 3,867 | 239 | 33 | 4,139 |
UK other investments at 31 July 2019 included £4m (FY2018: £19m) of interest and inflation swaps held by SIPS.
The scheme assets do not include any property occupied by, or other assets used by, the Group. Equities include investments in broad-based equity indices, some of which hold ordinary equity shares in Smiths Group plc.
| 31 July 2018 – £m | ||||||
|---|---|---|---|---|---|---|
| SIPS | TIGPS | US schemes |
SIPS | TIGPS | US schemes |
|
| Present value of funded scheme liabilities: | ||||||
| – Active deferred members | (42) | (60) | (95) | (57) | (56) | (88) |
| – Deferred members | (930) | (587) | (123) | (784) | (550) | (115) |
| – Pensioners | (1,142) | (857) | (72) | (1,070) | (804) | (47) |
| Present value of funded scheme liabilities | (2,114) | (1,504) | (290) | (1,911) | (1,410) | (250) |
| Market value of scheme assets | 2,377 | 1,710 | 282 | 2,214 | 1,633 | 239 |
| Surplus/(deficit) | 263 | 206 | (8) | 303 | 223 | (11) |
| 31 July 2019 – £m | 31 July 2018 – £m | |||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| Market value of scheme assets | 4,106 | 282 | 36 | 4,424 | 3,867 | 239 | 33 | 4,139 |
| Present value of funded scheme liabilities | (3,637) | (291) | (45) | (3,973) | (3,342) | (250) | (41) | (3,633) |
| Surplus/(deficit) | 469 | (9) | (9) | 451 | 525 | (11) | (8) | 506 |
| Unfunded pension plans | (56) | (8) | (59) | (123) | (53) | (7) | (49) | (109) |
| Post-retirement healthcare | (5) | (10) | (2) | (17) | (5) | (9) | (2) | (16) |
| Present value of unfunded obligations | (61) | (18) | (61) | (140) | (58) | (16) | (51) | (125) |
| Net pension asset/(liability) | 408 | (27) | (70) | 311 | 467 | (27) | (59) | 381 |
| Post-retirement assets | 469 | 469 | 526 | 526 | ||||
| Post-retirement liabilities | (61) | (27) | (64) | (152) | (59) | (27) | (59) | (145) |
| Liabilities held for distribution to owners | (6) | (6) | ||||||
| Net pension asset/(liability) | 408 | (27) | (70) | 311 | 467 | (27) | (59) | 381 |
Liabilities held for distribution to owners comprises £5m of unfunded pension plans and £1m deficit on defined benefit schemes within the Smiths Medical division.
Where any individual scheme shows a recoverable surplus under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one scheme is not available to fund the IAS 19 deficit of another scheme. The retirement benefit asset disclosed arises from the rights of the employers to recover the surplus at the end of the life of the scheme.
| Amounts recognised in the consolidated income statement | ||
|---|---|---|
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
| Amounts charged to operating profit | ||
| Current service cost | 3 | 3 |
| Past service costs – Guaranteed Minimum Pension (GMP) equalisation | 29 | |
| Settlement loss/(gain) | 1 | (4) |
| Scheme administration costs | 4 | 5 |
| 37 | 4 | |
| The operating cost is charged as follows: | ||
| Cost of sales | 1 | 1 |
| Sales and distribution costs | 1 | 1 |
| Headline administrative expenses | 5 | 6 |
| Non-headline settlement loss/(gain) | 1 | (4) |
| Non-headline administrative expenses | 29 | |
| 37 | 4 | |
| Amounts credited to finance costs | ||
| Non-headline other finance income – retirement benefits | (11) | (7) |
| Amounts recognised directly in the consolidated statement of comprehensive income | ||
|---|---|---|
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
| Actuarial gains/(losses) | ||
| Difference between interest credit and return on assets | 355 | (18) |
| Experience losses on scheme liabilities | (4) | (10) |
| Actuarial gains arising from changes in demographic assumptions | 25 | 5 |
| Actuarial (losses)/gains arising from changes in financial assumptions | (452) | 127 |
| (76) | 104 |
| 31 July 2019 – £m | 31 July 2018 – £m | |||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| At beginning of period | (3,342) | (250) | (41) | (3,633) | (3,571) | (292) | (42) | (3,905) |
| Current service cost | (1) | (1) | (1) | (1) | ||||
| Past service costs | (29) | (29) | ||||||
| Interest on obligations | (91) | (9) | (2) | (102) | (90) | (10) | (2) | (102) |
| Actuarial movement on liabilities | (394) | (24) | (418) | 107 | 13 | 1 | 121 | |
| Liabilities extinguished on settlement | 31 | 31 | ||||||
| Exchange adjustments | (21) | (2) | (23) | |||||
| Benefits paid | 219 | 13 | 1 | 233 | 212 | 9 | 2 | 223 |
| At end of period | (3,637) | (291) | (45) | (3,973) | (3,342) | (249) | (42) | (3,633) |
| Assets | Obligations | |||
|---|---|---|---|---|
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
| At beginning of period | (125) | (130) | ||
| Reclassification of small unfunded obligations | ||||
| Liabilities transferred on disposals | 1 | |||
| Current service cost | (2) | (2) | ||
| Interest on obligations | (3) | (3) | ||
| Actuarial movement | (13) | 2 | ||
| Employer contributions | 6 | 7 | ||
| Exchange adjustments | (3) | |||
| Benefits paid | (6) | (7) | 6 | 7 |
| At end of period | (140) | (125) |
Company contributions to the defined benefit pension plans and post-retirement healthcare plans for 2019 totalled £36m (FY2018: £49m). This comprised regular contributions to funded schemes of £12m (FY2018: £24m) to SIPS, £12m (FY2018: £5m) to TIGPS, a one-off £5m contribution (FY2018: £12m) to funded US schemes and contributions to other schemes of £1m (FY2018: £2m). In addition, £6m (FY2018: £7m) was spent on providing benefits under unfunded defined benefit pension and post-retirement healthcare plans.
In 2020, the cash contributions to the Group's schemes are expected to total about £40m, including £12m to SIPS and £12m to TIGPS, with the balance relating mainly to the US scheme. Group contributions in respect of the unfunded schemes and post-retirement healthcare are expected to be in line with 2019.
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:
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.
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 will lapse. There is no re-testing of the performance conditions.
LTIP awards have performance conditions relating to underlying revenue growth, growth in headline EPS, ROCE and cash conversion.
Under the scheme, participants were required to invest between 25% and 50% of their post-tax bonus to purchase the Company's shares at the prevailing market price. Matching shares granted in October 2015 vested during the year at a rate correlating to the performance of the Group LTIP issued for the same performance period. There are no SMP awards outstanding at 31 July 2019 and no future awards will be made under the SMP.
In September 2016, the Smiths Excellence plan (SEP) was introduced. The SEP is designed to reinforce value creation over the medium term by focusing on specific objectives in key areas of operational performance. Awards vest after two years, depending on performance on the operational objectives during the first year and continued employment with the Group. There is no re-testing of performance. However, the Remuneration Committee has discretion to adjust vesting rates if material misstatements in reported performance are subsequently identified and awards are subject to clawback provisions in the event of misconduct.
Directors are not eligible to participate in the SEP.
Restricted stock is used by the Remuneration Committee, as a part of the 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.
| Long-term incentive |
Restricted | Save as you earn |
Weighted average exercise price |
||||
|---|---|---|---|---|---|---|---|
| plans | SMP | SEP | stock | scheme | Total | £ | |
| Ordinary shares under option ('000) | |||||||
| 31 July 2017 | 3,798 | 926 | 748 | 205 | 1,110 | 6,787 | £1.64 |
| Granted | 1,600 | 857 | 283 | 268 | 3,008 | £1.07 | |
| Exercised | (444) | (424) | (55) | (178) | (298) | (1,399) | £2.12 |
| Lapsed | (1,043) | (89) | (191) | (6) | (118) | (1,447) | £0.86 |
| 31 July 2018 | 3,911 | 413 | 1,359 | 304 | 962 | 6,949 | £1.46 |
| Granted | 1,602 | 928 | 24 | 315 | 2,869 | £1.30 | |
| Exercised | (406) | (331) | (379) | (79) | (193) | (1,388) | £1.27 |
| Lapsed | (1,215) | (82) | (621) | (57) | (72) | (2,047) | £0.41 |
| 31 July 2019 | 3,892 | 1,287 | 192 | 1,012 | 6,383 | £1.77 |
Options and awards were exercised on an irregular basis during the period. The average closing share price over the financial year was 1,479.21p (FY2018: 1,589.60p). There has been no change to the effective option price of any of the outstanding options during the period.
| Total shares under |
Weighted average remaining contractual |
Total shares | Weighted average remaining contractual |
Options | Exercisable weighted average exercise price |
Options | Exercisable weighted average exercise price |
|
|---|---|---|---|---|---|---|---|---|
| Range of exercise prices | option at 31 July 2019 ('000) |
life at 31 July 2019 (months) |
under option at 31 July 2018 ('000) |
life at 31 July 2018 (months) |
exercisable at 31 July 2019 ('000) |
for options exercisable at 31 July 2019 |
exercisable at 31 July 2018 ('000) |
for options exercisable at 31 July 2018 |
| £0.00 – £2.00 | 5,370 | 15 | 5,986 | 13 | n/a | n/a | n/a | n/a |
| £6.01 – £10.00 | 312 | 10 | 504 | 17 | n/a | n/a | n/a | n/a |
| £10.01 – £14.00 | 700 | 36 | 459 | 40 | n/a | n/a | n/a | n/a |
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 models for 2019 and 2018 are volatility of 25% to 20% (FY2018: 25% to 20%) and dividend yield of 3% (FY2018: 3%), based on historical data, for the period corresponding with the vesting period of the option. These generated a weighted average fair value for SEP of £14.48 (FY2018: £14.87), LTIP of £14.52 (FY2018: £13.48), and restricted stock of £13.43 (FY2018: £12.73).
Included within staff costs is an expense arising from share-based payment transactions of £15m (FY2018: £16m), of which £14m (FY2018: £14m) relates to equity-settled share-based payment.
| Goodwill £m |
Development costs £m |
Acquired intangibles (see table below) £m |
Software, patents and intellectual property £m |
Total £m |
|
|---|---|---|---|---|---|
| Cost | |||||
| At 31 July 2017 | 1,658 | 330 | 574 | 206 | 2,768 |
| Exchange adjustments | 1 | 1 | 1 | 1 | 4 |
| Business combinations (note 26) | 46 | 29 | 1 | 76 | |
| Additions | 29 | 11 | 40 | ||
| Disposals | (11) | (11) | |||
| Business disposals (note 28) | (1) | (22) | (1) | (24) | |
| At 31 July 2018 | 1,704 | 360 | 582 | 207 | 2,853 |
| Exchange adjustments | 110 | 24 | 47 | 9 | 190 |
| Business combinations (note 26) | 127 | 148 | 275 | ||
| Additions | 30 | 12 | 42 | ||
| Disposals | (7) | (7) | |||
| Business disposals (note 27) | (7) | (7) | |||
| Reclassified to assets held for distribution to owners (note 27) | (622) | (270) | (212) | (50) | (1,154) |
| At 31 July 2019 | 1,312 | 144 | 565 | 171 | 2,192 |
| Amortisation and impairments | |||||
| At 31 July 2017 | 88 | 180 | 324 | 161 | 753 |
| Exchange adjustments | 1 | 1 | 2 | ||
| Charge for the year | 24 | 29 | 18 | 71 | |
| Disposals | (11) | (11) | |||
| Business disposals (note 28) | (22) | (1) | (23) | ||
| At 31 July 2018 | 88 | 205 | 331 | 168 | 792 |
| Exchange adjustments | 5 | 14 | 24 | 6 | 49 |
| Charge for the year | 23 | 45 | 13 | 81 | |
| Disposals | (6) | (6) | |||
| Reclassified to assets held for distribution to owners (note 27) | (27) | (143) | (195) | (43) | (408) |
| At 31 July 2019 | 66 | 99 | 205 | 138 | 508 |
| Net book value at 31 July 2019 | 1,246 | 45 | 360 | 33 | 1,684 |
| Net book value at 31 July 2018 | 1,616 | 155 | 251 | 39 | 2,061 |
| Net book value at 31 July 2017 | 1,570 | 150 | 250 | 45 | 2,015 |
In addition to goodwill, the acquired intangible assets comprise:
| Patents, licences and trademarks £m |
Technology £m |
Customer relationships £m |
Total acquired intangibles £m |
|
|---|---|---|---|---|
| Cost | ||||
| At 31 July 2017 | 57 | 211 | 306 | 574 |
| Exchange adjustments | 1 | 1 | ||
| Business combinations (note 26) | 2 | 27 | 29 | |
| Business disposals (note 28) | (22) | (22) | ||
| At 31 July 2018 | 57 | 214 | 311 | 582 |
| Exchange adjustments | 4 | 16 | 27 | 47 |
| Business combinations (note 26) | 13 | 135 | 148 | |
| Reclassified to assets held for distribution to owners (note 27) | (59) | (90) | (63) | (212) |
| At 31 July 2019 | 15 | 140 | 410 | 565 |
| Amortisation | ||||
| At 31 July 2017 | 36 | 110 | 178 | 324 |
| Charge for the year | 3 | 11 | 15 | 29 |
| Business disposals (note 28) | (22) | (22) | ||
| At 31 July 2018 | 39 | 121 | 171 | 331 |
| Exchange adjustments | 3 | 10 | 11 | 24 |
| Charge for the year | 3 | 12 | 30 | 45 |
| Reclassified to assets held for distribution to owners (note 27) | (42) | (90) | (63) | (195) |
| At 31 July 2019 | 3 | 53 | 149 | 205 |
| Net book value at 31 July 2019 | 12 | 87 | 261 | 360 |
| Net book value at 31 July 2018 | 18 | 93 | 140 | 251 |
| Net book value at 31 July 2017 | 21 | 101 | 128 | 250 |
Individually material intangible assets comprise £132m of customer related intangibles attributable to United Flexible (remaining amortisation period: 7 years) and £105m of customer relationship intangibles attributable to Morpho Detection (remaining amortisation period: 13 years).
Goodwill is tested for impairment at least annually or when there is an indication that the carrying value may not be recoverable.
Recoverable amount is determined by value in use or fair value less cost to sell calculations for each group of cash generating units (CGU) that goodwill is allocated to.
Value in use is calculated as the net present value of the projected risk-adjusted cash-flows of the CGU. These forecast cash-flows are based on the 2019 budget, the five-year strategic plan approved by the Board and detailed divisional strategic projections, where these have been prepared and approved by the Board.
Fair value less cost to sell 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.
Goodwill is allocated by division as follows:
| 2019 £m |
2019 Number of CGUs |
2018 £m |
2018 Number of CGUs |
|
|---|---|---|---|---|
| John Crane | 140 | 1 | 133 | 1 |
| Smiths Detection | 673 | 1 | 642 | 1 |
| Flex-Tek | 171 | 1 | 35 | 2 |
| Smiths Interconnect | 261 | 1 | 243 | 2 |
| Smiths Medical – reclassified as an asset held for distribution at 31 July 2019 (note 27) | 1 | 563 | 1 | |
| 1,245 | 5 | 1,616 | 7 |
Flex-Tek acquired United Flexible in February 2019 and a single management team was in place covering Flex-Tek and United Flexible. The integration of the two businesses since the acquisition date has progressed well and is such that they are considered to be a single CGU for impairment testing.
The key assumptions used in value in use calculations are:
The assumptions used in the impairment testing of CGUs with significant goodwill balances are as follows:
| Year ended 31 July 2019 | |||||
|---|---|---|---|---|---|
| John Crane | Smiths Detection |
Flex-Tek | Smiths Interconnect |
Smiths Medical |
|
| Net book value of goodwill (£m) | 140 | 673 | 171 | 261 | 595 |
| Basis of valuation | Value in use | Value in use | Value in use | Value in use | Value in use |
| Discount rate (pre-tax) | 13.9% | 11.2% | 11.3% | 12.6% | 9.9% |
| Period covered by management projections | 5 years | 5 years | 5 years | 5 years | 5 years |
| Long-term growth rates | 2.1% | 2.1% | 1.8% | 1.8% | 1.8% |
| Year ended 31 July 2018 | |||||
| John Crane | Smiths Detection | Smiths Interconnect | Smiths Medical | ||
| Microwave Subsystems |
Connectors and Components |
||||
| Net book value of goodwill (£m) | 133 | 642 | 75 | 168 | 563 |
| Basis of valuation | Value in use | Value in use | Value in use | Value in use | Value in use |
| Discount rate (pre-tax) | 14.0% | 13.5% | 12.4% | 14.9% | 12.0% |
| Period covered by management projections | 5 years | 5 years | 5 years | 5 years | 5 years |
| Long-term growth rates | 2.2% | 1.8% | 2.0% | 2.0% | 1.9% |
No impairment charges have been incurred (FY2018: £nil).
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.
No impairment charges have been incurred (FY2018: £nil).
| Land and buildings £m |
Plant and machinery £m |
Fixtures, fittings, tools and equipment £m |
Total £m |
|
|---|---|---|---|---|
| Cost or valuation | ||||
| At 31 July 2017 | 204 | 635 | 209 | 1,048 |
| Exchange adjustments | 1 | (1) | ||
| Business combinations (note 26) | 2 | 1 | 3 | |
| Additions | 8 | 47 | 13 | 68 |
| Disposals | (6) | (28) | (24) | (58) |
| Business disposals (note 28) | (1) | (19) | (3) | (23) |
| At 31 July 2018 | 207 | 637 | 194 | 1,038 |
| Exchange adjustments | 14 | 41 | 4 | 59 |
| Business combinations (note 26) | 3 | 8 | 11 | |
| Additions | 7 | 57 | 15 | 79 |
| Disposals | (2) | (38) | (17) | (57) |
| Reclassified to assets held for distribution to owners (note 27) | (43) | (309) | (58) | (410) |
| At 31 July 2019 | 186 | 396 | 138 | 720 |
| Depreciation | ||||
| At 31 July 2017 | 107 | 461 | 165 | 733 |
| Exchange adjustments | 1 | (1) | ||
| Charge for the year | 7 | 35 | 13 | 55 |
| Disposals | (6) | (24) | (23) | (53) |
| Business disposals (note 28) | (1) | (14) | (2) | (17) |
| At 31 July 2018 | 107 | 459 | 152 | 718 |
| Exchange adjustments | 6 | 31 | 2 | 39 |
| Charge for the year | 10 | 33 | 13 | 56 |
| Disposals | (36) | (14) | (50) | |
| Reclassified to assets held for distribution to owners (note 27) | (19) | (216) | (40) | (275) |
| At 31 July 2019 | 104 | 271 | 113 | 488 |
| Net book value at 31 July 2019 | 82 | 125 | 25 | 232 |
| Net book value at 31 July 2018 | 100 | 178 | 42 | 320 |
| Net book value at 31 July 2017 | 97 | 174 | 44 | 315 |
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Inventories comprise | ||
| Raw materials and consumables | 146 | 149 |
| Work in progress | 111 | 94 |
| Finished goods | 160 | 223 |
| 417 | 466 |
Note: Smiths Medical is classified as held for distribution to owners in the current year, the prior year comparatives have not been restated.
The Group consumed £1,440m (FY2018: £1,424m) of inventories during the period. In the year to 31 July 2019, £21m (FY2018: £13m) was charged for the write-down of inventory and £8m (FY2018: £7m) was released from inventory provisions no longer required.
| Inventory after provisions | 417 | 466 |
|---|---|---|
| Inventory provision | (51) | (54) |
| 468 | 520 | |
| Gross value of inventory partly or fully provided for | 111 | 129 |
| Gross inventory carried at full value | 357 | 391 |
| 31 July 2019 £m |
31 July 2018 £m |
| 31 July 2019 | 31 July 2018 restated* |
|
|---|---|---|
| £m | £m | |
| Non-current | ||
| Trade receivables | 1 | 1 |
| Contract assets | 45 | 45 |
| Other receivables | 6 | 11 |
| 52 | 57 | |
| Current | ||
| Trade receivables | 574 | 564 |
| Prepayments | 25 | 31 |
| Contract assets | 125 | 103 |
| Other receivables | 40 | 35 |
| 764 | 733 |
* The comparatives for 31 July 2018 have been represented to reflect the adoption of IFRS 15. Note: Smiths Medical is classified as held for distribution to owners in the current year, the prior year comparatives have not been restated.
Trade receivables do not carry interest. Management considers that the carrying value of trade and other receivables approximates to the fair value. Trade and other receivables, including prepayments, accrued income and other receivables qualifying as financial instruments are classified as 'loans and receivables'. The maximum credit exposure arising from these financial assets is £713m (FY2018: £688m).
Trade receivables are disclosed net of provisions for bad and doubtful debts. The provisions for bad and doubtful debts are based on specific risk assessment and reference to past default experience.
Contract assets comprise balances not yet due on contracts, where revenue recognition does not align with the agreed payment schedule. The main movements in the year arise from increases in contract asset balances of £22m (FY2018: £19m) due to £8m of foreign currency translation gains and an increase of £9m in Interconnect's receivables.
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 is the US Federal Government, representing 6% (FY2018: less than 5%) of Group revenue.
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Trade receivables which are not impaired and not yet due | 553 | 566 |
| Trade receivables which are not impaired and less than three months overdue | 93 | 97 |
| Trade receivables which are not impaired and more than three months overdue | 38 | 27 |
| Gross value of partially and fully provided receivables | 26 | 43 |
| 710 | 733 | |
| Provision for bad and doubtful debts | (24) | (32) |
| Trade receivables | 686 | 701 |
| 31 July 2019 | 31 July 2018 restated* |
|
|---|---|---|
| £m | £m | |
| Non-current | ||
| Other payables | 15 | 14 |
| Contract liabilities | 15 | 13 |
| 30 | 27 | |
| Current | ||
| Trade payables | 221 | 244 |
| Other payables | 12 | 23 |
| Other taxation and social security costs | 19 | 22 |
| Accruals | 201 | 185 |
| Contract liabilities | 116 | 132 |
| 569 | 606 |
* The comparatives for 31 July 2018 have been represented to reflect the adoption of IFRS 15. Note: Smiths Medical is classified as held for distribution to owners in the current year, the prior year comparatives have not been restated.
Trade and other payables, including accrued expenses and other payables qualifying as financial instruments, are accounted for at amortised cost and are categorised as other financial liabilities.
Contract liabilities include deferred income balances of £131m (FY2018: £104m) in respect of payments being made in advance of the revenue recognition and balances of £nil (FY2018: £41m) relating to amounts deferred under variable consideration agreements. The movement in the year arises primarily from the liabilities of the Smiths Medical division being classified as held for distribution (see note 27) and movements in the long term contracts of the Smiths Detection division.
At 31 July 2019, £13m (FY2018: £13m) was held on deposit with banks as security for liabilities or letters of credit.
The remaining balance of financial assets relate to the Group's investments in early stage businesses that are developing or commercialising related technology.
This note sets out the calculation of net debt, an important measure in explaining our financing position. The net debt figure includes accrued interest and fair value adjustments relating to hedge accounting.
| 31 July 2019 | £m | 31 July 2018 £m |
|---|---|---|
| Cash and cash equivalents | ||
| Net cash and deposits | 289 | 717 |
| Short-term borrowings | ||
| \$250m 7.20% US\$ Guaranteed notes 2019 | (190) | |
| Bank and other loans | (1) | |
| Interest accrual | (9) | (12) |
| (9) | (203) | |
| Long-term borrowings | ||
| \$400m 3.625% US\$ Guaranteed notes 2022 | (329) | (298) |
| €600m 1.25% Eurobond 2023 | (564) | (533) |
| €650m 2.00% Eurobond 2027 | (607) | (575) |
| Bank and other loans | (1) | |
| (1,500) | (1,407) | |
| Borrowings | (1,509) | (1,610) |
| Net debt | (1,220) | (893) |
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 £36m (FY2018: £42m) was charged to the consolidated income statement in this period in respect of public bonds.
Loans amounting to £nil (FY2018: £2m) were secured on plant and equipment with a book value of £nil (FY2018: £3m).
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Cash at bank and in hand | 153 | 287 |
| Short-term deposits | 136 | 430 |
| Cash and cash equivalents | 289 | 717 |
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 2019 the total value of overdrafts on accounts in interest compensation cash pooling systems was £nil (FY2018: £nil). The balances held in zero balancing cash pooling arrangements have daily settlement of balances. Therefore netting is not relevant.
| Changes in net debt | Changes in other financing items | |||||||
|---|---|---|---|---|---|---|---|---|
| Net cash and cash equivalents £m |
Other short-term borrowings £m |
Long-term borrowings £m |
Net debt £m |
Interest rate & cross currency swaps £m |
Foreign exchange contracts £m |
Other financing items £m |
Total liabilities from financing activities £m |
|
| At 31 July 2018 | 717 | (203) | (1,407) | (893) | 43 | 4 | 47 | (846) |
| Foreign exchange gains and losses | 10 | (4) | (47) | (41) | 5,733 | 5,733 | 5,692 | |
| Net cash outflow | (218) | (218) | (30) | (5,733) | (5,763) | (5,981) | ||
| Repayment of borrowings | (194) | 194 | ||||||
| Capitalisation, interest accruals and unwind of capitalised fees |
2 | (1) | 1 | 30 | 30 | 31 | ||
| Fair value movement from interest rate hedging |
(46) | (46) | (46) | |||||
| Revaluation of derivative contracts | 2 | (1) | 1 | 1 | ||||
| Reclassified to asset/liability held for | ||||||||
| distribution to owners | (26) | 2 | 1 | (23) | (4) | (4) | (27) | |
| At 31 July 2019 | 289 | (9) | (1,500) | (1,220) | 45 | (1) | 44 | (1,176) |
The Company has in place credit facility agreements under which a change in control would trigger prepayment clauses. The Company also has bonds in issue, the terms of which would allow bondholders to exercise put options and require the Company to buy back the bonds at their principal amount plus interest if a rating downgrade occurs at the same time as a change of control takes effect.
The Group's international operations and debt financing expose it to financial risks which include the effects of changes in foreign exchange rates, changes in debt market prices, interest rates, credit risks and liquidity risks. The management of operational credit risk is discussed in note 14.
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 prepared monthly. This is circulated to the Chief Financial Officer each month and key elements to the Audit and Risk Committee on a semi-annual basis.
The Policy maintains a treasury control framework within which counterparty risk, financing and debt strategy, cash and liquidity, interest rate risk and currency translation management are reserved for Group Treasury, while currency transaction management is devolved to operating divisions.
Centrally directed cash management systems exist globally to manage overall liquid resources efficiently across the divisions. The Group uses financial instruments to raise financing for its global operations, to manage related interest rate and currency financial risk, and to hedge transaction risk within subsidiary companies.
The Group does not speculate in financial instruments. All financial instruments hedge existing business exposures and all are recognised on the balance sheet.
The Policy defines four treasury risk components and for each component a set of financial metrics to be measured and reported monthly compared against pre-agreed objectives.
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 minimise the resulting cost of debt capital. The credit ratings at the end of July 2019 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 at two times or lower over the medium term. Capital management is discussed in more detail in note 25.
The Group's risk management objectives are to ensure that the majority of funding is drawn from the public debt markets, the average maturity profile of gross debt is at or greater than three years, and between 40-60% of gross debt is at fixed rates. At 31 July 2019 these measures were 100% (FY2018: 100%), 5.2 years (FY2018: 5.5 years) and 48% (FY2018: 55%)
The Group remains in full compliance with all covenants within its external debt agreements. Interest rate risk management is discussed in note 18(b).
The Group's objective is to ensure that at any time undrawn committed facilities, net of short-term overdraft financing, are at least £300m and that committed facilities have at least 12 months to run until maturity. At 31 July 2019, these measures were £655m (FY2018: £609m) and 51 months (FY2018: 51 months). At 31 July 2019, net cash resources were £289m (FY2018: £717m). Liquidity risk management is discussed in note 18(d).
The Group is an international business with the majority of its net assets denominated in foreign currency. We protect our balance sheet and reserves from adverse foreign exchange movements by financing our foreign currency assets where appropriate in the same currency. The Group's objective for managing transaction currency exposure is to reduce medium-term volatility to cash-flow, margins and earnings. Foreign exchange risk management is discussed in note 18(a) below.
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 2019 | |||||
|---|---|---|---|---|---|
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Financial assets and liabilities | |||||
| Financial instruments included in trade and other receivables | 35 | 380 | 130 | 168 | 713 |
| Financial instruments included in trade and other payables | (47) | (204) | (70) | (73) | (394) |
| Cash and cash equivalents | 27 | 150 | 23 | 89 | 289 |
| 15 | 326 | 83 | 184 | 608 | |
| Exclude balances held in operations with the same functional currency | (15) | (155) | (75) | (177) | (422) |
| Exposure arising from intra-group loans | (11) | 55 | (41) | 3 | |
| Forward foreign exchange contracts | (17) | (149) | (19) | 185 | |
| (17) | 11 | 44 | 151 | 189 | |
| At 31 July 2018 | |||||
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Financial assets and liabilities | |||||
| Financial instruments included in trade and other receivables | 42 | 375 | 106 | 165 | 688 |
| Financial instruments included in trade and other payables | (49) | (237) | (77) | (78) | (441) |
| Cash and cash equivalents | 53 | 444 | 58 | 162 | 717 |
| Cross currency swaps (not hedge accounted) | (242) | 267 | 25 | ||
| Borrowings not designated as net investment hedges | (1) | (2) | (271) | (2) | (276) |
| 45 | 338 | 83 | 247 | 713 | |
| Exclude balances held in operations with the same functional currency | (40) | (195) | (63) | (227) | (525) |
| Exposure arising from intra-group loans | (307) | (65) | (38) | (410) | |
| Forward foreign exchange contracts | (100) | (6) | 41 | 65 | |
| (95) | (170) | (4) | 47 | (222) |
Financial instruments included in trade and other receivables comprise trade receivables, accrued income and other receivables which qualify as financial instruments. Similarly, financial instruments included in trade and other payables comprise trade payables, accrued expenses and other payables that qualify as financial instruments.
Based on the assets and liabilities held at the year-end, if the specified currencies were to strengthen 10% while all other market rates remained constant, the change in the fair value of financial instruments not designated as net investment hedges would have the following effect:
| Impact on profit for the year 31 July 2019 £m |
Gain/(loss) recognised in reserves 31 July 2019 £m |
Impact on profit for the year 31 July 2018 £m |
Gain/(loss) recognised in reserves 31 July 2018 £m |
|
|---|---|---|---|---|
| US dollar | (10) | 3 | 19 | (4) |
| Euro | (3) | (1) | (1) | 2 |
| Sterling | 10 | (2) | (32) | (6) |
These sensitivities were calculated before adjusting for tax and exclude the effect of quasi-equity intra-group loans.
The Group uses forward foreign exchange contracts to hedge future foreign currency sales and purchases. At 31 July 2019, contracts with a nominal value of £54m (FY2018: £385m) were designated as hedging instruments. In addition, the Group had outstanding foreign currency contracts with a nominal value of £431m (FY2018: £275m) 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 19.
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 is the effect of the counterparty and the Group's own credit risk on the fair value of the foreign exchange forward contracts, which is not reflected in the fair value of the hedged item attributable to changes in foreign exchange rates 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, 100% are for periods of 12 months or less (FY2018: 81%).
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 31 July 2019 |
Year ended 31 July 2018 |
||
|---|---|---|---|
| £m | £m | ||
| Brought forward cash-flow hedge reserve at start of year | 2 | 1 | |
| Foreign exchange forward contracts: | Net fair value gains on effective hedges | 2 | 2 |
| Amount reclassified to income statement – revenue | (2) | 1 | |
| Amount reclassified to income statement – cost of sales | (2) | (2) | |
| Carried forward cash-flow hedge reserve at end of year | 2 |
The following tables set out information regarding the change in value of the hedged item used in calculating hedge ineffectiveness as well as the impacts on the cash-flow hedge reserve:
| Cash-flow hedge reserve | ||||||
|---|---|---|---|---|---|---|
| Hedged item | Hedged exposure | Hedging instrument | Changes in value of the hedged item for calculating ineffectiveness £m |
Changes in value of the hedging instrument for calculating ineffectiveness £m |
Continued hedges £m |
Discontinued hedges £m |
| Foreign exchange | ||||||
| Sales and purchases | Foreign currency risk | contracts | 2 | (2) |
Cash-flow hedges generated £nil of ineffectiveness in FY2019 which was recognised in the income statement through finance costs.
The Group has significant investments in overseas operations, particularly in the United States 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.
The table below sets out the currency of loans and swap contracts designated as net investment hedges:
| At 31 July 2019 | At 31 July 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| US\$ £m |
Euro £m |
Total £m |
Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Loans designated as net investment hedges | (325) | (854) | (1,179) | (491) | (836) | (1,327) | ||
| Cross-currency swap | (613) | 364 | (249) | (329) | 357 | 28 | ||
| Currency swap contracts | 110 | (110) | ||||||
| (938) | (490) | (1,428) | 110 | (820) | (479) | (110) | (1,299) |
At 31 July 2019, cross-currency swaps hedged the Group's exposure to US dollars and Euros (31 July 2018: US dollars and Euros). All the cross-currency swaps designated as net investment hedges are non-current (FY2018: non-current).
Swaps generating £353m of the US dollar exposure (FY2018: £329m) will mature in April 2023 and swaps generating £260m of the US dollar exposure (FY2018: £nil) will mature in February 2027.
In addition, non-swapped borrowings were also used to hedge the Group's exposure to US dollars and euros (31 July 2018 US dollars and euros). Borrowings generating £325m of the US dollar exposure (FY2018: £302m April 2023 and £189m May 2019) will mature in April 2023. Borrowings generating £543m of the euro exposure (FY2018: £531m) will mature in April 2023 and borrowings generating £312m of the euro exposure (FY2018: £305m) will mature in February 2027.
In the prior year swap contracts hedged the Group's exposure to Canadian dollars, Japanese yen and Chinese renminbi. All these currency swap contracts designated as net investment hedges in the prior year were current.
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 to the hedged items and therefore, there is an economic relationship with the hedge ratio established as 1:1.
The main sources of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group's own credit risk on the fair value of the cross-currency swaps and cross-currency basis risk 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 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 31 July 2019 £m |
Year ended 31 July 2018 £m |
||
|---|---|---|---|
| Brought forward net investment hedge reserve at start of year | (304) | (291) | |
| Cross-currency swaps | Net fair value losses on effective hedges | (35) | (7) |
| Bonds | Net fair value losses on effective hedges | (44) | (1) |
| Amounts removed from the hedge reserve and | |||
| recognised in the income statement | Profit/(loss) on business disposal | (5) | |
| Carried forward net investment hedge reserve at end of year | (383) | (304) |
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 2019:
| Net investment hedge reserve | ||||||
|---|---|---|---|---|---|---|
| Hedged item | Hedged exposure | Hedging instrument | Changes in value of the hedged item for calculating ineffectiveness £m |
Changes in value of the hedging instrument for calculating ineffectiveness £m |
Continued hedges £m |
Discontinued hedges £m |
| Overseas operation | Foreign currency risk | Forward contracts | (1) | |||
| Overseas operation | Foreign currency risk | Cross-currency swaps | 35 | (37) | (35) | |
| Overseas operation | Foreign currency risk | Bonds | 44 | (44) | (44) | |
| 79 | (82) | (79) |
Net investment hedges generated £1m of ineffectiveness in FY2019 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 31 July 2019 £m |
reserve 31 July 2018 £m |
| US dollar 104 |
91 |
| Euro 54 |
53 |
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.
The Group operates an interest rate policy designed to optimise interest cost and reduce volatility in reported earnings. The Group's current policy is to require interest rates to be fixed within a band of between 40% and 60 % of the level of gross debt. This is achieved through fixed rate borrowings and interest rate swaps. At 31 July 2019, 48% (FY2018: 55%) of the Group's gross borrowings were at fixed interest rates, after adjusting for interest rate swaps and the impact of short maturity derivatives designated as net investment hedges.
The Group monitors its fixed rate risk profile against both gross and net debt. For medium-term planning, it now 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 2019, after interest rate swaps, is 3.22% (FY2018: 3.69%).
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. The other financial assets and liabilities do not earn or bear interest and for all financial instruments except for borrowings the carrying value is not materially different from their fair value.
| At fair value through profit or loss 31 July 2019 £m |
Cash and cash equivalents 31 July 2019 £m |
Borrowings 31 July 2019 £m |
Fair value of borrowings 31 July 2019 £m |
Available for sale investments 31 July 2018 £m |
Cash and cash equivalents 31 July 2018 £m |
Borrowings 31 July 2018 £m |
Fair value of borrowings 31 July 2018 £m |
|
|---|---|---|---|---|---|---|---|---|
| Fixed interest | ||||||||
| Less than one year | (190) | (196) | ||||||
| Between one and five years | (384) | (391) | (365) | (368) | ||||
| Greater than five years | (314) | (342) | (307) | (314) | ||||
| Total fixed interest financial liabilities | (698) | (733) | (862) | (878) | ||||
| Floating rate interest financial assets/(liabilities) | 6 | 238 | (811) | (811) | 4 | 657 | (748) | (758) |
| Total interest-bearing financial assets/(liabilities) |
6 | 238 | (1,509) | (1,544) | 4 | 657 | (1,610) | (1,636) |
| Non-interest-bearing assets in the same category | 13 | 51 | 14 | 60 | ||||
| Total | 19 | 289 | (1,509) | (1,544) | 18 | 717 | (1,610) | (1,636) |
The Group also has exposures to the fair values of non-derivative financial instruments such as EUR and USD fixed rate borrowings. To manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swap and cross-currency interest rate swaps which for accounting purposes are designated as fair value hedges.
At 31 July 2019 and 31 July 2018, the Group had designated the following hedges against variability in the fair value of borrowings arising from fluctuations in base rates:
Additionally at 31 July 2019 the Group designated the following hedge against variability in the fair value of borrowings arising from fluctuations in base rates:
– €300m of the fixed/floating and € exchange exposure of EUR/USD interest rate swaps maturing on 23 February 2027 partially hedging the € 2027 Eurobond.
The fair values of the hedging instruments are disclosed in note 19. The effect of the swaps is to convert £761m (FY2018: £471m) debt from fixed rate to floating rate. The swaps have similar critical terms to the hedged items, such as the reference rate, reset dates, notional amounts, payment dates and maturities. Therefore, there is an economic relationship and the hedge ratio is established as 1:1. Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.
The main sources of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group's own credit risk on the fair value of the cross-currency and interest rate swaps and 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 is recognised immediately in the income statement in the period that it occurs.
The following table sets out the details of the hedged exposures covered by the Group's fair value hedges:
| Changes in value Changes in value of the of hedged item hedging instrument |
Carrying amount | Accumulated fair value adjustments on hedged item |
|||||
|---|---|---|---|---|---|---|---|
| Hedged item Hedged exposure |
for calculating ineffectiveness £m |
for calculating ineffectiveness £m |
Assets £m |
Liabilities £m |
Assets £m |
Liabilities £m |
|
| Fixed rate bonds (a) Interest rate risk | 8 | (5) | 123 | 2 | |||
| Fixed rate bonds (a) Interest rate and currency rate risk | 44 | (37) | 638 | 39 | |||
| 52 | (42) | 761 | 41 |
(a) Classified as borrowings
Fair value hedges generated £10m of ineffectiveness in FY2019 which was recognised in the income statement through finance costs.
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 2019, 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 less than £5m impact (FY2018: £3m impact) on the Group's profit before tax.
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 £308m at 31 July 2019 (FY2018: £735m).
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Cash in AAA liquidity funds | 85 | 200 |
| Cash at banks with at least a AA- credit rating | 97 | 306 |
| Cash at banks with all other A credit ratings | 97 | 74 |
| Cash at other banks | 10 | 137 |
| Investments in bank deposits | 13 | 13 |
| Other investments | 6 | 5 |
| 308 | 735 |
At 31 July 2019, the maximum exposure with a single bank for deposits and cash is £179m (FY2018: £127m), whilst the maximum mark to market exposure with a single bank for derivatives is £17m (FY2018: £17m). These banks have A+ and AA- credit ratings respectively (FY2018: Both AA-).
The Board policy specifies the maintenance of unused committed credit facilities of at least £300m at all times to ensure it has sufficient available funds for operations and planned development, which is provided by a multi-currency revolving credit facility.
Smiths has a \$800m Revolving Credit Facility that matures on 1 November 2023. At the balance sheet date, the Group had the following undrawn credit facilities:
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Expiring after more than two years | 655 | 609 |
As at 31 July 2019, £136m (FY2018: £430m) of cash and cash equivalents was on deposit with various banks of which £32m (FY2018: £71m) was on deposit with UK banks, £85m (FY2018: £200m) was in liquidity funds and £13m (FY2018: £13m) of investments comprised bank deposits held to secure liabilities and letters of credit.
| Borrowings (note 17) 31 July 2019 £m |
Fair value adjustments 31 July 2019 £m |
Contractual interest payments 31 July 2019 £m |
Total contractual cash-flows 31 July 2019 £m |
Borrowings (note 17) 31 July 2018 £m |
Fair value adjustments 31 July 2018 £m |
Contractual interest payments 31 July 2018 £m |
Total contractual cash-flows 31 July 2018 £m |
|
|---|---|---|---|---|---|---|---|---|
| Less than one year | (9) | (31) | (40) | (203) | (43) | (246) | ||
| Between one and two years | (31) | (31) | (29) | (29) | ||||
| Between two and three years | (31) | (31) | (29) | (29) | ||||
| Between three and four years | (893) | 20 | (25) | (898) | (29) | (29) | ||
| Between four and five years | (12) | (12) | (832) | (5) | (24) | (861) | ||
| Greater than five years | (607) | 20 | (36) | (623) | (575) | (46) | (621) | |
| Total | (1,509) | 40 | (166) | (1,635) | (1,610) | (5) | (200) | (1,815) |
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.
| Net | Net | |||||
|---|---|---|---|---|---|---|
| Receipts 31 July 2019 £m |
Payments 31 July 2019 £m |
cash-flow 31 July 2019 £m |
Receipts 31 July 2018 £m |
Payments 31 July 2018 £m |
cash-flow 31 July 2018 £m |
|
| 217 | (236) | (19) | 379 | (386) | (7) | |
| 712 | (652) | 60 | 726 | (657) | 69 | |
| 241 | (238) | 3 | 319 | (324) | (5) | |
| 19 | (18) | 1 | 36 | (42) | (6) | |
| 1,189 | (1,144) | 45 | 1,460 | (1,409) | 51 | |
This table 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.
The contractual cash-flows for financial liabilities included in trade and other payables are: £384m (FY2018: £432m) due in less than one year, £6m (FY2018: £6m) due between one and five years and £3m (FY2018: £3m) due after more than five years.
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 2019 | ||||
|---|---|---|---|---|
| Contract or underlying |
Fair value | |||
| nominal amount £m |
Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (cash-flow hedges) | 54 | (2) | (2) | |
| Foreign exchange contracts (not hedge accounted) | 431 | 4 | (3) | 1 |
| Total foreign exchange contracts | 485 | 4 | (5) | (1) |
| Cross-currency swaps (fair value and net investment hedges) | 613 | 46 | 46 | |
| Interest rate swaps (fair value hedges) | 123 | (1) | (1) | |
| Total financial derivatives | 1,221 | 50 | (6) | 44 |
| Balance sheet entries | ||||
| Non-current | 777 | 47 | (1) | 46 |
| Current | 444 | 3 | (5) | (2) |
| Total financial derivatives | 1,221 | 50 | (6) | 44 |
| At 31 July 2018 | ||||
|---|---|---|---|---|
| Contract or underlying |
Fair value | |||
| nominal amount £m |
Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (cash-flow hedges) | 385 | 6 | (4) | 2 |
| Foreign exchange contracts (not hedge accounted) | 275 | 2 | 2 | |
| Total foreign exchange contracts | 660 | 8 | (4) | 4 |
| Currency swaps (net investment hedges) | 110 | |||
| Cross-currency swaps (fair value and net investment hedges) | 328 | 28 | 28 | |
| Cross-currency swaps (not hedge accounted) | 242 | 21 | 21 | |
| Interest rate swaps (fair value hedges) | 114 | (6) | (6) | |
| Total financial derivatives | 1,454 | 57 | (10) | 47 |
| Balance sheet entries | ||||
| Non-current | 760 | 50 | (6) | 44 |
| Current | 694 | 7 | (4) | 3 |
| Total financial derivatives | 1,454 | 57 | (10) | 47 |
Maturity profile, average interest and foreign currency exchange rates of the hedging instruments used in the Group's hedging strategies:
| Maturity | |||||
|---|---|---|---|---|---|
| Hedged exposure | Hedging instrument | Up to one year |
One to five years |
More than five years |
|
| Fair value hedges | |||||
| Interest rate risk | Interest Rate Swaps – USD | - Notional amount (£m) | 123 | ||
| - Average spread over 6 month USD LIBOR | 1.797% | ||||
| Interest Rate Swaps – EUR | - Notional amount (£m) | 364 | |||
| - Average spread over 3 month EUR LIBOR | 1.015% | ||||
| Interest rate risk/ | Cross-currency swaps (EUR:GBP) | - Notional amount (£m) | 254 | ||
| Foreign currency risk | - Average exchange rate | 0.8450 | |||
| - Average spread over 3 month USD LIBOR | 1.750% | ||||
| Net investment hedges | |||||
| Foreign currency risk | Cross-currency swaps (EUR:USD) | - Notional amount (£m) | 353 | ||
| - Average exchange rate | 1.0773 | ||||
| Cross-currency swaps (GBP:USD) | - Notional amount (£m) | 260 | |||
| - Average exchange rate | 1.2534 | ||||
| Cash-flow hedges | |||||
| Foreign currency risk | Foreign exchange contracts | - Notional amount (£m) | 24 | ||
| (EUR:USD) | - Average exchange rate | 1.1885 | |||
| Foreign exchange contracts | - Notional amount (£m) | 12 | |||
| (EUR:GBP) | - Average exchange rate | 0.9021 | |||
| Foreign exchange contracts | - Notional amount (£m) | 12 | |||
| (USD:GBP) | - Average exchange rate | 1.3523 | |||
| Foreign exchange contracts | - Notional amount (£m) | 6 | |||
| (GBP:CZK) | - Average exchange rate | 28.8236 |
At 31 July 2019, the Group had forward foreign exchange contracts with a nominal value of £54m 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 28 July 2020. 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 on page 179.
Any foreign exchange contracts which are not formally designated as hedges and tested are classified as 'held for trading' and not hedge accounted.
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 31 July 2019 £m |
Liabilities 31 July 2019 £m |
Assets 31 July 2018 £m |
Liabilities 31 July 2018 £m |
|
|---|---|---|---|---|
| Gross value of assets and liabilities | 50 | (6) | 57 | (10) |
| Related assets and liabilities subject to master netting agreements | (2) | 2 | (1) | |
| Net exposure | 48 | (4) | 56 | (10) |
| As at 31 July 2019 | Notes | Basis for determining fair value |
At amortised cost £m |
At fair value through profit or loss £m |
Total carrying value £m |
Total fair value £m |
|---|---|---|---|---|---|---|
| Financial assets | ||||||
| Other investments | 16 | A | 13 | 13 | 13 | |
| Other investments | 16 | E | 6 | 6 | 6 | |
| Cash and cash equivalents | 17 | A | 153 | 136 | 289 | 289 |
| Trade and other financial receivables | 14 | A/B | 764 | 764 | 764 | |
| Derivative financial instruments | 19 | B | 50 | 50 | 50 | |
| Total financial assets | 917 | 205 | 1,122 | 1,122 | ||
| Financial liabilities | ||||||
| Trade and other financial payables | 15 | A | (569) | (569) | (569) | |
| Short-term borrowings | 17 | C | (9) | (9) | (9) | |
| Long-term borrowings | 17 | C | (1,500) | (1,500) | (1,535) | |
| Finance leases | 21 | D | (3) | (3) | (3) | |
| Derivative financial instruments | 19 | B | (6) | (6) | (6) | |
| Total financial liabilities | (2,081) | (6) | (2,087) | (2,122) | ||
| Loans and |
| receivables/ | Fair value | Total | ||||
|---|---|---|---|---|---|---|
| Basis for | other financial | through profit | carrying | Total | ||
| As at 31 July 2018 | Notes | determining fair value |
liabilities £m |
or loss £m |
value £m |
fair value £m |
| Financial assets | ||||||
| Other investments | 16 | A | 13 | 13 | 13 | |
| Other investments | 16 | E | 5 | 5 | 5 | |
| Cash and cash equivalents | 17 | A | 717 | 717 | 717 | |
| Trade and other financial receivables | 14 | A/B | 733 | 733 | 733 | |
| Derivative financial instruments | 19 | B | 57 | 57 | 57 | |
| Total financial assets | 1,450 | 75 | 1,525 | 1,525 | ||
| Financial liabilities | ||||||
| Trade and other financial payables | 15 | A | (606) | (606) | (606) | |
| Short-term borrowings | 17 | C | (203) | (203) | (203) | |
| Long-term borrowings | 17 | C | (1,405) | (1,405) | (1,433) | |
| Finance leases | 21 | D | (2) | (2) | (2) | |
| Derivative financial instruments | 19 | B | (10) | (10) | (10) | |
| Total financial liabilities | (2,216) | (10) | (2,226) | (2,254) |
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 arms-length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies described below:
The minimum uncancellable lease payments which the Group is committed to make are:
| 31 July 2019 | 31 July 2018 | ||||
|---|---|---|---|---|---|
| Land and buildings £m |
Other £m |
Land and buildings £m |
Other £m |
||
| Payments due: | |||||
| – not later than one year | 36 | 8 | 34 | 7 | |
| – later than one year and not later than five years | 84 | 9 | 83 | 8 | |
| – later than five years | 17 | 23 | |||
| 137 | 17 | 140 | 15 |
At 31 July 2019, commitments, comprising bonds and guarantees arising in the normal course of business, amounted to £209m (FY2018: £184m), including pension commitments of £54m (FY2018: £54m).
| Trading | Non-headline and legacy | Total | |||
|---|---|---|---|---|---|
| £m | John Crane, Inc. litigation £m |
Titeflex Corporation litigation £m |
Other £m |
£m | |
| Current liabilities | 21 | 29 | 20 | 6 | 76 |
| Non-current liabilities | 2 | 194 | 58 | 8 | 262 |
| At 31 July 2018 | 23 | 223 | 78 | 14 | 338 |
| Exchange adjustments | 1 | 17 | 5 | 1 | 24 |
| Business combinations (note 26) | 12 | 12 | |||
| Provision charged | 15 | 15 | 30 | ||
| Provision released | (6) | (6) | (12) | ||
| Unwind of provision discount | 6 | 2 | 8 | ||
| Utilisation | (12) | (24) | (5) | (3) | (44) |
| Reclassified to liability held for distribution to owners (note 27) | (3) | (2) | (5) | ||
| At 31 July 2019 | 18 | 237 | 74 | 22 | 351 |
| Current liabilities | 17 | 29 | 16 | 4 | 66 |
| Non-current liabilities | 1 | 208 | 58 | 18 | 285 |
| At 31 July 2019 | 18 | 237 | 74 | 22 | 351 |
The John Crane, Inc. and Titeflex Corporation litigation provisions are the only provisions that are discounted.
At 31 July 2019, the Group has warranty and product liability provisions of £17m (FY2018: £22m). 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.
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, though 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.
In the ordinary course of its business, the Group is subject to commercial disputes and litigation such as government price audits, product liability claims, employee disputes and other kinds of lawsuits, and faces different types of legal issues in different jurisdictions. The high level of activity in the US, for example, exposes the Group to the likelihood of various types of litigation commonplace in that country, such as 'mass tort' and 'class action' litigation, legal challenges to the scope and validity of patents, and product liability and insurance subrogation claims. These types of proceedings (or the threat of them) are also used to create pressure to encourage negotiated settlement of disputes. Any claim brought against the Group (with or without merit) could be costly to defend. These matters are inherently difficult to quantify. In appropriate cases a provision is recognised based on best estimates and management judgement but there can be no guarantee that these provisions (which may be subject to potentially material revision from time to time) will result in an accurate prediction of the actual costs and liabilities that may be incurred. There are also contingent liabilities in respect of litigation for which no provisions are made.
The Group operates in some markets where the risk of unethical or corrupt behaviour is material and has procedures, including an employee 'Ethics Alertline', to help it identify potential issues. Such procedures will, from time to time, give rise to internal investigations, sometimes conducted with external support, to ensure that Smiths 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 also co-operates with relevant authorities in investigating business conduct issues whenever requested to. The Group is not aware of any issues which are expected to generate material financial exposures.
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 judgments in relation thereto, to the extent that such costs can be reliably estimated.
The JCI products generally referred to in these cases consist of industrial sealing product, primarily packing and gaskets. The asbestos was encapsulated within these products in such a manner that causes JCI to believe, based on tests conducted on its behalf, that the products were safe. JCI ceased manufacturing products containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its current and expected asbestos litigation, including the most efficacious presentation of its 'safe product' defence, and intends to continue to resist these asbestos claims based upon this defence. The table below summarises the JCI claims experience over the last 39 years since the start of this litigation:
| Year ended 31 July 2019 |
Year ended 31 July 2018 |
Year ended 31 July 2017 |
Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|---|---|---|
| JCI claims experience | |||||
| Claims against JCI that have been dismissed | 285,000 | 277,000 | 273,000 | 247,000 | 242,000 |
| Claims JCI is currently a defendant in | 38,000 | 43,000 | 50,000 | 74,000 | 76,000 |
| Cumulative final judgments, after appeals, against JCI since 1979 | 144 | 140 | 138 | 137 | 133 |
| Cumulative value of awards (\$'m) since 1979 | 168 | 164 | 160 | 158 | 153 |
The number of claims outstanding at 31 July 2019 reflects the benefit of 8,000 claims being dismissed in the year.
JCI has also incurred significant additional defence costs. The litigation involves claims for a number of allegedly asbestos-related diseases, with awards, when made, for mesothelioma tending to be larger than those for the other diseases. JCI's ability to defend mesothelioma cases successfully is, therefore, likely to have a significant impact on its annual aggregate adverse judgment and defence costs.
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 judgments awarded.
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 build-up of assets in trusts established by asbestos defendants in Chapter 11 restructuring ('524(g) trusts') will increase the influence of these trusts on the behaviour of claimants. Developments in the Garlock Sealing Technologies LLC Chapter 11 proceedings have provided additional data on plaintiff claims to 524 (g) trusts. Given the evidence that emerged of inconsistent duplicate claims, there is a significant likelihood that this will lead to changes in the pattern of claims made in the future, and the costs arising from claims.
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 (FY2018: 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, and recent events, like the Garlock Sealing Technologies LLC Chapter 11 proceedings, which may lead to further major changes.
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 judgments 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.
While JCI has excess liability insurance, the availability of such insurance and scope of the cover are currently the subject of litigation in the United States. Pending the outcome of that litigation, JCI has met defence costs directly. The calculation of the provision does not take account of any potential recoveries from insurers.
The JCI asbestos litigation provision has developed over the last five years as follows:
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
Year ended 31 July 2017 £m |
Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|---|---|---|
| John Crane, Inc. litigation provision | |||||
| Gross provision | 257 | 251 | 260 | 267 | 236 |
| Discount | (20) | (28) | (23) | (15) | (20) |
| Discounted provision | 237 | 223 | 237 | 252 | 216 |
| Operating profit charge/(credit) | |||||
| Increased provisions for adverse judgments and legal defence costs | 7 | 13 | 17 | 8 | 14 |
| Change in US risk-free rates | 8 | (6) | (13) | 7 | 1 |
| Subtotal – items charged to/(released from) the provision | 15 | 7 | 4 | 15 | 15 |
| Litigation management, legal fees in connection with litigation against insurers and defence strategy |
2 | 3 | 11 | 8 | 4 |
| Recoveries from insurers | (11) | (6) | (16) | ||
| Total operating profit charge | 6 | 10 | 9 | 7 | 19 |
| Cash-flow | |||||
| Provision utilisation | (24) | (27) | (24) | (22) | (24) |
| John Crane, Inc. litigation spend | 26 | 30 | 32 | 32 | 27 |
The increase in 2019 is principally due to decreasing US dollar discount rates, with no material movement in the gross provision.
The operating charge for John Crane, Inc. litigation comprises:
– a charge of £7m (FY2018: £13m) in respect of the net increased provision for adverse judgments and legal defence costs;
– a charge of £8m arising from a decrease in US risk-free rates (FY2018: credit of £6m);
The provision may be subject to potentially material revision from time to time if new information becomes available as a result of future events. There can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of related litigation.
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 £234m and future spend at the 95th percentile of £297m (FY2018: £230m and £290m, respectively). Statistical analysis of the distribution of these outcomes indicates that there is a 50% probability that the total future spend will fall between £242m and £267m (FY2018: between £238m and £263m), compared to the gross provision value of £257m (FY2018: £251m).
If the asbestos litigation environment becomes more volatile and uncertain, for example if defendants are successful in legal cases against plaintiff law firms and this impacts the nature of claims filed, the time horizon over which the provision can be calculated may reduce. Conversely, if the environment became more stable, or JCI changed approach and committed to long-term settlement arrangements, the time period covered by the provision might be extended.
The projections use a ten year time horizon. Reducing the time horizon by one year would reduce the provision by £17m (FY2018: £15m) and reducing it by five years would reduce the provision by £100m (FY2018: £91m).
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 provision by £14m (FY2018: £13m) and extending it by five years would increase the provision by £59m (FY2018: £52m). However, there are also reasonable scenarios that, given certain recent events in the US asbestos litigation environment, would result in no additional asbestos litigation for JCI beyond ten years. At this time, how the asbestos litigation environment may evolve beyond ten years is not reasonably estimable.
Provision has been made for future defence costs and the cost of adverse judgments expected to occur. JCI's claims experience is significantly impacted by other factors which influence the US litigation environment. These 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, a subsidiary of the Group in the Flex-Tek division, has received a number of claims from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping product. It has also received a number of product liability claims regarding this product, some in the form of purported class actions. Titeflex Corporation believes that its products are a safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and national codes. However some claims have been settled on an individual basis without admission of liability. Equivalent third-party products in the US marketplace face similar challenges.
The continuing progress of claims and the pattern of settlement, together with recent market-place activity, provide sufficient evidence to recognise a liability in the accounts. Therefore provision has been made for the costs which the Group is expected to incur in respect of future claims to the extent that such costs can be reliably estimated. Titeflex Corporation sells flexible gas piping with extensive installation and safety guidance (revised in 2008) designed to assure the safety of the product and minimise the risk of damage associated with lightning strikes.
The assumptions made in assessing the appropriate level of provision, which are based on past experience, include: the period over which expenditure can be reliably estimated; the number of future settlements; the average amount of settlements; and the impact of statutes of repose and safe installation initiatives on the expected number of future claims.
The provision of £74m (FY2018: £78m) 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 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Gross provision | 118 | 129 |
| Discount | (44) | (51) |
| Discounted pre-tax provision | 74 | 78 |
| Deferred tax | (18) | (19) |
| Discounted post-tax provision | 56 | 59 |
A credit of £6m (FY2018: £6m 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 driven by a reduction in the average number of claims per year and a decline in the settlement rate experienced.
The significant uncertainty associated with the future level of claims and of the costs arising out of related litigation means that there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred. Therefore the provision may be subject to potentially material revision from time to time, if new information becomes available as a result of future events.
The projections incorporate a long-term assumption regarding the impact of safe installation initiatives on the level of future claims. If the assumed annual benefit of bonding and grounding initiatives were 0.5% higher, the provision would be £5m (FY2018: £4m) lower, and if the benefit were 0.5% lower, the provision would increase by £6m (FY2018: £5m).
Legacy provisions comprise provisions relating to former business activities and properties no longer used by Smiths. Non-headline provisions comprise all provisions that were disclosed as non-headline items when they were charged to the consolidated income statement. These provisions include non-headline reorganisation, vacant properties, disposal indemnities and litigation in respect of old products and discontinued business activities.
At 31 July 2019, there were reorganisation provisions of £3m relating to the integration of the Morpho business into the Detection division (FY2018: £7m). The Morpho integration provision is expected to be utilised in the next year.
At 31 July 2019, there were provisions of £14m (FY2018: £2m) related to actual and potential environmental issues for sites currently or previously occupied by Smiths operations and £1m (FY2018: £2m) related to onerous leases and dilapidations provisions.
Other provisions include disposal provisions of £3m (FY2018: £3m) relating to warranties and other obligations in respect of the disposal of the Marine Systems and Aerospace businesses.
| Total share capital at 31 July 2019 | 395,956,781 | 148 | |
|---|---|---|---|
| Exercise of share options | 195,554 | 2 | |
| Total share capital at 31 July 2018 | 395,761,227 | 148 | |
| Exercise of share options | 284,565 | 3 | |
| Total share capital at 31 July 2017 | 395,476,662 | 148 | |
| Ordinary shares of 37.5p each | |||
| Number of shares | capital £m |
Consideration £m |
|
| Issued |
As at 31 July 2019, the Company's issued share capital was 395,956,781 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 2019, 8,401,830 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 regards to control of 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.
The Directors are authorised to issue and allot shares and to buy back shares subject to annual shareholder approval at the AGM. Such authorities were granted by shareholders at the 2018 AGM, and at the 2019 AGM it will be proposed that the Directors be granted new authorities to allot and buy back shares.
The Company did not purchase any of its own shares during the financial year ended 31 July 2019. As at 16 September 2019 (the latest practicable date for inclusion in this report), the Company had an unexpired authority to repurchase ordinary shares up to a maximum of 40m ordinary shares. As at 16 September 2019, the Company did not hold any shares in treasury. Any ordinary shares purchased may be cancelled or held in treasury.
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 2019, the trust held 53,058 ordinary shares in the Company. The trust waived its dividend entitlement on its holding during the year, and the trust abstains from voting the shares at general meetings.
The following dividends were declared and paid in the period:
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|
| Ordinary final dividend of 30.75p for FY2018 (FY2017: 29.70p) paid 16 November 2018 | 122 | 117 |
| Ordinary interim dividend of 14.10p for FY2019 (FY2018: 13.80p) paid 26 April 2019 | 56 | 55 |
| 178 | 172 |
The final dividend for the year ended 31 July 2019 of 31.80p per share was recommended by the Board on 19 September 2019 and will be paid to shareholders on 15 November 2019, subject to approval by the shareholders. This dividend has not been included as a liability in these accounts and is payable to all shareholders on the register of Members at close of business on 18 October 2019.
The following waived all dividends payable in the year, and all future dividends, on their shareholdings in the Company:
Retained earnings include the value of Smiths Group plc shares held by the Smiths Industries Employee Benefit Trust. In the year the Company issued 1,170,315 (FY2018: nil) shares to the Trust, and the Trust purchased 1,222,607 shares (FY2018: 952,111 shares) in the market for a consideration of £19m (FY2018: £15m). At 31 July 2019, the Trust held 53,058 (FY2018: 766) ordinary shares.
The capital redemption reserve, revaluation reserve and merger reserve arose from: share repurchases; revaluations of property, plant and equipment; and merger accounting for business combinations before the adoption of IFRS, respectively.
Capital employed comprises total equity adjusted for goodwill recognised directly in reserves, net post-retirement benefit related assets and liabilities, net litigation provisions relating to non-headline items and net debt. The efficiency of the allocation of the 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. The ROCE was 14.4% (FY2018: 14.6%), see note 30.
The capital structure is based on the Directors' judgement of the balance required to maintain flexibility while achieving an efficient cost of capital.
The ratio of net debt to headline EBITDA of 1.8 (FY2018: 1.4) 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 is more than able to fund the immediate investment needs and other legacy obligations. See note 30 for the definition of headline EBITDA and the calculation of this ratio.
As part of its capital management the Group strategy is to maintain a solid investment grade credit rating to ensure access to the widest possible sources of financing and to minimise the resulting cost of capital. At 31 July 2019, the Group had a credit rating of BBB+/Baa2 (FY2018: 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 minimum dividend cover of around 2.0.
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| The hedge reserve on the balance sheet comprises: | ||
| – cash-flow hedge reserve | 2 | |
| – net investment hedge reserve | (383) | (304) |
| (383) | (302) |
See transactional currency exposure risk management disclosures in note 18 for additional details of cash-flow hedges, and translational currency exposure risk management disclosure also in note 18 for additional details of net investment hedges.
On 19 February 2019, the Group's Flex-Tek division completed the acquisition of the entire share capital of United Flexible, an engineering solutions business, for a headline price of \$345m. The acquisition strengthens Flex-Tek's global position in aerospace and industrial end markets. The intangible assets recognised on this acquisition comprise customer relationships, order backlog and tradenames. 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 2019, United Flexible contributed £56m to revenue and £11m to profit before taxation. If the Group had acquired this business at the beginning of the financial year, the acquisition would have contributed £123m to revenue and £15m to profit before taxation. Due to the size of the acquired business, the assessment of the fair value of the assets and liabilities acquired has not yet been finalised and in accordance with IFRS 3 'Business combinations' they are shown as provisional in the table below.
On 17 April 2019, the Group's John Crane division completed the acquisition of the Industrial Division of Advanced Diamond Technologies for £6m. This business has been renamed John Crane Diamond. John Crane Diamond has developed unrivalled expertise in proprietary materials that capture the properties of natural diamond using chemical vapor deposition, further enhancing John Crane's industry leadership. 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 2019, John Crane Diamond contributed £1m to revenue and less than £1m to profit before taxation. If the Group had acquired this business at the beginning of the financial year, the acquisition would have contributed £2m to revenue and £1m to profit before taxation.
The provisional balance sheets at the date of acquisition are:
| United Flexible £m |
John Crane Diamond £m |
Total £m |
||
|---|---|---|---|---|
| Non-current assets | – acquired intangible assets | 146 | 2 | 148 |
| – land and buildings | 3 | 3 | ||
| – plant and equipment | 8 | 8 | ||
| Current assets | – inventory | 25 | 25 | |
| – trade and other receivables | 15 | 1 | 16 | |
| – cash and cash equivalents | 7 | 7 | ||
| Current liabilities | – trade and other payables | (13) | (13) | |
| Non-current liabilities | – provisions | (12) | (12) | |
| – deferred tax | (31) | (31) | ||
| Net assets acquired | 148 | 3 | 151 | |
| Goodwill on current year acquisitions | 124 | 3 | 127 | |
| Cash paid during the year | 271 | 6 | 277 | |
| Deferred consideration | 1 | 1 | ||
| Total consideration | 272 | 6 | 278 |
On 22 March 2019, the Group formally announced the intention to pursue a demerger of the Smiths Medical business and separately list it on the UK Stock Exchange. At the July 2019 Smith Group Board meeting, it was determined that the project had progressed sufficiently for Smiths Medical business to be accounted for as a discontinued operation and as a business held for distribution to owners. The Group is on track to complete the demerger of Smiths Medical during the first half of calendar year 2020.
The financial performance of the Smiths Medical business in the current and prior years is presented below:
| Year ended 31 July 2019 | Year ended 31 July 2018 – restated* | |||||
|---|---|---|---|---|---|---|
| Non-headline | Non-headline | |||||
| Headline £m |
(note 3) £m |
Total £m |
Headline £m |
(note 3) £m |
Total £m |
|
| Revenue | 874 | 874 | 869 | 869 | ||
| Cost of sales | (412) | (412) | (405) | (405) | ||
| Gross profit | 462 | 462 | 464 | 464 | ||
| Sales and distribution costs | (183) | (183) | (177) | (177) | ||
| Administrative expenses | (132) | (13) | (145) | (131) | (4) | (135) |
| Profit on business disposal | 17 | 17 | ||||
| Operating profit | 147 | 4 | 151 | 156 | (4) | 152 |
| Finance costs | (3) | (38) | (41) | (2) | (2) | (4) |
| Taxation | (32) | 7 | (25) | (39) | 51 | 12 |
| Profit from discontinued operations | 112 | (27) | 85 | 115 | 45 | 160 |
* The comparatives for FY2018 have been restated to reflect the adoption of IFRS 15 – see page 146 for further details.
£3.3m (FY2018: £2.8m) interest was capitalised as part of the costs of Smiths Medical development projects. £0.6m (FY2018: £0.8m) of tax relief has been recognised as current tax relief in the period. The demerger of the Medical division is not anticipated to give rise to material tax charges, however, it is noted that the relevant regulatory filings and clearances are still in progress.
Cash-flow from discontinued operations included in the consolidated cash-flow statement is as follows:
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Net cash inflow from operating activities | 149 | 123 |
| Net cash-flow used in investing activities | (28) | (43) |
| Net cash-flow used in financing activities | (60) | (59) |
| 61 | 21 |
The carrying value of the assets and liabilities of the Smiths Medical business as at 31 July 2019 are as follows:
| 31 July 2019 £m |
|
|---|---|
| Assets classified as held for distribution to owners: | |
| Intangible assets | 746 |
| Property, plant and equipment | 135 |
| Inventories | 151 |
| Deferred tax assets | 13 |
| Current tax receivable | 2 |
| Trade and other receivables | 138 |
| Cash and cash equivalents | 26 |
| Financial derivatives | 5 |
| Assets classified as held for distribution to owners | 1,216 |
| Liabilities classified as held for distribution to owners: | |
| Financial liabilities | |
| – borrowings | (3) |
| – financial derivatives | (2) |
| Trade and other payables | (137) |
| Current tax payable | (11) |
| Deferred tax liabilities | (48) |
| Retirement benefit obligations | (6) |
Headline operating profit for discontinued operations is stated after charging depreciation £19m (FY2018: £20m), amortisation £21m (FY2018: £18m) and share based payments £nil (FY2018: £2m).
The capital expenditure on property, plant and equipment, capitalised development and other intangible assets for discontinued operations is £45m (FY2018: £48m).
Provisions for liabilities and charges (6) Liabilities classified as held for distribution to owners (213)
Revenue for the Smiths Medical discontinued operation is analysed by the following product lines: Infusion Systems £307m (FY2018: £302m), Vascular Access £286m (FY2018: £294m) and Vital Care/Other £281m (FY2018: £273m).
Revenue by destination and non-current operating assets by location for discontinued operations is shown below:
| Year ended 31 July 2019 | Year ended 31 July 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Americas £m |
Europe, Middle East & Africa £m |
Asia-Pacific £m |
Total £m |
Americas £m |
Europe, Middle East & Africa £m |
Asia-Pacific £m |
Total £m |
|
| Revenue | 493 | 233 | 148 | 874 | 476 | 241 | 152 | 869 |
| Intangible assets and property, plant and equipment |
772 | 64 | 45 | 881 | 711 | 78 | 42 | 831 |
In the prior year, the Group recognised a net profit of £7m for business disposals, this profit was principally due to the sale of John Crane Bearings which completed on 31 May 2018.
| Year ended 31 July 2019 | Year ended 31 July 2018 – restated | ||||||
|---|---|---|---|---|---|---|---|
| Headline | Non-headline | Total | Headline | Non-headline | Total | ||
| £m | £m | £m | £m | £m | £m | ||
| Operating profit | – continuing operations | 427 | (101) | 326 | 388 | (46) | 342 |
| – discontinued operations | 147 | 4 | 151 | 156 | (4) | 152 | |
| Amortisation of intangible assets | 36 | 45 | 81 | 39 | 32 | 71 | |
| Depreciation of property, plant and equipment | 56 | 56 | 55 | 55 | |||
| (Profit)/loss on disposal of property, plant and equipment | 4 | 4 | (1) | (1) | |||
| Profit on disposal of businesses | (18) | (18) | (7) | (7) | |||
| Share-based payment expense | 15 | 15 | 14 | 2 | 16 | ||
| Retirement benefits | 7 | (6) | 1 | 5 | (49) | (44) | |
| Decrease/(increase) in inventories | (52) | 4 | (48) | (19) | 2 | (17) | |
| Decrease/(increase) in trade and other receivables | (105) | (105) | (17) | (17) | |||
| Increase/(decrease) in trade and other payables | 60 | 6 | 66 | 26 | (5) | 21 | |
| Decrease in provisions | (7) | (19) | (26) | (6) | (30) | (36) | |
| Cash generated from operations | 588 | (85) | 503 | 640 | (105) | 535 | |
| Interest paid | (64) | (64) | (71) | (1) | (72) | ||
| Interest received | 6 | 6 | 7 | 7 | |||
| Tax paid | (99) | (99) | (65) | (65) | |||
| Net cash inflow from operating activities | 431 | (85) | 346 | 511 | (106) | 405 |
The split of tax payments between headline and non-headline only considers the nature of payments made. No adjustment has been made for reductions in tax payments due to tax relief received on non-headline items.
The Group measure of headline operating cash includes capital expenditure supporting organic growth and excludes interest and tax.
| Year ended 31 July 2019 | Year ended 31 July 2018 | |||||
|---|---|---|---|---|---|---|
| Headline £m |
Non-headline £m |
Total £m |
Headline £m |
Non-headline £m |
Total £m |
|
| Net cash inflow from operating activities | 431 | (85) | 346 | 511 | (106) | 405 |
| Include: | ||||||
| Expenditure on capitalised development, other intangible assets | ||||||
| and property, plant and equipment | (118) | (118) | (106) | (106) | ||
| Disposals of property, plant and equipment | 4 | 4 | 4 | 4 | ||
| Investment in financial assets relating to operating activities and | ||||||
| pensions financing | 2 | 2 | (1) | (1) | ||
| Free cash-flow | 234 | 302 | ||||
| Exclude: | ||||||
| Investment in financial assets relating to operating activities and | ||||||
| pensions financing outstanding at the balance sheet | (2) | (2) | 1 | 1 | ||
| Interest paid | 64 | 64 | 71 | 1 | 72 | |
| Interest received | (6) | (6) | (7) | (7) | ||
| Tax paid | 99 | 99 | 65 | 65 | ||
| Headline operating cash-flow | 474 | (85) | 389 | 538 | (105) | 433 |
Headline operating cash conversion for the total Group is calculated as follows:
| Headline operating cash conversion | 83% | 99% |
|---|---|---|
| Headline operating cash-flow | 474 | 538 |
| Headline operating profit | 574 | 544 |
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
| Year ended | Year ended | |
|---|---|---|
| 31 July 2019 | 31 July 2018 | |
| £m | £m | |
| Free cash-flow | 234 | 302 |
| Acquisition of businesses | (277) | (71) |
| Disposal of businesses and discontinued operations | 22 | 29 |
| Net cash-flow used in financing activities | (391) | (316) |
| Net decrease in cash and cash equivalents | (412) | (56) |
In addition to the non-statutory profit measures explained in note 3, the Group calculates credit metrics and return on capital employed incorporating the same adjustments. See the disclosures on presentation of results in accounting policies for an explanation of the excluded items.
Smiths ROCE is calculated over a rolling 12-month period and is the percentage that headline operating profit comprises of monthly average capital employed. See note 1 for the divisional headline operating profit and average divisional capital employed used to calculate divisional ROCE.
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 £787m (FY2018: £787m) and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt.
| 31 July 2019 | 31 July 2018 | ||
|---|---|---|---|
| Notes | £m | £m | |
| Net assets | 2,381 | 2,288 | |
| Adjust for: | |||
| Goodwill recognised directly in reserves | 787 | 787 | |
| Post-retirement benefit assets and liabilities | 8 | (311) | (381) |
| Tax related to post-retirement benefit assets and liabilities | 55 | 62 | |
| John Crane, Inc. litigation provisions and related tax | 22 | 187 | 175 |
| Titeflex Corporation litigation provisions and related tax | 22 | 56 | 59 |
| Net debt- including £23m of net cash in discontinued operations | 17 | 1,197 | 893 |
| Capital employed | 4,352 | 3,883 |
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
|
|---|---|---|---|
| Headline operating profit for previous 12 months – including discontinued operations | 574 | 544 | |
| Average capital employed | 1 | 3,972 | 3,735 |
| ROCE | 14.4% | 14.6% |
Smiths Group monitors the ratio of net debt to Headline EBITDA as part of its management of credit ratings, see note 25 for details. This ratio is presented for the whole Group, including discontinued operations, and is calculated as follows:
| Headline EBITDA | 666 | 641 | |
|---|---|---|---|
| – amortisation of software, patents and intellectual property | 10 | 13 | 18 |
| – amortisation of development costs | 10 | 23 | 24 |
| – depreciation | 12 | 56 | 55 |
| Exclude: | |||
| – headline operating profit of discontinued operations | 27 | 147 | 156 |
| Include: | |||
| Headline operating profit | 427 | 388 | |
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated £m |
£1m of software amortisation was charged to restructuring projects and treated as a non-headline cost.
| Ratio of net debt to headline EBITDA | 1.8 | 1.4 |
|---|---|---|
| Net debt – including £23m of net cash in discontinued operations 17 |
1,197 | 893 |
| Headline EBITDA | 666 | 641 |
| Notes | Year ended 31 July 2019 £m |
Year ended 31 July 2018 £m |
The headline income statement metrics shown below for the years ended 31 July 2018, 2017, 2016 and 2015 have been represented to show the results of Smiths Medical as a discontinued operation.
| Year ended 31 July 2019 £m |
Year ended 31 July 2018 restated* £m |
Year ended 31 July 2017 £m |
Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
||
|---|---|---|---|---|---|---|
| Income statement metrics – headline* | ||||||
| Continuing operations | Revenue | 2,498 | 2,328 | 2,329 | 2,075 | 2,061 |
| Headline operating profit | 427 | 388 | 355 | 292 | 315 | |
| Headline profit before tax | 376 | 333 | 296 | 234 | 263 | |
| Discontinued operations | Revenue | 874 | 869 | 951 | 874 | 836 |
| Headline operating profit | 147 | 156 | 194 | 174 | 150 | |
| Headline profit before tax | 144 | 154 | 192 | 173 | 150 | |
| Income statement metrics – statutory** | ||||||
| Revenue | 2,498 | 2,328 | 3,280 | 2,949 | 2,897 | |
| Operating profit | 326 | 342 | 674 | 387 | 394 | |
| Profit before taxation | 304 | 287 | 601 | 346 | 325 | |
| Profit for the year | 227 | 279 | 572 | 261 | 248 | |
| Balance sheet metrics*** | ||||||
| Net debt | (1,197) | (893) | (967) | (978) | (818) | |
| Shareholders' equity | 2,360 | 2,272 | 2,089 | 1,646 | 1,419 | |
| Average capital employed | 3,972 | 3,735 | 3,639 | 3,324 | 3,197 | |
| Ratios*** | ||||||
| Headline operating profit: revenue (%) | 17.0 | 17.0 | 18.0 | 17.3 | 17.6 | |
| Headline effective tax rate (%) | 25.9 | 25.8 | 26.5 | 25.0 | 25.5 | |
| Return on capital employed (%) | 14.4 | 14.6 | 16.2 | 15.3 | 16.0 | |
| Return on shareholders' funds (%) | 12.3 | 12.1 | 14.5 | 14.3 | 15.8 | |
| Cash-flow metrics*** | ||||||
| Headline operating cash | 474 | 538 | 695 | 520 | 484 | |
| Headline operating cash conversion (%) | 83 | 99 | 118 | 102 | 95 | |
| Free cash-flow | 234 | 302 | 370 | 243 | 158 | |
| Free cash-flow per share (p) | 59.1 | 76.3 | 93.6 | 61.1 | 40.1 | |
| Earnings per share*** | ||||||
| Headline earnings per share (p) | 96.8 | 90.7 | 97.6 | 85.2 | 86.1 | |
| Dividends and dividend cover*** | ||||||
| Pence per share | 45.90 | 44.55 | 43.25 | 42.00 | 41.00 | |
| Headline dividend cover | 2.1 | 2.0 | 2.3 | 2.0 | 2.1 | |
| Number of employees (000s)*** | ||||||
| United Kingdom | 1.6 | 1.5 | 1.5 | 1.5 | 1.7 | |
| Overseas | 20.5 | 20.2 | 20.4 | 20.5 | 21.6 | |
| 22.0 | 21.7 | 21.9 | 22.0 | 23.3 |
* The headline income statement metrics in the above five year record have been presented to reflect the reclassification of the Smiths Medical business as a discontinued operation and the Group's current accounting policy of including restructuring and pension administration costs within headline profit. The discontinued operations comparatives for the year ended 31 July 2018 have also been restated for the adoption of IFRS 15.
** The statutory income statement metrics are presented based on continuing operations for both the current and comparative year. The year ended 31 July 2017 and prior years are presented as originally published.
*** Balance sheet metrics, ratios, cash-flow metrics, earnings per share, dividend cover and number of employees are presented based on both continuing and discontinued operations for all years.
| Year ended 31 July 2019 | Year ended 31 July 2018 – restated* | ||||||
|---|---|---|---|---|---|---|---|
| Non-headline | Non-headline | ||||||
| Notes | Headline \$m |
(note 3) \$m |
Total \$m |
Headline \$m |
(note 3) \$m |
Total \$m |
|
| Continuing operations | |||||||
| Revenue | 1 | 3,218 | 3,218 | 3,139 | 3,139 | ||
| Cost of sales | (1,841) | (1,841) | (1,789) | (1,789) | |||
| Gross profit | 1,377 | 1,377 | 1,350 | 1,350 | |||
| Sales and distribution costs | (344) | (344) | (348) | (348) | |||
| Administrative expenses | (483) | (130) | (613) | (479) | (71) | (550) | |
| Profit on business disposal | 28 | 9 | 9 | ||||
| Operating profit/(loss) | 2 | 550 | (130) | 420 | 523 | (62) | 461 |
| Interest receivable | 14 | 14 | 13 | 13 | |||
| Interest payable | (80) | (80) | (88) | (88) | |||
| Other financing gains/(losses) | 23 | 23 | (9) | (9) | |||
| Other finance charges – retirement benefits | 8 | 14 | 14 | 9 | 9 | ||
| Finance costs | 4 | (66) | 37 | (29) | (75) | (75) | |
| Continuing operations – Profit before taxation | 484 | (93) | 391 | 448 | (62) | 386 | |
| Taxation | 6 | (133) | (76) | (209) | (117) | (110) | (227) |
| Continuing operations – Profit for the year | 351 | (169) | 182 | 331 | (172) | 159 | |
| Discontinued operations | |||||||
| Loss on discontinued operations | 27 | 144 | (35) | 109 | 155 | 61 | 216 |
| Profit for the year | 495 | (204) | 291 | 486 | (111) | 375 | |
| Attributable to | |||||||
| Smiths Group shareholders – continuing operations | 348 | (169) | 179 | 328 | (172) | 156 | |
| Smiths Group shareholders – discontinued operations | 144 | (35) | 109 | 155 | 61 | 216 | |
| Non-controlling interests in respect of continuing | |||||||
| operations | 3 | 3 | 3 | 3 | |||
| 495 | (204) | 291 | 486 | (111) | 375 | ||
| Earnings per share | 5 | ||||||
| Basic | 73.2c | 94.4c | |||||
| Basic – continuing | 45.5c | 39.9c | |||||
| Diluted | 72.8c | 93.1c | |||||
| Diluted – continuing | 45.3c | 39.3c |
* Results for the year ended 31 July 2018 have been restated to reflect the adoption of IFRS 15 and the reclassification of the Smiths Medical business as a discontinued operation.
Assets and liabilities have been translated into US dollars at the exchange rate at the date of that balance sheet and income, expenses and cash-flows are translated at average exchange rates for the period. This reflects the accounting approach that Smiths Group plc would use if the Group moved to reporting in US dollars without making any changes to its Group structure or financing arrangements.
| Year ended 31 July 2019 |
Year ended 31 July 2018 |
||
|---|---|---|---|
| Notes | \$m | \$m | |
| Profit for the year | 291 | 375 | |
| Other comprehensive income: | |||
| Actuarial gains on retirement benefits | 8 | (98) | 140 |
| Taxation recognised on actuarial movements | 6 | 17 | (24) |
| Other comprehensive income and expenditure which will not be reclassified | |||
| to the consolidated income statement | (81) | 116 | |
| Other comprehensive income which will be reclassified and reclassifications: | |||
| Exchange (losses)/gains | 30 | (11) | |
| Cumulative exchange gains recycled on disposal | (7) | ||
| Fair value gains/(losses) and reclassification adjustments: | |||
| – deferred on available for sale financial assets | 2 | 1 | |
| – reclassified to income statement on available for sale financial assets | 4 | ||
| – deferred in the period on cash-flow and net investment hedges | (99) | (8) | |
| – reclassified to income statement on cash-flow and net investment hedges | (5) | (8) | |
| Taxation recognised on fair value gains | 6 | ||
| Total other comprehensive income | (153) | 83 | |
| Total comprehensive income | 138 | 458 | |
| Attributable to | |||
| Smiths Group shareholders | 135 | 456 | |
| Non-controlling interests | 3 | 2 | |
| 138 | 458 |
| Notes | 31 July 2019 \$m |
31 July 2018 \$m |
|
|---|---|---|---|
| Non-current assets | |||
| Intangible assets | 10 | 2,057 | 2,705 |
| Property, plant and equipment | 12 | 283 | 420 |
| Financial assets – other investments | 16 | 23 | 23 |
| Retirement benefit assets | 8 | 573 | 690 |
| Deferred tax assets | 6 | 140 | 237 |
| Trade and other receivables | 14 | 64 | 75 |
| Financial derivatives | 19 | 57 | 65 |
| 3,197 | 4,215 | ||
| Current assets | |||
| Inventories | 13 | 510 | 612 |
| Current tax receivable | 6 | 14 | 49 |
| Trade and other receivables | 14 | 933 | 963 |
| Cash and cash equivalents | 17 | 353 | 941 |
| Financial derivatives | 19 | 4 | 9 |
| Assets held for distribution to owners | 27 | 1,484 | |
| 3,298 | 2,574 | ||
| Total assets | 6,495 | 6,789 | |
| Current liabilities | |||
| Financial liabilities | |||
| – borrowings | 17 | (11) | (266) |
| – financial derivatives | 19 | (7) | (6) |
| Provisions for liabilities and charges | 22 | (80) | (100) |
| Trade and other payables | 15 | (695) | (795) |
| Current tax payable | 6 | (69) | (94) |
| Liabilities held for distribution to owners | 27 | (259) | |
| (1,121) | (1,261) | ||
| Non-current liabilities | |||
| Financial liabilities | |||
| – borrowings | 17 | (1,831) | (1,847) |
| – financial derivatives | 19 | (1) | (8) |
| Provisions for liabilities and charges | 22 | (349) | (344) |
| Retirement benefit obligations | 8 | (186) | (190) |
| Current tax payable | 6 | (9) | |
| Deferred tax liabilities | 6 | (55) | (101) |
| Trade and other payables | 15 | (36) | (35) |
| (2,467) | (2,525) | ||
| Total liabilities | (3,588) | (3,786) | |
| Net assets | 2,907 | 3,003 | |
| Shareholders' equity | |||
| Share capital | 23 | 181 | 194 |
| Share premium account | 440 | 469 | |
| Capital redemption reserve | 25 | 7 | 8 |
| Revaluation reserve | 25 | 1 | 2 |
| Merger reserve | 25 | 287 | 308 |
| Retained earnings | 2,434 | 2,398 | |
| Hedge reserve | 25 | (468) | (397) |
| Total shareholders' equity | 2,882 | 2,982 | |
| Non-controlling interest equity | 25 | 21 | |
| Total equity | 2,907 | 3,003 | |
| Notes | Share capital and share premium \$m |
Other reserves \$m |
Retained earnings \$m |
Hedge reserve \$m |
Equity shareholders' funds \$m |
Non controlling interest \$m |
Total equity \$m |
|
|---|---|---|---|---|---|---|---|---|
| At 31 July 2018 | 663 | 318 | 2,398 | (397) | 2,982 | 21 | 3,003 | |
| Profit for the year | 289 | 289 | 2 | 291 | ||||
| Other comprehensive income: | ||||||||
| Exchange (losses)/gains | (44) | (23) | 63 | 33 | 29 | 1 | 30 | |
| Actuarial gains on retirement benefits and tax | (81) | (81) | (81) | |||||
| Fair value gains/(losses) and related tax | 2 | (104) | (102) | (102) | ||||
| Total comprehensive income for the year | (44) | (23) | 273 | (71) | 135 | 3 | 138 | |
| Transactions relating to ownership interests: | ||||||||
| Exercises of share options | 23 | 2 | 2 | 2 | ||||
| Purchase of own shares | 25 | (24) | (24) | (24) | ||||
| Dividends: | ||||||||
| – equity shareholders | 24 | (230) | (230) | (230) | ||||
| – non-controlling interests | (1) | (1) | ||||||
| Receipt of capital from non-controlling interest | 2 | 2 | ||||||
| Share-based payment | 9 | 17 | 17 | 17 | ||||
| At 31 July 2019 | 621 | 295 | 2,434 | (468) | 2,882 | 25 | 2,907 | |
| Notes | Share capital and share premium \$m |
Other reserves \$m |
Retained earnings \$m |
Hedge reserve \$m |
Equity shareholders' funds \$m |
Non controlling interest \$m |
Total equity \$m |
|
| At 31 July 2017 | 664 | 320 | 2,155 | (383) | 2,756 | 19 | 2,775 | |
| Profit for the year | 372 | 372 | 3 | 375 | ||||
| Other comprehensive income: | ||||||||
| Exchange (losses)/gains | (5) | (2) | (13) | 2 | (18) | (18) | ||
| Actuarial gains on retirement benefits and tax | 116 | 116 | 116 | |||||
| Fair value gains/(losses) and related tax | 1 | (16) | (15) | (15) | ||||
| Total comprehensive income for the year | (5) | (2) | 476 | (14) | 455 | 3 | 458 | |
| Transactions relating to ownership interests: | ||||||||
| Exercises of share options | 23 | 4 | 4 | 4 | ||||
| Purchase of own shares | 25 | (20) | (20) | (20) | ||||
| Dividends: | ||||||||
| – equity shareholders | 24 | (232) | (232) | (232) | ||||
| – non-controlling interests | (1) | (1) | ||||||
| Share-based payment | 9 | 19 | 19 | 19 | ||||
| At 31 July 2018 | 663 | 318 | 2,398 | (397) | 2,982 | 21 | 3,003 |
| Notes | Year ended 31 July 2019 \$m |
Year ended 31 July 2018 \$m |
|
|---|---|---|---|
| Net cash inflow from operating activities | 29 | 445 | 546 |
| Cash-flows from investing activities | |||
| Expenditure on capitalised development | (35) | (35) | |
| Expenditure on other intangible assets | 10 | (15) | (16) |
| Purchases of property, plant and equipment | 12 | (102) | (92) |
| Disposals of property, plant and equipment | 5 | 5 | |
| Investment in financial assets | 16 | 3 | (1) |
| Acquisition of businesses | 26 | (357) | (96) |
| Disposals of businesses – continuing operations | 28 | 39 | |
| Disposals of businesses – discontinued operations | 27 | 39 | |
| Tax paid on disposal of business – discontinued operations | (10) | ||
| Net cash-flow used in investing activities | (472) | (196) | |
| Cash-flows from financing activities | |||
| Proceeds from exercise of share options | 23 | 3 | 4 |
| Purchase of own shares | 25 | (24) | (21) |
| Settlement of cash settled options | (3) | (1) | |
| Dividends paid to equity shareholders | 24 | (230) | (232) |
| Cash inflow from matured derivative financial instruments | 5 | ||
| Reduction and repayment of borrowings | 17 | (250) | (182) |
| Net cash-flow used in financing activities | (504) | (427) | |
| Net decrease in cash and cash equivalents | (531) | (77) | |
| Cash and cash equivalents at beginning of year | 941 | 1,030 | |
| Cash held in disposal group | (33) | ||
| Exchange differences | (24) | (12) | |
| Cash and cash equivalents at end of year | 17 | 353 | 941 |
| Cash and cash equivalents at end of year comprise: | |||
| – cash at bank and in hand | 187 | 377 | |
| – short-term deposits | 166 | 564 | |
| 353 | 941 |
| Notes | Year ended 31 July 2019 \$m |
Year ended 31 July 2018 \$m |
|
|---|---|---|---|
| Net debt at start of year | 17 | (1,178) | (1,275) |
| Net (decrease)/increase in cash and cash equivalents | (531) | (77) | |
| Net cash held in disposal group | (29) | ||
| Reduction and repayment of borrowings | 250 | 182 | |
| Movement in net debt resulting from cash-flows | (310) | 105 | |
| Capitalisation, interest accruals and unwind of capitalisation fees | 1 | 3 | |
| Movement from fair value hedging | (59) | 1 | |
| Exchange differences | 56 | (12) | |
| Movement in net debt in the year | (312) | 97 | |
| Net debt at end of year | 17 | (1,490) | (1,178) |
The headline income statement metrics shown below for the years ended 31 July 2018, 2017, 2016 and 2015 have been represented to show the results of Smiths Medical as a discontinued operation.
| Year ended 31 July 2019 \$m |
Year ended 31 July 2018 restated* \$m |
Year ended 31 July 2017 \$m |
Year ended 31 July 2016 \$m |
Year ended 31 July 2015 \$m |
||
|---|---|---|---|---|---|---|
| Income statement metrics – headline* | ||||||
| Continuing operations | Revenue | 3,218 | 3,139 | 2,952 | 3,036 | 3,219 |
| Headline operating profit | 550 | 523 | 450 | 428 | 492 | |
| Headline profit before tax | 484 | 449 | 375 | 343 | 411 | |
| Discontinued operations | Revenue | 1,126 | 1,172 | 1,206 | 1,279 | 1,306 |
| Headline operating profit | 189 | 210 | 246 | 255 | 234 | |
| Headline profit before tax | 185 | 208 | 243 | 254 | 234 | |
| Income statement metrics – statutory** | ||||||
| Revenue | 3,218 | 3,139 | 4,158 | 4,315 | 4,525 | |
| Operating profit | 420 | 461 | 855 | 567 | 616 | |
| Profit before taxation | 391 | 386 | 762 | 506 | 509 | |
| Profit for the year | 291 | 375 | 715 | 382 | 388 | |
| Balance sheet metrics*** | ||||||
| Net debt | (1,462) | (1,172) | (1,275) | (1,294) | (1,278) | |
| Shareholders' equity | 2,882 | 2,982 | 2,756 | 2,178 | 2,219 | |
| Average capital employed | 4,852 | 4,903 | 4,800 | 4,864 | 4,994 | |
| Ratios*** | ||||||
| Headline operating profit: revenue (%) | 17.0 | 17.0 | 18.0 | 17.3 | 17.6 | |
| Headline effective tax rate (%) | 25.9 | 25.8 | 26.5 | 25.0 | 25.5 | |
| Return on capital employed (%) | 14.4 | 14.6 | 16.2 | 15.3 | 16.0 | |
| Return on shareholders' funds (%) | 12.1 | 12.5 | 14.2 | 14.6 | 15.3 | |
| Cash-flow metrics*** | ||||||
| Headline operating cash | 611 | 725 | 881 | 760 | 756 | |
| Headline operating cash conversion (%) | 83 | 99 | 118 | 102 | 95 | |
| Free cash-flow | 301 | 407 | 469 | 356 | 247 | |
| Free cash-flow per share (c) | 76.1 | 102.9 | 118.6 | 89.4 | 62.6 | |
| Earnings per share*** | ||||||
| Headline earnings per share (c) | 124.7 | 122.3 | 123.6 | 124.6 | 134.5 | |
| Dividends and dividend cover*** | ||||||
| Cents per share (c) | 59.1 | 60.1 | 54.8 | 61.5 | 64.0 | |
| Headline dividend cover | 2.1 | 2.0 | 2.3 | 2.0 | 2.1 | |
| Number of employees (000s)*** | ||||||
| United States of America | 7.2 | 7.1 | 7.7 | 7.9 | 8.4 | |
| Rest of World | 14.8 | 14.6 | 14.2 | 14.1 | 14.9 | |
| 22.0 | 21.7 | 21.9 | 22.0 | 23.3 |
* The headline income statement metrics in the above five year record have been presented to reflect the reclassification of the Smiths Medical business as a discontinued operation and the Group's current accounting policy of including restructuring and pension administration costs within headline profit. The discontinued operations comparatives for the year ended 31 July 2018 have also been restated for the adoption of IFRS 15.
** The statutory income statement metrics are presented based on continuing operations for both the current and comparative year. The year ended 31 July 2017 and prior years are presented as originally published.
*** Balance sheet metrics, ratios, cash-flow metrics, earnings per share, dividend cover and number of employees are presented based on both continuing and discontinued operations for all years.
| Notes | 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|---|
| Non-current assets | |||
| Tangible assets | 2 | 1 | |
| Investments and advances | 3 | 3,519 | 3,247 |
| Financial assets | 4 | 6 | 6 |
| Retirement benefit assets | 11 | 469 | 526 |
| Debtors | 6 | 1 | 1 |
| Financial derivatives | 9 | 45 | 49 |
| Total non-current assets | 4,040 | 3,830 | |
| Current assets | |||
| Debtors | 6 | 67 | 63 |
| Cash at bank and on deposit | 8 | 90 | 347 |
| Financial derivatives | 9 | 4 | 2 |
| Total current assets | 161 | 412 | |
| Current liabilities | |||
| Creditors | 7 | (76) | (331) |
| Financial derivatives | 9 | (2) | |
| Net current assets | 83 | 81 | |
| Total assets less current liabilities | 4,123 | 3,911 | |
| Non-current liabilities | |||
| Borrowings | 8 | (1,461) | (1,405) |
| Provisions for liabilities and charges | 10 | (2) | (2) |
| Retirement benefit liabilities | 11 | (61) | (59) |
| Deferred tax liabilities | 5 | (8) | |
| Financial derivatives | 9 | (2) | (6) |
| Total non-current liabilities | (1,526) | (1,480) | |
| Net assets | 2,597 | 2,431 | |
| Capital and reserves | |||
| Called up share capital | 12 | 148 | 148 |
| Share premium account | 12 | 360 | 358 |
| Capital redemption reserve | 12 | 6 | 6 |
| Other reserves | 12 | 181 | 181 |
| Profit and loss account | 12 | 1,902 | 1,738 |
| Shareholders' equity | 2,597 | 2,431 |
The accounts on pages 200 to 207 were approved by the Board of Directors on 19 September 2019 and were signed on its behalf by:
Andy Reynolds Smith John Shipsey
CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
Smiths Group plc – registered number 137013
| Share | Share | Capital redemption |
Other | Retained | Shareholders' | |
|---|---|---|---|---|---|---|
| capital £m |
premium £m |
reserve £m |
reserves £m |
profit £m |
equity £m |
|
| At 31 July 2018 | 148 | 358 | 6 | 181 | 1,738 | 2,431 |
| Profit for the year | 403 | 403 | ||||
| Other comprehensive income: | ||||||
| Actuarial loss on retirement benefits | (66) | (66) | ||||
| Taxation recognised on retirement benefits | 11 | 11 | ||||
| Total comprehensive income | 348 | 348 | ||||
| Transactions with owners: | ||||||
| Exercise of share options | 2 | 2 | ||||
| Purchase of own shares | (19) | (19) | ||||
| Dividends paid to equity shareholders | (178) | (178) | ||||
| Share-based payment | 13 | 13 | ||||
| Total transactions with owners recognised in equity | 2 | (184) | (182) | |||
| At 31 July 2019 | 148 | 360 | 6 | 181 | 1,902 | 2,597 |
| Capital | ||||||
| Share capital |
Share premium |
redemption reserve |
Other reserves |
Retained profit |
Shareholders' equity |
|
| £m | £m | £m | £m | £m | £m | |
| At 31 July 2017 | 148 | 355 | 6 | 181 | 1,818 | 2,508 |
| Profit for the year | 7 | 7 | ||||
| Other comprehensive income: | ||||||
| Actuarial gain on retirement benefits | 103 | 103 | ||||
| Taxation recognised on retirement benefits | (17) | (17) | ||||
| Total comprehensive income | 93 | 93 | ||||
| Transactions with owners: | ||||||
| Exercise of share options | 3 | 3 | ||||
| Purchase of own shares | (15) | (15) | ||||
| Dividends paid to equity shareholders | (172) | (172) | ||||
| Share-based payment | 14 | 14 | ||||
| Total transactions with owners recognised in equity | 3 | (173) | (170) | |||
| At 31 July 2018 | 148 | 358 | 6 | 181 | 1,738 | 2,431 |
The accounts have been prepared in accordance with the Companies Act 2006 and Financial Reporting Standard 101, "Reduced Disclosure Framework" (FRS 101).
These accounts have been prepared on a going concern basis and 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 permitted by Section 408(3) of the Companies Act 2006, the Company's income statement and statement of comprehensive income have not been presented. As permitted by Section 408(2), information about the Company's employee numbers and costs is not presented.
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101:
On 1 August 2018, the Company and Group adopted IFRS 9: Financial Instruments. There was no material impact on adoption of this new standard, further details on the impact of IFRS 9 on the Group processes and disclosures is included within the Group accounting policies on page 145.
The preparation of the accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions 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 estimates and assumptions used in these parent company financial statements are set out below.
The Company has recognised deferred tax assets of £68m (FY2018: £63m) relating to revenue losses brought forward. The recognition of these assets is dependent on the ability to recover them against the unwind of other tax positions and forecast UK taxable profits of the tax group. The treatment of these assets is reviewed regularly. Further detail on the Company's deferred taxation position is included in note 5.
The financial statements include costs in relation to, and provision for, retirement benefit obligations. The costs and the present value of any related pension assets and liabilities depend on such factors as life expectancy of the members, the returns that plan assets generate and the discount rate used to calculate the present value of the liabilities. The Company uses previous experience and independent actuarial advice to select the values of critical estimates. The estimates, and the effect of variances in key estimates, are disclosed in note 8 to the consolidated accounts.
At 31 July 2019 there is a retirement benefit asset of £469m (FY2018: £525m) which arises from the rights of the employers to recover the surplus at the end of the life of the scheme. If the pension schemes were wound up while they still had members, the schemes would need to buy out the benefits of all members. The buyouts would cost significantly more than the present value of the scheme liabilities calculated in accordance with IAS 19: Employee benefits.
Foreign currency transactions are recorded at the exchange rate ruling on the date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the retranslation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the profit and loss account.
Payments made under operating leases are charged to the profit and loss account as incurred over the term of the lease.
Where a leasehold property is vacant or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made for the anticipated future shortfall up to termination of the lease.
Depreciation is provided at rates estimated to write off the relevant assets by equal annual amounts over their expected useful lives. In general, the rates used are: Freehold and long leasehold property – 2%; Short leasehold property – over the period of the lease; Plant, machinery, etc. – 10% to 20%; Fixtures, fittings, tools and other equipment – 10% to 33%.
The Company's investments in shares in Group companies are stated at cost less provision for impairment. Any impairment is charged to the profit and loss account as it arises.
The policies disclosed in the Group accounting policies on pages 141 to 146 for recognition, measurement and presentation of financial instruments are applied in the Company accounts.
Deferred tax is provided 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.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.
Provisions for disposal indemnities, restructuring costs, vacant leasehold property 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.
The Company has both defined benefit and defined contribution plans.
For defined benefit plans the liability for each scheme recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of AA corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full when they occur and presented in the statement of other comprehensive income.
For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Contributions are expensed as incurred.
The Company also has post-retirement healthcare schemes that are accounted for on a similar basis to the defined benefit plans.
The Company operates a number of equity-settled and cash-settled share-based compensation plans.
The fair value of the shares or share options granted is recognised over the vesting period to reflect the value of the employee services received. The charge relating to grants to employees of the Company is recognised as an expense in the profit and loss account and the charge for grants to employees of other group companies is recognised as an investment in the relevant subsidiary.
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 that are likely to vest.
For cash-settled share-based payment schemes, a liability is recognised based on the fair value of the payment earned by the balance sheet date. For equity-settled share-based payment schemes, the corresponding credit is recognised directly in reserves.
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.
The audit fee for the Parent Company was £0.1m (FY2018: £0.1m).
| Plant and equipment |
|
|---|---|
| £m | |
| Cost or valuation | |
| At 31 July 2018 and 31 July 2019 | 3 |
| Depreciation | |
| At 31 July 2018 | 2 |
| Charge for the year | (1) |
| At 31 July 2019 | 3 |
| Net book value at 31 July 2019 | |
| Net book value at 31 July 2018 | 1 |
Plant and equipment comprises plant, machinery, fixtures, fittings, tools and equipment, including computer hardware.
| Shares in subsidiary undertakings £m |
Loans due from subsidiaries £m |
Total £m |
|
|---|---|---|---|
| Cost or valuation | |||
| At 31 July 2018 | 2,414 | 844 | 3,258 |
| Exchange adjustments | 76 | 76 | |
| Contribution through share options | 8 | 8 | |
| Disposals | (8) | (8) | |
| Increase in advances due from subsidiaries | 191 | 191 | |
| At 31 July 2019 | 2,414 | 1,111 | 3,525 |
| Provision for impairment | |||
| At 31 July 2018 and 31 July 2019 | 5 | 1 | 6 |
| Net book value at 31 July 2019 | 2,409 | 1,110 | 3,519 |
| Net book value at 31 July 2018 | 2,404 | 843 | 3,247 |
Loans due to subsidiaries are offset against loans due from subsidiaries to the extent that there is a legal right of set off and an intention to settle the balances net. At 31 July 2019 £2,540m of loans payable are offset against loans receivable (FY2018: £2,323m). The Company has large offsetting loan balances because it uses loans to reduce its foreign currency exposures and separately monitor net cash generated from trading activities.
The Company's subsidiaries are largely held according to business lines by the following holding companies, which are incorporated in England:
Smiths Group International Holdings Limited Smiths Detection Group Limited John Crane Group Limited Flex-Tek Group (UK) Limited Smiths Interconnect Group Limited Smiths Medical Group Limited The principal subsidiaries and their countries of incorporation are:
Smiths Detection – Watford Ltd Smiths Medical International Limited John Crane UK Limited
Smiths Heimann GmbH (Germany) Smiths Detection (Asia-Pacific) Pte Ltd (Singapore) Smiths Medical Japan Limited (Japan) John Crane Middle East FZE (UAE) John Crane Technology (Tianjin) Co Limited (China) John Crane Saudi Arabia Ltd (Saudi Arabia) John Crane Canada Inc (Canada)
Smiths Detection, Inc. Smiths Medical ASD, Inc. John Crane, Inc. Titeflex Corporation Flexible Technologies, Inc. Tutco, LLC. Smiths Interconnect Americas, Inc Smiths Interconnect, Inc Kreisler Manufacturing Corp Smiths Tubular Systems – Laconia Inc Of the companies above, Smiths Group International Holdings Limited is 100% owned directly by the Company. The others are 100% owned through intermediate holding companies. Shareholdings are of ordinary shares or common stock. All of the above subsidiaries operate in their country of incorporation.
See pages 208 to 216 for a complete list of subsidiary undertakings.
At 31 July 2019 £6m (FY2018: £6m) was held on deposit with banks as security for liabilities or letters of credit.
The Company has recognised the following deferred tax assets and liabilities:
| Share based payment £m |
Retirement benefit obligations £m |
Losses carried forward £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|
| At 31 July 2018 | 3 | (75) | 63 | 1 | (8) |
| (Charge)/credit to income statement | (2) | (6) | 5 | 1 | (2) |
| Charge to equity | (1) | 11 | 10 | ||
| At 31 July 2019 | (70) | 68 | 2 |
The Company is part of a UK tax group including all its UK-based subsidiaries. The Company has recognised deferred tax assets of £68m (FY2018: £63m) relating to revenue losses brought forward. The recognition of these assets is dependent on the ability to recover them against the unwind of other tax positions and forecast UK taxable profits of the tax group. The treatment of these assets is reviewed regularly.
As at 31 July 2019 the Company has unrecognised deferred tax assets relating to share based payments of £3m (FY2018: £nil).
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Amounts falling due after one year | ||
| Other receivables | 1 | 1 |
| Amounts falling due within one year | ||
| Amounts owed by subsidiaries – repayable on demand | 57 | 56 |
| Other receivables | 10 | 7 |
| Debtors falling due within one year | 67 | 63 |
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Amounts falling due within one year | ||
| Term loans due within one year (note 8) | 190 | |
| Amounts owed to subsidiaries | 42 | 113 |
| Other creditors | 20 | 18 |
| Accruals and deferred income | 14 | 10 |
| 76 | 331 |
| 31 July 2019 | 31 July 2018 | |
|---|---|---|
| £m | £m | |
| Cash at bank | 6 | 12 |
| Short-term deposits | 84 | 335 |
| Cash and cash equivalents | 90 | 347 |
| Term loans due within one year (note 7) | (190) | |
| Term loans due after more than one year | (1,461) | (1,405) |
| Borrowings | (1,461) | (1,595) |
| Net debt | (1,371) | (1,248) |
The currency and coupons for the term loans are disclosed in note 17 of the Group accounts.
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Less than one year | 190 | |
| Between three and four years | 868 | |
| Between four and five years | 831 | |
| Greater than five years | 593 | 574 |
| Smiths Group plc term loans | 1,461 | 1,595 |
See the liquidity risk disclosures in note 18 in the Group accounts for information on the cash and borrowing facilities available to the Group. The Company can borrow an additional \$800m under the US\$800m multi-currency revolving credit facility, which matures in November 2023.
The tables below set out the nominal amount and fair value of derivative contracts held by the Company:
| At 31 July 2019 | ||||
|---|---|---|---|---|
| Contract or underlying | Fair value | |||
| nominal amount £m |
Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (not hedge accounted) | 347 | 4 | (3) | 1 |
| Cross currency swaps (fair value and net investment hedges) | 613 | 45 | 45 | |
| Interest rate swaps (fair value hedges) | 123 | (1) | (1) | |
| Total financial derivatives | 1,083 | 49 | (4) | 45 |
| Balance sheet entries | ||||
| Non-current | 45 | (2) | 43 | |
| Current | 4 | (2) | 2 | |
| Total financial derivatives | 49 | (4) | 45 | |
| At 31 July 2018 | ||||
| Contract or underlying | Fair value | |||
| nominal amount £m |
Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (not hedge accounted) | 179 | 2 | 2 | |
| Currency swaps (net investment hedges) | 110 | |||
| Cross currency swaps (fair value and net investment hedges) | 570 | 49 | 49 | |
| Interest rate swaps (fair value hedges) | 114 | (6) | (6) | |
| Total financial derivatives | 973 | 51 | (6) | 45 |
| Balance sheet entries | ||||
| Non-current | 49 | (6) | 43 | |
| Current | 2 | 2 |
Derivatives, including forward exchange contracts, currency swaps, interest rate instruments and embedded derivatives are level 2 fair value instruments and are valued at the net present value of the future cash-flows calculated using market data at the balance sheet date (principally exchange rates and yield curves).
Total financial derivatives 51 (6) 45
The charge/credit to the income statement arising from change in fair value in the year was £1m (FY2018: £10m)
| 2 | 2 | |||
|---|---|---|---|---|
| Disposals | 2 | 2 | ||
| At 31 July 2018 £m |
Charged against profit £m |
Utilisation £m |
At 31 July 2019 £m |
The closing disposal provision relates to warranties and other obligations in respect of a past disposal and is expected to be utilised within the next five years.
The Company is the principal employer for the two major defined benefit plans in the UK. The Company is accounting for all the UK defined benefit schemes (funded and unfunded) and virtually all of the post-retirement healthcare schemes.
The retirement benefit assets and liabilities comprise:
| 31 July 2019 £m |
31 July 2018 £m |
|
|---|---|---|
| Market value of scheme assets | 4,106 | 3,867 |
| Present value of funded scheme liabilities | (3,637) | (3,342) |
| Surplus | 469 | 525 |
| Unfunded pension plans | (56) | (53) |
| Post-retirement healthcare | (5) | (5) |
| Present value of unfunded obligations | (61) | (58) |
| Net pension asset | 408 | 467 |
| Retirement benefit assets | 469 | 526 |
| Retirement benefit liabilities | (61) | (59) |
| Net pension asset | 408 | 467 |
See the disclosures for UK schemes in note 8 to the consolidated accounts for the circumstances of the major schemes, risk management, principal assumptions, assets and liabilities and the funding position of the two major schemes.
| Issued capital |
Consideration | |||
|---|---|---|---|---|
| Number of shares | £m | £m | ||
| Ordinary shares of 37.5p each | ||||
| At 31 July 2018 | 395,761,227 | 148 | ||
| Exercise of share options | 195,544 | 2 | ||
| Total share capital at 31 July 2019 | 395,956,781 | 148 |
At 31 July 2019, all of the issued share capital was in free issue. All issued shares are fully paid.
See note 9 to the consolidated accounts for information about share schemes, including total shares under options and options exercisable at the balance sheet date.
During the year, the Company received £2m (FY2018: £3m) on the issue of shares in respect of the exercise of options awarded under various share option schemes.
The retained earnings include the purchase of Smiths Group plc shares by the Smiths Industries Employee Benefit Trust, and the issue of these shares upon the exercise of share options. The consideration paid was £19m (FY2018: £15m) and £2m (FY2018: £nil) was received as a result of the issue of shares. At 31 July 2019 the Trust held 53,058 (FY2018: 766) ordinary shares.
The Company's profit and loss reserve of £1,902m (FY2018: £1,738m) includes £960m (FY2018: £838m) of distributable profits. See note 25 in the Group accounts for a discussion of capital management and the factors the Board consider when proposing dividends.
Other reserves arose from the cancellation of the share premium arising from an equity-funded acquisition in the year ended 30 July 1988.
The Company has provided guarantees and arranged letter of credit facilities to support the Group's pension plans. The current amount outstanding under letters of credit is £54m (FY2018: £54m).
The Company has guaranteed the US\$800m revolving credit facility available to a subsidiary.
The directors propose a final dividend of 31.80p per share (totalling approximately £126m) for the year ended 31 July 2019. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 13 November 2019.
These financial statements do not reflect this dividend payable, which will be accounted for in shareholders' equity as an appropriation of retained earnings in the year ending 31 July 2020. During the year ended 31 July 2019, a final dividend of 30.75p per share (totalling £122m) was paid in respect of the dividends declared for the year ended 31 July 2018.
A full list of the Group's related undertakings as at 31 July 2019 is provided below. The entities are grouped by the country in which they are incorporated and details of their registered office address, classes(es) of shares and ownership is disclosed. Related undertakings includes subsidiaries, associated undertakings, joint ventures and associates.
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| UNITED KINGDOM | |||
| 1 Sheldon Square, Paddington, London, W2 6TT | |||
| Smiths Detection Group Limited | Ordinary £1 | 100 | |
| Smiths Detection Investments Limited | Ordinary £1 | 100 | |
| Smiths Detection Limited | Ordinary £1 | 100 | 100 |
| Smiths Detection United Kingdom Limited | Ordinary £1 | 100 | |
| Smiths Group Finance EU Limited | Ordinary €1 | 100 | |
| Smiths Group Finance US Limited | Ordinary US\$1 | 100 | |
| Smiths Heimann Limited | Ordinary £1 | 100 | 100 |
| 11-12 St James's Square, London, SW1Y 4LB | |||
| Air Log Limited | Ordinary 1p | 100 | |
| EIS Group Plc | Ordinary 25p | 100 | 100 |
| Flex-Tek Group (UK) Limited | Ordinary £1 | 100 | |
| Flightspares Limited | Ordinary 10p | 100 | 100 |
| Francis Shaw And Company (Manchester) Limited | Ordinary £1 | 100 | |
| Francis Shaw P L C | 37% 2nd Pref Ordinary 10p; 5.25% Cum Pref | 100 | |
| £1; Dif 20p; Ordinary 10p | |||
| Graseby Limited | Ordinary 25p | 100 | 100 |
| Kontak Manufacturing Company Limited | Ordinary £1 | 100 | |
| Pyzotec Limited | Ordinary £1 | 75 | 75 |
| Roof Units (Group) Limited | Ordinary 10p | 100 | 100 |
| Sedding (No.3) Limited | Ordinary £1 | 100 | |
| S.I. Pension Trustees Limited | Ordinary £1 | 100 | 100 |
| SI Properties Limited | Ordinary 25p | 100 | 100 |
| SITI 1 Limited | Common US\$1 | 100 | |
| Smiths Aerospace Components Tyseley Limited | Ordinary £1 | 100 | 100 |
| Smiths Aerospace Gloucester Limited | Ordinary 25p; Ordinary A 25p | 100 | |
| Smiths Finance Limited | Ordinary £1; Red US\$1 | 100 | |
| Smiths Group Innovation Limited | Ordinary £1 | 100 | |
| Smiths Group International Holdings Limited | Ordinary £1 | 100 | 100 |
| Smiths Industries Limited | 7% Non Cum Pref; Ordinary £1 | 100 | 100 |
| Smiths Medical 2020 Limited | Ordinary £1 | 100 | |
| Smiths Medical Distribution Limited | Ordinary £1 | 100 | 100 |
| Smiths Medical Limited | Ordinary £1 | 99 | |
| Smiths Nominees Limited | Ordinary £1 | 100 | 100 |
| Smiths Wolverhampton Limited | Ordinary 25p | 100 | |
| TI Group Limited | Ordinary 25p | 100 | 100 |
| TI Guarantee Company Limited | Limited By Guarantee | 100 | |
| TI Interest Limited | Ordinary A £1; Ordinary B £1; | 100 | |
| Floating Rate Cum Red Pref C £1 | |||
| Tigrup No. 7 Limited | Ordinary £1 | 100 | 100 |
| Tigrup No. 14 Limited | Ordinary 20p | 100 | |
| XD Communications Limited | Ordinary £1 | 100 | |
| XDG Limited | Ordinary 50p | 100 | 100 |
| 29 Dunsinane Avenue, Dundee, DD2 3QF | |||
| Flexible Ducting, Limited | Ordinary £1 | 100 | |
| Trak Microwave Limited | Ordinary £1 | 100 | |
| 52 Grayshill Road, Westfield Industrial Area, Cumbernauld, G68 9HG | |||
| Ashfield Medical Systems Limited | Ordinary £1 | 100 | |
| 54 Hagley Road, Edgbaston, Birmingham, B16 8PE | |||
| CVE Trustee Limited | Ordinary £1 | 50 | 100 |
| Smiths Pensions Limited | Ordinary £1 | 99 | 100 |
| TI Pension Trustee Limited | Limited By Guarantee | 100 | |
| 1500 Eureka Park, Lower Pemberton, Ashford, Kent, TN25 4BF | |||
| Graseby Medical Limited | Ordinary £1 | 100 | |
| Medex Medical Limited | Ordinary £1 | 100 | |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| Pneupac Limited | Ordinary 50p | 100 | |
| SI Overseas Holdings Limited | Ordinary £1 | 100 | |
| Smiths Medical Group Limited | Ordinary A £1; Ordinary B £1; Ordinary C £1 | 100 | |
| Smiths Medical International Limited | Ordinary £1; Pref €2 | 100 | |
| Abercanaid, Merthyr Tydfil, Mid Glamorgan, CF48 1UX | |||
| Amnitec Hose Limited | Ordinary 1p | 100 | |
| Amnitec Limited | Ordinary £1 | 100 | |
| Buckingham House, 361-366 Buckingham Avenue, Slough, Berkshire, SL1 4LU |
|||
| Flexibox International Limited | Ordinary £1 | 100 | |
| Flexibox Limited | Ordinary £1 | 100 | |
| John Crane Group Limited | Ordinary £1 | 100 | |
| John Crane Investments Limited | Ordinary £1 | 100 | |
| John Crane UK Limited | Ordinary £1 | 100 | |
| OIE Services Limited | Ordinary £1 | 100 | |
| Project Sugar Limited | Ordinary £1 | 100 | |
| Building 7, Croxley Business Park, Hatters Lane, Watford, WD18 8PA |
|||
| Smiths Business Information Services Limited | Ordinary £10 | 100 | |
| Centurion Court, North Esplanade, West Aberdeen, AB11 5QH | |||
| John Crane Asset Management Solutions Limited | Ordinary £1 | 100 | |
| Century House, Maylands Avenue, Hemel Hempstead, Hertfordshire, HP2 7DE |
|||
| Smiths Detection-Watford Limited | Ordinary £1 | 100 | |
| Unit 130 Centennial Park, Elstree, Hertfordshire, WD6 3TJ | |||
| Hypertac Limited | Ordinary £1 | 100 | |
| Smiths Industries Industrial Group Limited | Ordinary £1 | 100 | |
| Smiths Interconnect Group Limited | Ordinary £1 | 100 | |
| Unit 3 & 4, Illuma House, Gelders Hall Road, Shepshed, Leicestershire, LE12 9NH |
|||
| Gastite Systems Limited | Ordinary £1 | 100 | |
| ANGOLA | |||
| Rue Kwamme Nkrumah, Torres Impor-Africa, 3 Andar, Apt A, Luanda | |||
| John Crane (Angola) Prestacao De Services Ltd | Ordinary AOA 1 | 100 | |
| ARGENTINA | |||
| Av. Leandro N. Alem 1110, 13 Floor, Baker Mackenzie Office, Buenos Aires | |||
| John Crane Argentina SA | Common \$1 ARS | 100 | |
| TI Group Automotive Systems (Argentina) SA | Ordinary \$1 ARS | 100 | |
| AUSTRALIA | |||
| 549 – 551, Somerville Road, Sunshine, Melbourne, VIC 3020 | |||
| Flexibox Pty Limited | Ordinary AUS\$ | 100 | |
| John Crane Australia Pty Limited | Ordinary AUS\$1 | 100 | |
| Botany Grove Estate Unit 5, 14A Baker Street, Botany, NSW 2019 | |||
| Smiths Detection (Australia) Pty Ltd | Ordinary AUD\$1 | 100 | |
| Suite 2.03, 97 Waterloo Road, Macquarie Park, NSW 2113 | |||
| Smiths Medical Australasia Pty Ltd | Ordinary | 100 | |
| AUSTRIA | |||
| Campus 21, Europaring, A 03 5 02, Brunn Am Gebirge, A-2345 | |||
| Smiths Medical Osterreich GmbH | Ordinary €1 | 100 | |
| AZERBAIJAN REPUBLIC | |||
| 32, Dostluq Street, Salyan Highway PO Box AZ1023, Baku | |||
| John Crane Baku LLC | Ordinary US\$10 | 100 | |
| BELGIUM | |||
| Pegasuslaan 5, Diegem, 1831 | |||
| Smiths Medical Belgium NV | Registered Shares | 100 | |
| Glasstraat 37, Antwerpen, 2170 | |||
| John Crane Belgium NV | Ordinary | 100 |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| BRAZIL | |||
| Rua George OHM, 205-5 Andar-Conj. 51 E 52 Torre B, Cidade Moncoes – CEP 04576-020, São Paulo |
|||
| Smiths Medical Do Brasil Produtos Hospitalares LTDA Rua Tabapoã, 422, 10th floor, conj. 101, Itaim Bibi, 04533-001 |
Ordinary R\$1 | 100 | |
| Smiths Detection Brasil Comérico De Equipamentos LTDA Industrial District of The City of Rio Claro, State of São Paulo, AV. Brasil Number 4.700, CEP 13505-600 |
Common R\$1 | 100 | |
| Smiths Brasil LTDA | Ordinary R\$1 | 100 | |
| CANADA | |||
| 301, Gough Road, Markham, Ontario, L3R 4Y8 | |||
| Smiths Medical Canada Ltd | Common | 100 | |
| 423, Green North Road, Stoney Creek, Ontario, L8E 3A1 | |||
| John Crane Canada Inc | Common CAD\$1 | 100 | |
| 3700, Stock Exchange Tower, P.O. Box 242, 800 Place Victoria, Montreal, PQ, H4Z 1E9 |
|||
| Smiths Detection Montreal Inc. | Class A Shares; Class B Shares | 100 | |
| 4610, Eastgate Parkway, Unit 3, Mississauga, Ontario, L4W 3W6 | |||
| Flexible Technologies (Canada) Ltd. | Ordinary \$1 | 100 | |
| CHILE | |||
| Americo Vespucio 2542, Complejo Empresarial El Cortijo, Conchali, Santiago | |||
| John Crane Chile SA | Ordinary 1 Peso | 100 | |
| CHINA | |||
| No. 7, Factory Building, Maqiao Industrial Square, Changshu Economic Development Zone, Changshu, Jiangsu |
|||
| Changshu Flex-Tek Thermal Fluid Systems Manufacturer Co. Ltd No.9, No. 1, Haitai Huake Road, Huayuan Industrial District (Outside The Ring), Binhai Hi-Tech, Industrial Park, Tianjin |
US\$520,800 | 100 | |
| John Crane Technology (Tianjin) Co Limited | Ordinary US\$1 | 100 | |
| No. 14 Unit, No. 78, XingLin Road, Suzhou Industrial Park, Suzhou 215026 | |||
| Antares Advanced Test Technologies (Suzhou) Co. Ltd | Ordinary \$1 | 100 | |
| No. 26, The 3rd Avenue, Economic & Technological Development Area, Hangzhou |
|||
| Smiths Medical Instrument (Zhejiang) Co. Ltd | Ordinary CNY1 | 100 | |
| No. 120, Sanjiang Avenue, Economic Development Zone, Mianyang, Sichuan Province |
|||
| Huafeng Smiths Interconnect (Sichuan) Co., Ltd | Ordinary RMB1 | 60 | |
| Room 923B, No 55, Xili Road, Shanghai, (China) Pilot Free Trade Zone | |||
| SMO Detection Equipment (Shanghai) Co., Ltd | Ordinary US\$1 | 100 | |
| Room 1668, No. 14F Floor 3 Datong Building, Huanghe Avenue, Nankai District, Tianjin |
|||
| John Crane China Co Limited | Ordinary CNY1 | 100 | |
| Unit 2805, Tower 3, Jing An Kerry Centre, 1228 Middle Yan An Road, Shanghai, 200040 |
|||
| Smiths Medical (Shanghai) Co., Ltd. | Ordinary US\$ | 100 | |
| Unit 3018, South Tower, Beijing Kerry Centre, 1, Guanghua Road, | |||
| Chaoyang District, Beijing | |||
| Smiths Medical (Beijing) Co. Ltd | Ordinary US\$1 | 100 | |
| COLOMBIA | |||
| Calle 46A No 82-54 Int 14, Parque Empresarial San Cayetano, Bogota | |||
| John Crane Colombia SA | Ordinary COP\$1 | 100 | |
| COSTA RICA | |||
| 33rd St. Number 777 Barrio Francisco Peralta, Central Avenue & 8th, San Jose |
|||
| Smiths Interconnect Sociedad Anonima | Ordinary US\$1 | 100 | |
| CZECH REPUBLIC | |||
| Jana Sigmunda 78, Lutin, 78349 | |||
| John Crane A.S. | Ordinary CZK 1M | 100 | |
| Olomoucka 306, Hranice I-Mesto, Hranice, 75301 | |||
| Smiths Medical Czech Republic A.S | Ordinary CZK 100,000 | 100 | |
210 SMITHS GROUP PLC Annual Report FY2019
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| DENMARK | |||
| Orestads Boulevard 73, 2300 Kobenhavn S | |||
| Smiths Medical Danmark ApS | DKK 100 Shares | 100 | |
| DOMINICAN REPUBLIC | |||
| Calle El Recodo, #2 Bella Vista, Santa Domingo | |||
| John Crane Dominicana SA | Ordinary DP\$1 | 100 | |
| EGYPT | |||
| 139, Mogamaa El Masanea Street, El Amireya, Cairo | |||
| John Crane Egypt LLC | Ordinary EGP 1 | 100 | |
| John Crane Egypt Sealing Systems LLC | Ordinary EGP 100 | 99 | |
| Nile City Towers, North Tower, 22nd Floor, Ramlet Boulaq, Nile Cournich, Cairo |
|||
| Detection Technologies Egypt | Quotas | 100 | |
| FINLAND | |||
| PO Box 10, Punasillantie 15, Muurame, 40950 | |||
| John Crane Safematic Oy | Ordinary €16.82 | 100 | |
| FRANCE | |||
| 3/5 Rue Du Pont Des Halles, Batiment A, Rungis, 94150 | |||
| Smiths Medical France S.A.S. | €7.7 Shares | 100 | |
| 22, Avenue Maurice Chevalier, 77833 Ozoir-La-Ferriere, Paris | |||
| Titeflex Europe S.A.S. | Ordinary \$39 | 100 | |
| 31 Rue Isidore Maille, Saint-Aubin-Les-Elbeuf, 76410 | |||
| Hypertac S.A. | Ordinary €76 | 100 | |
| 36 Rue Charles Heller, Vitry Sur Seine, F-94400 | |||
| Smiths Heimann S.A.S. | €1 Shares | 100 | |
| 114, Rue Jules Ferry, B.p.35, Deville-Les-Rouen, 76250 | |||
| John Crane France S.A.S. | Ordinary €286 | 100 | |
| T I S A (France) | Ordinary €4.9 | 100 | |
| GERMANY | |||
| Am Zirkus 2, Berlin, 10117 | |||
| John Crane Filtration Technologies GmbH | Ordinary €1 | 100 | |
| Bretonischer Ring 3, Grasbrunn, 85630 | |||
| Smiths Group Deutschland GmbH | €1,491,400 Shares; €3,478,400 Shares; | 100 | |
| €995,500 Shares | |||
| Smiths Medical Deutschland GmbH | €1,000 Shares; €27,000 Shares; €5,000 Shares; €500 Shares |
100 | |
| Gewerbestraße 15 a, Graben, 86836 | |||
| Gastite Systems Deutschland GmbH | Ordinary €1 | 100 | |
| Im Herzen 4, Wiesbaden, 65205 | |||
| Smiths Detection GmbH | € 25,000 Share; €183,100 Share; €791,900 Share |
100 | |
| Smiths Heimann GmbH | Ordinary | 100 | |
| Neckarweg 3, Vellmar, 34246 | |||
| Herkules Holding GmbH | Ordinary €1 | 100 | |
| Seebach GmbH | Ordinary €1 | 100 | |
| Reepschlager Str., 10B, Lubeck, 23556 | |||
| Flexschlauch Produktions GmbH | DM 11,000; DM 380,000; DM 9,000 | 100 | |
| Tolzer Strasse, 15 82031, Grunwald | |||
| Zamor KG | Ordinary shares €1 | 48 | |
| Ulrichsberger Strasse 17, Deggendorf, 94469 | |||
| Hypertac GmbH | Ordinary €1 | 100 | |
| Werner–Von–Siemens – Str.6, Fulda, 36041 | |||
| John Crane GmbH | Ordinary €1 | 100 | |
| GREECE | |||
| 3 Stratigou Tobre Street, Municipality Of Agia Paraskevi, Athens, 153 42 | |||
| John Crane Hellas – Engineered Sealing Systems Monoprosopi EPE | Ordinary €1 | 100 |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| GUERNSEY | |||
| Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ | |||
| Smiths Group Insurance Limited | Ordinary £1 | 100 | |
| HONG KONG | |||
| Suite 1106-8, 11/F Tai Yau Building, No 181 Johnston Road, Wanchai | |||
| Smiths Detection Hong Kong Limited | Ordinary 1 HKD | 100 | |
| Smiths Interconnect Group (HK) Limited | Ordinary US\$1 | 100 | |
| Smiths Interconnect Hong Kong Co Limited | Ordinary US\$1 | 100 | |
| Smiths Medical (Hong Kong) Limited | Ordinary 1 HKD | 100 | |
| HUNGARY | |||
| 2040 Budaors, Gyar U. 2 | |||
| John Crane Hungary Kft | Ordinary €1 | 100 | |
| INDIA 508/509, 5th Floor, Western Edge Ii, Western Express Highway, |
|||
| Borivali East, Mumbai, 400066 | |||
| Smiths Medical India Private Limited | Ordinary INR 1 | 100 | |
| D-196 Okhla Industrial Area, Phase-1, New Dehli, 110020 | |||
| Plenty India Limited | Ordinary Shares | 100 | |
| No 11, 1st Phase, Peenya, Industrial Area, Bangalore, 560058 | |||
| John Crane Sealing Systems India Private Limited | Ordinary INR 10 | 100 | |
| Smiths Interconnect India Private Limited | Ordinary INR 10 | 100 | |
| No 38, Kiadb Industrial Area, Bangalor, 561203 | |||
| STS Titeflex India Pvt Ltd | Ordinary INR 100 | 100 | |
| Shirwal, Maharashtra 412801 | |||
| Seebach Filter Solutions India Pvt Ltd | Ordinary INR 10 | 90 | |
| Vardhman Crown Mall, Unit No. 300 3rd Floor, Sector 19 Dwarka, New Delhi 110075 |
|||
| Smiths Detection Systems Private Limited | Class A Equity Shares INR 10; | 100 | |
| Class B Equity Shares INR 10 | |||
| INDONESIA | |||
| Cilandak Commercial Estate Bldg 401A, Ji. Kko Cilandak, Jakarta, 12560 | |||
| PT John Crane Indonesia | Ordinary IDR 1,000 | 99 | |
| IRELAND | |||
| Suite 3, One Earlsfort Centre, Earlsfort Terrace, Dublin 2 | |||
| Graseby Medical Ireland Limited | Ordinary €1.269738 | 100 | |
| Smiths Detection Ireland Limited | Ordinary €1.25; Ordinary B €1.269738; | 100 | |
| Ordinary D €1.25; Series C €1.25 | |||
| T53/54, Shannon Industrial Estate, Shannon, Co. Clare | |||
| John Crane (Ireland) Limited | Ordinary €1 | 100 | |
| ITALY | |||
| Via Da Bissone 7A, Genova, 16153 | |||
| Hypertac SpA | Ordinary €5 | 100 | |
| Via Della Stazione, 2, 04013 Latina Scalo, Latina | |||
| Smiths Medical Italia srl | Ordinary €1 | 100 | |
| Via Giotto 3, Muggio, 20835 | |||
| John Crane Italia SpA | Ordinary €5.16 | 100 | |
| Smiths Detection Italia srl | Quota Value of Shares | 100 | |
| Smiths Group Italia Srl | Ordinary €1 | 100 | |
| JAPAN | |||
| 7-1-1, Akasaka, Minato-Ku, Tokyo | |||
| Smiths Medical Japan Ltd | Common Stock | 100 | |
| 2222, Kamitoyama Ritto City, Ritto-Shi, Shiga-Ken | |||
| John Crane Japan Inc | Ordinary JYP 1,000 | 70 | |
| Metro City Kamiyacho 3F, 5-1-5, Toranomon, Minato-ku, Tokyo | |||
| Smiths Detection Japan Gk | Cash Contribution | 100 |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| KAZAKHSTAN | |||
| Atyrau Region, Gatyrau, Station K Arabathan, House Production Site 14, 060000 |
|||
| John Crane Kazakhstan | Ordinary KZT | 100 | |
| KOREA, REPUBLIC OF | |||
| Migeundong, Westgatetower 15F, 70 Chungjeong-Ro, Seodaemun-Gu, Seoul | |||
| John Crane Korea Co Ltd | Ordinary Kwon 5,000 | 100 | |
| MALAYSIA | |||
| 207, Jalan Tun Razak, Suite 13.03, 13th Floor, Menara Tan & Tan, Kuala Lumpur, 50400 |
|||
| John Crane Malaysia Sdn Bhd | Ordinary RM1 | 100 | |
| Suite 13.03, 13th Floor, Menara Tan & Tan, 207 Jalan Tun Razak, 50400, Kuala Lumpur |
|||
| Flexible Ducting Malaysia Sdn Bhd | Ordinary RM1 | 100 | |
| Smiths Detection Malaysia Sdn Bhd | Ordinary RM1 | 100 | |
| MEXICO | |||
| 679, Poniente 152, Vallejo Delegacion Azcapotzalco, Mexico City, 2300 | |||
| Industrias John Crane Mexico S.A. de C.V. | Series A MXN 1; Series B MXN 1 | 100 | |
| Av. Primero De Mayo Lote 3 Edificio 1B, Prologis Park, Reynosa, 88780 | |||
| Tutco De Mexico S de RL de CV | Ordinary \$1.00 | 100 | |
| Ave Calidad No. 4, Parque Industrial, Internacional Tijuana, Tijuana, B.C., 22425 |
|||
| Smiths Healthcare Manufacturing, S.A. de C.V. | Series B 10 Pesos; Series B-1 Pesos 10 | 100 | |
| Carretera Ciudad Victoria Matamoros, Km.173+600, Solonia San Fernando Centro, Tamaulipas, San Fernando, CP 87600 |
|||
| John Crane Sociedad De Responsibilidad Limitada De Capital Variable | Ordinary MXN \$1 | 100 | |
| Carretera Libre Antiguo Camino Tijuana 20221-B, Fideicomiso el Florido, Tijuana, Baja California, 22234 |
|||
| Smiths Interconnect Mexico S. de Rl de C.v. | Equity Quotas MEX \$2,500 | 100 | |
| Paseo De La Reforma 505, Col, Cuauhtemoc, 6500, Ciudad De Mexico | |||
| Smiths Detection Mexico S. de Rl de C.v. | PS US\$1; PS US\$2,999 | 100 | |
| NETHERLANDS | |||
| Abraham van Stolkweg 118, Rotterdam, 3041 JA | |||
| Amnitec BV | Ordinary €1 | 100 | |
| Bergen 9 – 17, Barendrecht, Zuid, 2993LR | |||
| John Crane Holland BV | Ordinary €1 | 100 | |
| Smiths Detection Netherlands BV | Ordinary €1 | 100 | |
| Buckingham House, 361-366 Buckingham Avenue, Slough, Berkshire, SL1 4LU, England |
|||
| Smiths Group Holdings Netherlands BV | Ordinary €1 | 100 | |
| Hydrograaf 25, PO Box 442, 6900 Ak Zevenaar, Duiven, 6921 RS Indufil BV |
Ordinary €1 | 100 | |
| Jagersbosstraat 28, 5241JT Rosmalen | |||
| Smiths Medical Nederland B.V. | Shares NLG 100 | 100 | |
| NEW ZEALAND | |||
| Quigg Partners, Level 7, 36 Brandon Street, Wellington, 6011 | |||
| Smiths Detection New Zealand Limited | Ordinary | 100 | |
| PERU | |||
| Av. Guillermo Dansey 2124, Urbanizacion Industrial Conde, Lima | |||
| John Crane Peru SAC | Common Shares PEN 1 | 100 | |
| POLAND | |||
| Warszawska 153, Bielsko – Biala, 43 – 300 | |||
| John Crane Poland Sp Z O.O. | Ordinary 50 PLN | 100 | |
| PORTUGAL | |||
| Avenida Engenheiro Duarte Pacheco, Amoreiras, Torre 2, 15º A, Campo De Ourique, Lisboa, 1070-102 |
|||
| Smiths Medical (Portugal), Unipessoal Lda | €505,000 Share | 100 |
| PUERTO RICO 654 Plaza, Suite #933, 654 Munoz Rivera Ave, San Juan, 00918 John Crane Caribe Ltd Common Share US\$1 100 RUSSIAN FEDERATION 104 Oktyabrskayanab., Building 25, Litera AJ, Premises 4-H, Saint-Petersburg, 193079 Smiths Heimann Rus LLC Ordinary RUB 1 100 B.savvinsky Per, D.11, Moscow, 119435 LLC John Crane Rus Ordinary RUR 1 100 SAUDI ARABIA Dammam Industrial City, Dammam, 3243 John Crane Saudi Arabia Ltd Ordinary ZAR 1 100 |
|---|
| PO Box 11525, Riyadh |
| Smiths Detection Saudi Arabia Ltd 1,000 Saudi Riyals Shares 100 |
| SINGAPORE |
| 80 Raffles Place, Uob Plaza 1, #32-01, 048624 |
| John Crane Singapore Pte Limited Ordinary S\$1 100 |
| Smiths Medical Singapore Pte. Limited Ordinary US\$1 100 |
| 20, Pasir Panjang Road, #13-26 Mapletree Business City, 117439 |
| Smiths Connectors Asia Pte. Ltd. Ordinary S\$1 100 |
| Smiths Detection (Asia Pacific) Pte. Ltd Ordinary S\$1 100 |
| SLOVAKIA |
| Dvorakovo nabrezie 10, Bratislava-mestska cast Stare Mesto, 811 02 |
| John Crane Slovakia SRO Ordinary €1 100 |
| SOUTH AFRICA |
| 2, Jansen Road, Nuffield Industrial Sites, Springs Gauteng, 1559 |
| Flexibox (Pty) Limited Ordinary SAR 1 100 |
| John Crane Pty Ltd Ordinary ZAR 1 100 |
| SPAIN |
| Av Diagonal, Num.635 P.1, Barcelona, 08028 |
| Smiths Medical Espana S.L. Shares €1 100 |
| Cemento 1, Torrejon De Ardoz, Madrid |
| John Crane Iberica SA Ordinary €6.010121 100 |
| SWEDEN |
| Knivsta, 74180 |
| Habia Teknofluor AB SEK100 Shares 100 |
| Teknofluor Holding AB SEK100 Shares 100 |
| Box 1143, 164 22 Kista |
| Smiths Medical Sverige AB SEK100 Shares 100 |
| Faltspatsgatan 4, Se-421 30 Vastra Frolunda |
| John Crane Sverige AB Ordinary SEK 100 100 |
| SWITZERLAND |
| Freulerstrasse 4, Birsfelden, 4127 |
| John Crane (Switzerland) AG Ordinary 1 CHF 100 |
| Zurichstrasse 33, Adliswil, 8134 |
| Smiths Medical Schweiz AG Shares of CHF 10 100 |
| TAIWAN |
| 324-4, Fong-Jen Road, Renwu District, Kaohsiung City 814 |
| John Crane Taiwan Co Ltd. Ordinary T\$1 100 |
| THAILAND |
| 9/311, 31st Floor, Um Tower, Ramkhamhaeng Road, Suanluang District, Bangkok |
| John Crane (Thailand) Limited Ordinary THB 1; Pref THB 25 100 |
| 99/3 Moo 5, Kingkaew Road, Tambol Rajatheva, Amphoe Bangplee, Samutprakarn Province, 10540 |
| Smiths Detection (Thailand) Limited Pref THB 100; Ordinary THB 100 100 |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| TUNISIA | |||
| Zone Industrielle Route De Khniss, Monastir, 5000 | |||
| Smiths Connectors Tunisia SARL | Ordinary 100 DT | 100 | |
| TURKEY | |||
| Istanbul Sariyer, Huzur Mahallesi, Ahmet Bayman Caddessi, Dis, | |||
| Reklamcilik Apt No:17-19/1 | |||
| John Crane Endustriyel Sizdirmazlik Sistemleri Ltd | Ordinary TRY 25 | 100 | |
| UNITED ARAB EMIRATES | |||
| Building B10, Industrial Mussaffah, M44, Sector 15, Abu Dhabi | |||
| Smiths Detection Security Systems LLC | AED 1,500 | 49 | |
| Dubai Airport Free Zone, PO Box 48225, Building No. 8WA (West Side), | |||
| 401, Dubai | |||
| Smiths Detection Middle East FZE | AED 1,000,000 Share | 100 | |
| S20113, Jebel Ali Free Zone, 61040 | |||
| John Crane Middle East FZE | Ordinary AED 1 | 100 | |
| UNITED STATES | |||
| 51 Growth Road, Laconia, NH, 03246 | |||
| Scotia Acquisition Co | Common Stock of US\$0.01 | 100 | |
| Scotia Real Estate LLC | Limited Liability Company Interests | 100 | |
| 116, Pine Street, 3rd Floor, Suite 320, Harrisburg, PA 17101 | |||
| Tutco, LLC | Ordinary US\$1 | 100 | |
| 180 Van Riper Avenue, Elmwood Park, NJ 07407 | |||
| Kreisler Industrial Corp | Common Stock | 100 | |
| Kreisler Manufacturing Corp | Common Stock of US\$0.001 | 100 | |
| 51 Growth Road, Laconia, NH 03246 | |||
| Lakes Region Tubular Products Inc. | Common Stock | 100 | |
| 208 S. Lasalle Street, Suite 814, Chicago, IL, 60604 | |||
| John Crane International Inc. | Common Shares | 100 | |
| 5200, Upper Metro Place, Dublin, OH, 43017 | |||
| Medex Cardio-Pulmonary, Inc | Common Stock of US\$0.01 | 100 | |
| 815 Forestwood Drive, Romeoville, IL 60446 | |||
| United Flexible, Inc. | Common Stock of US\$0.001 | 100 | |
| US Hose Corp | Common Stock | 100 | |
| 1219 Stewart Plaza, Dunbar, WV, 25064 | |||
| Seebach Filtration USA, Inc. | Ordinary US\$25 | 100 | |
| 2801 Red Dog Lane, Knoxville, TN 37914 | |||
| Fulton Bellows LLC | Limited Liability Company Interests | 100 | |
| Corporation Service Company, 251 Little Falls Drive, Wilmington, DE, 19808 | |||
| MDII Investments LLC | Ordinary | 100 | |
| Smiths Detection US Holdings, LLC | Limited Liability Company Interests | 100 | |
| Corporation Service Company, 2711 Centerville Rd, Suite 400, Wilmington, | |||
| DE, 19808 | |||
| United Flexible Technologies, Inc. | Common Stock of US\$0.001 | 100 | |
| The Corporation Trust Company, 1209 Orange Street, Wilmington, DE, 19801 | |||
| Flexible Technologies, Inc | Ordinary Shares US\$0.01 | 100 | |
| Flex-Tek Group (US) LLC | Ordinary | 100 | |
| John Crane Inc | Common US\$0.01; Preferred US\$0.10 | 100 | |
| John Crane Group, LLC | Ordinary US\$0.01 | 100 | |
| John Crane Production Solutions Inc | Ordinary US\$0.01 | 100 | |
| Powercam-Houdaille, Inc. | Common Shares US\$1 | 100 | |
| Smiths Business Information Services, Inc. | Ordinary US\$0.01 | 100 | |
| Smiths Detection International, LLC | Equity Interests | 100 | |
| Smiths Detection US, LLC | Ordinary US\$1 | 100 | |
| Smiths Group Services Corp. | Common Stock US\$0.01 | 100 | |
| Smiths Interconnect Americas, Inc. | Common Stock US\$0.01 | 100 | |
| Smiths Interconnect, Inc. | Common Stock US\$10 | 100 | |
| Smiths US Innovation LLC | Ordinary | 100 |
| Name | Security | Direct (%) | Total (%) |
|---|---|---|---|
| CT Corporation System, 9 Capitol Street, Concord, NH 03301 | |||
| Smiths Tubular Systems-Laconia, Inc | Ordinary Shares US\$1 | 100 | |
| CT Corporation System, 155 Federal Street, Suite 700, Boston, MA 02110 | |||
| Titeflex Commercial, Inc. | Ordinary US\$0.01 | 100 | |
| One Corporate Center, Hartford, CT 06103-3220 | |||
| Titeflex Corporation | Ordinary US\$1 | 100 | |
| Registered Agent Solutions, Inc., 1679 Dupont Highway, Suite 100, Dover DE, 19901 |
|||
| Smiths Medical ASD Inc. | Common Stock \$1 | 100 | |
| The Corporation Trust Company of Nevada, 701 S Carson Street, Suite 200, Carson City, NV, 89701 |
|||
| Smiths Detection Inc | Common Stock of \$0.0001 | 100 | |
| VENEZUELA | |||
| Carretera Vía A Perijá, Km 8 ½, Avenida 50, Local N° 185-72, Zona Industrial El Silencio, Maracaibo, 4001 |
|||
| John Crane Venezuela CA | Class A BSF1; Class B BSF1; Common BSF1 |
100 | |
| ASSOCIATES | |||
| GERMANY | |||
| Steinmühlenweg 5, 65439 Florsheim am Main / Wicker | |||
| STI Security Training International GmbH | Ordinary Shares | 34 | |
| RUSSIAN FEDERATION | |||
| 28, Academica Vedeneeva Street, Perm, Permskiy Region, 614038 | |||
| LLC John Crane Iskra | Ordinary RUR 1 | 50 |
Smiths Interconnect Canada Inc. was incorporated on 13 September 2019. Smiths Group plc indirectly owns the entire issued share capital and the new company will be consolidated as a subsidiary from the date of incorporation.
The Company does not operate through any branches. Some Group subsidiary companies have established branch operations outside the UK.
| 2020 | ||
|---|---|---|
| 2019 | (provisional) | |
| Announcement of FY2019 Results | 20 September | |
| Final dividend ex-dividend date | 17 October | |
| Final dividend record date | 18 October | |
| Last DRIP election date | 1 November | |
| Annual General Meeting | 13 November | |
| Final dividend payment date | 15 November | |
| Announcement of FY2020 Interim Results | 31 March | |
| Interim dividend ex-dividend date | 9 April | |
| Interim dividend record date | 14 April | |
| Last DRIP election date | 24 April | |
| Interim dividend payment date | 11 May | |
| FY2020 financial year end | 31 July | |
| Announcement of FY2020 Results | September |
Smiths Group plc 4th Floor 11-12 St James's Square London SW1Y 4LB, UK 020 7004 1600
Incorporated in England Company No. 137013 www.smiths.com
Our share register is maintained by Equiniti. If you have any questions about your Smiths shares, please contact Equiniti by:
Visiting: www.shareview.co.uk.
T: 0371 384 2943 (in the UK) T: +44 (0)121 415 7047 (outside the UK) Textel: 0870 384 2255 Lines open 8:30am to 5:30pm (UK time), Monday to Friday (excluding public holidays in England and Wales)
Writing to: Equiniti Limited, Aspect House Spencer Road, Lancing, West Sussex, BN99 6DA
Equiniti offer the Shareview portfolio service to investors, visit www.shareview.co.uk to register for an account. Through Shareview you can access information about your investments, including balance movements and indicative share prices, as well as practical help about transferring your shares or updating your personal details.
From November 2019 Smiths will no longer be issuing dividend cheques. In order to have future dividends paid directly to your bank or building society account please contact Equiniti for a copy of the Bank Mandate Form, or register your nominated bank or building society account by visiting www. shareview.co.uk. By registering your account all future dividends will be paid securely by direct credit on the dividend payment date.
Alternatively, Smiths offers a Dividend Reinvestment Plan. For more information please visit our website or contact Equiniti.
The market value of an ordinary share of the Company on 31 March 1982 for the purposes of capital gains tax was 136.875p (taking into account the sub-division of 50p shares into 25p shares on 14 January 1985 and the subdivision and consolidation of 25p shares into 37.5p shares on 18 June 2007).
The 2019 Smiths Group plc AGM will be held at 10:30am on Wednesday, 13 November 2019 at Linklaters LLP, One Silk Street, London, EC2Y 8HQ. The Notice of AGM can be found in a separate document which is sent out at least 20 working days before the AGM and made available on our website. If you are in any doubt as to what action you should take in relation to the resolutions being proposed at the AGM, you are recommended to consult your stockbroker, bank manager, solicitor, accountant or other independent professional adviser authorised under the Financial Services and Markets Act 2000. For those shareholders unable to attend the AGM, the meeting will be webcast and may be viewed online by registering on our website.
The Company provides electronic proxy voting for the AGM. Shareholders who are unable to attend the AGM in person are encouraged to vote their shares by appointing a proxy and issuing voting instructions. Electronic and paper proxy appointments and voting instructions must be received by the Company's Registrar not later than 48 hours before the AGM is held in order to be valid. Shareholders who are not CREST members can appoint a proxy and vote online by visiting www.sharevote.co.uk. CREST members, CREST personal members and other CREST-sponsored members should consult the CREST Manual or their sponsor or voting service provider for instructions on electronic proxy appointment and voting.
Designed and Produced by Radley Yeldar.
4th Floor 11-12 St James's Square London SW1Y 4LB, UK +44 (0)20 7004 1600 www.smiths.com
LSE: SMIN ADR: SMGZY
To view this report online go to www.smiths.com/investors @smithsgroupplc
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.