Annual Report • Jul 31, 2016
Annual Report
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Smiths Group plc Annual Report 2016
| Smiths at a glance | 4 |
|---|---|
| Our divisions | 6 |
| Chairman's statement | 8 |
| Chief Executive's review | 10 |
| Delivering excellence across Smiths | 14 |
| Our business model | 20 |
| Our strategic priorities | 22 |
| Our markets | 24 |
| Operational review | |
| CFO report | 25 |
| John Crane | 32 |
| Smiths Medical | 36 |
| Smiths Detection | 40 |
| Smiths Interconnect | 44 |
| Flex-Tek | 48 |
| Risks and responsibility | |
| Principal risks and uncertainties | 52 |
Corporate responsibility 61
| Board of directors | 72 |
|---|---|
| Corporate governance statement | 75 |
| Directors' remuneration report | 94 |
| Group directors' report | 115 |
| Statement of directors' | |
|---|---|
| responsibilities | 124 |
| Independent auditors' report to the members of Smiths Group plc |
|
| – Group | 125 |
| Consolidated income statement | 132 |
| Consolidated statement | |
| of comprehensive income | 133 |
| Consolidated balance sheet | 134 |
| Consolidated statement | |
| of changes in equity | 135 |
| Consolidated cash-flow statement | 136 |
| Accounting policies | 137 |
| Notes to the accounts | 144 |
| Unaudited Group financial record | |
| 2012-2016 | 185 |
| Unaudited US dollar primary | |
| statements | 186 |
| Unaudited Group US dollar financial | |
| record 2013-2016 | 191 |
| Independent auditors' report to the members of Smiths Group plc |
|
| – Parent company | 192 |
| Smiths Group plc company accounts | 194 |
| Financial calendar | 210 |
The purpose of this document is to provide information to the members of the Company. This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and unless otherwise required by applicable law the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its directors accept no liability to third parties in respect of this document save as would arise under English law.
This report contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.
Smiths Group is a global technology company listed on the London Stock Exchange. Our vision is to build Smiths Group into one of the world's leading technology companies.
Growth in reported revenue and headline operating profit in four out of five divisions
Group revenue declined 2% on an underlying1 basis; up 2% on a reported basis
53% of Group revenues derived from aftermarket and consumables
Headline operating profit declined 4% on an underlying1 basis, driven by tough global energy market conditions for John Crane
Good margin expansion in Smiths Medical, Smiths Detection and Smiths Interconnect
John Crane margins resilient at 21.9%; Flex-Tek margins stable
Earnings per share of 85.2 pence fell 1% year-on-year driven by higher finance costs
102% cash conversion drove an underlying reduction in net debt
Proposed final dividend of 28.75 pence per share. Full year dividend growth of 2.4%
\$710m acquisition of Morpho Detection expected to complete in early 2017, subject to regulatory clearances
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
Headline free cash-flow £400m
Headline earnings per share 85.2p
Read more at www.smiths.com
| Smiths at a glance | 4 |
|---|---|
| Our divisions | 6 |
| Chairman's statement | 8 |
| Chief Executive's review | 10 |
| Delivering excellence across Smiths | 14 |
| Our business model | 20 |
| Our strategic priorities | 22 |
| Our markets | 24 |
| Operational review | |
| CFO report | 25 |
| John Crane | 32 |
| Smiths Medical | 36 |
| Smiths Detection | 40 |
| Smiths Interconnect | 44 |
| Flex-Tek | 48 |
| Principal risks and uncertainties | 52 |
|---|---|
| Corporate responsibility | 61 |
John Crane uses advanced 3D scanning to create digital engineering models from field installations, allowing our engineers to spend more time troubleshooting our customers' mission-critical rotating equipment, and enabling future 3D printing capabilities.
We apply leading-edge technology to design, manufacture and deliver innovative solutions that meet our customers' needs. Our products and services – often hidden from view – touch the lives of millions of people every day.
Employees worldwide
22,000
We serve a wide range of end markets – from healthcare, energy and petrochemicals through to threat and contraband detection, telecommunications and equipment manufacture. Our customers range from governments and their agencies, to hospitals, petrochemical companies and equipment manufacturers and service providers in various sectors around the world.
Our products and services are often critical to our customers' operations, while our proprietary technology and high service levels help create competitive advantage.
We employ 22,000 people in more than 50 countries through our five divisions: John Crane, Smiths Medical, Smiths Detection, Smiths Interconnect and Flex-Tek.
We do this responsibly, through the combined expertise of our people and effective, focused leadership, to deliver value to our customers, shareholders and wider stakeholders.
Group manufacturing and service locations
Group revenue by destination
68% of our revenue comes from three markets: healthcare, energy, and homeland security and defence. Our aftermarket products and services account for 53% of our business.
Location of assets
Percentage of revenue from emerging markets
17%
North America 55% United Kingdom 15% Europe exc. UK 18% Rest of World 12% Excludes cash and cash equivalents North America 52% United Kingdom 4% Europe exc. UK 17% Rest of World 27% Read more in note 1
on page 144
Smiths Group has five divisions each serving specialist technology markets worldwide
Providing engineered products and services to global energy and process industry customers
Supplying medical devices and consumables that are vital to patient care globally
Revenue
Headline operating profit margin
Employees
Competitive strengths
Market leader in mechanical seals
Strong proprietary technology and expertise in applied engineering
High degree of customisation to meet specific demands
Global network of c. 230 sales and service centres
Over half of sales in aftermarket
Read more on pages 32-35 or www.johncrane.com
Strong market positions in chosen clinical areas
Highly recognised and respected brands
Reputation for quality and safety
Extensive global sales network
Innovative pipeline of new products in development
Read more on pages 36-39 or www.smiths-medical.com
Designing and manufacturing technology solutions that detect and identify security threats and contraband
Operates in regulated markets requiring rigorous product certification
Technologies leveraged across many markets and applications
Investment in continuous improvement driving division-wide efficiencies
Growing aftermarket revenues (37% of total revenues)
Read more on pages 40-43 or www.smithsdetection.com
Developing electronic components and sub-systems that connect, protect and control critical telecommunications systems
Innovative and technically differentiated offerings
Ultra-high reliability solutions used in demanding applications
Customer intimacy, responsiveness
and product customisation Highly regulated markets with strong
barriers to entry
Global presence, reach and support
Read more on pages 44-47 or www.smithsinterconnect.com
Providing engineered components that heat and move fluids and gases
High-performance flexible tubing products for aerospace
High capability to design and manufacture heating solutions for bespoke applications
Strong customer relationships Market-leading product performance in residential gas tubing
Read more on pages 48-51 or www.flextekgroup.com
Divisional headline operating profit*
*Before corporate costs
Smiths Group has embarked on a new and exciting phase in its evolution.
A revitalised sense of mission and a renewed focus on technology leadership, together with the diversity of our end markets, help to provide the scope for business growth and security against challenging trading conditions.
Throughout my career, I've passionately believed that every company should have the courage to build a dream. Setting out a viable dream for our employees, customers and shareholders, appointing great leaders and then building a compelling strategy to drive relentlessly towards that end – these are the hallmarks and seeds of growing and building great companies.
Smiths Group is no different. With a proud legacy of technological innovation, market leadership positions across many of our businesses, and a large cadre of experienced people, there is much that is inspirational and extraordinary in what we do every day. Rather than feel conditioned and constrained by our past, or even by new circumstances, we should be intent on recapturing the company's historical and innate spirit of enquiry and innovation in order to bring new levels of ambition to our purpose. Our employees' qualities and resourcefulness provide a powerful platform for injecting new momentum into our business. But a vital part of this mission is inspiring our people and instilling them with a renewed sense of self-belief.
Focusing on the areas of greatest market attractiveness, and pursuing these through initiatives to drive organic and inorganic growth, we will create the conditions for long-term sustainable competitive advantage. This is what the world's great companies do; relentlessly build sustainable competitive advantage, mixed in with an honourable and ethical approach to business. Reinvigorating innovation and supporting it through more disciplined commercialisation processes, as well as through increasing resources, has a vital role to play here. Faster growth is the answer to our value creation challenge and in my mind, the best kind of growth is organic growth. This is because it points to the ability of a company to adapt, adjust and reinvent itself as new times and competition dictates. We have, and will continue to, supplement it with acquisitions because they bring the additional needed element of speed.
Thanks to the progress that has been made to address our pension scheme liabilities, long-term funding arrangements are now in place which will materially increase the cash resources available to invest in these growth opportunities.
On several occasions over the past year, I have reflected on the following observation from that great man of letters, George Bernard Shaw. It might apply, equally, to companies: "People are always blaming their circumstances for what they are. I don't believe in (blaming) circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and if they can't find them, they make them."
At an important point in this great engineering company's fortunes, it is an honour for the Board to have played a significant part in 'making the circumstances' for a revitalised sense of mission at Smiths Group. More than at any time during my tenure as Chairman, I am convinced that we are in a better position to build and grow. Under the energetic leadership of Andy Reynolds Smith, and with a renewed commitment to innovation, a single-minded focus on targeting attractive markets and a relentless drive to improve operational excellence, the next few years hold out exciting opportunities for us to be the architects of our own fortune.
Smiths Group embarks on this journey in a period of ongoing volatility in the external environment. Uncharted territories are becoming ever more commonplace on the roadmaps of the world. Economic forecasts are generally weaker, political turbulence is higher and personal security has generally worsened over the past couple of years. The implications of other significant events, such as the outcome of the UK's referendum on EU membership and the ongoing US presidential election campaign, will be with us for many years to come. Continuing
Sir George Buckley Chairman
factors such as low oil prices, low interest rates and currency volatility create additional planning uncertainties for every company. Add to that an evolving threat environment and increasing geopolitical unrest, and it is clear that the risks that companies must navigate in today's world show little sign of abating. But, usually, inside every threat is a hidden opportunity.
Rather than be disheartened by these prospects, our resolve should be steadied by the recognition that our Group's very diversity serves us well. Along those lines, Smiths delivered a robust and improved performance this year. Our broad end market exposures helped us to offset the anticipated net declines in John Crane's oil industry oriented revenues, with profitable growth in our other two large divisions. Smiths Medical continued its record of profitable growth, fuelled in part by increased investment over recent years in product innovation and expansion into new geographies. For the Group as a whole, incidentally, there continues to be much opportunity to expand into emerging markets. Smiths Detection's strong performance was built on improving sales volumes, particularly in ports and borders, and on the hard work done in that division to improve operational performance through value engineering and programme management initiatives.
With the vast majority of our revenues derived from markets with long-term growth potential – nearly two-thirds comes from the three key markets of healthcare, energy, and homeland security and defence – we have taken some important steps this year to equip ourselves to face the future with confidence. Your Board has been deeply and vigorously engaged in assessing strategic opportunities to position Smiths Group for future growth.
Typical Western engineering companies have been caught in a high margin, low growth trap for many years. With this financial backdrop, profitably growing the top line is the most important lever of value creation. Higher levels of organic growth,
driven by innovation, imagination and creativity remain our principal objective. The world's great companies are all innovative ones.
Success, however, does not come overnight. Rebuilding this kind of capability and confidence in a company requires a good measure of patience and determination. So we will continue to pull hard on all the other growth levers that the company has at its disposal, such as initiatives to improve margins and working capital turns. Success in these endeavours will not only deliver a keener edge to our competitiveness, but also ensure greater consistency of execution across our businesses.
As someone who is passionate about growth and innovation, a focus on increasing technological differentiation has a powerful resonance. As a businessman concerned with delivering new value for shareholders, it also happens to make perfect sense. Innovation is not done for its own sake, but done to create relative competitive advantage, increasing customer satisfaction and greater employee engagement. It's an 'everybody wins' strategy. We have many compelling and recognised brands with an enviable reputation for quality. By showing a greater appetite for innovation across our manufacturing, logistics, product and service lines, as well as more adventurousness in our geographic reach, our ambition will ultimately turn these brands into enduring franchises.
In April, we announced the largest acquisition for the Group in more than a decade, with the agreement to purchase Morpho Detection. Completion is subject to a number of regulatory clearances, which we continue to expect in early 2017. The combined business will provide us with technology and innovation resources to deploy against growing and ever more sophisticated global security and contraband threats. In many ways, this acquisition should also be seen as a signal of our intent to accelerate sustainable growth in attractive markets. We will continue to take an active approach to portfolio management as we seek to simplify and strengthen the Group's structure.
The theme of this year's report is 'Being the best at what we do', and throughout you will find numerous examples of how our employees strive to achieve excellence across our operational, commercial and technical activities. On my visits with Smiths Group colleagues across the world, I have continued to be impressed by their spirit, commitment and creativity. With operational excellence and innovation now firmly on the agenda at Smiths, we set great store by attracting, retaining, developing, engaging and inspiring our many employees.
comprehensive MyVoice employee survey across all our divisions and we will listen hard to what our employees are telling us, and take action to improve where we can. With the well-being and safety of our people as a vital need, I am pleased to note that recordable injury incident rates are now at their lowest historical level. There is no room for complacency, and our goal continues to be zero incidents. We have also continued our long-term trend of improving our environmental performance, with material reductions in energy, GHG emissions, water usage and non-recyclable waste during the year.
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. This policy will enable us to retain sufficient cash-flow to finance our investment in the drivers of growth and to meet our financial obligations. 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. The Board is recommending a final dividend per share of 28.75 pence, giving a total dividend for the year of 42 pence, an increase of 2.4% year-on-year. The final dividend will be paid on 18 November to shareholders registered at close of business on 21 October. The ex-dividend date is 20 October.
As I mentioned in these pages last year, David Challen decided to step down from the Board after the AGM, having served with distinction as Chair of the Audit Committee and as Senior Independent Director. I am delighted to welcome Mark Seligman to the Board, who brings with him the valuable perspectives gleaned from a long and successful career in banking. I am also pleased that Sir Kevin Tebbit agreed to underscore his many years of insightful service to the Board by becoming our Senior Independent Director.
Sir George Buckley Chairman
In my first year as CEO, my aim has been to lay the foundations for future value creation through stronger growth, improved competitiveness, more robust and consistent execution and a better focused portfolio.
Group revenue fell 2% on an underlying1 basis, a robust performance highlighting the benefits of our broad range of end market exposures. Good growth was reported in Smiths Medical and Smiths Detection. John Crane experienced tough trading conditions as volatility in the global energy markets continued to reduce demand. Revenue in Smiths Interconnect and Flex-Tek was slightly down on the prior year on an underlying1 basis. On a reported basis, Group revenue grew 2%, benefitting from foreign exchange, and in particular the strength of the US dollar.
Reported Group headline operating profit of £510m was in line with the prior year, although on an underlying basis this fell 4%. The Group's operating profit margin fell 40 basis points on an underlying basis. Margin expansion in Smiths Medical, Smiths Detection and Smiths Interconnect reflected strong trading performance in addition to cost control and restructuring activities, but was offset by weakness in John Crane's end markets.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
The Group delivered an improvement in cash generation with a cash conversion rate of 102%. We have made progress in improving stock turns this year, with £30m cash inflow from inventory reductions. Headline free cash-flow of £400m increased 18%. Net debt of £978m reduced by £23m on an underlying basis, despite a significantly higher pension contribution in the year.
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. This policy will enable us to retain sufficient cash-flow to finance our investment in the drivers of growth and to meet our financial obligations. 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.
The Board is recommending a final dividend per share of 28.75 pence, giving a total dividend for the year of 42 pence, an increase of 2.4% year-on-year. The final dividend will be paid on 18 November to shareholders registered at close of business on 21 October. The ex-dividend date is 20 October.
We anticipate a broad continuation of the trends experienced in 2016, with ongoing challenges in John Crane's end markets being more than offset by moderate underlying1 revenue growth in our other divisions. As is typically the case, Group performance in 2017 is expected to be weighted towards the second half. We expect cash conversion to continue to be strong in the coming year and the recent depreciation of sterling is expected to provide a tailwind to reported revenue and operating profit, should current rates prevail.
Andy Reynolds Smith Chief Executive
Read more on pages 25-31 and in note 5 on page 151
Cash conversion
Read more in note 26 on page 182
Read more on pages 26-31 and in note 26 on page 182
Everything I felt about Smiths Group on my first day as Chief Executive – strength in depth but great opportunity for improvement – I now believe even more passionately. The Group has a number of businesses, grouped into five high-quality divisions. Many of the businesses occupy leading positions in the markets they serve. This forms a solid platform, and provides a clear opportunity to build on the Group's innate DNA to take us to the next level of growth, innovation and competitive differentiation.
In my first few months, I set up a strategic review of our businesses to identify the drivers for future growth and value creation, with a particular focus on market attractiveness and our competitiveness – essentially asking the question 'How good can it be?' The review has provided clarity on the 'doability' – the risks, costs and time required – and we have aligned its findings with a more robust capital allocation process. As a result of our detailed knowledge of our businesses and the actions we have taken to date, our ambitions for Smiths Group are well-founded.
My vision is to establish Smiths as one of the world's leading technology companies, with sustainable outperformance in our chosen markets. We will achieve this by focusing on our two strategic priorities:
As we target leadership positions in our chosen markets, everything we do in pursuit of these priorities will be based on the quality of our people, doing the right thing and the rigour of our financial discipline.
In order to achieve sustainable growth, it is important to target the right segments within markets, the right geographies and the right customers, and to increase the value of the content we have with our customers. All of these, of course, should be underpinned by world-class competitiveness. We call this our Growth Framework. As a result of our strategic review's detailed assessment of our divisions by market sub-segment, we now have a much more granular understanding of the growth characteristics of the markets that each of our divisions serves. For example:
John Crane's performance this year has demonstrated the importance of maintaining exposure to a broad range of end markets. While oil and gas capital expenditure has been a catalyst for growth and margin expansion over the past decade, and this segment accounted for 57% of John Crane's revenues in 2016, we will do more to expand into non-oil and gas verticals which make up the remaining 43%, such as the chemical, pharmaceutical, and pulp and paper industries. We will also consider organic and inorganic means to expand into adjacent mission-critical products and components with similar business characteristics to our current offering, as well as investing in digital solutions such as predictive diagnostics and reviewing potential breakthrough disruptive technologies, particularly in the field of advanced materials and 3D printing. We will do more to improve our market positioning in key geographies, such as China, and John Crane must also position itself better to take advantage of the long-term implications of increasing environmental regulations and the drive towards lower emissions and higher energy efficiency. Many of our products, including dry gas seals, have demonstrable benefits in this regard. With 59% of revenue derived from aftermarket products and services, we view John Crane as a 20%+ margin business.
Smiths Medical's portfolio incorporates several strong brands and market leadership positions, particularly within Infusion Systems, Vascular Access and Vital Care. Our market sub-segmentation review has led us to identify with more precision the areas that are growing and those that are not, so that we can focus our significantly increased investment in higher-growth categories. We will position ourselves better to address key global trends, such as increasing digitalisation and the growth of alternate sites of care, which we expect to do by strengthening our category leadership positions through greater innovation and competitive differentiation and by building our 'pump to patient' strategy – and beyond. We view Smiths Medical as a 20%+ margin business.
Smiths Detection's strong revenue growth and margin expansion this year comes from high new business wins, increasing initiatives to capture aftermarket service revenues, and sustained management action to improve productivity and operations. With a broad portfolio in a global homeland security market which we estimate will grow at a mid-single digits CAGR to 2021, the business benefits from a global reach and strong existing relationships with some customers. We view Smiths Detection as a mid-teens margin business. In April, I announced that we had agreed to purchase Morpho Detection from Safran S.A., for an enterprise value of \$710m. Morpho Detection is a high quality business, with a strong management team, and this combination provides a compelling competitive platform for product, service and technology leadership. The acquisition will better position us to meet customer requirements for high-technology, cost-efficient solutions and services, including software. We continue to anticipate completion of the acquisition to take place in early 2017, subject to regulatory clearances.
Smiths Interconnect provides high reliability electronic components to multiple industries, including the defence, telecoms, aerospace and medical end verticals. Our review has given us clarity on the most attractive customer segments within these verticals, and led us to conclude that Smiths Interconnect is better positioned to serve those customers who seek more sophisticated and differentiated technology solutions. We will therefore focus increasingly on select customer types in the most attractive verticals, and align our investment in new product development accordingly to meet electronics industry trends such as miniaturisation, power efficiency and processing speed. We view Smiths Interconnect as a mid-teens margin business.
Flex-Tek provides a range of engineered components for the aerospace, medical, industrial, construction and domestic appliance end markets. With a more in-depth understanding of the relative attractiveness of these end markets, we will prioritise areas of faster growth and where Flex-Tek can deliver competitive differentiation, including in technology expertise and customer service. We view Flex-Tek as a mid-teens margin business.
We have undertaken a strategic review across the Group to examine in detail the growth characteristics of the markets we serve and our competitive positioning within those markets. We start from a solid base with a Group of well-run and well-positioned businesses.
A key conclusion of our strategic review is that there is material opportunity to improve competitiveness by ensuring robust and consistent execution across Smiths Group – achieving excellence. We have defined six core pillars of Excellence at Smiths, which will be leveraged across the Group: Customer, People, Technology, Production, Programme and Supply Chain. Each pillar has an Executive Committee sponsor. Employees throughout the organisation have been engaged in how they can play their role in this agenda, and in April we held the inaugural Smiths Excellence Awards to recognise outstanding examples of initiatives and behaviours in each of the Excellence categories.
The Smiths Excellence System will drive continuous improvement and consistent execution across our businesses, focused on speed and efficiency. Key priorities over the next year include:
Increasing our service offering through initiatives on pricing and channel management.
Recognising that people are our one true source of sustainable competitive advantage, we are implementing a People Plan along with culture change initiatives to build a learning organisation that attracts, retains, develops, engages and inspires the very best people.
To build a culture of innovation, we are investing in a Group-wide New Product Innovation process that will ensure our product and service vitality is strong and will sharpen our focus on commercialisation. We are reviewing the efficiency and quantum of total R&D spend and I am also leading the implementation of the Group-wide i 3 innovation forum. We plan to invest in building digital capabilities in the coming year through a central Innovation Fund and expect to invest increasingly in this area over time.
Developing a culture of Continuous Improvement and lean enterprise, supported by the correct structures, processes, enablers, measures, and people capabilities and skills.
Executing complex programmes is critical to our customer relationships, and we are developing a gated programme management process and an ever-increasing focus on rigorous contract management.
Improving the speed of flow through the business from the supplier through to our plants and the customer will reduce lead times, reduce working capital and ensure customers get what they want when they want it.
As we take action to develop market leadership positions and to improve our own competitiveness, we will continue to take a disciplined approach to balance sheet management. We have increased the focus on cash generation as a primary measure of performance, and have taken steps to improve inventory management across our businesses which will ultimately improve working capital. By adopting a Group-wide approach to capital allocation in order to maximise risk-adjusted returns, we will apply strong financial discipline to acquisition and disposal activities where opportunities present a compelling strategic rationale, aligned with our focus on investing in attractive technology-led areas.
As we position Smiths Group for long-term growth, we will target organic and inorganic opportunities that offer the best levels of sustainable growth and value creation. We will build market-leading positions in our chosen markets with a more focused portfolio of businesses that embody the essential characteristics of where Smiths Group creates value.
These characteristics include having:
By pursuing this strategy, I am confident that over the long-term Smiths can outperform our chosen markets and achieve world-class competitiveness as we realise our vision of becoming one of the world's leading technology companies.
Andy Reynolds Smith Chief Executive
We will increase expenditure on research and development by around £20m in the coming year to invest in future growth opportunities.
Building intimacy with our customers and aligning strategically with their needs is critical to broadening and deepening the level of value we provide and driving growth.
Smiths Interconnect used its reputation as a technical innovator and trusted supplier to develop its relationship with Space Systems Loral (SSL), a major commercial satellite customer. By focusing additional resources on the account and proving ourselves as a technology partner, we were contracted to provide critical microwave components that enabled SSL to standardise their equipment design and react more quickly to their own customers' needs.
©gettyimages
People are our one true source of sustainable competitive advantage. That's why we're building a learning organisation which attracts, retains, engages, develops and inspires all of our employees.
We're proud of how Smiths Medical's Women's Leadership Network has grown in reach and depth in recent years. Starting as a group of 50 women leaders, there are now local chapters in every region of the world – fostering engagement and collaboration right across Smiths Group, and breaking the barriers that may get in the way of women moving into more senior leadership roles.
Delivering excellence across Smiths Continued
Innovation is at the heart of what we do. Pursuing areas of technological differentiation and accelerating the digital evolution of our business can help us to deliver value to our customers and unlock our growth potential.
John Crane's new diagnostic system Sense™ is designed to reduce customers' operational costs by predicting the maintenance needs of critical components and minimising disruption to their operations. Currently in customer trials, this marks an exciting milestone as we move beyond simple monitoring to become the industry leader in predictive diagnostics.
Transforming our operations through new manufacturing techniques and automation is central to how we improve efficiency and deliver competitive advantage for our customers.
Just look at what Smiths Detection has achieved at its site in Wiesbaden, Germany. By applying LEAN production principles to how we assemble generators and X-ray scanners, we were able to improve productivity, as well as cutting manufacturing lead times for high volume products by more than 50%.
Strategic report
Governance
Accounts
Delivering excellence across Smiths Continued
Working closely with customers on complex programmes is one of our core capabilities. Delivering outstanding value and quality to demanding deadlines is critical to our success.
Smiths Interconnect delivers complex solutions that offer real value to our customers. Working in partnership every step of the way to provide antenna systems enabling encryption-protected communication for the US Navy, from supporting the customer design phase through prototyping and into full production, shows our strong commitment to programme execution.
We know the value of optimising our supply chain. Developing deeper relationships with our key suppliers helps us to deliver our own strategic objectives.
That's why we held our first ever Group-wide Strategic Supplier Conference this year, bringing together nearly 50 select suppliers from across our business. It was an opportunity to build partnership and engagement in our drive for operational efficiency, innovation and growth.
Smiths Group's vision is to become one of the world's leading technology companies. Our business model is built on our commitment to six pillars of Excellence.
Greater intimacy with our customers and strategic alignment with their needs, to broaden and deepen the level of value we provide.
Building a culture of innovation through technological differentiation, digital capabilities and improved R&D and New Product Introduction processes.
Consistent and flawless execution of complex programmes to meet our commitments, supported by rigorous contract management.
Building a learning organisation and developing the best ways to attract, retain, develop, engage and inspire our colleagues.
A culture of Continuous Improvement and lean enterprise, supported by the right structures, processes, enablers, measures and people capabilities and skills.
Improving flow through the business to improve stock turns, and management of strategic suppliers.
Strategic report
Governance
Accounts
Smiths Excellence underpins our strategic priorities of outperforming our markets and achieving world-class competitiveness. Everything we do in pursuit of these priorities will be based on the quality of our people, doing the right thing and the rigour of our strong financial framework.
My objective is to create value for all of our stakeholders through a renewed emphasis on growth, innovation and focusing the portfolio – supported by the best execution, improved productivity and effective capital allocation.
Andy Reynolds Smith Chief Executive
We aim to invest in opportunities that create value for the Group by maximising the efficient use of capital while carefully managing cash and Group liquidity.
Our balance sheet continues to be strong, allowing us to fund growth opportunities to generate superior shareholder returns.
At the core of our financial strategy is a simple financial management framework: Maintain a strong investmentgrade credit rating Invest in opportunities which create value Measured balance sheet management Active portfolio management Maintain a competitive tax rate Robust enterprise risk management framework
Conducted in-depth business reviews to identify the drivers for future growth and value creation
Findings provide clarity on market positioning of our businesses and competitiveness
Agreement to acquire Morpho Detection shows our willingness to invest in attractive opportunities which improve our competitiveness and technology capabilities
Deploy our strategy throughout the organisation, so that all employees know their role
Manage the integration of Morpho Detection, subject to regulatory approvals for the completion of the acquisition
Take further steps to focus and strengthen the portfolio in order to maximise long-term shareholder value
Identified six pillars of Excellence at Smiths – Customer, People, Technology, Production, Programme and Supply Chain
Launched Smiths Excellence Awards to recognise outstanding achievements and behaviours across the six pillars
Held first-ever Group-wide Strategic Suppliers conference to build long-term relationships based on value and innovation
We invested £112m in companyfunded R&D, equivalent to 3.8% of revenue
i 3 Group-wide innovation forum established to focus on new product development and medium- to long-term technology trends
Established consistent measures of customer quality
Deploy Smiths Excellence System across the business, implementing top priorities for each pillar
Introduce a revised incentive system to reflect the importance of driving performance improvements
Establish a central Innovation Fund to drive focus on technological differentiation
Develop and deploy a common and measurable New Product Introduction process across the Group
Our businesses are either market leaders in their sectors or are well placed in attractive niches. 68% of our revenue comes from end markets in healthcare, energy, and homeland security and defence. Around half of our revenue is derived from servicing our customers' aftermarket needs or from supplying single-use consumables that are used as part of our customers' everyday procedures. This provides a resilience to our revenues and strong, stable cash-flows.
Our largest single end market is healthcare. The majority of revenue comes from medical devices supplied by Smiths Medical, and both Smiths Interconnect and Flex-Tek supply components to medical device manufacturers. The medical device market is driven over the long-term by ageing populations, patient and health worker safety legislation and increasing healthcare spending in developing countries. Some 83% of Smiths Medical's revenue is from single-use devices used in everyday hospital procedures. The remaining 17% of revenue is from capital equipment, such as infusion pumps.
Smiths Detection provides threat detection equipment for airports, ports and borders, critical infrastructure, military and emergency responder markets. Demand is driven in the medium-term by ongoing geopolitical unrest and associated terrorist and criminal threats, but there is considerable variation by geography and end market. The growing installed base creates opportunities for aftermarket and upgrade revenues. The defence segment, representing 6% of Group revenue, is served by both Smiths Interconnect and Smiths Detection, and is primarily driven by spending on specific programmes in developed markets like the US.
This market is primarily served by John Crane, representing c. 60% of its revenues. The long-term drivers include the global demand for energy, a desire for national energy independence and increasing environmental and safety requirements.
68% of our revenue comes from three markets: healthcare, oil and gas, and homeland security and defence.
John Crane's mechanical seals and seal support systems are primarily used in the process equipment found in downstream (eg: refineries, ethylene crackers) and midstream (eg: pipelines, gas storage, LNG transportation) applications. Demand for original equipment (41% of revenue) is affected by customer capital expenditure cycles, while aftermarket service (59% of revenue) depends on utilisation rates and equipment age. The drop in oil prices in late 2014 has reduced customer capital expenditure, causing declines in revenue in original equipment and, to a lesser extent, aftermarket service.
Smiths Group serves a range of general industrial sectors including power generation, alternative energy, mining, automotive, test equipment and rail, among others. There are different drivers for each of these markets but overall they tend to track GDP. They are served by John Crane, Smiths Interconnect and Flex-Tek.
Smiths Interconnect supplies a range of high-performance microwave equipment to support the build-out and upgrade of wireless telecommunications infrastructure. It also provides power supply equipment for data centres and high-reliability connectors for semiconductor testing. Growth is driven by the proliferation of mobile communication devices, internet usage and the demand for higher data rates, and by the capital expenditure of network operators and data centre providers.
Flex-Tek manufactures a range of products such as flexible gas piping and ducting for HVAC applications that are used in the construction of homes, primarily in the US. Demand for single family home starts is driven by population growth.
Flex-Tek provides hydraulic hoses and fuel lines for airframes and aeroengines and Smiths Interconnect sells connectors and microwave components for aircraft and satellite communications. Aerospace demand is driven by investment in new fuel-efficient aircraft and by increasing passenger and freight traffic.
Equipment sales 47% Aftermarket/consumables 53%
*Industrial includes power generation, alternative energy, mining, test, rail and other general industrial applications
Our financial strategy is designed to support the delivery of the corporate strategy outlined by the Chief Executive on pages 10 to 13. We aim to invest in opportunities that create value for the Group by maximising the efficient use of capital while carefully managing cash and Group liquidity. Our balance sheet continues to be strong, allowing us to fund growth opportunities to generate superior shareholder returns.
At the core of our financial strategy is a simple financial management framework:
The aim of our strategy is to drive a 'virtuous circle' of growth with an unrelenting focus on cash generation being at the heart of everything we do.
We will generate cash through:
We will invest our cash in activities which will generate profitable revenue growth.
We will ensure our costs are appropriate to maintain and where possible improve the profitability of the base business.
We will create shareholder value by ensuring our capital is invested in opportunities which maximise the risk adjusted return on that capital.
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. This policy will enable us to retain sufficient cash-flow to finance our investment in the drivers of growth and to meet our financial obligations.
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.
As part of our disciplined approach to balance sheet management, we seek to maintain a strong investment-grade credit rating with a net debt:EBITDA ratio of no more than 2.0 over the medium-term. We would be willing to temporarily exceed this upper limit in the case of acquisitions, provided there were clear actionable plans to return to the upper limit of 2.0 within an acceptable timeframe.
Chris O'Shea Chief Financial Officer Accounts
To deliver our financial strategy we will focus on functional excellence across the Group and improve substantially our talent development. We have a strong cadre of finance people across the Group but we have not managed our talent as well as we could. During the year we have laid the foundations for improvement as follows:
These steps are intended to help ensure we share best practice across the Group and create a culture of continuous improvement. Underpinning that is a desire to return to a position where Smiths Group is recognised for the quality of talent in the finance community. Internal succession is a hallmark of a great company, and this requires a wellstocked and well-managed talent pipeline. The Smiths Finance Intern Programme will feed the Smiths Finance Graduate Programme, and this in turn will supply the Group with high-quality staff to progress through the organisation and hopefully one day to the position of Group CFO.
During the year, two of our divisional CFOs (Mary Heitmann in Smiths Interconnect and Bob Speer in Flex-Tek) decided to step down from their positions and I am proud that they were both succeeded by internal candidates: Alain McInnes transferred from Smiths Detection to become CFO in Smiths Interconnect and Patrick Henry stepped up from his role as VP Strategy in Flex-Tek to become CFO.
The Finance Leadership Team rolled out a personal development planning process in 2016 to ensure that all staff in the finance function across the Group have a discussion at least annually on their development. This is being cascaded throughout the organisation. During 2017 we will turn our focus to reinvigorating development programmes for our existing staff, using the output from our development discussions as input to these programmes.
The accounts in this report are prepared under International Financial Reporting Standards (IFRS), as adopted by the European Union (EU). The accounting policies used in preparing these accounts are set out on pages 196 to 198.
Applying accounting policies requires the use of certain judgements, assumptions and estimates. The most important of these are set out on page 197.
The divisional reviews describe our main customer and supplier relationships and the 'Risks and uncertainties' section outlines the risk management aspects of our contractual arrangements. Smiths Group has a wide range of suppliers and customers and, while the loss of, or disruption to, certain of these arrangements could temporarily affect the operations of an individual division, no single contract is considered essential to the Group.
As a global business Smiths Group is exposed to a number of different industries and macroeconomic trends but the nature of our diversified portfolio means that we are well placed to mitigate exposure to any specific sector or industry. This can be seen in a solid set of 2016 results, with strong performance in four of our five divisions mostly offsetting the impact of turmoil in the oil and gas market on John Crane. It was particularly pleasing to see continued revenue growth, albeit at a modest rate, in Smiths Medical, a good improvement in profitability at Smiths Interconnect, and the continuation of the strong recovery in Smiths Detection, which gave us the confidence to commit over \$700m of capital to the acquisition of Morpho Detection from Safran. We expect that acquisition to complete during 2017, subject to regulatory clearances.
Reported revenue increased by £52m (2%) to £2,949m, including the positive effects of foreign currency translation (£98m). On an underlying basis, revenue declined 2% as growth in Smiths Detection (+£43m; 9%) and Smiths Medical (+£6m; 1%) was offset by declines in John Crane (£87m; 10%) and Smiths Interconnect (£6m; 1%). In John Crane the reduction in revenue was more pronounced in the sales of original equipment, where revenues declined by 16% on an underlying basis; the aftermarket business was more resilient where the underlying revenue decline was 4%.
Reported headline operating profit of £510m was in line with the prior year (2015: £511m) including the positive effects of foreign currency translation (£19m). On an underlying basis operating profit declined 4%, driven principally by a £47m fall in John Crane. Operating margin decreased by 30 basis points to 17.3% (2015: 17.6%), driven by continued challenging conditions in global energy markets which impacted performance in John Crane, where margin declined 290 basis points to 21.9% (2015: 24.8%). Despite this decline, John Crane's margins remain the highest in the Group, demonstrating the underlying quality of this business.
Smiths Detection and Smiths Medical delivered strong margin improvement. Smiths Medical increased 160 basis points to 21.4% (2015: 19.8%) boosted by higher revenue, particularly in Vital Care, as well as a continued focus on cost management. Smiths Detection increased operating margin by 110 basis points to 13.0% (2015: 11.9%) supported by a strong revenue performance, a focus on operational efficiencies and strong cost management. Smiths Interconnect improved operating margin by 150 basis points to 13.1% (2015: 11.6%) by focusing on higher value customers, coupled with a range of productivity, efficiency and cost reduction initiatives. Operating margins of 18% in Flex-Tek were marginally lower than last year (2015: 18.5%) reflecting the impact of a product transition in the Gastite business.
Operating profit on a statutory basis, after taking account of the items excluded from the headline figures, was £387m (2015: £394m) – see notes 3 and 28 for information on the excluded items. The decrease was driven by an increase in non-headline charges of £6m reflecting an increase in the charge relating to legacy pension schemes, partially offset by a reduction in the charge for legacy liabilities due to settlement in our favour of a claim against an insurer relating to the John Crane, Inc. asbestos litigation.
Headline finance cost during the year totalled £59m, £7m higher than the previous year. This was principally due to an increase in interest payable on bonds of £7m, due to a full year's interest expense on the €600m bond issued at April 2015.
These items amounted to a charge of £105m compared to a charge of £134m in 2015. They comprised:
The principles of the Group's approach to taxation remain unchanged. The Group seeks to manage the cost of taxation in a responsible manner to enhance its competitive position on a global basis while managing its relationships with tax authorities on the basis of full disclosure, co-operation and legal compliance. A semi-annual tax report is reviewed by the Audit Committee to monitor compliance with these principles to ensure the Group delivers its tax objectives.
The headline tax charge for 2016 of £113m (2015: £117m) represented an effective rate of 25% on the headline profit before taxation (2015: 25.5%). On a statutory basis, the tax charge on continuing activities was £85m (2015: £77m).
The Group continues to take advantage of global manufacturing, research and development and other tax incentives, the tax-efficient use of capital and tax compliance management.
In 2016, Smiths Group paid £62m in direct corporate tax on profits and £105m in employment and other taxes. The Group additionally collected £210m on behalf of tax authorities, primarily from employees but also other indirect taxes such as VAT. The total amount of tax paid over to tax authorities during the year totalled £377m. A rate of between 26% and 27% is expected in the year ending 31 July 2017.
Basic headline earnings per share from continuing activities were 85.2p (2015: 86.1p). The reported 1% decline was mainly driven by higher finance charges for the year (£59m vs £52m), partly offset by a reduction in the effective tax rate to 25% from 25.5% in 2015 reflecting the successful conclusion of a number of historic tax disputes.
On a statutory basis, the basic earnings per share from continuing activities were 65.6p (2015: 62.4p), reflecting the recognition of a gain in non-headline finance costs relating to the contribution to the SIPS pension scheme of a portfolio of GILTS previously held in escrow for the scheme.
Operating cash generation remained strong, with headline operating cash-flow of £520m (2015: £484m), representing 102% (2015: 95%) of headline operating profit (see note 26 to the accounts for a reconciliation of headline operating cash and free cash-flow to statutory cash-flow measures).
Headline free cash-flow increased by £61m to £400m, reflecting the £36m increase in headline operating cash-flow, a reduction in cash tax payments of £29m to £62m, (2015: £91m), partially offset by an increase in net interest payments of £4m, from £54m in 2015 to £58m in 2016. Total free cash-flow, stated after all legacy costs, interest and taxes but before acquisitions and dividends, increased by £85m to £243m, reflecting the increase of £61m in headline free cash-flow and a reduction of £24m in the cash outflows on non-headline items principally due to cash inflows on foreign exchange hedging transactions of £41m partially offset by increased contributions to legacy defined benefit pension schemes.
On a statutory basis, net cash inflow from operations was £358m (2015: £266m).
Net debt at 31 July 2016 was £978m, an increase of £160m in the year. With the majority of the Group's net debt held in currencies other than pounds sterling to hedge the underlying asset base of the Group, the sharp decline in the value of sterling at the end of the financial year resulted in a foreign exchange translationdriven increase of £187m in net debt. The underlying debt in foreign currencies was unaffected by the change in the value of sterling. On an underlying basis, excluding the impact of foreign exchange movements, net debt reduced by £23m, reflecting good operational cash generation and a reduction in tax payments, partially offset by an increase in pension contributions.
At the end of the period, the Group had gross debt of £1,409m (2015: £1,313m) and cash reserves of £431m (2015: £495m). Of this gross debt, £270m (2015: £163m) falls due for repayment within one year. The maturity profile of the major tranches of the remaining £1,139m debt is as follows;
2018 – £132m (\$175m 7.37% bond)
2019 – £189m (\$250m 7.20% bond)
2022 – £304m (\$400m 3.625% bond)
2023 – £512m (€600m 1.25% bond)
Dividends paid in the year on ordinary shares amounted to £163m (2015: £160m). The Board has recommended a final dividend of 28.75 pence per share to be paid on 18 November 2016 to shareholders on the register at close of business on 21 October. When added to the 2016 interim dividend of 13.25p per share paid on 22 April 2016, this represents an increase of 2.4% on the 2015 full year dividend of 41 pence per share.
During the year we completed the purchase of XPD8, a conditioning monitoring business in John Crane, for £8m. In April 2016 we announced the acquisition of Morpho Detection for US\$710m. The transaction is expected to complete during 2017, subject to regulatory clearances, and on completion will be merged with Smiths Detection. In September 2016 we announced the disposal of our Artificial lift business in John Crane for US\$39.5m. This transaction is expected to conclude during 2017.
During the year agreement was reached on the triennial valuations with the Trustees of both major UK pension schemes. As a result, total required cash contributions to defined benefit pension schemes will fall substantially from £124m in 2016 to around £50m in 2017.
Following the transfer of all current US pensioners to Voya Retirement Insurance and Annuity Company in August 2015, around 60% of the gross liabilities of the US scheme are insured through a buyout contract.
As required by IFRS, the balance sheet reflects the net surplus or deficit in retirement benefit plans, taking assets at their market values at 31 July 2016 and evaluating liabilities at period-end AA corporate bond interest rates.
The retirement benefit position is shown below:
The tables below disclose the net status across a number of individual plans. Where any individual plan shows a surplus under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one plan is not available to fund the IAS 19 deficit of another plan. The net pension position has improved to a surplus of £80m at 31 July 2016 from a deficit of £108m at 31 July 2015.
The accounting basis under IAS 19 does not necessarily reflect the funding basis agreed with the Trustees and, should the schemes be wound up while they had members, they would need to buy out the benefits of all members. The buyouts would cost significantly more than the present value of scheme liabilities calculated in accordance with IAS 19.
31 July
31 January
31 July
| 2016 | 2016 | 2015 | |
|---|---|---|---|
| Funded plans | |||
| UK plans – funding status | 109% | 111% | 104% |
| US plans – funding status | 69% | 61% | 78% |
| Other plans – funding status | 88% | 85% | 86% |
| Total – funding status | 105% | 107% | 100% |
| 31 July 2016 |
31 January 2016 |
31 July 2015 |
|
| Surplus /(deficit) | |||
| Funded plans | 218 | 249 | 7 |
| Unfunded plans | (137) | (120) | (115) |
| Total deficit | 80 | 129 | (108) |
| Retirement benefit assets | 328 | 361 | 170 |
| Retirement benefit liabilities | (248) | (232) | (278) |
| 80 | 129 | (108) |
The approximate pension membership for the three main schemes at 31 July 2016 is set out in the table below:
| Total | 23,220 | 28,700 | 5,520 | 57,440 |
|---|---|---|---|---|
| Pensioners | 12,560 | 16,300 | 250 | 29,110 |
| Deferred | 10,310 | 12,160 | 3,020 | 25,490 |
| Deferred active | 350 | 240 | 2,250 | 2,840 |
| Pension scheme members as at 31 July 2016 | SIPS | TIGPS | US plans | Total |
Goodwill on acquisitions has been capitalised since 1998. Until 1 August 2004 it was amortised over a maximum 20-year period. Under IFRS goodwill is no longer amortised but instead is subject to annual reviews to test for impairment.
Intangible assets arising from business combinations ('acquired intangibles') are assessed at the time of acquisition in accordance with IFRS 3 (Revised) and are amortised over their expected useful life. This amortisation is excluded from the measure of headline profits. When indicators of impairments are identified, the intangible assets are tested and any impairment identified is charged in full. The impairment charge is excluded from the measure of headline profits. Other intangible assets comprise development costs or software which are capitalised as intangible assets as required by IFRS. Amortisation charged on these assets is deducted from headline profits.
The return on capital employed (ROCE) is calculated over a rolling 12-month period and is the percentage that headline operating profit comprises of monthly average capital employed. Capital employed comprises total equity adjusted for goodwill recognised directly in reserves, post-retirement benefit-related assets and liabilities net of tax, litigation provisions relating to exceptional items net of tax, and net debt. ROCE decreased 70 basis points to 15.3% (2015: 16.0%) as a result of reduced profitability in John Crane and Flex-Tek. ROCE in Smiths Medical, Smiths Detection and Smiths Interconnect have improved.
While the Group's decentralised organisation delegates day-to-day control to local management, Smiths Group has comprehensive control systems in place with regular reporting to the Board. The Group has continuous formalised business risk management processes operating at each division.
The Internal Audit Department completes site-based reviews of reporting units, as set out in a risk-based audit plan reviewed and approved by the Group CFO and Audit Committee. Further information regarding the Group's risk management procedures is set out in the Principal risks and uncertainties on pages 52 to 60 and the Corporate governance statement on pages 75 to 93.
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 for the Executive Committee, for every Board meeting and on a semi-annual basis for the Audit Committee.
The Policy maintains a treasury control framework within which counterparty risk, financing and debt strategy, interest rate risk and currency translation management are reserved for Group Treasury, while cash and currency transaction management are 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 2016 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 less than two times over the medium term.
Debt financing is managed centrally. At 31 July 2016 net debt was £978m (2015: £818m). The Group's strategy remains to finance the significant majority of its debt capital from long-term bond markets and at 31 July 2016 £1,392m of bonds were outstanding (2015: £1,298m). The core backstop financing for the Group is provided by a \$800m committed revolving credit facility provided by a group of ten global banking partners. This facility has a maturity in February 2021. The Group remains in full compliance with all covenants within its debt agreements. The Group's risk management objectives are to ensure that over time funding drawn from the bank market is less than 30% of net debt, the average maturity profile of gross debt is at or greater than four years and over 55% of gross debt is at fixed rates. At 31 July 2016, these measures were 0% (2015: 0%); 4.5 years (2015: 5.0 years) and 47% (2015: 58%).
At 31 July 2016, the \$800m committed bank facility was undrawn. The Group's objective is to ensure that at any time undrawn committed facilities net of short-term overdraft financing are greater than £200m and that committed facilities have at least 18 months to run until maturity. At 31 July 2016, these measures were £605m (2015: £512m) and 55 months (2015: 55 months). At 31 July 2016, cash resources were £430m (2015: £495m). These included funds received from the 2015 €600m 1.25% Senior Notes issuance net of repayment of the 7.25% £150m sterling bond on its normal maturity date in June 2016.
The Group aims to ensure that these resources are placed on deposit with highly rated relationship bank counterparties at short-notice availability. Credit exposure to every approved bank is defined by the Treasury Risk Management Policy, with counterparty limits established by reference to their Standard & Poor's long-term debt rating and CDS trading levels. Compliance is measured and reported to the Executive Committee and the Board. At 31 July 2016, 98% (2015: 99%) of cash resources were on deposit with the ten global banking partners. Of these resources £90m (2015: £33m) was invested with counterparties rated less than A+.
The results of overseas operations are translated into sterling at average exchange rates. The net assets are translated at year-end rates. The principal exchange rates, expressed in terms of the value of sterling, are shown in the following table:
| 31 July 2016 |
31 July 2015 |
31 January 2016 |
||
|---|---|---|---|---|
| Average rates: | ||||
| US dollar | 1.46 | 1.56 | Dollar strengthened 6% | 1.51 |
| Euro | 1.32 | 1.33 | Euro strengthened 1% | 1.37 |
| Year-end rates: | ||||
| US dollar | 1.32 | 1.56 | Dollar strengthened 15% | 1.42 |
| Euro | 1.19 | 1.42 | Euro strengthened 17% | 1.31 |
The Group has adopted hedge accounting for the significant majority of transaction hedging positions, thereby mitigating the impact of market value changes in the income statement. Material sales or purchases in foreign currencies are hedged at their inception by appropriate financial instruments, principally forward foreign exchange contracts and swaps. The Group's objective is to reduce medium-term volatility to cash-flow, margins and earnings.
The Group is an international business with the majority of its net assets denominated in foreign currency. It protects its balance sheet and reserves from adverse foreign exchange movements by financing its currency assets in the same currency such that, where the value of net asset exposure is over £30m equivalent, over 50% of those assets are matched with the same currency liability. At 31 July 2016, 50% (2015: 53%) of total foreign currency assets were matched by related currency liabilities.
Smiths Group faces different types of litigation in different jurisdictions. The high level of activity in the US, for example, exposes the Company 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.
John Crane, Inc. (JCI), a subsidiary of the Group, is currently one of many co-defendants in litigation in the US relating to products previously manufactured which contained asbestos. This litigation began more than 30 years ago and, typically, involves claims for a number of diseases including asbestosis, lung cancer and mesothelioma. The JCI products generally referred to in these cases consist of industrial sealing products, primarily packing and gaskets. The asbestos was encapsulated within these products in such a manner that, according to tests conducted on behalf of JCI, the products were safe. John Crane ceased manufacturing products containing asbestos in 1985.
The litigation involves claims for a number of allegedly asbestos-related diseases, with awards, when made, for mesothelioma tending to be larger than those for the other diseases. JCI's ability to defend mesothelioma cases successfully is, therefore, likely to have a significant impact on its annual aggregate adverse judgement and defence costs.
JCI continues to actively monitor the conduct and effect of its current and expected asbestos litigation, including the efficacious presentation of its 'safe product' defence, and intends to resist these asbestos cases based on this defence. Approximately 247,000 claims against JCI have been dismissed before trial over the last 37 years. JCI is currently a defendant in cases involving approximately 74,000 claims. Despite these large numbers of claims, since the inception of litigation JCI has had final judgements against it in 137 cases, and has had to pay awards amounting to approximately US\$158m.
At 31 July 2016, the aggregate provision for JCI asbestos litigation, including for adverse judgements and defence costs, amounted to £252m 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. The provision is based on past history and published tables of asbestos incidence projections and uses a 10-year time horizon. Moreover, in establishing this provision no account has been taken of any recoveries from insurers as their nature and timing are subject to pending litigation. Because of the significant uncertainty associated with the future level of asbestos 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.
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.
At 31 July 2016, provision of £94m has been made for the costs which the Group expects to incur in respect of these claims. 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.
The KPIs we used to manage the Group in 2016 are unchanged from 2015. These are set out overleaf. As we move into the execution of our new strategy these will be updated.
Revenue grew by 2% on a reported basis benefitting from £98m currency tailwinds. On an underlying basis revenue declined 2% as growth in Smiths Medical and Smiths Detection was more than offset by declines in John Crane and Smiths Interconnect.
| Revenue £m | Reported | Underlying | |
|---|---|---|---|
| 2016 | 2,949 | 2% | (2)% |
| 2015 | 2,897 | (2)% | (2)% |
| 2014 | 2,952 | (5)% | – |
| 2013 | 3,109 | 2% | 2% |
| 2012 | 3,038 | 7% | 5% |
85.2p down 1%
Headline earnings per share declined by 1% reflecting flat operating profit performance, a lower tax rate and higher finance costs.
| 2016 | 85.2 |
|---|---|
| 2015 | 86.1 |
| 2014 | 81.8 |
| 2013 | 92.7 |
| 2012 | 92.6 |
Building a learning organisation that attracts, retains, develops, engages and inspires our employees is central to our ambition of transforming Smiths into a world-class organisation and supporting our growth ambitions.
We have appointed a new CEO and CFO. We have continued to invest in our leadership development programmes across the Group. More than 600 leaders from across the business have been or are currently participating in these programmes.
We constantly challenge ourselves to have the right skills and competencies to support our growth ambitions and to strengthen our internal talent pipeline. We have improved our recruitment and assessment techniques, succession planning and development and put in place year-on-year improvement plans.
Managing and differentiating performance is critical to ensuring our employees fulfil their potential and deliver outstanding business results. We have created the new Smiths Excellence Awards to reward and recognise the highest level of achievement. We conducted our fourth comprehensive MyVoice global employee engagement survey and achieved a participation rate of 86% across the Group.
Return on capital employed decreased 70 basis points to 15.3% predominantly as a result of lower profitability at John Crane. Further details about return on capital employed can be found in note 28 on page 184.
15.3% down 70bps
| 2016 | 15.3 |
|---|---|
| 2015 | 16.0 |
| 2014 | 15.7 |
| 2013 | 16.6 |
| 2012 | 16.5 |
This is headline operating profit divided by monthly average capital employed, expressed as a percentage. Capital employed is total equity, adjusted for goodwill recognised directly in reserves, net post-retirement benefit-related assets and liabilities, litigation provisions relating to exceptional items and net debt.
Headline operating profit margin declined 30 basis points, reflecting lower profitability at John Crane. Margins improved in Smiths Medical, Smiths Detection and Smiths Interconnect.
17.3% down 30bps
| 2016 | 17.3 |
|---|---|
| 2015 | 17.6 |
| 2014 | 17.1 |
| 2013 | 18.0 |
| 2012 | 18.2 |
Based on our headline operating profit, which excludes a number of items that do not reflect the portfolio's underlying performance.
We promote a culture of responsibility throughout Smiths Group. This requires us all to work according to our Code of Ethics. We are committed to working in a way that protects the health and safety of employees and minimises the environmental effects of our activities and detrimental effects of our products and services. This delivers real business benefits, while ensuring that we meet our obligations to our stakeholders.
| 2016 | 2015 | |
|---|---|---|
| Recordable incident | ||
| rate per 100 | ||
| employees (RIR) | 0.47 | 0.55 |
| 2013-2018 Reduction target |
2016 v 2013 | |
|---|---|---|
| Energy | 15% | 7% |
| Greenhouse gas emissions |
15% | 22% |
| Total non recycled waste |
15% | 18% |
| Water consumption |
10% | 3% |
Our goal is zero harm and we made strides towards this in 2016, achieving our lowest RIR of 0.47. Compared to our baseline year of 2013, we have made good progress in reducing our environmental metrics, with GHG and non-recycled waste already exceeding our five-year goal. During 2016 we achieved reductions in energy, GHG emissions and non-recycled waste while water usage increased slightly.
Operating cash generation was strong with cash conversion at 102% of headline operating profit.
102% up 7%
| 2016 | 102 |
|---|---|
| 2015 | 95 |
| 2014 | 97 |
| 2013 | 98 |
| 2012 | 99 |
28%
John Crane provides engineered products and services to global energy and process industry customers.
Revenue performance £m £830m down 8%
| 2016 | 830 |
|---|---|
| 2015 | 905 |
| 2014 | 941 |
Revenue by sector First-fit 41% Aftermarket: 59%
Contribution to 2016 Group headline operating profit
33%
Percentage relates to headline operating profit before corporate costs
We are a global business in more than 50 countries, with over 230 sales and service centres and 19 manufacturing sites in 14 countries.
We serve process industries like refining and chemical, as well as pump and compressor OEMs. Our customers include Chevron, BP, ExxonMobil, Saudi Aramco, Shell, BASF, Sulzer, GE and Siemens.
We compete in seals, engineering bearings, filtration and couplings markets. Examples include Flowserve, Kingsbury and Danaher.
Our global supply chain aligns purchasing activity to leverage regional suppliers. Direct sourcing includes metals, ceramics, and advanced materials and parts.
Our seals can endure extreme conditions, withstanding temperatures as icy as the coldest town in Siberia, -75°C.
Recognised globally across process industry sectors, John Crane provides missioncritical technologies that drive reliability improvements and sustain the effective operation of customers' rotating equipment and other machinery. Our comprehensive product portfolio includes mechanical seals, seal support systems, engineered bearings, power transmission couplings and specialised filtration systems. These technologies are supported by the industry's largest global sales and service network that provides performance-enhancing services utilising expertise developed from decades of technology leadership coupled with proven field experience.
John Crane's primary end user vertical of oil and gas has experienced the most severe market downturn seen in the past 30 years, with significant cuts or delays to investment in large projects in the sector, resulting in a large volume impact on our original equipment business. While we believe the oil and gas market will remain challenging in the near-term, we maintain our belief that this sector is attractive in the long-term. Megatrends such as the global demand for energy, an increasing desire for national energy independence, and more stringent environmental and safety requirements will continue to generate demand for John Crane products. John Crane also has a significant presence in non-oil and gas process industry verticals such as chemical, power generation, and general industries, and we expect these verticals will continue to grow in the near-term.
Nearly 60% of John Crane's sales stem from the aftermarket servicing and support of existing installed equipment, which has proven to be resilient during the oil and gas downturn. John Crane's global network is a key asset that allows for quick-response and effective aftermarket service close to customers' operations. These facilities provide a range of value-added services including repair and refurbishment, rootcause analysis, alignment and condition monitoring, all designed to improve the performance of customers' rotating equipment and to reduce operational downtime. The geographic footprint continues to expand through opening additional service centres in key markets, in support of our growth strategy in selected high-growth markets.
To meet our vision of being a market leader in technologies and services for rotating equipment, John Crane's business strategy focuses on delivering above-market growth in selective process industry verticals, maximising aftermarket performance, enhancing our cost and productivity competitiveness, and accelerating growth through bolt-on acquisitions. John Crane aims to achieve this through a relentless focus on customer service, improving quality, developing our people, business ethics and safety.
Market leader in mechanical seals Strong proprietary technology and expertise in applied engineering High degree of customisation to meet specific demands Global network of c. 230 sales and service centres Over half of sales in aftermarket
Our global network is a key asset which allows for quick-response and effective aftermarket service close to customers' operations.
| 2016 £m |
2015 £m |
Reported growth |
Underlying growth |
|
|---|---|---|---|---|
| Revenue | 830 | 905 | (8)% | (10)% |
| Headline operating profit | 181 | 225 | (19)% | (20)% |
| Headline operating margin | 21.9% | 24.8% | (290)bps | |
| Statutory operating profit | 151 | 165 | (9)% | |
| Return on capital employed | 20.3% | 25.8% | (550)bps |
Revenue fell 10% on an underlying1 basis as difficult market conditions continued throughout global energy markets. The decline was driven by reduced sales in both the first-fit and aftermarket business. Reported revenue declined 8%, after £13m of foreign exchange benefit.
Underlying1 aftermarket revenue declined 4%, with continued economic uncertainty driving slower customer upgrades and retrofits, especially with oil and gas customers. Activity levels stabilised in the second half and a number of significant contract wins led to a growing aftermarket order book, reflecting the resilience of this business. While there were pockets of relative strength within certain regions, such as Latin America and Asia Pacific, weakness in the sector was fairly widespread. Underlying1 first-fit sales fell 16%, as continued volatility in energy prices put pressure on the business across most geographies. Lower underlying1 revenue was driven in particular by a sharp revenue decline in John Crane Production Solutions and weakness in North America. We continued to focus on expanding the installed base and our investment in first-fit projects was higher than any prior period.
Revenue from emerging markets represented 24% of John Crane sales, in line with the prior year, as headwinds in certain Latin American markets and challenging conditions in China offset efforts to increase our sales into emerging markets.
Headline operating profit fell 20% on an underlying1 basis driven primarily by lower sales volumes as well as high levels of investment in first-fit strategic projects, partially offset by favourable foreign exchange. Strong cost control actions included a reduction in headcount of more than 400 people. Headline operating profit margin fell 290 basis points to 21.9%. Return on capital declined 550 basis points to 20.3%, principally due to lower profitability. The difference between statutory and headline operating profit primarily reflects a £23m charge in relation to John Crane, Inc. asbestos litigation, a £10m impairment of John Crane Production Solutions goodwill and property, plant & equipment, and £10m of restructuring charges, offset by the recovery of £16m through a settlement with insurers.
During the year the decision was made to sell John Crane's artificial lift business. John Crane Production Solutions is held for sale at the year ended 31 July 2016. The business performance of John Crane Production Solutions is included within the financial summary and results presented above.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
John Crane's R&D projects include engineered solutions and technology advancements to meet customers' increasing demands for rotating equipment in extreme environments.
John Crane continued to invest in research and development projects in 2016. This included innovation for engineered solutions and technology advancements to meet customers' increasing demands for rotating equipment availability in extreme environments, while providing intelligence about performance and improving energy efficiency and cost savings. Specific developments included:
Continue expansion in selective process industry verticals Enhance productivity and cost competitiveness Build out selective emerging markets Maximise aftermarket performance
Develop new products and digital technologies
Go to www.johncrane.com for more information
Improving efficiency, reducing costs Performance Plus is John Crane's premier service offering, helping to improve efficiency and reduce operating costs for our customers. Already popular in pump-intensive plants such as refineries, we place reliability engineers at customer sites to maintain equipment
In late 2015, John Crane won a multiyear Performance Plus contract for two agribusiness plants in South America. Utilising our strong regional footprint we will improve their mean time between repairs on nearly 800 pumps from 17 months to almost 45 months, significantly reducing their operating costs and diversifying our reach into new industries.
and analyse root cause failures.
Contribution to 2016 Group revenue
30%
Contribution to 2016 Group headline operating profit 34%
Percentage relates to headline operating profit before corporate costs
We have operations in over 30 countries, with manufacturing located in North America, Europe and Asia.
Around three-quarters of our end users are hospitals. The remainder comprise alternate care and OEM partners.
Our competitors are diverse and include medical device businesses, as well as single product line companies.
We work continuously with our supplier base to reduce product and supply chain costs, improve delivery performance, ensure continuity of supply and achieve the highest quality. The majority of our direct spending is on resins, plastic injection mouldings and electronics.
Smiths Medical supplies medical devices and consumables that are vital to patient care globally.
Revenue by sector
Headline revenue performance £m £874m up 5%
| 2016 | 874 |
|---|---|
| 2015 | 836 |
| 2014 | 804 |
The medical device industry remains attractive, driven by numerous favourable and long-term trends. In turn, procedural growth is improving slightly, but constrained by healthcare system and budget reforms.
The global market we serve is estimated to be approximately £6bn, with numerous adjacent target markets. We are well positioned in lower risk, short-duration, interventional procedural devices that have a wide variety of applications. Our broad portfolio includes strong brands in hardware and consumable products, as well as software and services for both hospital and alternate care settings.
Our Infusion Systems products deliver medication and biologic therapies via infusion for the treatment of an array of indications, including acute and chronic pain management, cancer, pulmonary hypertension, and Parkinson's disease in hospital and home settings. We expect market growth through the increasing treatment of chronic conditions, and continued advancement of digital connectivity of medication delivery devices with hospital information technology systems and remote monitoring systems. Smiths Medical has a leading position in ambulatory infusion (CADD) and strong positions in the syringe pump (Medfusion and Graseby) and pain management (Portex) markets.
Our Vascular Access portfolio protects healthcare workers and patients from the risk of infection and injury through the use of safety-enabled devices. We pioneered safety devices, including the first safety peripheral intravenous catheter and the first port for delivery of chemotherapeutic agents, and our portfolio covers a range of functions, including drawing blood, injections and vaccinations (Jelco and Portex), delivery of chemotherapeutic agents (Deltec), and blood pressure monitoring for critically ill patients (Medex). The global market we serve is expected to grow as safety and infection reduction expands globally. We are well positioned to capitalise on the advancement of global initiatives on the use of safety-engineered syringes to protect healthcare workers from needlestick injuries.
Our Vital Care products help to manage patient airways before, during and after surgery (Portex), alleviate breathing difficulties (Portex), improve bronchial hygiene (Acapella), and help maintain body temperature (Level 1).
Our products for specialised care areas improve patient outcomes through in vitro diagnostics and fertilisation (Wallace), animal health and surgery (SurgiVet), emergency transport life support ventilation (Pneupac), and monitoring of critical vital signs (BCI).
Our primary focus is on improving patient outcomes and reducing the total cost of care by helping healthcare providers solve their clinical needs safely, efficiently and economically. We achieve this by investing in product development, manufacturing and supply chain optimisation, and efficiency gains in marketing and distribution models. We are investing for growth in both developed and developing markets, and are well positioned to take advantage of the ongoing shift in healthcare delivery from hospitals to alternate sites and home care.
Strong market positions in chosen clinical areas Highly recognised and respected brands Reputation for quality and safety Extensive global sales network
Innovative pipeline of new products in development
Our broad portfolio includes strong brands in hardware and consumable products, as well as software and services for both hospital and alternate care settings.
In 2016 the length of all our closed suction catheters, SuctionPro 72, sold would span more than 220 miles.
| 2016 £m |
2015 £m |
Reported growth |
Underlying growth |
|
|---|---|---|---|---|
| Revenue | 874 | 836 | 5% | 1% |
| Headline operating profit | 187 | 166 | 13% | 7% |
| Headline operating margin | 21.4% | 19.8% | 160bps | |
| Statutory operating profit | 166 | 142 | 17% | |
| Return on capital employed | 15.7% | 14.7% | 100bps |
Revenue grew 1% on an underlying1 basis driven in particular by growth in Vital Care revenue of 3%. Reported revenue grew 5% with favourable foreign exchange adding to strong business performance. Smiths Medical is now the largest division of the Group by both revenue and profit.
Vital Care underlying1 revenue growth was driven by tracheostomy and bronchial hygiene products. Vascular Access underlying1 revenue was broadly flat as sales of cardiothoracic and port products were partly offset by price pressure on peripheral intravenous catheters (PIVC). Infusion Systems underlying1 revenue was also flat as increased sales of hospital syringe infusion hardware and ambulatory infusion disposables were offset by a decline in sales of ambulatory infusion hardware following the strong prior-year performance in that segment. Specialty Products underlying1 revenue declined 2% as growth from in vitro fertilisation and animal health was offset by declines in patient monitoring and emergency medicine.
Sales into emerging markets increased 10% during the year, with direct sales into China and India up 22% and 21% respectively. Sales into distributor markets in South East Asia also performed well, growing 3%. Economic challenges in Russia, the Middle East and South America led to reduced sales into these markets.
Headline operating profit grew 7% on an underlying1 basis boosted by revenue gains, operational efficiencies, tight cost controls and restructuring programmes, which more than offset the downward pricing pressure in the sector and £5m adverse transactional foreign exchange. The headline operating margin of 21.4% was 160bps higher than the prior year, with £8m coming from favourable translational foreign exchange. The difference between statutory and headline operating profit reflects £14m of restructuring charges and £6m amortisation of intangible assets.
Return on capital employed increased 100bps to 15.7%, reflecting improved profitability that supported greater capital expenditure in new product development, capacity and manufacturing tooling.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
Ageing populations with increasing life expectancy and quality of life expectations
Growing incidence of chronic diseases
Increasing need for interoperable and connected systems
Growth of alternate site and home-based medical care
Rising healthcare spend in developing markets, offsetting budget constraints in developed markets
Research and development
+17%
acapella® is the most prescribed mechanical secretion mobilisation device in the world.
Research and development expenditure of £52m (2015: £45m) represented 6.0% of sales (2015: 5.4%), of which £30m was expensed (2015: £29m). This increased investment, alongside improvements in our new product development processes and productivity over the past two years, has resulted in a robust line-up of new products coming through the pipeline. In 2016, we saw an increase in product launches that will greatly increase our competitiveness and expand our served markets. In particular:
•The Graseby C8 syringe pump, developed by Smiths Medical's R&D team in Shanghai, was launched in China, contributing to 22% growth in that market.
We continue to focus on streamlining the R&D organisation while driving improvements in efficiency, programme discipline and execution, and prioritisation of resources. Further product launches across our portfolio are planned in the coming year.
Lay the foundation for accelerated growth and continued margin expansion
Build engagement, excitement and loyalty with customers and colleagues
Expand our portfolio of products and services
Improve marketing and sales force excellence
Drive operational excellence
Go to www.smiths-medical.com for more information
18%
Revenue performance £m £526m up 13%
Smiths Detection
designs and manufactures technology solutions that detect and identify security threats and contraband.
| 2016 | 526 |
|---|---|
| 2015 | 467 |
| 2014 | 512 |
40 Smiths Group plc Annual Report 2016
Contribution to 2016 Group headline operating profit 13%
Percentage relates to headline operating profit before corporate costs
We manufacture in Germany, France, Malaysia, US and the UK. We sell to over 200 countries.
The majority of revenues are influenced by over 100 governments and their agencies. Transportation customers account for 45% of revenues.
We compete with a wide range of companies in each end-use market. Those with the broadest reach include Rapiscan, L-3 SDS and Nuctech.
We co-ordinate manufacturing and purchasing activity globally to achieve scale economies and meet stringent quality and delivery standards.
Photo courtesy of Kuwait Customs
Smiths Detection produces equipment for customers in the air transportation, ports and borders, critical infrastructure, military and emergency responders end-use markets, to help them assure the safety and security of people and critical assets.
Demand for detection equipment and service is forecast to continue to grow at mid-single digits per annum over the near term, driven by ongoing geopolitical unrest and the resulting terrorist and criminal threats, but there is considerable variation by geography and end-use market. The growing installed equipment base creates significant opportunities for aftermarket (service and support) and upgrade revenues.
The heavily regulated air transportation sector is our largest market. Rising passenger volumes, continuing security threats, a strong replacement cycle and the increasing globalisation of trade, which boosts air freight volumes, are expected to continue to support market growth and new airport investment. Systems which help to integrate screening equipment with other forms of airport information are being used to improve the efficiency and effectiveness of the security process.
In the ports and borders market, the continuing globalisation of trade combined with increasing regulatory standards will drive the growth in demand for security screening equipment. Powerful technologies are required to address a variety of threats as governments become increasingly concerned about the smuggling of explosives, weapons and radiological materials, while continuing to recognise the strong revenue-generating potential from contraband detection.
The critical infrastructure market is large, but fragmented and unregulated. Growth in demand continues as public and private sector organisations seek to provide better protection for their assets and staff.
Global demand for chemical warfare agent detection equipment and other threatspecific sensors required by the military is forecast to grow steadily. Demand in the emergency responder end-use market, a subset of the military market, is driven by customers needing to deploy equipment as a consequence of both terrorist and non-terrorist events.
Our primary goal is to provide the best solutions for customers, delivered through a strategy of balanced growth supported by continuous improvement. Operational improvements based on value engineering, better quality, waste elimination and reduced lead times should deliver savings which will be reinvested in customerfocused development of products and software systems, as well as improvements in aftermarket coverage and service levels. Revenue growth from the aftermarket and digital solutions help to smooth out the volatility of prime contracting and are important sources of profitable revenue in their own right.
Operates in regulated markets requiring rigorous product certification
Technologies leveraged across many markets and applications
Investment in continuous improvement driving division-wide efficiencies
Growing aftermarket revenues (37% of total revenues)
Smiths Detection equipment helps assure the safety and security of people and critical assets.
In 2015 Smiths X-ray machines helped screen an estimated 1.6 billion carry-on bags a day at US airports alone.
| 2016 £m |
2015 £m |
Reported growth |
Underlying growth |
|
|---|---|---|---|---|
| Revenue | 526 | 467 | 13% | 9% |
| Headline operating profit | 69 | 55 | 24% | 20% |
| Headline operating margin | 13.0% | 11.9% | 110bps | |
| Statutory operating profit | 63 | 45 | 40% | |
| Return on capital employed | 11.9% | 9.6% | 230bps |
Revenue grew 9% on an underlying1 basis with growth in all businesses other than transportation. Initiatives to drive service attach rates and sales of premium service contracts led to a 14% increase in underlying1 aftermarket revenue, which represented 37% of sales. On a reported basis, revenue grew 13%, boosted by favourable foreign exchange.
Underlying1 transportation revenue fell 6% due to a lull in US activity levels, offset by strong sales into EMEA which included deliveries to London Heathrow, Abu Dhabi Airport and continued progress in the Middle East. Major contract wins in Saudi Arabia and Egypt were made in the period. Critical infrastructure underlying1 revenue grew 13%, driven by strength in aftermarket sales. Our revised product offering contributed to 75% underlying1 revenue growth in Ports & Borders, including deliveries for major programmes in Indonesia, Nicaragua,
Kuwait and for the US Customs and Border Protection Agency. Ongoing success in the US under the long-running JCAD and CBPS programmes, in addition to deliveries of RadSeeker detectors to the Domestic Nuclear Detection Office, led to underlying Military revenue1 growth of 9%.
Operating profit grew 20% on an underlying1 basis as increased sales, aftermarket strength and business mix were boosted by a number of value engineering and programme management initiatives. The difference between statutory and headline operating profit includes a £4m restructuring charge.
Return on capital employed improved 230 basis points to 11.9%, driven by higher profitability.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
Persistent and evolving terror threats
Changing security regulations for air cargo and passengers
Equipment replacement cycle – typically 7-10 years
Software-driven solutions providing functionality, networking and systems integration
Growth of security infrastructure in emerging markets
Aftermarket and consumables revenue
37%
Our Radiation detectors can identify radiation anomalies behind 13 inches of steel shielding.
Total research and development expenditure of £28m was in line with the prior year, of which £25m was company funded (2015: £25m). Investment was concentrated on fewer projects to drive a strong product pipeline that will deliver competitive advantages to our customers. This included:
Strengthen sales channels in all regions Drive R&D investment behind key product initiatives Launch value engineered products in specific end markets
Deliver further growth in aftermarket revenues
Implement continuous improvement initiatives
Go to www.smithsdetection.com for more information
In March, Smiths Detection announced a \$65 million five-year agreement to provide X-ray inspection systems to the Federal Protective Service (FPS), helping to protect approximately 1,000 Federal Government facilities across the country.
Through our previous working relationship, Smiths Detection has proven to be a reliable partner of FPS and this contract win demonstrates confidence in our continued service and support.
Contribution to 2016 Group revenue
15%
Revenue by sector Connectors 36% Microwave 44%
Revenue performance £m £435m up 4%
Smiths Interconnect develops electronic components and
sub-systems providing signal, power and microwave solutions.
| 2016 | 435 |
|---|---|
| 2015 | 420 |
| 2014 | 445 |
44 Smiths Group plc Annual Report 2016
Power 20%
Contribution to 2016 Group headline operating profit 11%
Percentage relates to headline operating profit before corporate costs
Principal operating regions We operate globally with locations in North and Central America, Europe, Asia and Australia.
Our blue chip customers are prime contractors, OEMs, system suppliers and sub-system manufacturers. Examples include Raytheon, Verizon, Huawei, CyrusOne and NVIDIA.
We have many small, medium and larger competitors in various product and technology areas, including Amphenol, Yokowo, Commscope, Anaren, Cobham and Emerson.
We develop supplier partnerships whilst ensuring no material individual dependencies.
Smiths Interconnect comprises three technology-focused businesses:
Connectors provides application-specific, high-reliability electrical interconnect solutions.
Microwave provides components, sub-assemblies and systems for defence, aerospace and wireless telecommunications.
Power provides distribution, conditioning and monitoring solutions for data centres.
Smiths Interconnect addresses a variety of end markets, particularly defence, aerospace, space, medical, wireless telecommunications, data centres and semiconductor test.
Global defence spending remains constrained as governments maintain tight budget control. New investment is biased towards system upgrades in critical areas such as intelligence, surveillance and reconnaissance, force protection and force multipliers. Our microwave technology, ruggedised connectors and electromagnetic pulse protection solutions are deployed in the most extreme environments, such as enabling sensors, communications and next-generation radar systems.
With a strong backlog, the commercial aerospace market remains robust, driven by increasing passenger and freight demand particularly in developing regions, and the need to upgrade fleets to more efficient aircraft. Smiths Interconnect provides connector and satellite communications antenna solutions for various aircraft and space applications.
The wireless telecommunications infrastructure market is driven by the need for higher data rates and bandwidth utilisation to support mobile communication devices and their data-intensive applications. Smiths Interconnect supplies highperformance microwave components used in cell sites, as well as products and test equipment that help optimise and protect network performance.
Data centre demand is driven by internet traffic growth caused by cloud computing, data regulations, web-enabled devices and mobile applications. Co-location providers continue to grow faster than enterprise demand as companies choose to outsource rather than fund large capital projects. Smiths Interconnect's conditioning, distribution and monitoring solutions ensure power quality is delivered to sensitive IT equipment.
Smiths Interconnect provides connector and cable assembly solutions to semiconductor applications. The high rate of technology refresh, increased functionality and greater connectivity requirements of electronic devices are key drivers for this market.
Our global business model is to focus on customers that value our innovative, technically differentiated offerings and our agility, responsiveness and service. We allocate resources to markets, customers and regions with the most attractive prospects, particularly defence, aerospace, medical, semiconductor, wireless telecommunications, data centres and Asia. Restructuring and efficiency initiatives, including lean and value engineering, deliver the funds for investment. By providing a technically challenging, exciting and rewarding environment, we attract and retain the necessary talent to drive our future performance.
Innovative and technically differentiated offerings
Ultra-high reliability solutions used in demanding applications
Customer intimacy, responsiveness and product customisation
Global presence, reach and support
Smiths Interconnect serves a variety of end markets, particularly defence, aerospace, space, medical, wireless telecommunications, data centres and semiconductor test.
Our connectors were used in the mission to land the Philae Probe on the surface of a comet.
| 2016 £m |
2015 £m |
Reported growth |
Underlying growth |
|
|---|---|---|---|---|
| Revenue | 435 | 420 | 4% | (1)% |
| Headline operating profit | 57 | 49 | 16% | 9% |
| Headline operating margin | 13.1% | 11.6% | 150bps | |
| Statutory operating profit | 26 | 28 | (7)% | |
| Return on capital employed | 10.3% | 9.1% | 120bps |
Revenue declined 1% on an underlying1 basis with good growth in the Power business offset by defence programme slowdowns and lower demand for semiconductors. Revenue grew 4% on a reported basis, boosted by £21m foreign exchange benefits.
Underlying1 revenue growth of 3% in the Power business was driven by strong data centre expansion in North America and an increased focus on preventative maintenance service contracts. Underlying1 Microwave revenue declined 5% due to lower customer demand and defence programme delays, although major new defence contracts for microwave assemblies were secured. Underlying1 Connectors revenue remained flat year-on-year as a decline in defence sales was offset by good demand in the commercial aerospace and space markets, which included the supply of high-reliability connectors to the NASA Orion exploration spacecraft.
Headline operating profit grew 9% on an underlying1 basis and the headline operating margin increased 150 bps to 13.1%, with accretion in all three business areas. Significant benefits came from improvements in productivity through value engineering, lean manufacturing and automation initiatives and from restructuring and procurement savings, which more than offset wage inflation and negative operational gearing from lower volumes and mix effects. The difference between statutory and headline operating profit primarily reflects an £18m goodwill impairment for Microwave, £8m amortisation of acquired intangible assets and £4m for restructuring.
Return on capital employed increased 120 basis points to 10.3% predominantly driven by the higher profitability.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
| Proliferation of electronic devices | |
|---|---|
| Demand for greater connectivity and mobility |
|
| Growth in high data rate applications | |
| Increasing sophistication of customer needs in emerging markets |
|
Increasingly sophisticated defence requirements
+6%
Our airborne satellite communication antenna systems have provided over 8 million hours of highspeed inflight connectivity.
Total research and development expenditure of £26m was in line with the prior year, representing 6.0% of revenue, of which £24m was company-funded (2015: £23m). Investments were focused on higher growth sectors, supporting key customers' needs or accessing new customers, regions or markets. Highlights included:
Focus on valued customers and sales channels International expansion, particularly Asia New product investments targeted at higher growth segments Reduce costs through value engineering and scale efficiencies
Embed new leadership team
Go to www.smithsinterconnect.com for more information
Contribution to 2016 Group revenue
9%
Flex-Tek provides engineered components that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets.
Revenue performance £m £284m up 6%
| 2016 | 284 |
|---|---|
| 2015 | 269 |
| 2014 | 250 |
Contribution to 2016 Group headline operating profit
9%
Percentage relates to headline operating profit before corporate costs
Our operations are mainly located in the US and Mexico, with Asian operations in India, China and Malaysia, and European facilities in France, Germany and the UK.
We serve the US construction industry, domestic appliance, aerospace engine and airframe manufactures and other niche markets. Large customers include Watsco, Ferguson, Boeing, Airbus, Pratt & Whitney, GE, Samsung, Trane and Carrier.
We compete with leading suppliers across our product range. Examples include Parker-Hannifin, Zoppas and Ward.
We source key materials from world-class companies selected to provide exceptional quality, service and value.
Flex-Tek designs and manufactures engineered components which heat and move fluids and gases for aerospace, consumer products, construction, medical, and industrial applications. The diverse nature of these markets reduces Flex-Tek's reliance on any specific technology, although the division is highly leveraged to the US economy.
Flex-Tek is organised under four marketspecific segments:
As the world's largest manufacturer of open coil heating elements, our products serve customers that manufacture tumble dryers, HVAC equipment, medical devices, and bespoke applications. Our specialised elements and thermal systems provide consistent temperature controls which improve system efficiency and performance. Revenue growth is driven by the US housing market, along with an increasing number of specialty heating applications in North America and Asia.
Flex-Tek manufactures market-leading flexible gas piping and HVAC flexible ducting for the US construction market. Our customers are large national wholesale distributors in North America, supplying both plumbing and HVAC tradesmen. The US housing market is driving positive revenue and market share gains.
We are a market-leading manufacturer of specialty high-performance, flexible and rigid tubing assemblies for aerospace applications worldwide. Our specialised tubing provides reliable and efficient delivery of hydraulic fluids and jet fuel for both commercial and military aircraft. The market for commercial aircraft remains strong, with an OEM commercial aircraft order book of over 13,000 units.
Flexible Solutions hoses and hose assemblies are focused into four distinct markets: medical respiratory care, floor care appliances, industrial ventilation and automotive. Automotive applications include petrol and brake fluid delivery in traditional automobiles as well as next-generation fuels for natural gas and hydrogen-powered vehicles.
The business performance generally follows macroeconomic indicators such as healthcare spending, US GDP and capital goods expenditure.
Our Construction Products segment is positioned to continue to grow revenue and market share in the US housing market, along with expanded geography and applications for our gas tubing products. In Heat Solutions we are expanding our product portfolio through new product development. Our Fluid Management business is focused on securing positions on next-generation aircraft in order to support the delivery of the commercial aircraft order book. We also continue to seek out strategic bolt-on acquisitions to support business development, through expansion of our product portfolio and market share gains.
High-performance flexible tubing products for aerospace
High capability to design and manufacture heating solutions for bespoke applications
Strong customer relationships
Market-leading product performance in residential gas tubing
Our Teflon braided hose can reach temperatures ranging from 230°C to -100°C.
| 2016 £m |
2015 £m |
Reported growth |
Underlying growth |
|
|---|---|---|---|---|
| Revenue | 284 | 269 | 6% | 0% |
| Headline operating profit | 51 | 50 | 3% | (3)% |
| Headline operating margin | 18.0% | 18.5% | (50)bps | |
| Statutory operating profit | 37 | 41 | (10)% | |
| Return on capital employed | 31.6% | 33.6% | (200)bps |
Revenue was in line with the prior year on an underlying1 basis. On a reported basis, foreign exchange benefits led to revenue growth of 6%.
Construction revenue grew 3% on an underlying1 basis, with both Gastite and Thermaflex benefitting from the growing US housing market. A softening of orders in aerospace led to a 1% underlying1 decline in Fluid Management revenue. Heat Solutions revenue fell 5% on an underlying1 basis, principally due to lower nickel prices reducing our own selling prices to customers. Flexible Solutions underlying1 revenue growth of 1% was driven by increased demand from the medical sector, although this was offset by a decline in the floorcare segment.
Headline operating profit of £51m delivered a margin of 18.0%, slightly lower than the prior year. A Gastite product transition was the primary driver of lower performance, even though Gastite margins were better than expected due to lower material costs. Profits and margins in Heat Solutions, Thermaflex, and Flexible Solutions improved slightly over the last year. The difference between statutory and headline operating
profit primarily reflects a £12m charge to extend the provision for litigation in relation to damage allegedly caused by lightning strikes.
Return on capital employed decreased 200 basis points to 31.6%, driven by the slightly lower rate of return on sales and by investment in expanding site capacity.
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
Strong commercial aerospace market growth Steady growth in US housing construction Expanding base of bespoke heating element solutions Growing European sales of gas tubing Additional applications for gas tubing products
Spending on research and development remained constant, focused on innovation to meet specific customer needs. We continued our focus on the development of specialty heating elements, expanded applications for gas tubing products and on products to meet the requirements of the next generation of quieter, more fuel-efficient aircraft.
New product development in key areas
Go to www.flextekgroup.com for more information
Did you know… Our Titeflex Aerospace hoses can be found on the International Space Station.
As one of the leading printer suppliers, Hewlett Packard (HP) is a pioneer of new technologies, so it's no surprise that they partnered with Flex-Tek's subsidiary, Tutco, when they needed to develop new heating applications for their large, industrial graphic printers.
Working with HP's design team, Tutco developed the designs and prototypes at its facilities in the US and China, and managed the pre-build and production of new heating elements used to dry ink during printing to deliver a range of heating applications across several HP platforms. These developments give HP game-changing capabilities as they aim to set benchmarks for speed and quality products.
Smiths Group is exposed to a wide range of risks in running its businesses. We regularly review these risks and ensure we have the appropriate processes and policies in place to manage them.
In accordance with the requirements of the 2014 revision of the UK Corporate Governance Code, the directors have assessed the longer-term prospects of the Group, taking into account the current position of the Group and a range of internal and external factors, including the principal risks detailed on pages 55 to 60 (the 'viability assessment').
The directors have determined that a three-year period to 31 July 2019 is an appropriate time frame for the viability assessment. The selected period is considered to be appropriate as, based on the historic 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 budget for 2017 and the Strategic Plan. Against these financial projections the directors took into account the principal risks (as outlined on pages 55 to 60) to develop a set of plausible scenarios with potentially high-impact outcomes including:
Consideration was then given to the magnitude of the gross risks and their potential impact, directly or indirectly,
The Group operates in global markets. In pursuing growth targets and strategic objectives we are prepared to accept certain levels of risk. We are very clear about the specific risks faced by our businesses and have robust actions in place to manage them. Our approach to each risk will vary over time and will depend on changing circumstances and the external environment.
The Board and its committees set the 'tone at the top' and approve the strategy of the business. On behalf of the Board, the Audit Committee is responsible for reviewing and assessing the effectiveness of the Group's risk management policies and processes, and the effectiveness of internal controls. The review covers all material controls, including financial, operational and compliance controls, as well as the Group's principal risks.
The Board ensures appropriate oversight and monitoring through a number of Board processes (strategy reviews, disclosures, Committee meetings, management reports and deep dives of selected risk areas). The Board is supported with input from a number of functions. Internal Audit is one of them and facilitates the Group's
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.
risk management processes, assesses the effectiveness of internal controls and identifies areas for improvement.
The Executive Committee is responsible for designing the system of internal control and risk management, and ensuring it is in place and effectively deployed throughout the business. It is responsible for ensuring the risk appetite of the Board is understood by risk owners and decision makers in the business. It is also responsible for conducting an annual assessment of strategic risk.
Divisional and functional teams are responsible for the day-to-day management and reporting of risks. They will identify new and emerging risks, ensure they are escalated where appropriate and take action to manage risks as required.
| Tone at the top Set the strategy |
Design the system | Complete risk reviews |
|---|---|---|
| Board and Audit Committee |
Executive Committee |
Divisional and Functional Teams |
| Review and assess risk management processes |
Identify and assess strategic and operational risks |
Management of risk/ risk registers |
Regulators
Running any business involves constant risk management. It is an integral and often implicit part of day-to-day operations.
For the purposes of review and assessment we draw out the principal risks and uncertainties using the Enterprise-wide Risk Management (ERM) process.
The 'three lines of defence' approach is an industry-recognised best practice model supporting ERM and an effective controls framework. It can help increase clarity regarding roles and responsibilities and improve the effectiveness of risk management systems. It is a model we have adopted.
| First line of defence Operational teams |
Second line of defence Risk and compliance |
Third line of defence Internal audit |
|---|---|---|
| •Establish and apply internal controls systems •Document and conform to policies and procedures •Understand roles and responsibilities •Follow risk process |
•Financial controls •Risk management •Security •Quality •Compliance •Monitoring |
•Internal audit •Internal controls assurance •Programme assurance •IT assurance •Fraud risk management |
| Functions that own and manage risks |
Functions that oversee risks | Functions that provide independent assurance |
In delivering our strategy it is important to understand and manage the risks that face us. We achieve this through our ERM approach which has been built to identify, evaluate, analyse and manage risks which threaten the successful achievement of our business strategy and objectives.
We do this by combining a top-down strategic view of risks driven by the Executive Committee with a bottom-up divisional process of identifying and managing risks. The process is continuous and is reflected in the chart below.
Our top-down approach involves a review of the internal and external environment, and an assessment by the Executive Committee of the principal risks that face the Group.
In an enhancement of the process during 2016, risk management papers have been presented at four Executive Committee meetings (two in 2015) with two of the sessions facilitated by the Director of Internal Audit. As part of this focus during the year a 'clean sheet of paper' approach was adopted in order to identify and assess strategic business risks, with time dedicated to identifying and discussing emerging risks.
Our bottom-up approach is driven by each of our divisions. They each operate their own risk management process, in line with Group guidelines, in order to manage risks specific to each business. This is an integral part of the Group ERM process.
Another enhancement of the risk management process was an additional Audit Committee meeting, held during May 2016, with a principal focus on reviewing all divisional and corporate risk in one session. This gave members of the Audit Committee the opportunity to assess the effectiveness of risk management processes, as well as strategic business risks and mitigating actions. In addition to the regular attendees of the Audit Committee, the CEO also attended.
In addition to the Audit Committee meeting held in May to consider risk, principal risks and uncertainties were reviewed and discussed at the March and July 2016 Audit Committee meetings. The Chief Executive now attends Audit Committee meetings.
This enhanced process provides a framework such that the Group's strategic, financial and operational risks are adequately considered by the Executive Committee and the Board.
The Board has reviewed 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. The Board considers the risk management process to be effective. It recognises this is an ongoing process and work will continue in 2017 to ensure it remains the case.
We maintain a detailed register of principal risks and uncertainties covering strategic, operational, financial and compliance risks. We rate them according to likelihood of occurrence and their potential impact. In 2016 we have begun to rate the 'velocity' of each risk. This measure is intended to reflect the time we would have to react to a risk were it to materialise. In the table to the right we provide a summary of each risk, a description of the potential impact and a summary of mitigating actions. We also provide ratings describing the potential impact, the trend versus 2015 and the 'velocity' of each risk.
High Trend
No change
Velocity Medium Global economic and financial market conditions have stabilised after the turmoil following the 2008 financial crisis, in large part due to the various impacts of quantitative easing and austerity measures. However, there remains continued uncertainty arising from a range of geopolitical and economic issues across the world. Smiths operates in more than 50 countries and is affected by global economic and political conditions. The business is affected by government spending priorities, in particular in the US and UK, and the willingness of governments to commit substantial resources to homeland security and defence.
The change in the leadership of the UK government and the upcoming US presidential election are two notable events that are likely to have an impact on the economic and political conditions in which we operate.
Global security concerns continue to drive uncertainty. These include the continuing situation in Syria and the Middle East and events in Ukraine that have led to economic and political sanctions against Russia and the devaluation of the Russian rouble. With the UK referendum result we will see uncertainty in the UK, Eurozone and elsewhere as the economic and political relationship between the UK and EU is determined.
The global oil price continues to trade at levels well below the average of the past few years which impacts the medium-term capital expenditure plans of a number of our customers, predominantly within the John Crane division.
Potential impact Low to medium
Trend No change
Velocity High
Risk and potential impact
There is a risk that the Group may not always be in complete compliance with laws, regulations or permits, for example concerning environmental or safety requirements worldwide. The Group could be held responsible for liabilities and consequences arising from past or future environmental damage, including potentially significant remedial costs. There can also be no assurance that any provisions for expected environmental liabilities and remediation costs will adequately cover these liabilities or costs.
The Group operates in highly regulated sectors. Smiths Detection, Smiths Interconnect and Smiths Medical are particularly subject to regulation, with certain customers, regulators or other enforcement bodies routinely inspecting the Group's practices, processes and premises.
Smiths Detection and Smiths Interconnect manufacture security products and components, which are subject to numerous export controls, technology licensing and other government regulations.
In addition, new legislation, regulations or certification requirements may require additional expense, restrict commercial flexibility and business strategies or introduce additional liabilities for the Company or directors.
Should a regulator's approval process take a particularly long time, our products may be delayed in getting to market, which could lead to a loss of revenue or benefit a competitor with a similar product.
Fraud or corruption on the part of a single employee could have severe consequences for the Group.
Failure to comply with certain regulations may result in significant financial penalties, debarment from government contracts and/or reputational damage.
The Group has a diversified portfolio of businesses that mitigates exposure to any one country or sector.
The divisions regularly monitor their order flows and other leading indicators, where available, so that they may respond quickly to deteriorating trading conditions.
Maintaining our competitiveness and continually improving our product offering for our customers ensures we remain resilient and well placed to take advantage of commercial opportunities.
Environmental, health and safety data are reported to the Executive Committee and the Board, along with actions to improve performance.
Smiths Medical has dedicated staff who maintain close contact with the US Food and Drug Administration and other key regulators.
All divisions have ethics and trade compliance training and access to advice. This includes training on the Group's Code of Business Ethics and assessments to support compliance.
Divisional and Group General Counsel monitor legislative changes (assisted by Government Relations staff) and report and monitor actions as necessary. This may require modifications to our supply chains and customer arrangements.
| Pension funding | ||
|---|---|---|
| Potential impact Low |
Risk and potential impact At 31 July 2016, the Group has legacy defined benefit pension plans, with aggregate liabilities of approximately £4.1bn on an accounting basis, with 2016 returning accounting funding to a surplus of £0.2bn. |
Mitigation All major schemes (US/UK) have been closed to new members and future accrual. |
| Trend Reduced Velocity |
Changes in discount rates, inflation, asset returns or mortality assumptions could lead to a materially higher deficit. For example, the cost of a buyout on a discontinued basis, and therefore using more conservative assumptions, is likely to be significantly higher than the |
Agreed funding plans are in place with the major UK schemes following the last triennial reviews. The Group seeks a good working relationship with the Trustees through regular update meetings. |
| Low | accounting deficit. In addition, there is a risk that the plan's assets, such as investments in equity and debt securities, will not be sufficient to cover the value of those benefits. |
Pension matters are regularly reported to the Board. |
| The implications of a worsening position include a direct impact on the Group's valuation and credit rating, and potential additional funding requirements at subsequent triennial reviews. |
The investment strategies of the three main plans (UK and US) are well hedged against changes in interest rate and inflation movements which has stabilised the overall funded position. |
Read more in note 8 on page 155
| Potential impact | Risk and potential impact |
|---|---|
| Low to medium Trend No change |
Exchange rate fluctuations have had, and could continue to have, a material impact on the reported results. The Group is exposed to two types of currency risk: transaction and translation. The Group's reported results will fluctuate as average exchange rates change. The Group's reported net assets will fluctuate as the year-end exchange rate changes. |
| Velocity Low |
The Group's ability to refinance its borrowings in the bank or capital markets is dependent on market conditions and the proper functioning of financial markets. The Group may be unable to refinance its debt when due. |
| The Group's future profitability, particularly in the US where there are higher rates of corporation tax, may cause the headline tax rate to increase over time. Changes in tax and fiscal regulations and transfer pricing rules in the countries in which we operate could affect the Group, particularly at times when public sector debt is high. Taxation costs could rise and earnings per share could deteriorate, which could |
affect the Group's market valuation.
The Group cannot be certain that it will be able to obtain insurance on acceptable terms or at all. Furthermore, the Group cannot be certain that its insurance will cover losses arising from events or that insurers will not dispute coverage. In addition, even if our coverage is sufficient, the insurance industry is subject to credit risk, particularly in the event of a catastrophe or where an insurer has substantial exposure to a specific risk. If insurance cover is inadequate or does not pay out as expected, the Group could be exposed to an unexpected material cash outflow, which may impact the Group's liquidity and/or share price.
The Group's hedging strategy, whereby larger transactions are hedge accounted, mitigates the risk to profitability to some extent. Net investment hedging of overseas assets of approximately 50%, through borrowing in non-sterling currencies, mitigates the impact of exchange rate fluctuations on net assets.
The Group's debt maturity is staggered so that the refinancing risk is minimised. As at 31 July 2016, the US\$800m committed revolving credit facility was undrawn.
The Group's taxation staff co-ordinate tax management to mitigate possible increases in the effective tax rate. Regular reporting to the Board of tax risks and exposures provides good visibility of issues.
Insurance risk is spread across a number of carriers to minimise individual insured risk and counterparty risk.
Read more on page 29
| Potential impact Medium Trend |
Risk and potential impact In the ordinary course of its business, the Group is subject to litigation such as product liability claims and lawsuits, including potential class actions, alleging that the Group's products have resulted or could result in an unsafe condition or injury. |
|
|---|---|---|
| No change Velocity High |
In addition, manufacturing flaws, component failures or design defects could require us to recall products. Many of our products are used in critical applications where the consequences of a failure could be extremely serious and, in some cases, potentially catastrophic. |
|
| Products sold to the aviation, security, healthcare, energy and consumer/domestic industries are critical products, where the consequences of failure could be particularly severe. |
||
| Furthermore, over half the Group's sales are in the US, where there is potentially increased litigation risk. |
||
| Any liability claim against the Group, with or without merit, could be costly to defend and could increase our insurance premiums. Some claims might not be covered by our insurance policies, either adequately or at all. |
||
| An adverse event involving one of our products could damage our reputation and reduce market acceptance and demand for |
Quality assurance processes are embedded in our manufacturing locations for critical equipment, supporting compliance with industry regulations.
A global best practice programme is continuing to enhance product quality processes across the Group. This is sponsored by the Executive Committee and leverages the ongoing work in Smiths Medical and John Crane.
The divisions have procedures for dealing with product liability issues and potential product recalls. These procedures are informed by crisis management planning workshops and rehearsals.
The Group has insurance cover for certain product liability risks. The US Safety Act provides legislative protection for certain Smiths Detection products in the US; and we support efforts to implement similar legislation in other markets.
Any litigation is managed under the supervision of the Group's legal function. We have detailed action plans to manage actual or threatened litigation.
Read more on page 30 and in note 22 on page 178
Potential impact Medium
Trend
Risk and potential impact
all of our products.
The Group's business depends on the availability and timely delivery of raw materials and purchased components, and could be affected by a disruption to its supply chain. In particular, we rely on sole suppliers to provide raw materials or components for some of our products.
The Group's manufacturing facilities are exposed to a number of natural catastrophe risks that, like other external events such as terrorist attacks or a disease pandemic, could have significant adverse consequences. The Group is also affected by the social, economic, regulatory and political conditions in the countries in which it operates. These are often unpredictable and outside the Group's control, particularly in developing countries.
The concentration of manufacturing in lower cost countries, in particular in Mexico and China, increases the length of the supply chain and means that an adverse event could have more significant consequences for our ability to supply customers on time. A longer supply chain also affects transport costs, which could be exacerbated by energy cost inflation.
Business continuity and disaster recovery plans are in place and tested for critical locations, to reduce the impact of an event.
Single-source supplier risks are identified and, where possible, key materials or components are dual sourced to mitigate the impact of an event.
The Group regularly evaluates its key sites for a range of risk factors using externally benchmarked assessments, and takes action to improve these ratings where appropriate.
The Group has business interruption and property damage insurance.
| Government customers | |||
|---|---|---|---|
| Potential impact Medium Trend |
Risk and potential impact We derive a significant proportion of our revenues in mature Western economies with a notable element directly related to government expenditure. Additionally, a high proportion of our products and services are in some way influenced by government regulation and certification. |
Mitigation The Group has a diversified portfolio of businesses that mitigates exposure to any one country or sector. Some of our government-related business has a services or consumables component, which can be more resilient during an economic downturn. |
|
| No change Velocity |
Smiths Detection, Smiths Medical and Smiths Interconnect frequently tender for government contracts. The timing of contract awards and payments under these contracts may be uncertain and uneven over |
||
| Medium | a given financial year. Any significant disruption or deterioration in relationship with these governments could result in fewer contracts and lower revenues. |
The Group has a Government Relations function so that it can inform policy and maintain close relationships with customers. |
|
| At a time when government finances are under pressure, these headwinds may lead to slower growth across the business. A decrease in spending by key government customers could materially affect the Group's results and financial condition. Delays in awarding government contracts can affect the Group's sales, margins and cash conversion in a particular reporting period. |
|||
| Technology and innovation | |||
| Potential impact Medium Trend |
Risk and potential impact Developing new products and improving existing products is critical to our business. There is a risk that competitors may innovate more effectively. The emergence of a disruptive technology could have an impact on a major cash-flow contributor to the Group over time. |
Mitigation The Group has a diversified technology portfolio in a range of sectors and geographies. |
|
| No change | The speed of innovation in certain markets may lead to shorter product | Our continued investment in R&D supports new product and service development. |
The Group looks to expand the addressable markets of its key businesses by building capabilities in adjacent markets, through organic investment and through targeted acquisitions.
business.
effect on sales growth.
Velocity Medium
| Potential impact Medium |
Risk and potential impact The loss of key personnel, or the failure to plan adequately for succession or develop new talent may impact the reputation of the Group, or lead to a disruption in the leadership of the business. |
Mitigation Each division or function holds talent and succession plan reviews at least annually. These plans are reviewed |
|---|---|---|
| Trend | Competition for personnel is intense and the Group may not be | by the Nomination Committee. |
| Reduced | successful in attracting or retaining qualified personnel, particularly engineering professionals. In addition, certain personnel may be |
Remuneration packages, including variable and long-term elements of the |
| Velocity Low |
required to receive security clearance and substantial training to work on certain programmes. The loss of key employees, the Group's inability |
compensation arrangements, are evaluated regularly against market practice. |
| to attract new or adequately trained employees, or a delay in hiring key personnel, could seriously harm the Group's business. |
The Chief Executive assesses, on an annual basis, the Top 25 people in the organisation |
|
| Over time, our competitive advantage is defined by the quality of our people – should we fail to attract, develop and retain key talent, in time our competitive advantage will erode, leading to weaker |
for performance, skills and competencies and presents development and succession plans to the Board. |
|
| growth potential or returns. |
lifecycles, increasing the need for innovation. Additionally, the entry of new competitors, the consolidation of existing competitors and changed or irrational competitor behaviour could significantly affect the Group's
The failure of the Group to develop its products and services, or more effective innovation by a competitor, could have a materially adverse
Leadership development programmes and formal career counselling support the talent pipeline.
Read more on pages 67-69
| Potential impact Medium Trend |
Risk and potential impact Failure to deliver, in a timely fashion or at all, the products and services Smiths is obliged to deliver, or any fault in contract execution due to delays or breaches by its suppliers or other counterparties, may lead to higher costs, liquidated damages or other penalties. |
Mitigation Contracts are managed and delivered by programme management teams that regularly review contract risks and take appropriate action. |
|---|---|---|
| No change | Differences between the estimated costs in the Group's medium and long-term contracts and actual costs may arise from a number |
A Group-level procedure for reviewing and approving high-risk contracts is in place. |
| Velocity Low |
of factors including production delays, cost overruns and other items. Certain of the Group's contracts, particularly those with governments, may include terms that provide for unlimited liabilities on the part of the Group or allow the government body or counterparty to terminate unilaterally, reduce or modify the relevant contracts or seek alternative sources of supply at the Group's expense. |
Divisional boards review significant contracts. The diversified nature of the Group mitigates the exposure to any single contract. |
| Potential impact Low |
|---|
| Trend No change |
Velocity Low
Targeted acquisitions and selected disposals form part of the Group's growth strategy. The success of our acquisition strategy depends on identifying targets, obtaining authorisations and having available financing. Even if an acquisition is completed, the acquired products and technologies may not be successful or may require significantly greater resources and investment than anticipated.
The Group may not be able to integrate the businesses that it acquires. If integration is unsuccessful, anticipated benefits are not realised or trading by acquired businesses falls below expectations, it may be necessary to impair the carrying value of these assets.
The Group's return on capital employed may fall if acquisition hurdle rates are not met. The Group's financial performance may suffer from goodwill or other acquisition-related impairment charges. Insufficient allowance for indemnities and warranties given at disposal may affect our financial position.
A Group-level procedure for reviewing and approving high-risk contracts is in place.
The diversified nature of the Group mitigates
The Executive Committee and Board review the acquisition pipeline. There are monthly reviews by the divisional presidents with strategy leads for each division.
We perform comprehensive strategic and financial reviews of all opportunities. Detailed due diligence, including an assessment of the target's talent and competencies, and integration planning is undertaken and reviewed in accordance with Group policy.
The Board only authorises acquisitions after completion of due diligence, and approval is subject to meeting the capital allocation and other financial hurdles set by the Board. The Executive Committee reviews postacquisition performance and integration.
On disposals, the Group seeks to minimise its exposure to indemnities and warranties and any that are provided are reviewed on a regular basis.
| Potential impact Medium to high |
|---|
| Trend No change |
| Velocity |
High
The Group's information systems, personnel, facilities and products are subject to security risk. The Group is dependent on information technology systems for both internal and external communications and for the day-to-day management of its operations. The incidence and sophistication of cyber-security crime is on the rise and some Group companies operate in sectors where cyber-criminals are active.
Any disruption to the information systems could have significant adverse consequences on the Group's operations or its ability to trade. It could result in the loss of confidential information and intellectual property, which could affect the Group's competitive position and cause reputational damage.
Oversight by the Board ensures information and cyber-security risks have an ongoing and proactive focus with an integrated business-wide approach.
Over the last year, Group capabilities were further evolved and Information Technology and Product resources and capabilities were expanded.
The Group works with advanced technology partners to implement technology solutions as well as following industryrecognised frameworks.
Compulsory awareness training has been deployed to all employees, alongside a rolling real-life simulation programme which ensure that employees are fully aware of the external threats faced by individuals from attacks such as Phishing on a daily basis.
The Group also works with external cyber sharing partnerships, sharing best practice and threat information.
At the heart of our business is a commitment to doing the right thing: behaving ethically, working safely, reducing our environmental impact, attracting and developing our people and contributing to our communities.
Our Code of Business Ethics provides the framework for our approach and CR focus areas.
Promoting a culture of responsibility, developing smarter ways of working and attracting the best talent, and delivering operational efficiencies to enhance margins form key elements of our values and business strategy, and add long-term value for our shareholders and our wider stakeholders.
| 1 | 2 |
|---|---|
| We comply with the law | We compete fairly |
| 3 | 4 |
| We act with integrity in all our | We treat suppliers, partners and |
| business dealings | customers properly |
| 5 We treat our co-workers respectfully |
6 We contribute to healthy, safe and secure workplaces |
| 7 | 8 |
| We respect the environment | We contribute to our communities |
| 9 We participate in relevant public debates |
10 We respect human rights |
| 11 We have high standards of financial record-keeping and reporting |
12 The Code applies to all of us |
Many of our products and services benefit the environment and contribute to the safety, health, security and productivity of people around the world. For example, Smiths Detection's security scanners play a vital role in helping to prevent terror attacks, while John Crane's seals help its customers to reduce their environmental impact. Similarly, how we do business is critical to our long-term success.
Conducting our business responsibly enables us to meet our obligations to our stakeholders and delivers real business benefits, creating long-term value for shareholders by:
Our approach also helps us to address key trends in our markets, including an increased focus on avoiding bribery and corruption, increased competition for talent in many of the global markets in which we operate, focusing more pressure on energy and water use, climate change, and materials safety, and enhancing our ability to recycle waste and products which have reached the end of their useful life.
Here we provide an overview of our approach and performance. Further detail on our approach, CR governance, performance and case studies can be found in our 2016 CR Report, which is available to download from www.smiths.com
Our Code of Business Ethics sets out 12 broad principles for how we do business, based on integrity, honesty, fairness and transparency. It provides the framework for our policies, programmes and procedures for a range of CR issues and is intended to instil responsible business practices across the business, enabling our employees to make ethical decisions, every time.
We focus on five priority issues: ethics, the environment, health and safety, our people, and the communities in which we operate.
As a global technology company operating in highly regulated sectors, building strong relationships with our employees, customers, governments and their agencies, regulators and suppliers across the globe is critical to our long-term success.
Our employees are key to delivering our strategy and are committed to attracting, retaining, developing, engaging and inspiring the best talent.
Strong, long-term customer relationships underpin our success. Many of our products are developed to meet customers' specific needs and our aftermarket services, especially in Smiths Detection and John Crane, help to build customer loyalty and improve our insight.
We engage with governments, their agencies and regulators directly through our divisions and a centralised Government Relations team, as well as working in partnership with industry bodies to leverage the benefits of scale.
We work with a broad range of suppliers and partners, such as distributors, across the Group and we require them to maintain high ethical standards comparable to our own (see pages 63 to 64).
We believe ethical behaviour is the responsibility of every Smiths employee, at every level of the organisation.
Our objective is not only to protect the reputation of our company and to safeguard the investment of our shareholders, but also to protect the interests of every employee by ensuring he or she has the knowledge and tools necessary for individual legal or regulatory compliance and ethical decision-making.
Held regional Business Ethics Forums in Brazil and China. These highlighted the need for all employees to take responsibility for ethical compliance
Met with key suppliers to discuss the Supplier Code of Business Ethics, which sets a minimum standard for ethical operations and behaviours of third parties
Held an International Trade Compliance Forum in Washington, DC to focus on specific trade compliance risks
Updated online training courses addressing the Smiths Code of Business Ethics and held employee focus sessions to gauge knowledge and understanding
Extended MyVoice global employee engagement survey to offer all employees an opportunity to assess the effectiveness of the Smiths Ethics programme
Engaged an external data collection agency to assess compliance risks for certain of our suppliers in high-risk countries
Our ethics programme is focused on continuing to embed the Code and ethicsand compliance-related policies through communication, training and awareness programmes. We aim to ensure our employees understand our expectations and are able to make the right, ethical decision every time and to know when to ask for help, as well as to ensure compliance with our ethics-related policies and controls and the laws and regulations of the jurisdictions in which we operate.
We continually review and update our policies and business controls to mitigate changing areas of risk. We also review, evaluate and update our ethics programme, systems and procedures for fostering, monitoring and auditing ethical business conduct.
Other focus areas include expanding our online training, encouraging open discussion of ethical risks with employees at every level of the organisation, developing additional policies to enhance governance of key risk areas, and continued collaboration with Internal Audit, as part of our risk management and assurance processes.
We regularly expand and update communications and training on key compliance areas to address evolving global risks, changes in laws and regulations, and enforcement trends in jurisdictions around the world. We also increase the number of languages in which training is offered to ensure we reach Smiths employees around the world as we expand. Our courses include global competition and international trade law, encompassing compliance with national laws governing import and export, and applicable embargoes and sanction programmes.
We use frequent, targeted communication and face-to-face training to spread the ethics and compliance message to every employee. Following the success of our global ethics forums over the past four years we have held several regional programmes in Brazil and China, exploring the individual ethical responsibility of every employee.
We also require our suppliers and partners to uphold our standards. To support this, we offer online training on Ethics for Third Parties for our agents, distributors and external sales representatives. Our Supplier Code of Business Ethics is available externally on the Smiths website and is provided to all major suppliers. The Supplier Code and our contractual provisions require suppliers to maintain high ethical standards in line with our Supplier Code or their own comparable ethics programme.
We encourage employees who have concerns or queries about the Code to raise them with line management, Human Resources or their local in-house legal counsel. If employees have concerns they do not feel comfortable discussing with line management or their local HR or Legal teams, they can report those concerns through our confidential Ethics Alertline, which is managed by a third party and enables them to report these directly to the Ethics and Compliance function. It is available 24/7 via email, the internet and toll-free phone numbers, in every language used by Smiths employees. All issues are addressed promptly and referred, as required, to relevant internal or external specialists for investigation. Our non-retaliation policy means that any employee who in good faith reports an act of apparent misconduct or unethical behaviour will not be victimised or treated adversely.
We seek to ensure that all sales and exports of defence equipment are undertaken in accordance with international trade regulations and national government export approval procedures and regulations, such as the International Traffic in Arms Regulation and the Export Administration Regulations in the US. These laws prohibit export of certain items to specific countries. The Group's policy is to adhere to all relevant government guidelines designed to ensure that products are not incorporated into weapons or other equipment used for the purposes of terrorism or abuse of human rights, with internal controls to ensure compliance with these guidelines.
Smiths seeks to uphold all internationally recognised human rights wherever its operations are located. Within this framework, we do not tolerate the use of child or forced labour at Smiths facilities or those of our suppliers. The Supplier Code of Business Ethics and contractual clauses incorporate and implement these prohibitions. Furthermore, we take all steps reasonably possible to ensure our products are not used to abuse human rights. This year Smiths produced its first Modern Slavery Statement in line with the UK Modern Slavery Act. This can be found at www.smiths.com
Hold regional ethics conferences in countries considered a compliance risk
Continue to update our training and compliance programmes in line with changing business needs and regulations
Continue to refresh employees' online Code of Business Ethics training every two years
Ensure suppliers understand our ethical standards and requirements to support the new Supplier Code of Business Ethics, including the prohibition of any abuse of human rights, such as slavery and human trafficking
Continue to ensure ethics messages are received and understood by all employees worldwide
Refresh our compliance risk assessments for all businesses and all regions
Expand our positive assurance programmes for significant risk areas
We are committed to achieving excellence in environment, health and safety management and performance.
Our aim is to provide effective leadership in the pursuit of injury-free and environmentally responsible workplaces.
Developed new global technical minimum safety standards for serious EHS risks
Completed formal sustainability materiality assessments in two divisions
Reduced injury incident rate to lowest historical level
Environmental performance continued its long-term improvement trend
Updated our multi-year EHS strategy with increased focus on safety culture and behaviours
Our environmental, health and safety (EHS) approach starts with our EHS policy, and is supported by our EHS strategy, KPIs and goals. Our divisions have responsibility for EHS matters within their business, and adapt the Group EHS strategy to improve their EHS management and performance.
We believe in continuous improvement and use management systems to realise its benefits. These systems identify risks and issues, helping sites to prioritise the most significant risks.
We aim to provide injury-free and environmentally responsible workplaces in order to protect our employees, communities, environment and shareholder value by effectively managing safety and environmental risks.
We align our EHS KPIs to our strategy, allowing us to assess our progress and form part of our senior management performance assessment.
In 2013, we set new five-year targets for our environmental metrics. Our targets are to achieve 15% reductions in energy usage, greenhouse gas emissions and waste generation, and a 10% reduction in water usage by 2018, all normalised to revenue against a baseline of 2013.
Our greenhouse gas (GHG) emissions calculation methodology closely follows the Greenhouse Gas Protocol and includes emissions from sources under our control. In addition, the inventory consists of Scope 1 (direct GHG emissions from sources owned or controlled by the company) and Scope 2 (GHG emissions from the generation of purchased electricity consumed by the company) emissions. In 2014, an external adviser performed a review of our GHG emissions calculation methodology and prepared a GHG Inventory Management Plan that has been used to further align our emissions calculation methodology with the GHG Protocol. It was concluded that emissions from vehicles, production processes and fugitive sources are small and not material compared to our total GHG emissions. Due to the difficult nature of collecting emission data from these sources and their immateriality, they have been excluded from the inventory totals. The materiality of these sources will be reviewed again in the future.
Over the past six years, we have significantly reduced our environmental impact with 21% energy, 38% GHG, 16% water and 25% non-recycled waste reductions, normalised to revenue.
Compared to our baseline year of 2013, we have achieved good progress in reducing our environmental metrics with GHG and non-recycled waste reductions already exceeding our five-year goal. During 2016, our overall environmental performance continued its long-term improvement trend with normalised reductions in energy, GHG emissions, and non-recycled waste while water usage increased slightly. Absolute environmental metrics reduced in 2016 with 9% energy, 17% GHG and 5% non-recycled waste. Absolute water usage increased 1%.
The Group is committed to protecting, as far as reasonably practicable, the health and safety of its employees. Our employees recognise this commitment and workplace safety continues to be the highest scoring dimension in our Group-wide employee engagement surveys.
Our Group-wide activities to reduce incidents have focused on improving our safety culture, behaviours and risk reduction. We continue to implement and build on these activities and are monitoring them through our Safety Leading Indicator Activities Programme. We use a safety leading indicator activity score as a KPI, which is supported by the recordable incident rate (RIR).
Our 2016 safety performance metrics were the Safety Leading Indicator Activity score, RIR and Lost Time Incident Rate (LTIR). Our safety leading indicator activities were split between Group-wide and divisionspecific activities, which allowed us to further target the individual improvement needs of each division.
As part of our strategic plan update and benchmarking in 2013, we also revised our safety performance targets. These targets increase our focus on leading indicator activities designed to improve safety culture, behaviours and reduce the risk of incidents. Our ultimate goal is 'zero harm' to employees. Adopting this aim further emphasises to employees and other stakeholders how seriously we take our safety performance. These metrics have placed less emphasis on RIR, but we continue to monitor RIR and the LTIR, and investigate incidents for contributing factors and trends to help focus risk assessments.
Total energy '000MWh 252,000 MWh
| 2016 | 252 |
|---|---|
| 2015 | 278 |
| 2014 | 284 |
| 2013 | 280 |
| 2012 | 279 |
'000 tonnes
79,000 tonnes
| 2016 | 79 |
|---|---|
| 2015 | 95 |
| 2014 | 102 |
| 2013 | 104 |
| 2012 | 107 |
'000m3 428,000m3
| 2016 | 428 |
|---|---|
| 2015 | 425 |
| 2014 | 457 |
| 2013 | 456 |
| 2012 | 456 |
'000 tonnes
4,900 tonnes
| 2016 | 4.9 |
|---|---|
| 2015 | 5.1 |
| 2014 | 5.6 |
| 2013 | 6.1 |
| 2012 | 5.8 |
A small number of historical metrics have been revised marginally to reflect refinements in monitoring
| Target 2013-18 | 2016 progress against 2013 | |
|---|---|---|
| Energy | 15% reduction | 7% reduction |
| Greenhouse gas emissions | 15% reduction | 22% reduction |
| Total non-recycled waste | 15% reduction | 18% reduction |
| Water consumption | 10% reduction | 3% reduction |
Reduction targets are compared to the 2013 baseline year and normalised to revenue consolidated at 2016 closing exchange rates.
86 MWh/£m revenue
| 2016 | 86 |
|---|---|
| 2015 | 93 |
| 2014 | 93 |
| 2013 | 92 |
| 2012 | 94 |
Total CO2 emissions Tonnes/£m revenue 27 tonnes/£m revenue
| 2016 | 27 |
|---|---|
| 2015 | 32 |
| 2014 | 33 |
| 2013 | 34 |
| 2012 | 36 |
m3 /£m revenue 145 m3 /£m revenue
| 2016 | 145 |
|---|---|
| 2015 | 142 |
| 2014 | 150 |
| 2013 | 150 |
| 2012 | 153 |
Tonnes/£m revenue 1.7 tonnes/£m revenue
| 2016 | 1.7 |
|---|---|
| 2015 | 1.7 |
| 2014 | 1.8 |
| 2013 | 2.0 |
| 2012 | 2.0 |
Where an employee requires medical attention beyond first aid (per 100 employees per year)
Where an employee is unable to work the day after an incident (per 100 employees per year)
| 2016 | 0.14 |
|---|---|
| 2015 | 0.22 |
| 2014 | 0.22 |
| 2013 | 0.22 |
| 2012 | 0.21 |
From 2004 to 2016, we achieved a significant reduction in our RIR, improving from 4.6 to 0.47, achieving our lowest RIR in 2016. We also focus on sites that experience increased incidents. This focus has already delivered significant improvements as we continue to drive world-class standards across the business.
After several years of a steady LTIR, we experienced a good reduction in 2016 to 0.14. Over the past thirteen years, we experienced three occupational fatalities with an employee at a former facility in Sweden in 2003, a contractor in Costa Rica in 2007, and an employee in a vehicle accident in 2014.
Implement new global technical minimum standards to address serious EHS risks
Focused leadership and employee training to support safety culture and behaviours
Update safety external benchmarking study to further identify areas of opportunity to support world-class safety
Building a learning organisation that attracts, retains, develops, engages and inspires the right people with the right skills is central to our ambition of transforming Smiths into a world-class organisation and supporting our growth ambitions.
We believe that people excellence is a strong enabler of business growth, and we develop our employees' capabilities so they can fulfil their potential and help us reach ours.
Conducted a comprehensive MyVoice global employee engagement survey
Launched the Smiths Excellence Awards to showcase and celebrate exceptional behaviours and achievements across the Group
Implemented several new programmes to provide learning and career development opportunities for our employees
Created additional HR efficiencies to ensure employees get the right information, faster
The Board places a high priority on attracting and retaining the right people and the Chief Executive is the Board member nominated to bring these ambitions to life. He is supported by the Group Human Resources Director, a team of Human Resources professionals and line managers across the organisation.
We have consistently focused on strengthening our leadership capabilities and talent pipeline at both senior and junior levels, improving our recruitment and assessment techniques, succession planning and development, enhancing employee engagement, and transforming our HR function to provide a strong platform for growth. We benchmark the effectiveness of our processes against world-class standards and put in place year-on-year improvement plans to help us become best-in-class.
As we work to transform Smiths into a world-class organisation, a talented and determined workforce, united by commercial acumen, an appetite for innovation, strong leadership and a commitment to collaboration and inclusion, will be essential to achieving our ambitions. To support this, we will continue to develop our leadership capabilities throughout the organisation to ensure we have the depth and breadth necessary to support growth; deepen our focus on our technological and engineering expertise in order to drive innovation and maintain our technological leadership; and continue to build employee engagement across the business in response to the global employee engagement survey and ongoing feedback.
We aspire to have a culture that is engaging, respectful, fair and diverse, and rooted in the regular giving and receiving of feedback. We recognise our employees' contributions and growth, and we are proud of both our heritage and our future.
We are on a journey to transform our culture, and to bring greater unity and strength across the Smiths divisions. These efforts will create more development opportunities for our employees and leaders and bring greater strength and recognition of the Smiths Group brand.
Communication, engagement and inclusion are at the heart of this journey. We have reached out to more than 600 employees across 20 countries to hear their feedback and insights into what makes Smiths great, and what we can do to better support employees. We will continue to engage with employees in different ways as we focus on culture and communication as part of our renewed focus on people excellence.
Our MyVoice survey is one valuable tool we use for measuring engagement and providing insights into our employees' experiences and perceptions. In March, we conducted our fourth global survey. We achieved a participation rate of 86% across the Group, and benchmarked results against global norms for the manufacturing industry. We will use the data and insights gained from this survey to identify our global priorities for 2017 and beyond.
Our focus on leadership development has delivered enhanced capability in our talent pipeline, through a more rigorous and consistent approach to assessing and developing talent and a greater focus on personal development plans. We have also invested significantly in our leadership development programmes across the Group and continue to add new opportunities to ensure our leaders have the skills, insights and support to be truly effective. These programmes challenge and engage our employees, build their understanding of the wider Group, increase their exposure to our senior leaders and enhance their core leadership competencies. The programmes will also improve the diversity of candidates, especially in the areas of gender, geography, and educational routes. More than 600 leaders from across the business have been on or are currently participating in these programmes.
We provide a variety of other learning and training opportunities, ranging from workshops and mentoring to online resources and internal and external training courses. Personal development planning and identification of training and development needs form a key part of our annual performance review process and we have implemented a new development programme for managers that helps them better coach and develop their employees, maximising the outcomes of the annual review process through ongoing development conversations and feedback.
We constantly challenge ourselves to have the right skills and competencies to support our growth ambitions. We believe this is best achieved through a healthy balance of recruiting the very best external candidates to bring fresh approaches and perspectives, while also strengthening our internal talent pipeline. For 2017, we will focus on building new relationships with universities, and new rotational and apprentice programmes for new graduates while continuing to expand our internal learning programme offerings and other development opportunities.
Managing and differentiating performance is critical to ensuring our employees fulfil their potential and deliver outstanding business results. In a competitive marketplace, we recognise the importance of rewarding employees appropriately and aim to offer compensation and benefits packages that enable us to attract, develop and retain key talent. We have also created the new Smiths Excellence Awards to reward and recognise the highest levels of achievement and impact in the six areas of our Excellence system: Customer, People, Production, Programme, Supply Chain and Technology.
With operations in more than 50 countries and a strategic focus on innovation and expanding into new geographic markets, having a diverse, engaged workforce that reflects our geographic footprint and brings local knowledge, fresh perspectives and constructive challenge is critical. We aim to provide an inclusive, collaborative culture that values every individual, fosters collaboration, and provides the tools, opportunities and challenges to enable them to fulfil their potential and add value to the business.
At the end of 2016, 38% of our global workforce and 18% of our senior managers were women. We are committed to increasing the diversity (in its broadest sense) of our workforce, and our two leadership development programmes aim to increase the diversity of candidates for senior positions. Two of our Board directors are women, representing 22% of the Board as at 31 July 2016, which is slightly below the level recommended by the Women on Boards Davies Report.
| Male | Female | Total | |
|---|---|---|---|
| Board directors | 7 | 2 | 9 |
| Senior managers* | 209 | 46 | 255 |
| Total employees | 13,700 | 8,300 22,000 |
*Senior managers are as defined by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, which includes employees who have responsibility for planning, directing or controlling the activities of the Group or a strategically significant part of the Group (other than Board members) and/or who are directors of subsidiary undertakings
It is our policy to provide equal employment opportunities. The Group recruits, selects and promotes employees on the basis of their qualifications, skills, aptitude and attitude. In employment-related decisions, we comply with all applicable antidiscrimination 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 aptitudes and abilities. We endeavour to find appropriate alternative jobs for those who are unable to continue in their existing job because of disability.
All our employees are treated with respect and dignity. Accordingly, any harassment or bullying is unacceptable. The Group respects the right of each employee to join or not to join a trade union or other bona fide employee representative organisation.
John Crane set up engineeringU as a 12-month accelerated development programme in 2014 to attract, develop and retain talented engineering graduates at a time when competition for STEM talent has never been greater. Since its inauguration, the programme has not only succeeded on these terms, but is also helping to improve the business overall by bringing fresh thinking to projects at an early stage.
The programme combines engineering and leadership development, through interactive workshops, coaching, self-study and business projects – giving graduates both the technical ability and confidence to move into permanent roles.
When new businesses are acquired, we implement plans to integrate them into the Group, ensuring that our business ethics, employee development and EHS policies and programmes are well embedded. We regularly review our processes in these areas, to identify any opportunities to improve.
Introduce a culture transformation focused on enhanced communication, collaboration, inclusion and excellence
Continue to develop leadership capabilities across the organisation
Deepen our commitment to and our development of STEM talent, including an increased focus on recruiting new graduates and providing expanded internship opportunities
Continue to align our reward and recognition approaches to highlight and reinforce excellence
Contributing to the communities in which we operate benefits both local people and our business.
It helps to drive prosperity in local communities, enhances our profile and reputation, promotes employee engagement and attracts new employees.
Given the diversity of our business and our decentralised structure, our community relationships and charitable programmes are primarily managed at a local level to allow our businesses to focus on the needs of their markets and communities. We also offer some Group-level support to charities and organisations that can demonstrate how a donation will enhance the well-being of people through improved education, health and welfare, or environment.
In 2016, we made charitable donations of £258,000 as a Group. Our employees also raised money for a wide range of charitable causes through a variety of fund-raising initiatives across the business.
Continue to engage with the communities in which we operate across the Group
The Strategic report was approved by the Board on 27 September 2016.
By order of the Board
Andy Reynolds Smith Chief Executive
Giving back to the community
a playground at a shelter for abused women, to hosting a carnival for children with special needs, Tutco is constantly searching for a new cause or need in the community.
Tutco General Manager Dane Owen said: "This year we all enjoyed a day replanting the garden at a local nursing home. It was such a pleasure to meet all the staff and we had a great time organising social activities for the residents."
| Board of directors | 72 |
|---|---|
| Corporate governance statement | 75 |
| Directors' remuneration report | 94 |
| Group directors' report | 115 |
Sir George Buckley Chairman
Sir George Buckley joined the Board on 1 August 2013 as a non-executive director and Deputy Chairman and was appointed as its Chairman on 19 November 2013.
Sir George has a PhD in Electrical Engineering. Sir George retired in 2012 as Chairman and CEO of 3M, the US-based global technology company and Dow Jones 30 component, after a long and successful business career spent mainly in the United States. He was previously Chairman and CEO of Brunswick Corporation and Chief Technology Officer for appliances, motors and controls at Emerson Electric Company. Sir George's expertise in engineering and innovation, combined with his extensive experience of large, multi-industry businesses that operate in global markets, are of huge benefit to Smiths.
Chairman of Ownership Capital
Non-executive director of Hitachi, Ltd.
Non-executive director and a member of the Audit Committee of PepsiCo, Inc.
Non-executive director and member of the Audit and Compensation Committees of Stanley Black & Decker, Inc.
Andy Reynolds Smith Chief Executive
Andy Reynolds Smith joined the Company as Chief Executive on 25 September 2015.
Before joining Smiths Group, Andy was Chief Executive Automotive at GKN plc, serving on the Board from 2007. He joined GKN in 2002 and held a number of senior positions across the Group, which included leading the Driveline, Powder Metallurgy and Land Systems divisions. In previous roles, Andy was Managing Director Europe for Ingersoll Rand's Bearings and Components business, Vice President International Operations at Invensys, and UK Country Director and Global Customer Director (Japan) for Delphi Automotive Systems. Andy began his career as an electrical and electronic apprentice with Texas Instruments. He is a former Chairman of the CBI Manufacturing Council and a former member of HM Government's Ministerial Advisory Group for Manufacturing and Green Economy Council. Until May 2016, he was a non-executive director of Morgan Advanced Materials plc. Andy has extensive experience in delivering significant growth in China and in driving business strategy, technological innovation and operational excellence.
Chris O'Shea Chief Financial Officer
Chris O'Shea joined the Company as Chief Financial Officer on 18 September 2015.
Chris is a qualified Chartered Accountant with a finance degree from the University of Glasgow and an MBA from Duke University. Chris joined Smiths Group from the metals technology company, Vesuvius plc, where he was the CFO from 2012, following its demerger from Cookson Group plc. He was also a non-executive director of Foseco India Ltd, an Indian-listed supplier to the foundry industry and a part of Vesuvius plc. Chris has also held a number of senior finance roles at BG Group, latterly serving as CFO for the group's businesses in Africa, the Middle East and Asia. From 1998 to 2005 Chris worked in the UK, the US and Nigeria for Royal Dutch Shell in a variety of roles, including CFO for Shell's offshore exploration and production business in Nigeria. Chris has wide knowledge and experience of multi-national operations, including the manufacturing and oil and gas sectors. He also has experience of international tax and financing through roles at Ernst & Young and Royal Dutch Shell.
Melanie Rowlands Company Secretary & Deputy Group
Mel was appointed as Company Secretary on 29 May 2015.
Mel holds an MA in Law from Oxford University and is a qualified solicitor. She joined Smiths in 2013, having previously held senior roles in BG Group plc and Linde AG. Most recently, she was the General Counsel of British Gas and Legal & HR Director of Edwards Group.
Audit Committee
Nomination Committee Remuneration Committee
Denotes Chair of the Committee
Committee membership
Bruno Angelici was appointed to the Board as a non-executive director on 1 July 2010.
Bruno has Business and Law degrees from Reims and an MBA from Kellogg School of Management. His career includes senior management roles in pharmaceutical and medical device companies. Bruno retired from AstraZeneca in 2010 as Executive Vice President, International after a 20-year career. He was responsible for Europe, Japan, Asia Pacific, Latin America, Middle East and Africa and originally joined as President of ICI Pharma France. Prior to this, he was at Baxter, a US-based global supplier of medical devices. He has extensive international experience, including in the US, and brings a deep understanding to the Group of the medical device and pharmaceutical industries.
Member of the Global Advisory Board of Takeda Pharmaceutical Company Ltd, Japan
Non-executive director and a member of the Nomination Committee of Novo Nordisk A/S, a Danish healthcare company
Member of the Supervisory Board and the Audit Committee of Wolters Kluwer nv, a Dutch-based information services and publishing company
Chairman of the Board and a member of the Nomination and Remuneration Committees of Vectura Group plc, a UK-listed specialty pharmaceutical company
Tanya Fratto Non-executive director
Committee membership
Tanya Fratto was appointed to the Board as a non-executive director on 1 July 2012.
Tanya is a qualified electrical engineer with a BSc in Electrical Engineering. She was CEO of Diamond Innovations Inc., a world-leading manufacturer of super-abrasive products for the material removal industry, until 2010. Before that she enjoyed a successful 20-year career with GE. She held a number of senior positions in product management, operations, Six Sigma and supply chain management. Tanya provides Smiths with wide experience in product innovation and sales and marketing in a range of sectors.
Non-executive director and a member of the Audit Committee of Advanced Drainage Systems, Inc., a US-listed water management and drainage company
Non-executive director and a member of the Nomination and Remuneration Committees of Ashtead Group plc, a UK-listed international equipment rental company
Committee membership
Anne Quinn was appointed to the Board as a non-executive director on 1 August 2009.
Anne has a BCom from Auckland University and MSc in Management Science from the Massachusetts Institute of Technology. Anne spent her early career with NZ Forest Products Limited and US management consulting company, Resource Planning Associates. She has extensive overseas experience in the oil and gas sector, having enjoyed a successful 25-year career with Standard Oil of Ohio and BP. She held a number of executive positions including Group Vice President in the US, Belgium, Colombia and the UK. Following her career with BP, Anne was the managing director of Riverstone LLP, an energy private equity group. Anne's experience is a great benefit to the Group in its development of new geographic markets and its exposure to the oil and gas sector.
Senior Independent Director and Chair of the Remuneration Committee of Mondi plc and Mondi Limited, a packaging and paper company, dual-listed in the UK and South Africa
Committee membership
Bill Seeger was appointed to the Board as a non-executive director on 12 May 2014.
Bill has a BA in Economics and an MBA, both from UCLA (University of California, Los Angeles). Bill joined GKN plc, the global engineering company, in 2003 as Senior Vice-President and Chief Financial Officer of Aerospace. In 2007 he became a member of the Executive Committee as President and Chief Executive Propulsion Systems and Special Products before being appointed to the Board as Group Finance Director the same year. Bill retired as the Finance Director of GKN in 2014. He previously held a number of senior finance posts during a 28-year career with TRW, the US-based automotive and aerospace group. His long career in finance in the engineering sector and in-depth knowledge of global markets, contracting and strategy execution greatly benefits Smiths.
Non-executive director and Chairman of the Audit and Risk Committee of Spectris plc, a UK-listed instrumentation and controls company
Visiting Professor – UCLA Anderson School of Management
Mark Seligman was appointed to the Board as a non-executive director on 16 May 2016.
Mark is a Chartered Accountant, with a MA in Philosophy, Politics and Economics. He is a former Chairman of UK investment banking for Credit Suisse and previously served in senior roles at S.G. Warburg. He is also a former Chairman of the UK Government's Industrial Development Advisory Board. He has served as non-executive Deputy Chairman of G4S plc and chaired its Audit Committee. He was also a non-executive director and the chairman of the Audit Committee of BG Group plc. He brings to the Board a long and successful career in investment banking and extensive experience in corporate finance and capital markets.
Senior Independent Director and member of the Audit and Nomination Committees of Kingfisher plc
Alternate member of the Panel on Takeovers and Mergers for the Association for Financial Markets in Europe
Committee membership
Sir Kevin Tebbit was appointed to the Board as a non-executive director on 14 June 2006 and was appointed as the Senior Independent Director on 17 November 2015.
Sir Kevin has a BA in History. He held policy management and finance posts in the MoD, Foreign and Commonwealth Office and NATO. These included three years' service in Washington as Defence and European Counsellor at the British Embassy before becoming Director of GCHQ and finally Permanent Under Secretary at the Ministry of Defence from 1998 to 2005. Sir Kevin's career as a former senior British civil servant provides Smiths with considerable experience in the security and defence sectors and in government relations issues.
Executive Vice President, Government and Defence of AECOM
Senior Associate Fellow at Royal United Services Institute
Visiting Professor at Kings College, London
Member of the Advisory Board of the Imperial College Institute for Security, Science and Technology
Audit Committee
Smiths has a long and proud history, and excellence in corporate governance is essential to ensuring the Company's continued and long-term success. As the Board of Smiths we are responsible for the good stewardship of our shareholders' investment; we set the strategic direction and risk appetite within which the executive management team generate and drive value but all underpinned by a strong framework of good governance.
In this Annual Report we are reporting against the FRC's new revised UK Corporate Governance Code and the Board has adopted the revised principles and requirements it contains, including assessing the Company's long-term viability and increased focus on the Company's assurance framework for risk management. During the year we introduced an extra meeting of the Audit Committee at which the committee was able to obtain a deeper understanding of the risks of each of the business divisions and to give added focus to specific risks such as cyber-security, as well as considering the strategic risks for the Group as a whole. I am pleased with the work done in relation to setting the risk appetite for the Group, and in understanding the material risk areas in terms of multiple dimensions that include reputational impact and velocity. I think this puts us in much better shape to weather the storms to which all businesses are subject from time to time.
I reported last year that the Board had overseen a great deal of change in 2015, and we continued to support Andy Reynolds Smith and Chris O'Shea through their inductions and during their first year as Chief Executive and Chief Financial Officer, respectively. Following the retirement of David Challen from the Board after last year's Annual General Meeting, the Nomination Committee carried out a thorough review of the Board's composition, looking at the skills, knowledge and experience needed to take Smiths forward. Following a rigorous selection process I was delighted that Mark Seligman joined the Board in May as a non-executive director. Mark has had a good induction and it was helpful that he was able to join us in time for the Board's strategic review at its three-day meeting in May. I was also extremely pleased when Sir Kevin Tebbit agreed to take on the position of Senior Independent Director, as were the rest of the Board.
Throughout the year the Board has met regularly with members of the executive management team and other senior managers, during Board meetings and at other times. In particular the Board has participated in detailed strategic reviews, operating reviews and risk reviews for each of the business areas of the Group. Non-executive directors have also had the opportunity to meet with senior management less formally, during dinners and during business visits, in order to give them the opportunity to connect with individuals at various levels in the organisation.
I was interested to see the FRC's report on Corporate Culture and the Role of Boards published in July of this year which explores the responsibility of Boards for setting the right "tone at the top" and overseeing the values and culture of a business and the importance of this in ensuring effective business decisions and risk management. The Board spent time during Board meetings this year to consider the Company's ethics and anti-bribery programme, the health and safety programme, and its security and environmental sustainability programmes. The Board also considered work undertaken around the Group's supplier code of conduct and endorsed a statement for publication reinforcing our commitment to ensure there is no slavery in our operations. Which takes me back to my original theme – the key to resilience is to ensure that a business keeps the trust and respect of its internal and external stakeholders, and Smiths is absolutely committed to demanding the right behaviours at all times.
Sir George Buckley Chairman
Sir George Buckley Chairman
Throughout the period 1 August 2015 to 31 July 2016 the Company has been in full compliance with the September 2014 edition of the UK Corporate Governance Code (the 'Code'), published by the Financial Reporting Council ('FRC') and available on its website (https://www.frc.org.uk/Our-Work/Codes-Standards/Corporategovernance/UK-Corporate-Governance-Code.aspx) except that:
1) The Company has not put the external audit contract out to tender for more than ten years. Details of the Company's intention in respect of competitive audit tendering and audit firm rotation and its compliance with the Competition & Markets Authority's Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 are described in the Audit Committee report on pages 88 and 89.
2) The value of any fees received by Philip Bowman in respect of his external non-executive directorships up to the time that he ceased to be a director of the Company on 24 September 2015 is not disclosed in the Directors' remuneration report, as this has not been considered relevant to the Company.
This Corporate governance statement is a section of the Group directors' report and is incorporated into the report by reference. This statement complies with sub-sections 2.1; 2.2(1); 2.3(1); 2.5; 2.7; and 2.10 of Rule 7 of the UK Listing Authority Disclosure Guidance & Transparency Rules. The information required to be disclosed by sub-section 2.6 of Rule 7 is shown in the Group directors' report on page 117 and is incorporated into this Corporate governance statement by reference.
Succession planning for the Board and senior management remained a priority together with oversight of a focused, comprehensive induction programme for the new executive directors. The Board held its annual senior management talent and succession planning review.
Andy Reynolds Smith appointed as Chief Executive and Chris O'Shea appointed as Chief Financial Officer.
Appointment of Sir Kevin Tebbit as SID and recruitment and induction of Mark Seligman as non-executive director.
The Audit Committee added a fourth meeting to its annual schedule in order to enable a greater focus on risk assessment and management; it also monitored reporting in accordance with the UK Corporate Governance Code 2014.
The Board supported a number of Ethics programmes, including regional Business & Ethics Forums in Sao Paulo, Washington, DC and Shanghai, and approved the Smiths Modern Slavery Act Statement and a positive assurance programme for compliance issues at key suppliers in high-risk countries.
With oversight by the Board, information and cyber-security risks continued to have a proactive focus. Compulsory training was deployed to all employees, alongside a rolling real-life simulation programme aimed to make employees aware of the external threats from attacks such as phishing.
The governance structure of the Group is illustrated below. The Board is responsible to stakeholders for overseeing these activities and supervising management in its implementation of the strategy within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board is also responsible for setting the Company's culture of ethical behaviour and compliance, and for promoting policies and providing oversight. The main activities of the Board are listed on page 78. In line with the UK Corporate Governance Code certain Board responsibilities are delegated to Board Committees which play an important role in supporting the Board (their terms of reference are available on our website). In addition, the work of the Chief Executive's Committee in executing the Group's strategy is supported by a number of sub-committees.
| Board and Board Committees | ||
|---|---|---|
| Board | ||
| Reviews and approves strategy, budgets and plans and ensures governance, risk and control framework |
||
| Nomination Committee | Remuneration Committee | Audit Committee |
| Reviews and makes recommendations to the Board on structure, size and composition of Board and Board Committees and succession planning for directors and senior management |
Makes recommendations to Board on remuneration framework and remuneration of Chairman, executive directors and senior management |
Monitors integrity of financial statements, internal control systems and risk management and internal and external audit controls |
| Executive Committee | Investment Committee | Disclosure Committee | Acquisitions & Divestments Committee |
|---|---|---|---|
| Develops and recommends strategy to Board, recommends budgets and plans to Board and executes strategy and drives performance to budget and plans |
Assesses high-value/ high-risk proposals, capital expenditure, asset disposal and special revenue expenditure projects that need Board or CEO approval |
Advises CEO and Board in accordance with Disclosure Policy. Makes recommendations concerning identification of inside information and the timing and method of disclosure |
Approves mergers, acquisitions, disposals and joint ventures within parameters delegated by Board |
In addition to the above there are a number of functional committees which include the Environmental Health & Safety Steering Committee, the Company's innovation council, known as i 3 , and the Ethics Code Compliance Council.
The Board holds formal meetings at least six times a year to make and review major decisions and monitor trading against the plans which it has approved, and holds additional meetings to consider the strategy of each of the divisions and the overall strategy of the Company. Further meetings are arranged as necessary to deal with urgent items. The Board exercises control by determining matters specifically reserved to it in a formal schedule which only the Board may change: these matters include the acquisition or divestment of significant companies or businesses, the issue of shares, significant contractual commitments, the review of the effectiveness of risk management processes and major capital expenditure.
The Board sets the Company's values and standards, including the Company's Code of Business Ethics which is referred to on pages 61 to 64. The role of the Board in the governance of the Group is illustrated in the diagram on page 77 and its main activities are outlined in the diagram below.
The executive directors and senior management team are responsible for the Company's financial performance, the day-to-day management of the Company's businesses and implementation of the strategy and direction approved by the Board.
•KPIs
As at 27 September 2016, the Board comprises Sir George Buckley (Chairman), Andy Reynolds Smith (Chief Executive), Chris O'Shea (Chief Financial Officer) and six independent non-executive directors: Bruno Angelici, Tanya Fratto, Anne Quinn, Bill Seeger, Mark Seligman and Sir Kevin Tebbit (Senior Independent Director). On 18 September 2015 Chris O'Shea was appointed as Chief Financial Officer and succeeded Peter Turner (who resigned as Finance Director on 24 April 2015) and Rob White (who acted as interim CFO until Chris O'Shea's appointment). Andy Reynolds Smith was appointed as an executive director and as the Chief Executive on 25 September 2015 (his predecessor, Philip Bowman, having stepped down as Chief Executive and as a director of the Company on 24 September 2015). David Challen retired as a non-executive director at the conclusion of the Annual General Meeting ('AGM') in November 2015. On 16 May 2016 Mark Seligman was appointed as a non-executive director of the Company. Biographies of the current directors are set out on pages 72 to 74.
The Board and its committees have the appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively. The wide-ranging experience and backgrounds of the non-executive directors ensure that they can debate and constructively challenge management in relation to both the development of strategy and the evaluation of performance against the goals set by the Board.
The Chairman meets the non-executive directors without the executive directors present after each Board meeting in order to understand their priorities and issues. He also meets with the Senior Independent Director and the Chairs of the Audit and Remuneration Committees. The Senior Independent Director meets the other non-executive directors without the Chairman present at least annually and is available to provide support to the Chairman and to serve as an intermediary for the other directors, if required.
There is a balance of executive and non-executive directors such that no individual or small group can dominate the Board's decision making. Throughout the financial year at least half the Board, excluding the Chairman, has comprised independent non-executive directors.
The FRC's UK Corporate Governance Code 2014 states that diversity is as much about differences of approach and experience as it is about gender. The Board does not endorse the setting of rigid quotas to achieve diversity but it does believe in the merits of a diverse mix of experience, interests and personalities to ensure the effective functioning of a Board in which the dialogue is both challenging and constructive. The diagrams overleaf illustrate the good balance of longer standing Board members and more recent appointments, and the diversity in gender and nationality.
The individual qualifications, strengths and experiences of the directors are included in their biographies on pages 72 to 74.
In deciding the chairmanship and membership of the Board committees, the need to refresh membership of the committees is taken into account. The table on page 79 indicates the service, to 31 July 2016, of each of the directors.
Each of the non-executive directors is considered to be independent and Sir George Buckley was considered to be independent at the time of his appointment as Chairman. In the light of the length of service of Sir Kevin Tebbit on the Board, the Board and each of its committees undertook a rigorous review of his performance, including his independence in order to evaluate his contribution to the Board and to the committees on which he sits. Sir Kevin continues to demonstrate attributes of an independent non-executive director, including contributing constructive challenge and debate at meetings, and there has been no evidence that his tenure on the Board has impacted his independence. As such the Board is satisfied that Sir Kevin continues to bring robust non-executive oversight. During the review, the Board also determined that Sir Kevin should remain in the role of Senior Independent Director (following his appointment to that role on the retirement of the previous incumbent, David Challen, on 17 November 2015).
These charts illustrate the diversity and tenure of board members as at 31 July 2016.
Four nationalities are represented on the Board (United Kingdom, France, United States and New Zealand), although the international experience of Board members is much wider than this.
The Board and Nomination Committee regularly review the mix of skills and experience on the Board. The chart illustrates the good balance of longer standing Board members and more recent appointments, providing both continuity and fresh perspectives.
The Board has established clearly defined roles for the Chairman and the Chief Executive. The Chairman is responsible for leadership of the Board, ensuring its effectiveness and setting its agenda. Once agreed by the Board as a whole, it is the Chief Executive's responsibility to ensure delivery of the strategic and financial objectives approved by the Board. During the year, the Chairman and Chief Executive have had meetings or calls at least weekly.
The Nomination Committee has a formal, rigorous and transparent procedure for the appointment of new directors, which are made on merit and against objective criteria, having due regard for the benefits of diversity, including gender. This procedure was followed in the selection and appointments of Chris O'Shea, as an executive director and Chief Financial Officer on 18 September 2015; Andy Reynolds Smith, as an executive director and Chief Executive on 25 September 2015; and Mark Seligman, as a non-executive director on 16 May 2016. Further information in relation to the recruitment of Messrs O'Shea, Reynolds Smith and Seligman is contained in the Nomination Committee report on pages 91 and 92.
The Board is satisfied that the directors are able to allocate sufficient time to their responsibilities relating to the Company. During the year, the Board considered the other engagements and proposed engagements of the directors as part of the director conflicts of interest procedure, as further described below.
All directors stand for election by the shareholders at the first AGM following their appointment. The Board has resolved that all directors who are willing to continue in office will stand for re-election by the shareholders each year at the AGM. Non-executive directors are appointed for a specified term of three years, subject now to annual re-election at each AGM, and reappointment for a second three-year term is not automatic. Any term for a non-executive director beyond six years is subject to a particularly rigorous review. The Chairman has confirmed that, following the performance reviews undertaken in 2016, the performance of each of the directors standing for re-election at this year's AGM continues to be effective and that they each continue to demonstrate commitment to their respective roles and dedicate the time necessary to perform their duties.
Under the Companies Act 2006 (the '2006 Act') a director must avoid a situation where he or she has, or could have, a direct or indirect interest that conflicts or possibly may conflict with the Company's interests. The 2006 Act allows directors of public companies to authorise conflicts and potential conflicts where appropriate and where the articles of association contain a provision to this effect. Article 65 of the Company's Articles of Association provides that the directors can authorise potential conflicts of interest.
The Board has put procedures in place for directors to report any potential or actual conflicts to the other members of the Board for their authorisation where appropriate. Each director is aware of the requirement to seek approval of the Board for any new conflict situations, as they may arise. The process of formally reviewing conflicts disclosed, and authorisations given (including such conditions as the Board may determine in each case), is repeated twice a year. Any conflicts or potential conflicts considered by the Board and any authorisations given are recorded in the Board minutes and in a register of director conflicts which is maintained by the Company Secretary.
The current directorships in listed companies and other significant commitments of the Chairman and the non-executive directors are shown on pages 72 to 74. During the year, Andy Reynolds Smith resigned as a non-executive director of Morgan Advanced Materials plc and Tanya Fratto was appointed as a non-executive director of Ashtead Group plc. It is confirmed that the Chairman and the non-executive directors have sufficient time to fulfil their commitments to the Company and that no executive director holds more than one non-executive directorship of another FTSE 100 company.
The table below shows the number of Board meetings held during the financial year ended 31 July 2016 and, opposite each director's name, the number of meetings they were eligible to attend and the number actually attended.
| Board meetings | ||
|---|---|---|
| Attended* | Eligible to attend* |
|
| Sir George Buckley (Chairman) | 11 | 11 |
| Andy Reynolds Smith | ||
| (appointed 25 September 2015) | 8 | 8 |
| Chris O'Shea (appointed 18 September 2015) | 9 | 9 |
| Bruno Angelici | 10† | 11 |
| Tanya Fratto | 10† | 11 |
| Anne Quinn | 11 | 11 |
| Bill Seeger | 11 | 11 |
| Mark Seligman (appointed 16 May 2016) | 2 | 2 |
| Sir Kevin Tebbit | 10† | 11 |
| Philip Bowman (resigned 24 September 2015) | 3 | 3 |
| David Challen (retired 17 November 2015) | 4 | 4 |
*Includes four occasions where matters were conducted by telephone conference calls and one matter approved by written resolution
†Bruno Angelici, Tanya Fratto and Sir Kevin Tebbit were each unable to attend a nonscheduled conference call meeting, called at short notice, due to prior commitments Rob White also attended three meetings as Interim Chief Financial Officer prior to the appointment of Chris O'Shea as Chief Financial Officer
During the year, the divisional general managers, heads of Corporate departments, senior managers and other external advisers were invited to attend certain Board meetings, as and when required.
The Board regards attendance at meetings as only one measure of directors' contributions to the Company. In addition to formal Board meetings, the directors attend other meetings and make site visits during the year.
As part of its 2016 schedule, the Board visited the head office and research and development laboratory of Smiths Medical in Minneapolis in July 2016. The visit included presentations on strategy, performance, operations, R&D and quality from senior management, a tour of the facility and the opportunity to meet employees in a less formal setting.
The Board is provided with detailed information up to a week in advance on matters to be considered at its meetings and non-executive directors have ready access to the executive directors and other senior corporate staff. Non-executive directors are also provided with information and updates between meetings. Regular site visits are arranged and non-executive directors are encouraged to visit sites independently. During site visits, briefings are arranged and the directors are free to discuss aspects of the business with employees at all levels.
Newly appointed directors undergo an induction programme to ensure that they have the necessary knowledge and understanding of the Company and its activities. They undertake briefing sessions on corporate governance, strategy, stakeholder issues, finance and risk management and HR, as well as meetings and site visits to business locations. Each director's individual experience and background is taken into account in developing a programme tailored to his or her own requirements. The suitability of external courses is kept under review by the Company Secretary who is charged with facilitating the induction of new directors and with assisting in the ongoing training and development of all directors. Tailored induction programmes were designed for Chris O'Shea, Andy Reynolds Smith and Mark Seligman in order to ease their transitions into their respective new roles and to expedite their integration into the Group.
All directors have access to the advice and services of the Company Secretary and a procedure is in place for them to take independent professional advice at the Company's expense should this be required.
The directors and officers of the Company and its subsidiaries have the benefit of a directors' and officers' liability insurance policy.
The Board and its committees undertake an annual evaluation of their own performance. This is conducted by external consultants at least once every three years. Last year the Board evaluation was conducted by an external consultant and the resulting actions included the introduction of a framework of periodic Board agenda items, focusing on certain key areas, such as succession planning and cyber-security risks.
In view of the changes in composition of the Board during the year, the evaluation for this financial year is being conducted with the assistance of an external consultant, Lintstock Limited (which also provides the Company with software and services for maintaining its insider list under the EU Market Abuse Regulation). The evaluation involved the completion by the directors of questionnaires relating to the performance of the Board and its committees collectively and to the personal contributions of the individual directors. The questionnaires were administered confidentially by Lintstock. The Board members were asked to mark the performance of the Board in areas such as strategy, risk management, succession planning and the overall efficiency and effectiveness of the Board. They were also asked to make specific comments and suggestions for improving the performance and efficiency of the Board. Lintstock's analysis of and report on the responses to the questionnaire will be discussed by the Board, which will review the findings and agree appropriate actions.
In addition, an evaluation of the Chairman was carried out by Sir Kevin Tebbit, as the Senior Independent Director, who sought the individual views of each of the directors. Sir Kevin then met with the Chairman to discuss feedback.
The Board continued with its practice of setting itself a series of written objectives for the financial year. Those for the year ended 31 July 2016 included the following:
The Chief Executive, the Chief Financial Officer and the Group Director, Corporate Affairs communicate with institutional investors through analysts' briefings and extensive investor roadshows in the UK, US and continental Europe, as well as timely Stock Exchange announcements, meetings with management and site visits, as shown in the table below. The Chairman also met with investors. The Senior Independent Director and the other non-executive directors are available to meet shareholders on request. Members of the Board, and in particular non-executive directors, are kept informed of investors' views, in the main through distribution of analysts' and brokers' briefings. At least twice a year a report is made to the Board on the number and types of meetings between the Company and institutional shareholders. The Board is confident that this process enables the non-executive directors to maintain a balanced understanding of the views and concerns of major shareholders.
During the year, the Chief Executive and Chief Financial Officer continued the programme of dialogues with shareholders in the UK, US and continental Europe as part of the 2016 investor relations programme, detailed below.
The Company values the contribution of its committed lending banks and bond holders to the achievement of its strategic aims. The Chief Financial Officer and the Director, Tax and Treasury meet with and communicate proactively with this investor base and the rating agencies, Standard & Poor's and Moody's, on a regular basis. There is also a formal, annual meeting with the rating agencies. They communicate with the debt markets generally via investor roadshows at the time of financing activity. Committed banks are invited to the biannual presentations of its trading results and the Capital Markets Days to enable them to keep informed of business strategy and meet both senior corporate and divisional management. Members of the Board are kept informed of the current credit views of debt investors, generally, and the rating agencies, specifically, by regular commentary and financial metric reporting to meetings.
All directors normally attend the AGM and shareholders are invited to ask questions during the meeting and to meet directors before and after the formal proceedings have ended. The Board values the AGM as an opportunity to meet with those shareholders who are able to attend and to take their questions.
At the 2015 AGM all directors in post, including the Chairs of the Audit, Nomination and Remuneration Committees, were available to answer shareholders' questions. The notice of the AGM and related papers were sent to shareholders at least 20 working days before the meeting.
The 2016 AGM will be held on 15 November 2016 and is an opportunity for shareholders to vote on certain aspects of Group business in person. It is intended that there shall be a poll vote on each resolution at the 2016 AGM. The audited, final results of the poll votes will be released to the London Stock Exchange and published on the Company's website, www.smiths.com, as soon as is practicable after the conclusion of the AGM.
| Roadshows | Presentations | |
|---|---|---|
| June 2016 | Hong Kong equity | |
| May 2016 | France and Germany equity | |
| April 2016 | US equity | |
| March 2016 | UK equity | Interim results |
| December 2015 | Private client brokers | |
| November 2015 | Private client brokers | AGM |
| October 2015 | CEO and CFO introductory roadshow | |
| September 2015 | Annual results |
The Board is required to present a fair, balanced and understandable assessment of the Company's position and prospects in the Annual Report and in interim and other public reports. The directors are required to explain in the Annual Report the basis on which the Company both generates and preserves value over the longer term and its strategy for delivering the Company's objectives. The Board is satisfied that it has met these obligations in this Annual Report. A summary of the directors' responsibilities for the financial statements is set out on page 124.
The assessment of the fairness, balance and understandability of the Annual Report is described on page 86.
The 'going concern' statement required by the Code is set out in the Group directors' report on page 116.
A report on the viability assessment made by the Board in accordance with requirements of the Code is included in the Strategic report on page 52.
The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its particular objectives and ensuring that there are sound risk management and internal control systems in place to safeguard shareholders' investments and the Company's assets. Throughout the financial year the Board, through the Audit Committee, reviews the effectiveness of internal control and the management of risks. In addition to financial and business reports, the Board has reviewed medium- and longer-term strategic plans; management development programmes; reports on key operational issues; tax; treasury; risk management; insurance; legal matters; and Audit Committee reports, including internal and external auditors' reports. The Audit Committee carried out a formal review of the effectiveness of the internal control system, covering all material controls, including financial, operational and compliance controls, and risk management systems, during the year ended 31 July 2016.
The Company has in place internal control and risk management systems in relation to the Company's financial reporting process and the Group's process for preparation of consolidated accounts. These systems include policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards ('IFRS'); require representatives of the businesses to certify that their reported information gives a true and fair view of the state of affairs of the business and its results for the period; and review and reconcile reported data. The Audit Committee is responsible for monitoring these internal control and risk management systems.
The Company's internal control is based on assessment of risk and a framework of control procedures to manage risks and to monitor compliance with procedures. The procedures for accountability and control are outlined below.
The Company's internal control systems are designed to meet the Company's particular needs and the risks to which it is exposed and, by their nature, can provide only reasonable, not absolute, assurance against material loss to the Company or material misstatement in the financial accounts.
The Group has an embedded process for the identification, evaluation and management of its principal business risks. The process is reviewed through the Audit Committee and monitored by the Group Internal Audit department. The Company has during the year identified the principal risks and the controls and procedures that are in place to manage these risks. The directors have 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, and the controls and procedures put in place to manage and mitigate the risks and defend the Group (as described on pages 52 to 60).
In the highly regulated environment of the industries in which the Company operates, procedures are codified in detailed operating procedures manuals and are reinforced by training programmes. These are designed to ensure compliance not only with the regulatory requirements but also with general principles of business integrity.
A key element in any system is communication: the executive directors and senior corporate staff meet regularly with representatives from the businesses to address financial, human resource, legal, risk management and other control issues.
The Audit Committee makes formal and transparent arrangements for considering how financial reporting and internal control principles are applied and for maintaining an appropriate relationship with the independent external auditors, PricewaterhouseCoopers LLP.
Information regarding the Remuneration Committee is set out on page 93 and the Directors' remuneration report is on pages 94 to 114.
The Company has established the Audit, Nomination and Remuneration Committees of the Board. Each such committee meets regularly in accordance with its respective terms of reference. Each committee's responsibilities, activities and membership are described in this Corporate governance statement. The full terms of reference of the following Board committees are available upon request and on the Company's website, www.smiths.com.
Bill Seeger Chairman of the Audit Committee
I am pleased to report to our stakeholders that the audit committee remains focused, diligent and aligned to providing a strong control environment for Smiths Group. Working together, real progress has been made to bring together our risk assessment with our strategic agenda and priorities. This year, as outlined in the detailed report of the committee, our focus was to integrate the work we do with the operational and strategic blueprint for the business under our new CEO and CFO. We also took a thorough look at the Group's 'lines of defence' strategy for modelling the effectiveness of the enterprise risk management and control systems.
This year we introduced a fourth annual meeting to the Committee's schedule at which the risk reviews for all the Group's businesses were brought together into a single, focused session. This has been of particular benefit in considering the potential impacts of the differing industry and geographical risks presented by our diverse businesses, both individually and in combination. This has also been used in assessing the risk profile of the Group as a whole and the effect that has on the 'long-term viability' assessment of the Group, as described in this Annual Report.
Committee membership
The members of the Committee during the 2016 financial year were:
| Appointed/last re-appointed | |
|---|---|
| Bill Seeger (Chairman) | 12 May 2014 |
| Bruno Angelici | 1 July 2016 |
| Tanya Fratto | 1 July 2015 |
| Anne Quinn | 1 August 2015 |
| Mark Seligman | 16 May 2016 |
| Sir Kevin Tebbit | 17 July 2016 |
| David Challen (retired 17 November 2015) |
All members served on the Committee throughout the year, except for Mark Seligman, who joined the Committee on his appointment as a non-executive director of the Company, and David Challen, who retired from the Board and the Committee on 17 November 2015.
Throughout the year we have benefited from productive and open relationships with our external auditor, Internal Audit and Group management. We have also welcomed the new executive team of Andy Reynolds Smith and Chris O'Shea who have provided the Committee with their strategic vision for the Group. The contributions of PwC, Internal Audit and senior management have all enhanced the effective operation of the Committee and its oversight of the Company's controls and risk management. In a business with the scale, diversity and geographical spread of Smiths Group, issues relating to internal financial and other risk controls, codes of conduct and ethical standards arise from time to time for review by the Committee. We are satisfied that the Group has systems in place to identify such issues promptly and that management has the appropriate processes and resources available to address them effectively.
The Committee has continued to monitor the changing rules and regulations applicable to the external auditor and its own role in the governance of the Group audit. Following its review of the independence and effectiveness of our external auditor, the Committee affirmed its recommendation last year that the most practical and business-driven approach to our external auditor appointment would be to conduct a competitive tendering and rotation in 2019. This timeframe would coincide with the normal audit partner rotation and comply with the auditor rotation transition rules. The Committee has recommended to the Board that PwC should be proposed for reappointment as auditor at this year's AGM.
We strive to achieve continuous improvement in our financial and risk controls and our high standards of corporate governance as Smiths Group evolves and grows. Sincere thanks to my audit committee colleagues as well as the executive team for the transparency with which they have supported the Committee.
All members of the Committee are independent non-executive directors and, in the view of the Board, have recent and relevant financial and accounting experience gained from their respective business activities in international businesses. In particular, Bill Seeger was the Group Finance Director of GKN plc, which post he had held for over six years before his retirement in 2014. Tanya Fratto, Anne Quinn and Bruno Angelici have extensive senior management experience in international oil & gas, engineering and medical devices industries, respectively; Mark Seligman has a long history in corporate finance; and Sir Kevin Tebbit has substantial knowledge of international governmental relationships. As part of his induction programme as a director of the Company (which included a detailed overview of the Company's business models, strategy and risk profile), Mark Seligman was provided with relevant material on the constitution and working of the Committee and copies of recent papers and presentations. Further details of the qualifications and experience of the members of the Committee are contained in the biographies of the directors on pages 72 to 74.
There have been no changes to the membership of the Committee since the financial year-end.
The Committee met four times during the 2016 financial year, with three meetings timed to align with the financial reporting and audit cycles of the Company, namely: the approval of the Annual Report in September; the approval of the half-year report in March; and the presentation of the pre-year-end 'early warnings' report from the external auditor, PricewaterhouseCoopers LLP ('PwC'), in July. A meeting was also held in May 2016 at which the Committee reviewed the risk management reports of the Group's five divisions.
The attendance record of the members of the Committee was:
| Attendance | |
|---|---|
| Bill Seeger (Chairman) | 4/4 |
| Bruno Angelici | 4/4 |
| Tanya Fratto | 4/4 |
| Anne Quinn | 4/4 |
| Mark Seligman (appointed 16 May 2016) | 2/2 |
| Sir Kevin Tebbit | 4/4 |
| David Challen (retired 17 November 2015) | 1/1 |
In order to maintain effective communications between all relevant parties, the following were frequent attendees at the meetings:
In addition, annual presentations on risk management were given to the Committee by the divisional general manager of each of the Group's five divisions and the head of Business Information Services ('BIS', the Group's IT function). The Senior Vice-President & General Counsel – Ethics & Compliance reported to the Committee on the implementation of the Business Ethics Programme; the work of the Company's Code Compliance Council; and the investigations into allegations of non-compliance with the Ethics Code, including issues raised through the Group's whistleblowing procedures.
At the conclusion of the meetings, the representatives of the external auditor and the Director of Internal Audit were each given the opportunity to discuss matters without executive management being present. The Director of Internal Audit, the Senior Vice-President & General Counsel – Ethics & Compliance and the external auditor have direct access to the Chairman and the members of the Committee should they wish to raise any concerns outside formal Committee meetings.
The members of the Committee also had the opportunity to meet separately at each meeting to discuss any relevant matters in the absence of all the invitees.
The members of the Committee receive briefing notes from the Company and from PwC on all relevant developments in company law; governance standards; and international and domestic financial accounting practices and regulations.
All the members of the Committee at the time attended the AGM in November 2015.
Outside of the formal meetings schedule, the Chairman of the Audit Committee has met separately with the senior management of the Company, the representatives of PwC and the Director of Internal Audit to discuss the Company's financial reporting and governance.
The primary role of the Audit Committee is to ensure the integrity of the financial reporting and audit processes and the maintenance of sound internal control and risk management systems. This includes responsibility for monitoring and reviewing:
The Chairman of the Audit Committee reports formally to the full Board on the activities of the Committee after each Committee meeting.
Written terms of reference that define the Committee's authority and responsibility are available on our website at www.smiths.com.
During the financial year, the Committee has:
•analysed the methodology and processes presented by the management for the assessment in the 2016 Annual Report of the prospects of the Company over the longer-term ('long-term viability assessment') and agreed that a three-year period is appropriate for this purpose, taking into consideration the Company's various business cycles and forecasting models. The Committee considered scenario-based stress testing models, prepared by the Company, to assess the impact on Group cash and finances if one or more of the Group's principal risks occurred. The Committee concurred with the conclusion that the Group's balance sheet and ability to raise cash were more than sufficient to withstand such occurrences comfortably for at least the three-year period under review.
Subsequent to the end of the financial year, the Committee has also reviewed and reported to the Board on the reports and information supplied by management and by PwC on the judgements and policies adopted for the 2016 Annual Report and the content of that document. The Committee considered that the quality and range of the material included within the 2016 Annual Report was sufficient to provide shareholders with the necessary information for them to assess properly the Group's position, performance, business model and strategy and that the report was presented in such a way as could be considered 'fair, balanced and understandable'. The Committee reviewed the statement on risk management and internal controls; the going concern statement; the assessment of the long-term viability of the Group; and the content of the announcement of the financial results for 2016.
In assessing the fairness, balance and understandability of the 2016 Annual Report, the Committee considered:
Following its review of the 2016 Annual Report, the Committee was of the opinion that it 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.
During the year, the Audit Committee has reviewed the Company's compliance with its governance obligations and its plans to comply with forthcoming changes thereto. In particular, the Committee has:
•considered the amendments to and developments in the International Financial Reporting Standards that affected the 2016 financial year; and the adoption of FRS 101 in place of the UK GAAP accounting framework;
•taken account of the Competition & Markets Authority's Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 (the 'CMA Order');
In relation to the Code, the Committee noted and approved the Company's plan to introduce the 'long-term viability' assessment and the detailed description of the strategies for managing and mitigating principal risks and threats in the 2016 financial year. Certain other changes introduced by the Code had already been adopted by the Company and reflected in the 2015 Annual Report.
The CMA Order applied to the Company's 2016 financial year. Under the transitional provisions of the order, the competitive audit tendering regulations require the Company to put the external auditor role out to tender by 2023. The Committee decided not to recommend a competitive tender this year in order to enable the Company's recently appointed Chief Executive and Chief Financial Officer the opportunity to acquaint themselves fully with the Group. The Committee took into account that the current audit engagement partner had had a full year in the role, in addition to his experience in shadowing the 2014 audit. The Committee's proposal for a competitive audit tender and auditor rotation is described in the External Auditor effectiveness and reappointment section below.
The Company has complied with the provisions of the CMA Order during the financial year ended 31 July 2016.
In relation to the activities of the external auditor, during the financial year, the Committee:
Subsequent to the financial year-end, the Committee has considered and approved the same items in respect of the 2016 audit and the preparation of the 2016 Annual Report. The Committee has recommended that PwC be proposed for reappointment as external auditor at the 2016 AGM.
The Committee considered that each of the Company's directors had taken all necessary steps to ensure that he or she was aware of all pertinent audit information and that such information had been properly communicated to PwC in a timely manner.
PwC presented its Group Audit Plan for the financial year ending 31 July 2016. The Committee discussed with PwC:
The Committee noted the focus on the audit risks associated with revenue recognition; certain litigation risks; impairment of goodwill; and management override of controls. PwC's proposal to decrease the overall materiality level to £17m (approximately 3.5% of headline operating profit) (2015: £18m) and an unchanged de-minimis reporting threshold of £500,000 was accepted as prudent and appropriate. The Committee considered the resources proposed by PwC, including the qualities, seniorities and experience of the audit team members, to be consistent with the scope of the audit. It was noted that the Audit Plan had been discussed and co-ordinated with Internal Audit. Through a combination of full-scope audits, specified audit procedures and local GAAP statutory audits, business units producing 89% of the Group's forecast headline operating profit for 2016 would be audited by PwC under the 2016 Audit Plan.
The fee structure and terms of the audit engagement letter, which had been agreed with Smiths management, and PwC's assessment of its independence were considered appropriate for the work proposed and were approved.
In order to safeguard auditor independence, the Committee has monitored compliance with the Group policy on the engagement of external audit firms for non-audit work. Non-audit services were divided into three categories in relation to the incumbent external auditor:
The Committee recognises that non-audit services falling in the Pre-approved category can be purchased more cost effectively from and completed more efficiently by the incumbent auditor due to the audit firm's existing knowledge of the Group and its systems. The Committee is satisfied that the non-audit work performed by PwC during the financial year had been properly assessed and authorised in accordance with the Group policy.
On 17 June 2016, the EU Audit Directive and Regulation came into force and the FRC published a revised Ethical Standard for Auditors in respect of audits of financial years beginning on or after that date. As a consequence of the new regulation and standard, the Committee has reviewed and approved changes to the Group policy on the engagement of audit firms for non-audit work in order to take account of the prohibited list of non-audit services that an incumbent auditor is not permitted to provide in the EU under the regulation and the cap on the level of permitted non-audit services that can be billed.
The Committee is responsible for the development, implementation and monitoring of the Company's policies on external audit which are designed to maintain the objectivity and independence of the external auditor. These policies also regulate the appointment by the Group of former employees of PwC and set out the approach to be taken when using the external auditor for non-audit work.
The external auditor is not permitted to provide services which could result in:
The Committee's review of the independence of the external auditor included:
As a result of this review, the Committee concluded that PwC remained appropriately independent in the role of external auditor.
Details of the fees paid to PwC in 2016 can be found in note 2 on page 149. Non-audit fees incurred during 2016 amounted to £0.3m which related principally to tax advisory services and audit-related assurance services in connection with the interim report. Non-audit fees as a percentage of audit fees totalled 6%. All such activities remained within the policy approved by the Board.
The Committee's review of the performance of PwC and the effectiveness of the external audit process included consideration of the views and opinions of the executive directors and senior management on PwC's effectiveness in a number of areas including independence and objectivity, audit strategy and planning, conduct and communication, audit findings and feedback, and expertise and resourcing. The results were positive and confirmed that both PwC and its audit process were appropriate and effective and that the relationships between the audit teams and the Company's businesses were strengthening. The Committee recognised the challenges in ensuring consistency in the audit process across the whole Group and the need to continue to improve communication at local and divisional levels.
The Committee received and considered the Independence Letters, sent by PwC in September 2015 in respect of its 2015 audit and September 2016 in respect of the 2016 audit, and concurred with PwC's opinion that it had complied with all relevant regulatory and professional requirements and that the firm's objectivity had not been compromised.
The Committee noted the findings in the Financial Reporting Council's May 2016 Audit Quality Inspection report on PwC. It evaluated a summary of PwC's internal quality control procedures and noted that the lead engagement partner, Andy Kemp, is accountable directly to the Committee for the execution of the audit. The Committee satisfied itself that the quality of the work exhibited by the firm and its commitment to improvements were of a high standard.
PwC has been the Company's external auditor since its formation in 1998, although a predecessor organisation of PwC held office as sole auditor in 1997. In determining whether to recommend PwC for reappointment as auditor in 2016, the Committee took into consideration the following factors:
Taking these elements into account and acknowledging that it would take some time to stage a competitive audit tender from initial planning to final selection, the Committee concluded (a) that it would not be practical to put the auditor appointment for 2016 out to competitive tender at this stage and (b) that it was appropriate to recommend to the Board that the reappointment of PwC as the Company's auditor for a further year be proposed to shareholders at the 2016 AGM.
Recognising the various requirements in the Code, the CMA Order and the Statutory Auditors and Third Country Auditors Regulations 2016 (implementing the EU's June 2014 Audit Directive and Regulation), the Committee reviewed its decision last year and concluded that it would remain in the best interests of the Company to plan for a competitive audit tender for the rotation of the external auditor in 2019. This would coincide with the end of the current PwC audit partner's five-year term and enable the Company to plan its implementation of the final audit firm rotation regulations. Notwithstanding its continued recommendation for tendering in 2019, the Committee will keep the performance of the incumbent audit firm under annual review.
The Board has considered and adopted the Committee's recommendations to propose the reappointment of PwC as auditor in 2016 and to plan for a competitive audit tender and auditor rotation in 2019.
There are no contractual obligations restricting the Group's choice of external auditor.
In fulfilling its responsibilities, the Committee:
The Committee has reviewed the effectiveness of the identification and management of risk at the Group level. Each division also presents an analysis of its own business strategic risks to the Committee on an annual basis.
Further information on the Group's systems of internal control and risk management is given on page 83.
During the financial year the Committee:
During the financial year, the Committee reviewed the report of the Treasury department of the Group on financial risk and treasury management, noting the Group's borrowing position and debt capacity. The extension of the Group's revolving credit facility to 2021, at no cost, and the repayment of the Sterling bond, on 30 June 2016, were noted.
The Committee also received status reports on tax risk from the Group's Tax department, noting the assessments of compliance, tax audit risk, tax provisions and international tax rates. The Company's assessment of its appetite for tax risk was also reviewed.
During the financial year, the Committee reviewed the annual report of the Group's Business Ethics Council on the Group-wide Ethics programme. The report included details of the investigations into allegations of non-compliance with the Ethics Code and whistleblowing events, including bribery and corruption, and the Council's work programme to support the initiatives of the businesses and monitor compliance with both the Group's Code of Business Ethics and the various applicable national regulations. The Committee received a report on the first phase of an external review of compliance with Group and divisional ethical policies and procedures. The Committee considered that the Company's processes and arrangements for staff to report concerns about any improprieties were both appropriate and effective. The Committee also considered that the Company's investigation of such reports and consequential actions (where required) were timely and effective.
During the year the Committee considered and approved changes to its terms of reference to reflect the changes contained in the Code and CMA Order, which applied to the Company's 2016 financial year.
During the year, the committee memberships of Bruno Angelici and Sir Kevin Tebbit came up for review. After a rigorous review of their individual performances as members of and their history on the Committee (with each individual not participating in the discussion concerning their own performance), the Committee determined to recommend to the Nomination Committee to propose to the Board that Bruno Angelici should be reappointed as a member of the Committee for a further three-year term. In the case of Sir Kevin Tebbit, who has over ten years' service as a non-executive director of the Company but was still considered to be independent, the Committee recommended that Sir Kevin should be reappointed as a member of the Committee for a further year. It was noted that Bill Seeger's first term as a member and as Chairman of the Committee would expire on 12 May 2017. In recognition that the Company's evaluation of Committee memberships usually takes place in July annually, it was agreed that it would be prudent to recommend extending Bill Seeger's term to the date on which Committee memberships are considered by the Board in 2017. It was further noted that membership of the Committee would automatically lapse if a member ceased to be a director of the Company.
An annual evaluation of the performance of the Committee is conducted as part of the annual evaluation of the performance of the Board. Details of the latest evaluation are given in the Corporate governance statement on page 81.
An important responsibility of the Audit Committee is to review and agree the most significant management judgements and issues. To satisfy this responsibility, the Committee requests a written formal update from the Chief Financial Officer and Director of Tax and Treasury three times a year and requires regular reports from the external auditors at each Committee meeting. The Committee carefully considers the content of these reports and the most significant issues and areas of judgement raised. The key areas of judgement in the year were as follows:
The Committee reviewed the key judgements on revenue recognition. Attention was given to large, multi-faceted and nonstandard contracts in Smiths Detection and to contracts where 'percentage of completion' accounting was used in Smiths Detection and Smiths Interconnect. The Committee reviewed the accounting treatment of three large programmes in Smiths Detection where management has assessed the portion of revenue to be attributed and the anticipated profit margin and concluded that the revenue judgements made were appropriate. The Committee also reviewed 'bill and hold' transactions in Smiths Detection and were satisfied with the adopted accounting treatment.
The Committee considered the Group's intangible assets and the assumptions used to justify the carrying values of these assets, including 'fair value less costs to sell'. Particular attention was given to John Crane Production Solutions, Smiths Interconnect Power and Smiths Interconnect Microwave Telecoms and Components. The Committee also reviewed the carrying value of capitalised development assets for Smiths Medical and Smiths Detection. The Committee agreed that the projected future cash-flows from these businesses either supported the carrying value of the assets or agreed with the value of the impairments recorded. In the case of Smiths Interconnect Telecoms, the Committee reviewed the 'fair value less costs to sell' model and agreed the value of the impairment. The Committee reviewed the disclosures contained in the financial statements and agreed that they appropriately reflect the sensitivity of the judgements made. Details of impairment testing and sensitivities are included in note 11 of the financial statements.
The Committee considered the key judgements within working capital and, in particular, the level of inventory provisions and overdue receivables in emerging markets. The Committee determined that the judgements made were appropriate to justify the working capital provision levels at 31 July 2016.
The Committee continued to monitor carefully the expert assessments of the financial exposure of the Group to the John Crane, Inc. asbestos litigation and to the Titeflex Corp. 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 reassessment of the time period for the Titeflex Corp. CSST provision and the continued appropriateness of the ten-year time period for John Crane, Inc. asbestos litigation. In both these cases, it was determined that the assumptions fairly reflect the position at 31 July 2016. Further details of the assumptions used are included in note 22 of the financial statements.
The Committee assessed the appropriateness of the Group's assumptions and judgements in relation to the estimates of the assets and liabilities to be recognised in income and deferred tax as well as the treatment of losses in the UK. Particular focus was given to deferred tax assets relating to the John Crane, Inc. asbestos provision, the Titeflex Corp. CSST provision, the write-off of tax assets in John Crane Production Solutions and the recognition of tax assets in Detection USA and France. In reviewing projected profit streams the Committee was satisfied that, where appropriate, the relevant entities will generate sufficient future taxable profits to utilise those assets recognised. Further details on movements in tax balances are set out in note 6 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 2016. The Committee agreed the treatment and the corresponding disclosures on these matters. More detail on post-retirement benefits is contained in note 8 of the financial statements.
During the year the FRC's Conduct Committee raised a number of points on the Company's 2015 Annual Report. The Committee has monitored the dialogue between the Company and the FRC and discussed with the external auditors the matters raised and the responses to date provided by the Company. The Committee noted that the Company has responded to all of the points raised by the FRC, with additional disclosures being included in the 2016 Annual Report in respect of provisions, revenue, tax, inventory provisioning and post-retirement benefits. The Committee is aware of the continuing correspondence over the remaining open item, namely the period over which a range of possible outcomes can be estimated sufficiently reliably for the provision by John Crane, Inc. in respect of its continuing asbestos litigation and related disclosures, including estimation uncertainty.
During the year, the Committee has monitored its discharge of responsibilities. In addition to the actions reported in the sections above, the Committee has:
The Committee has enjoyed a positive relationship with the Board throughout the year and has no contentious or unresolved issues to report.
The Committee has independent access to the services of Internal Audit and to the external auditor and may obtain outside professional advice, at the expense of the Company, as it sees fit, in the performance of its duties.
Introduction from the Chairman of the Nomination Committee During the 2016 financial year the Nomination Committee worked to find the Company's two new executive directors and we were delighted to appoint Andy Reynolds Smith and Chris O'Shea. In addition, after the retirement from the Board of David Challen I took the opportunity for the Nomination Committee to review the composition and balance of skills of the Board and to plan for succession in view of the Company's strategic aims. The review informed our search for a new non-executive director and I was delighted that Mark Seligman was appointed to the Board in May 2016. This report sets out details of these director appointments and their induction into the Company.
The attendance record of the members of the Committee was:
| Attendance | |
|---|---|
| Sir George Buckley (Chairman) | 3/3 |
| Bruno Angelici | 3/3 |
| Tanya Fratto | 2*/3 |
| Anne Quinn | 2*/3 |
| Bill Seeger | 3/3 |
| Mark Seligman (appointed 16 May 2016) | 1/1 |
| Sir Kevin Tebbit | 3/3 |
| David Challen (retired 17 November 2015) | 1/1 |
*Tanya Fratto and Anne Quinn were unable to attend a meeting called at short notice, due to prior commitments
The Committee meets periodically, as and when required. During the financial year the members of the Committee were: Sir George Buckley (Chairman), Bruno Angelici, David Challen (until November 2015), Tanya Fratto, Anne Quinn, Bill Seeger, Sir Kevin Tebbit and Mark Seligman (from his appointment in May 2016).
The Chief Executive is normally invited to attend the Nomination Committee. The HR Director, the Director of Talent and the Director of Reward have also attended these meetings in order to advise the Committee. External advisers may also be invited by the Committee to aid its deliberations.
The Committee leads the process for identifying and makes recommendations to the Board regarding candidates for appointment as directors of the Company and as Company Secretary (and their removal or retirement), giving full consideration to succession planning and the leadership needs of the Group. It also makes recommendations to the Board on the composition of the Nomination Committee and the composition and chairmanship of the Audit and Remuneration Committees. It reviews the structure, size and composition of the Board, including the balance of skills, knowledge and experience and the independence of the nonexecutive directors, and makes recommendations to the Board with regard to any changes. The Committee also has responsibility for the annual review of the talent pipeline for senior management roles.
The Chairman and the rest of the Board continue to support Lord Davies' aspiration for female board representation, but this presents a particular challenge for a small board. The Nomination Committee and the Board remain committed to ensuring diversity is included within the remit for appointments at all levels in the Company, but do not think it is appropriate to set specific Group-wide targets or objectives at this stage. Further information on diversity is provided in the Strategic Report.
The Committee has access to such information and advice both from within the Group and externally, at the cost of the Company, as it deems necessary. This may include the appointment of external search consultants, where appropriate.
The Committee reviews annually its terms of reference and effectiveness and recommends to the Board any changes required as a result of such review. The annual review of the Committee's terms of reference was conducted in July 2016 and certain changes were approved with effect from 1 August 2016.
Chris O'Shea and Andy Reynolds Smith were appointed as executive directors of the Company, on 18 and 25 September 2015, respectively, successfully concluding the searches, instigated by the Committee during the previous financial year and run in conjunction with Egon Zehnder (in Andy Reynolds Smith's case) and Inzito (in Chris O'Shea's case) and interview process.
David Challen retired from the Board on 17 November 2015, after 11 years' service. The Nomination Committee carried out a review of the skills and experience of the Board and embarked upon a search for a new non-executive director. The Committee appointed Lygon, an independent search firm with no other connections with the Company, to carry out the search. The Nomination Committee worked with Lygon to produce a detailed specification for the role including the capabilities and attributes which were either required or desirable. These included the benefits to the Board of diversity in its widest sense (gender, nationality, age, experience, and background) and the particular skills which would benefit the Company as a multi-industry company operating in a global market. From the candidates produced by the search, Mark Seligman was selected. He agreed to the appointment as a non-executive director and duly joined the Board and its Audit, Nomination and Remuneration Committees on 16 May 2016.
David Challen's retirement also created a vacancy in the position of Senior Independent Director. After due consideration, the Committee recommended to the Board that the role should be offered to Sir Kevin Tebbit. The Board concurred and Sir Kevin accepted the position with effect from 17 November 2015.
The Company Secretary is responsible for ensuring that new directors have a thorough and appropriate induction programmes when joining the Company's board of directors. Each of the directors who were appointed during the financial year received a comprehensive induction data reading room and hard copy data pack, containing detailed information on the Company and its business and on the proceedings of the Board and its committees. Each of these inductions was based on the individual directors' requirements and included meetings with Board members, divisional presidents, functional heads and other relevant employees and external advisers. Mark Seligman has visited some Smiths sites in order to gain a deeper understanding of the Group's business operations and these visits are ongoing. Andy Reynolds Smith and Chris O'Shea both received comprehensive on-boarding when they joined and they met with the Company's largest investors and spent several weeks visiting Smiths sites around the world, meeting employees at all levels of the organisation, as well as senior personnel and board members. Andy Reynolds Smith met with key customers and suppliers and also conducted town hall meetings at sites that he visited where he also listened to feedback from various parts of the organisation. Upon his appointment as Senior Independent Director Sir Kevin Tebbit received some additional focused training from the Company's external legal counsel.
During the year, the Committee conducted its annual review of senior management and succession plans with a view to ensuring a strong and robust plan exists in all parts of the Group.
In July 2016 the Committee considered the appointment and re-appointment of certain members of the Audit, Remuneration and Nomination Committees and the appointment of the Chairs of those committees and recommended the appointment and reappointment of members and Chairs as set out in more detail in the relevant sections of this Statement.
Also in July 2016 the Committee carefully assessed the independence of each of the non-executive directors and concluded that all of them were independent notwithstanding in the case of Sir Kevin Tebbit, the Senior Independent Director, that he had served on the Board for more than nine years. The Committee and the Board each considered the matter carefully and decided that Sir Kevin continues to demonstrate the qualities of independence and judgement in carrying out his role, supporting the executive directors and senior management in an objective manner. In addition, based on the recommendation of the Nomination Committee, the Board resolved that Sir Kevin should continue as Senior Independent Director.
The attendance record of the members of the Committee was:
| Attendance | |
|---|---|
| Anne Quinn (Chair) | 5/5 |
| Sir George Buckley | 5/5 |
| Bruno Angelici | 5/5 |
| Tanya Fratto | 5/5 |
| Bill Seeger | 5/5 |
| Mark Seligman (appointed 16 May 2016) | 2/2 |
| Sir Kevin Tebbit | 5/5 |
| David Challen (retired 17 November 2015) | 1/1 |
Introduction from the Chair of the Remuneration Committee The responsibilities of the Remuneration Committee are to make recommendations to the Board on the Company's remuneration framework, giving full consideration to the matters set out in the Code. The Committee also agrees with the Board the policy for the remuneration of the Chairman, the Chief Executive, the Chief Financial Officer and senior management. The Committee sets the remuneration for these individuals within the agreed policy having regard to a number of factors, including their performance, remuneration across the Company and market positioning. The Committee takes note of the policies and trends in remuneration across the whole Group in relation to all levels of employees. Further information about the activities and focus of the Remuneration Committee during the year is set out in the Directors' remuneration report.
The members of the Committee during the financial year were: Anne Quinn (Chair of the Committee), Bruno Angelici, Sir George Buckley, David Challen (until his retirement in November 2015), Tanya Fratto, Bill Seeger, Sir Kevin Tebbit and Mark Seligman (from his appointment in May 2016).
The Chief Executive is normally invited to attend Remuneration Committee meetings (except when his own remuneration is under discussion). The HR Director, the Director of Reward and Kepler Associates, the external remuneration adviser, have also attended meetings in order to advise the Committee, as and when required.
The Committee's activities are further described in the following Directors' remuneration report. The Committee reviews its terms of reference annually and recommends to the Board any changes required as a result of such review. The latest annual review of the Committee's terms of reference was conducted in July 2016.
On behalf of the Board, I am pleased to present the report of the Remuneration Committee for the year to 31 July 2016. As last year, this report is split into three parts:
Following the approval of the revised Policy at last year's AGM, there are no proposed changes to the Policy this year.
As highlighted by the Chairman and Chief Executive in their annual statements on pages 8 to 13 of this Annual Report, the markets remained challenging in the year to 31 July 2016. However, four of the five divisions reported growth in reported revenue and headline operating profit. Even though the operating profit declined in John Crane driven by the tough global energy market conditions, the division reported resilient margin performance. At a Group level, cash conversion remained very strong at 102% and ROCE, at 15%, remains well ahead of the Group's weighted average cost of capital. Against this backdrop, annual bonus payouts are between target and maximum but the TSR and EPS elements of 2013 LTIP awards lapsed in full following the end of the performance period on 31 July 2016. The Group's cash conversion, however, warranted the full payout of that element of the annual bonus and a partial vesting of the LTIP. The matching award under the CIP vested based on our sustained ROCE performance. The Committee recognises the importance of close alignment of remuneration with Group performance and we consider the incentive outcomes for this year to demonstrate this link (further details of which are disclosed in this year's Annual Report on Remuneration).
On behalf of the Board, I would like to thank shareholders for their continued support.
Strong cash conversion performance
Appointment of a new Chief Executive and Finance Director
Approved simplification of long-term incentives for 2016
The Directors' remuneration report is presented to shareholders by the Board. The report complies with Regulation 11 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (the 'Regulations'). As required by the Regulations, the Annual Report on Remuneration will be put to an advisory shareholder vote at the Annual General Meeting on 15 November 2016. The Committee also continues to comply with the provisions of the UK Corporate Governance Code relating to directors' remuneration, except as disclosed in the Corporate governance statement on page 75.
This section of the report sets out our remuneration policy for directors, which shareholders approved at the 2015 AGM and is effective for a period of three years from the date of the 2015 AGM. The only amendments to this policy report from the version approved by shareholders in 2015 are to update the data used in the pay-for-performance scenarios, to add page references, and to remove any references on the implementation of this policy in 2016.
The remuneration policy for the executive directors at Smiths is summarised in the table below:
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 increased) annually and benchmarked against comparable roles at companies of similar market capitalisation, revenues 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 Company as a whole.
Salary increases are typically effective 1 August.
Base salaries are adjusted according to the outcome of the annual review and will be disclosed in the Annual Report on Remuneration.
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.
Element and link to strategy 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 thus arrange their own pension provision).
Pension allowances are reviewed periodically to ensure market competitiveness.
Salary is the only element of remuneration that is taken into account when determining pension contributions or allowances.
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 other FTSE 100 companies of similar market capitalisation, revenues and complexity.
Pension arrangements for current executive directors are set out in the Annual Report on Remuneration.
The maximum level of pension contribution (or allowance in lieu thereof) is 30% of annual base salary.
Element and link to strategy Incentivises short-term cash management and profit growth, as well as annually defined non-financial goals.
Operation 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, subject to continued employment only.
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. 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.
In addition, cash and deferred share bonuses awarded for performance in 2015/16 onwards will be subject to malus and/or clawback 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 % payout then increases according to the level of achievement against targets.
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 and cash measures.
Incentivises long-term value creation for shareholders, sustainable profit 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 2016 onwards, vested shares may also be subject to a post vesting holding period. Details of any 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 are also subject to clawback 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.
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 straightline 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).
| Element and link to strategy To provide market competitive benefits to executive directors. |
Operation Benefits comprise car allowance, life assurance and private healthcare insurance, and other such benefits as the Committee may from time to time determine are appropriate. These 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. |
Opportunity Benefits vary by role and individual circumstances. Benefits in respect of the year under review are disclosed in the Annual Report on Remuneration. 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 (eg to facilitate recruitment, relocation, expatriation, etc) or in circumstances where factors outside the Group's control have changed materially (eg market increases in insurance costs). |
Performance measures Not applicable. |
||
|---|---|---|---|---|---|
| Sharesave | |||||
| Element and link to strategy Operation Performance Encourages ownership All UK employees (including executive directors) may save up to a maximum monthly measures |
of shares in the Company shareholder interests. 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. 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. The Company intends to look into introducing all-employee share schemes to some non-UK countries on a basis consistent with local laws and market practice. Not applicable.
and alignment with
| Element and link to strategy Encourages ownership of shares in the company and alignment with shareholder interests. |
Operation Executive directors must build a minimum shareholding of two times 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. |
Performance measures Not applicable. |
|---|---|---|
| ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- |
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 business plan.
The measures used in the Long-Term Incentive Plan are selected to reflect Smiths prevailing strategy and to reinforce the key drivers of value creation highlighted elsewhere in this Annual Report: operating margin, cash conversion and ROCE.
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 Remuneration 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 business plan, and longer term, consistent with the strategic plan. On top of aligning strategy with incentives, targets are designed to ensure that participants are aligned with the interests of shareholders.
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 Remuneration Committee reviews each year the all-employee pay and incentive trends and takes these into account in setting executive director pay 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.
The graphs below provide estimates of the potential future reward opportunity for executive directors, and the potential mix between the different elements of remuneration under three different performance scenarios; 'Minimum', 'On-Target' and 'Maximum'.
Potential opportunities illustrated above are based on the Policy, which will apply in the 2017 financial year, applied to the annualised base salary in force from 1 August 2016 for Andy Reynolds Smith and Chris O'Shea. For the annual bonus, the amounts illustrated are those potentially receivable in respect of performance for 2017. 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:
| CEO | CFO | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Base salary | Annual base salary | Base salary | Annual base salary | |||||||
| Pension | Company pension allowance | Pension | Company pension allowance | |||||||
| Other benefits | Taxable value of annual benefits provided | Other benefits | Taxable value of annual benefits provided | |||||||
| Cash bonus | 'Minimum' 0% of salary (Minimum) |
'On-Target' 72% of salary (Target) |
'Maximum' 120% of salary (Maximum) |
Cash bonus | 'Minimum' 0% of salary (Minimum) |
'On-Target' 60% of salary (Target) |
'Maximum' 100% of salary (Maximum) |
|||
| Deferred bonus |
'Minimum' 0% of salary |
'On-Target' 36% of salary (Target) |
'Maximum' 60% of salary (Maximum) |
Deferred bonus |
'Minimum' 0% of salary |
'On-Target' 30% of salary (Target) |
'Maximum' 50% of salary (Maximum) |
|||
| LTIP | 'Minimum' 0% of salary (Minimum) |
'On-Target' 75% of salary (Threshold) |
'Maximum' 300% of salary (Maximum) |
LTIP | 'Minimum' 0% of salary (Minimum) |
'On-Target' 62.5% of salary (Threshold) |
'Maximum' 250% of salary (Maximum) |
The policy for the remuneration of the Chairman and non-executive directors at Smiths is summarised in the table below:
| Element and link to strategy To attract, motivate and retain non-executive directors with the required skills and expertise. |
Operation Fees may be paid in cash or a combination of cash and shares and are reviewed annually (but not necessarily increased) to ensure they compare appropriately to fees payable at companies of similar size and complexity to Smiths. |
Opportunity Fees are adjusted according to the outcome of the annual reviews. The basic fee for non executive directors is subject to the maximum aggregate annual fee of £750,000, as approved |
Performance measures Not applicable. |
|---|---|---|---|
| Additional fees are paid to the chairs of the Remuneration, Nomination and Audit Committees and to the Senior Independent Director to reflect the additional time commitment of these roles. |
by shareholders in 2006 in the Company's Articles of Association. Fee levels for the year under review and for the current year are disclosed in the Annual Report |
||
| 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 Chairman and executive directors. |
on Remuneration. |
Other
The Chairman and non-executive directors are not eligible for benefits. The Chairman and the non-executive directors are not eligible for bonuses or participation in share schemes or any pension provision. They are paid an attendance allowance for each overseas meeting attended in addition to the annual fee and are reimbursed for actual expenses incurred (transportation, hotels etc.).
The Remuneration 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 Remuneration 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 Remuneration 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.
In recruiting a new non-executive director, the Committee will use the policy as set out in the table on page 100.
The Company's policy is that executive directors are normally employed on terms which include a one-year rolling period of notice and 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. Existing service contracts are available for viewing at the Company's Registered Office.
Andy Reynolds Smith is employed under a service contract with the Company dated 6 July 2015 and effective from 25 September 2015. It may be terminated by 12 months' notice given by the Company or six months' notice given by Andy Reynolds Smith. The Company may elect to terminate the contract by making a payment in lieu of notice equal to Andy Reynolds Smith's base salary and benefits (including pension allowance) in respect of any unserved period of notice. The service contract contains specific provisions enabling a reduction in any phased payments in lieu of notice, in the event that Andy Reynolds Smith finds alternative employment during the notice period.
Chris O'Shea is employed under a service contract with the Company dated 30 April 2015 and effective from 18 September 2015. It may be terminated by 12 months' notice given by the Company or six months' notice given by Chris O'Shea. The Company may elect to terminate the contract by making a payment in lieu of notice equal to Chris O'Shea's base salary and benefits (including pension allowance) in respect of any unserved period of notice. The service contract contains specific provisions enabling a reduction in any phased payments in lieu of notice, in the event that Chris O'Shea finds alternative employment during the notice period.
Philip Bowman was employed under a service contract with the Company dated 15 November 2007 and effective from 10 December 2007. It could be terminated with six months' notice given by Philip Bowman. Philip Bowman gave more than his contractual six months' notice when he signalled his intention to retire in December 2014. He was employed by the Company until 31 December 2015.
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. Although the Articles of Association only require directors to stand for re-election at every third AGM (or such earlier AGM as the Board may determine) thereafter (under Article 49), the Board has resolved that all directors who are willing to continue in office will stand for re-election 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.
| Non-executive director | Date of appointment | Expiry of current term | Date of election/last re-election |
|---|---|---|---|
| Bruno Angelici | 1 July 2010 | 2016 | 17 November 2015 |
| Sir George Buckley | 1 August 2013 | 2016 | 17 November 2015 |
| David Challen (retired 17 November 2015) | 21 September 2004 | N/A | N/A |
| Tanya Fratto | 1 July 2012 | 2016 | 17 November 2015 |
| Anne Quinn | 1 August 2009 | 2016 | 17 November 2015 |
| Bill Seeger | 12 May 2014 | 2016 | 17 November 2015 |
| Mark Seligman | 16 May 2016 | 2017 | N/A |
| Sir Kevin Tebbit | 14 June 2006 | 2016 | 17 November 2015 |
For those individuals regarded as 'bad leavers' (eg voluntary resignation or dismissals for cause), annual bonus awards are forfeited, and outstanding matching awards under the CIP and outstanding awards under the LTIP automatically lapse.
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 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 judgment 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 external appointments where it considers that such appointments will contribute to the director's breadth of knowledge and experience. Directors are permitted to retain fees associated with such appointments.
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. Each year the Committee is provided with information on pay trends and ratios of the wider employee population across the Group.
The Committee has actively consulted with major shareholders whenever there have been changes to the remuneration policy in a manner that is receptive to and respectful of shareholder views.
This section of the remuneration report details how our Policy was implemented in the year ended 31 July 2016.
The members of the Committee are Anne Quinn (Chair of the Committee), Sir George Buckley, Sir Kevin Tebbit, Bruno Angelici, Tanya Fratto, Bill Seeger and Mark Seligman (from his appointment on 16 May 2016). David Challen was a member of the Committee until his retirement on 17 November 2015. Their attendance at meetings held during the year is set out in the Corporate governance statement on page 81.
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.
During the year, the Committee received material assistance and advice from the Chief Executive, the HR Director, the Group Director of Reward, Kepler a brand of Mercer (the Committee's appointed independent remuneration adviser) and Freshfields Bruckhaus Deringer LLP. The Company Secretary has been secretary to the Committee since May 2016.
The Company paid a total annual fee of £58,306 to Kepler in relation to remuneration advice to the Remuneration Committee during the year. Fees were determined on the basis of time and expenses. During 2016, Kepler provided the Remuneration 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. Kepler was reappointed by the Remuneration Committee via competitive tender in 2013. 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 Kepler is objective and independent. Freshfields Bruckhaus Deringer LLP was appointed by the Company to advise the Group on various legal matters during the year.
The resulting voting outcome for last year's Directors' Remuneration Policy was as follows:
| Votes for | % of votes cast for | Votes against | % of votes cast against | Total votes cast | Votes withheld (abstentions) |
|---|---|---|---|---|---|
| 278,345,426 | 96.4% | 10,397,058 | 3.6% | 288,742,484 | 22,481,558 |
The resulting voting outcome for last year's Directors' Remuneration Report was as follows:
| Votes for | % of votes cast for | Votes against | % of votes cast against | Total votes cast | Votes withheld (abstentions) |
|---|---|---|---|---|---|
| 264,500,742 | 91.6% | 24,254,693 | 8.4% | 288,755,435 | 22,468,607 |
Executive directors
| Salary / fees | Benefits7 | Annual bonus8 | Long-term incentives9 |
Payments in lieu of pension contribution |
Other10 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
||
| Andy Reynolds Smith | 650 | – | 1 | – | 1,038 | – | – | 163 | – | 1,112 | – | 2,964 | – | ||
| Chris O'Shea | 430 | – | 1 | – | 572 | – | – | 108 | – | 751 | – | 1,862 | – | ||
| Philip Bowman | 127 | 860 | 3 | 32 | 201 | 1,239 | 960 | 1,703 | 53 | 361 | – | 1,344 | 4,195 |
| Salary / fees | Benefits7 | Annual bonus | Long-term incentives |
Payments in lieu of pension contribution |
Other | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
2016 £000 |
2015 £000 |
|
| Sir George Buckley1 | 413 | 410 | 105 | 134 | 518 | 544 | ||||||||
| David Challen2 | 28 | 91 | 28 | 91 | ||||||||||
| Sir Kevin Tebbit3 | 82 | 74 | 82 | 74 | ||||||||||
| Anne Quinn4 | 88 | 91 | 88 | 91 | ||||||||||
| Bruno Angelici | 68 | 74 | 7 | 4 | 75 | 78 | ||||||||
| Tanya Fratto | 80 | 77 | 40 | 54 | 120 | 131 | ||||||||
| Bill Seeger5 | 100 | 89 | 56 | 64 | 156 | 153 | ||||||||
| Mark Seligman6 | 14 | 14 |
1 Sir George Buckley's fee comprised his non-executive director's fee; an additional fee for being Chairman and his additional fee for the Chairmanship of the Nomination Committee.
2 David Challen waived his right to the fee payable to the Senior Independent Director but he did receive the fee paid for his Chairmanship of the Audit Committee, in addition to his non-executive director's fee. His fees for 2016 reflect the fact that he retired on 17 November 2015.
Sir Kevin Tebbitt's fees comprised his non-executive director's fee and his additional fee payable to the Senior Independent Director from November 2015.
4 Anne Quinn's fees comprised her non-executive director's fee and her additional fee for Chairing the Remuneration Committee.
5 Bill Seeger's fees comprised his non-executive director's fee and his additional fee for Chairing the Audit Committee.
6 Mark Seligman's fees for 2016 are for a part year following his appointment on 16 May 2016.
7 Benefits for executive directors include car allowance, life assurance and private healthcare insurance. For the Chairman and non-executive directors, this value relates to reimbursed travel-related expenses, which is grossed-up for the UK income tax and National Insurance contributions paid by the company on their behalf.
8 Andy Reynolds Smith and Chris O'Shea each deferred 33% of their 2016 bonus earned into Smiths shares. The total bonus paid during the year, including deferral, is captured under 'annual bonus' above.
9 Figure for 2016 has been valued using the three-month average share price to 31 July 2016 (£11.36) and includes the projected payouts from the 2013 CIP and 2013 LTIP awards. Figures for 2015 has been trued up (compared to last year's figure) to reflect the vest-date share price on 30 September 2015 of £10.05.
10 Other includes the face values of restricted share awards made to Andy Reynolds Smith and Chris O'Shea to reflect outstanding awards forfeited on their joining Smiths Group and a cash payment made to Andy Reynolds Smith to reflect the pro-rated 2015 annual bonus foregone in respect of his former employment. These values also include amounts received from the Company's Sharesave Scheme in 2016. Further details of the buyout arrangements are set out on page 108 of this report.
The table below summarises the structure of the 2016 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) |
Performance level | (% of max. bonus) |
(% salary) | £000 |
| Andy Reynolds Smith | EPS | 50% | 90% | Just below target | 81.9% | 73.7% | 480 |
| Cash conversion | 20% | 36% | At maximum | 100.0% | 36.0% | 234 | |
| Personal objectives | 30% | 54% | See below | 92.0% | 49.7% | 324 | |
| Total | 100% | 180% | 88.6% | 159.4% | 1,038 | ||
| Chris O'Shea | EPS | 50% | 75% | Just below target | 81.9% | 61.4% | 265 |
| Cash conversion | 20% | 30% | At maximum | 100.0% | 30.0% | 129 | |
| Personal objectives | 30% | 45% | See below | 92.0% | 41.4% | 178 | |
| Total | 100% | 150% | 88.6% | 132.8% | 572 | ||
| Philip Bowman | EPS | 50% | 90% | Just below target | 81.9% | 73.7% | 93 |
| Cash conversion | 20% | 36% | At maximum | 100.0% | 36.0% | 46 | |
| Personal objectives | 30% | 54% | See below | 90.0% | 48.6% | 62 | |
| Total | 100% | 180% | 88.0% | 158.3% | 201 |
Challenging personal objectives are derived from the Company's annual and strategic plans. For 2016, these targets included establishing the Smiths Excellence System to drive continuous improvement and consistent execution, leadership talent development and succession planning with an emphasis on building key functional capability, implementing a new organisation structure to bring higher rates of growth in Asia, bringing back Divisional earnings growth and measurable improvements in the commercial and programme management of the Group.
As disclosed last year, the Committee will disclose annual bonus targets at such time as these are considered to be no longer commercially sensitive. In line with this commitment, the table below summarises the financial targets and the Company's actual performance against these for the 2015 annual bonus.
| Performance targets and actual performance | |||||
|---|---|---|---|---|---|
| Measure | Threshold | Target | Maximum | Actual | |
| EPS | 82.5p | 84.7p | 87.0p | 84.6p | |
| Cash conversion1 | Q1 | – | 55% | – | >55% |
| Q2 | – | 85% | – | >85% | |
| Q3 | – | 85% | – | >85% | |
| Q4 | – | 85% | – | >85% | |
| FY | – | 85% | – | 94.7% |
1 Maximum payout requires the meeting or exceeding of all quarterly targets and the full year target.
Included in the 2016 'Long-term incentives' column of the executive director annual remuneration table above is the outcome of CIP awards granted in 2013 to Philip Bowman. Matching awards granted under the CIP in 2013 were subject to the following performance condition:
| Vesting schedule | Actual performance | ||||||
|---|---|---|---|---|---|---|---|
| Measure | Weighting | Performance period | ROCE performance | % match | ROCE | % match | |
| Group ROCE | 100% | 1 August 2013 | < WACC+1% p.a. | 0% | >WACC+3% p.a. | 200% | |
| to 31 July 2016 |
WACC+1% p.a. | 100% | |||||
| WACC+1% to 3% p.a. | 100% | ||||||
| ≥ WACC+3% p.a. | 200% | ||||||
| 2013 CIP | Interests held | Vesting % | Interests vesting | Date of vesting | Market price1 | Value £000 | |
| Philip Bowman | 41,913 | 100% | 41,913 | Oct 2016 | £11.36 | 476 |
1 Based on the average share price over the three months to 31 July 2016 of £11.36.
The CIP values carried in the 2016 long-term incentive element of the single figure table also include dividend equivalents of £69,936 for Philip Bowman in respect of the vested 2013 CIP shares.
Also included in the 2016 'Long-term incentives' column of the executive director annual remuneration table above, is the outcome of the LTIP awards granted in 2013 to Philip Bowman, details of which are summarised in the table below:
| Vesting schedule | Actual performance | |||||||
|---|---|---|---|---|---|---|---|---|
| Measure | Weighting | Performance period | Performance | % vesting | Outturn | % vesting | ||
| Group EPS growth | 50% | 1 August 2013 | < 6% p.a. | 0% | < 6% p.a. | 0% | ||
| to 31 July 2016 |
6% p.a. | 12.5% | ||||||
| ≥ 14% p.a. | 50.0% | |||||||
| Straight-line vesting between these points | ||||||||
| Total Shareholder Return rank | 30% | 1 August 2013 | Below median | 0% | Below median | 0% | ||
| vs. FTSE 100 companies (excluding financial services) |
to 31 July 2016 |
Median | 7.5% | |||||
| Upper quartile or above | 30.0% | |||||||
| Straight-line vesting between these points | ||||||||
| Average cash conversion | 20% | 1 August 2013 | < 85% | 0% | 97.8% | 17.8% | ||
| to | 85% | 5.0% | ||||||
| 31 July 2016 | ≥ 100% | 20.0% | ||||||
| Straight-line vesting between these points | ||||||||
| Total | 17.8% | |||||||
| 2013 LTIP | Interests held | Vesting % | Interests vesting | Date of vesting | Market price1 | Value £000 | ||
| Philip Bowman | 178,470 | 17.8% | 31,809 | Oct 2016 | £11.36 | 361 |
1 Based on the average share price over the three months to 31 July 2016 of £11.36.
The 2013 LTIP values carried in the single figure table also include dividend equivalents of £53,008 for Philip Bowman in respect of the vested LTIP shares.
During the year ended 31 July 2016, the executive directors were awarded conditional share awards under the LTIP details of which are summarised in the table below:
| Face value | |||||||
|---|---|---|---|---|---|---|---|
| Executive | Form of award | Date of grant | Number of shares awarded |
Award price1 | £'000 | % of salary | Date of vesting |
| Andy Reynolds Smith | Conditional shares | 26 Nov 2015 | 226,524 | £10.33 | 2,340 | 300% | Oct 2018 |
| Chris O'Shea | Conditional shares | 26 Nov 2015 | 119,796 | £10.33 | 1,238 | 250% | Oct 2018 |
1 The closing price on 25 November 2015.
The performance conditions attached to these 2015 LTIP awards are as follows:
| Vesting schedule | ||||
|---|---|---|---|---|
| Measure | Weighting | Performance period | Performance | % vesting |
| Group EPS growth | 30% | 1 August 2015 | < 3% p.a. | 0% |
| to 31 July 2018 |
3% p.a. | 7.5% | ||
| ≥ 12% p.a. | 30.0% | |||
| Straight-line vesting between these points | ||||
| Revenue Growth | 30% | 1 August 2015 | < 2% p.a. | 0% |
| to 31 July 2018 |
2% p.a. | 7.5% | ||
| ≥ 5% p.a. | 30.0% | |||
| Straight-line vesting between these points | ||||
| Return on Capital Employed | 20% | 1 August 2015 | < 15% | 0% |
| to 31 July 2018 |
15% | 5.0% | ||
| ≥ 18% | 20.0% | |||
| Straight-line vesting between these points | ||||
| Average cash conversion | 20% | 1 August 2015 | < 85% | 0% |
| to 31 July 2018 |
85% | 5.0% | ||
| ≥ 100% | 20.0% | |||
| Straight-line vesting between these points |
During the year ended 31 July 2016, Andy Reynolds Smith and Chris O'Shea became participants in the Smiths Group Sharesave Scheme. Andy Reynolds Smith has 2,078 share options under the scheme and Chris O'Shea has 3,464 share options under the scheme.
During the year ended 31 July 2016 (and as disclosed in last year's Remuneration Report), the following awards were made to Andy Reynolds Smith and Chris O'Shea to replicate the structure and fair value of incentives forfeited by each director as a consequence of their joining Smiths Group:
| Executive | Form of award | Date of grant | Number of shares awarded |
Award price1 | Face value £'000 |
Date of vesting |
|---|---|---|---|---|---|---|
| Andy Reynolds Smith | Restricted shares | 26 Nov 2015 | 30,412 56,481 |
£10.33 £10.33 |
314 583 |
30 Jun 2016 30 Jun 2017 |
| Conditional shares | 26 Nov 2015 | 79,806 26,602 26,602 |
£10.33 £10.33 £10.33 |
824 275 275 |
Oct 2018 Oct 2019 Oct 2020 |
|
| Chris O'Shea | Restricted shares | 26 Nov 2015 | 35,969 35,969 |
£10.33 £10.33 |
372 372 |
18 Sep 2016 18 Sep 2017 |
Restricted share awards will vest on the date of vesting shown, subject to the director remaining employed by Smiths Group at that date. The conditional shares awarded to Andy Reynolds Smith are based on performance over a period of three financial years preceding the vesting date, and will each vest subject to satisfaction of the same performance conditions that apply to awards made under the Company's LTIP vesting at the same time. The performance conditions for the first tranche of this award (vesting in October 2018) are as set out in the table summarising the 2015 LTIP performance conditions, above.
Andy Reynolds Smith and Chris O'Shea were each also entitled to a cash payment in early 2016, reflecting the actual reported outcome of the pro-rated 2015 annual bonus in respect of each director's former employment that was forfeited on joining Smiths Group. The amount of the cash payment for Andy Reynolds Smith (paid in April 2016) was £209,402 and is captured in the 'Other' column of the single figure of annual remuneration table on page 104. For Chris O'Shea, the actual reported outcome was for a zero payment and therefore no cash payment was made.
| Salary | Benefits | Bonus | |
|---|---|---|---|
| CEO remuneration | (9.6)% | (87.5)% | (1.0)% |
| Average of all employees | 2.6% | 0% | 17.9% |
CEO remuneration is based on a comparison of Philip Bowman's remuneration for 2015, and the sum of remuneration paid in 2016 to Andy Reynolds Smith and Philip Bowman (in relation to the period for which he remained CEO, ie to 25 September 2015).
'All employees' is defined as the global senior management population of approximately 60 individuals who are eligible to participate in the same incentive arrangements as the Chief Executive.
The table below shows shareholder distributions (ie dividends and share buybacks) and total employee pay expenditure for the financial years ended 31 July 2015 and 31 July 2016, and the percentage change.
| 2016 £m |
2015 £m |
Change | |
|---|---|---|---|
| Shareholder distributions | 163 | 160 | 1.9% |
| Employee costs | 872 | 857 | 1.8% |
No payments have been made to past directors in the year, other than those disclosed in the single figure of annual remuneration table on page 104.
Philip Bowman stepped down from the Board on 24 September 2015 and retired from the Company on 31 December 2015. Philip Bowman's remuneration as CEO for the year under review is captured in the single figure table. He continued to receive salary and benefits (including pension allowance) until his retirement and remained eligible for a pro-rata annual bonus for 2016. As disclosed in last year's Remuneration Report, the Committee exercised its discretion not to time pro-rate his outstanding CIP and LTIP awards. These vest on their normal vesting dates subject to the achievement of the original performance conditions over the relevant performance periods.
The following graph shows the Company's total shareholder return (TSR) performance over the past seven 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 were £193.47 and £214.91 respectively.
| CEO | 2010 P Bowman |
2011 P Bowman |
2012 P Bowman |
2013 P Bowman |
2014 P Bowman |
2015 P Bowman |
2016 P Bowman |
2016 A Reynolds Smith |
|---|---|---|---|---|---|---|---|---|
| CEO total remuneration £000 | 3,399 | 4,776 | 5,026 | 3,864 | 3,912 | 4,195 | 1,344 | 2,964 |
| Annual bonus outcome (% max) | 95% | 64% | 79% | 39% | 43% | 80% | 88% | 89% |
| CIP outcome (% max) | n/a | 100% | 100% | 100% | 100% | 100% | 100% | n/a |
| 2007 PSP outcome (% max)1 | 46% | 33% | n/a | n/a | n/a | n/a | n/a | n/a |
| LTIP outcome (% max) | 18% | 17% | 18% | n/a |
1 The 2007 PSP outcome shown for 2010 represents the outcome under the EPS element of that award only (2/3 of the award). The 2007 PSP outcome shown for 2011 represents the outcome under the TSR element of that award (1/3 of the award) as TSR performance was measured over a three-year period commencing on the date of the grant.
Note: VSP outcome as a percentage of maximum is not shown in table above as award opportunity was uncapped. Awards received are included in the CEO total remuneration table above and the values are: £1,453,000 for 2011 (150,694 shares at a price of £9.64); £1,899,000 for 2012 (175,193 shares at a price of £10.84); and £364,000 for 2013 at (25,885 shares at a price of £14.06).
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. 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 the following annualised salaries for executive directors for 2017:
| Executive director | 2015/16 | 2016/17 |
|---|---|---|
| Andy Reynolds Smith | £780,000 From date of joining |
£780,000 |
| Chris O'Shea | £495,000 From date of joining |
£507,375 From 1 August 2016 |
Andy Reynolds Smith and Chris O'Shea will each continue to receive a cash allowance in lieu of pension of 25% of their base salaries.
For 2017, Andy Reynolds Smith will continue to have a maximum bonus opportunity of 180% of salary and Chris O'Shea will continue to have a maximum bonus opportunity of 150% of salary. Annual bonus measures (and their weightings) will remain unchanged from 2016. 33% of any bonus earned will be deferred into shares for three years. Specific targets cannot be 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 (from 2016 onwards) of up to 400% of salary. Under the LTIP, the normal annual grants are 300% of salary for the Chief Executive and 250% of salary for the Finance Director.
LTIP awards granted to Andy Reynolds Smith and Chris O'Shea in 2016/17 (at the normal annual grant levels of 300% and 250% of salary respectively) will vest on the achievement of the following performance conditions:
| Performance measure | Weighting | Threshold performance target | Maximum performance target (full vesting of element) |
|---|---|---|---|
| 3-year EPS growth | 35% | 3% p.a. | 12% p.a. |
| 3-year average return on capital employed | 35% | 15% | 18% |
| 3-year average annual cash conversion | 30% | 85% | 100% |
The only change proposed to the LTIP for the 2016/17 cycle is a simplification of the scorecard from four to three measures. The Committee believes the proposed structure provides an appropriate balance between earnings growth, returns and cash. The Committee recognises that this balanced performance of the Group's performance 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.
NED fees paid for 2016 and to be paid in 2017 are shown below:
| 2016 | 2017 | |
|---|---|---|
| NED base fee | £64,575 | £66,200 |
| Additional fee payable to the Chairman of the Board | £328,425 | £336,636 |
| Additional fee payable to the Senior Independent Director | £20,000 | No change |
| Additional fees for Audit, Nomination and Remuneration Committee Chairs | £20,000 | No change |
| Attendance allowance for meetings outside the NED's home continent | £3,000 per meeting | No change |
It is proposed that executive directors should, over time, acquire a shareholding with a value equal to at least two years' base salary. 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. 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 2016.
| Shareholding requirement (% 2015/16 salary) |
Shares owned outright |
Shares subject to performance |
Performance tested but unvested shares |
Shares subject to CIP deferral |
Save As You Earn (SAYE) |
Current shareholding (% 2015/16 salary) |
Guideline met3 |
|
|---|---|---|---|---|---|---|---|---|
| Andy Reynolds Smith | 200% | 116,716 | 416,015 | 2,078 | 189% | No | ||
| Chris O'Shea | 200% | 20,069 | 191,734 | 3,464 | 51% | No | ||
| Philip Bowman1 | 200% | 610,599 | 472,382 | 22,935 | 0 | 692% | Yes | |
| Bruno Angelici | 2,000 | |||||||
| Sir George Buckley | 10,000 | |||||||
| David Challen2 | 1,333 | |||||||
| Tanya Fratto | 1,500 | |||||||
| Anne Quinn | 1,024 | |||||||
| Bill Seeger | 5,000 | |||||||
| Mark Seligman | 5,000 | |||||||
| Sir Kevin Tebbit | 1,000 |
1 The shares owned outright is at the date that Philip Bowman retired from the Company on 24 September 2015 and the value of his shareholding is based upon the share price on that date of £9.75.
2 The shares owned outright is at the date that David Challen retired from the Company on 17 November 2015.
3 Both Andy Reynolds Smith and Chris O'Shea have five years from the date of their appointment to meet the required personal shareholding.
There are no changes in the interests of the directors and their connected persons between 31 July 2016 and the date of this report.
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 10-year period to 10% of the issued ordinary share capital and under the Company's discretionary schemes to 5% in any 10-year period. As at 31 July 2016, the headroom available under these limits was 7.07% and 2.77%, respectively.
The directors' single figure of annual remuneration and accompanying notes on page 104; the incentive outcomes for 2015 and 2016 on page 105; the scheme interests awarded in 2016 and accompanying notes on page 107; the payments to past directors and payments for loss of office on page 109; the directors' shareholdings on page 111 and the directors' share options and long-term plans table on pages 112 to 114 have been audited.
The Directors' remuneration report has been approved by the Board and signed on its behalf by:
27 September 2016
| Options and awards held on |
Options and awards held on |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 31 July 2016 | 31 July 2015 | Option and award data | Awards vested 2015/16 | |||||||||
| Director and Plans | Number | Number | Performance test |
Exercise price |
Grant date |
Vesting date* |
Expiry date** |
Exercise/ vesting date |
Number | Exercise price |
Market price at date of grant# |
Market price at date of exercise## |
| Andy Reynolds Smith (appointed 25 September 2015) | ||||||||||||
| CEO Buyout | 0 | 0 | n/a | 26/11/15 | 30/06/16 | 31,597 | n/a 1034.00p 1114.50p | |||||
| award | 56,481 | 0 | n/a | 26/11/15 | 30/06/17 | 30/06/17 | ||||||
| Restricted | 79,806 | 0 | A | n/a | 26/11/15 | Oct 2018 | ||||||
| Share Award | 26,602 | 0 | F | n/a | 26/11/15 | Oct 2019 | ||||||
| 26,602 | 0 | TBD | n/a | 26/11/15 | Oct 2020 | |||||||
| LTIP 2015 | 226,524 | 0 | A | n/a | 26/11/15 | Oct 2018 | ||||||
| SAYE | 2,078 | 0 | – | 866.00p | 11/05/16 | 01/08/19 | 01/02/20 | |||||
| Chris O'Shea (appointed 18 September 2015) | ||||||||||||
| CFO Buyout | 35,969 | 0 | n/a | 26/11/15 | 18/09/16 | 18/09/16 | ||||||
| award | 35,969 | 0 | n/a | 26/11/15 | 18/09/17 | 18/09/17 | ||||||
| LTIP 2015 | 119,796 | 0 | A | n/a | 26/11/15 | Oct 2018 | ||||||
| SAYE | 3,464 | 0 | – | 866.00p | 11/05/16 | 01/08/21 | 01/02/22 | |||||
| Philip Bowman (stepped down 24 September 2015, ceased employment 31 December 2015) | ||||||||||||
| LTIP 2011 | 0† | 113,469 | D | n/a | 19/10/12 | 30/09/15 | 0 | |||||
| 0† | 68,081 | C | n/a | 19/10/12 | 30/09/15 | 0 | ||||||
| 0†† | 45,387 | E | n/a | 19/10/12 | ◊ | 30/09/15 | 37,823 | n/a 1076.00p | 999.62p | |||
| 89,235 | 89,235 | D | n/a | 19/09/13 | Oct 2016 | Oct 2016 | ||||||
| 53,541 | 53,541 | C | n/a | 19/09/13 | Oct 2016 | Oct 2016 | ||||||
| 35,694 | 35,694 | E | n/a | 19/09/13 | Oct 2016 | Oct 2016 | ||||||
| 100,398 | 100,398 | D | n/a | 26/09/14 | Oct 2017 | Oct 2017 | ||||||
| 60,239 | 60,239 | C | n/a | 26/09/14 | Oct 2017 | Oct 2017 | ||||||
| 40,159 | 40,159 | E | n/a | 26/09/14 | Oct 2017 | Oct 2017 | ||||||
| CIP | 0 | 107,704 | B | n/a | 19/10/12 | 30/09/15 | 107,704 | n/a 1076.00p | 999.62p | |||
| 41,913 | 41,913 | B | n/a | 26/09/13 | Oct 2016 | Oct 2016 | ||||||
| 51,203 | 51,203 | B | n/a | 26/09/14 | Oct 2017 | Oct 2017 | ||||||
| SAYE | 0 | 1,818 | – | 990.00p | 14/05/14 | 01/08/17 | 15/06/16 | 1,161 990.00p 1237.00p 1085.00p |
| CEO Buyout award | Under the terms of his contract of employment on joining the Company, Andy Reynolds Smith was granted a Buyout award over 86,893 shares of which 35% vested on 30 June 2016 and 65% will vest on 30 June 2017 (subject to Andy Reynolds Smith remaining an employee of the Company). 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. On 30 June 2016, Andy Reynolds Smith received 1,185 additional shares in respect of the notional dividends on the tranche of his award that vested that day. |
|---|---|
| Restricted Share Award | Under the terms of his contract of employment on joining the Company, Andy Reynolds Smith was also granted a conditional award over 133,010 shares of which up to 60% are expected to vest in October 2018 (subject to the performance tests applicable to awards granted under LTIP 2015 in 2015); 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. |
| CFO Buyout award | Under the terms of his contract of employment on joining the Company, Chris O'Shea was granted a Buyout award over 71,938 shares of which 50% will vest on 18 September 2016 (or at the end of any closed period in force at the time and subject to Chris O'Shea remaining an employee of the Company) and 20% will vest on 18 September 2017 (or at the end of any closed period in force at the time and subject to Chris O'Shea remaining an employee of the Company). 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. |
| CIP | The Smiths Group Co-Investment Plan |
| LTIP 2011 | The Smiths Group Long Term Incentive Plan 2011 |
| 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 CIP and the LTIPs are subject to the relevant performance test(s) being passed. |
| ** | The Expiry dates shown above apply in normal circumstances. No Expiry date is shown if the option or award was exercised or vested or lapsed prior to 23 September 2016. |
| # | Mid-market closing price of a Smiths share on the business day preceding the date of grant. Note: the exercise price of an option under the SAYE is set at 20% less than the mid-market closing price of a Smiths share on the business day immediately preceding the day on which employees are invited to participate in the grant. |
| ## | Actual sale price of shares sold on date of exercise of an option or the vesting of an award or the mid-market closing quotation on the date of exercise when no shares are sold. |
| † | Awards which lapsed during the period 1 August 2015 to 31 July 2016. |
| †† | Award which partially lapsed during the period 1 August 2015 to 31 July 2016. |
| ◊ | Awards which vested or were exercised after Philip Bowman ceased to be a director of the Company. |
| Performance tests | |
| A | LTIP 2015 awards – 30% subject to revenue growth; 30% subject to EPS element; 20% subject to cash conversion; 20% subject to return on capital employed. |
| B | CIP Return on Capital Employed (ROCE) test |
| C | LTIP Relative shareholder return (TSR) test |
| D | LTIP EPS growth test (EPS) test |
| E | LTIP Cash conversion (CC) test |
| F | LTIP 2016 awards (to be granted in the 2017 financial year) – 35% subject to EPS element; 35% subject to return on capital employed; 30% subject to cash conversion. |
| TBD | Each tranche of Andy Reynolds Smith's Restricted Share Award will vest subject to the same performance conditions as the LTIP award, which will vest at the same time as that tranche. Where these have yet to be agreed, these performance conditions will be confirmed in the relevant Remuneration Report. |
| – | There are no performance criteria for SAYE |
The high and low market prices of the ordinary shares during the period 1 August 2015 to 31 July 2016 were 858p and 1275p respectively.
The mid-market closing price on 31 July 2015 was 1129p and on 31 July 2016 was 1263p.
The mid-market closing prices of a Smiths share on the dates of the awards made to directors in the 2016 financial year was 1034p (26 November 2015).
The options over 5,542 shares granted to and held by the directors under SAYE at 31 July 2016 were granted at exercise prices below the market price of a Smiths Group share on 23 September 2016 (1420p).
None of the options or awards listed above was subject to any payment on grant.
No other directors held any options over the Company's shares during the period 1 August 2015 to 31 July 2016.
No options or awards have been granted to or exercised by directors or have lapsed during the period 1 August to 23 September 2016.
At 31 July 2016, the trustee of the Employee Share Trust held 852 shares (none of the directors had an interest in these shares at 31 July 2016). The market value of the shares held by the trustee on 31 July 2016 was £10,761 and dividends of approximately £351 were waived in the year in respect of the shares held by the trustee during the year.
Special provisions permit early exercise of options and vesting of awards in the event of retirement; redundancy; death; etc.
Smiths return on capital employed (ROCE) over the performance period for the 2012 CIP awards (1 August 2012 to 31 July 2015) exceeded the Company's weighted average costs of capital (WACC) over the period by more than 3% p.a. Accordingly the 2012 CIP Awards vested in full. The notional gross dividends accrued in respect of the performance period amounted to 165.56p per share. This amount, after deduction of income tax and National Insurance Contributions, was paid in cash in respect of each share that vested.
Over the three-year period from 1 August 2012 to 31 July 2015, Smiths TSR performance and EPS performance did not result in the vesting of any shares under those elements of the 2012 LTIP awards. The Cash Conversion element of the awards partially vested (83.3%) which resulted in 37,283 shares vesting for Philip Bowman. All the share awards under the TSR and EPS elements and the balance of the share awards under the Cash conversion element lapsed. The notional gross dividends accrued in respect of the performance period amounted to 165.56p per share. This amount, after deduction of income tax and National Insurance Contributions, was paid in cash in respect of each share that vested.
The results for the financial year ended 31 July 2016 are set out in the Consolidated income statement. Revenues for the year amounted to £2,949m (2015: £2,897m). The profit for the year after taxation amounted to £261m (2015: £248m).
An interim dividend of 13.25p per ordinary share of 37.5p ('ordinary share') was paid on 22 April 2016. The directors recommend for payment on 18 November 2016 a final cash dividend of 28.75p on each ordinary share, making a total dividend of 42p for the financial year.
The Group's progressive dividend policy is described in the CFO report on page 25.
Sir George Buckley; Bruno Angelici; Tanya Fratto; Anne Quinn, CBE; Bill Seeger; and Sir Kevin Tebbit, KCB, CMG all served as directors of the Company throughout the year. Chris O'Shea and Andy Reynolds Smith were appointed as executive directors on 18 September and 25 September 2015, respectively. Mark Seligman was appointed as a non-executive director on 16 May 2016. Philip Bowman resigned as a director and retired as Chief Executive on 24 September 2015. In accordance with section 430(2B) of the Companies Act 2006 (the '2006 Act'), details of the arrangements made in respect of Philip Bowman's retirement are available on the Company's website – www.smiths.com – and contained in the Directors' remuneration report on page 94. David Challen, CBE retired at the conclusion of the AGM on 17 November 2015 and has not received any payment following his retirement.
In accordance with the UK Corporate Governance Code, all the directors, apart from Mark Seligman, will retire voluntarily from office at the AGM and will seek re-election. Mark Seligman will retire at the AGM under Article 49 of the Company's Articles of Association, following his appointment during the year, and will seek election. Separate resolutions to re-elect or elect each of them as a director of the Company will be proposed at the AGM.
Biographical details of all the directors at the date of this report are set out on pages 72 to 74.
The Directors' remuneration report is on pages 94 to 114.
An ordinary resolution to approve the report will be put to shareholders at the AGM.
Details of the executive directors' service contracts are disclosed in the service contracts section of the Directors' remuneration report on page 101. Details of the interests of the executive directors in the Company's share option schemes and plans are shown in the Directors' remuneration report on pages 112 and 113.
Qualifying third-party indemnity provisions (as defined by section 234 the 2006 Act) have remained in force for the directors of the Company and certain other employees in respect of their directorships of some subsidiary companies during the financial year ended 31 July 2016 and, at the date of this report, are in force for the benefit of the current directors and certain other employees who are directors 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 company, as applicable.
Apart from the exceptions referred to above, no director had an interest in any significant contract to which the Company or its subsidiaries was a party during the year.
On 17 November 2015 the Company announced the finalisation of the triennial valuation of the Smiths Industries Pension Scheme as at 31 March 2015 under which the actuarial deficit was £285m, £250m lower than the previous triennial valuation. Following agreement with the Scheme Trustee, the Company's annual contribution to the Scheme has reduced from £60m per annum to £24m per annum. In August 2015 the Company concluded a partial buy-out of its US pension scheme under which US\$527m of liabilities was transferred to Voya Retirement Insurance and Annuity Company, thereby insuring around 60% of the of the gross liabilities of that scheme. On 1 March 2016 the Company announced the finalisation of the triennial valuation of the TI Group Pension Scheme under which the actuarial valuation had reduced from £117m to £16m. The Company has agreed with the Trustee to pay off the remaining deficit over three financial years, with the Company's contributions reducing from £16m in 2015 to £3m in 2017 and 2018.
On 21 April 2016 the Company announced it had agreed with Safran S.A. to purchase its Morpho Detection business for US\$710m. The acquisition is subject to customary conditions and regulatory approvals in several countries and is expected to be completed in early 2017.
On 25 July 2016 the Company moved its headquarters and its registered office to 4th Floor 11-12 St James's Square, London SW1Y 4LB.
On 23 September 2016 the Company announced that it had reached agreement to sell John Crane's Artificial Lift business for a cash consideration of US\$39.5m. Completion of the transaction is subject to customary regulatory approvals.
There have been no other post-balance sheet events.
As at 31 July 2016 the Company had been notified, pursuant to the Disclosure Guidance & Transparency Rules ('DTRs') of the Financial Conduct Authority ('FCA'), of notifiable voting rights in its issued share capital or had received disclosures pursuant to the 2006 Act of shareholding interests in excess of 3% of its share capital, as follows:
| Number of shares |
Percentage of issued ordinary share capital* |
Date of notification or disclosure |
|
|---|---|---|---|
| Ameriprise Financial | 23.1m | 5.9% | 11/08/2016 |
| BlackRock | 26.9m | 6.8% | 08/08/2016 |
| Dodge & Cox | 28.4m | 7.2% | 12/08/2016 |
| Harris Associates LP | 28.3m | 7.2% | 10/08/2016 |
*Percentage of ordinary share capital in issue on 31 July 2016.
During the period 1 August to 23 September 2016 the Company has received the following notifications or disclosures:
*Percentage of ordinary share capital in issue on 23 September 2016.
Note: The DTRs oblige a shareholder to notify to a company when his interests in the voting rights of that company's shares exceed or fall below 3% of the company's issued share capital and every whole percentage point above 3%. Where the voting rights in shares are managed by an investment manager under certain defined schemes, the manager is obliged to notify a company when its interests in the voting rights in the shares it manages under such schemes exceed or fall below 5% or 10% of the company's issued share capital.
The interests of the directors, their families and any connected persons in the issued share capital of the Company are shown in the Directors' remuneration report on page 111.
The Company has Group policies on environmental, employee and health & safety matters and operates a Code of Business Ethics. The Company seeks to minimise, as far as is reasonably practicable, any detrimental effects on the environment of its operations and products. The Group HR director has responsibility for environmental, health and safety matters, which are subject to preventative, investigatory and consultative systems, overseen by the Group Environment, Health and Safety Committee, and reports regularly to the Board on these matters. Issues relevant to the Company pension schemes are likewise covered by means of structured committees, including representation from recognised trade unions.
Further information on environmental, employee and health and safety matters, including key performance indicators, is contained in the Corporate responsibility summary on pages 61 to 69. The full Corporate responsibility report is available online at www.smiths.com/responsibility.
The Corporate governance statement is on pages 75 to 93 and is incorporated in this Directors' report by reference. PricewaterhouseCoopers LLP has reviewed the Company's statements as to compliance with the UK Corporate Governance Code, to the extent required by the UK Listing Authority Listing Rules. The results of its review are set out in the Independent auditors' report on pages 125 to 131.
The statements and reviews on pages 2 to 69 comprise the Group Strategic report which contains certain information, outlined below, that is incorporated into this Directors' report by reference:
The Company does not operate through any branches. Some Group subsidiary companies have established branch operations outside the UK.
The financial risk management objectives and policies of the Group; the policy for hedging each major type of forecasted transaction for which hedge accounting is used; and the exposure of the Group to foreign exchange risk, interest rate risk, price risk, financial credit risk, liquidity risk and cash-flow risk is outlined in note 18 of the Group accounts.
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 2 to 69. The financial position of the Company, its cash-flows, liquidity position and borrowing facilities are described in the CFO report on pages 25 to 31. 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.
On 30 June 2016 the Group paid off £150m of debt on maturity. The bond repayment resulted in the decrease of the average maturity of gross debt to 4.5 years (from 5.1 years at 31 July 2015).
The Group holds its debt in the currency of its underlying assets and as such most debt is held in US dollars and euros. The strengthening of both these currencies against the British pound in late June 2016 contributed to the Group's net debt, as reported in British pounds, increasing. At 31 July 2016 the net debt of the Group was £978m, a £160m increase from 31 July 2015. At 31 July 2016 the Group had available cash and short-term deposits of £431m. These liquid resources are immediately available with 98% invested with the Group's global banking partners.
The Group maintains a core US\$800m committed revolving credit facility from these banks which was undrawn at 31 July 2016. This committed facility matures in February 2021. 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 52 to 60, and have paid particular attention to the financial and pension funding risks and their mitigation (see page 56).
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 annual accounts of the Company and the Group.
The directors' assessment of the long-term prospects of the Company is described in the Strategic report on page 52.
As at 31 July 2016, the Company's nominal issued share capital was £148,208,652 and comprised 395,223,072 ordinary shares. The ordinary shares are listed and admitted to trading on the Main Market of the London Stock Exchange (symbol: SMIN). The Company has an American Depositary Receipt ('ADR') programme for which J.P. Morgan acts as Depositary and transfer agent. One ADR equates to one Smiths Group ordinary share. The programme trades 'over-the-counter' as a level 1 ADR programme under the ticker symbol SMGZY. At the year-end, 5,580,727 ordinary shares were held by the nominee of the programme depositary in respect of the same number of ADRs in issue at that time.
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.
There are no restrictions on transfer or limitations on the holding of any class of shares and no requirements for prior approval of any transfers. None of the shares carries any special rights with regard to control of the Company. There are no restrictions on the voting rights attaching to the ordinary shares (other than a 48 hour cut-off for the casting of proxy votes prior to a general meeting). There are no arrangements of which the directors are aware under which financial rights are held by a person other than the holder of the shares and no known agreements relating to or restrictions on share transfers or voting rights.
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 2016 the trust held 852 ordinary shares in the Company. The trust waived its dividend entitlement on its holding during the year: the trust abstains from voting the shares at general meetings.
The tables on pages 115 and 116 set out the notifications received by the Company pursuant to the FCA's DTRs and the 2006 Act, as at 31 July 2016 and any changes thereto up to 23 September 2016, from persons with significant direct or indirect holdings in the Company's share capital.
The rules about the appointment and replacement of directors are contained in the Company's Articles of Association and legislation in force from time to time. Changes to the Articles of Association must be approved by the shareholders in accordance with the legislation in force from time to time.
The powers of the directors are determined by English law and the Articles of Association of the Company in force from time to time. The directors have been authorised to issue and allot ordinary shares, pursuant to Article 5. The directors have authority to make market purchases of ordinary shares. The powers to issue and allot shares and, subject to specified limits, to allot shares on a non pre-emptive basis and on a pre-emptive basis, are referred to the shareholders at the AGM each year for renewal. At the AGM the shareholders are also requested to renew the power to make market purchases of ordinary shares. Any ordinary shares so purchased may be cancelled or held in treasury.
The Company has in place credit facility agreements under which a change in control would trigger prepayment clauses and 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 Company's share plans (including the buy-out awards granted to the executive directors on their appointments) contain clauses which may cause options and awards to vest on a change in control, in some cases subject to the satisfaction of performance conditions at that time. The Company is not party to any other significant agreements that would take effect, alter or terminate upon a change of control following a takeover.
No director or employee is contractually entitled to compensation for loss of office or employment as a result of a change in control except that provisions of the Company's share schemes may cause options and awards granted to employees under such schemes to vest on a change in control, in some cases subject to the satisfaction of performance conditions at that time.
No shares in the Company were either purchased or acquired or charged or disposed of by the Company or any nominee of the Company during the financial year ended 31 July 2016.
The 2006 Act recognises the growing importance of electronic communication ('e-communication') and enables companies to provide documentation and communications to shareholders via their websites, except to those shareholders who elect to receive hard (printed paper) copies by post. E-communication allows shareholders faster access to important information about the Company; saves the Company considerable overheads, by reducing its print production costs and postage; and helps the environment by saving the energy and raw materials that would otherwise be used in producing and dispatching printed documents. At the Extraordinary General Meeting held on 11 June 2007 shareholders approved the adoption of electronic communications.
Electronic copies of the Annual Report 2016 and the Notice of AGM will be posted on the Company's website, www.smiths.com. The Company's announcements to the Stock Exchange and press releases are available online through the website. Shareholding details and practical help on share transfers and changes of address can be found at www.shareview.co.uk.
Shareholders wishing to change their election and receive documents in hard copy form can do so at any time by contacting the Company's Registrar or by logging on to www.shareview.co.uk.
The 2016 AGM will be held on Tuesday 15 November 2016 at 11:00 am. The Notice of the AGM will be published on the Company's website, www.smiths.com, on or around 13 October 2016.
Details of the Directors' remuneration policy as approved at the AGM in 2015, are shown on pages 95 to 98. Under the regulations which now form part of the 2006 Act, the remuneration policy must be put to a binding shareholder vote at least once every three years. All payments to former and current directors must comply with the terms of the policy, unless specifically approved by shareholders in general meeting.
At the AGM shareholders will be asked to renew and extend the authority, given to the directors at the last AGM, to allot shares in the Company, or grant rights to subscribe for, or to convert any security into, shares in the Company for the purposes of Section 551 of the 2006 Act (the 'Allotment Resolution').
The authority in the first part of the Allotment Resolution will allow the directors to allot new shares in the Company or to grant rights to subscribe for or convert any security into shares in the Company up to a nominal value which is equivalent to approximately one-third of the total issued ordinary share capital of the Company as at the latest practical date prior to the publication of the Notice of AGM.
The authority in the second part of the Allotment Resolution will allow the directors to allot new shares or to grant rights to subscribe for or convert any security into shares in the Company only in connection with a rights issue up to a nominal value which is equivalent to approximately one-third of the total issued ordinary share capital of the Company as at the latest practical date prior to the publication of the Notice of AGM. This is in line with corporate governance guidelines. The Board has undertaken to seek the re-election of each director annually by the shareholders, whether or not this authority were to be used.
There are no present plans to undertake a rights issue or to allot new shares other than in connection with the Company's share option schemes and plans. The directors intend to take note of relevant corporate governance guidelines on the use of such powers in the event that the authority is exercised.
If the Allotment Resolution is passed the authority will expire on the earlier of 31 January 2018 and the end of the next AGM, due to be held in 2017.
Also at the AGM shareholders will be asked to pass two special resolutions to renew the powers granted to directors to disapply shareholders' pre-emption rights under certain circumstances (the 'Pre-emption Resolutions').
If the directors wish to allot new shares and other equity securities, or sell treasury shares, for cash (other than in connection with an employee share scheme) company law requires that these shares are offered first to shareholders in proportion to their existing holdings. There may be occasions, however, when the directors need the flexibility to finance business opportunities by the issue of shares without a pre-emptive offer to existing shareholders. This cannot be done under the 2006 Act unless the shareholders have first waived their pre-emption rights. The purpose of the Pre-emption Resolutions is to enable shareholders to so waive their pre-emption rights.
The Pre-emption Resolutions authorise the directors to allot new shares, pursuant to the authority given by the Allotment Resolution, or to sell treasury shares for cash:
a) in connection with a rights issue or pre-emptive offer; and/or
b) otherwise up to a nominal value equivalent to 5% of the total issued ordinary share capital of the Company as at the latest practical date prior to the publication of the Notice of AGM; and
c) in connection with the financing (or refinancing, if the authority is to be used within six months after the original transaction) of an acquisition or specified capital investment which is announced contemporaneously with the allotment or which has taken place in the preceding six-month period and is disclosed in the announcement of the allotment (provided that the nominal value equivalent is no more than 5% of the total issued share capital of the Company at the latest practical date prior to the publication of the Notice of AGM),
in each case without the shares first being offered to existing shareholders in proportion to their existing holdings.
The Board intends to adhere to the provisions in the Pre-emption Group's Statement of Principles, as updated in March 2015, and not to allot shares for cash on a non pre-emptive basis pursuant to the authority in Pre-emption Resolutions:
in each case other than in connection with an acquisition or specified capital investment which is announced contemporaneously with the allotment or which has taken place in the preceding six-month period and is disclosed in the announcement of the allotment.
The Pre-emption Resolutions also authorise the directors to allot new shares, pursuant to the authority given by the Allotment Resolution, or to sell treasury shares for cash in connection with a rights issue, without the shares first being offered to existing shareholders in proportion to their existing holdings. This is to allow the directors to make exclusions or such other arrangements as may be appropriate to resolve legal or practical problems which, for example, might arise with overseas shareholders. This is in line with corporate governance guidelines.
If the Pre-emption Resolutions are passed, the authorities they confer will expire on the earlier of 31 January 2018 and the end of the next AGM, due to be held in 2017.
During the financial year ended 31 July 2016, the following ordinary shares in the Company were issued:
•363,068 ordinary shares pursuant to the terms of the Company's shareholder-approved share option schemes and share plans.
At the AGM the Company will seek to renew the authority, granted at the last AGM to the directors, to purchase the Company's ordinary shares in the market.
The effect of the resolution is to renew the authority granted to the Company to purchase its own ordinary shares until the next AGM (due to be held in 2017) or 31 January 2018 whichever is the earlier. This authority is limited to 10% of the ordinary shares in issue as at the latest practical date prior to the publication of the Notice of AGM and the Company's exercise of this authority is subject to the stated upper and lower limits on the price payable, which reflect the requirements of the Listing Rules.
Pursuant to the 2006 Act, the Company can hold the shares which have been purchased as treasury shares and either resell them for cash, cancel them, either immediately or at a point in the future, or use them for the purposes of its employee share schemes. The directors believe that it is desirable for the Company to have this choice as holding the purchased shares as treasury shares would give the Company the ability to resell or transfer them in the future, and so provide the Company with additional flexibility in the management of its capital base. No dividends will be paid on, and no voting rights will be exercised in respect of, treasury shares. However, it is not the Company's present intention to hold shares in treasury in the event that any shares were to be purchased under this authority.
Shares will only be purchased if the directors consider such purchases to be in the best interests of shareholders generally and that they can be expected to result in an increase in earnings per share. The authority will only be used after careful consideration, taking into account market conditions prevailing at the time, other investment opportunities, appropriate gearing levels and the overall financial position of the Company. Shares held as treasury shares will not automatically be cancelled and will not be taken into account in future calculations of earnings per share (unless they are subsequently resold or transferred out of treasury).
If any shares purchased by the Company are held in treasury and used for the purposes of its employee share schemes, the Company will count those shares towards the limits on the number of new shares which may be issued under such schemes.
At 27 September 2016, the Company did not hold any shares in treasury.
The Group made contributions to non-EU political parties totalling US\$36,500 (£28,000) during the year. The political contributions were made on a bi-partisan basis in the US, in accordance with US state and federal election laws, in order to raise awareness and to promote the interests of the Company. The Group has a number of key manufacturing sites and approximately 7,900 employees in the US.
A resolution will be proposed at the AGM to renew the authority, granted by the shareholders at the last AGM to the Company and its UK subsidiaries, to make donations to political organisations and to incur political expenditure.
Part 14 of the 2006 Act requires companies to obtain shareholders' authority for donations to registered political parties and other political organisations in the EU totalling more than £5,000 in any twelve-month period, and for any political expenditure in the EU, subject to limited exceptions. The definition of donation in this context is very wide and extends to bodies such as those concerned with policy review, law reform and the representation of the business community. It could include special interest groups, such as those involved with the environment, which the Company and its UK subsidiaries might wish to support, even though these activities are not designed to support or influence support for a particular political party.
It is the policy of the Company not to make political donations or incur political expenditure in the EU, as those expressions are normally understood. To avoid inadvertent infringement of the 2006 Act, the directors are seeking shareholders' authority for the Company and its UK subsidiaries to make political donations (as defined in the 2006 Act) and to incur political expenditure (as defined in the 2006 Act) for the period from the date of the AGM to the conclusion of next year's AGM up to a maximum aggregate amount of £50,000.
Resolutions will be proposed at the AGM to reappoint PricewaterhouseCoopers LLP as independent auditors, to hold office until the next meeting at which the accounts are laid, and to authorise the directors to determine the auditors' remuneration. Further information on the process for recommending the appointment of auditors is contained in the Audit Committee report on pages 88 and 89.
A special resolution will be proposed at the AGM to renew the authority, granted by the shareholders at the last AGM to the Company, to call a general meeting of the Company (other than an AGM) with a minimum notice period of 14 clear days. Changes made to the 2006 Act by the Shareholders' Rights Regulations increased the notice period required for general meetings of the Company to 21 days unless shareholders approve a shorter notice period, which cannot, however, be less than 14 clear days. AGMs will continue to be held on at least 21 clear days' notice.
Before the coming into force of the Shareholders' Rights Regulations on 3 August 2009, the Company was able to call general meetings other than an AGM on 14 clear days' notice without obtaining such shareholder approval. In order to preserve this ability, such approval is sought at the AGM. Any exercise of this power by the Company will be conducted in accordance with any relevant corporate governance guidelines applicable at the time. In particular, the shorter notice period will only be used where flexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. The approval will be effective until the Company's next AGM, when it is intended that a similar resolution will be proposed.
The Company will comply with the requirement to provide appropriate facilities for all shareholders to vote by electronic means at general meetings held on less than 21 clear days' notice.
| Listing Rule | Information to be included | Disclosure |
|---|---|---|
| 9.8.4(1) | Interest capitalised by the Group | £1.8m interest was capitalised as part of the costs of development projects. £0.4m of tax relief has been recognised as current tax relief in the period |
| 9.8.4(2) | Unaudited financial information (LR9.2.18) | The supplementary US dollar financial statements on pages 186 to 190 The Group financial record 2012-2016 on page 185 |
| 9.8.4(4) | Long-term incentive scheme only involving a director (LR9.4.3) |
The terms of the contracts entered into with Chris O'Shea, appointed as Chief Financial Officer on 18 September 2015, and Andrew Reynolds Smith, appointed as Chief Executive on 25 September 2015, are described on page 101 and include details of their incentive arrangements |
| 9.8.4(5) | Directors' waivers of emoluments | None |
| 9.8.4(6) | Directors' waivers of future emoluments | None |
| 9.8.4(7) | Non pro-rata allotments for cash (issuer) | Shares have been issued and allotted pursuant to the exercise of options awarded under shareholder-approved schemes |
| 9.8.4(8) | Non pro-rata allotments for cash (major subsidiaries) | None |
| 9.8.4(9) | Listed company is a subsidiary of another company | Not applicable |
| 9.8.4(10) | Contracts of significance involving (a) a director or (b) a controlling shareholder |
(a) None; (b) Not applicable |
| 9.8.4(11) | Contracts for the provision of services by a controlling shareholder |
Not applicable |
| 9.8.4(12) | Waivers of dividends | (1) Wealth Nominees Limited WAIVED a/c (per pro the Smiths Industries Employee Share Trust) waived all the dividends payable in the year on its holding of 852 shares; and (2) Reuter File Limited waived its dividends in full (on 2 shares) |
| 9.8.4(13) | Waivers of future dividends | (1) Wealth Nominees Limited WAIVED a/c (full waiver) (2) Reuter File Limited (full waiver) |
| 9.8.4(14) | Agreement with a controlling shareholder LR9.2.2AR(2)(a) |
Not applicable |
| Additional information pursuant to LR9.8.6 | ||
| Listing Rule | Information to be included | Disclosure |
| 9.8.6(1) | Directors' (and their connected persons') interests in Smiths shares at year-end and at not more than one month prior to date of the Notice of AGM |
See page 111 |
| 9.8.6(2) | Interests in Smiths shares disclosed under DTR5 at year-end and not more than one month prior to date of the Notice of AGM |
See pages 115 and 116 |
| 9.8.6(3)(a) | Directors' going concern statement | See page 116 |
| 9.8.6(3)(b) | Directors' assessment of the Company's prospects | See page 52 |
| 9.8.6(4)(a) | Amount of the authority to purchase own shares available at year-end |
Authority available in full at year-end |
| 9.8.6(4)(b) | Off-market purchases of own shares during the year | None |
| 9.8.6(4)(c) | Off-market purchases of own shares post year-end | None |
| 9.8.6(4)(d) | Non pro-rata sales of treasury shares during the year | None |
| 9.8.6(5) | Compliance with the Main Principles of the UK Corporate Governance Code |
See the Corporate governance statement on page 76 |
| 9.8.6(6)(b) | Details of non-compliance with UK Corporate Governance Code and reasons |
See the Corporate governance statement on page 76 |
| 9.8.6(7) | Re directors proposed for re-election: the unexpired term of any director's service contract and a statement about directors with no service contracts |
Details of the executive directors' service contracts are given in the Directors' remuneration report on page 101 The Chairman and the non-executive directors serve under letters of appointment – see page 101 |
The Company continues to provide electronic proxy voting for this year's AGM. Shareholders who are not Crest members can appoint a proxy and vote online for or against (or consciously not vote on) the resolutions to be proposed at the AGM by visiting the website www.sharevote.co.uk. The onscreen instructions will give details on how to complete the appointment and voting process. 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. The Company may treat as invalid a Crest proxy voting instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
Paper proxy cards will be distributed with the Notice of AGM to all shareholders other than those who have elected to receive Company notifications by email.
Shareholders who will not be able to attend the AGM on 15 November 2016 in person are encouraged to vote their shares by appointing a proxy and issuing voting instructions (either electronically or by completing and returning their proxy cards). Electronic and paper proxy appointments and voting instructions must be received by the Company's Registrar not later than 48 hours before the AGM in order to be valid.
Following the publication of FRS 100 'Application of financial reporting requirements' by the Financial Reporting Council, the Company was required to change its accounting framework for its financial statements, which previously had followed UK GAAP, for the financial year commencing 1 August 2015.
The Board considered that it would be in the best interests of the Company to adopt FRS 101 'Reduced Disclosure Framework'. No disclosures in the current UK GAAP financial statements would be omitted on adoption of FRS 101.
Shareholders were invited to register any objection to the use of this Reduced Disclosure Framework no later than 10:30 am on 15 November 2015. No objections were received. The 2016 financial statements contained in this Annual Report have been prepared using the FRS 101 framework.
The address and contact details of Equiniti Limited, the Company's Registrar, are listed on the inside back cover of this report. Individual shareholders' access to their personal shareholder information is available online, through the www.shareview.co.uk website. The UK shareholder helpline telephone number is 0371 384 2943. Helpline services are available from 08:30 to 17:30, Monday to Friday. The international shareholder helpline telephone number is +44 (0) 121 415 7047.
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. If you received this document in printed form from the Company and have recently sold or transferred all your shares in Smiths Group plc, please pass this document to the purchaser or transferee or to the agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.
As at the date of this report, as far as each director is aware, there is no relevant audit information of which the Company's auditors are unaware. Each director has taken all the steps he or she should have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
Your directors believe that all the proposals to be considered at the AGM are in the best interests of the Company and its shareholders as a whole and recommend shareholders to vote in favour of the resolutions. The directors intend to vote in favour of the resolutions in respect of their own beneficial holdings.
By Order of the Board
Secretary Smiths Group plc 4th Floor, 11-12 St James's Square, London SW1Y 4LB
27 September 2016
| Statement of directors' responsibilities | 124 |
|---|---|
| Independent auditors' report to the members of Smiths Group plc |
125 |
| Consolidated income statement | 132 |
| Consolidated statement | |
| of comprehensive income | 133 |
| Consolidated balance sheet | 134 |
| Consolidated statement | |
| of changes in equity | 135 |
| Consolidated cash-flow statement | 136 |
| Accounting policies | 137 |
| Income statement notes | |
| 1 Segment information | 144 |
| 2 Operating profit 3 Non-statutory profit measures |
149 149 |
| 4 Net finance costs | 150 |
| 5 Earnings per share | 151 |
| Taxation notes | |
| 6 Taxation | 151 |
| Employee costs notes | |
| 7 Employees | 154 |
| 8 Post-retirement benefits 9 Employee share schemes |
155 161 |
| Balance sheet notes | |
| 10 Intangible assets | 162 |
| 11 Impairment testing | 163 |
| 12 Property, plant and equipment | 167 |
| 13 Inventories | 167 |
| 14 Trade and other receivables | 168 |
| 15 Trade and other payables | 168 |
| Financial instruments notes 16 Financial assets |
169 |
| 17 Borrowings and net debt | 169 |
| 18 Financial risk management | 170 |
| 19 Derivative financial instruments | 175 |
| 20 Fair value of financial instruments | 177 |
| 21 Commitments | 177 |
| Provisions notes 22 Provisions and contingent liabilities 178 |
|
| Reserves notes | |
| 23 Share capital | 181 |
| 24 Dividends | 181 |
| 25 Reserves | 181 |
| Cash-flow notes | |
| 26 Cash-flow | 182 |
| Other associated notes 27 Business held for sale |
183 |
| 28 Non-statutory capital and | |
| credit metrics | 184 |
| Unaudited Group financial record | |
| 2012-2016 | 185 |
| Unaudited US dollar primary statements 186 | |
| Unaudited Group US dollar financial | |
| record 2013-2016 | 191 |
| Independent auditors' report to the | |
| members of Smiths Group plc | 192 |
| Smiths Group plc company accounts | 194 |
Larger packages, smaller space Smiths Detection took on a customer's challenge to develop a mobile x-ray unit that could accommodate larger packages, but be available in a smaller vehicle. Applying continuous improvement techniques, we not only succeeded in producing the much smaller ScanVan, but also increased the efficiency, safety and throughput of the manufacturing process – cutting manufacturing costs by up to 50%.
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:
•select suitable accounting policies and then apply them consistently;
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 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 72 to 74) confirms that to the best of his or her knowledge:
•the Group's financial statements have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the Group's assets, liabilities and financial position as at 31 July 2016 and of its profit for the financial year then ended; and
•the Group directors' report and Strategic report include a fair review of the development and performance of the business and the position and performance of the Group, together with a description of the principal risks and uncertainties that the Group faces.
Signed on behalf of the Board of directors:
Andy Reynolds Smith Chris O'Shea Chief Executive Chief Financial Officer 27 September 2016
In our opinion, Smiths Group plc's Group accounts (the "financial statements"):
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law.
| Our audit approach Overview |
|
|---|---|
| Materiality | •Overall Group materiality of £17 million. |
| Audit scope | •We conducted audit work in 13 countries covering 40 reporting units. |
| •The reporting units where we performed audit work accounted for 75% (2015: 75%) of the Group's revenues and 79% (2015: 78%) of the Group's headline operating profit. |
|
| Areas of focus | •Revenue recognition (occurrence and cut off), together with accounting for complex programmes and contract accounting in the Smiths Detection and Smiths Interconnect Divisions. |
| •Working capital and associated provisions. | |
| •Goodwill and intangible asset impairment assessments, particularly for the Smiths Interconnect, John Crane Production Solutions and Detection CGUs. |
|
| •Product litigation provisions for asbestos in John Crane, Inc. and flexible gas piping product in Titeflex Corporation, a subsidiary of the Flex-Tek Division. |
|
| •Taxation provisions and the recognition of deferred tax assets. | |
| •Defined benefit pension plan net assets and liabilities. |
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)").
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as "areas of focus" in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. Each of the areas of focus below is referred to in the Significant Judgements and Issues section of the Audit Committee Report on page 90 and in the Significant judgement, key assumptions and estimates section of the Accounting Policies on pages 137 to 138. This is not a complete list of all risks identified by our audit.
We focused on revenue recognition for all divisions in the final month of the financial year to check that revenue was recorded in the correct period.
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 deliverables within the contract, achieving milestones within those contracts and the mechanisms in the contract by which risks and rewards 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 to recognise on revenue that is recorded.
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 provisions.
We focused on this area because inventory provisions include subjective estimates and are influenced by assumptions concerning future selling prices and the level of sales activity, and the Group also has material amounts of trade receivables that are overdue and not impaired (as disclosed in note 14 to the financial statements).
We focused in particular on inventory levels in those parts of the business experiencing challenging trading environments. We also focused on divisions with inherent judgements associated with large programmes and complex contractual terms.
The key associated risks were recoverability of billed and unbilled trade receivables and the valuation of inventory.
For all the divisions we assessed whether the Group's revenue recognition policies complied with IFRSs as adopted by the EU and tested the implementation of those policies. Specifically we considered whether revenue was recognised based on the transfer of the risks and rewards of ownership of goods 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 transactions which occurred near 31 July 2016.
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 and its financial ledgers.
In the case of the Smiths Detection and Smiths Interconnect divisions, for a sample of contracts, we read extracts of the relevant customer agreements and tested the accounting for separate deliverables and contractual milestones. This testing included evaluating customer acceptance of the work done to establish whether contractual milestones had been achieved, assessing the impact of any ongoing disputes, and assessing the reasonableness of the directors' 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.
Where appropriate, we evaluated the directors' forecasted sales for each significant category of slow moving inventory by comparing them to historical sales and orders for future sales.
We compared the historical provision for bad debts to the actual amounts written off, to determine whether the directors' estimation techniques were reasonable and considered the adequacy of provisions for bad debts for significant customers at reporting unit level, taking into account specific credit risk assessments for each customer.
In addition, we performed the procedures documented above for revenue recognition in relation to the key long term revenue contracts.
As a result, we satisfied ourselves that both inventory and receivables provisions have been prepared in line with Group policy and we found the estimates to be in line with our expectation.
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 overstated.
Goodwill and indefinite-lived intangible assets 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 dispose, requires judgement in both identifying and then valuing the relevant CGUs.
The impairment assessment for these assets involves subjective judgements about future business performance, with key assumptions including cash flows, the overall long-term growth rates, discount rates used and to the extent relevant, the fair value less costs to dispose.
In the year ended 31 July 2016, an impairment charge of £23m was recognised in relation to the John Crane Production Solutions, Microwave Components and Microwave Telecoms cash generating units ("CGUs"). We focused, in particular, on the recoverable values of each of these CGUs in the context of challenging trading conditions.
We also focused on the estimated values in use of the Power CGU, which has a combined net book value of goodwill of £128m. As this CGU has a lower headroom between its carrying value and value in use, judgements in the valuation models are even more important.
We evaluated the directors' future cash flow forecasts, and the process by which they were drawn up, including testing the underlying calculations and comparing them to the latest Board approved divisional budgets.
We challenged:
We evaluated the reasonableness of the directors' forecast performance by performing a sensitivity analysis around the key drivers of the cash flow forecasts, in particular:
We also evaluated the directors' assessment of the fair value less costs of disposal by comparing it to external analyst valuations.
In respect of the John Crane Production Solutions and Microwave Components CGUs, we sensitised each key driver of the cash flow forecasts, including the underlying assumptions listed above, by determining what we considered to be a reasonable possible change in assumption, based on current market data and historical and current business performance. Through this we determined an appropriate range of value in use. In respect of the Microwave Telecoms CGU, we assessed the fair value less costs to sell assessment referencing analyses of peer companies and broker reports. We found the assumptions used in determining the £5m, £7m and £11m impairments to be within an appropriate range.
For the Power CGU, having ascertained the extent of change in the assumptions that either individually or collectively would be required for the goodwill to be impaired, we considered the likelihood of such a movement in those key assumptions and resulting sensitivity analyses set out in note 11.
We validated the appropriateness of the related disclosures in note 11 of the financial statements, including sensitivities provided with respect to the Power CGU.
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 £252m has been made for the future defence costs which the Group is expected to incur and the expected costs of future adverse judgments 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 £94m 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.
Taxation provisions and the recognition of deferred tax assets
The Group has recognised £246m deferred tax assets on the balance sheet, the recognition of 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.
In John Crane Inc. we used our own internal experts to challenge management's assumptions underlying the adverse judgement and defence cost provisions. This included an examination of the model maintained by management's valuation expert and evaluation of the work of the 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. In addition we tested the mathematical accuracy of the underlying calculations and the input data.
At Titeflex Corporation we challenged management's underlying assumptions supporting their 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 testing them to historic claims.
We also discussed these matters with the Company's internal legal counsel, obtained letters from external counsel and evaluated the appropriateness of the disclosures made in the Group financial statements.
We found the assumptions to be consistent and in line with historical claims, that the provisions have been recognised in line with IAS 37 and that appropriate disclosures have been provided within the financial statements.
We evaluated the directors' assessment as to whether there will be sufficient taxable profits in future periods to support the recognition of deferred tax assets by evaluating the directors' future cash flow forecasts, and the process by which they were drawn up, including testing the underlying calculations and comparing them to the latest Board approved divisional budgets. We challenged:
We used our tax specialists to challenge management's assumptions underlying the provisions for uncertain tax positions. We discussed with management the known uncertain tax positions and read communications from taxation authorities to identify uncertain tax positions.
We assessed the adequacy of the directors' taxation provisions by considering factors such as whether the matter represents a permanent or temporary difference, and whether the provision addresses possible penalties and interest.
We did not identify any material exceptions from our audit work.
The Group has defined benefit pension plans with net post-retirement assets of £328m and net post-retirement liabilities of £249m, which are significant in the context of the overall balance sheet of the Group.
The valuation of the pension liabilities requires significant levels of judgement and technical expertise in choosing appropriate assumptions. A number of the key assumptions (including salary increases, inflation, discount rates and mortality) can have a material impact on the calculation of the liability.
The pension assets include significant pension asset investments, the fair value measurement of which includes some judgement.
The recognition of post-retirement plan net assets for accounting purposes is dependent on the rights of the employers to recover the surplus at the end of the life of the scheme.
We evaluated the directors' assessment of the assumptions made in relation to the valuations of the liabilities and assets in the pension plans and the assumptions around salary increases and mortality rates by comparing them to national and industry averages.
We also focussed on the valuation of pension plan liabilities and the pension assets as follows:
We did not identify any material exceptions from our audit work.
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 geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
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 19 reporting units, to give appropriate coverage of material balances at both divisional and Group levels. Of these, one reporting unit has been determined to be financially significant based on its contribution to Group revenue or headline operating profit. We conducted work in 13 countries and the Group engagement team visited multiple 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 75% (2015: 75%) of the Group's revenues and 79% (2015: 78%) of the Group's headline operating profit.
Further specific audit procedures over IT controls, central functions such as treasury and areas of significant judgement, including 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 on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Overall Group materiality | £17 million (2015: £18 million). |
|---|---|
| How we determined it | Approximately 3.5% of headline operating profit. Headline operating profit is operating profit adjusted for material non-recurring items or items considered non-operational in nature. |
| Rationale for benchmark applied |
Consistent with last year, we applied this benchmark because, in our view, this is the metric against which the performance of the Group is most commonly measured. |
| Component materiality | For each component in our audit scope, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £0.5 million and £15 million |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.5 million (2015: £0.5 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Under the Listing Rules we are required to review the directors' statement, set out on page 116, in relation to going concern. We have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors' statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.
As noted in the directors' statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's ability to continue as a going concern.
In our opinion, the information given in the Strategic Report and the Group directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
| information in the Annual Report is: | We have no exceptions | |
|---|---|---|
| •materially inconsistent with the information in the audited financial statements; or | to report. | |
| •apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or |
||
| •otherwise misleading. | ||
| the statement given by the directors on page 86 in accordance with provision C.1.1 of the UK Corporate Governance Code (the "Code"), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group's position and performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit. |
We have no exceptions to report. |
|
the section of the Annual Report on page 90, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
| •the directors' confirmation on page 52 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. |
We have nothing material to add or to draw attention to. |
|---|---|
| •the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. |
We have nothing material to add or to draw attention to. |
| •the directors' explanation on page 52 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. |
We have nothing material to add or to draw attention to. |
Under the Listing Rules we are required to review the directors' statement that they have carried out a robust assessment of the principal risks facing the Group and the directors' 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 Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the Code. We have nothing to report having performed our review.
Our responsibilities and those of the Directors
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 and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
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.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
•whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed;
•the reasonableness of significant accounting estimates made by the directors; and
•the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
We have reported separately on the company financial statements of Smiths Group plc for the year ended 31 July 2016 and on the information in the Directors' Remuneration Report that is described as having been audited.
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London
27 September 2016
(a) The maintenance and integrity of the Smiths Group plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
| Year ended 31 July 2016 | Year ended 31 July 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Non-headline | Non-headline | ||||||
| Notes | Headline £m |
(note 3) £m |
Total £m |
Headline £m |
(note 3) £m |
Total £m |
|
| Continuing operations | |||||||
| Revenue | 1 | 2,949 | 2,949 | 2,897 | 2,897 | ||
| Cost of sales | (1,600) | (1,600) | (1,564) | (1,564) | |||
| Gross profit | 1,349 | 1,349 | 1,333 | 1,333 | |||
| Sales and distribution costs | (403) | (403) | (406) | (406) | |||
| Administrative expenses | (436) | (139) | (575) | (416) | (117) | (533) | |
| Other operating income | 16 | 16 | |||||
| Operating profit | 2 | 510 | (123) | 387 | 511 | (117) | 394 |
| Interest receivable | 3 | 3 | 3 | 3 | |||
| Interest payable | (62) | (62) | (55) | (55) | |||
| Other financing gains/(losses) | 15 | 15 | (9) | (9) | |||
| Other finance income/(charges) – retirement benefits | 8 | 3 | 3 | (8) | (8) | ||
| Finance costs | 4 | (59) | 18 | (41) | (52) | (17) | (69) |
| Profit before taxation | 451 | (105) | 346 | 459 | (134) | 325 | |
| Taxation | 6 | (113) | 28 | (85) | (117) | 40 | (77) |
| Profit for the period | 338 | (77) | 261 | 342 | (94) | 248 | |
| Attributable to | |||||||
| Smiths Group shareholders | 336 | (77) | 259 | 340 | (94) | 246 | |
| Non-controlling interests | 2 | 2 | 2 | 2 | |||
| 338 | (77) | 261 | 342 | (94) | 248 | ||
| Earnings per share | 5 | ||||||
| Basic | 65.6p | 62.4p | |||||
| Diluted | 64.9p | 61.8p |
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 137 to 184, which form an integral part of the consolidated accounts.
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
||
|---|---|---|---|
| Notes | £m | £m | |
| Profit for the period | 261 | 248 | |
| Other comprehensive income | |||
| Actuarial (losses)/gains on retirement benefits | 8 | (40) | 60 |
| Taxation recognised on actuarial movements | 6 | 10 | 21 |
| Other comprehensive income and expenditure which will not be reclassified | |||
| to the consolidated income statement | (30) | 81 | |
| Other comprehensive income which will be reclassified and reclassifications | |||
| Exchange gains | 420 | 9 | |
| Fair value gains/(losses) and reclassification adjustments | |||
| – deferred on available for sale financial assets | (2) | 11 | |
| – reclassified to income statement on available for sale financial assets | 4 | (19) | |
| – deferred in the period on cash-flow and net investment hedges | (238) | (6) | |
| – reclassified to income statement on cash-flow and net investment hedges | 1 | ||
| Total other comprehensive income | 131 | 96 | |
| Total comprehensive income | 392 | 344 | |
| Attributable to | |||
| Smiths Group shareholders | 386 | 343 | |
| Non-controlling interests | 6 | 1 | |
| 392 | 344 |
| Notes | 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|---|
| Non-current assets | |||
| Intangible assets | 10 | 1,742 | 1,518 |
| Property, plant and equipment | 12 | 315 | 259 |
| Financial assets – other investments | 16 | 9 | 156 |
| Retirement benefit assets | 8 | 328 | 170 |
| Deferred tax assets | 6 | 246 | 218 |
| Trade and other receivables | 14 | 51 | 40 |
| Financial derivatives | 19 | 29 | 4 |
| Current assets | 2,720 | 2,365 | |
| Inventories | 13 | 478 | 454 |
| Current tax receivable | 6 | 62 | 30 |
| Trade and other receivables | 14 | 745 | 616 |
| Cash and cash equivalents | 17 | 431 | 495 |
| Financial derivatives | 19 | 13 | 20 |
| 1,729 | 1,615 | ||
| Assets of business held for sale | 27 | 24 | |
| Total assets | 4,473 | 3,980 | |
| Non-current liabilities | |||
| Financial liabilities | |||
| – borrowings | 17 | (1,139) | (1,150) |
| – financial derivatives | 19 | (1) | (6) |
| Provisions for liabilities and charges | 22 | (305) | (253) |
| Retirement benefit obligations | 8 | (248) | (278) |
| Deferred tax liabilities | 6 | (95) | (71) |
| Trade and other payables | 15 | (29) | (24) |
| Current liabilities | (1,817) | (1,782) | |
| Financial liabilities | |||
| – borrowings | 17 | (270) | (163) |
| – financial derivatives | 19 | (19) | (12) |
| Provisions for liabilities and charges | 22 | (94) | (79) |
| Trade and other payables | 15 | (536) | (466) |
| Current tax payable | 6 | (72) | (50) |
| (991) | (770) | ||
| Liabilities of business held for sale | 27 | (5) | |
| Total liabilities | (2,813) | (2,552) | |
| Net assets | 1,660 | 1,428 | |
| Shareholders' equity | |||
| Share capital | 23 | 148 | 148 |
| Share premium account | 352 | 349 | |
| Capital redemption reserve Revaluation reserve |
6 1 |
6 1 |
|
| Merger reserve | 235 | 235 | |
| Retained earnings | 1,205 | 743 | |
| Hedge reserve | 25 | (301) | (63) |
| Total shareholders' equity | 1,646 | 1,419 | |
| Non-controlling interest equity | 14 | 9 | |
| Total equity | 1,660 | 1,428 |
The accounts on pages 132 to 184 were approved by the Board of Directors on 27 September 2016 and were signed on its behalf by:
Andy Reynolds Smith Chris O'Shea
Chief Executive Chief Financial Officer
| At 31 July 2016 | 500 | 242 | 1,205 | (301) | 1,646 | 14 | 1,660 | |
|---|---|---|---|---|---|---|---|---|
| Share-based payment | 9 | 9 | 9 | 9 | ||||
| – non-controlling interests | (1) | (1) | ||||||
| – equity shareholders | 24 | (163) | (163) | (163) | ||||
| Dividends | ||||||||
| Purchase of own shares | 25 | (8) | (8) | (8) | ||||
| Transactions relating to ownership interests Exercises of share options |
23 | 3 | 3 | 3 | ||||
| Total comprehensive income for the period | 624 | (238) | 386 | 6 | 392 | |||
| Fair value gains/(losses) | (21) | (238) | (259) | (259) | ||||
| Exchange gains | 416 | 416 | 4 | 420 | ||||
| Actuarial loss on retirement benefits and tax | (30) | (30) | (30) | |||||
| Other comprehensive income | ||||||||
| Profit for the period | 259 | 259 | 2 | 261 | ||||
| At 31 July 2015 | 497 | 242 | 743 | (63) | 1,419 | 9 | 1,428 | |
| 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 |
| 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 2014 | 494 | 242 | 559 | (58) | 1,237 | 8 | 1,245 | |
| Profit for the year Other comprehensive income Actuarial losses on retirement benefits |
246 | 246 | 2 | 248 | ||||
| and related tax | 81 | 81 | 81 | |||||
| Exchange (losses)/gains | 10 | 10 | (1) | 9 | ||||
| Fair value gains/(losses) and related tax | 11 | (5) | 6 | 6 | ||||
| Total comprehensive income for the year | 348 | (5) | 343 | 1 | 344 | |||
| Transactions relating to ownership interests | ||||||||
| Exercises of share options | 23 | 3 | 3 | 3 | ||||
| Taxation recognised on share options | 6 | (1) | (1) | (1) | ||||
| Purchase of own shares | 25 | (11) | (11) | (11) | ||||
| Dividends | ||||||||
| – equity shareholders | 24 | (160) | (160) | (160) | ||||
| – non-controlling interest | ||||||||
| Share-based payment | 9 | 8 | 8 | 8 | ||||
| At 31 July 2015 | 497 | 242 | 743 | (63) | 1,419 | 9 | 1,428 |
| Notes | Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|---|
| Net cash inflow from operating activities | 26 | 358 | 266 |
| Cash-flows from investing activities | |||
| Expenditure on capitalised development | (23) | (18) | |
| Expenditure on other intangible assets | (11) | (18) | |
| Purchases of property, plant and equipment | 12 | (74) | (59) |
| Disposals of property, plant and equipment | 1 | 11 | |
| Investment in financial assets | (9) | (27) | |
| Acquisition of businesses | (8) | ||
| Disposals of businesses | 2 | ||
| Net cash-flow used in investing activities | (124) | (109) | |
| Cash-flows from financing activities | |||
| Proceeds from exercise of share options | 23 | 3 | 3 |
| Purchase of own shares | (8) | (11) | |
| Dividends paid to equity shareholders | 24 | (163) | (160) |
| Cash (outflow)/inflow from matured derivative financial instruments | (14) | 4 | |
| Increase in new borrowings | 1 | 568 | |
| Reduction and repayment of borrowings | (151) | (257) | |
| Net cash-flow used in financing activities | (332) | 147 | |
| Net (decrease)/increase in cash and cash equivalents | (98) | 304 | |
| Cash and cash equivalents at beginning of year | 495 | 189 | |
| Exchange differences | 33 | 2 | |
| Cash and cash equivalents at end of year | 17 | 430 | 495 |
| Cash and cash equivalents at end of year comprise | |||
| – cash at bank and in hand | 161 | 104 | |
| – short-term deposits | 270 | 391 | |
| – bank overdrafts | (1) | ||
| 430 | 495 | ||
| Included in cash and cash equivalents per the balance sheet | 431 | 495 | |
| Included in overdrafts per the balance sheet | (1) | ||
| 430 | 495 | ||
| Notes | Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|---|
| Net debt at start of year | 17 | (818) | (804) |
| Net (decrease)/increase in cash and cash equivalents Increase in borrowings Reduction and repayment of borrowings |
(98) (1) 151 |
304 (568) 257 |
|
| Movement in net debt resulting from cash-flows Capitalisation, interest accruals and unwind of capitalisation fees Movement from fair value hedging Exchange differences |
52 (2) (23) (187) |
(7) (1) 7 (13) |
|
| Movement in net debt in the year | (160) | (14) | |
| Net debt at end of year | 17 | (978) | (818) |
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 (IFRS IC) 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 estimates and assumptions used in these consolidated financial statements are set out below.
The timing of revenue recognition on contracts depends on the assessed stage of completion of contract activity at the balance sheet date. This assessment requires the expected total contract revenues and costs to be estimated based on the current progress of the contract. Revenue of £42m (2015: £39m) has been recognised in the period in respect of contracts in progress at the period end with a total expected value of £175m (2015: £137m) and cumulative revenue recognised to date of £137m (2015: £100m). A 5% reduction in the proportion of the contract activity recognised in the current period would have reduced operating profit by less than £1m for both Smiths Detection and Smiths Interconnect (2015: less than £1m).
Smiths Detection also 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 components of the contract, and the allocation of contract revenue to each component.
Smiths Medical has rebate arrangements in place with some distributors in respect of sales to end customers where sales prices have been negotiated by Smiths Medical. Rebates are estimated based on the level of discount derived from sales data from distributors, the amount of inventory held by distributors and the time lag between the initial sale to the distributor and the rebate being claimed. The rebate accrual at 31 July 2016 was £28m (2015: £21m).
Smiths Detection has multi-year contractual arrangements for the sale of goods and services. Margins achieved on these contracts can reflect the impact of commercial decisions made in different economic circumstances. In addition, contract delivery is subject to commercial and technical risks which can affect the outcome of the contract. At 31 July 2016 there was £4m (2015: £7m) balance sheet liability in respect of ongoing onerous contracts and no other contracts had been assessed as at significant risk of becoming onerous.
The Group has recognised deferred tax assets of £87m (2015: £28m) relating to losses and £120m (2015: £99m) relating to the John Crane, Inc. and Titeflex Corporation litigation provisions. The recognition of assets pertaining to these items involves judgement 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 £9m (2015: £10m), and a 5% increase in expected future operating profits would increase the level of deferred tax recognised by £11m (2015: £10m). Further detail on the Group's deferred taxation position is included in note 6.
The consolidated 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 Group 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.
At 31 July 2016 there is a retirement benefit asset of £328m (2015: £170m), 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. 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.
If the carrying value of any receivable is higher than the fair value, the Group makes provisions writing 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.
At 31 July 2016 the gross value of receivables partly provided for or more than three months overdue was £83m (2015: £57m) and there were provisions of £31m (2015: £22m) against these receivables. Consequently, these receivables were carried at a net value of £52m (2015: £35m). 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 writing 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 2016, there were provisions of £70m (2015: £72m) against gross inventory of £548m (2015: £528m). See note 13 for a breakdown of inventory.
A 10% increase in the proportion of raw materials provided for would increase the provision by £20m (2015: £18m) and a 10% increase in the proportion of finished goods provided for would increase the provision by £23m (2015: £24m).
Goodwill is tested at least annually for impairment and other assets, including intangible assets acquired in business combinations, are tested if there are any indications of impairment, in accordance with the accounting policy set out below. The recoverable amounts of cash generating units and assets are determined based on value in use calculations unless future trading projections cannot be adjusted to eliminate the impact of a major restructuring. The value in use calculations require the use of estimates including projected future cash-flows and other future events.
See note 11 for details of the critical assumptions made, including the sales and margin volatility in Smiths Interconnect and disclosures on the sensitivity of the impairment testing to these key assumptions, including details of the changes in assumptions which would be required to trigger an impairment in Smiths Interconnect Power.
As previously reported, John Crane, Inc., a subsidiary of the Group, is currently one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. Provision of £252m (2015: £216m) has been made for the future defence costs which the Group is expected to incur and the expected costs of future adverse judgments against John Crane, Inc. Whilst published incidence curves can be used to estimate the likely future pattern of asbestos related disease, John Crane, Inc.'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. John Crane, Inc. takes account of the advice of an expert in asbestos liability estimation in quantifying the expected costs.
As previously reported, 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 £94m (2015: £71m) has been made for the costs which the Group is expected to incur in respect of these claims. 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.
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.
All provisions may be subject to potentially material revisions from time to time if new information becomes available as a result of future events. See note 22 for details of the assumptions and disclosures on the sensitivity of the provision calculations.
In order to provide users of the accounts with a clear and consistent presentation of the underlying performance of the Group's ongoing trading activity, Smiths Group plc presents its results in the income statements with amounts relating to costs of acquisitions and disposals, amortisation of acquired intangibles, impairments, legacy liabilities, significant restructuring, material one-off items and certain re-measurements in a separate column. See note 3 for a breakdown of the items excluded from headline operating profit and headline finance costs.
Measures of the underlying performance of 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 28 for more information about the calculation of return on capital employed and credit metrics.
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 206 to 209.
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 over which the Group has significant influence 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 results and financial position of all subsidiaries and associates that have a functional currency different from sterling are translated into sterling as follows:
•assets and liabilities are translated at the rate of exchange at the date of that balance sheet;
•income and expenses are translated at average exchange rates for the period; and
•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.
For the convenience of users, supplementary primary financial statements translated into US dollars have been presented after the Group financial record. 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.
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.
Revenue from the sale of goods is recognised when the risks and rewards of ownership have been transferred to the customer, the amount of revenue can be measured reliably and recovery of the consideration is probable. For established products with simple installation requirements, revenue is recognised when the product is delivered to the customer in accordance with the agreed delivery terms. For products which are technically innovative, highly customised or require complex installation, revenue is recognised when the customer has completed its acceptance procedures.
Revenue from services is recognised in accounting periods in which the services are rendered, by reference to completion of the specific transaction, 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 on the basis of the proportion of the contract term completed, the proportion of the contract costs incurred or the specific services provided to date.
Contracts for the construction of substantial assets are accounted for as construction contracts if the customer specifies major structural elements of the design, including the ability to amend the design during the construction process. These projects normally involve installing customised systems with site-specific integration requirements.
Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. The Group uses the 'percentage of completion method' to determine the appropriate amount to recognise in a given period. The assessment of the stage of completion is dependent on the nature of the contract, but will generally be based on the estimated proportion of the total contract costs which have been incurred to date. If a contract is expected to be loss-making, a provision is recognised for the entire loss.
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, including any anticipated interest & penalties. 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 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.
A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of, has been abandoned or meets the criteria to be classified as held for sale.
Discontinued operations are presented on the income statement as a separate line and are shown net of tax.
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, and commenced after 1 August 2009, 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 12 years |
| Customer relationships | up to 7 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 property shorter of the economic life and the period the right is legally enforceable
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Property, plant and equipment 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 and whose construction began after 1 August 2009 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 for all items whose production began after 1 August 2009. 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 estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment terms will not be collected.
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 are 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.
Assets and businesses classified as held for sale 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 sale.
Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. The asset or business must be available for immediate sale and the sale must be highly probable within one year.
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: loans and receivables, available for sale financial assets or financial assets where changes in fair value are charged (or credited) to the income statement.
Financial assets are initially recognised at transaction price when the Group becomes party to contractual obligations. The transaction price used includes transaction costs unless the asset is being fair valued through the income statement.
The subsequent measurement of financial assets depends on their classification. Loans and receivables are measured at amortised cost using the effective interest rate method. Available for sale financial assets are subsequently measured at fair value, with unrealised gains and losses being recognised in other comprehensive income. Financial assets where changes in fair value are charged (or credited) to the income statement are subsequently measured at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the 'financial assets at fair value through the income statement' category are included in the income statement in the period in which they arise.
Financial assets are derecognised when the right to receive cash-flows 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.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising any resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair values of the hedged assets or liabilities that are attributable to the hedged risk.
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.
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.
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.
The following standards and interpretations have been issued by the IASB and will affect future annual reports and accounts.
A review of the impact of these standards and interpretations is being undertaken, and the impact of adopting them will be determined once this review has been completed. In particular the review of the impact of 'IFRS 15: Revenue from contracts with customers' will require an assessment at contract level for the military and long-term service businesses, and the impact of adopting this standard cannot be reliably estimated until this work is substantially complete.
These standards are under review by the EU and Smiths currently applies IFRS as adopted by the EU. Smiths will confirm their adoption date when the standards are applicable to Smiths, depending on the EU approval process and developments in the relationship between the UK and the EU.
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 194 to 205. The principal subsidiaries of the Parent Company are listed in the above accounts.
The Group is organised into five divisions: John Crane, Smiths Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These divisions design and manufacture 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.
Intersegment sales and transfers are charged at arm's length prices.
| Year ended 31 July 2016 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Corporate costs £m |
Total £m |
|
| Revenue | 830 | 874 | 526 | 435 | 284 | 2,949 | |
| Divisional headline operating profit Corporate headline operating costs |
181 | 187 | 69 | 57 | 51 | (35) | 545 (35) |
| Headline operating profit/(loss) Items excluded from headline measures (note 3) |
181 (30) |
187 (21) |
69 (6) |
57 (31) |
51 (14) |
(35) (21) |
510 (123) |
| Operating profit/(loss) | 151 | 166 | 63 | 26 | 37 | (56) | 387 |
| Year ended 31 July 2015 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Corporate costs £m |
Total £m |
|
| Revenue | 905 | 836 | 467 | 420 | 269 | 2,897 | |
| Divisional headline operating profit Corporate headline operating costs |
225 | 166 | 55 | 49 | 50 | (34) | 545 (34) |
| Headline operating profit/(loss) Items excluded from headline measures (note 3) |
225 (60) |
166 (24) |
55 (10) |
49 (21) |
50 (9) |
(34) 7 |
511 (117) |
| Operating profit/(loss) | 165 | 142 | 45 | 28 | 41 | (27) | 394 |
Divisional headline operating profit is stated after charging/(crediting) the following items:
| Year ended 31 July 2016 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Reconciling items £m |
Total £m |
|
| Depreciation | 15 | 20 | 6 | 8 | 3 | 1 | 53 |
| Amortisation of capitalised development | 14 | 12 | 26 | ||||
| Amortisation of software, patents and intellectual | |||||||
| property | 2 | 4 | 3 | 2 | 6 | 17 | |
| Amortisation of acquired intangibles | 15 | 15 | |||||
| Impairment of goodwill | 23 | 23 | |||||
| Impairment of trade investments | 2 | 2 | |||||
| Impairment of property, plant and equipment | 6 | 6 | |||||
| Share-based payment | 1 | 2 | 1 | 1 | 1 | 4 | 10 |
| Year ended 31 July 2015 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Reconciling items £m |
Total £m |
|
| Depreciation | 14 | 18 | 4 | 9 | 3 | 1 | 49 |
| Amortisation of capitalised development Amortisation of software, patents and intellectual |
13 | 10 | 23 | ||||
| property | 3 | 3 | 2 | 1 | 6 | 15 | |
| Amortisation of acquired intangibles | 33 | 33 | |||||
| Impairment of goodwill | 27 | 27 | |||||
| Share-based payment | 2 | 1 | 1 | 1 | 4 | 9 |
The reconciling items are central costs and charges that are treated as non-headline (see note 3).
| Segment assets | |
|---|---|
| Property, plant, equipment, development projects, | John Crane £m |
Medical £m |
Detection £m |
Interconnect £m |
Flex-Tek £m |
non-headline £m |
Total £m |
|---|---|---|---|---|---|---|---|
| other intangibles and investments | 100 | 221 | 95 | 46 | 33 | 15 | 510 |
| Inventory, trade and other receivables | 364 | 280 | 316 | 189 | 99 | 26 | 1,274 |
| Segment assets | 464 | 501 | 411 | 235 | 132 | 41 | 1,784 |
| 31 July 2015 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Corporate and non-headline £m |
Total £m |
|
| Property, plant, equipment, development projects, | |||||||
| other intangibles and investments Inventory, trade and other receivables |
96 351 |
175 247 |
84 260 |
38 160 |
22 83 |
167 9 |
582 1,110 |
| Segment assets | 447 | 422 | 344 | 198 | 105 | 176 | 1,692 |
Analysis by operating segment continued Segment assets and liabilities continued Segment liabilities
| Segment liabilities | (124) | (121) | (196) | (78) | (37) | (408) | (964) |
|---|---|---|---|---|---|---|---|
| Corporate and non-headline liabilities | (408) | (408) | |||||
| Divisional liabilities | (124) | (121) | (196) | (78) | (37) | (556) | |
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Corporate and non-headline £m |
Total £m |
|
| 31 July 2016 |
| Segment liabilities | (141) | (108) | (156) | (64) | (37) | (316) | (822) |
|---|---|---|---|---|---|---|---|
| Corporate and non-headline liabilities | (316) | (316) | |||||
| Divisional liabilities | (141) | (108) | (156) | (64) | (37) | (506) | |
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Corporate and non-headline £m |
Total £m |
|
| 31 July 2015 |
Non-headline liabilities comprise provisions and accruals relating to non-headline items, acquisitions and disposals.
| Assets | Liabilities | |||
|---|---|---|---|---|
| 31 July 2016 £m |
31 July 2015 £m |
31 July 2016 £m |
31 July 2015 £m |
|
| Segment assets and liabilities | 1,784 | 1,692 | (964) | (822) |
| Goodwill and acquired intangibles | 1,556 | 1,351 | ||
| Derivatives | 42 | 24 | (20) | (18) |
| Current and deferred tax | 308 | 248 | (167) | (121) |
| Retirement benefit assets and obligations | 328 | 170 | (248) | (278) |
| Cash and borrowings | 431 | 495 | (1,409) | (1,313) |
| Assets and liabilities of business held for sale | 24 | (5) | ||
| Statutory assets and liabilities | 4,473 | 3,980 | (2,813) | (2,552) |
The capital expenditure for each division is:
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Reconciling items £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Capital expenditure year ended 31 July 2016 | 14 | 53 | 19 | 12 | 9 | 3 | 110 |
| Capital expenditure year ended 31 July 2015 | 19 | 44 | 11 | 12 | 5 | 6 | 97 |
The reconciling items include corporate capital expenditure through Smiths Business Information Services on IT equipment and software.
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 £815m (31 July 2015: £815m) 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 28 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:
| Average total capital employed | 3,324 | |||||
|---|---|---|---|---|---|---|
| Average divisional capital employed Average corporate capital employed |
895 | 1,190 | 578 | 549 | 162 | 3,374 (50) |
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Total £m |
|
| 31 July 2016 |
| Average total capital employed | 3,197 | |||||
|---|---|---|---|---|---|---|
| Average divisional capital employed Average corporate capital employed |
872 | 1,126 | 577 | 535 | 148 | 3,258 (61) |
| John Crane £m |
Smiths Medical £m |
Smiths Detection £m |
Smiths Interconnect £m |
Flex-Tek £m |
Total £m |
|
| 31 July 2015 |
The revenue for the main product and service lines for each division is:
| John Crane | First-fit £m |
Aftermarket £m |
Total £m |
|---|---|---|---|
| Revenue year ended 31 July 2016 | 338 | 492 | 830 |
| Revenue year ended 31 July 2015 | 396 | 509 | 905 |
The detail in the John Crane revenue split has been reduced because the Group considers focusing on the split between First-Fit and Aftermarket revenue provides greater insight into trends affecting John Crane.
| Infusion systems |
Vascular access |
Vital care | Specialty products |
Total | |
|---|---|---|---|---|---|
| Smiths Medical | £m | £m | £m | £m | £m |
| Revenue year ended 31 July 2016 | 273 | 289 | 240 | 72 | 874 |
| Revenue year ended 31 July 2015 | 262 | 279 | 225 | 70 | 836 |
| Ports and | Critical | ||||
| Smiths Detection | Transportation £m |
borders £m |
Military £m |
infrastructure £m |
Total £m |
| Revenue year ended 31 July 2016 | 235 | 89 | 79 | 123 | 526 |
| Revenue year ended 31 July 2015 | 243 | 50 | 69 | 105 | 467 |
| Connectors | Microwave | Power | Total | ||
| Smiths Interconnect | £m | £m | £m | £m | |
| Revenue year ended 31 July 2016 | 155 | 192 | 88 | 435 | |
| Revenue year ended 31 July 2015 (restated) | 149 | 192 | 79 | 420 |
The allocation of Smiths Interconnect revenue for the year ended 31 July 2015 has been restated following a reorganisation that moved a business from Power to Microwave.
| Flex-Tek | Fluid Management £m |
Flexible Solutions £m |
Heat Solutions £m |
Construction Products £m |
Total £m |
|---|---|---|---|---|---|
| Revenue year ended 31 July 2016 | 72 | 54 | 66 | 92 | 284 |
| Revenue year ended 31 July 2015 | 69 | 51 | 65 | 84 | 269 |
The Group's statutory revenue is analysed as follows:
| 2,949 | 2,897 | |
|---|---|---|
| Contracts qualifying as construction contracts | 30 | 29 |
| Services | 312 | 268 |
| Sale of goods | 2,607 | 2,600 |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
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 2016 £m |
Year ended 31 July 2015 £m |
31 July 2016 £m |
31 July 2015 £m |
||
| United Kingdom | 114 | 121 | 129 | 119 | |
| Germany | 131 | 128 | 325 | 270 | |
| France | 85 | 81 | 17 | 16 | |
| Other European | 291 | 290 | 70 | 58 | |
| Total European | 621 | 620 | 541 | 463 | |
| United States of America | 1,396 | 1,378 | 1,349 | 1,172 | |
| Canada | 106 | 111 | 14 | 14 | |
| Other North American | 33 | 40 | 10 | 9 | |
| Total North American | 1,535 | 1,529 | 1,373 | 1,195 | |
| Japan | 101 | 93 | 21 | 14 | |
| China (excluding Hong Kong) | 95 | 98 | 63 | 57 | |
| Rest of the World | 597 | 557 | 59 | 48 | |
| 2,949 | 2,897 | 2,057 | 1,777 |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Research and development expense | 87 | 84 |
| Operating leases | ||
| – land and buildings | 30 | 31 |
| – other | 8 | 9 |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
| Audit services | ||
| Fees payable to the Company's auditors for the audit of the Company's annual financial statements Fees payable to the Company's auditors and its associates for other services |
3 | 3 |
| – the audit of the Company's subsidiaries | 2 | 2 |
| All other services | 5 | 5 1 |
Other services comprise audit-related assurance services £0.1m (2015: £nil), tax advisory services £0.1m (2015: £0.1m), tax compliance services £nil (2015: £0.1m), one-off IT and consulting projects £nil (2015: £0.4m) and other services £0.1m (2015: £nil). Total fees for non-audit services comprise 6% (2015: 12%) of audit fees. Audit-related assurance services include the review of the Interim Report.
The Company seeks to present a measure of underlying performance which is not impacted by material non-recurring items or items considered non-operational in nature. This measure of profit is described as 'headline' and is used by management to measure and monitor performance. See the disclosures on presentation of results in accounting policies for an explanation of the excluded items. The excluded items are referred to as 'non-headline' items.
The non-headline items included in statutory operating profit are as follows:
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
||
|---|---|---|---|
| Notes | £m | £m | |
| Restructuring programmes | (37) | (38) | |
| Changes to post-retirement benefits | (9) | 14 | |
| Acquisition and disposal costs and profits on disposal | (6) | 2 | |
| Provision for Titeflex Corporation subrogation claims | (11) | (8) | |
| Provision for John Crane, Inc. asbestos litigation | (23) | (19) | |
| Cost recovery for John Crane, Inc. asbestos litigation | 16 | ||
| Legacy retirement benefits administration costs | 8 | (7) | (8) |
| Impairment of goodwill, property, plant and equipment and trade investments | (31) | (27) | |
| Amortisation of acquired intangible assets | 10 | (15) | (33) |
| Non-headline items in operating profit | (123) | (117) |
Restructuring costs comprise £37m in respect of Fuel for Growth. This programme, which involves redundancy, relocation and consolidation of manufacturing, is considered a material non-recurring item by virtue of its size.
The £9m charge relating to post-retirement benefits comprises the £10m settlement cost for the buy-out of retiree liabilities completed by the US pension scheme on 14 August 2015, net of a £1m settlement gain on closing a small scheme in Holland.
An additional provision of £12m 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, and £1m overprovision for the costs of settling claims in the year has been released, generating a net charge of £11m.
The operating charge for John Crane, Inc. litigation comprises a charge of £8m in respect of the net increased provision for adverse judgments and legal defence costs, a charge of £7m arising from the decrease in US risk free rates, and £8m costs for litigation management, defence strategy and legal fees in connection with litigation against insurers. This is offset in the income statement by the recovery of £16m through a settlement with one insurer.
Impairments comprise £23m goodwill write-downs (see note 11), £6m on property plant and equipment and £2m on trade investments.
Restructuring costs included £39m in respect of Fuel for Growth and a £1m credit for provisions relating to earlier restructuring programmes which were released in the period.
Gains of £14m on changes to post-retirement benefits arose from a settlement offer by the US defined benefit pension plans – allowing deferred members a one-off option to elect to cash out their retirement entitlements rather than receive a pension at retirement – which was completed in September 2014.
A charge of £8m was made by Titeflex Corporation in respect of changes to the estimated cost of future claims including those from insurance companies seeking recompense for damage allegedly caused by lightning strikes. The change comprised £7m in respect of movements in the gross provision and £1m relating to changes in discounting.
The operating charge in respect of John Crane, Inc. litigation comprised £14m in respect of increased provision, £4m in respect of litigation management and legal fees in connection with litigation against insurers, and £1m arising from the decrease in US risk-free rates.
The non-headline items included in statutory finance costs are as follows:
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
||
|---|---|---|---|
| Notes | £m | £m | |
| Adjustment to discounted provisions | 22 | (5) | (5) |
| Fair value gain realised on contributing government bonds to Smiths Industries Pension Scheme | 4 | 19 | |
| Other financing gains/(losses) | 1 | (4) | |
| Other finance income/(costs) – retirement benefits | 8 | 3 | (8) |
| Non-headline gains/(losses) in finance costs | 18 | (17) |
See note 4 for an explanation of the fair value gain on bonds and note 8 for details of the impact of this transaction on the pension funding position.
| Year ended | Year ended | ||
|---|---|---|---|
| Notes | 31 July 2016 £m |
31 July 2015 £m |
|
| Interest receivable | 3 | 3 | |
| Interest payable | |||
| – bank loans and overdrafts, including associated fees | (8) | (8) | |
| – other loans | (54) | (47) | |
| Interest payable | (62) | (55) | |
| Other financing gains/(losses) | |||
| – fair value (losses)/gains on hedged debt | (23) | 8 | |
| – fair value gains/(losses) on fair value hedges | 23 | (8) | |
| – fair value gain realised on contributing government bonds to Smiths Industries Pension Scheme | 19 | ||
| – net foreign exchange gains/(losses) | 1 | (4) | |
| – adjustment to discounted provisions | (5) | (5) | |
| Other financing losses | 15 | (9) | |
| Net interest income/(expense) on retirement benefit obligations | 8 | 3 | (8) |
| Net finance costs | (41) | (69) |
The government bonds were accounted for as available for sale financial assets, and the cumulative fair value gains of £19m on these assets were recycled from other comprehensive income to the income statement when the bonds were contributed to the Smiths Industries Pension Scheme.
Basic earnings per share are calculated by dividing the profit for the year attributable to equity shareholders of the Parent Company by the average number of ordinary shares in issue during the year.
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Profit attributable to equity shareholders for the year | ||
| – total | 259 | 246 |
| Average number of shares in issue during the year | 395,095,591 | 394,742,972 |
Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 398,957,837 (2015: 398,552,818) 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 2016, 223,993 options (2015: no options) were excluded from this calculation because their effect was anti-dilutive for continuing operations.
A reconciliation of basic and headline earnings per share is as follows:
| Year ended 31 July 2016 | Year ended 31 July 2015 | |||
|---|---|---|---|---|
| £m | EPS (p) |
£m | EPS (p) |
|
| Profit attributable to equity shareholders of the Parent Company Exclude |
259 | 65.6 | 246 | 62.4 |
| Non-headline items and related tax | 77 | 19.6 | 94 | 23.7 |
| Headline profit attributable to equity shareholders for the year | 336 | 85.2 | 340 | 86.1 |
| Statutory earnings per share – diluted (p) | 64.9 | 61.8 | ||
| Headline earnings per share – diluted (p) | 84.3 | 85.3 |
The Group's approach to taxation is set out in the CFO report. 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.
| The taxation charge in the consolidated income statement for the year comprises | 31 July 2016 £m |
31 July 2015 £m |
|---|---|---|
| – current income tax charge | 56 | 71 |
| – current tax adjustments in respect of prior periods | (1) | |
| Current taxation | 56 | 70 |
| – deferred taxation | 29 | 7 |
| Total taxation expense in the consolidated income statement | 85 | 77 |
The tax expense on the profit for the year for continuing operations is different from the standard rate of corporation tax in the UK of 20.0% (2015: 20.7%). The difference is reconciled as follows:
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Profit before taxation – continuing operations | 346 | 325 |
| Notional taxation expense at UK rate of 20.0% (2015: 20.7%) | 69 | 67 |
| Different tax rates on non-UK profits and losses | 9 | 6 |
| Non-deductible expenses | 16 | 10 |
| Tax credits and non-taxable income | (11) | (16) |
| Adjustments to unrecognised deferred tax | 2 | 11 |
| Prior year true-up | (1) | |
| 85 | 77 | |
| Comprising | ||
| – taxation on headline profit | 113 | 117 |
| – tax on non-headline loss | (34) | (44) |
| – change in deferred tax recognition treated as non-headline | 6 | 4 |
| Taxation expense in the consolidated income statement | 85 | 77 |
The head office of Smiths Group is domiciled in the UK, so the tax charge has been reconciled to UK tax rates. In recent years, Smiths has made substantial payments to its UK defined benefit pension plans, which generated significant UK tax losses.
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Tax on items charged/(credited) to equity Deferred tax charge/(credit) |
||
| – retirement benefit schemes – share options |
(10) | (21) 1 |
| (10) | (20) |
The net retirement benefit charge to equity includes £4m (2015: £nil) relating to UK schemes. The main UK defined benefit pension plans are now in surplus, producing a deferred tax liability
| Current tax £m |
|
|---|---|
| At 31 July 2014 | (41) |
| (Charge)/credit to income statement | (70) |
| Tax paid | 91 |
| At 31 July 2015 | (20) |
| Foreign exchange gains and losses | 4 |
| (Charge)/credit to income statement | (56) |
| Tax paid | 62 |
| At 31 July 2016 | (10) |
| Current tax receivable | 62 |
| Current tax payable | (72) |
| At 31 July 2016 | (10) |
Provisions included in current tax liabilities are established based on reasonable estimates for 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.
| At 31 July 2016 | (145) | 8 | 87 | 140 | 61 | 151 |
|---|---|---|---|---|---|---|
| Deferred tax assets Deferred tax liabilities |
(24) (121) |
8 | 84 3 |
134 6 |
44 17 |
246 (95) |
| At 31 July 2016 | (145) | 8 | 87 | 140 | 61 | 151 |
| Acquisitions Exchange adjustments |
(1) (21) |
9 | 6 | 24 | 6 | (1) 24 |
| Credit/(charge) to income statement Credit/(charge) to equity |
(7) | (72) 10 |
53 | (10) | 7 | (29) 10 |
| At 31 July 2015 | (116) | 61 | 28 | 126 | 48 | 147 |
| Deferred tax assets Deferred tax liabilities |
(23) (93) |
61 | 26 2 |
112 14 |
42 6 |
218 (71) |
| At 31 July 2015 | (116) | 61 | 28 | 126 | 48 | 147 |
| Credit/(charge) to equity Exchange adjustments |
(8) | 20 2 |
2 | 8 | 3 | 20 7 |
| At 1 August 2014 Credit/(charge) to income statement |
(106) (2) |
49 (10) |
21 5 |
117 1 |
46 (1) |
127 (7) |
| Property, plant and equipment and intangible assets £m |
Employment benefits £m |
Losses carried forward £m |
Provisions £m |
Other £m |
Total £m |
The deferred tax asset relating to losses carried forward has been recognised on the basis:
•utilisation against offsetting deferred tax liabilities, including £49m relating to UK losses that has been recognised to offset an equivalent liability on the UK pension surplus; or
•evidence that operations show 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.
Deferred tax relating to provisions includes £84m (2015: £72m) relating to the John Crane, Inc. litigation provision, and £36m (2015: £27m) relating to Titeflex Corporation. See note 22 for additional information on provisions; and
Included in other deferred tax balances above is a deferred tax asset of £25m (2015: £26m) relating to inventory where current tax relief is only available when the inventory is sold.
The Group has not recognised deferred tax relating to deductible temporary differences in the UK amounting to £402m (2015: £400m) and non-UK losses amounting to £93m (2015: £126m).
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.
| 2016 £m |
Expiry of losses |
2015 £m |
Expiry of losses |
|
|---|---|---|---|---|
| Territory | ||||
| – Americas | 36 | 2019-2036 | 36 | 2019-2035 |
| – Asia | 11 | 2017-2023 | 12 | 2016-2022 |
| Total restricted losses | 47 | 48 | ||
| Unrestricted losses | ||||
| – operating losses | 211 | No expiry | 453 | No expiry |
| Total | 258 | 501 |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Staff costs during the period | ||
| Wages and salaries | 745 | 731 |
| Social security | 84 | 86 |
| Share-based payment (note 9) | 10 | 9 |
| Pension costs (including defined contribution schemes) (note 8) | 33 | 31 |
| 872 | 857 |
The average number of persons employed, rounded to the nearest 50 employees, was:
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|
| John Crane | 6,550 | 6,950 |
| Smiths Medical | 7,600 | 7,950 |
| Smiths Detection | 2,050 | 2,150 |
| Smiths Interconnect | 3,400 | 3,850 |
| Flex-Tek | 2,050 | 2,050 |
| Smiths Business Information Services | 250 | 250 |
| Corporate | 100 | 50 |
| 22,000 | 23,250 |
Smiths Business Information Services directly employs people working in its operations. All the costs of IT infrastructure and support, including these employment costs, are reflected in reported divisional operating profit.
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 94 to 114.
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Key management compensation | ||
| Salaries and short-term employee benefits | 12.8 | 12.7 |
| Cost of post-retirement benefits | 0.1 | |
| Cost of share-based incentive plans | 4.5 | 2.7 |
No member of key management had any material interest during the period in a contract of significance (other than a service contract or a qualifying third-party indemnity provision) with the Company or any of its subsidiaries. Options and awards held at the end of the period by key management in respect of the Company's share-based incentive plans were:
| Year ended 31 July 2016 | Year ended 31 July 2015 | ||||
|---|---|---|---|---|---|
| Number of instruments '000 |
Weighted average price |
Number of instruments '000 |
Weighted average price |
||
| CIP | 468 | 589 | |||
| ESOS | 18 | £10.97 | |||
| LTIP | 1,185 | 1,374 | |||
| Restricted stock | 261 | ||||
| SAYE | 15 | £8.99 | 11 | £9.19 |
The only related party transactions in the year ended 31 July 2016 were key management compensation (31 July 2015: no other transactions).
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 a number of 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 401k defined contribution plan operates. The total expense recognised in the consolidated income statement in respect of all these plans was £30m (2015: £28m).
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 2016. 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.
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|
| £m | £m | |
| At beginning of period | (108) | (242) |
| Exchange adjustment | (31) | (3) |
| Reclassification of small unfunded obligations | (2) | |
| Current service cost | (3) | (3) |
| Scheme administration costs | (7) | (8) |
| Past service cost, curtailments, settlements | (9) | 14 |
| Finance income/(charges) – retirement benefits | 3 | (8) |
| Contributions by employer | 275 | 84 |
| Actuarial (loss)/gain | (39) | 60 |
| Movement in surplus restriction | (1) | |
| Net retirement benefit asset/(liability) | 80 | (108) |
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 powers 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 Trustee Limited, a wholly owned subsidiary of Smiths Group plc). The board of trustee directors comprises five 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 2015, 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 November 2015 Smiths pays cash contributions of £2m a month until June 2020. As part of this agreement, Smiths contributed the index-linked gilts previously held in an escrow account. Under the governing documentation of the 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.
SIPS will implement Guaranteed Minimum Pensions equalisation in respect of members contracted out of the State Earnings Related Pensions Scheme prior to 6 April 1997, once the government has completed its consultations and confirmed an approach. It is not yet possible to reliably quantify the impact of this adjustment.
The duration of the SIPS liabilities is around 23 years (2015: 23 years) for active deferred members, 24 years (2015: 23 years) for deferred members and 12 years (2015: 12 years) for pensioners and dependants.
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 five 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 2015. Under the funding plan for TIGPS agreed in March 2016 Smiths pays cash contributions of £3m a year until April 2018. Under the governing documentation of the 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.
TIGPS will implement Guaranteed Minimum Pensions equalisation in respect of members contracted out of the State Earnings Related Pensions Scheme prior to 6 April 1997, once the government has completed its consultations and confirmed an approach. It is not yet possible to reliably quantify the impact of this adjustment.
The duration of the TIGPS liabilities is around 25 years (2015: 21 years) for active deferred members, 24 years (2015: 19 years) for deferred members and 11 years (2015: 11 years) for pensioners and dependants.
The most recent valuations of the six principal US pension and post-retirement healthcare plans were performed at 1 January 2015.
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 wholly owned subsidiary.
The duration of the liabilities for the largest US plan is around 20 years (2015: 14 years) for active deferred members, 20 years (2015: 19 years) for deferred members and 12 years (2015: 10 years) for pensioners and dependants.
On 14 August 2015 the US funded plans completed a buy-out of retiree liabilities for \$527m, transferring the obligation to pay pensions to Voya Retirement Insurance and Annuity Company. A settlement loss of £10m has been recognised on this transaction (see note 3). In August 2014, the US pension plans offered deferred members a one-off option to elect to cash out their retirement entitlements rather than receive a pension at retirement. Lump sum payments of \$150m were made in August and September 2014. This programme generated a settlement gain of £14m in the year ended 31 July 2015.
The pensions schemes are exposed to risks that:
These risks are managed separately for each pension scheme. However Smiths has adopted a common approach of closing defined benefit schemes to cap members' entitlements and supporting trustees in adopting investment strategies which match assets to future obligations, after allowing for the funding position of the scheme.
TIGPS with a mature member profile, and a strong funding position, has been able to progress its matching strategy to the point where roughly 50% of liabilities are covered by matching annuities, eliminating investment return, longevity, inflation and funding risks.
In August 2014 SIPS adjusted the scheme investment strategy. The scheme has investments in diversified growth funds and a portfolio of exchange traded equity index futures managed by BlackRock. The risk and return characteristics of equity index futures are similar to physical equities, but provide the scheme with improved liquidity. As at 31 July 2016 the SIPS portfolio of exchange traded equity index futures generated a £163m (2015: £497m) exposure to equities.
Following the company contribution of £152m UK government bonds to SIPS in December 2015 and the resulting improvement in the funding position, the trustees have adopted a leveraged liability matching strategy. The scheme uses repurchase arrangements, total return swaps, inflation swaps and interest rate swaps to hedge the interest and inflation risks of the scheme liabilities. Repurchase agreements exchange government bonds held by the scheme for cash with an obligation to buy back the asset at a fixed future date and price. The cash is invested in liability matching assets, reducing funding risk. A total return swap exchanges the return on a specified asset (for example an index-linked bond) and an interest payment (fixed or floating). Contracts are spread across a panel of banks. To minimise the risk that counterparties fail to settle obligations, positions are collateralised. For repurchase agreements, collateral is the difference between the present value of the repurchase obligation and the value of the asset exchanged. For swaps, collateral is based on market values. At 31 July 2016 scheme assets were net of £720m (2015: £nil) repurchase obligations, and nominal exposure from interest rate swaps of £293m, inflation swaps of £263m and total return swaps of £14m.
2016 UK 2016 US 2016 Other 2015 UK 2015 US 2015 Other Rate of increase in salaries n/a n/a 2.8% n/a n/a 2.6% Rate of increase for active deferred members 3.6% n/a n/a 4.1% n/a n/a Rate of increase in pensions in payment 2.7% n/a 1.6% 3.2% n/a 1.0% Rate of increase in deferred pensions 2.7% n/a 0.1% 3.2% n/a 0.1% Discount rate 2.3% 3.45% 2.8% 3.5% 4.35% 3.3% Inflation rate 2.7% n/a 2.3% 3.2% n/a 1.6% Healthcare cost increases 4.2% n/a 1.4% 4.7% n/a 2.1%
The assumptions used in calculating the costs and obligations of the Group's defined benefit pension plans are set by Smiths 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 yield on the iBOXX over 15-year AA-rated corporate bond index, adjusted if necessary to better reflect the shape of the yield curve considering the Aon Hewitt GBP Select AA curve. For the USA, the discount rate is based on the Towers Watson cash-flow matching models and set with reference to Moody's Aa annualised yield, the Citigroup High Grade Index and the Merrill Lynch 15+ years High Quality Index.
The mortality assumptions used in the principal UK schemes are based on the new "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 2015 CMI projections, 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 adjusted backward to 2006 with MP-2014 and projected forward using MP-2015 as of 31 July 2016. The table selected allows for future mortality improvements and applies an adjustment for job classification (blue collar versus white collar).
| Expected further years of life | UK schemes | US schemes | ||||||
|---|---|---|---|---|---|---|---|---|
| Male 31 July 2016 |
Female 31 July 2016 |
Male 31 July 2015 |
Female 31 July 2015 |
Male 31 July 2016 |
Female 31 July 2016 |
Male 31 July 2015 |
Female 31 July 2015 |
|
| Member who retires next year at age 65 Member, currently 45, when they retire |
23 | 24 | 23 | 24 | 21 | 23 | 22 | 24 |
| in 20 years' time | 24 | 26 | 25 | 27 | 23 | 25 | 23 | 26 |
Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2016 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 2016 £m |
Increase/ (decrease) in scheme assets 31 July 2016 £m |
(Increase)/ decrease in scheme liabilities 31 July 2016 £m |
Profit before tax for year ended 31 July 2015 £m |
Increase/ (decrease) in scheme assets 31 July 2015 £m |
(Increase)/ decrease in scheme liabilities 31 July 2015 £m |
|
|---|---|---|---|---|---|---|
| Rate of mortality – 1 year increase in life expectancy | (3) | 53 | (183) | (4) | 47 | (157) |
| Rate of mortality – 1 year decrease in life expectancy | 3 | (53) | 183 | 4 | (47) | 160 |
| Rate of inflation – 0.25% increase | (2) | 16 | (119) | (3) | 13 | (89) |
| Discount rate – 0.25% increase | 4 | (19) | 168 | 5 | (19) | 139 |
| Market value of scheme assets – 2.5% increase | 2 | 86 | 3 | 80 |
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.
Retirement-benefit plan assets
| 31 July 2016 £m |
31 July 2015 £m |
|||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| Cash and cash equivalents | ||||||||
| – cash | 57 | 1 | 58 | 41 | 17 | 58 | ||
| – liquidity funds | 89 | 89 | 172 | 1 | 173 | |||
| – cash collateral and liquidity funds held | ||||||||
| to support exchange traded futures | 53 | 53 | 29 | 29 | ||||
| Equities | ||||||||
| – UK funds | 111 | 3 | 114 | 123 | 1 | 124 | ||
| – North American funds | 124 | 2 | 126 | 129 | 110 | 2 | 241 | |
| – other regions and global funds | 214 | 5 | 219 | 227 | 47 | 16 | 290 | |
| Government bonds | ||||||||
| – index-linked bonds | 1,410 | 1,410 | 1,052 | 1,052 | ||||
| – fixed-interest bonds | 599 | 70 | 20 | 689 | 171 | 71 | 11 | 253 |
| Corporate bonds | 861 | 145 | 5 | 1,011 | 284 | 199 | 2 | 485 |
| Insured liabilities | 802 | 1 | 803 | 783 | 783 | |||
| Property | ||||||||
| – UK property | 149 | 149 | 174 | 174 | ||||
| – other property | 1 | 1 | ||||||
| Other | ||||||||
| – diversified growth funds | ||||||||
| and scheme receivables | 285 | 25 | 310 | 338 | 17 | 355 | ||
| – repurchase obligations | (720) | (720) | ||||||
| Total market value | 4,034 | 216 | 62 | 4,312 | 3,523 | 445 | 49 | 4,017 |
SIPS has a portfolio of exchange traded equity index futures, which are valued at market prices. These futures increase "leverage" in SIPS, creating additional asset exposure. At 31 July 2016, the gross equity exposure generated by these exchange traded futures was £163m (2015: £497m). At 31 July 2016 the aggregate value of this strategy, including cash received as collateral, was £9m (2015: a liability of less than £1m). The scheme was holding £44m (2015: £29m) in liquidity funds to meet potential future obligations to collateralise equity index futures.
UK other investments at 31 July 2016 included £162m (2015: £330m) of investments in diversified growth funds held by SIPS, £107m of investments in leveraged index linked UK government bond funds held by TIGPS and £9m (2015: £nil) SIPS interest and inflation swaps.
At 31 July 2016 SIPS assets were net of £720m (2015: £nil) repurchase obligations, and included £11m (2015: £nil) gains on interest rate swaps and £2m (2015: £nil) losses on inflation swaps. See risk management disclosures on page 156 for information on how the scheme is using repurchase arrangements and swap contracts to match the interest rate and inflation exposures of its assets to the interest rate and inflation exposures of the scheme liabilities. The scheme was holding £45m (2015: £nil) in liquidity funds to meet potential future obligations to collateralise repurchase arrangements or swap agreements.
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 2016 £m |
31 July 2015 £m |
|||||
|---|---|---|---|---|---|---|
| SIPS | TIGPS | US schemes |
SIPS | TIGPS | US schemes |
|
| Present value of funded scheme liabilities – Active deferred members – Deferred members |
(82) (881) |
(82) (688) |
(124) (175) |
(92) (756) |
(76) (625) |
(102) (130) |
| – Pensioners Present value of funded scheme liabilities Market value of scheme assets |
(1,086) (2,049) 2,227 |
(869) (1,639) 1,787 |
(16) (315) 216 |
(995) (1,843) 1,813 |
(823) (1,524) 1,693 |
(336) (568) 445 |
| Surplus/(deficit) | 178 | 148 | (99) | (30) | 169 | (123) |
Net retirement benefit obligations
| 31 July 2016 £m |
31 July 2015 £m |
|||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| Market value of scheme assets Present value of funded scheme liabilities |
4,034 (3,709) |
216 (315) |
62 (70) |
4,312 (4,094) |
3,523 (3,385) |
445 (568) |
49 (57) |
4,017 (4,010) |
| Surplus/(deficit) | 325 | (99) | (8) | 218 | 138 | (123) | (8) | 7 |
| Unfunded pension plans Post-retirement healthcare |
(56) (8) |
(8) (12) |
(52) (1) |
(116) (21) |
(52) (7) |
(7) (11) |
(37) (1) |
(96) (19) |
| Present value of unfunded obligations | (64) | (20) | (53) | (137) | (59) | (18) | (38) | (115) |
| Unrecognised asset due to surplus restriction | (1) | (1) | ||||||
| Net pension liability | 261 | (119) | (62) | 80 | 79 | (141) | (46) | (108) |
| Post-retirement assets Post-retirement liabilities |
327 (66) |
(119) | 1 (63) |
328 (248) |
169 (90) |
(141) | 1 (47) |
170 (278) |
| Net pension liability | 261 | (119) | (62) | 80 | 79 | (141) | (46) | (108) |
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.
| Net interest (income)/cost | (3) 8 |
|---|---|
| Amounts charged to finance costs | |
| 19 | (3) |
| Non-headline administrative expenses 16 |
(6) |
| Headline administrative expenses | 1 1 |
| Sales and distribution costs | 1 1 |
| Cost of sales | 1 1 |
| The operating cost is charged/(credited) as follows: | |
| 19 | (3) |
| Scheme administration costs | 7 8 |
| Settlement loss/(gain) | 9 (14) |
| Current service cost | 3 3 |
| Amounts charged/(credited) to operating profit | |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Actuarial gains/(losses) | ||
| Difference between interest credit and return on assets | 395 | 239 |
| Experience gains and (losses) on scheme liabilities | 58 | 46 |
| Actuarial gains/(losses) arising from changes in demographic assumptions | 47 | (15) |
| Actuarial gains/(losses) arising from changes in financial assumptions | (539) | (210) |
| Movements in surplus restriction | (1) | |
| (40) | 60 |
| Scheme administration costs Exchange adjustments Benefits paid |
(4) (180) |
(3) 51 (14) |
8 (3) |
(7) 59 (197) |
(4) (145) |
(4) 40 (128) |
(5) (4) |
(8) 35 (277) |
|---|---|---|---|---|---|---|---|---|
| Assets distributed on settlement | (360) | (360) | (1) | (1) | ||||
| Employer contributions | 199 | 68 | 2 | 269 | 53 | 23 | 3 | 79 |
| Actuarial gain on scheme assets | 372 | 20 | 3 | 395 | 242 | (6) | 3 | 239 |
| Interest on assets | 124 | 9 | 3 | 136 | 128 | 20 | 2 | 150 |
| At beginning of period | 3,523 | 445 | 49 | 4,017 | 3,249 | 500 | 51 | 3,800 |
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US schemes |
Other countries |
Total | |
| 31 July 2016 £m |
31 July 2015 £m |
| 31 July 2016 £m |
31 July 2015 £m |
|||||||
|---|---|---|---|---|---|---|---|---|
| UK schemes |
US schemes |
Other countries |
Total | UK schemes |
US | schemes Other countries | Total | |
| At beginning of period | (3,385) | (568) | (57) | (4,010) | (3,275) | (595) | (65) | (3,935) |
| Current service cost | (1) | (1) | (1) | (1) | ||||
| Interest on obligations | (115) | (12) | (2) | (129) | (128) | (23) | (3) | (154) |
| Actuarial (loss)/gain on liabilities | (389) | (31) | (3) | (423) | (127) | (43) | 1 | (169) |
| Liabilities extinguished on settlement | 350 | 1 | 351 | 14 | 14 | |||
| Exchange adjustments | (68) | (11) | (79) | (49) | 7 | (42) | ||
| Benefits paid | 180 | 14 | 3 | 197 | 145 | 128 | 4 | 277 |
| At end of period | (3,709) | (315) | (70) | (4,094) | (3,385) | (568) | (57) | (4,010) |
| Assets | Obligations | ||||
|---|---|---|---|---|---|
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
||
| At beginning of period | (115) | (107) | |||
| Reclassification of small unfunded obligations | (2) | ||||
| Current service cost | (2) | (2) | |||
| Interest on obligations | (4) | (4) | |||
| Actuarial loss | (11) | (10) | |||
| Employer contributions | 6 | 6 | |||
| Exchange adjustments | (11) | 4 | |||
| Benefits paid | (6) | (6) | 6 | 6 | |
| At end of period | (137) | (115) |
Company contributions to the defined benefit pension plans and post-retirement healthcare plans for 2016 totalled £275m (2015: £84m). This comprised regular contributions to funded schemes of £32m (2015: £36m) to SIPS, £11m (2015: £17m) to TIGPS, £34m (2015: £23m) to US Schemes, £6m to other schemes and additional contributions of \$50m to fund the buy-out arrangement for US pensioners in August 2015 and the contribution of £152m UK government bonds to SIPS in December 2015. In addition, £6m (2015: £6m) was spent on providing benefits under unfunded defined benefit pension and post-retirement healthcare plans.
In 2017 the following cash contributions to the Group's principal defined benefit schemes are expected: £24m to SIPS; £3m to TIGPS; approximately £29m to other defined benefit plans, including the US scheme; and £6m to unfunded schemes and post-retirement healthcare. Adding £4m planned buy-out funding for small UK and Canadian schemes, expected cash payments for 2017 total £66m.
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 the three-year performance period if performance conditions are met. LTIP awards are made to selected senior executives, including the executive directors. Awards made prior to 2016 were made with different targets for corporate executives and divisional executives. From 2016 onwards, all LTIP awards will have one set of targets.
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.
Group LTIP awards have performance conditions relating to underlying revenue growth, growth in headline EPS adjusted to exclude tax, ROCE, cash conversion and, for awards made before 2015, TSR relative to the FTSE 100 (excluding financial services companies).
Divisional LTIP awards have performance conditions relating to divisional performance against headline KPIs, including underlying revenue and operating profit growth, operating margins, ROCE, operating cash conversion, employee engagement and quality metrics.
In 2015 the CIP was replaced by the SMP. Under the CIP and SMP participants are required to invest between 25% and 50% of their post-tax bonus purchasing the Company's shares at the prevailing market price. At the end of a three-year period, if the executive is still in office and provided the performance test is passed, matching shares will be awarded in respect of any invested shares retained for that period. The number of matching shares to be awarded is determined by the Remuneration Committee at the end of the year in which the bonus is earned by reference to annual bonus, and other corporate financial criteria. The maximum award will not exceed the value, before tax, of the bonus or salary invested in shares by the executive.
For the CIP, vesting of matching shares will occur, and the matching shares will be released, at the end of the three-year period if the Group's Return on Capital Employed ('ROCE') over the performance period exceeds the Group's weighted average cost of capital ('WACC') over the performance period by an average margin of at least 1% per annum. If ROCE exceeds WACC by an average margin of 3% per annum, the enhanced performance condition is met, and a second matching share will be issued for every purchased share. For the SMP, vesting of matching shares will occur, and the matching shares will be released, at the end of the three-year period depending on the performance of the Group LTIP issued for the same performance period. The first matching share is awarded if the Group LTIP vests under any performance condition.
No future awards will be made under the CIP or SMP.
The 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. See the Directors' Remuneration Report pages 94 to 114 for details of the awards made to executive directors recruited in the year.
| Weighted | ||||||
|---|---|---|---|---|---|---|
| Long-term incentive |
Restricted | Other share |
average price |
|||
| CIP | plans | stock | schemes | Total | £ | |
| Ordinary shares under option ('000) | ||||||
| 1 August 2014 | 1,568 | 2,695 | 1,744 | 6,007 | £2.67 | |
| Granted | 533 | 1,240 | 302 | 2,075 | £1.31 | |
| Exercised | (580) | (258) | (418) | (1,256) | £2.62 | |
| Lapsed | (152) | (1,028) | (134) | (1,314) | £0.97 | |
| 31 July 2015 | 1,369 | 2,649 | 1,494 | 5,512 | £2.57 | |
| Granted | 635 | 1,628 | 303 | 329 | 2,895 | £0.99 |
| Exercised | (530) | (199) | (30) | (380) | (1,139) | £2.95 |
| Lapsed | (35) | (724) | (222) | (981) | £2.20 | |
| 31 July 2016 | 1,439 | 3,354 | 273 | 1,221 | 6,287 | £1.83 |
Options were exercised on an irregular basis during the period. The average closing share price over the financial year was 1,049.61p (2015: 1,176.19p). There has been no change to the effective option price of any of the outstanding options during the period.
| Range of exercise prices | Total shares under option at 31 Jul 2016 ('000) |
Weighted average remaining contractual life at 31 July 2016 (months) |
Total shares under option at 31 Jul 2015 ('000) |
Weighted average remaining contractual life at 31 July 2015 (months) |
Options exercisable at 31 July 2016 ('000) |
Exercisable weighted average exercise price for options exercisable at 31 July 2016 |
Options exercisable at 31 July 2015 ('000) |
Exercisable weighted average exercise price for options exercisable at 31 July 2015 |
|---|---|---|---|---|---|---|---|---|
| £0.00 – £2.00 | 5,066 | 18 | 4,018 | 15 | ||||
| £2.01 – £6.00 | 17 | 6 | 18 | 17 | ||||
| £6.01 – £10.00 £10.01 – £14.00 |
924 280 |
33 13 |
1,091 385 |
27 25 |
60 175 |
£9.04 £10.95 |
263 257 |
£8.97 £10.96 |
For the purposes of valuing options to arrive at the share-based payment charge, the Binomial option-pricing model has been used for most schemes and the Monte Carlo method is used for schemes with total shareholder return performance targets. The key assumptions used in the models for 2016 and 2015 are volatility of 25% to 30% (2015: 20% to 25%) and dividend yield of 3.75% (2015: 3.75%), based on historical data, for the period corresponding with the vesting period of the option. These generated a weighted average fair value for SMP/CIP of £10.34 (2015: £12.47), Group LTIP of £10.33 (2015: £10.78) and divisional LTIP of £10.33 (2015: £12.55), and restricted stock of £10.03 (2015: no grants). The fair value disclosed for the SMP/CIP award treats the two matching shares as separate options.
Included within staff costs is an expense arising from share-based payment transactions of £10m (2015: £9m), of which £9m (2015: £8m) 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 1 August 2014 | 1,395 | 216 | 386 | 164 | 2,161 |
| Exchange adjustments Additions |
26 | 9 20 |
19 | 2 18 |
56 38 |
| Disposals | (8) | (2) | (7) | (17) | |
| At 31 July 2015 | 1,421 | 237 | 403 | 177 | 2,238 |
| Exchange adjustments | 253 | 43 | 71 | 17 | 384 |
| Business combinations | 5 | 3 | 8 | ||
| Additions | 25 | 11 | 36 | ||
| Disposals | (3) | (6) | (9) | ||
| At 31 July 2016 | 1,679 | 302 | 477 | 199 | 2,657 |
| Amortisation | |||||
| At 1 August 2014 | 86 | 102 | 313 | 116 | 617 |
| Exchange adjustments | 2 | 4 | 14 | 1 | 21 |
| Charge for the year Impairment charge |
27 | 23 | 33 | 15 | 71 27 |
| Disposals | (8) | (2) | (6) | (16) | |
| At 31 July 2015 | 115 | 121 | 358 | 126 | 720 |
| Exchange adjustments | 24 | 22 | 65 | 11 | 122 |
| Charge for the year | 26 | 15 | 17 | 58 | |
| Impairment charge | 23 | 23 | |||
| Disposals | (3) | (5) | (8) | ||
| At 31 July 2016 | 162 | 166 | 438 | 149 | 915 |
| Net book value at 31 July 2016 | 1,517 | 136 | 39 | 50 | 1,742 |
| Net book value at 31 July 2015 | 1,306 | 116 | 45 | 51 | 1,518 |
| Net book value at 1 August 2014 | 1,309 | 114 | 73 | 48 | 1,544 |
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 1 August 2014 | 68 | 128 | 190 | 386 |
| Exchange adjustments | 4 | 10 | 5 | 19 |
| Disposals | (2) | (2) | ||
| At 31 July 2015 | 72 | 136 | 195 | 403 |
| Exchange adjustments | 13 | 24 | 34 | 71 |
| Business combinations | 3 | 3 | ||
| At 31 July 2016 | 85 | 160 | 232 | 477 |
| Amortisation | ||||
| At 1 August 2014 | 41 | 101 | 171 | 313 |
| Exchange adjustments | 2 | 8 | 4 | 14 |
| Charge for the year | 6 | 13 | 14 | 33 |
| Disposals | (2) | (2) | ||
| At 31 July 2015 | 49 | 120 | 189 | 358 |
| Exchange adjustments | 9 | 22 | 34 | 65 |
| Charge for the year | 3 | 7 | 5 | 15 |
| At 31 July 2016 | 61 | 149 | 228 | 438 |
| Net book value at 31 July 2016 | 24 | 11 | 4 | 39 |
| Net book value at 31 July 2015 | 23 | 16 | 6 | 45 |
| Net book value at 1 August 2014 | 27 | 27 | 19 | 73 |
Goodwill is not amortised but is tested for impairment at least annually. Value in use or fair value less cost to sell calculations are used to determine the recoverable amount of goodwill held allocated to each group of cash generating units (CGU). 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 2017 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 (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:
| 2016 £m |
2016 Number of CGUs |
2015 £m |
2015 Number of CGUs |
|
|---|---|---|---|---|
| John Crane | 108 | 3 | 92 | 3 |
| Smiths Medical | 591 | 1 | 508 | 1 |
| Smiths Detection | 410 | 1 | 343 | 1 |
| Smiths Interconnect | 381 | 5 | 340 | 5 |
| Flex-Tek | 27 | 2 | 23 | 2 |
| 1,517 | 12 | 1,306 | 12 |
The goodwill allocated to Smiths Interconnect Power has been split, and part of it allocated to Smiths Interconnect Microwave Telecoms, following the transfer of the protection business from Smiths Interconnect Power to Smiths Interconnect Microwave Telecoms to increase synergies from the customer base of these businesses. Goodwill was also reallocated from Smiths Interconnect Microwave Subsystems to Smiths Interconnect Microwave Components when a business was transferred between the two business units. These changes were made to reflect how the businesses were being managed. If goodwill had not been reallocated, the impairment recognised for Smiths Interconnect Microwave Telecoms and Smiths Interconnect Microwave Components would have been smaller.
John Crane Production Solutions ("JCPS")
JCPS is a business unit of John Crane focused on the servicing and provision of onshore down-hole 'artificial lift' pumping hardware and systems. Goodwill of £nil (2015: £5m) is allocated to JCPS. An impairment test was carried out following completion of the annual strategic planning process because the significant decline in oil prices had adversely affected JCPS customers. JCPS anticipate that customers will continue to scale back expansion plans and reduce running costs. Following this impairment test, the JCPS goodwill has been impaired by £5m (2015: £27m) and property, plant and equipment where the value is expected to be recovered at a CGU level has been impaired by £5m (2015: no impairment). The impairment has occurred because JCPS is now expected to have lower levels of trading activity, operating margins and growth in the future, significantly reducing the value in use of the business.
The impairment loss has been recognised in John Crane administration expenses, and excluded from headline operating profit for the division.
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|
| Impairment loss recognised | £5m | £27m |
| Property, plant the equipment impairment loss | £5m | |
| Basis of valuation | value in use | value in use |
| Discount rate used for impairment test | 13.7% | 12.9% |
| Long-term growth rates | 2.3% | 2.2% |
Sales assumptions for JCPS are based on:
•anticipated levels of maintenance and repair activities based on the current forward curve for oil prices; and
•expected North American drilling activity.
The gross margins included in the projections are lower than historical due to lower levels of activity. As required by 'IAS 36: Impairment of assets', margin projections for JCPS are based on the current fixed cost base, and do not incorporate any future restructuring.
At 31 July 2016 the Artificial lift business, comprising the US and Romanian activities of JCPS, was classified as held for sale (see note 27).
Goodwill of £66m (2015: £52m) is allocated to Smiths Interconnect Microwave Components. The underlying increase in goodwill is due to a reorganisation that moved a business from Smiths Interconnect Microwave Subsystems to Smiths Interconnect Microwave Components. An impairment test was carried out following the completion of the annual strategic planning process, which identified increased execution risks affecting the long-term strategy.
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|
| Impairment loss recognised | £7m | |
| Basis of valuation | value in use | value in use |
| Discount rate used for impairment test | 13.6% | 15.6% |
| Long-term growth rates | 2.3% | 2.4% |
Sales assumptions for Smiths Interconnect Microwave Components are based on:
•the current order book;
•sales projections from major customers; and
•developments in key customer markets including smartphone testing equipment.
Margin projections for Smiths Interconnect Microwave Components incorporate the variable cost structure of the current production capacity.
Goodwill of £11m (2015: £7m) is allocated to Smiths Interconnect Microwave Telecoms. The underlying increase in goodwill is due to a reorganisation that moved the protection business from Smiths Interconnect Power to Smiths Interconnect Microwave Telecoms. An impairment test was carried out following the completion of the annual strategic planning process, which identified execution risks affecting this CGU. The impairment testing used a fair value less costs to sell model to value the businesses, because the Board approved forecasts for this business fundamentally incorporated significant reorganisation activity.
| Year ended 31 July 2016 |
Year ended 31 July 2015 |
|
|---|---|---|
| Impairment loss recognised | £11m | |
| Basis of valuation | fair value | value in use |
| Discount rate used for impairment test | n/a | 14.1% |
| Long-term growth rates | n/a | 2.2% |
The estimate of fair value less costs to sell incorporated projected 2017 revenue and profitability. Sales assumptions for Smiths Interconnect Microwave Telecoms are based on the current order book, sales projections from major customers, technology developments, and competitor strategies.
Fair value was calculated using a level 3 valuation model. Valuation multiples were based on adjusted valuation multiples for listed comparator companies, validated against publically available information on transaction multiples. Costs to sell were estimated based on Group experience of transactions involving businesses of a similar size.
John Crane and Smiths Medical have strong aftermarket and consumables businesses, with consistent sales trends. Smiths Detection and Smiths Interconnect have greater sales and margin volatility due to lower levels of recurring revenue and involvement in government-funded programmes, particularly defence, and customer-led technology innovation. The key assumptions used in value in use calculations are:
The assumptions used in the impairment testing of significant CGUs are as follows:
| Year ended 31 July 2016 | ||||||
|---|---|---|---|---|---|---|
| John Crane | Smiths Medical |
Smiths Detection |
Smiths Interconnect | |||
| Core Rotating Equipment |
Microwave Subsystems |
Connectors | Power | |||
| Net book value of goodwill (£m) | 104 | 591 | 410 | 75 | 100 | 128 |
| Discount rate Period covered by management projections Long-term growth rates |
13.4% 5 years 2.3% |
11.0% 5 years 2.1% |
13.9% 5 years 2.0% |
11.8% 5 years 2.3% |
13.5% 5 years 2.0% |
11.7% 5 years 2.3% |
Impairment testing assumptions continued
| Year ended 31 July 2015 | |||||||
|---|---|---|---|---|---|---|---|
| John Crane | Smiths Smiths Medical Detection |
Smiths Interconnect | |||||
| Core Rotating Equipment |
Microwave Subsystems |
Connectors | Power | ||||
| Net book value of goodwill (£m) | 82 | 508 | 343 | 72 | 85 | 123 | |
| Discount rate | 11.9% | 10.7% | 14.4% | 12.6% | 15.4% | 12.2% | |
| Period covered by management projections Long-term growth rates |
5 years 2.0% |
5 years 2.2% |
5 years 2.2% |
5 years 2.5% |
5 years 1.5% |
5 years 2.5% |
The remaining balance of the goodwill represents smaller individual amounts which have been allocated to smaller CGUs.
Smiths Interconnect Power's value in use exceeds its carrying value by £1m (2015: £14m). Sensitivity analysis performed around the base case assumptions has indicated that for Smiths Interconnect Power, the following changes in assumptions (in isolation), would cause the value in use to fall below the carrying value. The 2015 sensitivities relate to the combined business of Smiths Interconnect Power and Smiths Interconnect Microwave Telecoms Protection, since they were only split in the current year.
| Year ended 31 July 2016 Change required to trigger impairment |
Year ended 31 July 2015 Change required to trigger impairment |
|
|---|---|---|
| Forecast revenue | 1% reduction | 10% reduction |
| Forecast margins | 10 basis points lower | 120 basis points lower |
| Discount rate | 10 basis points higher | 100 basis points higher |
| Long-term growth rates | 10 basis points lower | 190 basis points lower |
Sales assumptions for Smiths Interconnect Power are based on:
•the current order book;
Margin projections for Smiths Interconnect Power are based on current variable costs and production capacity, and the expected costs of increasing capacity to support higher levels of sales.
The directors also reviewed the fair value less costs to sell for the division when considering the results of the impairment testing, which also supported the conclusion that the Smiths Interconnect Power goodwill was not impaired.
For the other CGUs, sensitivity analysis performed around the base case assumptions has indicated that no reasonable changes in key assumptions would cause the carrying amount of any of the CGUs to exceed their respective recoverable amounts.
The Group has no indefinite life intangible assets other than goodwill. During the year impairment tests were carried out for development projects which 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 (2015: £nil).
Impairment charges of £5m for property, plant and equipment of John Crane Production Solutions have been recognised in the year, principally relating to property. Please see disclosures above under goodwill for an explanation of the circumstances affecting this business.
There are £1m impairment charges for sites affected by the Fuel for Growth restructuring (see note 3).
| Land and buildings £m |
Plant and machinery £m |
Fixtures, fittings, tools and equipment £m |
Total £m |
|
|---|---|---|---|---|
| Cost or valuation | ||||
| At 1 August 2014 | 184 | 520 | 212 | 916 |
| Exchange adjustments | 3 | 13 | (3) | 13 |
| Additions | 7 | 37 | 15 | 59 |
| Disposals | (13) | (33) | (25) | (71) |
| Business disposals | (1) | (1) | ||
| At 31 July 2015 | 181 | 536 | 199 | 916 |
| Exchange adjustments | 31 | 91 | 30 | 152 |
| Additions | 19 | 42 | 13 | 74 |
| Disposals | (2) | (35) | (21) | (58) |
| Transfers to disposal group held for sale at the year end | (6) | (3) | (1) | (10) |
| At 31 July 2016 | 223 | 631 | 220 | 1,074 |
| Depreciation | ||||
| At 1 August 2014 | 95 | 393 | 170 | 658 |
| Exchange adjustments | 2 | 11 | (2) | 11 |
| Charge for the year | 7 | 28 | 14 | 49 |
| Disposals | (7) | (28) | (25) | (60) |
| Business disposals | (1) | (1) | ||
| At 31 July 2015 | 97 | 403 | 157 | 657 |
| Exchange adjustments | 16 | 68 | 24 | 108 |
| Charge for the year | 8 | 31 | 14 | 53 |
| Impairments (note 11) | 5 | 1 | 6 | |
| Disposals | (1) | (34) | (20) | (55) |
| Transfers to disposal group held for sale at the year end | (6) | (3) | (1) | (10) |
| At 31 July 2016 | 119 | 466 | 174 | 759 |
| Net book value at 31 July 2016 | 104 | 165 | 46 | 315 |
| Net book value at 31 July 2015 | 84 | 133 | 42 | 259 |
| Net book value at 1 August 2014 | 89 | 127 | 42 | 258 |
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Inventories comprise | ||
| Raw materials and consumables | 174 | 157 |
| Work in progress | 102 | 96 |
| Finished goods | 202 | 203 |
| Less: payments on account | 478 | 456 (2) |
| 478 | 454 |
The Group consumed £1,319m (2015: £1,293m) of inventories during the period. In the year to 31 July 2016, £16m (2015: £13m) was charged for the write-down of inventory and £4m (2015: £4m) was released from inventory provisions no longer required.
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Gross inventory carried at full value | 436 | 415 |
| Gross value of inventory partly or fully provided for | 112 | 113 |
| 548 | 528 | |
| Inventory provision | (70) | (72) |
| Inventory after provisions | 478 | 456 |
| 31 July 2016 | 31 July 2015 | |
|---|---|---|
| £m | £m | |
| Non-current | ||
| Trade receivables | 31 | 29 |
| Accrued income | 3 | 5 |
| Prepayments | 1 | |
| Other receivables | 16 | 6 |
| 51 | 40 | |
| Current | ||
| Trade receivables | 665 | 560 |
| Accrued income | 18 | 17 |
| Prepayments | 21 | 14 |
| Other receivables | 41 | 25 |
| 745 | 616 |
Trade receivables include unbilled balances of £47m (2015: £27m) relating to Smiths Detection contracts, where revenue recognition does not align with the agreed billing schedule. The Group also has cash received of £41m (2015: £38m) deferred in trade and other payables relating to these Smiths Detection contracts.
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 £745m (2015: £611m).
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.
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 less than 5% (2015: less than 5%) of Group revenue.
| Trade receivables | 696 | 589 |
|---|---|---|
| Provision for bad and doubtful debts | 727 (31) |
611 (22) |
| Gross value of partially and fully provided receivables | 38 | 25 |
| Trade receivables which are not impaired and more than three months overdue | 45 | 32 |
| Trade receivables which are not impaired and less than three months overdue | 109 | 86 |
| Trade receivables which are not impaired and not yet due | 535 | 468 |
| 31 July 2016 £m |
31 July 2015 £m |
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Non-current Other payables |
29 | 24 |
| Current | ||
| Trade payables | 202 | 192 |
| Other payables | 11 | 11 |
| Other taxation and social security costs | 25 | 18 |
| Accruals | 231 | 191 |
| Deferred income | 67 | 54 |
| 536 | 466 |
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.
The Group invests in early stage businesses that are developing or commercialising related technology. In the current year £2m was invested in Detection businesses. In 2015 £2m was invested in John Crane and £1m was invested in interconnect businesses.
In December 2015, £152m of UK government bonds previously held as available for sale financial assets were contributed to Smiths Industries Pension Scheme. At 31 July 2015, the Group held £147m UK government bonds as part of the deficit-funding plan agreed with the trustee of this pension schemes. See note 8 for additional details.
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 the fair value adjustments relating to hedge accounting.
| 31 July 2016 | £m | 31 July 2015 £m |
|---|---|---|
| Cash and cash equivalents | ||
| Net cash and deposits | 431 | 495 |
| Short-term borrowings | ||
| Bank overdrafts | (1) | |
| £150m 7.25% Sterling Eurobond 2016 | (150) | |
| €300m 4.125% Eurobond 2017 | (255) | |
| Bank and other loans | (1) | (1) |
| Interest accrual | (13) | (12) |
| (270) | (163) | |
| Long-term borrowings | ||
| €300m 4.125% Eurobond 2017 | (214) | |
| \$175m 7.37% US\$ Private placement 2018 | (132) | (112) |
| \$250m 7.20% US\$ Guaranteed notes 2019 | (189) | (159) |
| \$400m 3.625% US\$ Guaranteed notes 2022 | (304) | (253) |
| €600m 1.25% Eurobond 2023 | (512) | (410) |
| Bank and other loans | (2) | (2) |
| (1,139) | (1,150) | |
| Borrowings (1,409) |
(1,313) | |
| Net debt | (978) | (818) |
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 £47m (2015: £42m) was charged to the consolidated income statement in this period in respect of public bonds.
| Net cash and cash equivalents | 430 | 495 |
|---|---|---|
| Bank overdrafts | (1) | |
| Cash and cash equivalents | 431 | 495 |
| Short-term deposits | 270 | 391 |
| Cash at bank and in hand | 161 | 104 |
| 31 July 2016 £m |
31 July 2015 £m |
Cash and cash equivalents include highly liquid investments with maturities of three months or less.
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, there is no intention to settle the balances net, so these arrangements do not qualify for net presentation. At 31 July 2016 and 31 July 2015 the total value of overdrafts on accounts in interest compensation cash pooling systems was less than £1m.
The balances held in zero balancing cash pooling arrangements have daily settlement of balances, so netting is not relevant.
| At 31 July 2016 | 430 | (269) | (1,139) | (978) |
|---|---|---|---|---|
| Change in maturity analysis | (256) | 256 | ||
| Fair value movement from interest rate hedging | (23) | (23) | ||
| Capitalisation, interest accruals and unwind of capitalised fees | (1) | (1) | (2) | |
| Drawdown of borrowings | (1) | (1) | ||
| Repayment of borrowings | 151 | 151 | ||
| Net cash outflow | (98) | (98) | ||
| Foreign exchange gains and losses | 33 | (220) | (187) | |
| At 31 July 2015 | 495 | (163) | (1,150) | (818) |
| Net cash and cash equivalents £m |
Other short-term borrowings £m |
Long-term borrowings £m |
Net debt £m |
Loans amounting to £3m (2015: £3m) were secured on plant and equipment with a book value of £3m (2015: £3m).
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.
Treasury and risk management policies are set by the Board. The policy sets out specific guidelines to manage foreign exchange risk, interest rate risk, credit risk and the use of financial instruments to manage risk. The instruments and techniques used to manage exposures include foreign currency derivatives, debt and other interest rate derivatives. The central treasury function monitors financial risks and compliance with risk management policies. The management of operational credit risk is discussed in note 14.
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 2016 | |||||
|---|---|---|---|---|---|
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Financial assets and liabilities | |||||
| Financial instruments included in trade and other receivables | 38 | 391 | 136 | 180 | 745 |
| Financial instruments included in trade and other payables | (48) | (203) | (72) | (79) | (402) |
| Cash and cash equivalents | 189 | 129 | 41 | 72 | 431 |
| Borrowings not designated as net investment hedges | 1 | (12) | (5) | (1) | (17) |
| 180 | 305 | 100 | 172 | 757 | |
| Exclude balances held in operations with the same functional currency | (180) | (188) | (101) | (167) | (636) |
| Exposure arising from intra-group loans | (165) | (70) | (77) | (312) | |
| Forward foreign exchange contracts | (286) | 112 | 119 | 55 | |
| (286) | 64 | 48 | (17) | (191) |
Transactional currency exposure continued
| At 31 July 2015 | |||||
|---|---|---|---|---|---|
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Financial assets and liabilities | |||||
| Financial instruments included in trade and other receivables | 34 | 316 | 111 | 150 | 611 |
| Financial instruments included in trade and other payables | (41) | (185) | (55) | (55) | (336) |
| Cash and cash equivalents | 311 | 115 | 20 | 49 | 495 |
| Borrowings not designated as net investment hedges | (151) | (11) | (3) | (165) | |
| 153 | 235 | 73 | 144 | 605 | |
| Exclude balances held in operations with the same functional currency | (155) | (149) | (72) | (138) | (514) |
| Exposure arising from intra-group loans | (101) | (28) | (49) | (178) | |
| Forward foreign exchange contracts | (163) | 48 | 79 | 36 | |
| (165) | 33 | 52 | (7) | (87) |
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 | Gain/(loss) | Impact | Gain/(loss) | |
|---|---|---|---|---|
| on profit | recognised in | on profit | recognised in | |
| for the year | reserves | for the year | reserves | |
| 31 July 2016 | 31 July 2016 | 31 July 2015 | 31 July 2015 | |
| £m | £m | £m | £m | |
| US dollar | 3 | 2 | 4 | (2) |
| Euro | (6) | (3) | 4 | |
| Sterling | 16 | (2) | 1 |
These sensitivities were calculated before adjusting for tax and exclude the effect of quasi-equity intra-group loans.
The Group uses foreign currency contracts to hedge future foreign currency sales and purchases. At 31 July 2016 contracts with a nominal value of £393m (2015: £317m) were designated as hedging instruments. In addition, the Group had outstanding foreign currency contracts with a nominal value of £529m (2015: £314m) 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. Of the foreign exchange contracts designated as hedging instruments 91% are for periods of 12 months or less (2015: 92%).
The movements in the cash-flow hedge reserve during the period are summarised in the table below:
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Brought forward cash-flow hedge reserve at start of year | 3 | |
| Gains/(losses) on effective cash-flow hedges recognised in equity | (10) | 2 |
| Amounts removed from the hedge reserve and recognised in the following lines on the income statement | ||
| – revenue | (1) | |
| – cost of sales | 1 | 1 |
| Carried forward cash-flow hedge reserve at end of year | (7) | 3 |
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 forward foreign exchange contracts and cross-currency swaps.
The table below sets out the currency of loans and swap contracts designated as net investment hedges:
| At 31 July 2016 | |||||
|---|---|---|---|---|---|
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Loans designated as net investment hedges | (625) | (767) | (1,392) | ||
| Cross-currency swap contracts | (358) | 373 | 15 | ||
| Currency swap contracts | 111 | (111) | |||
| 111 | (983) | (394) | (111) | (1,377) |
| At 31 July 2015 | |||||
|---|---|---|---|---|---|
| Sterling £m |
US\$ £m |
Euro £m |
Other £m |
Total £m |
|
| Loans designated as net investment hedges | (524) | (624) | (1,148) | ||
| Cross-currency swap contracts | (306) | 302 | (4) | ||
| Currency swap contracts | 90 | (90) | |||
| 90 | (830) | (322) | (90) | (1,152) |
At 31 July 2016 swap contracts hedged the Group's exposure to Canadian dollars, Japanese yen and Chinese renminbi (31 July 2015: Canadian dollars, Japanese yen and Chinese renminbi).
All the currency swap contracts designated as net investment hedges are current (2015: current). The cross-currency swap contracts will mature in April 2023.
The gains and losses that have been deferred in the net investment hedge reserve are shown in the table below:
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Brought forward net investment hedge reserve at start of year Amounts deferred in the period on effective net investment hedges |
(66) (228) |
(58) (8) |
| Carried forward net investment hedge reserve at end of year | (294) | (66) |
The fair values of these net investment hedges are subject to exchange rate movements. Based on the hedging instruments in place at the year-end, if the specified currencies were to strengthen 10% while all other market rates remained constant, it would have the following effect:
| Loss | Loss | |
|---|---|---|
| recognised | recognised | |
| in hedge | in hedge | |
| reserve | reserve | |
| 31 July 2016 | 31 July 2015 | |
| £m | £m | |
| US dollar | 98 | 80 |
| Euro | 35 | 35 |
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 for greater than 70% of the level of gross debt. This is achieved through fixed rate borrowings and interest rate swaps. At 31 July 2016 59% (2015: 57%) 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 2016, after interest rate swaps, is 3.68% (2015: 3.98%).
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.
| £m | Borrowings 31 July 2016 £m |
borrowings 31 July 2016 £m |
for sale investments 31 July 2015 £m |
and cash equivalents 31 July 2015 £m |
Borrowings 31 July 2015 £m |
Fair value of borrowings 31 July 2015 £m |
|---|---|---|---|---|---|---|
| (153) | (158) | (151) | (158) | |||
| (353) | (362) | 147 | (296) | (443) (290) |
||
| 390 | (828) (581) |
(882) (581) |
147 | 467 | (846) (467) |
(891) (467) |
| 390 | (1,409) | (1,463) | 147 | 467 | (1,313) | (1,358) |
| (1,358) | ||||||
| equivalents 31 July 2016 41 431 |
(322) (1,409) |
(362) (1,463) |
9 156 |
28 495 |
(399) (1,313) |
At 31 July 2016 and 31 July 2015 the Group has designated the following fair value hedges:
These positions hedge the risk of variability in the fair value of borrowings arising from fluctuations in base rates.
The fair values of the hedging instruments are disclosed in note 19. The effect of the swaps is to convert £552m (2015: £462m) debt from fixed rate to floating rate.
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 foreign exchange rates at 31 July 2016, and taking into consideration all fixed rate borrowings and interest rate swaps in place, a one percentage point (100 basis points) change in average floating interest rates for all three currencies would have a £2.1m (2015: £0.2m) impact on the Group's profit before tax.
Following the contribution of the UK Gilts to the pension scheme, the sensitivity of investments to changes in interest rates is no longer material.
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 £440m at 31 July 2016 (2015: £651m).
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| UK government bonds with at least a AA credit rating (note 16) | 147 | |
| Cash at banks with at least a AA- credit rating | 215 | 268 |
| Cash at banks with a A+ credit rating | 126 | 194 |
| Cash at other banks | 90 | 33 |
| Other investments | 9 | 9 |
| 440 | 651 |
At 31 July 2016 the maximum exposure with a single bank for deposits and cash is £97m (2015: £108m), whilst the maximum mark to market exposure for derivatives is £10m (2015: £4m). These banks have AA- and AA- credit rating, respectively (2015: AA- and AA-).
The Board policy specifies the maintenance of unused committed credit facilities of at least £200m 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.
On 19 February 2014 Smiths completed the refinancing of its existing \$800m Revolving Credit Facility. The two uncommitted extension options have been exercised on 4 February 2015 and 3 February 2016. The facility now matures on 19 February 2021. At the balance sheet date, the Group had the following undrawn credit facilities:
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Expiring within one year | ||
| Expiring between one and two years | ||
| Expiring after more than two years | 605 | 512 |
| 605 | 512 |
As at 31 July 2016, £270m (2015: £391m) of cash and cash equivalents was on deposit with various banks of which £119m (2015: £301m) was on deposit in the UK.
| Greater than five years Total |
(816) (1,409) |
8 9 |
(30) (178) |
(838) (1,578) |
(663) (1,313) |
(16) (15) |
(39) (198) |
(718) (1,526) |
|---|---|---|---|---|---|---|---|---|
| Between four and five years | (18) | (18) | (15) | (15) | ||||
| Between three and four years | (18) | (18) | (159) | (1) | (26) | (186) | ||
| Between two and three years | (190) | (1) | (32) | (223) | (113) | (34) | (147) | |
| Between one and two years | (133) | (41) | (174) | (215) | 3 | (43) | (255) | |
| Less than one year | (270) | 2 | (39) | (307) | (163) | (1) | (41) | (205) |
| Borrowings (Note 17) 31 July 2016 £m |
Fair value adjustments 31 July 2016 £m |
Contractual interest payments 31 July 2016 £m |
Total contractual cash-flows 31 July 2016 £m |
Borrowings (Note 17) 31 July 2015 £m |
Fair value adjustments 31 July 2015 £m |
Contractual interest payments 31 July 2015 £m |
Total contractual cash-flows 31 July 2015 £m |
The figures presented in the borrowings column include the non-cash adjustments which are highlighted in the adjacent column. The contractual interest reported for borrowings is before the effect of interest rate swaps.
Gross contractual cash-flows for derivative financial instruments
| Receipts 31 July 2016 £m |
Payments 31 July 2016 £m |
Net cash-flow 31 July 2016 £m |
Receipts 31 July 2015 £m |
Payments 31 July 2015 £m |
Net cash-flow 31 July 2015 £m |
|
|---|---|---|---|---|---|---|
| Assets | ||||||
| Less than one year | 425 | (415) | 10 | 326 | (304) | 22 |
| Greater than one year | 378 | (374) | 4 | 20 | (18) | 2 |
| Liabilities | ||||||
| Less than one year | 467 | (485) | (18) | 470 | (483) | (13) |
| Greater than one year | 28 | (29) | (1) | 326 | (320) | 6 |
| Total | 1,298 | (1,303) | (5) | 1,142 | (1,125) | 17 |
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 19.
The contractual cash-flows for financial liabilities included in trade and other payables are: £388m (2015: £324m) due in less than one year, £9m (2015: £7m) due between one and five years and £5m (2015: £5m) 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 2016 | ||||
|---|---|---|---|---|
| Contract or underlying nominal amount |
Fair value | |||
| £m | Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (cash-flow hedges) | 393 | 8 | (15) | (7) |
| Foreign exchange contracts (not hedge accounted) | 529 | 3 | (4) | (1) |
| Total foreign exchange contracts | 922 | 11 | (19) | (8) |
| Currency swaps (net investment hedges) | 111 | (1) | (1) | |
| Cross currency swaps (fair value and net investment hedges) | 326 | 25 | 25 | |
| Interest rate swaps (fair value hedges) | 214 | 6 | 6 | |
| Total financial derivatives | 1,573 | 42 | (20) | 22 |
| Balance sheet entries | ||||
| Non-current | 473 | 29 | (1) | 28 |
| Current | 1,100 | 13 | (19) | (6) |
| Total financial derivatives | 1,573 | 42 | (20) | 22 |
| At 31 July 2015 | ||||
|---|---|---|---|---|
| Contract or underlying nominal amount |
Fair value | |||
| £m | Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (cash-flow hedges) | 317 | 8 | (5) | 3 |
| Foreign exchange contracts (not hedge accounted) | 314 | 2 | (2) | |
| Total foreign exchange contracts | 631 | 10 | (7) | 3 |
| Currency swaps (net investment hedges) | 97 | 7 | 7 | |
| Currency swaps (not hedge accounted) | 157 | 3 | (5) | (2) |
| Total currency swaps | 254 | 10 | (5) | 5 |
| Cross currency swaps (fair value and net investment hedges) | 276 | (4) | (4) | |
| Interest rate swaps (fair value hedges) | 180 | 4 | (2) | 2 |
| Total financial derivatives | 1,341 | 24 | (18) | 6 |
| Balance sheet entries | ||||
| Non-current | 4 | (6) | (2) | |
| Current | 20 | (12) | 8 | |
| Total financial derivatives | 24 | (18) | 6 |
These contracts comprise derivatives which were previously part of the net investment hedging programme and matching contracts to eliminate this exposure. There is no further net exposure arising from these contracts.
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.
| Related assets and liabilities subject to master netting agreements | (2) | 2 | (4) | 4 |
|---|---|---|---|---|
| Net exposure | 40 | (18) | 20 | (14) |
| Gross value of assets and liabilities | 42 | (20) | 24 | (18) |
| 31 July 2016 | 31 July 2016 | 31 July 2015 | 31 July 2015 | |
| £m | £m | £m | £m | |
| Assets | Liabilities | Assets | Liabilities |
| Carrying value 31 July 2016 |
Fair value 31 July 2016 |
Carrying value 31 July 2015 |
Fair value 31 July 2015 |
||||
|---|---|---|---|---|---|---|---|
| Notes | £m | £m | £m | £m | |||
| Level 1 valuations | |||||||
| Financial assets – other investments | 16 | 147 | 147 | ||||
| Level 2 valuations | |||||||
| Financial derivatives – assets | 19 | 42 | 42 | 24 | 24 | ||
| Borrowings | 17 | (1,409) | (1,463) | (1,313) | (1,358) | ||
| Financial derivatives – liabilities | 19 | (20) | (20) | (18) | (18) | ||
| Level 3 valuations | |||||||
| Financial assets – other investments | 16 | 9 | 9 | 9 | 9 |
Investments with level 1 valuations at 31 July 2015 comprise quoted government bonds.
Derivatives, including forward exchange contracts, currency swaps, interest rate instruments, and embedded derivatives, 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).
Borrowings are valued at the net present value of the future cash-flows using credit spreads and yield curves derived from market data. Borrowings are carried on the balance sheet at amortised cost adjusted for fair value interest rate hedging. The fair value of fixed rate borrowings is only used for supplementary disclosures.
Cash, trade receivables and trade payables are excluded from this table because carrying value is a reasonable approximation to fair value for all these assets and liabilities.
The minimum uncancellable lease payments which the Group is committed to make are:
| 31 July 2016 | 31 July 2015 | |||
|---|---|---|---|---|
| Land and buildings £m |
Other £m |
Land and buildings £m |
Other £m |
|
| Payments due | ||||
| – not later than one year | 35 | 7 | 31 | 7 |
| – later than one year and not later than five years | 76 | 6 | 57 | 7 |
| – later than five years | 22 | 22 | ||
| 133 | 13 | 110 | 14 |
At 31 July 2016, commitments, comprising bonds and guarantees arising in the normal course of business, amounted to £174m (2015: £159m), including pension commitments of £54m (2015: £54m).
| Trading | Non-headline and legacy | Total | |||
|---|---|---|---|---|---|
| £m | John Crane, Inc. litigation £m |
Titeflex Corporation litigation £m |
Other £m |
£m | |
| Current liabilities Non-current liabilities |
21 5 |
27 189 |
17 54 |
14 5 |
79 253 |
| At 31 July 2015 Exchange adjustments Provision charged Provision released Unwind of provision discount Utilisation |
26 5 21 (4) (16) |
216 39 16 (1) 4 (22) |
71 14 12 (1) 1 (3) |
19 2 15 (2) (13) |
332 60 64 (8) 5 (54) |
| At 31 July 2016 | 32 | 252 | 94 | 21 | 399 |
| Current liabilities Non-current liabilities |
26 6 |
32 220 |
20 74 |
16 5 |
94 305 |
| At 31 July 2016 | 32 | 252 | 94 | 21 | 399 |
The John Crane, Inc. and Titeflex Corporation litigation provisions are the only provisions that are discounted.
At 31 July 2016 there are warranty and product liability provisions of £29m (2015: £24m). 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. Trading provisions include £1m (2015: £1m) in connection with ongoing price audits of overhead cost recovery charges associated with certain historical supply arrangements and royalty claims linked to customer funded development projects.
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.
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. JCI has recognised the recovery of £16m through a settlement with an insurer (see note 3) but this agreement does not provide any cover for future costs. The calculation of the provision does not take account of any potential recoveries from insurers.
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. Approximately 247,000 claims (2015: 242,000 claims) against JCI have been dismissed before trial over the last 37 years. JCI is currently a defendant in cases involving approximately 74,000 claims (2015: 76,000 claims). Despite the large number of claims brought against JCI, since the inception of the litigation it has had final judgments against it, after appeals, in 137 cases (2015: 133 cases) over the period, and has had to pay awards amounting to approximately US\$158m (2015: US\$153m). 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 and published tables of asbestos incidence projections and is determined using asbestos valuation experts, Bates White LLC. Whilst published incidence curves can be used to estimate the likely future pattern of asbestos related disease, John Crane, Inc.'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. The projections use a 10 year 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.
The assumptions made in assessing the appropriate level of provision include: the period over which the expenditure can be reliably estimated; the future trend of legal costs; the rate of future claims filed; the rate of successful resolution of claims; and the average amount of judgments awarded.
The provision in respect of JCI 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). Set out below is the gross, discounted and post-tax information relating to this provision:
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Gross provision | 267 | 236 |
| Discount | (15) | (20) |
| Discounted pre-tax provision | 252 | 216 |
| Deferred tax | (84) | (72) |
| Discounted post-tax provision | 168 | 144 |
However, because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of 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 and, as a result, the provision may be subject to potentially material revision from time to time if new information becomes available as a result of future events.
Statistical analysis of the provision indicates that there is a 50% probability that the total future spend will fall between £250m and £280m (2015: between £221m and £248m), compared to the gross provision value of £267m (2015: £236m).
The projections use a 10 year time horizon. Reducing the time horizon by one year would reduce the provision by £18m (2015: £15m) and reducing it by five years would reduce the provision by £107m (2015: £91m).
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, 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 10 year time horizon.
In recent years Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of claims from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping product. It has also received a number of product liability claims regarding this product, some in the form of purported class actions. Titeflex Corporation believes that its products are a safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and national codes; however some claims have been settled on an individual basis without admission of liability. Equivalent third-party products in the US marketplace face similar challenges.
The continuing progress of claims and the pattern of settlement, together with the 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. This is the first year that the company has had sufficient evidence of the impact of statutes of repose and safe installation initiatives to incorporate them into the provision calculation. Reflecting work completed in the year on streamlining the settlement process, and dismissing claims covered by statutes of repose, the Directors consider that the pattern of resolution of future potential claims by Titeflex Corporation is now more predictable. As a result, the provision model has been extended. Incorporating the two additional assumptions and extending the time period generated a net £16m increase in the provision.
The provision of £94m (2015: £71m) 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 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Gross provision | 140 | 77 |
| Discount | (46) | (6) |
| Discounted pre-tax provision | 94 | 71 |
| Deferred tax | (36) | (27) |
| Discounted post-tax provision | 58 | 44 |
However, because of the significant uncertainty associated with the future level of claims and of the costs arising out of 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 and, as a result, 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 about the impact of safe installation initiatives on the level of future claims. If the assumed annual benefit of bonding and grounding initiatives was 0.5% higher the provision would be £6m lower, and if the benefit was 0.5% lower, the provision would increase by £7m.
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 cover non-headline reorganisation, vacant properties, disposal indemnities and litigation in respect of old products and discontinued business activities.
At 31 July 2016 there were provisions of £11m (2015: £6m) related to Fuel for Growth, £3m (2015: £6m) related to onerous leases and dilapidations provisions, and £2m (2015: £1m) related to actual and potential environmental issues for sites which were no longer occupied by Smiths operations.
The Fuel for Growth provisions are expected to be utilised in 2017.
Other provisions include disposal provisions of £3m (2015: £3m) relating to warranties and other obligations in respect of the disposal of the Marine Systems and Aerospace businesses. Most of the balance is expected to be utilised within the next three years.
| Total share capital at 31 July 2016 | 395,223,072 | 148 | |
|---|---|---|---|
| Total share capital at 31 July 2015 Exercise of share options |
394,860,004 363,068 |
148 | 3 |
| Exercise of share options | 403,869 | 3 | |
| Ordinary shares of 37.5p each Total share capital at 31 July 2014 |
394,456,135 | 148 | |
| Number of shares | Issued capital £m |
Consideration £m |
At 31 July 2016 all of the issued share capital was in free issue. All issued shares are fully paid.
The following dividends were declared and paid in the period:
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Ordinary final dividend of 28.00p for 2015 (2014: 27.50p) paid 20 November 2015 | 111 | 108 |
| Ordinary interim dividend of 13.25p for 2016 (2015: 13.00p) paid 22 April 2016 | 52 | 52 |
| 163 | 160 |
The final dividend for the year ended 31 July 2016 of 28.75p per share was recommended by the Board on 27 September 2016 and will be paid to shareholders on 18 November 2016, 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 21 October 2016.
Retained earnings include the value of Smiths Group plc shares held by the Smiths Industries Employee Benefit Trust. In the year the Company issued nil (2015: nil) shares to the Trust, and the Trust purchased 760,218 shares (2015: 838,032 shares) in the market. At 31 July 2016 the Trust held 852 (2015: 852) 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 15.3% (2015: 16.0%), see note 28.
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 1.6 (2015: 1.4) is within the Group's stated policy of less than 2.0 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.
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 2016 the Group had a credit rating of BBB+/Baa2 (2015: 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 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| The hedge reserve on the balance sheet comprises | ||
| – cash-flow hedge reserve | (7) | 3 |
| – net investment hedge reserve | (294) | (66) |
| (301) | (63) |
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.
| Year ended 31 July 2016 | Year ended 31 July 2015 | |||||
|---|---|---|---|---|---|---|
| Headline £m |
Non-headline £m |
Total £m |
Headline £m |
Non-headline £m |
Total £m |
|
| Operating profit | 510 | (123) | 387 | 511 | (117) | 394 |
| Amortisation of intangible assets | 43 | 15 | 58 | 38 | 33 | 71 |
| Impairment of intangible assets | 23 | 23 | 27 | 27 | ||
| Impairment of trade investments | 2 | 2 | ||||
| Depreciation of property, plant and equipment | 53 | 53 | 49 | 49 | ||
| Impairment of property, plant and equipment | 6 | 6 | ||||
| Loss on disposal of property, plant and equipment | 2 | 2 | 1 | 1 | ||
| Loss/(profit) on disposal of business | 1 | 1 | ||||
| Share-based payment expense | 9 | 9 | 8 | 8 | ||
| Retirement benefits | 1 | (104) | (103) | 2 | (87) | (85) |
| Decrease/(increase) in inventories | 30 | 30 | (30) | (30) | ||
| (Increase)/decrease in trade and other receivables | (21) | (16) | (37) | 11 | 11 | |
| Increase/(decrease) in trade and other payables | 1 | 1 | (4) | (4) | ||
| Increase/(decrease) in provisions | (1) | 3 | 2 | (15) | (7) | (22) |
| Cash generated from operations | 627 | (194) | 433 | 571 | (150) | 421 |
| Interest paid | (61) | (61) | (56) | (10) | (66) | |
| Interest received | 3 | 45 | 48 | 2 | 2 | |
| Tax paid | (62) | (62) | (91) | (91) | ||
| Net cash inflow from operating activities | 507 | (149) | 358 | 426 | (160) | 266 |
Retirement benefit contributions comprise cash contributions of £123m and a non-cash transaction where £152m of financial assets were contributed to the Smiths Industries Pension Scheme. See note 8 for details.
Interest received in the period includes £41m cash inflows (2015: interest paid includes £10m cash outflows) on foreign exchange contracts hedging exposures on intra-group loans, and £4m exchange gains realised on internal interest.
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.
Strategic report
Governance
Accounts
The Group measure of headline operating cash excludes interest and tax and includes capital expenditure supporting organic growth.
| Year ended 31 July 2016 | Year ended 31 July 2015 | |||||
|---|---|---|---|---|---|---|
| Headline £m |
Non-headline £m |
Total £m |
Headline £m |
Non-headline £m |
Total £m |
|
| Net cash inflow from operating activities | 507 | (149) | 358 | 426 | (160) | 266 |
| Include | ||||||
| Expenditure on capitalised development, other intangible assets | ||||||
| and property, plant and equipment | (108) | (108) | (95) | (95) | ||
| Disposals of property, plant and equipment | 1 | 1 | 8 | 3 | 11 | |
| Investment in financial assets relating to pensions financing | (8) | (8) | (24) | (24) | ||
| Headline free cash-flow | 400 | (157) | 243 | 339 | (181) | 158 |
| Exclude | ||||||
| Interest paid | 61 | 61 | 56 | 10 | 66 | |
| Interest received | (3) | (45) | (48) | (2) | (2) | |
| Tax paid | 62 | 62 | 91 | 91 | ||
| Headline operating cash-flow | 520 | (202) | 318 | 484 | (171) | 313 |
Reconciliation of headline free cash-flow to total movement in cash and cash-equivalents
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|
| Headline free cash-flow | 400 | 339 |
| Non-headline free cash-flows | (157) | (181) |
| Investment in other financial assets | (1) | (3) |
| Acquisition of businesses | (8) | |
| Disposal of businesses | 2 | |
| Net cash-flow used in financing activities | (332) | 147 |
| Net (decrease)/increase cash and cash equivalents | (98) | 304 |
At 31 July 2016 the Group had invited offers for the purchase of the John Crane Artificial lift business. Agreement to sell the business was announced on 23 September 2016 and, subject to regulatory clearance, the disposal is expected to complete in the first half of 2016/17. In the year ended 31 July 2016 the business had headline losses of \$10m (2015: \$2m) on sales of \$53m (2015: \$91m).
As required by IFRS 5, the assets and liabilities to be sold have been disclosed as held for sale in the consolidated balance sheet as at 31 July 2016. No impairment loss was recognised on writing assets down to fair value less disposal costs although impairments were recognised earlier in the year relating to this business, see notes 11 and 12.
| 31 July 2016 £m |
|---|
| 17 |
| 7 |
| 24 |
| (5) |
| (5) |
In addition to the non-statutory profit measures explained in note 3, the Company 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 £815m (31 July 2015: £815m) and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt.
| Notes | 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|---|
| Net assets | 1,660 | 1,428 | |
| Adjust for | |||
| Goodwill recognised directly in reserves | 815 | 815 | |
| Post-retirement benefit assets and liabilities | 8 | (80) | 108 |
| Tax related to post retirement benefit assets and liabilities | (4) | (55) | |
| Investments related to post retirement benefit assets and liabilities | (147) | ||
| John Crane, Inc. litigation provisions and related tax | 22 | 168 | 144 |
| Titeflex Corporation litigation provisions and related tax | 22 | 58 | 44 |
| Net debt | 17 | 978 | 818 |
| Capital employed | 3,595 | 3,155 |
| Notes | Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|---|
| Headline operating profit for previous twelve months | 510 | 511 | |
| Average capital employed | 1 | 3,324 | 3,197 |
| ROCE | 15.3% | 16.0% |
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 calculated as follows.
| Notes | Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
|
|---|---|---|---|
| Headline operating profit | 510 | 511 | |
| Exclude | |||
| – depreciation | 12 | 53 | 49 |
| – amortisation of development costs | 10 | 26 | 23 |
| – amortisation of software, patents and intellectual property | 10 | 17 | 15 |
| Headline EBITDA | 606 | 598 |
| Net debt Ratio of net debt to headline EBITDA |
17 | 978 1.6 |
818 1.4 |
|---|---|---|---|
| Headline EBITDA | 606 | 598 | |
| Notes | Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
| Year ended 31 July 2016 £m |
Year ended 31 July 2015 £m |
Year ended 31 July 2014 £m |
Year ended 31 July 2013 £m |
Year ended 31 July 2012 £m |
|
|---|---|---|---|---|---|
| Income statement metrics – headline | |||||
| Revenue | 2,949 | 2,897 | 2,952 | 3,109 | 3,038 |
| Headline operating profit Headline profit before tax |
510 451 |
511 459 |
504 445 |
560 498 |
554 497 |
| Income statement metrics – statutory | |||||
| Operating profit | 387 | 394 | 378 | 487 | 407 |
| Profit before taxation | 346 | 325 | 302 | 396 | 366 |
| Profit after taxation | 261 | 248 | 235 | 317 | 258 |
| Balance sheet metrics | |||||
| Net borrowings | (978) | (818) | (804) | (744) | (791) |
| Shareholders' equity | 1,646 | 1,419 | 1,237 | 1,486 | 973 |
| Average capital employed | 3,324 | 3,197 | 3,218 | 3,362 | 3,349 |
| Ratios | |||||
| Headline operating profit: revenue (%) | 17.3 | 17.6 | 17.1 | 18.0 | 18.2 |
| Headline effective tax rate (%) | 25.0 | 25.5 | 27.0 | 26.5 | 26.5 |
| Return on capital employed (%) | 15.3 | 16.0 | 15.7 | 16.6 | 16.5 |
| Return on shareholders' funds (%) | 14.3 | 15.8 | 14.9 | 17.8 | 18.3 |
| Cash-flow | |||||
| Headline operating cash | 520 | 484 | 490 | 548 | 549 |
| Headline operating cash conversion (%) | 102 | 95 | 97 | 98 | 99 |
| Headline free cash-flow | 400 | 339 | |||
| Headline free cash-flow per share (p) | 101.2 | 85.9 | |||
| Earnings per share | |||||
| Headline earnings per share (p) | 85.2 | 86.1 | 81.8 | 92.7 | 92.6 |
| Dividends | |||||
| Pence per share | 42.00 | 41.00 | 40.25 | 39.50 | 38.00 |
| Special dividend | 30.00 | ||||
| Headline dividend cover | 2.0 | 2.1 | 2.0 | 2.3 | 2.4 |
| Number of employees (000s) | |||||
| United Kingdom | 1.5 | 1.7 | 1.8 | 1.9 | 1.9 |
| Overseas | 20.5 | 21.6 | 21.4 | 21.4 | 21.3 |
| 22.0 | 23.3 | 23.2 | 23.3 | 23.2 |
*The year ending 2012 has not been restated for the adoption of IAS 19 (revised 2011). As a result, the statutory operating profit is higher, since it does not include administration costs for retirement benefit schemes, and statutory finance costs are lower, since they benefit from higher interest credits on pension assets. There is no impact on figures reported on a headline basis.
| Year ended 31 July 2016 | Year ended 31 July 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Notes | Headline \$m |
Non-headline (note 3) \$m |
Total \$m |
Headline \$m |
Non-headline (note 3) \$m |
Total \$m |
|
| Continuing operations | |||||||
| Revenue | 1 | 4,315 | 4,315 | 4,525 | 4,525 | ||
| Cost of sales | (2,342) | (2,342) | (2,443) | (2,443) | |||
| Gross profit | 1,973 | 1,973 | 2,082 | 2,082 | |||
| Sales and distribution costs | (589) | (589) | (634) | (634) | |||
| Administrative expenses | (637) | (203) | (840) | (650) | (182) | (832) | |
| Other operating income | 23 | 23 | |||||
| Operating profit | 2 | 747 | (180) | 567 | 798 | (182) | 616 |
| Interest receivable | 5 | 5 | 5 | 5 | |||
| Interest payable | (91) | (91) | (86) | (86) | |||
| Other financing gains/(losses) | 21 | 21 | (14) | (14) | |||
| Other finance charges – retirement benefits | 8 | 4 | 4 | (12) | (12) | ||
| Finance costs | 4 | (86) | 25 | (61) | (81) | (26) | (107) |
| Profit before taxation | 661 | (155) | 506 | 717 | (208) | 509 | |
| Taxation | 6 | (165) | 41 | (124) | (183) | 62 | (121) |
| Profit for the period | 496 | (114) | 382 | 534 | (146) | 388 | |
| Attributable to | |||||||
| Smiths Group shareholders | 493 | (114) | 379 | 531 | (146) | 385 | |
| Non-controlling interests | 3 | 3 | 3 | 3 | |||
| 496 | (114) | 382 | 534 | (146) | 388 | ||
| Earnings per share | 5 | ||||||
| Basic | 95.9c | 97.5c | |||||
| Diluted | 95.1c | 96.5c |
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 2016 |
Year ended 31 July 2015 |
||
|---|---|---|---|
| Notes | \$m | \$m | |
| Profit for the period | 382 | 388 | |
| Other comprehensive income | |||
| Actuarial (losses)/gains on retirement benefits | 8 | (59) | 95 |
| Taxation recognised on actuarial movements | 6 | 15 | 31 |
| Other comprehensive income and expenditure which will not be reclassified | |||
| to the consolidated income statement | (44) | 126 | |
| Other comprehensive income which will be reclassified and reclassifications | |||
| Exchange gains/(losses) | 240 | (143) | |
| Fair value gains/(losses) and reclassification adjustments | |||
| – deferred on available for sale financial assets | (3) | ||
| – reclassified to income statement on available for sale financial assets | 4 | (28) | 17 |
| – deferred in the period on cash-flow and net investment hedges | (348) | (9) | |
| – reclassified to income statement on cash-flow and net investment hedges | 1 | ||
| Total other comprehensive income | (183) | (8) | |
| Total comprehensive income | 199 | 380 | |
| Attributable to | |||
| Smiths Group shareholders | 192 | 380 | |
| Non-controlling interests | 7 | ||
| 199 | 380 |
| Notes | 31 July 2016 \$m |
31 July 2015 \$m |
|
|---|---|---|---|
| Non-current assets | |||
| Intangible assets | 10 | 2,304 | 2,371 |
| Property, plant and equipment | 12 | 417 | 404 |
| Financial assets – other investments | 16 | 12 | 244 |
| Retirement benefit assets | 8 | 434 | 266 |
| Deferred tax assets | 6 | 326 | 341 |
| Trade and other receivables | 14 | 67 | 63 |
| Financial derivatives | 19 | 38 | 7 |
| 3,598 | 3,696 | ||
| Current assets Inventories |
632 | 710 | |
| Current tax receivable | 13 6 |
82 | 47 |
| Trade and other receivables | 14 | 986 | 962 |
| Cash and cash equivalents | 17 | 571 | 774 |
| Financial derivatives | 19 | 16 | 31 |
| 2,287 | 2,524 | ||
| Assets of businesses held for sale | 27 | 31 | |
| Total assets | 5,916 | 6,220 | |
| Non-current liabilities | |||
| Financial liabilities | |||
| – borrowings | 17 | (1,506) | (1,797) |
| – financial derivatives | 19 | (1) | (10) |
| Provisions for liabilities and charges | 22 | (403) | (395) |
| Retirement benefit obligations | 8 | (329) | (433) |
| Deferred tax liabilities | 6 | (126) | (112) |
| Trade and other payables | 15 | (38) | (38) |
| Current liabilities | (2,403) | (2,785) | |
| Financial liabilities | |||
| – borrowings | 17 | (359) | (255) |
| – financial derivatives | 19 | (23) | (19) |
| Provisions for liabilities and charges | 22 | (124) | (123) |
| Trade and other payables | 15 | (708) | (728) |
| Current tax payable | 6 | (95) | (78) |
| (1,309) | (1,203) | ||
| Liabilities of businesses held for sale | 27 | (7) | |
| Total liabilities | (3,719) | (3,988) | |
| Net assets | 2,197 | 2,232 | |
| Shareholders' equity | |||
| Share capital | 23 | 196 | 231 |
| Share premium account Capital redemption reserve |
466 7 |
546 9 |
|
| Revaluation reserve | 2 | 3 | |
| Merger reserve | 311 | 367 | |
| Retained earnings | 1,594 | 1,161 | |
| Hedge reserve | 25 | (398) | (98) |
| Total shareholders' equity | 2,178 | 2,219 | |
| Non-controlling interest equity | 19 | 13 | |
| Total equity | 2,197 | 2,232 |
| At 31 July 2016 | 662 | 320 | 1,594 | (398) | 2,178 | 19 | 2,197 | |
|---|---|---|---|---|---|---|---|---|
| Share-based payment | 9 | 13 | 13 | 13 | ||||
| – non-controlling interests | (1) | (1) | ||||||
| Dividends – equity shareholders |
24 | (239) | (239) | (239) | ||||
| Purchase of own shares | 25 | (12) | (12) | (12) | ||||
| Taxation recognised on share options | 6 | |||||||
| Transactions relating to ownership interests Exercises of share options |
23 | 5 | 5 | 5 | ||||
| Total comprehensive income for the period | (120) | (59) | 671 | (300) | 192 | 7 | 199 | |
| Actuarial gains on retirement benefits and tax Fair value gains/(losses) |
(44) (31) |
(348) | (44) (379) |
(44) (379) |
||||
| Other comprehensive income Exchange gains |
(120) | (59) | 367 | 48 | 236 | 4 | 240 | |
| Profit for the period | 379 | 379 | 3 | 382 | ||||
| At 31 July 2015 | 777 | 379 | 1,161 | (98) | 2,219 | 13 | 2,232 | |
| 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 |
| 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 2014 | 835 | 409 | 943 | (97) | 2,090 | 14 | 2,104 | |
| Profit for the year Other comprehensive income Actuarial losses on retirement benefits |
385 | 385 | 3 | 388 | ||||
| and related tax | 126 | 126 | 126 | |||||
| Exchange (losses)/gains | (63) | (30) | (54) | 7 | (140) | (3) | (143) | |
| Fair value gains/(losses) and related tax | 17 | (8) | 9 | 9 | ||||
| Total comprehensive income for the year | (63) | (30) | 474 | (1) | 380 | 380 | ||
| Transactions relating to ownership interests | ||||||||
| Exercises of share options | 23 | 5 | 5 | 5 | ||||
| Taxation recognised on share options | 6 | (2) | (2) | (2) | ||||
| Purchase of own shares | 25 | (17) | (17) | (17) | ||||
| Dividends | ||||||||
| – equity shareholders | 24 | (250) | (250) | (250) | ||||
| – non-controlling interest | (1) | (1) | ||||||
| Share-based payment | 9 | 13 | 13 | 13 | ||||
| At 31 July 2015 | 777 | 379 | 1,161 | (98) | 2,219 | 13 | 2,232 |
| Net cash inflow from operating activities | Notes | \$m | 31 July 2015 \$m |
|---|---|---|---|
| 26 | 524 | 416 | |
| Cash-flows from investing activities | |||
| Expenditure on capitalised development | (34) | (28) | |
| Expenditure on other intangible assets | (16) | (28) | |
| Purchases of property, plant and equipment | 12 | (108) | (92) |
| Disposals of property, plant and equipment | 1 | 17 | |
| Investment in financial assets | (13) | (42) | |
| Acquisition of businesses | (12) | ||
| Disposals of businesses | 3 | ||
| Net cash-flow used in investing activities | (182) | (170) | |
| Cash-flows from financing activities | |||
| Proceeds from exercise of share options | 23 | 4 | 5 |
| Purchase of own shares | (12) | (17) | |
| Dividends paid to equity shareholders | 24 | (239) | (250) |
| Dividends paid to non-controlling interests | (1) | (1) | |
| Cash (outflow)/ inflow from matured derivative financial instruments | (19) | 7 | |
| Increase in new borrowings | 1 | 887 | |
| Reduction and repayment of borrowings | (221) | (402) | |
| Net cash-flow used in financing activities | (487) | 229 | |
| Net increase/(decrease) in cash and cash equivalents | (145) | 475 | |
| Cash and cash equivalents at beginning of year | 774 | 319 | |
| Exchange differences | (60) | (20) | |
| Cash and cash equivalents at end of year | 17 | 569 | 774 |
| Cash and cash equivalents at end of year comprise | |||
| – cash at bank and in hand | 213 | 163 | |
| – short-term deposits | 358 | 611 | |
| – bank overdrafts | (2) | ||
| 569 | 774 | ||
| Included in cash and cash equivalents per the balance sheet | 571 | 774 | |
| Included in overdrafts per the balance sheet | (2) | ||
| 569 | 774 |
| Notes | Year ended 31 July 2016 \$m |
Year ended 31 July 2015 \$m |
|
|---|---|---|---|
| Net debt at start of year | 17 | (1,278) | (1,358) |
| Net (decrease)/increase in cash and cash equivalents Increase in borrowings Reduction and repayment of borrowings |
(145) (1) 221 |
475 (887) 402 |
|
| Movement in net debt resulting from cash-flows Capitalisation, interest accruals and unwind of capitalisation fees Movement from fair value hedging Exchange differences |
75 (3) (33) (55) |
(10) (2) 12 80 |
|
| Movement in net debt in the year | (16) | 80 | |
| Net debt at end of year | 17 | (1,294) | (1,278) |
| Year ended | Year ended | Year ended | Year ended | |
|---|---|---|---|---|
| 31 July 2016 | 31 July 2015 | 31 July 2014 | 31 July 2013 | |
| \$m | \$m | \$m | \$m | |
| Income statement metrics – headline | ||||
| Revenue | 4,315 | 4,525 | 4,849 | 4,866 |
| Headline operating profit | 747 | 798 | 828 | 876 |
| Headline profit before tax | 661 | 717 | 730 | 780 |
| Income statement metrics – statutory | ||||
| Operating profit | 567 | 616 | 620 | 762 |
| Profit before taxation | 506 | 509 | 496 | 620 |
| Profit after taxation | 382 | 388 | 385 | 496 |
| Balance sheet metrics | ||||
| Net borrowings | (1,294) | (1,278) | (1,358) | (1,129) |
| Shareholders' equity | 2,178 | 2,219 | 2,090 | 2,255 |
| Average capital employed | 4,864 | 4,994 | 5,287 | 5,263 |
| Ratios | ||||
| Headline operating profit: revenue (%) | 17.3 | 17.6 | 17.1 | 18.0 |
| Headline effective tax rate (%) | 25.0 | 25.5 | 27.0 | 26.5 |
| Return on capital employed (%) | 15.3 | 15.9 | 15.8 | 16.7 |
| Return on shareholders' funds (%) | 14.6 | 15.3 | 15.1 | 18.1 |
| Cash-flow | ||||
| Headline operating cash | 760 | 756 | 804 | 858 |
| Headline operating cash conversion (%) | 102 | 95 | 97 | 98 |
| Headline free cash-flow | 585 | 530 | ||
| Headline free cash-flow per share (c) | 148.2 | 134.2 | ||
| Earnings per share | ||||
| Headline earnings per share (c) | 124.6 | 134.5 | 134.4 | 145.1 |
| Dividends | ||||
| Cents per share (c) | 61.5 | 64.0 | 66.1 | 61.8 |
| Special dividend (c) | 49.3 | |||
| Headline dividend cover | 2.0 | 2.1 | 2.0 | 2.3 |
| Number of employees (000s) | ||||
| United States of America | 7.9 | 8.4 | 8.3 | 8.5 |
| Rest of World | 14.1 | 14.9 | 14.9 | 14.8 |
| 22.0 | 23.3 | 23.2 | 23.3 |
In our opinion, Smiths Group plc's Company financial statements (the "financial statements"):
The financial statements comprise:
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the Company accounts. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law (United Kingdom Generally Accepted Accounting Practice).
Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Group directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Under International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)") we are required to report to you if, in our opinion, information in the Annual Report is:
We have no exceptions to report arising from this responsibility.
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.
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
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 and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
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.
We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
We have reported separately on the Group financial statements of Smiths Group plc for the year ended 31 July 2016.
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London
(a) The maintenance and integrity of the Smiths Group plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
| 31 July 2016 | 31 July 2015 | ||
|---|---|---|---|
| Notes | £m | (restated) £m |
|
| Fixed assets | |||
| Intangible assets | 2 | ||
| Tangible assets | 3 | 1 | |
| Investments and advances | 4 | 3,487 | 3,486 |
| Available for sale financial assets | 5 | 147 | |
| 3,488 | 3,633 | ||
| Current assets | |||
| Retirement benefit assets | |||
| – amounts falling due after more than one year | 11 | 327 | 169 |
| Debtors | |||
| – amounts falling due within one year | 6 | 59 | 60 |
| Cash at bank and on deposit | 8 | 207 | 330 |
| Financial derivatives | |||
| – amounts falling due within one year – amounts falling due after more than one year |
9 | 4 29 |
12 4 |
| 9 | |||
| 626 | 575 | ||
| Creditors: amounts falling due within one year | 7 | (363) | (229) |
| Financial derivatives: amounts falling due within one year | 9 | (3) | (7) |
| Net current assets | 260 | 339 | |
| Total assets less current liabilities | 3,748 | 3,972 | |
| Creditors: amounts falling due after more than one year | 8 | (1,137) | (1,148) |
| Provisions for liabilities and charges | 10 | (2) | (2) |
| Retirement benefit liabilities | 11 | (65) | (90) |
| Financial derivatives: amounts falling due after more than one year | 9 | (6) | |
| Net assets including pension liabilities | 2,544 | 2,726 | |
| Capital and reserves | |||
| Called up share capital | 12 | 148 | 148 |
| Share premium account | 12 | 352 | 349 |
| Capital redemption reserve | 12 | 6 | 6 |
| Other reserves | 12 | 181 | 181 |
| Profit and loss account | 12 | 1,857 | 2,042 |
| Shareholders' equity | 2,544 | 2,726 |
The accounts on pages 194 to 205 were approved by the Board of Directors on 27 September 2016 and were signed on its behalf by:
Andy Reynolds Smith Chris O'Shea Chief Executive Chief Financial Officer
Smiths Group plc – registered number 137013
| 3 3 |
(8) (163) 9 (162) |
3 (8) (163) 9 (159) |
|
|---|---|---|---|
| (23) | (23) | ||
| (19) | (19) | ||
| (4) | |||
| 4 | |||
| (21) | |||
| 17 | 17 | ||
| 6 | 181 | 2,042 | 2,726 |
| £m | Other reserves £m |
Retained profit £m |
Shareholders' equity £m |
| Share capital £m 148 |
Share premium £m 349 |
Capital redemption reserve |
(21) 4 (4) |
| Capital | ||||||
|---|---|---|---|---|---|---|
| Share capital |
Share premium |
redemption reserve |
Other reserves |
Retained profit |
Shareholders' equity |
|
| £m | £m | £m | £m | £m | £m | |
| At 31 July 2014 | 148 | 346 | 6 | 181 | 1,886 | 2,567 |
| Profit for the period | 194 | 194 | ||||
| Other comprehensive income | ||||||
| Actuarial gain on retirement benefits | 113 | 113 | ||||
| Fair value gains on available for sale financial assets | 11 | 11 | ||||
| Total comprehensive income | 318 | 318 | ||||
| Transactions with owners | ||||||
| Exercise of share options | 3 | 3 | ||||
| Purchase of own shares | (11) | (11) | ||||
| Dividends paid to equity shareholders | (160) | (160) | ||||
| Share-based payment | 9 | 9 | ||||
| Total transactions with owners recognised in equity | 3 | (162) | (159) | |||
| At 31 July 2015 | 148 | 349 | 6 | 181 | 2,042 | 2,726 |
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 comprehensive income have not been presented. As permitted by Section 408(2), information about the Company's employee numbers and costs is not presented.
This is the Company's first year reporting under FRS 101. All comparative amounts have been restated from the previously applicable accounting standards in the United Kingdom. The impact of this restatement is disclosed in more detail in note 16. Tables are marked restated where the comparative numbers presented under FRS 101 are different from the amounts previously reported, to highlight the impact of adopting FRS 101.
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101:
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 not recognised deferred tax assets of £nil (2015: £27m) relating to losses and £19m (2015: £3m) relating to other temporary differences. The Company derecognised UK tax assets relating to revenue losses brought forward and other temporary differences due to the impact of the pension contributions on the outlook for the UK tax base. The treatment of these assets is reviewed regularly and is dependent on the ability to recover them against forecast UK taxable profits of the tax group. Further detail on the Company's deferred taxation position is included in note 13.
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 2016 there is a retirement benefit asset of £327m (2015: £169m) 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.
Investments in subsidiary undertakings and loans due from subsidiaries are reviewed regularly, and tested if there are any indications of impairment, or problems with recoverability. The recoverable amounts of investments are determined based on valuations of the underlying trading operations. The recoverability of loans is assessed by looking at the credit quality of the subsidiary and any support available to the subsidiary. These calculations require the use of estimates including projected future cash-flows and other future events.
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 139 to 143 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 (2015: £0.1m).
Cost or valuation At 31 July 2015 and 31 July 2016 5
Depreciation At 31 July 2015 and 31 July 2016 5
Net book value at 31 July 2016 Net book value at 31 July 2015
Intangible assets comprise computer software.
| Plant and equipment £m |
|
|---|---|
| Cost or valuation At 31 July 2015 Additions |
2 1 |
| At 31 July 2016 | 3 |
| Depreciation At 31 July 2015 Disposals |
2 |
| At 31 July 2016 | 2 |
| Net book value at 31 July 2016 Net book value at 31 July 2015 |
1 |
Plant and equipment comprises plant, machinery, fixtures, fittings, tools and equipment, including computer hardware.
Software £m
| Shares in subsidiary undertakings |
Loans due from subsidiaries |
Total | |
|---|---|---|---|
| £m | £m | £m | |
| Cost or valuation | |||
| At 31 July 2015 | 2,391 | 1,106 | 3,497 |
| Exchange adjustments | 207 | 207 | |
| Contribution through share options | 6 | 6 | |
| Increases in advances due from/(due to) subsidiaries | (212) | (212) | |
| At 31 July 2016 | 2,397 | 1,101 | 3,498 |
| Provision for impairment | |||
| At 31 July 2015 and 31 July 2016 | 10 | 1 | 11 |
| Net book value at 31 July 2016 | 2,387 | 1,100 | 3,487 |
| Net book value at 31 July 2015 | 2,381 | 1,105 | 3,486 |
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 2016, £1,372m of loans payable are offset against loans receivable (2015: £996m). 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 Smiths Medical Group Limited Smiths Interconnect 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 SAS (France) Smiths Heimann GmbH (Germany) Smiths Medical France SA (France) Smiths Medical Deutschland GmbH (Germany) John Crane Italia SpA (Italy)
Smiths Detection (Asia-Pacific) Pte Ltd (Singapore) Smiths Medical Japan Limited (Japan) John Crane Middle East FZE (UAE)
Smiths Detection, Inc. Smiths Medical ASD, Inc. John Crane, Inc. Titeflex Corporation Flexible Technologies, Inc. Tutco, Inc. Hypertronics Corporation Transtector Systems, Inc. Interconnect Devices, Inc. Power Distribution, Inc. JC Production Solutions, 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 subsidiaries operate in their country of incorporation.
See pages 206 to 209 for a complete list of subsidiary undertakings.
In December 2015, £152m of UK government bonds previously held as available for sale financial assets were contributed to Smiths Industries Pension Scheme. At 31 July 2015, the Group held £147m UK government bonds as part of the deficit-funding plan agreed with the trustee of this pension scheme. See note 8 of the Group accounts for additional details.
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Amounts falling due within one year | ||
| Amounts owed by subsidiaries | 55 | 56 |
| Other receivables | 4 | 4 |
| 59 | 60 |
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Amounts falling due within one year | ||
| Term loans due within one year (note 8) | 255 | 150 |
| Amounts owed to subsidiaries | 80 | 55 |
| Other creditors | 18 | 16 |
| Accruals and deferred income | 10 | 8 |
| 363 | 229 |
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Cash at bank | 7 | 2 |
| Short term deposits Cash and cash equivalents |
200 207 |
328 330 |
| Term loans due within one year (note 7) Term loans due after more than one year |
(255) (1,137) |
(150) (1,148) |
| Borrowings | (1,392) | (1,298) |
| Net debt | (1,185) | (968) |
The currency and coupons for the term loans are disclosed in note 17 of the Group accounts.
| 31 July 2016 £m |
31 July 2015 £m |
|
|---|---|---|
| Less than one year | 255 | 150 |
| Between one and two years | 132 | 214 |
| Between two and three years | 189 | 112 |
| Between three and four years | 159 | |
| Between four and five years | ||
| Greater than five years | 816 | 663 |
| Smiths Group plc term loans | 1,392 | 1,298 |
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 February 2021.
The tables below set out the nominal amount and fair value of derivative contracts held by the Company:
| At 31 July 2016 | ||||
|---|---|---|---|---|
| Contract or underlying nominal amount £m |
Fair value | |||
| Assets £m |
Liabilities £m |
Net £m |
||
| Foreign exchange contracts (not hedge accounted) | 437 | 2 | (2) | |
| Currency swaps (net investment hedges) | 111 | (1) | (1) | |
| Cross currency swaps (fair value and net investment hedges) | 326 | 25 | 25 | |
| Interest rate swaps (fair value hedges) | 214 | 6 | 6 | |
| Total financial derivatives | 1,088 | 33 | (3) | 30 |
| Balance sheet entries | ||||
| Non-current | 29 | 29 | ||
| Current | 4 | (3) | 1 | |
| Total financial derivatives | 33 | (3) | 30 |
| At 31 July 2015 | ||||
|---|---|---|---|---|
| Contract or underlying nominal amount |
Fair value | |||
| £m | Assets £m |
Liabilities £m |
Net £m |
|
| Foreign exchange contracts (not hedge accounted) | 254 | 2 | (2) | |
| Currency swaps (net investment hedges) | 97 | 7 | 7 | |
| Currency swaps (not hedge accounted) | 157 | 3 | (5) | (2) |
| Cross currency swaps (fair value and net investment hedges) | 276 | (4) | (4) | |
| Interest rate swaps (fair value hedges) | 180 | 4 | (2) | 2 |
| Total financial derivatives | 964 | 16 | (13) | 3 |
| Balance sheet entries | ||||
| Non-current | 4 | (6) | (2) | |
| Current | 12 | (7) | 5 | |
| Total financial derivatives | 16 | (13) | 3 |
| At 31 July 2015 £m |
Charged against profit £m |
Utilisation £m |
At 31 July 2016 £m |
|
|---|---|---|---|---|
| Disposals | 2 | 2 | ||
| 2 | 2 |
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. Following the adoption of FRS 101, 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:
| Net pension asset/(liability) | 262 | 79 |
|---|---|---|
| Retirement benefit assets Retirement benefit liabilities |
327 (65) |
169 (90) |
| Net pension asset/(liability) | 262 | 79 |
| Present value of unfunded obligations | (63) | (59) |
| Unfunded pension plans Post-retirement healthcare |
(56) (7) |
(52) (7) |
| Surplus | 325 | 138 |
| Market value of scheme assets Present value of funded scheme liabilities |
4,034 (3,709) |
3,523 (3,385) |
| 31 July 2016 £m |
31 July 2015 (restated) £m |
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.
| Total share capital at 31 July 2016 | 395,223,072 | 148 | |
|---|---|---|---|
| Exercise of share options | 363,068 | 3 | |
| At 31 July 2015 | 394,860,004 | 148 | |
| Ordinary shares of 37.5p each | |||
| Number of shares | Issued capital £m |
Consideration £m |
At 31 July 2016, 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 £3m (2015: £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 £8m (2015: £11m) and £nil (2015: £nil) was received as a result of the issue of shares. At 31 July 2016 the Trust held 852 (2015: 852) ordinary shares.
The Company's profit and loss reserve of £1,857m (2015: £2,042m) comprised £913m (2015: £908m) not available for distribution as a dividend and £944m (2015: £1,134m) available for distribution. 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 recognised the following deferred tax assets and liabilities:
| At 31 July 2016 | 2 | (48) | 44 | 2 | |
|---|---|---|---|---|---|
| Credit/(charge) to income statement Credit/(charge) to equity |
2 | (35) 4 |
27 | 2 | (4) 4 |
| At 31 July 2015 | (17) | 17 | |||
| Share-based payment £m |
Retirement benefit obligations £m |
Losses carried forward £m |
Other £m |
Total £m |
The Company is part of a UK tax group including all its UK-based subsidiaries. The Company derecognised UK tax assets relating to revenue losses brought forward and other temporary differences due to the impact of the pension contributions on the outlook for the UK tax base. The treatment of these assets is reviewed regularly and is dependent on the ability to recover them against forecast UK taxable profits of the tax group.
At 31 July 2016 the Company has unrecognised deferred tax assets of £19m (2015: £30m) relating to:
These tax allowances remain available to the Company and can be utilised should the UK tax base improve.
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 (2015: £54m).
The Company has guaranteed the US\$800m revolving credit facility available to a subsidiary.
The directors propose a final dividend of 28.75p per share (totalling approximately £114m) for the year ended 31 July 2016. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 15 November 2016.
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 2017. During the year ended 31 July 2016, a final dividend of 28.00p per share (totalling £111m) was paid in respect of the dividends declared for the year ended 31 July 2015.
| 31 July 2015 (as previously reported) |
Reclassifying software |
Applying IAS 19 |
31 July 2015 (restated) |
||
|---|---|---|---|---|---|
| Notes | £m | £m | £m | £m | |
| Fixed assets | |||||
| Intangible assets | 2 | ||||
| Tangible assets | 3 | ||||
| Investments and advances | 4 | 3,486 | 3,486 | ||
| Available for sale financial assets | 5 | 147 | 147 | ||
| 3,633 | 3,633 | ||||
| Current assets | |||||
| Debtors – amounts falling due within one year |
60 | 60 | |||
| Cash at bank and on deposit | 6 | 330 | 330 | ||
| Financial derivatives | |||||
| – amounts falling due within one year | 9 | 12 | 12 | ||
| – amounts falling due after more than one year | 9 | 4 | 4 | ||
| 406 | 406 | ||||
| Creditors: amounts falling due within one year | 7 | (236) | (236) | ||
| Net current assets/(liabilities) | 170 | 170 | |||
| Total assets less current liabilities | 3,803 | 3,803 | |||
| Creditors: amounts falling due after more than one year | 8 | (1,148) | (1,148) | ||
| Provisions for liabilities and charges | 10 | (2) | (2) | ||
| Financial derivatives | (6) | (6) | |||
| Net assets excluding pension liabilities | 2,647 | 2,647 | |||
| Retirement benefit assets | 11 | 169 | 169 | ||
| Retirement benefit liabilities | 11 | (89) | (1) | (90) | |
| Net assets including pension liabilities | 2,558 | 168 | 2,726 | ||
| Capital and reserves | |||||
| Called up share capital | 12 | 148 | 148 | ||
| Share premium account | 349 | 349 | |||
| Capital redemption reserve | 6 | 6 | |||
| Other reserves | 181 | 181 | |||
| Profit and loss account | 1,874 | 168 | 2,042 | ||
| Shareholders' equity | 2,558 | 168 | 2,726 | ||
| Reconciliation of total equity | |||||
| 31 July 2015 £m |
31 July 2014 £m |
||||
| As previously reported | 2,558 | 2,448 |
Fully amortised software has been reclassified from tangible to intangible assets, with no net impact on the balance sheet.
Applying IAS 19 has increased pension assets by £1,710m and liabilities by £1,542m at 31 July 2015, as the Company recognises schemes previously treated as multi-employer schemes. There is a £49m credit to comprehensive income for 2015 comprising:
| Subsidiary | Country | Security | Direct (%) | Total (%) |
|---|---|---|---|---|
| Air Log Limited Antares Advanced Test Technologies (Suzhou) Co. Ltd |
United Kingdom China |
ORD 1p Ord \$1 |
100 100 |
|
| Antares China Holdings, Inc | United States | Common shares | 100 | |
| Ashfield Medical Systems Limited | United Kingdom | Ord £1 | 100 | |
| CDI Oilfield Services Srl | Romania | Ord RON 10 | 100 | |
| Changshu Flex-Tek Thermal Fluid Systems Manufacturer Co. Ltd | China | US\$520,800 (reg capital) | 100 | |
| Compania EMC Tecnologia S.A. | Costa Rica | Ord \$1 | 100 | |
| CVE Trustee Limited | United Kingdom | Ord £1 | 100 | 100 |
| EIS Group Plc | United Kingdom | ORD 25p | 100 | 100 |
| Flagtown Limited | United Kingdom | Ord £1 | 100 | 100 |
| Flexible Ducting Malaysia Sdn Bhd | Malaysia | Ord \$1 | 100 | |
| Flexible Ducting, Limited | United Kingdom | Ord £1 | 100 | |
| Flexible Technologies (Canada) Ltd | Canada | Ordinary shares \$1 | 100 | |
| Flexible Technologies, Inc Flexibox (Northern Ireland) Limited |
United States United Kingdom |
Ordinary shares \$0.01 Ord £1 |
100 100 |
|
| Flexibox (Pty) Limited | South Africa | Ord | 100 | |
| Flexibox International Limited | United Kingdom | Ord £1 | 100 | |
| Flexibox Japan KK | Japan | Ord JPY 1000 | 100 | |
| Flexibox Limited | United Kingdom | Ord £1 | 100 | |
| Flexibox Pty Limited | Australia | Ord AUS\$ each | 100 | |
| Flexschlauch Producktions GmbH | Germany | Ord | 100 | |
| Flightspares Limited | United Kingdom | Ord £1; Ord 10p | 100 | 100 |
| Francis Shaw And Company (Manchester) Limited | United Kingdom | Ord £1 | 100 | |
| Francis Shaw P L C | United Kingdom | 37% 2nd Pref Ord 10p; 5.25% Cum Pref £1; | 100 | |
| Def 20p; Ord 10p | ||||
| George Maclellan Holdings Limited | United Kingdom | Def Ord 25p; Ord 5p | 100 | 100 |
| Global TI Limited Graseby Limited |
United Kingdom United Kingdom |
Ord £1 ORD 25p |
100 | 100 100 |
| Graseby Medical Ireland Limited | Ireland | Ord €1.269738 each | 100 | |
| Graseby Medical Limited | United Kingdom | Ord £1 | 100 | |
| Hypertac GmbH | Germany | Ord €1 | 100 | |
| Hypertac Limited | United Kingdom | Ord £1 | 100 | |
| Hypertac S.A. | France | Ord €76 | 100 | |
| Hypertac SpA | Italy | Ord €5 | 100 | |
| Hypertronics Corporation | United States | Common stock | 100 | |
| Indufil BV | Netherlands | Ord | 100 | |
| Industrias John Crane Mexico S.A. de C.V. | Mexico | Series A MXN 1; Series B MXN 1 | 100 | |
| Interconnect Devices, Inc. | United States | Common stock | 100 | |
| John Crane (Angola) Prestacao De Services Ltd | Angola | Ord AOA 1 | 100 | |
| John Crane (Ireland) Limited | Ireland | ORD US\$1 | 100 | |
| John Crane (Switzerland) AG John Crane (Thailand) Limited |
Switzerland Thailand |
Ord 1 CHF Ord THB1, Preferred shares |
100 100 |
|
| John Crane Argentina SA | Argentina | Common \$1 ARS | 100 | |
| John Crane Australia Pty Limited | Australia | Ord AUS\$1 | 100 | |
| John Crane Baku LLC | Azerbaijan | Ord US 10 | 100 | |
| John Crane Bearing Technology GmbH | Germany | Ord | 100 | |
| John Crane Belgium NV | Belgium | No par value | 100 | |
| John Crane Canada Inc | Canada | Common \$1 | 100 | |
| John Crane Caribe Ltd | Puerto Rico | Common shares | 100 | |
| John Crane Chile SA | Chile | Ord | 100 | |
| John Crane China Co. Limited | China | ORD CNY1 | 100 | |
| John Crane Colombia SA | Colombia | Ord COP\$1 | 100 | |
| John Crane Dominicana SA | Dominican Republic | Ord DP\$1 | 100 | |
| John Crane Egypt LLC John Crane Egypt Sealing Systems LLC |
Egypt Egypt |
Ord EGP 1 Ord EGP 1 |
100 100 |
|
| John Crane Endustriyel Sizdirmazlik Sistemleri Ltd | Turkey | Ord TRY 25 | 100 | |
| John Crane Flexibox India Private Limited | India | Ord INR 10 | 100 | |
| John Crane France SAS | France | Ord €286 | 100 | |
| John Crane GmbH | Germany | Ord €1 | 100 | |
| John Crane Group Corporation | United States | Ord | 100 | |
| John Crane Group Limited | United Kingdom | Ord £1 | 100 | |
| John Crane Hellas - Engineered Sealing Systems Monoprosopi EPE Greece | Ord €1 | 100 | ||
| John Crane Holland BV | Netherlands | Ord €1 | 100 | |
| John Crane Hungary Kft | Hungary | Ord €1 | 100 | |
| John Crane Iberica SA | Spain | Ord €6.010121 | 100 | |
| John Crane Inc | United States | Common \$0.01; preferred \$0.10 | 100 | |
| John Crane International Inc. | United States | Common shares | 100 | |
| John Crane International Limited | United Kingdom | Ord £1 | 100 | |
| John Crane Investments Limited | United Kingdom | Ord £1 | 100 | |
| John Crane Italia SpA | Italy | Ord €5.16 | 100 | |
| John Crane Japan Inc | Japan | Ord JPY1,000 | 70 |
| Subsidiary | Country | Security | Direct (%) | Total (%) |
|---|---|---|---|---|
| John Crane Kazakhstan | Kazakhstan | Ordinary equity | 100 | |
| John Crane Korea Co Ltd | Korea, Republic of | Ord KWON5,000 | 100 | |
| John Crane Malaysia Sdn. Bhd. | Malaysia | Ord MYR \$1 | 100 | |
| John Crane Middle East FZE | United Arab Emirates | Ord AED 1 | 100 | |
| John Crane Peru SAC | Peru | Common shares | 100 | |
| John Crane Poland Sp Z O.O. | Poland | Ord 50 PLN | 100 | |
| John Crane Production Solutions Inc | United States | Ord \$0.01 | 100 | |
| John Crane Pty Ltd | South Africa | Ord ZAR 1 | 100 | |
| John Crane Safematic Oy | Finland | Ord | 100 | |
| John Crane Saudi Arabia Ltd | Saudi Arabia | Ord ZAR 1 | 100 | |
| John Crane Sealing Systems India Private Limited | India | Ord INR10 | 100 | |
| John Crane Sigma AS | Czech Republic | Ord CZK 1m | 100 | |
| John Crane Singapore Pte Limited | Singapore | Ord S\$1 | 100 | |
| John Crane Slovakia sro | Slovakia | Ord €1 | 100 | |
| John Crane Sociedad De Responsibilidad Limitada De Capital Variable |
Mexico | Ord MXN \$1 | 100 | |
| John Crane Sverige AB | Sweden | Ord | 100 | |
| John Crane Taiwan Co Ltd. | Taiwan Province of China | Ord T\$1 | 100 | |
| John Crane Technology (Tianjin) Co Limited | China | Ord US\$1 | 100 | |
| John Crane UK Limited | United Kingdom | Ord £1 | 100 | |
| John Crane Venezuela CA | Venezuela | CLASS "A" VEF1; CLASS "B" VEF1; COMMON VEF1 | 100 | |
| Kaelus Communications Equipment (Shanghai) Co. Ltd | China | Ord \$1 | 100 | |
| Kaelus Interconnect (Shanghai) Co. Ltd. | China | Ord \$1 | 100 | |
| Kaelus Pty Ltd | Australia | E shares AUS \$1; ord AUS \$1 | 100 | |
| Kaelus, Inc. | United States | Class A common stock \$0.01; Class B common stock \$0.01 |
100 | |
| Kiinteisto Oy Ainolantie 21 | Finland | Ord | 100 | |
| Kontak Manufacturing Company Limited | United Kingdom | Ord £1 | 100 | |
| Lighthome Limited (in liquidation) | United Kingdom | Ord £1 | 100 | 100 |
| LLC John Crane Rus | Russian Federation | Ord RUB 1 each | 100 | |
| Medex Cardio-Pulmonary, Inc | United States | Common Stock of \$0.01 | 100 | |
| Medex Medical Limited | United Kingdom | Ord £1 | 100 | |
| Millitech, Inc. | United States | Common stock | 100 | |
| OIE Services Limited | United Kingdom | Ord £1 | 100 | |
| Oil Plus Limited | United Kingdom | Ord £1 | 100 | |
| Orion Corporation | United States | Ord 1 cent | 100 | |
| Plenty India Limited | India | Ord | 100 | |
| Pneupac Limited | United Kingdom | Ord £0.50 | 100 | |
| Power Distribution, Inc. | United States | Common | 100 | |
| Powercam-Houdaille, Inc. | United States | Common shares | 100 | |
| Project Sugar Limited | United Kingdom | Ord £1 | 100 | |
| Pt John Crane Indonesia | Indonesia | Ord IDR1,000 | 99 | |
| Pyzotec Limited | United Kingdom | Ord £1 | 75 | 75 |
| Radio Waves, Inc. | United States | Common stock | 100 | |
| Roof Units (Group) Limited | United Kingdom | ORD 10p | 100 | 100 |
| S.I. Pension Trustees Limited | United Kingdom | Ord £1 | 100 | 100 |
| Sabritec | United States | Ordinary shares | 100 | |
| Sedding (No.3) Limited | United Kingdom | Ord £1 | 100 | |
| Shenzhen Dowin Lightning Protection Engineering Co. Ltd | China | Ord 1RMB | 100 | |
| Shenzhen Dowin Lightning Technologies Co. Ltd. | China | Ord 1RMB | 100 | |
| SI Overseas Holdings Limited | United Kingdom | Ord £1 | 100 | |
| SI Properties Limited | United Kingdom | Ord 25p | 100 | 100 |
| SITI 1 Limited | United Kingdom | US\$1 shares | 100 | |
| Smiths Aerospace Components Tyseley Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Aerospace Components-Burnley Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Aerospace Gloucester Limited | United Kingdom | Ord 25p; Ord A 25p | 100 | |
| Smiths Brasil LTDA | Brazil | Ord R\$1 | 100 | |
| Smiths Business Information Services Limited | United Kingdom | Ord £10 | 100 | |
| Smiths Business Information Services, Inc. | United States | Ord \$0.01 | 100 | |
| Smiths Connectors Asia Pte. Ltd. | Singapore | Ord SGD\$1 | 100 | |
| Smiths Connectors Tunisia Sarl | Tunisia | Ord 1 DT | 100 | |
| Smiths Detection – Toronto Ltd. | Canada | Common shares; Preference shares | 100 | |
| Smiths Detection (Asia Pacific) Pte. Ltd Smiths Detection (Australia) Pty Ltd |
Singapore Australia |
Ord S\$1 Ord AUD 1 |
100 100 |
|
| Smiths Detection (Thailand) Limited | Thailand | Ord THB100; Pre THB100 | 100 | |
| Smiths Detection Brasil Comerico De Equipamentos LTDA | Brazil | Common | 100 | |
| Smiths Detection GmbH | Germany | 1 share of € 25,000; 1 share of €183,100; | 100 | |
| 1 shares of € 791,900 | ||||
| Smiths Detection Group Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Detection Inc Smiths Detection Investments Limited |
United States United Kingdom |
Common stock of \$0.0001 Ord £1 |
100 100 |
|
| Subsidiary | Country | Security | Direct (%) | Total (%) |
|---|---|---|---|---|
| Smiths Detection Ireland Limited | Ireland | Ord €1.25; Ord B of €1.269738; Ord D €1.25; Series C shares €1.25 |
100 | |
| Smiths Detection Italia Srl | Italy | Quota value of shares | 100 | |
| Smiths Detection Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Detection Malaysia Sdn Bhd | Malaysia | Share of 1 MYR | 100 | |
| Smiths Detection Middle East FZE | United Arab Emirates | Share of AED 1,000,000 | 100 | |
| Smiths Detection Montreal Inc. | Canada | Class A shares; Class B shares | 100 | |
| Smiths Detection New Zealand Limited | New Zealand | Ord NZ\$1 | 100 | |
| Smiths Detection Saudi Arabia Co. Ltd | Saudi Arabia | Share of 1000 Saudi Riyals | 100 | |
| Smiths Detection US, LLC | United States | Ord \$1 | 100 | |
| Smiths Detection US Holdings LLC | United States | Units of limited liability company interest | 100 | |
| Smiths Detection Security Systems LLC | Abu Dhabi | AED 1,500 | 49 | |
| Smiths Detection Veecon Systems Private Limited | India | Class A equity shares INR 10; Class B equity shares INR 10 |
100 | |
| Smiths Detection-Watford Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Finance Limited | United Kingdom | Ord £1; Redeemable US\$1 | 100 | |
| Smiths Finance Luxembourg Sarl | Luxembourg | Ord US\$0.01 | 100 | |
| Smiths Group (Gibraltar) Limited | Gibraltar | Ord US\$ 1.56 | 100 | |
| Smiths Group Deutschland GmbH | Germany | 1 share of €1,491,400; 1 share of €3,478,400; 1 share of €995,500 |
100 | |
| Smiths Group Holdings Netherlands BV | Netherlands | Ord | 100 | |
| Smiths Group Insurance Limited | Guernsey | Ord £1 | 100 | |
| Smiths Group International Holdings Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Group Italia Srl | Italy | Ord €1 | 100 | |
| Smiths Group Luxembourg Sarl | Luxembourg | Ord US\$1.00 | 100 | |
| Smiths Group Services Corp. | United States | Common stock \$0.01 | 100 | |
| Smiths Healthcare Limited | United Kingdom | ORD 1p | 100 | 100 |
| Smiths Healthcare Manufacturing, S.A. de C.V. | Mexico | Series B 10 pesos; series B-1 pesos 10 | 100 | |
| Smiths Heimann Del Ecuador SA (in liquidation) | Ecuador | Ordinary shares of \$1.00 each | 100 | |
| Smiths Heimann GmbH | Germany | Ord | 100 | |
| Smiths Heimann Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Heimann Rus LLC | Russian Federation | Ord | 100 | |
| Smiths Heimann S.A.S. | France | Shares of €1 each | 100 | |
| Smiths Industries GmbH | Germany | Ordinary | 100 | 100 |
| Smiths Industries Industrial Group Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Industries Limited | United Kingdom | 7% non cum pref; Ord £1 | 100 | 100 |
| Smiths Interconnect Australia Pty Ltd | Australia | Ord \$1 AUS | 100 | |
| Smiths Interconnect Connectors UK | United Kingdom | Ordinary | 100 | |
| Smiths Interconnect Connectors, Inc. | United States | Common | 100 | |
| Smiths Interconnect Group Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Interconnect Microwave Components, Inc. | United States | Common stock | 100 | |
| Smiths Interconnect Power Management, Inc. | United States | Common stock \$0.01 | 100 | |
| Smiths Interconnect Power Management UK | United Kingdom | Ordinary | 100 | |
| Smiths Interconnect, Inc. | United States | Common stock | 100 | |
| Smiths Medical (Beijing) Co. Ltd | China | Ordinary shares \$1 | 100 | |
| Smiths Medical (Hong Kong) Limited | Hong Kong | Ord HK\$1 | 100 | |
| Smiths Medical (Portugal), Unipessoal Lda | Portugal | 1 Share of €505,000 | 100 | |
| Smiths Medical (South Africa) (Pty) Ltd | South Africa | Shares of R1 each | 100 | |
| Smiths Medical ASD Inc. | United States | Common stock of \$1 | 100 | |
| Smiths Medical Australasia Pty Ltd | Australia | Ord | 100 | |
| Smiths Medical Belgium NV | Belgium | Registered shares | 100 | |
| Smiths Medical Canada Ltd | Canada | Common shares | 100 | |
| Smiths Medical Czech Republic A.S | Czech Republic | Ordinary | 100 | |
| Smiths Medical Danmark ApS | Denmark | Shares of DKK100 each | 100 | |
| Smiths Medical Deutschland GmbH | Germany | 1 share of €1,000; 1 share of €27,000; 1 share of €5,000 | 100 | |
| Smiths Medical Distribution Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Medical Do Brasil Produtos Hospitalares LTDA | Brazil | Ord R\$1 | 100 | |
| Smiths Medical Espana S.L. | Spain | Shares €1 | 100 | |
| Smiths Medical France SAS | France | Shares of €7.7 each | 100 | |
| Smiths Medical Group Limited | United Kingdom | Ord A £1; Ord B £1; Ord C £1 | 100 | |
| Smiths Medical India Private Limited | India | Ord 1 INR | 100 | |
| Smiths Medical Instrument (Zhejiang) Co. Ltd | China | Ordinary shares of RMB | 100 | |
| Smiths Medical International Limited | United Kingdom | Ord £1; Pref €2 | 100 | |
| Smiths Medical Italia Srl | Italy | Ord €1 | 100 | |
| Smiths Medical Japan Ltd | Japan | Common stock | 100 | |
| Smiths Medical Limited | United Kingdom | Ord £1 | 100 | |
| Smiths Medical Nederland B.V. | Netherlands | Shares NLG100 | 100 | |
| Smiths Medical Osterreich GmbH | Austria | Ord €1 | 100 | |
| Smiths Medical Schweiz AG | Switzerland | Shares of CHF 10.00 each | 100 | |
| Smiths Medical Singapore Pte. Limited | Singapore | Ordinary shares | 100 | |
| Smiths Medical Sverige AB | Sweden | Shares of SEK100 each | 100 |
| Subsidiary | Country | Security | Direct (%) | Total (%) |
|---|---|---|---|---|
| Smiths Medical UK | United Kingdom | Ord US\$1 | 100 | |
| Smiths Medical US, Inc | United States | Common stock of \$0.01 | 100 | |
| Smiths Nominees Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Pensions Limited | United Kingdom | Ord £1 | 100 | 100 |
| Smiths Power UK Limited | United Kingdom | Ord GBP1 | 100 | |
| Smiths Tubular Systems-Laconia, Inc | United States | Ordinary shares \$1 | 100 | |
| Smiths Wolverhampton Limited | United Kingdom | Ord 25p | 100 | |
| STS Titeflex India Pvt Ltd | India | Ordinary shares INR 100 | 100 | |
| Subvenmar Limited | United Kingdom | Ord £1 | 100 | |
| TECOM Industries, Incorporated | United States | Common stock \$1 | 100 | |
| TI Group Automotive Systems (Argentina) SA | Argentina | Ord \$1 ARS | 100 | |
| TI Group Limited | United Kingdom | Ord 25p | 100 | 100 |
| TI Guarantee Company Limited | United Kingdom | Limited by guarantee | 100 | |
| TI Interest Limited | United Kingdom | Ord A £1, Ord B £1, Floating Rate Cum Red Pref C £1 | 100 | 100 |
| TI SA (France) | France | Ord | 100 | |
| TIGrup No. 14 Limited | United Kingdom | Ord 20p | 100 | |
| TIGrup No.7 Limited | United Kingdom | Ord £1 | 100 | 100 |
| Titeflex Commercial, Inc. | United States | Ord \$0.01 | 100 | |
| Titeflex Corporation | United States | Ordinary shares \$1 | 100 | |
| Titeflex Europe SAS | France | Ord \$1 | 100 | |
| TRAK Microwave Corporation | United States | Common stock | 100 | |
| TRAK Microwave Limited | United Kingdom | Ordinary shares | 100 | |
| Transtector Systems, Inc. | United States | Common stock | 100 | |
| TriasX (Hong Kong) Limited | Hong Kong | Ord HKD \$1 | 100 | |
| TriasX (Suzhou) Telecommunications Co. Ltd. | China | Ord \$1 | 100 | |
| Turbo Components & Engineering Inc | United States | Common shares | 100 | |
| Tutco De Mexico S de RL de CV | Mexico | Ordinary shares \$1.00 | 100 | |
| Tutco, Inc | United States | Ordinary shares \$1 | 100 | |
| Venmar Limited | United Kingdom | A Ord 10p, B Ord 10p., C Ord £1, Pref 10p | 100 | |
| XD Communications Limited | United Kingdom | Ord £1 | 100 | |
| XDG Limited | United Kingdom | Ord 50p | 100 | 100 |
| XPD8 Solutions Limited | United Kingdom | Ord £1 | 100 | |
| Zamor KG | Germany | Ordinary shares €1 | 49 | |
| Associates | Country | Security | Direct (%) | Total (%) |
| LLC John Crane Iskra | Russian Federation | Ord 1 RUB | 50 |
| STI Security Training International GMBH | Germany | Ordinary shares €1 | 34 |
|---|---|---|---|
A new company, Gastite Systems Limited, was incorporated in the United Kingdom on 1 August 2016. 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.
| 2016 | |
|---|---|
| Announcement of results for 2015/16 | 28 September |
| Ordinary shares final dividend ex-dividend date | 20 October |
| Ordinary shares final dividend record date | 21 October |
| Annual General Meeting | 15 November |
| Ordinary shares final dividend payment date | 18 November |
| 2017 | |
| 2016/17 interim results announced | 22 March (provisional) |
| Ordinary shares interim dividend ex-dividend date | 30 March (provisional) |
| Ordinary shares interim dividend record date | 31 March (provisional) |
| Ordinary shares interim dividend payment date | 28 April (provisional) |
| Smiths Group financial year end | 31 July |
| Announcement of results for 2016/17 | 20 September (provisional) |
| Ordinary shares final dividend ex-dividend date | 19 October (provisional) |
| Ordinary shares final dividend record date | 20 October (provisional) |
| Annual General Meeting | 14 November (provisional) |
| Ordinary shares final dividend payment date | 17 November (provisional) |
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 2016 Annual General Meeting will be held at the Northcliffe House Auditorium of the law firm, Freshfields Bruckhaus Deringer, 26-28 Tudor Street, London EC4Y 0BQ on Tuesday 15 November 2016 at 11:00am.
Smiths Group plc 4th Floor 11-12 St James's Square London SW1Y 4LB, UK
T +44 (0)20 7004 1600 www.smiths.com
Incorporated in England No. 137013
Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA, UK
T 0371 384 2943 (United Kingdom) Lines open 8.30am to 5.30pm, Monday to Friday.
T +44 (0)121 415 7047 Textel 0870 384 2255 www.shareview.co.uk www.equiniti.com
PricewaterhouseCoopers LLP
| AGM | Annual General Meeting |
|---|---|
| BIS | Business Information Services |
| EHS | Environment, Health & Safety |
| EMEA | Europe, Middle East, Africa |
| GHG | Greenhouse Gas |
| HVAC | Heating, Ventilation and Air Conditioning |
| R&D | Research and Development |
| STEM | Science, Technology, Engineering and Mathematics |
This report is printed on Claro Silk which has FSC certification. The FSC (Forest Stewardship Council) is a worldwide label which identifies products obtained from sustainable and responsible forest management. Claro also has PEFC accreditation. The PEFC Council (Programme for the Endorsement of Forest Certification schemes) is an independent, non-profit, non-governmental organisation which promotes sustainably managed forests through independent third party certification.
Designed and produced by Langsford 020 7378 1457 www.langsford.co.uk
Printed by CPI Colour, an FSC (Forest Stewardship Council) accredited printer using vegetable based inks.
Location photography: Stuart Conway, Mick Ryan.
Board photography: Bob Wheeler.
Smiths Group plc 4th Floor 11-12 St James's Square, London SW1Y 4LB, UK 020 7004 1600 www.smiths.com
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