Smiths Group PLC

Annual Report • Oct 13, 2022

Smiths Group PLC 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 213800MJL6IPZS3ASA11 2022-07-31 213800MJL6IPZS3ASA11 2021-07-31 213800MJL6IPZS3ASA11 2020-07-31 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 smin:HeadlineMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 smin:NonHeadlineMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 smin:ShareCapitalAndSharePremiumMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:OtherReservesMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:RetainedEarningsMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800MJL6IPZS3ASA11 2020-08-01 2021-07-31 ifrs-full:NoncontrollingInterestsMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 smin:HeadlineMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 smin:NonHeadlineMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 smin:ShareCapitalAndSharePremiumMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:OtherReservesMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:RetainedEarningsMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800MJL6IPZS3ASA11 2021-08-01 2022-07-31 ifrs-full:NoncontrollingInterestsMember 213800MJL6IPZS3ASA11 2020-07-31 smin:ShareCapitalAndSharePremiumMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:OtherReservesMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:RetainedEarningsMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800MJL6IPZS3ASA11 2020-07-31 ifrs-full:NoncontrollingInterestsMember 213800MJL6IPZS3ASA11 2021-07-31 smin:ShareCapitalAndSharePremiumMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:OtherReservesMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:RetainedEarningsMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800MJL6IPZS3ASA11 2021-07-31 ifrs-full:NoncontrollingInterestsMember 213800MJL6IPZS3ASA11 2022-07-31 smin:ShareCapitalAndSharePremiumMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:OtherReservesMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:RetainedEarningsMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800MJL6IPZS3ASA11 2022-07-31 ifrs-full:NoncontrollingInterestsMember iso4217:GBP iso4217:GBP xbrli:shares Annu al Repor t F Y202 2 P IONEER S OF P R O GR E S S IMP R O V ING O UR W ORL D T HROUGH SM A R T ER ENG I N EERI N G Chai r man’s intro duc ti on 5 6 Bo ar d bi ogr aphi es 5 8 Nomination & Gover nance Commit tee Repor t 66 Au dit & R isk C om mit tee Repo r t 69 Remuneration & People Committee Repor t 75 Science, Sustainabili t y & Excellence Committee Repor t 89 Dir ec to r s’ Repo r t 9 0 Statement o f Direc tor s’ re sponsibilitie s 92 Our P ur p os e IFC F Y 2 0 2 2 high li ght s 1 Our p r io r iti e s and t ar g et s 2 Our ke y glo ba l mar ket s 2 Our di v i sio ns 3 OUR P URP O SE W e are pion eers of progress – improving ou r wor l d thr ough smar ter engine er ing. Smar ter e ngi neering mean s helpin g to sol ve the toughest p roblems , for our cus tomer s, our com mun iti es and ourselves. W e help t o creat e a safer , more e f f ici ent a nd better-co nnected world. W e are uni ted by ou r Purpose. It is what we do, how we th ink, and how we will c ont inu e to use our passio n for t echno logy and eng ineering t o be suc cessful in the fut ure. 01 O ve r v ie w IFC - 4 Chai r man’s statem ent 5 Chief Executi ve Of ficer’ s rev iew 9 - Our b usi ne s s mo del 9 - Our s tr ateg y 10 - Rev ie w of th e ye ar 1 1 Chief F i nan cial O f fic er ’s rev ie w 1 5 - Di v is ion al r ev i ew 1 7 Ke y per for mance i ndi ca tor s 21 Sus t ain abi li t y a t Smi th s 24 T ask Force on Climat e-rel ated Financial Disclosures 35 Sta keho ld er s an d S ec t ion 172 St ateme nt 4 1 Non-Financial Information Statemen t 4 5 Risk managemen t 4 6 - Pr i nci pal r isk s and u ncer t ainti es 47 Goi ng C on cer n a nd V i abil i t y S tate ment 5 4 02 Str ategic Repor t 5 -55 0 3 G over nance 5 6 -9 2 Ind epe nd ent au dito r’s rep or t 9 3 Co ns ol id ated pr imar y s tate ment s 103 Accounting policies 1 0 8 Note s to the a cco unt s 1 1 6 Unau di ted Gr o up f ina nci al r eco r d 2 018-20 2 2 1 6 4 Unau di ted U S dol l ar p r ima r y st atem ent s 1 6 5 Smi th s Gr oup p lc C omp an y acc ount s 1 71 Subsidiar y under tak ings 1 8 0 Shareholder information 1 87 0 4 Financ ial s tatement s 9 3 -1 8 7 CONTENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS P 24 READ MORE Sustainability at Smiths SEE MORE www.smiths.com SEE MORE www.smiths.com READ MORE Sustainability at Smiths P 24 GROSS VITALITY Percentage of rev enue from new product s F Y2 02 2 31% FY2021: 25% Acceler ating gro w th – + 3. 8% o rg anic re venu e gro w th, fa ste s t in near ly a d ec ade – Or ga nic r e ven ue gr o w th ahe ad of e xp ec t ati on s; +3 . 8 % 1 (H1 : +3. 4%; H2: + 4. 1 %); fi v e co ns ec ut iv e qu ar ter s of gr o w th; rep or ted gr o w th of + 6.7 % – Headl ine 2 EP S gro w th + 1 7 .8 % – High d ema nd ac r os s mo s t end m ar ket s w i th s tr on g or de r gr ow th of + 1 1 % 3 – £51 m of re ven ue f r om ne w pr o duc t s l aunch ed in F Y 2 0 2 2 ; R&D inv es tm ent in cr ea s ed + 14 % – T arg eted M& A contr i bu ted + 1 .8 % o f re po r ted gr ow th – Incr e asi ng r etu r ns to s har eh ol der s wi th pr op os e d tota l di v id end of 3 9 .6 p, +5% Stronger execution – Sm iths E xcellence Sy stem f ul ly embe dde d – Resi li ent op er ating m ar gin of 16.3 % w ith h ea dl ine o per ating p r of it 2 o f £ 417 m – Pr i ce of fse t tin g inf l ati on an d mit igat ing ot he r supp ly ch ain i mpa c t s – Sol id oper ating cash conver sion 4 of 8 0 %; in ve s tme nt in w or k ing c ap it al a nd ca pe x to sup por t gr o w th and mi tig ate sup ply c hai n imp ac t s – More focused por tfolio follow ing completion of Smiths Medical sale and r ap id r etur n of pro ce ed s w it h shar e b u y ba ck pr o gr a mme n o w 7 6% compl ete – Smi th s E xcel le nce S y ste m no w f ull y emb ed de d, w i th hig h- imp ac t p ro je c t s und er w ay a nd t ar gete d s av i ngs a c tio ns to d r i ve e nhan ce d ef f ic ien c y Insp iring and empowering our peo ple – an energise d and focused tea m – A ref r e she d le ad er sh ip tea m w ith n e w se nior a pp oint ment s t hr ou gho ut th e ye ar – Intr od uce d Sm ith s Le ad er s hip B eha v io ur s to b uild o n our s tr o ng c ultu re – Dr i v in g an e ve n mor e d y n amic a nd in clu si v e cult ur e w it h gr eate r foc us o n di ve r si t y – Co ntinu ing to tr ansl ate our com mit ment to E S G l ea der ship into ac t ion Strong ba l ance s heet – well p osit ione d to execute our g ro w t h str ategy – £ 3 8 0 m r ed uc ti on in gr o ss d ebt; l ev er age of 0 .3 x n et de bt /he ad li ne E BI T DA 4 – F inal b u y- in of t he T I Gr o up Pen si on S ch eme , del i ve r in g cer ta int y f or s ch eme member s and shareholder s GREENHOUSE GAS REDUCTION GHG redu c tion normalised to reven ue F Y2 02 2 (7.2)% SAFETY Recordable Incident Rate F Y2022 0.54 FY2021: 0.47 DIVERSITY % of senior leader ship position s taken by female s F Y2 0 2 2 24% FY2021: 23% DIRECT ECONOMIC CONTRIBUTION T axes paid + e mployee co st s + suppli er costs F Y2 0 22 £2.33bn FY2021: £1.95bn HEADLINE 2 F Y2022 F Y 2 0 21 Reported Organic 1 Revenue £2 ,56 6m £2, 4 06m + 6 .7 % +3.8% Operating profit £ 417 m £37 2m +12 . 0 % +1.7 % Operating profit margin 4 16 . 3 % 15 . 5 % +80 bps (30)bps Basic earnings per share (EPS) 6 9. 8 p 5 9. 3 p +1 7. 8 % Operating cash conversion 4 80% 12 9 % ( 49 ) % ROCE 4,5 14 . 2 % 13 .9 % +30 bps STATUTORY F Y2022 F Y 2 0 21 Reported Revenue £2 ,56 6m £2, 4 06m + 6 .7 % Operating profit £11 7 m £326m ( 6 4 .1 ) % Profit for the year (after tax) £1 ,035m £28 5m 26 3.2% Basic EPS 2 6 7.1 p 71. 7p 272.5% Dividend per share 3 9. 6 p 3 7. 7 p +5.0 % The following definitions are applied throughout this R epor t: 1 Or g an i c is h e ad l in e a dj us t ed t o ex cl u de t he e f f e c t s of f or e ig n e xch a ng e , ac qu i si t io n s an d r e st r u c t ur i ng . 2 He a dl i ne : In a dd i ti o n to s t at ut or y r ep o r t i ng , t he G r ou p r e po r ts o n a he a dl i ne b a s is . D ef i ni t io n s of h ea d l in e me tr ic s , an d in fo r m at io n a bo u t th e a dj us t m en t s to s t at u to r y m e a su r e s, a r e p r ov i d ed i n n ote 3 t o th e f in a nc i al s t at em en t s . He a dl i ne p e r f or man ce i s o n a Sm i th s G r ou p b as i s, e xc l ud in g t he r e s ul t s of S m it h s Me d ic a l . 3 Or d er g r o w t h e xc lu de s t h e ef f e c t s of f or e i gn e xc ha n ge a nd i n cl ud e s J oh n Cr ane , S mi t hs D e te c ti on a n d Sm i th s I nte r co n ne c t . 4 Al te r n at i v e Pe r for m an c e Me a su r e s ( AP M s ) an d ke y p er fo r ma n ce i nd ic a to r s a r e de f in e d in n ot e 2 9 to t he f i na n ci al s t a te me nt s . 5 E xc lu d e s th e im p ac t o f r e s tr u c t ur i n g ch ar g e s a nd s p en d . A Y E AR OF AC C ELER A T I N G GR O W T H A ND S T RON GER E X EC U T I O N F Y2022 HIGH LIGHTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 1 REVENUE BY GLOBAL MARKET General Industrial 42% Safety & Security 31% Energy 21% Aerospace 6% REVENUE BY DESTINA TION Americas 55% Europe 19% Asia Pacific 16% Rest of the World 10% We hav e s et the f ol lo w ing m edi um- ter m t ar get s: Organic revenue growth 4-6% (+M&A) EPS growth 7-10% (+M&A) ROCE 15-17% Operating profit margin 18-20% Operating cash conversion 100%+ Th e se t ar g et s ar e und er p inn ed b y Sm ith s op er a tio nal K P I s and e nv ir on ment al t ar g et s , incl udi ng a co mmi tm ent to Net Zer o for S c ope 1 & 2 e mis s ion s by 2 04 0 and Net Ze r o for Sc op e 3 emi s sio ns b y 2 0 5 0. Smit hs is int r insicall y strong with wor ld- cl as s e nginee r ing, lea ding p ositio ns in cr itic al mar kets , an d dis tinc tive glob al c ap abili ties , al l underpin ned by a strong financi al fr amework. Our priorit y is t o build o n our strengths t o unloc k value by moving with great er pace and u rgenc y to de li ver per formance in li ne with our sig nificant potential. Our focused plan, which is captu red in the Smit hs Valu e Engine , has three t op prior ities : Safet y & S ecur it y Our t hr ea t de tec tion e qui pm en t hel ps ke ep p eo pl e an d as s et s s a fe. D em an d in t he s ec ur i t y m ar ket is driven by persis tent and evol ving terror threat s, changing securit y regul ations, and increased global air travel and trad e Gener al Industr ial Cu st ome r s pu t th eir t r us t in o ur p ro du c t s a nd se r vic es t o sup p or t a wi de r a ng e of g en er a l industr ial applic ations in sector s including petrochemical , mining, pulp & paper , water treatment, semiconduc tor testing, heating elements , automotive and rail transpor tation Aer ospace Satellite launches and emerging acti vities like deep space exploration are driv ing demand for high-reliabilit y solutions in the space market. Grow th in aerospace is coming from the development of new fuel-eff icient aircraf t and increasing passen ger and freight traffic Energ y John Crane’ s mechanical seal s and sys tems suppor t energ y operations wor ldw ide including do wn s tr ea m an d mi ds tr ea m oil & g a s an d po we r gen er atio n. G ro w t h is d r i ven b y in cr ea se s i n gl ob al demand for energy, produc tiv it y, and enhanced environmental and safet y requirement s Acceler ating gro w th Streng thening executio n Doing eve n more to ins pire and em power our people READ MORE KPIs READ MORE Our business model and Our strategy P 9 P 21 O U R K E Y G L O BAL MAR KE TS OUR P RIORI T IE S AN D T AR G E T S READ MORE Sustainability at Smiths P 24 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 2 READ MORE www.smiths.com READ MORE www.smiths.com READ MORE CFO review P 17 READ MORE CFO review P 18 John Cr ane Mission- cr itical flow control solutions for increased eff icienc y , reliabilit y, and environme ntal sust ainabilit y. Smith s Dete c tion Detection and screening tech nolo gie s f or s afe t y, secu r it y and freedom of movement. John C r ane i s a glo bal l ea der i n the de si gn, manufac ture, instal lation and suppor t of rotating equipment solutions that drive ef ficienc y, safet y , and environme ntal sust ainabilit y in l arge -s cale industrial proc ess es. Customer s – En er g y – do w n - an d mid -s t re am a c ti v i ti es ( e.g . pi pe li ne s an d refiner ie s) of energy multinational s and power gener ation – Other pr oces s industr ies – a significant pre sence in chemical, li fe s ci enc e s, m ini ng , w ater t r eat me nt, a nd p ul p & pa pe r – A f ter mar ket – in cr e as ing d em an d for f ul l l if ec ycle asset management – Ideally positioned t o help customers meet their decar bo nisation and energ y tr ansition objec tiv es Comp etiti ve str eng ths – Strong and dif ferentiated propr ietar y technologies and exper tise acros s industr ies – L ar g es t i ns t al le d ba s e in th e En er g y an d In du st r ia l s m ar ket s – Innov ation focus ed, gr ow ing digit al capab ilit y – Customer intimacy and str ategic alignment with end user s thr o ugh a n et wor k o f ~ 2 0 0 s er v ic e an d sup po r t cent re s , an d unique capabili ties of field ser vice engineer s Gro w th dr i ver s – Near-term global demand for stable energy supply – Se c ul ar g r ow th in e ner g y a nd p r im ar y r es o ur ce de ma nd , especial ly in emerging markets – Increasing demand for enhanced ef ficienc y – Energ y tr ansition – envir onmental safeguar ding and cleaner proce ss es . Requirement t o reduce emissi ons, w ith par tic ular emp ha si s on me tha ne . Gr o w th of a mo re d i ve r si f ie d an d cleaner low-car bon energy eco-s y stem, includi ng hydrogen and r e ne w ab le s , w hic h dr i v e m or e de man di ng n ee ds i n compre ssion , pumping and filtration – Long-ter m customer par tn erships and out sour cing Competitor s Co mp eti tor s i nc lud e F lo w s er v e, E ag leB ur gm ann a nd A ES Smith s De tec ti on is a g lob al le ad er in threat detection and screening technologie s that p rote c t p eop le an d as s et s. Customer s – Av iat io n – air p or t s an d go v er nm ent s . Re gu l ator s are al so highly involved and shape mar ket development – O the r S ec ur i t y Sys te ms – a s ign if ic a nt pr e s enc e in hi gh - ene r g y c ar go i ns pe c ti on s y s tem s ( p or t s and b o rd er s), inte gr ate d s cr e eni ng s y s tem s fo r a br o ad r ange o f ur b an situations ( cour t houses , prisons , offices , shopping ma ll s, r ail stations , etc.), long-stan ding par tner ships w ith gover nments for det ection of chemical s and explosives in national defence Comp etiti ve str eng ths – Glo b al r ea ch a nd m ar ket-l ea din g br and – Dif ferentiated propr ietar y technologies lever a ged acros s a br o ad r ange o f mar ke t s – Signific ant res ear ch and development and digital c apabil ities – Fo cu s on mi nim isi ng p ro du c t en er g y u se – Customer intimacy and loy alt y through equipment c ycle and af ter mar ket of fer – Op er a tin g in r e gul at ed m ar ket s e gme nt s th at r eq uir e produc t cer tif ication – Net wor k of ~ 1 00 loc ations Gro w th dr i ver s – Per sis tent an d e vo lv in g th r eat s to n ati on al s ec ur i t y , pub l ic s afet y and c r it ic al i nfr as tr u c tur e – Cha ngi ng a v iat io n se cu r it y re gu l ati on s and c us to me r requir ements acros s our industr ies – Grow ing populations and urbanisation – Grow th of global tr anspor tation infr astr uc ture – Glo b al gr o w th of inter natio na l tr ade an d e -c om mer c e – Need for integr ated digital sol utions – Staf f ing cons tr aints ar e dri v ing demand for digit al image ana ly si s so f t wa r e su ch as a uto mat ed th r eat r e co gni ti on – Equipment replacement c ycle, t y pical ly 8– 10 year s Competitor s Co mp eti tor s i nc lud e Ra pi sc a n, L ei do s, N uc te ch , F l ir , Chem r in g an d Br u ker % OF REVENUE 35% 69% of John Crane revenue is from aftermarket sales % OF REVENUE 26% 5 4% of Sm it hs D et ec t io n re ve nu e is from aftermarket sales OUR DI V I SION S Our fo ur divisions o per at e in more t han 50 cou ntries. T oget her , our d iv isions a nd Group e mploy m ore tha n 1 4, 7 0 0 people . 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 3 READ MORE www.smiths.com % OF REVENUE 14% READ MORE CFO review P 19 READ MORE CFO review P 20 % OF REVENUE 25% F l e x -Te k Safe and ef ficient movement of fluids and g as es . Smith s Interconne c t Adv ancing the world through cutting- edge conne c ti vi t y. Fle x- T ek is a glo bal p rov i der o f high - per for m ance engineered solutions that suppor t the safe and eff icient movement of fluids and gases in a range of industr y sectors. Customer s – Constr uc tion – heati ng, ventilation and ai r- conditioning (H V A C) cu s tom er s a nd b uil de r s (f ul l r a ng e of he at ing ele me nt s , gas p ip ing , f le xib le a nd m et al du c tin g ) – Aero space – aircr af t manufac turer s and their tier-one sup pl ie r s ( a fu ll r ang e of r ig id an d f le xib le , hig h- an d lo w- pr e s sur e t ubi ng an d du c tin g fo r fl uid c on ve y an ce ) – Industr ial – Electr ic al Proce ss Heating (highly engineer ed, medium-high voltage) a nd specialist end-use applications suc h as m ed ic al h os e s Comp etiti ve str eng ths – Le ad ing c a pa bil i t y i n de si gn , man uf a c tur e a nd cost engine er ing – High-per formance dif ferentiated produc t s – Innov ation focused – Strong cus tomer relationships and br and reput ation Gro w th dr i ver s – T hr ou gh -c ycl e gr o w t h of th e U S ho usi ng c on st r uc t io n mar ket – E xpanding inte r national market for construc tion produc ts – Lo ng -ter m incr e as e in co mm er ci al an d mil i ta r y aircr aft pro duction – Customer focus on eff icient per for mance and env ironme ntal safegu arding – Industr ial heat solutions – Gr o w t h in u se of m e dic a l de v ice s Competitor s Competitors include Parker-Hannifin, Eaton, OmegaFlex , War r e n, W atl ow a nd S o ut hw a r k Met a l Smiths Interconnect is a preferred supplier of adv anced electr onic components , sub-s ys tems, optical and r adio frequenc y produc t s for customers requir ing reliable, high- speed and s ecure connecti vit y, often in harsh environment s. Customer s – Se mi con du c tor te s t – te st s o cket a nd p ro be c a r d so lu ti on s for higher-p er forming appl icati ons (gr aphic s pro ces sing , ar tif icial intelligence and data communication) for a bro ad r an ge o f chi p man uf a c tur e r s – Connec tor s – high-reliabili t y electr ic al interconnect so lu tio ns f or sp e cia l is ed a pp li c ati on s acr o s s a br o ad r ange o f healthcar e, industr ial , transp or t and aero space customer s – F ibr e - opt ic s a nd r adio f r e que nc y (RF ) com po ne nt s – br o ad r ange o f de v ice s , tr ans ce i ve r s fo r dem an din g high-rel iabilit y environments – espe cially with space and aerosp ace customer s – Smiths Interconnect Inc. – antenna sys tems, multi-func tion RF s y s tem s , as w el l as t im e and f r e que nc y sol uti on s fo r aerosp ace and defence cus tomers Comp etiti ve str eng ths – Br oa d p or t fol i o of cu t ti ng - ed ge te ch no lo gie s an d pr o du c t s – Strong re sear ch and engineering c apabilitie s – Customer in timacy and product customisation – Global reach and suppor t Gro w th dr i ver s – Inc re a se d de ma nd fo r f as ter d at a tr ansm is si on , gr e ater ba nd w i dt h and f a s ter p ro ce s si ng p o we r in ae r osp a ce, defence and communications – Gr o w t h of co nn ec t i v it y, as the w or l d b ec ome s m or e con ne c ted , dr i v en b y tr e nd s inc lu din g th e Inter net of T hin gs , Big D at a, I nter n et of S pa ce, I nd us tr y 4 .0 – Develop ment of healthc are technolog y Competitor s Competitors include Amphenol, TE Connecti vit y, Molex, Co bh am , Gle na ir , Hon ey w el l , A na re n, L e en o and W inw a y READ MORE www.smiths.com 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 4 O ver the years, I have tried to mak e my Chairman ’ s let ters interesting and rele v ant to topical events and descr ibe how we address them at Smiths. Las t year , I des cribed w hy we believed that, by the summer of 2 02 2, the coronav iru s ’ s mutations would b ecome les s v irulent , and COV ID- 1 9’ s impac t on so ciet y and bus ines s would gradually decline and disappear into the background of other infectious dis eas es we li ve with in perp etuity , like c olds or influenza. Th e bi g is su es t hat h av e unfol de d for S mi th s and ot her c omp ani e s in 2 0 2 2 ar e: – Supply chain shor t ages; – Inflation; and – T h e ef f ec t s of t he Uk r ai ne w ar , par ti cul a r ly i t s imp ac t s on fo od an d en er g y sup pl y. Th is s et of top ic s i s incr e dib ly co mpl ex an d con ne c t s the f is c al a nd mon et ar y po li cie s of th e w or l d’s gov er nm ent s , ec on omic g r ow th expec tations, ener gy shor tages, so cial dislocation, food shor tage s, per son al s afet y , l ab our s hor t age s , gl ob al mi gr at ion p at te r ns an d so cie tal p r es s ur es . T hi s is ob v io us ly not s om ethi ng I c an c ov er in a sho r t let ter . So, I w il l tr y to de al w i th ju st o ne o r t w o co nfu sin g pie ce s of thi s pu z zle . S o, sup pl y cha in sho r tag e s and r el ated infl ation w il l be m y fo cus f or th is ye ar ’s let ter . In any c omm od it y situ atio n, o nly t hr ee f ac to r s im pa c t a comm od it y’s pri ce at an y tim e: sup ply, dem and , and i nv entor y. Pr ice fluctuations occur continuously in globally traded comm od it ie s like c opp er an d alu mini um, a nd on a ny da y th er e ca n be s igni f ic ant di f fe r enc es in s pot a nd f ut ur e pr i cin g, d epe ndi ng on ex pe c ted f u tur e de man d. O il pr ices a re e sp ec ial ly s en sit i ve to an imb al a nce in s upp ly an d dem an d be c aus e mo s t cont r ac t s ne ver r e su lt in th e ac t ual d el i ver y of o il , on ly in sp ec ul at ion . But p r ic ing v a r iati on s like t he se a pp ear e v er y w her e, e ve n in non-commodity items. Th e w ar in U kr aine ha s c aus e d ene r g y and f oo d inf l atio n to wo r s en bot h lo c all y and g lob al ly. But in t he lo ng er ter m , en er g y is a zer o -s um ga me. S up pos e R us sia s el l s m or e en er g y to count r ie s su ch a s Indi a or Chi na . In that c a s e, as s umin g the y s ell a fu ll al lot ment , th os e vo lum e dem and s ar e mi ss ing f r om t he wo r ld m ar ketp l ace a nd , gi ve n tim e, tha t vo lume w i ll b e av ai l abl e to others. Th er e w il l be s om e temp or ar y spike s in oil p r ice s , bu t th ey sh ou ld not l a st b ec a us e the r e is a w ell- de v elo pe d ship pin g net wo r k for oil supply wor ldw ide and rebalancing regional supply and demand is po s sib le. T h er e ma y be in cr em ent al co st s due to the d if f er enc e bet wee n oil s hipp e d v ia oc ean c a r go v er su s th at tr a nsp or ted b y pip el ine, b ut i t is un li kely to l a st . Nat ur a l ga s is mo r e pr ob lem atic be c aus e pip el in e inf r as t r uc t ur e fr om R us si a is mo r e we ll- de vel op ed t han L N G ship pe d by s e a. S y nga s c an al so be m ad e fr om c oa l and , alo ng w i th f r a cki ng , the s e mig ht of fe r a so lu tio n if th e ga s supp ly d oe s not r e su me f ro m Ru ss ia. N ucl ea r po we r gen er at io n is al so po s sibl e in co untr i es w h er e nu cle ar un it s ha ve be en mot hb al led f or p ol iti c al or e nv ir on ment al r e as on s. B ut th e se is su es a re a s co nne c ted to p ol it ic al d eci sio ns a s to ec ono mic o r technological ones. Dur i ng an y ec ono mic o r se cu l ar di st ur b anc e, exe cu ti v es f a ce t w o pr i mar y c hal len ge s . T he f ir s t is to p r edi c t ho w lo ng a dis tu r ba nce w il l l a st , an d the s e con d is to pr e dic t h ow d ee p it w ill g et. We s a w thi s in th e 9/1 1 at t a ck s , the ‘ 0 8 -’0 9 deb t cr is is , and a gai n in the C O V ID - 1 9 pan de mic , plu s r ece nt sup ply c hai n sho r tag es a nd inf l at ion . W i tho ut a s en sib le fo re c as ti ng mo de l , we d on’t kno w w het her w e ar e f al li ng into a 1m deep di tch or o f f a 1 ,000m c li ff . W hen w e sp ea k abo ut a ‘sup ply c hai n’ , w e r efer to t he f lo w of inb oun d mater ial s to a co mp any a nd it s c on ver sion into f in ish ed goo ds v i a a man uf ac t ur in g pr o ce ss . T h er e is a co mpl eme nta r y outbound flow from the co mpany through various distribution cha nne l s unti l the p r odu c t ev ent ual ly r ea ch es t he f ina l cus to mer . Ev er y man uf ac t ur in g com pa ny h as th es e b uild ing b lo ck s , the inb oun d fl ow o f r a w mater i al , co nv er si on v ia a m anu f ac t ur in g or as s em bly p ro ce s s , and t hen o ut bo und d el i ver y of f in ish ed goo ds to t hei r cus tom er s . Unders tanding supply chains is a problem in dynamic s, not in s tat ic s . Jus t l ike th e v ibr ating s tr i ng of a v i ol in, w h en i t is fi gur ativ el y ‘ p luc ked ’ , eve r y t hin g in th e supp ly ch ain i s mo v ing u p, do w n, b ac k w ar d s, a nd fo r w ar ds . Pe r hap s th e clo se s t an alo g y to supp ly ch ain d y n ami c s is th e pul sat ing n ois e w e he ar w he n our p lumb ing at h om e ex per ience s a ‘w a ter ham mer ’ . T his i s ca us ed b y pr e s sur e w a ve s os c ill at ing b ac k w a rd s an d for w ar d bet wee n dis co ntin uit ie s in th e plum bin g s y ste m and i s ana lo gou s to the w a ve s of d ema nd th at r ip ple u p and d ow n d y n ami ca ll y in a supply chain. On th e ou tbo un d sid e of thi s pr oc es s , co mp ani es s el l th eir pr od uc t s to cu s tome r s thr o ugh v a r io us fo r ms of d is tr ib ut ion . So me g o dir ec t ly to cu s tome r s to be b uil t into pr od uc t pl atfo r ms such as vehicles or electronic s, some through distr ibution cha nne l s th at ho ld bu f f er in ve ntor y to smo oth o ut s upp ly an d dem and i mb al an ce s, a nd oth er s s el l th eir pr o duc t s dire c t to con sum er s o nl ine . T he d y na mic s a re d if fere nt in det ail , b ut the y al l suf fer v ar y in g de gr ee s of tr ansi ent pr o ble ms . C HAI R MAN ’ S S TAT E M E N T 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 5 What happe ns to o rder s when end-m ar ket demand f all s ? Let ’s per for m a tho ught e xp er i ment o n our s upp ly ch ain . Let ’s consid er a m ake-to - sto ck o r igi nal e qui pme nt man uf ac t ur er (OE M) a nd im agi ne th er e ar e thr e e or fo ur in vento r y sto r a ge loc at ion s in th e ou tb oun d sup ply c hain . L et’s imagi ne a r ed uc ti on in en d-m ar ket d ema nd b y 100 bp s and e xa min e wh at ha pp ens i n our supply chain . Th e ma nag em ent at th e inv entor y s tor age l oc ati on cl os e st to the e nd- ma r ket se e s dem and f a ll b y 100 b as is p oint s . Lo c al ma nag em ent kn o w s the y mus t c ut o r der s; ot her w i se , the y w il l hav e to o much i nv entor y. So , to be c ons er v at i ve, t he y cut t hei r or de r s b y 2 0 0 b asi s po int s , s ay. Th e ma nag em ent at the n ex t l oc at ion f ur the r up th e sup ply c hain s e es t hei r dem and fa ll b y 2 0 0 b as is p oint s , an d the y al so w or r y th ey w il l ha ve to o much i nv entor y, so th ey c ut o r der s by 3 0 0 b asi s po int s , and s o o n. Th e or d er r ed uc ti on num ber s chos en h er e ar e ju st i llu s tr at i ve, and t he ac t ual n umb er s w il l di f fe r dep en din g on a co mp any ’s r isk to ler ance, d is tr ib ut ion m eth od an d th e numb er of i nv entor y sto r a ge lo c atio ns . T he g re ater t he nu mbe r of inv ento r y sto r ag e loc at ion s in y our s upp ly ch ain , the m or e l ikely t her e w il l be a n over re action . Even with ‘ just-in-time ’ pull sys tem order ing, it’s natu r al t hat ma na gem ent o ver rea c t s to so me d egr e e in contr o ll in g inv entor y. S o, th e net ef fec t is t hat th er e’ s alw a y s an amp li f ic ati on in th e sup pl y chai n of an y fl uc tu atio n in en d- market demand. Co ns eq uent ly, if you a r e an OE M in a do w ntu r n, y ou w i ll al mo s t alw a y s se e yo ur de man d temp or ar ily f al l by m ulti ple s of t hat s ee n in the e nd -m ar ket as t he su ppl y cha in ad jus t s to ne w de man d con dit ion s . T he do w n st re am ef fec t is d if fere nt for m ake- to- o rd er manu f ac t ur er s th an fo r make -to -s toc k . But w e mu s t re mem be r this i s a t wo- si ded p r obl em , bot h on th e inb oun d sup ply c hai n and o n the o ut bou nd on e. S o , an ups tr e am su ppl y cha in’ s imp ac t ca n st ill c a us e pr ob lem s , pa r ticul a r ly w h en th er e is an i ncr e as e in dem an d. I’v e se en t his a mpl if ic at ion p he nom en on ha pp en at ev er y B2 B com pa ny I h av e wo r ked at . T he s a me ph en ome non a l s o hap pen s w he n, in s tea d, th er e is a n incr e as e in d ema nd, w h ich I w ill e xp l ain l ater . In one c a se , an in dus tr ial manu f ac t ur er I’m fami li ar w it h se ll s through ex tended dis tr ibution channel s and has an amplif ication of 2. 8 4. S o, i f the ir en d- mar ket d ema nd f al l s b y 100 b a sis p oint s , the y s ee th eir o r der s tempor ar ily f al l by 2 8 4 ba sis p oi nt s. In s te el dis tr i bu tio n, th at amp l if ic ati on nu mbe r is ab ou t 4 0 0 basi s po int s . Th e amp l if ic ati on f ac to r in s ea so nal b usi ne s se s w it h lo we r inv entor y t ur ns i s ab ou t 1 6 0 ba si s po int s. C on su mer e lec t r onic s ca n be a s hig h as a s ta gg er in g 2 ,0 0 0 bas is po int s . How lon g do these te mporar y suppl y cha in tr ansient s l as t? Th e ne x t qu es t ion i s, h o w lon g w ill t his t r an sie nt r edu c tio n in dem and l a s t? If t he su ppl y cha in we r e 100 % ef fici ent , it w oul d cle ar th e exce s s inv ento r y in one t ur n . Bu t we k no w th at sup ply chai ns ar e n ev er 10 0 % ef f ic ient . W h en I w as m ak ing t he s e ca lcu l atio ns e ar l ie r in my c ar e er , bec au se I d idn’t kn ow t he ex ac t sup ply c hain ef fic ien c y nu mb er , like any t yp ic al en gin ee r , I chos e 5 0 % as m y wo r ki ng hy p oth es is . F il l r ate s ar e a co mpl ex f unc t ion of dem and a nd in ve ntor y an d we re n’t alw ay s v al id i n high ly distur bed situations. Let ’s make the num ber s eas y in o ur th ou ght ex pe r ime nt. Th e 5 0 % ef fici enc y numb er me an s that a f our in ve ntor y tu r n comp an y w oul d ex per ience a t r an sie nt f all i n dem and l a s tin g for six m onth s , in oth er w or ds , t wo in ve ntor y tur ns. A lt hou gh th e end m ar ket ha s onl y f all en b y 100 b as is p oint s , it f ee l s l ike yo ur comp an y is s el li ng into a n ar tif ic ial ly muc h w or s e mar ket than it re al ly is . T he i ndu st r ial c omp an y I me ntio ne d ear lier fe lt l ike the end -m ar ket – an d s ale s – ha d temp or ar ily f al len b y 2 8 4 bas is poi nt s, n ot 10 0 ba sis p oint s. But c or r e sp ond ing ly, whe n the r e’ s an inc r ea se in d em and , it fe el s like yo ur co mp any i s se ll in g into an ar tif ic ial ly mu ch b et ter m ar ket th an it i s. T h at ov er shoot i n dem and i s onl y a temp or ar y illus ion , an d we’l l de al w i th tha t cas e shor tly. Or de r dem and f a ll s until sup ply a nd de man d co me into equ ili br iu m. M ean w hil e, th e tr a nsi ent r ed uc ti on in or d er s h as re mo ve d th e exce s s inv entor y f r om th e sup ply c hai n and , in my ex amp le, d ema nd r etu r ns to a n ew q uie s cent v a lue, a lb ei t no w 100 b as is p oint s sm al ler . So , in th is sim ple c a se o f fa ll in g dem and , th e s ale s ch all en ge of thi s hy p othet ic al m ake-to - sto ck c omp an y is ma de w or se by o rd er i ng un der shoot . T hi s ha s imp or tant f in anc ial i mp ac t s bec ause it ar tificially re duces a company’s repor ted g ro w th . In pub li c com pa nie s , we r ep or t to th e mar ket p er i odi c all y and , if a tem por ar y unde r sh oot i n dem and – o ne n ot r efl ec ti v e of th e re al en d- ma r ket con dit ion s – l as t s s ix m onth s , it c an s er i ou sly af fe c t th e pr oje c te d gr ow th r ate i n the f ul l-y ea r re su lt s , de pen din g on w hic h qua r ter of the f is c al y ea r the d is tur b an ce ha pp ens . What happe ns when there i s an incr eas e in dema nd? No w let’s con sid er th e opp os ite c as e, o ne w h er e the re i s a sud den i ncr e as e in de man d, w h ich w e’ve se en r e cent ly, par ti cul a r ly in e lec t r onic s. T he si mpl e ans wer to w hy t his is ha pp enin g is an i mb al an ce in su ppl y and d ema nd . But I w ill s ho w no w th at the p r obl em is a gai n mos t ly ar tif ic ial a nd temp or a r y, and so ar e th e as s oc iate d inf l atio nar y te nde nci es as p eop le o ve r- o r der to f il l an il lus ion ar y hig h dem an d. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 6 The case of increased d emand W hen t her e i s a sud de n incr e as e in d ema nd, m anu f ac tu r in g ca pa ci t y i s li mite d, s o th e sup ply c hain c a nnot f ul ly r e sp ond unle s s th er e is e xces s i dle c ap ac it y. Nor mal ly, manu fa c tur e r s lo ad f ac to r ie s to so me w he re b et wee n 8 5% a nd 9 0 % c ap ac it y for f ixe d co st a bs or p tio n re as on s . S o no w the ef fic ien c y of o ur sup ply c hain i s , de f ac to, o nly a bo ut 10% . S o e ven i f w e ca n incr e as e c ap aci t y tempo r ar i ly, sa y fr om 8 5% to 95 % or e ve n 100 % , unl es s w e ad d ne w c ap aci t y , the t ime fo r sup ply a nd dem and to r et ur n to e quil ibr ium is ex tende d. S om e com pa nie s may h av e ex tr a shi f t s a v ail a ble , bu t the n the y mig ht not h av e tr ai ne d wo r ker s to s t af f t hem , an d w ith l a bo ur sh or ta ge s dr i ve n by t his e xce ss d em and , auto mat ion i s of te n the a ns w er , but t hat i s a lon g-te r m s olu tio n. In my e ar l ier c a se o f dem and r e duc t ion , I us e d 5 0 % as th e ef f ic ien c y num be r for th e sup pl y chai n. Bu t no w, be c aus e of manu f ac t ur in g c apa ci t y l im it s , th at ef f ic ien c y is ef fec t iv el y only 10 %, s o th e r eco v er y tim e for e quil ib r ium to b e r ea che d is nom inal ly f i v e tim es a s lon g as i t did w i th 5 0 % . S o, a c omp an y that o nce e xp er i ence d a si x-m onth r e cov er y o n fa ll in g dem and coul d no w ex p er ie nce a 2 . 5 ye ar tr ansie nt bef or e com ple te re co ve r y. This i s an ex tre me c as e; nat ur a ll y, compa nie s t ake ev er y po s sib le co r r ec ti v e ac t ion to r e duc e this t imin g. B ut th is pr ob lem p ar tly e xpl ains w hy w e s ee e x ten de d re co ve r ie s and s hor t age s in o ur su ppl y cha ins . In pr act ice, t he s upp ly ch ain ma y t ake 18 months to r e co ver as w e eng ag e in co unter m ea sur e s. M ea ntim e, a ma s si ve amo unt of ne w f ixe d c ap aci t y is bein g ad de d to the s upp ly chai n, e sp ec ial ly in t he s emi con duc to r ar ea , w hic h w ill a l s o help gr adually r educe thes e distur bance time s and inflation alo ng w it h it . Comp anie s mus t control th e temptation to ov er- or der In this increase d demand case, our supply chain manager’ s tempt ati on is to o v er -o r der o ut of f ea r of ex per ienci ng co mp one nt sho r tag es . A f ter all , y ou c an’t ship a c ar w i th e ve n one m is si ng doo r han dl e. T hat n ew d em and te mpo r ar ily incr e as e s a com pa ny ’ s gr ow th, b ut i t c an ha ve s er ious f in anc ial co ns eq uen ce s , par ti cul a r ly on o ur in ve ntor y’s pr ici ng . We ca n end u p w ith long-dated order s at much higher-than-nor mal pr icing. This is a pr ob lem qu eui ng fo r an unh app y en din g. Th er e is t yp ic al ly on e ov er shoot , an d one u nd er sh oot i n any d y n amic s ys tem l ike the o ne I de s cr i be h er e. Fo r the mathematically inclined, w hen simplifie d, the dominant mode make s the d y n ami c re sp on s e loo k l ike a se con d- o r der s y s tem . Th e pr e cis e ef fec t of th es e tem po r ar y in cr ea se s in d em and depends ver y much on the company’s distribution method. Th e in ev i ta ble o utco me is t hat c omp ani es c a n end u p w ith to o much i nv entor y, pos si bly at h igh er pr ices , pr o duc in g v ar ia nce s aga ins t s t and ar d man uf ac t ur in g co st s . In a n ex t re me c as e, comp an ie s ma y fa ce ex p ens i ve e xces s a nd ob s olete ( E&O) inv entor y w r i te- of fs w he n th e ine v it ab le de man d f all s late r in th e tr ansient cyc le, with it s own over r eac tion tendancies. The ef fect s of con tain er sho r tages Th is ar ti fi cia l and s y n chr o nis ed s ur ge i n dem and h as r e sul ted in a sho r tag e of sh ipp ing c ont aine r s on s om e r ou tes w or l d w id e. Ins tea d of th e his tor ica l $2 ,0 0 0 for a cont ain er tr ansi t f ro m Chin a to Eur op e or th e Uni ted St ate s , cont ain er co s t s pe aked at $ 2 3 ,0 0 0 in 2 0 21. T o day i t’s aro und $13,0 0 0 . Chi na’ s zer o -C O V ID p ol ic y ca us ed h ol dup s and d el a ys i n the m ajo r E as t C oa st C hin a por t s and f ac to r ie s , w it h simi l ar in ef f ic ien cie s in ot her p or t s in th e US and Eu ro pe . S o, in p ar t, co nta ine r pr ic in g is a pr ox y for sup pl y chai n sho r tag e s and i nfl at ion , ma kin g th e ar tif ic ial d eman d problem even wor se. Sy nchronis ed demand Cle ar ly, the w or l d e con omy h as n ot su dde nly g ro w n b y 1 5% o r 2 0 %, s o w hy h av e co mp anie s ex p er ie nce d thi s su dde n inc re as e in demand, par ticular ly for electr onic s? The c ause lie s squar ely in the s ync hr oni se d e con omi c ‘sta r t up’ af ter the C O V ID - 1 9 pandemic, plus the tr ansient ar tificial demand de scr ibed ear lier . Al tho ugh w e ha v e be en us ing v i de oco nfer en cin g too l s fo r man y ye ar s , C OV ID- 1 9 for ce d unpr ac tis e d st af f into the us er p op ul ati on and a ccel er a ted ac cept an ce of th is as a w ay of wo r ki ng – an d a sub st it ute fo r so me f ace -to -f ac e me etin gs at t he of fice . T hat , in par t , dr ov e pa r t of the hi gh de man d for e lec t r onic s. L ikely, we w il l not f ul ly r etur n to pre - CO V I D- 1 9 w ay s of w or king e ve r ag ain. But t her e is a n ad dit ion al f ac to r at wo r k he re; s y n chr o nis at ion . Al tho ugh t he w or l d’s majo r con ne c ted e con omi es h av e sim il ar per iodic it y in the ir ec ono mic c ycle s , th ey a re n ot no r ma lly a ll in pha se . In th e s ame w a y th at dem an d fel l pr ec ipi tou sly in l a te 2 0 0 8 , it di d so b ec a us e of the s ync hr oni se d co ll a ps e in al l deb t mar ket s . Simi l ar ly, her e w e ha ve a s y n chr o nis ed i ncr e as e in de man d in mo st m ar ket s , ma de w or se by a n illu s or y dem an d cur v e. Howev er , global economies will gr adually set tle int o historic al phasing patter ns, easing some of this synchronis ation problem. So , the ‘ 0 8 -’0 9 do w ntu r n occ ur r e d be c aus e of a de bt cr i si s hap pen ing s imul ta ne ous ly ac r os s th e wo r ld , w hic h pr od uce d a s y nch ro nis e d ec ono mic d ow nt ur n . Her e, w e ha d a sim il ar b ut opp os ite pr o ble m: a sy n chr o nis ed u ptur n and, to m ake it w or s e, sy nchr onise d ar tif icial excess demand. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 7 Infl ation So me e con om is t s ar gu e that i nfl at ion h as b ee n c aus e d by exce s si ve s t imul us p ack ag es t hat c r as he d he adl on g into sup ply chai n sho r tag e s. H ow e ve r , t he y ar e t wo sid es o f the s a me co in. But t he r ea l pr ob lem i s muc h mor e co mp lex , an d the s o lut ion s ar e po ss ibl y simp ler . Infl a tio n has b e en ma de w or s e b y ar tif ic ial sy nchronis ed demand that cre ated short ages , combined with high - cos t s lo w- mo v in g cont ain er s a nd th e w ar in U kr aine, w hi ch has d r i ve n up fo od an d en er g y pr i ce s. A d dit ion al ly, zero - C OV ID- 1 9 pol ic ie s in Ch ina h av e plu gg ed up o r slo w ed s upp ly ch ain s and at ten dant l ab ou r sho r tag e s we re c au s ed b y al l the ab o ve . I hav e de sc r ib ed h er e w hy w e ar e ex pe r ien cin g so me p ar t s of th es e sup ply c hain d if fic ulti es a nd w h y the y ha ve l a s ted s o lo ng. It’s imp or tant to r em emb er t he ma x im tha t the s ol uti on to high p r ice s i s high p r ic es . S imil a r ly, the s olu tio n to lo w pr i ce s is lo w pr ices . C omp ani e s re de si gn th eir pr o duc t s, r e- so ur ce supplier s and use lower -cos t substitutes for expen sive material s , w hich i s pa r t of the co mp ani es’ me cha nis m to contr o l inf l atio n. Th e si ze of the U S e con omy i s app r oxim ately $ 21 tr il l ion , an d the US us e s ap pr oxim ately 6 .9 bill ion b ar r e l s of o il a ye ar . So e ach $10 incr e as e in th e pr i ce of a b ar r el of o il r ed uce s sp en ding p o we r in the U S e con omy b y ab ou t 3 0 b asi s po int s . A $ 6 0 inc re as e in t he pr ic e of a ba r r el of oi l , w hic h we s a w at it s p ea k, i f ma inta ine d, re duc e s spe ndi ng p ow er in t he U S ec ono my b y 180 b as is p oint s . Simil ar ly, incr easin g interes t r ates simulta neous ly incre ase s infl ation an d l ater r e duce s i t by c oo li ng de man d. Th os e co mp anie s s uf fer ing t he gr e ates t n ear -te r m ch all eng e ar e tho se i n pr oc es s in du st r ie s th at us e a lot of e ner g y. Smi th s do es not ha v e high e ner g y -i ntens i ve m anu fa c tur ing pr oc es s e s . So how does all of t his en d? Th e Chi ne se C om muni s t Pa r t y C ong re s s w il l ta ke pl ac e in Oc tob er . It ma y be w h en Chi na de cl a re s v i c tor y ov er C O V ID an d el imin ates i t s zer o - CO V ID pol ic y. T hat w il l gr adual ly f r ee up plu gge d p or ts , e as e sup pl y cha in sho r tag e s, r e duc e cont ain er cos t s , an d ea se s om e pr e s sur e on c omp on ent sup pl y fr om C hina . Sup ply c hai n tr a nsi ent s w il l end n atu r al ly w i th tim e, th ou gh not w ith ou t so me p ain , and a r tif ici al de man d w il l re duc e. A r ed uc ti on in ec ono mic s ti mulu s w ill a l s o he lp, th ou gh I ha ve r e s er v ati ons that a r apid in cr ea s e in inter e s t r ate s ma y wo r k ag ain st pol ic ym aker s a nd cr e ate r ece s si on s in so me e con omi e s acr os s the We s ter n w or l d. T og eth er , thes e f ac to r s w il l re du ce l ab our sho r tag es a nd e as e th e pr es s ur e on p r ici ng an d inf l ati on. L as tl y, prob le ms th at We ste r n ec ono mie s ha ve s uf fer ed o ve r the p as t t wo y ear s wil l al mo st c er tain ly cr e ate a s w ath e of manufac tur ing re patr iation initiative s. T hat is likely to reduce eco no mic gr o w th in Chin a and ot he r par t s of th e A sian ec ono my. But i t w ill a l s o cr e ate ne w job s an d inv es t ment s i n Wes ter n economies and dr ive ef f icienc y initiative s and automation inv es t ment s . M y gr andm othe r wo uld h av e s aid , “i t’s an ill w i nd th at blows nobody a ny good” . I hop e thi s let te r ha s hel p ed r ea de r s , in s ome s mal l w ay, to und er s t and t he co mpl ex iti e s and ef fec t s of th is v er y unu sua l tim e. Sir Ge or ge W. Buckley C HAIR MAN 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 8 SMITHS VALUE ENGINE O U R B US I N ES S M O D E L Our c ompelli ng busi ness model leve r ages our world-cl ass enginee ring, leadi ng posit ions in criti cal marke ts , and gl obal capabi lities t o help cust omers solve t hei r toug hest proble ms. The Smit hs Va lue Eng ine is su ppor ted by a robust fina ncia l fr amework charac te r ised by recurr ing reven ues, high m argins, and st rong cash gene r atio n. OUR CULTURE OUR STAKEHOLDERS READ MORE Our culture P 28 READ MORE Engaging with our stakeholders P 41 Our cultur e inspir es and emp owe r s our pe opl e. We l i ve o ur Val ue s of inte gr it y, re sp ec t , cu s tome r foc us , o w ner ship, an d pa s sio n ev er y da y, in each a c tio n an d dec is ion t hat w e ta ke. A s tr ong c ult ur e grounded in Va lues is what has enabled Smi th s to pr osp er f or mo r e than 1 70 yea rs. Our L ea de r shi p Beh av i our s pro v id e a unif i ed de s cr i ptio n of w hat l ea der ship mea ns at S mi ths a nd a sh ar ed comm it ment to h ow w e ac t i n se r vi ce of our stakeholder s. Smiths Le ader ship Beh av i our s align to o ur th re e co re prior itie s of grow th, execution and people. Grow th – Inno v ate s for i mp ac t – Se t s v isi on to in spi re E xe cu ti on – T akes acc ount ab ili t y and ow n er s hip – Del i v er s r e sul t s at pa ce People – Li v e s Sm ith s Valu e s – De ve lop s se lf an d oth er s – Leads inclusi vely and empo wer s People Our capable, dedicated and pas sionate col l ea gu e s ar e ou r gr ea te s t as s et . We a im to at tr ac t an d r et ai n th e ve r y be s t by c r eat in g an env i r on me nt fo r co ll e ag ue s b as e d on r e sp ec t, pe r s on al gr o w th, r ec og ni ti on a nd d ev el op me nt of t al ent , an d a s en s e of b el on gin g and purpose. Customer s Strong and enduring customer rel ationships w il l su st a in S mi th s int o th e fu tu r e. Meeting customer needs and exc eeding the ir e xp e c t at io ns , n ot ju s t w it h pr o du c t s , qua l it y and s er v ic e, b ut i n th e w ay w e co nd uc t bu sin e s s an d pa y at tenti on t o the t hi ng s tha t ma t ter t o th em – f or e xa mp le, e th ic s and environment al per form ance – is a fu nd am ent a l pa r t of our b u sin e s s mo de l an d our Values. Suppl ier s Developing mutually benefic ial relationships with our supplier s and building resilience, qualit y and eff iciency across our supply chain is a f un da me nt al c ont r ib u tor to o ur c u st om er offer ing and the long-term competitiv enes s of Smiths. Communitie s an d so ciet y We aim t o im pr ov e o ur w or l d b y co ntr i bu ti ng positi vely to our communities and societ y in general . Smiths produc ts and ser vices suppor t critical global indus trie s wher e we ar e pi on ee r in g pr o gr e s s in s af et y, eff i ci en c y and environment al per form ance. We pl ay a be nef i ci al r ol e in l oc a l ec on om ie s th r ou gh j ob creation and skill s development, procur ement and generating ta x revenues , operating s afely , enviro nmentally respon sibly and ethically , and engaging dire ct ly. Regulator s and gover nment s We build relationships with gover nments , polic y makers and regulator s across the wo r l d. We d o th is s o th at w e c an o pe r at e ef f ec tiv el y, to en su re o ur i nte re s t s an d th o se of th e in du s tr i es i n w hi ch w e op er ate ar e repre sented in decision-making, and in order to co ntr i bu te o ur e xp er ti se o n em er g in g national, re gional and global needs. Investor s We ar e co mm it te d to o pe nn e s s an d tran sparenc y wi th all capital prov iders and the ef f ec tiv e m ana g em ent o f r is k w hi le w e un lo ck v alu e an d r et ur n s fo r ou r in ve s to r s. CHIEF EXECU TIV E OFFICER’S REV IE W 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 9 Grow th Wo rld -Clas s Engineer ing Leading Positions in Critical Mar kets E xe cu ti on Global Capab ilities Robust Financial Framework People OUR PRIORITIES OUR STRENGTHS OUR PURPOSE PIONEER S OF PR O GRE S S Improving our worl d through smar ter engineer ing MEGATRENDS OUR STRATEGIC PRIORITIES O U R STR A TE G Y W e are com mitted t o per for min g to ou r pot ent ial – g rowing fas te r to un lock en hanc ed value crea tion f or the G roup. W e actively m anage o ur por t folio of b usin es ses and seek t o optimis e th eir p er for m ance thr ou gh or ga nic inv es tme nt and dis cipl ined us e of c apit al for mergers and ac quis itio ns. In F Y20 22 we made good progress in advancing o ur str at egy . Organic revenue growth EPS grow th ROCE Operating profit margin Operating cash conversion F Y2 0 21 ( 2.2 )% 19. 3 % 13 .9 % 15 . 5 % 12 9 % F Y2022 3.8% 1 7. 8 % 14 . 2 % 16 . 3 % 80% FY2022 PROGRESS AGAINST TARGETS +M& A +M& A 7-1 0 % 1 5- 1 7% 18 -2 0% 1 00%+ 4- 6% Th e s tr ateg y f or e ac h di v i si on i s t ail or e d to i t s ind i v id ua l ci rc um s t anc e s an d ta ke s acc ou nt of trends in overal l demand, specific customer needs, rel ative competitor per for mance, and unde rly ing business models. In addition, we t r ac k th e e vo lu ti on of ke y G ro up - w i de se c ul a r the me s a nd t re nd s an d th ei r im pa c t on o ur b us ine s s . Ou r Pu r p os e an d co mm it me nt to s us t ai na bi li t y le ad er s hi p ar e r ef le c te d in o ur i nte nt to p r io r it is e E S G pe r for m an ce at S mi th s . A s a r e su lt , w hi l s t ea ch of t he s e th em e s is i mp or ta nt , we p l a ce ad di tio n al em ph as is o n ou r r es p on se t o th os e megatrends which rel ate to the energ y tran sition ag en da a nd t he o ve r al l r e duc tion o f w as t e an d en er g y us e . T hi s w il l al lo w u s to le v er a ge o ur unique capabilitie s to enable our customer s to me et th ei r su s t ain ab il it y go al s whi le w e de l i ve r on o ur o w n co mmi tm en t s. Gener al Industri al – Eff icient, cleaner processes – Waste reduc tion, re-use/recycle – Safe operations – Equipment reliabilit y – A s s et l if e maximi sation – Light weight material s Sa fet y & Sec ur it y – S afe t r a ve l – Secur e tra de – Safe people – Secure places – Smar t cities Energ y – Envir onmental urgenc y – Energ y eff icienc y – Low er emissions – Energ y trans formation – A ir q ua li t y Aerospace – Faster/seamless connec ti vi t y – Satell ite applications – Pers onalised integr ated mobilit y solution s – T aki ng f u ll a d v an ta g e of s tr on g de ma nd w e c ur r en tly s e e ac r os s m os t of ou r ma r ket s – Improving new produc t develop ment and commercialisation – Ex tend in g ou r re a ch b y bu il di ng o ut p r io r i t y a dj ace nc ie s – Supplementing organic grow th with disciplined M& A – Developing high-value green technology solutions for our customers – Emb e dd in g the S mi th s E x cel le nc e Sy s te m ac ro s s th e Gr o up – Accelerating pace and est ablishing a more consistent operating r hy thm – Co nti nu ou sl y imp r ov i ng t o de li v er v a lu e fo r cu s tom er s – Executing agains t our environmental commitments – Bui ld in g up on o ur w or l d - cl a s s s af et y rec or d – Acceler ating talent developme nt through the Smiths Leader ship Behavio urs – Creating an ever-more diver s e and inclusive environment – Li v i ng S mi th s Va lu es e ac h an d e ve r y day FY2022 progress – Fi ve consecuti ve quar ters of organic revenue grow th – Acceler ated organic revenue grow th tow ards tar get range – £51m of re ve nu e fr o m ne w pr o du c t s l a un ch ed i n F Y2 0 2 2 – R&D in ve s t men t in cr e as e d + 14% to 4.2 % of sa le s (+ 3 0bp s v s F Y2 0 2 1) – + 1 .8 % a d dit io na l gr o w t h f ro m t ar ge te d M& A FY2022 progress – Resilient operating prof it margins amidst challenging macro environment – Pr ice off set ting infl ation and mitigating other supply chain impac t s – SE S f u ll y em be dd e d ac ro s s th e Gr o up, w i th a w el l- re s ou rc ed t ea m an d 25 high-impac t projec t s under w ay – New sustainabil it y str ategy laun ched – Solid oper ating cash conversion achieved FY2022 progress – Ref re s he d s en ior l e ad er s hi p tea m le a din g a f as t er p ac e – Introduced Smiths Leader ship Behavio urs to accelerate cultur al change – Mor e a mb it io us d i ve r si t y g o al s i n pl a ce – > 1 ,0 0 0 L e an S ix S ig ma q ua li f ic at io ns t hr ou gh o ur S E S A c a dem y 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 10 Grow th E xe cu ti on People “ CHIE F E X EC U T I V E ’ S R E V I E W O F T HE Y E A R F Y2023 out l ook – E x pe c t to del i v er 4 .0 % to 4 .5 % or g ani c re v enu e gr ow th w ith m od er a te mar gi n impr o ve ment – Str on g or de r bo ok s an d le adi ng ma r ket po sit io ns su pp or t sust ained mo mentum – Co st i nfl a tio n bei ng ac t i ve ly man ag ed t hr ou gh pr o duc ti v i t y pr og r am me s and p r ic ing a c tio ns – Mac ro ec on omi c and g eo pol i tic al u nce r taint y as we ll a s sup ply chain challenges continue F Y 2 0 2 2 b usines s per for m ance Co mme ntar y r efe r s to Sm ith s Gr o up pe r for ma nce exc lud ing Smi th s Med ic al , w hi ch w a s acco unte d for a s ‘ dis cont inu ed oper ations’ before the sale completed on 6 Januar y 20 2 2. Smi th s del i ve r ed gr o w th ahe ad of e xp ec t ati on s w ith o r gan ic re v enue u p + 3. 8 % . Gr ow th ac cel er ate d to + 4 . 1 % in the s ec on d hal f, wh ich b uilt o n the m om entu m we h ad ac hie v ed in t he f ir s t hal f of + 3. 4%. We e xec ute d wel l in a c hal len gin g env i r onm ent w it h pos it i ve p r ici ng ac t ion c ov er i ng th e imp ac t of e le v ated i npu t cos t s , and m aint ain ed c los e ma na gem ent of o ur sup ply c hai n to mit igate other impact s. A s w e s tr i v e to cont inua ll y ins pir e an d emp ow er o ur gr e at pe opl e, w e l aun che d our e nha nce d su st ai nab ili t y str ateg y and s et out n e w Smi th s Le ad er sh ip Be ha v iou r s . T he se B eh av io ur s p r ov i de a unif i ed de s cr i ptio n of w hat l ea der ships m ea ns at S mit hs an d a shar e d co mmi tme nt to ho w we w il l ac t a s emp lo ye e s. FY2022 BUSINESS PERFORMANCE (£m) F Y2 021 F Y 20 21 res truc tur ing charges Foreign exchange Acquisitions Organic movement FY2 022 Revenue 2,406 – 26 42 92 2,56 6 Headline operating profit 372 21 5 11 8 417 Headline operating profit margin 15 . 5 % +90bps +0 bps + 20 bps (3 0)bps 16 . 3 % ORGANIC REVENUE GROWTH IN OUR END MARKETS % of Smiths revenue H1 20 2 2 H2 2 0 2 2 F Y202 2 General Industr ial 42% + 5 .7 % +16 . 5 % +11 . 4 % S af et y & Se cu r it y 31% (3.5 )% ( 8.9 ) % (6. 4) % Energ y 2 1% + 7. 5 % +0. 3% +3.5% Aerospace 6% +16 .7 % +14 . 2 % +15 . 4 % Smiths Group 10 0 % +3.4 % + 4 .1 % +3.8% ORGANIC REVENUE GROWTH (BY BUSINESS) H1 20 2 2 H2 2 0 2 2 FY2 022 John Crane + 5 .1% +2 .5 % +3. 7% Smith s Detec tion ( 7. 2 ) % (11 . 3 ) % ( 9. 4 ) % F l e x -Te k + 1 0.0% +2 0 .9 % + 1 6 .1 % Smiths Interconnect +12 .9 % +1 4 . 8 % +13 . 9 % Smiths Group +3.4 % + 4 .1 % +3.8% W e contin ued to demonstr ate strong progress in F Y2022 , ex ecuting at pace on our g row th s trateg y . W e delivered grow th ahead of e xpec t ations, our fastes t organic grow th in nearly a decade. Along with accel er ating grow th, we fur ther strengthened our company through incre ased investment s in innovation, commercialisation and supply cha in. Still more , we returned £6 6 1 m of cash to our sharehol der s through div idends and share repurchas es. All of this gives us confidence for c ontinued progress in F Y20 23. Despite an un ce r tain ma cr o environment, we expec t to deliver 4 .0 - 4.5 % organic revenue growth w ith moder ate margin improvement. By focusing on our top priorities of grow th, executio n, and people, we are creating value for our customer s, collea gues , communities and investors. T ogether , we’ re building an ever- stronger future for Smiths. Many thanks to my colleague s around the wor ld for doing what we do bes t – improving our world through smar ter engineering. ” Pa ul Keel , CHIE F E XEC U T I V E O F F ICE R 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 11 Gro w th Growing faster is the primar y dri ver of unlocking enhanced value cre at io n fo r the G ro up . Th ro ug h the y ea r we d el i ver ed g ro w th in each quar ter and FY org anic revenue growth of +3.8% , our best pe r f or m an ce in n ea r ly a de c ad e. Gr ow th ac cele r ate d in th e se co nd ha lf fo r bot h F lex- T ek (+20.9% ) and S mit hs Inte rc onn ec t ( + 1 4 .8 % ). Jo hn Cr a ne d el i ver e d +2.5 % gr ow th in th e se co nd h alf im pa c ted b y ce s s ati on of s al es i nto Rus si a and s upp ly ch ain di sr u ptio n, w h ich im pa c ted o ur ab ili t y to con ver t s tr on g or de r int ake into r ev enu e. A s exp ec te d, S mit hs Dete c tio n cont inu ed to b e af fe c ted b y th e so f ter A v iati on or igina l equ ipm ent (O E ) ma r ket thr o ugh t he s eco nd h alf, b ut go o d or de r gr ow th un der p ins o ur co nf ide nce in t he m edi um-te r m pr o spe c t s for th is s egm ent . Rev enu e gr ew + 6.7% on a r ep or ted b asi s , to £ 2, 5 6 6 m (F Y 2 0 21 : £ 2 , 4 0 6m ). T his i ncl ud ed + £ 26 m of f av ou r ab le fo re ign exchange transl ation, and +£42m fr om the acquisition of Roy al M eta l Pr o duc t s L L C (Ro y al M eta l ) in F eb r uar y 2 0 21. Sin ce Feb r u ar y 2 0 2 2, Ro y al M eta l re su lt s ha ve b e en acc ounte d for as or g anic g r ow th. Str on g exec ut ion t o ma x imi s e ma r ket re co ver y op po r tuni t y is th e fi r s t of the f our a c tio nab le le v er s fo r acc eler ating g ro w th. Our b usi ne s s ope r ate s ac r os s fo ur maj or gl ob al en d mar kets: Gen er al Indu st r ial , S a fet y & Sec ur i t y, En er g y, and A er osp ac e. Our s tr on g ma r ket po sit ion s , cou ple d w it h the b al a nce d ma r ket exp os ur e we h av e ac ro s s our b usi ne s se s , ar e di st inc t i ve l ong - ter m ad v a nta ge s fo r Smi th s. Smi th s or gan ic r ev en ue gr o w th in our l ar g e st e nd m ar ket, Gen er al Indu st r ial , w a s + 1 1.4% in F Y 2 0 2 2, w i th gr o w th acce ler ating in t he s ec ond h al f. Thi s w as d r i ve n by J ohn C r an e’ s gr ow th in s eg ment s l ike ch emi ca l pr o ce ss ing , w ater t re atm ent and life sciences, demand for Flex- T ek’s constr uc tion produc ts and Smiths Interconnect’s semiconduc tor test solutions w hich re main ed s t ro ng th r oug hou t th e ye ar . Smit hs or g ani c re v enu e in S afet y & Se cu r it y wa s (6 . 4 )% , r ef le c tin g conti nue d co ntr a c tio n of the A v iati on OE m ar ket . T his w as par tia ll y of f s et by g ro w th in Smi th s Dete c ti on’ s othe r se gme nt s as w el l as gr o w th fr om Smi th s Inter con ne c t’s defenc e- r el ated p r od uc t s . T he + 3. 5 % gr ow th in th e En er g y s egm ent r ef le c ted s tr on g de man d in Jo hn Cr an e. A s menti one d ab ov e, s ec on d hal f gr ow th w a s imp ac te d by ce s s ati on of s a le s into Rus s ia an d sup ply c hain d isr uptio ns . Our f a ste s t gr o w t h in F Y 2 0 2 2 c am e in A er osp a ce + 1 5. 4% as incr e as ing ai rc r af t buil ds dr o ve s tr on g de man d for F l ex- T e k and Smiths Interconnect’s aerospace solutions . A s p ar t of our g ro w th s tr ate g y, we ha ve int ro du ced a n e w app ro ac h for o ur bu sin es s i n Chin a. Fr om t he s ta r t of F Y2 0 2 3, the S mit hs Ch ina l ea der ship tea m no w ha s lea d r es po nsi bil it y for our op er ation s in th e cou ntr y (exc lud ing S mit hs Inte rc onn ec t ’s se mico ndu c tor b usin e ss u nit w h ich w il l co ntinu e to r epo r t glob al ly ). T o ref le c t thi s , T ed Wan , Pr e sid ent of S mi ths Ch ina , ha s join ed t he S mit hs G ro up E xe cu ti v e Co mmi t tee . Our s ec on d le ver f or f as ter g ro w th is improved new product development and commercialisation . Dur ing F Y 2 0 2 2, w e l au nch ed 21 high -i mp ac t ne w pr o duc t s i ncl udin g F le x- T ek ’ s P y th on lin e s et s, a f l exi ble , mult i- l ay er pi pe u se d in v ar ious he ati ng , ventilation and air conditioning (HVAC) applications; Smiths Dete c tio n’ s iCMO RE au tom ated d etec ti on al go r it hms; a nd Sm it hs Inter con ne c t’s spac e qual i fi ed c onn ec tor s. Gr o ss V ita li t y , w hich mea su re s th e cont r ib uti on of p ro du c t s l aun che d in th e l as t fi v e ye ar s i ncr e as ed to 31% (F Y 2 0 21 : 25 %), de mo ns tr ating o ur success ful commercialis ation of new pro duct s. A s an i ndu s tr ia l tech no log y l ea de r , c onti nuin g to inv e s t in R&D ens ur es w e c ap it al is e on th e we al th of op po r tunit ie s in our pipel ine, wi th incre asing dem and for our sus tainabil it y- re l ated p r odu c t s. D ur i ng F Y 2 0 2 2 , we i nv es te d £9 2 m in R&D (F Y 2 0 21 : £ 8 4 m ), of w hich £ 8 0 m ( F Y 2 0 21 : £76m) w a s an in com e st atem ent ch ar ge a nd £1 2m c ap it al is e d (F Y 2 0 21 : £ 8m ). Our c us tom er s an d thi r d pa r ties c ontr ibute d a fu r ther £1 5m ( F Y 2 0 2 1: £ 10 m ) . T o supp or t new p r od uc t l aun ch es , an d th e st ro ng d ema nd fo r exi s tin g so lut ion s , we i ncr e as ed c a pex + 14.5 % in F Y 2 0 2 2 to £( 71)m (F Y 2 0 21 : £(6 2 ) m). T hi s re pr e se nt s 1 .5 x dep re ci atio n an d amor tis ation (F Y2 021 : 1 . 2 x ). Our t hir d gr o w th lev er is building out priorit y adjacencies . E ach of our fo ur bu sin es s e s ar e exe cu tin g st r ate gie s to ex p and t heir gr ow th be y ond t hei r ex is tin g cor e m ar ket po si tio ns . E x amp le s in F Y 2 0 2 2 inc lud e the l a unc h of Smi th s Inter co nne c t’s medi c al c abl e as s emb li es , an d Jo hn Cr a ne’s multi- pur p os e f ilter; an ef f ic ient w ater -s a v ing s ol uti on fo r the t re atm ent of p ro ce s s w ater i n pul p & pap er , minin g, p o wer g en er at ion p l ant s an d r ef ine r ie s. Our fo ur th gr o w t h le ve r is us ing discipline d M&A to aug ment our or g ani c gr ow th fo cu s. F l ex- T e k ’s acqui sit ion o f Roy al M et al in Feb r ua r y 2 0 21 is an e xcell ent ex am ple of t his . A cqu ir ed fo r $1 07m (7 .6x tr aili ng E BI T DA ), F Y 2 0 2 2 r ev enu e and p r of it gr o w th wer e + 4 8 % and +70 %. D ur i ng H1 20 2 2 , th e acq uis iti on co ntr ib ute d £4 2m o f re v enu e and £1 1 m of oper ating p r ofi t , add ing 1.8 % on to p of or ga nic r e ven ue gr o w th for F Y 2 0 2 2 . Fo r H2 2 0 2 2 , cont r ibu ti on fr om Ro y al M eta l w as in clu de d in ou r or gan ic r e sult s. Roy al M et al br ou ght a com ple me ntar y H V AC p or t fo li o, di st r ibu ti on s y ne r gie s , and p os iti v e pr i cin g. W h ile dr i v i ng su s ta ine d or ga nic gr o w th re main s ou r pr i or i t y, we co ntin ue to ex pl or e v alu e acc ret i ve M& A oppor tunities acros s the Group. In Jan uar y 2 0 2 2 , we s ucc es s f ul ly com pl eted th e s ale of S mi th s Med ic al to I CU Me dic al , I nc . (I CU ), se v er a l mont hs e ar l ie r tha n exp e c ted. T h is w a s our l a r ge st p or t fo li o mo ve i n ov er a de c ad e and p os iti on s the G ro up e ve n mor e s tr on gly to a cce s s th e gr ow th av ail able in o ur ind us tr i al tec hno lo g y cor e . T he s al e gen er a ted a pr of it o n disp os a l of £1 .0 bn , w it h imme di ate net c as h pr o cee ds of £1 .3 bn an d f ur ther v a lue to c ome f r om a p otenti al $ 0 . 1 bn ear n out and o ur s ta ke in ICU, w hi ch is r e co gnis e d as a £ 0. 4 bn a s set o n our bal ance sh eet . Fo r mor e in for m atio n on th e di v es tm ent , ple as e se e note 2 7 of th e f ina nci al s tate ment s . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 E xe c u ti o n Stronger execution is ou r s eco nd ke y pr io r it y . In F Y 2 0 2 2, h ea dl ine o pe r ati ng p rof i t gr ew + 1. 7% ( + £8 m ) on an or gan ic b asi s , and + 12.0 % (+ £ 4 5 m ) on a r ep or ted b asi s to £ 4 1 7m ( F Y 2 0 2 1: £ 3 7 2 m ) . Hea dl ine o pe r ati ng p ro fi t be nef ite d f ro m s tr ong p r of it le v er a ge in F lex- T ek and Sm ith s Inter co nne c t . T his w a s p ar tial ly of fse t by th e imp ac t o f sup ply c hain d isr uption o n Joh n Cr a ne an d Smi th s Dete c tio n, l ow er v ol ume s in th e Av iat ion O E s egm ent of Smi th s Dete c tio n, a nd ou r cont inue d in ve s tme nt in gr o w th. On a re po r ted ba sis , h ea dli ne op er ating p ro fi t inc r ea se d gi v en £ 21m of re s tr u c tur ing cos t s b oo ked in F Y 2 0 21, fav ou r ab le F X tr a ns l atio n of £5 m an d H1 20 2 2 co ntr ib ut ion f r om Ro y al Me tal . Hea dl ine o pe r ati ng p ro fi t mar g in w as 16. 3% , d ow n ( 3 0 ) bp s on an or gan ic b asi s an d up + 8 0bp s on a r ep or ted b asi s. Hea dl ine E P S g re w + 1 7 . 8 % , dr i v en b y he adl in e op er at ing p r of it gr ow th, a r e duc t ion i n the ef fec ti v e he ad lin e t ax r ate and th e ben ef it f r om th e on goin g sh ar e bu y b ack p r ogr amme . T he he ad li ne ta x ch ar ge fo r F Y 2 0 2 2 of £104 m ( F Y 2 0 21 : £96m ) re pr e se nt s an ef fe c ti v e r ate of 2 7 .6% (F Y 2 0 21 : 28 .9% ). RO CE in cr ea se d + 3 0 bp s to 14.2 % ( F Y2 021 : 13. 9 %). T hi s ref l ec t s the hi ghe r pr of it ab il it y of the Gr o up, mo re t han o f f se t tin g the temp or a r y incr e as e in w or k in g ca pi ta l . For f ur th er det ail o f the ca lcu l atio n, p le as e r efer to n ote 2 9 to the f in anc ial s t ateme nt s . Smiths has a strong tr ack re cord of oper ating cash conver sion, hav i ng a ver age d 100 % o ve r the l ast f i v e ye ar s . T his y e ar , we del i ve r ed s ol id o per ating c a sh co nv er s ion of 8 0% ( F Y 2 0 21 : 1 2 9 %) w hile n av ig atin g sup pl y cha in dis r upt ion a nd th e as s oc iate d inv es t ment in w o r kin g c api t al . He ad li ne op er ating c as h-f lo w w a s £ 3 3 2m ( F Y 2 0 21 : £510m). In F Y 2 0 2 2, w e em be dd ed o ur Smi th s E xce ll ence S y s tem ac ro s s the c omp an y. SE S is a s tep ch ang e in ap pr o ach a nd op er ating r hy thm; exe cu tin g w ith g re ater p ace , ur ge nc y a nd co ns is tenc y in sup por t of ou r pr i or i tie s . SE S i s wel l r e so ur ced w i th si x f ul l-time M as ter Bl a ck B elt s ( MBB ) and 2 3 Bla ck B elt s ( BB) i n pl ac e and t he f ir s t hi gh -imp ac t B l ac k Bel t pr oj ec t s n ow un de r w ay. Both t he MBB s and B Bs ar e de di ca ted re s our ce s le ad ing c ontin uo us imp r ov em ent pr oj ec t s a cr os s th e or gan is ati on . T hei r cur r ent p r oje c t s ar e fo cu se d on im pr ov i ng lead times, order book conver sion, incre asing capacit y and cost re duc t io n, w hi ch ar e he lp ing to b oth n av i gate th e imm edi ate sho r t- ter m di sr up tio ns an d sup po r t mor e ef f ic ient m ar gin e xp an sio n as w e gr ow t he top l in e. S E S li nk s our a c tio ns to o ur s tr ate g y, pr io r it is e s for hi gh imp a c t and c re ate s f ull-ti me co ntin uou s improv ement career paths . We hav e al so ide nti fi ed s om e ta r geted s a v in gs pr o jec t s to d r i ve enh ance d ef fici enc y and ag il it y in re sp on ding to o ur en d mar kets . In Joh n Cr a ne, t he fo cu s is to sim pl if y the o r gan is ati on to b et ter se r ve ou r cus tom er s a nd m ax imi se g ro w th opp or tun iti es . In Smi th s Dete c tio n, w e ar e r e st r uc t ur in g th e ope r at ion s to be mor e r e sil ient a nd im pr o ve ef fic ien c y in r e sp ons e to ma r ket con dit ion s . T he no n- he adl in e ch ar ge fo r the s e s av i ngs p r oje c t s is ex pe c ted to b e £ 3 5 - 4 0 m in F Y 2 0 2 3, w ith a nnu ali s ed b enef i t s of £ 25 - 3 0 m , of w hic h app rox im ately 5 0 % i s ex pe c ted to b e del i v er ed in F Y 2 0 2 3 . People Inspiring and empowerin g our people is ou r th ir d key pr i or i t y. S afet y and w ell- bei ng ar e al w ay s fo r emo st o f our p r io r iti e s. We hav e a s tr on g and r o bus t s afe t y c ult ur e and s tr iv e for a zer o har m w or kpl ac e, w it h s afet y cons ide r at ion s integ r ate d into al l of our a c ti v it ie s. O ur Re cor da ble I nci dent R ate for F Y 2 02 2 w a s 0.5 4 and c ontin ue d to tr a ck b elo w th e ind us tr y av er age an d in th e top quar tile of industr y per formance, ref lec ting the impor t ance of s afet y in eve r y t hin g we d o. We conti nue to s upp or t our c ol lea gu es in t he Uk r a ine / Rus sia re gio n ami ds t th e ong oin g con fl ic t . A s commu nic ate d at the inter im r e su lt s , we s top pe d al l s ale s into R us sia f ol lo w ing t he inv a sio n and a r e in the p r oce s s of e xi tin g our o per ation s in Ru s sia . A n as s oc iate d non -h ea dl ine c har g e of £1 9m is i ncl ude d in th e acco unt s , f ur ther d et ail s c a n be fo und i n note 3 of th e f ina nci al st atem ent s . We ma de a Gr o up -w i de d onat ion to t he Re d Cr os s to sup por t th e v it al w or k t he y ar e doi ng fo r the p eo pl e of Ukr aine, a nd impl eme nted a d ona tio n matchi ng s ch eme fo r our c ol le agu es . Dur i ng F Y 2 0 2 2 a nu mbe r of s eni or ap poi ntme nt s we re m ad e to the l ea der ship team i ncl udi ng Cl a re S c her rer a s Chief F i nan cial Of fi cer , Ber n ar d Cic ut a s Pr e si dent of J oh n Cr an e, Ver a K iri kov a as Chi ef Pe opl e O f f ic er an d Joh n Os ter gr en a s Chi ef Su st ai nab ili t y Of fi cer . All o f the s e ind i v idu al s b r in g a we alt h of ex per ience w h ich w ill h el p acce ler ate our pr o gr es s i n exec ut ing o ur s tr a teg y. Under this refre shed leader ship, as we conti nue to strengthen our c ultu re , we h av e intr o duc ed a s et of b eha v io ur s: th e Smi th s Le ad er sh ip Be ha v iou r s , to br in g our V alu es to l if e. T he s e se v en Beh av i our s des cr ib e ho w w e w or k w i th on e anot her a nd t ake ow n er sh ip an d acc ount abi li t y for our a c tio ns . T he y app ly to ev er yo ne at S mi ths – f r om th e sh op f lo or to s eni or exe cu ti v es . We dev el op ed th e Sm ith s L ea der s hip B eh av io ur s t hr oug h a ro bu st p r oce s s of fo cu s gr oup s , w hich g ath er ed t he v ie w s of col le agu e s fr om 21 c ount r ie s an d 72 s ite s ac ro s s the o r gan is ati on . Th e se w er e fo ll ow ed b y w or k sh op s w ith o ur E xecut i ve C om mit tee to cr eate an d r ef ine a s et of b eha v io ur s th at w oul d be r el ev a nt and comp el l ing fo r th e w hol e or ga nis at ion a nd su pp or t fu tur e gr o w th. Th e Be ha v iou r s w il l be com e fou ndat io nal to p ro ce s se s in clu din g re cr u it ment , de ve lop me nt, c ar e er pr o gr es s ion a nd r e w ar d. We bel ie v e that t he y w ill e nab le th e Smi th s cul tur e to b e ev en more dy namic and i nclusive. A n imp or ta nt ste p in emb e ddin g an in clu si v e and d i ver se cul tur e is inc r ea sin g our g end er di v er s it y. We are foc us e d on pr o ac ti v el y incr e as ing t he num be r of wo men i n le ade r sh ip r ole s at S mit hs . We hav e 4 5 % fem ale r e pr e se ntat ion o n the S mi ths B o ar d, a nd we w elc ome d th re e ne w fe mal e mem ber s to our E xe cu ti ve Co mmi t tee in F Y 2 02 2 ( 31 % fem ale ). Wome n make up 2 8 % of our global employee population, but only 24% of our senior leader s ar e fem ale. We a r e wo r ki ng to ch ang e thi s w it h a pr ogr amme of ac ti v i tie s de si gne d to id enti f y , sup po r t and ad v a nce t he c ar e er s of wo men at S mi ths . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 Del i v er in g our E S G c omm itm ent s , w hi ch inc lu de t ar get s f or re duc t io n in w ater , wa s te and p ac ka gin g, an d our N et Zer o GH G emis s ion s co mmi tme nt s for S co pe 1, 2 and 3, w i ll im pr ov e th e env ir o nme nta l executio n of our o per ation s , our p r odu c t s an d our sup ply c hain . In pr e par ation f or s et ti ng s cie nce -b a se d ta r get s ali gne d to ou r Net Zer o c ommi tm ent s , we m ad e fu r ther p ro gr e s s und er s t and ing a nd c ateg or i sin g the u nde r ly in g dat a . In F Y 2 0 2 2, nor mali se d GH G emi ss ion s r ed uce d by ( 7 .2 ) % , no r mal i se d w ater us ag e r edu ce d by ( 4 . 5 )% a nd n or ma li se d n on- r ec ycl ab le w a ste re duc ed b y (1 1 .5) % . T he s e r edu c tio ns ar e o n top of si gni fi c ant pr og re s s al r ea d y ma de sin ce F Y 2 0 07 , when w e f ir s t im ple mente d env ir o nme nta l ta rg et s . We hav e s et and c omm unic ate d F Y 2 0 2 4 env ir o nme nta l go al s , an imp or tant s tep to s upp or t the d el i ve r y of our c ommi tm ent to Net Zer o GHG e mis s ion s for S c op e 1 & 2 by 2 0 4 0. We ha ve a c le ar ro ad map f or ho w w e w ill a chi ev e thi s , pub li she d on o ur w ebs ite. It de tai l s th e pa th we a r e ta kin g to ach ie ve N et Zer o S cop e 1 & 2 emis s ion s by 2 04 0 and, f ur th er m or e, ou r ambi ti on to ac hie ve N et Zer o S cop e 1, 2 and 3 emis s ion s by 2 0 5 0 . Our people ar e a key as s et in d el i ve r ing o ur E S G co mmi tm ent s . We kn ow th at gr e at thin gs h app en w h en we p r otec t , r es pe c t, and s upp or t our te ams . We nu r tur e our p eo ple a nd de v elo p the ir tal ent s s o th at the y f lou r ish a nd c an h el p bui ld th e Smi th s of tomo r r ow. We ar e su pp or ting o ur te ams to s tr en gt hen o ur lo c al comm uni tie s an d we a r e wo r kin g e ver y d ay w i th ou r unw a ve r ing commitment to str ong gover nance and ethical pr actice. READ MORE Sustainability at Smiths P 24 Our E S G appr oach Environment, Social and Governance (ESG) performance is at the very centre of our Purpose, and fundamental to each of our priorities. Dur i ng F Y 2 0 2 2 , we e s t abl is he d a S cie nce, S us t ain abi li t y & E xcel le nce C omm it te e of th e Bo ar d , cha ir ed b y Da me A n n Do w li ng , to pr ov i de gu ida nce a nd su per v i sio n of our s us t aina bil it y st r ate g y. We put in pl ace the c omp an y’s fir s t Ch ief S us ta ina bil it y Of fi cer w h o is le adi ng o ur su st ain abi li t y s t r ate g y and t ar g et s thr ou gho ut t he bu sin e ss . T hi s s tr ate g y ( w hic h w ill b e se t out i n fu ll in o ur in aug ur al S us t ain abi li t y a t Smi th s re po r t in Oc tob er ), de s cr i be s ho w w e ar e emb r ac in g and p r io r iti sin g E S G per for mance at S mi ths to d el i ve r on ou r Pu r po se a nd cr e ate gen uine a nd si gni fi c ant v alu e for a ll o ur s ta keho lde r s . T o supp or t the d el i ver y of o ur s tr ateg y, execu ti ve c omp en s atio n is n ow l in ked to our su s ta inab il it y tar g et s, w i th E S G m etr i c s (GH G r edu c tio n and ene rg y u s ag e) in clu de d in ou r ann ual an d our l on g-te r m inc enti v e comp en s ati on pr o gr a mme s b egi nnin g in F Y 2 0 2 3 . Deli vering sust ainable grow th mea ns l ev er aging o ur uni que ca pa bil it ie s to de ve lop a nd co mme rc ial is e gr e en tec hn olo g y th at w ill h el p tr a ns for m indus tr ies an d pr o v ide o ur cu s tome r s w it h so lut ion s for t hei r op er at ion s , ena bl ing t hem to m eet t hei r ow n envir onmental targ ets acros s climate risk , energ y tran sition and ot her e nv ir on ment al n ee ds . E xampl e s incl ud e meth ane abatement; more ener g y eff icient critic al safet y infr astr uc ture; electr ic al heating solutions; tran smission and stor age of alter n ati v e f uel s; car b on c ap tur e; an d nex t gene r ati on el ec t r ic al conn ec to r s th at w il l sa fely a nd r el iab ly su pp or t the di git is at ion a nd electr if ication of infr astr uc ture. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 “ C H I E F F I NAN C IAL OFF ICER’ S R E V I E W O F T HE Y E A R Smiths simple a nd ef fec tive fr amewor k tr ansl ates busines s s trengths into financial strengths resulting i n strong ca sh generation that in tur n fu el s reinve stme nt in or ganic gro w th , complementar y M& A and shar eholder retur ns. ” Clare Scher rer , C HI E F FI NANC IAL OF FIC E R Th e t wo mai n UK pe nsi on s ch eme s an d the U S p ens ion p l an ar e we ll he dg ed a gai ns t ch ang e s in inter e s t and i nfl at ion r ates . O v er 9 0 % of th eir a ss et s a re i nv es te d in thi rd -p ar t y annui tie s , go ver nment b ond s , inv e st ment g r ad e cr e dit o r c ash , w it h no re main ing e qui t y inve s tme nt s . A s at 31 Ju ly 2 0 2 2 , ov er 6 0 % of the UK l ia bil it ie s ha d be en d e- r iske d thr o ugh t he pu rc ha se of annuitie s fr om third -par t y insur er s . Capital a llocatio n Net de bt at 31 Jul y 2 0 2 2 w as £150m ( F Y 2 0 21 : £1 ,018m), £ 8 6 8 m st ro ng er as a r e su lt of th e pr oc ee ds r e cei v ed f r om th e s ale of Smi th s Med ic al in J anu ar y 2 0 2 2 . Net de bt to he ad li ne EB I T DA h as impr o ve d to 0. 3 x ( F Y 2 0 21 : 1 .6x ). Given our stron g balance sheet position and capital allocation app ro ac h, w e ini ti ated a £ 742m sh ar e bu y b ack i n No vem be r 2 0 21 . A s at 16 Septe mb er 2 0 2 2 , we h ad co mpl eted 76 % of th e pr og r am me. At th e cur rent r u n- r ate an d sh ar e pr ic e, w e wo uld c omp lete th e pr og r am me in e ar ly C Y 2 0 2 3 , w it h an ant icip ate d re du c tio n in sh ar es to ~3 4 6m (a 13% r e duc t ion ). In li ne w it h our p r ogr e s si v e di v id end p ol ic y the Bo ar d i s re co mme ndin g a f ina l di v id end of 2 7 .3 p, br in gin g the tot al d i v ide nd for th e ye ar to 3 9 .6p, a y ear - on - ye ar in cr ea se o f +5% ( F Y 2 0 21 : 37 . 7p). Th e f ina l di v ide nd w il l b e pai d on 18 Nov emb er 2 0 2 2 to s har eh ol der s on th e re gi ste r at clo s e of bus ine s s on 21 O c tob er 2 0 2 2 . Ou r di v id end pol ic y aims to in cr ea s e di v id end s in l ine w i th gr o w th in ear nings and c a sh-f lo w w ith the ob jec ti ve of maintaining minimum di v ide nd c ov er of ar o und t wo ti me s . Th e po l ic y e nab le s us to r et ain suf fic ient c a sh -fl ow to f in anc e inv e st ment i n gr ow th an d me et our financial obligations. In sett ing the lev el of div id end pa y ment s, the Board consider s pr ev ailing economic conditions and futur e inv es t ment p l an s. Th e C omp an y of fe r s a Di v i den d Rein ve s tm ent P l an ( DRIP ) e nab li ng shar e hol de r s to us e th eir c as h di v id end to b u y f ur ther s har e s in th e Co mp any – s ee o ur w ebs ite fo r det ail s. T o par tic ip ate in th e DRI P , shar e hol de r s mu st s ubm it th eir e lec t ion n oti ce to be r e cei v ed b y 2 8 Oc tob er 2 0 2 2 ( the E le c ti on Da te). El ec t ion s r ece i ve d af te r the Ele c ti on D ate w ill a ppl y to di v ide nd s pa id af ter 1 8 No ve mbe r 2 0 2 2 . Pu rc has e s un der t he DR IP ar e ma de o n, or a s s oon a s pr ac tic ab le af ter , the di v i den d p ay m ent date an d at pr e v ail in g mar ket p r ic es . We al s o ap pl ied p r oce e ds f r om th e s ale of S mit hs M edi c al to r edu ce debt b y r ed ee min g ear ly a $ 4 0 0m bo nd o n 1 7 Feb r uar y 2 0 2 2 w h ich w as du e to be r ep ai d in Oc to be r 2 0 2 2. T h is r e sulte d in gr o s s debt of £1 , 166 m (F Y 2 0 21: £ 1 ,5 4 6m ) as at 31 Ju ly 2 0 2 2 . T her e ar e n o f inan cia l cove nant s as so cia ted w i th th e gr os s de bt. A s at 31 July 2 0 2 2 t he wei ghted a v er a ge m atur i t y wa s 2. 5 ye ar s , w i th th e ne x t mat ur i t y d ue in A pr il 20 2 3. Ca sh inc r ea se d to £1 ,0 5 6 m (F Y 2 0 21 : £ 4 0 5 m). A n $ 8 0 0m (c .£ 6 5 6m at t he pe r io d- e nd exc han ge r a te) r ev ol v ing cr edi t f ac ili t y (RC F ) rema ins u ndr aw n and m atur e s in N ov emb er 2 0 24 . T he o nly f in anc ial co v ena nt re l ate s to inter e st c ov er , unde r w hich E BI T D A mus t b e gr eate r tha n or eq ual to 3 t ime s net i nter es t . T aking c a sh an d th e RC F toge the r , to tal l i quid it y wa s ov er £1. 7bn at the e nd of t he pe r io d. F ree cash-flow In F Y 2 0 2 2, f r ee c a sh -f lo w gen er a tio n w as £130 m ( F Y 2 0 21 : £2 8 4m ) or 31 % of he ad li ne op er ating pr of i t ( F Y 2 0 21 : 7 6%), ref le c tin g an incr e as ed i nv es t ment in i nv entor y an d c api t al ex pe ndi tur e . Pensions Incl ud ed w i thin f r ee c a sh -fl ow w as £9m o f pen si on co ntr ib uti on s, (F Y 2 0 21 : £ 3 0 m). T h e sign if ic ant r e duc t ion i n pen si on co ntr ib uti on s ref le c t s no c ontr ibuti on s ne ed ed to th e T I Gr ou p Pen sio n S che me ( T I GP S) and £ 3 m to th e Smi th s Indu s tr ie s P ens ion S c hem e ( SIP S), gi ve n the w el l-fu nde d p osi tio n of b oth s che me s . For F Y 2 0 2 3, we exp e c t tota l ca sh c ontr i but ion s to be a r oun d £(1 2 ) m (in clu din g a fu nde d US p l an , unf und ed s ch em es a nd p os t-ret ir eme nt healthc are pl ans). In Jun e 2 0 2 2, t he T IG P S T r us te e comp lete d a de al to s ec ur e it s re main ing u nin sur ed p en sio n l iabi li tie s , b y w ay of a £ 6 4 0 mill io n bul k ann uit y bu y -in w i th Roth es a y L if e plc . T hi s mea ns t hat al l of the S c hem e’ s li abil i tie s ar e no w in sur e d, w i th a f ina l bu y - out of the s ch em e to be co mpl eted a s so on a s r ea so nab ly pr ac tic al , del i ve r in g cer ta int y f or th e S che me’s 21 ,0 0 0 me mbe r s an d re mo v ing f u tur e r i sk for S mi ths . A s a re sul t of th e bu y -in a £1 71 m non -h ea dl ine c har g e w as r e cog nis e d in the F Y 2 02 2 ac count s and t he net a cco untin g pe ns ion s ur pl us de cr e as ed to £19 4m ( F Y 2 0 2 1: £ 4 1 3 m ) . SIP S is es tim ated to b e in s ur pl us on t he T ech nic al P r ov i sio ns fu ndin g b asi s. G i ve n the f un din g po sit ion , no f ur th er c as h contr ibut ion s ar e cur rentl y be ing m ade . T he G ro up an d the S IP S T ru ste e cont inu e to wo r k tog eth er to pr o gr es s to w ar d s fu ll b u y- out funding. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 Foreign exchange Th e r es ult s of o v er s ea s op er ation s ar e tr a ns l ated into s ter ling at av er a ge e xchan ge r ates . Net a ss et s ar e t r an sl ate d at pe r io d- en d r ate s. T h e Gr ou p is ex p os ed to fo r eign e xcha nge m ov em ent s , main ly th e US D ol l ar an d the E ur o. T he p r inc ip al exch ang e r ate s , exp r es s e d in ter m s of the v alue of Ste r li ng , ar e sho w n in t he follow ing table: Average rates Per iod-en d rates 31 Ju ly 2 0 2 2 (1 2 months) 31 Ju l y 2 0 21 (12 m o n t h s ) 31 Ju ly 2 0 2 2 31 Ju l y 2 0 21 USD 1.3 2 1. 3 6 1. 22 1. 3 9 EUR 1 .1 8 1 .1 3 1 .1 9 1.1 7 Li tigation Smi th s Gr oup f a ce s dif fer ent t yp es of l i tig atio n in di f fe r ent jur is di c tio ns . P le as e se e be lo w an up date o n the t wo si gni fi c ant litigation prov isions. For more information, refer to note 23 of the f in anc ial s t ateme nt s. John Crane, Inc. litigation Joh n Cr an e, In c. ( JCI ) a sub sid iar y of th e Gr ou p, cont inue s to ac ti v ely m oni tor th e co ndu c t and ef fec t of i t s cur rent an d ex pe c ted asb e sto s li ti gati on , inc lud ing th e ef f ec t i ve pr e s ent atio n of it s ‘s afe pr od uc t’ d efen ce, an d inten ds to r e sis t a sb es tos c a se s b as e d on thi s defe nce . A pp r oxim ately 3 0 6 ,0 00 c l aim s ag ains t J CI ha ve be en di smis s e d befo r e tr ia l ov er th e l as t 4 0 year s. JCI i s cur rent ly a defen da nt in c as e s inv olv i ng ap pr ox imatel y 2 2, 0 0 0 c l aim s . De spi te th es e l ar g e num ber s of cl aim s, s inc e the in cep tio n of asb e sto s li ti gati on a gain s t JCI i t ha s ha d 14 9 c as es a nd h as ha d to pa y aw a r ds am ount ing to ap pr ox imate ly $1 75m . At 31 Jul y 2 0 2 2, t he a ggr e gate pr o v isi on fo r JCI a sb e sto s li ti gati on , incl udi ng fo r ad v er s e ju dge ment s a nd d efen ce co st s , am ounte d to £ 2 2 9m ( F Y 2 0 21 : £ 21 2m ) ex pr e s se d at th e the n cur rent exc han ge r ate. I n dec idi ng up on t he am ount of t he pr o v is ion , JC I has r e li ed on in dep en dent e xp er t ad v ic e fr om a s pe cia li s t. Titeflex Corpor ation litigation T itef lex C or por a tio n, a su bsi dia r y of the G ro up in t he F le x- T ek di v isi on , ha s re cei v ed a n umb er of c l aim s in r ece nt ye ar s f r om ins ur a nce co mp ani es s e eki ng r ec omp en se o n a sub r og ated ba sis f or th e ef fe c t s of d ama ge s al leg ed ly c aus e d by i t s f lex ibl e gas p ipin g pr o duc t s b ein g en er gis e d by l ig htnin g s tr ike s. I t ha s al s o r ec ei ve d a num ber o f pr od uc t l iab il it y cl aim s re l atin g to this p r od uc t, s om e in th e for m of pur po r ted cl a s s ac ti ons . T itef lex C or por a tio n bel ie v es t hat i t s pr od uc t s ar e a s afe a nd ef fe c ti v e me ans o f del i v er in g gas w h en in s ta lle d in a ccor d anc e w ith t he ma nuf a c tur er ’s inst r uc t ion s an d lo ca l and n ati ona l cod e s; ho we ve r , some c l aim s ha ve b ee n set tled o n an ind i v idu al b asi s w ith ou t adm is si on of l iab il it y . T he c ontin uin g pr og re s s of cl aims and t he p at ter n of s et t lem ent , tog ethe r w it h re cent m ar ket-pl a ce ac ti v i t y, pr ov i de su f f i cie nt ev id en ce to r eco gni s e a li abil i t y in the a cco unt s. At 31 Jul y 2 0 2 2, a p r ov i sio n of £ 52m ( F Y 2 0 21 : £ 47 m) h as b ee n mad e for t he co s t s w hic h the G ro up ex p ec t s to in cur i n re sp ec t o f the s e cl ai ms . Fo r the G ro up’ s l iti gati on p ro v is ion s , be c aus e of th e sign if ic ant u ncer t aint y as so ciate d w it h the f u tur e le v el of cl aims and of t he co s t s ar is ing o ut of t he r el ate d l iti gat ion , th er e is no guar antee th at th e as sum pti ons u s ed to e s tima te the p ro v is ion w ill r e sul t in an a ccur ate pre di c tio n of the a c tu al cos t s t hat ma y be incur r ed. Statutor y r e sult s Income s t atement Th e £ 3 0 0 m di f f er enc e bet wee n he adl in e op er a ting p r of it of £41 7m an d st atu tor y op er ating p ro fi t of £1 1 7 m is no n- he adl in e item s as d efi ne d in note 3 of t he f in anc ial s t ateme nt s. T h e l ar ge s t con st it uent s r el ate to the T IGP S bu y- in w hi ch r es ulte d in an acco unti ng ch ar ge of £17 1m, amor tis at ion o f acq uir ed i nta ngib le as s et s of £ 51 m, Rus sia - re l ated im pa ir me nt and c lo sur e cos t s of £19m, pa st s er v i ce co st s f or b enef i t equ al is ati on an d impr o ve ment s o f £4 3m , as be s tos l it igat ion i n Joh n Cr a ne, In c, a nd subrogation claims in Titeflex Corp or ation. Statutor y oper ating pr of it of £1 1 7 m w as £ 20 9m l ow er t han l a s t ye ar ( F Y 2 0 21 : £3 2 6m ), ref le c tin g hi gher n on -h ea dl ine c har g es o f f se t tin g the i ncr e as e in hea dl ine o pe r at ing p ro fi t . Sta tuto r y fi nan ce co st s w er e £ (1 4 )m ( F Y 2 0 21 : £( 8 6) m), m ainl y due to a £ 2 2m fo r eign e xcha nge g ain o n an inter co mp any l oa n w ith Smi th s Med ic al ( F Y 2 0 21 : £( 5 0) m ) w hich w as set t le d on di spo s al ; the m atchin g cr e dit in d is cont inu ed op er ation s net s o ut to ze ro i n tota l Gr oup e ar n ing s. Non -h ea dl ine t a xati on i tems o f £1 4 m re l ate to amo r tis ati on of acquisition-rel ated in tangible ass ets , legacy pension scheme arr angement s, litigation prov isions and non-headline finance item s. T h e s tat uto r y ef fe c ti v e ta x r a te w as 8 7 % (F Y 2 021 : 35 % ), dr i ve n pr i ncip al ly b y th e non -h ea dl ine s et t lem ent lo s s fr o m the T I GP S b u y- in fo r w hic h the re w a s no a s so ci ated d efer r e d ta x . Pl ea se r ef er to note s 3 an d 6 of th e fi nan cial s t atem ent s fo r fur ther detail s . Dis continued o per ations – Smiths Medic al On 6 Ja nua r y 2 02 2, the G r oup co mpl eted t he s al e of Sm ith s Med ic al to I CU Me dic al , I nc . (I CU ) at an e nter pr ise v al ue of $ 2.7b n and a n equ it y val ue of $ 2. 4 bn a f ter a dju st ment s for debt , l iab ili ti es and w or k in g c api ta l . For t he f i ve m onth s th at Smi th s Me dic al r em ain ed in t he Gr o up, it del i ve r ed h ea dli ne pr of i t af te r ta x of £ 49m. Th e di f fe re nce b et wee n st at utor y an d he ad li ne pr of i t af ter t a x is £ 97 3 m, w h ich i ncl ude s £1,03 6 m gai n on di sp os al , £( 3 3)m of re gu l ator y r eme diat io n cos t s , £(14) m fr om t he im pa ir me nt of inv e st ment s , £ ( 2 2 ) m of fo re ign e xchan ge l os s es o n the inter com pa ny lo an w i th S mit hs G ro up (c ontin uin g ope r at ion s), an d +£ 6m of t a x cr ed it o n the s e no n- hea dl in e item s. P l ea se r efe r to note s 3 and 2 7 of t he f in anci al s ta teme nt s for f ur the r det ail s. T otal Group profit a f ter tax and EPS Sta tuto r y pr of it af ter ta x fo r the tot al G ro up in cr ea se d b y +26 3% to £1 ,0 3 5 m ( F Y 2 0 21 : £2 8 5m) w h ich in clu de d th e pr of it o n s ale of Smi th s Me dic al . S tat uto r y ba sic E P S w a s up +27 3 % to 267 . 1 p ( F Y 2 0 2 1: 7 1. 7 p ) . Statu tor y c ash -f low Sta tuto r y net c as h inf lo w fr o m op er at ing a c ti v i tie s for t he tot al Gr oup w a s £ 2 7 9m ( F Y 2 0 21 : £5 35 m). S e e note 2 8 to th e f ina nci al st atem ent s fo r a re co nci li atio n of he adl in e op er at ing c a sh -f lo w to statu tory cash-fl ow. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 JO HN C R A NE READ MORE www.smiths.com FY2022 FINANCIAL PERFORMANCE FY2 022 £m F Y 20 21 £m Reported grow th H1 organic grow th H2 organic grow th F Y organic grow th Revenue 9 01 865 +4.2 % + 5 .1 % +2 . 5 % +3 . 7% Or iginal Equipment 279 273 +2. 2 % +1 . 8 % +2 .7 % +2 . 3 % Afte rma rk e t 622 592 + 5 .1 % + 6 . 6% + 2.4 % +4.3% Energ y 530 510 +3. 9% +7. 5 % +0.3% +3.5% Industr ial s 3 71 355 + 4 .5% +1 . 7 % +5.8 % + 3.9 % Headline operating profit 18 8 18 7 +0.2 % +6. 3% (8. 9)% (2.8 )% Headline operating profit margin 2 0 .9 % 2 1. 6% (70 )bps + 20bps (270) bps ( 1 40)bps Statutor y operating profit 167 18 4 ( 9. 2 ) % Return on capit al employed 1 9. 4% 20.0% (60)bps R&D c a sh c os t s a s % of s a le s 2.5% 2 .1 % +4 0bps REVENUE (£m) F Y 20 21 reported Foreign exchange Organic movement FY2 022 repor ted Revenue 865 4 32 9 01 OPERATING PROFIT (£m) F Y 20 21 reported F Y 20 21 res truc tur ing costs Foreign exchange Organic movement FY2 022 repor ted Headl ine oper ating prof it 18 7 4 2 (5) 18 8 Headl ine oper ating prof it margin 2 1. 6% +5 0bps + 1 0bps (1 40)bps 2 0 .9 % John Crane’ s stro ng market position, glob al s er v i ce net wor k, an d col l ab or ativ e customer rel ationships underp in its per for mance . Or ga nic r e ve nue w a s up + 3.7% fo r th e ye ar , wit h gr o w t h acr o s s both o f Joh n Cr a ne’ s se gm ent s; En er g y up + 3. 5% a nd In dus tr ial up + 3.9% . On a r ep or ted b asi s , re v enu e w as up + 4 .2 % , w i th a £ 4 m fa vo ur able fo re ign exchange impact . Ac t i v it y lev el s r em ain ed h igh th r oug h F Y 2 0 2 2 w ith + 10.5 % or de r gr ow th an d a re co rd o r der b o ok . Or g anic r e ve nue gr ow th in H2 of +2. 5% ( H1 : +5. 1 %) w as temp er ed b y th e ce s sa tio n of s ale s into Rus si a fr o m Mar ch 2 0 2 2 , a (1 10) bp s imp ac t fo r H2 an d (6 0 )b ps fo r F Y 2 0 2 2 . E x te nde d le ad t ime s on c er tai n mater i al s al so impacted order book conver sion. Af ter ma r ket re pr e se nt s 69% of J ohn Cr an e’ s re v enu e (F Y 2 0 21 : 6 8 % ). Af ter ma r ket re v enu e w as up + 4. 3 % on an or gan ic b asi s . Joh n Cr an e’ s l ar ge i ns t all ed ba se a nd le ad ing s er v ic e of f er in g po sit io ns it w ell to m ee t the s tr on g de man d for af ter mar ket r ep air s , ma intena nce a nd upg r ad e s. O r gan ic r ev en ue f ro m Or i gin al Equi pme nt (OE ) wa s up +2. 3 %. T h e r ate of ne w or de r s co ntinu e s to impr o ve , w ith st ro ng O E or de r gr ow th in th e s eco nd h alf. Cus tom er de man d ac ro s s bot h OE an d af ter mar ket is s tr on g, d r i ve n by t he increasing demand for energy, a long with dec ar bonis ation and the transition to cle an en er g y s our ce s . Cus tom er s a r e re qui r ing s y s tem s to be m or e r el iab le and energ y eff icient, interconnected and digi t all y ena ble d, a nd us e di v er s e lo w - ca r bo n ene r g y so ur ce s. T h e se t re nds ben ef it J ohn Cr ane as t he y re qu ir e sign if ic ant i nv es tm ent in n ew i nfr ast r uc t ur e and r etr of i t s to ex is tin g inf r a st r uc t ur e, as w ell a s ne w te chn olo g y to r edu ce cos t an d acc ele r ate th e dep lo y ment o f cleaner energ y. Joh n Cr an e is w el l po sit io ned to s upp or t customer s through the energ y tr ansition. Joh n Cr an e is w or k in g clo s ely w i th cus tom er s a nd s t akeho ld er s to a ccel er a te innovation acros s sever al dec arb onisation the me s to re du ce met han e an d othe r GHG emissions , increase as set ef ficienc y, and e nab le r a pid s c al in g of lo w- c ar bon hy dr og en, a lon g w it h c ar b on c apt ur e, uti li s atio n and s to r ag e. A s an exa mpl e, the J ohn Cr ane S en se ® digital pl at for m mon itor s the con di tio n and ef fec ti v en es s o f equ ipm ent an d hel ps c us tom er s o ptim is e maintenance sche dules an d minimise do w ntim e. Jo hn Cr ane’ s ups tr e am pump ing s e al s , u se d in w ater i ntens i ve indu s tr ie s , s av e an a ve r a ge of on e mil l ion gal lon s of w ater p er s e al pe r ye ar . Joh n Cr an e s ec ur ed mu ltip le n ew contr ac t s in su s tai nab il it y and hy dr o gen incl udi ng f r om Nat ur eWor k s , on e of th e l ar ge s t pr o duce r s of bi op oly m er s a nd th e NEOM Green Hydr ogen Pr ojec t, fur ther cem entin g Jo hn Cr a ne’s leade r shi p in these major env ironmental themes . Hea dl ine o pe r ati ng p ro fi t of £188 m dec r ea se d by ( 2. 8) % on a n or ga nic ba sis , a s pr ic in g of f s et cos t inf l at ion but w as imp ac ted b y in cr ea se d co s t s asso ciated wi th supply chain disruption and in cr ea s ed R&D in ve s tm ent for f u tur e grow th. T o fur ther strength en John Cr an e’ s po sit ion f or th es e si gni f ic ant gr ow th op po r tunit ie s and to b et ter s er v e cus tom er s a n umb er of t ar ge ted ac t ion s hav e b een i dent if ie d. T h es e ac t ion s ar e focused on s implif y ing the end-to-end v alu e chai n re s ulti ng in a n ev en m or e agi le and eff icient business . Hea dl ine o pe r ati ng p ro fi t w as u p + 0. 2 % on a re po r ted ba sis , w i th + £ 2m o f fa vo ur able for ei gn exch ang e an d £4 m of r e s tr uc t ur in g cos t s ch ar ge d in F Y 2 0 21. The d if fere nce bet wee n s tat uto r y and h ea dli ne op er ating pr of it in clu de s th e net c os t in r el ati on to the p ro v is ion f or Jo hn Cr ane, In c. asbes tos litigation and Russia- rel ated imp air m ent an d clo sur e c os t s . DIVIS IONAL REVI EW 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 SM ITH S D E TEC TIO N READ MORE www.smiths.com ROCE RO CE w a s 1 9 .4%, d ow n ( 6 0) bp s , due to inv es t ment in w o r kin g c api t al through F Y 20 2 2. R&D Ca sh R&D ex pe ndi tu re i ncr e as ed to 2 . 5% of s ale s ( F Y 2 0 21 : 2. 1 %). Jo hn Cr ane’ s inno v at ion i s pr im ar il y foc us e d on enhancing efficienc y, per formance and sustainabilit y by using mat erial s science ad v an cem ent s to r ed uce f r ic t ion i n high - dut y wet s ea l s or i ncr e as e ma xi mum rot at ing sp e ed r eq uir e d in ne x t ge ner ation hy dr og en co mpr e s so r s . Joh n Cr a ne is al so inv e st ing i n fa s ter mo de ll in g to re duc e de ve lop ment t ime a nd in cr ea s e seal per for mance. Joh n Cr an e s eal in g so lu tio ns ha v e a sign if ic ant r o le in h el pin g our c us tome r s in their sust ainabil it y jo ur ney s thro ugh reducing leaks . Ex amples of such product s incl ud e a se al fo r dem and ing h yd ro c ar b on pip el ine s w it h a uni que , pate nted s eal tech nol og y t hat si gni f ic antl y ex te nds t he mea n tim e bet we en r ep air , re duc ing mainte nan ce, im pr ov i ng ef fic ien c y an d pr otec t ing t he en v ir onm ent f r om p otentia ll y har mf ul l ea ks . We al so l aun ch ed Jo hn Cr an e S en se ® T urb o, w hi ch inc lu de s a fi r s t-to-m ar ket s en so r- en ab led d r y gas seal. This ground-breaking t echnology intr od uce s th e Joh n Cr a ne S en s e ® pl atfor m , prov iding r eal-time monitor ing and m ach ine l ear ning dia gn os tic s o n equ ipm ent, h el pin g cu s tome r s to pr e vent lea k s and r e duce d o w ntime . Smiths Detection gr ew i n all s e gme nt s except f or Av i atio n or i gina l eq uipm ent (O E ) w hich , as a ntic ip ated , w as im pa c ted b y it s cha lle ngi ng en d mar ket. Or ga nic r e ve nue dec l ine d (9 .4 ) % or ( 9 . 1)% on a r e por ted ba sis , in clu din g £ 2m of f a vo ur a ble f or eig n excha ng e. T he c es s at ion of s a le s to Rus s ia re su lted i n a he ad w in d of ( 7 0) bp s in H2 an d ( 4 0 )b ps fo r the f ul l ye ar . OE r epr e s ented 4 6% of F Y 2 0 2 2 r e ve nue s . Or ga nic OE r e ve nue s w er e do w n ( 2 2 . 6) % . Go od gr o w th in OE s al es f or O th er S e cur i t y Sy s tems ( OS S) we re m or e th an of fse t by lo we r Av iat ion O E s ale s as c us tom er s conti nue to s t abi li se o pe r ati on s po st t he COV ID pandemic . 5 4% of Smi th s Dete c ti on’ s sa le s wer e d er i v ed f r om th e af term ar ket . Th e un der l y ing t re nd in a f ter mar ket rev enues acros s both Aviation and Other Se cu r it y Sy s tems c ontin ue d to imp ro v e, acce ler ating in H 2 to del i v er +5 .9% gr ow th in F Y 2 0 2 2, r ef le c tin g th e ben ef it of a l a r ge ins t all ed b a se an d a r etur n to mor e t y p ic al oper ating patter ns. Organic rev enue from Aviation decreas ed (1 4 .7) % r ef le c ting t he s lo wd ow n i n the Av iat ion O E mar ket . A lth ou gh w e exp e c t conti nue d ma r ket cha ll eng es i n the n ea r- ter m, w e ar e in cr ea sin gly w el l po si tio ne d for reco ver y when it comes. T ender activ it y in Av iat ion h as s t ar ted to inc re as e, a nd S mit hs Dete c tio n cont inu es to s ec ur e ne w co ntr a c t s w ith o r der i ntake gr o w in g. Re cent w in s incl ud e cont r ac t s f or ho ld b ag ga ge in t he US; ch eck p oint s ec ur i t y i n It aly, Jap an an d Ireland; a nd for bo th hold baggage and che ck po int in Me xi co an d S ou th Ko re a . Or ga nic r e ven ue f r om O S S gr e w by +7 . 1 %, dr i ve n by d em and fo r Po r ts & B or de r s so lut ion s . E x pa ndin g th e OS S seg ment i s a key ten et of Sm ith s Dete c ti on’ s st r ate g y to exp an d into at t r ac t i ve m ar ket ad jac enc ie s. Th is is d em on st r ate d by ke y OS S contr a c t w ins in F Y 2 02 2 in clu ding h igh - ene r g y X-r a y s y ste ms fo r cus to mer s in Jap an an d the US; thi s ye ar ’s Commo nw ea lth G am es wher e Smiths Detection wer e the off icial secur it y pro vider; r adiation solutions to tr a nsp or tat io n cus tom er s i n the U S; and defen ce e quip ment d e vel opm ent p ro je c t s for the U S De pa r tment of D efen s e. Gi ve n the n e w cont r ac t w i ns ac r os s Av ia tio n and O S S a nd th e st r ong o r der i nta ke thr ou gh F Y 2 0 2 2 w e ex pe c t a r etur n to gr ow th in F Y 2 0 2 3. FY2022 FINANCIAL PERFORMANCE FY2 022 £m F Y 20 21 £m Reported grow th H1 organic grow th H2 organic grow th F Y organic grow th Revenue 655 721 ( 9.1 ) % ( 7. 2 ) % ( 11 . 3 ) % ( 9. 4 ) % Or iginal Equipment 300 390 ( 2 3 .1 ) % ( 1 7. 5 ) % ( 2 6 .7 ) % (22.6)% Afte rma rk e t 355 3 31 + 7. 3 % + 4.0 % +7. 7 % + 5 .9 % Aviation 4 67 546 (14 . 5 ) % (12 . 5 ) % (1 6.5)% (14 .7 ) % Other Se curi t y Systems 18 8 17 5 + 7. 4 % + 8 .1 % + 6.2% + 7.1 % Headline operating profit 73 99 (26.8)% (1 3.0)% (4 2.0)% ( 3 0.7 )% Headline operating profit margin 11 .1 % 13 .7 % ( 260 )bps (8 0)bps (570 )bps (340)bps Statutor y operating profit 36 77 (5 3.2 )% Return on capit al employed 7.1 % 9. 7 % (26 0)bps R&D c a sh c os t s a s % of s a le s 9. 3 % 7. 4 % + 1 90bps REVENUE (£m) F Y 20 21 reported Foreign exchange Organic movement FY2 022 repor ted Revenue 721 2 (6 8) 655 OPERATING PROFIT (£m) F Y 20 21 reported F Y 20 21 res truc tur ing cost Foreign exchange Organic movement FY2 022 repor ted Headl ine oper ating prof it 99 6 (1) ( 31) 73 Headl ine oper ating prof it margin 13 .7 % +90bps (1 0)bps (3 4 0)bps 1 1 .1 % 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 FLE X - TEK READ MORE www.smiths.com Smiths Detection’ s headline oper ating pr of it w a s do w n ( 3 0.7 ) % on an o r gani c ba sis , im pa c ted b y lo w er vo lum es a nd supply chai n challenges, par ticularly the s c ar ci t y of e le c tr oni c com po nent s and in cr ea s ed l ogi s tic s c os t s . Hea dl ine o pe r ati ng p ro fi t of £ 7 3m w as do w n ( 26 .8 ) % on a r ep or ted b as is , including £( 1 )m adver s e foreign ex change tr a nsl a tio n and £ 6m of r e s tr u c tur i ng cha rg e s in F Y 2 0 21. Hea dl ine o pe r ati ng p ro fi t mar g in w as 1 1 . 1%, dow n ( 3 4 0) bp s on an o r gani c ba sis a nd ( 2 6 0) bp s on a r ep or ted b as is . A numb er of r e s tr u c tur i ng ini ti ati ve s ar e und er w ay t hat w il l en abl e Smi th s Dete c tio n to be m or e r es il ient in re sp on din g to cha nge s in i t s en d mar kets and deli ver impro ved mar gins. Th e di f fe re nce b et wee n st at utor y an d hea dl ine o pe r at ing p ro fi t pr i mar i ly r efl ec t s amo r tis ati on of ac quir e d int ang ibl es a nd a cha rg e for w r ite- do w n s as s oci ated w i th Smiths Detection’ s exit fr om Russia. ROCE RO CE de cr e as ed b y ( 2 6 0) bp s to 7 . 1 % , due to l ow er p ro fi ta bil i t y in F Y 2 0 2 2 . R&D Ca sh R&D ex pe ndi tu re w a s 9 .3 % of s al es , + 1 90 bp s hig her t han l a s t ye ar . Thi s inc lud es an inc r ea se in c us tom er f und ed p r oje c t s to £1 4 m (F Y 2 0 21 : £ 9m). Smi th s Dete c tio n cont inu ed to in ve s t in the d ev el opm ent of n ex t g en er at ion dete c tio n de v ice s for t he d efenc e mar ket, ne w alg or i thm s to imp r ov e the d etec t ion of dan ger o us go o ds , and d igi t al so lu tio ns to strengthen our af termar ket proposition to make pe op le an d inf r a st r uc t ur e s afer . Cer ta in pr o gr am me s ar e co - fu nde d b y st r ate gic c us tom er s s ee kin g nex t-generation solutions to securit y cha lle ng es . D ur in g F Y 2 0 2 2, w e l au nch ed a ne w high - vo lum e air c ar go s cr e eni ng tech nol og y, as w el l as an e x ten sio n of our automat ed detection algorithm, iCMORE, to enable cur renc y detection, suppor ting the f ig ht aga ins t gl ob al mo ne y l aun de r ing , we ap ons d etec t ion , l ith ium b at ter i e s and dangerous goods. F l e x- Te k ’s agile oper ating model and close customer rel ationships contributed to a re co rd y e ar for t he b usin e ss . Or ga nic r e ven ue in cr ea se d + 1 6. 1 %, w ith r e cor d gr o w th in th e se con d ha lf of +20.9% . Rev en ue gr e w +27 . 4% on a re po r ted ba sis , in clu din g + £1 4 m fa v our able foreign exchange tr ansl ation and +£42m from acquisitions. Or ga nic r e ven ue f r om F le x- T ek ’ s Indu s tr ia l se gme nt w as up + 16.3 % . Str on g gr o w t h w as dr i v en b y de man d for i t s co ns tr u c tio n- re l ated p ro du c t s in th e US , pa r ticul arl y for HVAC applications, wher e Flex- T ek continued to outper form the under lying mar ket . O th er dr i v er s i ncl ud ed go o d gr ow th of it s in du st r ial h eat a ppl ic at ion s an d ac ti v e price management. Demand remained st ro ng t hr ou gho ut th e se co nd h alf, an d the b usi ne s s re mai ns v ig il ant of ke y ma r ket in di c ato r s . Dur i ng th e se co nd h alf, F le x- T ek c onti nue d to exec ute i t s gr ow th s tr ateg y, laun chin g the P y thon l ine s et s p r odu c t, a m ulti -l a ye r pip e us ed in v ari ou s H VAC ap pl ic ati ons , re pl ac in g the t r ad iti on al an d mor e co s tly cop per p ip es . I t al s o ex p and ed i t s met al duc ti ng of fer in g w hich w as intr od uce d to the p or t fol io a s p ar t of the Ro y al Met al s acq uisi ti on, w i th t he op eni ng of a d edi c ated gr eenf i eld f a cil it y in T exas . Organic re venue fr om Flex- T ek ’ s Aerosp ace se gme nt w as up + 14.6% as t he ae r osp ac e mar ket b en efi t s f ro m an in cr ea sin g numb er of aircr af t buil ds. Headline oper ating profit increas ed + 21. 7% o n an or g ani c ba sis , r ef le c tin g incr e as ed v ol ume s an d s tr on g cos t man age ment . H ea dl ine op er ating p ro fi t w as up + 3 7 . 1% at £ 133 m on a r ep or ted ba sis , in clu din g + £ 3m f av ou r ab le fo r eign exchange transl ation and +£ 1 1m fr om acquisitions. Headline oper ating profit mar gi n w as up + 150b ps to 2 0 .6%, o n a repor ted basis. The dif fer ence bet ween st atu tor y an d he adl in e op er a tin g pr of it i s due to am or tis at ion o f acq uir ed i nta ngib le ass ets and prov ision for Titeflex Corpor ation subr ogation cl aims . FY2022 FINANCIAL PERFORMANCE FY2 022 £m F Y 20 21 £m Reported grow th H1 organic grow th H2 organic grow th F Y organic grow th Revenue 6 47 508 +2 7. 4 % +10 . 0 % + 2 0 .9 % +16 .1 % Industr ial s 5 31 409 +2 9. 8 % + 8.5% +2 2 . 6 % +1 6 . 3 % Aero space 116 99 +17. 5 % + 16 .1 % +1 3 . 4% +1 4 . 6 % Headline operating profit 13 3 97 + 3 7.1% +18 . 3 % +24 . 3 % + 21.7 % Headline operating profit margin 2 0 . 6% 1 9.1 % + 1 50bps + 1 50bps + 6 0bps +90 bp s Statutor y operating profit 10 6 83 + 2 7. 7 % Return on capit al employed 2 5 . 6% 2 1. 6 % +40 0 bps R&D c a sh c os t s a s % of s a le s 0 . 4% 0.5% (1 0)bps REVENUE (£m) F Y 20 21 reported Foreign exchange Acquisitions Organic movement FY2 022 repor ted Revenue 508 14 42 83 6 47 OPERATING PROFIT (£m) F Y 20 21 reported Foreign exchange Acquisiti ons Organic movement FY2 022 repor ted Headl ine oper ating prof it 97 3 11 22 13 3 Headl ine oper ating prof it margin 1 9 .1 % + 1 0bps +5 0bps + 90 bps 20 . 6% 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 19 SMI T HS IN T E R C ONNEC T READ MORE www.smiths.com In Feb r ua r y 2 02 1 , the G r oup a cqui re d Ro y al Met al , a le adi ng m anu fa c tur er o f re si de ntial and l ig ht comm er ci al H VAC p ro du c t s for $1 07m. D ur in g H1 20 2 2 th e acq uis iti on contr ibute d £4 2 m of r ev enu e and £1 1 m of ope r at ing p ro fi t . Sin ce Fe br u ar y 2 0 2 2, Ro y al Met al r es ult s h av e be en a cco unted fo r as organic gro w th. Roy al M eta l com ple ment s t he o rg ani c gr ow th th at F lex- T ek is alr e ad y dr iv in g thr ou gh th e de ve lop ment o f inn ov at i ve ai r distribution produc t s that suppor t improv ed ene rg y e f f ic ienc y and in do or air q ual i t y. Th e ac quis it ion p r ov id e s the b en efi t s of complementar y HVAC por t folios , sy ner gies in distribu tion, and positi ve pricing , dem on st r ati ng th e v alu e th at we c an c r eate thr ou gh ou r high ly di sc ipl in ed an d se le c ti ve M&A proc ess. ROCE RO CE in cr ea se d + 4 00 b ps to 2 5. 6% ref le c tin g th e re co r d pr of it gr o w th in F Y 2 0 2 2 . R&D Ca sh R&D ex pe ndi tu re r em ain ed b ro a dly con sis tent at 0 . 4% of sa le s (F Y 2 0 21: 0.5% ). R&D is fo cus e d on de v elo pin g ne w pr od uc t s for th e con s tr u c tio n mar ket, and an exp an de d pr o duc t of fer in g in ae ro sp ace . Smiths Inte rconnect ’ s cut ting-edge so lut ion s an d st r ong p os iti on s in it s m ar ket sub se gme nt s und er p inn ed a v er y s tr on g F Y 2 0 2 2 per for mance w i th o rg ani c re v enu e up + 1 3.9% . Re ven ue gr o w th in H2 2 0 2 2 acce ler ated to + 1 4 .8 % r ef le c tin g on goin g mom entu m fr o m a gr ow in g or d er bo ok a nd new produc t launches . Revenue increased by + 1 6. 3 % on a r ep or ted b as is , w it h + £6 m favour able foreign exchange transl ation. Th is s tr on g pe r for ma nce r ef le c t s gr ow th acros s the semiconductor test busine ss w ith c ontin ue d hig h dem and , co uple d w it h ne w pr od uc t l au nch es a nd n ew c us tom er w ins . Sm ith s Inter co nne c t’s spa ce an d def ence p roducts als o delivered g ood gr ow th, i n pa r ticul a r com ing f r om th e l aunc h of 2 8 G f ibr e - opt ic tr ans cei v er s fo r satelli te communications and from sp ace- qual i fi ed c onn ec tor s. Du r ing t he s ec ond hal f, Smi ths I nterc onn ec t p r ogr e s s ed it s gr o w th into adj acen cie s w i th th e succ es s f ul int ro du c tio n of it s f ir st me dic al cable as sembly pr oduc t. Smi th s Inter con ne c t enter s F Y 2 0 2 3 w ith s igni f ic ant or d er s f or it s spac e- qualified pr oduct s for commercial satellite constellations , next gener ation chip te s tin g so lu tio ns an d for m ed ic al cable as sembl ies . Hea dl ine o pe r ati ng p ro fi t inc r ea se d + 3 9 . 7 % on an or g ani c ba sis , w i th gr o w th dr i ve n by stro ng revenue per formance, positi ve pricing actions and good supply cha in man age ment . H ea dl ine op er ating p ro fi t w as up + 8 8. 2 % to £6 5 m on a r ep or ted b as is , incl udi ng £10m of r es tr uct ur in g co st s i n F Y 2 0 21 . He adl in e op er at ing p r of it ma r gin w as 18.0 % , up + 68 0bp s on a r ep or ted b asi s and + 3 30 bp s on an o r gan ic b asi s. Th e di f fe re nce b et wee n st at utor y an d hea dl ine o pe r at ing p ro fi t r efl ec t s t he amor tis ation of acqu ired intangibles. ROCE RO CE in cr ea se d + 7 5 0 bps to 16. 3% , dr ive n by hi ghe r pr of it ab il it y . R&D Ca sh R&D ex pe ndi tu re r ep r es ente d 5. 6% of s ale s ( F Y 2 0 21 : 6. 3% ), w it h the a bs olu te spe nd y ear o n ye ar r em aini ng th e s ame . R&D is fo cus e d on br ingin g to mar ket n ew pr od uc t s th at imp ro v e con ne c ti v it y and pr od uc t inte gr it y in de man din g ope r at ing envir onments. Pr oduct l aunches included the n ew s pa ce qu al if ie d con ne c tor s and optical tr anscei ver s, w hich enable high- speed, relia ble da ta processing for co mmu nic ati on s atel l ite s an d GP S navigation sy stems; medical connector s us ed in c r it ic al c ar e; an d upg r a de s of s emi - test prod ucts. FY2022 FINANCIAL PERFORMANCE FY2 022 £m F Y 20 21 £m Reported grow th H1 organic grow th H2 organic grow th F Y organic grow th Revenue 363 3 12 +16 . 3 % +12 .9 % +1 4 . 8 % +1 3 . 9 % Headline operating profit 65 35 + 88.2 % + 5 8 .7 % +2 8 . 0 % +39 . 7% Headline operating profit margin 18 . 0 % 11. 2 % + 6 80 bps +490 bps + 1 90 bps +33 0bps Statutor y operating profit 64 34 +8 8.2% Return on capit al employed 16 . 3 % 8.8% + 750bps R&D c a sh c os t s a s % of s a le s 5. 6% 6. 3% ( 70) bps REVENUE (£m) F Y 20 21 reported Foreign exchange Organic movement FY2 022 repor ted Revenue 312 6 45 363 OPERATING PROFIT (£m) F Y 20 21 reported F Y 20 21 res truc tur ing costs Foreign exchange Organic movement FY2 022 repor ted Headl ine oper ating prof it 35 10 1 19 65 Headl ine oper ating prof it margin 11. 2 % + 3 30 bps + 1 0bps +33 0bps 18. 0 % 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 20 Financ ial tar get s Our f ina ncia l ta rg et s we re s et out a t our C ap it al Ma r kets D ay in No vem ber 2 0 21 . Our ro bus t f inan cia l fr a mew or k under pins the Smiths Value Engine powered by recur rin g revenue grow th, high mar gins, low as set intensit y and exc eptional cash gener ation. Al l me as ur es e xclu de S mit hs Me di ca l . A lter n ati v e Per for m anc e Me asu re s ( A P Ms ) an d key p er for ma nce i ndi ca tor s ar e d efi ne d in note 2 9 to the f in anc ial s t ateme nt s. MEDIUM- TERM TA R G E T +4-6% MEDIUM- TERM TA R G E T 18-20% MEDIUM- TERM TA R G E T +7-10% READ MORE CEO review of the year READ MORE CEO review of the year READ MORE CEO review of the year P 11 P 11 P 11 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 21 K E Y P ERFORM A NCE INDI C A TO R S Key Link to strategy Grow th E xecution People ORGA NIC RE V ENUE GRO W TH OPER A TING P ROF I T M A RGIN E A R NINGS P ER SH A R E GRO W TH Gr o w in g f as te r is t he p r im ar y dr i v e r of un lo ck in g v al ue cr e ati on f or th e G ro up . Str o ng er e xe cu ti on i s th e se c on d key p r io r i t y f or t he G r ou p an d w il l dr i v e hi gh er m ar gi ns . Str o ng m ar g in s w il l co nv er t re v en ue g r ow th int o ear nings gro w th. STR A TEGY STR A TEGY STR A TEGY F Y2022 PROGRESS In F Y 2 0 2 2 w e de l i ve r ed o r ga nic r e v en ue gr o w th in a ll f our qua r ter s of t he y e ar an d f ul l y ea r gr o w t h of + 3 . 8 % . Gr o w th acc el er ated in H 2 v s H1 to + 4 . 1 % . F Y2022 PROGRESS In F Y 2 0 2 2 m ar gi n w as r e s il ie nt at 16. 3 %, a mi ds t a c ha ll en gin g ma cr o en v ir o nm ent , w hi le c ont in uin g to in v es t i n fu t ur e grow th. F Y2022 PROGRESS In F Y 2 0 2 2 w e de l i ve r ed s tr o ng E P S gro w th of 17 . 8 % , dr iv en by o pe r a tin g pr o fi t gr o w th, a r e du c ti on i n th e ef f ec t i v e he ad li ne t a x r a te, an d th e b en ef it f r om t he o ng oi ng s ha r e buy back programme. PERFORMA NCE PERFORMA NCE PERFORMA NCE LINKED TO REMUNER A TION LINKED TO REMUNER A TION LINKED TO REMUNER A TION (2.2) % (1.0)% 3.0 % 3.4% 3.8% FY2021 FY2020 FY2019 FY2018 FY2022 15.5% 12.8% 17.1% 16.6% 16.3% FY2021 FY2020 FY2019 FY2018 FY2022 19.3% (2 7 . 4)% 11.0% 11.7% 17.8% FY2021 FY2020 FY2019 FY2018 FY2022 Oper ational tar get s Our op er a tion al t ar get s a re al s o al igne d to our t hre e Smit hs Val ue Eng ine p ri or iti es . Al ter na ti ve P er for m ance M ea sur e s ( A P Ms ) and ke y pe r for man ce in dic ato r s ar e def in ed i n note 2 9 to th e f inan cia l s tate ment s . MEDIUM- TERM TA R G E T 15-17% MEDIUM- TERM TA R G E T 100%+ MEDIUM- TERM TA R G E T 30%+ MEDIUM- TERM TA R G E T Net Zero Scope 1 & 2 emis sions by 20 40 READ MORE CEO review of the year READ MORE CEO review of the year READ MORE CEO review of the year READ MORE Sustainability at Smiths P 11 P 11 P 11 P 24 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 22 RE T UR N ON CA P ITAL EMP LOY ED (R OCE ) OPER ATING CA SH CON V ERSION GROSS VIT A LIT Y GREENHOUSE GA S REDUCTION Mon it or i ng o ur r et ur n o n c ap it al a c t s a s a di sc ip li ne o n bo th or ga ni c an d in or g ani c in ve s t me nt to dr i v e m ax im um v a lu e fr o m ou r gr o w t h . Mai nt ain in g ou r st r on g tr ack r e co r d of c as h co nv er sio n is a key c om po ne nt of o ur r ob us t f i nan ci al f r a me w or k. Gr os s V it al it y me as ur e s th e r ev en ue c on tr i bu ti on of pr o duc ts l a unc he d in t he l ast f i v e y ea r s . Im pr o ve d ne w pr o duc t dev el op me nt an d co mm er c ial i s ati on i s a ke y component of our grow th strategy. Me eti ng o ur c om mi tm ent to d el i v er N et Ze ro S c op e 1 & 2 GH G emi s si on s b y 2 0 4 0 is a fu nd am ent a l pa r t of our sustainabilit y str ategy. Pe r for mance data is normal ised to revenu e. STR A TEGY STR A TEGY STR A TEGY STR A TEGY F Y2022 PROGRESS In F Y 2 0 2 2 R O CE in cr e as e d + 3 0 bp s to 14. 2 % a s hi gh pr of i ta bi l it y mor e t han o f f s et in v e st me nt in w o r ki ng c a pi t al . F Y2022 PROGRESS In F Y 20 2 2 we deliver ed solid oper ating cash conver sion of 8 0 % w h ile n a v ig ati ng s up ply c ha in d isr upti on a nd t he as s oc ia ted i nv e s tm ent i n wo r k in g c ap it al . F Y2022 PROGRESS In F Y 2 0 2 2 r e ve nu e fr o m ne w p r od uc t s i nc re a se d to 31% of total revenue, demonstr ating the success of our conti nued inv e s tm ent i n R&D an d co mm er c ial i s ati on o f ne w p ro du c t s . F Y2022 PROGRESS In F Y 2 0 2 2 w e ac hi ev e d a r ed uc t io n in S co pe 1 & 2 e mi s si on s of ( 7 .2 ) % n or mal is e d to r ev en ue . A b so lu te S c op e 1 & 2 emi s si on s fe ll b y (1. 1) %. PERFORMA NCE PERFORMA NCE PERFORMA NCE PERFORMA NCE LINKED TO REMUNER A TION LINKED TO REMUNER A TION LINKED TO REMUNER A TION 13.9% 12.8% 15.7% 15.3% 14.2% FY2021 FY2020 FY2019 FY2018 FY2022 129% 112% 74% 104% 80% FY2021 FY2020 FY2019 FY2018 FY2022 31% 25% FY2022 FY2021 ( 7 .2)% FY2022 Gr o s s V i t al i t y i s a n ew K PI in F Y 2 0 2 2 F Y2 0 2 1 da t a w as r e s t at ed i n F Y 2 0 2 2 us i ng t h e ba s is of p r ep a r at i on d e s cr i b ed o n p a ge 2 9. Hi s to r ic S c o pe 1 & 2 da ta i s t he r ef or e n o t co mp a r a bl e . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 23 71 73 72 71 72 FY2021 FY2020 FY2019 FY2018 FY2022 24% 23% FY2022 FY2021 MEDIUM- TERM TA R G E T A ze ro harm wor k pl ace MEDIUM- TERM TA R G E T Uppe r quar tile MEDIUM-TERM TARGET 30 % by the end of F Y 2 024 READ MORE Sustainability at Smiths READ MORE Sustainability at Smiths READ MORE Sustainability at Smiths P 24 P 24 P 24 RECO RDA BL E INCID ENT R A TE MY S A Y SURV E Y ENGAGEMENT SC ORE DIVE RS ITY Our c om mi tm ent t o our p e op le s t ar t s w it h kee pi ng u s al l s afe a nd h ea lt hy. T hi s is o ur e s s ent ial f ou nd ati on a nd num be r on e fo cu s . Ou r key s a fet y met r ic i s Re cor d ab le Inc id ent R ate ( R IR ) p er 10 0 c ol le a gu es . En ga gi ng o ur p eo pl e is ke y to t he s ucc e s s of ou r s tr ateg y. We ha ve b e en t r a ck in g em pl oy e e en ga ge me nt on a r ang e of imp or t ant c ul tur al me as ur e s si nc e 2 017 . We ar e fo c us ed o n pr o a c ti v el y in cr e as ing t he n um be r of wo me n in l ea de r sh ip r o le s at S mi th s , w it h ou r me as ur e be in g pe rc ent a ge o f se ni or l ea de r s hip p os i tio n s ta ken b y females . STR A TEGY STR A TEGY STR A TEGY F Y2022 PROGRESS Gr ou p RI R in F Y 2 0 2 2 w a s 0. 5 4, 15% ab o ve F Y 2 0 2 1, but con tin ue d to t r a ck b el ow t he i nd us tr y a ve r a ge a nd i n th e top quar tile of industr y per for mance. F Y2022 PROGRESS Our o v er all g lo ba l en ga ge me nt s co r e re ma in ed s t ab le in F Y 2 0 2 2 an d w e co nti nu ed to h a ve a v er y hi gh s ur v ey re s po ns e r ate of 8 2 % . F Y2022 PROGRESS We ma de p r og r es s d ur i ng F Y 2 0 2 2 t o re a ch 2 4% se ni or leader ship positions taken by females. PERFORMA NCE PERFORMA NCE PERFORMA NCE 0.47 0.35 0.50 0.44 0.54 FY2021 FY2020 FY2019 FY2018 FY2022 Pe r ce nt a ge o f s en io r l ea d er shi p po s it i on s t ak en b y fe ma le s i s a n e w K P I in F Y 2 0 2 2 . Environment, S ocial and Governance (E SG) per for mance is at th e ver y centr e of ou r Pur p os e, an d we ar e commi t ted to sustainabil it y leader ship. We bel ie v e in doi ng b usin e ss r e sp on sib ly, the r ig ht w ay e ve r y day, and t r an sl at ing o ur P ur p os e and V alue s into p r a c tic al a c tio n tha t mob il is es S mi ths s tr e ng ths to i mpr o ve o ur w or l d. We ar e pi on eer ing pro g ress t ow ards a sustainable future through our products , se r vi ce s, o pe r at ion s , and o ur pe op le – pu r sui ng e xcell enc e in e v e r y t h i n g w e do. We a re c omm it t ing to am bi tio us t ar get s a nd t ak ing tan gib le ac t ion to d el i ve r v alu e for a ll ou r st akeh ol de r s. Se e ou r Su st ain abi li t y at Smit hs Rep or t for f ur the r info r mat ion on our E SG f r am ew or k, pr i or i tie s an d p er for ma nce . Our ES G fr amework We dis tin gui sh ten f oun dati ona l E S G ele ment s t hat ar e e s s entia l to our s ucce s s . READ MORE Sustainability at Smiths Report S U ST AI NAB I LI T Y A T SM I THS SUSTAINABILITY AT SMITHS 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 24 Deliver ing Net Zero GHG Developing tal ent Respec ting natur al resourc es Improv ing safet y , health and w ell-being Contr ibu ting to our communities Pr omoting di ver sit y, equit y and inclusion ENV IRONMENT SOCI A L GOV ERN A NCE Managing r isk and maintaining str ong an d ef fec ti ve control s Behav ing ethic ally and legally Ef fec ti ve long-ter m decision making and tr anspar enc y Commercial ising high-value green t echnolog ies IMPROVING SAFETY, HEALTH AND WELL-BEING Our co mmit ment to o ur pe op le s tar t s w ith keep ing u s all s af e and h ealt hy. This is o ur e ss enti al f ound atio n and nu mbe r one f oc us . We str i ve to alw ay s im pro ve and b e pr oac tive, in clu din g de sig ning f or s af et y; str eng the ning o ur s afe t y cu lture e ver y day; a nd wor k ing to i mpr ove ou r coll ea gue s’ li ves i n the r ound . We ar e tha nk fu l for t hos e w h o ca me b efor e us a nd hel pe d e s ta bl ish r ob us t s afet y cult ur e s at our s ite s th at we w or k to c onti nuo usl y re ne w, st re ng the n and c onn ec t . We und er s t and t hat s tr on g s afet y cult ur e is f und am ent all y abo ut ke epin g s afet y per sona l and m us t r efl ec t , an d resp ect , our divers e and global organisation. READ MORE Safety P 31 DEVELOPING TALENT Our organis ational commitment is to ens ure th at al l our col le agu es h ave op po r tu niti es to develop their skill s and reach their full potential . Smi th s col le agu e s hav e ac ce ss to t r ai ning a nd r e so ur ce s to und er take th eir r ol e s s afely, ef fe c ti v ely, and in l in e w it h our p ol ici es . C ol le agu e s al s o ha ve a cce s s to a de ve lop ing r an ge of p er s on al an d sk ill s gro w th re s our ce s a s the y pr og re s s in th eir c ar e er s i ncl udi ng sp ec ial is t te chni c al and f un c tio nal a nd ex ter nal ly ac cr edi ted p r ogr amme s . We ar e cur r ent ly h onin g our l ea der ship pr o gr a mme s to bet te r sup por t bu sin es s n ee ds a nd s o that o ur le ad er s ca n mo re ef fec ti v ely s upp or t th eir tea ms . READ MORE Sustainability at Smiths report COMMERCIALISING HIGH-VALUE GREEN TECHNOLOGIES Among our biggest oppor tunities to de liver st akeho lde r v alue i s r unn ing ou r bus ine s se s we ll an d dri ving grow th through deliver y of top commercial progr ammes that enable sust ainabilit y per fo rmance for and through our customers. We supp or t cu sto me r s and i ndu s tr ie s th at ar e le ad ing t he w ay to a su s ta inab le f ut ur e by d ev el opi ng an d imp lem enti ng gr een te ch nol og y s ol uti on s ta r geti ng cl im ate r is k, e ner g y tr ansition and nex t gener ation, eff icient infra str uc ture. Our un iqu e eng ine er i ng c ap abi li tie s an d tec hn olo gie s pos it ion u s st r ong ly to sup po r t cus tom er s o n this v i t al jour ney an d we a r e ta rg etin g ne w pr o duc t d ev el opm ent opp or tun iti es i n gr ow th ma r ket s w her e o ur tec hno lo g y and capabil ities of fer dif ferentiated value through impro ved sustainabilit y per formance. Devel oping and commercial ising sust ainabilit y-adv antag ed pr od uc t s an d se r vi ce s w il l enab le S mit hs to h av e an e ven gr eater p os iti v e im pa c t on gl ob al en v ir onm ent al pr i or i tie s than w e co ul d ach iev e on o ur o w n. READ MORE Sustainability at Smiths report DELIVERING NET ZERO GHG We have a succe s sf ul r ecor d of d eli ve r ing reduc tions in our operational GHG emissions. We are now t ak in g big s tep s for w ar d. In F Y 2 0 2 2, w e co mmi t ted to a mbi ti ous N et Zer o t ar get s t hat ali gn S mit hs w i th th e UN’s cr iti c al gl ob al cl im ate obj ec ti v e s: Net Zer o em is si on s fr om o ur op er ation s ( S cop e 1 & 2 ) b y 2 0 4 0 a nd N et Zer o emi s sio ns f r om ou r sup ply c hain a nd pr od uc t s in u se ( S c ope 3 ) b y 2 0 5 0. READ MORE Environment P 30 RESPECTING NATURAL RESOURCES Natur al res our ces a re fi nite, a nd we believe that all busines se s have a responsib ilit y to us e them r es pe c t ful ly and s a fely – min imi sing consumption and preventing pollution. Our l ong s ta ndin g co mmi tme nt s to us e ene r g y ef f ic ient ly and mi nimi se w aste ar e in cr e asin gly o f inter e st a nd v al ue to our c us tome r s as t he y al so se ek to m ana ge th eir o w n env ir o nme nta l foot pr i nt s. READ MORE Environment P 30 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 25 EN V IR O NMEN T SO C IAL CONTRIBUTING TO OUR COMMUNITIES We aim to imp rove o ur wo r ld b y contributing posi tively to our communities and societ y in general . Smi th s pr od uc t s an d se r v ice s sup po r t cr it ic al gl ob al indu s tr ie s w h er e we a re p ion ee r in g pr og re s s in safet y, e f ficienc y , and environmental per formance. Our o per ation s ar ou nd th e wo r l d pl ay a b en ef ici al role in local economies through job creation and skills de vel op ment; p r oc ur eme nt and g ene r at ing t a x re v enu es; and oper ating safely, environmental ly resp onsibly and ethic a lly. We al s o en ga ge di re c tly t hr ou gh f und r ai sin g, char itable gi vin g and education initiativ es . READ MORE Sustainability at Smiths report BEHAVING ETHICALLY AND LEGALLY Beh av ing e thic al ly and w it h integ r it y i s a fun dam ent al p ar t of our Valu es . We al s o ope r ate in som e hig hly reg ul ate d mar ket s an d se c tor s w hic h req uire s tr ic t adher ence to l oc al an d inter n atio nal industr y regulations. We hav e a mat ur e go ve r na nce en v ir on ment w i th ex ac t ing st an dar d s, r o bus t di li gen ce pr o ce s se s an d a pr o ac ti v e man age ment a pp ro ac h. A nd we s ee k to wo r k w it h par tn er s w ho su ppo r t our Val ue s to mini mis e r is k an d ma xim is e our p osi ti v e so ci al an d env i ro nme nta l imp ac t . READ MORE Sustainability at Smiths report MANAGING RISK AND MAINTAINING STRONG AND EFFECTIVE CONTROLS Continual as ses sment and manage ment of risk s, and a s sur an ce thr oug h inter n al cont rol s, is a n integ r al p ar t of day- to - day o per ations a t Smit hs . Our ent erpr ise r isk management (ERM) pro cess suppor ts ope n com muni c atio n on r i sk be t w ee n the B o ar d an d the Au dit & R isk C om mit tee, th e E xec ut i ve C om mit tee, our di v isi on s, a nd si te s, a nd en su re s th at r is k is ap pr op r iate ly man age d to de li v er o ur bu sin es s o bje c ti v es . E S G m at ter s ar e fu lly i ntegr ated into th e ER M pr oc es s a nd ar e id enti f ie d and m ana ge d in th e s ame w a y as ot her G r oup r i sk s . READ MORE Risk management P 46 EFFECTIVE LONG-TERM DECISION MAKING AND TRANSPARENCY Goo d qua lit y , ethi ca l and ef fec ti ve d eci sio n- making builds sus tainab le busines se s and enab le s the m to cre ate lo ng -ter m v alu e fo r all stakeholders . Our o ve r al l go v er na nce f r a me wo r k pr o v id es t he s tr u c tur e s and s y s tem s thr o ugh w hi ch o ur s tr ate gie s an d ob jec t i ve s ar e set a nd ac hie v ed , ho w r is k is mo nito r ed an d ma nag ed v ia cont r ol s , an d ho w ou r pe r for man ce is m ana ge d an d opti mis ed w i th ap pr op r iate o v er si ght f ro m th e Bo ar d. READ MORE Governance P 56 PROMOTING DIVERSITY, EQUITY AND INCLUSION Our te am of co lle agu es r epr es en ts d ozen s of nations, speaking a multiplicit y of language s, and embody ing many dif ferent perspe c tives . We str ive to emb r ace th es e dif feren ces a nd pr om ote ac ti ons a nd behaviour s that will deliver an inclusive and suppor tive work envir onment where ever y member of the Smiths team c an b e the b es t ve rs ion o f them s elve s. We kn ow th at w he n col le ag ue s fee l inc lud ed , v alu ed , and enc our aged to m ake a me anin gf ul c ontr ibuti on , Smi th s w ill thr i v e as w e co ntinu e to at tr ac t and r et ain t he di v er s e t ale nt that w e ne ed . READ MORE People P 33 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 26 SO C IAL continued GOV ERN A NCE Gro w th Del i ve r su st a in ab le g row th by t a rg et in g hi gh - gr ow th mar ke t s w he re we c a n leverage our unique capabilitie s to dev elop and deliver differentiated technolo gy solutions which help solve some of the world’ s bigges t challenges for our customers and global communities – P r io r it is e ne w pr o duc t d ev el opm ent ( NP D) pr o gr am me s th at del i v er th e sus t ain abi li t y per for mance o ur cu s tome r s ne ed a nd w ant . D ev el op an d de sig nate top s us t aina ble gr ow th NP D pr og r am me s in e ach d i v isi on th at cont r ibu te si gnif i ca ntly to d i v isi ona l re v enue g r ow th an d w her e co mme rc ial s ucce s s w il l de li v er co r r es po ndi ng sustainabilit y per formance benefit s, such as energ y eff icienc y , GHG reduction , and renew able energ y pro duction – Inte gr a te env ir o nme nta l sus t ain abil i t y m etr i c s into ou r NPD p r oce s s es to e nab le our o w n Net Ze ro d el i ve r y, and our c us tome r s’ and th e ind us tr i es w e s er ve READ MORE about Growth P 12 E xec u ti o n Del i ve r our c omm it me nt s t o Ne t Ze ro S ci en ce -B a s ed T ar ge t s ( SB T s) and furt her improve the environmental perf ormance of our oper ations – Del iv er oper ational target s for renew able energ y, w aste gener ation, water use and packagi ng – D el i ve r Net Zer o G HG emi s sio ns c ommi tm ent s fo r S cop e s 1 , 2 and 3 a nd a s so ciate d SBT s through energy ef f icienc y and renew able energ y, i ncluding optimising produc t design an d our supply chains READ MORE about Execution P 13 People Del i ve r fo r pe op le , en su r in g th at we g ro w ou r bu si ne s s in l ine w i th o ur Va lu es , our L e ad er sh ip B eh av io ur s , an d pl a n f or th e l ong -t er m f utu re o f Smi th s – S us t ain an d v it al is e ou r s afet y cultu re a nd p er for m ance – D ev el op an d emp ow er S mi ths t al ent fo r the f u tur e – E mb ed an i ncl usi v e an d di ve r s e cul tur e an d inc re as e ge nd er di v er s it y READ MORE about People P 13 Our E S G s tr ategic pr io r itie s Our su s tai nab ili t y s tr ate g y fol low s ou r Smit hs Valu e Eng ine pr i or iti es – G row th, E xe cuti on an d Peo ple . W it hin th is f r am ew or k, w e foc us o n our hi ghe s t-imp ac t o ppo r tuni tie s to ac cele r ate p er for m anc e and c re ate v al ue w it h sp eci f ic ac t ion s that w il l le ad to c onc re te and m ea sur able r e sul t s. Remuner ation T o alig n de cis ion -m ak ing an d o w ner ship of our E SG go al s, S S E metr ics w i ll fo r m pa r t of the S mit hs an nua l and l ong -ter m i nce nti ve pl an s for F Y 2 0 2 3. A GHG r e duc t ion m etr i c for m ed p ar t of ou r lon g- ter m in centi v e pl a n in F Y 2 0 2 2 . READ MORE Remuneration & People Committee Report P 75 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 27 Our e nabl ing c ultur e At S mit hs o ur cul tur e em po w er s an d en abl es o ur pe op le to de li v er on our P ur pos e. L i v in g our f i v e Valu es e v er y da y, in each a c tio n and dec is ion t hat w e ta ke, make s Sm ith s a pl a ce w he re w e ar e h app y and p ro ud to w or k . I t’s wh at make s us r el ia ble , tr u st wo r thy, and v alu ed p ar tne r s for o ur cu s tome r s an d sup pl ier s and sup po r ts th e lon g-te r m su st ain abi li t y and suc ce ss o f our b usi ne s s mo del . Th e Sm ith s L ea der s hip B eh av io ur s in cor por ate o ur Val ue s and a ppl y the m to del i ve r in g for al l s ta keho ld er s . T he s e ven Le ad er sh ip Be ha v iou r s de s cr ib e ho w w e wo r k w it h one a not her , dem on st r ate o ur Valu e s, a nd cr e ate v alu e thr o ugh o ur ac ti on s. Imp or tant ly, the Le ad er s hip B eha v io ur s ap ply to e v er yo ne at Smi th s – fr om t he sh op f lo or to s eni or exe cu ti v e s. W h atev er r ol e we p l ay, we c an al l de mon s tr a te and d ev elo p our L e ade r sh ip Beh av i our s to impr ov e an d del i ve r as a te am , de vel opi ng and s har i ng ou r ta lent s to s upp or t ea ch oth er an d imp ro v e our tomorrow. Our g oa l is to us e th e Le ad er s hip B eha v io ur s to in spi re a nd he lp st re ng the n and s hif t the S mit hs c ult ur e to be e ve n mor e d y n amic , incl usi v e, an d fo cu se d on d el i ver ing re s ult s th at cr e ate v alu e for our p eo ple , cus tom er s a nd ot her s t akeh old er s . We hav e be en t r ac ki ng en ga gem ent on a r ange o f imp or tant cultur al me asur es inclu ding safet y , ethics , belon ging, inclus iv it y , lea de r shi p, and s er v ic e sinc e 2 01 7 . Our ov er a ll gl ob al en ga gem ent sc or e re mai ne d st ab le fo r May 2 0 2 2 a nd N ov emb er 2 0 21, jus t be lo w th e ben chm ar k p ro v id ed b y ou r sur v ey p ar tne r . We conti nue d to ha ve a v er y hi gh sur v ey r e sp on se r ate of 82 % i n May 2 0 2 2 w i th n ear ly 1 9 ,0 0 0 co mme nt s sub mit ted. S ee o ur K P Is on p age 2 3. We wi ll co ntin ue to us e th e sur v ey i n a tr a nsp ar ent a nd m etic ulo us w ay to su r fac e is su es a nd m or e pr ec is ely u nde r s t and w h at we ar e doi ng w ell a nd w h er e we n ee d to do b et ter . We al s o inten d to fl ex th e que s tio ns i n fu tur e s ur ve y s to tes t en ga gem ent w ith in fo cus a re as a nd to en su re t hat w e cont inu e to wo r k an d communicate effe cti vely. Ethic s Beh av in g eth ic al ly an d w ith i ntegr i t y is a fun dam ent al p ar t of our Valu es . O ur Co de of B usi ne s s Ethi c s gui de s Sm ith s co lle ag ue s to re co gni se an d de al ap pr op r iate ly w it h leg al an d ethi c al is s ue s that t he y ma y enc ounter i n the c our s e of t heir w or k. T hi s is sup ple mente d by a s uite o f pol ic ie s an d pr oc edu re s r el at ing to specif ic ethics and compliance matter s. Our c oll ea gue s an d bu sin es s p ar tne r s ar e ex p ec te d to re po r t any ac ti v i t y – w h eth er in ou r bus ine s s or t ho se of o ur p ar tner s – that the y co nsi der m ay b e in br e ach o f our et hic s c od es a nd p ol ici es . Both o ur co ll ea gue s an d pa r tner s have a cce s s to our c onf id enti al ‘Sp ea k Ou t’ r ep or tin g hotl in e, w hi ch is a cce s sib le 2 4 hou r s a da y, se ve n da ys a w e ek . Rep or ts c a n be m ade a no ny mo us ly. OUR VALUES SMITHS LEADERSHIP BEHAVIOURS 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 28 E S G go ver nance and o ver sight mo del Smit hs E xc elle nce S ys te m Science, Sustainabilit y & E xcelle nce C ommi t tee Remuneration & People Committee Nomination & Governance Commit tee Audit & Ris k Co mmit te e NPD management – cu s to me r v al ue a nd sustainab le design Energy T eam – energy efficienc y and GHG deliver y HSE T echnical Comm itte e – s af et y and environment Busines s Ethic s Council s HR Business Par tner s Divi sion Commercial T eams – T echnology/ Sustainable design ESG Leader ship Te a m s Group HSE Group Ethics and Compliance HR Leadership Te a m Company Secretar y Director of Internal Audit and Risk Div isional Presidents Chief Sustaina bilit y Of ficer Chief People Of ficer Group Gener al Couns el Smiths Board E xecu ti ve Co mmi t tee E S G go ver nance and o ver sight Th e Sm ith s Bo ar d of D ir ec to r s an d E xe cu ti v e Co mmi t tee hav e ult imate r e sp on sib ili t y for Smi th s E S G pe r for man ce an d as s oci ated g ov er n anc e and o v er si ght . T he S ci enc e, Su s tai nab il it y & E xcel le nce ( S S E ) C om mit tee of the B o ar d, c hair e d by D am e Ann Dow ling, is r e sp on sibl e for o v er s ee ing t he Gr o up’ s app r oa ch to sc ienc e, su s tai nab il it y , and e xcel len ce. T h e ov er s ight cover s R&D , commercialis ation and sustainabili t y str ategies , incl udi ng th e imp ac t of c l imate c han ge an d r el ate d metr ics and ta rg et s . The Remuneration & People Committee over s ees our ap pr o ach to p eo pl e and c ult ur e mat te r s , and t he A udi t & Ris k Co mmi t tee o v er s ee s ou r r is k man age ment p r oc es s e s and s y s tem s of inter nal cont ro l . T he N omin ati on & G ov er n ance Co mmi t tee ke eps t he Gr o up’ s high - lev el g ov er n anc e fr ame wo r k und er r ev i ew to e nsu re a pp ro pr i ate guid anc e and o v er si ght is maint ain ed . Su s tai nab il it y str ateg y and d el i ve r y ar e le d by m emb er s of the S mi ths E xecu ti v e Co mmi t tee: o ur Chie f Sus t ain abi li t y Of fi cer; Chief Pe opl e O f f ice r ; Gr o up Ge ner al Co uns el ; and o ur div isional Pre sidents . Our s tr ategic o ve r si ght an d col l ab or ation m ode l ena ble s u s to br in g tog ethe r the s ki ll s and kn ow l ed ge of o ur Bo ar d , our e xec uti v e team a nd bu sin es s a nd f unc t ion al le ad er s to d r i ve ef fec ti v e lo ng - ter m de ci sio n mak in g, E S G in no v atio n an d be s t pr a c tic es a cr os s Smi th s. O ur Sm ith s E xc ell enc e Sy s tem su pp or ts t he w h ole , dr i v in g business- wide r esults-focus ed execution. ES G met r ic s and ta rg et s ar e ca s c ade d th ro ugh t he di v i sio ns an d em be dde d in o ur co re oper ating model . E S G rep or tin g We fol lo w es t ab li she d r ep or ting s t an dar d s and r e gul ar ly rep or t our per for mance , tr a nsp ar ent ly sh ar in g our d at a and e nga gin g w it h thir d - par t y r atin gs ag enc ie s . We us e thi s infor mation to e v al uate ou r ow n pr og re s s an d info r m the w or k we ar e doi ng in o ur fo cu s ar ea s. Env ironm ental dat a – basi s of pr epar ation Gr oup e nv ir on ment al d at a in thi s r epo r t exclud e s Smi th s Me dic al . Smi th s Med ic al en er g y us e an d GH G S cop e 1 & 2 emi s sio ns da ta i s sho w n s ep ar ate ly in th e t able o n p age 3 0 . In pr ep ar ation fo r set ting S ci enc e- Ba s ed T ar get s a li gne d to our Ne t Zer o com mit me nt s, i n F Y 2 0 2 2 a ro bu st r e v ie w of ou r F Y 2 0 21 S cop e 1 & 2 GHG i nv entor y an d his to r ic a ss e s sme nt s of mater i al it y and cl a s si fi c atio n w as un de r taken b y our e x ter n al spe ci al is t pa r tner , Ramb ol l . T his w a s un der ta ken in ac cor d ance w ith I S O s ta nda r ds . T his p r oce s s r e sulte d in th e r ec l as si f ic atio n of cer ta in ac t iv i ti es a nd si te dat a, p r ev i ous ly dete r min ed to b e imma ter ial a nd S co pe 3 . T he r e cl as s if ic ati on m eant t hat s uch ac ti v i tie s an d dat a is n ow i nco r po r ate d w it hin ou r S cop e 1 & 2 inv entor ies . In ad di tio n, o ur GHG e mis s ion s ar e c alc ul ate d usin g re v is e d re gio nal e mis s ion s f ac tor s. B as ed o n thi s wo r k , ene r g y us e and e mis si on s dat a for S mi ths G r oup h as b een r e s t ated f r om that p r ev io us ly dis c los e d for F Y 2 0 21. The s a me ap pr o ach h as b ee n us ed fo r F Y 2 0 2 2 emi s sio ns d ata a nd c alc ul at ion s. F Y 2 0 21 re s t ateme nt: – Smi th s lea s ed gr o und f le et an d sma ll le as e d of f ic es /sites ( pr ev i ou sly c ons ide r ed to b e S cop e 3) r e - cl as s if ie d as S co pe s 1 &2 ( ad de d 3 9 ,0 8 3 M W h) – Inclusion of our Royal Metal acquisition ’ s sit e and transpor tation fl eet ( ad de d 5, 2 8 9 M W h ) – Ene r g y us e up date d for s om e site s ( ad de d le s s than 5 00 M W h) – Regional Scope 2 emission factor s updated (r educed emissions by 9 , 9 81 t CO 2 e) – Ba se r e ve nue d at a has a l s o be en up date d for a ll n or m al is ed ca lcu l atio ns in clu din g GH G emis s ion s , w ater an d w as te Stakeholder expe ct ations , standar ds and third -par t y assur an ce pr a c tic es c onti nue to e vo lv e in thi s ar ea . Ou r meth od s an d pr a c tic es w i ll co ntin ue to imp r ov e an d be r ef le c ted in o ur env ir o nme nta l per for mance r e su lt s an d as s oci ated d is clo sur e s . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 29 EN V IR O NMEN T Smi th s has h ad e nv ir on ment al i mpr o ve ment t ar g et s sin ce F Y 2 0 0 7 . Sin ce F Y 2 0 0 7 w e hav e r ed uce d w ater u se a nd n on- r ec ycl ab le w as te by m or e th an 3 0 % on a n abs ol ute b as is an d we h av e incr e as ed t he u se of r en e w abl e ele c tr i cit y in our o pe r ati on s to 6 3 % of tota l ele c tr i cit y us e ( site s r ep or tin g uti li t y d at a und er Sm ith s HS E Repo r ting P ol ic y, w ith 2 0 or mor e emp lo ye e s). We ac hie v ed this b y en ga gin g our p eo ple , cha ngi ng ou r pr oc es s e s , inv es t ing in lo w- c ar b on a nd en er g y ef fici ent te chn olo gie s , an d inc re as ing o ur us e of r ene w ab le el ec tr icit y. Cli mate -r el ate d r i sk s and t hei r potent ial im pa c t on th e bu sin es s and i t s s tr ate g y for m par t of r isk r e por tin g an d r is k man age ment acr os s t he Gr o up. D ue to i t s lon g-te r m nat ur e, cl im ate cha ng e is no t con sid er ed to b e a pr i nci pa l r isk , b ut w e r eco gni s e the im po r tanc e of as s es s ing b oth p hy si ca l and t r an si tio n r is k fr om c l imate c han ge in a for m al w a y. Se e our TC F D dis cl osu re o n pa ge 3 5 . We hav e ag re e d the t hr ee s t and ar ds r el ev a nt to our b usi ne s s und er the S us t aina bil it y Ac count ing S ta nda r ds B oa rd ( SA SB) f r a me wo r k ( A ero space Defence; Electronic and Elec tr ic Equipment; and Indu s tr ia l Mac hine r y and G o ods ) an d we a r e re v ie w in g the p otenti al app li ca bil it y of a fou r th (E lec t r oni c Manu f ac tu r ing a nd O r igi nal De sig n Man uf ac t ur in g ). In F Y 2 0 2 2, w e un der too k a gap a nal y sis to ide ntif y th e re po r ting ar e as w e ne ed to p ro gr e s s to fu lly a li gn to th e fr amew or k and ar e t ar get ing al i gnme nt dur i ng F Y 2 0 2 3 . In F Y 2 0 2 2, w e co mmi t ted to a mbi ti ous N et Zer o t ar get s t hat ali gn S mit hs w i th th e UN’s cr iti c al gl ob al cl im ate obj ec ti v e s: Net Zer o em is si on s fr om o ur op er ation s ( S cop e 1 & 2 ) b y 2 0 4 0 and N et Zer o emi s sio ns f r om o ur sup ply c hai n and p ro du c t s in us e ( S cop e 3 ) by 2 0 5 0 . We hav e co mmi t ted to s et S ci enc e- Ba s ed T ar get s ( S BT s ) w ith the S BT in iti ati v e ( SB T i ) and s ign ed on to t he 1.5° C Bus ine s s A mbi ti on un der t he UN R ace to Ze ro , co ve r ing S c op e 1 , 2 and 3 GHG e mis si on s. We w il l su bmi t pr op os al s to the SB T i in 2 0 2 2 to es t abl is h our b e sp oke pl an s an d inter im S BTs. Ba se d on o ur r ev i ew of d at a mater i al it y , ou r Sc op e 3 emi ss io ns w il l like ly sig nif ic a ntly e xcee d our o pe r ati on al emi s sio ns ( S co pe s 1 & 2 ). A s i s t y p ic al a nd ex pe c ted f or di v er s if ie d ind us tr i al bu sin es s e s , emis s ion s as s oc iate d w ith o ur su ppl y cha in (C ateg or y 1 P ur cha s ed Go od s and S e r vi ce s) a nd P r odu c t s in us e (C ate gor y 1 1 ) ar e antic ip ated , pe ndin g in -pr o ce s s ve r if ic at ion , to acc ount f or th e maj or i t y of o ur S co pe 3 em is si on s. A s re quir e d by t he S BT i , our pr op os ed i nter im r ed uc ti on t ar ge t wi ll c ov er mo r e tha n t w o thi r ds of our tot al S c ope 3 G HG in ve ntor y. We re co gni se t hat de li v er i ng o ur Net Ze ro t ar g et s w ill r e qui re con sis tent a nd p r ior it y fo cu s ac ro s s all a sp ec t s of o ur gl ob al ope r at ion s for t he ne x t 15-25 y ear s. In F Y 2 0 2 3 , w e wi ll b e focused on establ ishing fou ndational process es and approaches nec es s a r y to def ine a nd de li v er n ear - an d mi d-ter m tar get s , incl udi ng th e inter i m SB T s re quir e d und er th e SB T i fr ame wo r k . Energy use and GHG (Scope 1 & 2) emissions Smi th s incl ud es i t s Str e aml in ed E ner g y a nd C ar b on Rep or tin g ( SECR ) for F Y 2 0 2 2 , incl udi ng ou r emi ss io ns an d glo ba l ene r g y us e and i ntens it y (no r mal i se d) m etr i c bel o w. Our GH G emi ss io ns ca lcu l atio ns a nd r ep or ting f ol lo w s the W R I / W B C SD G re en hou s e Gas protocol (oper ational approach) and cover s emissions from all s ou rc es u nde r our c ontr ol , g r oup ed un de r S cop e 1 and S c op e 2. Performance in current three-year goal period FY2 022-2024 target Progres s FY20 22 Use of renewable elec tr icit y 1,2 +5 % inc r ea s e to 6 6% +2% i nc re a s e to 6 3 % Normalis ed greenhouse gas emissions 3,4 5% reduction 7 .2% reduction Normalis ed non-rec ycl able waste 2,3 5% reduction 1 1 .5% reduction Nor mal is e d w ate r us e in s t re s s e d ar e as (1 1 lo c ati on s ) 2,3 5% reduction 4.5% reduction Water reduction projec t s 10 in F Y2 0 2 2 12 p r oj e c t s Packaging reduc tion projec ts 8 in F Y 2 0 2 2 5 p ro je c t s 1 N on - G HG p r o du c in g el e c tr ic so u rc e s in c lu di n g hy d r oe l ec t r i c an d n uc le a r. 2 S i te s r ep o r t i ng u t il i t y d at a u nd er S m it h s H SE R ep o r t i ng P o li c y, w i t h 2 0 or m o r e em pl o y ee s 3 N or mal i s ed t o r ev e nu e . A bs o l ut e GH G e mi s si o ns d o w n 1. 1%. 4 W e ha v e bu il t a m or e a g gr e s si v e G H G re d uc t i on t a r ge t tr aje c to r y to m ee t ou r S BTs an d a n en er g y e f f i ci e nc y t a r g et i nto o ur c o ll e a gu e an d e xe cu t i v e in ce nt i v e pl a n s fo r F Y2 02 3 . Energy use and GHG (Scope 1 & 2) emissions FY2 022 FY2 021 1 Global energy use – absolute values KWh 224,3 34,020 224,394,230 UK en er g y u s e KWh 10 , 4 4 5 ,9 0 0 n /a Smiths Medic al 2 KWh 2 7, 4 6 3 , 8 0 0 75,0 06,5 00 Smiths Medic al UK 2 KWh 4 61, 8 0 0 n/a Global emissions – absolute values Scope 1 (direct emissions) t CO 2 e 19 ,1 3 1 2 0,37 8 Scope 2 (indirect emissions) t CO 2 e 32,5 39 31, 8 6 5 To t a l t CO 2 e 51,67 0 52,24 3 UK S co p e 1 & 2 emi s si on s t CO 2 e 1,7 5 5 n /a Sm it hs M ed ic al S c op e 1 & 2 e mis s io ns 2 t CO 2 e 6 ,1 7 6 16 , 74 0 Sm it hs M ed ic al U K S co pe 1 & 2 e mi s si on s 2 t CO 2 e 7 n /a Global emissions – normalis ed values Scope 1 (direct emissions) t CO 2 e/£m re venue 7. 4 6 8 . 47 Scope 2 (indirect emissions) t CO 2 e/£m re venue 12 . 6 8 13 . 2 4 To t a l t CO 2 e/£m re venue 2 0 .1 4 21.7 1 1 F Y 2 0 21 d at a u pd a te d fo l lo w i ng v e r i fi c at i on . S e e b as i s of p r ep a r at i on p a r a gr aph o n p ag e 2 9. 2 S mi t hs M e di c a l F Y2 0 2 1 an d F Y 2 0 2 2 da t a is n ot i n cl u de d in G r o up d at a a nd h a s no t b ee n u pd at e d fo r th e c ha n ge s d e sc r i be d a b ov e . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 30 Ener gy ef f icienc y an d ren ew able el ec tr icit y Acc ele r ati ng p ro je c t s that r e duc e ov er all ene r g y us e an d incr e as e our u se of e le c tr ic it y fr om r en ew a ble s ou rc es w i ll b e cr i tic al to o ur succ es s i n ach iev i ng ou r S cop e 1 & 2 t ar get s . In F Y 2 0 2 2, w e e s ta bl ish ed a G r oup - w ide E ne r g y T eam to pr i or i tis e, coo r din ate and e nsu re d el i ve r y of the p r oje c t s ne ce s s ar y to mee t our N et Zer o an d SB T com mit ment s , in clu din g ene r g y ef f ic ien c y, onsi te r ene w ab le en er g y (e .g. , so l ar ), and p r oc ur in g re ne w abl e en er g y. The E ne r g y T eam w il l pl ay a c r it ic al r ol e in identify ing, aggregati ng, suppor ting a nd tracking project s as we move for w ard. 6 3 % of th e ele c tr i ci t y c ur r entl y us ed i n our op er ation s is f r om re ne w abl e s our ce s ( si tes r ep or tin g ut ili t y data un de r Smi th s HS E Repo r ting Po l ic y, wi th 2 0 o r mo re e mpl oy ee s ) and o ur g oal i s to incr e as e thi s to 6 6% by th e end of F Y 2 02 4 and to 10 0 % by 2 0 4 0. We und er took a gl ob al su r ve y of on site r e ne w abl e opp or tun it ie s in F Y 2 0 21 and h av e be en e v alu atin g a r an ge of te ch nol og ie s inc lud ing so l ar , win d, lo w - c ar b on he atin g an d co ol ing ( LCH C), an d comb ine d hea t and p o wer ( CHP ). A n on si te re ne w abl e ene r g y s y ste m is alr e ad y in p l ac e in Su zho u, C hina a nd w e ha ve r e centl y com ple ted a so l ar in st al l ati on at S mit hs D etec t ion , Jo hor B ah r u, M al a y sia . Env ironment al management Per for mance against our comprehensive por tfolio of env ir o nme nta l po li cie s is o ve r s ee n by o ur inter n al au di t pr oc es s and w e ma inta in an ex ter nal e nv ir on ment al c omp li anc e aud it pr og r am me of ap pr oxi matel y 1 5 si tes e ve r y ye ar . All S mi ths ope r at ion al si tes w i th o ve r 5 0 col le ag ue s ar e r equ ir ed un de r Gr oup p ol ic y to be cer tif i ed un der I S O en v ir onm ent al an d s afet y st an dar d s (1 8 0 01 o r 4 5 0 01 a nd 14 0 01) – appr ox imatel y 6 0 si tes – unle s s th ey w er e r ec entl y acq uir ed j us t bef or e or du r ing t he CO V ID - 1 9 pa nde mic . T ho s e site s w er e not a ll ow ed t hir d p ar t y v isi tor s d ur in g the p an dem ic an d ar e no w w or k ing to w ar d s cer tif ic at ion a s lo c al co ndi tio ns a llo w. We ha d no en v ir on ment al spil l s o r env i ro nm ent al com pl ian ce p enal tie s or f in e s in F Y 2 0 2 2 . R estrict ed su bsta nc es Al l di v is ion s p ar tici pate in a r e gul a r for um to shar e be s t pr actice s and ensure compliance wi th global res tric ted sub st an ce r eg ul ati ons i ncl udin g W E EE , RoH S, P r op 6 5 , RE ACH , T SC A a nd Re spo ns ibl e Mine r al s. We op er ate a Rest r ic te d Sub st an ce Ste er i ng C omm it te e to ens ur e th at we a re adequately res ourced in this area . SO C IAL S afet y We hav e an e x ten si ve s et of h ea lth an d s afet y pol ic ie s and p r oc edu re s that a ll op er ation s ar e r equ ir ed to fo ll ow. Pe r for ma nce a gai ns t the s e pol ic ie s is o ve r s ee n by an a udi t pr o ce s s that a l s o co ver s all Sm ith s pr od uc ti on f ac ili ti es in clu din g IS O H S E man age ment s ys tems . We re por t al l inju r ie s glo ba ll y in acc or da nce w i th US O S H A gu idan ce. Our h ea dl ine s afe t y m etr i c s ar e Rec or dab le In cid ent R ate (R IR ) – w her e in cid ent s r eq uir e me dic a l at tenti on b ey on d fi r s t aid – a nd Lo st T i me In cid ent Rate ( LTIR ) – w h er e a co lle ag ue is u nab le to w or k fol lo w ing a n inc ide nt – per 10 0 co ll ea gue s , pe r ye ar ac r os s Sm ith s . In ad dit ion to p r epa r in g injur y r e duc t ion p l ans , e ac h of our d i vi si ons is r eq uir ed to s et co mpl etio n t ar get s fo r th e S afet y Lea din g Indi c ator ( S L I) p ro ac t i ve a nd pr e ve ntat i ve s af et y m ea sur e s mo s t re le v ant to th eir op er ation s , wi th a n exp e c tat ion of a chi ev i ng 9 5% of tar g et ann ual ly. SL Is i ncl ude a c ti v i tie s su ch as s a fet y inspe c ti on s, lea de r shi p tour s , t r ain ing , an d our s afe t y l ook o ut p ee r -to -p eer obser vation progr amme. Our G ro up Re cor da ble I nci dent R ate in F Y 2 0 2 2 w a s 0. 5 4; 15% abo v e F Y 2 0 21 but c onti nue d to tr ack be lo w the i ndu st r y av er a ge and in t he top q uar til e of ind us tr y p er for m ance 1 . Our G ro up L os t T ime In cid ent R ate w as 0 .2 4 . W hile o ur fo cu s on s afet y did n ot w av er du r ing F Y 2 0 2 2 , l ike man y comp an ie s , we f ac ed s e ver al cha lle ng es t hat l ikely af fec te d our s afet y per for ma nce . Ev i den ce in dic ate s tha t the s e inc re as e d injur y r ate s ha ve b ee n br oa dly e xp er i enc ed a cr os s th e ind us tr i al s ec tor mor e r ec entl y. Staf fing a nd s upp ly ch ain ch al len ge s dur i ng an d fol lo w ing t he C O V ID - 1 9 pan dem ic ha ve m ea nt that at s om e Sm ith s site s co ll ea gue s ha ve h ad to w or k i r r egu l ar or e x ten de d ho ur s . Nea r ly 3 ,0 0 0 coll ea gue s r ep or ted ha v in g CO V I D- 1 9 dur i ng th e ye ar; ret ur ni ng to w or k a nd su f f er in g the a f ter - ef fec t s of C OV ID- 1 9 is cha lle ngi ng. We h av e s een t he f ur the r imp ac t of l imi ted f a ce to f ace inter a c tio n; s afet y commi t tee s un abl e to me et; l imi t s on tr avel ; an d the g ene r al i mp ac t of p eo ple d eal in g w it h the up he av a l of CO V ID- 1 9 . Th is p er for m ance d oe s n ot re fl ec t th e w or k en v ir onm ent w e w ish to hav e, an d w e intend to i mpr o ve s af et y p er for m anc e con si ste ntly ye ar on y ea r by c ontin uin g to inv e st i n ne w pr og r am me s , tr a inin g acti v ities and site-speci fic injur y r eductio n plans . Dur i ng F Y 2 0 2 2 S mit hs r e cor d ed zer o w or k -r el ate d col le ag ue or contrac tor fatalities . Thre e contrac tor recordable incidents were re po r ted. We r ec ei ve d no s igni f ic ant s afe t y f in es o r pe nal tie s . Incl udi ng Sm it hs Me dic a l , we a chi ev ed a n RIR of 0 .5 0 an d an LTIR of 0. 21. The nat ur e of w or k in t he S mit hs Me di ca l op er at ion s me ant that t he di v i sio n pr ev i ou sly h ad a p osi ti v e imp ac t o n injur y r ates . RECORDABLE INCIDENT RATE Per 10 0 col le ag ue s 0.5 4 FY2021: 0.47 LOST TIME INCIDENT RATE Per 10 0 col le ag ue s 0.2 4 FY2021: 0.20 0.47 0.35 0.50 0.44 0.54 FY2021 FY2020 FY2019 FY2018 FY2022 0.20 0.17 0.24 0.19 0.24 FY2021 FY2020 FY2019 FY2018 FY2022 1 B L S d at a – N A I C S 3 39 9 0 0 ; w w w. b l s .g o v / ii f /os h um . htm # 2 0 Q ua r til e _ D a ta 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 31 COVID- 1 9 S afet y pre c au tio ns r el at ing to C O V ID - 1 9 hav e be en a n imp or tant feat ur e of ou r ov er a ll s af et y ef for ts o v er th e l as t 3 0 mo nth s. W hile m an y re s tr i c tio ns h av e no w be en l if ted, w e co ntinu e to mon itor t he si tu atio n, a nd e ach of o ur lo c ati ons c onti nue s to comp ly w i th lo c al r eq uir em ent s as i nfec t ion r ates f luc t uate . Pr act ic al m ea sur e s to sup po r t our col le ag ue s acr o s s the p er i od have included: – A n unw aver i ng fo cu s on C O V ID -s afe w o r k env i ro nme nt s – Pu r sui ng a co ns is tent ap pr oa ch to c or e emp lo ye e be nef it s i ncl udin g li fe co ve r , cri tic a l ill ne s s , dis a bil it y, and med ic al in sur ance – Roll in g ou t a glo ba l Emp lo ye e A ssi st an ce P ro gr amme ( E AP ) – Regular communic ation, bespo ke resour ce sites and well nes s material s A s a G ro up, w e ar e ho nou re d b y the in cr e dibl e ef f or ts m ad e by o ur tea ms in s upp or tin g the ir ow n s af et y a nd th e s afet y of othe r s , inc lud ing in o ur co mmu nit ie s, w h ile co ntin uin g to ser v e our c us tome r s ac r os s thi s ex tende d per iod. O ur da ta in dic ate s that c ol lea gu e CO V ID - 1 9 c as es h av e t ypi c all y tr a cked l oc al comm uni t y c a se s an d th at the r e hav e b een v er y fe w in st an ce s of tr a nsm is si on at w or k . Enga ging w ith our co llea gue s Our global communications acti vi ties are designe d to engage col le agu e s ar oun d the w or ld w ith o ur P ur p os e and o ur s tr ateg y. Ke y com muni ca tio ns ma ter ia l s ar e tr ansl ate d into o ur ten core l anguage s. Our S mit hs N ow a pp is a p l at fo r m for c ol lea gu es to r e cei v e ne w s fr om a ro un d the b usi ne s s and s har e th eir v i ew s an d s tor i es a nd is alw ays a c ti v e w ith g r as s r oot s co ntent . T her e i s al s o a gl ob al for tnightly e-newslet ter , Signal, w hich amplifies key company ne w s to the gl ob al b usin e s s. O ur intr anet w eb p or tal a c t s as a n onl ine h ub fo r hol din g r es ou rc es f or ma ny ar e as in clu din g s afet y , well-being, ethic s and compliance, div er sit y and inclusion , and I T tips . We und er took o ur M y S ay c ol le agu e eng ag eme nt sur v ey i n Nov em ber 2 021 an d May 2 02 2 an d com muni c ated th e key out com es t o c ollea gues. We und er took a nu mb er of en ga gem ent pr o jec t s i n F Y2 0 2 2 including: – Communication s around our re sults announcem ents and C ap it al Ma r ket s ev ent; – Co mmun ic ati ons a ro un d our S E S Aw a rd s an d M y S ay s ur ve y s; – A glob al T o w n Hal l in Ma y 2 0 2 2; – Our S mit hs D ay c eleb r at ion o f Smi th s cul tur e in Ju ne 2 0 2 2 . Memb er s of the E xe cu ti v e Co mmi t tee s har e d v ide o me s s ag e s and v i site d si tes a ro un d the w or ld to shar e S mit hs D ay with colle agues; – Glo ba l lea de r shi p sum mit s f or ou r Se nio r Le ad er s hip te am in Nov em ber 2 021, Febr ua r y 2 0 2 2 and J uly 2 0 2 2 w i th th e ne x t on e pl an ne d for No v emb er 2 0 2 2; a nd – A n onl in e pr e se ntat ion a nd Q & A a bo ut p ay an d th e wo r k of th e Remuneration (now the Remuneration & People) Committee hos te d by C om mit tee Chair B ill S e eg er . Memb er s of our E xe cu ti v e Co mmi t tee a nd B oar d h av e al so v isi ted a r an ge of S mit hs s ite s dur i ng th e ye ar . Read m or e on p ag e 6 0. Developi ng talen t Th er e ar e ma ny o ppo r tuni tie s fo r pe opl e to gr ow t hei r c ar eer s at Smi th s. O ur mo r e st r uc t ur ed an d di v er s e ap pr o ach to s ucce s si on pl an ning f ol lo w ing t he t ale nt re v ie w s th is ye ar h as en ab led u s to ide ntif y an d de vel op hi gh -p otentia l ind i v idu al s f r om a b ro ad er p oo l of di ve r s e col le ag ue s fr o m all g eo gr aphic al r e gio ns , sp ec ial is ed ski ll s et s an d ind us tr y ex pe r ien ce. S e pa r atel y, appoi ntme nt s to our mos t s eni or r ol es a r e dis cu s se d at a mo nthly T al ent De v elo pme nt Co mmi t tee c omp r isi ng al l me mbe r s of th e E xe cu ti v e Co mmi t tee . Th is y ear a l s o s aw t he int ro du c tio n of a ne w or ga nis at ion al m etr ic to enab le m ean ing f ul me as ur eme nt of ta lent p r ogr e s sio n thr o ugh the o r gani s ati on. We w i ll co ntin ue to in ve s t in inter n al t ale nt mob il it y as a sig nif ic ant s o urc e of v alu e for S mi ths . W hile o ur di v i sio ns s er v e dif fere nt mar kets , the r e is mu ch comm on g ro und i n the q ual it ie s and s ki ll s et s r eq uir ed in o ur tech nic al te am s as th ey e nab le us to d el i ve r ef f ic ient ly an d cr eate ne w pr od uc t s fo r the f u tur e. We s e e opp or tun iti es to l ev er age this c omm on gr o und m or e ef fec ti v ely b y cr ea tin g for m al Gr o up - w ide te chn ic al co mmu nit ie s w her e gr o ups of s pe cia li s t s ca n conn ec t , sh ar e pr ob lem s an d ide as , an d co ntr ib ute to de li v er y of our s tr ateg y – for e xam ple e ner g y r e duc t ion p r oje c t s . We pl an to intr od uce a c omm on te chni c al c ar ee r l ad der a cr os s t he Gr o up that w il l pr o v id e ca r eer v i sib il it y for ind i v idu al s a nd en han ce inter n al ta lent m ob ili t y . Rew ar d and re cognitio n Reco gni sin g and r e w ar di ng co ll ea gue s in a f ai r , open an d mea nin gf ul w a y is an i mpo r tant un de r pin to d ev el opin g t alent . We ar e com mit te d to f air p ay p r a c tice s an d en sur i ng th at col le agu e s par ti cip ate in ou r suc ce ss . We hav e be en a n acc re di ted L i v in g Wag e emp lo ye r in th e UK sin ce 2 018. In the U K , w e op er ate a n all- em plo y ee S har e s av e S ch eme , w hich e nab le s co lle ag ue s to bu y S mit hs s har e s at a dis co unte d r ate. We h av e al s o b ee n und er tak in g a pr oc es s to al i gn emp lo ye e ben ef it s a cr os s ma r ket s , so t he y ar e the s a me fo r col le agu e s in any of o ur fo ur di v is ion s or G ro up. We h av e com ple ted th is w or k in Chin a, In dia an d Me xi co to date . Th e Bo ar d i s con s cio us of th e ch all en ging i mp ac t of c ur r ent infl ationa r y pr e ss ur e s on co lle ag ue s an d thi s is r ef lec te d in th e man age ment d ec isi on to fo cu s mo re o f the s al ar y incr ea se b ud get on th os e w ho ar e m or e si gnif i ca ntly af fec te d in the c omi ng y ear . 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 32 Div er sit y , equit y and inclusion We pr ov i de e qual e mpl oy m ent op po r tuni tie s . We re cr uit, s upp or t and p ro mote o ur pe op le b as ed o n th eir qu al if ic ati on s, s kil l s , aptitude and attitude. In employment -rel ated decisions, we comply w ith a ll ap pl ic ab le ant i- di sc r imin ati on r equ ir eme nt s in th e relev ant jurisdiction s. We have ze ro toler ance for discrimination, har ass ment o r r eta li atio n. People with disabili ties are given full consider ation for employ ment and sub sequ ent tr aining (inclu ding re -tr aining , if need ed, for people who have bec ome d isabled), career de vel op ment a nd pr o moti on b as ed o n th eir apt it ude a nd ab il it y. We end ea vo ur to f ind r o le s for th os e w ho a r e unab le to co ntin ue in the ir ex is ti ng jo b be c aus e of di s abi li t y. We ar e foc us ed o n pr o ac ti v ely i ncr e asi ng th e num ber o f wo men i n lea de r shi p ro le s at Sm ith s , as w el l as un de r s ta ndin g th e cha lle ng es a nd b ar r i er s th at ma y be i mpe din g th em f ro m f ulf il li ng thei r pote ntial . We have s om e w ay to g o, w hi ch is w h y it i s one of our E S G s tr ategic p r io r it ie s. We hav e f i ve fe mal e mem be r s of th e Smi th s Bo ar d ( 4 5%), and w e w elco me d thr e e ne w fem ale m emb er s to o ur E xe cu ti v e Co mmi t tee in F Y 2 02 2 ( 31 % w ome n). Wom en m ake up 2 8 % of our gl ob al co ll ea gue p op ul ati on , but o nly 2 4% of our 6 5 6 s eni or lea de r s . We ar e wo r ki ng to ch ang e thi s w it h a pr og r am me of ac ti v i tie s d es ign ed to id enti f y, suppor t an d ad v a nce th e ca re er s of the hig h- pote ntial w om en w e al r ea d y hav e at S mit hs . Our t ar g et is to r ea ch 2 7 % b y the e nd of F Y 2 0 2 3 and 3 0 % by the e nd of F Y 2 0 2 4 . Th e op po r tunit y to impr o ve i n the d iv er sit y , equ it y and incl usi on ar e a ha s be en r ec ogn is ed a nd pr ior it is ed i n our People str ategy. Besides clear ly ar ticulated diver sit y metr ic s and o bje c ti v es , in F Y 2 02 3 w e w il l al s o intr o duc e our r e v is ed pe opl e le ade r de ve lop ment p r ogr amme , w hich i s f ull y al ign ed to our S mit hs L ea der ship Be ha v iou r s . One e ntir e le ar n ing mo dule i n the p r ogr amme w il l be f oc us ed o n emot ion al and cultural intelligence, conscious inclusion, and the role of le ade r s in s et ti ng an d le adi ng di v er s e te ams . In a ddi ti on, ev er y di v is ion h as i ntr odu ce d it s o w n di v er s it y and inc lus ion pr io r it ie s , of te n sup por ted b y de di ca ted in di v id ual s, an d incl udi ng un der rep re s ente d gr oup n et w or ks , ed uc ati on, communication and other suppor t acti v ities . Communitie s Our direct econ omic contribution to communities and societ y w as £ 2 . 3 3bn in F Y 2 0 2 2 . FY2 022 Employe e costs £82 3m Supplier cost s £1, 3 6 4 m Ta x p a i d £14 0 m To t a l £2 .3 3bn GEND ER DI V ER SI T Y IN THE GROUP BOARD OF DIREC TORS Male 6 (55%) Female 5 (45%) EXECUTIVE C OMMITTEE Male 9 (69%) Female 4 (31%) SENIOR LEADERSHIP TEAM 1 Male 498 (76%) Female 158 (24%) TO T AL C OLLEAGUES Male 10,631 (72%) Female 4,133 (28%) 1 S e ni o r Le a de r s hi p Team i s t he K P I u s e d to t r a ck g en d er d i v er s i t y a t Sm i th s . I t is de f in ed a s a ll c o ll e a gu e s th at a r e Gr ad e 14 or a bo v e . Da t a fo r G r a de 14 a nd a b o ve pl us D i r ec t or s of su bs id i ar y co mp a ni e s , in l i ne w i t h th e d ef in i ti o n in t he C o mp a ni e s Ac t 2 00 6 ( S t r at eg i c Re po r t and D i re c t or s’ R ep o r t ) Reg ul a ti o ns 2 013 is F em al e: 171 an d Ma l e: 5 61. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 33 GOV ERNA NCE Human right s We con sid er v io l ati ons o f huma n r ight s to b e ap pa ll in g cr im es . Co ndu c t that e xp loi t s w or ker s or deni es t hem t he r i ght s an d ben ef it s to w hi ch th ey a re l eg all y enti tle d is w h ol ly in con sis tent w ith o ur Val ue s and p ol ic ie s an d is not to ler ated. We r e cog nis e th e imp or tant r e sp on sibi li t y we ha ve, a nd w e sup po r t the v isi on of a wo r ld w h er e ev er y one c a n enjo y th eir un i ve r s al hu man r i ght s . Our Hu man R ight s P ol ic y is guid ed b y th e inter n atio nal h uman right s principles encompas sed in the Univers al Decl ar ation of Huma n Ri ght s , the Inte r nat ion al L a bo ur Or g aniz ati on’ s De cl ar ation o n Fund ame nta l Pr incip le s and R ight s at Wo r k , an d the Un ite d Nati on s Gui din g Pr i nci ple s on B usi ne s s and H uman Rig ht s. We a dhe re to n ati ona l l aw an d r eg ul ati ons i n ea ch ma r ket in w hic h we o per ate and , sho uld w e en cou nter co nfl ic t b et wee n inter n atio nal ly r ec og nis ed h uma n r ight s a nd na tio nal l a w s , we w il l se ek w a y s to hon our t he p r inc ipl es of i nter na tio nal hu man r ight s. Al l pe r s on s wo r ki ng fo r , o r on b eha lf of, S mit hs ar e r eq uir e d to adh er e to our P ol ic y and app r oa ch. Our Respon sible Miner al s Sourcin g Polic y addres s es our comm it ment to t he s our cin g of mi ner al s in an et hic al a nd sus t ain abl e man ner t hat s afe gua r ds hu man r i ght s an d aim s to ens ur e that t in , tun gs ten , ta ntal um, g ol d and c ob alt a re s o urc ed w ith d ue r e spe c t fo r huma n r ight s a nd in a m ann er th at do e s not fi nan ce ar m ed gr o ups . T o achi ev e thi s ob jec t i ve , we t ake gui dan ce from the OECD Due Diligence Guidance for R espon sible Supply Chai ns of Mi ner al s f ro m Co nfl ic t-A f fec ted a nd Hi gh- Ri sk A r ea s . We exp e c t tho se w i th w h om w e hav e a bu sin e ss r el ation ship – sup pl ier s , c ontr acto r s , sub co ntr a c tor s , an d an yo ne el se in ou r sup ply c hain s , inc lud ing an y r ec r ui tme nt age nt s or ot her p ro v id er s of l ab our ( temp or a r y or oth er w is e) – to s har e o ur com mit ment to huma n r ight s a nd to b e fr e e fr o m pr a c tic es a s so ci ated w i th hum an r ight s v i ol ati on s , incl udi ng fo rc ed / i nv olu nta r y la bo ur or m od er n sl av er y. We take v er y s er io us ly any a ll eg atio ns th at hum an r i ght s are no t properly respect ed. We hav e not i de ntif ie d an y se r io us hum an r i ght s is s ue s in our ope r at ion s or in t ho se of o ur su ppl ie r s in F Y 2 0 2 2 . Th e Sm ith s Mo de r n Sl a ve r y and Hu man T r af fic kin g St ateme nt F Y 2 0 2 2 c an be f oun d on th e Smi th s cor por ate w eb si te w w w.smiths .com A nti- br ib er y and anti - cor r up tion Br ib er y an d cor r uption m at ter s are co v er ed b y ou r Co de of Busi ne s s Ethi c s . We al s o ha ve s pe ci fi c po li cie s an d pr oc ed ur es re l atin g to ac ti v i tie s t hat cr e ate br ib er y an d co r r upt ion r isk s, a nd an umb re ll a a nti- br i ber y a nd ant i- co r r upt ion p ol ic y that pr o v ide s a sing le v ie w of o ur app r oa ch . T he se p ol ic ie s co ve r a br oa d r a nge of mat te r s inc lud ing t he gi v i ng an d r ece i v ing of g if ts , me al s , a nd hos pi tal i t y ; inv i ta tio ns to go v er nm ent of fic ial s; our app ro ac h to fa cil i tat ion p ay m ent s; an d cont r ol s a r oun d the a ppo intm ent of dis tr i bu tor s an d ag ent s , cu sto ms b ro ker s , an d fr ei ght fo r w ar der s. Our et hic s d ash bo ar d en ab le s us to inter rog ate our r e gis ter of gif ts , me al s and enter t ainm ent in an e f fe c ti v e and u se fu l w ay. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 34 The T ask Fo rce on Cl ima te -r el ated F in anci al Di sc los ure s ( TCF D) hel ps to imp ro ve tr an sp are nc y o n cli mate - rel a ted ri sk s an d opp or tuniti es b y pr ov idi ng an in ter na tion ally reco gni se d fr a mew or k to gui de co mpa nie s in ma ki ng more effec tive climate-related financial disclosures. O v er th e l as t thr e e ye ar s w e h av e dem on st r ate d our c ontin ue d comm it ment to al i gnin g w ith t he r e comm en dati on s of the T CF D thr ou gh ex p and ing a nd up dat ing o ur as s e ss ment o f cl imate - re l ated r i sk s an d opp or tun it ie s. T hi s on goi ng s y s tem atic as s es sm ent h as al lo w ed us to i de ntif y the p otent ial r i sk s an d oppor tunities that climat e change presents to our busines s, ena bl ing u s to bet te r pr ep ar e fo r an unc er tai n fu tur e an d en sur e that o ur bu sin es s s tr ateg y is r e sil ie nt to fu tur e c han ge s . Mitigating our risk s and realising our opp or tunities Our di v er sif ied p or t fo li o, r es po nsi v en es s to n ew m ar ket re qui re ment s a nd g eo gr a phi c spr e ad of a s set s m ea n that our b usin e ss i s w ell p r ep ar ed to r e sp ond to c li mate r i sk s in the s ho r t term . Ho we ve r , the fu tur e i s unce r tain , s o in F Y 2 0 2 2 we h av e an d w ill conti nue to t ake ac t ion to s t re ng the n our l ong er -ter m c l imate re si li ence , imp lem enti ng me as ur e s to re duc e our e xp os ur e to the potent ial c li mate r i sk s we h av e id enti fi ed an d en sur ing that S mi ths is be s t p osi tio ne d to re al is e ou r opp or tun iti e s. F or ex amp le: Climate-re silient asset s: Joh n Cr an e ha s und er ta ken ana ly sis to ide ntif y f aci li tie s v ul n er a ble to t he ef fec t s of cl im ate cha ng e and has p ut i n pl ac e mon ito r ing a nd mi tig ati on me as ur es to a cco unt for ex tre me w eat her . For ex am ple , one s ite ha s be en r el oc ate d as a r e sult o f re cent i ns ur an ce cl aims c aus e d by f lo o ding i s sue s . Joh n Cr an e ha s al s o co ns ide re d th e r is k of ex t r eme w eat he r during site selection of new facilities , including consideration of hur r i c ane p ath s an d pr oxi mit y to flo o d pl ain s . Mitigating supply chain risks: Ac ro s s al l the di v i sio ns , si ngl e so ur ce mate r ial s are a vo ide d w he re v er po s sib le an d ins te ad , an app r oa ch of s ou rc ing f r om mu ltip le s si tes i n mult ipl e locations acros s the globe is tak en. This increas es resil ience of the s upp ly ch ain a gain s t r egi ona l dis r upt ion c au se d b y ex treme weather event s. Keeping c ost s down: T o mitig ate th e r isk s a s so cia ted w it h r is ing re s our ce c os t s , the P r oc ur em ent tea m ha s ev al uate d Smi th s Detection’ s supply chain and tr anspor tation process es for eff icienc y impro vements . This included implementing measure s suc h as op timi s atio n of sp ac e in fr e ight th r oug h re us ab le s ta ck ing so lut ion s an d ex plo r ing l oc a li se d bu sin es s m od el s to r e duc e produc t tr anspor t ation distances. Strengthening oversight and owner ship: Our n ew l y for m ed Sc ien ce, S us t ain abil i t y & E xcelle nce ( S SE ) C omm it te e of the B oa r d, ch air e d by D ame A nn Do w li ng , is r es po nsi ble f or over seeing the Group ’ s approach to science, sustainabilit y, and excellence. The over sight covers R&D, commercial isation and s us ta ina bil it y st r ate gie s , inc ludi ng th e imp ac t o f cl imate cha nge a nd r el ate d met r ic s a nd t ar get s . We al so ap poi nted a Ch ief Sus t ain abi li t y O f fic er to th e E xe cu ti ve C om mit tee. Th e S SE ov er s e es t he f ol lo w ing : – Pr i or i tis ing n e w pr od uc t de v elo pme nt pr og r am me s w ho se comm er ci al su cce s s w ill d el i ve r re v enu e gr ow th an d cor r e sp on ding s us t ain abil i t y p er for m anc e ben ef it s to an d through our customer s. T his includes energ y ef ficienc y, GHG reduc tions and renew able energy pr oduction and use. – Del i v er in g Net Ze ro G HG em is si on co mmi tme nt s for S c ope s 1, 2 and 3 a nd as s o ciate d SB T s thr ou gh en er g y ef f ic ien c y, ren e w abl e ene rg y, and o ptim isi ng pr o duc t d e sign a nd o ur sup ply c hai ns . TCFD recommended d isclosures At th e tim e of pub l ic atio n of th is A nn ual Re por t, t he G ro up ha s made climate-related financial disclosure s consistent with the TCFD’ s recommendations and Recommended Disclosures pur s uant to L i s ting R ule 9 .8 .6 ( R ) ( 8 ). T he fo llo w in g ta ble summ ar i se s ou r dis cl osu re s a nd r efer s to whe re f ur th er det ai l on cl im ate- r el ated f in anc ial d is clo sur e s c an b e fou nd in th is Annu al Repor t. In com plet ing t his w or k the Gr ou p mad e us e of TCF D g uid anc e mater i al in clu din g the TC F D tech nic al s upp lem ent o n the u se of scenari o analysis , TCFD Guidance on Metric s , T ar get s, and T ra nsi ti on P l ans , a nd th e TCF D G uid ance f or A ll S e c tor s . Th e Gr o up is co ntin uing to m ake pr o gr es s a cr os s al l fo ur pil l ar s o f the r e com men dati on s and i s wo r k ing to f ur the r al ign an d be m or e tr a nsp ar ent i n it s di sc lo sur e s in l ine w i th th e ev ol v ing g uid el ine s to bet te r com muni c ate the w or k t hat i s bei ng do ne inte r na lly. In F Y 2 0 2 3 w e inten d to und er take a m ater ia li t y ass e s sme nt to dem on st r ate th at Sm ith s ha s con si der e d the m os t im por t ant topi c s in E S G, inc lu ding c l imate r i sk an d opp or tun it ie s. We ar e al s o de ve lo pin g a Gr oup - w id e st r ate gic r e sp on se to ene rg y t r a nsi tio n in r el at ion to o ur o w n tar g et s , the i mpl ic at ion s on cu r re nt cu sto mer s and en d us e mar kets , and o pp or tuni tie s for Smiths . In F Y 2 0 2 3 w e inten d to pr ep ar e an d pub li sh a de tai led , s ta nda lon e TCF D do cu ment to e nhan ce o ur dis cl os ur es to c ov er th e se mat ter s and t ake acco unt of p ro gr e s s. T A S K F O RC E O N C LI M A TE - REL A T ED F I NAN C IAL DI S CLO S URE S 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 35 GOV ERNA NCE Disclose Smiths gover nance around climate-related risks and oppor t unities. a. Des cr ib e the B oar d’ s over s ight o f cli mate - rel a ted r is k s and o ppo r tunitie s . The Boar d overs ees the Group’ s approach to sustainabilit y, including clima te change. The Board has ov er s ight of o ur Gr o up and d i v isi ona l st r ate gie s , r ec ei v ing r e gul a r upd ate s on pe r for ma nce an d de ep di ve s into di v i sio nal s t r ate g y on a r ot atio nal b as is . Cl imate c han ge o pp or tuni tie s ar e inte gr ated into our s tr ategic p l anni ng p ro ce s se s , in clu din g our E S G f r a me wo r k an d E S G s tr ate gic p r io r it ie s. T h e S SE Co mmi t tee of t he B oa r d is r es po nsi ble f or o ver see ing t he Gr o up’ s app r oa ch to s cie nce, s us t aina bil it y and e xcel len ce. T h e ov er s ight co v er s R&D, co mme rc ial is at ion a nd su s ta inab il it y str ateg y, inclu ding the im pa c t of cl im ate cha ng e and r el a ted met r ic s a nd t ar ge t s. T h e Au dit & R is k Co mmi t tee of t he Bo ar d is r e sp on sib le for r e v ie w ing a nd a s se s sin g th e ef fe c ti v ene s s of r i sk ma na gem ent , inc ludi ng cl imate r i sk in t he bu sin es s . T he r e su lt s of ou r annu al a ss e s sme nt of cl im ate cha nge r isk s and opp or tun iti es a re r e por ted to t he A udi t & Ri sk C omm it te e. – Se e B oa rd g ov er n an ce mo del p a ge 5 7 – Se e E S G go v er n ance a nd o ve r si ght mo del p a ge 2 9 – Se e E nter pr ise Ri sk Ma na gem ent ( ER M) p ro ce s s p age 4 6 – Se e B oa rd a c ti v i t y p ag e 6 0 – Se e S S E Co mmi t tee Re po r t pag e 8 9 – Se e ou r E S G fr ame wo r k pa ge 2 4 – Se e ou r E S G st r ate gic p r io r it ie s pa ge 2 7 – Se e St akeh ol der s and S1 72 St ateme nt pa ge 4 1 b. D es cr ib e ma nag eme nt’ s rol e in as s es s ing an d ma nagi ng cl ima te -r el ated r i sk s and oppor tunities Th e E xe cu ti v e Co mmi t tee i s r es po nsi ble fo r th e Gr oup’s appr oa ch to su s ta inab il it y , inc lud ing c li mate cha nge . Cl imate -r e l ated r i sk is r e por ted a nd m ana ge d in th e s ame w a y as ot her r isk s in the b us ine s s . O v er an d abo v e this , t he r e sult s o f our an nua l as s es s ment of c l imate c han ge r i sk an d opp or tun iti es a r e re po r ted to the E xecu ti ve C om mit tee and inte gr ated into our s tr ategic p l ann ing p r oce s s es , in cl udin g our E S G s tr ategic p r io r it ie s. O ur Gr o up an d di v isi on al s tr ate gic r e v ie w an d pl an ning p r oc es s e s con sid er and r e sp ond to c l imate -r el a ted op po r tuni tie s as p ar t of ou r di v isi on al s tr ate gic p l ann ing p r oce s s es a nd our E S G f r a me wo r k an d E S G st r ate gic p r io r it ie s. T o al ign d ec isi on -ma ki ng an d ow n er s hip of o ur E S G go al s , su s ta inab il it y metr i c s for m p ar t of th e Smi th s ann ual an d lo ng -ter m in cent i ve p l ans . – Se e E nter pr ise Ri sk Ma na gem ent ( ER M) p ro ce s s p age 4 6 – Se e E S G go v er n ance a nd o ve r si ght mo del p a ge 2 9 – Se e ou r E S G fr ame wo r k pa ge 2 4 – Se e ou r E S G st r ate gic p r io r it ie s pa ge 2 7 – Se e O ur bu sine s s m ode l pa ge 9 – Se e O ur st r ate g y an d meg atr en ds p ag e 10 – Se e Rem uner ation & P eo ple C om mit tee Repo r t pag e 7 5 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 36 STR A TEG Y Disclose the actual and p otenti al imp a c t s of climate-related risks and opp or tun iti es o n the G r oup’s bus ine s s , st r ate g y and financial pl anning, w here such information is material . a. Des cr ib e the c lim ate -r el ate d r isk s an d op por tuni tie s the or ga nis a tion ha s id enti fie d over th e sho r t, med ium an d lon g ter m . We con duc t a s y s tem atic a s se s sm ent on a n annu al b as is to id enti f y phy si ca l and t r an si tio n r is ks and o pp or tuni tie s o ve r the s hor t, m ed ium an d lo ng ter m . Fur the r , our Pur pos e and c omm itm ent to sus t ain abil i t y l ea der ship ar e r efl ec te d in ou r intent to pr ior it is e E S G pe r for man ce at S mit hs . We ther ef or e pl a ce ad dit io nal em ph asi s on ou r re s pon s e to me gatr en ds in o ur s ec to r s w hic h r el ate to the e ner g y tr ansi ti on ag en da an d ov er all r edu c tio n of w as te an d en er g y us e. – Se e th is y ear ’s rep or ting o n Ke y tr ansi tio n r isk s a nd op po r tuni tie s an d Ke y ph ys ic al r i sk s and o pp or tuni tie s p ag e 4 0 – Se e Mi tig atin g our r isk s and r e al isin g our o pp or tuni ti es p ag e 3 5 – Se e O ur bu sine s s m ode l pa ge 9 – Se e O ur st r ate g y an d meg atr en ds p ag e 10 b. D es cr ib e the i mpa c t of c lim ate -r el ate d r isk s an d op por tunit ies o n the o rg ani sa tion’ s busines ses , str ategy and financial pl anning. We inco r po r ate t he cl im ate- r el ate d r isk s a nd op po r tuni tie s w e ide ntif y into ou r bus ine s s pl a nnin g and s tr ateg y de ve lop ment p r oc es s e s at bot h the d i v isi on an d Gr oup - le ve l , inc ludi ng o ur E S G fr amew or k and s tr ate gic p r io r it ie s. To align d eci sio n- mak in g and o w n er sh ip of ou r E S G go al s , sus t ain abil i t y m etr i c s for m p ar t of th e Smi th s ann ual an d lo ng -ter m in cent i ve p l ans . – Se e Mi tig atin g our r isk s and r e al isin g our o pp or tuni ti es o n pa ge 3 5 – Se e ou r E S G fr ame wo r k pa ge 2 4 – Se e ou r E S G st r ate gic p r io r it ie s pa ge 2 7 – Se e E nv ir on ment p er for m anc e pa ge 3 0 – Se e O ur st r ate g y an d meg atr en ds p ag e 10 – Se e Chi ef E xe cu ti v e Of fi cer ’s rev ie w of t he y ear p ag e 1 1 – Se e Rem uner ation & P eo ple C om mit tee Repo r t pag e 7 5 c. Des cr ib e the r es ili ence o f the or ga nis a tion’ s str ate g y . T aking i nto con sid er a tion dif f ere nt cl imate - re l ated s cena r ios , in clu ding a 2 °C o r lo wer s cena r io. Th e s cen ar io s we u se to a s se s s th e r es il ienc e of ou r bus ine s s alw a y s inc lu de co nsi der ation o f a 2 °C or lo w er s cen ar io . T his y ear w e h av e ex pan de d th e r an ge of s ce nar i os w e as s e ss o ur s el ve s ag ain st and h av e dis cl os ed o ur r a ting s of th e r es ili enc e of our b us ine s s ag ain st o ur id enti f ied p otent ial r isk s . W hi l s t cl ima te r isk i s not c ons ide r ed a p r inc ipa l r is k for S mit hs , f ail ur e to mee t st akeh ol der exp e c tat ion s on E S G o bl igat io ns is c on sid er ed a p r inc ip al r is k . T his i s ad dr es s ed t hr ou gh Gr o up st r ate g y and o ur E S G s tr ategic pr ior it ie s . – Se e S ce nar i o ana ly si s – buil din g upo n pr e v iou s wo r k on p ag e 3 9 – Se e Ke y tr ansi tio n r is k s and o pp or tuni tie s an d Ke y ph y sic al r isk s and o pp or tuni tie s p ag e 4 0 – Se e P r inc ip al r i sk s pa ge 49 – Se e ou r E S G st r ate gic p r io r it ie s pa ge 2 7 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 37 RISK M A NAGEMENT Dis cl os e ho w Sm ith s id enti f ie s, asse ss es and manages climate-related risks . a. Des cr ib e the o rg ani sa tion’ s proce s se s f or id enti f y in g an d as se s sin g clim ate - rel ate d r is ks . Cli mate -r el ate d r i sk is r ep or ted an d ma nag ed i n the s a me w a y as oth er r i sk s in th e bu sine s s . O v er an d abo v e this , w e co ndu c t a s y ste mati c sc ena r io an aly s is exe rc is e on an a nnu al ba si s to ide ntif y an d as s es s c li mate -r el ate d r is k s and o pp or tuni tie s . T his u se s t he fo llo w in g s ta ge d pr oc es s: i. Un der sta nd r e ven ue s tr e ams a s ba s e c as e; ii. Cl im ate sc ena r io an aly s is – hi gh- le ve l r isk a nd opp or tun it y mapp ing c ond uc ted o v er t wo ph ys ic al an d t wo tr a ns iti on cl im ate sc ena r io s ov er t wo time h or i zon s (m ed ium - and l ong -ter m ); ii i. Inte gr ate d f inan cia l imp ac t a s se s sm ent s – r i sk s and opp or tun iti es i dent if ie d to unc ov er th e f ina nci al dr i v er s t hat w il l info r m and s hap e f ut ur e inv e st ment ; and i v. T est ing a nd v al i dati on – w or k sh op s con duc te d at Gr o up and d i v isi ona l le ve l to ref in e the r isk and o pp or tuni t y m app in g by r e v ie w ing p otenti al mate r ial i t y o ve r tim e, id enti f y potenti al mi tig atio n mea su re s to inf or m s tr ateg y, and ref in e met r ic s an d t ar get s . – Se e E RM pr o ce s s pa ge 4 6 – Se e th is y ear ’s appr oa ch in S c ena r io an aly s is - bu ildi ng up on p re v io us w or k o n pa ge 3 9 b. De sc r ibe t he or gan is ati on’ s proce ss e s for m ana gin g cli mate - rel a ted r is k s Cli mate -r el ate d r i sk is r ep or ted an d ma nag ed i n the s a me w a y as oth er r i sk s in th e bu sine s s . A s par t of our a nnua l sc ena r io an aly s is exe rc is e, w e al s o id enti f y key ac ti ons to m it igate p otenti al cl im ate- re l ated r i sk s an d to re al is e ou r ide ntif i ed op po r tuni tie s . S ee s t age d pr o ce s s de s cr ib ed a bo ve . – Se e E RM pr o ce s s on p ag e 4 6 – Se e Mi tig atin g our r isk s and r e al isin g our o pp or tuni ti es o n pa ge 3 5 c. Des cr ib e ho w pro ce ss e s for i den tif yin g, a ss e s sing , an d man agin g cl imate - re l ated r i sk s are integrated into the organisation’ s over all risk management. We inco r po r ate t he cl im ate- r el ate d r isk s w e id enti f y into our E RM pr o ce s s. – Se e Mi tig atin g our r isk s and r e al isin g our o pp or tuni ti es o n pa ge 3 5 – Se e E RM pr o ce s s on p ag e 4 6 ME T RI C S A ND TA R G E T S Disclos e the metric s and t ar g et s us ed to as s es s an d ma nag e r ele v ant climate-related risks and oppor t unities, wh ere such information is mat erial . a. Disc los e th e metr i c s us ed b y the or ga nis a tion to a s se s s cli mate - rel a ted r is ks a nd opp or tuniti es in l ine w it h it s s tr ate g y and r i sk ma nag eme nt pr oce ss e s. We re por t ag ain s t our en v ir on ment al m etr ic s annual ly. T his y ea r we h av e al s o un der t aken a ga p anal y sis of o ur me tr ic s a nd t ar ge t s to ide ntif y key a re as w h er e w e ca n imp ro v e our m oni tor in g of cl imate -r el ated per for mance . We ha ve b uilt a m or e ag gr es s i ve G HG r ed uc ti on t ar get t r aj ec to r y to mee t S cien ce -B as e d T arg et s an d ene rg y e f f ic ienc y and ne w p ro du c t com mer ci al is ati on t ar get s i nto our in cent i ve ar ra ng eme nt s for F Y 2 0 2 3. Our c li mate -r el ate d met r ic s a nd t ar get s n o w incl ud e: – T otal en er g y us e – Ene r g y ef f ic ien c y t ar ge t, an d ne w pr o duc t c omm er cia li s atio n r ev enu e ta r get p er pr o gr a mme , both l in ked to r emu ner ation fo r F Y 2 0 2 3 A I P – Sc op e 1 & 2 emi s sio ns ab so lu te re duc t ion t ar g et l inked to r em une r ati on fo r F Y 2 0 2 3 LTIP – Sc op e 1 & 2 emi s sio ns no r ma li se d to r ev en ue t ar get l inke d to r emun er ation fo r F Y 2 0 2 2 L T IP – Se e E nv ir on ment p er for m anc e on p ag e 3 0 – Se e Rem uner ation & P eo ple C om mit tee Repo r t on pa ge 7 5 b. D is clo se S cop e 1 , Sc ope 2 a nd, i f app ro pr ia te, Sco pe 3 GH G emi ss ion s, and th e rel a ted r is k s. We dis cl os e our S co pe 1 a nd 2 em is si ons a nnu all y. We have c r eate d a ba se li ne in ve ntor y of ou r Sc op e 3 emis s ion s w hic h w ill b e v al id ated b efor e b ein g sub mit ted to the S BT i i n F Y 2 0 2 3. – Se e E ner g y u se a nd GH G ( S cop e 1 & 2 ) e mis si on s on p ag e 3 0 – Se e S co pe 3 inf or m atio n on p ag e 3 0 – Se e E nv ir on ment p er for m anc e on p ag e 3 0 c. Des cr ib e the t ar ge t s us ed b y the or ga nis at ion to m ana ge cl imate - re l ated r i sk s an d opp or tuniti es an d pe r f or ma nce ag ain st t ar ge t s. We re por t on o ur pr o gr es s a gai ns t ou r env ir o nme nta l ta rg et s an nual ly. T his y ea r we h av e al s o und er taken a g ap an aly si s to id enti f y key add iti on al met r ic s a nd t ar get s w h ich c oul d imp ro v e mon itor ing of our c li mate -r el a ted p er for ma nce . S ee m etr ic s and ta r get s d es cr ibed a bo ve . – Se e E nv ir on ment p er for m anc e on p ag e 3 0 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 38 Scenario ana lysis – bui lding upon p rev ious work Dur i ng F Y 2 0 21, clim ate- r el ate d phy s ic al an d tr ansi tio n r isk s a nd opp or tun iti es w er e a ss e s se d un der t wo c lim ate s cen ar io s and time p er i od s , and t he ac t ion s th at cou ld b e ta ken to mit iga te r isk s and c ap tur e op po r tunit ie s we r e inco r p or ate d into o ur st r ate gic plannin g proce ss es . Our m os t r ec ent sc ena r io a naly s is exe rc is e, co ndu c ted in Q 3 F Y 2 0 2 2, b uil ds up on th e as s e ss ment o f pr ev i ou s ye ar s , an d se ek s to pr ov i de a m or e in- d epth u nd er s t and ing an d co mp ar is on o f physic al and tran sition risk s and oppor tunities. A wider r ange of scenarios w as considere d, including t wo tr ansition scenar ios and t wo ph y sic a l r isk s ce nar i os . Physical scenar ios For t he ph y sic al s ce nar ios , the Inte r go ver nment al P an el on Cli mate Ch ang e’ s (IP CC) Repr e s ent ati v e Co nce ntr at ion P at hw a y (R CP ) 4 .5 an d R CP 8 .5 s ce nar i os w er e us e d. RCP4.5 – RCP4 .5 r e pr e se nt s an inter m ed iate emi s sio ns s ce nar i o w her e by cl imate p ol ic ie s ar e imp lem ented to l im it GH G emi s sio ns . – In the 2 0 4 0 s, g lob al m ean s ur fa ce temp er atur e is pr o jec te d to incr e as e b y 1 . 1 °C. B y th e 2 0 8 0 s , thi s r eac he s 1.4 °C. RCP8.5 – RCP 8.5 i s a hig h- em is sio ns s ce nar i o and r e pr e se nt s a fu tur e w her e le v el s of g re en hou se g as ( GHG) e mis s ion s cont inu e to r is e thr ou gho ut t he 21st cent ur y w it h minim al p ol ic y inter venti on . A s s uch , GH G emis s ion s w er e as su me d to conti nue to i ncr e as e thr ou gho ut t he ce ntur y, wi th out s ign if ic ant inte r vent ion s . – In the 2 0 4 0 s, g lob al m ean s ur fa ce temp er atur e is pr o jec te d to incr e as e b y 1 .8 ° C. B y t he 2 0 8 0 s , th is r ea che s 3 .7°C. Across both scenarios: – Some regions w ill exper ience increased annual rainfall , w hil s t ot her r e gio ns w il l r ece i ve le s s an nua l r ainf a ll . – Regi ons a re l ikel y to ex per ience s e as ona l dif fer enc es i n temperature and precipit ation patterns . For example, ann ual pr ec ipi tat ion i n the U K is pr o jec te d to inc r ea se b ut th is i s due to pr oje c ted w et te r w inter s , in cr ea sin g the r isk of f lo odi ng; in contr as t, s umme r s ar e p ro je c ted to b eco me dr ier , incre as ing the r i sk of dr o ught . – E x t re me w eat her e v ent s su ch a s fl oo din g, w il df ir e s and d r oug ht ar e li kely to be co me mo r e se ve r e and m or e f re qu ent . – Th e di f fe re nce b et wee n the t wo s cen ar i os is p ar tic ul ar ly ev id ent in the p r oje c ti ons to w ar d s the e nd of t he ce ntur y, whi ch ar e much m or e ex tre me un der R CP 8.5 . T r ansition scenar ios For the transiti on scenario s, the International Energ y Agenc y ’ s (IE A ) Wor l d Ene r g y Ou tlo ok S us t ain abl e De ve lop ment S c ena r io ( SD S) a nd St ate d Pol ic ie s S cen ar i o ( S T EP S) we re u s ed . 2021 Stated Policies Scenario (STEPS) – Th is s cen ar i o ref le c t s cu r r ent p ol ic y -s et t ing b a se d on s ec to r- by -s ec to r as s e ss ment o f the s pe ci fi c po li cie s in p l ace, a s w ell as th os e th at ha ve b een a nn ounc ed b y go ve r nm ent s ar o und the w or l d. – It aim s to pr o v id e a ben chm ar k to a s se s s th e potent ial achi ev em ent s ( and l im it ati ons ) of r ec ent de v elo pme nt s in en er g y and climat e polic y: – Ris ks to o il s ec ur i t y r em ain – Gas mar kets are changing r apidly – Ele c tr i ci t y m ov e s to the h ea r t of mod er n en er g y s ec ur i t y 2021 Sustainable Development Scenario (SDS) – Th e as s umpt ion s on p ubl ic h eal th an d the e co nom y ar e th e s ame a s in th e S T EP S – Full a li gnm ent w it h the P a r is A gr ee me nt to hol d th e r is e in glob al a ve r a ge tem per atur e to “w el l bel o w 2 °C … an d pu r sui ng ef fo r ts to l imi t ( r is es ) to 1.5 °C” – It w or k s b ac k w ar d s fr om t he a chie v eme nt of su st ain abl e en er g y- re l ated g oa l s – uni v er sal a cce s s to af f or dab le, r el ia ble a nd mo der n e ner g y s er v ic es b y 2 0 30 , a sub st ant ial r e duc ti on in a ir pol lu tio n, a nd ef fec ti v e ac ti on to co mb at cl ima te chan ge – a nd sho w s w hat w ou ld b e r equ ir ed to m eet th em – Major tran sfor mation of the g lobal ener gy s ys tem – Net Zer o b y 2 0 70 – Sur g e in cl ean e ner g y p ol ic ie s ( pr om oti on of hy dr o gen , bi og as , biomethane and Carbon Capture, Utilis ation and St or age (CCUS) across sectors) – Sta gg er ed i ntr od uc ti on of C O 2 pr ices – Fos si l fu el s ubsi die s ph as e d out b y 2 0 2 5 in ne t-impo r ting count r ie s an d by 2 0 35 in n et-e xp or ting c ount r ie s A s w el l as a s se s sin g r is k s and o pp or tuni tie s un der a g re ater numb er of s ce nar i os , thi s ye ar ’s ass e s sme nt incl ud ed d eta ile d eng ag eme nt w ith e ac h of the f our d iv i si ons to e nab le a ‘ de ep di v e’ into is su es s pe ci fi c to ea ch an d to bet ter unde r s ta nd th e Gr ou p- lev el i mpl ic at ion s of th es e r i sk s and o pp or tuni ti es . In ad dit ion , w e hav e as s e s se d th e le vel o f eac h r is k and opp or tun it y in mor e det ai l to bet te r und er s t and t he p otenti al fi nan cial i mp ac t s of th e id enti fi ed r i sk s an d op por tu nit ie s. Al tho ugh a q uant it ati v e as s e ss ment w as not un der ta ken, r isk and opp or tun it y r atin gs w er e def in ed in l in e w it h the G ro up an d di v is ion lev el r isk re gi ste r s to al lo w a bet ter unde r s ta ndin g of th e sc a le of ide ntif i ed r i sk s an d opp or tun iti es , e nab lin g Sm ith s to pr i or i ti se actions for risk mitigation. Th e se a ddi ti ona l ac ti v i tie s al lo w us to b et ter u nde r s t and t he nuan ce d natu re o f r isk s a nd op po r tuni tie s po s ed ac r os s ou r bus ine s s , at Gr ou p and d i v isi on le ve l , und er a w id er r ange of f u tur e sce nar ios . Th is ul tim ately en abl e s us to imp r ov e our r e sil ie nce , by a ddr e s sin g r is ks a cr os s o ur po r tf ol io an d en sur i ng th at opp or tun iti es a re i nco r po r ate d w it hin ou r bus ine s s s tr a teg y. Pr i or i t y r isk s and o pp or tuni tie s ar e s umm ar is e d in the t ab le s bel ow a cr os s t he r a ng e of sc ena r io s. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 39 Key phy si ca l r isk s an d op por tunit ies O v er th e me dium an d lo nge r ter m , key p hy sic a l r isk s r el ate to the pote ntial ef fec t th at pr oj ec te d inc r ea se s in th e f re qu enc y and s ev er i t y of ex t re me w eat her e v ent s co uld h av e on o ur as s et s an d sup ply c hai n. T he s e r is k s be com e mo re s e ve re u nde r the h igh - emi ss ion s RCP 8 .5 scen ar io. Ho we ve r , we hav e al so ide nti fi ed s ev er al opp or tuni ti es w h er e ea ch of o ur di v is ion s c an w or k to d ev elo p inn ov a ti ve s ol ut ion s to our customers’ climat e-rel ated challenges. RCP4.5 physic al scenario RCP 8.5 physic al scenario 204 0s medium term 2080s long term 204 0s medium term 2080s long term Risks Le v el o f r i sk c a te g or i e s: Ve r y Lo w – Lo w – M od e r at e – H ig h – Ve r y H ig h Da ma g e to Gr o up a s s et s f ro m ex tre me w e at he r ev en t s: In cr e as e d co s t s an d r e sul ti ng re v en ue l os s e s du e to r ep ai r an d in sur anc e co st s. Low Mo der ate Low High T emperature regulation requirements during heatw aves and cold snaps: Health and s afet y r is k s fr o m ov e r he at in g, h igh er o pe r a tin g co s t s f r om in cr e as e d ai r co nd it io nin g an d he ati ng . C ap it al c os t s a s s oc iat ed w i th r et r of it tin g as s et s to p r ov i de s u f f ic ie nt temperatur e control s. Low Low Low Low Da ma g e to key s up p ly ch ai n a s se t s f ro m ex tre me w ea th e r ev en t s: L os s of r e v en ue du e to di sr u pti on /del ay o f ma nu f ac t ur i ng p r oc es s e s . Mod er a te High Mo de r ate High Disruption to transpor tation and d istr ibution network s from extreme weather events: Lo s s of r e ve nu e du e to de l ay s g et t in g pr o du c t s to m ar ket , c au s ed b y s upp ly c ha in disruption. Mod er a te High Mo de r ate High Oppor tunities Grow th in remote sensing market: Inc r ea s ed r e v en ue f r om g ro w th in d em an d for s a tel l ite te c hn ol og y f or e nv i ro nm en ta l mo ni tor ing an d tr ack in g. Mod er a te High Mo de r ate Ver y Hi gh Inc r ea s ed d em a nd f or c oo l in g s y st em s: I nc re a se d r e ve nu e f ro m in cr e as e d de ma nd f or residential and domestic cool ing sy stems, dri ven by ongoing var iation in global temperatures . Low Mo der ate M ode r ate Mo de r ate Key tr an si tion r i sk s and o pp or tunitie s Ke y tr a nsi ti on r is k s ide ntif i ed o ve r the n ex t 3 0 y e ar s pr imar il y re s ult f r om inc r ea sin g cos t s a ss o ciate d w it h the p r ic e and a v ail a bil it y of re s our ce s an d com pl ian ce w i th inc r ea se d r epo r ting r e quir em ent s , alt ho ugh i ncr e as ed c omp eti tio n al s o p os es a r isk . Ne w and e mer gi ng m ar ket s pr e s ent us w i th si gni fi c ant op por tu nit ie s for gr o w th, w i th de man d for e ner g y ef fic ient p r odu c t s an d se r vi ce s increasing greatly as we transition to a lower carb on global economy . ST EP S transition scenar io SDS tran sition scenario 20 30 medium term 2050 long term 2030 medium term 2050 long term Risks Increased regulations and pricing on GHG emissions: Greater cost s associated with emissions reduction, monitoring and repor ting obligations. Low Mo der ate M ode r ate Mo de r ate Increased transpor t ation c ost s: Gre ate r f uel c os t s d ue to i nc r ea s ed p r ic in g on G HG emissions. Mod er a te M od er a te M od er ate High Cost and availabilit y of resources: Incr e as e d pr i ce a nd r e du ce d av a il a bi li t y of cr i tic a l r a w mate r ia l s . L im it ed s up pl y of ma ter i al s and co mp o ne nt s co ul d le ad t o pr i ce v ol a til i t y a nd produc tion constr aints . Mod er a te M od er a te M od er ate M od er ate New and emerging competitors: Redu ce d a cce s si bl e ma r ket d ue to i nc re a se d competition in Net Zero/energ y eff icienc y spaces , such as methane leakage. Mod er a te Low Hi gh Low Oppor tunities Grow th in aviation/aerospace energy efficienc y market: Increased re venue from development of new produc ts for aviation /aerospace, such as energ y efficien c y detection produc t s and solutions . Mod er a te High High Ve r y Hig h Grow th in energy efficienc y product s market: Increa sed rev enue from Smiths eff icienc y produc t s and ser v ices, par ticular ly methane det ec tion and remediation. Increase d inv e s tm ent f or n e w tec hn ol og ie s e .g ., c ar bon c a ptu r e, u tl is a ti on an d s to r a ge ( CC US ) a nd hydrogen. High M od er ate Ver y H ig h Mo der ate Grow th in power industr y energy efficienc y: Increased revenue from development of emerging low- car bon emis sion technologies to reduce electr icit y tr ansmission los ses . High Ve r y Hig h High M od er ate 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 40 Unders tanding the needs and prio rities of our key stakeholder s and building s trong and positi ve relations hips is critical to our success. Stakeholder engagement takes pl ace a cro ss t he Gr oup, o per ational ly by ou r di v isi onal team s and m ana gem ent , at G rou p leve l , and b y the B oar d . In a bus ine s s a s di ve r si fi ed a s Smi th s , eng ag eme nt w ith m os t st akeh ol der g ro ups i s ha ndl ed lo c al ly b y man ag eme nt, or b y spe ci al is t Gr ou p team s. T h e Bo ar d m aint ain s ov er s ight a nd only e ng age s di re c tl y if th er e ar e is s ue s w hic h tr ul y w ar r ant it s inv olv em ent or w h er e it c a n add v alue. T hi s is p ar tic ul ar l y tr u e of eng ag eme nt w ith c us tom er s a nd su ppl ie r s (t he ma jor it y of w h om ar e uniq ue to a sp ec if ic d i v isi on ) bu t is al so usu al ly th e ca s e for go ver nment s , r egu l ator s a nd o ur lo c al com mun iti es . The outcomes of stakeholder engagement, including concer ns r ai se d, a re r ep or ted to t he B oar d a nd B oa r d Co mmi t tee s on a re gul a r ba si s thr ou gh ou r usu al pr o ce s se s th at sup po r t infor m ed decision-making. Discussion and decision-making by the Boar d take s th e v ie w s of key s t akeho ld er s i nto acco unt , in or de r to ba l anc e thei r ne ed s, a nd ef fec ti v ely b uil d the s us t aina ble , lon g-te r m su cce s s of the G r oup . Dur i ng th e ye ar en de d 31 July 2 02 2 , the B o ar d ha s ac ted i n acco r dan ce w it h S ec t ion 172(1) of the Co mp anie s A c t 2 0 0 6 w i th eac h Dir e c tor ac t ing i n the w a y th ey c ons ide r , in goo d fa ith , w oul d be m os t li kely to pr o mote th e suc ce s s of the C om pa ny fo r the ben ef it of i t s me mbe r s as a w h ol e. In do in g so, t he D ir ec tor s had re gar d to t he inte re s t s of oth er s t akeho ld er s , w hil st m aint aini ng and o ve r s eei ng hi gh s ta nda r ds of b usi ne s s con duc t . O ur app r oa ch to k ey st akeholders and st akeholder consider ations that in fluence d Bo ar d di sc us si ons a nd th e ou tcom es o f the s e dis cu s sio ns a re outlined below. Fur ther e xam ple s of h ow s t akeh ol der s vie w s ha ve b e en br ou ght into the b oa r dr oo m ca n be f oun d in our G o ve r nan ce Rep or t on p age s 6 0 a n d 61. KEY PEOPLE PRIORITIES – Health, safety and well-be ing – Pu r po s e an d cul tur e – Ethical behav iour – Rew a r d an d re co gn it ion – Employe e retention and engagement – T alent developm ent – Div ersi t y, equit y and inclusion – Sus tainabil it y – Communit y contr ibution BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – Management engages with colleagues through regular town hall meeti ngs, Company news upd ate s an d thr o ug h our o nl in e too l s w h er e co ll ea gu es c a n sh ar e th eir v i ew s . S e e pa ge 3 2 for more inf or mation – Non-executi ve Director s under take work force engagement activi ties, including in-person site v i si t s an d at te nd anc e at co ll ea gu e me etin gs , f or u ms an d e ve nt s . S ee p ag e 6 0 fo r more information – T he B oa r d and Re mu ner atio n & Pe op le C omm it tee re ce i ve r e gul a r up date s f r om t he Ch ief People Of f icer on employee engagement, re w ard, talent, and diver si t y and inclusion – T he A udi t & R isk C om mi t te e is pr o v id ed w ith up date s o n ‘S pe ak O ut ’ , our c onf i dent ial repor ting hotline, and other repo r t s and statistic s rel ating to the Group’ s ethical policie s and per for mance – T he B oa r d re ce i ve s h ea lth a nd s af et y r e po r ts at e v er y Bo ar d m e etin g – T he B oa r d al s o r e cei v e s re gu l ar up d ate s on th e Gr o up’s pens ion a r r a ng em ent s OUTCOMES OF ENGAGEMENT IN FY2022 – Gi v en th e imp or t anc e of, an d fo cu s on , Pe opl e in t he S mit hs V alu e En gin e, t he B oa r d approv ed the evolution of the Remuneration Commit tee into the Remuneration & People Commit tee – Ba s ed o n fe edb a ck f r om co ll ea gu e s thr o ugh t he M y S a y en ga ge me nt sur v ey, th e Bo ar d w as s upp or ti v e of th e l au nch o f our n e w Smi th s L ea de r sh ip B eha v io ur s , w h ich a r e sho w n o n pa ge 2 8 , an d th e fo cu s on di v er sit y and in cl usi on , w it h an en ha nce d ge nd er di ve r si t y mea sur e a dd ed a s a K P I de s cr i be d on p a ge 2 3 – T he B oa r d sup po r ted th e de - r is kin g of t he T I Gr o up P ens io n S ch eme b y w a y of a £ 6 4 0m bul k an nui t y bu y- in . T he B oa r d co nsi de r ed an d de c li ne d the r e qu e st f r om t he S I Pe ns ion Scheme T rus tees to pay enhanced member benefit s PE OPLE OUR APPROACH Our p eo pl e ar e v it al to th e su cce ss of Smiths. We aim to at t r ac t and re ta in th e ver y b es t by cr e atin g an en v ir onm ent f or co ll ea gue s ba se d on r e sp ec t , pe r so na l gro w th, re co gnit ion a nd d ev elo pm ent of t al ent , and a s en se o f be lon gin g and p ur p os e. Our c ult ur e is a p ow er ful a s se t and empower s and enables our people to del i ve r our P ur p os e. I t is s upp or ted b y our Valu es a nd o ur Le ad er s hip B eha v io ur s which influence ever y decision, guide ho w we b eha ve , and h el p make S mit hs a pl ac e w her e p eop le a re h app y an d pr oud t o wo r k. READ MORE Governance SEE MORE Sustainability at Smiths Report P 60 S T A K EHO L DER S A N D SE C TI O N 1 72 S TAT E M E N T 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 41 KEY CUSTOMER PRIORITIES – Pro duct innov ation, qualit y and ser v ice – Env ironmental per formance of produc ts to hel p c us tom er s meet t hei r ow n envir onmental goal s – Long-ter m str ategic relationships – Mut ua l con fi de nce a nd r e sp ec t – Ethi c al b eh av io ur a nd d ata p r ote c tio n BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – Management teams engage with customer s through for mal feedback ac tiv itie s such as su r ve y s , qua r ter ly b usi ne s s r ev i e w s and s en io r tea m me eti ng s w ith ke y c us tom er s . T he y al s o in tegr ate info r ma l fe edb a ck f r om co nv er sat ion s ha d w i th cu s tom er s b y ou r oper ational and field-b ased teams – Management teams use Key Account Managemen t struc tures and Customer Rel at ion sh ip Ma na gem ent to o l s ac r os s o ur bu sin e s s to de li v er t ime ly an d hi gh - qua li t y re s po ns e s to our c us to me r s . We aim to a pp ly b es t p r ac t ic es , d ev el op s kil l s a nd capabil ities , and deliv er continuous improvement in execution to enhance the over all customer exper ience – Cus to mer s and m ar ket c hal le ng es a r e con si de r ed a s pa r t of the m ont hly d i v isi on al pe r f or m an ce up da tes to t he E xecu ti v e C omm it te e w i th a de ep d i ve e v er y qu ar ter – Di v is io nal p er fo r ma nce r e po r ts ar e s ent t o the B o ar d on a q ua r ter ly b as is an d de ep d i ve s on di v i si ona l pe r for m anc e and s t r ate g y ar e h eld o n a r ot ati on al b asi s – T he B oa r d mo nit or s p er for mance i nd ic ato r s r el at in g to cu sto me r s ati sf a c ti on su ch a s On - Ti me -I n- Ful l (OT I F ) and C os t of Po o r Qu al it y (CO P Q ) – In F Y 2 0 2 2 th e Au di t & Ri sk C om mi t tee w a s up da ted o n pr o duc t q ual i t y a nd c us tom er s in di v i sio na l r is k de ep di v e s . S ee p ag e 7 3 fo r mo re i nfo r mat io n OUTCOMES OF ENGAGEMENT IN FY2022 – T he B oa r d app r ov e d the c r ea tio n of th e S ci enc e, S us t ain abi li t y & E xcel le nce ( S SE ) Co mmi t te e. T h e Co mmi t te e o ve r s ee s th e Gr o up’s appr oa ch to s us t ain ab il it y and to ne w pr o duc t d e ve lop me nt, b ot h key p r io r it ie s fo r our c us to me r s . S ee p ag e 8 9 fo r more information – T he B oa r d app r ov e d our d i v is ion al s tr ategi e s, i nc lud ing a n in cr ea s ed f oc us o n commercialising hig h-v alue green t echnologies that ena ble sustainabilit y per formance for a nd th r ou gh ou r cu s tome r s – A s p ar t of th e Bo ar d e v a luat io n, t he B oa r d r eq ue s ted g re ate r v isi bil i t y o f mac r o con di ti on s, e x te r na l mar kets an d th e imp a c t of op po r tuni ti es a r is ing f r o m tec hno lo g y – T he S S E Co mm it te e r eq ue s ted m or e o v er s ight o n pr o duc t idea tio n s tr en gt h an d ear ly- stage new product development to ensure that t he Group is appropriately focused on megatrends and new markets – T he B oa r d con si de re d inf l a tio n an d sup pl y cha in p re s s ur es a nd t he im p ac t on p r ic in g and margin s – T he B oa r d w as s at is f ie d th at th e cu ltu re o f th e Gr ou p is ap pr o pr i atel y foc us e d on customer needs and that customer risk s are being managed appropriately CUS TOMERS OUR APPROACH Meeting cus tomer need s and exceeding their expe c tations w ith pr oduc t s, qual i t y an d s er v ice. T h e w ay w e con duc t bus ine s s an d pa y at te ntio n to the t hin gs that m at ter t o the m – for e xam pl e, eth ic s and environment al per for mance – is a fu nda ment a l par t of ou r op er a ting m od el and o ur Val ue s. We recognis e that stron g and endurin g custom er rel ationship s will sus tain Smiths into the futur e. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 42 KEY SUPPLIER PRIORITIES – Long-ter m relation ships with Smiths – Mut ua l con fi de nce a nd r e sp ec t – Ethical behav iour – Retur n for al l pa r tner s – Innov ation par tner ships BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – Man ag em ent te am s me et r eg ul ar ly wi th s upp l ier s to re v ie w pe r for m anc e, dis c us s ne w b usi ne s s op po r tuni ti es , s et g oa l s an d w or k o n imp r ov em ent a re a s. F or o ur higher value and /or more complex products , managemen t engages with our su pplier s at th e hig he s t le ve l to pa r tne r on R&D, ne w p ro du c t int ro du c ti on , qua l it y and co nti nuo us improv ement projec ts – Updates on suppliers and supply chain are in cluded in divisional per formance updat es to the E xecu ti v e C om mit tee – Di v is io nal p er fo r ma nce r e po r ts ar e s ent t o the B o ar d on a q ua r ter ly b as is an d de ep di v e s on di v i si on al p er for m anc e an d st r ate g y ar e d is cu s se d b y th e Bo ar d o n a rot atio nal ba sis – In F Y 2 0 2 2 th e Au di t & Ri sk C om mi t tee w a s up da ted o n sup pl y cha in r i sk an d eth ic s a nd compliance in each div ision OUTCOMES OF ENGAGEMENT IN FY2022 – Each div ision developed and implemen ted appropriate contingency plans to mitiga te the i mp ac t of s up ply c ha in ch al len ge s a r is ing f r om t he C O V ID - 19 pand emi c, t he R us si a / Ukr aine c onf l ic t , tr ansp or t ati on an d l ab ou r is su e s , and o the r ch al len ge s – T he B oa r d w as s upp o r tiv e of t he on go in g pr oj ec t to m it ig ate th e r is k fr o m hig h- dependency sole source suppliers – Man ag em ent ap pr o ve d th e im ple me nta tio n of a s ou rc e- to -p ay s ol ut io n w it h a sin gle po r tal a cce s s fo r our s upp l ier b a se w h ic h aim s to imp r ov e pr o cu r eme nt ef fic ien c y and effec ti venes s – T he B oa r d w as s upp o r tiv e of t he r ef r es hin g of th e Gr o up’s Supp li er C od e of C on duc t dur i ng t he y ea r to inc r ea se f oc us o n E S G mat ter s , inc lu din g en v ir on ment a l po li ci es and per for mance SUPPLI ERS OUR APPROACH Develo ping mutually benef icial rel ationship s with our suppl ier s and building re silience, qualit y and e f fic ienc y acr os s o ur su ppl y cha in is a f un dam ent al cont r ibu tor to o ur cu s tom er of f er an d th e long-term sustainability of Smit hs. We ope r ate a to ta l v alu e sup ply c hai n app ro ac h tha t con si der s a ll a sp ec t s of a supplier ’ s contrib ution to gener ate and ca ptu re v a lue . T his i ncl ud es et hic al a nd envir onment al matter s , including GHG re duc tion , and a li gnm ent w it h our Va lu es , continuous improvement and risk . KEY COMMUNITY PRIORITIES – S afe a nd ef fec ti v e op er atio ns – Green technolog y, environmental per fo rm ance, resp ec ting natural resource s – Fair employment, skill s develop ment, and prosper it y – Ethical behav iour – Direc t engagement – education and c om mun it y supp or t BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – Our te am s ac r os s th e w or l d en ga ge di r ec t ly w it h th eir l oc a l com mun it ie s th ro ug h fundr ai sing, char it able giv ing , and educatio n initiativ es – Science, T echnolog y , Engineer ing and Maths (ST EM ) education initiative s are par ticular ly imp or ta nt to ma na ge ment a nd to o ur co l le agu e s as a w a y to sh ar e th eir p a s sio n for eng ine er ing an d en cou r a ge y ou ng p eo pl e to con si de r c ar ee r s in t he s ec t or . Many o f our site s r un ST E M pr o gr amme s – T he B oa r d is p ro v id e d w it h upd ate s on t he el em ent s of t he G r oup’s ope r at ion s w hi ch imp ac t t he w i der c om mun it y, inclu din g th e Gr ou p’ s Gl ob al T a x Str ateg y. Th is d es c r ib es o ur approach to the responsible management of tax affair s to enhance long-t erm shareholder v alu e w hil e co ntr ib u tin g to pub l ic e xp en di tur e an d th e we lf a re o f our l oc a l co mmu nit ie s – T he A udi t & R isk C om mi t te e re ce i ve s r e gul a r re po r ts o n is s ue s r a is ed t hr ou gh t he G ro up’s ‘Speak Out’ rep or ting hotlin e which enables repor ting of matters af fec ting communities suc h as s a fet y , eth ic al b eh av i our , hum an r i ght s a nd m od er n s l av er y – At o ur Ju ly L ea de r sh ip Su mmi t s eni or l ea de r s to ok ti me o ut to v ol unte er at f i v e London charitie s – Co ll ea gu es a r e re gu l ar l y inv o lve d in a nd s upp or t lo c al c omm uni t y eve nt s OUTCOMES OF ENGAGEMENT IN FY2022 – T he B oa r d app r ov e d the G r ou p’ s ne w E S G s tr ategi c pr i or i ti es w h ich o ut l ine o ur fo c us on new product development programmes w hich deliver sustainabilit y per formance and on deli ver ing our environment al commitments – T he Gr o up d ona ted to t he Re d Cr os s to s up po r t the pe op le o f Ukr aine . Sm it hs a l s o matched colleague donations – In F Y 2 0 2 2 w e be ga n a pil ot fo r a ne w co mmu ni t y e ng ag eme nt pr o gr a mm e – Imp r ov i ng Our Wo r l d – w hic h w il l inc lu de p ai d vo lunte er ing tim e fo r col le a gue s C OMMUNI TIE S A ND S O C IE T Y OUR APPROACH We aim to im pr ov e our w or l d b y contrib uting posi tiv ely to our communities and s o ciet y in gen er a l . Smi ths p r odu c t s an d s er v ice s sup po r t cri tical glob al industr ies w here we are pio ne er in g pr og re s s in s af et y, ef f ic ien c y, and environment al per for mance. Our o pe r ati on s ar oun d the w or ld pl ay a ben ef ici al r ole i n lo c al ec ono mie s th ro ugh job creation and skills development; procur ement and generating ta x revenue s; oper ating safely, env ironmentally res ponsibly and ethic ally; and dire c t engagement. Healthy and prosper ous communitie s and stron g rel ationships ar e ali gne d w it h our Va lue s a nd in spi re a nd pr omo te a se ns e of pr ide an d ow ne r sh ip in our p e opl e. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 43 KEY INVESTOR PRIORITIES – Sus tainable gr ow th – Shareholder returns – Del i v er i ng a gai ns t o ur s tr ateg y – Opennes s and tr ansparen c y – Maintaining ef fec ti ve control s and managing risk – Env ironment al per for mance and social impac t BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – T he B oa r d at ten ds t he A GM a nd G en er al Mee tin gs w h er e sh ar eh ol de r s ar e in v ite d to sub mi t que s ti on s to th e Bo ar d i n pe r s on an d r em otel y – T he Ch ief E xecu ti v e O f f ic er an d th e Chi ef F in anc ia l O f f ic er ho s t r es ul t s pr e se nt ati on s and Q & A se s si on s an d me et w it h a br o ad s pr e ad of t he G r oup’s cap it al p r ov i de r s th ro ug ho ut t he y ea r – Mem be r s of t he B oa r d en ga ge d w it h inv e s tor s at t he C ap it a l Mar ket s Day in N ov em be r 2 0 21 – A na ly s t an d br oke r br i ef ing s , and r e po r ts of m e etin gs w i th m aj or or p r os pe c ti v e sha r eho ld er s, ar e ci rc ul a ted to D ir ec t or s o ut s id e the f or m al B oa r d me eti ng s ch ed ule – In F Y 2 0 2 2 th e Bo ar d s o ugh t sha r eho ld er f ee db ac k on th e b es t c our se of ac t io n on th e us e of th e pr o cee d s fol lo w in g th e co mpl eti on of t he s a le of S mi th s Me dic al – In F Y 2 0 2 2 th e Ch air of t he Re mun er a tio n & Pe op le C om mi t tee m et w i th ou r top sharehold er s to discus s Smiths Remuner ation Polic y – T he B oa r d con si de r s it s div i de nd p ol ic y and th e UK P ens io ns A c t 2 0 21, pr io r to ap pr o v ing t he pa y me nt of a di v i de nd OUTCOMES OF ENGAGEMENT IN FY2022 – T he B oa r d re af fir m e d the G r oup’s str ateg y in cl udi ng t he S mit hs V alu e En gin e an d fo cu s on ou r thr e e pr ior i tie s of G r ow th , E xe cu ti on an d Pe op le – T he B oa r d app r ov e d ho ldi ng a C ap it al M ar ket s Day in N ov em be r 2 0 21 to up da te inv e s tor s and o the r s ta keho ld er s on the G r oup’s str ateg y an d me di um- ter m t ar g et s – T he B oa r d app r ov e d the p l an ne d cr e ati on of a S us t ain ab il it y at Smi th s Rep or t – T he B oa r d con si de re d th e Gr o up’s capi t al al lo c ati on a nd di vid en d po l ic y i n li ght of t he ca sh p r oc ee ds r e cei v e d fr o m th e s ale of S mi th s Me di ca l . T he B o ar d de ter m ine d th at th e pr oc ee ds w o ul d be sp l it b et wee n in ve s tm ent in g r ow th an d a si gni f ic ant r et ur n of c a pi ta l to sha reholder s through a s hare repurchase progr amme – T he B oa r d app r ov e d the p a y me nt of th e f ina l di v id en d fo r F Y 2 0 21 an d the F Y 2 02 2 interim div ide nd I NVEST O R S OUR APPROACH We are c omm it te d to op enn e ss a nd tr ansparenc y with all capital prov ider s and to the ef fec t i ve ma na gem ent of r i sk . We repor t routinely to shareholder s thr ou gh ou r for m al r es ult s a c ti v i tie s an d und er take r eg ul ar m eet ing s an d one - of f ev ent s su ch a s C api ta l Mar ket s D ay s a nd inves tor conferences. Third -par t y analyst and b ro ker br i ef ing s al s o fo r m p ar t of our communications s chedule. Sha re hol de r s ar e dir e c tly co ns ulte d by t he Bo ar d on s uch m at ter s as Remun er a tio n Pol ic y and v ie w s ar e so ught o n key corp or ate ac tiv it y . KEY GOVERNMENT AND REGULATOR PRIORITIES – Pr o du c t and o pe r at io nal s a fet y – Net Zero and environmental polic ies – Pr ote c ti on of n at ur a l re s ou rc e s – Def enc e an d se cu r it y – Safe and f air wor king condi tions – Economic grow th and pr osper it y – T rade compl iance – Ethical behav iour – Pr iv ac y and data prot ec tion BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES – Our G r oup C o r po r ate A f fa ir s te am b as e d in th e UK , US, Eu r op e and A sia g uid e s an d sup po r ts o ur r el at io ns hip s w it h key r e gul a tor s , l oc al p o li c y m aker s , b ud get h ol de r s an d ind us tr y gr o ups . I t al so le ad s our o u tr ea ch a nd r el a tio ns hip p r og r am me w i th g ov er n me nt bo die s a nd r e gul ato r s , w i th th e aim o f pr om oti ng a d ee pe r und er st and in g of th e Smi th s cul tur e a nd p ro du c t s – Gover nment polic y and re gulator s are considere d during formul ation of div isional str ategies – Upd ate s on r e gul ator y pr oc es s e s fo r app r ov a l of n ew p r od uc t s ar e p r ov i de d dur i ng di v i si on al p er for m anc e r ev i ew s a t the E xecu ti v e C om mit tee OUTCOMES OF ENGAGEMENT IN FY2022 – Management approve d policy guidelines and an oper ational framewor k within which government relations are conducted. The business sustains harmonious relations with the g ov er nment s i n th e cou ntr i e s w her e w e ma nu fa c tu r e and o pe r ate a nd w i th t he relev ant regul ator y author itie s – Polic y guidance was issued to the business to navigate issues such as the COV ID- 1 9 pandemic and the Russia / Ukr aine conflic t GO V ER NME N T S A ND REGUL A TORS OUR APPROACH Go ver nment s an d r egu l ato r s ar e v it al to our b usi ne s s as th ey a re p ol ic y set ter s and i nfl uen cer s i n the m ar ket s w h ere we op er ate. We op er a te in so me h ighl y re gul a ted m ar ket s an d se c to r s re qu ir in g st r ic t a dhe re nce to l oc al a nd in ter na tio nal ind us tr y and p r odu c t r egu l ati on s, a nd s tr on g ethical pr ac tices . We hav e a mat ur e go ver n an ce env i ro nme nt with exacting standards, robust diligence pr oce s s es a nd a p ro ac tiv e man ag eme nt app ro ac h to r edu ce th e like lih oo d of an ethical , legal or re gulator y brea ch impac ting our busine ss . In the n or m al co ur s e of bu sin es s , w e build rel ationships with gover nment s, pol ic ym aker s an d re gu l ator s a cr os s th e wor ld. We do t his a t bot h Gr oup a nd at di v isi on al le vel s o th at w e ar e abl e to op er a te ef fe c t iv ely a nd to e ns ure o ur int er es t s an d tho se o f the in du st r ie s in w hi ch w e ope r ate are r ep r es ente d in d ec isi on -m aki ng . We al s o contrib ute our exper tise on emergin g national, regional and global needs. 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 44 Hu man rights and a nti -briber y and a nti- cor r uption We ar e com mit te d to up hol din g hig h ethi ca l st an dar d s w he re ve r we o per ate aro und t he w or l d, a nd w e re qu ir e our s upp li er s an d othe r bus ine s s p ar tner s to do the s am e. Br iber y an d cor rup tio n mat ter s are c ov er ed b y ou r Co de of B usin e s s Ethi c s. We a l s o ha ve specif ic policies and pr ocedure s rel ating to ac tiv ities that create br ib er y an d cor rup tio n r isk s , an d an um br el l a anti -b r ib er y and anti -c or r u ptio n po li c y t hat pr o v id es a s ing le v ie w of ou r app ro a ch. Th e se p ol ic ie s co ver a b r oa d r a nge o f mat ter s inclu din g the gi v ing a nd r ec ei v in g of gif ts , m eal s, an d ho spi t al it y; inv it at ion s to gov er nment of fici al s; o ur ap pr o ach to f ac il it ati on p ay m ent s; and c ontr ol s aro und t he ap po intm ent of di s tr ib utor s and ag ent s , cus tom s br o ker s , and f r ei ght for w a rd er s . T h e Smi th s Mod er n Sl a ver y a nd Hum an T r af fick in g St ateme nt and o ur Hum an Ri ght s Pol ic y can b e fo und o n our w eb site . Polic y due diligence and outcomes Smi th s ope r ate s a co nfi de ntial ‘ Sp ea k Ou t’ r ep or ting h otl in e to re po r t beha v iou r and a c ti v i tie s th at br ea ch o ur Valu e s, o ur pol ic ie s , or th e l aw. T hi s is cr itic al to a s se s sin g th e ef fe c ti v ene s s of our p ol ic ie s. A l l re po r ts to th e ‘S pe ak O ut’ h otl in e ar e inv es t igate d, a nd me tr ic s a s so ci ated w i th r ep or ting m on itor e d. Repo r ts c an b e ma de an on y mo usly. Ou r ethic s tr aini ng op er ates in t w o tie r s – on li ne mo du le s del i v er ed in a ll o ur cor e l a ngu ag es , an d group tr aining acti vitie s cover ing specif ic subject s. A dditionally, we r u n re gi ona l ethi c s wo r k sh ops f or le ad er s a cr os s Sm it hs to emb ed a d eep er u nde r s ta ndi ng of o ur ethi c s an d com pl ian ce cri tical dr iver s . Dur i ng F Y 2 0 2 2 w e cont inu ed to r e v ie w the ef fec ti v en es s of c er tai n of our p ol ic ie s, i ncl udi ng: – Rev ie w in g our et hic s d ash bo ar d w hi ch en abl e s us to inter r o gate our r eg is ter of gi f ts , me al s , an d enter t ainm ent – Requi r in g all c ol lea gu es to t ake a mo de r n sl a ve r y aw ar e ne s s tr ai nin g mo dule e v er y t w o y ea r s – Impl eme ntin g a ne w Su ppl ie r Co de of C on duc t , in clu din g det ail s of ho w thi rd p ar ti es c an r e por t co nce r ns to o ur ‘S pe ak Ou t’ h otl in e – Upd atin g the H uma n Rig ht s Pol ic y , inc lud ing t he co mmi tme nt to ens ur e that r e cr u itm ent a gent s a re f r ee f r om p r a c tice s as s oci ated w i th hu man r i ght s v io l ati ons – Cr eati ng a w or k in g gr oup, co mpr ise d of di v is ion al an d Gr ou p Pr o cur em ent le ad er s hip an d th e Ethi c s & Co mpl ia nce te am , to mon itor a nd r e v ie w pr oc ur eme nt r el ate d mo der n s l av er y an d huma n r ight s r isk s and c ontr ol s – Intr od uci ng mi cr o -aw aren es s v i de os th at en abl e us to communicate quickly and e f fec ti vely on issue s that aris e – Co ndu c tin g our th ir d cl im ate r isk a nd o ppo r tuni tie s as s e s sme nt for th e di v is ion s an d Gr oup O ther info r mation O the r infor mation to s upp or t thi s s tate ment c an b e fo und as fo ll ow s: – Busi ne s s mo del o n pa ge 9 – Pr i nci pal r isk s and u ncer t ainti es o n pa ge 47 – Non -f ina nci al K P Is on p a ge s 2 2 an d 2 3 – T ask For ce o n Cl imate -r e l ated F in anc ial D is cl osu re s on p a ge 3 5 – V iab il it y State ment o n pa ge 5 4 – Sus t ain abi li t y a t Smi th s Repo r t whi ch c an b e fou nd on our website The follow ing disc losure aligns to the non-financial rep or ting req uire men ts c ont aine d in s ec ti ons 4 1 4 CA an d 4 1 4CB o f the C omp ani es A c t 2 0 06 a nd re fle c t s our co mmi tmen t to and management of the environment, employees , social matter s, human right s and anti-br iber y and ant i- corr uption. Our Sm ith s cultu re an d Value s su pp or t our ef fo r ts in th es e are as an d are d es cr ib ed o n pa ge 9 . Env ironm ent We comm it te d to amb it iou s Net Ze ro t ar g et s: Net Ze ro e mis s ion s fr om o ur op er ation s ( S cop e 1 an d 2 ) b y 2 0 4 0 and Net Ze ro e mis si on s fr om o ur su ppl y cha in an d pr od uc t s in u se ( S c ope 3 ) b y 2 0 5 0. We al so hav e lo ng st an din g com mit ment s to u se e ner g y a nd ot her n atur al re s our ce s ef fic ientl y and m inim is e w as te. T h e po li cie s th at sup po r t our approach include : – Envir onmental Sustainabilit y Polic y – Hea lth , S afet y and E nv ir o nme nt (H SE ) Pol ic y – HSE Repor ting Pol ic y – Respon sible Miner al s Sourcin g Polic y – Restr ic ted Substance s Polic y Emplo yee s Our p eo ple a re v i t al to th e succ es s o f Smi th s, a nd w e aim to at t r ac t and r et ain t he v er y be s t by c r eati ng an e nv ir o nme nt for em plo y ee s based on respect, personal growth, recogniti on and develop ment of ta lent , an d a se ns e of be lon gin g and p ur p os e. T h e po li cie s th at suppor t our approach include: – Fair Em pl oy m ent Po li c y – Global Mobilit y A s signment Policy – Recruitment Polic y So cial mat ter s We aim to imp r ov e our w or ld by co ntr i but ing p os iti v el y to our comm uni tie s an d so ci et y. Sm ith s pr o duc t s a nd s er v ice s su pp or t cr i tic al g lob al in du st r ie s an d our o per ation s ar ou nd th e wo r ld p l ay a ro le in l oc al e co nom ie s thr o ugh j ob cr e atio n; pr oc ur eme nt and gener ating tax rev enues; oper ating respon sibly and ethically; and engaging directly. The policies that suppor t our approach include : – Co de of B usin e ss E thic s – Dat a P rote c ti on an d Pr iv ac y Pol ic y – Dat a P rote c ti on C od e of Co ndu c t – Sup pl ier C o de of C on duc t N O N - FI NAN C IAL INF O R M A T I O N S TAT E M E N T 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 45 Risk go ver nance Th e Bo ar d a nd i t s Co mmi t tee s s et th e cul tur e an d app r ov e the st r ate g y of the G r oup . T he B oar d e ns ur es a ppr o pr ia te ov er s ight and m oni tor i ng th ro ugh a n umb er of m ec hani sm s, i ncl udin g st r ate g y re v ie w s , Co mmi t te e mee tin gs , man ag eme nt r epo r ts and fo cu s ed r e vi ew s o f se lec te d r is k ar ea s . On b eha lf of th e Bo ar d , the A ud it & R isk C om mit tee is r es po nsi ble for r e v ie wi ng an d as s e s sin g the ef fec ti v en es s of t he Gr o up’ s r is k man age ment a nd inte r nal c ontr o l s y ste ms . T he r e v ie w pr oc es s cov er s the Gr ou p’ s pr inc ip al r i sk s , as w ell a s f ina nci al , op er a tio nal and compliance control s . Th e E xe cu ti v e Co mmi t tee i s r es po nsi ble fo r de si gnin g the Enter p r is e R isk Ma na gem ent f r am e wo r k and e ns ur in g that it is ef fec ti v el y dep lo ye d thr o ugh ou t the G r oup. T h e E xe cu ti v e Co mmi t tee a l s o ens ur e s that t he B oa r d’s ri sk app eti te is und er s too d b y r isk o w n er s an d de ci sio n- maker s, en sur e s r is ks , including climate risk , are adequately managed , and conduct s an annu al as s e s sme nt of s tr ate gic r isk . Ea ch p r inc ip al r is k is o w ne d by a m emb er or m emb er s of the E xe cu ti v e Co mmi t tee . We operate across a number of markets and geogr aphies. We are pre pa red to a ccept ce r tain le vel s o f r isk to r eal is e our ambitions, and our Purpos e, to improve our wor ld through smar ter engineering . We under s t and th e r isk s w e fa ce and t ake a pr oa c ti ve app ro ach to r i sk ma nag emen t in or de r to ma xim is e oppor tunities , dri ve better commercial decision- making, and p rote c t our p eo ple a nd ou r bus ine s se s . Ente r pr ise Risk Management (ERM) roles and r esponsibilities BOA R D A ND AUDI T & RIS K COMMI T TEE – A ppr o ve t he s tr ateg y and s et th e cul tur e an d r is k app eti te of th e Gr oup – Rev ie w an d as s es s t he ef fec ti v ene s s of r i sk ma nag em ent an d inter n al control sy stems – Moni tor th r oug h Bo ar d pr o ce s se s an d go od g ov er n anc e INT ERN A L AUD IT Independent assurance – Pr ov i de a s sur ance on inte r na l cont ro l s , pr o gr a mme s , s y s tems a nd r i sk management processe s E X ECU T I V E CO MMIT TEE A ND SENIOR M A N A GEMEN T – De sig n and e s ta bl is h r isk m ana ge ment a nd inte r nal c ontr o l s y ste ms – Ens ur e tha t the r i sk ap pet ite of t he B oa rd i s und er s to od b y r is k ow n er s and decision-makers – Ensure risk s are adequat ely managed RIS K A ND CO MPL I A NCE FUNC TION S Monitoring and compliance – De vel op an d man ag e the E RM p r oce s s – Moni tor r i sk s an d cont ro l s – De vel op an d man ag e po li cie s an d cont r ol f r am e wo r k s – Ensure f inancial, leg al and ethical compliance – Ens ur e se cu r it y, quali t y a nd he al th an d s afet y DIVI SI ONAL MANA GE M EN T Risk ownership and mitigation – Ident if y, manag e an d es c al ate r i sk s – Set div ision’ s str ategic objec tiv es – E st ab li sh an d ap ply inte r nal c ontr o l s y ste ms – E sc al ate iss ue s to the E xecu ti v e Co mmi t tee a s r equ ir ed OPE R A TIONAL TEAMS Conducting business activities in accordance with Group policies and standards – Unders tand r oles and resp onsibilitie s – Comply with pol icies – Follow risk management processe s 3rd LINE OF DEFENCE 2nd LINE OF DEFENCE 1st LINE OF DEFENCE RISK MANA G E M E NT 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 46 Runn ing a b usi ne s s inv ol ve s co ntinu al as s e s sme nt and man age ment o f r isk s – i t is an i ntegr al par t of da y -to -d ay ope r at ion s . Our E nter p r is e Ri sk Man ag eme nt (E RM ) pr o ce s s sup por t s op en co mmu nic ati on on r isk bet we en th e Bo ar d an d Au dit & R isk C om mit tee, th e E xec ut i ve C om mit tee, our d iv i si ons , fu nc ti ons a nd si te s. I t en abl es u s to man ag e and m oni tor th e r isk s w hi ch th r eaten s ucc es s f ul exe cu tio n of our s t r ate g y and ens ur es o ur s tr ategic , f inan cia l , com pl ian ce an d ope r at ion al r i sk s ar e app ro pr i ately c ons id er ed b y th e E xec ut i ve C om mit tee and b y the B oa r d. Our divisional and func tional teams are re sponsible for day- to- d ay ma na gem ent an d r epo r ting of r i sk s , inc lud ing c li mate r isk . T h ey i dent if y ne w and e mer g ing r i sk s , es c al ate w h er e app ro pr i ate, an d ta ke ac tio n to en sur e r is k s ar e man ag ed a s re qui re d. O ur di v i sio ns al so co ndu c t ann ual a ss e s sm ent s of th e r isk s t he y fa ce. I n F Y 2 0 2 2 the s e we r e upd ated to e ns ur e that t he l ates t v ie w s w er e pr e se nted a nd co nsi de re d. Inter na l aud it p ro v id e s ind epe nd ent an d obj ec ti v e as s ur a nce to both t he A udi t & Ri sk an d E xe cu ti v e Co mmi t tee s on t he a deq uac y and ef fec ti v en es s of o ur r i sk man ag eme nt and i nter n al cont r ol pr oc es s e s. I t f aci li t ates t he E RM pr o ce s s and p r ov i de s si te- ba se d contr o l s an d as s ur a nce r e v ie w s of key pr o gr a mme s , pr o ce s se s and s ys tem s . Th e A udi t & Ris k Co mmi t te e, on b eha lf of th e Bo ar d , r ev i ew s the effec ti venes s of the risk management proce ss , consider ing pr in cip al r i sk s an d unce r taint ie s and a c tio ns t aken b y management t o manage those risks. Dur i ng F Y 2 0 2 2 th e E xe cu ti v e Co mmi t tee a gr ee d th e ER M time tab le, a nd th e r is k s se lec te d fo r ‘d ee p -d i ve’ dis cu s sio ns at E xec ut i ve a nd A udi t & Ri sk C ommi t te e me etin gs . T he s e we re: supply chain ; produc t qualit y; and contractual obligations . Th e Gr o up’ s li st o f pr in cip al r i sk s w as a l s o dis c us s ed an d recalibrated by the E xecutive Co mmittee. Th er e is a r e quir e ment f or r is k ow n er s to d emo ns tr ate how the y pr o v ide a s sur ance th at co ntr ol s are w or k ing e f fe c ti v ely. E x ampl e s ar e pr ov i de d in th e ta ble s of p r inc ip al r is k s fr om p a g e 4 9. In ad dit ion , a f ur ther 3 2 r i sk w or k sh op s we re f a cil it ate d at ope r at ion al si tes d ur in g the y e ar to sup po r t the bo t tom -up v i ew of r isk t hat h as fe d into di v i sio nal an d f unc t ion al r i sk as s e ss ment s. Th e Di re c tor s c on sid er th e r is k man age ment p r oc es s to be e f fective. Emer ging r i sk s Eme r gin g r isk s a nd h or izo n sc a nnin g ar e inte gr ate d into th e ER M pr oc es s . Fun c tio ns in t he bu sin es s of ten ta ke the le ad i n identif y ing and promoting ri sk awar enes s and mitigation activ itie s. Cli mate ch an ge r ema ins a n eme r gin g r isk a nd fo r ms p ar t of re po r ting an d r is k man ag eme nt in the b us ine s s . Dur i ng F Y 2 0 2 2 we under took scenario analysis, including climat e risk and o pp or tuni tie s w or k sh op s for G r oup an d th e di v isi on s. Ou tcome s f r om th is w or k ar e d es cr ibed i n the T ask F or ce on Climate-related Financial Disclosure s ( TCFD) sec tion on pa ge 3 5 . We maintain a register of principal r isk s and uncer taintie s covering the str ategic, financial , oper ational and comp lia nce r is ks f a ced by t he Gr oup. Risk proces s We re v ie w ea ch r i sk an d r ate a nu mbe r of f ac tor s: gro s s imp ac t , applying the hy pothetical assumption there ar e no mitigating contr o l s in p l ace; r e si dual i mp ac t an d li keli ho od , ta kin g into acco unt ex is ti ng mi tig atin g co ntr ol s; the re pu tat ion al imp a c t of a r isk ; and v el oc it y , w hic h ref l ec t s th e ex pe c ted t ime w e w oul d hav e to r ea c t sho ul d a r isk m ater i al is e. T he s e, in t ur n , dr i ve mitigation prior itie s. A trend metr ic shows the net position of the r isk y ea r- o n- ye ar . We rep or t on th e co nne c ti v i t y b et ween r isk s to hel p un der sta nd th e po tentia l for o ne r is k to ha ve an i mp ac t on anot her . Th is is p r es ente d ag ain st e ac h r isk i n the f or m of a ‘r isk re l atio ns hip’ cha r t indic at ing th e l ink age b et wee n ea ch pr incip al r isk a nd oth er s o n th e li st . T hi s ha s be en us e d as an i npu t to the V iab il it y State ment a s se s sm ent an d w ill b e us e d mor e w i del y in fu tur e r i sk s cen ar io p l an ning a nd mi ti gati on w or k . Change s to pr in cipa l r i sk s Our p r inc ip al r is k s cont inue to e v olv e in r e spo ns e to ou r cha ngin g r isk e nv ir on me nt. T hi s ye ar , bas e d on ou r cur r e nt as s es sm ent of the ir mate r ial it y, we hav e inc lud ed t wo n ew p r inc ip al r i sk s: Gr ow th , ref le c ti ng ou r re ne we d fo cu s on gr o w th in our s tr ateg y; and e nv ir on ment , s oc ial an d go ve r na nce ( E S G), r efl ec t ing an incr e as ed f oc us f r om in ve s tor s , em plo y ee s , cu sto mer s and sup pl ier s . We h av e re mo ve d our G r oup P or t fol io r isk w ith t he comp let ion of t he s al e of Sm ith s Me dic al . We have c omb ine d a numb er of r i sk s in clu din g CO V ID - 1 9 and I ntegr ated Sup ply C hain into a Bus ine s s C ontin uit y r isk ; Cus tom er s a nd Ma r ket s r is k s into a Co mme rc ial r i sk; a nd Et hic al B re ac h and C ont r ac t ual Obligations into Legal and Compliance risk . W hile w e co ntin ue to mo nito r and m an age a w i de r ange of r i sk s , the t ab le s that f ol lo w sum mar i se t ho se r i sk s co nsi de re d to ha ve the gr e ate st p otent ial im pa c t if th ey w er e to m ater ia li se . P RIN C IP A L R I SK S A N D UN CE R T A IN T IE S 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 47 Pr inc ipal r isk s an d uncer t ainties Prin cipal risk L in k to s t r at eg y Gross risk Residual risk Likelihood Velocit y Tr en d 1. ORGANIC GROWTH Ver y High Mo der ate Possible Ye a r s A bi li t y to ach ie ve o r ga ni c gr o w t h in l in e w it h ma r ket op p or tun it y 2. ESG High Low Possible Yea r s Fail ur e to m ee t st a keh ol de r ex p ec t at io ns on environmental , social and gover nance obligations 3. TECHNOLOGY Ver y High Mo der ate Probable Ye ar s — T echnology disruption by existing or future competitor 4. PEOPLE Mod er ate Low Possible Months A bi li t y to at tr ac t and r e ta in p eo pl e 5. BUSINESS CONTINUITY High M ode r ate Pr obable Week s Business disruption to supply chain or operations 6. ECONOMY AND GEOPOLITICS High M ode r ate L ikely Months Impact of economic and geopolitic al environm ent 7. COMMERCIAL High Low Possible Yea r s — Lo s s of fo c us o n cu s tom er s a nd n ot c om pe tin g in th e r i ght m ar ket s 8. PRODUCT QUALITY Mod er ate Low Probable We eks — Fail ur e of p r od uc t c a us e s s er i ou s ha r m to people/propert y 9. CYBER SECURITY High Low Prob able Days — Imp a c t of en ter p r is e o r pr o du c t c y b er e v ent 10. LEGAL AND COMPLIANCE High Low Possible Day s — Si gni f ic a nt eth ic a l br e ac h or f ai l in g to meet contrac tual obligations Key Link to strategy Grow th E xecution People Likelihood Al mo s t Ce r tain > 8 0% Likely > 60 % Prob able > 4 0 % Possible > 20 % Unlikely < 20 % Trend Ne w Stable — Up Conn ec ti v i t y bet ween pr inc ipal r isk s ORGA NIC GROW TH ESG TECH NOLOGY PEOPLE BUSINE SS CONTINUIT Y ECONOMY AND GEOPOLITIC S COMME RCIA L PRODUCT QUALITY CYBER SECURI T Y LEG AL AND COMPLIA NCE ORGANIC G ROW TH ESG TECHNOLO GY PEOPLE BUSINE SS CONT INUIT Y ECONOMY AND GEOPOLITIC S COMMERCI AL PRODUCT QUALITY CYBER SECURIT Y LEG AL AND COM PLIANC E 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 48 1 . O RGA NIC G RO W TH – A bil it y t o achi eve or ga nic gr ow th in lin e w ith ma r ket opp or tunit y RISK OWNER Divisional Presidents TREND NE W R I SK 2. E S G – Fai lure to meet stakeholder expec tations on environmental , soci al and governance obligations RISK OWNER Chief Sustainability Officer TREND NE W R I SK The risk of not growing means we become less relevant and discounted by the market, resulting in erosion of shareholder value. A growth culture is a ke y co mp on en t of t he G r ou p’s str a te g y. Gro w th is a fr amework that drives the operational tasks, pr oj ec ts a nd i ni ti at i ve s of t h e Gr ou p. T h e Gr ou p’s heritag e depends on innovation, which present s nu me ro us o p po r tuni ti e s fo r gr o w t h th at a re con s t an tly p u r su ed . C om p an ie s th a t do n ot g ro w t y p ic al ly d o no t a t tr a c t t he m os t t al en te d te am members , as great people seek oppor tunities for advancement. How this could impact our strategy or business model – Material adver s e effec t on valuation – Er o si on o f our r e pu t ati on a s a le a de r in ou r ma r ket s a nd of o ur a bi li t y to at tr ac t an d r et ain t a le nt E xa mp l e s of h ow w e ma na g e th is r i sk – A cl ea r Gr o up s tr ateg y to a ch ie v e or g ani c gr o w t h go al s, u nd er p in ne d by d et ai le d div isional str ategies – De ta il ed r e v ie w s of e x is ti ng a nd p ote nti al ne w ma r ket s to i de nti f y opp o r tuni ti e s w it h signific ant grow th potential – S ec ur i ng a nd r e ta ini ng t he b e s t ta le nt to exe cu te s tr ateg y a nd d el i v er o r ga nic g r ow th – A nnual incentive progr amme to suppor t profitable grow th – A nnual strategic planning , budgeting proce ss and monthly forec asting – On go in g in ve s t me nt in r e s ea rc h an d de ve lo pm en t to dr i v e in no v at io n an d gr o w th – Sm it hs E xcel le nc e Sy s tem i n pl a ce t o en sur e effec tive execution Example s of how we know the controls are working eff ecti vely – Div isional per formance and forecast rev iew s completed monthly – Per for mance and K PIs monitore d an d tr a cke d b y th e Bo a r d – Functional re view s of Smiths Excellence an d Pe op le s tr ateg ie s Environmental , Social and Governance (ESG) areas are essential matters for all c ompanies and stakeholders. Failure to meet stakeholder expect ations on increasing ESG obligations may expose the Group to reputational or financial r is k . Th i s in cl ud e s r is k s a s so c ia te d w it h shifting inves tor sentiment, evolving customer requirements , supply chain trends, social attitudes toward the environmental impact of product s, and ou r ab il it y to at t r ac t and r et a in t a le nt . Fai lu re t o ac t appropriately ma y well i ncrease the magnit ude of th e r is k ov er t he l on g te r m . How this could impact our strategy or business model – Lo s s of ke y t al ent c om mi t te d to wo r k in g for a s o ci al ly r e sp on s ibl e an d sustainable organisation – L imi t t he nu mb er o f de bt an d e qui t y inv es to r s – A d ve r s e im pa c t on t he a bi li t y to meet customer expec tations on sustainabilit y per for mance – Limiting the sust ainable grow th potential of our ke y b us ine s s s e gm ent s – Fai lur e to m ai nt ain s t ro n g con tr ol s and corpor ate governance on ESG -rel ated no n- fi na nc ial m et r ic s c ou ld l e ad to f r a ud or error s E xa mp l e s of h ow w e ma na g e th is r i sk – Rep or t on E S G i n a tr ans pa r ent w a y w i th appropr iate ver ification acti vit y, includi ng pub l ic at io n of o ur f ir s t S us t ai na bi li t y at Sm it hs r ep o r t in F Y2 0 2 2 – S ci en ce, S u st a ina bi li t y & E xcel l enc e ( S S E ) Co mm it t ee of t he B o ar d e s t ab li sh e d to ov er see a nd s up po r t del i v er y of E S G t a r get s and goal s – Su s t ain ab il it y st r at eg y i nte gr a ted t o Gr o up an d di v is io n s tr ategi e s , al ig nin g an d le ve r a gi ng t he S mi th s Val ue E n gin e to d el i ve r v alu e fo r al l s ta keh ol d er s – E xecuti ve management responsible for se t ti ng a nd d el i v er i ng E S G g o al s – E S G t ar g et s bu il t into l on g- ter m a nd a nn ua l remuner ation incentive plans – Me et Task Fo rc e on C li ma te- r el ated Financial Disclosures ( TCFD) repor ting requirements – Co mm it ted to s et t in g S cie nc e -B a se d T ar g et s to me et N et Ze ro S c op e 1 & 2 em is s io ns b y 2 0 4 0 and Ne t Zer o S c op e 3 em is s io ns b y 2 0 5 0; al so s et 3 - ye ar t a r get s F Y 2 02 2-24 f or GH G, w as te , w ate r an d r en ew a bl e el ec t r ic i t y Example s of how we know the controls are working eff ecti vely – S S E Co mm it t ee m ee t s fo ur ti me s a y ea r to review prog ress – Pr ogre ss on environment al metrics – A ll d i v is io ns e ng ag ed i n pr o du c t ar e as t ha t suppor t environmental per for mance of , and through, cus tomers – St ro n g sc or e s fo r s afe t y a nd e thi c al m at te r s in th e M y S a y em pl oy e e sur v e y 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 49 3. TECHNOL OGY – T echno log y d isr up tio n by ex is ting o r fu ture co mpe titor RISK OWNE R Divisional Presidents TREND — 4. PEOP LE – A b ili t y to at t r ac t a nd re ta in pe opl e RISK OWNE R Chief People Officer TREND Differ entiated products and ser vice s are critical to ou r su cc es s . We m ay b e un a bl e to m ai nt ai n technological differentiation; to meet customers’ existing needs or ant icipate emerging demand tr en ds ; an d ma y f ac e di sr u p ti ve i nn o v ati o n by a com p et it or . Th is c ou l d af f e c t ou r s tr a te g y or bu si ne s s m od e l thr o ug h a ma te r ia l a d ve r se e f f ec t on revenue, revenue grow th or profit margin; erosion of our reputation as a technology leader in o ur m ar ke t s; a nd o ur a bi li t y t o at t r a c t an d retain talent. How this could impact our strategy or business model – Mat er i al a d ve r s e ef fec t on m ar g in an d pr of i ta bl e gr o w th – Er o si on o f our r e pu t ati on a s a le a de r in ou r ma r ket s a nd of o ur a bi li t y to at tr ac t an d r et ain t a le nt E xa mp l e s of h ow w e ma na g e th is r i sk – Pr oac tive rep ositioning of the port fol io ar ou nd t he m os t at tr ac tiv e m ar ket s wh er e we c a n su s ta in abl y ho l d a top t hr e e po si ti on based on techn ology leadership – Div ersi fied technolog y por t folio ser ving a r an ge o f s ec to r s a nd g eo gr aph ie s , mi ti gat in g ex po su r e to an y on e se c to r or a r ea – Co nt inu in g an d sm ar ter in v es t me nt in R&D (F Y 2 0 2 2 : 4 . 2 % of G ro up r e v enu e, F Y 2 0 2 1 : 3 .9 % ) – Fo cu s on b ui ld in g a cu ltu r e of in no v at io n w it h a lo ng -r ang e te chn ol o g y r oa dm ap for each div ision – Focus on next generation and tr ansfor mational initiatives – Ne w P r od uc t I ntr o du c ti on ( NP I ) proces s operating across div isions to accelerate project s – Gr o s s V i ta l it y as a K P I – Robust int ellectual proper ty (IP) protection v ia p ate nt s an d oth er p r ote c ti on s , an d litigation where appropr iate Example s of how we know the controls are working eff ecti vely – New product development progress is re v i ew e d by t he S SE Co mm it tee an d is p ar t of ou r inte r n al p er for manc e indicator tr ackin g sy stem – A dh er en ce to N PI p r o ce s s is a ud ite d an d emb e dd ed i n s y s tem s w i th m ont hly ‘ pipel ine’ over view prov ided by divisions – T ec hn ol og y r o a dma p is p a r t of the Gr ou p s tr ategi c c y cl e People are our only truly sustainab le source of competi tive ad v anta ge and compe tition fo r key skill s is intense, especial ly around science, technology, engineering and mathematics (S TEM) di sc ip l in e s. We m ay n o t be s uc ce s sf u l in a t tr a c t in g, retaining, developing, engaging and inspir ing the r ig ht p eo p le w i th t he r i gh t sk i ll s to ach ie ve o ur grow th ambitions. How this could impact our strategy or business model – In abi l it y to at tr ac t key t a len t le ad in g to a lo s s of co mp et it i ve a d v a nta g e – Di f f i cu lt y in re ta ini ng p er son ne l , at al l le ve l s o f the o r ga ni s ati on , l ea di ng to a loss of competitive ad vantag e – In acquisitions, losing key personnel from the newly-acquired business which may signific antly impact per formance and value E xa mp l e s of h ow w e ma na g e th is r i sk – Remuner ation regul arly ev aluated ag ain s t ma r ket t re nd s – Fo cu s on S mi th s L ea d er s hip B e ha v io ur s – Introduc tion of t echnic al engineering communities, technical car eer lad der , and early car eer pro gr amme – T argeted talent and succession planning s tr ategy – Fo cu s on o nb o ar d ing a nd i ni ti al exper ience improvement – Increa se in te rnal ta len t mo bility – Str uctur ed asse ssment, dev elopment, and rew ard pr ogr amme – Div ersi t y and inclusion initiatives Example s of how we know the controls are working eff ecti vely – Fo r ma l an d inf or m al m e as ur e s of c ult ur e, for e x amp le r e gu l ar e ng ag em ent s ur v ey s with follow-up action planning – Remuneration & People Commit tee tr a ck s ke y p eo pl e me tr i c s 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 50 5. BUSINE S S C ONT INUI T Y – Bus ine s s dis r upti on to sup ply ch ain o r ope r atio ns RISK OWNE R Divisional Presidents TREND 6. EC ONO M Y A ND GEOP OL IT IC S – Im pac t of econo mic an d ge opo lit ic al env ir onm ent RISK OWNE R Chief Financial Officer TREND Major disruption to the Group’ s oper ations can re su lt i n f ai lu re t o me e t ou r cu s to me r ne e ds . Timely , efficient supply of r aw materials and purchased components is critical to our abilit y to deliver to our customers . Manufac turing and supply chain continuity is exposed to exter nal events that could have significant adver se consequences , including natural catas trophes , civil or political unrest, changes in regulator y conditions, terroris t attacks an d di s ea s e p an de mi c s – t hi s ap pl i es t o ou r ow n m an uf a c tu r in g s it es a n d th os e of o ur key component suppliers. How this could impact our strategy or business model – Inabilit y to deliver produc ts /solutions to customers , impacting financial per for mance and reput ation E xa mp l e s of h ow w e ma na g e th is r i sk – Smiths E xcellence System oper ating model del i v er s incr e a se d fo c us o n re s il ie nt an d cost-effecti ve supply – Busines s continuity and disas ter recover y pl a ns i n pl a ce an d te s te d for c r i ti c al l oc at io ns – Reg ul a r ev alua tio n of ke y si te s fo r a r an ge o f r is k f ac t or s u si ng e x te r na ll y benchmar ked asses sments – risk re duction me as ur e s fo r cr i ti c al p r od uc t s a nd d ua l manufac tur ing cap abilitie s – Mitigation plans for sole source suppliers, sub-contr ac tor s and ser v ice provi ders developed and deployed by divisions to include qualif ication of alternativ e source s of su pply where appropriate – Proper ty damage and business interruption insurance Example s of how we know the controls are working eff ecti vely – Busines s continuity pl ans tested annually – Risk mitigation plans rev iewe d and repor ted by divisions – Business interruption risk sur ve ys com pl ete d b y an e x ter nal p ro v i de r for ke y o pe r at io na l si te s – In su r an ce r e qu ir em ent s d r i v en b y th e r is k ap pe ti te of th e Gr o up a nd d i v is io ns are val idated at least annually The world is experiencing widespread global inflation and severe inflation in energy markets . Th e Ru s si a n inv a s io n of U k r ai ne h a s re s ult ed i n new trade sanc tions and in troduced additional supply and pricing uncert ainties to t ight energy an d co mm od i t y m ar ke t s. C hi n a’ s ap pr o ac h to managing COV ID- 1 9 is further contributing to rising cost s and disrupted supply chains. Central ba nk s g lo b al ly a re r a i si ng r ate s in o r de r to c ur b inf l a ti on . Sm it h s f ace s t he r i s k of r i si ng l a b ou r , material , and transpor tation costs which it may no t be a b le to p a s s on t hr o ug h pr i ci ng . I n ad di ti on , as c en tr a l b an k s ta ke ac tio n to c ur tai l in f l at io n, th er e is a r i s k of a r eg io na l or g l ob al r e ce s si on which would pressure our revenue grow th and profitabilit y. Geopolitical tensions and trading bl oc f o r ma ti on m ay f u r t he r im p ac t t he f r ee mo ve me nt o f c ap it a l , go o ds , a n d pe op l e an d ad d volatilit y to our supply chains or constrain our market opportunities. How this could impact our strategy or business model – Significant and prolonged reduction in gl ob al d em an d fo r ou r pr o du c t s – Geopo litic al tensions relating to Russia, Chi na , In dia , a nd t he Mi dd le E a s t ad v er sel y impact tr ade – Ad ver se impact on business per formance due t o th e imp o si ti on of t ar if f s – Gover nment s continue t o look for ways to imp r o ve t a x r ev en ue s to e a se f i sc a l budget pressures E xa mp l e s of h ow w e ma na g e th is r i sk – Div ersi fied por tfolio of business es which mi tig ate s e xp os ur e to a ny o ne c ou ntr y or sector – Geogr aphic spre ad which mitigates the imp a c t of tr ade b a r r ie r s b et wee n r eg io ns – Div isions monitor order flow s and other le ad in g ind ic at or s s o t hat t he y m ay r e sp on d quickly t o deterior ating trading condition s an d ta r if fs / bar r ier s to f r e e tr a d e – Rep r es e nt ati on o f our i nte re s t s b y th e Gr o up Co r p or ate Af fa ir s te am – Net wor k of trade compliance of ficer s acros s the G r ou p w ho m on it or up c omi ng c ha ng e s in r eg ul a tio n an d o ve r s ee i mp or t an d expor t activi ties Example s of how we know the controls are working eff ecti vely – Co s t an d pr ice inf l a tio n ar e t r a cke d and acti vely managed monthly – Or d er t r a ck in g r ep or ted a nd m on it or e d – Busines s indicators repor ted weekly 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 51 7 . COMMER CI A L – L os s of fo cu s on cu sto mer s an d no t comp etin g in the r i ght ma r kets RISK OWNE R Divisional Presidents TREND — 8. PRODU C T QUA LI T Y – Failure o f pro du c t ca us es s er io us ha r m to pe opl e/pr ope r ty RISK OWNE R Divisional Presidents TREND — Ou r ma r ket s a r e ev olv i ng a t a f a st p a ce , cr ea ti ng potential for customers to change their business mo de l s a s th ey l o ok t o de li v er p r od uc ts a nd ser v ices at higher qualit y, with better ser vice an d at l ow e r cos t . Fai lu re o f th e G ro up t o kee p pace with customer changes/requirements (innovation, go-to- market strategies) could have a materially adverse impac t on Group per for mance. A significant propor tion of our revenue c omes fr om t he U S a nd E ur op e an m ar ke t s , w it h a no t ab l e propor tion coming from governments. In addition to ge o gr aph ic a l ma r ket s , t he re i s a r i sk t ha t we do n ot f o cu s on a t tr ac ti v e se c t or s w h er e we h av e, or could have, a sustainable position. The Group ’ s gr ow th s tr a te g y is e x pa n di ng o ur o pe r a ti on s in developing/ higher-grow th markets – par ticular ly markets that are unders er ved in Asia Pacific . How this could impact our strategy or business model – Fai lur e to d e ve lo p oth er m ar ke t s an d geogr aph ies impac t s str ategic progr es s and financial per for mance – Signific ant disruption to government budgets re s ul t s in fe w er c ont r a c t s b ein g a w ar d ed to Smiths, impac ting financial per fo rmance – Lo s s of m ar ke t sh ar e an d ad v e r s e imp a c t on G ro up r e s ult s E xa mp l e s of h ow w e ma na g e th is r i sk – Ne w pr o du c t in no v at io n fe ed b ac k thr o ug h mar ket re s ea r ch a nd di r ec t f ee db a ck f r om existing and potential customers – A di v er sif ie d p or t fo li o of b us ine s s e s mi tig ate s e xp os ur e to a ny o ne c ou ntr y, sec tor or customer – Gro w th str ategy which pl aces emphasis on expanding operations in higher-gr ow th mar kets a nd r e gi on s w hi ch a re c ur ren tly under ser ved, including Asia – St r ate gi c pr o ce s s to c a ptu r e continuing oppor tunities in curr ent an d adj ac ent m ar kets – Gover nment rel ations function w hich collaborates with colleag ues across the Group t o advise on developments Example s of how we know the controls are working eff ecti vely – Str ategic revie w proces s; divisional de ep d i ve s – Customer input gathered on a frequent basis – Strong and long-term customer relationships prov ide assurance – Managing Director c ouncils est ablished in In di a an d Chi na The mission- critical nature of many of our produc ts , ser vices and solutions mak es the potential consequences of failure more serious than for other businesses . In the ordinary course of business, we are potentiall y subject to material produc t liabilit y claims and lawsuit s, including potential class actions, from customers or thi r d p ar tie s . In te r na l r is k s c an o r i gin a te f ro m inadequacies or insufficiencie s in proces ses for procurement of material s and components, change control, manufac turin g, internal qualit y sys tems, adaptation to changing industr y regulations , and systems maintenance and compliance. Exter nal risks can result from failure to manage produc t certific ation and c ompliance, inspec tions and audits or challenges to product registr ations or c er tifications , which can lead t o in ab il it y to bi d fo r b us in e s s an d /or s el l pr o du c t s and ultimatel y regulator y action and fines. How this could impact our strategy or business model – On e of o ur b usi ne s s e s or S mi th s , as a w h ol e, ha s it s r e pu t ati on d am ag ed l ea di ng t o a lo s s of customers/f uture business – Mat er i al ha r m c au s ed t o pe op le o r pr o pe r t y and/or business in terr uption for customer s due t o qua l it y is su e s , de si gn d efe c t s , manuf ac tur ing failur es , component fail ure s, etc r e sul t s in r e pu ta ti on al d ama g e, lo s s of bu sin e s s an d hi ghe r co s t s be y on d (c os te d in ) war r ant y cl aims – Contr act ual claims for penalties, indemnitie s, and damages and al so produ ct li ab il it y cl ai ms a r is in g f r om en d -u s er s a nd other affec ted third par ties ( potentially larg e cla ss) E xa mp l e s of h ow w e ma na g e th is r i sk – Div isional qualit y r isk asse ssment s tha t ad dr e s s pr o du c t f ai lur e s , pr o du c t per for mance, pr oduc t safet y, pro duct compliance, re gulator y compliance, and market authorisation – Quali t y assur ance pr oces se s embedded in manufacturing locations for critical equipment, suppor ting compliance with customer re quirements and industr y regul ations – Quali t y developm ent and qualit y inte gr atio n bu ilt i nto n ew p r od uc t development processes – Risk analysis and mitigation pro ces ses rel ating to produ ct c yber re silience embedded in t he product lifecycle process. Pr o ac tiv e s te ps t ake n to en su r e pr o du c t c yber rel ated risk s are continually monitored and manage d – In su r an ce c ov e r for p r od uc t l i abi l it y an d oth er r el ated r i sk s s uc h as a v iat io n gr ou nd in g – Ins ur anc e and L e ga l te am s par tner to ensure contrac t s (and supplier flow down s) cover insurance issues and cl a ims a r e no ti fi e d – Contr actin g and litigation managed under the over sight of the Group Gener al Counsel w ith re gu l ar r e po r tin g to E xe c ut i ve C o mmi t te e and Board Example s of how we know the controls are working eff ecti vely – Qu al i t y m ea s ur e s (e .g . def ec t i ve p a r ts p er mil l io n (D P P M) a nd c os t of p o or q ual i t y (C OP Q )) a re m e as ur e d an d ac t io n pl a ns p ut in pl ace to dr iv e th eir i mp r ov em en t – th es e are regul ar ly repor ted – Group and divisional governance framewor ks (including Delegation of Authorit y ) ensure a close working relationship betw een legal and commercial teams (including qualit y) to manage risks – Fe w er q ual i t y i s su e s at l a unc h of new product s 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 52 9 . CY BER S ECURI T Y – Imp ac t of e nter p r is e or pr odu c t c y b er eve nt RISK OWNE R Chief Financial Officer TREND — 1 0. LEGA L A ND C OMPL I A NCE – S igni fi ca nt eth ic al br eac h or f ail ing to m eet co ntr a c tua l obl iga tion s RISK OWNE R Group General Counsel TREND — C y b er a t t ac k s s ee k in g to co mp r om is e t he confidentialit y, integrit y and availab ilit y of IT s y s te m s an d th e da t a he l d on t he m ar e a con ti nu in g r i sk . We op e r a te in m ar ke t s a nd pr o du c t ar e as w h ic h ar e k no w n to b e of i nt er e st to cybe r criminals . Digitalis ation and increased interconnectiv it y of our product s intensify the risk and the number of areas under potential attack. How this could impact our strategy or business model – Compr omised confidentialit y , int egr it y and av a il ab il i t y o f our a s s et s r e su lt ing f r o m a c y b er at tac k , imp a c ti ng o ur ab il i t y to d el i v er to customers and, ultimately , financial per for mance and reput ation – E x p os ur e to si gn if ic a nt l os s e s in th e e ve nt of a c y b er s e cur it y b r ea ch , p ar tic ul a r l y re l at in g to ou r se c ur i t y p r od uc t s . T h e se i nc lu de n ot onl y cu s tom er l os s e s , bu t al so th o se o f a potentially large clas s of third par ties E xa mp l e s of h ow w e ma na g e th is r i sk – Bo a r d ov er sigh t of th e ap pr o ac h to mi ti ga tin g c yber r isk – Pro acti ve focus on information and cyber se c ur i t y r isk s su pp or te d by a s t ro ng gover nance fr ame wor k – Group -w ide asse ssment of critic al information assets and protection to enhance secur it y – Information Securit y Awarene ss progr amme – S ec ur i t y mon ito r in g to p r ov i de ea r ly d ete c ti on o f ho st il e ac t i v it y on Sm it hs n et wor k s a nd a n in ci de nt management proces s – Par tnership and monitor ing arr ang ements in pl ace w it h cr iti ca l th ir d p ar tie s , i nc lu din g communications ser vice prov ider s – C ybe r risk analysis and mitigation pro ces ses embedded in t he product lifecycle process to increase resil ience Example s of how we know the controls are working eff ecti vely – Fo r ma l r ev i e w s w it h th e E xe c ut i ve Co mm it t ee a nd t he B o ar d – Vulner abilit y scanning/event repor ting – E x ternal rev iew s of vulner abilit y con trol s – Mandator y staf f train ing – Compl iance with rec ognised s tandar ds We ha ve m or e th an 14 ,70 0 c ol le a gu e s in m or e th an 5 0 co un tr i e s . In di v i du al s may n ot a ll b e ha ve in a cco r da nc e w it h th e Gr ou p’s Valu es a n d in accordance with ethical and legal requirements. We oper ate within increasingly complex legal regimes, of ten in highly regulated markets and with governments , customers and suppliers re qu ir i ng s t r ic t a d he re nc e to l a w s. We m ay f a il to de l i ve r con tr ac te d pr o du c t s a nd s e r vi ce s or fa il i n ou r co nt r a c tu al e xe cu ti on d ue t o de l ay s o r breaches by our suppliers or other counterpar ties. How this could impact our strategy or business model – Eth ic s o r co mp l ian ce b r ea ch c a us e s ha r m to our reputation, financial perfor mance, cu st om er r el a ti on sh ips a nd o ur a bi li t y to at tr ac t an d r et ain t a le nt – Failure to comply with tr ade compliance (i mp or t an d ex po r t ) le ad s to si gn if ic a nt f in e s and/or delays procurement or supplies – Fai lur e to m e et s tr i c t co nd it io ns w i th in gover nment contrac ts , par ticul ar ly in the US , co ul d pr e v ent u s bi dd in g for c on tr a c t s or h av e oth er s e r io us f i na nc ial a nd reputational consequences – Breach of contrac t resulting in significant ex pe ns e s du e to di sp u tes a nd c l ai ms , l os s of cu s tom er s, da ma ge t o our r e pu t ati on w i th other customers /prosp ecti ve customer s , an d lo ss o f r ev en ue a nd p r of i t due t o hi ghe r cost s, liquidated damages or other penalties – Contr act s , par ticul arly thos e with governments , may in clude terms that provide for u nl im ite d l ia bi li ti e s, i nc lu di ng fo r lo s s of profi ts , IP i ndemnitie s, per petual war r anties or al l ow i ng t he c ou nter p a r t y to c an ce l , mo di f y or ter m in ate un il at er a ll y an d s ee k alte r n ati v e s ou rc e s of su pp ly a t our e x pe ns e E xa mp l e s of h ow w e ma na g e th is r i sk – Eth ic s a nd C o mp li an ce te am r un a pr o ac ti ve pr o gr a mm ati c ap pr o a ch , ar e as of w h ic h ar e at di f f er en t st a ge s of m at ur i t y i nc lu di ng: – Ma na gin g an i nd ep en de nt ‘ Sp ea k Ou t ’ repor ting line and investigations process with communications encour aging the repor ting of ethics violations (includes abi l it y to re po r t ano ny m ou sl y an d a no n- retaliation pol ic y) – A nti-briber y and anti-corr uption and other man d ator y t r ai nin g fo r al l em pl o ye e s on - li ne a nd i n pe r s on t r ai ni ng w i th p r oc e ss for monitoring and repor ting compliance – Po l ici e s an d pr o ce s s to m it ig ate r i sk s inc lu di ng p ol i cie s a nd p r oc ed ur e s to mitigate distributor and agent -rel ated risk s, including d ue diligence, con tr actual control s and internal approv al s – A nti-tr ust tr aining pro gr ammes and guidance and dawn r aid proce sse s – Moder n Slav er y and T ransp arenc y Statement and procedure s to reduce the r isk of m o de r n sl a v er y w it hi n th e Group and ou r supply chain – Net wor k of trade compliance of ficer s ac ro s s th e Gr o up w h o mo ni tor u pc om in g ch an ge s in r e gu l ati on a nd o v er s e e im po r t and expor t ac tiv ities – Monitoring and acting on upcoming legislati ve changes – Multi-func tional progr amme for General Data Protection Regulation (GDPR) compliance Example s of how we know the controls are working eff ecti vely – Multiple sour ces to asse ss cultur e including M y S ay r e s ult s , ‘ Sp e ak O ut ’ r ep or t s , Eth ic s Pul se sur vey s, internal audi t findings , ex it i nter v i ew s a nd e thi c s qu e s ti on s in per for mance re vie ws – Monitoring and repor ting on compliance with ethics and compliance policies , on training statistic s, on investigations, on results of the Ethics Pul se metr ics (E xecuti ve Commit tee an d Au di t & Ri sk C om mi t te e o ve r si ght ) – Di v i si on al l eg al te am s em be d de d in t he business , working cross-f unctionally throughou t the con tr ac t lifec ycle, contrac t r is k too l r ol l ed o ut i n th re e di v i si on s an d us ed t o as s e s s mi ti gat io n of r i sk t hr ou gh contrac t negotiations 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 53 Th e Di re c tor s h av e dete r min ed t hat a th re e -y ea r per iod to 31 Jul y 2 0 25 i s an ap pr op r iate ti mef r am e for t he v ia bil it y as se s sm ent . Th e s ele c ted p er i od i s con sid er ed to b e ap pr op r iate a s, b as e d on th e his tor i c al pe r for ma nce of t he G ro up, a thr e e- y ea r out lo ok re pr e se nt s an opt imum b al a nce of l on g-te r m pr oj ec ti on an d acceptable fore cas ting accur ac y. The three -ye ar viabili t y as s es sm ent t imef r a me al so ta kes into a cco unt co nsi der ation s suc h as th e mat ur i t y of t he Gr o up’ s bo r r ow in g f ac ili ti es a nd the c ycl ic al it y of the p er for m anc e of the G r oup’s under l y ing mar ket s . In m aki ng th is v ia bil it y as se s sm ent , the D ir ec to r s ha ve con sid er ed t he c ur r ent f ina nci al p osi tio n and p r osp e c t s of the Gr oup, in clu din g th e cur r ent y e ar bu sin es s p er for m anc e, the det aile d op er ating p l an for 2 02 3 a nd fo re c as t s fo r 2 0 24 a nd 2 0 2 5. Ag ain st t he s e fi nan cia l pr oje c ti ons , t he Di re c tor s to ok i nto acco unt the p r inc ip al r is k s (a s ou tl ine d on p ag es 4 8 to 5 3 ) to de vel op a s et of pl au sib le s cen ar io s ( as s et ou t ov er l eaf ) wi th p otenti all y hig h- impact outcomes. In addition t o the scenario specif ic assumptions (detailed overleaf ) the p r inc ip al as s umpt ion s for t his t hr ee - ye ar v iab il it y as se s sm ent ar e as fo ll ow s: – F Y2 0 2 3 for ec a st s a re b a se d on th e det ail ed o pe r ati ng pl an r ef le c tin g the a c tu al F Y 2 0 2 2 pe r for ma nce – F Y2 0 2 4 an d F Y 2 0 25 a r e ba se d on f or ec a st p er cent a ge gr ow th r ate s f r om th e F Y 2 0 2 3 fo re c as t – Th e se v er e bu t pl au sib le do w n sid e sc ena r io fo r the r e cur r e nce of CO V I D- 1 9 dis r upt ion h as b ee n mo del le d as su min g a significant decline in demand and supply chain disruption (a s ou tl ine d in S cen ar i o 1 on p ag e 5 5 ) – No mitigating activ ities such as fur ther restr uc tur ing or th e acce s s to ad di tio nal f in anc ing h av e be en r ef le c ted in the f or ec a s t es ti mate s Co nsi der ation w a s th en gi v en to th e ma gni tud e of th e gr os s r i sk s and t heir p otent ial im pa c t, di r ec tl y or in dir ec t ly, on the G r oup’s fu tur e p er for m anc e and l iq uidi t y . T he a ss e s sme nt inc lud ed s tr e s s tes ti ng of th e Gr ou p’ s fin anc ial c a pa cit y to abs or b t he im pa c t of suc h ad v er s e e vent s , ei th er in di v idu al ly or in c omb inat ion , an d w hat mi tig atin g ac ti on s the G r oup c oul d ta ke to re sp on d to the m in or de r to pr otec t i t s bu sin es s . Th e Di re c tor s a l s o con si der e d the G r oup’s abili t y to r aise add iti on al l iqui dit y. In per for mi ng th is as s e s sme nt, t he Di re c tor s hav e t aken co mfor t fr o m the d i ver sit y of the Gr o up’ s bus ine s s es acr os s d if fere nt mar ket s , in du st r ie s , ge ogr aphie s , pr o duc t s a nd cus tom er s . In o r der to e nsu re c on sis ten c y, the b as e c as e us e d for th e thr e e- y ear v i abi li t y a s se s sm ent ha s al so be en r ec on cile d aga ins t di v i sio nal i mp air m ent r ev i ew m od el s . Ba se d on t he r ob us t as s e ss ment , th e Dir e c tor s c onf ir m th at th ey hav e a r ea so nab le e xp ec t ati on th e Gr ou p w ill r em ain v ia ble f or the p er i od b ein g as s es s e d and w il l co ntinu e to op er ate a nd m eet it s l iab il iti es a s th ey f al l du e. T he D ir ec to r s ha ve n o r ea so n to dou bt that t he G ro up w il l cont inu e in bu sin es s b ey on d the p er i od under asse ssment . The Group’ s business ac tiv ities, together with the factor s likely to af f ec t i t s fut ure d evel opm ent , pe r f or ma nce an d pos itio n are s et ou t in th e Str ate gic Rep or t on pag es 5 t o 55. T he f ina nci al po siti on of th e Co mp any, its c as h- flo w s, liquidit y position and borr owing fa cilities are descr ibed on pa ge s 1 5 an d 1 6. In ad ditio n, th e note s to th e fin anc ial statement s include the Company ’ s objectives , policies and p roce s s es f or ma nag ing it s c a pit al; i t s fin anci al risk management objec ti ves; detail s of its financial ins tr um ent s an d he dgin g ac ti v iti es; an d it s ex po sur es to cre dit r i sk an d liq uidi t y r i sk . Th e Gr o up ha s und er taken a d et aile d go ing c onc er n r e v ie w w ith a se ve re b ut p l au sibl e do w ns ide s ce nar i o t aki ng into a ccou nt ev er y thing t hat h as b een l ea r nt sin ce Mar ch 2 02 0. At 31 Jul y 2 0 2 2 the n et de bt of th e Gr ou p w as £1 5 0 m, a £ 8 7 2m dec r ea se f r om 31 Jul y 2 0 21. At the en d of Jul y, the Gr oup h ad av ail able c as h and s hor t-ter m de po sit s o f £1 ,0 5 6m . T he s e li quid re s our ce s ar e im me diatel y av ai l abl e w it h 9 9 % inv e ste d w it h the G ro up’ s glo b al ba nk ing p ar tne r s . T he Gr o up’ s deb t pr of ile sho w s an a ve r ag e mat ur i t y of 2 . 5 ye ar s ( fr o m 3. 2 ye ar s at 31 J uly 2 0 21) , w it h the n ex t d ebt m atur it y b ein g the € 6 0 0m Eur ob on d in A pr il 2 02 3 . Th e Gr o up mai ntai ns a co r e US $ 80 0m co mmi t ted r e vo lv in g cr edi t f ac ili t y fr om th es e b ank s w hi ch ma tur e s in No ve mb er 2 0 24 . T he f a cil it y w as un dr a w n at 31 Jul y 2 0 2 2 and h as n ot be en dr a w n sin ce it s l a s t r ene w al in N ov em ber 2 01 7 . T his f a cil it y has an inter e st c ov er f ina nci al co ve nant . H ow e ver , this i s not f or ec a st to pr ev ent u til is at ion at t he G ro up’ s dis cr et ion i f r equ ir ed . The Direc tors , having made appropriate enqui r ies, have a re as on abl e ex pe c ta tio n that t he C omp an y and t he G ro up ha ve ade qu ate re s our ce s to co ntin ue in o per ation f or a pe r io d of at lea s t 1 2 mo nths f r om t he date of t his Re po r t. T hus , th ey c onti nue to ado pt th e goi ng co nce r n ba si s of acc ount ing in p r ep ar in g the fi nan cial s t atem ent s of th e Co mp an y and t he Gr o up. In acc or dan ce w i th th e re qui re ment s of the 2 018 UK Cor p or ate Go ve r nan ce C od e, th e Dir e c tor s h av e as s es s ed t he l ong er -ter m pr osp e c t s of the G r oup, t ak ing i nto acco unt i t s cur r e nt pos it ion a nd a r an ge of inte r na l and e x ter n al f ac to r s , inc lud ing th e pr i nci pa l r isk s d eta ile d on p ag es 47 to 5 3 ( the ‘ v iab ili t y ass e s sme nt’ ). GOING C ONCERN AN D VIAB I LI T Y S TAT E M E N T 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 54 Scenarios mod elled Scenarios Link to principal risks Scenario-specific assumptions Scenario 1 A glob al e v ent, s uc h as a si gni fi c ant COV ID- 1 9 resurgence lockdown , leads to the e nfor ce d clo sur e of ke y pr o duc ti on site s fo r a 2-3 m onth p er i od w i th on go ing supply chai n disruption, low customer demand and rece ssio nar y circumst ances ex ten din g into th e fol lo w in g ye ar . Busine ss continui t y and E conomy and geopol itic s – 2 0 % f al l in r ev enu e ac ro s s the G r oup in F Y 2 02 3 a nd a 10% f al l in F Y 2 0 24 c omp ar e d to the b as e c a se . – 6 5% r e duc t ion i n op er at ing p r of it in F Y 2 0 2 3 due to pl ant c lo sur e s , cus tom er an d sup pl y cha in dis r upt ion a nd a 3 5 % fa ll in F Y2 02 4. – Inc r ea se d wo r k ing c ap it al du e to s tock b uil ds an d cu sto me r def aul t s. – No mi ti gati ng ac t i v iti e s suc h as r e st r uc t ur in g and headcount reductions . Scenario 2 One o f Joh n Cr an e’ s me cha nic al s e al s i s ide ntif ie d as f a ult y and th e c aus e of an exp lo sio n at a maj or r ef ine r y ca usi ng th e dea ths of t wo s t af f a nd si gni fi c ant da mag e to the p l ant . Joh n Cr a ne is s ue d for t he cos t s of r ep air a nd r e sto r at ion of t he p l ant in ad dit ion to t he co ns eq uent ial l os s es of plant closu re. Pr oduc t qualit y – Le ga l defe nce c os t s of £ 2 0 m p er ann um pl us a on e- of f pay m ent of £1 0 0 m in F Y 2 0 2 3 in set t lem ent of de ce as ed ’s cla ims . – Le gal d efenc e cos t s of £ 5 m pe r ann um ov er t he r ev i ew p er i od in r el ati on to ag re em ent of r e s tor at ion c os t s . – Re sto r ati on c os t s of £ 5 0 m spr e ad o ve r the 3 - ye ar r e v ie w per iod. – Le gal d efenc e cos t s of £ 25m p er a nnum o ve r the r e v ie w pe r io d in r el ati on to mi tig atio n of co ns eq uent ial l os s cl a ims . – One - of f p a y ment of £ 25 0 m pa y ab le in F Y 2 0 2 3 in set tl em ent of the l os s es c l aim . – Insur ance cl aim rej ec ted. Scenario 3 Fol lo w in g a pr od uc t c y b er -at tack , a ter r or i sm r el ate d inc ide nt occ ur s at a US air por t. A s a cons e que nce , the U S Go ve r nme nt r ev oke s Smi th s Dete c ti on’ s li cenc e. S a le s of Dete c ti on’ s pr od uc t s to the U S mil it ar y an d al l oth er go ve r nm ent al contr ac t s ha ve b ee n ba nne d an d due to th e re pu tat ion al da mag e, th e imp ac t o f the b an w ill s pr ea d to othe r di v is ion s . Cy ber secu rit y – Imm ed iate lo ss o f all U S b as ed G o ver nment co ntr a c t s w it hin Smiths Detection. – 2 5% f al l in oth er S mit hs D etec t ion r e ve nue o ve r F Y 2 0 2 3 . – L os s of 5 0 % of Inte rc onn ec t ’s Nor t h A me r ic a r ev en ue. – Le ga l defe nce c os t s of £10m per a nnum . – £100 m f ine l ev ie d b y US G ov er n ment f or s ec ur i t y b re ac h. – £ 5 0 m com pen s ati on p aid to U S Go v er nm ent in F Y 2 0 2 3 in re sp ec t of pr ev i ou s pr od uc t s pu rc ha se d tha t may h av e s ec ur it y fl a w s . – In sur ance cl a im und er p ro du c t li abil i t y i s not m et or de l ay ed out s id e of the r e v ie w pe r io d. Scenario 4 Smi th s Dete c tio n ar e fou nd gu ilt y of br ibi ng gover nment off icial s in A sian countries in or de r to l an d sign if ic ant c ontr ac t s. Th is da ma ge s the G r oup’s repu ta tio n and lea ds to w or l d w id e re gu l ator s im po sin g sign if ic ant s a nc ti ons o n th e Gr oup . Le gal a nd compliance – Reg ul ator y f in es g lob al ly am ount ing to £100 m . – L os s of al l f utu re r e ve nue i n bot h Chin a and J ap an. – 10% s al es e r osi on in D etec t ion’s USA a nd E ME A mar ket s du e to reputational damage. – £ 5 0 m of se v er a nce c os t s inc ur r e d. – 10% f al l in r ev en ue w it hin ot her S mit hs b usi ne s se s du e to the reput ational impact . Scenario 5 A maj or f ir e at th e Joh n Cr an e pl a nt in Cze ch Rep ubl ic r en de r s th e fa cil it y unusable, causing se vere disr uption to production. Busine ss continuit y – L os s of si x mo nths E ME A re v enu e and m ar gin i n F Y 2 0 2 3. – 2 0 % r ed uc ti on in f ut ur e ( F Y 2 0 24 an d F Y 2 0 2 5 ) EME A r ev en ue du e to los s in m ar ket sh ar e s and c omp eti ti v ene s s . – Br ea ch of s upp ly co ntr a c t s le adi ng to le gal d efen ce co s t s of £ 2 0 m per a nnum p lus a o ne - of f s et t lem ent of £ 5 0 m in F Y 2 0 2 3. – Ref ur bi shm ent an d r ep air co st s of £5 0 m in Cze ch Re pub li c (net of insur anc e claim s). – C os t s of inc r ea sin g ca pa ci t y at o the r Joh n Cr an e si tes i ncu r s an add iti on al £ 5 0 m of cos t . – C api ta l ex pen di tur e on r e pl ac eme nt eq uipm ent in C zec h Repub l ic of £1 0 m (n et of in sur ance cl a ims ). Scenario 6 Co mbin ati on of s cen ar io s 2 an d 3. Pr oduc t qualit y and Cy ber secu rit y A s above. Th e Str ategic Re po r t wa s app r ov ed b y th e Bo ar d on 2 2 S e ptemb er 2 0 2 2 . B y or de r of th e Bo ar d Pa ul Keel CHIE F E XEC U T I V E O F F ICE R 01 OVE RVIEW 02 STRATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 55 I am pl eas ed t o intr odu ce our C or p or ate G ove rn ance Rep or t, in which we descr ibe our governance arr angement s, the ope r atio n of the B oa rd a nd it s C om mit te es , an d how t he Board dischar ged it s responsibilitie s during the year . Fol lo w in g the C O V ID - 1 9 disr uption t hat s o man y of us s uf fer ed , this y e ar we r et ur n ed to f ac e-to -f a ce Bo ar d a nd C omm it te e mee tin gs an d ha ve h ad th e opp or tun it y to enga ge w i th an d he ar fr om m any o f our c oll ea gue s in p er son . T his in clu de d a Bo ar d v isi t to our F l ex- T e k op er at ion i n Por tl a nd, T enn e ss e e. T he re i s no su bs ti tute f or me eti ng p eop le to r ec og nis e th e cha lle ng es t he y fa ce, t he as pir ation s the y h old a nd th e cu ltur e w i thin w h ich t he y ope r ate . Und er s t and ing ke y com po nent s l ike th e se h el p the B o ar d sup por t a he alt hy b usin e ss . I t w as a l s o go od to s ee , and f or me to per sona ll y mee t w ith , s ome of o ur sh ar eh old er s a t our C ap it al Mar ket s e ve nt and t he A GM l a st N ov em ber . Th e Bo ar d to ok s om e cr i tic al s tr ategic d ec isi on s dur i ng th e ye ar , incl udi ng th e de cis ion to s el l Sm ith s Me dic a l to ICU M edi c al , Inc . Th e tr ans ac ti on c omp leted i n Jan uar y, and w e w ish o ur fo r mer Smi th s Med ic al co ll ea gue s e ve r y succ es s m ov i ng fo r w ar d. Mor e inf or ma tio n ca n be fo un d on p age 6 1 . Bo ar d s ucce s si on pl an ning h as a l s o be en a ke y foc us th is y ear . Th e Bo ar d m ad e the d ec isi on to ap poi nt Cl ar e S ch er r er a s Chi ef F inan cia l O f f ic er in A pr il, an d to app oi nt Ric har d H ow e s as an i nde pe nde nt Non - exec ut i ve D ir ec tor i n S eptem ber 2 02 2 . T he B oa r d no w com pr i se s six m ale s an d f i ve fe mal es , t wo Di re c tor s fr om his to r ic al ly und er -r ep re s ente d ethn ic gr ou ps an d se v en w it h a bir thp l ace or b ackgr o und o ut s ide t he UK . Mor e info r mati on c an b e fo und in the N omi nati on & G ov er n anc e Co mmi t tee Re por t on p ag e 6 6. Fo r a Gr ou p suc h as S mit hs , w it h a di ve r s e wo r k for ce a nd a w ide g eo gr a phi c spr e ad , that d i ver sit y is cr uc ial , b ut i t is e qual ly imp or tant t hat th e Dir e c tor s a re c a pa ble a nd su it abl y ex pe r ien ced indi v i dua l s . T he b iog r ap hie s of o ur Dir e c tor s c a n be fo und o n pa ge s 5 8 an d 59 . Hav i ng a s tr on g go ve r nan ce f r am e wo r k tha t sup por t s th e Gr oup’s long- ter m s tr ategic go al s is cr i tic al i f w e ar e to sup por t the b usi ne s s and e nha nce th e inter e s t s of al l our s t akeh old er s for th e f utu r e. T he B oa r d cont inu all y keep s it s g ov er n ance ar r a ng eme nt s und er r ev i ew. D ur in g the y ea r the B o ar d ag re ed to the fo r ma l con s tit ut ion of t hr ee n ew C om mit tees: t he S ci enc e, Sus t ain abi li t y & E xcell enc e Co mmi t tee; th e Remu ner ation & People Commit tee; and the Finance Committee which each ev olv e d fr om t he pr e v io us Rem uner ation a nd T r an s ac ti on Committees respecti vely . Th e se n ew C om mit tees a llo w fo r gr eate r ov er s ight in t he ar ea s of inn ov at ion , su s tai nab il it y , pe op le an d fi nan cia l agil i t y to hel p be t ter su pp or t the S mit hs Val ue E ngi ne, t hat co nne c t s our P ur p os e, o ur s tr eng th s and o ur pr ior it ie s of Gr o w th, E xecution and People. F inal ly, I wou ld l ike to th ank th e Sm ith s wo r k for ce a nd m y fel lo w Dir e c tor s fo r the ir w or k on s har e hol de r s’ beha lf th is ye ar . In par tic ul ar , I wou ld l ike to tha nk T any a Fr atto w h o w ill be r etir ing fr o m the B o ar d at th e con clu sio n of the 2 02 2 A GM. Dur i ng he r tenu re , T any a ha s pr ov i de d an in v alu abl e cont r ibu ti on to the C omp an y an d I wo uld l ike to th ank h er fo r her w i se c oun se l and h umo ur alo ng t he w a y. On beh alf of t he B oa r d, I w oul d al so like to th ank J ohn S hip s ey fo r his s er v ic e to Smi th s as Ch ief F inan cia l O f f ice r until A pr il thi s ye ar . I hop e yo u f ind t he fo ll ow in g r ep or t inter es ti ng , and , alo ng w i th my fel lo w Co mmi t tee C hair s, I w oul d be h app y to dis c us s an y of the content a t our up co ming A GM . Sir Ge or ge W. Buckley C HAIR MAN 0 3 G over nance 5 6 -9 2 UK Co r por ate Gover n ance C o de C omp lia nce In F Y 2 0 2 2, a nd at t he date of t his r ep or t, t he C omp an y ap pl ied t he Pr i nci ple s an d com pl ie d w ith a ll P r ov i sio ns of t he UK C or p or ate Go ve r nan ce C od e (th e Co de ) in f ul l , as ex pl a ine d thr o ugh ou t this Re po r t. A cop y of t he C od e is av a il ab le f ro m th e F inan cia l Repor ting Council ’ s website at fr c.org.uk . Further information on comp l ianc e w it h the C od e c an b e foun d as f oll o ws: Bo ar d L ea der ship and C om pa ny P ur p os e 5 7 Div ision of respon sibilities 62 Evaluation, composition and succession 6 4 Au dit , r is k and i nter na l cont r ol 69 Remuneration 75 C HAI R MAN ’ S I NTRO D U C TI O N 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 56 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 The p r ima r y role of t he Bo ar d is to l ea d Smith s in a wa y that e nsu re s it s lo ng -ter m su cces s . Th e Bo ard is re sp on sib le fo r app rov in g Gr oup s tr ate g y and f or overse eing its implementation. Subjec t to applicable legislation and regul ation and the Ar ticles of A s sociation, the Di rec tors m ay exerc is e all p owe rs o f the C om pan y . Th e Bo ar d e xer cis e s ov er sight of ou r Co mp any a nd in d oin g so ens ur es t hat t he s tr a teg y is c on sis tent w i th o ur P ur po s e and i s del i ve r ed in l in e w ith o ur Val ue s . In sup po r t of pro tec ti ng an d gr ow in g s ta keho lde r v alu e the B o ar d co ntinu all y mo nito r s th e inter n al cont r ol s , r i sk ma na gem ent an d v iab il it y of the C omp an y, as w ell a s co nsi der ing the v i ew s o f st akeh ol der s. Th e Bo ar d h as ap pr o ve d a go ve r na nce f r a me wo r k of s y s tems and c ontr ol s to ef fe c ti ve ly di sc har g e it s co ll ec t i ve r e sp ons ibil i t y. The fr ame wor k includes the delegation of specific author ities to the B oa r d’s fi ve C om mit tees , a s set o ut b elo w. T he T er m s of Refer enc e for t he se C om mi t tee s , w hic h we re r e v ie we d dur ing the y ea r , can be f oun d on ou r we bsi te w w w.smi th s. com . BOARD COMMITTEES BOARD Gover nance model Nomination & Governance Com mit te e Aud it & Ri sk Com mit te e Remuneration & People Com mit te e Science, Sustainabilit y & E xcelle nce Com mit te e Fin ance Com mit te e EXECUTIVE MANAGEMENT COMMITTEES E xecu ti ve Co mmi t tee A ssis ts the Chief Executi ve Of f icer in discharging his responsibilities and is collec tively re sponsible for implementing str ategy, ensuring consistent execution and emb e dd in g th e cul tu r e an d Val ue s . Investment Co mmittee A ss es ses high- value and high-r isk pro pos al s, ca pi t al e xp en di t ur e, a s se t di sp os a l an d sp ec ia l revenu e expenditure proje ct s which requir e Chi ef E x ec ut i ve O f fi ce r or B oa r d ap pr o v al . Disclosure Committee Ad vis e s th e Ch ief E xec ut i ve O f fi ce r and t he Board on the iden tific ation of inside in formation, an d the t im in g an d met ho d of i t s di s cl os ur e. Rev i e w s an d ma kes recommend ations to the Bo ar d o n th e s tr u c tu r e, size and composition of th e Bo a r d an d it s Co mm it t ee s . It a l s o l ea ds the p r o ce s s fo r Di re c to r appointmen ts and Director and senior management succes sion planning. O v er s e e s th e on go in g sui t ab il it y of th e Group’ s gover nance framework. En su r es t he i nte gr i t y o f th e Group’ s financial repor ting and audit proces se s, and the main tenance of sound internal control and risk management sy stems, including over si ght of the inte r na l au di t f unc t io n an d the G r ou p’s ethic s a nd compliance acti vi ties. Manages the rel ationship w it h th e ex t er n al a udi to r , including making recommend ations to the Bo ar d a nd s ha r eh ol de r s in rel ation to the appointment an d re - ap po int me nt of t he ex ternal auditor . Responsible f or the Group ’ s Direc tors’ Remuneration Po li c y a nd r e v ie w s an d overs ees the Group ’ s remuner ation str ategy for the E xec ut i ve D ir e c to r s an d senior managemen t. O v er s e e s , on b eh al f of th e Boar d, the implementation of th e Pe op le s t r ate g y for the Group, including the Group ’ s approach to di v er s i t y, eq ui t y and inclusion. Ov erse es the Group ’ s cul tu r e an d ap pr o ac h to science, sustainabilit y an d exce ll en ce ( S SE ). This includes review ing the scientific and techn ology strategy , inn o v ati on , r e se a rc h an d development; over seeing the Group ’ s sustainabilit y str ateg y; over se eing the Smiths Excellence System; and review ing and determining S SE target s, metric s and KPIs rel ating to remuneration. O v er s e e s an d pr o v id e s agi l it y to the G r ou p’s appro ach to capital management including so ur ce s a nd u se s o f c as h, por t folio acti vit y, changes to c ap it al s t r uc t ur e a nd budgetar y planning. This Commit tee evo lved from the T r ans action Commit tee which prev iously focused on suppor ting the Smiths Medical s ale. READ MORE Committee Report P 69 READ MORE Committee Report P 75 READ MORE Committee Report P 89 SEE MORE www.smiths.com READ MORE Committee Report P 66 BOA R D LE AD ER S HIP A ND C O MPAN Y P UR P OS E R OL E OF T HE B O A R D 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 57 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Sir George Bu ckley Chairman A pp oi nte d: 1 Au gu s t 2 013 N R S F I Skill s and e xper ience: Sir George has ex tensive exper ience of large, multi- ind us t r y bus in e s se s o pe r at in g in g lob a l ma r ket s a nd h as h ad a l on g c ar e er in en gi ne er i ng a nd i nn ov atio n. A s Cha ir m an , Si r Ge o r ge en s ur e s ef f ec t i v e com mu nic a ti on w i th ke y s t akeh ol d er s a nd t hat t he B o ar d p r ov i de s s t ro n g le ad er s hi p an d gui da nc e fo r th e exe cu ti v e m an ag em ent te am . D ur i ng t he ye ar , Si r Ge o r ge p r ov i de d in v al ua bl e le ad er ship o n th e s al e of Sm it hs Me dic a l al on gs id e hi s su pp or t of th e F in an ce C om mi t te e. H e ho ld s a P hD i n Elec tr ical En gineer ing. Career experience: Sir G e or g e ha s he l d pr e v io us r o le s of C hai r ma n an d CEO at 3 M C om pa ny, a U S ba s ed g lo ba l te chn o lo g y co mp an y an d D ow J on e s 3 0 co mp on ent , Ch ai r ma n an d CEO o f Br u ns w i ck C o r po r a tio n an d Ch ief T ech no lo g y O f fic er f or ap p li an ce s , mo tor s a nd c on tr ol s at Em er s o n El ec tr ic Co mp an y. Sir G e or g e al so br ings n o n- e xec u ti v e ex pe r i en ce to th e B oa r d, ha v in g se r ve d as N on - e xec ut i v e Dir e c to r at Pe ps iC o In c . an d Hi t ach i L im ite d , an d as Ch ai r ma n of S ta nl ey B l ac k & De c ker , Inc . Paul Keel Chief Executi ve Of ficer A pp oi nte d: 25 M a y 2 0 21 Skill s and e xper ience: Pa ul h as a s t r on g tr ack r ec or d o f de li v e r in g r es ul t s in innovation-le d and diversi fied global industr ial technology busine sse s. His i nter nati on al e xp er ienc e po si t ion s hi m w el l to al lo w S mi th s to de l i ve r on it s s ign if i c ant p ote nti al . H e is a g r a du ate of C a r le ton C ol l eg e an d Ha r va r d Business School. Career experience: Pr ior to j oin in g Sm it hs P a ul w or ked at 3M C o mp an y bet we en 2 0 0 4 an d 2 0 2 0, w ithi n th e US a nd U K . D ur i ng t hi s pe r io d , he l ed a num be r of gl ob a l bu sin e s s es i nc lu din g th e $ 5 bn r e v en ue C on su me r Bus in e s s Gr o up an d s ev er al in du st r ia l bu si ne s s e s r an gi ng i n si ze f ro m $ 4 00 m i n re v en ue to o v er $1bn. He a l s o le d a nu mb er o f ente r p r is e f un c ti on s inc lu di ng M anu f ac t ur ing an d S upp ly C ha in , Mar ketin g an d S al e s, S tr ateg y an d Bus in e s s De v elo p men t. I n th e sh or t pe r io d b et wee n 3M a nd S mi th s , P au l completed a v ariet y of consulting projec ts . Paul ’ s other experience includes ro le s o f inc r ea si ng r e sp o ns ibi l it y at Ge ne r al E l ec t r ic , M cK i ns e y & Co mp a ny an d Ge ne r al M il l s . Cl are S cher r er Chief Financial Of f icer A pp oi nte d: 2 9 A p r il 2 0 2 2 . C l ar e w il l s t an d fo r ele c t io n at th e 2 0 2 2 A GM Skill s and e xper ience: Cl ar e h as e x te ns i v e ex pe r ie nc e w or k in g w it h an d ad v i sin g a b r oa d r a ng e of in du s tr i al c om pa ni es a r ou nd t he g lo be . Sh e ha s pa r tic ul ar ly re le v an t ex pe r i enc e in t he s e c tor s in wh ic h Sm it hs h as s t r on g po si ti on s , in clu di ng e ne r g y, saf et y & se cu r it y and a er o sp a ce. S h e ho ld s a B A fr o m Ha r va r d Un i ve r si t y and an M B A f ro m th e Ha r v ar d Bu si ne s s S ch o ol . Career experience: Cl ar e j oi ne d Sm it hs f r o m Go ld ma n S ac h s w he re s he sp ent m or e t ha n 25 y e ar s , a nd w a s a P ar tn er fo r m or e th an a d ec a d e, an d mo st r e ce nt ly C o -H ea d of t he G lo ba l In du st r ia l s b us in e ss . P r i or to j oi nin g Sm it hs , Cl are h ad b e en a c lo se a d v i se r to th e Gr o up f or a n umb er o f ye ar s, inc lu di ng h av i ng a d v is e d on t he s a le of S mi t hs M ed ic al a s w el l as h a v ing contributed to the development of the str ategy announced at the Novemb er 2 0 21 C ap it al M ar ke t s ev e nt . Pr ior to G ol dm an S a ch s , Cl a r e w as a c on su lt an t at Mc K in s ey & C o mp an y. Pam Cheng Non- executive Direc tor A pp oi nte d: 1 Ma rc h 2 0 2 0 A N R S I Skill s and e xper ience: P am’s exp er i en ce i n th e ar ea s of R& D, ma nu fa c t ur in g , sale s and marketing, commercial operations , supply chain management an d tec hn ol og y g ai ne d w i thi n l ar g e gl ob al b us in es s e s in s t r ate g ic al ly impor t ant regions for Smiths, fur ther str engthens the Boar d’s discus sions on em b ed din g w or ld cl a s s op er atio ns . P a m ho ld s a B ac he lo r of S ci en ce an d a Ma st er ’s deg re e in C he mi c al E ng ine e r in g fr o m Ste v en s In s ti tu te of T ech no lo g y, Ne w Je r s e y an d an MB A i n Mar ketin g fr o m P ac e Un i ve r si t y , Ne w Yo r k , U S A . Career experience: Pam is E xecutiv e Vice- Pre sident, Oper ations and Information T echnology at As tr aZenec a plc, a mu ltinational pharmaceu tical an d bio ph ar mace u tic a l co mp an y. Pr i or t o jo ini ng A st r a Zen e ca i n 2 015, P am w as P r e si de nt of M SD ( M er ck & C o ., In c . ) in Ch in a. P a m ha s al s o p r ev i ou sl y hel d v a r io us e ng in ee r in g an d pr o je c t ma na ge me nt p os it io ns a t Uni v er sa l Oil Produc ts , Union Car bide Corp oration and GAF Chemical s. Dame Ann Dowl ing Non- executive Direc tor App ointed: 1 9 September 2018 A N R S I Skill s and e xper ience: Dame Ann’ s contribution to engineering res earch is in ter n at ion al ly r e co gn is e d, a nd h er k n ow l e dg e an d ba ckg r ou nd of fer a differ ent perspec ti ve to Board discussion s, par tic ular ly as they relate to en gin e er i ng , in no v at io n an d su st a ina bi li t y. Dame A nn ha s a de gr e e in Mathematics and a PhD in Engineer ing. Career experience: Da me A n n ha s ha d a di s ti ng uis he d a ca d emi c c ar e er an d is c ur r en tly a D e pu t y V ice Ch an ce ll or a nd a n Em er i t us P r ofe s s o r of Me ch ani c al E n gin ee r in g at t he U ni v er s it y of C amb r i dg e, w h er e sh e s er v ed a s He ad o f En gi ne er i ng f or f i v e ye ar s until 2 014. Sh e se r ve d a s the P r e si de nt an d Cha ir m an o f T r us te e s of th e Ro y al A c ad em y of E n gin ee r in g f r om 2 014 to 2 019 an d as a N on - exe cu t i ve D ir e c tor o f BP pl c f r om 2 012 unti l Ma y 2 0 21, wh er e she w as a me mb er of t he S afet y and S us t ain ab il i t y C om mi t te e. Ta n y a F r a t t o Non- executive Direc tor A pp oi nte d: 1 Ju ly 2 012. Tany a w il l r eti r e fr o m th e Bo a r d at th e co nc lu si on of t he 2 0 2 2 A G M A N R I Skill s and e xper ience: In ad di ti on t o he r ex pe r ie nc e in m anu f ac t ur ing an d op er atio ns , Tany a br i ng s in si ght i nto pr o du c t in no v at io n, s a le s a nd m ar ke tin g ac ro s s a r a ng e of s e c tor s and an e x te ns i ve k n ow led ge of o p er atin g in th e U S, to Bo a rd d is c us s io ns . A s one of t he l on ge s t s er v in g m emb e r s of t he B oa r d, she h a s a de ep k no w l ed g e of th e Gr o up . Sh e is a q ual i f ie d el ec t r ic a l en gi ne er an d ha s a B S c in E le c tr i c al E ng in ee r in g. Career experience: T any a h a s ha d a su cce s s f ul c a re e r r un nin g busines ses over 2 0 years w ith Gener al Electr ic Cor por ation, a multinational con gl om er ate. P r i or to j oi nin g th e Sm it hs B o ar d , sh e w a s th e CEO of D ia mo nd Inn o v ati on s In c, a m an uf a c tu r er of i nd us tr ial di am on ds . Tany a al s o s er v ed a s a no n- e xec u ti v e dir e c to r on t he B o ar d of M on di p lc f r om 2 0 1 7 to Ma y 2 0 2 2 . Other significant appointment s: Non-E xecutiv e Director of Ad vanced Dr aina ge S y s tem s , In c. a nd A shte ad G r ou p pl c . A Au d it & R i sk C o mm it tee R Remuneration & People Committee F Finance Commit tee Commit tee Chair N Nomination & Governance Committee S Science, Sustainabilit y & Excellence Committee I In de p en d ent D i r ec t or o r in t h e Ch ai r m an’s case independent on appointmen t Key BOAR D BIOGR A PHIE S 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 58 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 K ar in Ho eing Non- executive Direc tor A pp oi nte d: 2 A pr il 2 0 2 0 N R S I Skill s and e xper ience: K ar i n br i ng s cu r r ent e xe cu ti v e e xp er i en ce o f oil & g as , def en ce, s e cu r it y, and a er os p ac e to th e Bo a rd g ai ne d f r om a r a ng e of r o le s at l ar g e mu lti na ti on al gr o up s. K ar in h as al so p r ov i de d v al ua bl e as s is t an ce an d ad v i ce in e xe cu ti v e an d n on - exe cu ti ve su cce s s ion p l a nni ng a nd E S G a nd sustainabilit y matters. Kar in holds a Diploma Geophysics (MSc Geophy sics) fr o m th e Uni v e r si t y of Ham bur g , G er m an y. Career experience: K ar i n is G r oup E SG, C ult ur e a nd B us ine s s Tran s fo r ma ti on Dir e c to r at B A E S y s tem s pl c. P r i or t o jo ini ng B A E s he l e d on e of th e ma jo r international business div isions at Schlumber ger , a multinational oil ser vices company. Karin spent 20 year s at Schlumberger , where she held a number of se ni or HR , m ar ke tin g , tec hn ol og y and l in e ma na ge me nt le ad er ship p os i tio n s ac ro s s Eu ro p e, th e Mi dd le E a s t an d A s ia . Richar d How es Non- executive Direc tor A pp oi nte d: 1 S ept emb e r 2 0 2 2 . Ri ch ar d w il l s t an d fo r app o int me nt at th e 2 0 2 2 A GM A N R I Skill s and e xper ience: Ric h ar d ’s bac kgr ou nd i n se ni or f i nan ci al p os it io ns a t l ar g e li s ted c om p ani e s in a v a r iet y of s ec to r s b r in gs v a lu ab le i ns igh t to th e Bo ar d ’s dis cu s si on s . Ri ch ar d h ol ds a B S c i n Ge o gr a ph y f r om L ou gh bo r ou gh Uni v er sit y and i s a Fe ll o w of th e IC A E W. Career experience: Ric h ar d is C hi ef F in an ci al O f f i ce r of Bu nz l pl c, t he specialis t international distributio n and ser v ices Group. Richard qualif ied as a Cha r ted A cc oun ta nt w i th E r n st & Youn g b efo r e mo v in g to th e in ve s t me nt b ank Dr e s dne r K lei nw o r t Ben s on . P r io r to jo in in g Bun zl i n 2 019 , Rich ar d h el d CF O positions at v arious multinational business es including Inchcape plc, Coats Gr ou p pl c an d B ak ka v or p lc . Bill Seeger Senior Independent Direc tor A pp oi nte d: 12 May 2 014 A N R F I Skill s and e xper ience: Bil l ha s ha d a l on g an d su cce s s f ul c a re er i n f in anc e in th e en gi ne er i ng s e c tor, gaini ng a n in - de pth k n ow l ed g e of gl ob al m ar kets . Bill ’ s extensi ve exper ience in global engineering busines ses suppor ts the Bo ar d ’s ro bu s t de ci si on -m ak in g. B il l ha s a B A in e co no mi c s an d an M B A . Career experience: Bil l w a s ap po inte d Ch ai r of th e Rem un er atio n & Pe op le Co mm it t ee o n 1 Ju ly 2 018, a nd a s S en io r In de pe nd ent D ir e c to r at th e 2 018 AG M. B il l ha s be en C ha ir of t he F i na nc e Co mm it t ee s inc e it w as for mal is e d in No ve mb er 2 0 2 1. Wi th ef fec t f r o m 1 Feb r u ar y 2 0 2 2 Bi ll w as ap po inte d to t he Bo ar d o f IC U Me di c al , In c . in a cco r da nc e w it h th e ter m s of t he s ha r eh ol de r s agr e em en t ente r ed i nto w i th th e s al e of S mi th s Me di c al . H e is a l s o a me mb er of IC U ’s Aud it a nd C om pl ia nc e C omm it tee. B il l w as G r ou p F in an ce D ir ec t or at GK N p lc , a gl ob a l en gin e er i ng gr o up, u nti l hi s re tir e me nt in 2 0 14. A t GK N he al so h el d th e ro le s o f CEO o f the P r o pu l si on S y s tem s Di vis io n an d CFO o f th e A er os p ac e Di v i si on . P r io r to th at , Bil l s pe nt 3 0 y ea r s at T R W, a US - b as e d au tom oti ve an d ae ro sp a ce gr o up, w h er e h e he ld v a r i ou s se ni or finance positions. Other significant appointment s: S eni or I nd ep en de nt D ir ec t or at S p ec t r is p lc an d Le c tu r er at U CL A A n d er s o n S ch oo l of Ma na g eme nt . Mar k S eligma n Non- executive Direc tor A pp oi nte d: 16 May 2 016 A N R F I Skill s and e xper ience: Mark ’s extensive exper ience in corpor ate finance an d ca pi t al m ar ke t s sup p or t s Bo ar d d is c us s io n of th e Gr o up’s por t fo li o man a ge me nt an d s tr a teg y. H e pr o v id ed s ig ni fi c ant c ou ns e l dur ing th e s al e of Sm it hs M e dic a l th r ou gh hi s su pp or t of t he T r a ns a c ti on a nd n o w F in anc e Co mm it t ee . Ma r k al so br i ng s n on - exe cu ti ve ex pe r ie nc e to th e B oa r d, h av i ng se r ve d as s e nio r in de pe n den t dir e c to r an d au di t com mi t te e ch ai r ma n at se v er al F TS E100 c om pa ni es . M ar k i s a Ch ar ter ed A c co unt an t and h a s an M A in ph il os op h y, pol i tic s and e co no mic s. Career experience: Mar k is a for mer s en io r inv e s tm ent b a nker a nd d ur i ng h is exe cu ti v e c ar e er h e h el d v ar i ou s r ol es a t Cr e di t Su is s e, i nc lu din g Ch air man of UK I nv e st me nt B an ki ng . Ma r k s er v ed a s a no n- e xe cu ti v e di r ec to r on t he Bo ar d o f K in gf i sh er p lc f r om 2 012 to Ja nu ar y 2 0 21. Other significant appointment s: Senior Independent Direc tor at NatWes t Gr ou p pl c an d A lte r na te me mb er at P a ne l on Takeov e r s an d Me r ge r s fo r th e A s s o cia ti on f or F in an ci al M ar ket s i n Eur o p e. Noel T at a Non- executive Direc tor A pp oi nte d: 1 Ja nu ar y 2 017 A N R I Skill s and e xper ience: No el h as h ad a s uc ce s s fu l c ar e er i n glo b al b us ine s s . He h as e x te ns i ve e xp e r ie nc e of th e hi gh - gr o w t h e con o mie s w h ic h ar e ke y mar kets f or o ur gr o w th s tr ateg y an d h as b ee n in v al ua bl e in de v el op in g key s t r ate gi c r el at io ns hi ps i n A s ia s inc e jo in ing t he B o ar d . No el h as a B A in Economics. Career experience: No el w a s th e Ma na gin g D ir ec tor of T at a Inte r n ati on al L imi te d ( TIL ), a glo b al t r a din g an d di s tr i bu ti on c om pa ny a nd a t r a din g ar m of t he Tata Gr o up, a p r i v at ely ow n e d mul ti nat io na l ho ld in g co mp an y. Und er t he t er m s of t he T at a Gr o up g ov e r na nc e gui de l ine s , h e r eti r ed f r om t he po si ti on of M an ag in g Di r ec to r on 12 No ve mb er 2 0 2 1. He wa s th er e af ter r e- app o inte d as a D ir e c to r an d No n- E xe c ut i ve C ha ir m an of T I L w it h ef f ec t fr om 1 5 November 20 21 . Other significant appointment s: E ach o f th e fo ll o w in g com p ani e s fo r ms pa r t of the Tata Gr o up: N on -i nd ep en de nt N on - exe cu t i ve C hai r m an at Tata Inv e s tm ent C o r po r a ti on , T re nt L td an d Vol ta s L td . Non - in de pe nd ent N on - exe cu ti v e V ice Ch air man at Tata Ste el L i mi ted a nd T ita n C omp a ny L td . Mat thew W hy te Company Secr etar y A pp oi nte d: 1 Au gu s t 2 0 21 Skill s and e xper ience: Mat t he w i s a Ch ar ter ed C o mp an y S e cr et ar y an d a Fel l ow o f T he C har ter e d G ov er nanc e In s ti tu te UK a nd I r el a nd . Mat the w jo in ed Sm it hs i n 2 017 hav in g pr e v io us ly g ai ne d go v er n an ce an d l eg al e xp er ienc e in se ni or r o le s in l a r ge m ult in ati on al l i st ed g r oup s in a v a r ie t y o f se c to r s , mo s t re ce nt ly at S c hr o de r s pl c an d Ri o T int o plc . A Au d it & R i sk C o mm it tee R Remuneration & People Committee F Finance Commit tee Commit tee Chair N Nomination & Governance Committee S Science, Sustainabilit y & Excellence Committee I In de p en d ent D i r ec t or o r in t h e Ch ai r m an’s case independent on appointmen t Key READ MORE The biographies of the Executive Committee members can be found on our website. Ot her Di rec tors w ho s er ved d ur in g F Y20 2 2 Jo hn S hip s ey s te pp e d do w n f r om th e B oa r d an d as C hi ef F in an ci al O f f i ce r in A p r il 2 0 2 2 . H is b io gr aph y ca n b e fou nd i n ou r F Y 2 0 21 A n nua l Rep o r t. 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 59 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Dur in g F Y20 2 2, t he Dir ec to r s conti nued t o pro vi de over si ght , ch all eng e and g uid ance on a b ro ad r a nge o f topics . This included the development and implementation of the Group ’ s strategic objec tives , culture and operational per for m ance. T he key ar ea s of fo cus f or th e Bo ar d dur in g the ye ar ar e se t out b elo w. Pur pos e – En sur ed t hat o ur fo cus o n s tr ate g y an d bus ine s s de ci sio ns ali gne d w it h our P ur pos e Str ateg y – Reaf fir m ed th e Gr ou p st r ate g y, inclu din g the S mit hs Va lue En gine a nd fo cu s on ou r thr e e pr i or i tie s of Gr o w th, E xecut ion and People – Endor se d the refre shed div isional str ategies and implementation of the n ew i n- mar ket oper a tin g mo del fo r Chin a – Completed deep-di ves on the implementation of each division’ s str ategy pro viding constr uc tiv e feedback and guidance – Ensure d stakeholder consider ations wer e embedded in discussion s and decision-making through enhanced repor ting fr om e ac h of the d i v isi on s – Appr oved a new sustainabilit y str ategy – Ag re ed t he s al e of Sm ith s Me dic a l to ICU M edi c al , Inc ( IC U ) and t he su bs equ ent £ 742m sh ar e bu y b ack p r ogr amme – Sup po r ted the r el a unc h of the S mi ths E xcell enc e Sy s tem ( S E S) – Discus sed and consider ed oppor tunities for inorganic grow th Peopl e, Values and cultur e – A pp ro v ed a w or k fo rc e eng ag eme nt st r ate g y w her e in di v id ual N on - executive Dire ctor s have been allocated div isional or functional and g eo gr a phi c ar ea s of r es po nsi bil it y in or de r to ref le c t th e glo ba l natu re o f our b usin e ss a nd inte r nat ion al co mp osi tio n of our B o ar d. Th e S eni or In dep en dent D ir ec to r is th e de si gnate d No n- exe cu ti v e Dir ec to r r es po nsi ble f or w or k for ce e ng age ment a nd o ve r s ee s this acti vit y – Recei v e d upd ate s fr om t he No n- e xecu ti v e Dir e c tor s o n the ir wo r k for ce en ga gem ent a c ti v it ie s. T h is in clu de d Dam e A nn Do w li ng’s visi t s to th e Smi th s Dete c tio n Hem el He mps te ad si te an d to a Se r v ice T eam o n- site at a l a r ge c us tome r ; P am Ch eng’s vis it s to the F le x- T e k T utco and G as ti te op er ation s; Mar k S el ig man’s visi t to the Q ual i fi c atio n and T es t l a bor ator y at Inter con ne c t’s Dund ee site; an d Bil l S ee ger a nd K a r in Ho ein g’ s at ten dan ce at co ll ea gue meetings about Ethic s and Compliance and E SG – Co ndu c ted on e -o n- on e an d gr oup o nl ine m eet ing s bet we en Dir ec to r s an d emp lo ye e s dur in g th e CO V I D- 1 9 pa nd emic . Th is en sur e d th at Dir e c tor s s t ay ed in to uc h w ith t he Gr o up’ s emp loy e es g i ven t hat m any w er e w or k in g fr om h om e – Recei v e d a re po r t fr om th e ne w Chi ef Peo pl e Of fic er on h er key obser v ations since joini ng the Company and prior ities for the new People str ategy – Sup po r ted the E xecu ti ve C om mi t tee in t he l au nch o f the n ew Smi th s Le ad er sh ip Be ha v iou r s to gui de h ow w e w ant o ur pe opl e to ac t in s upp or t of our c ult ur e – O v er si ght of th e A ss es sm ent , De ve lop a nd Re w ar d P r oje c t to ali gn key e lem ent s of S mit hs HR p r oce s s e s wi th t he th re e prior itie s of Grow th, E xecution and People – Recei v e d re gul ar update s o n empl oy e e eng ag eme nt, th e Gr oup’s pensi on ar ra ng eme nt s and h ea lth an d s afet y Succes sion an d lea der ship – Foc us e d on Bo ar d s ucce s si on p l anni ng an d key r ol es w i th in the business – A pp ro v ed th e app oi ntme nt of a ne w Chi ef F inan cia l O f f ic er and Non-executi ve Direc tor – A pp ro v ed ch an ge s to the E xecu ti v e Co mmi t tee , incl udi ng the a ppo intm ent of s ev en n ew m emb er s – Rev ie w ed s eni or m ana gem ent s ucce s si on pl a ns an d th e ta lent pipeline across the Group BO A RD A C TIV IT Y 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 60 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 F inance – Consider ed busines s per for mance throu gh a series of di v isi on al de ep - di v es at B o ar d me etin gs – Rev ie w ed an d ap pr ov e d the G ro up’ s r es ult s a nno unc eme nt s and the F Y 2 0 21 A nnual Rep or t – Sup po r ted the d e- r is kin g of th e T I Gr ou p Pen sio n S che me b y w ay of a £ 6 4 0m bu lk a nnui t y b u y -in . T he B oa r d con sid er ed a nd dec l ine d the r e que s t f ro m th e SI Pe ns ion S c hem e T ru ste e s to pay enhanced member ben efit s – A pp ro v ed th e f inal d i v ide nd fo r F Y 2 0 21 an d the F Y 2 0 2 2 inter im d i v ide nd – Co nsi der e d the f ee db ack f r om s t akeh old er s o n the C ap it al Mar ket s e ve nt hel d in No v emb er 2 0 21 – O the r key mat ter s con sid er ed b y th e Au di t & Ris k Co mmi t tee ar e set o ut o n pa ge s 71 an d 72 Gover nance and r i sk – Recei v e d upd ate s on our p r in cip al r i sk s – Ong oin g ov er sight of ou r inter n al co ntr ol s in ord er to en su re an ef f ec ti v e co ntr ol en v ir on ment – Co ntinu ed m oni tor i ng of r i sk ma nag em ent an d inter n al co ntr ol s by th e A udi t & Ris k Co mmi t tee , inc lud ing d ee p- di v e s fr o m the di v isi on s on su ppl y cha in an d pr od uc t qu ali t y – A pp ro v ed an d pr o v ide d o ver sight of th e Ethi c s an d Co mpl ia nce annual wor k progr amm e – Ongoing consider ation of the Group’ s compliance wi th the Co de an d r el ate d ac ti v i tie s – Und er took a n inter n al Bo ar d e v alu ati on to r ev i ew t he ef fe c ti v ene s s of t he Bo ar d a nd i t s Co mmi t tee s , w hic h inc lud ed dis cu s sing t he p ro gr e s s mad e f ro m the p r ev i ous y e ar’s ev aluation and agreeing ac tions for the nex t financial year . Se e p ag es 6 4 and 6 5 – A pp ro v ed th e e st ab li shm ent of th e S cie nce , Su st ai nab ili t y & E xcel le nce C omm it te e an d the e v olu tio n of th e Remun er a tio n & Peo ple C om mi t tee an d th e F ina nce C omm it te e – E s ta bl ish ed a fo r w ar d ag en da fo cu se d on s tr ateg y and a d ee p - di ve p r ogr amme to en su re r e gul ar r e v ie w s of key a re as o f foc us Pr incipal decisions Hav i ng an ef fec ti v e an d di ve r s e Bo ar d ha s en abl ed hi gh qu al it y dis cu s sio ns ah ea d of exe cu tin g se ve r al ke y de ci sio ns du r ing t he y ear . Th e Bo ar d e nga ge s w i th s ta keho lde r s w he re r e le v ant an d ta kes th eir inter e st s i nto acco unt w he n mak in g de cis ion s . Bel ow a r e exa mpl es of the p r in cip al de ci sio ns t aken d ur in g the y ea r . Fur th er ex amp le s of ho w st akeh ol de r v iew s h av e be en c ons id er ed in t he b oa r dr oom c a n be fo und o n pa ge s 4 1 to 4 4. Sale of Smit hs Medical t o ICU Smi th s Med ic al w a s so ld to I CU on 6 J anu ar y 2 0 2 2 . Ho we v er , the se par ation o f Smi th s Med ic al h ad b een a ke y fo cus o f the B o ar d sinc e 2 018. Th e Bo ar d h ad d eter min ed t hat t he s ep ar at ion o f Smi th s Med ic al w oul d en abl e Smi th s to con centr ate on gr ow i ng a s a lea din g indu s tr ia l tech no lo g y gr oup an d en abl e Smi th s Me dic al to fo cu s on re al is ing i t s fu ll p otenti al in th e me dic a l de v ice ma r ket . Stakeholder s were a key consideration dur ing the decision-making pr oc es s . T he B o ar d ac ti v el y eng ag ed w i th al l opti on s to ma xim is e v alu e for al l s ta keho lde r s an d to pr o v ide t he C omp an y w ith a n enh ance d pl a t for m f or f ut ur e gr ow th . T his le d to th e Bo ar d ap pr o v ing the s al e of Sm ith s Me dic a l to ICU. A n othe r key B oa r d de cis ion w a s the u se of t he p ro ce ed s onc e the s a le ha d com ple ted . Th e Bo ar d so ught s har eh ol der f ee db ack o n the b e st c our se of ac t ion a nd deter m ine d th at the p r oce ed s w oul d be s pl it b et w e en in ve s tme nt in gr ow th an d a sig nif ic a nt re tur n of c a pit al to s har eh ol der s thr oug h a share buyback pro gr amme. Mor e inf or ma tio n ca n be fo un d on th e we bsi te. Reaf f ir ming th e Gr oup’ s str ategy Pa ul Ke el j oin ed th e Bo ar d in M ay 2 0 21 a s the G r oup’s Chief E xec ut i ve O f fic er . His fir st ob jec t i ve w a s to r ev i ew t he Gr o up’ s st r ate g y, what w a s w or k ing w el l and w h er e op po r tunit ie s ex is ted . In his f ir st si x mont hs , P aul v i si ted m or e tha n a doze n of Smi th s l ar ge s t op er at io ns ar o und th e w or l d. T o se ek fe ed ba ck he m et w it h so me of th e Gr ou p’ s supp l ier s a nd c us tome r s an d Smi th s l ar ge s t inv es to r s . Pa ul r ep or ted hi s fi ndin gs b ac k to the B o ar d an d the n ew pr io r it ie s , bei ng ac ce s sin g gr ow th, i mpr o v ing e xec uti on an d do ing mor e to in spi re a nd e mpo w er ou r pe opl e, w er e dis c us se d an d end or s e d by th e Bo ar d . T he C ap it al Ma r ket s ev ent in N ov emb er 2 0 21 success fully communicated to shareholder s and other stakeholder s the G ro up’ s s tr ate g y, inclu din g our E S G p r io r it ie s and h o w eac h of the di v i sio ns w er e ac cel er at ing g ro w th and v a lue c r eati on . At t he Bo ar d’s st r ate g y mee tin g in Ma y 2 0 2 2, t he B oar d h ad t he op po r tunit y to re v ie w in de tai l and c hal le nge t he r ef re s hed d i v isi ona l s tr ate gie s and t he ne w in -m ar ket op er ating m od el for C hina . Th e Bo ar d a l s o de cid ed to m ake se v er a l go ver nance e nha nce ment s to supp or t th e st r ate g y. Thi s inc lud ed th e cr e atio n of th e Sc ien ce, Sus t ain abi li t y & E xcell enc e Co mmi t tee to o ve r s ee t he Gr o up’ s appro ach to science, sustainabil it y, and ex cellence, including R&D, comm er ci ali s ati on , and s us ta ina bil it y str ategie s . A s wel l as th e ev olu ti on of th e Remun er ation & Pe op le C omm it te e to sup po r t the Peo ple p r io r it y in the S mi ths V alu e En gine . In ad di tio n, i t w as a gr ee d that t he F in anc e Co mmi t tee w ou ld o ve r se e th e Gr ou p’ s sou rc es a nd us es of c a sh in clu din g it s ap pr o ac h to por t fo li o ac ti v i t y , ev olv i ng f r om the T r an s ac ti on C omm it te e w hic h fo cus e d on su pp or ting t he Sm it hs Med ic al s al e. F in all y, to suppo r t accel er a ted gr o w th and d eli v er on Sm ith s si gnif i ca nt pote ntial , t he B oa r d app ro v ed a nu mbe r of cha nge s to th e E xe cu ti v e Co mmi t tee . 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 61 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 The following role specific ations set out the clear divi sion of responsibilit y bet ween executive and non-executive memb er s of t he Bo ar d, w hic h sup por t the in tegr i t y of th e Board’ s operations. CHAIRMAN – En sur e s the B o ar d’s contin ue d ef f ec ti v en es s – Sha pe s b oar d ro om c ult ur e and e nco ur a ge s in di v id ual Direc tor engagement – Le ad s the B oa r d and s et s t he Bo ar d a ge nda , dete r mini ng the s t yle a nd to ne of di sc us si on s at Bo ar d me eti ng s – Leads the annual Boar d ev aluation CHIEF EXECUTIVE OFFICER – De ve lop s and p r op os es s tr ateg y to th e Bo ar d – Se t s and c omm unic ate s th e cul tur e, Va lue s , and b eh av io ur s fo r th e Gr oup – Le ad s the E xecu ti ve C om mit tee – Mana ge s th e da y to day o pe r at ion s of th e Co mp any – Manages rel ationships wi th key stakeholders CHIEF FINANCIAL OFFICER – Sup po r ts th e Chi ef E xe cu ti ve O f fic er in en su r ing t he de vel op ment a nd exe cu tio n of s tr a teg y – En sur e s the a ccu r ac y and co mpl etene s s of t he Gr o up’ s fi nan cial s t atem ent s to en sur e th ey r ef le c t a tr u e an d acc ur ate r en di tio n of the C om pa ny ’s per f or m anc e – En sur e s the G r oup o per ates r ob us t r is k man age ment a nd inte r nal c ontr o l s y ste ms to en su re accur ate and timely financial and non-financial repo r ting and ultimately t o safeguar d stakehold er s’ interest s SENIOR INDEPENDENT DIRECTOR – Sup po r ts th e Cha ir ma n in th e del i v er y of th e Board’ s ob jectives – Is av a il ab le to sh ar eho ld er s i f the y w is h to r ai se any concern s – O v er s ee s w or k fo rc e eng ag eme nt by t he No n- execu tive Directors – Le ad s the Ch air s ucce s si on pr o ce s s NON-EXECUTIVE DIRECTORS – Pro vide constr uc ti ve challenge and strategic guidance to Bo ar d an d Co mmi t tee d is cu ss ion s – O v er s ee m ana ge ment a nd th e bu sine s s an d of f er special ist ad vice – A s s e ss t he ef fec ti v ene s s of s y s tem s of inter nal cont ro l and risk management COMPANY SECRETARY – Ad v i se s th e Bo ar d o n go ve r nan ce ma t ter s – Sup po r ts th e Cha ir ma n in th e ef f ic ient an d ef fec ti v e fu nc ti onin g of th e Bo ar d an d it s C om mit tees – En sur e s the B o ar d r ece i ve s qu al it y infor m atio n in a timely manner There is a schedule of matters w hich are considered signific ant to Smiths and have therefore been rese r ve d for d eci sio ns b y the Bo ar d. T hi s is du e to thei r str ategic , financial , or reputational implications or consequences . The f or m al sc hed ule c an b e fou nd on o ur we bsite . Th e Chi ef E xe cu ti ve O f fic er is r e sp on sib le for p r ep ar in g and re co mme ndin g th e st r ate g y and f or th e da y-to - da y ma nag em ent of the C om pa ny. E xec ut i ve m ana gem ent im ple ment t he Gr o up’ s st r ate g y and p r ov i de th e Chief E xecu ti v e O f f ice r , and the B oa r d as a w ho le, w i th th e info r mat ion t he y ne ed to m ake de cis ion s th at w ill d eter mi ne th e lon g- ter m su cce s s of th e Gr oup . At e ach s ch ed ule d Bo ar d m eeti ng th e Chi ef E xe cu ti ve O f fic er and t he Chi ef F ina nci al O f f ic er pr e s ent s ep ar ate r ep or t s , det ail ing b us ine s s pe r for ma nce an d pr o gr es s a gai ns t s tr ate g y. Th e se a re s upp lem ente d by r e gul ar p er for m an ce up date s fr o m the Ch ief E xecut i ve O f fice r to the D ir ec to r s b et w e en me etin gs . W hen a ppr o pr ia te, inv i t atio ns to B oa r d mee tin gs ar e ex tende d to di v isi ona l pr e sid ent s , he ad s of f unc ti on s and s ubj ec t m at ter exp er t s , sup po r ting v is ibil i t y of t al ent an d exe cu ti ve s ucc es si on pl an ning . E x ter nal a d v is er s a re i nv i ted to at ten d as n ec es s a r y. Dir ec to r at ten dan ce at B oa r d and C om mit tee meet ing s in F Y 2 0 2 2 is s et ou t on p ag e 6 3 . T o ensur e t he co ntinu ed ef fec ti v en es s of t he B oa r d, th e Chai r man m eet s t he N on- e xec uti v e Di re c tor s w i th ou t the E xec ut i ve D ir ec to r s pr e se nt af te r ea ch B oar d m eet ing . He al so has s ep ar ate meet ing s w ith t he S en ior I nde pe nde nt Dir e c tor and t he Ch air s of t he B oa r d Co mmi t tee s on a r e gul a r ba sis a nd w ith e ac h of the ot he r Non - exec ut i ve D ir ec to r s at le as t an nual ly. Th e S eni or In dep en dent D ir ec to r con sul t s w it h the ot her N on - exec ut i ve D ir ec tor s wi tho ut t he Ch air m an pr e se nt at le as t annu all y, to ass e s s the p er for m anc e of the C hair man. DIV I SION OF RE SPON SIBILITIE S H OW TH E BOAR D O P E R AT E S 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 62 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Tim e commi tment Al l Dir e c tor s m us t al lo ca te suf fic ient t ime to th eir w or k in ord er to di sc har g e th eir r e spo ns ibil it ie s ef f ec ti v el y. An ex p ec te d tim e comm it ment of 2 5 da y s pe r ann um is s et ou t in th e Non - exe cu ti ve D ir ec to r let te r of app oi ntme nt. H ow e ver , Co mmi t tee Ch air s, th e Se nio r Ind ep end ent Di re c tor a nd th e Cha ir ma n com mit m or e tim e as r e quir e d. In t he n or ma l cou r s e of bus ine s s , Dir e c tor s a re exp e c ted to f ami li ar is e th em se lve s w i th bu sin es s p r io r it ie s and c hal len ge s , pr ep ar e fo r and a t tend B o ar d an d Co mmi t tee m eet ing s , at ten d the A GM , eng ag e wi th s t akeh old er s a nd p ar tic ipa te in the B o ar d ev a luat ion p r oc es s . E xe cu ti v e Dir e c tor s ar e n ot pe r mi t ted to take o n the c hair mans hip or m or e th an on e no n- exe cu ti v e dir ec to r shi p in a F T SE100 co mp any, or an y othe r sig nif ic a nt app oint ment . A ny ap po intm ent to oth er dir e c tor s hip s ar e re v ie w ed in a d v an ce b y the B oa r d for c onf li c t s and t ime c omm itm ent co ns ide r ati on s. In F Y 2 0 2 2 the B o ar d co ncl ude d th at the C hair man and t he N on- e xec uti v e Di re c tor s d ev ote d suf fi cient t ime to f ul f il th eir co mmi tme nt s to Smi th s. P ar tic ul ar c on sid er a tio n w as gi v en to N oel T at a’ s other c omm itm ent s a s he h old s a num ber o f Bo ar d le ve l po si tio ns ou t si de the G ro up al l of w hi ch ar e at T ata G ro up co mp ani es a s sh ow n in h is bi og r ap hy on p a ge 59 . T he B oar d r e af f ir med th at No el ’s othe r comm it ment s d o not p re v ent him f r om c ommi t ti ng s uf f i cie nt time to h is w or k a s a Dir e c tor , as ev i den ced b y hi s at ten dan ce an d ef fe c ti v e par ti cip ati on at al l Bo ar d an d C ommi t te e me etin gs an d ad h oc B o ar d up date c al l s . A s a c ur r ent e xec uti v e w i th cont a c t s in hig her - gr o w th count r ie s w hi ch ar e a s tr a tegi c foc us fo r Smi th s , he br ings v al uab le an d dis ti nc t ex pe r ie nce to o ur Bo ar d di sc us si on s. Adv ice and ins ur ance Our D ir ec to r s ar e ab le to se ek i nde pe nde nt pr ofe s si ona l ad v ic e at the e xp en se o f Smi th s to enab le t hem to f ul fi l the ir ob li gati on s as mem ber s of the Bo ar d . In ad di tio n, th e Dir e c tor s a nd O f fice r s of S mit hs an d it s s ubs idi ar ie s ha ve t he b ene fi t of a Di re c tor s’ an d Of fi cer s’ li abil i t y in sur ance p ol ic y . Dur ing F Y 2 0 2 2, a nd at t he date o f this r e por t , qual i f yin g thir d -p ar t y i nd emni t y pro v isi on s (a s def in ed b y s ec ti on 2 3 4 o f the A c t ) h av e re mai ne d in for ce f or th e Dir e c tor s of t he C omp an y and c er tai n othe r emp lo ye e s in r es pe c t of th eir dir e c tor s hip s of so me su bsi diar y c omp ani es i n re l ati on to cer t ain lo s se s an d l iab ili ti es w hi ch th ey m ay i ncu r (or m ay h av e inc ur r ed ) to thi r d pa r ties i n the cour se of th eir p rof es s ion al du tie s fo r the C om pa ny, or a sub sid iar y. Direc tor at tendance Board Nomination & Governance Committee Au d it & R i sk Committee Remuneration & People Committee Science, Sustainability & Excellence Committee Finance Committee Sir George Buckley 10 / 10 5/5 – 4 /4 3/3 7/ 7 Pa ul K e el 10 / 10 – – – – – John Shipsey 1 7/ 8 – – – – – Clar e Scher rer 1 2/2 – – – – – Pa m Ch en g 2 9/10 4/5 3 /4 3 /4 3/3 – Da me A n n Do w l in g 10 / 10 5/5 4 /4 4 /4 3/3 – T any a Fr at to 10 /10 5/5 4 /4 4 /4 - – Kar in Hoeing 10 /10 5/5 – 4 /4 3/3 – Bill Seeger 10 /10 5/5 4 /4 4 /4 – 7/ 7 Mark S eligman 10 / 10 5/5 4 /4 4 /4 – 7/ 7 N o e l Ta t a 10 / 10 5/5 4 /4 4 /4 – – 1 O n 2 9 A p r i l 2 0 2 2 Cl a r e S c he r r er w as ap p oi nt ed t o th e B o ar d a nd J o hn S h ip s ey s t oo d d o w n as a D i re c t or. Joh n S hi p se y d id n o t at te n d th e m ee ti n g w he r e hi s o ng o in g a pp o int m en t was discussed. 2 P a m Ch e ng w a s u na bl e to a t te n d th e M ar c h Bo a r d an d C om m it t e e me et i ng s d ue t o pe r s o na l ci r cu m s ta n ce s . P a m Ch en g p r ov i d ed h e r co mm e nt s a nd i n pu t o n th e m at te r s u n de r co ns i de r a ti o n to t he C ha ir s of th e r el e v an t fo r u ms p r i or t o th e m ee t in gs b e in g h el d . 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 63 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Each year an evaluation of the Board and its Commit tees is con duc te d to mo nitor t heir e f fe c ti ven es s an d to hel p identif y any improvement oppor tunities. It is ex ternally facilit ated ever y three years . The annual evaluation of the per formance of the Non-executi ve Dir ec to r s an d th e Chief E xecu ti ve O f fic er is l ed b y th e Chai r man . The ev aluation of the Non-executi ve Direc tors includes indiv idual mee tin gs w it h the C hair man. F ee db ack i s gi ve n to the C hief E xec ut i ve O f fic er by t he Ch air m an af ter eac h Bo ar d me eti ng an d on an a d ho c ba sis t hr ou gho ut t he y ear . Th e S eni or In dep en dent Dir ec to r an d the Ch ief E xecut i ve O f fice r le ad th e ev a luat ion s fo r the Ch air m an an d th e Chief F i nan cial O f fic er r e spe c ti v ely. Fol lo w in g the e x ter n al ly f aci li ta ted e v alu atio n in F Y 2 0 21, the F Y 2 0 2 2 ev a luat ion w a s c ar r i ed o ut inte r nal ly. Ind epe nd ent Au di t Ltd , w ho ha ve s upp or ted t he e v alu atio n pr oc e ss s inc e F Y 2 01 9 , but h av e no ot her c onn ec t ion to t he C omp an y, ass is ted w i th th e inter p ret at ion of t he r e sul t s of a se lf-a ss e s sme nt que s ti onn air e is su ed to th e Bo ar d . T he ac t ion s fo llo w in g the F Y 20 2 2 e v alu atio n hav e b een g ro up ed in f our th em es: s tr ategic d ec isi on ma ki ng; succes sion plannin g; Board communication; and stakeholder eng ag eme nt and a re s et o ut b elo w. O v er a ll , th e Bo ar d a gr ee d th at sign if ic ant p r ogr e s s ha d be en ma de s ince t he e x ter n al e v alua tio n. It is t he p re s ent inte ntio n that t he F Y 2 0 2 3 e v al uati on w il l be inter n al ly f a cil i ta ted . Bo ar d e v aluatio n f inding s an d ac tions ST R ATEGIC DE CISION M A K ING FY2021 external evaluation findings Action taken in FY2022 FY2022 evaluation findings and actions for FY2023 – Se ek to r e ach a c le ar er consensus on the Group-wide str ategic objecti ve s and how the C om pan y w il l ach ie ve th em – Ensure the Remuneration Co mmi t tee h as a b al an ce d foc us on b oth f in anc ial a nd n on- financial considerations – Fol lo w in g the ap po intm ent of P au l Ke el th e cor p or ate st r ate g y and c omm unic at ion s pl a n for th e Gr ou p pos t t he s al e of Smi th s Me dic al w er e r e -e v al uated by th e Bo ar d a nd r eaf fir med. T h e s tr ate g y an d acco mp any i ng K P Is a re d e sc r ib ed on p a ge s 10 and 21 to 2 3 respectively – Th e C omp an y hel d a C api ta l Mar ket s e ve nt in November 2 021 – Enh anc ed 5 y ea r st r ate gic p l anni ng di sc us si on s we re hel d w ith G r oup a nd di v i sio nal l ea der ship, w ith a f oc us on de li v er i ng th e st r ate gic o bje c ti v es i n li ne w it h the Smiths Value Engine – Non -f ina nci al inc enti v e me as ur es f or ma nag em ent ar e no w pa r t of E xec ut iv e Di re c tor a nd s eni or management incentive arr an gements – Greatly enhanced s tr ategic discus sions wer e h eld d ur in g the y e ar r es ult ing in cle ar er a li gnm ent on t he Gr o up’ s str ategic prior itie s. Going for war d, the ar ea s of fo cus w ou ld b e gr eate r v isib il it y of macro conditions, ex ternal mar kets and the im pa c t or o ppo r tuni tie s ar i sin g fr o m tech nol og y. T he ap po intm ent of a Chi ef Sus t ain abi li t y O f fic er an d the d ev el opm ent and e mbe dd ing of a s us t aina bil it y st r ate g y were par ticular impro vements – Wh en for mul atin g it s a gen da s, t he Bo ar d w il l enc our age in cr ea se d tim e for str ategic deep- div es to underscor e the Bo ar d fo cu s on or g anic g ro w th E V ALUA TION, COMPOSI TION AND SUCCE SSION BO A RD E V A L U AT I O N 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 64 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 SUC CE S S ION PL A NNING FY2021 external evaluation findings Action taken in FY2022 FY2022 evaluation findings and actions for FY2023 – Hold regul ar discussions between the Non-execut ive Dir ec to r s an d Chi ef E xe cut i ve Of fic er on h is o w n to dis cu s s senior management succession and d ev elo pm ent – Co ntinu e the B o ar d’s engagement acti vi ties wi th key tal ent ac r os s th e Gr ou p – Prep are for the tran sition of the C hair man and S e nio r Ind epe nd ent Dir e c tor r ol es i n the n ex t f ew y ea r s – E xecutive and non-executive succession planning was a key fo cu s dur in g th e ye ar w it h the B o ar d ap pr ov i ng a numb er of E xecu ti ve m an age ment c han ge s – The C hief E xecu ti ve O f fic er up date d the B o ar d on en han ce d talent and suc ces sion planning for senior leadership roles – Chair succession planning commenced led by the Senior Independent Direc tor – Th e Bo ar d c onti nue d it s inte r a c tio n w ith h igh -p otenti al emp loy e es to i mpr o ve t heir u nde r s ta ndi ng of t he inter nal ‘b enc h st re ng th ’ w ith v i r tual an d in p er s on o ne -to -o ne tal ent sp otl ig ht s fr e que ntly t ak ing p l ac e – Face -to -f ace e xp os ur e at Bo ar d an d C ommi t te e me etin gs for hi gh- po tentia l ta lent w i thin t he G ro up w a s re intr o duce d once tra vel res tr iction s were lif ted – The Boar d visited Flex- T ek ’ s oper ation in Por tland, T enne ss e e and m et w it h mem be r s of th e F lex- T ek leader ship team – Boar d succession planning for non- exec ut i ve p osi ti ons w as ident if ie d to be a key fo cu s for co ns ide r ati on du r in g the y ea r – Chan ge s to th e E xe cu ti ve m ana ge ment team w er e w ell m an age d an d succ es s ion p l ann ing o ve r si ght ha d been enhanced signif icantly – Fur ther f oc us w oul d be a r r an ge d on Executive Comm ittee develo pment and succes sion planning , including prov iding oppor tunitie s for the Non- exec ut i ve D ir ec tor s to meet in di v id ual ly and in s mal l gr ou ps w it h a cr os s - sec tion of employees BOA RD COMMUNICA TION FY2021 external evaluation findings Action taken in FY2022 FY2022 evaluation findings and actions for FY2023 – Mor e f r equ ent up date s fo r the B oa r d as th e Sm ith s Medical sep ar ation tran sac tion progressed were requested – Co nsi der t he s ch edu lin g of Co mmi t tee m eet ing s and holding hybrid meetings – Co ntinu e to imp ro v e the time li ne s s of Bo ar d in for m atio n – Str u c tur e Ch ief E xe cu ti v e Of f icer and Chief Financial Of f icer re po r ts to ti e in mo re c lo se ly w ith p r ogr e s s on s tr ategic pri ori ties of the business – Regul ar update s o n the S mit hs M edi c al s ale w er e pr o v id ed thr ou gh th e for m ati on of th e T r ans a c tio n Co mmi t tee w h ich met ei ght tim e s dur in g F Y 2 0 2 2 pr i or to i t s for m al is at ion a s the F in anc e Co mmi t tee ( w h ich m et a fu r ther s ev en t ime s ) – Th e Bo ar d c onti nue d to ide nti f y oppo r tunit ie s to imp r ov e comm uni cat io n bet wee n it s el f and G r oup e xec uti v e s. Th e ne w w a ys o f wo r ki ng w hi ch w er e ad opte d dur in g th e pan de mic w er e r et aine d w it h one B o ar d me etin g an d a number of Commit tee meetings held remotely or par tial ly re motel y to re du ce inter n ati ona l tr a ve l . T his p r omo ted goo d go v er na nce t hr ou gh ag ile an d tim ely d ec isi on ma kin g – Th e ne w pr o ce s se s int ro du ced to f a cil it ate e ar ly s t ag e information flows and ensure that the Non-executive Dir ec to r s ( sp ec if ic al ly t he Ch air m an an d Co mmi t tee Chai r s) h ad t he op po r tunit y for e ar l ier i npu t into B oa r d and C om mit te e p ape r s w er e f ur ther e v olv ed a nd br iefin g processes refined – Sig nif ic a nt impr o ve ment s w er e ev id en ced at B o ar d me etin gs b oth in the q ual it y and ti mel in es s of B o ar d and C om mit te e mate r ial s and al so the o pen ne s s and q ual i t y of d eb ate arising ther efrom – Mee ting d y n ami c s ha d imp ro v ed leading to better convers ations – Th e su cce s s of th e T ra ns ac t ion Co mmi t tee l ed to th e for mali s atio n of its ac ti vitie s with the es tabli shment of the F in anc e Co mmi t tee . T his h el pe d to improve information flow s and decision- making and guidance in an agile manner – Remote o r hy br id meet ing s w ill conti nue a nd th e or ga nis at ion o f Bo ar d and C om mit te e me eti ngs w or ks w ell STAKEHOL DER ENGAGEMENT FY2021 external evaluation findings Action taken in FY2022 FY2022 evaluation findings and actions for FY2023 – Res tr uct ur e the B o ar d’s interac tion with st akeholder s w ith m or e fo cu s on E S G, employee engagem ent and hearing cust omer and supplier per spec ti ves – T ra ns fer t he r ol e of de si gnate d Non-executi ve Direc tor for employee engagem ent from the Se nio r Ind ep end ent Di re c tor to another Non-executive Dire ctor – A st akeh ol der m ap ha s be en d ev el ope d – A Dir ec to r wo r k for ce e ng age ment s tr ateg y w as developed w ith indiv idual Non-executiv e Director s being all oc ate d di v is ion al or f un c tio nal a nd ge o gr ap hic a re as o f resp onsibilit y . Ov ersight is prov ided by the Remuner ation & People Committee – Th e S cie nce , Su st ain ab ili t y & Exc ell enc e Co mmi t tee w a s es t abl is he d, w hi ch pr o v id ed o ve r si ght for m any a c ti v i tie s connec ted with the Group’ s stakeholders – The Board ac knowledged tha t conti nue d fo cu s on E S G, pe op le, tal ent , cul tur e an d sup pl ier s wa s cr i tic al , a nd th at the o ng oin g foc us o n the s ucce s s f ul e st ab li shm ent of th e Science, Sus tainabil it y & E xcellence Co mmi t tee’s role w er e key 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 65 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Comm it tee m embershi p and mee ti ngs Th e me mbe r s of th e C ommi t te e, th eir bi ogr aphi es a nd at te nda nce at me etin gs du r ing t he y ear c a n be fo und o n pa ge s 5 8 , 59 a nd 6 3. Th e Chi ef E xe cu ti ve O f fic er is n or m al ly inv i ted to at tend Co mmi t te e mee tin gs an d at ten de d all b ut o ne of t he me etin gs i n F Y 2 0 2 2. O the r mem ber s of seni or m ana gem ent ar e in v ite d to at ten d as neces s ar y . Commit tee p er for mance ev aluation In F Y 2 0 2 2, t he p er for m ance o f the C om mit tee w as co ns ide re d as p ar t of the inte r na l Bo ar d e v alu atio n pr oc es s . O v er all , i t w as conf ir m ed t hat th e Co mmi t te e cont inue s to op er ate ef fe c ti ve ly. Com mit tee ac tiv i tie s Boar d succe ssion Th e Bo ar d h as a du t y to keep suc ce ss ion p l an s und er r eg ul ar re v ie w. T he No n- exe cu ti v e Dir e c tor s , w i tho ut t he Ch air m an pr es ent a nd l ed b y the S e nio r Ind ep end ent Di re c tor , dis cus s e d the s ucce s si on ar r ange me nt s for th e Cha ir ma n w ho r ea ch ed his ni ne -y ea r ann i ver sar y si nce a pp ointm ent on 1 A u gus t 2 0 2 2 . Fol lo w in g the ap po intm ent of P au l Ke el , th e Co mmi t tee a gr ee d and t he B oar d s upp or ted t hat S ir Ge or g e Buc kley s ho uld b e in vi ted to re main a s Cha ir ma n to ov er s e e a pe r io d of sig nif ic a nt st r ate gic cha nge f or th e Gr ou p. Bo ar d s ucce s si on w il l cont inu e to be a ke y focus du r ing F Y 20 2 3. T any a Fr at to i s s tepp ing d ow n f r om th e Bo ar d at t he co nc lusi on of the 2 0 2 2 A GM , and t he Ch air m an le d th e se ar ch fo r a Non - exec ut i ve D ir ec tor to r e pl ac e her . Th e Co mmi t te e re co mme nde d the a ppo intm ent of R ich ar d Ho w es to t he B oar d , an d he jo ine d as a Non - exec ut i ve D ir ec to r on 1 S epte mbe r 2 0 2 2 . A s w i th al l Bo ar d app oint ment s , th er e w a s a for m al , r ig or ou s an d tr a nsp ar ent pr oc es s , in vo lv in g all D ir ec to r s an d w ith r e com men dat ion s b as ed on th e mer i t of th e ind i v idu al c an did ates . Bu cha nan H ar ve y & C o. wer e u se d as e xec uti v e s ear c h con sul ta nt s. T h e fi r m ha s no ot her conn ec t ion to S mi ths a nd i s a sign ator y to th e Volunt ar y C od e of Conduc t on Gender Diver sit y . Th e Cha ir ma n and t he Ch ief E xe cu ti v e O f f ic er c ar r i ed o ut th e se ar ch pr o ce s s for t he r ol e of Chie f F inan cia l O f f ice r w it hou t th e for m al su ppo r t of an ex te r nal s e ar ch f ir m . Mult ipl e c and idate s wer e c ons id er ed . T he C omm it te e w as int imate ly in vo lve d in th is pr oc es s an d w as r e gul a r ly up date d on p ro gr e s s. C l ar e S che r r er , w ho w a s wel l k no w n to the C om pa ny, wa s id enti fi ed a s be ing the p ref er r e d ca ndi date . Cl ar e pr e v iou sly w or ked for G old man S ach s w he re s he sp ent m or e th an 2 5 ye ar s an d w as a P a r tner for m or e tha n a de c ade , and m os t r ec entl y Co -H ea d of th e Glo ba l Industr ial s busines s. Clar e has ex tensive exp erience wor k ing w ith a b r oa d r an ge of i ndu st r ial c omp an ie s ar oun d th e glo be, acce ler ating gr o w th and in cr e asin g v al ue. S he h as p ar tic ul ar l y re le v ant ex pe r ien ce in t he s ec to r s in w hi ch Sm ith s op er ates . Chair man’ s s t atement I am pl eas ed t o pre s ent th e Co mmit te e’ s repor t for F Y20 2 2. T he C ommi t tee h as de leg ated r es po nsi bil it y fro m the B oar d to re v iew th e st r uc tur e, size a nd comp osi tion o f the Bo ar d an d it s C ommi t tee s , and to ens ure th at the y are f it f or pu rp os e. Th e Bo ar d w h ole he ar tedly s upp or t s th e pr in cip le s of th e F TS E Wome n Le ad er s Re v ie w and t he P ar ke r Rev ie w on g en der and et hnic d i ve r si t y a nd w e we re d el ighte d to r ec omm end the a ppo intm ent of a n ew Ch ief F in anc ial O f fice r . We wer e al s o pl ea se d to r eco mm end a n ew N on - exec ut i ve D ir ec tor to the B oa r d. W h en ma kin g th es e r ec omm end ati ons , w e con sid er ed t he b al an ce of sk il l s , k no w le dge a nd e xp er ie nce o n the B oa r d. D iv er sit y of gend er , soc ial an d eth nic b ac kgro un d of the D ir ec to r s ar e al so imp or ta nt con sid er ation s alo ng w i th count r y of or i gin to en sur e t he co ntinu ed i nter nat ion al di v er s it y of the B o ar d. We al so t ake into acc ount t he Gr o up’ s s tr ate g y, bus ine s s pe r for ma nce, c ur r ent a nd f ut ur e le ad er sh ip ne ed s , challenges and oppor tunitie s. We ov er s a w the s en ior m ana ge ment s ucc es si on p ipe li ne and p l ann ing an d dur ing the y ea r we a ppr o ve d th e app oint me nt of se v en ne w E xe cu ti v e Co mmi t tee m emb er s. At l ea st o nce a ye ar w e re v ie w s eni or ma nag em ent su cce s sio n pl an s an d the qual i t y of t he t ale nt pip el ine a cr os s t he Gr o up. Per i odi c all y we r e v ie w the B o ar d’s gov er n anc e fr ame wo r k . Th is y ear w e r ec omm en de d es t abl i shin g the S c ien ce, Sus t ain abi li t y & E xcell enc e Co mmi t tee , and d ec ide d to ch ang e the ter ms of re fer en ce of th e Remun er ation C omm it te e to en sur e mor e fo cu s on p eo ple . T he F in anc e Co mmi t tee w a s for mali se d and fo cu s es o n the s ou rc es a nd us e of c a sh in clu ding p or t fo li o ac ti v i t y, cha nge s to c ap it al s tr u c tur e an d bu dg eta r y pl an ning . Mor e inf or ma tio n abo ut o ur ac t i v iti es c a n be fo und o n the f ol lo w ing pa ge s . I wo uld l ike to th ank m y fel lo w Co mmi t te e mem ber s for thei r cont inu ed ha r d wo r k ov er t he p er io d. Sir Ge or ge W. Buckley C HAIR MAN OF T HE N OM I NA TIO N & G OVE RNAN C E C OM M ITTEE N OMIN A T I O N & G O VE R NAN C E C O MMI T T E E REP OR T 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 66 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Th e C ommi t te e con sid er e d that i t w as i n the b e st i nter es t s of the G ro up an d it s s t akeh old er s to r e com men d to th e Bo ar d th at Cl ar e S ch er r er b e app oi nted as C hief F in anc ial O f fic er w it h ef f ec t fr om 2 9 Ap r il 2 0 2 2 . Jo hn Sh ips ey s tep pe d do w n a s Chief F i nan cial Of fi cer an d fr o m the B o ar d of Sm ith s Gr o up w it h ef fe c t f ro m 2 9 A pr i l 2 0 2 2 . His r emu ner ation a r r a nge ment s w er e ap pr o ve d by the Remu ner ation & People Committee. Div er sit y Smi th s Bo ar d is h ighl y di ve r s e. I t sup po r ts th e pr i ncip le s of th e F TS E Wome n Le ad er s Re v ie w an d Pa r ker Re vi ew o n ge nde r and ethni c di v er si t y and pa y s cl os e at tent ion to th e inter nation al na tur e of it s m akeup. M emb er s of the Bo ar d an d s eni or ma nag em ent w il l collec tiv ely poss es s diver sit y o f gender , national bir thpl ace, social and ethnic backgrounds, cognitiv e and pers onal streng ths, along w ith a c omb inat ion of s ki ll s , e xp er i ence a nd k no w le dg e. T hi s is imp or tant f or th e ef fe c ti v e op er ation of th e Bo ar d a nd o ve r sig ht of the Group. Th e C ommi t te e is r e spo ns ible f or r ec omm en ding a pp oint ment s to the B oa r d fol lo w ing i t s r eg ul ar a s se s sm ent of th e Bo ar d an d it s C omm it te e s’ compo si tio n, w hi l s t al s o co ns ide r in g the G ro up’ s str ategic objecti ve s. The C ommit tee mak es r ecommendations ba se d on t he me r it of t he in di v id ual c an di date s, h av i ng du e re ga r d for th e be nef it s o f di ve r si t y i n the b r oa de s t se ns e, in clu din g gen der and et hnic it y and al so th e ne ed to en su re t he ef fec ti v e fu nc ti onin g of the B o ar d at al l tim es , e sp ec ial ly as m emb er ship of th e Bo ar d is refres hed. In or de r to hel p ac hie v e the s e asp ir a tio ns , th e Co mmi t tee o nly us es t he s er v ice s of e xec uti v e s ear ch f ir ms w ho ha ve s ign ed up to the Vol unta r y Co de of C on duc t o n Ge nd er Di v er s it y. This ap pl ie s to man age ment p os it ion s , not ju st to t he B oa r d. E xe cu ti v e se ar ch fi r ms ar e a l s o re qui re d to en sur e n on -UK n atio nal s, w om en an d ca ndi date s f ro m his tor ica lly u nde r- r epr e s ented e thni c gr oup s ar e re pr e se nted on t he sh or tl is t fo r all B o ar d po si tio ns . Th e Bo ar d m eet s a ll of i t s di v er s it y tar ge t s, t he F T SE Wo men Le ad er s Re v ie w ta rg et of 4 0% r ep re s ent atio n of w ome n on F T SE 35 0 Boa rd s , the P a r ker Rev i ew r e com men dat ion fo r F TS E 100 comp an ie s to ha ve o ne dir e c tor of et hnic d i ver sit y , and t he F in anc ial Co ndu c t Au th or i t y ’s Lis tin g Rul e w her e by at l ea st o ne s eni or b oa r d pos it ion i s hel d b y a wo man . Di ve r si t y infor mat ion f or th e Bo ar d , E xe cu ti ve C om mit tee, se nio r man age r s an d the G r oup a s a w ho le c an b e foun d on p ag e 3 3 . Th e Bo ar d e x ten ds i t s wo r k on di v er sit y to s en ior l ea der ship pos it ion s in th e bu sine s s an d ac ro s s the G r oup. T h e Bo ar d D i ve r si t y Pol ic y wa s r ev ie w ed d ur in g the y ea r and c a n be fo und o n our website w w w.smiths .com. Gover n ance Th e C ommi t te e is r e spo ns ible f or kee pin g the B o ar d’s gov er n anc e fr amew or k under r e v ie w. In F Y 2 0 2 2 the C o mmi t tee r e com men de d the e s ta bl ish me nt of the S c ien ce, S us t aina bil it y & E xcel le nce Co mmi t tee to o ve r s ee th e Gr o up’ s app ro ac h to sc ien ce, sustainabilit y and excellence, incl uding R&D , commercialisation, and s us ta ina bil it y str ategie s . It a l s o r ev i ew ed t he op er ation of t he Remun er at ion C om mi t tee an d it s o v er s ight of t he Gr o up’ s w ide r Peo ple - re l ated a c ti v i tie s , and r e com men de d it s e v olu tio n into th e Remuneration & People Committee. In addition the Commit tee re co mme nde d th e ev ol uti on of th e T r ans a c tio n Co mmi t te e into the F inan ce C omm it te e, w it h r es po nsi bil it y for o ver sight of th e Gr ou p’ s so ur ce s and u se s of c a sh inc lu ding p or t fo li o ac ti v i t y, cha ng es to capit al str uc ture and budg etar y planning. Dur i ng th e ye ar th e C ommi t te e re v ie w ed th e Bo ar d s kil l s a nd exp er i enc e matr ix, B o ar d Di v er s it y Pol ic y and it s o w n T er ms of Reference . Th e Co mmi t tee a l s o co nsi der e d Dir e c tor en ga gem ent w ith s t akeh old er s , in clu din g the w o r k for ce, b efor e t his resp onsibilit y move d to the Remuneration & People Committee. Indu c ti on T o ensur e t hat th ey a re a ble to ef fec ti v el y contr ibute to di sc us si on s and d ec isi on- ma kin g, a ll of o ur Dir e c tor s p ar tic ip ate in an in duc t io n pr og r am me on j oini ng th e Bo ar d . E ach i ndu c tio n pl an i s ta ilo re d to pr ov i de th e ind i v idu al Di re c tor w i th th e ne ce s s ar y kn ow l ed ge an d und er s t and ing of t he Gr o up, b as ed o n the ir pe r s ona l exp er i enc e and b ac kgr oun d. Gi v en h er al r ea d y ex tensi v e kn ow l ed ge of S mit hs , for Cl a re S c her rer th is in clu de d me etin g w it h key s ta keho lde r s incl udi ng in ve s tor s , a d v is er s , th e ex tern al au dito r K P MG an d re cei v i ng br iefin gs o n the r ol e an d re sp on sib il iti es o f bei ng a l is ted comp an y dir e c tor . Cla re S c her rer h as al so v isi ted n ume ro us G ro up ope r at ion s in th e US a nd Eur op e. T h e ind uc ti on pr o gr amme for Ric har d H ow e s has s imil arl y be en t ail or ed to hi s ex pe r ien ce an d is cur r ent ly un der w a y. Di ver sit y Per for mance Policy target At l ea s t 5 0 % of t he B o ar d w i th a b ir thp l ac e or b ac kgr o un d ou t si de o f th e UK Outside the UK 64% UK 36% Po lic y tar ge t : 50% BIRTHPLACE OR BACKGROUND Policy target At l ea s t 4 0 % o f th e Bo ar d to b e f ema le Policy target by 2025 At l ea s t on e of th e Ch ai r ma n, S e ni or I nd ep en de nt Dir e c to r , Chie f E xe cu ti v e O f ficer or C hie f F ina nc ia l O f f ic er p o si tio n w il l b e he ld b y a fem al e Current composition Female Chief Financial Of ficer Female 45% Male 55% Po lic y tar ge t : 40% GENDER Policy target At l ea s t on e Di r ec to r f r om a hi s tor ica ll y un de r - repre sented ethnic group Current composition 2 Po lic y tar ge t : 1 ETHNICITY Co r r e c t a s at 16 S ep te mb e r 2 0 2 2 . 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 67 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Conflict s of in terest Al l of ou r Dir e c tor s mu s t av oid s it uati on s w her e th ey h av e a dir e c t or in dir ec t i nter es t th at co nfl ic t s , o r may p os s ibly c onf l ic t, w i th t he be s t inter e st s o f Smi th s. T h e Bo ar d h as th e aut ho r it y to auth or i se conf l ic t s an d pote ntial c onf l ic t s in ac cor d anc e wi th o ur A r tic le s of A s s oc iati on an d th e Co mpa nie s A c t 2 0 0 6 ( A c t ), and B o ar d app r ov a l mus t b e gr ante d be for e a Di re c tor a ccep t s a ne w ex te r nal app oint ment , w het her i t am ount s to a c onf li c t or no t. T h e Co mp any Se cr et ar y ma int ains a Re gi ste r of Co nfl ic t s whic h is r e v ie we d by the D ir ec to r s at le as t t wic e a ye ar , and th e Bo ar d r et ains t he p ow er to v ar y or ter m inate a ny au th or is a tio n pr ev i ous ly pr o v id ed . Dire c tor el ec tio n and re - ele c tion Ea ch y ea r Smi th s Dir e c tor s ar e s ubje c t to el ec ti on or r e - ele c tio n by s har eh ol der s at our A nn ual G en er a l Mee tin g ( AGM ). Our Ch air m an , on b ehal f of th e Bo ar d , ha s conf ir m ed t hat e ach Non-executi ve Direc tor standing for re-elec tion at this year’s AGM c onti nue s to b e an ef f ec t i ve me mb er of th e Bo ar d , and h as demonstr at ed the commitment required. T he Senior Independent Dir ec to r ha s conf ir med th at the C hair man cont inu es to b e ef f ec ti v e and s upp or t s his r e - ele c tio n to the B o ar d at th e AG M. T he r ules re ga rd ing t he ap po intm ent an d re pl a cem ent of Di re c tor s are deter m ine d by o ur A r tic le s of A ss oc iati on an d the A c t . T he A r ti cle s of A s s oc iati on c an b e fo und o n our w eb site a nd c an o nly b e ame nde d b y a spe ci al r es ol ut ion of s har eh ol der s. Infor mation a nd tr aining Th e Bo ar d r e co gnis e s th e imp or tan ce of on go ing t r ai ning a nd our D ir ec tor s are gi v en t he op po r tunit y to upd ate the ir sk ill s and exp er i enc e on a r eg ul ar b as is . A ny i ndi v i dua l de vel op ment n ee ds ar e dis cu s se d w it h the D ir ec to r s at th e annu al p er for m ance ev al uati on . In or d er for t he D ir ec tor s to rem ain a w ar e of bu sin es s pr io r it ie s an d ex te r nal d ev el opm ent s , th e Bo ar d is p r ov i de d w ith formal repor ts and updates from the divisions , functional leader s and e x ter n al ad v i s er s on a r e gul a r ba sis . Fur ther to t he s al e of Smi th s Me dic al to I CU, in w hic h th e Gr oup hol ds a 10% s t ake, Bi ll S e eg er w as p r ov i de d w ith s pe ci fi c tr a inin g in con ne c tio n w ith h is du tie s a s a US C om pan y Di re c tor an d potent ial c onf li c t s of inter e s t bet we en IC U and S mi ths . In or de r to op er ate ef fec ti v el y our D ir ec tor s mus t re cei v e acc ur ate, timely and high-quali t y inform ation. The Comp any Se cretar y and hi s tea m as si st t he Ch air m an an d Chief E xecu ti v e O f f ic er in ens ur in g ef f ec ti v e info r mat ion f l ow s an d th at the B o ar d is p ro v id ed w ith a ll r el ev ant i nfor m ati on to en abl e the D ir ec to r s to dis ch ar ge their responsibil ities . Independence and objec ti v it y Th e Bo ar d ke eps t he in dep en den ce of t he No n- exe cu ti v e Dir e c tor s und er co ntinu ou s re v ie w. In Jul y 2 0 2 2, t he C omm it te e r ev ie w ed t he guid anc e cont ain ed i n the C od e an d as s es s ed t he p er for m anc e and ind epe nd enc e of ea ch of th e Non - exe cu ti v e Dir ec to r s . It c onc lud ed that e ac h of the m cont r ibu ted e f fe c ti v ely to th e op er ation of th e Bo ar d an d that t he y sh oul d all b e co nsi de re d as i nde pe nde nt. T any a Fr at to w as app ointe d as a D ir ec tor o n 1 Jul y 2 01 2 and a s sh e had s er v ed o n the B o ar d for m or e th an nin e ye ar s a par ticu l ar ly r igo r ous r e v ie w of he r pe r for man ce w a s und er taken . T he B o ar d concluded that she contributed to construc ti ve challenge and deb ate at me eti ngs a nd th at sh e cont inue s to d emo ns tr ate the qualities of objec tiv it y and independ ence. It is an ticipated that T any a Fr at to w i ll s tep d ow n f r om th e Bo ar d at t he 2 0 2 2 A GM. Hav i ng s er ve d on t he B oar d f or mo r e tha n six y e ar s , Bil l S ee ge r and Mark Sel igman’ s continued objecti v it y and independence wer e al s o sub je c t to r ig or ou s re v ie w. It w a s agr e ed t hat th ey c onti nue to be in dep en dent a nd o bje c ti v e. Ha v ing s er v ed o n the B o ar d for m or e than s ix y ea r s , the B o ar d al so con si der e d and c onf ir m ed th at Si r Geor ge Buckley con tinues to be objective. 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 68 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Chair man’ s s t atement I am pl eas ed t o pre s ent th e Co mmit te e’ s repor t for F Y20 2 2. T he C ommi t tee f ulf il s an i mpo r tant ov er sig ht ro le, monitorin g the integrit y of the Group’ s financ ial repor ting and th e ef f ec ti ve ne ss o f it s s y ste m of inte rn al con tro l and risk management fr amewo rk . Th e me mbe r sh ip of th e Co mmi t tee h as r e centl y cha ng ed . We wel com ed R ich ar d Ho w es to t he C omm it te e fol lo w in g his app oint ment to t he B oa rd o n 1 S eptem be r 2 0 2 2. Tanya Fr atto w i ll be s tepp in g do w n fr om t he B oa r d and t her efo r e the C om mit tee af ter t he A GM in N ov emb er . I wou ld l ike to com men d T any a’ s member ship over many year s. Th e C ommi t te e met fo ur tim e s dur i ng th e ye ar . Eac h me etin g age nd a incl ud ed a r ange of to pic s a cr os s t he C ommi t te e’ s ar ea s of re spon sibili t y, including: – Consider ation of financial rep or ting matter s at each meeting. At th e Mar ch m eet ing t he C omm it te e r ev i ew ed t he h alf- ye ar re su lt s an nou nce ment a nd at th e S eptem be r me etin g we re v ie w ed th e A nn ual Rep or t an d acco mp any i ng ma ter ia l s , pr i or to the r el ea se of t he G ro up’ s r es ult s . Ou r wo r k inc lu ded r e v ie w in g the m ater ia l jud gem ent s an d is s ue s , incl udi ng th e tr eat me nt of the s al e of Sm ith s Me dic a l and t he di sc ontin uati on of t he Gr o up’ s ope r at ion s in Ru s sia , the r e su lt s of im pai r me nt tes tin g an d the goin g co nce r n and l on g-te r m v iab ili t y ass e s sme nt s. – We per for med de ep - di v e re v ie w s on o ur pr incip al r i sk s including su pply chain, product qualit y, customers and contrac tual obligations. Div isional Pre sidents and their t eams at ten ded C om mi t tee m eet ing s on a r ot atio nal b as is an d pr es ente d th eir r i sk r eg is ter s an d pr incip al r i sk de ep - di v es . Th is al lo w ed th e C ommi t te e to gain a n und er s t and ing of t he cult ur e an d r isk s p r es ent t hr ou gho ut th e or ga nis at ion . – Our Finance E xcellence Pr ogr amme, par ticular ly in rel ation to inter n al cont r ol s , c ontin ue s to be a f oc us for t he C om mit te e and w e ar e mo ni tor in g pote ntial d ev el opm ent s in r el ation to th e audi t an d go ve r nan ce r efor ms, a s we ll a s ho w we m ight r e sp ond to cha nge s in r e gul at ion . – Beh av in g eth ic al ly an d w ith i ntegr i t y is a fun dam ent al p ar t of our Valu es . T he S e nio r V ic e Pr e si dent an d G ene r al C ou ns el , Eth ic s and Compliance at tended our March and September Commi t tee mee tin gs an d pr o vi de d up date s on o ur Ethi c s an d Co mpl ian ce (E&C) p r ogr amme . Our E&C p r ogr amme fo cu se s o n high er r i sk and c r it ic al ar e as su ch a s br ib er y an d cor ru ptio n, h uman r ight s, inter n atio nal t r a de an d pr i v a c y/dat a pr ote c tio n. We r e cei v e a re po r t on dat a comp ile d f ro m ‘S pe ak Ou t’, our conf ide ntia l repor ting hotline, and any mat er ial investigations. Our e x ter n al au dito r , KP MG, co ntin ue s to pr o v ide r ob us t ch al len ge to man age ment a nd p ro v id e s it s in dep en dent v i ew to t he Co mmi t tee o n spe ci f ic f ina nci al r epo r ting ju dg eme nt s an d the control envir onment. I’ d l ike to than k my co ll ea gue s o n the C om mit te e fo r thei r contr ibut ion du r in g the y ea r and I l oo k for w ar d to c ontin uin g our wo r k in F Y 2 0 2 3 . Mark S eligman CH A IR M A N O F T HE AUD I T & RI SK C OMM IT T E E Comm it tee m embershi p and mee ti ngs Al l me mbe r s of th e Co mmi t te e ar e ind ep end ent No n- e xecu ti v e Dir ec to r s an d col le c ti v ely h av e r ece nt and r e lev ant fin anc ial , accounting and sector exper ience. Commit tee member biogr aphies and at tendan ce at me eti ngs d ur in g the y e ar c an b e foun d on pa ge s 5 8, 59 a nd 6 3. T h e Bo ar d co nsi de r s th at Mar k S e li gma n has t he r ec ent an d r ele v ant f in anci al ex p er ie nce r e quir e d to cha ir the C o mmi t te e. At th e inv i t atio n of th e Chai r man o f the C om mit te e, an d in or d er to maintain ef fec ti ve commun icatio ns, the Chair m an, Chief E xecuti v e Of fi cer an d Chi ef F inan cia l O f f ic er an d an au dit p ar tne r of K P MG at ten ded a ll m eet ing s. O t her r e gul a r at ten de es in clu de d th e Gr oup F i nan cial C o ntr ol ler , the Di re c tor of I nter na l Au dit , S en ior V ice P r e sid ent an d Ge ner al Co uns el , Et hic s a nd C omp l ianc e, th e Co mp any S e cr et ar y and D ep ut y Se cr et ar y. Di v isi ona l Pr e si dent s , the V ice Pr e si dent F in anc e E xce lle nce a nd s eni or ma na gem ent wer e a l s o inv i ted to at tend as ap pr op r iate . P w C, as th e au dito r of Smi th s Med ic al , al so at ten de d on e Co mmi t tee m eet ing . At t he con clu sio n of me etin gs , K P MG a nd th e Dir e c tor of Inte r nal A ud it wer e e ac h gi ve n the o pp or tuni t y to disc us s mat ter s w ith t he Co mmi t tee w i tho ut e xec uti v e ma na gem ent b eing p r es ent . Th e he ad s of Inter n al A udi t an d Ethi c s and C om pl ian ce, to get her w ith K P M G, hav e dir e c t acc es s to t he C omm it te e sho ul d the y w is h to r ai se an y co nce r ns o ut si de fo r ma l Co mmi t tee m eet ing s. Th e C ommi t te e wo r k s to a st r uc t ur ed p r ogr amme of a c ti v it ie s and mee tin gs to co inc ide w i th key e v ent s ar ou nd o ur f inan cia l c alen da r and , on b eha lf of th e Bo ar d , to pr o v ide o ve r si ght of th e Gr ou p’ s r isk m ana ge ment a nd inte r nal c ontr o l pr oc es s . T he Ch air m an of the C om mit te e r ep or ts f or m all y to the B o ar d on th e C ommi t te e’ s acti v ities af ter each meeting. Commit tee p er for mance ev aluation Th r oug h the a nnu al Bo ar d e v alu ati on pr o ce s s, s e e pa ge s 6 4 and 6 5 , the B o ar d ha s ag ain co nf ir me d th e ef fe c ti v en es s of t his Co mmi t tee in i t s r ol e of sup po r ting th e Bo ar d in c omp li anc e w ith its dutie s. AUDIT , RISK AND INTERNAL CONTROL A U DIT & R I S K C O MMI T T E E REP OR T 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 69 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 fi nan cial y e ar . His tenur e w il l be l imi ted to f i v e ye ar s in l in e w it h aud it st an dar d s and d ue to K P MG p ar tne r r otat ion p ol ic ie s . Th e C ommi t te e conf ir m s th at the C om pa ny h as co mpl ie d w it h the p ro v is ion s of th e St atu tor y A udi t S er v ice s O rd er 2 014 re l atin g to the UK a udi t ma r ket for l a rg e co mp anie s th r oug hou t th e ye ar und er r ev i ew a nd as a t the d ate of thi s r epo r t. Sco pe of t he ex te r nal au dit p l an an d fe e pro po sa l At i t s No vem be r 2 0 21 me etin g the C om mit tee re v ie w ed an d app ro v ed K P MG ’s prop os ed a udi t pl a n. T he f ee fo r the F Y 20 2 2 audi t w a s agr e ed in J uly 2 0 2 2 . T he C om mit tee cont inue d to mon itor K PMG’s exec uti on of th e 2 0 2 2 au dit p l an du r ing t he y ea r . Smiths Medical Due to P w C ’s under s t and ing of S mi ths M ed ic al ’ s fin anc ial re po r ting an d inter n al co ntr ol en v ir on ment a nd th e wo r k ne ce s s ar y to supp or t th e se pa r ati on of th at bu sin es s , P w C co ntin ued to a c t as th e aud itor f or S mit hs Me dic a l until t he s al e of the b us ine s s on 6 Jan uar y 2 0 2 2 . P w C pr o v ide d an up date to t he C omm it te e at it s September 20 21 meeting. Independence and objecti vit y Th e C ommi t te e is r e spo ns ible f or th e imp lem ent atio n an d mon itor ing of th e Gr oup’s poli cie s on e x ter nal aud it , w hic h ar e de sig ne d to maint ain t he o bje c ti v it y and s af egu ar d th e ind epe nd enc e of the e x ter nal aud itor . Th e se p ol ici e s ar e re v ie w ed annu all y. The y co v er th e eng ag eme nt of the e x ter nal aud itor f or non -au di t se r vi ce s and t he ap po intm ent b y the G r oup of f or me r emp loy e es of t he e x ter n al au dito r . In ad dit ion to m oni tor i ng co mpl ia nce w i th Gr o up po l icie s , th e Co mmi t tee’s rev ie w of K P M G’s indep end enc e inc lud ed e xam inin g wr it ten confirmation fr om KP MG that they remained independent and o bje c ti v e w ith in th e conte x t of ap pl ic ab le pr of es s ion al st an dar d s and c on sid er in g the p er for mance of t he au di t engagement par tn er . Non-audit ser vices Not wi ths t an ding d ev el opi ng pr ac tic e bei ng a dopte d b y audi t f ir m s not to pr o v id e non -a udi t se r v ice s to au dit c li ent s , the C om mi t tee recognis es that cer tain per mis sible non-audit ser vices c an be comp lete d mo re ef fic ient ly b y, and be p urc ha se d mo r e cos t- ef fe c ti v ely f r om , the i ncu mbe nt aud ito r due to th e au dit f ir m’s exi s tin g kn ow l ed ge of th e Gr o up and i t s s y s tems . Un de r the p ol ic y app ro v ed b y the C om mi t tee, i t ha s de leg ated i t s r es po nsi bil it y for aut hor ising t he pu rc ha se of n on -au di t ser v i ce s fr o m the e x ter n al audi tor to t he Ch air m an of th e Co mmi t tee a nd /or th e Chie f Financial Of ficer within specif ic limits . Det ail s of the fe es p ai d to K P MG fo r the y ea r end ed 31 Ju ly 2 0 2 2 ca n be f oun d in note 2 of t he f in anc ial s t ateme nt s on p age 1 2 0. N on- aud it fe e s as a p er cent ag e of au dit f ee s tot all ed 1 1 % (F Y 2 0 21 : 13% ). Non -au dit f ee s co mpr i s e audi t r el ate d as su r an ce se r vi ce s and f ee s in co nne c ti on w i th th e s ale of S mit hs M edi c al . Th e Gr o up wo ul d not ex p ec t in t he or d inar y c our s e of b usi ne s s for non -au di t fee s to exc ee d 2 0 % of th e av er a ge of t he p re v io us th re e ye ar s’ total G r oup a udi t fe es un le s s excep tio nal c ir cum s tan ce s exi s ted . T he C ommi t te e conf ir ms that t he no n- aud it w or k per for med b y K P MG, w hic h inc lud ed w or k in pre pa r ati on fo r the s ep ar ation of S mit hs M edi c al dur ing the y ea r , was p r ope r ly as s es s ed a nd au th or i se d in ac cor d ance w i th t he Gr o up’ s pol i c y. Com mit tee ac tiv i tie s Fin ancial an d nar r ati ve r epor tin g Th e C ommi t te e re v ie w ed t he f ull a nd h alf y ea r ly r e sul t s ann oun ceme nt s , the A nnual Rep or t and t he v ia bil it y and g oin g concern s tatements before recommen ding them to the Boar d for appro val . Th e Gr o up ha s inter n al co ntr ol an d r is k man ag eme nt ar r a ng eme nt s in pl a ce to sup po r t the f ina nci al r ep or ting proces s which prov ide reasonable assur ance that t he financial st atem ent s ar e p re pa re d in a ccor d anc e w ith a ppl ic a ble s t and ar ds . Th e se a r r an ge ment s i ncl ude d s ee kin g di v is ion al co nf ir mat ion t hat the r ep or ted inf or m atio n gi v es a t r ue an d f air v i ew of t he r e sult s for th e pe r io d and e ns ur in g that r e co rd ke epi ng al lo w s an a ccur ate and fair reflection of tr ansac tions. More information on risk man age ment a nd inte r nal c ontr o l s c an b e fou nd on p a ge 7 3 . A n imp or ta nt re sp on sib il it y of the C omm it te e is to r e v iew a nd agr e e the m os t si gnif i ca nt man ag eme nt acc ounti ng e s tim ates and ju dg eme nt s w hic h imp ac t t he f ina nci al s tate ment s . T he ke y ar ea s of jud ge ment in t he y ea r ar e set o ut o n pa ge s 71 an d 72 . Af ter r ece i v ing r ep or t s on th e sig nif ic a nt es ti mate s an d ar ea s of jud gem ent an d af ter dis cus s ion w i th K P MG, t he C omm it te e agr e ed th at th e jud gem ent s m ade w er e ap pr op r iate a nd co r r ec t ly ref le c ted a nd p re s ente d in th e A nnu al Rep or t. Fai r , bal anced and underst andable Th e C ommi t te e app li ed t he s am e due di li gen ce ap pr o ach a do pted in pr e v iou s ye ar s i n or de r to as s es s w h ethe r the A nnual Rep or t is fa ir , bal an ced a nd un der st and abl e, on e of th e key UK C or p or ate Go ve r nan ce C od e re qu ir eme nt s. T h is inc lu ded b ein g up date d on th e inter n al ve r if ic at ion p r oce s s c ar r ied ou t to sup po r t the Co mmi t tee’s ass es s ment of t he di sc lo sur e s ma de in t he A nn ual Repo r t. T he C om mit te e al so r ev ie w ed v a r io us mate r ial s on r isk m ana ge ment a nd inte r nal c ontr o l s , go ing c once r n an d the a s se s sm ent of th e Gr ou p’ s lon g-ter m via bil it y. In doing s o it considered: – the a ccur ac y, integr i t y and con si ste nc y o f the m es s a ge s con ve ye d in th e A nn ual Rep or t; – the a ppr op r iate ne s s of th e le vel of d et ail in t he narr ative repor ting; – the corr elation bet w een judgements , estimation of uncer tainties and i s sue s an d the a s so ci ated di s clo sur e s; and – the e xp l anat ion s of th e dif fer enc es b et wee n st at utor y a nd hea dl ine r e po r ted re su lt s . T aking t he ab o ve into a cco unt, to get her w i th t he v ie w s ex pr e s se d by K P MG, t he C omm it te e r ec omm end ed , and i n tur n t he B oa r d conf ir m ed , th at the 2 0 2 2 A nnual Rep or t, t aken a s a w ho le, i s fair , bal anced and under s tandable and pr ov ides the nece ss ar y infor mation f or sh ar eh old er s to a s se s s th e Co mp any ’s posi tio n, per for mance , bus ine s s mo de l and s tr ateg y. E x ter nal au dit Th e C ommi t te e pl ac es g re at im po r tanc e on th e qua li t y, ef fe c ti v ene s s an d ind ep end en ce of th e ex te r nal a udi t pr o ce s s. Fol lo w in g a tend er pr o ce s s K P MG w as a pp ointe d as t he Co mp any ’s exte r na l audi tor at t he 2 019 Ann ual G en er a l Me etin g. Mich ael M alo ne y, the K P MG au dit p ar tn er r es po nsi ble f or th e Co mp any ’s audit s ince 2 019 wil l r etir e fo ll ow i ng th e com plet io n of the F Y 2 0 2 2 a udi t . Fur ther to a n ex te nsi v e s ele c tio n pr o ce ss ov er s ee n by t he Ch air m an of th e Co mmi t te e, Mic hae l Ba r r a de ll w ill b e app oi nted a s the l ea d eng ag eme nt pa r tner fo r the n ex t 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 70 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 The key a rea s of ju dge men t for F Y2 0 22 a re as f ol low s: Areas of focus Actions taken MEDIC A L DI SP OS A L AC C OUN TIN G On 6 Ja nua r y 2 02 2, the G r oup co mpl eted t he s ale of S mit hs M edi c al to IC U Me dic al , In c. ( I CU ). A s p ar t of th e sa le th e Gr ou p has i nc ur r ed an d pr ov i de d for s ep ar ation e xp ens e s , that a r is e f ro m contrac tual and commercial obligations due to the s ep ar ation , and h as r et ain ed a 10% h ol din g in ICU a nd r ec ei ve d $1 0 0 m of def er r e d conti ng ent consider ation, the value s of which are dependent on th e ICU s har e p r ice . The Commit tee consider ed the constituent elements of the separ ation expens es incl ud ed w i thin t he ne t gain o n s ale of S mi ths M ed ic al an d r ev ie w ed t he app ro pr i atene s s of th e pr o v isi on s mad e r el ati ng to th e s ale a nd th e tr a ns iti on se r vi ce s bei ng p ro v id ed b y Sm ith s Gr o up to Smi th s Me dic al . Th e C ommi t te e re v ie w ed t he f ina nci al r epo r ting t re atm ent an d the b a sis f or determining the fair value of the def er red contingent consider ation, which has b ee n cl a s sif ie d as a f in anc ial a s se t at fa ir v alu e thr o ugh p r ofi t an d los s . Th e 31 July 2 02 2 IC U sha r e pr ic e of cir c a $1 77 (6 J anu ar y 2 0 2 2: $ 2 31) was 2 3% do w n fr om w h en th e s ale c omp lete d. T hi s r edu c tio n in sh ar e pr i ce ha s r es ulte d in Smi th s r eco gni sin g f air v al ue lo s se s th r oug h the In co me St atem ent an d O the r Co mpr eh en si ve I nco me. S e e note s 14 and 2 7 of th e f inan cia l st atem ent s . RE V ENUE REC OGNIT ION Smi th s Dete c tio n and S mi ths I nter conn ec t h av e mult i- ye ar co ntr a c tu al ar r ange ment s f or th e s ale of go od s and s er v ic es . E s ti mate s ar e r eq uir ed at the B al a nce S he et date w h en dete r min ing the s t ag e of com plet io n of cont r ac t s f or rev enue recognition . Th e C ommi t te e re v ie w ed m ana gem ent ’s rev enu e re co gni tio n jud ge ment s . Th e C ommi t te e note d that t he ti min g of r ev enu e re co gni tio n inv ol ve s ju dg eme nt s as to w he n cont ro l of an a s set p a ss e s to th e cus tom er o r , p ar ti cul a r ly in S mit hs Dete c tio n and S mi ths I nter conn ec t , as to t he s t age o f com plet ion o f cont r ac t ac ti v i t y a nd w he the r the s ep ar ate per for m ance o bl ig atio ns h av e be en f ul fil le d. Th e C ommi t te e re v ie w ed an d co ncu r r ed w i th ma nag em ent’s conc lus ion s on the s igni f ic ant ju dg eme nt s for c omp lex p ro gr amme s an d cont r ac t a cco untin g. Se e no te 1 of the f in anc ial s t ateme nt s . TA X AT I O N Th e Gr o up ha s ex te nsi v e inter nation al op er ation s and in t he n or m al co ur s e of bu sin es s th e Dir ec to r s ma ke jud gem ent s an d e st imate s in re l atio n to pote ntial t a x ex po sur e s . Th e as s et s an d li abi li tie s r ec og nis ed i n inc ome a nd def er r ed t a x , as w el l as th e tr eat ment of l os s es i n the U K , w er e as s e s se d. P ar tic ul ar f oc us w a s gi ve n to the re co gni tio n of UK de fer r e d ta x as s et s; def er r ed t a x as s et s r el ati ng to th e Jo hn Crane, Inc. asbe stos prov ision; and the Titeflex Cor por ation CS ST pr ovi sion. Th e C ommi t te e note d the o ng oin g ta x au dit s t hat ar e l ikely to c onc lu de in the n ex t 12 to 24 mo nths , an d th e unce r taint y as so ci ated w i th th eir o utco me. Th e C ommi t te e note d that t he f in al ou tcom e may v ar y signi fi c antl y fr om t he amo unt s cu r r ently p r ov i de d for t ax r isk s. S e e note 6 of t he f ina nci al s ta teme nt s. IMPAIRMEN T – INTANGIBL E A SSE TS (INC LUDING G OOD W ILL ) AND RU S SI A Th e Gr o up ho lds a s ign if ic ant a mou nt of go od w il l , es pe cia lly i n re l atio n to th e Smi th s Dete c tio n c ash gener ating unit (CGU). Th e int an gibl e as s et s an d the a s sump tio ns u se d to jus ti f y thei r ca r r y ing v a lue s wer e r e v ie we d, i ncl udin g th e app li c abl e dis co unt r ate u se d for i mp air m ent test ing purpos es. Smi th s Dete c tio n w as t he Gr o up’ s only C G U w her e th e imp air ment he adr o om w a s mor e l imi ted fo r F Y 2 0 2 2 an d w her e a pl ausib le do w ns ide s ce nar io or a re as on abl e cha nge i n key as s umpt ion s co uld c a us e the c ar r y i ng v al ue of t he C GU to exce ed it s r ec ov er able v al ue. S mi ths D ete c tio n’ s limi ted i mp air m ent he adr o om i s dr i v en by a l ow er s t ar ting p oint f r om t he F Y 2 0 2 2 o ut t ur n , ref le c ti ng a di f f ic ult m ar ket sub se que nt to CO V I D- 1 9 tha t has i mp ac ted i t s av i ati on s ec ur it y cus tom er s , an incr e as ed d is cou nt r ate dr iv en by t he m acr o ec ono mic h ur dle s in F Y 2 0 2 2 a nd th e imp ac t of tem po r ar y s upp ly ch ain is s ue s . Ea r nin gs gr o w th w ith in the i mp air m ent mo del i s fr om t he l ow er F Y 2 0 2 2 b as e p osi ti on an d the C GU r e co ver able a mou nt exce ede d i t s ca r r y ing v a lue - t her efo r e no im pai r me nt w as n ece s s ar y. Th e Co mmi t tee h as r e v ie we d the a dd iti ona l dis cl os ur es m ad e ar oun d thi s imp air m ent re v ie w. S ee n ote 1 1 of the fi nan cial s t atem ent s . A s an no unce d w i th th e H Y 2 0 2 2 inter im re sul t s, t he G ro up su sp end ed s a le s into Rus si a. T h e Co mmi t tee a gr ee d w it h the R us si a imp air m ent ch ar ge a nd r el ate d w ind d ow n c os t s . Th e C ommi t te e has a l s o ag re ed t hat t he se i tem s ar e mater ial in qua ntum an d sh oul d be s ep ar ately dis cl os ed t hr ou gh th e non -h ea dl ine i tem s w ith in the i nco me s t ateme nt. S e e note 3 of t he f in anc ial s t ateme nt s. SIGNIFICANT FINA NCIA L REPORTING MA T TERS 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 71 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Areas of focus Actions taken PRO V IS ION S FOR L I A BILI T IE S A ND CH A R GE S Th e Gr o up ho lds s ign if ic ant m ater ia l pr o v isi ons for Jo hn Cr ane, In c. a sb es to s re s ol uti on; an d the Titeflex Cor por ation CS S T product cl aims. Th e C ommi t te e con sid er e d the ap pr op r iate ne s s of th e lev el of t he p ro v is ion s held against John Crane, Inc. asbestos litigation and the Titeflex Corpor ation CS ST c l aim s. In p ar tic ul ar , the C om mit tee con sid er ed t he tr e atme nt of potent ial l iab il it ie s, t he ch an ge s to the a s sum ptio ns m ad e in c alc ul ati ng the p ro v is ion s , se ns iti v i tie s to ch an ge s in as s umpt ion s an d ad v ic e re cei v e d fr om t he Gr o up’ s sp eci al is t ex tern al a d v is er s . T he C om mit tee agr ee d th e conti nue d ap pr op r iaten e ss o f the ten - ye ar ti me p er io d for J oh n Cr an e, In c. asb e sto s li ti gati on . In the c a s e of the J ohn C r an e, Inc . a sb es tos l i tig atio n, t he Co mmi t tee a l s o agr e ed w i th th e jud gem ent t hat , w hil s t l a rg e num be r s of cl a ims ar e mad e ag ain st J ohn C r an e, Inc . a nd oth er de fen dant s e ve r y ye ar , due to bot h kn ow n an d as y et un kn ow n d ev elo pm ent s in t he US l eg al s y s tem an d oth er ev ent s that w il l im pa c t the a sb es to s leg al en v ir onm ent , a su f f ic ientl y r el iabl e e st imate ca nno t be ma de to c ov er th e f ull p er i od o ve r w hic h it i s exp e c ted th at co st s w i ll be in cur r e d. In b oth t he se c a s es , i t w as d eter mi ned t hat t he as s umpt ion s f air l y ref le c t th e po sit ion . S ee n ote 2 3 of t he f in anc ial s t ateme nt s. PO ST -RE T IREMENT BENEFIT S Th e Gr o up ha s mater i al p ens ion p l an a ss et s and l ia bil it ie s and t her e i s a high d eg re e of es timation uncer taint y. Th e C ommi t te e re v ie w ed t he f ina nci al r epo r ting t re atm ent fo r the f in al T I Gr o up Pen sio n S che me ( TI GP S) bul k an nui t y b u y- in. T h is bu y -i n ha s be en s ec ur ed w i th a comm it ment to f ul ly bu y - ou t th e Sc he me o ver t he n ex t fe w y ea r s so h as b ee n acco unted f or a s a set tleme nt, w i th th e r es ulti ng s et tl eme nt lo ss a nd p as t s er v ice cos t sh ow n i n the G r oup’s income s t atem ent in F Y 2 0 2 2 . A su r plu s r es tr ict ion h as be en ap pl ie d to the r em aini ng S ch eme a s s et s to br in g th e net su r plu s to zer o. Th e C ommi t te e has a l s o r ev i ew ed a nd a gr ee d the m eth od s, a s sum pti ons a nd ben chm ar k s us e d by t he ac t uar ies to c alc ul ate th e po si tio n of th e UK and U S sc hem es a t 31 July 2 0 2 2 , w hic h ha ve co ntin ue d to sho w a net a cco untin g sur plus pos it ion w h ich h as b een r e duc ed b y £ 219m in F Y2 02 2 . Th e C ommi t te e agr e ed th e tr e atme nt and t he co r r es po ndi ng di sc los ur e s on th es e mat ter s. S ee n ote 8 of th e fi nan cia l st atem ent s . PRE SENT A TI ON OF HE ADL INE PR OF IT S A ND OR GA NIC GR OW T H Th e Gr o up pr e se nt s he adl in e pr of it s a nd or g ani c gr ow th me as ur es w h ich r e quir e a djus t ment to IF R S re qui re d dat a . T his i s a mater ial jud gem ent and r e quir e s a co nsi ste nt app li c atio n of th e Gr oup’s account ing p ol ic y on this to pic . Th e C ommi t te e con sid er e d the p ol ic y , pr e se ntat ion a nd ju dg eme nt s in r el ati on to the G ro up’ s pe r for ma nce, i n pa r ticul a r the s ep ar ation of h ea dl ine a nd n on- hea dl ine i tem s. T h is in clu de d the c on sid er at ion o f w hich i tem s re l ated to t he Gr oup’s ongoi ng tr adin g ac ti v i t y o r th os e w hich s ho uld b e r ec or de d as n on - headline. Th e C ommi t te e re v ie w ed t he ap pr op r iate le v el of di sc los ur e for t he im pa ir me nt cha rg e r ec ogn is ed in F Y 2 0 2 2 a ga ins t th e Gr ou p’ s Rus si an bu sin es s e s and r el a ted w ind d ow n c os t s . Th e C ommi t te e agr e ed th at th e com bin ed im pa ir me nt cha r ge re qui re d s ep ar ate p r es ent ati on a s a non -h ea dl ine i tem . In ad dit ion , th e Co mmi t tee a l s o con si der e d tho se j ud gem ent s in c onn ec ti on w ith i tem s to be r ef le c ted or a dju ste d in or g ani c per for mance . S ee n ote 3 of th e fi nan cial s t atem ent s . 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 72 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Effec ti venes s of the Group ’ s r isk management and internal control s In F Y 2 0 2 2, t he C omm it te e, on b eh alf o f the B o ar d and w i th t he as si st an ce of th e Inter n al A udi t f unc ti on , mo nito re d, r e v ie we d an d as s es s ed t he ef fec ti v ene s s of t he Gr o up’ s r isk m an age ment a nd inter n al cont r ol s y s tem s in the c ontex t of the Gr o up’ s st r ate g y, business model and risk appetite. De ep - di ve s w er e c ar r i ed o ut du r ing t he y ea r on th e fol lo w ing pr in cip al r i sk s . T he pr incip al r i sk s ha ve si nce b ee n up dated a s det aile d on p ag e 47 : – Pr o duc t q ual it y – John C r an e, Sm it hs D etec ti on an d F le x- T ek – Cus tom er s – S mi ths D etec t ion a nd S mit hs Inte rc onn ec t – Sup ply c hai n – Joh n Cr an e an d F lex- T ek – Contr actual obligations Consider ation of the r isk register s alongside the principal risk deep -di ve s and other thematic r isk areas enables the Co mmi t tee a nd f ul l Bo ar d to un der sta nd th e cu ltur e, r isk s and opp or tun iti es a nd a ss ur a nce p r oce s s es t hr ou gho ut t he bu sin es s and t he p otentia l imp ac t o n the G r oup. N o sig nif ic a nt fa il ing s or w eak ne s s es w er e id enti f ie d. Th e C ommi t te e we re a l s o pr o v ide d w it h upd ate s in r el ati on to th e Finance E xcellence Pr ogr amme par ticul ar ly in relation to projec t s to impr o ve a nd s t and ar dis e f in ance a c ti v i t y a cr os s th e Gr ou p and o ngo ing a c ti v i t y to im pr o ve g ene r al I T c ontr ol s. T he y al so mon itor e d the p otent ial d ev elo pm ent of au dit a nd g ov er n anc e ref or m s and h ow t he b usi ne s s might r e sp on d to cha nge s in regul ation . Prin cipal ri sks upd ate Th e C ommi t te e c ar r ie d ou t a r obu s t as s es s ment of t he p r inc ip al r isk s f ac ing t he G ro up, in clu din g tho se t hat w oul d th re aten i t s bus ine s s mo de l , fu tur e p er for m anc e, so lv enc y and l iqui di t y. We hav e r efr e sh ed t he F Y 2 0 2 2 pr incip al r i sk s to r efl ec t t he cr i ti ca l r isk s f ac ing t he b usi ne s s and t he fo ll ow in g ch ang es w er e m ade: – Gr ow th an d E S G ha ve b ee n ad de d as pr incip al r i sk s – Gr oup p or t fo li o r isk h as b ee n r emo ve d w it h the c omp let ion of the s al e of Sm ith s Me dic a l – A numb er of r i sk s , inc lud ing C O V ID - 1 9 and Inte gr a ted su ppl y chai n, h av e be en co mbi ne d into a Bus ine s s co ntinu it y ri sk – Ethic a l br ea ch an d Co ntr act ual o bl ig atio ns h av e mer g ed into a Legal and compliance r isk – Cus tom er s a nd ma r ket s r is ks h av e me r ge d into a Commer cial risk A de sc r ipt ion of t he p r inc ipa l r is ks f a cin g the G r oup a nd ho w th e se wer e r e v ie we d to as s e s s the G ro up’ s v iab il it y can b e fo und o n pa ge s 47 to 5 3. Ef fe c ti vene s s of th e ex ter n al au dit Th e C ommi t te e cont inua lly a s s es s ed t he ef fec ti v ene s s of th e ex ter nal aud itor d ur in g th e ye ar , inclu din g it s in dep en den ce, objec tiv it y, appropr iate m indset and profes sional scepticism. The Commit tee consider ed: – the c onc lus ion of t he F Y 2 0 21 au di t pr oc es s – the r e v ie w of aud it p l ans – content , in sig ht and v a lue of K PMG’s rep or t s – ro bu st ne s s and p er cep ti v ene s s of K P MG i n han dl ing of ke y acco unti ng an d aud it ju dg eme nt s – man age ment ’s res po ns e s to any a udi t fi ndi ngs – dis cu s sio ns w i th man ag eme nt (b oth w i th an d w it ho ut th e ex ter nal aud itor p r es ent ) and w it h the e x ter n al au di tor (b oth w i th an d w ith ou t man ag eme nt pr e se nt ) – the f in din gs of th e F RC ’s 20 2 2 Au di t Qua li t y Insp ec ti on Rep or t w ith K P M G to und er s t and t he ac t i v it ie s bei ng un der t aken to add re s s th e f indi ng s and K P M G’s posit ion r e gar d ing t he v ar ious ar ea s of aud it r efo r m w hic h ar e cur rentl y und er r ev i ew A s F Y 2 0 2 2 w a s K P MG’s thir d y ear a s th e Gr oup’s ex ter na l aud itor , the C om mit te e p aid p ar tic ul ar at tention to e nsu r ing t hat i t w as s atis f ie d that t he C omm it te e’ s and m ana ge ment ’s feedb ac k fr o m pr ev i ous e f fe c ti v ene s s r ev i ew s h ad b ee n ad equ ately a ddr e s s ed. Th is in clu de d the c lo se o ut of p r ev io us ly dis c us s ed au di t mat ter s. In ad dit ion i t al so con sid er e d othe r st at utor y r ep or tin g, au di t pl an ning a nd s co pe de li v er able s , and t hat K P M G had c onti nue d to de vote s uf fici ent ti me an d re s our ce s to un de r s ta nd an d as s es s t he bus ine s s , it s ke y r isk s a nd co ntr ol s. Pr i or to th e s ale of S mi th s Med ic al , th e Smi th s Me dic al b usi ne s s conti nue d to be a udi ted b y P w C. T he C om mit tee al s o con si der e d the ef fec ti v en es s of t he pr o ce s s w her e by K P MG w as able to achi ev e co mfor t fr o m P w C on it s w o r k for t hat di v i sio n in r es pe c t of the F Y 2 0 21 f in anc ial s t atem ent s . Af ter ta kin g into ac cou nt the f a c tor s ab o ve an d it s g ene r al inter a c tio n w it h K P MG th ro ugh ou t the p er i od , th e Co mmi t tee w as s ati s fi ed t hat th e aud it w a s ef f ec ti v e. T h e Co mmi t tee the ref or e agr e ed t hat i t w as ap pr op r iate to r e com men d to the Bo ar d th at the r e app oi ntme nt of K P MG a s the C om pan y’s audi tor for a f ur the r ye ar b e pr op os ed to s har eh ol der s at the 2 0 2 2 A GM. A fu r ther r ev i ew o f the F Y 2 0 2 2 a udi t w ill b e co ndu c ted a hea d of the F Y 2 0 2 3 half y ea r re s ult s . Risk manag ement and intern al control Th e Bo ar d i s r es pon sib le fo r en sur i ng th at so un d r isk man age ment a nd inte r nal c ontr o l s y ste ms ar e in p l ac e. Th e E xe cu ti v e Co mmi t tee i s r es po nsi ble fo r de si gnin g the r isk man age ment a nd inte r nal c ontr o l s y ste ms an d en sur i ng th ey a r e ef fe c ti v ely d epl oy ed t hr ou gho ut t he Gr o up. T h e inter n al cont r ol s y ste m is a f r am ew or k to mana ge r i sk s and m oni tor c omp li ance w ith p r oce dur e s . It i s de sig ne d to mee t the G ro up’ s p ar ticu l ar nee ds a nd th e r is k s to w hich i t is e xp os ed . Ho w ev er , it c an pr o v ide only r e as on abl e, not a bs olu te, a ss ur a nce a gai ns t mate r ial l os s to the G ro up or m ater i al mis s t atem ent in th e f inan cia l s tate ment s . Mor e de tai l c an be f oun d on p ag es 4 6 to 5 3. 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 73 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Ethic s and compliance Dur i ng th e ye ar , the C ommi t te e re v ie w ed t he Eth ic s an d Complian ce annual work pr ogr amme and pr ov ided over sight of inves tigations in to allegations of non-compl iance with the Code of Busi ne s s Ethi c s . T his in clu de d mat te r s r a is ed t hr oug h the G r oup’s ethic s rep or tin g pr oc edu re s in clu din g the G r oup’s ‘Spe ak- Out’ hotl in e w hic h all ow s f or an on ym ou s r epo r ting . Smi th s ‘Sp e ak Ou t’ ho tl ine co mp r is e s a numb er of d if f er ent ch ann el s (inc lud ing ca ll ce ntr e s op er ate d by a n ind ep end ent th ir d p ar t y ac r os s th e Gr oup’s globa l op er at ion s ) for em pl oy ee s an d othe r s ta kehol de r s to repor t concer ns . Dur i ng th e ye ar th er e w er e no m at ter s r ais ed th at r equ ir ed the Committee’ s direct inter vention or investigations which re su lted i n a mater ial los s to th e Gr ou p or a de tr im ent al imp ac t on our c us tom er s o r sup pl ier s. T he C om mit te e r ec ei ve s r eg ul ar re po r ts on t he tot al nu mbe r and n atu re of c a s es b y r egi on , the r ati o of an ony m ou s v s at tr ib ute d eth ic s r ep or ts , a nd th e r at io of sub st ant iate d vs u ns ubs t antia ted c as e s . T he an ony m ou s vs a t tr ib ute d met r ic is u s ed to mo ni tor tr u s t in th e Gr oup’s repor ting sy stem. Accordingly, the Committee considere d that the G ro up’ s pr o ce s se s an d ar r angem ent s fo r emp lo ye e s to re po r t concer ns, including anony mou sly and withou t retal iation, about any im pr op r iet ie s and t he ar ra ng eme nt s for an y sub s equ ent inv es t igat ion a s ne ce s s ar y, wer e bot h app r opr i ate an d ef fe c ti v e. Dur i ng th e ye ar , the C ommi t te e pr o vi de d ov er sight of a num be r of ar ea s ta r gete d by t he Eth ic s an d Co mpl ia nce w or k pro gr a mme . Mor e inf or ma tio n on th e Gr oup’s appr oa ch to Et hic s an d Co mpl ian ce c an b e fou nd on p a ge 3 4 a nd in t he S us t aina bil it y at Smi th s re po r t found o n our w eb site . A s s es sment of intern al control and r isk managem ent ar r angement s Th e C ommi t te e w as s at is fi ed t hat th e Gr ou p’ s pr oce s s e s go ver ning f ina nci al r epo r ting a nd co ntr ol s, it s c ult ur e, eth ic al st an dar d s and i t s r el ati on ship s w it h st akeh ol de r s cont inu ed to be effective. Th e C ommi t te e w as al so s ati sf i ed w i th th e app ro pr i atene s s and a de qua c y of t he Gr o up’ s r isk m ana ge ment a r r a nge ment s , inter n al cont r ol f r am ew o r k and t hr ee l in es o f defe nce m od el . Int ernal Audit Inter na l Au di t is in dep en dent of t he b usin e s s and s o ha s no resp onsibilit y for oper ational busines s management. This ensur es the inte gr i t y a nd o bje c ti v i t y of i t s ann ual A ud it P l an , w hic h is app ro v ed b y the C om mi t tee . T he au th or i t y of t he Inter nal Au dit fu nc ti on is d er i v ed f r om th e Co mmi t te e. T he D ir ec to r of Inter n al Au dit i s acc ount ab le to th e Bo ar d th ro ugh t he C omm it te e Chai r man , alt ho ugh a dmin is tr ativ ely t he D ir ec tor o f Inter n al Au di t re po r ts to th e Chie f F inan cia l O f f ice r . In or de r to c ar r y ou t the r e sp on sib ili ti es , a s set o ut in a c har ter app ro v ed b y the C om mi t tee, t he Inte r nal A ud it f un c tio n has: – fu ll an d unr e s tr ic te d acc es s to a ll r ec or ds , p ro pe r t y and per sonnel; – ind epe nd ent acc es s to t he C omm it te e Cha ir ma n and m emb er s of the C om mit tee; – the r i ght to r eq ue st m ee tin gs w it h the C om mit tee; and – the a uth or i t y a nd o bl igat ion to r e por t si gnif i ca nt f indi ng s or oth er co nce r ns to t he C ommi t te e. During t he period, t he Comm ittee received progress repor t s on th e exec ut ion o f the F Y 2 0 2 2 Inte r na l Au dit P l an a nd di sc us s ed any hi gh pr ior it y contr o l enh anc eme nt opp or tun iti es a nd ac ti on pl a ns to a ddr e s s the s e. T h e Co mmi t tee a l s o app r ov ed the F Y 2 0 2 3 Inter nal A ud it P l an , inc lud ing t he pr o po se d au dit sc ope , app r oa ch, c ov er age an d bu dge t incl udi ng th e al loc at ion of resourc es. Th e C ommi t te e ov er s e es t he p er for ma nce o f the Inte r nal Au dit f un c tio n thr o ugh th e Dir e c tor of Inte r na l Au dit ’s at ten danc e at Co mmi t te e me etin gs , r ev i ew of w or k pre s ented thr ou gho ut t he co ur s e of th e ye ar , and a r ev i ew of a gr e ed K PI s w hic h ar e r epo r ted to the C om mi t tee at e ac h Co mmi t tee mee tin g. T he C om mit tee al s o co nsi der e d the r e su lt s of an ano ny mo us s ur ve y cir c ul ated to t he A udi t & Ri sk C omm it te e, se nior m an age ment a nd th e Gr o up’ s ex ter nal aud itor o n th e per for mance of t he f unc t ion d ur in g th e ye ar . Ov er all , Inter n al Au dit i s se en a s a v alu ed a s sur ance f unc t ion t hr ou gho ut the G ro up. I t is a ppr o pr iate ly r e so urc ed a nd co nfor m s w it h industr y standards in its approach. In acc or dan ce w i th th e Inter n atio nal S ta nda r ds fo r the Pr ofe s si ona l Pr ac tic e of Inter n al A udi tin g, th e as s e s sme nt of the I nter na l Au dit f un c tio n is r eq uir e d to be c ar r ied ou t by an ind ep end ent th ir d p ar t y at le as t e ve r y fi v e ye ar s . T h e l as t ind epe nd ent thi r d- pa r t y as s es s ment w a s c ar r i ed o ut in 2 018. Th e ne x t in dep en dent t hir d -p ar t y a s se s sm ent w il l ta ke pl ace dur ing F Y2 0 2 3. 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 74 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Our objecti ves are to create clear alignment between remuneration and sust ainable, long-term s takeholder interest s. We tak e account of shareholder v iews and ensure that p er for ma nce sup po r t s t he del i ver y of bu sin es s s tr ate g y through targeting our key per formance indicators (K PIs). Chair man’ s s t atement I am pl ea se d to pr e se nt the Re mune r at ion Re por t fo r the y ea r to 31 July 2 0 2 2 . T hi s w ill b e my fo ur th ye ar a s Chai r ma n of the Co mmi t tee . In thi s tim e we h av e ad apte d our P ol ic y to a li gn w ith s t akeh old er e xp ec t ati ons a nd gu ide li ne s w hil st en sur i ng it su pp or ts b us ine s s s tr ate g y. We hav e al s o b een m ind f ul of unprecedented sociopolitical pres sures . Th e Di re c tor s’ Remun er ation P ol ic y w a s ap pr ov e d at the A GM on 1 7 No ve mbe r 2 0 21. The Di re c tor s ’ Remun er ation Rep or t for F Y 2 0 2 2 w ill b e pu t to an ad v i s or y sha re ho ld er vote a t the 2 0 2 2 AGM o n 16 Novem be r 2 0 2 2. I l oo k for w a r d to you r cont inu ed sup por t at th e upc omi ng A GM. Remuner ation & Pe ople C ommi t tee Dur i ng F Y 2 0 2 2 w e too k the i mpo r tant s tep of e xp an din g the re sp on sib il iti es o f the C om mit te e to inc lu de o ver see ing t he impl eme nta tio n of the P eo ple s tr ateg y an d, a s nec e ss a r y, make re co mme ndat ion s to th e Bo ar d r eg ar din g ch ang e s to or ap pr ov a l of the s tr ateg y. Th e br o ad er Remu ner ation & P eo ple C om mit tee no w ov er s e es the p ro ce s s for t he G ro up’ s t alent s t r ate g y and t he de v elo pme nt of a di ve r s e pip el ine o f succ es s ion b el ow s en ior m ana gem ent . Resp on sib il it y ex ten ds to th e Gr ou p’ s di ver sit y , equ it y and in clu sio n st r ate g y and a ppr o ac h to wo r k for ce en ga gem ent in clu din g re v ie w in g the r e sul t s of th e emp lo ye e eng ag eme nt sur v ey a nd th e re l ated a c tio n pl an s . Th er e is a p r ogr amme of B o ar d en gag em ent ac ti v i ti es to e nab le the N on- E xe cu ti v e Dir e c tor s to h av e re gul ar dialo gu e w ith col le agu e s acr os s t he Gr o up to info r m th eir v ie w of em pl oy ee eng ag eme nt and e nsu re w el l-b ein g po li cie s an d pr og r am me s are ef fective. Th e C ommi t te e re mai ns r e spo ns ibl e for th e Gr ou p’ s ov er a ll remuner ation str ateg y , over se eing the Group’ s Remuneration Pol ic y for Dir e c tor s a nd s eni or ma na gem ent . T he C omm it te e se ek s to ac hie ve a s tr ateg y th at at tr act s, mot i v ates a nd r et ain s exec ut i ve m ana gem ent of t he qu al it y req uir e d to r un th e Gr ou p succ es s f ul ly. Th e st r ate g y pr om otes t he l ong -ter m s ucc es s of Smi th s, w h ile r ef le c tin g the v i ew s of a ll s t akeho ld er s . Busines s context for F Y 20 2 2 We hav e ma de g oo d pr og re s s th is y ear w i th a r en ew e d foc us on tec hno lo g y and n e w pr od uc t de v elo pme nt. F ol lo w ing t he succ es s f ul s al e of Smi th s Me dic al , w e ha ve a n amb iti ou s gr ow th st r ate g y w hic h wi ll am pl if y Sm ith s po s t the M edi c al s ale . Ou r Remun er at ion P ol ic y is st ro ngl y al ign ed to th e pr i or i tie s in t he Smi th s Valu e En gine a nd o ur A IP an d LTIP met r ic s fo r F Y 2 0 2 3 out li ne d l ater in t his s t ateme nt ar e de si gne d to sup po r t this . We hav e not b e en imm une to t he ma cr oe co nom ic ch al len ge s incl udi ng th e CO V ID- 1 9 pan dem ic , but w e h av e sho w n r e sil ien ce in the f a ce of th e se c hal len ge s an d cont inu e to be a gile to m aint ain the p er for m anc e of the b us ine s s and s upp or t our p e opl e and comm uni tie s . Or g anic r e ve nue g ro w th ha s be en ah ea d of expectations and we have d elivered five consecutive q uar ters of gr ow th . Th is h as b een s upp or ted b y s tr on ger e xec uti on an d oper ational resil ience. Inspiring and empow ering our people has be en an im po r tant el eme nt of bui ldi ng th is mo ment um . Sharehol der consult ation We ar e con sc io us of th e com pet iti v e gl ob al en v ir onm ent fo r exec ut i ve t ale nt. D ur i ng th e ye ar , we r ea che d ou t to maj or shar e hol de r s to dis c us s th eir v ie w s on t he int ro du c tio n of an add iti on al sh ar e pl an d e sign ed to r e w ar d su pe r ior p er for m anc e ov er a f i ve - ye ar p er io d, i n li ne w it h the s t r ate g y ann oun ced at the C ap it al Ma r ket s Ev ent in N ov emb er 2 0 21. Fee dba ck f r om shareholder s w as that they were s ymp athetic to this objecti ve but p r efer r e d the s imp li cit y of del i v er y w it hin th e pa r am eter s o f the c ur r ent Rem une r ati on P ol ic y. We we re d el ighte d to ha ve t he opp or tun it y to tal k and w o uld l ike to th ank sh ar eh ol der s for the feedback prov ided. Boar d chan ges In A pr i l 2 0 2 2 we a nno unc ed th e ap poi ntme nt of Cl ar e S ch er r er a s Chief F i nan cial O f fic er , alon gsi de a num be r of exe cu ti ve l ea der ship app oint ment s , co ntin uin g the g oo d pr og r es s m ade o v er r ece nt ye ar s in p os iti oni ng th e Co mp any f or th e f utu re . Cl ar e w a s app ointe d on a s al a r y of £ 5 5 3 ,75 0, w hi ch w il l be n ex t r e v ie we d in Oc to ber 2 02 3 , an d a pen si on al lo w anc e in l ine w i th th e r ate av ail able to th e w ide r UK w or k fo rc e. He r ince nti v e ar r a ng eme nt s and b en efi t s enti tl eme nt ar e in l ine w i th th e Remun er ation P ol ic y. A summ ar y of th e r emun er ation fo r the o utg oin g Chie f F inan cia l Of fi cer is p r ov i de d on p age 8 3. Implementation for F Y2 0 2 3 Th e Bo ar d i s con s cio us of th e ch all en ging i mp ac t of c ur r ent infl ationa r y pr e ss ur e s on ou r col le agu e s and t his i s ref le c ted i n the man age ment d ec isi on to fo cu s mo re o f the s al ar y incr ea se b ud get on th os e se c tor s of the wo r k for ce w h ich a re m or e si gni fi c antly af fe c ted . P aul K ee l ’s sal a r y has b ee n inc re as e d by 2 . 5% a nd is ef fe c ti v e fr o m 1 Oc tob er 2 0 2 2 . T h e incr e as e is i n lin e w it h se nio r man age ment a nd i s bel ow t he in cr em ent fo r the w i der w or k f or ce. Cl ar e S ch er r er ’s sal ar y w il l r ema in unc han ge d for F Y 2 02 3 . We conti nue to a s se s s an d ev ol ve h ow o ur su st ai nab ili t y str ateg y sho uld b e r ef lec te d w it hin o ur r emun er a tio n fr amew o r k . Fol lo w in g ca re fu l con sid er ation b y the C om mit tee, we w i ll b e intr od uci ng ne w ob je c ti v es w i thi n the A n nua l Ince nti v e Pl a n ( A IP) for F Y 2 0 2 3, ali gne d to ou r st r ate g y and t he co mmi tme nt s ma de at the N ov emb er 2 0 21 C ap it al Ma r ket s ev ent . RE MUNE R A T IO N & PE O PLE C O MMI T T E E REP OR T 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 75 For t he F Y 2 0 2 3 A IP , w e w il l intr o duce t wo n ew p er for m anc e metr ics b a se d on r ed uc ti on s in en er g y us a ge ac r os s th e bus ine s s and r e ve nue f r om ne w p ro du c t pr og r am me s , incl udi ng ou r sus t ain abl e pr od uc t s . T he n ew m ea sur e s w ill e ac h ha ve a wei ghti ng of 10% . T hi s buil ds o n the q uant if iab le an d me as ur a ble Sc op e 1 and 2 G r een ho us e ga s re duc t ion m etr i c s inc or p or ated in our L on g- T er m Ince nti ve P l a n (LTIP ), dr i v in g ach ie vem ent of our c ommi tm ent to Net Ze r o emi ss ion s f ro m op er a tio ns b y 2 0 4 0 . T he re w i ll n o lon ger b e a pe r s ona l obj ec t i ve s met r ic in A IP , re infor ci ng th e fo cus o n tea m per for mance . Oth er ac tiv itie s of the C ommit tee in F Y 2 0 2 2 In ad dit ion to t hos e hi ghl ig hted el se w her e in t his s t ateme nt, t he Co mmi t tee h as al so un der ta ken th e fol lo w ing a c ti v i tie s in F Y 2 0 2 2 – Rev ie w ed b usi ne s s pl an s an d per for mance to a s se s s th eir potent ial im pa c t on e xis t ing an d f ut ur e ince nti v e ar r angem ent s – Rev ie w ed r em une r ati on of t he w id er w or k fo rc e and r el a ted pol ic ie s to en sur e inter nal al ign ment of r e w ar d – A pp ro v ed F Y 2 0 2 3 sal a r y incr e as e s for th e E xe cu ti v e Co mmi t tee considering av ailable budget, indiv idual per for mance rating and pos it ion i n sa l ar y r a ng e – Rev ie w ed t he C ommi t te e’ s per for mance an d T er ms of Ref er enc e – A pp ro v ed th e Remun er ation Rep or t for i ncl usi on in th e Annu al Repor t – A pp ro v ed th e se r v ice co ntr act s o f the E xecu ti ve D ir ec to r s Commi t tee m ember ship and meeting s Th e me mbe r sh ip of th e Co mmi t tee a nd th eir m eet ing at tendan ce dur in g th e ye ar is s et ou t on p ag e s 5 8 , 59 an d 6 0 of thi s r epo r t. I had s er v ed o n a re mun er a tio n com mit te e fo r at lea s t 1 2 mo nths pr io r to my ap po intm ent as Re mun er at ion C om mit tee Chai r man . Sir G eo r ge Bu ckle y is a bs ent w he n his o w n r emu ner ation a s Chai r man o f the B oa r d is un der c on sid er at ion . Th e Chi ef E xe cu ti ve a t tend s me etin gs of t he C omm it te e by inv i tat ion b ut h e is n ot inv ol ve d in th e deter minati on of hi s ow n re mun er at ion , or p re s ent d ur in g con sid er ation of an y ch ang e s to it . Commit tee per for mance ev aluation Th e ann ual e v al uati on of th e Co mmi t te e w as co nd uc ted a s pa r t of the i nter na lly f a cil it ate d ev a luat ion p r oce s s of th e Bo ar d a nd it s C omm it te e s. T h e fi ndi ngs r el ating to th e Co mmi t tee w er e dis cu s se d w it h me. M or e info r mat ion c a n be fo und o n pa ge 6 4. O v er a ll , th e Co mmi t te e is v ie w ed a s ef fe c ti v e and p er for m ing w el l and i s r ig or ou s in dis ch ar gin g it s r e sp on sib ili ti es . Th er e w er e thr e e sc he dul ed C omm it te e me etin gs h eld d ur in g the ye ar an d one s pe cia l me etin g. Look ing for w ar d Th e C ommi t te e w ill c onti nue i t s foc us o n all s t akeh ol der g ro ups and t he w id er w or k fo rc e w hen d is cus s ing e xec uti v e p ay s tr ateg y. It w il l al s o co ns ide r the b r oa der i mp ac t of n on- fi nan cia l mea su re s suc h as S mit hs L ea der ship Be ha v iou r s an d ho w the s e sh oul d be ref le c ted i n re mun er a tio n dec is ion s. I n pa r ticul a r the C om mit tee w ill s ee k to as s e ss h o w the m acr o ec ono mic e nv ir on ment i s imp ac ti ng th e mar ket for glob al t al ent an d the s e ar ch fo r tal ent w ill c ontin ue to b e a pr i or i t y a s we g ro w. Bill Seeger CH A IR M A N O F T HE RE MUNE R A T ION & P EO PL E C OM MI T TE E REMUNER A TION & PE OPLE COMMIT TEE REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 76 Base s alar y Paul Keel received: £875,000 Clare Scherrer received: £140,567 John Shipsey (former CFO) received: £551,496 Pension and benefi t s – Pen si on s con tr ib ut io ns of 12% o f ba s e s al ar y f or P au l Ke el and C l ar e S ch er r e r , in lin e w it h th e r ate a v ail a bl e to th e w ide r UK w or k fo r ce. J oh n Shi ps e y re ce i ve d co ntr i bu tio ns o f 2 0. 5% – Benefi ts include d healthcar e, insur ance, car benef it and re lo c ati on b en efi t s fo r th e CEO. A nnual b onus ( A IP) Long term ince ntive (L T IP) Total bonus payout (% of maximum): Paul Keel: 38.8% Clare Scherrer: 38.8% John Shipsey: 37.8% Total vesting (% of maximum): Paul Keel: N/A Clare Scherrer: N/A John Shipsey: 14.1% Threshold (25% payout) Maximum (100% payout) Achievement Operating profit (40%) Organic revenue growth (30%) H1 (10%) Headline operating cash conversion (20%) FY (10%) Personal objectives (10%) £459m £2,784m 90% 95% 0% £502m £2,926m 110% 115% 10% £2,832m £464m 3.2% 93% 13.8% 12.8% 0.0% 9.0% 9% 81% Paul Keel Clare Scherrer John Shipsey Salar y 875 141 5 51 Pension and benefits 279 24 13 9 Annual bonus 67 8 91 344 Long term inc entives - - 223 Paul Keel Clare Scherrer John Shipsey £1,832 £256 £1,257 Salary Pension and benefits Annual bonus Long term incentives £2,000 £1,000 £500 £1,500 £0 IM PLEMENT A T ION OF R EMU NER A T ION POLICY IN F Y20 22 SING LE FIGURE (£0 0 0) Threshold (25% payout) Maximum (100% payout) Vesting Organic revenue growth (30%) Group EPS growth after tax (25%) Average ROCE (20%) Average headline operating cash conversion (25%) 90% 15% p.a. 4% p.a. 3% 105% 18% p.a. 11% p.a. 6% 1.8% 0.6% 13.7% 96% 0% Total 14.1% 0% 0% 14.1% * Pe r s on a l ob je c t i v e s ou t t ur n f o r Jo hn S h ip s e y w as 8 % o f m ax i mu m E X EC U TI V E R EM UN ER A TIO N AT A GL A N CE 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 77 Base s alar y Paul Keel: £896,875 (2.5% increase) Clare Scherrer: £553,750 (0% increase) UK wider workforce increases of 3.0%. A nnual b onus ( max imum opp or tunit y) Long t erm incent ive s (L T IP) Pension Ben efit s Paul Keel: 12% of base salary Clare Scherrer: 12% of base salary Benefit s packag e consisting of healthc are, insur ance, car ben efit and relocation benefit s. Benefit s packag e consisting of healthcar e, insur ance and car allo wance . Paul Keel: 200% of base salary Clare Scherrer: 165% of base salary Perfor mance measure Weighting Operating Profit 30% Reve nue 30% He a dl i ne O p er ati ng C a sh C o n ve r s io n 20% New Product Commercialisation 10 % Energ y Efficienc y 10 % – 3 3 % of an nu al b onu s def er r e d into sh ar e s fo r thr e e ye ar s. – Specif ic targ ets are consider ed to be commercially sensiti ve and will be di sclosed retros pecti vely . Paul Keel: 189,900 number of shares Clare Scherrer: 91,342 number of shares Perfor mance measure (3 year) Weighting Threshold (25% v esting) Maximum (full vesti ng) EP S gr ow th af ter t a x 20% 6% 11% Revenue grow th 30% 3.5 % 6.5% Fr e e c as h -f l ow 20% 45% 55% Av e r a ge R O CE 15 % 14% 17 % Reduction in GHG 15 % 15 % 2 0% – T w o- y ea r po s t-ve s ti ng h ol din g pe r io d ap pl ie s . – T he s am e f ixe d num be r of sh ar e s as i n 2 0 21 w il l be g r an ted to Pa ul K ee l in Oc tober 2 02 2 , p er th e Po li c y. – Cl ar e S c her rer ’s aw ar d w il l be i n l ine w i th h er co ntr ac t of emp lo y me nt ( v alu e of 2 5 0 % of s a l ar y ). Shar ehol ding r equir ement s – E xe cu ti v e Dir e c tor s shou ld b uil d a mi nimu m sh ar eh ol din g eq ui v al ent to t he a nnu al f ixe d nu mb er of s har e s a w ar d ed un de r th e LTIP w ith in f i v e ye ar s a nd a re r e qui r ed to h ol d sh ar e s eq ui v al ent to t hei r fu ll i n- e mpl oy m ent s ha re ho ld ing g ui del in e, o r ac t ual h ol din g if lo we r , for t w o y ea r s p os t-e mpl o y men t. ST A TEMENT OF I MPLEM ENT A T ION OF R EMU NER A TIO N P OLICY I N F Y 20 2 3 PERFO RM A NCE M E A SURES A ND LIN K TO ST R A T EG Y Annual bonus (AIP) GROW TH EX ECU TION PEOPLE 1 2 3 4 5 1 2 3 4 1 2 3 4 5 OPER ATING PROFIT RE VENUE GROW TH OPER ATING CA SH CONVER SION NEW PRODUCT COMMERCIA LISATION ENERGY EFFICIENCY Long T erm Inc entive Plan (L TIP) EP S G R OW TH A FT E R TA X RE VENUE GROW TH FREE CA SH-FLOW AVERAGE ROCE REDUCTION IN G HG EMISSIONS GROW TH 1. Strong execution to maximis e underlyin g market expansion 2. Improve d pro duct development and commercialisation 3. B ui l di ng o u t prior ity adjacencies 4. Disciplined M&A 5. Sustainable Smiths EX ECU TION 1. Operational 2. Financial 3. Functional 4. Sustainable Smiths PEOPLE 1. Sa fe t y a n d we l l be in g 2. In s pi r e an d e mp o w er t a le nt 3. Diversit y, Eq uit y, Inclusion 4. Communities 5. Sustainable Smiths EX ECUTI VE REMUNER A TION A T A GL ANCE 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 78 Alignm ent with t he UK Corpor at e Governanc e Code Th e t abl e bel ow d et ail s h o w the C om mit tee add re s s es t he f ac to r s s et ou t w ith in P ro v is ion 4 0 of the UK C or por ate G o ver nance C o de: Clarity – The Commit tee welcomes tr anspar enc y and regular engagement with shareh older s with regar d to ex ecuti ve remuner ation. Du r in g 2 0 2 2 , th e Co mm it tee Ch air m an h a s con s ulte d w i th s ha re ho l de r s to f ul ly u nd er s t an d th ei r v ie w s p ar tic ul ar ly in rel ation to share bas ed remuner ation Simplicity – Par ticipants in incen tiv e plans recei ve annual communications to confir m awar d level s and per form ance measures . Su pp or tin g gu id an ce d oc um ent s a nd i ns t r uc t io na l v id eo s ar e a v ai l ab le o nl in e. T h e Rem un er atio n Po li c y f or E xecu t i ve Dir e c to r s un de r pi ns t ha t of th e w id er w o r k fo rc e an d th e 2 0 21 P ol ic y re v ie w f ur th er s imp l if ie d t he a r r a ng em ent s Risk – The Commit tee consider s the effec tive management of risk throughou t the deliver y of incentive plan s, applying re asonable dis c r eti on to o v er r ide fo r mu l ai c ou tco me s i f ne ce s s a r y – The Commit tee consider s that the str uc ture of incentive arr angement s does not encourage unneces sar y risk taking – Fo r E xe cu ti v e D ir e c tor s , o ne t hi r d of th e an nu al b on us p ay m en t is d efe r r ed i nto sh ar e s w i th a n ad di ti on al th r ee y e ar s until vest ing – Rob us t m alu s an d cl a w b ac k pr o v i sio n s ar e in p l ac e fo r inc en ti v e pl a ns a nd a r e cl ea r ly c om mun ic at ed Predictability – Our P o li c y c le ar l y ou tl i ne s th e ma x im um a w ar d l ev el s and v e s tin g o utc om es a pp l ic ab le t o ann ua l bo nu s an d LTIP . A s s ta ted ab ov e un de r ‘r is k ’, the Co mm it t ee h as t he a bi li t y to app ly di s cr et io n to fo r mu l ai c ou tco me s an d c le ar m alu s an d cl aw ba ck prov isions exist Proportionality – T he re i s a l ink b et we en s t r ate gi c bu si ne s s ob je c t i ve s an d p er for manc e ou tco me , as o u tl in ed o n p ag e 7 8 – Our P o li c y f or o ur in ce nti v e pl ans o ut li ne s t hr e sh ol d, t a r get a nd m a xi mum o pp o r tuni t y l e ve l s , w i th a c tu al o utc om e s dependent on per formance achieved against pre-determined measures – T hr ou gh t he d e si gn of t he P ol ic y and t he d is cr et io n of t he C om mi t te e, p o or p er for manc e is n ot r e w ar d ed Alignment to culture – Sm it hs G r oup V al ue s of p a s sio n , inte gr i t y, res pe c t , o w ne r sh ip an d c us to me r fo cu s un de r pi n th e de si gn a nd o pe r at io n of the i nc ent i v e pr o gr a mm e s. T h e bu si ne s s s tr ateg y i s su pp or te d by t he s e Va lue s w h ic h ar e w id el y co mm uni c ate d ac r os s the Company Consider ation of wider wor k force Th e C ommi t te e con sid er s a ll s t akeho ld er gr o ups w h en s et tin g exe cu ti ve p a y, includ ing o ur p eop le . Th e C ommi t te e is br iefed on pa y ar r angem ent s a cr os s th e bu sine s s an d r ece i ve s r ep or t s on r emun er ation i ss ue s r a is ed b y emp lo ye e s thr ou gh th e emp lo ye e eng ag eme nt sur v ey an d at di v i sio nal an d f unc t ion al to w n hal l me etin gs . In S eptem be r 2 0 21 the C om mit tee Chair man dis cu s se d exe cu ti v e pa y and s us t ain able b us ine s s pe r for ma nce at a n emp loy e e Q& A ev ent . A v ide o w a s cir cu l ated in a d v an ce, ex pl a inin g w hy w e ha ve a Re mune r at ion & P eo ple C om mit te e, h ow w i der C om pa ny p ay p ol ic ie s ar e al ign ed w i th exe cu ti v e pa y st r uc t ur e s, a nd ho w e xecu ti v e pa y s tr u c tur e s al ign to o ur P ur p os e, Val ue s an d cult ur e dr i v e su st ain ab le bus ine s s pe r for ma nce fo r th e ben ef it of al l ou r st akeh ol de r s. E mp lo ye e s wer e e nco ur a ge d to sub mit q ue s tio ns in a d v an ce, an d as k questions on the day . Th e ov er all r e spo ns ibil i t y fo r wo r k for ce e ng age ment r e s t s w it h the S e nior I nde pe nd ent Dir e c tor w hi le ea ch No n- e xec uti v e Dir e c tor h as re sp on sib il it y for wo r k for ce e nga ge ment i n a spe ci f ic ge og r ap hic al r e gio n and b usi ne s s ar ea . Nin e ev ent s at te nd ed b y Non - exe cu ti ve Dir ec to r s sp ec if ic a lly r el a tin g to wo r k for ce en ga gem ent to ok pl a ce in F Y 2 0 2 2 , f ur the r det ail s of whi ch ar e ou tl in ed o n pa ge 6 0 . REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 79 Single f igure of an nual r emuner ation ( audi ted) E xecu ti ve Dir ec tors Sal ar y Benefi ts P ay m en t s in lieu of pension contribution T otal fix ed Annual bonus 2 Lon g-ter m incenti ve s T otal per formance rel ate d To t a l FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 Pa ul K e el 1 875 16 3 18 3 54 96 10 1,1 5 4 227 67 8 223 – – 67 8 223 1, 8 3 2 450 Clar e Scher rer 141 – 7 – 17 – 16 5 – 91 – – – 91 – 256 – John Shipsey (for mer CFO) 5 51 5 40 26 11 11 3 131 69 0 682 344 5 67 22 3 3 2 81 4 5 67 848 1 ,257 1, 5 3 0 1 A n a d v a nc e p ay m e nt o f $ 8 7,3 49 w a s m ad e t o Pa u l Ke e l in A u gu s t 2 0 2 2 f or h im t o s et t le U S t a xe s d ue o n b en ef i t s w h ic h ar e a l s o t a xa b le i n th e U K . Up o n r e ce ip t of t he r e f un d r el a t in g to t hi s fo r ei gn t a x c r ed i t on h is U K t a x re t ur n , a f ul l r e fu n d w il l b e pr o v i de d t o th e C om p an y. 2 E xec ut i v e Di r e c to r s d ef er 3 3% of t h e bo n us i nt o Sm i th s sh a r e s. T h e to t al b o nu s p ai d du r i ng t h e ye a r, incl u di ng d e fe r r a l , is c a pt u r ed u n de r A n nu al B o nu s a bo v e. T h e d ef er ra l is f o r a th r ee - ye a r pe r i od a n d is n o t su bj e c t to a ny f u r t h er p e r f or man ce o r o th er c o nd i ti on s . 3 T h e sh a r e pr i c e ap pr e c ia ti o n at t r ib u t ab l e to th e F Y 2 0 2 2 L on g Ter m In c en ti v e f or J o hn S hi p se y w a s 8 . 0 % (£ 7 ,6 6 3 ). F o r F Y2 0 2 1 i t w as 11.3 % ( £ 2 0 , 52 6 ). N o di s cr e ti o n ha s b ee n a pp l ie d t o th e amounts attributable to share price appreciation. 4 T h e L on g Ter m In c en ti v e v a lu e fo r F Y 2 0 21 f or J o hn S hi p s ey h a s be e n r e st a te d to s ho w t h e ac t u al a mo u nt ( r a th er t h an t he e s t im at e d am o unt i n l a s t ye a r ’s re p or t ) an d to i nc l ud e di vi de n d ac cr ual p a y me nt s o f £ 2 2 , 4 61 wh i ch w a s p ai d o n ve s t in g . T he t ot a l r em un er ati o n is a l s o r e s ta te d a cc or d in g ly. T h e e s ti ma te d L o ng Ter m I nc en ti v e v a lu e s fo r F Y 2 0 2 2 ar e c a lc u l at ed u s in g th e ve s t in g p er c en ta g e of 14 .1% and t he a v e r a ge s ha r e p r ic e o ve r t he t hr e e m on th s t o 2 9 Ju ly 2 02 2 o f 1,47 9 p; i t al so i nc lu d e s th e di v i d en d a cc r u al p a y me nt o f £16,7 9 1 fo r J oh n Sh i ps e y, p ay a b le on v e s ti n g. T h e a ve r a g e sh ar e p r i ce f or t h e f i ve d a y s to 2 9 J ul y 2 0 2 2 o f 1,512p i s u se d t o c al cu l at e th e d i v id e nd e q ui v a le nt v a l ue . S al ar y Cl ar e S ch er r er w a s app oi nted to th e Bo ar d a s Chief F i nan cia l Of fic er on 2 9 Ap r il 2 0 2 2 w it h an an nual b a se s a l ar y of £ 5 5 3 ,75 0. T h e v alu es in the s ing le f igu re t ab le ab ov e r ef le c t the r em une r ati on p aid f r om 2 9 A pr il 2 0 2 2 . Joh n Ship s ey s tep pe d do w n fr o m the B o ar d as Ch ief F in anc ial O f fice r on 2 9 A p r il 2 0 2 2 a nd r em aine d emp lo ye d b y the G r oup unt il 31 July 2 0 2 2 to ens ur e a smo oth t r an si tio n. T h e v alu es i n the s ing le f igur e t ab le ab ov e r efl ec t t he r emu ner ation p ai d to 31 July 2 0 2 2 . Ben efi t s Ben ef it s fo r E xe cu ti v e Dir ec to r s in clu de l ife a s sur ance, d is ab il it y insur ance, p r i v ate he al thc ar e in sur ance, c a r re l ated b en efi t s an d reloc ation benefits (CEO only). Pension E xec ut i ve s ma y ch oo se e ith er to p ar tici pate i n the C om pa ny ’s define d co ntr ib ut ion p en sio n pl an o r to re ce i ve a p ens ion a ll ow a nce i n li eu the re of. P aul K eel a nd Cl a re S c her rer r e cei v ed an a ll ow a nce in l ie u of pe ns ion c ontr i but io n equ i v alent to 12% of s a l ar y dur ing the y ea r . Th is is a li gne d to th e r ate a v ail ab le to th e w id er UK w or k fo rc e. Joh n Ship s ey r e cei v ed an a ll ow a nce in l ie u of pe ns ion c ontr i bu tio n of 2 0. 5% of s a l ar y dur i ng th e ye ar . F Y 2 02 2 a nnual bo nus ou tcome Th e ma xi mum an nua l bo nus o ppo r tuni tie s fo r F Y 2 0 2 2 we re 2 00 % of s a l ar y for P a ul Ke el , 165% o f s al ar y fo r Cl ar e S ch er r er ( p r o- r ate d for ti me si nce ap po intm ent ) a nd 165% of s a l ar y fo r the fo r me r CFO, J ohn S hip se y. For F Y 2 0 2 2 , f ina nci al met r ic s m ad e up 9 0 % of th e annu al b onu s, w i th th e f ina l 10% ba s ed o n per for mance a gai ns t pe r s ona l obj ec ti v e s. Th e t abl e bel ow s umm ar i se s th e fi nan cia l ta rg et s an d the C om pa ny ’s actu al p er for m ance ( r e st ate d at bu dge t excha ng e r ate s) a gai ns t the s e for t he F Y 2 0 2 2 an nual b on us . Per forman ce targets , actual perfor mance and outtur n Measure Weightin g Thre shold 25% pay out Ta r g e t 5 0 % p ay o ut Maximum 10 0 % p a y ou t A ctual Outtur n Oper ating Profi t 40% £ 4 59m £ 47 8 m £ 50 2m £46 4 12 . 8 % Revenue Grow th 30% £ 2, 784m £ 2 , 8 41m £ 2,926m £ 2,8 32 13 . 8 % Headline Oper ating Cash Conver sion H1 10 % 90% 10 0 % 110 % 93% 3.2% FY 10 % 95% 10 5 % 11 5 % 8 1% 0.0% T otal Financial 90% 2 9. 8 % Pers onal Objecti ve s 10 % 90% 9. 0 % To t a l 10 0 % 38.8% REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 80 Per sonal objec tives Chal le ngin g pe r s ona l obj ec t i ve s ar e s et ea ch y ear f or th e E xe cu ti ve D ir ec to r s , to re info rc e the C om pan y ’ s op er ating an d s tr ate gic pr io r it ie s . T he pe r s ona l obj ec t i ve s for t he E xecu ti ve D ir ec to r s for F Y2 02 2 co mpr ise d a numb er of s tr ategic l on g-ter m enabl er s , s om e of which remain commercially sensiti ve, together with shor t -term proje ct s aligned to innovation, oper ational excellence and capabilit y pl an ning . A chi ev eme nt s ag ain st p er s on al ob je c ti v es i n the y ea r (w h ich h av e a 10% w eight ing ) a r e in the t ab le b elo w. Dur ing the p r oce s s of ste ppi ng d ow n , the p er for m an ce of Jo hn Sh ips e y w as co ns ide re d an d as s e ss e d by t he C omm it te e and a n ov er all r at ing o f 8 0 % w as agr e ed (o ut tur n of 8 % of ma x imum b on us ). Pa ul Keel Categor y Achievement Outt urn Grow th (including financial s) Group Strategy De ve lop ed a nd co mmu nic ate d a com pel l ing e nter pr ise s tr ateg y for th e Gr ou p inc lud ing e x ten si v e inv es to r eng ag eme nt, a high li ght of w hi ch w as t he N ov emb er 2 0 21 C ap it al Ma r ket s Ev ent . Envir onmental , Social & Gov ernan ce E s ta bl ish ed a B o ar d- le ve l sus t ain abil i t y fo cu s ed C omm it te e - the S c ienc e, S us ta ina bil it y & E xcel len ce ( S S E ) C om mit tee and app ointe d Chi ef Su st ain abi li t y Of f ic er . O ver sa w the d ev el opm ent an d impl eme nta tio n of a com pel l ing G r oup - w id e sus t ain abil i t y s tr ateg y w hich w as inco r po r ate d into inc enti v e co mpe ns at ion p r ogr amme s . Se t and c omm unic ate d env i r onm ent al go al s, to sup po r t the del i ve r y of our c omm itm ent to Ne t Zer o GHG E mi ss ion s f ro m ope r at ion s by 2 0 4 0. Ma pp ed o ur ap pr oa ch , sig nin g on to th e Sc ien ce B as ed Target s In it iati v e and t he UN R ac e to Zer o ple dg e. Por t folio Clo se d the S mi ths M ed ic al tr ans ac t ion w i th an e nter p r is e v alu e of $2 .7bn an d an e qui t y v a lue of $ 2 .4 b n af te r adju s tme nt s for debt , l iab ili ti es a nd w or k in g ca pi tal . 4 4. 2 / 50.0 E xe cu ti on Smiths E xcellence Sy s tem ( SE S) De ve lop ed a nd de pl oy ed a G ro up - w ide S E S pr o gr a mme , buil din g on th e foun dat ion s of th e SE S A c ad em y and e mbe dd ing l ean meth od olo g y. A pp ointm ent of M as ter Bl a ck B elt s a nd Bl a ck Bel t s in al l di v is ion s to en sur e de li v er y of r e sul t s. Oper ations Nav igated globa l supply chain hea dw ind s, inclu ding impac t s fr om U kr aine in v asi on . Del i v er ed p r odu c ti v i t y an d pr icing g ain s to of f s et r a w mater ial infl ation . Man age d w or k ing c a pit al l ev el s to suppor t gro w th . Customer Impr o ve d On T i me in Fu ll (O T IF ) and r edu ce d Co st o f Poo r Qu al it y (CO P Q ). 23.0 /25.0 People Te a m Ke y E xe cu ti ve C om mit tee app oint ment s i ncl udin g CF O, CP O, CS O, J ohn C r an e Pr e si dent a nd Gr o up SE S D ir ec to r . Inclusion and Diver sit y E s ta bl ish ed a n ex ten de d le ad er sh ip tea m com pr i se d of th e top 2 0 0 le ad er s , w i th imp r ov ed di v er sit y . In ad dit ion , th e num ber of se nior l ea de r shi p po sit ion s t aken b y fema le s is 2 4%. T alent Develop ment De ve lop ed a nd l au nch ed a n as s es s ment , de ve lop me nt and re w ar d p r ogr amme th at en sur e s al l cr i tic al l ea der ship r ole s hav e ‘re ad y no w ’ su cce s so r and t al ent pip el in e is co ns t antl y re v ie w ed an d in de v elo pme nt. 22.8/25 .0 T otal ( 9% of maximum bonus oppor tunit y) 90.0/100.0 Cl are S ch er re r (fro m 29 A pri l 20 22 ) Achievement Outt urn Grow th E xe cu ti on People Cl ar e ha s ma de an e xcel lent s t ar t in her f ir st qua r ter wi th S mit hs in clu din g: - – Co ncl udin g th e fi nal b u y- in for t he £1 bn l eg ac y T I G r oup Pe ns ion S c hem e – De ve lop ing a nd de plo y in g s tr ong i nter na l cont r ol s – Str u c tur i ng an ef fec ti v e F in anc e Le ad er sh ip tea m w ith ke y app oi ntme nt s – Del i v er in g go od H 2 fi nan cial r e su lt s an d fi f t h con s ec uti v e qu ar ter of gr ow th O ve r a ll r ati n g of 90% was approv ed by the Committee re p re s e nt in g 9 % o f maximum bonus (pro -r ated for ser vice) REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 81 O ver all F Y 2 0 2 2 annual b onus out tur n Th e fo llo w in g ta ble s et s o ut th e ov er all F Y 2 0 2 2 b onu s ou t tur n for E xec ut i ve D ir ec to r s: Maximum oppor tuni t y Out tur n ( p e r ce nt a ge o f m ax i mu m ) Pa ul K e el 200% 3 8.8% Clar e Scher rer 1 16 5 % 38.8 % John Shipsey (former CFO) 16 5 % 3 7. 8 % 1 C l ar e S c h er r e r jo i ne d t he B o ar d a s C hi ef F i n an ci al O f fi ce r o n 2 9 A p r il . T h e m ax i mu m b on us o p p or tun i t y o f 165 % o f s al a r y ha s be e n pr o - r a te d to r e fl e c t th e t im e s in ce a pp o in tm e nt . Th e C ommi t te e con sid er e d the am ou nt s ca r efu lly i n the c ontex t of the Gr o up’ s per for mance , indi v i dua l pe r for man ce an d the c ur r ent mac ro e con omi c env i ro nme nt, a nd de ter min ed t hat th e am ount s w er e a f air r ef le c tio n of pe r for ma nce in t he p as t f ina nci al y ear . F Y2 02 0 long-t erm incen tive plan outco me Joh n Ship s ey r e cei v ed an a w ar d un de r the LTIP in O c tob er 2 019 , s ubje c t to th e fol lo w in g per for mance c ond iti on s: Measure Weightin g Per formance period Thre shold (25%) Maximum (10 0 % ) A ctual Out turn (% o f vest ing) Organic s ales gro w th 30% 1 A ug us t 2 0 19 to 31 Jul y 2 0 2 2 3% 6% 0 . 6% 0.0% Gr ou p E P S gr o w th af t er t a x 25% 1 A u gu s t 2 019 to 31 Jul y 2 0 2 2 4% p. a. 11 % p . a . 1. 8 % 0.0 % Av er age R O CE 20% 1 A ug us t 2 0 19 to 31 Jul y 2 0 2 2 15 % p . a . 18 % p . a . 13 .7 % 0.0 % Aver age headline oper ating cash conver sion 25% 1 A u gu s t 2 019 to 31 Jul y 2 0 2 2 90% 10 5 % 96% 14 .1 % T otal vesting 1 4 .1 % No dis c ret ion w as exer cis e d by t he Rem uner ation & P eo ple C om mit tee in r es pe c t of th e for m ul aic o utco me s un der t he LTIP . No a w ar d s wer e d ue to ve s t to P aul K ee l or Cl a re S c her rer un der t his a w ar d . Scheme in terests aw arded in respec t of F Y20 22 (audited) Sc he me inter e s t s aw a r de d ar e ou tl ine d be lo w. Scheme F o r m of a w a r d D a te of g r a nt Number of s ha r e s awarded Awar d price Face value (£000 ) % ve s t in g at threshold per form ance Per forman ce pe r i od e n d da te Pa ul K e el LT I P Conditional shares 5 November 2 021 18 9, 9 0 0 1, 4 3 5 p 2, 725 25% 31 Jul y 2 0 2 4 Pa ul K e el Def erred bonus Conditional shares 5 November 20 21 5,378 1, 4 3 5 p 77 N /A N /A John Shipsey LT I P C onditional shares 5 November 20 21 1 0 0 ,1 5 0 1, 4 3 5 p 1, 4 3 7 25% 31 Jul y 2 0 2 4 John Shipsey Deferred bonus Conditional shares 5 November 20 21 13 , 6 8 0 1, 4 3 5 p 196 N /A N /A No aw ard s wer e g r ante d to Cl ar e S ch er r er i n F Y 2 0 2 2. Th e pe r for ma nce m ea sur e s for t he F Y 2 0 2 2 LTIP a w ar d ar e as f ol lo w s: Measure Weighting Thre shold (25% vest ing) M aximum T hr ee - y ea r EP S gr ow th af ter t ax 20% 4% p. a . 11% p . a . Thr ee-y ear organic revenu e grow th 30% 2 % p. a . 6% p . a . T hr ee - y ea r av er age f r e e c as h- fl o w (a s a p er ce nt ag e of o pe r at in g pr of i t ) 20% 45% 55% T hr ee - y ea r av er age r e tur n on ca pi t al e mp lo ye d 15 % 13 % 17 % Three -year reduc tion in greenhous e gas em issions (nor malised ) 15 % 5% 10 % To t a l 10 0 % REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 82 Pay men t s to past Directors (audited ) A nd y Re y no lds S mi th w a s pai d an am ount of £ 8 76,4 51 in li eu of n otic e for th e un ser v ed p ar t of hi s t w el ve m onth n otic e per iod w hi ch end ed o n 24 M ay 2 0 2 2 . In a ddi tio n, t he F Y 2 0 2 0 LTIP w il l ve s t in 2 0 2 2 , pr o -r ated for s er v ic e to 31 July 2 0 21. 1 79 ,62 7 sha re s , pr o -r ated for se r vi ce w il l ve s t at 14. 1 %. T hi s is eq ui v al ent to 16,8 8 5 s har e s a w it h an e s tima ted v al ue of £ 2 49 , 72 9 . Pay men t s for loss of o f fice (audit ed) Joh n Ship s ey s tep pe d do w n fr o m the B o ar d on 2 9 A pr il 2 0 2 2 bu t re mai ne d an emp lo ye e of th e Co mp any o n his e xi s ting te r ms o f emp loy m ent unt il 31 July 2 02 2 . Mr Shi ps ey w i ll b e pai d in l ieu of n oti ce for t he un s er ve d p ar t of his 12 month not ice p er i od . T he p ay m ent in l ieu o f noti ce w il l be m ade i n mont hly in s ta lm ent s to en abl e a r edu c tio n in th e pa y ment s in the ev ent t hat Mr S hip se y f ind s alte r nat i ve em plo y me nt pr i or to 2 9 A p r il 2 0 2 3. Fu r ther d eta il s in r el ation to th e pa y me nt in l ieu of n otic e w ill b e pr o v id ed in t he F Y 2 0 2 3 A nnual Rep or t . Mr Shi ps ey r em ain ed e ntit le d to re cei v e an an nua l bo nus fo r F Y 2 0 2 2 , the f ul l v alu e of w hic h ha s be en in clu de d in th e sin gle f ig ur e tab le . One t hir d of t he an nual b on us w il l be d efer r e d into sh ar es f or th re e ye ar s. Mr Shi ps ey ’s shar e aw a r ds un der t he C omp an y’s Lon g- T erm I nce nti ve P l an ( LTIP ), w ill b e pr e se r ve d in acc or da nce w i th th e go od l ea ve r pr ov i sio ns of t he LTIP , su bje c t to a tim e pr o -r ating a dju st ment a nd no r ma l ve s tin g date s . Infor mation r e l atin g to the v e st ing o f sha re s und er th e L T IP w il l be up date d in th e r ele v ant D ir ec tor s ’ Remu ner ation Rep or t s . Th e C omp an y mad e a co ntr ib uti on to w ar ds M r Shi ps ey ’s legal f ee s of up to £12,0 0 0 . Directors’ s hare opti ons and long- term share plans (audi ted) Op ti o n an d a w ar d d at a Awards vested F Y 20 21 Di r ec t or a n d P l an Options and awards he ld o n 31 Ju ly 2 0 2 2 Number Options and awards he ld o n 31 Ju ly 2 0 2 1 Number Per forman ce test Exercise price Gr ant date Vesting date + Ex pir y date + + Date ves ted Numb er Exercise price Mar ket price at da te of gr ant Mar ket price at da te of vestin g Paul Keel LT I P 141 , 0 5 9 1 41 , 0 5 9 B n /a 2 8 / 0 9/ 21 No v 2 0 2 3 1 8 9, 9 0 0 0 C 0 5 / 11 / 2 1 N ov 2 0 24 Deferred bo nus award 5,378 0 – n/a 0 5 / 11 / 2 1 0 5 / 11 / 2 4 S AY E 1, 5 47 0 – 116 3 p 1 7 /05/22 01 / 08/25 01/ 02 / 26 Jo hn S hi ps e y (Form er CFO) LT I P 0 95,8 37 A n /a 31/1 0 /18 O c t 2 0 21 13 / 10 / 2 1 1 8,209 n /a 1, 3 6 9 p 1, 4 2 1p 95,8 37 95,8 37 A n /a 03 /10/19 Oc t 2 0 2 2 95,8 37 95,8 37 B n /a 0 4 / 11 / 2 0 N ov 2 02 3 1 0 0 ,1 5 0 0 C 0 5 / 11 / 2 1 N ov 2 02 4 Deferred bo nus award 0 6, 39 3 – n/a 31/1 0/18 31/ 10 / 21 31/ 10 / 2 1 6,39 3 n /a 1, 3 69 p 1, 4 2 1p 6 ,9 3 3 6 ,9 3 3 – n /a 03 /10/19 0 3/1 0/22 3,4 06 0 – n/a 0 4 / 11 / 2 0 0 4 / 11 / 2 3 13 , 6 8 0 0 0 5 / 11 / 2 1 0 5 / 11 / 2 4 S AY E 1,96 9 1,96 9 – 914 p 20/05/20 01 /08/23 01/ 0 2 / 2 4 Key LTI P T h e Sm i th s Gr o u p Lo n g-Ter m In ce nt i v e P l an 2 0 15. SAYE The Smiths Group Sharesave Scheme. + T h e v es t i ng d at e s sh o w n ab o v e in r e sp e c t of a w a r d s ma d e un de r t he LT IP a r e s ub je c t t o th e r el e v an t pe r for m a nc e te s t ( s ) b ei ng p a s s ed . + + T h e ex p ir y da te s s ho w n a b ov e a pp l y in n or m a l ci r cu m s ta n ce s . Perfor mance tests A LTIP a w a r ds i n 2 0 18 an d 2 019 – 2 5 % su bj e c t to E P S g r o w t h; 2 0 % s ub j ec t t o R O CE ; 2 5% s u bj e c t to c a sh c on v e r si o n; 3 0 % s ub je c t t o or g an i c re v e nu e gr o w th. B LTI P a w ar d s i n 2 0 2 0 – 2 5 % su bj e c t to E P S g r o w t h; 2 5 % su bj e c t to R O CE ; 2 5 % su b je c t to f r e e c a sh -f l o w; 2 5 % s ub je c t t o or g an i c re v e nu e gr o w th . C LT I P aw a r d s in 2 0 2 1 – 2 0 % s ub je c t to E P S gr ow th; 15 % su b je c t to R O C E; 2 0 % s u bj e c t to f r ee c a s h- f lo w ; 3 0 % s ub je c t t o or g an i c re v e nu e gr o w th; 15 % su bj e c t to r e du c t io n in g r e en ho u s e gas emissions. – T h er e a r e n o pe r for m a nc e cr i t er i a fo r t he D ef e r r ed B o nu s S ha r e s a w ar d s or S AYE . Notes – T h e hi g h an d lo w m a r ket p r i ce s o f th e o r di na r y sh ar e s du r i ng t h e pe r i od 1 A u g us t 2 0 2 1 to 2 9 J ul y 2 0 2 2 w e r e 1,6 2 9p a n d 1,3 5 6 p r e sp e c t i ve l y. T he m id - m ar k et c lo s in g pr ice o n 31 J ul y 2 0 21 w as 1, 5 5 5 .5 p a nd o n 2 9 J ul y 2 0 2 2 w a s 1,5 4 3 p. – T h e mi d -m a r ke t cl o si ng p r i ce o f a Sm i th s G r ou p sh a r e on t he d a te of t h e aw ard s m ad e t o Di r ec t or s in th e F Y2 02 2 f i na nc i al y e ar w a s 1, 4 3 5 p ( 5 N o ve m be r 2 0 2 1). – T h e op t io n o ve r 1,5 47 sh ar e s gr ant ed t o an d h el d b y P au l Ke e l at 3 1 Ju ly 2 0 2 2 wer e g r a nte d a t an e xe r ci s e pr ice b el o w t he m ar ket pr ice o f a Sm i th s G ro u p sh ar e o n 17 Ma y 2 0 2 2 (1, 4 5 4p ). Sh ar e s a r e gr ante d i n Ma y b ut t h e s av i n gs p e r io d c om m en ce s i n A ug us t . – T h e op t io n s ov e r 1,969 sh ar e s g r an te d to a n d he l d by J o hn S hi p se y a t 31 J ul y 2 0 2 2 w er e g r a nt ed a t an e xe r ci s e pr ice b e lo w t he m ar ket pr ice o f a Sm i th s G r ou p sh a re o n 2 0 M a y 2 0 2 0 (1, 26 8 p ). Sh ar e s a r e gr ante d i n Ma y b ut t h e s av i n gs p e r io d c om m en ce s i n A ug us t . – N on e o f th e op t io n s or a w a r ds l i s te d ab o v e w as s u bj e c t to a ny p a y me nt o n g r an t . – N o ot h er D ir e c to r s h el d a ny o p ti on s o v er t h e Co m pa n y’s s ha r e s du r i ng t h e pe r i od 1 A u gu s t 2 0 2 1 to 31 J ul y 2 0 2 2 . – N o op t io n s or a w a r ds h a ve b e en g r a nt ed t o or e xe r ci s e d by D i r ec t or s or ha v e l ap s e d du r in g t he p e r io d 1 A u gu s t to 16 S e pte m be r 2 0 2 2 . – A t 31 J ul y 2 0 2 2 , t he t r u s te e of t he E m pl o y ee S h ar e Tr us t h el d 618, 6 62 s h ar e s . T he m a r ke t v al ue o f t he s ha r e s he l d b y th e tr us te e on 3 1 Ju ly 2 0 2 2 wa s £ 9,5 4 5 ,9 5 5 an d al l d i v id e nd s w er e w ai v e d in t he y e a r in r e sp e c t of t h e sh a re s h e ld b y t he t r u s te e. – S p ec i al p r o v is io n s pe r m i t ea r l y ex er c is e o f op ti o ns a n d ve s t in g of a w a r ds i n t he e v en t of r e ti r em e nt , r ed un d an c y, a nd d e at h . REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 83 Share ownership requi rement f or E xecut ive Direc tors E xec ut i ve D ir ec to r s ar e r eq uir ed to b uil d a minim um sh ar eho ld ing e qui v a lent to t he ann ual f i xed nu mb er of sh ar es a w ar d ed un de r the L T IP w it hin f i ve y ea r s . E xe cu ti ve D ir ec to r s ar e r eq uir ed to r et ain a t lea s t 5 0 % of an y net v es te d sha re a w ar d s (af ter s ale s to me et t ax li abil i tie s) u ntil th os e gu ide lin e s ar e ach ie ve d. S har e s un der d efer r e d bo nus a w ar d s and LTIP a w ar ds w h ich h av e ve s ted b ut ar e s ubje c t to a fur th er ho ld ing p er i od ( net of a s sum ed i nco me t ax ) count to w ar d s the r e quir em ent . Aw a r ds th at ar e s til l sub jec t to p er for m anc e con dit ion s do n ot co unt tow ard s the r e quir em ent . E xec ut i ve D ir ec to r s w il l be r eq uir ed to h ol d sha r es e qui v a lent to t heir f ul l in - emp lo y ment s har eh ol din g guid el ine , or ac t ual h ol din g if lo w er , for t w o y ear s pos t-em plo y me nt, in l in e w it h be s t pr a c tic e gui dan ce. T o enfo rc e thi s re qui re ment , v es te d sha re s ar e h eld i n a nom ine e acc ount p ro v id ed b y Sm it hs sh ar e pl a n admi nis tr ator . This p ol ic y appl ie s to A n d y Rey n old s Smi th , w ho s tep pe d do w n f ro m the G ro up du r ing F Y 2 0 21, and Jo hn S hips e y w ho s tep pe d do w n fr o m the G r oup du r ing F Y 2 02 2 . Mr Rey n ol ds S mit h is r eq uir ed to h ol d a numb er of s har e s in th e Co mp any w i th a v a lue at l ea st e qu al to £ 2 , 1 09 , 4 5 0 at 31 Ju ly 2 0 21 unti l at le as t 31 July 2 0 2 3, w hile M r Shi ps ey i s re qui re d to ho ld 5 4,959 sh ar es i n the C om pa ny unti l at le as t 31 July 2 02 4. Shar e s cheme dilution limi t s Th e C omp an y com pl ie s w ith t he gu ide li ne s l aid d o w n by th e Inv e s tme nt A s s oc iati on . T he se r e s tr i c t the i s sue of n e w shar e s un der a ll t he Co mp any ’s shar e sc hem es i n any te n- ye ar p er i od to 10% of t he i ss ue d or din ar y sh ar e c api ta l and u nde r the C om pa ny ’s discr et ion ar y sc hem es to 5 % in a ny ten -y ea r pe r io d. A s at 31 July 2 0 2 2 th e he adr o om a v ail ab le un der t he s e lim it s w a s 8. 2 8 % a nd 3.79 % r e sp ec t i ve ly. E xecutive Direc tors’ sh areholdings (audit ed) Th e t abl e bel ow s ho w s th e sha re hol din g for e ac h E xe cu ti ve D ir ec to r ag ain st t heir r e sp ec t i ve s har eh ol din g re qui re ment a s at 31 July 2 0 2 2 . Di r ec t or a n d P l an Shareholding requir ement Shares owned outr ight Shares su bj e c t to per form ance Vest ed shares in holding period Shares arising from bonus def err al S av e A s Yo u E a r n (SA YE) Current shareholding (% o f requir ement) 1 Shareholding requir ement met Pa ul K e el 18 9, 9 0 0 s h a r e s 25 ,000 3 3 0 ,95 9 0 5,378 1, 5 47 14 . 6% No Clar e Scher rer 91, 3 4 2 s h ar e s 2 5, 000 0 0 0 0 2 7. 4 % No 1 S h ar e s o w ne d o u tr i gh t ( in cl u di n g ve s te d s ha r e s in h o ld in g p er iod ), a n d th e n et o f in co m e ta x v a l ue o f sh ar e s a r i si ng f r o m b on us d ef e r r a l ar e t a ken i nt o ac co u nt f or t h e sh ar e h ol di n g re q ui r em e nt . E x ec u ti v e D ir e c to r s h a ve f i v e y e ar s f r o m th e d ate o f ap p o int m en t to m ee t t he r e qu i re d p e r s on al s h ar e ho l di n g; P au l K ee l h as u nt il 2 5 M a y 2 0 26 a n d Cl a r e S ch e r r er h a s un ti l 2 9 A p r il 2 0 2 7 t o me e t th e r eq u ir e me nt . Th er e ha ve b e en no c han ge s to th e Dir e c tor s’ shar e hol din gs b et ween 1 A u gus t 2 0 2 2 an d 1 6 S epte mbe r 2 0 2 2 . TS R per for mance Th e fo llo w in g gr a ph sh o ws t he C omp an y’s total s har e hol de r ret ur n ( T SR ) p er for m anc e ov er t he p as t ten y ear s comp ar ed to t he F T SE 100 In dex . T h e F TS E 100 I nde x , of w hic h the C om pa ny ha s be en a m emb er th r oug hou t th e pe r io d, ha s be en s el ec te d to ref l ec t th e T SR per for mance of ot he r lea din g UK-l is te d com pa nie s . T he v al ue s of hy p oth etic a l £1 0 0 in ve s tme nt s in th e F TS E 100 I nde x an d Smi th s Gr oup plc sh ar e s at 31 July 2 0 2 2 w er e £187 . 2 5 an d £1 91 .4 4 r es pe c ti v ely. T ot al Shar eholder Return Value of £100 invested on 31 July 2012 Smiths Group FTSE100 2012 2013 £134.58 £129.86 £129.14 £121.19 £131.40 £136.72 £182.50 £195.66 £170.34 £195.53 £175.63 £158.07 £133.74 2014 2015 2016 2017 2018 2019 2022 2021 2020 £220 £200 £100 £120 £140 £160 £180 £149.00 £ 187.25 £178.50 £ 191.44 £176.01 £202.90 £120.21 £100 REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 84 Chi ef E xecu tive’ s r emun er atio n for the last ten years F Y202 2 P Ke el F Y2 021 P Ke el F Y 20 21 A Reynolds Smith FY2020 A Reynolds Smith F Y 2 0 19 A Reynolds Smith F Y2 018 A Reynolds Smith F Y 2 017 A Reynolds Smith F Y 2 0 16 A Reynolds Smith F Y 2 0 16 P Bo w m an F Y 2 0 15 P Bo w m an F Y2 0 14 P Bo w m an F Y2 0 13 P Bo w m an T otal remuneration £000 1, 8 3 2 450 2 ,7 5 3 2 ,1 9 6 4 ,1 3 0 3,25 1 2, 320 2,9 6 4 1, 6 0 2 4 ,19 5 3 ,9 12 3,86 4 Annual bonus outcome (% max ) 39% 76% 70% 17 % 41 % 42% 96% 89% 88% 80% 4 3% 39% Common Inves tment Plan outcome (% m a x ) n /a n /a n /a n /a n/a n /a n/a n /a 10 0 % 10 0 % 10 0 % 10 0 % L TIP outcome (% m a x ) n/a n /a 19 % 31% 75% 32% n/a n/a 18% 17 % 18 % n /a Chief E xec uti ve pay r atio s Th e se r atios s et o ut th e com pa r is on b et wee n the Ch ief E xe cu ti v e’ s re mun er at ion a nd th at fo r emp loy e es i n the U K wo r k for ce. Total remuneration Ye a r Method 25th percentile ratio Me d ia n p ay r ati o 75th percentile r atio F Y2022 Option B 5 8 :1 3 9 :1 2 6 :1 F Y2 0 21 Option B 1 0 5 :1 7 5 :1 4 7 :1 F Y2020 Option B 7 5 :1 5 3 :1 3 4 :1 F Y 2 0 19 Option B 1 3 3 :1 9 7 :1 6 5 :1 Salary Ye a r Method 25th percentile ratio Me d ia n p ay r ati o 75th percentile r atio F Y2022 Option B 2 8 :1 2 0 :1 1 3 :1 F Y2 0 21 Option B 3 5 :1 2 5 :1 17 :1 F Y2020 Option B 3 1:1 2 2 :1 15 :1 F Y 2 0 19 Option B 3 6 :1 2 6 :1 1 8 :1 Sal ar y (£ ) Tota l Re m un er ati on ( £ ) Chief Executi ve 875 ,000 1, 8 3 2 ,1 3 0 25th percentile employee 31, 2 0 0 31, 3 7 5 Median employee 44,000 4 7, 5 0 7 75th percentile employee 64,8 66 69, 4 2 0 Th e p ay dat a fo r emp lo ye e s in th e UK wo r k for ce h as b ee n c alcu l ated u sin g Opt ion B , ba se d on t he dat a us e d for g end er p ay r ep or tin g, due to th e av a il ab ili t y of data at t he ti me th e A nnu al Rep or t w as p ubl is he d. T he g en der p ay r e por tin g b asi s com pr i se s s al a r y and b en efi t s as at 15 Apr il 20 2 2 a nd in centi v e p ay m ent s p ay ab le in r e sp ec t of F Y 2 02 2 . T he C omm it te e co nsi der s that thi s pr o v ide s an o utco me th at is re pr e se ntat i ve of t he em plo y ee s at th es e p ay l ev el s . I t is a ss ume d th at th e v alue o f emp lo ye e be nef it s i s 7 .0% of b as e s al a r y. Th e w or k fo rce r e mune r at ion f ig ur e s ar e tho se p ai d to UK em plo ye e s w ho se p ay i s at th e 25 th , med ian a nd 7 5th p er ce ntile o f pa y for the G ro up’ s UK em plo y ee s . F igu re s ar e sh o w n on bo th th e pr es c r ibe d b asi s us ing tot al p ay a nd al so s al ar y o nly w hi ch pr o v id es a u sef ul ong oin g com pa r is on a s it i s a le s s vo l atil e ba sis . T he to tal r e mune r at ion r atios h av e r edu ce d pr im ar il y due to t he CEO n ot cur rent ly be ing in r ece ipt of LTIP p ay m ent s . T he C omm it te e mo nito r s r at ios o n an an nua l ba sis . Percentage change in D irec tor s’ remuner ation F Y2 0 2 1 to F Y 2 0 2 2 FY2020 t o FY2021 Sal ar y/ Fees Benef it s Bonus S alar y/Fees Ben efit s Bonus Chief Executi ve Of ficer 0% 239% 2 0 4% n/a n /a n/a Chief Financial Of f icer n /a n/a n /a n /a n/a n /a Outgoing Chief Financial Of f icer 2.5% 10 0 % -39% 0% -1. 0 % 308% Non-executi ve Director remuneration 2 .5% 10 0 % n /a% -4.0 % -1 0 0 % n /a Av er age of a ll e mp lo y ee s 2.5% 2.5% -3 4% 0% 0% 2 67 % ‘ All e mpl oy ee s’ is def in ed a s all U K Gr oup e mpl oy e es , 2 0 0 a nd 196 emplo ye es a t all g r ad e s in F Y 2 0 2 2 an d F Y 2 0 21 r es pe c ti v ely. Remun er at ion f or th e Chi ef E xe cut i ve O f fic er w as p r o -r a ted fo r se r vi ce f ro m 2 5 May 2 0 21 - 31 Ju ly 2 0 21 fo r F Y 2 0 21 . REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 85 Re l ative impo r tance o f spend on pay Th e t abl e bel ow s ho w s sh ar eho ld er di st r ibu ti ons ( i .e. di v i den ds a nd sh ar e bu y b ac ks ) an d tota l emp lo ye e pa y ex pe ndi tu re f or F Y 2 0 21 an d F Y 2 0 2 2, a nd th e pe rc ent age c han ge . F Y202 2 £m F Y 20 21 £m Change Sharehol der distribu tions 6 61 18 5 257% Employe e costs - Continuing operations 823 – N /A - T ota l Gr o up ( in cl ud in g Sm it hs M ed ic a l ) 930 1, 0 19 - 8 .7 3 % E xecu ti ve Dir ec tors’ ser v i ce contr a c t s Th e C omp an y’s pol ic y is that E xecut i ve D ir ec to r s ar e no r ma lly e mpl oy ed o n ter m s w hic h inc lud e a one - ye ar r ol l ing p er i od of n otic e fr o m the C om pan y an d six m ont hs’ noti ce f ro m the i ndi v i dua l . T he co ntr a c t inc lud e s pr ov i sio n for t he p ay m ent of a p re dete r min ed s um in th e ev ent of ter minati on of em plo y me nt in ce r tain ci rc um st an ce s (b ut e xclud ing c ir cum s ta nce s w he re t he C omp an y is ent it led to d ism is s w ith ou t com pen s ati on ). In ad dit ion to p ay m ent of b as ic s al a r y, pensi on al lo w an ce an d ben ef it s in r e sp ec t o f the un ex pir e d po r tion of t he one - ye ar no tice p er i od , the p r ed eter mi ne d sum w oul d in clu de an nual b on us an d sha re a w ar d s onl y in r es pe c t of th e per iod th ey h av e se r ved , p ay ab le fo ll ow i ng th e end o f the r el ev a nt pe r for man ce p er io d an d sub jec t to t he n or ma l pe r for man ce co ndi ti ons . Pa ul Ke el i s emp lo ye d und er a s er v ice c ontr ac t w ith t he C omp an y date d and ef fec t iv e f r om 2 5 May 2 0 21. He be c ame a n E xe cut i ve D ir ec to r w ith ef fec t f r om 2 5 May 2 021. Cl ar e S ch er r er i s emp lo ye d und er a s er v ice c ontr ac t w ith t he C omp an y date d 13 Ap r il 2 0 2 2 an d ef f ec ti v e 2 9 A p r il 2 0 2 2 . Sh e be c ame a n E xec ut i ve D ir ec to r w ith ef fec t f r om 2 9 A p r il 2 0 2 2 . Th e s er v ice c ontr act s for both E xecu ti v e Dir e c tor s m ay b e ter min ated b y 12 months’ not ice gi v en b y th e Co mp any o r si x mont hs’ noti ce gi ve n by t he Di re c tor . Th e Co mp any m ay e lec t to te r min ate the c ontr ac t by m aki ng a p ay m ent in l ie u of noti ce e qual to t he D ir ec tor ’s ba se s a l ar y an d ben ef it s ( inc lud ing p en sio n all o w anc e) in r e sp ec t of a ny un se r ve d pe r io d of not ice . T he s er v ice c ontr ac t s cont ain s pe ci fi c pr ov i sio ns e nab li ng a r ed uc ti on in an y ph as ed p a y ment s in l ie u of not ice , in the e v ent th at the D ir ec to r f ind s alter nati ve e mpl oy m ent dur ing the n otic e per iod. T h e se r v ice co ntr act s a re a v ail able fo r v iew i ng at t he C omp an y’s Regis ter e d O f f ice . Leaving and chan ge- of -cont rol prov isions W hen d eter m inin g le av in g ar r angem ent s fo r an E xe cu ti v e Dir e c tor th e Co mmi t tee t ake s into a ccou nt any c ontr ac tua l agr e eme nt s incl udi ng th e pr o v isi ons o f any i ncent i ve a r r an ge ment s , t yp ic al ma r ket pr act ice a nd th e pe r for man ce an d con du c t of the i ndi v i dual . For t hos e in di v id ual s reg ar de d as ‘ b ad le av er s’ (e. g. v olu nta r y re si gnat ion o r dis mis s al f or c au se ), annu al b onu s aw ar d s ar e for fei ted , and out s t an din g aw ar d s und er th e LTIP au tomat ic al ly l ap se . Def er r ed b on us aw ard s ar e for fei ted on d ism is s al fo r c aus e. A ‘ g oo d le av er ’ w ill t y pic al ly r em ain el ig ibl e for a p ro - r ate d ann ual b onu s aw a r d, no r ma lly to b e p aid af ter the e nd of th e f ina nci al ye ar . Th e C ommi t te e re tai ns di sc r etio n to pa y th e bon us e ar ly a nd n ot to app ly def er r a l w her e i t wo ul d othe r wi s e app ly, but w oul d do s o onl y in com pa s sio nate c irc um st an ce s. D efe r re d b onu s aw a rd s sh all c onti nue in f ul l an d ve s t on th e or i gin all y antic ip ated v e st ing d ates . Al ter na ti ve ly, in comp as s ion ate cir cu ms t ance s , th e Co mmi t tee m ay d eter m ine th at aw ard s sho uld v e s t w hen t he p ar tici pa nt cea se s emp loy m ent . Aw a r ds in t he fo r m of opt ion s ma y be e xer cis e d in acc or da nce w i th th e r ul es of t he ap pl ic ab le s ch eme . L T IP aw a r ds w il l t y p ic al ly v es t at th e no r ma l ve s tin g date to th e ex te nt that t he a ss o ciate d pe r for ma nce c ond iti on s ar e met , bu t w ill nor mally b e pr o -r ated on t he b asi s of ac t ual s er v ic e w ith in th e per fo r man ce p er io d. A ny hol din g per iod w il l or din ar il y cont inu e to app ly. Th e C ommi t te e re tai ns di sc r etio n to ve s t the a w ar d b efor e t he en d of th e or ig ina lly a ntic ipa ted p er for ma nce p er i od , and to a s se s s per for mance a cco rd ing ly, and to w ai v e the c ontin uati on of t he h old ing p er i od o r to sho r ten it s ap pl ic ati on , but w o uld d o so o nly in compassionate circumstance s. Ves ted LTIP a w ar ds w h ich ar e s ubj ec t to a ho ld ing p er i od w il l or di nar i ly co ntinu e to be s ubje c t to th e ho ldin g pe r io d, a lth oug h the Co mmi t tee r et ain s dis cr et ion to w a i ve th e co ntinu atio n of th e hol din g pe r io d or to sh or ten it s a pp li ca tio n but w o uld d o so o nly in compassionate circumstance s. In c as es o f de ath or d is ab ili t y , indi v i dua l s ar e au tom atic a lly d ee me d to be go o d lea ve r s un der t he pl an r ule s of th e L T IP . A ll ot her g oo d lea ve r s w il l be d efi ne d at the d is cr eti on of th e Co mmi t te e on a c as e -b y- c a se b as is . In con ne c tio n w ith t he ter minati on of an E xecu ti ve D ir ec to r’s contr ac t, th e C omp an y may m ake a p ay me nt on ac cou nt of acc r ue d bu t unt aken lea ve . T he C omp an y ha s the p o we r to enter into s et t lem ent ag re em ent s w i th Dir e c tor s a nd to p ay c omp en s atio n to set tle pote ntial l eg al cl a ims . In ad dit ion , an d con sis tent w i th m ar ket pr ac tice , in th e ev ent of t he ter m inat ion of a n E xe cu ti v e Dir ec to r , the Co mp any m ay m ake a cont r ibu ti on tow a rd s th at ind i v idu al ’s leg al fe es a nd fe e s for o utp l ace ment s er v i ce s as p ar t of a ne goti ated s et t lem ent . A ny s uch f ee s w il l be di sc lo se d as p ar t of the d et ail of ter m inat ion a r r a nge ment s. In the e v ent of a ch ang e of co ntr ol , LTIP a w ar ds w il l v es t to th e ex te nt tha t eac h of th e per for mance c ond it ion s is m et ba se d on t he C omm it te e’ s as s es sm ent of p er for m anc e ov er th e pe r for ma nce p er i od to th e date of c han ge of c ontr ol . For inter n al p er for ma nce m ea sur e s , the C om mit tee may e xer cis e i t s jud gem ent in d eter m inin g the o utco me b as e d on it s a s se s sm ent of w h ethe r or n ot the p er for m anc e con di tio ns w oul d ha ve b ee n met to a gr e ater or l es s er e x tent at t he en d of th e fu ll p er for m ance p er i od . Aw a r ds w il l al s o no r ma lly b e pr o -r ated to r efl ec t t he ti me th at ha s el ap se d bet we en th e gr a nt of th e aw ar d a nd th e date of c han ge of c ontr o l . T he C omm it te e r eta ins di s cr etio n to v ar y th es e pr o v is ion s on a c as e - by-case bas is. REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 86 Non- executive Direc tor s Single figure of annual remuneration (audited) Sal ar y/fe es Benef it s 1 To t a l FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 FY2 022 £000 F Y 20 21 £000 Sir George Buckley 2 4 61 4 61 47 – 508 4 61 Bruno A ngelici – 24 - – - 24 Oli vier Bohuon – 24 - – - 24 Pa m Ch en g 77 71 - – 77 71 Da me A n n Do w l in g 3 87 71 3 – 90 71 T any a Fr at to 81 71 - – 81 71 Kar in Hoeing 73 71 - – 73 71 Bill Seeger 4 14 6 11 9 - – 14 6 119 Mark S eligman 5 10 0 99 - – 10 0 99 N o e l Ta t a 89 71 - – 89 71 1 B e ne f it s f or t h e Ch ai r m an a n d No n - ex ec u ti v e D ir e c to r s r e l at e to r ei m bu r s e d tr ave l- r el ate d an d ot he r e xp e n se s ( i nc lu d in g f l ig ht c os t s w h e r e ap pl i c ab l e) , w hi c h ar e g ro s s e d- u p fo r t he U K in co m e ta x a nd N a ti on a l In su r a n ce c on tr i b ut i on s p ai d b y th e C om p an y o n th e ir b eh a lf . 2 S ir G e o r ge B uc kl e y ’s fe e is i n r e sp e c t of a l l hi s r e sp o ns ib i li t ie s f or S m it h s Gr o up . 3 D am e A n n D o w li n g’s fe e co m pr i s e d he r N on - e xe cu t i ve D i r ec t or ’s fe e a nd h e r ad d it i on al f e e fo r c ha ir i n g th e S c ie nc e, S u s t ai na b il i t y & E x ce l le nc e C o mm it tee . 4 B il l S e eg e r ’s fe es c o mp r i s ed h i s No n - ex ec u ti v e D ir e c to r ’s fe e, h i s ad d it i on al f e e fo r ch a ir i n g Rem u ne r a ti on & P e op l e C om mi t t ee , hi s a d di ti o na l fe e a s S en i or I nd e pe n de nt D i r ec t or a n d a su pp l em en t ar y fe e p r ov i d ed t o th e C ha ir s o f e ac h of t h e C om mi t t ee s r e l at ed t o th e s a le o f Sm i th s M ed ic a l ( p a y ab l e unt i l 31 J an ua r y 20 2 2 ). 5 M ar k S e l i gm an’s f ee s c om p r is e d h is N o n- e xe c ut i v e Di r e c to r ’s fe e, h is a d di t io na l f ee f o r ch ai r i ng t he A u d it & R i sk C o mm it tee a nd a s u pp l em en t ar y fe e p ro v i d ed t o th e Ch a ir s o f e ac h of t h e Co m mi t te e s r el ate d to t he s a le o f S mi th s M e di c al ( p a y a bl e un ti l 31 J an u ar y 2 0 2 2 ). Non- executive Direc tor fee s Non - exec ut i ve D ir ec to r fee s p aid d ur in g F Y 2 0 2 2 and p a y abl e dur i ng F Y 2 0 2 3 a re s ho w n be lo w. Th e Remu ner ation & P eo ple C om mit te e mad e th e dec isi on to fo cu s mo re o f the F Y 2 0 2 3 sal a r y incr e as e bu dg et on th os e s ec tor s of the w or k fo rc e w ho ar e m or e imp ac te d by cur r ent i nfl ationa r y pr es s ur es . I t w as d eter mi ne d that t he NE D fe e incr e as e sh oul d mir r o r that a w ar d ed to s eni or em plo y ee s an d lo we r than t hat of t he w id er UK w or kfor ce . T he fe e in cr ea se s of 2 .5 % w il l be ef fec ti v e f r om 1 Oc to be r 2 0 2 2. F Y2022 F Y2023 Fe e pa y a bl e to Ch air m an o f th e Bo ar d f or a ll r e s po ns ib il it ie s £46 1 ,250 £ 4 6 6,9 2 0 Non-executi ve Director base fee £7 3,0 30 £ 74 , 8 5 5 Ad di ti on al f ee p a y ab le to t he S e ni or In d ep en de nt Di r ec to r £20 ,000 £20 ,000 Addit ional fee for Commit tee Chair s £20 ,000 £20 ,000 Supplementar y fee 1 £ 1 5,000 £ N /A Attendance allowance for each meet ing outside the Non-executive Direc tor’ s home con tinent £4,000 £4, 000 1 S up p le m en ta r y fe e pr o v i de d to t h e Ch ai r s o f th e A ud i t & Ri s k an d Re mu n er ati on & P e op l e Co m mi t te e s i n re s p ec t o f a dd i ti on a l wo r k lo a d r el a te d to t h e se p ar ati on o f S mi t hs M e di c al f r o m th e p er i o d 1 Fe b r ua r y 20 2 1 to 3 1 Ja nu a r y 20 2 2 . Share o wn er ship guidance for Non- executive Direc tor s Non - exec ut i ve D ir ec to r s ar e en cour age d to acq uir e sh ar es i n the C om pa ny w i th a v alu e of on e tim es t he an nua l ba se f ee, o v er a f i ve y ea r per iod. T h e fi v e y ear p er i od i s fr o m the l ate r of 1 Au gu st 2 0 21 o r the d ate of ap po intme nt to the B o ar d. In a dd iti on , the N on -e xec ut i ve Dir ec to r s ar e en co ur a ge d to ret ai n a sha re hol din g of on e tim es t he an nua l ba se f ee fo r at le as t t wo ye ar s af ter the D ir ec to r le av es the B oa r d. Non-executive Direc tors’ sh areholdings (audit ed) Th e t abl e bel ow s ho w s th e sha re hol din g for e ac h Non - exe cu ti ve D ir ec to r . 31 Ju l y 2 0 2 2 Sir George Buckley 26,591 Pa m Ch en g 6, 000 Da me A n n Do w l in g 5 , 813 T any a Fr at to 1, 5 0 0 Kar in Hoeing 503 Richard Howes 1 - Bill Seeger 1 0 ,000 Mark S eligman 6, 000 N o e l Ta t a 6, 000 1 R ic h ar d H o w es w as ap p oi nt ed a s a n in de p en d en t No n - ex ec u ti ve Di r e c to r w it h ef fec t f r o m 1 S ep te m be r 2 0 2 2 . H e w a s no t a me mb e r of t h e Bo a r d du r i ng F Y 2 0 2 2 . Fol lo w in g thei r qua r ter ly acq uis iti on of O r din ar y Sh ar es , un de r a sha re p ur cha s e agr e eme nt usin g a f ixe d pr op or tio n of th e af ter -t a x fee s re cei v ed f r om t he C omp an y ( 2 0 % ), Sir G eo r ge Bu ckle y ac quir e d 812 share s on 1 A ug us t 2 0 2 2 an d K ar i n Hoe ing a cqu ir ed 21 1 shar e s on 1 Au gus t 2 0 2 2 . T he re h av e be en n o fu r ther c han ge s to the D ir ec to r s’ shar eh ol din gs b et w e en 1 A ugu st 2 02 2 an d 1 6 S eptem be r 2 0 2 2. REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 87 Chair man’ s a nd Non - executi v e Dir ec tor s ’ let ter s of appo intment Th e Cha ir ma n and t he N on- e xec uti v e Di re c tor s s er v e th e Co mp any un de r let ter s of app ointm ent an d do n ot ha ve c ontr act s o f se r vi ce or co ntr a c t s for s er v ic es . E xcept w her e ap po inted at a G en er al Meet ing , Dir e c tor s s t and f or el ec ti on b y sh ar eho ld er s at t he f ir s t A GM fol lo w ing a pp ointm ent . T he B o ar d ha s re s olv e d that a ll D ir ec tor s wh o ar e w ill in g to cont inu e in of f ic e w ill s t an d for r e - ele c tio n by t he shar e hol de r s ea ch y ea r at the A GM . Ei the r pa r t y c an ter m inate t he ap po intm ent on o ne mo nth ’s wr it te n not ice an d no c omp en s atio n is pa y abl e in th e ev ent of a n app oint ment b ein g ter mi nate d ear ly. The let ter s of app oi ntme nt or oth er ap pl ic ab le ag re em ent s ar e a v ail ab le for v ie w in g at th e Co mp any ’s Regis ter ed O f fice . Non-executive Direc tor Da te o f ap p oi nt me nt Sir George Buckley 1 Au gu s t 2 013 Pa m Ch en g 1 Mar c h 2 0 2 0 Da me A n n Do w l in g 1 9 September 201 8 T any a Fr at to 1 Jul y 2 012 Kar in Hoeing 2 A pr i l 2 0 2 0 Richard Howes 1 September 20 22 Bill Seeger 12 May 2 014 Mark S eligman 16 M a y 2 0 16 N o e l Ta t a 1 Jan ua r y 2 017 Statement of sharehol der voting Th e t abl e bel ow s et s o ut th e C omp an y vot ing o utco me of th e ad v i so r y re s olu ti on fo r app ro v al o f the D ir ec to r s’ Remune r ati on Rep or t and the a ppr o v al of th e Di re c tor s’ Remun er ation P ol ic y at t he 2 0 21 A GM: Resolution Vot es f o r % of v ot es ca s t f or Vote s against % of v ot es cast agains t To t a l vot es cast Votes withh eld (abstentions) Direc tors’ Remuneration Repor t 315 ,6 3 3 , 416 9 5 . 8 6% 1 3 , 615 , 3 3 8 4 .1 4 % 3 29 ,248,754 4 6 9, 6 6 5 Direc tors’ Remuneration Polic y 2 82,034,4 58 8 6. 69 % 4 3 , 312 , 0 0 9 13 . 3 1% 325 ,346 ,46 7 4 , 37 1,9 5 2 Adv iser s to the Com mittee Dur i ng th e ye ar , the C ommi t te e re ce i ve d mater ial as si st an ce an d ad v ic e fr om t he Ch ief E xe cu ti v e O f f ic er , the Chief P eo ple O f fic er , the Glo ba l Rew a r d Dir ec to r , Deloi t te L L P an d Fr es hfi el ds Br u ck hau s De r ing er L L P . T h e Co mmi t tee’s appointe d in dep en dent r em une r ati on ad v is er i s De loi t te L L P . T he C om pa ny S e cr eta r y is s ec ret ar y to th e C ommi t te e. Th e C omp an y pai d a tot al fe e of £1 67 , 8 0 0 to Delo it te L L P in r e l atio n to r emun er a tio n ad v ic e to the C om mit tee dur in g the y e ar . Fee s wer e deter m ine d on t he b asi s of tim e an d exp en se s . Dur i ng F Y 2 0 2 2 , De loi t te L L P pr o v id ed th e C ommi t te e w ith i nfor m ati on on m ar ket , comp l ianc e sup po r t for thi s ye ar ’s Dire c tor s’ Remuneration Repor t , adv ice on remuner ation of the incoming Chief Financial Of ficer , the shareho lder consultation proce ss and the p ro v is ion o f othe r ad v ic e r el atin g to r emun er ation g ov er n anc e and m ar ket pr ac tice . De loi t te L L P is a f oun din g mem ber o f the Remun er at ion C on su lt ant s Gr o up and a s ign ator y to it s C o de of C on duc t . D elo it te L L P p ro v id ed a ddi ti ona l ta x ad v i so r y se r vi ce s inc lud ing glob al c or p or ation t ax c omp li anc e and e mpl oy ee m ob il it y ad v ice, a s we ll a s com pa ny s ec r eta r ial , inte r na l audi t co - so urc e, tr ans ac t ion and c ons ult an c y s er v ice s . T he C om mit tee is s ati sf ie d th at the a d v ice p r ov i de d by D elo it te L L P i s obj ec t i ve an d in dep en dent a nd th at the y do not h av e co nne c tio ns w i th th e Gr ou p that m ay i mp air th eir in dep en de nce . Summar y of Remuner ation Pol ic y Full d et ail s of t he Rem une r ati on P ol ic y f or E xe cu ti v e Dir e c tor s , w hi ch w a s app ro v ed b y sha r eho ld er s at t he A GM on 17 Nove mbe r 2 0 21, ar e set o ut o n the C om pa ny ’s websi te and i n the 2 0 21 A nnual Rep or t an d Acc ount s o n pa ge s 1 1 2 to 1 19 . Th e Di re c tor s’ Remun er ation Rep or t ha s be en ap pr o ve d by t he B oa rd a nd si gne d on i t s be hal f by : Bill Seeger CH A IR M A N O F T HE RE MUNE R A T ION & P EO PL E C OM MI T TE E 22 S eptember 202 2 REMUNER A TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 88 Comm it tee m embershi p and mee ti ngs Th er e w er e thr e e sc he dule d me eti ngs d ur in g the y e ar . T h e m e m b e r s of the C om mit tee, the ir bi ogr aphie s a nd at ten da nce at m eet ing s dur in g th e ye ar c an b e foun d on p ag e 5 8 , 59 an d 6 3 . Th e Chi ef E xe cu ti ve O f fic er , Chief Su s tai nab il it y Of fice r and Gr oup O pe r at ion al E xce ll enc e Dir e c tor at ten de d ev er y m eeti ng . O the r mem ber s of seni or m ana gem ent w er e in v ited to a t tend as neces s ar y . Commit tee p er for mance ev aluation Th r oug h the a nnu al Bo ar d e v alu ati on pr o ce s s ( pa ge s 6 4 a nd 6 5 ), the B oa r d conf ir med th e ef fe c ti v en es s of t he C omm it te e in it s r o le of sup po r ting th e Bo ar d in c omp li anc e w ith i t s r emi t. Com mit tee ac tiv i tie s Th e ma in topi c s co nsi der e d at Co mmi t te e mee tin gs w er e as fo ll ow s: Sc ience Joh n Cr an e, S mit hs D etec t ion a nd F le x- T ek u pd ated th e Co mmi t tee o n the ir ne w pr o duc t d ev el opm ent ( NP D) pr o ce ss e s and p ipe li ne s and h o w tech no log y, inn ov at ion a nd su s ta inab il it y wer e in fl uen cin g the ir ne x t ge ner ation of p r odu c t s . In Jul y the Commit tee visited Flex- T ek’s oper ations in Por tl and, T enne sse e, and e xp er i ence d th e ne w P y th on l in e set s a t fi r s t-hand . Und er s t and ing e ac h of the d i v isi ons’ NP D pr oc es s e s fr o m ide ati on to comm er ci ali s ati on of ne w p ro du c t s in sup po r t of the Gr o up’ s Gr os s V i t al it y KP I h as b een i mpo r tant . T he C om mit tee ar e high ly eng ag ed in t his ar e a an d ar e exci ted b y the p r od uc t op po r tunit ie s in the N PD p ipe li ne an d by w a y s in w hi ch th e de ve lop ment processes can be expedited . Sust ainabilit y Smi th s ne w Chief S us t ain abil i t y O f fic er jo ine d th e bus ine s s in Jan uar y 2 0 2 2 an d le d the d ev el opm ent of th e ne w su s tai nab il it y st r ate g y w hic h w as ap pr o ve d by t he B oa rd d ur in g the y e ar . Se e p ag e 27 f or a su mmar y of t he s tr ateg y. The C om mit tee re cei v ed r e gul a r upd ate s on th e de ve lop ment a nd im ple ment ati on of the s tr ateg y an d ho w the d i v isi on s we re d r i v ing s us t aina bil it y in the ir bu sin es s e s and e mb ed ding i t in th eir n ew p r odu c t pip el ine . T he C omm it te e cont inu ed to m oni tor pr o gr e ss aga ins t S mit hs su s ta inab il it y metr i c s inc lud ing G HG emi s sio ns , renew able elec tr icit y, energy ef ficienc y , water use and waste disp os a l . T he C omm it te e mo nito r ed pr o gr e s s tow a rd s s et tin g Sc ien ce B as ed Target s to a chi ev e Net Ze ro t hr ou gh th e SB T i. Th e C ommi t te e app r ov ed t he ne w S us ta ina bil it y at Smi th s Repo r t w hich w i ll p ro v id e st ake hol de r s w it h an enh anc ed un de r s ta ndi ng of Smi th s app r oa ch to E S G. T he r ep or t c an be f oun d on o ur website w w w.smiths .com. E xcell ence Th e Gr o up Op er ationa l E xce lle nce D ir ec to r at ten de d eac h Co mmi t tee m eet ing to r ep or t on th e Sm ith s E xce ll ence S y s tem ( SE S ). T he C ommi t te e we re u pd ated o n the r ol lo ut a nd em be ddi ng of pha s e t w o of S E S and h o w the b usi ne s s is t ar get ing e xcel len ce thr ou gh r e sult s - or ie nta ted pr o ce s s imp ro v eme nt s and t he conti nuin g de ve lop me nt of our t al ented p eo pl e. SE S supp or ts our ab il it y to inno v ate an d del i v er ne w tec hn olo g y for c us tom er s . It al so sup po r ts t he exe cu tio n of ou r sus t ain abil i t y a nd Net Ze r o st r ate gie s . T he C omm it te e w as p r ov id ed w i th d eep - di v e s on S E S fr om F l ex- T e k w hic h dem on st r ate d ho w SE S w as bein g em be dde d in the business. Chair’ s St atement I am pl eas ed t o pre s ent ou r fir s t S cien ce, Sus t ain abil it y & E xcelle nce ( S SE ) Co mmit te e Repo r t . S SE ar e cr iti ca l elem ent s in t he exec utio n of our s tr a teg y. Refl ec ti ng th e imp or ta nce an d co mmi tme nt to thi s topi c, th is y ear the B oa r d app r ov ed t he cr e atio n of th e S SE C om mit tee to pr ov i de the B oa r d w ith e nha nce d ov er sight of S S E mat te r s in clu ding the G ro up’ s inn ov a tio n and n ew p r odu c t de ve lop me nt pr oc es s , env ir o nme nta l and s us t aina bil it y per for mance, a nd th e em be ddin g and deli ver y of operational excellence thro ugh the Smiths E xcellence Sy s tem . Whe n es t abl i shin g the C om mi t tee, t he B oa r d ens ur ed t hat mem ber s bro ught a r ange of e xp er i enc e on th e S SE r e l ated top ic s that f al l w it hin th e C ommi t te e’ s re mit . I ha ve h ad a ke en inter e s t in engineer ing excellence, innov ation and sustainabil it y thr oughout my c ar ee r inc lud ing l ea der ship r ole s a s Hea d of th e En gin eer ing Dep ar tm ent at th e Uni v er s it y of Cam br i dge a nd a s Pr e sid ent of t he Roy al A c ad em y of En gin eer ing. T hi s inter e st c onti nue s th r oug h my cur r ent p os it ion s as D epu t y Vi ce Ch anc ell or an d Em er i tus P r ofe s s or of Me cha nic al E ngi ne er in g at C amb r id ge. I w a s a me mb er of bp p lc’s S afet y and Su s ta inab il it y Com mit tee until Ma y 2 0 21. I am del i ghted to b e joi ne d on th e Co mmi t tee b y S ir Ge or g e Buckl ey, P am Che ng an d K ar i n Ho eing . Si r Ge or ge h as e x ten si v e exp er i enc e of le adi ng l ar g e inn ov at i ve m ulti nati on al gr oup s w hic h has b ee n in st r ume nta l in ou r con sid er ation of m at ter s r el ating to ne w pr od uc t de v elo pme nt. P a m br in gs c hal len ge to o per ation al excel len ce f r om he r ro le a s E xe cu ti ve V ice- P re si dent , O per ation s and Inf or m atio n T echn olo g y at A str aZene c a plc . F in al ly, Ka r in’ s cur r ent e xec ut i ve ex p er ie nce a s Gr ou p E S G, Cult ur e an d Busi ne s s T ra ns for mation D ir ec to r at B A E Sy s tem s plc h as b ee n inv a lua ble a s we h av e de vel op ed o ur su st ai nab ili t y str ateg y and p r io r it ie s. We a re al s o al l mem be r s of th e Remun er ation & Pe op le C omm it te e and wer e d el ighte d to be a ble to r e com men d the i ntr od uc ti on of key a nd st re tchin g sus t ain abil i t y m ea sur e s into ou r inc enti v e ar r angem ent s in sup por t of Sm it hs s tr ateg y. O v er th e nex t year , I loo k for w a r d to the C om mit te e’ s cont inu ed ov er s ight of S mit hs S S E ag en da, i ncl udi ng f ur the r pr es ent at ion s fr om our di v i sio ns a nd Gr o up ex pe r ts . I am exc ite d by t he op po r tunit ie s pr es ente d b y the in no v ati on an d ne w pr o duc t s w e ha ve i n the p ipe li ne to supp or t our g r ow th s tr ate g y. I wou ld l ike to tha nk my c ol lea gu es on th e Co mmi t tee f or th eir co ntr ib ut ion s dur i ng th e ye ar an d I lo ok for w ar d to c ontin uin g our w or k i n F Y 2 0 2 3. Dame Ann Dowling C HAIR O F TH E SC IE NC E , S UST AINAB I LITY & E XC ELLEN CE CO MM ITTEE S CIE NCE , S U ST AI NAB I LI T Y & E XCEL L E N CE C O MMI T T E E REP OR T 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 89 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 O the r infor mation t hat i s re le v ant to th e Dir e c tor s’ Repo r t, and w h ich i s al s o in cor por ate d by r ef er enc e, c an b e foun d as f oll o ws: Disclosure Location L ikel y f ut ur e de v el op me nt s in t he C o mp an y St r ate gi c Rep or t p ag e s 5 to 2 3 Director s’ div idend recommendation Str ateg ic Re po r t pa ge 15 Research and develop ment activ ities Str ate gi c Rep o r t pag e s 17 to 20 Em pl oy m ent o f di s ab le d pe r s on s Su s ta in abi l it y at Sm it hs p a ge 3 3 Engagement with UK employee s Sus t ai na bil i t y a t Sm it hs p a ge 3 2 Engagement with supplier s , customer s and others in a busines s relationship with the company Su s ta in abi l it y at Sm it hs p a ge s 4 1 to 4 4 Political donations and expenditure Political donations page 9 1 Greenho use gas emissions, ener gy consumption and energ y efficienc y Su st a ina bi li t y at Smi th s p ag e 3 0 Cor por ate Gover nance Statement G o ve r na nc e Rep or t p ag es 5 6 to 92 Dir e c to r s du r in g F Y 2 0 2 2 Go v er n an ce Re po r t pa ge s 5 8 a nd 5 9 Director appointmen t Go v er n an ce Re po r t pa ge 6 8 Amen dment of Ar ticles of As sociation G ov er nanc e Rep o r t pag e 6 8 Indemnities Go v er n an ce Re po r t pa ge 6 3 Change o f control Remuner ation Repor t page 86 Bo r r o w in gs an d n et de bt n ote p ag e 14 1 Direc tors’ Responsibilit y Statement Statement of Direc tors’ responsibil ities page 92 Disclosure of in formation to the auditor Statement of Direc tors’ responsibil ities page 92 Financial Instr uments Fin anc ia l r is k ma na ge me nt n ote p ag e s 142 to 14 8 Share capital disclosures Sh ar e c ap it a l note p a ge 15 5 Ac qu is it io n of o w n sh ar e s ( sh ar e b u y ba ck p r og r a mm e) Sh ar e c ap it a l note p a ge 15 5 Director s’ Power s Go v er n an ce Re po r t pa ge 5 7 Sh ar e c ap it a l note p a ge 15 5 Po st B a l an ce S he et E ve nt s Po st B a l an ce S he et E ve nt n ote p ag e 16 3 Ov erse as branches Su bs idi ar y un de r tak in g s note p a ge 18 6 Th e Str ategic Re po r t is a re quir e ment of t he C omp an ie s Ac t 2 00 6 (th e ‘ Ac t’ ) an d c an be f oun d on p ag es 5 to 5 5 . T he C om pan y ha s cho se n, in a cco r dan ce w it h se c ti on 4 14C(1 1 ) of the A c t , to inc lud e cer tai n mat te r s in i t s Str ategic Rep or t tha t wo uld ot her w i se b e dis cl os ed in t his D ir ec to r s’ Repor t . T he St r ate gic Rep or t and the D ir ec to r s’ Repor t tog ethe r ar e th e man age ment r e po r t for the p ur p os es o f Rule 4 . 1 .8 R of th e Di sc los ur e Gui dan ce an d T r an sparenc y Rules. DIRE CTOR S’ REP OR T 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 90 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Lis ting Rules Disclosure Infor m ati on r eq uir ed b y th e F ina nci al C ond uc t A uth or i t y’ s L is ti ng Ru le s c an be f oun d as s et ou t be lo w. Th er e ar e no f ur th er di sc los ur e s re qui re d in a ccor d anc e w ith L i st ing R ule 9 .8 R . Listing Rule Disclosure Location 9 .8. 4R(1 ) Capitali sed i nt erest Discontinued operations note page 1 57 9 .8. 4R(1 2 )(1 3) Divid end wa iver D i v id en d n ote p ag e 156 9 .8.6R(1 ) Dire ctors ’ int erests Re mun er atio n Rep o r t pag e s 8 4 a nd 8 7 9 .8.6R( 2) Major shareholder s’ in teres ts Table o n p ag e 91 9 .8.6R(3)(a)(b) Go in g Co nc er n a nd V iabi l it y Sta tem ent Str ateg ic Re po r t pa ge 5 4 9 .8.6R(4 )(a) P ur c ha se o f o w n sh ar e s Sh ar e c ap it a l note p a ge 15 5 9 .8.6R(5 )(6)(a) and (b) UK Cor por ate Gover nance Code complian ce G o ve r n anc e Rep o r t pag e 5 6 9 .8.6R(7 ) Un ex pi re d te r m of S e r vi ce C on tr a c t Remuner ation Repor t page 86 9 .8.6R(8)(a) Stat ement on inclusion o f TCFD S u s ta in abi l it y at Smi t hs p ag e 3 5 9 .8.6R(9) B o ar d d i ve r s it y tar g et s G o ve r na nc e Rep or t pa g e 67 Poli tic al donati ons Th e Gr o up did n ot gi v e any m on ey fo r po li ti ca l pur p os e s in th e UK , t he E U or o ut si de of t he E U, nor d id it m ake an y pol i tic al d on atio ns to pol i tic al p ar tie s o r othe r po li tic a l or gan is ati on s, o r to any i nd epe nd ent el ec ti on c an did ates , o r inc ur any p ol i tic al e xp en dit ur e dur i ng the y ea r . In accor da nce w i th th e US F ed er a l Ele c ti on C amp ai gn A c t, S mit hs p ro v id e s admi nis tr ati ve s upp or t to a fed er a l Pol i tic al Ac t ion C om mit tee (PAC ) in the U S f und ed b y th e vo lunt ar y p ol iti c al co ntr ib uti on s of el igi ble e mpl oy ee s . T he PAC i s not c ontr o lle d b y the C om pan y an d all d ec isi on s re ga r ding t he am ount s and re ci pie nt s of cont r ibu ti ons a r e dir ec te d by a s te er in g co mmi t tee c omp r isi ng Go ve r nme nt Rel ati on s emp lo ye es a nd r ep or ted to al l el ig ible to c ontr ibute to th e PAC. C ontr i bu tio ns to p ol iti c al or g anis a tio ns r ep or ted b y the PA C dur in g F Y 2 0 2 2 tot all ed $ 8,0 00 ( F Y 2 0 21 : $ 3 0 ,5 0 0). Major shareh older’ interes t s A s at 31 Ju ly 2 0 2 2 , the C om pa ny ha d be en n oti fi ed un de r the F in an cial C on duc t A u tho r it y’s Dis clo sur e G uida nce & T r an sp ar en c y Ru le s , or ha d r ece i ve d dis cl os ur es p ur s uant to th e Co mp ani es A c t 2 0 06, o f the fo ll ow i ng h old ing s of vo tin g r ight s i n it s sh ar e s: Number of voting rights Number of voting rights % o f to t al v o ti ng r i g ht s Date of notification BlackRock , Inc. 23. 3m 5 .9 31 Ma y 2 018 Amer ipr ise Financial, Inc. 20.8m 5.3 3 Oc to be r 2 018 Ar temis I nve stment Management LLP 19. 8 m 5.0 14 Ap r il 2 0 2 0 Harr is A sso ciates L.P . 19. 7 m 5.0 2 2 Ju ly 2 019 Do dg e & C ox 19. 2 m 5.0 1 2 Ma r ch 2 0 2 2 Jupiter As set Management 14. 8m 3.8 22 September 201 6 No f ur ther n oti fi c atio ns w er e r ec ei ve d be t w ee n 1 Au gu st a nd 16 Septem be r 2 0 2 2 B y or de r of th e Bo ar d Mat th ew W hy te CO M P ANY SE C RET ARY 22 S eptember 202 2 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 91 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 Statement of Dir ec tor s ’ r e spon sibil itie s in respect of the Annua l R epor t and the financial st atements Th e Di re c tor s a r e re sp on sib le fo r pr ep ar in g th e A nnu al Rep or t, incl uding a Strat egic R eport, Directors’ Repo r t, Directors’ Remuneration Repor t and Cor por ate Gover nance Statement, and t he Gr o up an d Pa re nt Co mp any f in anc ial s t atem ent s in accordance w ith applic able l aw and regul ations . Co mp any l a w r equ ir es t he D ir ec tor s to pre pa re G r oup an d P ar ent Co mp any f in anc ial s t ateme nt s for e ac h fin an cial y e ar . Under t hat l aw th e Dir e c tor s h av e ele c te d to pr ep ar e the G r oup f in anc ial st atem ent s in a cco rd anc e w ith i nter na tio nal a cco untin g st an da rd s in conf or mi t y wi th th e re qui re ment s o f the C om pa nie s A c t 2 0 0 6 and a ppl ic ab le l a w an d hav e el ec te d to pr ep ar e th e Pa r ent Co mp any f in anc ial s t ateme nt s in acc or da nce w i th UK a cco untin g st an dar d s and a ppl ic a ble l a w ( UK G ene r al ly A cce pted A cco unti ng Pr act ice ), inc lud ing F R S 101 ‘Redu ced D is cl osu re Fr ame wo r k . ’ Und er co mp any l a w th e Dir e c tor s mu s t not ap pr o ve th e f ina nci al st atem ent s un le s s the y ar e s ati sf ie d th at th ey gi v e a tr u e an d fa ir v iew o f the s t ate of af fair s of the Gr ou p and t he P ar ent C om pa ny and of t hei r pr of it o r los s fo r th at per iod. I n pr ep ar in g ea ch of t he Gr oup a nd P ar ent C om pa ny f ina nci al s tate ment s , t he Di re c tor s are requ ired t o: – S el ec t s uit ab le ac cou nting p ol ic ie s an d the n app ly them consistently; – Ma ke jud gem ent s an d e st imate s th at ar e r ea so nab le, r el ev a nt, reliab le and prud ent; – F or th e Gr oup f in anc ial s t atem ent s , st ate w h ethe r app li c abl e UK-ad opte d inter n ati ona l acc ounti ng s t and ar ds h av e be en fol lo we d fo r the gr o up f ina nci al s tate ment s; – F or th e Pa r ent C omp an y fi nan cial s t atem ent s , s tate w h ethe r app li ca ble U nite d K in gd om A cco untin g St and ar ds h av e be en fol lo we d su bje c t to any m ater i al de par tu re s di sc lo se d and exp l ain ed i n the P ar e nt Co mpa ny f in anc ial s t ateme nt s; – A ss e ss t he G ro up an d P ar ent C omp an y’s abil it y to conti nue a s a goin g co nce r n, di s clo sin g, a s app li c abl e, mat ters r e l ated to going concern; and – Us e th e go ing c once r n b asi s of acc ount ing u nle s s th ey ei th er intend to l iq uid ate the G r oup o r the P ar e nt Co mp any o r to cea s e ope r at ion s , or ha ve n o r eal i st ic alte r nat i ve b ut to do s o. Th e Di re c tor s a r e re sp on sib le fo r keep ing a de quate a cco untin g re co rd s th at ar e su f f ic ient to sh o w and e xp l ain th e P ar ent Company’s tr ansac tions and disclose with reasonable accurac y at any t ime t he f ina nci al po si tio n of the P a re nt Co mp any a nd ena ble t hem to e nsu re t hat i t s fi nan cia l st atem ent s co mp ly w it h the C om pan ie s A c t 2 0 0 6 an d, a s re ga rd s th e Gr oup f in anc ial st atem ent s , A r tic le 4 of th e I A S Regul at ion . T he D ir ec tor s are al s o r es po nsi ble f or su ch inter nal cont r ol as t he y deter mine is nec es s a r y to enab le th e pr ep ar ation of f in anc ial s t atem ent s th at ar e fr e e fr om m ater i al mi ss t atem ent , w heth er du e to fr aud or er r or an d ha ve a g ene r al r e sp on sib il it y for ta kin g su ch s teps a s ar e re as on abl y op en to th em to s afe gua r d the a s set s o f the G r oup and to p re v ent an d dete c t fr aud an d othe r ir r eg ul ar i ti es . Th e Di re c tor s a r e re sp on sib le fo r the m ainten anc e and i ntegr i t y of the corpor ate governance and financial in form ation included on th e Co mp any ’s webs ite. L eg isl ation in t he Uni ted K ingd om go ver ning th e pr ep ar ation an d dis s em inati on of t he f ina nci al st atem ent s ma y di f fe r fr o m leg isl a tio n in oth er jur i s dic ti on s. In accordance with Disclosure Guidance and T r ansparenc y Ru le 4. 1 . 1 4R , th e fi nan cial s t atem ent s w il l for m p ar t of th e ann ual financial repor t prepar ed using the single electronic repor ting for m at und er th e T r ans pa re nc y Dire c ti v e Eur op ea n Sin gle Elec tronic Format (‘E SEF ’ ) Regulation. The auditor’ s repor t on th es e f ina nci al s tate ment s p r ov i de s no a s sur ance o ver t he E SE F for m at . Direc tors’ respon sibilit y st atement Ea ch of t he Di re c tor s (w ho a re l is te d on p ag es 5 8 and 59 ) conf ir m s that to t he b es t of hi s or h er kn o w le dge: – T h e fi nan cial s t atem ent s , w hic h ha ve b ee n pr ep ar ed i n acco r dan ce w it h the a ppl ic a ble s et of a cco untin g s tan da r ds , gi ve a tr ue a nd f air v i ew o f the a s set s , l ia bil it ie s, f in anc ial p os iti on an d pr of it o r los s of t he C omp an y and t he un de r tak ing s inc lud ed in the consolidation taken as a whole; – T h e Str ategic Rep or t and G r oup D ir ec to r s’ Repor t, to get her t he man age ment r e por t , inc lud es a f ai r re v ie w of th e de ve lop me nt and p er for m anc e of the b us ine s s and t he p osi ti on of th e Co mp any an d th e und er tak in gs in clu de d in th e con so l idat ion take n as a w ho le, to get her w i th a d es cr iption o f the p r inc ip al r isk s a nd un cer tai ntie s th at th ey f ac e; and – A s at the da te of thi s A nnu al Rep or t and f in anc ial s t ateme nt s, the re i s no r el ev a nt aud it info r mat io n of w hic h the C om pan y ’ s audi tor i s una w ar e. E a ch Di re c tor h as t aken al l th e ste ps h e or she s hou ld ha v e take n as a Di re c tor i n or de r to make him s elf o r her self a w ar e of an y r ele v ant a udi t info r mati on an d to e st ab li sh that t he C omp an y’s audi tor is a w ar e of t hat inf or ma tio n. We con sid er th e A nn ual Rep or t and f in anc ial s t atem ent s , ta ken as a w ho le, i s f air , bal an ce d and u nde r s ta nd abl e and p ro v id e s the infor mation n ec es s a r y for sh ar eh old er s to a s se s s th e Gr ou p’ s pos it ion a nd p er for ma nce , bus ine s s mo de l and s tr ateg y. Sig ne d on be hal f of th e Bo ar d of D ir ec to r s: Paul Keel Clare S cherrer CHIE F E XEC U T I V E O F F ICE R CH IEF F IN A NCI A L O FF I CE R 22 S eptember 202 2 01 OVE RVIEW 02 ST RATEGIC REPORT 03 GOVERNA NCE 04 FI NANCIAL ST A TEM ENTS 92 SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 INDE P E ND E N T AUD I TOR ’S R E P O R T to t he mem bers of Smit hs Group p lc Ind epe nd ent au dito r’s rep or t 9 3 Co ns ol id ated pr imar y s tate ment s Consol idated income st atemen t 1 0 3 Conso lidated statement of compreh ensiv e income 104 Consol idated balance sheet 1 05 Co ns ol id ated s t ateme nt of cha ng es i n equ it y 106 Consoli dat ed cash-fl ow sta tem ent 107 Accounting policies 108 Note s to the a cco unt s 1 Se gme nt info r mati on 1 1 6 2 Ope r ati ng co s t s 120 3 Non -s tat uto r y pr of it m ea sur e s 1 21 4 Net f inan ce co s t s 1 2 3 5 Ear nings p er s har e 1 24 6 T axat ion 124 7 Emp lo ye e s 1 27 8 Retir eme nt ben ef it s 1 2 8 9 Emp loy e e sha re s ch eme s 1 3 3 10 Inta ngi ble a s set s 134 1 1 Imp air m ent te st ing 135 1 2 Pr op er t y, pl ant a nd e quip me nt 137 13 Rig ht of us e as s et s 1 3 8 14 F inan cia l as s et s – oth er in ve s tme nt s 138 1 5 Inv entor ies 1 3 8 1 6 T ra de an d oth er r ec ei v ab le s 139 1 7 T ra de an d oth er p ay a ble s 140 18 Bor ro w ing s and n et de bt 140 1 9 F inan cia l r is k man age me nt 142 2 0 Der iv ati v e f ina nci al in st r um ent s 148 21 Fair v al ue of f ina nci al in st r um ent s 1 5 0 2 2 Co mmi tme nt s 1 51 2 3 Pr o v isi on s and c ontin ge nt li abil i tie s 1 5 1 24 Sha re c a pit al 155 25 Div idends 1 56 26 Re se r ve s 1 5 6 27 D is cont inu ed o per ation s an d bus ine s s es h eld f or s al e 1 57 2 8 Ca sh -f lo w 1 59 2 9 A l ter nat i ve p er for m anc e me asu re s an d key pe r for ma nce in dic ato r s 160 3 0 P os t B al an ce Sh ee t Ev ent s 1 6 3 31 Au dit e xempt ion t aken f or su bsi diar ies 1 6 3 Unau di ted f i ve - ye ar Gr o up f ina nci al r ec or d 164 Unau di ted U S dol l ar p r ima r y st atem ent s 165 Smi th s Gr oup p lc C omp an y acc ount s Compan y balance she et 1 71 Co mp any s t ateme nt of ch ang es i n eq uit y 1 72 Co mp any a ccou ntin g po li cie s 1 73 Note s to the C om pa ny ac count s 1 7 6 Subsidiar y under tak ings 1 8 0 0 4 Financ ial s tatement s 9 3 -1 8 7 1 Our opinio n is unmo dif ied We hav e au dite d th e fi nan cial s t atem ent s of S mit hs G ro up pl c (“ th e Co mp any ” ) for t he y ear e nd ed 31 Jul y 2 0 2 2 w hic h com pr i se the c ons ol i dated i nco me s t ateme nt, c ons ol id ated s t atem ent of comprehensi ve income, consolidated balance sheet, consolidated st atem ent of c han ge s in e qui t y, con so li date d c ash -f lo w s tate ment , Co mp any b al an ce sh eet , C omp an y s tate ment of c han ge s in e qui t y, and t he r el ate d note s , inc lud ing t he ac count ing p ol ic ie s on p ag es 108 to 1 1 5. In our opinion: – the f ina nci al s ta tement s giv e a tr u e and f ai r v ie w of th e st ate of the G ro up’ s an d of the P a re nt Co mp any ’s af fa ir s a s at 31 July 2 0 2 2 and of t he G ro up’ s pr of it f or th e ye ar th en en de d; – the Gr o up f ina nci al s tate ment s h av e be en p ro pe r ly pr ep ar ed i n acco r dan ce w it h UK-a dop ted inte r nati on al acco unti ng s t and ar ds; – the p ar ent C omp an y f inan cia l st atem ent s h av e be en p ro pe r ly pr ep ar ed i n acco r dan ce w it h UK ac count ing s t an dar d s, i ncl udin g FR S 101 Redu ce d Dis cl os ur e Fr am ew or k; and – the f ina nci al s ta tement s have b ee n pr ep ar e d in acc or da nce w i th the r e quir em ent s of t he C omp ani e s Ac t 2 0 06 . Basis f or opinion We con duc te d our a udi t in ac cor da nce w i th Inte r nat ion al Sta nd ar ds o n Au dit ing ( UK ) ( “I S A s (UK )” ) an d app li ca ble l aw. Our re sp on sib il iti es a re d e sc r ib ed b elo w. We be li ev e that t he au di t ev id en ce we h av e obt ai ne d is a su f f ic ient a nd ap pr op r iate b as is fo r our op ini on . Our a udi t opi nio n is co nsi s tent w it h our r ep or t to the Au dit & R isk C om mit tee. We wer e f ir s t a ppo inte d as au dito r by t he sh ar eh ol der s o n 13 Nove mbe r 2 019 . T he p er i od of tot al un inter r upted en ga gem ent is for t he th r ee f in anc ial y ear s ende d 31 July 2 0 2 2 . We h av e fulfil led our ethical responsibil ities under , and we remain ind epe nd ent of th e Gr ou p in acc or da nce w i th , UK ethi c al re qui re ment s i ncl udi ng th e F RC Et hic al S ta nd ar d as ap pl ie d to li ste d pub l ic inter e s t enti tie s . No n on -au dit s er v ic es p r ohib ite d by that S ta nda r d we re p r ov id ed . INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 93 Recove r abi lit y of goo dw i ll in re sp ec t of the Smit hs Dete c tion c a sh ge ner a ting u nit (C GU) (Gr oup) (£ 6 4 4 mill ion ( 2 021 : £6 1 0 milli on)) Ref er to p ag e 71 ( A udi t & Ris k Com mit te e Repo r t ), p age 108 (a ccounti ng po lic ie s) and page 1 35 (financial disclosures) Risk vs 2021 : increase The r isk – sub jec tive estimat e and forecast based ass essment Th e Gr o up ho lds a s ign if ic ant a mou nt of go od w il l , e sp eci all y in r el at ion to the S mit hs D etec t ion c a sh ge ner ating u nit ( CG U). T h e v alu e in us e ca lcu l atio n for t he S mit hs D etec t ion C GU, w hi ch r epr e s ent s the e s tim ated r e co ver able a mou nt, i s subj ec t i ve du e to the i nhe r ent uncer taint y involv ed in fore c astin g and disco unting es timated fut ure ca sh f lo w s ( sp ec if ic al ly th e key a s sump tio ns - di sc ount r ate, pr oje c ted cos t inf l ati on an d 5 - ye ar r ev en ue gr o w th r ate). A s p ar t of our r isk as s es s ment , w e deter m ine d th at the v a lue i n us e of the C GU h as a h igh d egr e e of e st imat ion u ncer t aint y , w it h a potent ial r ange of r e as on abl e outc ome s gr e ater th an ou r mater iali t y for th e f inan cia l s tate ment s a s a w ho le, an d po s sib ly ma ny tim e s that a mou nt. Th e f ina nci al s tate ment s ( no te 1 1) dis cl os e the s en si ti v it y es ti mate d by m ana gem ent . T he s e dis cl osu re s gi v e r ele v ant i nfor m ati on ab ou t the e s tim atio n unc er tai nt y in clu din g the r isk of a r edu c tio n in th e hea dr o om or n ee d for a n imp air m ent a s a re su lt of a r ea s ona bly pos s ibl e cha nge i n one o r mo re o f the ke y as su mpti on s us ed in t he v alue i n us e c alc ul ati on fo r thi s CG U. O v er v ie w Materialit y: gr oup f in anci al s t ateme nt s as a w ho le £1 6 mill io n ( 2 0 21 : £1 1.3 mil l ion ). 5. 1 % of Gr oup p r ofi t b efor e t ax ati on f ro m cont inui ng op er ation s no r mal i se d to excl ude t he ef fe c t of sp ec if ic i tem s as ex pl a ine d in s ec t ion 5 of t his r ep or t . ( 2 0 21 : 4. 5% of G r oup p r ofi t b efor e t ax ati on f ro m cont inui ng op er ation s no r mal i se d to exclu de th e ef f ec t of s pe ci fi c item s an d by a ve r a ging o v er th e l as t th re e ye ar s). Cover age: 82 % ( 2 0 21 : 7 0 %) of G r oup p r ofi t be for e t ax atio n f ro m cont inui ng op er ation s. Key audit mat ter s vs 202 1 Reco ve r ab il it y of Go od w il l in r e spe c t of th e Sm ith s De tec ti on c as h gen er ating uni t (C GU ) (G r oup ) ▲ Es timation of litigation prov isions for asbestos in John Crane, Inc. (Group) ‹ › Valu atio n of UK def in ed b en ef it S IP S’s pen sio n sc hem e li abi li tie s an d acc ount ing of s et t lem ent lo s s in T IG P S pen si on s che me ( P ar ent C omp an y) ▼ 2 Cha nges to K ey Audit M atters A s at 31 Ju ly 2 0 21, we ident if ie d a key a udi t mat te r (Gr o up) in re l atio n to the r e co ve r ab il it y of cap it al is e d de vel op ment c os t s for th e Intel li f us e pr o gr am me w i thin a s se t s hel d for s a le in th e Smi th s Med ic al di v i sio n. F ol lo w ing t he s al e of the S mi ths M ed ic al di v isi on du r ing t he y ea r , t his i s no l ong er a r el ev ant r isk of mate r ial mis s t ateme nt and t her efo r e no lo ng er a key a udi t mat te r . A s at 31 Ju ly 2 0 21, we ident if ie d a key a udi t mat te r (P ar e nt Co mp any ) in r el at io n to def ine d be nef it p en sio n l iabi li tie s w hi ch incl ud ed b oth th e T IGP S and S IP S p en sio n sc hem es . F oll o wi ng th e exec ut ion of a b u y -in in sur ance p ol ic y for the T I GP S s ch em e dur in g th e cur r ent y e ar , this is n o lon ge r a re le v ant r i sk of mater i al mi ss t atem ent an d the r efor e no l on ger a ke y aud it m at ter . We conti nue to r e co gnis e UK S IP S p en sio n sc hem e as a ke y aud it mat ter ( P ar ent C om pa ny ) in th e cur rent y ea r . I n ad dit ion , th e audi t of the b u y- in tr ans ac t ion i s con si der e d to be an a re a w hi ch ha d sign if ic ant ef fec t on o ur o ve r al l au dit s tr ateg y and a ll oc ati on of re s our ce s in p l ann ing a nd co mpl etin g the a udi t an d is th er efor e incl ud ed a s a key au dit m at ter . 3 K ey aud it matte r s: ou r asses smen t of r isk s of m aterial mi ss t atement Ke y aud it ma t ter s ar e t hos e m at ter s t hat , in ou r pr ofe s sio nal jud gem ent , we re o f mos t si gni f ic anc e in th e audi t of th e f inan cia l st atem ent s an d inc lud e th e mos t s igni f ic ant as s e s se d r is k s of mater i al mi ss t atem ent ( w het her o r not du e to f r au d) i dent if ie d by us , inc lud ing t hos e w hi ch ha d th e gr eate s t ef fe c t on: th e ov er all audi t s tr a teg y; t he al lo c atio n of r es ou rc es i n the a udi t; an d dir ec t ing the ef for ts of t he en ga gem ent te am. We s umm ar i se b elo w th e key audi t mat ter s, i n de cr ea sin g or de r of aud it s igni f ic anc e, in ar ri v in g at our au di t opi nio n abo v e, tog ethe r w it h our ke y aud it pr o ce dur e s to add re s s th os e mat ter s and , as r e quir e d for p ubl ic inte re s t ent iti es , our r e sul t s fr om t ho se p r oce dur e s . T he se m at ter s wer e ad dr e ss e d, and o ur r es ult s a re b a se d on p ro ce dur e s und er ta ken, in t he co ntex t of, and s ol ely fo r the p ur p os e of, our a udi t of th e fi nan cial s t atem ent s as a w ho le, a nd in f or mi ng ou r opi nion t he re on , and c on se qu ently a r e inci de ntal to t hat o pini on , and w e do n ot pr o v id e a se par ate opin ion o n these mat ters . INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 94 Our response We per for med th e tes t s b elo w r a the r tha n se ek ing to r el y on an y of the G r oup’s contro l s b ec a us e the n atur e of t he b al an ce is s uch that w e w oul d ex pe c t to obt ain a udi t ev i den ce p r ima r ily th r oug h the detail ed procedu res described. Our procedures i ncluded : – Benchmarking as sumptions and historical compari son: A s s e ss ing a nd ch al len gin g the ke y as su mpti on s thr o ugh retrosp ec tive r ev iew and compar ison to exter nal industr y forecas ts. – Our s e c to r ex pe r ie nce: U sin g our v a luat ion s sp ec ial is t s to cha lle ng e the a ppr o pr iate ne s s of di sco unt r ates by d er i v in g our o w n ind ep end ent r ange an d us e d ex ter nal mar ket data to chal le ng e man age ment a s sum pti on of 5 - ye ar r e ven ue growth rat es. – Sensiti vit y analysis: Es ti mati ng th e v alu e in us e u til isi ng ind epe nd ent an d mor e c ons er v at i ve fo r ec a st s a nd di sc ount r ate s and a s se s si ng w he the r thi s re su lted i n imp air m ent . – Compar ing valuations: Using our valuation specialis t, comp ar ing the v a luat ion p er t he v al ue in u se im pa ir me nt mo del aga ins t ex p ec te d enter p r is e v al uati ons p er a nal ys t r ep or t s and compar able comp anies’ earnings multiple. – A sse ssing tr ansparenc y: A s s e ss ing t he a de qua c y of th e Gr oup’s discl os ur es i n re sp e c t of the j udg em ent an d es ti mate s ar oun d go od w il l r ec ov er a bil it y for th e Sm ith s De tec ti on C GU, incl udi ng di sc lo sur e s of th e sen si ti v i t y in t he v al ue in u se ca lcu l atio ns to c han ge s in th e key a s sump tio ns . Our r esult s We foun d the c a r r y ing a mou nt of go od w il l r el ate d to the S mi ths Dete c tio n CG U to be a ccep tab le ( 20 21 : acce pt able ) an d we f oun d the sensitiv it y disclosure made to be acceptable (20 21 : acceptable). Es timation of litigation prov isions for asbe stos in John Cr an e, Inc . £ 22 9 mi lli on ( 20 21 : £21 2 mill ion )) Refer to p ag e 72 ( Audi t & Ris k Co mmi t tee Rep or t), pa ge 108 (acco untin g policies) and page 1 5 1 (financial disclosures) Risk vs 2021 : uncha nged Th e r isk – sub jec ti v e e stim ate Th er e ar e si gni fi c ant ju dge ment s a nd e s tim ates i nv olv ed i n the as sum pti ons u nde r ly in g th e pr ov i sio ns i n re sp e c t of Joh n Cr a ne, Inc. asbestos litigation, including the projection per iod, forec ast numb er of f u tur e cl a ims a nd a ss o ciate d cl a im and d efen ce co s t s app li ed to th e for e c as t an d the m eth od olo g y ap pl ied f or e s tima tin g the prov ision. Th e ef f ec t of t he s e mat ter s is that , as p ar t of ou r r isk a s se s sm ent , we d eter mi ne d that t he l iti gat ion p r ov i sio n has a h igh d egr e e of es ti mati on un cer t aint y , w ith a p otent ial r ange of r e as ona ble outc ome s gr e ater th an ou r mater i al it y for th e fi nan cial s t atem ent s as a w ho le an d po s sib ly ma ny ti me s that a mo unt. T h e f ina nci al st atem ent s ( note 2 3) dis cl os e the s en si ti v it y es ti mate d by the Group. Our response We per for med th e tes t s b elo w r a the r tha n se ek ing to r el y on an y of the G r oup’s contro l s b ec a us e the n atur e of t he b al an ce is s uch that w e w oul d ex pe c t to obt ain a udi t ev i den ce p r ima r ily th r oug h the detail ed procedu res described. Our procedures i ncluded : – Our actuari al exper tise: Cha lle ngi ng th e key ju dg eme nt of th e ten- y ear p r oje c tio n pe r io d usi ng ou r ow n a c tua r ial s pe cia li s t and our sector knowledge and expe r tise. – Benchmarking as sumptions: Using o ur o w n ac tu ar i al spe ci al is t s , we d er i v ed o ur ow n i nde pe nd ent r a nge o f the estimated provision. – Enq uir y of l a w yer s: Ob tai nin g ex te r nal i nde pe nde nt le gal conf ir m ati ons o f his tor i c al an d ong oin g cl a ims a nd ag re ein g to the hi s tor ic a l and o ng oin g cl aim s dat a us e d by m ana ge ment exp er t for e s tim atin g th e fu tur e p r oje c ted co s t and c l aim s . – A sse ss ed management ’ s exper t: As se ssing the competenc y , kn ow l ed ge an d ind ep end enc e of th e exp er t us ing o ur own specia list. – As se ssing methodolog y: Eva luat ing t he me tho do lo g y app li ed b y man age ment to t he e s tim atio n to as s es s t hat th e met ho dol og y uti li se d is in l in e w it h indu s tr y pr act ice . – Historic al comparison: A s s es s ing an d ch all en ging t he p ro je c ted indemnit y and defence expenditure throu gh retrospec ti ve re vie w of inc ur r ed c os t . – A sse ssing tr ansparenc y: A s ses sing whether the disclosur es of the ef fec t of r e as on ably p os s ibl e cha nge s in ke y jud ge ment s and a s sump tio ns r ef le c t s the r isks i nhe r ent in th e pr o v isi ons’ estimation. Our r esult s We foun d the l ev el of l i tig atio n pr o v isi onin g an d re l ated d is clo sur e s in the f in anc ial s t atem ent s in r e sp ec t of J ohn Cr ane Inc . asb e sto s li ti gati on to b e acce pt abl e ( 2 0 21 : acce pta ble ). INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 95 Valuation of UK defined benefit SIPS pens ion scheme liabilities (£ 1 ,60 3 million (20 21 : 2,0 78 million)) and accoun ting of s et tl eme nt los s a nd p as t se r vice co st in relation to TIGPS pen sion scheme buy- in ((£ 1 95 m illion (2 0 21 : Nil)) ( Pa ren t Co mpa ny) Ref er to p age 7 2 ( Audit & Ris k Co mmit te e Repo r t ), p age 108 (a ccounti ng p oli cie s) and page 1 2 8 (financial disclosures) Risk vs 2021 : decrease The r isk - sub jec tive valuatio n and signific ant tr ans a c tion Sig nif ic a nt es ti mate s ar e ma de in v a luin g the C om pa ny ’s pos t r eti re me nt def ine d be nef i t pl an o bl iga tio ns in p ar tic ul ar the di s count r ates , th e inf l atio n r ate s , mo r tal it y and p ens ion incr e as e as s umpt ion s . Sma ll c han ge s in th e as su mpti on s us ed to deter m ine t he l iab ili ti es , in p ar tic ul ar t ho se r el a ting to d is cou nt r ate s , inf l atio n and m or ta li t y can h av e a sign if ic ant i mp ac t on the v a luat ion of t he l iab il iti es . T h e ef fe c t of th es e m at ter s i s tha t, as p ar t of our r i sk as s e s sme nt, w e dete r min ed t hat th e pe nsi on as sum pti ons h av e a hig h de gr ee of e s tim ati on unc er tai nt y, wi th a potent ial r ange of r e as on abl e ou tcome s gr e ater th an ou r mater i al it y for th e fi nan cial s t atem ent s as a w h ol e, an d po ss ibl y man y tim es t hat am ount . In con duc t ing o ur f ina l aud it w or k , fo ll ow i ng th e bu y -in s e cur e d dur in g th e cur r ent y e ar w it h an intent ion to f ul ly b u y- ou t th e sc hem e in th e ne ar f utu re , we r e as s es s e d the d egr e e of es ti mati on un cer ta int y f or T IG P S s ch eme to b e le s s th an th at mater i al it y. Howe ve r , the aud it of th e bu y -i n tr a ns ac t ion i s con sid er ed to b e an ar e a w hic h ha d sign if ic ant ef fec t on o ur ov er a ll a udi t st r ate g y an d all oc ati on of r e s our ce s in pl anning a nd comp let ing t he au dit w i th r e gar d to th e qua ntum of t he s et tl eme nt los s an d th e acco unti ng of t he tr ans ac t ion a s a set tleme nt r at her than a n inv e st me nt dec is ion . Our response We per for med th e tes t s b elo w r a the r tha n se ek ing to r el y on an y of the G r oup’s contro l s b ec a us e the n atur e of t he b al an ce is s uch that w e w oul d ex pe c t to obt ain a udi t ev i den ce p r ima r ily th r oug h the detail ed procedu res described. Our procedures i ncluded : – Benchmarking as sumptions: Chal len gin g the ke y as su mpti on s app li ed in t he c alc ul at ion of t he l iab il it y , inc lud ing t he di sc ount r ate s , inf l atio n r ate s , mo r tal it y and p ens ion i ncr e as e s wi th t he sup por t of ou r ow n a c tua r ial s pe cia li s t s by c omp ar i ng ag ain s t ma r ket dat a . – A sse ssing ac tuar y ’ s credentials: A ss es sing the competence, ind epe nd enc e and inte gr i t y of the sc he me’ s ac t uar y. – Inspec tion of re levant document s: Inspecting contr act doc um ent s , tr u ste e min ute s , pr oje c t pl an and co mmun ic ati ons to as s es s w h ethe r the b u y- in tr ans ac t ion h as b ee n acc ounte d for app ro pr i ately in a cco r dan ce w it h I A S 1 9 usin g our o w n ac t uar i al specia lists and ou r sector knowledge and exper tise. – T est o f de t ai l: Co nf ir me d th e tr a ns fer o f as s et s to the i ns ur er to fu nd th e ini tial p r emiu m for t he bu y -i n. We r ec onc ile d th e ben ef it cash flo ws , administr ation and other expenses w ith ex ternal evidence obtained. – A sse ssing tr ansparenc y: Co nsi der ing the a de qua c y of t he dis cl osu re s in r e sp ec t of t he s en sit i v it y of the ob l igat ion to key as s umpt ion s an d the d is clo sur e in r e sp ec t of t he b u y- in trans ac tion. Our r esult s We foun d the v aluati on of th e pe nsi on s ch eme l ia bil it ie s of SIP S sc hem e to be a ccept ab le ( 2 021 : acce pta ble ) an d we f oun d the sensitiv it y disclosure made to be ac ceptable (2 021 : ac ceptable). We foun d the a cco untin g of th e se t tle ment l os s an d p as t se r v ice cos t fo r T IGP S sch eme i n the p er i od to b e acc ept abl e ( 2 0 21 : Nil ). INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 96 4 The impact of cli mat e chan ge on ou r audi t We hav e co nsi der e d th e potent ial im pa c t s of cl im ate cha ng e on th e fi nan cial s t atem ent s as p ar t of pl a nni ng ou r aud it . A s t he G ro up has s et o ut on p a ge 4 0 , cl im ate cha nge h as t he p otenti al to gi v e r is e to a numb er of t r an si tio n r is k s and o pp or tuni tie s an d ph y sic al r isk s a nd op po r tunit ie s . Th e Gr o up ha s st ate d the ir com mi tme nt to achi ev e Net Ze r o for S co pe 1 a nd 2 em is si ons b y 2 0 40 a nd to achi ev e Net Ze r o for S co pe 3 e mis si on s by 2 0 5 0 . T he ar e as of t he fi nan cial s t atem ent s th at ar e mo st l ikel y to be p otenti all y af f ec te d by c lim ate r el ate d cha nge s a nd ini ti ati ve s ar e f u tur e lo s s of r ev enu e due to supply chai n challenges. The Group considered the impact of cl imate c han ge a nd th e Gr ou p’ s tar g et s in th e pr ep ar ation of the f in anc ial s t ateme nt s, a s de s cr i be d on p age 3 9 , and c onc lu ded this d id n ot hav e a ma ter ial e f fe c t on th e co ns ol id ated f in anci al st atem ent s . We pe r for me d a r is k as s es s ment , t aki ng into a ccou nt cl imate c han ge r i sk s an d the c ommi tm ent s ma de b y th e Gr oup . We hel d inq uir i es of m ana ge ment r e gar di ng th eir p r oce s s es f or as s es si ng th e pote ntia l imp ac t of c li mate ch ang e r is k on th e Gr ou p’ s fi nan cial s t atem ent s an d hel d di sc us si ons w i th o ur ow n c l imate cha nge p r ofe s sio nal s to chal len ge o ur r is k as s es s ment . Ba se d on o ur r is k as s e ss ment w e d eter min ed t hat t he b al an ce s in the s e f ina nci al s tate ment s a re n ot at si gni fi c ant r is k in r el ati on to cl imate c han ge. T h is is b e ca us e, b as ed o n our r isk as s es s ment , the l ong -ter m g r ow th r ate i s not i dent if ie d as a ke y as sum pti on a re as on abl y po s sibl e ch ang e in w hic h cou ld r e sul t in an im pai r me nt in r el ati on to th e es t imate d v alu e in us e of th e Sm ith s Dete c ti on CG U. Hence , we a s se s s ed t hat th er e is n ot a sig nif ic a nt imp ac t o n our au di t for th is f ina nci al y ear . Th er e w as n o imp ac t o f cl imate cha nge o n our ke y aud it m at ter s i ncl ude d in s ec t ion 3 . We ha ve r e ad the G ro up’ s dis c los ur e of cl im ate re l ated i nfor m atio n in th e fr o nt hal f of the A nnual Rep or t as s et ou t on p ag e s 3 5 to 4 0 an d con si der e d con sis ten c y w i th th e fi nan cia l st atem ent s an d our a udi t kn o w le dge . £ 16 m (2021 : £ 1 1.3 m illion) Whole financial statements materiality £ 15 . 8 m (2 0 21 : £1 1 .0 mi ll io n) Ran g e of m at er i al it y at 32 ( 20 21: 34 ) com p on en t s (£0 .6m – £15.8 m) ( 20 21: £0. 6m – £1 1 m) £0.8 m (2 0 21 : £ 0.6 m) Mi s st a te me nt s r ep or ted t o th e Au di t & R is k C om mi t te e Gr ou p pr o fi t b efo r e ta x f r om c ont in uin g oper ations, normalise d to exclude specif ic items Group mat eriali t y £10 . 4 m (2021 : £7 .3 million) Whole financial statements perf ormance materiality Material it y Gro up pr ofi t bef or e ta x fr om con tinui ng op er at ion s, n or ma lis ed to e xclud e spe cif ic ite ms - £ 314 million ( 2 0 21 : Group pro fit b ef ore t a x fro m conti nuin g ope r ati ons , no r mal is ed to excl ude s pe cif ic ite ms an d by av er ag ing o ver th e l as t thre e yea rs d ue to th e imp ac t of t he C OV ID - 1 9 pand emic - £ 2 5 3 mil lio n) 5 Our applic ation of material it y and an over view of t he scope o f our a udit Material it y Mater i al it y for the G r oup f in anc ial s t ateme nt s as a w h ole w as set at £1 6 mill io n ( 2 0 21 : £1 1.3 mil l ion ), dete r min ed w i th r efer en ce to a ben chm ar k of G r oup p ro fi t bef or e t ax f r om co ntinu ing o pe r ati on s normal ised to exclude foreign exchange gai n on int ercompany lo an w it h dis co ntinu ed o per ation s , of £ 2 2 mi ll io n ( 2 0 21 : £5 0 m ill io n los s ), ret ir em ent be nef it s ch em e set tleme nt los s £1 71 mil li on ( 2 0 21 : Nil ), p as t s er v ic e equ al is ati on co s t £4 3 mil li on ( 2 021 : Nil ) and im pa ir me nt of as s et s £1 9 mil l ion ( 20 21 : Nil ). Mater ia li t y for the 2 0 21 G r oup f in anci al s ta teme nt s as a w ho le w a s dete r min ed w ith r efe re nce to a b en chm ar k of G ro up pr of i t bef or e ta x f ro m conti nuin g op er ation s nor mali se d as d e sc r ibe d ab ov e an d al s o by a ve r ag ing o v er th e l as t thr e e ye ar s d ue to th e imp ac t of t he CO V ID - 1 9 pa nde mic . T he G r oup te am p er for me d pr o ce dur e s on the e xclud ed i tem s. Mater i al it y for the P a re nt Co mp any f in anc ial s t atem ent s as a w hol e w as s et at £1 5. 8 mi ll ion ( 20 21 : £1 1.0 mil li on ), deter m ine d w ith r efe re nce to a b en chm ar k of P ar ent C om pa ny tot al a ss et s , lim ite d to be l es s th an m ater ia li t y f or Gr o up mate r ial it y as a w h ole . It r ep re s ent s 0 .4%% ( 2 0 21 : 0.5 %) of to tal a s se t s. In li ne w it h our a udi t met ho dol og y, our p ro ce dur e s on indi v i dua l acc ount b al an ce s and d is cl osu re s w er e pe r for me d to a lo wer t hr e sho ld , pe r for man ce ma ter ial i t y, so a s to re du ce to an acc ept abl e le ve l the r i sk th at in di v idu al ly imm ater ia l mis s t ateme nt s in ind i v idu al acc ount b al a nce s a dd up to a mater i al am ount a cr os s th e f ina nci al s tate ment s a s a w ho le. Per for m anc e mater iali t y w a s s et at 6 5% ( 20 21 : 6 5% ) of m ater ia li t y for th e f inan cia l s tate ment s a s a w ho le, w hi ch e quate s to £1 0. 4 mil l ion ( 20 21 : £ 7 . 3 mil l ion ) fo r the G r oup an d £10.2 mil li on ( 2 0 21 : £7 .2 mil l ion ) fo r the P a re nt com pa ny. We appl ie d thi s per ce nta ge in o ur de ter min ati on of p er for ma nce m ater i al it y ba se d on t he le ve l of id enti f ied a udi t mis s t atem ent s an d cont ro l def ici enc ie s dur i ng th e pr i or y ear . We agr ee d to r ep or t to the Au dit & R isk C om mit tee any c or r ec te d or un co r re c te d ide ntif ie d mis s t ateme nt s exce edi ng £ 0. 8 mil li on ( 2 021 : £0 .6 mil l ion ), in ad dit ion to ot her i de ntif ie d mi ss t atem ent s th at w ar r anted re po r ting on q ual it ati v e gr o und s. INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 97 Sco pe Th e Gr o up op er ate s in m or e th an 5 0 co untr i e s acr os s s ix conti nent s w i th t he l ar g es t fo otp r int s b ein g in th e US , Eur op e and A sia. T h e Gr ou p is or g ani se d into fo ur di v is ion s: Jo hn Cr an e, S mit hs D etec t ion , F lex- T ek and Sm it hs Inter co nne c t is a consol idation of over 250 repo r ting component s. Smiths Medic al di v isi on w a s so ld in c ur r ent y ea r (di sc onti nue d op er a tio ns ). We sc ope d th e aud it b y obt ain ing a n und er s t and ing of t he G ro up an d it s en v ir onm ent an d as s e s sin g the r i sk of m ater ia l mis s t ateme nt at the G r oup le v el . We ha ve c on sid er ed c omp on ent s b as ed o n thei r cont r ibu ti on to Gr o up r ev enu e; Gr oup A ss et s a nd Gr o up pr of it b efor e t ax f or co ntin uing o pe r ati on s inc lud ing w h ethe r we had s uf fic ient c ov er a ge o v er ea ch di v i sio n and t he sp ec if ic r isk s in the components. Of t he G ro up’ s 2 5 3 ( 2 0 21: 25 4 ) r epo r ting c omp on ent s , we subj ec te d 2 3 ( 2 021 : 24 ) to f ul l sc op e audi t s fo r Gr oup p ur p os e s and 9 ( 20 21 :8 ) to spe ci f ied r isk-focu se d au dit p r oce dur e s or a udi t of sp eci f ic acc ount b al a nce s . T he co mp one nt s for w h ich w e per for med au dit o f spe ci f ic acc ount b al a nce s w er e not in di v id ual ly fi nan cial ly s igni f ic ant en ou gh to r equ ir e a fu ll s co pe au di t for G ro up pur p os e s bu t we re i ncl ude d in th e s cop e of ou r Gr oup r ep or tin g wo r k in or d er to pr o v ide f ur th er co ve r a ge o ve r the G ro up’ s r es ult s . Th e co mpo nent s for wh ich w e p er for m ed sp ec if ie d r is k-focu se d audit proce dure s were not indiv idual ly financially signif icant eno ugh to r e quir e an a udi t for G r oup r ep or tin g pur pos es b ut d id pr es ent s pe ci fi c ind i v idu al r is k s that n ee de d to be a ddr e s s ed . Specified risk- focused a udit p rocedures were per formed over a numb er of a re as , in clu din g li ti gati on pr o v is ion s and d ef ine d be nef it pension ass ets and liabili ties. Th e Gr o up aud it p er for m ed an aly tic al p r oce dur e s o ve r the t r ad ing re su lt s of th e dis co ntin ue d ope r at ion ( the S mi ths M edi c al di v i sio n) and s ubs t anti v e te st o ve r the d isp os a l acco unti ng an d r es ult ant pr of it o n s ale r ec og nize d in th e con so l idate d f ina nci al s tate ment s . Th e s cop e of th e aud it w or k p er for m ed w a s pr e dom inate ly sub st ant i ve a s we p l ace d l imi ted r el ian ce up on th e Gr ou p’ s inter n al cont r ol o ver f in anc ial r ep or tin g. Th e co mpo nent s wit hin th e s cop e of ou r wo r k acc ounte d for the fo ll ow i ng p er cent ag e s of the G r oup’s res ult s fo r cont inui ng ope r at ion s ar e sh ow n , r ig ht. Th e r ema inin g 26% ( 2 0 21 : 26%) of tot al Gr o up r ev enu e, 18% ( 2 0 21 : 30 % ) of G r oup p ro fi t bef or e ta x f r om co ntinu ing o pe r ati on s and 2 5 % ( 2 0 21 : 21 %) o f tota l Gr oup a s set s is rep r es ente d b y re po r ting co mp one nt s w hich i ndi v i dua lly d id no t re pr e se nt mor e than 1% ( 2 0 21 : 3% ) of an y of tota l Gr ou p re v enue f or co ntin uing oper ations, Group prof it before tax for conti nuing operations or tota l Gr oup a s set s. For t he s e re si dua l com pon ent s , w e pe r for me d an ana ly si s at an ag gr eg ated G r oup l ev el to r e- e xam ine o ur as s es sm ent t hat th er e we r e no si gni fi c ant r is k s of mater ial miss tatement within these components . Th e Gr oup’ s r es ult s GROUP REVENUE GROUP PROFIT BEFORE TAX GROUP TOTAL ASSETS 2022 Group revenue Group profit be fo r e t ax Gr o up t ot a l ass ets Fu ll s c op e fo r gr ou p au di t purpose s 57% 76 % 68% Au di t of A cc ou nt B al a nce 17 % 6% 3% Specified risk -focused audit proce dures – – 4% Residual components 2 6% 18 % 25% 2021 Fu ll s c op e fo r gr ou p au di t purpose s 60% 61% 69 % Au di t of A cc ou nt B al a nce 14% 7% 7% Specified risk -foc used audit proce dures – 2% 3% Residual components 2 6% 30% 2 1% (2021 74%) 74% (2021 79%) 75% (2021 70%) 82% INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 98 We considered whether thes e risk s could plausibly af fec t the li quid it y or co ven ant co mpl ia nce i n the g oin g con cer n p er i od b y comp ar ing se v er e bu t pl au sib le do w n sid e sc enar ios th at cou ld ar is e f r om th es e r i sk s ind i v idu all y and c ol lec t i ve ly ag ain st t he lev el of a v ail able f ina nci al r es ou rc es a nd co v ena nt thr e sho ld s indi c ated b y th e Gr oup’s finan cia l for e c as t s . We al s o as s e s se d the completeness of the going concern disclosure. Our con clusio ns based on this work: – we co nsi de r that t he Di re c tor s ’ us e of th e goi ng co nce r n ba si s of acc ounti ng in t he pr e par ation o f the f in anc ial s t ateme nt s is appropriate; – we ha ve n ot id enti f ied , an d con cur w i th th e Dir e c tor s’ as s es sm ent t hat th er e is n ot, a m ater ia l unc er taint y re l ated to ev ent s or c on dit ion s tha t, in di v id ual ly or c ol le c ti ve ly, may c as t sign if ic ant d oub t on th e Gr oup’s or Com pan y ’ s abi li t y to continu e as a go ing c onc er n fo r the g oin g co nce r n pe r io d; – we ha ve n oth ing m ater ia l to ad d or dr aw at tenti on to in r el at ion to the D ir ec to r s’ st ateme nt on p ag e 92 to t he f in anci al s t ateme nt s on th e us e of the g oin g co nce r n ba si s of acc ounti ng w i th no mater i al un cer tai ntie s th at ma y c as t si gnif i ca nt do ubt ov er t he Gr oup a nd C omp an y’s use o f that b as is fo r the g oin g co ncer n per iod, a nd w e fou nd th e goi ng co nce r n di sc los ur e on p ag e 5 4 to be acceptable; and – the r e l ated s t ateme nt und er th e L is tin g Rul es s et o ut o n pa ge 91 is mate r ial ly co ns is tent w it h the f in anc ial s t atem ent s an d our audit knowledge. Ho we ve r , as we c ann ot pr e dic t al l f ut ur e ev ent s o r con dit ion s an d as su bs equ ent e ve nt s ma y re s ult in o utco me s th at ar e inc ons is tent w ith j udg em ent s th at we re r e as on abl e at the t ime t he y we re m ad e, the a bo ve c onc lus ion s ar e not a g uar antee th at the G r oup o r the Co mp any w il l co ntinu e in op er ation . Th e Gr o up aud it te am in st r uc te d com po nent a udi tor s a s to th e sign if ic ant a re as to b e co ve r ed , incl udi ng th e r ele v ant r i sk s det aile d ab ov e an d the i nfor m ati on to be r e por ted b ac k . T he Gr o up audi t tea m set t he c omp one nt mate r ial it y wh ich r ange d f ro m £0 .6 mi ll ion to £15.8 mil l ion ( 20 21 : £0 .6 mi ll io n to £1 1.0 mill i on ), hav i ng r eg ar d to th e mix o f size a nd r i sk pr of il e of the G r oup acr os s t he co mp one nt s. T h e wo r k on 3 0 o f the 3 2 ( 2 0 21 : 3 3 o f the 3 4 ) co mp one nt s w as p er for m ed b y co mpo nent a udi tor s a nd t he audi t of th e P ar ent C omp an y w as p er for m ed b y th e Gr ou p team . Th e w or k on S mi ths M ed ic al in clu din g dis pos a l acc ount ing w a s per for med b y the G r oup te am. Regul ar vi de o confe r enc e mee tin gs w er e hel d w it h all i n- sc ope comp on ent s at te nd ed b y se nio r gr oup a udi t team m em ber s. Th e se m eet ing s inv ol ve d ex pl an ati on of Gr o up au dit i ns tr u c tio ns , inv olv em ent in p l ann ing au di t pr oc edu re s , di sc us si ng pr o gr e ss upd ates a nd em er gi ng f in ding s , re v ie w in g ou tcome s of te s tin g per for med an d inv ol vem ent in d is cus s ing a udi t f indi ng s w ith comp on ent m ana gem ent . T he G ro up au dit te am r ou tin ely re v ie w ed th e au dit d oc ume ntat ion of a ll c omp on ent au dit s t hr ou gh v ar io us s t ag es of t hei r aud it s . We we re u nab le to v is it o ne Chi na comp on ent ( not f in anc ial ly si gni fi c ant ) an d r emote a cce s s to audi t do cu ment ati on is p r ohib ite d by l oc a l l aw. A s a re sult o f thi s re s tr i c tio n, w e ex tende d our o ve r si ght of th is co mpo ne nt’s audit thr ou gh ex tende d dis c us sio n w it h com pon ent au di t team . 6 Goin g conc ern Th e Dir e c tor s h av e pr ep ar e d the f in anc ial s t atem ent s on t he go ing con cer n b as is a s the y do n ot inten d to li qui date th e Gr ou p or th e Co mp any o r to cea se t hei r op er at ion s , and a s th ey h av e con clu de d that t he Gr o up’ s and t he C omp an y’s fin anc ial p os iti on me an s tha t this i s r eal i st ic . T he y ha ve al so co ncl ude d th at the r e ar e no ma ter ia l unce r taint ie s that c oul d ha ve c a st s ign if ic ant d oubt o v er th eir ab il it y to conti nue a s a go ing c onc er n fo r at le as t a ye ar f r om th e date of app ro v al of t he f in anc ial s t ateme nt s ( “th e goi ng co nce r n pe r io d” ). We us ed ou r kn ow l ed ge of t he Gr o up, it s in du st r ie s an d the g ene r al eco no mic en v ir on ment to i dent if y the in her e nt r isk s to i t s bu sine s s mo del an d an aly s ed h ow t ho se r i sk s mi ght af f ec t th e Gr o up’ s and Company’s financial re sources or abilit y to continue oper ations ov er th e goi ng co nce r n pe r io d. T h e r isk s t hat w e con si der e d mo st like ly to ad v er s el y af fe c t th e Gr ou p’ s and C omp an y’s av ail a ble fi nan cial r e s our ce s an d met r ic s r el ev ant to d ebt c ov en ant s ov er t his per iod were: – Ad v er s e tr adin g con dit ion s an d imp ac t o n the G r oup’s oper at ion s or th at of it s s upp li er s a nd cu s tome r s , suc h as d el a ys a nd ca nce ll at ion s of or d er s an d de li v er i es , a s a re s ult of r e cur r e nce of CO V I D 1 9 dis r upt ion , r e sult ing i n a sign if ic ant d eter i or a tio n in the Group’ s liquidit y position. – Pr od uc t qu al it y fai lur e w hic h wo uld r e su lt in r ep ut ati ona l damage amongst customer s and therefore reduction in order s and c us tom er lo s s as w el l as p otentia l sig nif ic a nt li abil i t y c l aim s r aise d agains t the Gro up. INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 99 7 F raud and breac hes of law s and regulati ons – abi lit y to de tect Identif ying an d re spon ding to r isk s of mater ial miss tatement due to f r aud T o identi f y r isk s of m ater ia l mis s t ateme nt due to f r a ud ( “ f r a ud r isk s”) w e a ss e s se d e ve nt s or co ndi tio ns t hat co uld i ndi c ate an ince nti v e or pr e s sur e to co mmi t fr aud or p r ov i de an o pp or tuni t y to comm it f r a ud . Our r i sk a ss e s sme nt pr o ced ur es i ncl ude d: – Enq uir in g of Di re c tor s, the A u dit & R isk C om mit tee, inter n al audi t an d ins pe c tio n of po l ic y d oc ume ntat ion a s to th e Gr oup’s high -l ev el p ol ici e s and p r oce dur e s to pr e ve nt and d etec t f r a ud , incl udi ng th e inter n al au dit f un c tio n, a nd th e Gr ou p’ s chan nel f or “w hi st leb lo w ing” , as w ell a s w het her t he y ha ve k no w le dg e of any actual , suspected or alleged fraud. – Readi ng B oa r d, A udi t & Ri sk , Di sc los ur e, T r an s ac ti ons , Nomination & Gover nance, Remuneration & People, Inv es t ment s a nd E xe cu ti v e Co mmi t tee m inu tes . – Consider ing remuner ation incentive scheme s and per for mance tar g et s fo r man age ment a nd D ir ec tor s inclu din g the E P S t ar g et for management remuner ation. – Usin g anal y tic al pr o ced ur es to i dent if y any u nus ual o r unexpected relations hips. We comm unic ate d id enti f ied f r aud r isk s t hr ou gho ut th e au dit te am and r em ain ed al er t to any in dic at ion s of f r au d thr o ugh ou t the a udi t . Th is in clu de d com muni c atio n fr o m the G ro up to f ul l sc ope a nd audi t of sp ec if ic a cco unt b al an ce s sc ope c omp on ent au dit te am s of re le v ant f r au d r is ks i de ntif ie d at th e Gr ou p lev el a nd r eq ue s tin g the fu ll s cop e an d aud it ac cou nt ba l ance s co pe c omp on ent au dit te am s to re por t to th e Gr ou p audi t tea m any i ns t ance s of f r a ud th at co uld gi ve r i s e to a mater i al mi ss t atem ent at Gr o up. A s r e quir e d by a udi tin g st an dar d s an d tak in g into acc ount p os s ible pr es s ur es to m ee t pr of it t ar ge t s, a nd o ur ov er all kn o w led ge of t he contr o l env i ro nm ent, w e p er for m p ro ce dur e s to ad dr es s t he r i sk of man age ment o v er r i de of c ontr ol s and th e r is k of fr audul ent r ev en ue re co gni tio n, in p ar ti cul a r in the S mi ths D ete c tio n Inc , US A and Smi th s Dete c tio n Ge r man y Gm bH co mpo nent s a signi fi c ant po r tion of mult i- y ea r contr ac t s ( pr o gr a mme r e ve nue ) r ev enu e is n or m all y re co gni se d in th e l as t m onth of t he y ear . Th er efo re , the re i s a r is k of re v enue b ein g o ver st ated du r ing t he y ea r end c los ing p er i od t hr ou gh the m anip ul ati on of t he ti ming o f re co r ding o f the s a le tr ans ac ti on fr om s uch p r es s ur e. We di d not i dent if y any a ddi tio nal f r aud r is ks . We per formed procedu res inclu ding : – Ident if y ing j our n al ent r ie s to te st f or al l com po nent s w i thi n fu ll sc ope a nd au di t of sp eci f ic ac count b al a nce s s cop e b as ed o n risk cr iter ia and comparing the identified entr ies to suppor ting doc um ent atio n. T h es e in clu de d unus ual e ntr ie s in r e ve nue acco unt s , c as h and c a sh eq ui v al ent s or b or r o w in gs acc ount s and e ntr ie s p os ted b y s eni or f ina nce m ana gem ent . – T e sting conso lidation adjustment entries pos ted and comparing the identified entrie s to su ppor ting documentation. Identif ying an d re spon ding to r isk s of mater ial misstateme nt due t o non-comp liance with laws and regulati ons We ide ntif ie d ar e as of l a w s and r e gul at ion s th at cou ld r e as ona bly be ex p ec te d to hav e a mate r ial ef fec t o n the f in anc ial s t ateme nt s from our gener al commercial and sec tor exper ience, through dis cu s sio n w ith t he Di re c tor s and oth er man ag eme nt (a s r eq uir ed by au di tin g st an dar d s), an d f ro m ins pe c tio n of th e Gr oup’s re gul a tor y and l eg al co r r es po nde nce a nd di sc us s ed w i th th e Dir ec to r s an d oth er ma nag em ent th e po li cie s an d pr oc ed ur es regar ding complian ce with l aw s and regul ations. A s t he Gr o up is r e gul ate d, o ur as s es s ment o f r isk s in vo lv ed gain ing an u nd er s t and ing of t he co ntr ol e nv ir on ment i ncl udin g th e enti t y ’s pro ced ur e s for co mpl y ing w i th r eg ul ator y r e quir em ent s . We comm unic ate d id enti f ied l a w s an d re gu l atio ns t hr oug ho ut ou r team a nd r ema ine d ale r t to any in dic ati on s of no n- co mpl ia nce thr ou gho ut t he au di t. T hi s inc lud ed c omm unic at ion f r om t he gr oup to f ul l-sc op e com po nent a udi t team s of r el ev ant l aws and r e gul at ion s id enti fi ed at t he Gr o up le ve l , and a r e que s t for fu ll s cop e co mpo ne nt audi tor s to rep or t to the G ro up tea m any ins t anc es of n on - com pl ian ce w it h l aw s a nd r eg ul ati ons t hat c oul d gi ve r i s e to a mater i al mi ss t atem ent at Gr o up. Th e po tentia l ef fe c t of th e se l a w s an d re gul a tio ns on t he f in anci al statements v arie s consider ably. F ir s tly, the G r oup is s ubj ec t to l a w s an d re gul a tio ns th at dir e c tly af fe c t th e fi nan cia l st atem ent s in clu din g fi nan cia l re po r ting legislation (including related companies legislation ), d istr ibutable profit s legisl ation, taxation legislation and pensions legislation, and w e as s e s se d the e x tent o f com pl ian ce w it h the s e l aw s a nd re gul a tio ns a s par t of o ur pr oc ed ur es o n the r el ated fi nan cial statement items. Se co ndl y, the Gr oup i s sub je c t to man y othe r l aw s a nd r eg ul ati on s w her e th e con s equ enc es o f non - com pl ian ce co uld h av e a mate r ial ef fe c t on am ou nt s or di sc los ur e s in the f in anc ial s t atem ent s , for ins t anc e thr ou gh th e imp os iti on of f in es o r li ti gati on . We ide ntif ie d the fo ll ow i ng ar e as a s tho se m os t l ikely to h av e su ch an ef fec t: health and safet y , anti-brib er y and cor r uption, consider ing dea li ngs w i th g ov er n ment c us tom er s , em plo y me nt l aw, an d cer tai n asp e c t s of com pa ny le gi sl ati on r ec og nisi ng th e r egu l ated natu re o f the M edi c al di v is ion a c ti v i tie s an d it s l ega l for m . Au dit ing s t and ar ds l im it th e r equ ir ed au di t pr oc ed ur es to i dent if y non - com pl ian ce w it h the s e l aw s a nd r e gul ati on s to enq uir y of th e Dir ec to r s an d oth er ma nag em ent an d ins pe c tio n of r egu l ator y an d legal corre spondence, if any . Therefore, if a breach of operational re gul a tio ns is n ot di sc los e d to us or e v id ent f r om r ele v ant cor r e sp on den ce, an a udi t w il l not de tec t th at br e ach . INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 10 0 Cont ex t of the a bilit y of the a udit t o detect fr aud or breaches of law or regulati on O w in g to the i nhe re nt li mit ati on s of an au dit , th er e is an una vo ida ble r i sk th at w e may n ot ha ve d etec te d s ome m ater i al mis s t ateme nt s in th e fin an cial s t atem ent s , ev en t hou gh w e ha ve pr op er ly p l ann ed a nd p er for m ed o ur aud it in a cco r dan ce w it h audi tin g s ta nda r ds . Fo r exa mpl e, th e fu r ther r em ov ed n on - comp l ianc e w it h l aw s an d r egu l ati ons i s fr o m the e v ent s an d tr a ns ac t ion s r efl ec te d in th e f inan cia l st atem ent s , th e le s s li kely the in her e ntly l imi ted p r oce dur e s r eq uir ed b y au dit ing s t an dar d s wo uld i dent if y it . In ad dit ion , as w i th an y au dit , th er e re mai ne d a high er r i sk of non - dete c tio n of f r au d, a s the s e ma y inv ol ve co ll usi on , for ge r y, intenti ona l omi s sio ns , mis r epr e s enta tio ns , or t he o ver ri de of inter n al cont r ol s . O ur au dit p r oce dur e s ar e de si gne d to dete c t mater i al mi ss t atem ent . We ar e not r e sp on sibl e for p r ev enti ng non - com pl ian ce or f r a ud an d c ann ot be e xp ec te d to dete c t no n- compliance w ith all la ws and re gulation s. 8 W e ha ve not hing t o repor t on the o ther infor mation in th e A nnual Repor t Th e Di re c tor s a r e re sp on sib le fo r the ot her i nfor m ati on pr e s ented in the A nnual Rep or t tog eth er w it h the f in anc ial s t ateme nt s . Our opin ion o n the f in anc ial s t atem ent s do e s not co v er th e othe r infor mation a nd , acco r din gly, we do n ot ex pr e s s an au dit o pin ion or , except as e xp li ci tly s t ated b elo w, any f or m of a s sur ance conclusion ther eon. Our r e sp ons ibi li t y i s to r ea d the ot her i nfor m ati on an d, in d oin g so , con sid er w he the r , base d on o ur f ina nci al s tate ment s a udi t w or k , the inf or m atio n the r ein is m ater i all y mis s t ated o r inco ns is tent w it h the f in anc ial s t ateme nt s or ou r aud it k no w le dg e. B as ed s ol ely o n that w or k we hav e no t ide ntif ie d ma ter ial m is s ta tement s in the other infor mation. Strateg ic Re por t and D irec tors ’ Re por t Ba se d s ole ly on o ur w or k on t he ot her in for m atio n: – we ha ve n ot id enti f ied m ater i al mi ss t atem ent s in th e Str ategic Repo r t and th e Dir e c tor s’ Repo r t; – in our o pini on th e info r mat ion g iv en i n tho se r e por t s fo r the fi nan cial y e ar is c ons is tent w i th th e fi nan cial s t atem ent s; an d – in our o pini on th os e r ep or ts h av e be en p re pa r ed in a cco rd anc e w ith t he C omp an ie s Ac t 2 0 06 . Dire c tor s’ Remuner ation Repor t In our o pini on th e p ar t of the D ir ec tor s ’ Remu ner ation Rep or t to be au di ted ha s be en p ro pe r ly p re pa re d in a ccor d anc e w ith t he Co mp anie s A c t 2 0 0 6 . Disclosu res of emerging a nd principal risks and longer-ter m viabil it y We ar e re qui re d to pe r for m pr o ce dur e s to ide ntif y w het her t her e is a mate r ial i nco nsi s tenc y bet w e en th e Dir e c tor s’ dis clo sur e s in re sp ec t o f eme r ging a nd p r inc ip al r is k s and t he v iab il it y st atem ent, and t he f ina nci al s tate ment s a nd o ur aud it k no w le dg e. Ba se d on t ho se p ro ce dur e s , we h av e not hing m ater i al to ad d or dr a w at tent ion to in r e l atio n to: – the Di re c tor s ’ conf ir matio n w ith in the v i abi li t y s t atem ent p ag e 5 4 that t he y ha ve c ar r ied ou t a r obu s t as s es sm ent of t he em er gin g and p r inc ip al r is k s fa cin g th e Gr oup, i ncl udin g th os e tha t wo uld thr ea ten it s b usi ne s s mo del , f u tur e p er for ma nce , so lve nc y and liquidi t y; – the P r in cip al Ri sk s di sc los ur e s de sc r ibi ng th e se r i sk s an d ho w eme rg ing r isk s ar e ide ntif ie d, a nd e xp l aini ng ho w th ey a r e bei ng man age d an d mit iga ted; and – the Di re c tor s ’ ex pl an ati on in th e v iab il it y st ateme nt of ho w th ey hav e as s e s se d th e pr os pe c t s of the G r oup, o ve r w hat p er i od the y ha ve d one s o an d w hy t he y con sid er e d that p er i od to b e app ro pr i ate, an d the ir s tate ment a s to w het her t he y hav e a re as on abl e ex pe c ta tio n that t he Gr o up w il l be ab le to co ntin ue in ope r at ion a nd me et i t s li abil i tie s as t he y f all d ue o ve r the p er i od of the ir as s e ss me nt, in clu din g any r el a ted di sc lo sur e s dr a w ing attention t o any necess ar y qualifications or assumptions. We ar e al s o r eq uir ed to r e v ie w the V iabil it y St ateme nt, s et ou t on pa ge 5 4 under t he L is t ing R ule s . Ba se d on t he ab ov e pr o ce dur e s, we h av e con clu de d that t he ab o ve di sc lo sur e s ar e mate r ial ly con sis tent w i th th e f ina nci al s tate ment s a nd ou r aud it k no w le dg e. Our w or k i s l imite d to as s e s sin g the s e mat te r s in th e conte x t of only t he k no w le dg e acq uir ed d ur in g our f in anc ial s t ateme nt s audi t . A s w e c ann ot pr e dic t a ll f ut ur e ev ent s o r con di tio ns an d as sub se que nt ev ent s m ay r e sul t in ou tcom es t hat ar e in con si ste nt w ith j udg em ent s th at we re r e as on abl e at the t ime t he y we re m ad e, the a bs enc e of any thin g to r ep or t on the s e s tate ment s i s not a guar antee a s to the G ro up’ s an d Co mp any ’s longe r- ter m v ia bil it y. INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 101 Cor p or ate gover na nce dis clo sure s We ar e re qui re d to pe r for m pr o ce dur e s to ide ntif y w het her t her e is a mate r ial i nco nsi s tenc y bet w e en th e Dir e c tor s’ cor p or ate go ver nance d is clo sur e s an d the f in anc ial s t ateme nt s and o ur audit knowledge. Ba se d on t ho se p ro ce dur e s , we h av e con clu de d tha t eac h of th e fol lo w ing i s mater ially c on sis tent w i th th e f inan cia l st atem ent s a nd our au di t kn ow l ed ge: – the Director s’ statement that they consider that the Annual Repo r t and f ina nci al s tate ment s t aken a s a w ho le is f ai r , balance d and understandable, and prov ides the information nec es s a r y for sh ar eh old er s to a s se s s th e Gr ou p’ s pos iti on an d per for mance , bus ine s s mo de l and s tr ateg y; – the s ec t ion of t he A n nua l Repo r t des cr i bin g the w or k of the Au dit & R isk C om mit tee, inc lud ing t he si gni fi c ant is s ue s that t he Au dit & R isk C om mit tee con sid er ed i n re l ati on to th e fi nan cia l st atem ent s , an d ho w the s e is s ue s we re a dd re s s ed; an d – the s ec t ion of t he A n nua l Repo r t that de s cr ib e s the r e v ie w of the ef fec ti v en es s of t he Gr o up’ s r is k man age me nt and inte r na l control sy stems . We ar e re qui re d to r ev i ew t he p ar t of the C or p or ate Gov er nance Sta teme nt re l atin g to the G r oup’s compl ian ce w it h the p r ov i sio ns of the U K Co r po r ate G ov er n anc e Co de s pe cif i ed b y the L i s tin g Rule s fo r our r e v ie w. We hav e not hin g to re po r t in this r e sp ec t . 9 W e ha ve not hing t o repor t on the o ther matte r s on which we a re required t o repor t by exception Und er th e Co mp anie s A c t 2 0 0 6 , we a re r e qui re d to r ep or t to you i f, in our opi nion: – ade quate a cco untin g r ec or ds h av e not b ee n kept b y the p ar ent Co mp any, or r etur n s ad eq uate fo r our au di t hav e n ot be en re cei v ed f r om b r an ch es n ot v is ite d by u s; or – the p ar ent C omp an y f inan cia l st atem ent s a nd th e pa r t of the D ir ec to r s’ Remune r ati on Rep or t to be au di ted ar e n ot in agr e eme nt w ith t he ac cou ntin g re co rd s an d re tur n s; or – cer tai n dis cl osu re s of D ir ec to r s’ rem uner ation s pe ci fi ed b y l aw ar e not m ade; o r – we ha ve n ot r ec ei ve d al l the i nfor m ati on an d ex pl an atio ns w e re qui re f or ou r aud it . We hav e not hin g to re po r t in the s e re sp ec t s . 1 0 Respective re sponsi bili ties Dire c tor s’ r esp onsib ilitie s A s e xp l aine d mo r e fu lly i n the ir s tate ment s et o ut on p a ge 9 0, the D ir ec to r s ar e r es po nsi ble f or: the pr ep ar at ion o f the f in anc ial st atem ent s in clu din g bei ng s ati s fi ed th at th ey g i ve a tr ue and fa ir v ie w; su ch inte r nal c ontr o l as th ey d eter m ine i s ne ce ss a r y to ena ble t he pr ep ar ation of f in an cial s t atem ent s th at ar e fr e e f ro m mater i al mi ss t atem ent , w heth er du e to fr aud or e r r or; ass e ss ing the G ro up an d pa r ent C omp an y’s abil it y to contin ue a s a goin g con cer n , dis c los ing , as ap pl ic ab le, m at ter s rel ate d to goi ng con cer n; an d usi ng th e go ing c onc er n b asi s of ac count ing u nle s s the y ei the r inten d to li quid ate the G r oup o r the p ar ent C om pa ny or to cea se o pe r ati on s, o r ha ve n o r eal is t ic alte r nat i ve b ut to do s o. Audi tor’ s r e spon sibili ties Our o bje c ti v es a re to o bt ain r ea s ona ble a s sur ance ab ou t w heth er the f in anc ial s t ateme nt s as a w h ole a re f r ee f r om m ater ia l mis s t ateme nt, w h ethe r due to f r a ud or e r r or , and to is s ue our op ini on in an a udi tor ’s rep or t. Re as ona ble a s sur ance i s a high l ev el of a s sur ance, b ut d oe s not g uar antee th at an au dit con duc te d in ac cor da nce w i th I S A s (UK ) w ill a lw a ys d etec t a mater i al mi ss t atem ent w he n it e xi st s . Mi ss t atem ent s c an ar ise fr om f r aud or er r o r and a re c on sid er ed m ater i al if, in di v idu al ly or in a ggr e gate, th e y coul d r ea so nab ly b e ex pe c ted to inf lu enc e the e con om ic de cis io ns of u se r s ta ken on th e b asi s of th e fi nan cial st ateme nt s. A fu lle r de s cr ipt ion o f our r e sp ons ibil i tie s is p r ov i de d on th e F RC ’ s website at w w w.frc.org .uk /auditorsr espon sibilities . Th e C omp an y is r eq uir ed to i ncl ude t he s e fi nan cial s t atem ent s in an an nual f in anc ial r ep or t pr ep ar e d usi ng th e sin gle e lec t r onic re po r ting fo r mat s pe cif i ed in t he T D E S EF Re gul at ion . T his audi tor ’s rep or t pr ov i de s no a s sur ance ov er w h eth er th e annu al fi nan cial r e por t ha s be en p re pa re d in a ccor d anc e w ith t hat fo r mat . 1 1 The purpose of our a udit work and t o whom we owe our respons ibi lities Th is r ep or t is ma de s ol ely to th e C omp an y’s memb er s , a s a bo d y, in accor d ance w i th Ch apter 3 o f P ar t 1 6 of the C om pa nie s Ac t 2 0 06. O ur au di t wo r k ha s be en un der t aken s o that w e mi ght st ate to th e Co mp any ’s membe r s th os e mat ter s we ar e r e quir e d to st ate to th em in an a udi tor ’s repo r t and fo r no oth er p ur p os e. T o the f ull es t ex tent per mit ted b y l a w, we do n ot acc ept o r as sum e r es po nsi bil it y to any on e othe r tha n the C om pa ny an d the Co mp any ’s membe r s , as a b od y, for ou r aud it w or k , fo r thi s re po r t, or for the opinions we have formed. Michael Maloney SENIOR ST A T UTOR Y AUDITOR for an d on b eha lf of K P M G L L P , St atu tor y Au di tor Char ter ed A cc ount ant s 1 5 Canada Squar e Lo ndo n E1 4 5 GL Date: 2 2 S epte mbe r 2 0 2 2 INDEPENDENT A UDITOR’S REPORT 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 10 2 Cons olidated income s t atemen t Year e n de d 31 J u ly 2 022 Year e n de d 31 J ul y 2 021 Notes Headline £m Non-headline (n ot e 3) £m To t a l £m Headline £m Non-headline (n o te 3 ) £m To t a l £m CONTINUING OPER ATIONS Revenue 1 2,566 – 2,566 2,406 – 2,406 Oper ating costs 2 (2,149) (300) (2,449) (2,034) (46) (2,080) Operating profit/(loss) 2 417 (300) 117 372 (46) 326 In te rest rec eivabl e 4 14 – 14 9 – 9 In te rest pa yable 4 (55) – (55) (49) – (49) Other f inancing gains /( loss es ) 4 – 20 20 – (52) (52) Other finance income – retirement benefits 4 – 7 7 – 6 6 Finance (cos ts )/ income 4 (41) 27 (14) (40) (46) (86) Profit /(loss) before taxation 376 (273) 103 332 (92) 240 T axation 6 (104) 14 (90) (96) 13 (83) Profit /(loss) for t he year 272 (259) 13 236 (79) 157 DISCONTI NUED OPE R A TIONS Profit /(loss) from discontinued operations 27 49 973 1,022 134 (6) 128 PR OF I T/(LO S S ) FO R TH E Y E AR 321 714 1,035 370 (85) 285 Profit /(loss) for t he year attributable to: Smiths Group sharehol ders – continuing operations 270 (259) 11 235 (79) 156 Smiths Group sharehol ders – discontinued oper ations 49 973 1,022 134 (6) 128 Non-contr olling interest s 2 – 2 1 – 1 321 714 1,035 370 (85) 285 EARNI NG S P ER SHAR E 5 Basic 267.1 p 71.7p Basic – continuing 2.8p 39.4 p Dilu ted 266.0p 71.3 p Diluted – continuing 2.8p 39.1 p Refe rence s in the consolidated income st atemen t, consolidated statement of comprehensive income, consolidated bal ance sheet, con s ol ida ted s t atem ent of ch an ge s in e qui t y and con s ol id ated c a sh -f lo w st ate ment r e l ate to note s o n pa ge s 1 1 6 to 1 63 , w hic h for m an integ r al p ar t of th e co ns ol id ated a cco unt s . CONSOLIDA TED PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 022 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 103 Cons olidated s t atemen t of comprehen si ve income Notes Ye a r e nd e d 31 Ju ly 2 022 £m Y ear ended 31 Ju l y 2 021 repres ented £m PR OF I T FO R T HE Y E A R 1,035 285 O ther comprehensive income (OCI) O CI which will not be reclassified to the income statement : Re-mea surement of retirement benefits ass ets and obligations 8 (17) 13 T axation on post-retirem ent benefits movement s 6 – (6) Fa ir v al ue m o ve me nt s on f i na nc ial a s s et s at f a ir v al ue t hr o ug h OC I 14 (63) 4 (80) 11 O CI which will be recl assified and reclas sifications: Fair value gains and re cla ssif ic ation adjustment s: – d efe r r ed i n th e pe r io d o n ca sh -f l ow a nd n et i nv e s tm ent h ed ge s (82) 82 – r e cl a s si f ie d to in co me s t ate men t on c a sh -f lo w a nd n et in v es t me nt he d ge s 5 2 (77) 84 Foreign exchange (FX ) movements net of recycling: E xchange gains/(loss es) on transl ation of foreign operations 276 (166) E xc ha ng e ga in s r ec ycl ed t o th e inc om e s ta tem ent o n di sp os a l of b us in es s (196) – 80 (166) T otal other comprehensive income , net of taxation (77) (71) T otal comprehensive income 958 214 Attr ibutab le to: Smiths Group s hareholder s 957 214 Non-contr olling interest s 1 – 958 214 T otal comprehensive income attributable to Smiths Group shareholders arising from: Continuing operations 131 152 Discontinued operations 827 62 958 214 * T h e co m pa r a ti v e y e ar h a s be e n r ep r e se nt e d to in c lu d e ‘F ai r v al ue m o v em e nt s o n f in an c ia l as s e t s at f a ir v a lu e t hr o ug h O CI ’ w i th in t h e ‘O CI w h i ch w i ll n o t be r e c l as s i f ie d to t h e in co m e st a te me nt ’ s ub to ta l r a th e r th an w i t hi n th e ‘O C I w hi c h w il l b e re c l a s si f ie d a nd r e c l as s i f ic a ti on s’ s ub to t al . T h is r e c l a s si f ic a ti o n ha s n o im p ac t o n to t al o th er c o mp r eh e ns i v e in c om e in t h e co mp a r a ti v e y ea r e nd e d 31 J ul y 2 021. CONSOLIDATED PRIMA RY ST A TEMENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 022 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 104 Cons olidated b al ance sheet Notes 31 Ju ly 2 022 £m 31 Ju l y 2 021 £m NON-CURR ENT A SSE T S Intangible as set s 10 1,588 1,498 Pr o pe r t y, pl an t an d eq uip me nt 12 243 212 Ri ght of u s e as s et s 13 106 108 Financial ass ets – other investments 14 395 11 Retirement benefit assets 8 309 546 Def er r e d t ax a s s et s 6 95 92 T r ad e an d ot he r re ce i v ab le s 16 69 59 Financial der iv ative s 20 – 75 2,805 2,601 CURRENT ASSE TS Inventories 15 570 381 Cur rent t a x r ec ei v a bl e 6 50 75 T r ad e an d ot he r re ce i v ab le s 16 738 630 Ca sh a nd c a sh e qu i v al ent s 18 1,056 405 Financial der iv ative s 20 4 2 A s s et s h el d fo r s al e 27 – 1,243 2,418 2,736 TOT AL AS SETS 5,223 5,337 CURRE NT LIABI LITIES Financial liabili ties: – bo r r o w ing s 18 (509) (9) – lease liabilitie s 18 (29) (27) – financial deri vati ves 20 (27) (3) Prov isions 23 (88) (46) T r ad e an d ot he r pa y ab le s 17 (682) (530) Cur rent t a x p ay a bl e 6 (64) (89) Liabili ties held for sale 27 – (283) (1,399) (987) NON-CU RRENT LIABILITIES Financial liabili ties: – bo r r o w ing s 18 (538) (1,372) – lease liabilitie s 18 (90) (94) – financial deri vati ves 20 (20) – Prov isions 23 (247) (241) Retirement benefit obligations 8 (115) (128) Corp or ation tax payable 6 (3) (5) Deferr ed tax liabilitie s 6 (44) (28) T r ad e an d ot he r pa y ab le s 17 (46) (59) (1,103) (1,927) TOT AL LIA BILITI ES (2,502) (2,914) N ET ASSETS 2,721 2,423 SHA REHOLDER S’ EQUIT Y Share cap ital 24 136 149 Shar e premium account 365 363 Capital re demption reser ve 26 19 6 Revaluation re ser ve 26 – 1 Merger re ser ve 26 235 235 Cumulativ e transl ation adjustment s 487 509 Retained ear nings 1,659 1,367 He dg e r es e r ve 26 (202) (228) T otal shareholder s’ equity 2,699 2,402 Non- control ling interes t equit y 26 22 21 TOT AL EQU IT Y 2,721 2,423 Th e ac cou nt s on p ag e s 103 to 16 3 we re a pp r ov ed b y th e Bo ar d of D ir e c tor s o n 2 2 S epte mbe r 2 02 2 an d we r e sig ne d on it s b eh al f by : Paul Keel Clare S cherrer CHIE F E XEC U T I V E O F F ICE R CHIEF F I N A NC I A L OF F I CER CONSOLIDATED PRIMA RY ST A TEMENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 022 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 105 Consolida ted stat eme nt o f chang es in equ it y Notes Share capital and share premium £m Other reserves £m Cumulative transl ation adjustment s £m Retained earnings £m Hedge reser ve £m Equity shareholders’ funds £m Non- controlling interest £m To t a l equity £m At 31 J uly 2 021 512 242 509 1,367 (228) 2,402 21 2,423 P r of it f or t he y e ar – – – 1,033 – 1,033 2 1,035 O ther comprehensi ve income: – re-m easurement of retirement benefits af te r t ax – – – (17) – (17) – (17) – F X mov em en t s net o f r ec ycl in g – (1) (22) 1 103 81 (1) 80 – fa ir v a lu e gai ns a nd r e l ate d t ax – – – (63) (77) (140) – (140) T otal comprehensive income for the year – (1) (22) 954 26 957 1 958 T ransac tions relating to owners hip interest s: Is s ue of n e w eq ui t y s ha r es 24 2 – – – – 2 – 2 Pu r ch as e of s ha re s b y E mp lo ye e B en ef it Tr u s t – – – (16) – (16) – (16) Procee ds from exercise of share options – – – 1 – 1 – 1 Share buyb acks 24 (13) 13 – (511) – (511) – (511) Div idends: – equit y shareholder s 25 – – – (150) – (150) – (150) Share-based payment 9 – – – 14 – 14 – 14 At 31 J uly 2 022 501 254 487 1,659 (202) 2,699 22 2,721 Notes Share capital and share premium £m Other reserves £m Cumulati ve transl ation adjustment s £m Retained earnings £m Hedge reser ve £m Equit y shareholders’ funds £m Non- contr oll ing int erest £m To t a l equit y £m At 31 J uly 2 020 510 242 674 1,259 (312) 2,373 21 2,394 P r of it f or t he y e ar – – – 284 – 284 1 285 O ther comprehensi ve income: – re-measur ement of retirement benefits af te r t ax – – – 7 – 7 – 7 – F X mov em en t s net o f r ec ycl in g – – (165) – – (165) (1) (166) – fa ir v a lu e gai ns a nd r e l ate d t ax – – – 4 84 88 – 88 T otal comprehensive income for the year – – (165) 295 84 214 – 214 T ransac tions relating to owners hip interest s: E xercises of share options 24 2 – – – – 2 – 2 Rec eip t of c ap i ta l fr o m no n -c on tr ol l in g in te rest – – – – – – 1 1 Pu r ch as e of o w n sh ar e s 24 – – – (16) – (16) – (16) Div idends: – equit y shareholder s 25 – – – (185) – (185) – (185) – non-controll ing interest – – – – – – (1) (1) Share-based payment 9 – – – 14 – 14 – 14 At 31 J uly 2 021 512 242 509 1,367 (228) 2,402 21 2,423 CONSOLIDATED PRIMA RY ST A TEMENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 022 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 106 Con s oli dated c a sh-f lo w s t atement Notes Ye a r e nd e d 31 Ju ly 2 022 £m Y ear ended 31 Ju l y 2 021 £m Net cash inflow from operating activities 28 279 535 Cash-fl ows fr om i nvest ing activiti es E xpenditure on capitalised development (22) (27) E x pe nd it ur e o n oth er i nt an gib le a s s et s (8) (12) Pu r ch as e s of p ro p er t y, pl a nt an d eq ui pm ent (58) (78) Disposal s of proper ty, plant and equipme nt 3 2 Ca pi t al r et ur n ed b y ot he r in ve s t me nt s – 7 Acquisition of business es – (83) Inves tment in financial ass et – discontinued operations – (14) Pr o ce e ds o n dis p os a l of su bs id iar ies , n et of c a sh d is po se d 1,331 – Ne t ca s h -f lo w u se d in i nv e s tin g a c ti v i ti es 1,246 (205) Cash-flow s from financing activ ities Procee ds from exercise of share options 24 2 2 Share buyb acks 24 (511) – Pu r ch as e of s ha re s b y E mp lo ye e B en ef it Tru st 26 (16) (16) Pr o ce e ds r e cei v e d on e xer c is e of e mp lo ye e s har e o pt io ns 1 – Set tlement of cash-set tled options (1) – Div idends paid to equity shareholders 25 (150) (185) Lease payments (38) (44) Red uc t io n an d re p ay m ent o f bo r r o w in gs (295) – Ca sh i nf lo w f r om m atu r ed d er iv at i ve f i na nc ial i ns t r um ent s 23 4 Net cash-flow used in financing activities (985) (239) Ne t in cr ea s e in c a s h an d c as h e qu i va l en t s 540 91 Ca sh a nd c a sh e qu i v al ent s a t be gi nn in g of ye a r 405 366 Mo ve me nt in n et c a sh h el d in di sp o s al gr o up 48 (28) Foreign exchange r ate movements 62 (24) Cash and cash equivalent s at end of year 18 1,055 405 Ca sh a nd c a sh e qu i v al ent s a t en d of y ea r co mp r is e: – ca s h at b ank a nd i n ha nd 242 219 – shor t-t er m deposits 814 186 1,056 405 – ba nk o ve r dr af t s (1) – 1,055 405 CONSOLIDATED PRIMA RY ST A TEMENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 022 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 107 Basi s of pr epar ation Th e ac cou nt s ha ve b ee n pr ep ar e d in ac cor d anc e w it h Inter n ati ona l Ac cou ntin g St and ar d s in co nfor m it y wi th t he r eq uir em ent s of t he Co mp ani es A c t 2 0 06. Th e co ns ol id ate d fi nan cia l s tate men t s ha ve b ee n pr ep ar e d und er th e his tor ica l cos t c onv ent ion m o dif ie d to in clu de r e v alu ati on of c er tai n fi nan cia l ins t r um ent s , sh ar e opt ion s an d pe ns ion a s se t s and l ia bil i tie s , hel d at f air v a lue a s de s cr i be d be lo w. Going concer n Th e Di re c tor s are s at is f ie d that t he G r oup h as a de qua te re s our ce s to cont inu e to op er a te for a p er i od n ot le s s th an 12 month s fr o m the d ate of app r ov a l of th e fi nan ci al s tate me nt s and t hat t he re a re n o ma ter ia l uncer t ainties around their asse ssment. Accor dingly, the Direc tor s cont inu e to ad opt t he go in g con cer n b a sis o f acc ount ing . Th e Gr o up’ s bu sin e ss a c ti v i tie s , to geth er w i th th e f ac to r s l ikely to af fe c t i t s fu tu re d e vel op men t, p er for m anc e an d po sit io n, ar e s et o ut in the S tr a tegi c Rep or t on p age s 5 to 5 5 . T he G ro up’s fina nci al p osi ti on , ca sh -f lo w s , li qui di t y a nd b or r o w ing f a cil i tie s ar e d es cr ibed i n the C FO re v ie w s ec t ion o n p age s 15 to 1 6. O the r f ac tor s cons ide r ed b y th e Bo ar d a s pa r t of thei r goi ng c onc er n ass es sment included the inherent uncert ainties in cash-flo w for e c as t s . Ba s ed o n the a bo ve , the D ir e c tor s h av e co ncl ud ed th at the G r oup i s we ll p l ace d to ma na ge i t s f ina nci ng an d oth er b usi ne s s r isk s s at is f ac to r ily, and t he y ha ve a r e as on ab le ex pe c t ati on th at th e Gr oup w i ll h av e ad eq uate r e so ur ce s to co ntin ue in o pe r ati on f or at lea s t 12 months f r om t he si gni ng d ate of th es e f in anc ial s t atem ent s . Th e y the r efor e co ns id er it a pp ro pr i ate to ad opt t he g oin g co nce r n ba sis o f acc ount ing i n pr ep ar i ng t he f ina nc ial s t atem ent s . Key e s timates and signific ant judgement s Th e pr e pa r ati on of t he a cco unt s in c onfo r mi t y w i th g ene r a lly a cce pted acc ount ing p r in cip le s r equ ir e s man ag eme nt to ma ke es ti mate s an d jud gem ent s t hat af fec t t he r ep or ted am ou nt s of as s et s an d l iab il it ie s and d is cl osu re o f cont ing ent a s se t s and l ia bil i tie s at t he date o f the acc ount s a nd th e r ep or ted am oun t s of r ev enu e s and e xp en s es d ur in g the r ep or tin g p er io d . Ac t ual r e su lt s ma y di f f er f ro m th es e e s tim ate s. Th e key s o ur ce s of e st imat io n unc er tai nt y to get he r w ith t he significant judgements and assumptions used for these consolidated fi nan cia l s tate men t s ar e se t out b el o w. S ource s of e stim ation un cer ta int y Impa irment reviews of intangi ble assets In c ar r y in g ou t imp air ment r ev i ew s o f int ang ibl e as s et s , a num be r of sig nif i c ant as s umpt io ns h av e to be m ad e w hen p r ep ar in g c as h- fl ow p r oje c ti on s to dete r min e the v alue in u se o f the a s se t or c as h gen er ating un it ( CG U). T h es e in clu de t he f ut ur e r a te of mar ket gr ow th , dis co unt r a tes , th e ma r ket de man d for t he p r odu c t s acq uir e d, th e f ut ur e pr of it ab il it y of acq uir e d bus ine s s e s or pr o du c t s, le vel s of re imb ur s em ent , and s ucc es s i n obt ain ing r e gul ator y app r ov a l s . If a c tua l r es ult s d if fer or ch an ge s in e xp ec t at ion s ar i se , imp air m ent c har g e s ma y be r e quir e d w hic h wo ul d ad v er s el y imp ac t oper ating result s. Cr it ic al e s ti mate s , and t he ef fec t of v a r ian ce s in t he se e s ti mate s , ar e dis cl os ed i n note 1 1 . Retirement benefit s Dete r min ing t he v al ue of t he f ut ur e def i ne d ben ef it o bl ig ati on in vo lv es sig nif ic a nt es t imate s in r e sp ec t o f the a s su mpti on s us ed to c a lcu l ate pr e se nt v alu e s. T h es e in cl ude f u tur e m or ta li t y , dis co unt r a te and inf l ati on . Th e Gr o up us e s pr e v io us ex p er ie nce a nd in de pe nd ent ac t uar ial ad v ic e to se le c t the v alue s for c r it ic al e s ti mate s . A po r tion of U K pe nsi on li abil i tie s ar e i ns ur ed v ia b ul k an nui t y p ol ic ie s w hic h br o ad ly matc h th e sc hem e ob li gat ion to i de ntif i ed gr o ups o f pen si on er s . T he s e as s et s ar e v alu ed b y an e x ter n al qu al if ie d ac t ua r y at the a c tu ar ia l v alu ati on of th e corr esp onding liabilit y , reflec ting this mat ching rel ationship. Th e Gr o up's pr in cip al d ef ine d be nef i t pe nsi on p l an s ar e in th e UK and t he U S and t he s e ha ve b ee n cl os ed s o th at no f u tur e b en efi t s ar e acc r ue d. C r it ic al e s tim ate s for t he s e pl an s , an d the ef fec t of v ar ia nce s in t he s e es t imate s , ar e di sc lo se d in n ote 8 . Pr ov isions f or liabil ities and char ge s Th e Gr o up ha s ma de p r ov i sio ns fo r cl a ims a nd l it ig atio ns w h er e it ha s ha d to def en d it s el f ag ain st p r oc ee din gs b ro ug ht by ot he r pa r ties . T h es e p ro v is io ns h av e be en m ade f or th e be s t e s tim ate of the e xp e c ted e xp en dit ur e r eq uir e d to set tle ea ch ob l iga tio n, alth ou gh th er e c an b e no g uar antee th at su ch p ro v i sio ns ( w hi ch may b e su bje c t to p otenti al ly mate r ia l re v is io n fr o m tim e to tim e) w ill a ccu r ate ly pr e dic t t he a c tua l cos t s a nd l iab il it ie s th at ma y be incurre d. The most significant of thes e litigation provisions are described below . Joh n Cr a ne, I nc . ( J CI ), a sub sid iar y of t he Gr o up, is o ne of m an y co - defe nd ant s in l it ig atio n r el at ing to p r odu c t s pr e v io usl y man uf a c tur e d w hic h cont ai ne d asb e s tos . Pr o v is ion o f £ 2 2 9m ( F Y 2 0 21 : £ 212m) h as be en ma de f or th e f ut ur e defe nce c os t s w hi ch th e Gr o up is e xp ec te d to inc ur an d the e xp e c ted c os t s of f ut ur e ad v er se jud ge ment s aga ins t J CI. W hil s t we ll- e s ta bl ish ed i nci de nce c ur ve s c an b e us e d to es ti mate t he l ikely f u tur e p at te r n of as be s tos -r el ated dis e as e, J CI’s cl ai ms ex p er i enc e is si gni f ic antl y imp ac te d b y oth er f ac to r s w hi ch influence the US litigation environment. These c an include : changing app r oa che s o n the p ar t of th e pl a inti f f s’ bar; chan gin g at t it ude s amo ng st t he ju di cia r y at bot h tr ia l and a pp el l ate le ve l s; an d le gi sl ati v e and p r oce du r al c han ge s in b oth t he s t ate an d fed er al cour t s y s tem s. Be c aus e of t he si gni f ic ant un cer t aint y as so ci ated w i th t he f ut ur e le ve l of as be s tos c l aim s and o f the c os t s ar ising o ut o f the r e l ated l i tig ati on , the re c a n be n o gua r a ntee th at th e as s umpt ion s us e d to e st imate t he pr ov i si on w il l r es ult i n an ac cur ate pre di c tio n of th e ac t ual c os t s th at wil l be incur re d. In qua nti f yin g th e ex pe c ted c os t s JC I ta kes a cco unt of t he ad vic e of an ex pe r t in asb e sto s l iab il it y es tim ati on . T he fo ll ow i ng e s tim ate s we re m ad e in pr e pa r in g the p r ov i sio n c alc ul at ion: – the per iod o ve r w hic h the e xp en di tur e c an b e r el iab ly e s tim ated is ju dg ed to b e ten y ea r s , ba s ed on p a st e xp er ience r e gar d ing signific ant changes in the litigation environment that have occ ur r e d ev er y fe w y ear s and on t he am ou nt of tim e t aken in th e pa s t for s om e of th os e ch an ge s to imp ac t t he b r oa der asb e s tos l it igat io n env i r onm ent . S ee n ote 2 3 f or a s en sit i v it y sho w in g th e imp ac t o n the p r ov i si on of r ed uc ing o r inc r ea sin g this time horizon; – the f ut ur e tr en d of le ga l co st s , t he r a te of f utu r e cl ai ms f il ed , the r ate of s ucc es s f ul r e so lu tio n of cl a ims , a nd th e av er age am ou nt of jud ge ment s aw ar de d ha ve b e en pr o je c ted b as e d on th e pa s t his tor y of J CI c l aim s an d we ll- e st ab li sh ed t ab le s of as be s tos incidence projections, since this is the best avail able evidence. Cl aim s hi sto r y fr o m othe r def end ant s i s not u se d to c alc ul ate t he pr ov i si on b ec au se J CI ’s defenc e st r ate g y ge ner ates a si gni f ic ant ly dif fer ent p at ter n of leg al co st s a nd s et t lem ent e xp en se s . S ee n ote 2 3 for a s en si ti v i t y s ho w ing t he r ange of e xp e c ted f u tur e sp en d. T itef le x Co r p or at io n, a s ubs idi ar y of th e Gr ou p in th e F lex- T ek di v is ion , has r e cei v e d a numb er o f cl ai ms f r om in su r an ce co mp ani es s e ek ing re co mp ens e o n a sub ro ga ted b as is fo r th e ef fe c t s of d ama ge a ll eg edl y ca us ed b y l igh tnin g s tr ike s in r el ation to i t s f lex ib le ga s pip in g pr od uc t . It h as a l s o r ece i ve d a num be r of pr o duc t l i abil i t y c l aim s re ga r din g thi s pr od uc t , so me i n the f or m of p ur p or ted c l as s a c tio ns . T itef le x Co r p or at io n be li ev e s that i t s pr o du c t s ar e a s afe an d ef fec ti v e me ans o f del i v er in g ga s w he n ins t al le d in ac cor d anc e w ith t he man uf ac t ur er ’s ins tr u c tio ns an d lo c al an d na tio nal c od es; h o we v er , so me cl aims ha v e be en s et tl ed o n an in di v i dua l ba sis w i th ou t adm is si on of l ia bil it y. Pro v i sio n of £ 52 m (F Y 2 0 21: £47 m ) ha s be en mad e fo r the c os t s w hi ch th e Gr ou p is e xp ec te d to in cur in r e sp e c t of the s e cl a ims . In p r ep ar in g th e pr ov i si on c al cul at io n, ke y es t imate s ACCOUNT ING POLICIES 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 10 8 hav e b ee n mad e ab ou t th e imp ac t of s a fe in st al l at ion i nit iat i ve s on t he le vel o f fu tu re c l aim s . S ee n ote 2 3 f or a s en sit i v it y sho w in g the i mp ac t on th e pr o v isi on of r e duc in g or in cr ea sin g th e ex pe c ted i mp ac t . Ho we v er , bec au s e of th e sig nif ic a nt unc er tai nt y a s so ci ated w i th t he fu tu re l ev el of c l aim s , th er e c an b e no gu ar a ntee t hat t he a ss ump tio ns us ed to e s tim ate th e pr o v isi on w il l r e sul t in an ac cur ate pr ed ic ti on of the a c tu al co st s t hat m ay b e in cur r e d. T ax ation Th e Gr o up ha s r ec ogn is ed d efe r r ed t ax a s s et s of £103 m (F Y 2 0 21: £ 14 4 m) r e l atin g to lo s se s an d £69m ( F Y 2 0 21 : £6 5 m ) rel ating t o the John Cr ane, Inc. and Titeflex Cor por ation litigation pr ov i si on s. T h e re co gn iti on of a s se t s pe r tain ing to t he s e item s re qui r es m an age me nt to make s igni f ic ant e s ti mate s as to t he like li ho od of r e al is at io n of the s e def er r e d ta x a ss et s a nd th e ph as ing and at tr ibu ti on of f ut ur e t ax ab le pr of i t s . T his i s ba s ed o n a numb er of f ac tor s, w hi ch ma na gem ent u se to a s se s s th e ex pe c t ati on th at the b en ef it of t he s e as s et s w il l be r e al is ed , inc lu din g ex pe c ted future level s of operating profit, expenditur e on litigation, pension cont r ib uti on s and t he t imin g of th e un w ind of o the r ta x p osi ti on s. T axat io n li abi li tie s in cl ude d pr o v is io ns of £ 3 8m (F Y 2 021 : £ 3 4 m ), the maj or i t y o f w hic h re l ate d to the r isk of ch al len ge to t he ge o gr a phi c all oc at io n of pr of it s by ta x au th or i tie s . In ad di tio n to the r isk s pr o v ide d fo r , the Gr ou p fa ce s a v ar iet y of othe r ta x r i sk s , w hic h r es ult f r om o pe r at ing i n a com ple x glo b al env i ro nm ent , inc lud ing t he o ng oin g re for m o f bot h inter n ati on al an d dom e st ic t ax r ule s, n ew a nd o ng oin g ta x au di t s in th e Gr ou p’ s l ar ge r mar ket s a nd t he ch al len ge to f ul f il on go ing t a x com pl ia nce f il in g and t r an s fer p r ic ing o bl ig ati ons g i ve n the s c al e an d di ve r si t y of the Group’ s g lobal oper ations. Th e Gr o up ant ici pate s th at a nu mb er of t ax a udi t s ar e l ikel y to con clu de i n the n ex t 12 to 24 m onth s . Du e to the u nce r taint y as s oc iate d w ith s uc h ta x i tems , i t is p os si ble t hat t he co nc lus io n of op en t ax m at ter s may r e sul t in a f ina l ou tcom e th at v ar i es sig nif ic a ntly f r om t he am ou nt s note d ab ov e. Revenue r eco gnition Revenue is reco gnised as the perfor mance obligations t o deliver pr od uc t s o r se r vi ce s ar e s ati s fi ed a nd r e ven ue i s re co r de d ba s ed o n the a mo unt of co ns ide r at ion e xp e c ted to b e r ece i ve d in e xcha nge f or satisf ying the perfor mance obligations. Smi th s Dete c ti on an d Sm it hs Inte rc onn ec t have m ult i- ye ar cont r a c tua l ar r ange ment s f or th e s al e of go od s an d se r vi ce s . Wher e these contr ac ts hav e separ ately identifiable components wi th dis ti nc t p at ter ns of del i v er y an d cu sto me r acc ept an ce, r e ven ue i s acc ounte d for s e pa r atel y for e ac h id enti f iab le co mp one nt . Th e Gr o up ente r s into ce r tai n cont r ac ts fo r agr e ed f ee s th at ar e per fo r me d ac ro s s mo re t han o ne a cco unti ng p er i od an d r ev en ue i s re co gni s ed o ve r tim e. E s t imate s ar e r e quir e d at th e ba l an ce sh eet date w he n dete r min ing t he s t ag e of co mpl eti on of th e co ntr a c t ac t i v it y. Th is a s se s sm ent r e quir e s th e ex pe c ted to ta l cos t s of t he c ontr ac t and the r em ain ing c os t s to co mp lete th e co ntr a c t to be e s ti mate d. At 31 Ju ly 2 0 2 2 , the G r oup h el d cont r a c t s w it h a tota l v alu e of £181 m ( 2 0 21 : £1 6 6m ), of w hic h £135m ( 20 21: £99 m) h ad b ee n de li v er e d and £47m ( 2 0 21 : £67m) rem ain s f ul ly or p ar tia ll y uns at is f ie d. £ 3 7m of the u ns at is f ied a mo unt is e xp e c ted to b e re co gn is ed in t he c omi ng ye ar , wi th th e r ema ind er b ein g r ec ogn is ed w i th in t w o y ea r s . A 5% inc re as e in t he r em ain ing c os t to co mpl ete th e cont r a c t s wo ul d ha ve re du ced G r oup o pe r at ing p r of it in t he c ur r ent y e ar by l e s s tha n £ 2m ( 2 0 21 : le s s tha n £ 2m ). Valuat ion of financial as set s Fol lo w in g th e s ale of S mi th s Me dic al t he G ro up h as r ec og nis e d a fi nan cia l as s et fo r the f a ir v alu e of th e $1 0 0 m ad di tio na l sale s consider ation that is con tingent on the future share pr ice per fo r man ce of t he en l ar g ed I CU Me di ca l , Inc ( I CU ) bu sin es s . Th e e ar no ut r e qui re s t he Gr o up to r et ain b en efi cia l ow n er ship of at le as t 1.25 m IC U sh ar es a nd f or th e IC U sha re p r ic e to av er age $ 3 0 0 or mor e fo r any 3 0- da y pe r io d dur ing th e fi r s t thr e e ye ar s po st- com ple tio n, o r for a ny 4 5 -da y pe r io d in th e fo ur th ye ar p os t- completion. A n ex te r na l v alu ati on f ir m h as b ee n en gag ed to u nd er take M onte Ca r lo v a luat io n simu l ati on s in or d er to e s tim ate the p r ob ab ili t y of the fu tu re I CU s har e p r ice e xce edi ng $ 30 0. Th e se v a luat io n sim ul ati on s hav e d eter mi ne d a f air v al ue of £19m (U S $2 3m). Signific ant judg ement s made in apply ing accounting p ol icie s Busine s s combinati ons On th e ac qui sit io n of a bu sin es s , th e Gr o up ha s to ma ke jud gem ent s on th e id enti f ic ati on of s pe ci fi c int an gibl e as s et s w hi ch ar e re co gni s ed s ep ar ately fr o m go od w i ll an d th en am or tis e d ov er t hei r es ti mate d us ef ul l i ve s . T he s e inc lu de i tems s uc h as b r an d na me s and c us tom er l is t s , to w hi ch v al ue i s fi r s t at tr ibute d at th e tim e of acq uis it ion . T he c a pi ta li s ati on of th e se a s s et s and t he r el ated amo r tis ati on c har g es a r e ba se d on j ud gem ent s a bo ut t he v al ue an d eco no mic l i fe of su ch i tem s. W her e a cqu isi ti on s ar e sig nif i c ant, a pp ro pr i ate ad v i ce i s so ught from profes sional advis er s before making such allocations. W her e t he Gr o up ha s a co ntr act ual o pti on to a cqu ir e a bu sin es s in the future, managemen t have applied j udgement in determining w heth er i t ha s sub s ta nti v e vot ing r ight s in th e bu sin es s a nd w h ethe r the b usi ne s s sh oul d be a cco unte d for a s a su bsi dia r y or as s o ciate . In appl ying these judgements, management have rev iewed whether the o pti on an d an y re l ate d leg al /comm er cia l ag re em ent s p ro v id e the G r oup w i th p ow er o r si gni fi c ant inf lu en ce ov er t he b usi ne s s and h av e as s e s se d w het he r the r e ar e any b ar ri er s t hat p re v ent th e Gr oup f r om e xer ci sin g th es e r i ght s . Retirement benefit s At 31 Ju ly 2 0 2 2 th e Gr ou p ha s re co gn is ed £ 3 0 9 m of r etir e ment ben ef it a s se t s (F Y 2 0 21: £5 4 6m) an d a net p en si on a ss et of £19 4 m (F Y 2 0 21: £4 1 3m ), pr incip al ly r el a tin g to the S mi th s Ind us tr i es P en sio n Sc he me ( ' SIP S'), w h ich a r is e s fr o m the r ight s of th e emp lo ye r s to re co ve r th e sur p lu s at the e nd of t he l if e of th e sc he me. Th e r ec og nit ion o f thi s sur plus is a s ign if ic a nt jud ge ment . T h er e is jud gem ent r e qui re d in d eter m inin g w het he r an unc on di tio nal r ight of ref un d ex is t s b as e d on th e pr o v is ion s of th e r ele v ant t r us t d ee d an d r ule s . Ha v in g ta ken le gal a d v ic e w ith r e gar d to t he r i ght s of t he G ro up und er th e r ele v ant T r u st d ee d an d r ul es , i t ha s be en d eter m ine d that t he s ur pl us i s re co v er a ble b y th e Gr o up an d the r efor e c an b e re co gni s ed . In pa r ticu l ar , in the o r din ar y cou r s e of bu sin e ss , t he tr u ste e s of th e sc hem e do n ot ha v e a unil ate r a l po w er to ter m inate and w i nd -up t he s ch eme o r au gme nt be nef i t s. I f th e pe nsi on s ch eme w as w ou nd up w h ile i t st il l ha d mem be r s , the s c hem e wo ul d ne ed to bu y ou t th e be nef it s of all me mb er s . T he b u y out w o uld c os t sig nif ic a ntly m or e th an th e c ar r y in g v al ue of th e s che me l ia bil it ie s w ith in th es e f in anc ial s t atem ent s w hi ch a re c a lcu l ated i n acc or da nce w ith I A S 19 : Em pl oy ee b en ef it s . Capitalisation o f develop ment c ost s E x pe ndi tu re i ncu r r ed i n the d ev el op ment o f maj or ne w p ro du c t s is ca pi ta li s ed a s inter n al ly ge ne r ate d int ang ibl e as s et s on ly w h en it h as be en ju dg ed t hat s tr i c t cr i ter i a ar e met , sp e cif i ca ll y in r el at ion to t he pr od uc t s' tec hni ca l fe asi bil it y and c omm er ci al v ia bil it y (th e abi li t y to gen er ate pro ba bl e fu tu re e co no mic b en efi t s ). ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 10 9 Th e as s e s sme nt of te chn ic al fe as ibi li t y and f ut ur e com me rc ial v iab ili t y of dev el op ment p r oje c t s r eq uir e s si gni fi c ant ju dg eme nt an d the u se o f as su mpt ion s . Ke y jud ge men t s ma de in t he as s e s sm ent of futur e commercial v iabilit y include: – Scop e of w or k to a ch ie ve r e gul ato r y cle ar ance ( w he re r e qui r ed ) – inc lud ing t he l ev el of te s tin g e v ide nce a nd d oc ume nta tio n; – Comp eti tor a c ti v it y – inc lud ing t he im pa c t of p otenti al co mp eti tor pr od uc t l a unc he s on th e ma r ket pl a ce an d cu s tome r dem an d; and – Lau nch t ime l ine – in cl udi ng ti me an d r es o ur ce r eq uir ed to es t ab li sh an d sup po r t the co mm er cia l l aun ch of a n ew p r od uc t . T ax ation A s s t ated i n the p r ev i ou s se c ti on ' S our ce s of e s ti mati on unce r tain t y ', the Gr ou p has r e co gni se d de fer r e d ta x a s set s o f £1 0 3 m ( F Y 2 0 21 : £1 4 4m ) re l atin g to lo s se s a nd £ 69m (F Y 2 0 21 : £6 5 m ) rel ating t o the John Cr ane, Inc. and Titeflex Cor por ation litigation pr ov i si on s. T h e de cis io n to re co gni s e defe r r ed t a x as s et s r eq uir e s jud gem ent i n deter minin g w het her t he G ro up w il l be a bl e to uti li se his tor ica l ta x lo s se s in f u tur e p er i od s . It ha s b een c on clu de d that t he re a re s uf fic ie nt ta x abl e pr of it s i n f utu r e per iods to suppor t recognition. Th e Gr o up ha s al so app l ie d jud gem ent i n the d ec isi on s ma de to recognise pro visions against uncer tain tax positions; please see note 6 fo r f ur ther d et ail s. Pr es ent ation of h eadl ine p rof it s and or ganic gr ow th In or d er to pr o v id e us er s o f the a cco unt s w i th a cl ea r and c on sis te nt pr e se ntat io n of th e per fo r man ce of t he G ro up’s ongoi ng tr adin g ac ti v i t y, th e inc ome s t atem ent i s pr e se nted i n a thr e e- co lum n for m at w it h 'h ea dl ine' p ro fi t s sh ow n s ep a r atel y fr o m no n- he adl in e item s . In ad di tio n, t he G ro up r ep or t s or ga nic g r ow th r ate s fo r s al es and p r of it m ea sur e s . Se e n ote 1 for d is cl osu re s of h ea dl in e op er at in g pr of it a nd n ote 2 9 for m or e inf or m atio n ab ou t the a lter n ati v e p er for m anc e me as ur es ('AP Ms' ) us ed b y th e Gr ou p. Jud ge ment i s r eq uir ed i n dete r min ing w h ich i tem s sh oul d be included as non-headline. The amor tisation / impairment of ac quired int ang ibl es , l eg ac y l ia bil i tie s , mate r ia l one - of f items a nd c er tai n re - me asu r eme nt s ar e in clu de d in a s ep ar a te col umn of t he in co me st atem ent . S e e note 3 fo r a br e akdo w n of t he i tems e xclu de d f ro m headline profit. Ca lcu l atin g or g ani c gr ow th al so r eq uir e s jud ge men t. Or ga nic g ro w th ad jus t s th e mo v eme nt in he ad li ne p er for m anc e to excl ude t he im pa c t of fo r eign e xch ang e, r e st r uc t ur i ng co s t s an d acq uis it ion s . T his d ef ini tio n of or g ani c gr ow th is t he s a me as t hat us ed fo r un der lyi ng gr o w th in pr e v io us ac cou ntin g pe r io ds . Signif ic ant a ccounting p ol icie s Basis of con solidation Th e Gr o up’ s co ns ol id ated a cco unt s in cl ude t he f in anc ial s t atem ent s of Smi th s Gr o up pl c (th e ‘Co mp any ’ ) an d al l enti ti es c ontr o ll ed b y th e Co mp any ( i t s sub sid iar ies ). A li s t of the s ub sid iar i e s of Smi th s Gr o up plc i s pr o v ide d on p a ge s 180 to 18 6. Th e C omp an y co ntr ol s an enti t y w h en i t (i ) ha s p ow er o ve r th e enti t y; (ii ) i s ex po se d or h as r i ght s to v a r iab le r et ur ns f r om i t s in vo lv eme nt w ith t he e ntit y; an d (i ii) h as t he ab il it y to af fe c t th os e r etu r ns t hr ou gh it s p ow er o v er th e enti t y . T he G r oup r e as s e ss e s w het he r or no t it cont r ol s a s ubs idi ar y if f a c t s an d cir cu ms t anc es i ndi c ate th at the r e ar e cha ng es to o ne o r mo re o f the s e thr e e el eme nt s of co ntr ol . Sub si diar ies ar e f ul ly c ons o li date d f ro m th e date on w h ich c ont ro l is obt ain ed b y th e Co mp an y to the d ate th at co ntr ol c ea se s . W her e t he Gr o up lo s es c ontr o l of a su bsi dia r y, the as s et s an d li abil i tie s ar e d er ec og nis e d alo ng w i th an y r el ate d no n- co ntr o ll in g inter e s t and ot he r com po nent s of equi t y. A n y re s ulti ng g ain or l os s is r ec og nis e d in th e inc ome s t atem ent . A n y inter e s t re ta ine d in th e for m er s ubs idi ar y is m ea sur e d at f air v a lue w h en co ntr ol i s lo s t. Th e no n- c ontr o ll in g inter e s t s in th e Gr ou p ba l an ce sh eet r ep r e se nt the s har e of n et as s et s of s ub sid iar y un der t ak ing s hel d ou t si de t he Gr oup . T he m ov em ent in t he y ea r com pr i se s t he pr of i t at tr ibut ab le to suc h inter e s t s tog eth er w i th an y di v id en ds p aid , mo v eme nt s in re sp e c t of co r po r ate t r an s ac t ion s an d r el ate d exch an ge di f f er enc es . Inter e s t s in as s oc iate s ar e a cco unted f or u sin g the e qu it y meth od . Th e y ar e ini tia ll y re co gni s ed at c os t, w h ic h inc lud e s tr a ns a c tio n cos t s . S ubs eq ue nt to ini tia l re co gn iti on , th e Gr oup f i nan cia l st atem ent s i ncl ud e the G r oup’s shar e of th e pr of i t or lo s s an d othe r com pr eh en si ve i nco me of e qu it y-a cco unte d inv e ste e s , until t he d ate on w hi ch si gni fi c ant inf lu en ce ce as e s . Al l inte rc omp an y tr ans ac t ion s , ba l an ce s, a nd g ain s and l os s e s on tr ans ac t ion s b et w e en Gr o up co mp ani es a r e el imin ate d on consolidation. Foreign cur ren cies The Company’s presentational cu r renc y and functional currenc y is ste r l ing . T he f in anc ial p os it ion o f all s ub sid iar i es a nd a s so ci ate s that hav e a f un c tio nal c ur r en c y d if fere nt fr o m s ter l in g ar e tr a ns l ated i nto ste r l ing at t he r ate of excha ng e at th e date of t hat b al a nce s he et, a nd the i nco me an d ex pe ns e s ar e tr ansl a ted at a ve r a ge e xcha nge r ates for t he p er io d . Al l r es ult in g for ei gn exc han ge r ate mov em ent s ar e re co gni s ed a s a se pa r ate c omp on ent of e qui t y . On consolidation, foreign ex change rate movements arising from the t r an sl a tio n of th e net in ve s tm ent in f or ei gn ent iti e s, a nd of bor ro w ing s an d oth er cu r r enc y ins tr u ment s d e sig nate d as h ed ge s of suc h in ve s tm ent s , ar e t aken to sh ar eh ol de r s’ equi t y . W he n a foreign operation is sold, the cu mulati ve amount of such f oreign exch ang e r ate m o vem ent s i s r eco gn is ed i n the i nco me s t atem ent as pa r t of the ga in or l os s on s a le. Foreign exchange r ate movement s arising on transac tions are re co gni s ed in t he in co me s ta teme nt. T h os e ar ising o n tr adin g ar e ta ken to op er a tin g pr of it ; tho s e ar is in g on b or r o w ing s ar e cl a s si fi ed as f in anc e inc ome o r co st . Rev e nu e Rev enu e is m ea sur e d at th e f air v al ue of t he co ns id er at io n re ce i ve d, net of t r a de di sc ount s (inc lud ing d is tr i bu tor r eb ate s) a nd s a le s ta xe s. Re v enu e is di sc oun ted on ly w h er e the i mp ac t of d is co untin g is ma ter ia l . W hen t he G r oup e nter s into c om ple x con tr a c t s w it h mul tip le, separ ately identifiable components , the terms of the contract ar e re v ie w ed to d eter m ine w h eth er o r not t he el eme nt s of th e cont r a c t sho ul d be a cco unted f or s ep ar ately. If a cont r a c t is b ein g spl i t into mul tip le co mp on ent s , th e cont r a c t re v enu e is al lo c ate d to the d if fere nt co mpo ne nt s at th e st ar t of th e co ntr a c t . T he b as is of al lo ca tio n dep en ds o n the s ub st an ce of t he co ntr act . T h e Gr ou p consider s rel ative s tand-alone sel ling pr ices, contr ac tual price s and rel ative cos t when alloc ating revenue. Th e Gr o up ha s id enti f ie d the f ol lo w ing d if fer ent t yp es o f re v enu e: (i) Sale of goods recognised at a point in time – generic products manufactured by Smiths Ge ner i c pr o duc t s a r e def in ed a s eit he r : – Pro du c t s tha t ar e not s pe ci fi c to an y pa r ticul ar cus tom er; – Pro du c t s tha t may i ni tia lly b e sp ec if ic to a c us to mer b ut c a n be re co nf igu re d at mi nim al co st , i. e. r et ain ing a m ar gi n, fo r s ale to a n alter nati v e cus to mer; or ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 11 0 – Pro du c t s tha t ar e sp ec if ic to a c us tom er bu t ar e m anu f ac tu re d at Smi th s r is k, i .e . we h av e no r i ght to p ay m ent of c os t s pl us m ar gin if th e cu sto me r re fu s es to t ake co ntr o l of the g oo ds . For est ablished pr oduc ts w ith simple install ation requir ements, re v enu e is r ec og nis e d w hen c ont ro l of th e pr o duc t i s pa s s ed to the c us tom er . Th e po int in t ime t hat c ontr o l pa s se s i s def in ed in acc or da nce w i th th e ag re e d ship pi ng ter ms and i s dete r min ed o n a ca s e by c a se b a sis . T h e tim e of de sp atch o r de li v er y of t he go o ds to the c us tom er i s nor mall y the p oi nt at w hic h in vo ici ng o ccu r s . Ho we v er fo r so me g ene r ic p ro du c t s , re v enu e is r e co gnis e d w he n the overall per formance obligation has been completed, which is of te n af te r the c us to mer h as c omp lete d it s a cce pt anc e pr oc ed ur es and h as a s sum ed c ontr o l . Pr o duc t s t hat a re s o ld un de r mul tip le el eme nt ar r ange men t s, i .e. cont r a c t s inv ol v ing a c omb in atio n of pr o du c t s and s er v i ce s, a r e bun dle d into a s ing le p er for m anc e obl ig ati on un le s s the c us to mer ca n be nef i t fr om t he g oo ds o r se r v ice s ei th er on t hei r ow n , or tog ethe r w it h oth er r e so ur ce s tha t ar e r ea dily a v ail able to th e cus to mer a nd ar e d is tin c t w it hin t he co ntex t of the co ntr a c t . For c ontr ac t s th at pa s s co ntr ol of t he p ro du c t to the c us to mer o nly on completi on of installation ser vices, rev enue is recognised upon completion of the installation. A n ob li gat ion to r ep l ac e or r ep air f a ult y pr od uc t s un der t he s t an dar d w ar r ant y ter ms is r ec ogn is ed a s a pr o v is ion . If t he c ontr ac t inc lu de s ter m s that e it her e x ten d th e w ar r ant y b ey on d th e s ta nda r d ter m or imp ly t hat m ainten an ce is p r ov i de d to keep t he p ro du c t wo r k ing , the s e ar e s er v ice w arr antie s an d r ev en ue is d efe r r ed to co v er th e per for mance obligation i n an amoun t equiv alent t o the stand-alone sellin g price of that ser v ice. (ii) Sale of goods recognised over time – customer-specific products where the contractual terms include rights to payment for work performed to date Cus tom er -s pe ci f ic pr o du c t s ar e def in ed a s be ing: – Pro du c t s tha t ca nn ot be r e con fi gur e d ec ono mic a ll y suc h th at it re mai ns p ro fi t abl e to se ll to a not her c us tom er; – Pro du c t s tha t ca nn ot be s ol d to an oth er cu s tome r du e to contrac tual re str ic tions; and – Pro du c t s tha t all ow S mi th s to ch ar ge fo r th e wo r k pe r for m ed to date in a n amo unt th at r ep re s ent s t he co s t s inc ur r e d to date p lus a mar gi n, s ho uld t he c us tom er r ef us e to t ake cont r ol of t he go o ds . For c ontr ac t s th at me et th e ter m s li s ted ab o ve , re v enu e is re co gni s ed o ve r the p er iod th at th e Gr ou p is en ga ge d in th e man uf ac t ur e of th e pr o duc t , c alc ul ate d us ing t he i npu t met ho d ba se d on t he am ou nt of co st s incur r e d to date c omp ar e d to th e ov er all co st s o f the c ont r ac t . T hi s is c on sid er ed to b e a f ai thf ul dep ic ti on of t he tr ans fe r of the g oo ds to t he c us tom er a s the c os t s inc ur r ed , tot al ex p ec te d co st s a nd tot al o r der v alue ar e k no w n. Th e ti me of d es pa tch or d el i ve r y of the g oo ds to t he c us tom er is nor mall y the p oi nt at w hic h inv o icin g o ccur s. A n ob li gat ion to p r ov i de a r ef un d for f au lt y pro du c t s und er t he st an da rd w arr ant y te r ms i s r ec ogn is ed a s a pr o v is ion . If t he c ontr ac t inc lud e s ter m s that e it her e x ten d th e w ar r ant y b ey on d th e s ta nda r d ter m or i mpl y tha t mai ntena nce i s pr o v id ed to ke ep th e pr od uc t wo r ki ng , the s e ar e s er v ic e w ar r antie s an d re v enu e is d efer r e d to co ver t he p er for m an ce ob li gat ion i n an am ount e qu i v ale nt to th e stand -alone selling pr ice of that ser v ice. (iii) Services recognised over time – services relating to the installation, repair and ongoing maintenance of equipment Ser vice s include install ation, commissio ning, testing, tr aining, sof t w ar e h os ti ng an d ma inten anc e, pr o du c t re pa ir s an d co ntr act s und er ta kin g ex tende d w ar r ant y s er v i ce s. For c omp le x ins t al l ati on s w her e t he su pp ly of s er v ice s c an not b e se pa r ate d fr o m the s up ply of p r od uc t , re v enu e is r e co gnis e d up on acceptance o f the combined per for mance obligation (see Sale of goods (i) above). For s er v i ce s that c a n be a cco unte d for a s a se pa r ate p er for mance obligation, revenue is recognised over time, assess ed on the basis of the a c tu al s er v ice p r ov i de d as a p ro po r tion o f the tot al s e r vi ce s to be p ro v id ed . Dep en din g on t he na tur e of t he co ntr act , r e ven ue i s re co gn is ed as follows: – Install ation, commissioning and testing ser vice s (wh en neither lin ked to t he su pp ly of pr o du c t nor s ubj ec t to a cce pt anc e) a re re co gni s ed r ateabl y as t he s er v ice s a re p r ov i de d; – T r aining s e r vi ce s ar e r ec ogn is ed o n co mpl eti on of th e tr aining cour s e; – Sof t w ar e ho s tin g and m ainte nan ce s er v ic es a r e re co gni s ed r ate abl y ov er t he l ife o f the c ont r ac t ; – Pro du c t re pa ir s er v ice s , w h er e the p r od uc t is r et ur n ed to S mi ths pr emi s es f or r em edi al ac t io n, ar e r e co gni se d w he n the p r od uc t is ret ur n ed to t he c us tom er an d th ey r e gai n cont ro l of th e as s et; – On-s ite a d ho c pr o duc t r ep ai r se r vi ce s ar e r ec og nis e d r ate abl y as the ser vices are per formed; – Long -ter m pro duc t r e pa ir an d mai ntena nce c ont r ac t s a r e re co gni s ed r ateabl y ov er t he co ntr act te r m; an d – Ex tende d s er v ice w a r r a ntie s ar e r e co gni se d r ate ab ly o ve r the contrac t term. Inv oi cin g for s er v i ce s dep en ds o n the n atu re o f the s er v i ce pr o v id ed w ith s om e s er v ice s c har g ed i n ad v an ce an d oth er s i n ar r e ar s . W her e c ontr ac t s ar e acc ou nted fo r un der t he r e ven ue r e co gni se d ov er ti me b as is , th e pr op or ti on of co s t s inc ur r e d is u se d to determine the percentage of contrac t completion. Co ntr a c t s fo r the c on st r uc t io n of sub s ta ntia l as s et s , w hic h no r ma lly l as t in e xce ss o f one y e ar , are a cco unted f or un de r the r e ve nu e re co gni s ed o ve r tim e ba si s, u sin g an i npu t met ho d. For f i xed -p r ic e cont r a c t s, r e ve nu e is r ec og nis e d ba se d up on a n as s es s ment o f the a mo unt of co s t inc ur r e d und er t he co ntr act , com pa re d to th e tot al ex pe c te d cos t s t hat w il l b e inc ur r ed u nd er the c ontr ac t. T h is c al cul a tio n is ap pl ie d cu mul at i ve ly w i th an y ov er / und er r ec og nit io n bei ng a dju ste d in t he cu r r ent p er i od . For cost -plus contrac ts , revenue is recognised based upon cost s inc ur r ed to d ate pl us an y ag re e d mar g in. For both fixed-pr ice and cost -plus contrac ts , invoicing is nor mally ba se d on a s ch e dule w i th m ile s ton e pa y me nt s. Contr ac t cos t s Th e Gr o up ha s t aken th e pr ac tic al e xp e die nt of not c a pi ta li sin g cont r a c t cos t s a s the y ar e e xp ec te d to b e ex pen s ed w i thi n one y e ar fr om t he d ate of si gnin g. ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 111 Leases Th e Gr o up r ec ogn is e s r ig ht of us e as s et s at t he co mm enc eme nt date of t he le as e . Rig ht of us e as s et s a re m ea su re d at co s t inc lu din g the a mo unt of le as e l iab il it ie s r ec ogn is ed a nd in it ial di r ec t co s t s inc ur r ed , le s s an y inc enti v e s gr a nted b y th e le s s or . Right of u s e as s et s ar e de pr e ciate d o ve r the s ho r ter of the l ea se te r m an d the us ef ul l ife of t he r i ght of u se a s se t s, u nle s s th er e is a t r a ns fer o f ow n er s hip o r pur ch as e op tio n w hic h is r e as on abl y cer ta in to be exer ci se d at t he en d of th e le as e ter m , in w hi ch c a se d ep re ci ati on is ch ar ge d o ve r the u se fu l li fe of t he un de r ly in g as s et . Ri ght of u se as s et s ar e su bje c t to imp ai r me nt. Le as e s of bu ild ing s t y p ic al ly h av e le as e ter m s b et w e en 1 an d 6 ye ar s , w hi le pl a nt an d mac hin er y ge ne r al ly h av e le as e ter m s bet we en 1 an d 3 ye ar s . T h e Gr ou p al s o ha s ce r tain l ea se s of mac hin er y w it h le as e ter m s of 12 month s or le s s an d le as e s of of fic e equ ipm ent w i th lo w v a lue ( t y p ic al ly b elo w £ 5 ,0 0 0). T he G ro up ap pl ie s the 'sh or t-ter m le as e' and ' le as e of l ow - v alu e as s et s' re co gn iti on exem pti ons f or th e se l ea s es a nd r ec og nis e s th e le as e pa y me nt s as s oc iate d w ith t he s e le as e s as an e xp en s e on a s tr aight-l ine b as is ov er th e le as e ter m. T ax ation Th e ch ar ge f or t ax ati on i s ba s ed o n pr of it s f or th e ye ar a nd ta kes into a cco unt t a xat ion d efer red b e ca us e of tem po r ar y dif fer enc es b et we en th e tr ea tme nt of cer t ain i tem s for t a xat ion a nd accounting pur po se s. Cur r ent i nco me t a x as s et s an d li abi li ti es a r e me asu r ed at the a mo unt ex pe c te d to be r e cov er e d f ro m or p ai d to ta xa tio n aut ho r it ie s. Tax ben ef it s ar e n ot r ec ogn is ed u nle s s i t is l ikely t hat the t a x po si tio ns a re s us t ain abl e. T ax p os it ion s t aken ar e t hen re v ie w ed to a s se s s w h ethe r a pr o v isi on s hou ld b e ma de b as e d on pr ev ailin g cir c ums t an ce s . T ax pr o v isi on s ar e inc lu de d in cu r r ent t ax li abil i tie s . T he t a x r ate s an d t ax l a w s us e d to com pu te the a mo unt ar e tho s e tha t ar e ena c ted o r sub s ta nti v ely e na c ted , at the r e po r ting date in t he co untr ies w h er e th e Gr ou p ope r ate s an d ge ne r ate s taxable income. Th e Gr o up op er ates an d is s ubj ec t to t a xat ion i n man y co untr i es . T ax le gis l ati on i s dif fer ent in e ac h cou ntr y, is of te n com ple x an d is su bje c t to inte r pr et ati on b y man ag em ent an d go ve r nm ent aut ho r it ie s. T h e se m at ter s of jud gem ent gi v e r i se to t he n ee d to cr eate p r ov i sio ns f or un cer t ain t ax p os it ion s w hi ch ar e r ec og nis e d w hen i t is c on sid er ed m or e l ikel y tha n not t hat th er e w il l be a fu tu re o ut f l ow o f fu nds to a t a xi ng au th or i t y . P ro v is io ns ar e m ad e aga ins t i ndi v i dua l ex po sur e s an d ta ke into acc ou nt the s pe ci fi c cir cu ms t anc es o f ea ch c as e, i ncl udi ng t he s tr en gt h of tec hni c al ar gum ent s , r ec ent c a se l a w de ci sio ns o r r ul in gs o n simi l ar is s ue s and r el ev ant ex ter nal ad v i ce. Th e am ount s are me a sur e d usi ng on e of th e fo ll ow in g me tho ds , dep en din g on w hi ch of t he m etho ds t he D ir ec to r s ex p ec t w il l b et ter ref l ec t th e am ount t he G ro up w il l p ay to t he t ax a uth or it y: – The si ngl e be s t e s tim ate met ho d is u se d w he re t he re i s a sin gle outc om e that i s mo r e li kely th an n ot to occ ur . Th is w il l ha pp en , for exa mp le, w h er e th e ta x ou tco me is b ina r y or th e r an ge o f po s sib le outc om es i s ve r y lim ite d; – Alter n ati v ely, a pr ob ab il it y wei ghte d ex pe c ted v a lue i s us e d w her e, o n th e ba l anc e of pr o ba bil it ie s , the r e w ill b e a p ay m ent to the t a x au tho r it y but t he re a r e a numb er o f po ss ibl e ou tcom e s. In thi s c as e, a p ro b abil i t y i s as s ign ed to e ac h of th e ou tcom es and t he am ou nt pr o v ide d is t he s um of th e se r i sk-w ei ghted amo unt s . In a ss e s sin g pr o v is ion s ag ain s t unc er tai n ta x p osi ti ons , man ag eme nt us e s in -h ous e t ax e xp er t s , pr ofe s si on al f ir m s an d pr ev i ou s ex pe r ien ce of t he t ax in g au tho r i t y to e v al uate th e r is k . Defe r r ed t a x is p ro v id ed i n f ull u sin g th e ba l anc e she et l ia bil it y meth o d. A def er r e d ta x a ss et i s r eco gn is ed w h er e it i s pr o ba ble t hat fu tu re t a xa ble i nco me w il l b e suf fi cie nt to ut ili s e the a v ail able r el ief. T ax is c har g ed o r cr ed ite d to th e inc ome s t atem ent e xcept w h en i t re l ate s to ite ms ch ar g ed o r cr ed ite d dir e c tly to e qui t y , in w hi ch c as e the t a x is al so de al t w ith i n eq uit y. Defe r r ed t a x is p ro v id ed o n tem por ar y dif fer enc es a r is ing o n inv e st me nt s in su bsi dia r ie s an d as s oc iate s , exce pt w he r e the t imin g of the r e v er s al o f the te mp or a r y dif fer enc e s is co ntr ol le d b y the Co mp any a nd i t is p ro b abl e tha t the te mp or a r y dif fer enc e w ill n ot re v er s e in th e fo re s ee ab le f ut ur e. Defe r r ed t a x li abi li ti es a nd a s set s a r e not d is cou nted . Employee benefit s Share- base d compensation Th e f air v a lue o f the s har e s or s ha re o pti on s gr a nted i s re co gni s ed as an e xp en se o v er th e ve s ti ng p er i od to r ef le c t th e v alu e of th e emp lo ye e s er v ice s r ec ei v ed . T he f ai r v alu e of opt io ns gr anted , excl udin g th e imp ac t o f any n on -m ar ket v e st in g con di tio ns , is ca lcu l ate d usi ng e s ta bl is he d opti on p r ic ing m od el s, pr i nci pa ll y bin omi al mo de l s . T he p r ob abi li t y of meet ing n on -m ar ket v e st in g con di tio ns , w hi ch in clu de p r of it ab ili t y tar ge t s, i s us e d to es t imate t he numb er o f sha re o pti on s w hic h ar e l ikely to v e st . For cash-se ttled share-ba sed payme nt, a li abili t y is recog nised ba se d on t he f ai r v alu e of th e pa y me nt ea r ne d by t he b al a nce s he et date. F or e qui t y-s et t le d sha re - ba s ed p ay m ent , th e cor r e sp on din g credit i s recogni sed directly in reser ves. Pension obligations and post-retirement benefits Pen si ons a nd s imil a r be nef i t s ( pr i nci pa lly h ea lth c ar e) a r e acco unte d for un de r I A S 1 9 . The r et ir em ent be nef i t obl i gati on in r e sp e c t of th e def in ed b ene fi t pl a ns i s the l i abil i t y ( th e pr e se nt v alu e of al l ex pe c te d fu tu re o bl ig ati ons ) le s s th e f air v a lue o f the p l an a s set s . Th e in com e s tate me nt ex pen s e is al lo c ate d bet we en cu r r ent s er v ic e cos t s , r ef le c tin g the i ncr e as e in l ia bil i t y d ue to an y be nef i t acc r ue d by e mpl oy ee s in t he c ur r ent p er i od , an y pa s t se r v ice c os t s /cr ed it s and s et t lem ent l os s e s or ga ins w h ich a re r e co gni se d im me diate ly, and the scheme administr ation cost s. Ac t uar ial gai ns an d lo s se s ar e r e co gnis e d in th e s tate me nt of com pr eh en si v e inc ome i n the y e ar in w hi ch t he y ar i se . Th e se c omp r i se t he im pa c t on th e l iab il iti e s of ch ang e s in dem og r ap hic a nd f in anc ial a s sum pti on s com pa r ed w i th th e s ta r t of the y ea r , act ual e xp er ience b ein g di f f er ent to a ss ump tio ns a nd th e ret ur n o n pl a n as s et s be ing a bo v e or b elo w th e am ount in cl ud ed in the n et pe ns ion i nter e st c os t . Pa y me nt s to def in ed c ont r ibu ti on s ch eme s ar e c har g ed a s an inc ome s t atem ent e xp en se a s th ey f al l du e. Intangibl e as s et s Goodw ill Go od w i ll r ep r es ent s t he e xce ss o f the c os t of a n acq uis iti on o ve r th e fa ir v al ue of t he Gr o up’ s sh ar e of th e id enti f iab le ne t as s et s of th e acquired subsidiar y at t he date of acquisition. Th e go o d w ill a r is ing f r om a cqu isi ti on s of sub si diar ies af ter 1 Au gus t 1 9 9 8 is i ncl ud ed in i nta ngi bl e as s et s , tes te d ann ual ly f or im pai r me nt and c a r r ie d at co s t le s s acc umu l ated i mp air m ent lo s s es . G ain s an d los s e s on th e di sp os al of a n enti t y inclu de t he c ar r y i ng am ou nt of go od w i ll r el at in g to the e nti t y s ol d. T h e go od w i ll ar isin g fr o m acq uis it ion s of su bsi dia r ie s b efor e 1 A ug us t 199 8 w as s et a gai ns t re s er v es i n the y e ar of ac qui si tio n. ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 112 Go od w i ll i s tes te d for i mp air m ent at l ea st a nnu al ly. Sho ul d the te s t ind ic ate th at th e net r e al is ab le v al ue of t he C GU i s le s s tha n cur rent ca r r y ing v alue, a n imp air ment lo s s w ill b e r ec ogn is ed i mme di ately in th e inc ome s t atem ent . S ubs eq ue nt re v er s a l s of im pa ir m ent los s e s for g oo d w il l ar e no t re co gni s ed . Research and development E x pe ndi tu re o n r es e ar ch an d de ve lo pme nt is c har g ed to t he in co me st atem ent i n the y e ar in w hi ch i t is in cur red w i th t he exc epti on of: – Amo unt s r e co ve r ab le f r om th ir d p ar tie s; and – Ex pe ndi tu r e inc ur r ed i n r es pe c t of th e de ve lo pme nt of ma jo r ne w pr o duc t s w h er e th e ou tcom e of th os e pr o jec t s is as se s s ed as b ein g re a so nab ly ce r tain a s r eg ar ds v i abi li t y and tec hni c al fea sib il it y. Such e xp en dit ur e is c a pit al i se d an d amo r tis ed o v er the e s tim ate d pe r io d of s ale f or e ac h pr od uc t , com me nci ng in t he ye ar th at th e pr o duc t i s re a d y for s a le. A mor tis ati on i s ch ar ge d st r ai ght l ine o r b as ed o n th e uni t s pr od uce d , dep en din g on th e nat ur e of th e pr od uc t an d th e av a il ab ili t y of rel ia bl e es ti mate s of production volumes. Th e co s t of de ve lo pme nt pr oj ec t s w h ich a r e ex pe c ted to t ake a sub st ant ial p er iod of ti me to co mp lete in clu de s at t r ib ut ab le bor ro w ing c os t s . Intangible as set s acquired in busine ss combinations Th e id enti f iab le n et as s et s ac qui r ed a s a re s ult of a b us ine s s com bin ati on ma y in clu de int an gib le a s set s other t han g oo d w il l . A ny s uch i nta ngi ble a s s et s ar e am or tis e d st r ai ght l in e ov er th eir ex pe c ted u sef u l li v e s as fo ll ow s: Patents, licence s and tr ademar ks up to 2 0 y ea r s T e chnology up to 13 yea r s Customer rel ationships up to 1 1 year s Th e as s et s’ us ef ul l i ve s ar e r e v ie we d, a nd a dju ste d if a pp ro pr i ate, at ea ch b al an ce sh ee t date . Sof t wa re, p aten t s and i ntell ec tu al pr op er t y Th e e s tim ated u sef ul l i v e s ar e as fo ll o w s: Sof t w are up to 7 year s Pa tent s an d intel le c tu al proper t y sho r ter of the e co no mic l i fe and t he p er i od th e r i ght is legally enforceab le Th e as s et s’ us ef ul l i ve s ar e r e v ie we d, a nd a dju ste d if a pp ro pr i ate, at ea ch b al an ce sh ee t date . Pr oper t y, plant and equipment Pr o per t y , pl ant a nd e qui pm ent ar e s t ated at h is tor i c al co s t le s s acc umul ated dep r ec iati on a nd an y r ec ogn is ed i mp air m ent l os s es . L an d is n ot dep r ec iate d. D ep re ci ati on is p r ov i de d on oth er a s se t s es ti mate d to w r i te of f t he de pr e cia ble a mo unt of r el ev a nt as s et s by e qua l ann ual i ns t al men t s ov er th eir e s ti mate d us ef ul l i ve s . In ge ner al, t he r ates us e d ar e: Freehold and long leasehold bu ildings 2% pe r ann um Shor t leasehol d proper t y ove r th e per iod of t he le as e Pl a nt, m ac hin er y, etc. 10% to 2 0 % p er ann um F ix t ur e s , fi t ti ng s, to ol s and other equipment 10 % to 3 3 % p er an num Th e co s t of any a s s et s w hic h ar e ex pe c te d to ta ke a sub st ant ial per iod of t ime to c omp lete in cl ude s at tr ibu ta bl e bor ro w ing c os t s . Th e as s et s’ re s idu al v al ue s an d us ef ul l i ve s ar e r e v ie we d, a nd adj us ted i f ap pr op r iate , at ea ch b al an ce sh ee t date . A n as s et’s ca r r y ing a mo unt is w r it ten do w n im me dia tely to i t s r eco v er a bl e amo unt i f the a s se t’s car r y i ng am oun t is gr e ater th an i t s es t imate d reco ver able amount. Inventories Inv ento r ie s ar e s ta ted at t he lo w er of c os t an d net r e al is ab le v a lue . Co st i s dete r mi ne d usi ng th e f ir s t-in , fi r s t-ou t ( F IFO ) meth o d. Th e co s t of f inis he d go od s an d wo r k in p ro gr e s s co mpr i s es r aw mater ial s , dir e c t l ab our , oth er dir e c t co st s and r el ate d pr o duc t ion ov er h ea ds ( b as ed o n no r ma l op er at in g ca pa ci t y ). T h e cos t of i tem s of inv ento r y w hic h ta ke a sub st ant ial p er i od o f tim e to com pl ete includes attribut able borr owing cost s. Th e ne t re al is a ble v alue of in ve ntor i e s is th e es t imate d s el li ng pr ice in th e or din ar y co ur s e of b usi ne s s , le s s app li c abl e v ar i abl e se ll in g ex pen s es . P r ov i si ons a r e ma de fo r any s lo w -m ov in g, o bs ol ete or defecti ve inventorie s. T r ade and other r ecei v ables T ra de r e cei v a bl es a nd co ntr ac t as s et s ar e ini ti al ly r ec ogn is ed a t fa ir v al ue an d sub s eq uent ly me as ur e d at amo r tis ed c os t , le s s any app r opr iate pr ov i sio n fo r ex pe c ted c re di t lo s se s . A pr ov i si on fo r ex pe c ted c r edi t lo s se s i s es t ab li sh ed w h en th er e is obj ec t i ve e v id enc e tha t it w il l not b e p os si ble to c ol le c t al l amo unt s due a cco r din g to the o r ig ina l pa y me nt ter m s. E xpe c te d cr ed it l os s es ar e dete r min ed u sin g his to r ic al w r ite- of fs as a b a sis , w i th a d efa ult r isk m ult ipl ie r ap pl ie d to ref l ec t c ount r y r isk p r emiu m. T h e Gr ou p app li e s the IF R S 9 s imp l if ie d li fet ime e xp ec ted cr ed it lo s s ap pr o ach for t r ad e r ec ei v ab le s an d cont r a c t as s et s w hi ch do n ot co nta in a signific ant financing component. Pr ov isions Pro visions are recognised w hen the Group has a present obligation (l ega l or c ons t r uc t i ve ) as a r e su lt of a p as t e ve nt, i t is p ro b abl e that a n ou t f lo w of r es o ur ce s emb od y i ng e co nom ic b ene fi t s w il l be r e quir e d to se t tl e the o bl ig atio n, a nd a r el ia bl e es ti mate c an b e mad e of th e am ount o f the o bl ig atio n. W her e the G r oup e xp e c t s so me or a ll of a p r ov i si on to b e re imb ur s ed , fo r ex amp le un der a n ins ur a nce c ont r ac t , th e r eimb ur s em ent i s r eco gn is ed a s a se p ar ate as s et bu t onl y w he n the r ei mbu r s eme nt is v ir tu al ly ce r tain . Pro visio ns for war r anties and produc t liabilit y , disposal indemnities , res truc tur ing costs , proper t y d ilapidations and legal claims ar e re co gn is ed w h en: th e Co mp any h as a l eg al or c on s tr u c ti ve obl ig ati on a s a re s ult of a p a st e v ent; i t is pr o ba bl e that a n ou t f lo w of re s ou rc es w i ll b e re qu ir ed to s et t le th e ob li gat ion; a nd th e am ount has b e en r el iab ly e s tim ated . P r ov i sio ns a re n ot r ec og nis e d for f u tur e oper ating loss es. Pr o v isi on s ar e di sc ounte d w he r e the t ime v a lue o f mo ne y is ma ter ia l . W her e t her e i s a num ber o f simi l ar ob l iga tio ns , fo r ex amp le w h er e a w ar r ant y ha s b een g i ve n, t he l ikel ih oo d th at an ou t f lo w w il l be re qui r ed in s et t le ment i s dete r min ed b y co ns id er in g th e cl a ss of obligations as a whole. A provision is recognised even if the like li ho od of a n ou t f lo w w it h re s pe c t to any o ne i tem in cl ude d in t he same clas s of obligations may be small. ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 11 3 Businesse s held for s ale Bus ine s s es c l as s if ie d as h el d for s a le ar e m ea sur e d at th e lo we r of ca r r y ing a mo unt an d f air v a lue l es s c os t s to s el l . Imp air ment lo s se s on ini ti al cl a s si fi c ati on as h el d for s a le an d ga ins o r lo ss e s on sub se qu ent r em ea sur e ment s a r e inc lud ed i n the i nco me s t atem ent . No de pr e ciat ion i s ch ar ge d on a s se t s and b us ine s s es c l a ss if ie d as hel d for s a le . Bus ine s s es a r e cl a ss if ie d as h el d for s a le i f the ir c ar r y in g am ount w ill b e s et tl ed p r in cip al ly th r oug h a s ale r ather t ha n thr ou gh cont inui ng u se a nd th e fo ll ow i ng cr iter ia a re m et: – The b usi ne s s mus t b e a s ep ar ate m aj or l ine o f bus ine s s , av ai l abl e for i mme di ate s ale i n it s p re s ent c on dit io n; – Manag em ent is c omm it te d to th e pl a n to se ll t he bu sin e s s and a n ac ti v e pr o gr a mm e to loc a te a bu y er an d com pl ete the p l an m us t have bee n init iat ed; – The di sp os al g r oup m us t be a c ti v ely m ar kete d for s a le at a p r ic e that i s r ea so na ble i n re l ati on to i t s cur rent f ai r v alu e; – Shar eh ol der a nd r e gul ato r y app r ov a l is hi ghl y pr ob ab le an d th e pl an i s unl ikel y to be s ign if ic ant ly c han ge d or w i th dr a w n; and – Sal e is ex p ec te d to be c omp lete d w it hin 12 month s of th e b al an ce she et da te. Th e as s et s a nd l iab il it ie s of bu sin e ss e s he ld fo r s al e ar e pr e se nted as s ep ar ate line s o n the b al ance sh eet . Dis continued o per ations A discontin ued oper ation is either : – A compo ne nt of th e Gr ou p’ s bus ine s s th at r ep re s ent s a s ep ar ate maj or l ine o f bu sin es s o r ge ogr aphi c al ar e a of op er ation s tha t ha s be en di sp os ed o f, has b ee n ab an don ed o r me et s th e cr i ter i a to be cl a ss if ie d as h el d for s a le; or – A busin es s a cqu ir ed s ol ely f or th e pu r po se o f se ll in g it . Dis co ntin ue d op er ation s ar e pr e s ente d on th e inc om e st atem ent as a s ep ar ate line a nd a re s ho w n ne t of ta x . In acc or da nce w i th I A S 21, gains an d lo s se s o n intr a- gr oup mon et ar y as s et s an d l iab il iti e s ar e not e li min ated . T her ef or e fo re ign exch ang e r ate m o vem ent s o n inter co mp an y lo an s w ith d is co ntinu ed ope r at io ns ar e p re s ente d on t he in com e s ta teme nt as n on -h ea dl ine fi nan ce co s t item s . Cash and cash equivalents Ca sh an d c as h eq ui v al ent s in clu de c a sh at b ank a nd i n han d an d high ly l iq uid inte r es t-b ea r ing s e cur itie s w i th mat ur i ti es of t hr e e mont hs o r le s s. In th e ca sh -f lo w s tate me nt, c a sh an d c as h equ i v ale nt s ar e sh o w n net of b an k ov er dr af t s , w hic h ar e in clu de d as c ur r ent b or ro w ing s in li ab ili ti es o n th e ba l anc e she et . Financial as set s Th e cl a s si fi c ati on of f in anc ial a s se t s dep en ds o n the p ur p os e fo r w hic h the a s se t s we re a cq uir ed . Ma na gem ent d eter mi ne s th e cl a ss if ic at io n of an a ss et at i nit ial r e co gni ti on an d r e- e v alu ate s the d e sign ati on at e ac h re po r ting d ate. F i nan cia l as s et s ar e cl a ss if ie d as: m ea su re d at am or ti se d co st , f air v alue th r oug h oth er com pr eh en si ve i nco me o r f air v al ue th r ou gh pr of i t and l os s . Financial as set s pr imar ily include tra de recei v ables , cash and ca sh e qui v a le nt s (co mpr ising c a sh at b an k , mon e y mar ket f un ds , and shor t-term deposit s), shor t-t er m inves tments , deri v ative s (fo re ign e xcha ng e cont r a c t s an d inter e s t r ate d er i v at i ve s ) and unl is te d inv e st me nt s. – T r ade r ec ei v ab le s ar e cl a s si fi ed e it her a s ‘h el d to col le c t’ a nd me asu r ed at a mor ti se d co s t or as ‘ he ld to c ol lec t a nd s el l ’ a nd measure d at fair value through other comprehensi ve income (F V O CI ). Th e Gr o up ma y se ll t r a de r ec ei v ab le s du e fr o m cer ta in cus to mer s befor e t he du e date . A ny t r a de r ec ei v ab le s f r om su ch cus to mer s that ar e n ot so ld a t the r ep or tin g date a r e cl a s sif ie d a s ‘he ld to c ol le c t and s el l ’ ; – Cash a nd c a sh eq ui v al ent s ( con si st ing o f ba l anc es w i th b an k s and othe r f ina nci al in s tit ut ion s , mo ne y- ma r ket f und s an d sho r t-term dep os it s ) an d sh or t-term i nv e st men t s ar e sub je c t to lo w ma r ket r isk . C a sh b al an ce s an d sho r t-term i nv e st ment s are m ea sur e d at amo r tis ed c os t . Mon ey m ar ket f un ds a nd sh or t-ter m de po si t s ar e me asu r ed at f ai r v alu e thr o ugh p r of it an d lo s s (F V PL ); – Der i v ati v e s ar e me as ur ed a t F V P L; – Lis te d and u nl is ted i nv es t ment s a r e me asu r ed at F V O CI; and – Deferred contingent consider ation are measured at F VP L . F ina nci al as s et s a re d er e cog nis e d w hen t he r i ght to r e cei v e c ash - fl ow s f r om t he a ss et s h as e xp ir ed , or h as b ee n tr a ns fe r r ed , and t he Gr oup h as t r a ns fer red s ub st ant ial ly al l of t he r i sk s an d re w a rd s of ow n er s hip. W hen s ec ur i tie s cl ass if ie d as a v ail able fo r s ale a r e so ld or imp ai r ed , the a ccu mul a ted f air v alue ad jus t ment s p r ev i ou sly ta ken to r es er v e s ar e inc lud ed i n th e inc ome s t atem ent . F ina nci al as s et s a re c l as s if ie d as c ur r ent i f th ey a re e xp e c ted to b e re al is e d w ith in 12 month s of th e ba l anc e sh eet d ate. Financial liabili ties Bo r r ow i ngs a r e ini tia lly r e co gni se d at th e f air v a lue o f the p r oc ee ds , net of r el ated tr a ns a c tio n co st s . T h es e tr ans a c tio n cos t s , an d an y discount or premium on issue, are su bsequently amor tised under the ef fec t i ve inte r es t r ate meth od th r ou gh th e inc ome s t atem ent a s inter e s t ov er th e l ife o f the l oa n and a dd ed to t he l ia bil it y dis cl os ed in th e ba l anc e she et . Rel ate d ac cr u ed in ter es t i s inc lu de d in th e borr ow ings figure. Bo r r ow i ngs a r e cl a ss if ie d as c ur r e nt li abi li ti es u nle s s th e Gr ou p ha s an unc on dit io nal r ight to defe r se t tl eme nt of th e li abi li t y for at le as t one y e ar af ter the b al an ce sh e et date . Deri v ative financi al instr ument s and hedging ac tiv ities Th e Gr o up us e s de r i v ati v e f ina nci al in s tr u ment s to h ed ge i t s ex po sur e s to for e ign e xcha ng e and i nter e st r ates ar ising f r om i t s oper ating and financing acti vi ties. Der iv ati ve financial ins tr uments ar e initially recogni sed at fair value on th e date a d er i v at i ve c ontr ac t is en ter ed in to and a re s ub se qu entl y re - me asu r ed at t hei r fa ir v al ue. T h e met ho d of r ec og nis ing a ny re s ulti ng g ain or l os s d ep end s on w h eth er th e der iv at i ve f in anc ial ins tr ument i s de si gnate d as a h ed gin g in s tr um ent a nd, i f s o, th e nat ur e of th e item b ein g he dg ed . W her e d er i v at i ve f in an cia l ins tr ument s a re d e sig nate d into he d gin g relationships, the Group f or mally documen ts the following: – the r isk m an ag eme nt obj ec t i ve a nd s tr ateg y fo r enter i ng the hedge; – the natu r e of th e r isk s b ein g he dg ed a nd t he e con omi c re l ati on ship b et wee n th e he dg ed i tem an d th e he dgi ng instr ument; and – whet her t he c han ge in c a sh -f lo w s of th e he dg ed i tem an d he dg ing ins tr ument a re e xp ec ted to of f s et ea ch ot her . Chan ge s in t he f ai r v alu e of an y der iv at i ve f in anc ial i ns tr ument s th at do no t qua li f y for he dg e acc ou ntin g ar e r ec ogn is ed i mme di ately i n the income statement. ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 11 4 Fair valu e hedge Th e Gr o up us e s de r i v ati v e f ina nci al in s tr u ment s to c on ve r t par t of it s f ixe d r a te deb t to fl oa tin g r ate in o r de r to he dge t he r i sk s ar ising fr om i t s ex ter nal b or ro w ing s . Th e Gr o up de si gn ates t he s e as f ai r v alu e he dg es o f inter e s t r ate r isk . C han ge s in t he he d gin g ins tr ument a re r e cor d ed i n the inc ome s t atem ent , tog eth er w i th an y cha ng es i n the f a ir v al ue s of the h ed ge d as s et s or l i abil i tie s th at ar e at tri bu ta ble to t he h ed ge d r isk to t he e x tent t hat t he he d ge is ef fec t i ve . Ga ins o r lo s se s re l atin g to an y ine f fe c ti v en es s a re i mme di ately r e co gni se d in t he income statement. Cash -flow hedge Ca sh -f lo w he dg ing i s us ed b y th e Gr o up to he dg e cer t ain ex p osu r es to v ar ia bil i t y i n fu tu re c a sh -f lo w s. Th e ef fec ti v e po r tion s of ch an ge s in th e f air v a lue s of d er i v at i ve s th at ar e de si gnate d an d qua li f y as c as h-f l ow h ed ge s ar e r ec og nis e d in equ it y. The g ain or l os s r el a tin g to any i nef fec ti v e po r tion i s r ec ogn is ed imm edi ately i n the i nco me s t atem ent . A m ount s a ccu mul ate d in t he he dge r e s er v e ar e re c y cl ed i n the i nco me s t atem ent in t he p er i od s w hen t he h ed ge d item s w il l af f ec t p r of it or l os s ( for e xa mpl e, w he n th e for e c as t s ale t hat i s he dg ed t ake s pl a ce ). If a fo r ec a st t r an s ac t ion t hat i s he dg ed r e su lt s in t he r ec og nit ion o f a non -f in anc ial a s se t (fo r ex amp le, i nv entor y ) or a l i abil i t y, the g ain s and l os s e s pr ev i ou sly d efer red i n th e he dge r e s er ve a r e tr a ns fe r r ed fr om t he r e s er ve a nd in clu de d in t he ini ti al me as ur em ent of t he cos t of t he a ss et o r li abi li t y . W he n a he dg ing in s tr u men t ex pir e s or is s ol d, o r w he n a he dg e no lo ng er m eet s t he cr iter ia f or h ed ge acc ount ing , an y cum ul ati v e ga in or l os s ex is t ing i n the h ed ge re s er v e at tha t tim e re mai ns i n the r e s er ve a nd i s re co gni s ed w hen t he fo r ec a st t r an s ac t io n is ul tim ately r e co gni se d in th e income statement. W hen a f or e ca s t tr ans ac t ion i s no l ong er e xp ec te d to o ccu r , the cum ul ati v e ga in or l os s th at w a s re po r ted in oth er c omp r ehe ns iv e inc ome i s imm ed iatel y tr a ns fe r r ed to t he in com e s tate me nt. Net investment hedg e He dge s of n et in ve s tm ent s in f or eig n op er a tio ns a re a cco unte d for s imil a r ly to c a sh -fl o w he dge s . A n y gai n or lo s s on th e he dg ing ins tr ument r el a tin g to the e f fe c ti v e po r tion o f the h ed ge i s recognis ed in other comprehensiv e income; the gain or loss rel ating to any i nef fec ti v e po r tion i s r ec ogn is ed i mme di ately i n the i nco me st atem ent . W h en a fo re ign o pe r at ion i s di spo s ed of, g ain s and l os s e s acc umul ated in eq ui t y r el ated to tha t ope r at io n ar e inc lud ed i n th e inc ome s t atem ent fo r th at pe r io d. Fa ir value of fi nancia l asset s and liabi lities The f air value s of financial asset s and financial liabil itie s are the amo unt s at w h ich t he in s tr um ent c oul d be e xcha ng ed i n a cur r e nt tr a ns a c tio n bet we en w il l ing p ar ti es , ot her t han i n a for ce d or liquidation sale. ‘IF R S 13: Fair v alu e me as ur em ent’ r e qui re s f ai r v alu e me asu r eme nt s to be c l as s if ie d acc or di ng to th e fo ll ow in g hi er a rc hy : – Lev el 1 – qu oted p r ic es i n ac ti v e ma r ket s fo r ide ntic a l as s et s or liabilitie s; – Lev el 2 – v al uati on s in w hi ch al l inp ut s a r e obs er v a ble e it her dir ec t ly ( i. e. as p r ic es ) o r ind ir ec t ly ( i.e . der iv ed f r om p r ice s ); an d – Lev el 3 – v al uati on s in w hi ch on e or m or e in put s that ar e sig nif ic a nt to the r e su lti ng v al ue a re n ot b as ed o n ob se r v abl e mar ket data . Se e n ote 21 for i nfor matio n on th e met ho ds w h ich t he Gr o up us e s to es ti mate t he f air v a lue s of i t s f in anc ial in s tr u ment s. Div idends Di v id en ds ar e r e co gnis e d as a l ia bil it y in th e pe r io d in w hi ch th ey ar e aut ho r is e d. T he i nter i m di v id end i s r ec ogn is ed w h en i t is p ai d and t he f in al di v i den d is r e co gni se d w he n it h as b ee n app r ov ed b y sharehold ers at the Annual Gener al Meeting. New accounting s t and ar ds ef fec tiv e 2 0 2 2 No ne w ac cou ntin g s ta nd ar ds h av e be en a do pted i n the f in an cia l ye ar . Th e acc ount ing p ol ic ie s ad opte d in t he pr e pa r at ion o f the s e con s ol ida ted f in anc ial s t atem ent s ar e c on sis tent w i th t ho se f ol lo we d in th e pr ev i ou s f inan ci al ye ar . New s t andar ds an d interpr et ations not y et a dopte d No oth er n ew s t an dar d s , ne w inter p r et atio ns o r ame nd ment s to st an da rd s or i nter p ret at ion s ha v e be en pu bl is he d w hic h ar e ex pe c ted to h av e a si gni fi c ant im pa c t on t he Gr o up’ s financial st atements. Par ent C ompany Th e ul tim ate P ar ent C omp an y of th e Gr o up is S mi ths G r oup p lc , a com pa ny in cor por a ted in E ng l an d and W ale s a nd l is te d on th e Lo nd on Sto ck E xchan ge. Th e ac cou nt s of th e P ar ent C omp an y, Smi ths G r oup p lc , ha ve b ee n pr ep ar e d in acc or d anc e w ith t he C om pa nie s A c t 2 0 0 6 an d F in anc ial Repor ting Standard 1 01 , 'R educed Disclosure Framew ork '. Th e C omp an y acc oun t s ar e pr e se nted i n se pa r ate f in anc ial st atem ent s o n pa ge s 171 to 1 79 . The p r in cip al s ubs idi ar i es o f the Pa r ent C omp an y ar e l is ted i n the a bo v e acc ount s . ACCO UNTING POL ICIE S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 115 1 S egm ent infor mation A naly sis b y op er atin g s egment Th e Gr o up is o r gan is ed i nto fou r di v is ion s: Jo hn Cr ane, S mi ths D ete c tio n, F l ex- T ek and S mit hs In ter con ne c t. T h e se d i v isi on s de si gn, man uf ac t ur e an d sup po r t the fo ll ow i ng p ro du c t s: – John Crane – me ch ani ca l se al s, s ea l sup po r t sy s tem s , po w er tr ansm is si on co upl in gs a nd sp e cia li se d f ilt r at ion s ys tem s; – Smiths Detection – sen s or s a nd s y s tem s th at dete c t an d ide nti f y exp los i ve s , na rc oti c s , we ap on s, c he mic al a ge nt s , bio ha za r ds an d co ntr a ba nd; – Flex - T ek – engi ne er ed c om po nent s , f le xi ble h os ing a nd r i gid t ubi ng t hat h eat a nd mo v e fl uid s an d ga se s; an d – Smiths I nterconnec t – spe ci al is ed e le c tr oni c an d r a dio f r eq uen c y b oa r d- le ve l an d w av eg uid e de v ice s , co nn ec to r s , c abl es , te s t so cket s a nd sub -s ys tem s us ed i n high -s pe e d, hi gh r el iab il it y, secu r e con ne c ti v it y app li c ati on s. Th e p osi ti on an d pe r for ma nce o f ea ch di v i sio n ar e r ep or ted at e ach B o ar d me et ing to t he B oa r d of Dir e c tor s. T his i nfor matio n is pr e pa re d usi ng th e s am e acc ount ing p ol ic ie s as t he co ns o li date d f ina nci al inf or m atio n exce pt th at th e Gr ou p us es h ea dl in e op er a tin g pr of it to m on itor the d i v isi on al r es ult s a nd o pe r ati ng a s set s to moni tor th e di v i sio nal p os it ion . S ee n ote 3 an d note 2 9 for an ex pl anati on of w hi ch i tems a r e excluded from headline measures. Th e s al e of th e Gr ou p’ s Smi th s Me dic al b us ine s s w a s com ple ted o n 6 Jan uar y 2 0 2 2 a nd th e r es ult s o f Smi th s Me dic a l ar e dis c los e d as a dis co ntin ue d op er at io n in note 2 7 . Inter s e gme nt s ale s an d tr ans fer s are ch ar g ed at a r m’ s len gt h pr i ce s. Segment tr ading per forma nce Year e n de d 31 J u ly 2 0 22 John Crane £m Smiths Detection £m F l e x- Te k £m Smiths Interconnect £m Corpor ate cost s £m To t a l £m Revenue 901 655 6 47 363 – 2,5 66 Div isional headline oper ating profit 18 8 73 13 3 65 – 4 59 Co r p or ate hea dl i ne o pe r at in g co s t s – – – – ( 42) (42) Headline operating profit /(loss) 18 8 73 13 3 65 (4 2) 417 Ite ms e xcl ud ed f r o m he ad l ine m e as ur e s (n ote 3 ) ( 2 1) (37) (27) (1) ( 214 ) ( 30 0) Operating profit/(loss) 167 36 10 6 64 ( 25 6) 11 7 Year e n de d 31 J u ly 2 0 2 1 John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m Corpor ate costs £m To t a l £m Revenue 865 721 508 312 – 2,4 06 Div isional headline oper ating profit 18 7 99 97 35 – 41 8 Co r p or ate hea dl i ne o pe r at in g co s t s – – – – (4 6) (4 6) Headline operating profit /(loss) 18 7 99 97 35 ( 4 6) 372 Ite ms e xcl ud ed f r o m he ad l ine m e as ur e s (n ote 3 ) (3) (22 ) (14 ) (1) (6) (4 6) Operating profit/(loss) 18 4 77 83 34 (52 ) 326 Op er a tin g pr of it i s s tate d af ter cha r gin g (cr e dit in g ) the f ol lo w ing i tem s: Year e n de d 31 J u ly 2 0 22 John Crane £m Smiths Detection £m F l e x- Te k £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m De pr e ci ati on – p r op er t y, pl a nt an d e qui pm ent 15 10 7 5 1 38 De pr e ci ati on – r i ght o f us e a s se t s 15 7 5 2 1 30 Amor tisation of capitalis ed development costs – 3 – – – 3 A mo r tis at io n of s of t w ar e , pa tent s a nd i nte ll ec t ua l pr o pe r t y 3 1 – 2 1 7 Am or tis ation of acquire d intangibles – – – – 51 51 Share-based payment 3 2 2 1 4 12 Ru ss ia i mp ai r me nt ch ar g e s an d r el ate d c lo su re c os t s 9 10 – – – 19 T ransition ser vices cost reimbur s ement – – – – (7) (7 ) Year e n de d 31 J u ly 2 0 2 1 John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m De pr e ci ati on – p r op er t y, pl a nt an d e qui pm ent 15 12 6 6 1 40 De pr e ci ati on – r i ght o f us e a s se t s 14 7 4 5 2 32 Amor tisation of capitalis ed development costs – 7 – – – 7 A mo r tis at io n of s of t w ar e , pa tent s a nd i nte ll ec t ua l pr o pe r t y 3 1 – 2 1 7 Am or tis ation of acquire d intangibles – – – – 53 53 Share-based payment 3 2 1 1 6 13 Str ategic restr uct uring cost s 4 6 – 10 1 21 Th e co r po r ate a nd n on -h ea dl ine c olu mn co mpr ise s ce ntr a l info r mat io n tec hno lo g y, human r e s our ce s an d he ad qu ar ter s co s t s and n on -h ea dl in e ex pen s es ( s e e note 3 ). NO TE S T O T HE AC C OU NT S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 116 Segment ass et s and liabilities Segment assets 31 Ju ly 2 0 2 2 John Crane £m Smiths Detection £m F l e x- Te k £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m Pr o pe r t y, pl an t, e qu ip me nt, r ight of u s e as s et s , d ev el op me nt p r oje c t s , other intangibles and inve stme nts 167 12 7 84 54 399 8 31 Inv e ntor y, tr a de a nd o th er r e cei v able s 429 524 24 4 167 13 1 ,3 77 Segment ass ets 596 651 328 221 412 2,208 31 Ju l y 2 0 21 John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m Pr o pe r t y, pl an t, e qu ip me nt, r ight of u s e as s et s , d ev el op me nt p r oje c t s , other intangibles and inve stme nts 15 2 117 75 44 18 406 Inv e ntor y, tr a de a nd o th er r e cei v able s 356 417 16 0 12 7 10 1, 0 7 0 Segment ass ets 508 534 235 17 1 28 1, 476 Non -h ea dl in e as s et s co mpr ise r e cei v ab le s r el at ing to n on -h ea dl in e item s , ac qui sit io ns an d di sp os al s. Segment liabilities 31 Ju ly 2 0 2 2 John Crane £m Smiths Detection £m F l e x- Te k £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m Div isional liabilitie s (15 5 ) ( 3 47 ) (9 1) (8 5) – ( 67 8) Corp or ate and non-headline liabilities – – – – (385) (385) Segment liabilities (15 5 ) (3 47 ) ( 9 1) (8 5) (38 5) (1, 0 6 3 ) 31 Ju l y 2 0 21 John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m Div isional liabilitie s (13 7 ) ( 2 76 ) (6 6) ( 61) – (54 0) Corp or ate and non-headline liabilities – – – – (3 3 6) ( 3 36) Segment liabilities (13 7 ) ( 2 76 ) (6 6) ( 61) ( 3 36) ( 8 76) Non -h ea dl in e li abi li tie s c omp r is e pr o v is io ns an d acc r ua l s r el a tin g to no n- he adl in e ite ms , ac qui si tio ns a nd di sp os al s. Reconciliation of segment assets and liabilities to statutory assets and liabilities A sset s Liabilities 31 Ju ly 2022 £m 31 Ju l y 20 21 £m 31 Ju ly 2022 £m 31 Ju l y 20 21 £m Segment asset s and liabilities 2,208 1, 476 (1, 0 6 3 ) ( 8 76) Good w ill and acquired intan gibles 1, 5 01 1, 4 2 3 – – Der iv ative s 4 77 ( 47 ) ( 3) Cur rent a nd d ef er r e d ta x 14 5 167 ( 111) ( 12 2 ) Retirement benefit assets and obligations 309 546 ( 11 5 ) (12 8 ) Ca sh a nd b o r r ow i ng s 1, 0 5 6 405 ( 1 ,1 6 6 ) (1, 5 0 2 ) A s s et s a nd l ia bi li t ie s he ld f or s a le – 1, 2 4 3 – ( 28 3) Statutor y asset s and liabilities 5,223 5,3 37 ( 2,50 2) ( 2 ,9 14 ) Segment capital expenditure Th e c ap it al ex p end it ur e on p ro pe r t y, pl ant an d eq uip men t, c ap it al is e d de ve lop me nt an d othe r int an gib le as s et s fo r ea ch di v i si on is: John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m Corpor ate and non-headline £m To t a l £m Ca pi t al e xp en di tu r e ye ar e nd e d 31 Jul y 2 0 2 2 24 23 11 12 1 71 Ca pi t al e xp en di tu r e ye ar e nd e d 31 Jul y 2 0 21 19 23 9 9 2 62 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 117 Segment capital employed Ca pi ta l emp lo ye d is a n on -s t atu tor y me as ur e of in ve s te d re s ou rc es . I t com pr i se s s t atu tor y ne t as s et s ad jus te d to ad d go od w il l r ec og nis e d dir ec t ly in r e s er ve s in r e sp e c t of sub si diar ies a cqu ir ed b efo re 1 A ug us t 199 8 of £ 478 m ( F Y 2 0 21 : £7 8 7m) an d el im inate r et ir em ent be nef i t as s et s an d obl i gati on s an d li tig ati on p ro v is io ns r el at in g to non - he adl in e ite ms , bo th ne t of r el ate d ta x , an d net d ebt . S e e note 2 9 f or a re co nci li ati on of n et as s et s to c ap it al e mpl oy ed . Th e 12-month r o ll in g av er age c ap it al e mpl oy ed b y di v i si on , w hic h Smi th s us e s to c alc ul ate di v i sio na l re tur n o n c api t al em plo y ed , is: 31 Ju ly 2 0 2 2 John Crane £m Smiths Detection £m F l e x- Te k £m Smiths Interconnect £m To t a l £m Aver age divisional capital employed 970 1, 019 52 0 400 2 ,9 0 9 Aver age corp or ate capital employed 31 Average total capital employed – continuing operations 2 ,94 0 31 Ju l y 2 0 21 John Crane £m Smiths Detection £m Flex- T ek £m Smiths Interconnect £m To t a l £m Aver age divisional capital employed 937 1, 0 18 4 49 395 2,7 9 9 Aver age corp or ate capital employed 31 Average total capital employed – continuing operations 2,830 Analysis of reven ue Th e r ev en ue fo r th e main p r od uc t an d s er v ice l in e s for e ac h di v is ion i s: John Crane Original Equipment £m Afte rmark e t £m To t a l £m Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 279 62 2 9 01 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 273 59 2 865 Smith s Detec tion Aviation £m Other securi t y sy ste ms £m To t a l £m Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 4 67 18 8 655 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 546 17 5 7 21 F l e x -Te k Aerosp ace £m Industrial s £m To t a l £m Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 116 531 6 47 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 99 409 508 Smiths Interconnect Components , connector s & subs y stem s £m Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 363 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 312 Af ter ma r ket s al es c ontr ibute d £1 , 2 3 8 m ( F Y 2 0 21 : £1 , 1 98 m) o f Gr ou p re v enu e: Joh n Cr a ne af ter ma r ket s ale s w er e £ 62 2m ( F Y 2 0 21 : £ 59 2m ); Smi th s Dete c ti on af ter ma r ket s ale s w er e £ 3 5 5 m (F Y 2 0 2 1 : £3 31 m); F lex- T ek af te r ma r ket s ale s w er e £ 2 6 1 m (F Y 2 0 21 : £ 2 70 m ); an d Smi th s Inter co nne c t af ter mar ket s a le s w er e £n il ( F Y 2 0 21 : £5 m ). NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 118 Di v is ion al r e ve nue i s an aly s ed b y th e Sm ith s Gr o up key g lob al m ar ket s a s fo ll ow s: General Industrial £m Safet y & Secur it y £m Energ y £m Aerosp ace £m To t a l £m John Crane Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 371 – 530 – 9 01 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 355 – 510 – 865 Smith s Detec tion Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 – 655 – – 655 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 – 7 21 – – 721 F l e x Te k Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 531 – – 116 6 47 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 409 – – 99 508 Smiths Interconnect Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 16 6 14 4 – 53 363 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 13 9 12 8 – 45 312 To t a l Rev en ue y e ar e nd ed 31 J ul y 2 0 2 2 1, 0 6 8 79 9 5 30 169 2,56 6 Rev en ue y e ar e nd ed 31 J ul y 2 0 21 903 8 49 510 14 4 2,406 Th e Gr o up’ s s tat uto r y re v enu e is a nal ys e d as f ol lo w s: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m S al e of go o ds r e co gn is e d at a po int i n ti me 1, 8 4 9 1,7 2 3 S al e of go o ds r e co gn is e d ov er t im e 99 94 Ser vices re cognised over time 61 8 589 2,56 6 2,406 Analysis by geographical areas Th e Gr o up’ s r ev en ue b y de s tin ati on an d no n- c ur r ent o per atin g as s et s by l oc at io n ar e sh ow n b el ow : Reve nue Int a n gi bl e a s se t s , r i gh t of u s e as s et s and p r op e r t y, pl a nt a nd equipment Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Amer ic as 1, 4 2 3 1, 2 4 4 1, 3 2 4 1,1 9 5 Europ e 480 522 49 8 512 A sia-P acific 421 390 76 70 Res t o f th e Wor l d 242 250 39 41 2,56 6 2,406 1,9 3 7 1, 8 18 Rev enu e by d e st ina tio n at tr ibut ab le to th e Uni ted K ingd om w a s £ 7 5m ( F Y 2 0 21 : £69m ). O the r r ev enu e fo und to b e si gni f ic ant in clu de d, t he Uni ted St ate s of A m er i c a, tot al l ing £1,2 0 6m ( F Y 2 0 21 : £1 ,0 4 7m), Chi na (e xclu din g Ho ng K ong ) £1 32 m (F Y 2 0 21: £ 123 m) a nd G er m any £123 m (F Y 2 0 21: £ 130 m ). Rev enu e by d e st ina tio n ha s be en s el ec te d as th e b asi s fo r at tr i bu tin g r ev enu e to ge og r ap hi ca l ar ea s as t his w as the ge ogr aphi c at tr i bu tio n of r ev en ue u se d by m an ag eme nt to r ev i ew b usi ne s s pe r for ma nce . Non - cur rent a s set s loc ate d in th e Uni ted K i ng dom to ta l £1 0 8 m ( F Y 2 0 21 : £1 10m ). Si gni f ic ant n on -c ur r en t as s et s he ld in t he Un ite d St ate s of A me r ic a £1,26 0 m (F Y 2 0 21: £ 1, 138 m ) an d Ge r ma ny £ 3 40 m ( F Y 2 0 21 : £ 3 5 0 m). NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 119 2 Op er ating cos t s Th e Gr o up's ope r at ing c os t s fo r cont inu ing o pe r at ion s ar e an aly s e d as fo ll ow s: Year e n de d 31 J u ly 2 0 22 Year e n de d 31 J ul y 2 0 2 1 Headline £m Non-headline (n ot e 3) £m To t a l £m Headline £m Non-headline (n o te 3 ) £m To t a l £m Co s t of s al e s – dir e c t m ater ial s , l a bo ur , pr o du c ti on a nd distr ibution over heads 1, 6 0 5 – 1, 6 0 5 1, 49 1 – 1, 4 9 1 Sell ing costs 200 – 200 18 8 – 18 8 Administr ati ve expense s 3 51 300 6 51 355 46 4 01 T ransition ser vices cost reimbur s ement (7) – (7 ) – – – To t a l 2 ,1 4 9 300 2 , 4 49 2,03 4 46 2,080 Fol lo w in g th e s ale of t he S mit hs M ed ic al b usi ne s s, t he G r oup h as p ro v id ed t r a nsi ti on s er v ic es to t he S mit hs M ed ic al G ro up, w hi ch is disclose d above as tr ansition ser vice s cost reimbur sement. Operating profit is stated after charging (crediting): Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Res e ar c h an d de ve lo pm en t ex pe ns e 80 76 De pr e ci ati on o f pr op e r t y, pl ant a nd e qu ip me nt 38 40 De pr e ci ati on o f r ig ht of u se a s s et s 30 32 Amor tisation of intangible ass ets 61 67 Str ateg ic r e s tr u c tu r in g pr o gr amm e an d w r ite - d ow ns – 21 Ru ss ia i mp ai r me nt an d r el a ted c lo su r e co st s (s ee n ote 11 ) 19 – T ransition ser vices cost reimbur s ement (7 ) – Res e ar ch an d de ve lo pme nt (R&D ) c as h cos t s w er e £107m (F Y 2 0 21 : £94 m) c omp r is ing £ 8 0 m ( F Y 2 0 21 : £ 7 6m ) of R&D e xp en se d to th e inc om e st atem ent , £1 2m ( F Y 2 0 21 : £8 m ) of c ap it al is e d cos t s a nd £15m (F Y 2 0 21 : £10m) of c us to mer f un de d R&D. Ad mini s tr a ti v e ex pen s es i nc lud e £ 3m ( F Y 2 0 21 : £1 m) i n re s pe c t of le as e p ay m ent s fo r sh or t-ter m and l ow - v al ue le as e s w hic h w er e not inc lud ed w i th in r ig ht of us e as s et s a nd le as e l ia bil it ie s . Auditors' remuneration Th e fo ll ow i ng fe e s we re p ai d or a re p a y abl e to th e Co mp any ’s audi tor s , K P M G L L P and ot he r fi r ms i n the K PMG n et w o r k , for t he y ear e nd ed 31 July 2 0 2 2 . Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Audit ser vices Fe es p a y ab le to t he C o mp an y ’s audi tor s for th e au di t of t he C om p an y’s ann ua l f ina nc ia l st at em ent s 2.8 2.3 Fe es p a y ab le to t he C o mp an y ’s audi tor s and i t s as s o ci ate s fo r oth er s e r vi ce s: – the a ud it o f th e Co mp a ny ’s subs id ia r ie s 4.6 4.2 7. 4 6.5 All other ser v ices 0.8 0 .9 O the r se r v ice s co mpr ise au di t-re l ate d as su r an ce s er v ic es £ 0 .5 m (F Y 2 021 : £0 . 4m ) an d fe e s for r ep or tin g ac cou nta nt se r vi ce s in c onn ec t ion w ith a c l as s 1 d isp os a l £0 . 3m ( F Y 2 0 21 : £ 0.5 m ). Au di t-re l ated a s su r an ce s er v ice s i ncl ud e the r e v ie w of th e Inter im Repor t . T otal f ee s fo r no n aud it s er v ic es c omp r is e 1 1 % (F Y 2 021 : 13% ) of au dit f ee s . In th e cur r e nt ye ar , the Gr o up ha s ad di tio na lly a gr e ed £ 0. 5 m of ad di tio nal f ee s w i th th e Gr ou p aud ito r s r el at ing to t he au di t of th e pr i or y ear financial st atements. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 0 3 Non-s t atutor y pr ofit measure s Headl ine p rof it m easur e s Th e Gr o up ha s id enti f ie d and d ef ine d a ‘h ea dl in e’ mea sur e of p er for mance w h ich i s not i mp ac te d by m ater i al n on- r ec ur r i ng i tem s or i tems con si der e d no n- op er ation al / tr a din g in n atur e . T his n on - GA A P me as ur e of pr of i t is n ot inten de d to be a s ub st it ute fo r an y IF R S me as ur e s of per fo r man ce, b ut i s a key m ea sur e u se d b y man ag em ent to un der st and a nd m ana ge p er for m an ce. S e e th e dis cl os ur e s on pr e s ent ati on of re s ult s in a cco unti ng p ol ic ie s for a n ex pl a nati on of t he a dju st me nt s. T h e ite ms e xclu de d fr o m 'he a dl ine' ar e r efer red to a s ‘non -h ea dl ine’ ite ms . Non-hea dline oper ating profit items i. CONTINUING OPERATIONS Th e no n- he ad li ne i tems i nc lud ed i n st at uto r y ope r at ing p r of it fo r co ntinu ing o pe r at io ns w er e as f ol lo w s: Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Post-acquisition integration costs and fair value adjustment unwind Unw ind of a cq uis it io n b al a nce s he et f a ir v a lue u pl i f t (2) ( 1) Integration progr amme cost s – (1) Acquisition and disposal related transac tion costs and provision releases Business acquisition/disposal costs (5) (1) Legac y pension scheme arrangement s Pas t ser v ice cost s for benefit equalisation and improvement s 8 ( 4 3) (6) Retirement benefit scheme settlement loss 8 ( 17 1) – Non-headline litigation provision movements Movement in prov ision held against Titeflex Cor por ation subrogation claims 23 (2) 13 Prov ision for John Crane, Inc. asbestos litigation 23 (7 ) (6) Co s t r ec ov er y f or J ohn C r a ne , Inc . a sb e s tos l i ti gat io n – 9 Other items Ru ss ia i mp ai r me nt ch ar g e s an d r el ate d c lo su re c os t s 11 ( 19 ) – Am or tis ation of acquire d intangible ass ets 10 ( 51) (5 3) Non-headline items in operating profit – continuing operations (30 0) (4 6) Post-acquisition integration costs and fair value adjustment unwind Th e im pa c t of un w ind ing t he a cqui si tio n b al an ce sh eet f a ir v al ue ad jus t ment s r e qui re d b y IF R S 3 'B usi ne s s com bin ati on s' wa s re co gn is ed a s non -h ea dl in e as t he ch ar ge d id n ot r el ate to tr adin g ac t i v it y. The £ 2 m (F Y 2 0 2 1 : £1 m) cha r ge w a s du e to the u nw in d of f air v a lue u pl if ts o n th e acq uis it ion of Ro y al M et al P r odu c t s . Th e £1 m of inte gr a tio n pr o gr a mme c os t s in F Y 2 0 21 p r in cip al ly r el a ted to d efi ne d pr oj ec t s f or th e inte gr at io n of Uni ted F l ex ibl e into th e ex is tin g F le x- T e k bus ine s s . Inte gr a tio n pr o gr a mme c os t s in clu de d th e dir ec t c os t s of o r gan is at ion al ch an ge, s ite r ation al is at ion a nd e nti t y clo sur e c os t s . T he Un ite d F lex ib le inte gr ation p r ogr amme c on clu de d in th e cur rent y ea r . Integr a tio n cos t s w er e r e cog nis e d as n on -h ea dl ine item s be c au se t he y w er e con si der e d mate r ia l and b ea r no r el ation to t he on go ing p er for mance o f the a cq uir ed b us ine s s es . Acquisition and dispos al related transac tion costs and provision releases Th e £ 5 m of bu sin es s a cqu isi ti on /dis po s al co s t s ( F Y 2 0 21 : £1 m) pr i nci pa ll y re l ate to a pr o v is ion f or p otenti al l it iga tio n ex pe ns e s re l ati ng to an acq uir e d bus ine s s th at w er e unk no w n at t he ti me of t he ac qui si tio n. T h e se c os t s ar e r ec og nis e d as n on -h ea dl ine i tem s be c aus e t he y enti re ly re l ate to an a cqu isi ti on tr ans ac t io n and a re c on sid er e d to be n on -tr adin g in nat ur e. Legac y pension scheme arrangement s Th e cu r r ent y ea r pa s t se r vi ce co s t s of £ 4 3m (F Y 2 0 21: £6m) c omp r is e s th e fol lo w in g: – £ 19m of cos t s ( F Y 2 0 21 : £6m ) th at w er e r ec ogn is ed i n re s pe c t of th e his to r ic e qua li s ati on of r et ir eme nt be nef i t s for m en an d w ome n ( se e note 8 fo r f ur ther d et ail s); and – £2 4m o f cos t s ( F Y 2 0 21 : £n il ) t hat w er e r e cog nis e d fol lo w in g th e T I Gr ou p Pen si on S ch em e ( T I GP S) exe cu tin g an in su r an ce bu y - in po li c y. Th is r ef le c t s th e ex pe c t atio n th at the T I GP S tr us te e w ill u se a ny s ur pl us , r em aini ng af ter the c os t s of b u y ing - ou t an d w ind ing -u p the sc hem e ha ve b e en met , to im pr o ve m emb er b en efi t s ( s ee n ote 8 fo r fu r ther d eta il s ). Th e se p a st s er v i ce co s t s ar e r epo r ted as n on -h ea dl in e as th ey a r e non - re cu r r in g an d re l ate to le ga c y p en sio n li abi li ti es . A £1 71 m ret ir eme nt be nef i t sc hem e s et tl em ent lo s s ha s be en r ec og nis e d in th e cur rent y ea r (F Y 2 0 2 1 : £nil ) fol lo w ing T I GP S exec uti ng an ins ur a nce b u y -in p ol ic y for it s r e main in g unin sur e d l iab il iti e s ( se e note 8 f or f ur the r det ail s). T his i tem i s r ep or ted as n on -h ea dl in e as i t is non -r e cu r r in g and r e l ate s to le gac y pen sio n l iab ili ti es . Non-headline litigation provision movements Th e fo ll ow i ng l it iga tio n cos t s a nd r e cov er ies h av e be en t re ate d as n on -he a dl ine i tem s be c aus e th e pr o v is ion s w er e tr ea ted a s no n- he adl in e w hen o r ig ina lly r e co gni se d an d th e sub ro ga tio n cl ai ms a nd l it iga tio n re l ate to pr o du c t s tha t the G r oup n o lo nge r s ell s in the s e ma r ket s: – The £ 2 m ch ar ge ( F Y 2 0 21 : £13m cr edi t ) r e co gni se d by T itefl ex C or p or ation i s pr i nci pa ll y in r es pe c t of an i ncr e as e in t he e s tim ated c os t of fu tu re c l aim s . S ee n ote 2 3 fo r f ur ther d et ail s; and – The £ 7m cha r ge ( F Y 2 0 21 : £6 m cha r ge ) r eco gn is ed f or Jo hn Cr ane, In c . asb e s tos l it iga tio n pr o v isi on w a s pr i nci pa lly d ue to a n inc re as e d pr ov i si on fo r ad v er s e ju dg eme nt s an d le gal d efen ce c os t s . T he co s t s re co v er ed v i a ins ur er s et t lem ent s i n F Y 2 0 21 we r e £9 m. S e e note 2 3 for f ur the r det ai l s . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 121 Other items Fol lo w in g th e de cis ion i n Mar ch 2 02 2 to su sp en d s ale s into R us si a the G r oup h as r e co gni se d £1 9m ( F Y 2 0 21 : £n il ) o f Rus s ia im pa ir me nt cha r ge s an d re l ate d clo sur e c os t s ( s ee n ote 1 1 for f ur ther d et ail s). Th e se e xp en se s a re r e co gni se d as n on -h ea dl in e item s a s the y ar e b oth non -r e cu r r in g and m ater ial in si ze. Ac quir e d int an gib le a ss et a mor ti s ati on co s t s of £ 51 m (F Y 2 0 21 : £5 3m) w er e r e co gni se d in th e cu r r ent y ear . T his w a s co ns ide r ed to b e a no n- he adl in e ite m on th e ba si s tha t the s e ch ar ge s r e sul ted f r om a cqu isi ti on ac cou ntin g an d we re n on - op er ation al in n atur e . Non-headline finance costs items Th e no n- he ad li ne i tems i nc lud ed i n fi nan ce co s t s for c onti nui ng op er ation s w er e as f ol lo w s: Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Unwind of discoun t on provisions 23 (3) (2) Other finance income – retirement benefits 8 7 6 Fair v alue g ain o n in v es t me nt in e ar l y s ta g e bu sin e s s 14 1 – Foreign exchange gain (loss) on in tercompany loan with discont inued operations 22 (50) Non-headline items in finance costs – continuing oper ations 27 ( 4 6) Continuing operations – non-headline loss before taxation (2 73) (9 2 ) Th e f ina nc ing e lem ent s of n on -h ea dl ine l eg ac y liab il it ie s , inc lud ing t he £ 3 m (F Y 20 21 : £ 2m ) un w in d of dis co unt o n pr ov i si on s, w er e e xclu de d fr om h ea dl in e fi nan ce c os t s be c au se t he s e pr ov i si on s we re o r ig ina lly r e co gni se d a s non - he adl in e and t hi s tr eat men t has b e en ma int ain ed for o ng oin g cos t s a nd cr e di t s. O the r fi nan ce in co me co mpr ise s £ 7m (F Y 2 0 21: £6m) of f i nan cin g cr e dit s r e l atin g to r etir e ment b en ef it s . T he s e w er e excl ud ed f r om h ea dl ine fi nan ce co s t s be c aus e t he on go ing c os t s an d cr e dit s a r e a le gac y of pr ev i ou s emp lo ye e pe ns ion a r r a ng eme nt s . For ei gn exc han ge g ain s or l os s es o n inter c omp an y f ina nci ng b et w e en S mit hs M edi c al an d th e cont inu ing G r oup w er e r ec og nis e d on th e f ace of the i nco me s t atem ent a s a non - he adl in e ite m due to t he c l as si f ic ati on of t he S mit hs M ed ic al di v i sio n as a d is co ntinu ed o pe r at ion . T he £2 2m foreign excha nge gain in continui ng oper ations (F Y 2 021 : £50m loss ) mat ches the foreign ex change loss in discont inued oper ations. Th is w a s excl ud ed f r om h ea dl ine n et f ina nce c os t s a s the s e f air v a lue m ov em ent s w er e n on -o pe r at io nal in n atu r e and w er e p ur ely a consequence of the pres entational requirements for discontinued operations. Non-headline taxation items Th e no n- he ad li ne i tems i nc lud ed i n ta xa tio n for c ont inui ng op er atio ns w er e as f ol lo w s: Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m T ax c re d it o n no n- he a dl in e lo s s 6 19 9 (Increase)/ decrease in unrecogn ised UK defe rr ed tax asset 6 (5) 4 Non-headline items in taxation – continuing operations 14 13 Continuing operations – non-headline loss for the year ( 2 59) (7 9) Mov em en t in u nr ec og ni se d UK d ef e r re d t ax a s s et Th e se m o vem ent s a re r e po r ted as n on -h ea dl ine b ec a us e th e pr i or y ear c ha r ge w a s re po r ted as n on -h ea dl ine . In F Y 2 019 £3 6 m of def er r ed ta x w as d er e co gni se d fo ll ow in g th e de ci sio n to se pa r ate S mi ths M ed ic al w h ich r e duc es t he G ro up's pr of it ab il it y in the U K . T hi s ye ar , fol lo w in g s ale of M ed ic al t her e i s an ad di tio na l non - he adl in e ch ar ge fo r UK l os s es . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 2 ii. DISCONTINUED OPERATIONS The non-headline items for discon tinued operations were as follows: Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Non-headline oper ating profit items Medfusion documentation remediation cost s (3 3) – Impairment of investment in Ivenix , Inc conver tible debt (14 ) – Medical separ ation cost s – ( 18 ) Imp ai r me nt of c a pi t al is e d de v el op me nt co s t s an d r el ate d a s se t s – ( 61 ) Non-headline finance costs items Foreign exchange (loss) /gain on in tercompany loan with parent (22) 50 Gain on sale of discontinued oper ation Ga in o n the s ale of S mi th s Me di c al to I CU M ed ic a l , Inc . 27 1, 0 3 6 – Non-headline ta xation items T ax o n no n- he a dl in e lo s s 27 6 23 Non-headline items in profit from discontinued operations 973 (6) Pr of i t fo r th e ye a r – no n -h e ad li ne i te m s fo r co nt in ui ng a nd d is c on tin u ed o pe r a ti on s 714 (8 5) In th e cur r e nt ye ar S mit hs M edi c al r ec og nis e d a pr o v isi on of £ 3 3m ag ain s t the e xp ec te d co s t s of th e re me dia tio n ac ti on s r equ ir ed to a dd re s s eac h of th e ob se r v atio ns a nd di s cus s ion i tem s co nta ine d in th e US F oo d an d Dr ug Ad mini s tr a tio n (F D A ) ‘ fo r- c au se’ au di t fi ndi ng s on th e Medfusion produc t range. In th e cur r e nt pe r io d a de cis io n w as t aken b y S mit hs M edi c al to ex i t the ir co mme rc ial a gr e eme nt w it h I ve nix , I nc . T he s e cir cu ms t anc e s hav e r e sul ted in a c ha ng e in s tr ate g y an d ha ve t r ig ge re d an in di c ator of im pa ir m ent to th e c ar r y in g v alu e of th e Sm ith s Me di ca l inv e s tme nt in I ve ni x, I nc . A s this ch an ge in c ir cum s ta nce s in di ca tes t hat i t is n ot cu r r entl y pr ob ab le th at th e inv e s tme nt w il l re al is e e con om ic b enef i t s , man ag eme nt ha ve i mp air e d the e ntir e £14m v al ue of S mit hs M ed ic al ’ s I ve nix , In c . inv e s tme nt. In th e pr i or ye ar t he £18m of Me dic a l se pa r at ion c os t s r ep r es ente d in cr em ent al co s t s inc ur r e d by t he Gr o up to s ep ar ate Smit hs M edi c al . Th is c os t ha s be en r ep or ted a s no n- he ad li ne a s the f ul l y ear e f fe c t of th e tr ans ac t ion o n th e Gr ou p's fina nc ial s t atem ent s is b oth m ater ial and n on -r e cur rin g. I n the c ur r ent y e ar s ep ar a tio n and t r a ns a c tio n cos t s i ncu r r ed o n the s a le of t he S mit hs M edi c al bu sin e s s to ICU M ed ic al , Inc h av e be en in cl ude d w i thin t he ‘G ain o n s ale of d is co ntin ue d op er at io n’ calc ul at ion ( s e e note 2 7 ). Th e £ 2 2 m for ei gn exc han ge l os s o n inter co mp any l oa n w it h pa re nt ( F Y 2 0 21 : £5 0 m g ain ) dir e c tly o f f s et s the f or ei gn exc han ge g ain in cont inui ng o pe r ati on s . Th is i s excl ude d f r om he a dl ine n et f ina nce c os t s as t he s e f air v al ue m ov em ent s ar e n on - op er at io nal i n nat ur e and a r e purely a consequence of the present ational requirement s for discontinued operations . 4 Net f ina nce cos t s Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Interest receiv able 14 9 In te rest pa yable : – ba nk l oa ns a nd o v er d r af ts , i nc lud in g as s o ci ate d fe e s (12 ) (7) – oth er l oa ns (40) (39) – inte re s t o n le as e s (3) (3) Interest payable (55) ( 49 ) Headline net finance costs ( 41 ) (4 0) Other f inancing gains /( loss es ): – v alu at io n mo v eme nt s o n f air v a lu e he dg e d de bt (32) 22 – v alu at io n mo v eme nt s o n f air v a lu e de r i v at i ve s 33 (25) – for e ign e xch an g e and i ne f fe c t i ve ne s s o n net i nv e s tm ent h ed ge s (2) 3 – re tr ansl atio n of fo r ei gn cu r r en c y b an k b al a nce s (1) (3) – oth er i tem s in cl ud in g co unte r p ar t y c re di t r i sk a dj us tm ent s and n on -h ed g e acc ou nte d de r i v at i ve s 2 3 Other financing gains/(losses) – – Non-headline finance cost items: Foreign exchange gain on intercompany loan with discontinued operations 3 22 (50) Unwind of discoun t on provisions 3 ( 3) (2) Fair v alue g ain o n in v es t me nt in e ar l y s ta g e bu sin e s s 14 1 – Net in terest income on retirement benefit obligations 8 7 6 Non-headline finance cost items 27 ( 4 6) Net finance costs (14 ) (86) NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 3 5 E ar nings per sh are Ba sic e ar nings p er s har e a re c a lcu l ated b y di v i din g the p r of it f or th e ye ar at t r ib ut ab le to e qui t y s har e ho lde r s of t he C omp an y b y the a ve r a ge numb er o f or din ar y sh ar e s in is s ue du r ing t he y ea r . Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Pr o fi t at t r ib u ta bl e to e qui t y shar e ho ld er s for th e y ea r: – continuing 11 15 6 – discontinued 1, 0 2 2 12 8 To t a l 1, 0 3 3 284 Av er age n umb er o f sh ar e s in i s su e dur ing th e y ea r (n ote 2 4 ) 3 8 6 , 67 8 , 2 11 396,350,5 8 6 St atu to r y ear ning s p er sh ar e to ta l – b as ic 2 6 7.1 p 71. 7p St atu to r y ear ning s p er sh ar e to ta l – di lu ted 266.0p 7 1. 3 p Statutor y ear nings per share continuing operations – basic 2.8p 3 9. 4 p St atu to r y ear ning s p er sh ar e c ont in uin g op e r at io ns – d ilu te d 2.8p 3 9.1 p Dilu te d ear nings p er s har e a re c a lcu l ated b y di v i din g th e pr of it at tr ibu t abl e to or di nar y sh ar eh ol der s by 3 8 8, 3 49 , 7 5 8 ( F Y 2 0 21 : 39 8 , 576,5 0 2 ) or din ar y sh ar e s, b ei ng th e av er age nu mb er of or d ina r y sha re s in i s su e dur i ng th e ye ar a dju ste d b y the d ilu ti v e ef f ec t of e mpl oy e e sha r e sc hem e s. N o opt ion s ( F Y 2 0 21 : nil ) wer e exc lud ed f r om t his c a lcu l ati on be c au se t hei r ef f ec t w a s anti - dil uti v e. A re co nci li ati on of s t atu tor y an d he ad lin e ea r nin gs p er s har e i s as fo ll o ws : Year e n de d 31 J u ly 2 0 22 Year e n de d 31 J ul y 2 0 2 1 £m Basic EPS (p) Diluted EPS (p) £m Basic EPS (p) Di lu te d E P S (p) T ota l pr o fi t at tr ibu t ab le to e qu it y sha r eh ol de r s of t he P a r ent C om p an y 1, 0 3 3 2 6 7.1 266.0 28 4 7 1. 7 71. 3 E xc lud e: N on -h ea dl i ne i tem s ( not e 3) ( 7 14 ) 85 He ad li ne e ar ning s pe r sh ar e 319 82.5 8 2 .1 3 69 9 3 .1 92 .6 Prof it from continuing operations at tribut able to equity sharehol der s of the Parent Company 11 2.8 2 .8 15 6 3 9. 4 3 9.1 E xc lud e: N on -h ea dl i ne i tem s ( not e 3) 259 79 Headline ear nings per share – conti nuing oper ations 270 6 9. 8 6 9. 5 235 5 9. 3 5 9. 0 6 T ax ation Th is n ote on ly pr o v id es i nfor matio n abo ut c or p or ate inco me t a xes u nde r IF R S . Smi th s com pa nie s o pe r ate in o v er 5 0 co untr ies a cr os s the w or ld. T he y p ay a nd co ll ec t m an y dif fer ent t axe s in a dd it ion to c or p or ate inco me t axe s in cl udi ng: p ay r ol l t axe s; v al ue a dde d an d s ale s ta xe s; pr op er t y t a xes; p r od uc t-sp ec if ic t a xes; a nd en v ir on men ta l ta xe s. T h e co st s a s s oc iate d w ith t he s e oth er t axe s ar e in clu de d in p r ofi t befo r e ta x . Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m T he t a xat io n ch ar g e in t he c on so l id ate d in com e s t atem en t for t he y e ar c om pr i s es : Continuing operation s – cur ren t inc om e t ax c ha r ge 68 71 – cur ren t ta x a dju s tm ent s i n r es p ec t o f pr i or p er iod s 5 7 Current taxation 73 78 Deferr ed taxation 17 5 T otal taxation expense – continuing oper ations 90 83 Analy se d as: Headline taxation expense 10 4 96 Non-headline taxation credit (14 ) (13 ) T otal taxation expense in the consolidated income statement 90 83 Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m T ax o n it em s ch a rg e d /(c re di te d) t o eq ui t y Deferred tax: – retirement benefit schemes – 6 – foreign exchange – (5 ) – s hare-based paymen t (1) (1) (1) – Th e £ nil ( F Y 2 0 21 : £6 m) c har g e to eq uit y for r eti r eme nt be nef i t s re l ated to U K r etir e ment s ch em es . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 4 Cur rent ta xatio n li abili ties Current tax £m At 31 J uly 2 0 2 0 (38) Foreign exchange gain 1 Charge to income state ment (78) Ta x p a i d 96 At 31 J uly 2 0 21 (19 ) Cur rent t a x r ec ei v a bl e 75 Cur rent t a x p ay a bl e w it hi n on e ye ar (8 9) Co r p or atio n ta x p ay able a f te r mo r e th an o ne y ea r (5) At 31 J uly 2 0 21 (19 ) Foreign exchange gain (4) Charge to income state ment (73) Ta x p a i d 79 At 31 J uly 2 0 2 2 (17 ) Cur rent t a x r ec ei v a bl e 50 Cur rent t a x p ay a bl e w it hi n on e ye ar (64 ) Co r p or atio n ta x p ay able a f te r mo r e th an o ne y ea r (3) At 31 J uly 2 0 2 2 (17 ) T axat io n li abi li tie s in cl ude d pr o v is io ns of £ 3 8m (F Y 2 021 : £ 3 4 m ), the m ajo r it y of w hic h r el ate d to the r isk of ch al len ge to t he ge o gr a phi c all oc at io n of pr of it s by ta x au th or i tie s . In ad di tio n to the r isk s pr o v ide d fo r , the Gr ou p fa ce s a v ar iet y of ot her t a x r is k s, w h ic h re s ult f r om op er ating i n a com pl ex gl ob al en v ir on ment , inc lud ing t he o ngo in g ref or m o f bot h inter n ati ona l an d dom e st ic t ax r ule s, n e w and o ng oin g ta x au di t s in th e Gr ou p’ s l ar ge r ma r ket s an d the cha ll eng e to f ulf il o ng oin g t ax c omp li anc e f il ing a nd tr ans fer p r ic in g obl ig ati on s gi ve n th e sc a le an d di v er si t y of the G ro up’s globa l op er a tio ns . Th e Gr o up ant ici pate s th at a nu mb er of t ax a udi t s ar e l ikel y to con clu de i n the n ex t 1 2 to 24 mo nth s. D ue to t he un cer t aint y as so ci ated w i th suc h ta x i tems , i t is p os si bl e that t he c onc lus io n of op en t ax m at te r s ma y r es ult i n a fi nal o utc ome t hat v a r ie s si gni f ic ant ly f ro m th e amo unt s not ed above. Reconciliati on of th e t ax char ge Th e he ad li ne t ax c ha r ge fo r the y e ar of £104 m ( F Y 2 0 21 : £96 m) r ep r es e nted an e f fe c ti v e r ate o f 27 .6% (F Y 2 0 21 : 2 8 .9%). T h e he adl in e ef fec ti v e ta x r ate f or th e tot al Gr o up in clu din g di sc onti nue d op er ation s w as 2 7 .2 % ( F Y 2 0 21 : 27 . 1 %). T he t ax c ha r ge on t he p ro fi t fo r the y e ar fo r cont inui ng o pe r ati on s w as d if fere nt f ro m th e st an da r d r ate of c or p or ation t a x in th e UK of 19% ( F Y 2 0 21 : 19 .0 % ). T he d if fer enc e is r ec on cile d as follows: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Profit before taxation 103 240 Not io na l ta x ati on e x pe ns e at U K co r po r a te r at e of 19 .0% ( F Y 2 0 2 1 : 19 . 0 % ) 20 46 Di f fe r ent t a x r a te s on n on -U K pr o fi t s an d l os s e s 13 16 Non-deductible expenses and other charges 11 30 T ax c re d it s a nd n on -t a xa bl e in co me (6) (8) Non - he a dl in e UK de fe r r ed t a x as s et r e co gn it io n ad ju st me nt 5 (4) Other adjustment s to u nre cognised deferr ed tax 10 (4) Non -t a x r el i ev a bl e lo s s on U K pe ns io ns s c he me s 41 – T ax on Smiths Medical consolidation adjustments 2 8 Pr ior year true-up (6) (1) T otal taxation expense in the consolidated income statement 90 83 Compr ising: T ax ati on o n he a dl in e pr of i t 10 4 96 Non-headline taxation items: – T ax o n no n- he a dl in e lo s s (19 ) (9) – UK de fer re d ta x a s se t r ec og ni ti on a dju s tm ent 5 (4) T axation on non-headline items (14 ) (13 ) T otal taxation expense in the consolidated income statement 90 83 Th e he ad o f f ic e of Sm ith s Gr o up is d omi cil ed i n the U K ; so t he t ax c ha r ge ha s be en r e co nci le d to UK ta x r ates . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 5 Defe r red taxation assets /(liabi lities) Pr ope r t y, p l a nt , equipment and intangible ass ets £m Employment benef it s £m Losse s carr ied for war d £m Prov isions £m Other £m To t a l £m At 31 J uly 2 0 2 0 ( 74 ) (66) 12 8 86 1 75 Reallocations 11 (1) (14 ) 2 2 – Charge to income statement – continuing oper ations 4 ( 31) 27 (5) – (5) Cr ed it t o eq ui t y – (6) 5 – – (1) Foreign exchange r ate movements 3 (1) (2) (5) – (5) At 31 J uly 2 0 21 (5 6) (10 5 ) 14 4 78 3 64 Def er r e d t ax a s s et s 2 ( 113 ) 12 6 62 15 92 Deferr ed tax liabilitie s (58) 8 18 16 ( 12 ) (28) At 31 J uly 2 0 21 (5 6) (10 5 ) 14 4 78 3 64 Reallocations (15 ) 1 9 1 4 – Charge to income statement – continuing oper ations 4 50 (5 4) (10 ) (7 ) ( 17 ) Cr ed it t o eq ui t y – 3 – – (4) (1) Foreign exchange r ate movements (9) – 4 10 – 5 At 31 J uly 2 0 2 2 ( 76) ( 51) 10 3 79 (4) 51 Def er r e d t ax a s s et s (1) (56) 76 65 11 95 Deferr ed tax liabilitie s (75) 5 27 14 ( 15 ) (4 4) At 31 J uly 2 0 2 2 ( 76) ( 51) 10 3 79 (4) 51 Real lo c ati on s in F Y 2 0 2 2 in clu de £10m w he r e at tr i bu tes u s ed to sh el ter P DC F as s es s ment s have b e en r ea ll oc ate d fr o m lo ss e s to c ap it al all ow ance s , fol lo w in g the c on clu sio n of th e Gr o up's PD CF au dit w i th U K HMR C co ve r in g F Y 2 01 5 to F Y 2 0 2 0. Of t he a mou nt s inc lu de d w it hin 'O t her ' in t he t ab le ab o ve a s at 31 July 2 02 2 , li abi li ti es r e l atin g to t ax o n unr em it te d ea r nin gs w er e £19m (F Y 2 0 21: £ 14m ). Th e ag gr eg ate am ount o f temp or ar y dif f er en ce s as s oc iate d w it h inv e s tme nt s in su bsi dia r ie s fo r w hic h defe r r ed t a x li ab ili ti es hav e n ot be en r e co gnis e d w as i mmate r ia l . Th e def er r e d ta x a ss et r el ating to l os s es h as b ee n r ec ogn is ed o n th e ba sis o f st r on g ev i den ce of f u tur e t ax ab le pr o fi t s ag ain s t w hic h the unu til is e d ta x lo s se s c an b e r el ie ve d or b e ca us e it i s pr o ba ble t hat t he y w ill b e r ec ov er e d ag ain st t he r e ve r s al of d efe r r ed t ax l i abil i tie s . Defe r r ed t a x r el ati ng to p ro v i sio ns in cl ude s £ 5 7m (F Y 2 0 21 : £ 5 4 m ) re l ati ng to Jo hn Cr ane In c. l i tig ati on pr o v is ion , an d £1 2m ( F Y 2 0 21 : £1 1m) rel ating t o Titeflex Corpor ation litigation provision. S ee note 2 3 for additional information on pro visions. Unrecog nised def erred t ax Th e Gr o up ha s unr e co gni se d de fer r e d ta x r el at in g to los s e s am ount ing to £ 3 35 m ( F Y 2 0 21 : £1 0 7m). Th e ex pi r y date of op er ating l os s e s c ar r i ed fo r w ar d is d ep en dent u po n the l aw of the v ari ou s ter r i tor i e s in w hic h th e los s e s ar i se . A su mma r y of ex pir y d ates f or th e unr e co gni se d de fer r e d ta x on l os s e s is s et ou t be lo w: 2022 £m Expir y of losses 20 21 £m E x pi r y of losses Restr icted loss es – A sia – n /a 30 202 2- 2 027 Unres tric ted loss es – operating loss es 335 No expir y 77 No expir y T ot al u nr e co gn is e d de fe r re d t a x on l os s e s 335 10 7 Unr e cog nis e d defe r r ed t a x r el ati ng to l os s es h as i ncr e as e d by £ 2 2 8m (F Y 2 021 : inc re a se d by £13m ). Cha nge s to u nr ec ogn is ed l os s e s inc lud e an inc r ea se o f £ 2 26 m, m ain ly r el ate d to UK d efer r e d t ax o n los s e s th at we r e bei ng r e cog nis e d to of f s et th e def er r ed t a x l iab ili t y rel ate d to th e T I Pen sio n su r plu s , no w w r i t ten of f fol lo w ing t he b ul k annu it y bu y -in w i th Roth e s ay L i fe pl c, ot he r inc re as e s of £ 3 9m a nd a r e duc t ion o f £ 37m re l ated to t he s a le of S mit hs M edi c al . Sale of Smit hs Medical Th e s al e of 100 % o f the s har e c ap it al o f the U K Smi th s Me dic a l ho ldi ng co mp an y com ple ted o n the 6 J anu ar y 2 0 2 2 . T he p r of it on s a le w a s exempt from tax under the Substantial Shareho lding Exemption. Developm ents in the Grou p tax position In De ce mbe r 2 0 21, the Or ga nis a tio n for Ec on omi c Co - o per atio n and D e ve lop me nt ( 'OEC D' ) pub li sh ed r u le s r el at ing to g lob al m inim um ta xa tio n – the s o - c al le d Pi ll ar 2 r ule s, s ch ed ule d to ap ply f r om 2 02 3 , r eg ar din g th e fu tu re t a xa tio n of l ar g e mul tin atio na l s su ch a s Smi th s . Th e Gr o up w il l cont inu e to mo ni tor th e de ve lop me nt an d fu tu re i mpl em ent atio n of th e se r ules . H ow e ver , at thi s tim e an d as c ur r ent ly dr af ted , the y ar e n ot ex pe c ted to h av e a mate r ia l imp ac t o n th e Gr oup . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 6 7 Empl oyees Year e n de d 31 J u ly 2 0 22 Year e n de d 31 J ul y 2 0 2 1 Continuing operations £m Discontinued operations £m To t a l £m Continuing operations £m Discontinued operations £m To t a l £m St af f c os t s d ur i ng t he p e r io d Wages and sal ar ies 70 0 91 791 62 7 23 4 8 61 Social securit y 81 9 90 85 22 10 7 Share-based payment (not e 9) 13 2 15 13 1 14 Pen si on c os t s ( in cl ud in g de fi ne d co ntr ibu tio n s ch em e s) ( n ote 8 ) 29 5 34 26 11 37 823 10 7 930 7 51 268 1, 019 Th e av er age n umb er of p er s on s em plo y ed , r oun de d to th e ne ar es t 5 0 e mp lo ye es , w a s: Ye a r e nd e d 31 Ju ly 2 0 2 2 Y ear ended 31 Ju l y 2 0 21 John Crane 6,05 0 5 ,9 5 0 Smiths Detection 3 ,1 0 0 3, 000 F l e x -Te k 3,30 0 3,000 Smiths Interconnect 2,5 0 0 2,30 0 Cor por ate (including central /shared IT ser vice s) 300 30 0 Continuing operation s 1 5,250 14 , 5 5 0 Di sc ont in ue d op er atio n s – Sm it hs M ed ic al ( i n pe r io d to 6 J an uar y 2 0 2 2 ) 6 ,7 0 0 7, 5 0 0 To t a l 21 ,9 5 0 22,050 Key manag ement Th e key m an ag eme nt of th e Gr ou p com pr i se s S mi ths G r oup p lc B oa r d Dir e c tor s a nd E xecu ti v e Co mmi t te e mem be r s . T hei r agg r eg ate com pe ns at ion i s sh ow n b el ow. D eta il s o f Dir e c tor s’ r emun er ation a re c ont ain ed i n th e re po r t of the Rem une r at ion & P eo pl e Co mmi t te e on pa ge s 7 5 to 8 8 . Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Key management compens ation Sal ar ies and shor t-term employee benefit s 10. 3 12 . 8 Cost of retirement benefit s 0.7 0 .9 Co s t of sh ar e - ba s ed i nc ent i ve p l an s 4 .7 3 .9 No me mb er of ke y man ag eme nt ha d an y mater ial inter e s t dur i ng t he p er io d in a c ontr ac t of si gni fi c anc e (ot her t han a s er v i ce co ntr a c t or a qu al if y ing t hir d -p ar t y i nde mni t y pro v is io n) w i th th e C omp an y or an y of i t s sub si diar ies . Opt ion s an d aw a r ds he ld at t he e nd of t he p er i od b y key m ana ge men t in r es pe c t of th e Co mp an y’s shar e -b a se d in cent i ve p l an s we re: Year e n de d 31 J u ly 2 0 22 Ye ar e nd e d 31 J ul y 2 0 21 Number of instr uments ’000 Weighted average exerc is e price Nu mb e r of instr uments ’000 Weighted average exercise price SEP – 16 9 LT I P 1, 411 1, 6 4 5 Restr icted stock 8 82 S AY E 16 £ 11. 4 3 11 £ 10 .11 Re l at ed par t y trans ac tions The only rel ated par t y tr ans ac tions in F Y20 2 2 were key management compensation (F Y2 0 21 : key management compensation ). NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 7 8 Retirement benefi t s Smi th s pr o v ide s r et ir eme nt be nef i t s to emp lo ye e s in a num be r of co untr i e s. T h is in clu de s de fi ne d be nef it a nd d ef ine d co ntr ib ut ion p l an s an d, main ly in t he Un ite d K in gd om ( UK ) and U nite d St ate s of A m er i c a (U S), p os t-r eti re men t he alth c ar e. Defin ed co ntr ibution pl an s Th e Gr o up op er ates de fi ne d cont r ib uti on p l an s acr o s s man y co untr i es . In t he UK a d ef in ed co ntr i bu tio n pl a n has b e en of fer ed si nce t he clo sur e of t he U K def in ed b ene fi t pe ns ion p l an s . In th e US a 4 01 (k ) defi ne d cont r ib uti on p l an op er ates . T he tot al e xp en s e re co gni s ed in t he con s ol ida ted in co me s ta teme nt in r e spe c t of a ll th e se p l an s w as £ 3 4m ( F Y 2 0 21 : £ 3 6m ). Defined be nefit and post -ret iremen t health care pl ans Th e pr incip al d ef ine d be nef i t pe nsi on p l an s ar e in th e UK an d in th e US a nd t he se h av e b een c lo se d s o th at no f ut ur e b enef i t s ar e ac cr u ed . For a ll s ch eme s , p en sio n cos t s a re a s s es s ed i n acc or da nce w i th t he a d v ice of i nd ep end ent , pr of es s ion al ly qu al if ie d ac t uar ies . Th e se v a lua tio ns h av e be en u pd ated b y in dep en de nt qua li f ie d ac tu ar i es i n or de r to as s e s s the l ia bil i tie s of t he s che me s a s at 31 July 2 0 2 2. Co ntr ib ut ion s to th e sc he me s ar e ma de o n th e ad v ic e of th e ac t uar i es , i n acc or da nce w i th l oc al f un din g r eq uir em ent s . The changes in the present value of the net pension asset in the period were: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m At beginning of per iod 413 372 Foreign exchange r ate movements - 5 Curr ent ser v ice cost (2) (2) Scheme administr ation cost s (4) (5) Pas t ser v ice cost, cur t ailments , settlement s – continui ng oper ations ( 2 14 ) (6) Set tlements – discontinued oper ations (3) – Finance income – retirement benefits 7 6 Contribu tions by employer 9 30 Ac tuar ial gain 3 13 Reti r em ent b en ef it o bl i gat io ns d is po s ed o f w it h Sm it hs M e dic a l ( note 2 7 ) 5 – Unrecognised asset s due t o surplus restr iction ( 20) – Net retirement benefit asset 194 413 Th e £ 4 13m net r eti re men t ben ef it a s se t for F Y 2 0 21 i ncl ud ed £ 5 m of p ens io n obl ig ati on s dis cl os e d w ith in l iab il iti e s hel d fo r s ale . UK pension scheme s Smi th s f und ed U K pen si on s ch eme s ar e s ubj ec t to a s t atu tor y f un din g obj ec t i ve , as s et ou t in UK p en si on le gi sl at ion . S ch eme t r us te e s ne ed to obt ain r e gul a r ac t uar i al v al uat ion s to as s e s s the s c hem e ag ain st t hi s fu ndi ng ob je c ti v e. T h e tr u ste e s and s po ns or ing co mp anie s n ee d to agr e e fu ndi ng p l an s to imp ro v e the p os it ion o f a sc hem e w he n it i s be lo w the a cce pt abl e f und ing l ev el . Th e UK P ens io ns Re gul ato r ha s ex tensi v e po w er s to p r otec t t he b ene fi t s of m emb er s , p r omo te go od a dmin is tr ation a nd r e duc e the r i sk of sit uat ion s ar i sin g w hi ch ma y r eq uir e co mp ens a tio n to be p ai d fr o m the P en sio n Pr ote c ti on Fu nd. T h e se i ncl ud e imp os ing a s ch ed ule o f cont r ib uti on s or th e c alc ul at ion o f the te ch nic al p r ov i si ons , w h er e a tr uste e an d com pa ny f ail to a gr e e app r opr iate ca lcu l ati on s. Smith s Ind us tr ie s Pen sio n Sc hem e (' SIP S' ) Th is s ch em e w as c los e d to fu tu re a cc r ual e f fe c ti v e 1 No ve mb er 2 0 0 9 . S IP S p r ov i de s in de x-l inke d (to ap pl ic ab le c ap s ) pen si on b ene fi t s ba se d on f in al e ar n ing s at date of c lo sur e . SIP S is go ve r ne d b y a cor p or ate tr us te e ( S. I. P ens io n T ru s tee s L imi ted , a w ho ll y ow n ed sub sid iar y of S mi ths G r oup p lc ). T he b o ar d of tr uste e dir e c tor s c ur r en tly c omp r is e s fou r Co mp an y- no min ated t r us te es a nd f our m emb er - nom ina ted tr uste e s, w i th a n ind ep en dent c hai r ma n se le c ted b y Sm ith s Gr o up pl c. Trus te e dir e c tor s a re r e sp on sib le fo r th e man ag eme nt, adm ini st r at ion , f und ing a nd i nv es tm ent s tr ateg y of t he s ch eme . Th e mo s t re ce nt ac t uar i al v al uat ion o f thi s sc hem e ha s be en p er for med us ing t he P r oj ec te d Uni t Met ho d as at 31 Ma r ch 2 0 2 0. T h e v al uati on sho w ed a s ur p lus of £ 34 m o n the T ec hni c al P r ov i sio ns f un din g ba si s at th e v alu ati on date a nd t he f un din g po sit io n has i mp ro v ed si nce t he n. A s p ar t of th e v alu ati on ag r eem ent , no c ont r ibu ti on s ar e cur rent ly be ing p ai d to SI P S an d th e Gr ou p's cur r ent ex p ec t ati on i s that t he s e cont r ib uti on s w ill n ot r ec om men ce ( alt ho ugh t her e a re c ir cum s t anc es r el ating to th e S ch em e’ s fun di ng le v el in w hi ch c ontr i bu tio ns c oul d be due to S IP S ). Th e dur atio n of SIP S lia bil i tie s is a r oun d 2 0 ye ar s (F Y 2 0 21 : 2 3 ye ar s) for a c ti v e defe r r ed m em ber s, 2 0 y ea r s (F Y 2 021 : 2 2 ye ar s ) fo r def er r ed mem be r s an d 1 1 year s (F Y 2 0 21 : 1 2 ye ar s ) fo r pe ns ion er s a nd d ep end ant s . Und er th e go ve r ni ng do c ume ntat io n of SIP S, an y fu tu re s ur p lus w o uld b e r etu r na ble to S mi ths G r oup p lc b y r ef und , as s umin g gr adual set tlement of the liabili ties over the lifetime of the scheme. In SIP S, as p ar t of on go ing d at a cl ean sin g w or k b ein g un der t aken to pr e pa re t he s ch em e for a p otent ial f ul l bu y - ou t in th e f ut ur e, it h as be en di sc ov er e d tha t the m eth od u se d in t he e ar ly 199 0 s to e qu al is e re tir em ent a ge s be t w e en me n and w o men i n t w o of i t s sm all er b ene fi t s se c ti ons w as inco r r ec t . A n a dd it ion al l iab il it y of £1 9m ha s be en r e co gni se d as a p a st s er v i ce co st to r ef l ec t th e co r r ec t ion o f thi s is su e. A w ide r r ev i ew i s bei ng un de r taken to d eter m ine i f e qual i s atio n w as u nd er take n cor rec t ly in ot he r se c ti on s of the S c he me. S ho ul d any i s su es ar is e f r om th is r e v ie w, any a ddi ti ona l l iab ili t y is ex pe c ted to b e acc oun ted fo r at th e po int th e le gal i nv es t igat io ns ar e c omp lete d an d the r e is cl ar it y o n the l eg al ly ef f ec t i ve d ates t hat e qu al is at ion o f ret ir em ent a ge s w as i mpl em ented i n r es pe c ti v e se c ti on s. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 8 TI Group Pension Scheme ('T IGP S') Th is s ch em e w as c los e d to fu tu re a cc r ual e f fe c ti v e 1 No ve mb er 2 0 0 9 . T I GP S pro v id es i nd ex-l in ked ( to app li c abl e c aps ) p en sio n be nef it s b a se d on fi nal e ar n ing s at th e date of c lo sur e . T IGP S is go ve r ne d b y a cor p or ate tr us te e ( TI Pe ns ion T r u ste e L imi te d, an i nd epe nd ent co mp an y ). Th e bo ar d of tr u s tee di re c tor s comp r is e s fou r Co mp an y- no min ated t r us te es a nd f our m emb er - nom inate d tr uste e s, w i th a n ind ep en dent t r us te e dir e c tor se le c ted b y th e tr u ste e. T h e tr u s tee i s re sp on si ble f or th e ma nag em ent , adm ini st r at io n, f un din g and i nv e st ment s t r ate g y of th e sc he me. In Jun e 2 0 2 2 th e T IGP S tr us te e com pl eted a d ea l to se cu re i t s r em aini ng un ins ur e d pen si on l iab il it ie s , by w a y of a bu lk a nnu it y bu y- in w i th Rothe s a y L ife p lc . T hi s me ans a ll of t he s ch em e’ s lia bil i tie s ar e in su r ed v ia s e ve n bu y -i n po li cie s . T he f in al bu y - in ha s be en s e cur e d w it h an intent ion to f ul ly b u y- o ut t he S ch em e as s oo n as r e as on abl y pr act ic al a nd w i thin a p er iod of fo ur y ea r s . Co ns eq ue ntly, the i nco me s t atem ent re co gni s es a s et t lem ent l os s of £1 71m in rel at ion to t he b u y- in. I n ter m s agr e ed b et we en th e Gr ou p and t he T I GP S t r us te e pr i or to t he tr ans ac t io n, w hen T I GP S conv er t s al l of it s b u y- in p ol ic ie s to bu y - ou t po li cie s an d su bs eq uent ly w in ds -u p, the t r us te e is ex p ec te d to us e an y sur plus r em aini ng , af te r the c os t s of b u y ing - ou t an d w ind ing -u p the s ch em e ha ve b ee n met , to imp r ov e me mb er b enef i t s . A pa s t se r vi ce co s t of £ 2 4 m has b e en re co gni s ed fo r thi s in th e inc om e st ate ment . T h e Gr ou p ha s no ex p ec t ati on of r e cei v i ng a r ef und f r om t he s ch eme a nd h as p l ace d an e co no mic ben ef it v a lue o f zer o on t he T I GP S s ur p lus f r om 10 Jun e 2 0 2 2 . A s T I GP S cur r entl y r eta ins t he l eg al ob li gat ion to p a y all s c hem e be nef i t s, T I GP S liab il it ie s r ema in p ar t of the r et ir eme nt be nef i t obl i gati on s on th e ba l anc e she et al on gsi de t he co r r e spo nd ing b u y -in a s set s. T he s e li abi li tie s a nd a ss et s w i ll b e de -r e co gni se d at th e po int th e bu y -i n po li cie s ar e con ve r ted to bu y - ou t s an d the l eg al ob li gat io n for p ay m ent of b en ef it s i s tr a ns fe r r ed to t he r ele v a nt ins ur er s . Th e mo s t re ce nt ac t uar i al v al uat ion o f thi s sc hem e ha s be en p er for med us ing t he P r oj ec te d Uni t Met ho d as at 5 A pr il 2 0 2 0. T h e v alu ati on sh o we d a sur p lus o f £ 2 2m o n th e T echn ic al P r ov i sio ns f un din g b asi s at th e v alu ati on d ate and t he f un din g po si tio n ha s imp r ov ed s inc e the n. G i ve n T IGP S’s cir cu ms t anc es , t he Gr o up's cur r ent e xp e c tat io n is th at no f ur th er co ntr i bu tio ns to T I GP S w i ll b e r eq uir ed . Th e dur atio n of th e T IGP S lia bil it ie s is a ro un d 21 ye ar s ( F Y 2 0 21: 23 y ear s) for a c ti v e def er r ed m em be r s , 19 year s ( F Y 2 0 21 : 21 ye ar s) for d efer red mem be r s an d 10 year s (F Y 2 0 21 : 1 1 year s) for p en sio ne r s an d dep en da nt s. US pensio n plans Th e v al uati on s of th e pr i nci pa l US p en sio n an d po st-r et ir eme nt he alt hc ar e p l an s we re p er for med us in g cen su s dat a at 1 Ja nua r y 2 0 2 2. Th e p ens io n pl an s w er e cl os ed w i th ef fec t f r om 3 0 A p r il 2 0 0 9 and be nef i t s we re c a lcu l ated a s at th at date a nd a re n ot r ev alue d. G ov er n anc e of the U S pe ns ion p l an s is o ve r s ee n by a S et tlor C om mit tee app oi nted b y Sm ith s Gr o up S er v ic es C o r p, a w ho lly o w n ed s ubs idi ar y of th e Gr ou p. Th e dur atio n of th e li abi li tie s fo r th e l ar ge s t U S pl an i s ar ou nd 16 yea r s (F Y 2 021 : 18 year s) for a c ti v e defe r r ed m em ber s, 15 year s (F Y 2 0 21 : 18 ye ar s ) fo r defe r r ed m emb er s and 10 yea r s ( F Y 2 0 21 : 1 2 ye ar s ) fo r pen si on er s a nd de pe nd ant s . Risk manag ement In r es pe c t of un ins ur ed l ia bil i tie s , th e pe nsi on s sc he me s ar e ex p os ed to r i sk s th at: – inve s tme nt r etur ns ar e be lo w ex pe c t atio ns , l ea v ing t he s ch eme s w i th in su f f ic ien t as s et s in f ut ur e to p ay al l th eir p en sio n ob li gat ion s; – membe r s an d de pe nda nt s l i ve l ong er t han e xp ec te d, i ncr e as ing t he v a lue of t he p en sio ns w h ich t he s ch eme s h av e to pa y; – infl ati on r ates ar e hi ghe r th an ex pe c te d, c au sin g am ount s p a y abl e und er in de x-l inke d pe ns ion s to b e high er t han e xp ec te d; an d – incr ea se d co ntr ib ut io ns ar e r e quir e d to me et f un din g ta r get s i f lo we r inter e s t r ate s in cr e as e the c ur r e nt v alu e of l iab il iti e s. Th e se r isk s ar e ma nag ed s e pa r atel y for e ac h pe ns ion s ch em e. Ho w ev er , the G r oup h as a do pted a c omm on a pp ro ac h of cl os ing d ef ine d ben ef it s ch em es to c a p mem be r s’ enti tle ment s and of su pp or tin g tr u ste e s in ad op tin g inv e st me nt st r ate gi es w h ich a im to he dg e th e v alu e of as s et s ag ain s t cha ng es i n the v a lue o f li abi li ti es c a us ed b y ch an ge s in inte re s t an d inf l ati on r ates . Ac r os s SI P S an d T IG P S , app r oxi matel y 6 0 % of al l l iab il iti es a r e no w de -r isked t hr ou gh 1 1 bul k ann uit ie s. TIGP S T IGP S has c ov er ed r o ugh ly 10 0 % of l iab il iti e s w ith m atch ing a nnui ti es , e li min atin g inv e s tme nt r etur n, lon ge v it y, infl ati on a nd f un din g r is ks i n resp ec t of those liabilities . SIP S SIP S has co v er ed r o ugh ly 3 0 % of l ia bil it ie s w it h matc hin g ann uit ie s , el imin ati ng in ve s tm ent r et ur n , lon ge v it y, infl ati on a nd f un din g r isk s i n re sp e c t of th os e li ab ili ti es . I t ha s al s o a dop ted a L i abil i t y D r i v en In ve s tm ent ( L DI ) s tr ate g y to he d ge inte re s t an d inf l ati on r i sk s of t he s che me’s unin sur e d l iab il iti e s by in v es tm ent i n gilt s to ge the r w it h the u se o f gilt r e pur ch as e ar r ang eme nt s , tota l r etur n sw a ps , inf l ati on s w a ps an d inter e s t r ate s w a ps . T he s tr ateg y al so t akes i nto acc ount t he s ch em e’ s cor p or ate bon d inv e s tme nt s . The critical estimates and principal assumptions used in updating the valuations are set out below: 2022 UK 2022 US 2022 Other 20 21 UK 20 21 US 20 21 Other Rate o f in cr e as e in s a l ar i e s n /a n /a 2.2 % n /a n /a 2.5% Rate o f in cr e as e fo r ac t i ve d ef er r e d me mb er s 4.0% n /a n /a 4.2% n /a n /a Rate o f in cr e as e in p en si on s in p a y me nt 3. 4% n /a 1. 2 % 3.3 % n /a 1. 5 % Rate o f in cr e as e in d efe r r e d pe ns io ns 3. 4% n /a n /a 3. 3% n /a n /a Discount rate 3.5% 4.5% 1. 1% 1.7 % 2 .7 % 0 .7 % Infl atio n r ate 3. 4% n /a 1. 3 % 3.3 % n /a 1. 5 % Healthcar e cost increase s 4 . 4% n /a n /a 4 . 4% n /a n /a Th e as s ump tio ns u se d in c al cul a tin g the c os t s an d ob li gat ion s of t he Gr o up’ s def in ed b en ef it p en sio n pl a ns ar e s et b y th e Gr ou p af te r con sul ta tio n w it h ind ep en dent p r ofe s sio na lly q ual i fi ed a c tu ar ie s . T he a s sum pti on s us ed a re e s ti mate s ch os en f r om a r ange o f po ss ibl e ac tu ar i al as s umpt io ns w hi ch , due to t he t ime s c ale c ov er e d, m ay n ot ne ce s s ar il y occ ur in p r a c tic e. F or co untr ies ou t si de t he UK a nd U S A , assumptions are disclosed as a weigh ted average. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 12 9 Inflation r ate assumptions Th e RP I inf l at io n as su mpt ion of 3 . 4% has b ee n de r i ve d us ing t he A on U K Go v er nm ent G ilt P r ic e s Onl y Cur v e w ith a n Inf l ati on R isk P r em ium (IR P ) of 0. 2 % p. a ., w h er ea s in pr e v io us y ea r s th e A on UK G ov er nment R PI C ur ve w a s us e d. I t is e s tim ated t hat t he im pa c t of th is ch an ge in RP I met ho do lo g y is to in cr ea s e the R P I as su mpt ion b y 0. 1 % at 31 Jul y 2 0 2 2 an d thi s is e xp ec te d to in cr ea se t he b al a nce s he et l iab il iti e s, f or bot h SIP S and T IG P S , by 1.0 % of DB O at 31 Ju ly 2 0 2 2 . Th e G ov er n ment 's r es po ns e to i t s con su lt atio n on R PI r ef or m w a s pub l ish ed o n 25 N ov em be r 2 0 2 0, a nd s tr on gl y imp li ed t hat R PI w il l be com e al ig ne d w ith C PI -H f r om 2 0 30 . No sp e cif i c all o w anc e (b e yo nd an y thing a lr e ad y p r ic ed in to mar ket s ) h as b ee n fa c tor e d into th e RP I as su mpti on s for p oten tial c ha ng es . T he a s su mpti on fo r th e lon g- ter m g ap be t w ee n RP I an d CP I is 0 .6% p. a. ( F Y 2 0 21 :0 .6%) r ef l ec ti ng t he Gr oup’s vie w on t he m ar ket p r ici ng of t his g ap o ve r the l i feti me of t he UK s ch em es’ l iab il iti es , i .e. 1.0 % p. a . (F Y 2 0 21: 1 .0% ) p re -2 0 3 0 an d 0. 2 % p. a. p os t-20 3 0 ( F Y 2 0 21 :0 . 1 %). Discount rate as sumptions Th e UK s ch em es u se a d is co unt r ate b a se d on t he an nua li s ed y ie ld o n th e Ao n GBP S e le c t A A Cur v e, us ing t he e xp ec te d c as h-f l ow s f r om a noti on al s ch eme w i th o bl iga tio ns of t he s a me du r ati on a s tha t of th e UK s che me s . T he U S Pl an use s a di s cou nt r ate b as e d on th e ann ual i se d y iel d der iv ed f r om W i ll is Tower s Wat so n’ s R AT E:L in k (1 0 th – 9 0 th) m od el us ing t he P l an’s expe c te d ca sh -f lo w s . Mor tal it y assumptions Th e mo r tal i t y a s sum pti ons u s ed in t he p r inc ip al UK s ch em es a r e ba s ed on t he ' S A PS S 3' bi r th ye ar t abl es w i th r el e v ant s c al ing f a c tor s ba se d on t he r e cent e xp er i enc e of th e sc he me s . Th e as s ump tio n al lo w s for f u tur e im pr o ve ment s i n li fe e xp ec t an c y in l in e w it h the 2 021 CMI pr oj ec ti on s , w ith a s mo oth ing f a c tor of 7 .0 an d ' A ' par ameter of 0 .5 % / 0 .2 5 % ( SI P S / T I GP S ) an d bl end ed to a l on g-te r m r a te of 1.25 %. Th e mo r tal i t y a s sum pti ons u s ed in t he p r inc ip al U S sc he me s ar e b as ed o n ge ner ation al m or ta li t y u sin g P r i-2 012 sex-d is tin c t, e mp lo ye e / non - di s abl ed a nnui t ant t abl e, w i th a 2 012 bas e ye ar , pr oje c te d for w a rd g en er ation all y w it h the M P-20 2 1 mor t al it y sc ale . No e xp li ci t adj us tm ent ha s be en m ad e to mo r tal it y as sum pti on s in r e spe c t of C O V ID - 1 9 . E x pe c t ed f u r t h er y e ar s of li f e UK schemes US schemes Male 31 Ju ly 2 0 2 2 Female 31 Ju ly 2 0 2 2 Male 31 Ju l y 2 0 21 Female 31 Ju l y 2 0 21 Male 31 Ju ly 2 0 2 2 Female 31 Ju ly 2 0 2 2 Male 31 Ju l y 2 0 21 Female 31 Ju l y 2 0 21 Mem b er w h o re ti re s n ex t yea r at a ge 6 5 22 24 22 24 21 22 20 22 Member , cur rently 45 , when they retire in 2 0 y ea r s’ tim e 23 25 23 25 22 24 22 24 Sensitiv it y Se ns it i v iti e s in r es pe c t of th e key a s sum pti on s us ed to m ea sur e t he pr incip al p en si on s che me s as a t 31 July 2 0 2 2 a r e set o ut b el ow. Th e se s en si ti v i tie s s ho w the h y p othe tic al i mp ac t of a c han ge i n ea ch of t he l is ted a s su mpti on s in is o l atio n, w i th t he exc ept ion o f the s en si ti v i t y to inf l ati on w hi ch in cor por ate s t he im pa c t of ce r tain c or r el a tin g as su mpt ion s . In pr ac tic e, su ch as s ump tio ns r are ly ch ang e in i so l ati on . Profit before tax for year ended 31 Ju ly 2 0 2 2 £m Increase / (decr ease) i n scheme assets 31 Ju ly 2 0 2 2 £m (Increase)/ decrease in scheme liabilities 31 Ju ly 2 0 2 2 £m Pr o f it b e fo r e tax fo r ye a r en d ed 31 Ju l y 2 0 21 £m Increase / (decrease) i n scheme ass ets 31 Ju l y 2 0 21 £m (Increase) / decrease i n scheme liabilities 31 Ju l y 2 0 21 £m Rate o f mo r tal i t y – 1 y e ar in cr e a se i n li fe e x pe c t an c y ( 2) 84 ( 13 5 ) (2) 99 ( 209) Rate o f mo r tal i t y – 1 y e ar d ec r ea s e in l if e ex p ec t an c y 2 (84) 13 6 2 (97 ) 206 Rate o f inf l at io n – 0. 2 5 % in cr e as e ( 1) 34 ( 69 ) (1) 30 (9 8) Di sc ou nt r a te – 0. 2 5% i nc r ea s e 2 ( 49) 97 3 (3 8) 14 6 Mar ket va lu e of s ch em e as s et s – 2 . 5 % inc r ea s e 1 4 0 – 1 73 – Th e ef fec t on p r ofi t b efor e t a x ref l ec t s t he im pa c t of cu r r ent s er v ice c os t an d net i nter e st c os t . T he v a lue o f the s ch em e as s et s is af fec te d by c han ge s in m or ta li t y ra tes , inf l at io n and d is cou ntin g be c au se t he y af f ec t t he c ar r y i ng v al ue of t he in sur ance a s se t s. A ss et valuation Th e p ens io n sc hem e s hol d a ss et s i n a v ar ie t y of p o ole d f un ds , in w hi ch th e un der lyin g as s et s t yp ic al ly ar e i nv es te d in cr e di t and c a sh a s set s . Th e se f un ds a r e v alu ed . T he p r ice of t he f un ds i s se t by a dmin is tr ator s /cu sto di ans e mpl oy e d by t he in ve s tm ent m ana ge r s an d ba s ed o n the v alu e of th e und er l y ing a s se t s hel d in th e f und s . Det ai l s of p r ic ing m eth od olo g y ar e s et ou t w i thin i nter n al co ntr ol r e por t s pr o v id ed f or e ach fu nd . Pr i ce s ar e up date d da ily, we ekly o r mo nthl y dep en din g up on th e fr e qu enc y of the f un d’s dea li ng . Bo nds a r e v alu ed u sin g ob se r v abl e br oker q uote s . Gil t r epu rc ha se o bl ig ati ons a r e v alu ed b y th e r ele v ant m ana ge r , whi ch de r i ve s t he v al ue usi ng an i ndu s tr y r eco gn is ed m od el w i th ob s er v ab le inp ut s . Pr o per t y is va lu ed b y sp ec ial is t s a ppl y ing r e co gni se d pr o pe r t y v alu ati on m etho ds i nco r p or a tin g cur rent m ar ket da ta o n r ent al y ie ld s and tr ansa ction pr ices . T otal r et ur n , inter e s t and i nf l atio n s w ap s an d for w a rd F X co ntr ac t s ar e bil a ter a l agr e em ent s b et w e en co unter par tie s an d do n ot ha ve obs er v a ble m ar ket p r ic es . T he s e de r i v ati v e co ntr act s are v al ue d usi ng o bs er v ab le in pu t s. Ins ur ed l ia bil i tie s co mpr ise a nnui t y pol ici e s br o adl y match in g the s ch em e obl i gati on to i dent if ie d gr ou ps of m emb er s. T he s e as s et s ar e v alu ed b y an e x ter n al qu al if ie d ac t ua r y at the a c tu ar ia l v alu ati on of th e co r r es po ndi ng l ia bil it y, refl ec t ing t hi s match ing r e l atio ns hip . Th e in sur ance p ol ic ie s ar e tr e ated a s qu al if y ing in su r an ce p ol ic ie s as n on e of the i ns ur er s a re r e l ated p ar ti es o f Smi th s Gr ou p, and t he pr oc ee ds of t he p ol ic ie s c an on ly b e us ed to p a y or f und e mp lo ye e be nef i t s for t he r e sp ec ti v e s ch eme s , ar e n ot av a il ab le to Sm it hs G ro up’s cr ed ito r s an d ca nn ot be p ai d to Smi th s Gr o up. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 0 Retirement benefit plan assets 31 Ju ly 2 0 2 2 – £m 31 J ul y 2 0 21 – £ m UK schemes US schemes Other countries To t a l UK schemes US schemes Other countries To t a l Ca sh a nd c a sh e qu i v al ent s 90 1 1 92 71 1 – 72 Pooled funds: – Pool ed equi t y – – 3 3 – – 3 3 – Pooled Diver sif ied Grow th – – 15 15 – – 19 19 – Pool ed credit 379 – – 379 420 – – 42 0 Corp or ate bonds 412 167 – 579 791 19 2 – 98 3 Gover nment bonds /L DI 49 8 57 3 558 1, 2 9 8 79 3 1, 3 8 0 Insured liabili ties 1,6 4 9 – – 1, 6 49 1, 4 6 2 – – 1, 4 6 2 Prop er t y 39 – – 39 62 – – 62 Other – – – – – – 5 5 T ot al m ar ke t v al u e 3 , 0 67 225 22 3 , 3 14 4 ,1 0 4 272 30 4,406 Th e as s et s a re u nqu ote d. G ov er n men t bon ds /L D I po r tfo l ios c ont ain £ 96 0 m (F Y 2 021 : £1 ,92 9m ) of UK G ov er nment b on ds (g ilt s ), £ 47 6m (F Y 2 0 21: £626m ) of g ilt r ep ur ch as e ob li gat ion s an d £9 m of inter e s t an d inf l ati on s w a p as s et s ( F Y 2 0 21 : £5 m ob li gat io ns ). Th e UK b on d po r tf ol io s inc lud e for w a r d F X contr ac t s w it h a net v a lue of £ 5 m ( F Y 2 0 21 : £1 m). T he s e ar e he ld to h ed ge a gai ns t fo re ign cur r e nc y r isk in r e sp ec t of o v er s ea s bo nd s . Th e s che me a s set s do not in clu de a ny pr o pe r t y oc cup ie d by, or oth er a s set s u s ed b y, the Gr o up. Present value of funded scheme liabilities and assets for the main UK and US schemes 31 Ju ly 2 0 2 2 – £m 31 J ul y 2 0 2 1 – £m SIPS TIGPS US schemes SIPS TIGP S US schemes Pr e s ent v alue o f fu nd e d sc he me l ia bi li t ie s: – Acti ve deferre d members (32) ( 23) ( 41) (42 ) ( 2 9) (73) – Deferred member s ( 5 61 ) ( 4 42) (10 9 ) ( 8 10 ) (6 32 ) ( 11 9 ) – Pensioners ( 1 ,01 0) (6 70) (88) ( 1, 2 2 6 ) (8 09) ( 8 1) Pr e s ent v alue o f fu nd e d sc he me l ia bi li t ie s (1,6 0 3 ) (1 , 135) (23 8) (2 ,07 8) (1, 4 7 0 ) ( 27 3) Mar ket va lu e of s ch em e as s et s 1,912 1 ,15 5 2 25 2 , 410 1, 6 8 4 272 Surp lus restr ic tion – (20) – – – – Surplus /(deficit) 309 – (13 ) 332 214 (1) Net retirement benefit obligations 31 Ju ly 2 0 2 2 – £m 31 J ul y 2 0 21 – £ m UK schemes US schemes Other countries To t a l UK schemes US schemes Other countries To t a l Mar ket va lu e of s ch em e as s et s 3, 0 67 2 25 22 3, 3 14 4 ,1 0 4 272 30 4,4 06 Pr e s ent v alue o f fu nd e d sc he me l ia bi li t ie s ( 2,738) (2 38) ( 27 ) ( 3,00 3) (3,55 8) (27 3) ( 38) ( 3 , 8 69 ) Surp lus restr ic tion (2 0) – – (20) – – – – Surplus /(deficit ) 309 (13 ) (5) 2 91 546 (1) (8) 5 37 Unf un de d p en si on p l an s (4 3) ( 7) (4 0) (90) (54 ) (7) (5 5) ( 116 ) Post-retirement healthcar e (4) (1) (2 ) (7 ) (4) ( 1) ( 3) (8) Pre sent value of unfunded obligations ( 47 ) (8) (42) (97 ) (5 8) (8) (58) (12 4 ) Net pension ass et/(liabilit y) 262 ( 21) ( 47 ) 194 4 88 (9) (6 6) 413 Retirement benefit assets 309 – – 3 09 546 – – 546 Retirement benefit liabilities ( 47 ) ( 2 1) (47 ) ( 11 5 ) (58) (9) ( 61) ( 12 8 ) Liabili ties held for sale – – – – – – (5) (5) Net pension ass et/(liabilit y) 262 ( 21) ( 47 ) 194 4 88 (9) (6 6) 413 L iab ili ti es h el d for s a le in F Y 2 0 21 c om pr i se £ 4 m of unf un de d pe ns ion p l an s an d £1 m def ici t on d ef ine d b enef i t s che me s w it hin t he S mit hs Medical division . W her e a ny in di v id ual s c hem e sh ow s a r e co ve r ab le s ur pl us un de r I A S 1 9 , this is d is clo s ed o n the b al a nce s he et as a r et ir em ent b enef i t as s et . Th e I A S 1 9 sur plus of a ny on e s che me i s not a v ail a ble to f u nd th e I A S 1 9 def ic it of a not her s ch em e. T h e ret ir em ent b ene fi t as s et di sc lo se d ar is e s f ro m th e r ight s of the em plo y er s to r e co ve r the s ur p lus at t he e nd of t he l ife o f the s ch em e i.e . w he n the l a s t be nef ic iar y ’s obli gat ion has b e en me t. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 131 Amounts recognised in the consolidated income statement Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Amount s charged to oper ating profit Curr ent ser v ice cost 2 2 Pa s t s er v ic e co s t s – be nef i t e qu al is at io n s 43 6 Set tlement loss 17 1 – Scheme administr ation cost s 4 5 220 13 Th e op e r at in g co s t is c ha r ge d a s fo l lo w s: Headl ine administr ati ve expe nse s 6 7 Non-headline settlement loss 17 1 – Non-he adline adminis tr ati ve expen ses 43 6 220 13 A mo un t s cr e di te d to f in an ce c os t s Non-headl ine other finance income – retirement benefit s (7) (6) Amounts recognised directly in the consolidated statement of comprehensive income Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Re-measurement s of retirement defined benefit assets and liabilities Di f fe r en ce b et we en in ter e s t cr e di t an d re tu r n on a s s et s (83 5) (57 ) E xper ience gains on scheme liabilities ( 3 1) 44 Ac t ua r ia l ga in s ar i si ng f r om c ha ng e s in d em og r ap hi c as s um pti on s 1 10 Actuar ial gains/(los ses ) arising from changes in financial assumptions 86 8 16 Movement in surplus res tric tion (20) – (17 ) 13 Changes in present value of funded scheme assets 31 Ju ly 2 0 2 2 – £m 31 J ul y 2 0 21 – £ m UK schemes US schemes Other countries To t a l UK schemes US schemes Other countries To t a l At beginning of per iod 4 ,1 0 4 272 30 4,406 4,240 3 11 31 4 ,582 Inte re s t o n as s et s 70 8 1 79 58 7 1 66 Ac t ua r ia l mo v em ent o n s ch em e as s et s (773) (62 ) – (8 3 5) (4 0) ( 17 ) – (57 ) Employer contribu tions 3 – 1 4 20 4 1 25 Scheme administr ation cost s ( 3) ( 1) – (4) (4) ( 1) – (5) Foreign exchange r ate movements – 3 3 – 33 – ( 17 ) – ( 17 ) A s s et s t r a ns fe r r ed o n b usi ne s s d isp o s al – – (5) (5) – – – – A s s et s d is tr ibu ted o n s et t lem en t s (18 0) – – (18 0 ) – – – – Cur t ailment gains /(l oss es) – (9) – (9) – – – – Be nef i t s p ai d (15 4 ) (16 ) (5) ( 17 5 ) ( 17 0 ) (15 ) ( 3) (18 8 ) At end of period 3 , 0 67 2 25 22 3 , 314 4 ,1 0 4 272 30 4,406 Changes in present value of funded defined benefit obligations 31 Ju ly 2 0 2 2 – £m 31 J ul y 2 0 21 – £ m UK schemes US schemes Other countries To t a l UK schemes US schemes Other countries To t a l At beginning of per iod (3,558) ( 2 73) (3 8) (3 , 8 69) (3 ,72 4 ) ( 314 ) (4 0) (4 ,0 78) Curr ent ser v ice cost – – – – – – (1) (1) Pas t ser v ice cost s (4 3) – – ( 4 3) (6 ) – – (6) Interest on obligations ( 61) (8) (1) (70) ( 51) (7) (2) (60) Ac tuarial mov ement on liabil ities 761 5 4 2 8 17 53 16 – 69 Foreign exchange r ate movements – (33) – (3 3) – 17 2 19 Liabili ties tr ansfer red on busines s disposal – – 5 5 – – – – Cur t ailment gains /(l oss es) – 6 – 6 – – – – Liabili ties extin guished on settlements 9 – – 9 – – – – Be nef i t s p ai d 15 4 16 5 17 5 17 0 15 3 18 8 At end of period ( 2 ,73 8) (2 38) (27 ) (3, 003) (3 ,55 8) ( 27 3) (38) (3 , 8 69) NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 2 Changes in present value of unfunded defined benefit pensions and post-retirement healthcare plans A sset s Obligations Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m At beginning of per iod – – (12 4 ) (13 2 ) Curr ent ser v ice cost – – (1) (1) Interest on obligations – – (2) (1) Ac tuarial mov ement – – 21 2 Employer contribu tions 5 5 – – Foreign exchange r ate movements – – – 3 Liabili ties tr ansfer red on busines s disposal – – 4 – Be nef i t s p ai d (5) (5) 5 5 At end of period – – (9 7 ) (12 4 ) Changes in the effect of the asset ceiling over the year Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Irrecover able asset at beginning of period – – Ac t ua r ia l mo v em ent o n s ch em e as s et s (2 0) – At end of period (20) – Cash contributions Co mp any c ont r ibu ti on s to the d ef ine d b enef i t pe ns ion p l an s and p os t-r eti r eme nt he alt hc ar e p l ans to ta ll ed £ 9m ( F Y 2 0 21 : £ 3 0 m). Th is c omp r is e d re gu l ar co ntr i but io ns to f un de d sc he me s of £ 3 m (F Y 2 0 21: £ 12m) to SIP S, £n il ( F Y 2 0 21 : £8 m ) to T IGP S, £n il ( F Y 2 0 21 : £4 m ) to fu nde d U S sc he me s an d cont r ib uti on s to oth er s che me s of £1m (F Y2 0 21: £ 1 m ). In ad dit io n, £ 5 m (F Y 2 021 : £ 5m ) w a s spe nt on p r ov i din g ben ef it s u nd er unf un de d def in ed b en ef it p en sio n an d po st-r et ir eme nt he alt hc ar e p l an s. In F Y 2 0 2 3 , c ash c ont r ibu ti on s to the G r oup’s sche me s ar e e xp ec te d to be u p to £1 2m in tot al . 9 Employee share s chemes Th e Gr o up op er ates sh ar e s che me s an d pl a ns fo r th e ben ef it of e mp lo ye e s. T h e nat ur e of th e pr i nci pa l sc hem e s and p l an s , inc lud ing g en er al conditions, is set out below: Long- T erm Incen tive Pl an (L T IP) Th e LTIP is a s har e p l an un de r w hic h an aw ard o ve r a c app e d num ber o f sha r es w i ll v es t af ter th e end o f a thr e e- y ear p er for mance p er iod if per fo r man ce co nd it ion s ar e me t. LTIP a w ar d s ar e ma de to s el ec te d se nio r exe cu ti v e s, i ncl udi ng t he E xe cu ti v e Di re c tor s. L TIP per for m ance co ndi tion s Ea ch p er for m an ce co ndi ti on ha s a th re s hol d b elo w w hi ch no s ha re s v e st a nd a m ax imu m pe r for ma nce t ar g et at or a bo ve w h ich t he aw a rd v e s t s in f ul l . For p er for manc e bet we en ‘t hr e sho ld ’ an d ‘max imu m’ , a w ar d s ve s t on a s t r ai ght-l ine s li din g sc a le. T h e pe r for m anc e con di tio ns a re a s se s s ed s ep ar ately; s o p er for m anc e on on e co ndi ti on do e s not a f fe c t th e ve s ti ng of t he oth er e lem ent s of t he a w ar d. To the ex te nt tha t the p er for mance t ar g et s ar e n ot met o ve r th e thr e e- y ea r per fo r man ce p er i od , aw a r ds l ap s e. T he r e is n o re -te s tin g of th e per for mance conditions. L T IP aw ard s ha ve p er for m an ce co ndi ti on s re l ati ng to or g ani c re v enu e gr o w th, gr o w th in he adl in e EP S, R OCE , f r ee c a sh -f lo w and m ee tin g ESG t arge ts. Smiths E xce llence Pl an ( SEP) Th e l a st S mi th s E xce lle nce p l an ( S EP ) g r ant w a s is s ue d in O c tob er 2 019 , v e ste d on 31 J uly 2 0 21 a nd exe rc is e d in Oc to be r 2 0 21. No fur the r SEP awards ha ve been made. R estrict ed st ock Res tr icte d s toc k is u se d by t he Re mun er at io n and P eo pl e Co mmi t tee , as a p ar t of r ec r ui tm ent s tr ateg y, to make aw ar d s in r ec og nit io n of inc enti v e ar r ang eme nt s for fei ted o n le av i ng a pr e v io us e mpl oy er . If an a w ar d i s con si der e d ap pr op r iate , the a w ar d w il l t ake acc ou nt of re le v ant f ac to r s in clu din g th e f air v al ue of a w ar d s for fei ted , an y pe r for ma nce c on dit ion s at t ac he d, t he l ikel ih oo d of th os e co nd iti on s be ing met an d th e pr op or ti on of th e ve s ti ng p er i od r em ain ing . Save as you earn ( S A YE ) Th e S AY E s ch eme i s an HM Re ve nu e & Cus tom s ap pr o ve d al l-e mpl oy e e s av in gs -r el a ted sh ar e op tio n sc he me w hi ch is o pe n to al l UK emp lo ye e s. P a r ticip ant s e nter into a c ont r ac t to s a v e a fi xed a mo unt p er mo nth of u p to £5 00 i n ag gr eg ate for t hr ee y e ar s an d ar e gr anted an opt io n ov er sh ar e s at a f ixe d opt io n pr i ce, s et at a di sc ou nt to mar ket p r ic e at th e date of i nv i tat ion to p ar ti cip ate . Th e num be r of sh ar e s is deter mine d by t he m onth ly am ount s a v ed an d th e bo nus p ai d on m atur it y of t he s a v ing s co ntr a c t . Opt ion s gr anted un der t he S A Y E s ch eme ar e not s ubj ec t to a ny p er for m anc e con di tio ns . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 3 Lon g-ter m incenti ve plans SEP Restric ted stoc k S av e a s y ou earn scheme Tot a l Weighted average exercise price Ordinar y shares under option/ awar d (’000) 31 Ju ly 2 02 0 3 ,9 3 7 1, 2 9 5 131 1, 2 0 7 6,570 £1. 8 9 Gr a nted 2 ,14 3 358 11 139 2 , 6 51 £0.6 8 Exercise d (3 4 6) ( 4 11 ) (60) (16 5 ) (982 ) £ 2.0 3 Lap sed ( 8 19 ) (391 ) (18 ) (96) (1, 3 2 4 ) £ 0 .7 5 31 Ju ly 2 02 1 4 ,9 15 8 51 64 1, 0 8 5 6 ,915 £1. 6 3 Reclas sific ation 348 (3 4 8) – – – – Gr a nted 2,255 – 2 12 167 2 ,6 3 4 £0 .7 1 Exercise d (224) ( 313 ) ( 16 3 ) (13 8 ) (8 3 8) £ 1.9 0 Lap sed (1,9 8 4 ) (19 0 ) (30) ( 22 9) ( 2,4 3 3) £ 0.9 7 31 Ju ly 2 02 2 5 , 3 10 – 83 8 85 6,278 £ 1. 4 5 Opt ion s an d aw a r ds w er e exe rc is ed o n an ir reg ul ar b a sis d ur in g th e per iod. T h e av er age c los in g sha re p r ic e ov er t he f ina nc ial y ea r w as 1 , 47 6. 3p ( F Y 2 0 21 : 1,50 8.6 p). T he re h as b e en no c ha nge to t he ef fec ti v e op tio n pr i ce of a ny of th e ou t s ta nd ing o pti on s dur i ng th e pe r io d. Th e num be r of exe rc is ab le s har e o ptio ns a t 31 July 2 0 2 2 w as nil ( 31 Jul y 2 0 21 : nil ). Ra ng e o f ex er c is e p r i ce s T otal shares under options/awards at 31 J u ly 2 0 22 (’000 ) Weighted average remaining contractual li f e at 31 J u ly 2 0 22 (months) Tota l sh ar e s u nd e r options/awar ds at 31 J ul y 2 0 2 1 (’000 ) Weighted av er age remaining contr actual li f e at 31 J u ly 2 0 2 1 (mont hs) £0 .0 0 – £2 . 0 0 5,39 3 19 5,83 0 15 £6.01 – £1 0.00 49 0 18 655 30 £10. 01 – £12. 0 0 395 29 430 24 For t he p ur p os es o f v alu ing o pti on s to ar r i v e at th e sha r e- b as ed p a y ment c har g e, th e bi nom ial o pti on p r ici ng m od el ha s be en u s ed . T he key as su mpti on s us ed i n th e mo del w er e v ol at il it y of 25 % to 2 0 % ( F Y 2 0 21 : 25 % to 2 0 % ) an d di v id end y i el d of 2 .6% (F Y 2 0 21: 2.8 % ), b as ed o n his tor ica l dat a, f or th e pe r io d co r r es po ndi ng w i th th e ve s ti ng p er i od of t he op tio n. T h e se g en er ate d a w eig hted a ve r a ge f air v alue fo r L T IP of £1 4 .81 ( F Y 2 0 21: £ 14. 1 0), a nd r e st r ic te d s toc k of £14.59 ( F Y 2 0 21: £ 14.6 3). St af f c os t s in clu de d £1 5m ( F Y 2 0 21 : £14m) f or sh ar e -b as e d pa y me nt s , of w hic h £14m (F Y 2 0 21: £ 13m) r el ated to eq uit y- set tled s har e -b a se d p ay m ent s . 1 0 Intangib le a s set s Goodwill £m Development costs £m Acquire d intangibles (see ta ble below) £m Sof t war e, pa te nt s a nd intellectual proper t y £m To t a l £m Cost At 31 J uly 2 0 2 0 1, 2 5 4 15 5 546 174 2 ,1 2 9 Foreign exchange r ate movements (6 8) (7 ) (30) (6) ( 111 ) Business combinations 21 – 46 – 67 Additions – 8 – 10 18 Disposal s – – – (1) (1) At 31 J uly 2 0 21 1, 2 0 7 15 6 5 62 17 7 2 ,1 0 2 Foreign exchange r ate movements 10 4 6 68 10 18 8 Additions – 12 – 6 18 At 31 J uly 2 0 2 2 1 , 3 11 174 630 19 3 2,308 Amor tis ation and impairments At 31 J uly 2 0 2 0 62 112 2 49 14 2 565 Foreign exchange r ate movements (3) (5) ( 15 ) (4) ( 27) Amor tisation charge for the year – 7 53 7 67 Disposal s – – – (1) (1) At 31 J uly 2 0 21 59 11 4 2 87 14 4 60 4 Foreign exchange r ate movements 4 6 35 6 51 Amor tisation charge for the year – 3 51 7 61 Imp ai r me nt c ha r ge fo r th e y ea r 4 – – – 4 At 31 J uly 2 0 2 2 67 12 3 373 15 7 720 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 1, 2 4 4 51 257 36 1, 5 8 8 Net b o ok v a lue a t 31 Ju ly 2 0 21 1,1 4 8 42 275 33 1, 49 8 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 1,1 9 2 43 297 32 1, 5 6 4 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 4 In ad di tio n to go od w il l , ac qui re d int an gib le a s set s c om pr i se: Pate nts , licences and trademar ks £m T echnology £m Customer relationships £m To t a l acquired intangibles £m Cost At 31 J uly 2 0 2 0 15 13 9 392 546 Foreign exchange r ate movements ( 1) (7 ) (22) ( 30) Business combinations 3 2 41 46 At 31 J uly 2 0 21 17 13 4 411 562 Foreign exchange r ate movements 2 18 48 68 At 31 J uly 2 0 2 2 19 15 2 4 59 630 Am or tis atio n At 31 J uly 2 0 2 0 4 60 18 5 2 49 Foreign exchange r ate movements – (3) ( 12 ) (15 ) Cha r ge f or t he y ea r 1 10 42 53 At 31 J uly 2 0 21 5 67 215 2 87 Foreign exchange r ate movements 1 10 24 35 Cha r ge f or t he y ea r 2 10 39 51 At 31 J uly 2 0 2 2 8 87 278 373 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 11 65 181 257 Net b o ok v a lue a t 31 Ju ly 2 0 21 12 67 19 6 275 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 11 79 2 07 297 Indi v i du all y mate r ial i nta ngi bl e as s et s co mpr ise £ 71m of cus tome r r el ate d int an gibl e s at tr i bu ta ble to U ni ted F le xi ble ( r em ain ing a mor ti s ati on per iod: 4 ye ar s), £6 1 m of cu sto me r re l ati on ship i nta ng ibl es at tr ibu t abl e to Mor pho De tec t ion ( r em aini ng am or ti s atio n pe r io d: 6 ye ar s ), £ 3 5m o f cu sto me r- r el ate d int an gibl e s at tr i bu ta ble to Ro y al M et al ( re mai nin g am or tis at ion p er iod: 6 ye ar s ), an d £1 9m of de ve lop me nt cos t int an gi ble s at t r ib ut ab le to a co mpu te d tomo gr aphy p r ogr amme i n Dete c ti on th at is c ur r ent ly un de r de ve lop me nt. Th e ch ar ge a s s oc iate d w ith t he am or ti s atio n of int an gib le a s set s i s inc lu de d in op er ating c os t s on t he co ns o li date d inc om e st ate ment . 1 1 Imp air me nt tes ting Goodw ill Go od w i ll i s tes te d for i mp air m ent at l ea st a nnu al ly or w h en ev er th er e i s an in dic at ion t hat t he c ar r y in g v al ue ma y no t be r e co ver able . Fur ther d et ail s of the im pa ir me nt r ev i ew p r oc es s an d ju dg eme nt s ar e in clu de d in th e ' S our ce s of e s tim ati on un cer ta int y' s ec ti on of t he 'Basis of preparation' f or the consolidated financial statements. For t he p ur p os e of imp ai r me nt tes t ing , as s et s ar e gr o up ed at t he lo w e st l ev el s for w hi ch th er e ar e s ep ar a tely i dent if ia ble c a sh -f lo w s , kn ow n as cash gener ating units (CGUs ), taking in to consider ation the commonalit y of repor ting, policies , leader ship and intra- div isional tr ading re l ati on ship s . Go od w i ll a cqu ir ed t hr ou gh bu sin e ss c om bin atio ns i s al lo c ated to gr o ups o f CG Us at a di v i si ona l (or o pe r at ing s e gme nt ) le v el , bei ng th e lo w es t l ev el at w h ich m ana ge me nt mon ito r s p er for m anc e se pa r ate ly. Th e c ar r y in g v al ue of g oo d w il l at 31 July i s al lo c ated b y di v i sio n as f oll o w s: 2022 £m 2022 Number of CGUs 20 21 £m 20 21 Nu mb e r of CGUs John Crane 13 2 1 12 9 1 Smiths Detection 644 2 61 0 1 F l e x -Te k 194 1 16 9 1 Smiths Interconnect 2 74 1 240 1 Smiths Medic al – – – 1 1, 2 4 4 5 1 ,1 4 8 5 * I n F Y2 0 2 2 t h e Sm i th s D et ec t i on C G U ha s b e en r e s tr uc tu r e d an d th e D et ec t i on R u ss i a bu s in e s s sp l it i nt o a s ep a r at e C GU, s e e t he ‘ Ru s s ia i mp a ir m e nt c ha r g es a n d r el a te d cl o su r e co s t s’ se c t io n b el o w fo r f ur th er d et a il s Critic al estimate s used in impair ment testing Th e r ec ov er able a mou nt for i mp air m ent te s tin g is d eter m ine d f ro m th e hig her of f a ir v al ue le s s co s t s of di spo s al a nd v al ue in u se o f the C G U. In as s e s sin g v alu e in us e, t he e s tim ated f u tur e c a sh -fl o w s ar e dis co unte d to the ir pr e s ent v a lue u sin g a po s t-ta x dis co unt r a te that r ef le c t s cur r e nt mar ket ass e s sme nt s of th e tim e v al ue of m on ey, fr om w h ich p r e- ta x di sc ount r ates ar e d eter m ine d. Fair v al ue l es s c os t s of di sp os al i s c alc ul ate d us ing a v ail a bl e info r mat ion o n pa s t an d ex pe c ted f u tur e p ro fi t abi li t y , v alu atio n mul tip le s fo r com pa r ab le qu ote d com pa nie s an d sim il ar t r an s ac t io ns ( adj us te d as r eq uir e d for s ign if ic ant d if fer enc es ) an d info r ma tio n on co s t s of si mil ar tr a ns a c tio ns . Fair v alue le s s co s t s to se ll m od el s are u se d w he n tr a din g pr o jec t io ns in t he s tr ategic p l an c a nnot b e a djus te d to el imi nate t he imp ac t of a m aj or r e st r uc t ur in g. Th e v al ue in u se o f CG Us is c a lcu l ated a s th e net p re s ent v a lue o f the p r oje c te d r isk-a dju ste d c as h-f l ow s of e ac h CG U. T he se c a sh -f lo w for e c as t s ar e b as ed o n th e F Y 2 0 2 3 b usi ne s s pl an ( a s app r ov ed b y th e B oa rd ) an d th e fi v e -y e ar det ai le d di v is ion al s tr ategic p r oje c ti on s w hic h hav e b ee n pr ep ar e d by d i v isi ona l ma nag em ent an d ap pr o ve d by t he Ch ief F in anc ial O f fi cer . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 5 Th e key a s sum pti on s us ed i n dete r min ing t he v al ue in u s e we re: – Revenu e: Pr oje c ted s a le s we r e bui lt up w i th r efe re nce to m ar ket s a nd p ro du c t c ateg or i es . T h ey in co r po r ate d p as t pe r for ma nce , his to r ic al gr ow th r a tes a nd p ro je c tio ns o f de ve lop me nt s in key m ar ket s; – A ver age earning s before interest and tax margin: P ro je c ted m ar gin s r ef le c t his to r ic al p er for m an ce, o ur ex pe c t ati ons f or f ut ur e co s t inf l ati on an d th e imp ac t of a ll c omp lete d pr oj ec t s to i mpr o v e op er at io nal ef fic ie nc y a nd l ev er age s c ale . T he pr o je c tio ns d id no t inc lud e th e imp ac t of f u tur e r e s tr u c tur i ng p r oje c t s to w hic h th e Gr ou p w as n ot ye t com mit ted; – Projected capital e xpenditure: The c a sh -f lo w for e c as t s fo r c api t al ex pe nd itu r e we re b a se d on p as t e xp er i enc e an d inc lud ed c omm it te d ong oin g c ap it al e xp en dit ur e co nsi s tent w i th th e F Y 2 0 2 3 b udg et an d th e di v is ion al s tr ategic p r oj ec ti on s. T h e fo re c as t di d not i nc lud e any fu tu re c a pi ta l exp en di tur e t hat im pr o ve d /enha nce d th e op er ation /ass et in e xce s s of it s c ur r ent s t an dar d o f pe r for ma nce; – Dis cou nt r a te: T h e dis co unt r a tes h av e be en c a lcu l ated b a se d on t he Gr o up’s weighte d av er age co s t of c api t al an d r is k s sp eci f ic to th e C GU bei ng te s ted . In dete r mi nin g the r isk adj us ted d is co unt r a te, ma nag em ent co ns ide r ed t he s y s tem atic r isk to ea ch of t he G ro up’s CGUs an d app li ed a n av er age of di sc oun t r ate s us e d by ot her c om pa nie s fo r the i ndu s tr i es i n w hic h Smi th s di v is io ns op er ate. P re -t a x r ate s of 1 1 . 3% to 1 2 . 3% ( F Y 2 0 21 : 9 . 9 % to 13.2 % ) h av e be en u se d fo r the i mp air m ent te s tin g; and – Lon g- ter m g ro w th r ate s: F or th e pu r po se s of t he G ro up’s valu e in us e c al cul a tio ns , a lo ng -ter m gro w th r ate into p er p et uit y w as ap pl ie d imm edi ately a t the e nd of t he f i v e- y ear f or ec a s t pe r io d. G ro w th r ate s fo r th e pe r io d af te r the d et ail ed fo r ec a st s wer e ba s ed o n the lon g- ter m GD P pr oj ec t ion s of t he pr imar y ma r ket for e ac h CG U. Th e av er age gr o w th r ate u se d in th e te st in g w as 2 .0 % (F Y 2 0 21 : 2. 1 %). Th e se r ates di d not r ef le c t th e lo ng -ter m a s sum pti on s us ed b y th e Gr ou p for i nv es t ment p l an nin g. Th e as s ump tio ns u se d in th e imp ai r me nt tes t ing o f CG Us w it h sig ni fi c ant go od wil l ba l an ce s we re a s fo ll ow s: A s a t 31 Ma y 2 0 22 John Crane Smiths Detection F l e x -Te k Smiths Interconnect Net book value of goodwill (£m) 13 2 640 18 7 266 Basis of valuation Va lu e in u s e Val u e in u s e Val ue i n u s e Val ue i n u se Discount rate – p re-tax 1 2.3% 11 . 3 % 11 . 7 % 11. 5 % – p o s t- t a x 9.1% 8 .7 % 9. 2 % 9. 3 % Perio d covered by management projec tions 5 yea r s 5 y e ar s 5 y e ar s 5 ye ar s Revenue – compound annual grow th rate over projection per iod 5.3% 3.8% 3.8 % 6.0 % Av er age e ar n in gs b efo r e inte r e st a nd t a x ma r gi n 2 4 .9 % 14 .1 % 1 9. 7 % 17. 8 % Lo ng -te r m gr o w th r at es 1.9 % 2.4 % 1. 7 % 2 .1% A s at 3 1 Ju ly 2 02 1 John Crane Smiths Detection Flex- T ek Smiths Interconnect Smiths Medical Net book value of goodwill (£m) 12 9 610 169 24 0 5 35 Basis of valuation Va lu e in u s e Val ue i n u se Va lu e in u s e Val ue i n u se Va lu e in u s e Discount rate – p re-tax 13 . 2 % 10. 3 % 11 . 4 % 11.1 % 9.9 % – p o s t- t a x 9. 5 % 8.2% 9.1 % 9. 0 % 8.0% Perio d covered by management projec tions 5 y e ar s 5 y e ar s 5 ye ar s 5 ye ar s 5 ye ar s Revenue – compound annual grow th rate over projection per iod 6 . 4% 2.8 % 5.0 % 5 .9 % 5 .9 % Av er age e ar n in gs b efo r e inte r e st a nd t a x ma r gi n 2 5. 4% 13 . 4% 2 0.0 % 1 9. 0 % 1 8.8% Lo ng -te r m gr o w th r at es 2 .1 % 1. 8 % 1.9 % 2.4 % 2.2% For e c as t e ar ni ngs b efo r e inter e s t and t a x ha ve b ee n pr oj ec te d us ing: – expe c ted f u tur e s a le s ba s ed o n the s t r ate gic p l an , w hic h w as c on st r uc te d at a m ar ket le v el w it h inp ut f r om ke y acc ount m an ag er s , pr o du c t lin e ma na ger s, bu sin e ss d e vel op men t and s a le s tea ms . A n a ss e s sm ent of t he ma r ket an d ex is tin g co ntr act s /pro gr amme s w as m ad e to pr od uce t he s al e s for e c as t; an d – cur re nt co st s t r uc t ur e an d pr od uc ti on c ap a cit y, whic h inc lu de o ur ex pe c t ati ons f or f ut ur e co s t inf l ati on . T he pr o je c tio ns di d not i nc lud e th e imp ac t of f u tur e r e s tr u c tur i ng p r oje c t s to w hic h th e Gr ou p w as n ot ye t com mit ted. Sensitiv it y anal ysis W it h the e xcep tio n of th e Smi th s De tec ti on C GU, th e r ec ov er able am ou nt of al l CG Us exc ee de d the ir c ar r y in g v al ue, o n th e ba sis o f the as su mpti on s se t ou t in th e ta ble a bo v e and a ny r ea s on abl y po ss ibl e ch ang e s the r eof. Th e e s tim ated r e co ve r ab le am ou nt of th e Smi th s Dete c ti on C GU e xcee de d th e c ar r y in g v alu e by £1 10m. A n y de cl in e in e st ima ted v al ue in us e in e xces s o f thi s amo unt w ou ld r e sul t in th e re co gn iti on of i mp air m ent c har g es . I f the a s sum pti on s us ed i n the i mp air m ent r e v ie w we re c han ge d to a gr e ater ex tent tha n as p re s ente d in th e fo ll ow i ng t abl e, th e ch ang e s wo ul d, in i so l ati on , le ad to im p air m ent lo s se s b ein g re co gni s ed fo r th e ye ar en de d 31 Jul y 2 0 2 2: Ch an g e r eq ui r e d fo r c ar r y in g v a lu e to e q ua l r ec o v er abl e am o un t – F Y2 0 2 2 Smiths Detection Revenue – compound annual grow th rate (CAGR ) over 5-ye ar projec tion period - 24 0 bps decrease Av er age e ar n in gs b efo r e inte r e st a nd t a x ma r gi n - 130 bps decrease Post-tax d iscount rate + 7 0 bp s in cr ea s e No te: L o ng - te r m gr o w th r at e s ar e n ot i nc l ud e d in t he s e n si t i v it y ta bl e ab o v e as m a na g em e nt c on si d er t h at t he r e is n o r e as o n ab ly p o s si b le c ha n ge i n l on g -te r m g r ow th r a te t ha t w ou l d r es u lt i n an impairment. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 6 Ch an g e r eq ui r e d fo r c ar r y in g v a lu e to e q ua l r ec o v er abl e am o un t – F Y2 0 2 1 Smiths Detection Revenue – compound annual grow th rate (CAGR ) over 5-ye ar projec tion period - 56 0 bps decrease Post-tax d iscount rate +22 0 b ps i ncr e a se Proper t y , plant a nd equi pment, righ t of use assets and finite-life in tangib le asset s At e ach r e po r ting p er i od d ate, th e Gr ou p r ev i ew s t he c ar r y in g am ount s of it s pr op er t y, pl a nt, e qui pme nt, r ight of us e a ss et s a nd f ini te -l if e int ang ibl e as s et s to de ter mi ne w he the r the r e is an y in dic at ion t hat t hos e a s set s h av e su f f er ed a n imp ai r me nt los s . Th e Gr o up ha s no i nd efi nite l i fe int an gib le a ss et s ot he r tha n go od w il l . D ur in g th e ye ar , imp air m ent te s t s we r e ca r r ie d o ut fo r c api t al is ed de ve lop me nt cos t s t hat h av e not y et s t ar ted to be a mo r tis ed an d ac qui re d int an gib le s w he re t he re w er e in di ca tio ns of i mp air m ent . Val ue in us e c alc ul ati on s we r e us ed to d eter m ine t he r e cov er able v a lue s of t he s e as s et s . In th e cur r e nt ye ar th e Gr o up ha s r ec ogn is ed £17 m of imp air ment ch ar ge s a gai ns t it s Rus sia r el ated net b al a nce s he et ex po sur e (F Y 2 0 21: £nil ), s ee b el ow. Russia i mpairment ch arges and related closu re cost s A s a nno unc ed i n Mar ch 2 0 2 2 , in t he c ur r ent y ea r the G r oup s us pe nde d s al es i nto Ru ss ia . Fol lo w in g th is de ci sio n th e Smi th s De tec ti on re po r ting s tr uct ur e ha s be en r e s tr u c tur e d an d the D ete c tio n Ru s sia b usi ne s s spl i t into a s ep ar ate CGU, £ 4m o f the D ete c tio n C GU ha s be en app or tio ne d to th e Dete c ti on Ru s sia C GU a nd f ul ly im pa ir ed . Man ag eme nt ha s as s e ss e d al l Gr ou p op er at io ns fo r th eir ex p osu r e to Rus s ia an d the v alue of th e se R us si a r el ate d net a s se t s ha s be en fu lly i mp air e d in F Y 2 0 2 2 . T he G r oup h as r e cog nis e d £1 9m of R us si a re l ated i mp air m ent c har g e s and c lo sur e co s t s thr o ugh n on -h ea dl in e ope r at ing e xp en s es i n F Y 2 0 2 2 ( se e n ote 3), w hi ch ar e an aly s e d as fo ll o w s: John Crane £m Smiths Detection £m To t a l £m Goodwill – 4 4 Workin g capital bal ance s 9 4 13 Net impairment charge 9 8 17 Related closure cost s – 2 2 Russian impairm ent and related closure costs 9 10 19 1 2 Proper t y , p l ant a nd equi pmen t Land and buildings £m Plant and machiner y £m Fixtures, fit tings, to ol s and equipment £m To t a l £m Cost or valuation At 31 J uly 2 0 2 0 17 5 383 13 3 69 1 Foreign exchange r ate movements (6) ( 21) (6) (33) Business combinations – 2 – 2 Additions 6 38 – 44 Disposal s (3) ( 14 ) (5) (22) At 31 J uly 2 0 21 17 2 388 12 2 682 Foreign exchange r ate movements 14 37 6 57 Additions 4 42 6 52 Disposal s ( 14 ) (10 ) (5 ) ( 29) At 31 J uly 2 0 2 2 176 457 12 9 76 2 Depreciation At 31 J uly 2 0 2 0 10 2 2 61 11 0 47 3 Foreign exchange r ate movements (3) ( 15 ) (6) ( 24) Cha r ge f or t he y ea r 10 26 4 40 Disposal s (3) ( 12 ) (4) (19 ) At 31 J uly 2 0 21 10 6 260 10 4 47 0 Foreign exchange r ate movements 9 25 5 39 Cha r ge f or t he y ea r 7 24 7 38 Disposal s ( 14 ) (10 ) (4) ( 28) At 31 J uly 2 0 2 2 10 8 299 112 519 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 68 15 8 17 243 Net b o ok v a lue a t 31 Ju ly 2 0 21 66 12 8 18 212 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 73 12 2 23 2 18 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 7 1 3 Right o f use assets Proper tie s £m Vehicles £m Equipment £m To t a l £m Cost or valuation At 31 J uly 2 0 2 0 11 0 14 1 12 5 Foreign exchange r ate movements (5) ( 1) – (6) Business combinations 9 1 – 10 Rec og ni ti on of r ight of u s e as s et 44 3 – 47 De r ec og ni ti on of r ight of u s e as s et (12 ) – – (12 ) At 31 J uly 2 0 21 14 6 17 1 16 4 Foreign exchange r ate movements 12 1 – 13 Rec og ni ti on of r ight of u s e as s et 18 4 – 22 De r ec og ni ti on of r ight of u s e as s et (2) (1) – (3) At 31 J uly 2 0 2 2 174 21 1 196 Depreciation At 31 J uly 2 0 2 0 26 5 – 31 Foreign exchange r ate movements (2) – – (2) Cha r ge f or t he y ea r 27 5 – 32 De r ec og ni ti on of r ight of u s e as s et (5) – – (5) At 31 J uly 2 0 21 46 10 – 56 Foreign exchange r ate movements 5 1 – 6 Cha r ge f or t he y ea r 25 5 – 30 De r ec og ni ti on of r ight of u s e as s et (1) ( 1) – (2) At 31 J uly 2 0 2 2 75 15 – 90 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 99 6 1 10 6 Net b o ok v a lue a t 31 Ju ly 2 0 21 10 0 7 1 10 8 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 84 9 1 94 1 4 Fin anci al assets – othe r investme nts Investment in ICU Medical, In c eq u it y £m Defer re d contin gent consideration £m Investment s in e ar ly st a g e businesses £m Cash collateral deposit £m To t a l £m Cost or valuation At 31 J uly 2 0 2 0 – – 8 11 19 Disposal s – – – (7 ) (7) Fair value change through Other Comprehensi ve Income – – (1) – (1) At 31 J uly 2 0 21 – – 7 4 11 Foreign exchange r ate movements – – 1 – 1 Additions 426 30 4 – 4 60 Disposal – – (4) – (4) Fair v alue c ha ng e th r ou gh P r of it a nd L o s s – ( 11 ) 1 – (10 ) Fair value change through Other Comprehensi ve Income (62) – ( 1) – (63 ) At 31 J uly 2 0 2 2 364 19 8 4 395 Fol lo w in g th e s ale of S mi th s Me dic al t he G ro up h as r ec og nis e d a fi nan cia l as s et fo r it s i nv es tm ent i n 10% of th e eq ui t y in I CU M ed ic al , In c (I CU ) an d a fi nan ci al as s et fo r th e fa ir v al ue of $100 m ad di tio na l s ale s co ns ide r at ion t hat i s co ntin gent o n th e fu tu re s ha re p r ic e pe r for ma nce of I C U. Th e Gr o up's inv es t ment s i n ea r ly s t age b us ine s s e s ar e in bu sin e ss e s th at ar e de v elo pin g or c omm er ci al isi ng r el ate d te chn ol og y. Ca sh c oll ater al d ep osi t s r ep re s ent a mou nt s he ld on d ep os it w i th b ank s a s se cu r it y for l ia bil it ie s or l et ter s of cre di t . 1 5 Inventor ies 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Ra w ma ter i al s a nd c on s uma bl e s 18 7 11 7 Wor k i n pr o gr e s s 10 6 81 Finished goods 277 18 3 T otal inventories 570 3 81 In F Y 2 0 2 2 , ope r at ing c os t s fo r co ntin uin g ope r at io ns in clu de d £1 , 3 2 3 m (F Y 2 0 21: £ 1,2 3 3 m ) of inv ento r y con su me d, £12m (F Y 2 0 21 : £8 m ) w as cha r ge d for t he w r i te- d ow n o f inv ento r y and £12m (F Y 2 0 21 : £ 4m ) w a s re le as e d fr om p r ov i si ons n o lo ng er r eq uir e d. Dis co ntin ue d op er ation s con su me d £9 5 m (F Y 2 021 : £ 218m ) of inv ento r y, £nil ( F Y 2 0 21 : £4 m ) w as c har g ed f or th e w r i te- d ow n of i nv ento r y and £ni l (F Y 2 0 21: £ 1 m ) w as r el ea se d f r om pr o v is ion s no l on ge r re qu ir ed . Fur the r det ail s of dis con tinu ed o pe r at ion s ar e di sc lo se d in n ote 2 7 . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 8 Inventor y prov isionin g 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Gr os s i nv en tor y c ar ri ed at f u ll v a lu e 492 324 Gr os s v alue o f inv e ntor y p ar tl y or f ul ly p r ov i de d f or 131 10 4 623 428 Inventor y provision (5 3) ( 47 ) Inventor y after provisions 570 381 1 6 T r ade and ot her rec eiv ables 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Non- current T rade re ceiv ables 1 – Contrac t asset s 58 49 Other re ceiv able s 10 10 69 59 Current T rade re ceiv ables 506 4 31 Prep aym ents 33 26 Contrac t asset s 12 7 131 Other re ceiv able s 72 42 738 6 30 T ra de r e cei v a bl es d o not c a r r y inter e s t. M ana ge men t con si der s that th e c ar r y in g v alu e of tr ade an d oth er r ec ei v ab le s ap pr ox imate s to th e fa ir v al ue. T r a de a nd ot her r e cei v a ble s , in clu din g pr e pa y me nt s, a ccr ued in co me an d oth er r ec ei v ab le s qu al if y ing a s f ina nci al in s tr um ent s ar e acc ounte d fo r at am or tis ed c os t . T he m ax imu m cr ed it e xp os ur e ar i sin g fr o m the s e f ina nc ial a s set s w as £7 2 6m ( F Y 2 0 21 : £62 9m). Co ntr a c t as s et s co mp r is e un bil le d ba l anc e s not y et du e on co ntr act s , w h er e r ev en ue r ec og nit io n do es n ot al ig n w ith t he a gr ee d p ay m ent sc he dul e. T he m ain m ov em ent s i n the y ea r ar os e f r om in cr ea s es i n cont r a c t as s et b al an ce s of £19m (F Y 2 0 21 : £1 8m ) pr incip al ly w i thi n Smi th s Dete c ti on , of f s et b y £1 5m of f or ei gn cu r r enc y tr an sl at io n los s e s (F Y 2 021 : £6 m lo ss ). A numb er o f Fl ex- T ek ’s and Inter co nne c t 's cus to mer s pro v id e sup pl ie r f inan ce s ch em es w h ich a ll ow t hei r sup pl ier s to sel l tr ade r ec ei v ab le s , w ith ou t r ec our se, to b ank s . T hi s is co mm onl y kn ow n a s in vo ice d is cou ntin g or f ac to r in g. D ur in g F Y 2 0 2 2 th e Gr o up co ll ec te d £9 2 m of re ce i v abl es t hr ou gh th e se s ch em es ( F Y 2 0 21 : £ 9 0m ). T he i mp ac t of i nv oic e dis co unt ing o n the F Y 2 02 2 b al an ce sh ee t w as th at tr ade re ce i v abl es w er e r e duc ed b y £19m (2 0 21: £ 14m). T h e c ash r e cei v e d v ia th es e s ch eme s w a s cl a s si fi ed a s an o per atin g ca sh i nfl ow a s it h ad aris en from oper ating ac tiv itie s. T ra de r e cei v a bl es a re d is cl os ed n et of p ro v is io ns fo r ex pe c ted c r ed it lo s s , w it h his tor ica l w r ite - of fs us ed a s a b asi s an d a def au lt r i sk mult ipl ie r ap pl ie d to re fl ec t c ount r y r isk p r emi um. C re di t r is k is m ana ge d s ep ar ate ly fo r ea ch c us tom er an d, w h er e ap pr op r iate , a cr ed it lim it i s se t for t he c us tom er b as ed o n pr e v io us ex p er ie nce o f the c us tom er a nd th ir d- p ar t y cr e di t r at ing s. T h e Gr o up ha s no s ign if ic ant con cent r at ion o f cr ed it r i sk , w it h ex po sur e s pr ea d o ve r a l ar ge n umb er of c us tom er s . T h e l ar ge s t si ngl e cu sto me r w as t he U S Fed er al Go ve r nm ent , re pr e s enti ng 7 % ( F Y 2 0 21 : 7 %) o f Gr ou p re v enu e. Ageing o f trade receiv ables 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m T r ad e r ec ei v a bl e s w hic h ar e n ot y et du e 3 96 338 T r ad e r ec ei v a bl e s w hic h ar e b et we en 1-3 0 d ay s o v er du e 51 45 T r ad e r ec ei v a bl e s w hic h ar e b et we en 31-6 0 d ay s o v er du e 24 15 T r ad e r ec ei v a bl e s w hic h ar e b et we en 6 1-90 d ay s o v er du e 11 8 T r ad e r ec ei v a bl e s w hic h ar e b et we en 91- 1 2 0 da y s ov er d ue 7 5 T r ad e r ec ei v a bl e s w hic h ar e m or e t han 12 0 da y s ov e r due 54 52 543 463 E xpec ted credit loss allowance provision (36) (32 ) T rade receivables 507 4 31 Mo vem ent i n ex pe c ted c re di t lo s s all o w anc e 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Br ou ght f or w a r d lo ss a l lo w an ce at t he s t ar t of t he p er i o d 32 35 Exchange adjustments 4 (2) Inc r ea s e in al l ow a nc e r ec og ni se d in t he i nc om e s ta tem ent 8 6 A mo unt s w r it ten o f f o r r ec ov e re d d ur in g th e y ea r (8) (7) C ar r i ed f o r war d l os s a ll o w an ce a t th e en d of t he y e ar 36 32 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 13 9 1 7 T r ade and o ther payabl es 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Non- current Other pay ables 13 13 Contr act liabili ties 33 46 46 59 Current T rade payables 282 18 8 Other pay ables 57 39 O th er t ax at io n an d s oc ial s e cu r i t y c os t s 30 28 Accr uals 18 3 18 8 Contr act liabili ties 13 0 87 682 530 T ra de a nd ot her p a y abl e s, i ncl udi ng a ccr ued ex pe ns e s an d oth er p ay ab le s qu al if y ing a s f ina nc ial in s tr u ment s , a re a cco unte d for at amo r tis ed c os t an d ar e c ateg or i se d a s T ra de a nd ot her f in an cia l pa y ab le s in n ote 21. Co ntr a c t l iab il iti e s com pr i se d efer red i nco me b al a nce s of £163 m ( F Y 2 0 21 : £1 3 3 m ) in r es pe c t of p ay m ent s b ein g ma de in a d v an ce of r e ve nue re co gni ti on . T he m ov em ent in th e y ear a r is e s pr i mar ily fr om t he l on g-te r m con tr a c t s of th e Sm ith s D etec t ion d i v isi on w h er e inv oicin g under mile s ton e s pr ec ed e s the d el i ve r y of the p r og r am me p er for m anc e ob li gat ion s . Rev enu e r ec ogn is ed i n the y e ar in clu de s £1 1 3m ( F Y 20 2 1 : £ 94m ) that w as inc lud ed i n the o pe nin g cont r a c t li abi li ti es b al a nce . T hi s re v enu e pr i mar i ly r el ate s to th e de li v er y of p er for m an ce ob li gat ion s in t he Smi th s Dete c ti on b usi ne s s. 1 8 Bor row ings a nd net d ebt Th is n ote s et s ou t the c a lcu l ati on of n et de bt, a n imp or ta nt me as ur e in ex pl a ini ng ou r f inan ci ng p osi ti on . Net d ebt in clu de s a ccr u ed i nter e st and f ai r v alu e ad jus tm ent s r el ating to h ed ge ac cou ntin g. 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m C as h an d c a sh e qu i v al en t s Net c a sh a nd d ep os it s 1, 0 5 6 4 05 Shor t-term borr owings €6 00 m 1.2 5 % Eur o bo nd 2 02 3 (502) – O ver dr af ts (1) – Lease liabil ities (2 9) ( 27) Interest accrual (6) (9) (5 38) (3 6) Long-term borrowings $ 4 00 m 3 .6 2 5% U S $ G ua r a nte ed n ote s 2 0 2 2 – ( 28 9) €6 00 m 1.2 5 % Eur o bo nd 2 02 3 – ( 5 16 ) €6 5 0m 2 .0 0% E ur ob on d 2 0 2 7 (5 38) ( 5 67 ) Lease liabil ities (90) (94 ) (62 8) (1, 4 6 6) Borrowings / Gross debt ( 1 ,1 6 6 ) (1, 5 02 ) De r i v at i ve s m an ag in g inte re s t r ate r is k an d cur ren c y p r of il e of th e de bt (40) 75 Ne t ca s h /(d e bt ) ( 31 Ju ly 2 0 21 co mp ar ati ve e xc lu de s £ 4 m o f ne t c as h i n bu si ne s s e s he ld f o r s al e) (15 0 ) (1, 0 2 2 ) Cash and cash equivalents 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Ca sh a t ba nk a nd i n ha nd 242 219 Shor t-term deposit s 814 18 6 C as h an d c a sh e qu i v al en t s 1, 0 5 6 4 05 Ca sh an d c as h eq ui v al ent s in clu de h igh ly l iqu id in ve s tm ent s w i th mat ur i tie s of t hr ee m ont hs o r le s s. B or ro w ing s ar e ac cou nted fo r at amo r tis ed c os t an d ar e c ateg or i s ed a s oth er f ina nci al l iab il it ie s . Se e n ote 18 for a mat ur it y ana ly si s of bo r r ow i ng s. I nter e st o f £ 3 0m (F Y 2 0 21: £3 0 m) w a s ch ar ge d to th e con s ol id ated i nco me s t atem ent in t he p er io d in r e sp ec t o f pub li c bo nd s. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 0 A nalysis of financial der i v ative s on bal ance she et Non-curr ent ass ets £m Current ass ets £m Current liabilities £m Non-curr ent liabilities £m Net balance £m De r i v at i ve s m an ag in g inte re s t r ate r is k an d cur ren c y p r of il e of th e de bt – – (20) (20) (40) Foreign exchange for w ard contrac ts – 4 (7) – (3) At 31 J uly 2 0 2 2 – 4 (27) ( 20) (4 3) De r i v at i ve s m an ag in g inte re s t r ate r is k an d cur ren c y p r of il e of th e de bt 75 – – – 75 Foreign exchange for w ard contrac ts – 2 (3) – ( 1) At 31 J uly 2 0 21 75 2 ( 3) – 74 Movement s in a ss et s /(l iabilitie s) ar ising fr om financ ing ac ti v itie s Changes in net deb t Changes in other financing items: FX contract s £m Cash and cash equivalent s £m Other shor t-term borr ow ings £m Lon g-ter m borr ow ings £m Inter es t rate & cross- curr enc y swaps £m Net debt £m To t a l liabilities from financing activ ities £m At 31 J uly 2 0 2 0 366 ( 41 ) (1,5 20 ) 82 ( 1 ,11 3 ) (2) ( 1 ,11 5 ) Foreign exchange gains/( losse s) (24 ) 2 79 – 57 (3,20 0) (3, 143) Net cash in flow from continuing operations * 6 3 3 3 – – 96 3,2 0 0 3,296 Lease liabil ities acquired – ( 1) (10 ) – ( 11) – ( 11 ) Net m o ve me nt f ro m le a se m o di fi c at io ns – (4 6) – – (4 6) – (4 6) Fair v alue m o ve me nt f ro m int er e s t r ate h e dg ing – – 8 – 8 – 8 Revaluation of deriv ati ve contrac ts – – – (7) (7 ) 3 (4) Inte re s t e xp en s e t aken t o inc om e s ta tem ent * * – (4) ( 31) – (35) – (35) In te rest pa id – – 2 9 – 29 – 2 9 Reclas sific ation to short-term borr ow ings – 21 ( 21) – – – – At 31 J uly 2 0 21 405 (3 6) ( 1, 4 6 6 ) 75 ( 1, 0 2 2 ) 1 (1 , 0 2 1) Foreign exchange gains/( losse s) 62 ( 3) 4 – 63 (6 ,7 9 9 ) ( 6 ,7 3 6 ) Net cash in flow from continuing operations * 589 34 295 – 918 6 ,7 9 9 7, 7 17 Net m o ve me nt f ro m le a se m o di fi c at io ns – (22) – – (22) – (22) Fair v alue m o ve me nt f ro m int er e s t r ate h e dg ing – 2 27 – 29 – 29 Revaluation of deriv ati ve contrac ts – – – ( 11 5 ) ( 11 5 ) (4) ( 11 9 ) Inte re s t e xp en s e t aken t o inc om e s ta tem ent * * – (35) – – (3 5) – (35) In te rest pa id – – 34 – 34 – 34 Reclas sific ation to short-term borr ow ings – ( 47 8 ) 478 – – – – At 31 J uly 2 0 2 2 1, 0 5 6 (5 3 8) (628 ) ( 4 0) (15 0) (3) (15 3) * I n F Y2 1, th e n et c a sh i nf l o w fo r th e to t al G r ou p i nc lu d in g di s co nt i nu e d op e r at i on s w a s £ 91m. £ 6 3 m f r o m co nt in ui n g op e r at i on s a nd £ 2 8m f r om d is c on ti n ue d o pe r a ti o ns . I n F Y2 2 , t he n e t ca s h in f lo w f or t h e tot a l Gr o u p in cl u di ng d i sc o nt in ue d o pe r a ti o ns w as £ 5 8 9 m, £ 5 7m o f w hi ch r e l a te d to t he c a s h he ld b y t h e Sm i th s Me d ic a l at t h e ti me o f di s po s a l . * * Th e G r ou p ha s a l s o in c ur r e d £ 8 m ( F Y2 0 2 1: £9m ) o f b an k ch a r ge s t ha t w er e e x pe n s ed w h e n pa i d an d w er e n ot i nc l ud e d in n et d e bt . Cash pooling Ca sh an d o ve rd r af t bal a nce s in i nter e st c om pen s ati on c a sh p oo li ng s y s tem s ar e r ep or ted gr o ss o n th e ba l anc e she et . T he c a sh p oo li ng agr e eme nt s in cor p or ate a leg al ly enf or ce abl e r ig ht of net s et t lem ent . Ho w ev er , as th er e is n o inte ntio n to se t tl e the b al a nce s n et, t he s e ar r a ng eme nt s do n ot qu al if y for n et pr e s ent ati on . At 31 Ju ly 2 0 2 2 th e tot al v al ue of o ve r dr af t s on ac cou nt s in inte re s t co mp en s atio n c ash po ol in g s y ste ms w a s £n il ( F Y 2 0 21 : £ni l ). T he b al ance s he ld in ze r o ba l anc ing c a sh p oo l ing a r r a nge me nt s ha ve d aily s et t le ment o f ba l anc es . Th er efo r e net t in g is no t re le v ant . Secured loans Lo an s am ount ing to £ nil ( F Y 2 0 21 : £n il ) wer e s ec ur ed o n pl a nt and e qu ipm ent w i th a bo ok v alue of £ nil ( F Y 2 0 21 : £n il ). Change of contro l Th e C omp an y ha s in pl ace cr ed it f a cil it y agr e eme nt s un der w h ich a c ha nge i n cont r ol w oul d tr igge r pr ep ay m ent c l aus e s . T he C om pa ny al so has b on ds i n is su e, th e ter m s of w hi ch w oul d al lo w bo nd ho lde r s to exe r cis e pu t op tio ns a nd r eq uir e th e C omp an y to bu y b ac k the b on ds at the ir pr i nci pa l am ount p lus i nter e st i f a r at in g do w ngr ade o cc ur s at th e s am e tim e as a c han ge of c ont ro l t akes e f fe c t . Leas e l iabilitie s Le as e l iab il iti e s ha ve b ee n me as ur ed at t he p re s ent v a lue of t he r em ain ing l ea s e pa y me nt s. T h e we ighte d a ver age i ncr em ent al b or r o w in g r ate ap pl ie d to le as e l iab il it ie s in F Y 2 0 2 2 w a s 3. 6 3 % ( F Y 2 0 21 : 3. 3 %). NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 141 1 9 F inancial r isk management Th e Gr o up’ s inter natio nal o pe r at ion s an d de bt f ina nci ng e xp os e it to f in an cia l r is ks w h ich i ncl ud e the e f fe c t s of c han ge s in fo r eig n exch ang e r ate s , deb t mar ket pr ice s , inter e s t r ate s , cr e di t r is ks a nd l iq uid it y ri sk s . T he m ana ge ment o f op er a tio nal c r edi t r i sk is d is cu ss e d in n ote 1 6. T reas ur y Risk Man agement Pol ic y Th e B oa rd m aint ai ns a T re a sur y Ri sk M ana ge ment P ol ic y , w hic h go ve r n s the t re a sur y op er ation s of th e Gr o up an d it s s ubs idi ar y co mp anie s and t he co ns ol i date d fi nan ci al r is k pr of il e to be m aint ain ed . A r ep or t on tr e as ur y ac ti v i ti es , f in anc ial m etr i c s an d com pl ia nce w i th th e Po li c y is ci rc ul ate d to th e Chie f F ina nci al O f f i cer e ac h mon th an d key el em ent s to th e Au di t an d Ris k Co mmi t te e on a s emi -a nnu al b asi s . Th e Po l ic y m aint ain s a tr e as ur y cont r ol f r a me wo r k w it hin w h ich c ounte r p ar t y r i sk , f ina nci ng a nd de bt s tr ateg y, cas h an d li qui dit y, intere s t r ate r i sk an d cu r r enc y tr an sl at ion m an ag eme nt ar e r es e r ved f or G ro up T re as ur y, whi le c ur r en c y tr ans ac t io n man ag eme nt is d ev ol ve d to oper ating divisions. Ce ntr a ll y dir ec te d c as h ma nag em ent s y s tem s ex is t gl ob al ly to ma na ge o ve r al l l iqu id r e so ur ce s ef f i cie ntly a cr os s t he di v i si ons . T h e Gr ou p us es f in an cia l ins t r ume nt s to r a is e f ina nci ng fo r it s g lob al o pe r at ion s , to man ag e r el ate d inter e s t r ate a nd c ur r en c y f in anc ial r i sk , an d to hedge tr ans actio n risk wi thin subsidiar y companie s. Th e Gr o up do e s not s pe cu l ate in f ina nc ial in s tr u ment s . A l l fi nan ci al in st r um ent s h ed ge ex is t ing b us ine s s ex po su re s an d al l ar e r ec og nis e d on th e ba l anc e sh eet . Th e Po l ic y d ef ine s fo ur tr e as ur y r is k com po nen t s and f or e ach c omp on ent a s et of f in anc ial m etr ics to b e me a sur e d and r e po r ted mont hly against pre-agreed ob jectives . 1 ) Credit qualit y Th e Gr o up’ s s tr a teg y i s to main ta in a so l id in ve s tm ent-g r a de r a tin g to ens ur e ac ce s s to the w i de s t po s sib le s our ce s of f in an cin g at th e r ight t ime a nd to o ptim is e th e re s ult ing c os t of de bt c ap it al . T h e cr e dit r ating s at th e en d of Jul y 2 0 2 2 we r e BBB + / B aa 2 (b oth s t ab le ) fr o m St and ar d & Po or ’s and Mo od y ’s re sp ec t i vel y. An e s s ent ial el em ent of an i nv e st men t-gr ade r at in g is co ns is tent an d r ob us t c as h-f lo w m etr i c s . Th e Gr o up’ s ob je c ti ve i s to ma int ain a n et deb t / hea dl ine E BI T D A r at io of t wo ti me s or l ow er o ve r th e me dium te r m. C a pit al m an ag eme nt is dis cu s se d in m or e de tai l in no te 26. 2) D eb t and i ntere s t r ate Th e Gr o up’ s r is k ma nag em ent ob je c ti v es a r e to ens ur e th at th e maj or i t y of fun din g is dr aw n fr o m th e pub li c deb t mar kets w i th th e av er age mat ur it y pr of ile o f gr os s de bt to b e at or gr e ater t han t hr ee y e ar s , an d bet we en 4 0- 6 0 % of gr o s s deb t is at f ixe d r a tes . A t 31 July 2 02 2 th e se me asu r es w er e 10 0 % (F Y 2 021 : 100 % ), 2 .7 year s (F Y 2 0 21 : 3. 2 ye ar s ) an d 5 0 % ( F Y 2 0 21 : 5 4%). T h e av er age mat ur i t y prof il e of gr o ss d ebt i s bel o w the t ar g et of th r ee y ea r s be c au se t he n et c ash r e s our ce s of £1,05 5 m ar e s uf fic ient to c ov er t he sh or t-ter m bo r r o w ing s of £ 5 3 8m. Th e Gr o up r em ain s in f ull c omp l ian ce w it h al l co ve nant s w i th in it s e x ter nal de bt ag re em ent s . Inte re s t r ate r isk ma nag em ent i s dis cu s se d in note 19( b). 3) Liquidit y management Th e Gr o up’ s ob je c ti ve i s to en sur e t hat at a ny ti me un dr awn c om mit ted fa cil i tie s , ne t of sh or t-ter m ov er dr af t f ina nci ng , ar e at le as t £ 3 0 0m and t hat c omm it te d f ac ili ti es h av e at l ea st 12 month s to r u n until m atu r it y. At 31 July 2 0 2 2 , th e se m ea sur e s w er e £6 5 7m (F Y 2 0 21: £57 5 m) and 2 7 m onth s ( F Y 2 0 21 : 39 m ont hs ). At 31 Ju ly 2 0 2 2 , net c a sh r e so ur ce s we r e £1 ,0 5 5 m (F Y 2 021 : £4 05 m ). L iqui di t y r isk man ag em ent is dis cu s se d in n ote 19(d). 4) Currenc y management Th e Gr o up is a n inter n ati on al bu sin es s w i th t he ma jo r it y of it s n et as s et s de no min ated i n for ei gn cu r r enc y. It pr otec t s t he b al an ce s he et and r e s er ve s f r om a d ve r s e for ei gn exc han ge m ov em ent s b y f ina nci ng fo r eig n cur r e nc y a s s et s w he re a pp ro pr i ate in th e s am e cur r e nc y. Th e Gr o up’ s ob je c ti ve f or m ana gin g tr ans ac t ion c ur r en c y e xp os ur e is to r e duc e me dium -te r m vo l ati li t y to c a sh -f lo w, mar g ins a nd e ar ni ng s. For ei gn exc han ge r isk man ag em ent is d is cu s se d in n ote 18( a) b el ow. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 2 (a) For eign exchange risk T r ans ac tional currenc y exposure Th e Gr o up is e xp os e d to for ei gn c ur r en c y r i sk s ar i sin g fr o m s ale s o r pur ch as e s by b us ine s s es i n cur ren cie s oth er t han t hei r fu nc ti on al cur r e nc y. It i s Gr o up po li c y t hat , w he n the n et fo re ign e xcha ng e ex po sur e to k no w n f ut ur e s ale s an d pu rc ha se s i s mater ial , thi s ex po sur e is he dg ed u sin g fo r w ar d for e ign e xcha ng e cont r a c t s. T h e net e xp os ur e is c al cul ated by a dju s tin g the e xp e c ted c a sh- fl ow f or p ay m ent s o r re ce ipt s in t he s am e cu r r enc y linke d to th e s ale o r pur ch as e . Th is p ol ic y minimi s es t he r i sk th at th e pr of i t s gen er ated fr o m the t r a ns ac t io n w ill b e af fec ted b y fo r eign e xch ang e mo ve me nt s w hic h oc cur af ter the p r ic e ha s be en d eter m ine d. H ed ge a cco untin g do cu men tat ion a nd ef fe c ti v en es s te s ti ng ar e o nly un de r taken i f it i s co st ef fec t i ve . Th e fo ll ow i ng t abl e sh ow s t he c ur r en c y of f in anc ial i ns tr ument s . It e xclu de s lo an s an d de r i v ati v e s de si gnate d as n et in ve s tm ent h ed ge s . At 31 J u ly 2 0 22 Sterling £m US$ £m Euro £m Other £m To t a l £m Financial asset s and liabilities F ina nc ia l in st r u me nt s in cl ud ed i n tr ade an d ot he r r ec ei v a bl es 41 423 11 4 169 747 F ina nc ia l in st r u me nt s in cl ud ed i n tr ade an d ot he r pa y a bl es (52 ) ( 23 9) (9 8) (101) (49 0 ) Ca sh a nd c a sh e qu i v al ent s 355 5 06 74 12 0 1, 0 5 5 Borr owings not designat ed as ne t investment hedges (2 8) (5 8) ( 14 ) (19 ) ( 11 9 ) 316 632 76 16 9 1 ,1 9 3 E xc lud e b al a nc es h el d in o pe r a ti on s w it h th e s am e f unc t io na l cu r r en c y. ( 322) ( 149 ) (80) (14 2 ) ( 69 3) E x po su r e ar i si ng f r om i ntr a- Gr o up lo a ns – ( 419 ) (27 ) (8 9) (535) Future for war d foreign ex change contract cash-f lows (42) (40) (3 8) 12 0 – (4 8) 2 4 (69) 5 8 (35 ) At 3 1 Ju ly 2 0 2 1 Ster lin g £m US$ £m Euro £m Other £m To t a l £m Financial asset s and liabilities F ina nc ia l in st r u me nt s in cl ud ed i n tr ade an d ot he r r ec ei v a bl es 28 326 11 3 17 7 644 F ina nc ia l in st r u me nt s in cl ud ed i n tr ade an d ot he r pa y a bl es ( 49 ) (167 ) ( 79) (64 ) ( 359) Ca sh a nd c a sh e qu i v al ent s 46 18 7 80 92 4 05 Borr owings not designat ed as ne t investment hedges ( 3 1) (55) (12 ) ( 21) ( 11 9 ) (6) 2 91 10 2 18 4 571 E xc lud e b al a nc es h el d in o pe r a ti on s w it h th e s am e fu nc t io na l cu r r en c y 7 ( 11 0 ) (80) (18 3 ) (366) E x po su r e ar i si ng f r om i ntr a- Gr o up lo a ns – (18 2 ) ( 19 ) (75) ( 2 76 ) Future for war d foreign ex change contract cash-f lows (51) ( 67 ) 22 96 – (50) (6 8) 25 22 ( 71) F ina nci al in s tr um ent s in cl ud ed in t r a de an d oth er r ec ei v ab le s co mp r is e tr ade r ec ei v ab le s , acc r ue d in com e an d oth er r ec ei v ab le s w hic h qua li f y as fi nan ci al in st r um ent s . Si mil a r ly, fin an cia l ins tr ument s i ncl ud ed in t r a de an d oth er p ay a bl es c omp r is e tr ade p ay able s , acc r ue d ex pen s es a nd ot her p a y abl e s tha t qua li f y as fi nan ci al in st r um ent s . Ba s ed on t he a s se t s and l ia bil i tie s he ld at t he y ea r- e nd , if th e sp ec if ie d cu r r enc ie s w er e to s tr en gth en 10 % w hile a ll ot her m ar ket r ate s r ema ine d co ns t ant , the c ha ng e in th e fa ir v al ue of f in anc ial i ns tr ument s n ot de si gna ted a s net in ve s tm ent h ed ge s w oul d ha ve t he follo wing ef fe ct: Impact on profit fo r t he y e ar FY2 022 £m Gain/(loss) recognised in reserves FY2 022 £m Impact on prof it fo r th e y ea r F Y 20 21 £m Gain/ (los s) recognised in reserves F Y 20 21 £m US dollar (3) 1 3 2 Euro 8 (1) 2 (5 ) Ster l in g 4 – (1) 2 Th e se s en si ti v i tie s w er e c al cul ate d b efor e a dju st ing f or t a x and e xclu de t he ef fec t of qu as i- eq ui t y in tr a - Gr ou p lo an s. Cash-flow hedging Th e Gr o up us e s for w a r d for ei gn exc han ge c ont r ac t s to h ed ge f u tur e fo r eig n cur renc y sa le s an d pur ch as e s . At 31 Ju ly 2 0 2 2 , cont r a c t s w it h a nom ina l v alu e of £14 1 m (F Y 2 0 21 : £1 07m ) we re d e sig nate d as h ed gin g in st r um ent s . In a ddi ti on, t he G r oup h ad o ut s t and in g for ei gn cu r r enc y cont r a c t s w ith a n om ina l v alu e of £ 2 2 6m ( F Y 2 0 21 : £ 251 m) w h ich w er e b ein g us e d to man ag e tr a ns a c tio na l for ei gn exc han ge e xp os ur e s, b ut we re n ot ac cou nted f or as c a sh -f lo w he dg es . T h e f air v al ue of t he co ntr act s is dis cl os ed i n note 2 0 . Th e ma jor it y of h ed ge d tr ans ac t io ns w il l be r e co gni se d in t he co ns ol i date d inc ome s t atem ent i n the s a me p er i od th at th e c as h-f lo w s ar e ex pe c ted to o cc ur , wit h th e onl y dif fer enc e s ar is in g be c aus e of n or m al co mm er cia l cr ed it ter ms on s al es a nd p ur cha s es . I t is th e Gr o up’ s po li c y to he d ge 8 0 % of c er tai n ex po sur e s fo r the n ex t t wo y e ar s an d 5 0 % of h igh ly pr o ba ble e xp os ur e s for t he ne x t 12 month s . Hedge ef fecti vene ss is determined at the inception of the hedge rel ationship, and through perio dic prospec ti ve effe cti vene ss as ses sment s to ens ur e th at an e con om ic r el at ion sh ip ex is t s b et w e en th e he dg ed i tem an d he dg ing i ns tr ument . T he f or ei gn exch an ge fo r w ar d co ntr a c t s hav e si mil a r cr i tic a l ter m s to the h ed ge d ite ms , su ch a s th e noti on al am oun t s and m atu r it ie s. T h er efo r e, th er e is a n ec ono mic r e l ati ons hip and t he h ed ge r a tio i s e st ab li sh ed a s 1 : 1. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 3 Th e ma in s our ce s of h ed ge in ef f ec t i ve ne s s in th e se h ed gin g r el ati on shi ps ar e t he ef fec t of th e Gr o up's and th e co unter p ar t y c r ed it r i sk s on th e f air v al ue of t he fo r eig n exch ang e fo r wa r d cont r a c t s , w hic h is no t re fl ec te d in th e f air v a lue of t he h ed ge d ite m and t he r i sk of ov er -h ed gin g w he re t he h ed ge r el a tio ns hip r eq uir e s r e- b al an cin g. N o oth er s our ce s of i nef fec ti v en es s e mer g ed f r om t he s e he dgi ng re l ati on ship s . A ny h ed ge in ef fec ti v en es s i s re co gni s ed im me diate ly in t he in co me s ta teme nt in th e pe r io d th at it o cc ur s . O f th e for ei gn exch ang e co ntr a c t s de si gn ated a s he dgi ng in s tr u ment s, 9 8 % ar e fo r pe r io ds of 12 month s or l es s ( F Y 2 0 21 : 8 9 % ). Th e fo ll ow i ng t abl e pr e s ent s a r ec on cil iat ion b y r i sk c ate gor y of t he c a sh -fl o w he dge r e s er v e and a nal y sis o f othe r co mpr eh en si v e inc om e in r el ati on to h ed ge a cco unti ng: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Br ou ght f or w a r d ca s h-f l o w he dg e r es e r ve at s t ar t of y ea r 2 – Foreign exchange for w ard contrac ts: N et f ai r v al ue g ain s on e f f ec t i ve h e dg e s (6) 1 A mo unt r e cl ass if i ed t o inc om e s t atem ent – c os t o f s al es – 1 A mo unt r e cl ass if i ed t o inc om e s t atem ent – f i na nc e co st s 1 – Carr ied for w ard cash-fl ow hedge reser ve at end of year (3) 2 Th e fo ll ow i ng t abl e s set o ut i nfor matio n r ega r din g th e cha ng e in v al ue of th e he dg ed i tem u se d in c al cul ating h ed ge in ef f ec t i ven e s s as w el l as th e imp ac ts on t he c a sh- fl ow h ed ge r e s er ve: Hedged item Hedged exposure He dging instr ument Financial year Ch a ng e s in v a l ue o f t he hedged item for calculating ineffec tivene ss £m Ch a ng e s in v a l ue o f t he hedging instrument for calculating ineffe ctivene ss £m Cash-flow hedge reserve £m Sale s and purchases Foreign currenc y risk Foreign exchange contrac t s F Y2022 (6) 6 (6) F Y2 0 21 1 ( 1) 1 Ca sh -f lo w he dg es g en er a ted £ nil of i nef fec ti v en es s i n F Y 2 0 2 2 (F Y 2 021 : £n il ) w h ich w as re co gni se d in t he in com e s tate me nt thr o ugh finance cos ts . T r ansl ational currenc y exp osure Th e Gr o up ha s si gni fi c ant in ve s tm ent s in o v er s ea s op er ation s , pa r ticu l ar l y in th e US an d Eur o pe . A s a r e su lt, t he s ter ling v alue of th e Gr o up’ s ba l anc e she et c an b e si gni fi c antl y af f ec te d by m o ve ment s i n exch an ge r a tes . T he G r oup s e ek s to mi tig ate th e ef f ec t of t he s e tr a ns l ati ona l cur r e nc y e xp os ur e s by m atchi ng t he ne t inv e st me nt in ov er sea s op er ation s w it h bo r r ow i ng s den om inate d in th eir f u nc ti ona l cur ren cie s , excep t w her e s ign if ic ant a d v er s e inter e s t di f fe r enti al s o r oth er f ac to r s w oul d r en der t he co s t of su ch h ed gin g ac ti v i t y unec ono mic . T h is is ach ie ve d by b or ro w ing p r im ar il y in th e re le v ant c ur r en c y or i n so me c a se s in dir e c tl y usi ng cr o s s- cu r r enc y sw a ps . Net investment hedg es Th e t abl e be lo w se t s ou t the c ur r en c y of l o ans a nd s w a p cont r a c t s de si gnate d a s net in ve s tm ent h ed ge s: At 31 J u ly 2 0 22 A t 31 Ju l y 2 0 21 US$ £m Euro £m To t a l £m US$ £m Euro £m To t a l £m Loans designated as net investment hedges – ( 4 51) ( 4 51 ) (285) ( 4 59) ( 74 4 ) Cros s- cur renc y s w ap ( 615 ) – ( 615 ) (5 3 9) – ( 5 39) ( 61 5 ) ( 4 51) (1, 0 6 6 ) (82 4) (4 59) ( 1 ,283 ) At 31 Ju ly 2 0 2 2 , cr os s -c ur r en c y s w aps he dg ed t he Gr o up’ s ex po su re to U S do ll ar s and e ur os ( 31 Ju ly 2 0 21 : US d ol l ar s a nd eu ro s ). Al l th e cr os s- c ur r en c y s w a ps d es ign ated a s ne t inv e st me nt he dg es w er e c ur r ent a nd n on -c ur r ent ( F Y 2 0 21: non- cu r r ent ). Sw a ps ge ne r ati ng £ 3 5 4m of t he U S dol l ar e xp os ur e ( F Y 2 0 21 : £310m ) w il l mat ur e in A p r il 2 0 2 3 and s w ap s ge ner ating £ 26 1 m of the US d ol l ar ex po sur e ( F Y 2 0 21 : £ 2 2 9m ) w il l mat ur e in Fe br u ar y 2 0 2 7 . In ad di tio n, n on -s w a pp ed b or r o w in gs w er e al so us e d to he dge t he G ro up’s expo sur e to U S do ll a r s an d eur o s (31 J uly 2 0 21 U S do ll a r s an d eur os ). Bo r r o w ing s ge ner ating £ 28 5 m of t he U S dol l ar e xp os ur e ( F Y 2 0 21 : £ 2 8 5 m) h av e be en p r ep aid i n Feb r ua r y 2 0 2 2. Bo r r ow i ngs g en er a tin g £ 5 0 0 m of th e eur o e xp os ur e (F Y 2 0 21: £5 0 8 m) w i ll m atur e i n A pr i l 2 0 2 3 an d bo r r o w ing s gen er ating £ 28 7m of the e ur o ex po sur e ( F Y 2 0 21 : £ 2 9 2m ) w il l mat ur e in Fe br u ar y 2 0 2 7 . Hedge ef fecti vene ss is determined at the inception of the hedge rel ationship, and through perio dic prospec ti ve effe cti vene ss as ses sment s to ens ur e th at an e con om ic r el at ion sh ip ex is t s b et w e en th e he dg ed i tem an d he dg ing i ns tr ument . T he s w aps an d bor ro w ing s ha ve t he s am e noti on al am oun t as th e he dg ed i tem s and , th er efo re , th er e is an e co no mic r el a tio ns hip w i th th e he dg e r at io e s ta bl is he d as 1 : 1. Th e ma in s our ce s of h ed ge in ef f ec t i ve ne s s in th e se h ed gin g r el ati on shi ps is t he ef fec t of t he co unte r pa r t y an d the G r oup’s ow n cr ed it r isk o n th e f air v al ue of t he fo r eign e xch ang e for w a r d cont r a c t s w hic h is n ot r efl ec te d in th e f air v a lue o f the h ed ge d ite m an d the r i sk of ov er -h ed gin g w he re t he h ed ge r el a tio ns hip r eq uir e s r e- b al an cin g. N o oth er s our ce s of i nef fec ti v en es s e mer g ed f r om t he s e he dgi ng re l ati on ship s . A ny h ed ge in ef fec ti v en es s i s re co gni s ed im me diate ly in t he in co me s ta teme nt in th e pe r io d th at it o cc ur s . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 4 Th e fo ll ow i ng t abl e pr e s ent s a r ec on cil iat ion b y r i sk c ate gor y of t he n et in ve s tme nt he dg e r es er v e an d ana ly si s of oth er co mp re he nsi v e inc ome i n re l ati on to h ed ge ac cou ntin g: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Br ou ght f or w a r d net i nv e s tm ent h ed ge r e s er v e at s t ar t of ye ar (238 ) ( 314 ) Cros s- cur renc y s w aps Net f a ir v a lue g ai ns o n ef fec ti v e h ed ge s (82 ) 14 Bonds Net f a ir v al ue g ai ns o n ef f ec t i v e he dg e s 5 62 A mo unt s r e mo v ed f r o m the h e dg e r es e r ve an d recognis ed in the i ncome statement Profit /(loss) on business disposal 10 3 – Carr ied for w ard net investment hedge reser ve at end of year ( 2 12 ) (23 8) Th e fo ll ow i ng t abl e s et s ou t info r mat io n re ga r din g the c ha nge i n v alu e of th e he dg ed i tem u se d in c al cul a tin g he dg e inef fec ti v en e ss a s w el l as th e imp ac ts on t he n et inv e s tme nt he dg e r es er v e as at 31 J uly 2 0 2 2 a nd 31 Jul y 2 0 21 : Hedged item Hedged exposure H edging instr ument Financial year Ch a ng e s in v a l ue o f t he hedged item for calculating ineffec tivene ss £m Ch a ng e s in v a l ue o f t he hedging instrument for calculating ineffe ctivene ss £m Net investment hedge reserve £m Overseas oper ation Foreign currenc y risk Cros s- cur renc y s w aps F Y2022 82 (82) (82) Bonds FY2022 (5) 5 5 77 (77) (77) Overseas oper ation Foreign currenc y risk Cros s- cur renc y s w aps F Y2 0 21 ( 14 ) 17 14 Bonds F Y 2 021 (62) 62 62 ( 76 ) 79 76 Net in ve s tm ent h ed ge s ge ner ated £1 m of in ef fe c ti v en e ss i n F Y 2 0 2 2 ( F Y 2 0 21 : £3 m ) w hic h w as r e co gni se d in th e inc om e st ate ment t hr ou gh finance cos ts . Th e f air v a lue s of t he s e net in v es tm ent h ed ge s ar e s ubje c t to exc han ge r ate mov em ent s . B as e d on th e he dg ing i ns tr u men t s in pl a ce at the y e ar - end , if t he sp e cif i ed c ur r en cie s w er e to s tr en gt hen 10 % w hil e all o the r mar ket ra tes r e main ed c on s ta nt, i t wo ul d ha ve t he follo wing ef fe ct: Loss recognised in hedge reser ve 31 Ju ly 2 0 2 2 £m Loss recognised in hedge reser ve 31 Ju l y 2 0 21 £m US dollar 68 92 Euro 50 51 Th e se m o vem ent s w ou ld b e f ull y of f s et b y an op po si te mo ve me nt on th e r etr a ns l ati on of t he ne t as s et s of th e ov er sea s su bsi dia r ie s . Th e se s en si ti v i tie s w er e c al cul ate d b efor e a dju st ing f or t a x. (b) I nte res t r ate risk Th e Gr o up op er ates an i nter es t r ate pol ic y des ign ed to o pti mis e inte re s t co s t and r e du ce vo l ati li t y in rep or ted e ar n in gs . T he G ro up’s cur re nt po li c y is to r e qui re i nter e s t r ate s to be f i xed w i th in a ba nd of b et wee n 4 0 % a nd 6 0 % of t he le v el of gr o s s deb t. T h is i s ach ie ve d thr o ugh f i xed r ate b or r o w in gs an d inter e s t r ate s w aps. A t 31 Ju ly 2 0 2 2 , 5 0 % (F Y 2 021 : 5 4% ) of the G r oup’s gro ss b or ro w ing s we r e at f ixe d inter e s t r ate s , af te r adj us tin g fo r inter e s t r ate s w a ps an d th e imp ac t o f sho r t matur it y d er i v at i ve s d es ign ated a s ne t inv e st me nt he dg es . Th e Gr o up mo ni tor s i t s f ixe d r ate r isk pr of il e aga ins t b oth g ro s s an d net d ebt . Fo r me dium -te r m pl a nnin g, i t fo cu se s o n gr os s d ebt to el imin ate th e fl uc t uati on s of v ar i abl e c as h le ve l s o ve r the c ycle . T he w ei ghte d av er a ge i nter e st r ate on bo r r ow i ng s and c r os s- c ur r en c y s w aps a t 31 July 2 0 2 2 , af ter inter e s t r ate s w a ps , w a s 3. 0 6% (F Y 2 0 21 : 2. 0 6%). NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 5 Intere s t r ate p rof ile o f fin anc ial a ss et s a nd li abi liti es a nd th e fa ir v alu e of bo r row in gs Th e fo ll ow i ng t abl e sh ow s t he inte r es t r ate ri sk ex p osu r e of inv e s tme nt s , c ash a nd b or r o w in gs , w it h th e bor ro w ing s ad jus te d for t he im pa c t of inter e s t r ate h ed gin g. O t her f in an cia l as s et s an d li abi li ti es d o not e ar n o r be ar inte r es t , an d for al l f in anc ial in s tr u men t s excep t bo r r ow i ng s, the c a r r y ing v a lue i s not m ater i al ly di f fe r ent f r om th eir f ai r v alu e. A s a t 31 Ju ly 2 0 2 2 A s at 3 1 Ju ly 2 021 At f a ir v a lu e through profit or loss £m C as h a nd cash equivalent s £m Borrowings £m Fai r v al u e of borrowings £m At f a ir v a l ue through profit or loss £m Cash and cash equivalent s £m Borr ow ings £m Fai r v a lu e of borr ow ings £m Fixed interest Le s s th an o ne y e ar – – ( 2 0 3) (2 03) – – (3 6) (3 6) Bet we en o ne a nd f i v e y ea r s – – ( 357 ) (3 59) – – ( 41 8 ) (4 34) Gr e ater t ha n f i ve y e ar s – – ( 24) (24) – – ( 3 21) ( 35 3) T otal fixed interes t financial liabilities – – (584) ( 5 8 6) – – (775) (82 3) Floating r ate int eres t financial asset s /(l iabilities ) 390 970 ( 582) (58 6) 4 333 (727 ) ( 73 6) T otal interest-bearing financial asset s/(liabilities) 390 970 ( 1 ,1 6 6 ) ( 1 ,1 7 2 ) 4 333 (1, 5 02 ) (1, 5 5 9) Non - inte r es t- be ar i ng a s s et s in t he s a me c at eg or y 4 86 – – 7 72 – – To t a l 3 94 1, 0 5 6 ( 1,1 6 6 ) ( 1 ,1 7 2 ) 11 4 05 (1, 5 0 2 ) (1,5 59 ) * Fai r v a lu e ga i ns a nd l o s s es i n t hi s c at eg o r y of as s et s a r e r e co gn i s ed i n ot h er c om p re h en s i ve i n co m e. Interest rate hedging Th e Gr o up al so ha s ex po sur e s to th e f air v a lue s of n on - der i v ativ e f in anc ial in s tr u ment s such a s EU R and U S D fi xed r ate bor ro w ing s . T o mana ge t he r i sk of ch an ge s in t he se f a ir v al ue s , the G r oup h as e nter ed i nto fi xe d-to -f lo at ing i nter e st r ate sw aps and c r os s- c ur r en c y inter e s t r ate s w a ps w hi ch fo r acc ount in g pur p os e s ar e de s ign ated a s f air v a lue h ed ge s . At 31 Ju ly 2 0 2 2 an d 31 Jul y 2 0 21 , th e Gr ou p ha d de si gnate d th e fol lo w in g he dg es a ga ins t v a r iab il it y in the f a ir v alu e of b or r o w in gs ar i sin g fr om f l uc tu ati on s in ba s e r ate s: – €4 0 0m of th e f ixe d / f lo atin g el eme nt of th e EU R /U SD i nter e st r ate sw aps th at mat ur e on 2 8 A p r il 2 0 2 3 par tia lly h ed gin g th e € 20 2 3 Eurobond; – €3 0 0 m of t he f i xed / f lo ati ng an d € exch an ge e xp os ur e of E UR /U S D inter e s t r ate s w a ps m atur ing on 2 3 Febr u ar y 2 0 2 7 pa r tial ly he d gin g the € 2 0 27 E ur ob ond; a nd – The $1 5 0 m inter e s t r ate s w a p w hic h mat ur e s on 12 Octo be r 2 0 2 2 , pa r tial ly he dg ing t he U SD 2 0 2 2 G uar antee d note s , w a s ear ly re de em ed in Fe br u ar y 2 0 2 2 . Th e f air v a lue s of t he h ed gin g ins t r um ent s ar e di sc lo se d in n ote 2 0. T h e ef f ec t of t he s w a ps w a s to co nv er t £5 8 8m ( F Y 2 0 21 : £ 7 05 m ) deb t fr om f i xed r ate to fl oat ing r ate. T he s w a ps h av e sim il ar c r it ic al te r ms to t he he d ge d item s , su ch as t he r efe r enc e r ate, r e s et date s , noti on al am oun t s, p a y ment d ate s and m atu r it ie s . T her ef or e, th er e is a n ec on omi c re l ati on ship a nd t he he d ge r a tio i s es t ab li sh ed a s 1 : 1. Hedge ef fecti vene ss is determined at the inception of the hedge rel ationship, and through perio dic prospec ti ve effe cti vene ss as ses sment s to ens ur e th at an e con om ic r el at ion sh ip ex is t s b et w e en th e he dg ed i tem an d he dg ing i ns tr ument . Th e ma in s our ce s of h ed ge in ef f ec t i ve ne s s in th e se h ed gin g r el ati on shi ps is t he ef fec t of t he c ur r en c y b as is r i sk on c r os s- c ur r en c y inte re s t r ate s w a ps w hi ch ar e n ot r efl ec te d in t he f air v a lue o f the h ed ge d ite m. N o oth er s our ce s of i nef fec ti v en es s e mer g ed f r om t he s e he dgi ng re l ati on ship s . A ny h ed ge in ef fec ti v en es s w a s r ec ogn is ed i mme di ately i n the i nco me s t atem ent in t he p er io d in w h ich i t oc cur red . Th e fo ll ow i ng t abl e s et s ou t the d et ail s of the he d ge d ex po sur e s co ve r ed b y th e Gr ou p's fair v a lue h ed ge s: Changes in value of hedged item for calculating ineffec tivene ss £m Ch a ng e s in v a l ue o f t he hedging instrument for calculating ineffec tivene ss £m Carr y ing amount Accumulated fair value adjustments on hedged item Hedged item He dged exposure Financial year Ass ets £m Liabilities £m Ass ets £m Liabilities £m Fi xe d r ate bonds (a) Inte re s t r ate r is k F Y2022 8 (8) – 336 – (2) Inte re s t r ate & cur r e nc y r ate r i sk F Y2022 21 ( 20) – 252 – (5) 29 (2 8) – 588 – (7) Fi xe d r ate bonds (a) Inte re s t r ate r is k F Y2 0 21 5 (5) – 4 49 – 6 Inte re s t r ate & cur r e nc y r ate r i sk F Y2 0 21 4 (7 ) – 256 – 16 9 (12 ) – 705 – 22 (a ) Cl as si f ie d a s b or r o w i ng s Fair v al ue h ed ge s ge ner ated a £1 m ine f fe c ti v en es s i n F Y 2 0 2 2 (F Y 2 021 : £ 3m ) w hi ch w a s re co gni s ed in t he in co me s ta teme nt thr o ugh finance cos ts . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 6 Sensitivity of interest charges to interest rate movements Th e Gr o up ha s ex po su re to s ter lin g, U S do ll ar a nd e ur o inter e s t r ate s . Ho w ev er , the G ro up d oe s no t hav e a si gni f ic ant e xp os ur e to inter e s t r ate m ov em ent s fo r any i ndi v i du al cu r r enc y. Bas ed o n the c omp os it ion o f net d ebt an d in ve s tm ent s at 31 Ju ly 2 0 2 2 , and t ak in g into con si der ation a ll f i xed r ate bor r o w in gs an d inter e s t r ate s wap s in p l ace , a one p er ce nta ge p oi nt (100 b asi s po int s ) ch ang e in a ve r a ge f lo ati ng inter e s t r ate s fo r all t hr ee c ur r e nci es w o uld h av e a £ 2 m imp ac t ( F Y 2 0 21 : £ 5m i mp ac t ) o n the G r oup’s prof i t bef or e t ax . Impact of LIBOR transition Th e UK F in an cia l Co nd uc t A uth or i t y anno unc ed o n 5 Mar ch 2 0 21 t hat L I BO R ben ch mar k r ates w il l b e dis co ntin ue d af te r 31 De cem be r 2 0 21 excep t the m aj or i t y o f US d ol l ar s et ti ngs w h ich w i ll b e di sc onti nue d af ter 30 J un e 2 0 2 3. T h e Gr o up is e xp os e d to inter e s t r ate b enc hm ar k ref or m o n it s in ter es t r ate sw a ps a nd cr o s s- cu r r enc y inter es t r ate sw a ps w hi ch r efe re nce 3 - mo nth an d 6 -m onth U S D L IBO R, h av e an ag gr eg ate no min al v alu e of U SD 74 9m , and m atu r e bet we en A p r il 2 0 2 3 a nd F ebr uar y 2 0 27 . In A pr il 20 21 t he G ro up co nf ir m ed a dhe r enc e to the I SD A 2 0 2 0 IB OR Fa ll b ac ks P r oto col a s pu bl is he d by t he Inte r nat ion al S w ap s and D er iv ati v e s A ss oc iati on , Inc . ( IS D A ) on 2 3 O c tob er 2 0 21 (th e Pr oto co l ), e ns ur in g tha t app r opr iate fa ll b ack s c a n app ly to th e se d er i v at i ve s in t he e ve nt of L IB OR di s cont inu atio n. (c) Financ ial credit risk Th e Gr o up is e xp os e d to cr ed it-r el ate d lo s s es i n the e v ent of n on -p er for m anc e by c ounte r p ar tie s to f ina nci al in s tr um ent s , b ut d oe s no t cur r e ntly e xp ec t a ny c ounte r p ar tie s to f ail to m eet t hei r obl i gati on s. C re di t r is k is mi ti gate d by t he B o ar d- app r ov e d po li c y of o nly p l aci ng c a sh dep os it s w i th hi ghl y r ate d r el at ion shi p ba nk co unter par tie s w it hin c ounte r p ar t y l imi t s e s ta bl ish ed b y r efe re nce to t he ir St an dar d & P oo r’s lon g- ter m de bt r a tin g. In t he n or m al co ur s e of b usi ne s s, t he G r oup o pe r ate s c as h po ol in g s y s tems , w h er e a le gal r ight of s et-of f appl ie s . Th e ma x imum c r edi t r i sk ex p osu re i n the e v ent of ot he r pa r ties f a il ing to p er for m t he ir ob li gat ion s un der f in an cia l as s et s , excl udi ng tr ade and ot he r re ce i v abl es a nd d er i v at i ve s , tot al s £1 ,067m at 31 July 2 0 2 2 ( F Y 2 0 21 : £41 6m). 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Ca sh i n A A A l iq uid it y fu nd s 5 51 116 Ca sh a t ba nk s w i th a t le as t a A A - cr e di t r at in g 10 4 46 Ca sh a t ba nk s w i th a ll o th er A cr e di t r a tin g s 397 2 37 Cash at other bank s 4 6 Inves tments in bank deposits 4 4 Other inves tments 7 7 1, 0 67 416 At 31 Ju ly 2 0 2 2 , the m a xim um ex po su re w i th a s ing le b ank f or de po si t s an d ca sh w a s £ 3 3 9 m (F Y 2 0 21: £7 9m ), wh il s t th e ma x imum m ar k to mar ket e xp os ur e w it h a sin gle b an k for d er i v ativ e s w as £15m (F Y 2 0 21: £26 m ). Th e se b an k s hav e A A A a nd A A - cr e dit r ating s r es pe c ti v el y (F Y 2 0 21: Both A A A an d A A- ). (d) L iquidi t y r isk Borrowing facilities Bo ar d p ol ic y spec if ie s t he ma inten anc e of un us ed c omm it te d cr e dit f a cil i tie s of at l ea s t £ 3 0 0 m at al l tim e s to ens ur e th at th e Gr ou p ha s suf fi cie nt av ai l ab le f und s fo r ope r at io ns an d pl a nne d de v elo pm ent . T he G r oup h as Re vo lv in g Cr ed it Fa cil i tie s of $ 80 0m mat ur i ng 1 No v emb er 2 0 24 . A t the b al ance sh eet d ate, t he Gr o up ha d th e fol lo w in g un dr a w n cr e dit f a cil i tie s: 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m E x pi r in g af t er m or e th an t wo y ea r s 657 575 Cash deposits A s at 31 J uly 2 0 2 2 , £ 814m (F Y 2 021 : £1 8 6 m) of c a sh a nd c as h eq ui v al ent s w a s on d epo si t w it h v ar i ous b an k s of w hic h £ 5 5 8 m ( F Y 2 0 21 : £1 16m) w as in l iq uid it y fun ds . £ 4 m (F Y 2 0 2 1 : £4 m) o f inv e s tme nt s com pr i s ed b ank d ep os it s h eld to s e cur e l ia bil it ie s an d let te r s of c re di t . Gross contractual cash-flows for borrowings A s a t 31 Ju ly 2 0 2 2 A s at 3 1 Ju ly 2 02 1 Borrowings (n o te 18) £m Fair value adjustment s £m Contrac tual interest payment s £m To t a l contractual cash-flows £m Borr ow ings (not e 1 8) £m Fair value adjustment s £m Contrac tual int erest pay ment s £m To t a l contractual cash -flow s £m Le s s th an o ne y e ar (53 9) 2 ( 17 ) (55 4) (3 6) – ( 28) (6 4) Bet we en o ne a nd t wo y e ar s ( 2 3) – ( 11) (3 4) (82 3) (6) (2 3) ( 852 ) Bet we en t wo a nd t hr e e ye ar s (20) – ( 11 ) ( 31) (20) – ( 11 ) ( 3 1) Bet we en t hr e e an d fo ur y ea r s (14 ) – ( 11) ( 25) (14 ) – ( 11 ) (25 ) Bet we en f ou r an d fi ve ye ar s (5 52 ) 5 ( 11) (5 58) (10 ) – ( 11 ) ( 2 1) Gr e ater t ha n f i ve y e ar s (24 ) – – (24) (577 ) ( 16 ) ( 11) (604) To t a l ( 1 ,1 7 2 ) 7 ( 61) (1, 2 26 ) (1, 4 8 0 ) (22) (95) (1, 5 9 7 ) Th e f igu r es p r es ente d in t he b or r o w ing s co lum n inc lud e th e non - c as h adj us tm ent s w hi ch ar e hi ghl i ghted i n the a dj ace nt col umn . Th e co ntr act ual i nter e st r e po r ted for b or r o w in gs i s bef or e th e ef fe c t of inte r es t r ate sw a ps . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 147 Gross contractual cash-flows for derivative financial instruments A s a t 31 Ju ly 2 0 2 2 A s at 3 1 Ju ly 2 02 1 Receip ts £m Payment s £m Net cash-flow £m Receipts £m Pay me nts £m Net cash -flow £m A sset s Le s s th an o ne y e ar 495 ( 5 2 1) (26) 14 2 (14 4 ) (2) Gr e ater t ha n on e ye ar 270 (2 90) ( 20) 642 (568) 74 Liabilities Le s s th an o ne y e ar 2 12 (209) 3 220 ( 2 19 ) 1 Gr e ater t ha n on e ye ar 8 (8) – 3 (2) 1 To t a l 9 85 (1,0 2 8 ) (4 3) 1,0 0 7 (9 3 3) 74 Th is t ab le ab o ve p re s ent s t he un dis c ounte d f ut ur e cont r a c tua l c as h-f lo w s fo r al l der iv at i ve f in anc ial i ns tr u me nt s. F or th is di s clo su re , c ash - fl ow s i n for ei gn c ur r enc ie s ar e tr ans l ated u sin g th e spo t r ate s at th e b al an ce sh eet d ate. T h e f air v a lue s of t he se f i nan cia l ins t r um ent s ar e pr e se nted in n ote 2 0 . Gross contractual cash-flows for other financial liabilities Th e co ntr act ual c a sh -f lo w s for f i nan cia l li abi li ti es i ncl ud ed in t r a de an d oth er p ay a bl es w er e £ 47 4m ( F Y 2 0 21 : £ 3 51 m) du e in le s s th an on e ye ar an d £13m (F Y 2 0 21 : £ 8m ) du e bet we en o ne an d f i ve y ea r s . 2 0 D er i v ati ve f inancial ins tr uments Th e t abl e s bel o w set o ut t he n omi nal a mou nt an d fa ir v al ue of d er i v at i ve c ontr ac t s he ld b y th e Gr oup, i de ntif y in g the d er i v a ti v e cont r a c t s which qualif y for hedge accounti ng treatment: At 31 J u ly 2 0 22 Contrac t or underlying nominal amount £m Fair value Ass ets £m Liabilities £m Net £m Foreign exchange contrac ts (cash-flo w hedges) 141 3 (5) (2) Foreign exchange contrac ts (not hedge accoun ted) 226 1 (2) (1) T otal foreign exchange contract s 3 67 4 (7) (3) Cr os s - cu r r en c y s w a ps ( f air v a lu e an d ne t inv e s tm ent h e dg es ) 615 – (4 0) (4 0) T otal financial derivati ves 982 4 ( 47 ) ( 4 3) Bal ance sheet entries: Non-cur rent 269 – (2 0) ( 20) Curr ent 713 4 (27 ) ( 2 3) T otal financial derivati ves 982 4 ( 47 ) ( 4 3) At 3 1 Ju ly 2 0 2 1 Contrac t or underl ying nominal amount £m Fair value A sset s £m Liabilitie s £m Net £m Foreign exchange contrac ts (cash-flo w hedges) 10 7 1 (2) ( 1) Foreign exchange contrac ts (not hedge accoun ted) 251 1 ( 1) – T otal foreign exchange contract s 358 2 (3) (1) Cr os s - cu r r en c y s w a ps ( f air v a lu e an d ne t inv e s tm ent h e dg es ) 539 72 – 72 Inte re s t r ate sw aps ( fa ir v a lu e he dg e s) 10 8 3 – 3 T otal financial derivati ves 1, 0 0 5 77 (3) 74 Bal ance sheet entries: Non-cur rent 655 75 – 75 Curr ent 350 2 (3) (1) T otal financial derivati ves 1, 0 0 5 77 (3) 74 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 14 8 Th e mat ur i t y prof il e, a ve r a ge inte re s t an d for e ign c ur r en c y exc han ge r ates of t he h ed gin g ins t r ume nt s us e d in th e Gr ou p's hed gin g st r ate gie s ar e a s fo llo w s: Ma tu r i t y a t 31 J ul y 20 2 2 Mat ur i t y a t 31 J ul y 2 0 21 Hedged exposure Hedgin g instrume nt Up to one year On e to f i v e years More than five years Up to on e y ea r On e to f i v e year s More than five years Fair value hedge s Inte re s t r ate r is k Int er e s t r ate s wap s – US D – Not io na l am oun t (£ m ) – – – – 10 8 – – Av er age sp r e ad o ve r 6 mo nth U SD L IBOR – – – – 1.7 9 7 % – Inte re s t r ate sw aps – EU R – Not io na l am oun t (£ m ) 336 – – – 3 41 – – Av er age sp r e ad o ve r 3 mo nth E UR L I BO R 1. 0 15 % – – – 1. 0 15 % – Inte re s t r ate r is k / Foreign currenc y risk Cros s- cur renc y s w aps (EU R:GBP) – Not io na l am oun t (£ m ) – 254 – – – 25 4 – Av er age e xch an ge r ate – 0.8 4 5 – – – 0.8 4 5 – Av er age sp r e ad o ve r 3 mo nth G BP L IB O R – 1. 7 5 0 % – – – 1.7 5 0 % Net investment hedges Foreign currenc y risk Cr oss -cur r enc y sw ap s (EUR:US D) – Not io na l am oun t (£ m ) 354 – – – 310 – – Av er age e xch an ge r ate 1. 0 7 7 3 – – – 1. 0 7 7 3 – Cros s- cur renc y s w aps (GBP:USD) – Not io na l am oun t (£ m ) – 2 61 – – – 229 – Av er age e xch an ge r ate – 1 .253 4 – – – 1 .253 4 Cash-flow hedges Foreign currenc y risk Foreign exchange contra ct s (EUR:US D) – Not io na l am oun t (£ m ) 77 – – 47 5 – – Av er age e xch an ge r ate 4 .17 8 5 – – 1 .19 1 5 1. 2 2 0 5 – Foreign exchange contrac t s (EUR:GBP) – Not io na l am oun t (£ m ) 28 8 – 31 3 – – Av er age e xch an ge r ate 0.8 32 3 1.1 6 7 6 – 0. 8 996 0 .9 0 94 – Foreign exchange contra ct s (EUR: AUD) – Not io na l am oun t (£ m ) 6 – – 7 – – – Av er age e xch an ge r ate 1 .5226 – – 1. 5 8 3 2 – – Foreign exchange contrac t s (USD:GBP) – Not io na l am oun t (£ m ) 16 – – 8 – – – Av er age e xch an ge r ate 1. 3 2 7 3 – – 1 .35 77 – – Foreign exchange contrac t s (GBP:CZK ) – Not io na l am oun t (£ m ) 6 – – 6 – – – Av er age e xch an ge r ate 30.298 8 – – 2 9. 7 0 2 8 – – At 31 Ju ly 2 0 2 2 , the G r oup h ad f or w ar d fo r eig n exch ang e co ntr a c t s w it h a no min al v al ue of £14 1 m (F Y 2 0 21 : £1 0 7m) de si gna ted a s c ash -f lo w he dge s . T he s e fo r wa r d for ei gn e xcha nge c ont r ac t s a r e in r el at ion to s a le an d pur c ha se of m ult ipl e cur ren cie s w i th v ar y in g mat ur i tie s up to 2 0 Jul y 2 0 2 3. T h e l ar g es t s ing le cu r r enc y pair s are d is cl os ed a bo ve a nd m ake up 10 0 % of th e noti on al he dg ed e xp o sur e. T h e not io nal a nd f air v alu es o f the s e for e ign e xcha ng e for w ar d d er i v a ti ve s a re s ho w n in th e no min al am ou nt and f a ir v alu e of d er i v at i ve c ontr ac t s ta ble o n p age 14 8 . Accounting for oth er der i v ati v e contr ac t s A ny fo r eig n exch an ge co ntr act s w h ich a r e not fo r ma ll y de si gnate d as h ed ge s an d te ste d ar e c l as si f ie d as ‘ hel d fo r tr a din g’ and n ot hedge accoun ted. Net ting Inter n ati ona l Sw a ps an d D er i v at i ve s A ss oc iati on ( I SD A ) mas ter n et t ing a gr ee me nt s ar e in pl ace w it h der i v ativ e co unter par tie s exc ept fo r cont r a c t s tr a de d on a d ed ic ated i nter n ati ona l ele c tr o nic t r ad ing p l at f or m u se d fo r ope r at io nal f or eig n exch an ge he dg ing . Un der t he s e agr e eme nt s if a c r edi t e ve nt occ ur s , a ll o ut s t and ing t r a ns ac t io ns un de r the I S DA ar e te r min ated a nd o nly a s ing le ne t amo unt p er cou nter p ar t y i s pa y ab le in s et t lem ent of a ll t r an s ac t ion s . T he I SD A ag r eem ent s d o not m ee t the c r ite r ia f or of fse t tin g, s inc e the o f f s et ti ng is enf or ce abl e onl y if s pe ci fi c ev ent s o cc ur in th e f ut ur e, an d th er e is n o intent ion to s et tle the c ont r ac t s o n a net b a sis . Ass ets 31 Ju ly 2 0 2 2 £m Liabilities 31 Ju ly 2 0 2 2 £m A sset s 31 Ju l y 2 0 21 £m Liabilitie s 31 Ju l y 2 0 21 £m Gr os s v alue o f as s et s a nd l ia bi li ti e s 4 ( 47 ) 77 (3) Related asset s and liabilities subject to master netting agreement s (4) 4 ( 1) 1 Net exposure – (4 3) 76 (2) NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 149 21 Fair v alue of f inancial ins tr ument s A s a t 31 Ju ly 2 0 2 2 Notes Basis for determining fair value At amortised cost £m At f a ir v a lu e through profit or l o s s £m At f a ir v a lu e through OCI £m To t a l carr y ing value £m To t a l fair value £m Financial assets Other inves tments 14 A – 4 364 368 36 8 Other inves tments 14 F – 19 8 27 27 Ca sh a nd c a sh e qu i v al ent s 18 A 506 550 – 1,0 5 6 1, 0 5 6 T rade and other financial recei v ables 16 B/C 807 – – 807 807 Der iv ative financial instr ument s 20 C – 4 – 4 4 T otal financial asset s 1, 313 577 372 2,2 62 2, 262 Financial liabilities T r ad e an d ot he r fi na nc ial p a y ab le s 17 B (728) – – (728) (7 28) Shor t-term borrow ings 18 D ( 50 9) – – (50 9) ( 50 9) Long-term borr ow ings 18 D (5 38) – – (5 3 8) (5 4 4) Lease liabil ities 18 E ( 11 9 ) – – ( 11 9 ) ( 119 ) Der iv ative financial instr ument s 20 C – ( 47 ) – ( 47 ) ( 47 ) T otal financial liabilities (1, 8 94 ) ( 47 ) – ( 1 , 9 41 ) (1,94 7 ) A s at 3 1 Ju ly 2 02 1 Note s Basis for determining fair value At amortis ed cost £m At f a ir v a l ue through profit or loss £m At f a ir v a l ue through OCI £m To t a l car r yin g value £m To t a l fair value £m Financial assets Other inves tments 14 A – 4 – 4 4 Other inves tments 14 F – – 7 7 7 Ca sh a nd c a sh e qu i v al ent s 18 A 289 11 6 – 4 05 405 T rade and other financial recei v ables 16 B/C 689 – – 689 6 89 Der iv ative financial instr ument s 20 C – 77 – 77 77 T otal financial assets 978 19 7 7 1 ,1 8 2 1 ,1 8 2 Financial liabilities T r ad e an d ot he r fi na nc ial p a y ab le s 17 B (5 89) – – (5 89) (58 9) Shor t-term borrow ings 18 D (9) – – (9) (9) Long-term borr ow ings 18 D (1, 3 7 2 ) – – (1, 3 7 2 ) ( 1, 4 2 9 ) Lease liabil ities 18 E (12 1) – – (12 1 ) ( 12 1) Der iv ative financial instr ument s 20 C – (3) – (3) ( 3) T otal financial liabilities ( 2 , 0 91) ( 3) – ( 2 , 0 94 ) ( 2 ,1 5 1 ) Th e f air v a lue o f a fi nan cia l in st r um ent is t he p r ic e at w hic h an as s et c oul d be e xcha ng ed , or a l iab il it y set t le d, b et wee n kn ow l ed ge ab le, w ill in g pa r tie s in an a r m's-le ng th tr ans ac t io n. Fai r v alu es h av e b ee n deter mine d w ith r ef er en ce to av a il ab le m ar ket inf or m atio n at th e ba l anc e she et d ate, us ing t he m eth od olo gi es d e sc r ib ed b el ow : A C ar r y in g v alu e is a s sum ed to b e a r ea so na ble a pp rox im atio n to f air v a lue f or al l of th e se a s se t s and l ia bil i tie s ( Le v el 1 as d ef in ed b y IF R S 13 Fair Valu e Me as ur eme nt ). B C a r r y ing v a lue i s as s ume d to be a r e as on ab le ap pr ox imat ion to f a ir v al ue fo r all o f the s e as s et s an d l iab il it ie s (L e ve l 2 as de fi ne d by IF R S 13 Fair Valu e Me as ur eme nt ). C Fa ir v alu e s of de r i v ati v e f ina nci al a ss et s a nd l ia bil it ie s an d tr a de r e cei v a bl es h el d to col le c t or s el l ar e e s tim ated b y di sc ount ing e xp e c ted fu tu re c ontr ac tu al c as h-f l ow s u sin g pr e v ail in g inter e s t r ate c ur ve s . A m ount s d en omi nate d in fo re ign c ur r en cie s a re v a lue d at t he exch ang e r ate p r ev a il ing at t he b al a nce s he et date . T he s e fi nan ci al in st r um ent s ar e i ncl ud ed on t he b al a nce s he et at f air v a lue , de r i ve d fr om o bs er v a ble m ar ket p r ice s ( L ev el 2 a s def in ed b y IF R S 13 Fair Val ue M ea sur em ent ). D B or r o w in gs ar e c ar ri ed at a mor ti se d co s t. A mount s d eno min ate d in for e ign c ur r en cie s ar e v a lue d at th e exch an ge r ate pre v ai li ng at t he ba l anc e she et d ate. T he f a ir v al ue of b or r o w in gs is e s ti mate d usi ng q uote d pr i ce s (L e ve l 1 as de fi ne d by IF R S 13). E L ea se s ar e c a r r ie d at am or tis e d cos t . A m ount s d en omi nate d in fo re ign c ur r en ci es a re v alue d at the e xch ang e r ate p r ev a il ing at t he ba l anc e she et d ate. T he f a ir v al ue of th e le as e co ntr act i s e st ima ted b y dis c ount ing c ontr ac tu al f ut ur e c ash -f lo w s ( Le v el 2 as d ef ine d b y IF R S 13 ). F Th e fa ir v al ue of i ns tr u men t s is e s tim ated b y us ing u no bs er v ab le in pu t s to the e x ten t that r e le v ant ob s er v ab le inp ut s a r e not a v ail a ble . Uno bs er v ab le in pu t s ar e de v elo pe d us ing t he b es t in for m ati on a v ail a ble i n the c ir cum s t anc es , w hi ch m ay in clu de t he G ro up’s own d at a, ta kin g into a cco unt al l info r mat io n abo ut m ar ket p ar tic ip ati on a ss ump tio ns t hat i s re l iab ly av a il ab le ( Le v el 3 a s def in ed b y IF R S 13). IF R S 13 def ine s a t hr ee - le vel v aluati on hi er arch y: L ev el 1 – qu ote d pr i ce s for s imil a r in st r um ent s Le ve l 2 – dir e c tly o bs er v ab le m ar ket in pu t s oth er th an L ev el 1 in pu t s Le ve l 3 – inp ut s n ot b as ed o n ob se r v abl e mar ket data NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 0 2 2 C ommitm ent s At 31 Ju ly 2 0 2 2 , com mi tme nt s , com pr i sin g bo nd s and g uar antee s ar i sin g in t he no r ma l co ur s e of bu sin e s s, a mo unted to £ 23 4m (F Y 2 0 21: £210m ), inc lud ing p en si on co mmi tm ent s of £ 5 6 m (F Y 2 0 21: £5 4 m ). In ad dit io n, th e Gr o up ha s co mmi t ted e xp en di tur e o n c api ta l pr oj ec t s am ou ntin g to £1 5m ( F Y 2 0 21 : £ 4m ). 2 3 P r ov isions and contingent l iabilitie s T rading Non -headline and legacy To t a l £m John Crane, Inc. litigation £m Ti tefle x Corpor ation litigation £m Other £m £m At 31 J uly 2 0 2 0 14 2 31 66 20 3 31 Foreign exchange r ate movements (1) ( 12 ) (4) ( 1) ( 18 ) Prov ision charged 7 5 – – 12 Prov ision released (4) – (13 ) – ( 17 ) Unwind of provision discount – 1 1 – 2 Utilisation (6) (13) (3) (2) ( 24) Business combinations 1 – – – 1 At 31 J uly 2 0 21 11 2 12 47 17 2 87 Curr ent liabilities 10 26 8 2 46 Non-cur r ent liabilities 1 18 6 39 15 2 41 At 31 J uly 2 0 21 11 2 12 47 17 2 87 Foreign exchange r ate movements 1 30 6 2 39 Prov ision charged 6 6 2 26 40 Prov ision released (3) – – – ( 3) Unwind of provision discount – 2 1 – 3 Utilisation (4) ( 2 1) (4) (2) ( 31) At 31 J uly 2 0 2 2 11 229 52 43 335 Curr ent liabilities 10 34 14 30 88 Non-cur r ent liabilities 1 19 5 38 13 2 47 At 31 J uly 2 0 2 2 11 229 52 43 335 The John Crane, Inc. and Titeflex Corpor ation litigation provisions were the only provisions that were discoun ted; other provisions have not be en di sc ounte d a s the i mp ac t w oul d b e imm ater ia l . T r adin g Th e pr o v is ion s in clu de d as t r a din g re pr e se nt am ount s p r ov i de d for i n the o r din ar y co ur s e of bu sin e s s. T r a din g pr o v isi on s ar e ch ar ge d an d released through headline profit. Warr ant y prov ision and produc t liabilit y At 31 Ju ly 2 0 2 2 , the G r oup h ad w a r r a nt y a nd p ro du c t li abi li t y pro v is io ns of £ 7m (F Y 2 021 : £9 m). W ar r antie s ov er t he Gr o up’s prod uc t s t y p ic al ly co v er pe r io ds o f bet we en on e an d thr e e ye ar s . P r ov i si on is m ad e for t he l ikel y cos t of a f ter - s ale s su pp or t ba s ed on t he r e cent p a st exper ience of individual busine ss es. Commercial disputes and litigation in respect of ongoing business activities Th e Gr o up ha s on o cc as io n be en r eq uir e d to ta ke leg al a c tio n to pr ote c t it s i ntell ec t ua l pr op er t y a nd ot her r i ght s a gai ns t inf r in ge men t. It h as al so ha d to def end i t s el f aga ins t p r oce e din gs br o ugh t by ot her p ar ti es , in cl udi ng pr o du c t li abi li t y a nd i nsu r an ce s ubr o gat ion c l aim s . Pr o v isi on i s ma de fo r any e xp e c ted c os t s an d li abi li ti es i n re l ati on to th e se p r oce e din gs w h er e app r op r iate, a lth ou gh th er e c an b e no gua r ante e th at su ch pr o v is ion s ( w hic h ma y be s ubj ec t to p otent ial ly m ater i al r ev i sio n f ro m tim e to tim e) w i ll a ccu r atel y pr e dic t t he ac t ua l cos t s an d l iab il it ie s tha t may b e in cur red . Contingent liabilities In th e or din ar y co ur s e of i t s bu sin es s , th e Gr o up is s ubj ec t to c omm er cia l dis pu te s and l i tig ati on su ch a s go ve r nm ent pr ice aud it s , p ro du c t li abil i t y c l aim s , emp lo ye e di sp ute s an d oth er ki nd s of l aw s ui t s , and f a ce s dif fer ent t yp e s of le gal i s su es i n dif fer ent ju r is di c tio ns . T he h igh le vel o f ac ti v i t y in the U S, fo r ex amp le , ex po se s th e Gr o up to th e li keli ho od of v ari ou s t y p e s of l iti gat io n com mon pl a ce in t hat c ount r y, such as ‘mas s tor t’ an d ‘cl as s ac t ion’ l iti gat ion , le ga l cha ll en ge s to th e sc op e and v a li di t y of p ate nt s , and p r od uc t l iab il it y and in sur ance s ubr o gat ion cl ai ms . T he s e t y p e s of pr o ce ed ing s (or t he t hr eat o f the m) a r e al s o us e d to cr ea te pr e ss ur e to en co ur a ge n eg otia ted s et tl em ent of di sp ute s . A ny c l aim b r oug ht ag ain st t he G r oup ( w i th or w i th ou t mer it ) co uld b e co s tly to d efen d. T h es e m at ter s are in her e ntly d if fic ult to q uant if y. In app r op r iate c a se s a p ro v is io n is r ec og nis e d ba se d on b e s t es ti mate s an d ma na gem ent ju dg em ent bu t th er e c an b e no gu ar antee th at the s e pr o v isi on s ( w hic h ma y be s ubj ec t to p otent ial ly ma ter ia l re v i sio n fr o m tim e to tim e) w il l r e sul t in an a ccu r ate p re di c tio n of th e ac tu al cos t s an d l iab il it ie s tha t may b e in cur red . T he re a r e al s o co ntin ge nt li abi li ti es i n re s pe c t of l iti gat io n for w hi ch n o pr o v isi on s ar e ma de . Th e Gr o up op er ates in s om e ma r ket s w her e t he r i sk of un eth ic al o r cor r upt be ha v iou r is ma ter ia l and h as p r oc edu r es , in clu din g an emp lo ye e ‘Eth ic s A le r tli ne’ , to hel p it i de ntif y po tenti al is s ue s . Su ch pr o ce dur e s w il l , fr o m tim e to tim e, gi v e r is e to inte r na l inv e st ig atio ns , so met ime s co nd uc ted w i th e x ter nal sup po r t, to en sur e t hat th e Gr o up pr o pe r ly un de r s ta nd s r isk s a nd c onc er n s and c a n ta ke ste ps b oth to man ag e imm ed iate is s ue s an d to imp r ov e it s p r a c tic es a nd p ro ce dur e s fo r th e fu tu re . T he G ro up i s not a w ar e of an y is s ue s w hic h ar e ex pe c ted to g ene r ate m ater i al f in anc ial e xp os ur e s. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 151 Non-headline and legac y John Crane, Inc. Joh n Cr a ne, I nc . ( J CI ) is o ne of m any c o -d efe nda nt s in nu mer o us l a w sui t s p end ing i n the U ni ted St ate s in w h ich p l aint if fs ar e cl a imi ng dam ag es a r is ing f r om a ll eg ed e xp os ur e to, or u se o f, pr od uc t s pr e v io us ly ma nuf a c tur e d w hic h co nta ine d as be s tos . Unt il 2 0 0 6 , th e aw a rd s , the r el ated inter e s t and a ll m ater i al de fen ce co st s w e re m et dir e c tl y by in su re r s . In 2 0 0 7 , JCI s ec ur ed t he c omm ut ati on of c er tai n ins ur ance po li cie s in r e sp ec t o f pr od uc t l ia bil it y. Pro v i sio n is ma de i n r es pe c t of th e ex pe c ted c os t s of d efen din g k no w n and p r ed ic te d fu tu re c l aim s an d of ad v er s e ju dg em ent s in r el a tio n th er eto, to th e ex tent that s uc h cos t s c an b e r el iab ly e s tim ated . Th e JC I pr o duc t s g en er a ll y ref er r e d to in th es e c a se s co ns is t of in dus t r ial s e al ing p r od uc t , pr im ar i ly p ack in g an d gas ket s . T he as be s tos w a s enc ap su l ated w i th in th es e pr o du c t s in su ch a m ann er th at c aus e s JC I to be li ev e, b as e d on te s t s con du c ted o n it s b eh alf, th at th e pr o duc t s we re s a fe. J CI ce as e d man uf ac t ur i ng pr o du c t s cont ai nin g as be s tos in 198 5. JCI c onti nue s to a c ti v ely m oni tor t he co nd uc t an d ef f ec t of i t s cu r r ent an d ex pe c te d asb e s tos l it iga tio n, in cl udi ng th e mo s t ef f ic a cio us pr e se ntat io n of it s ‘s afe p r odu c t’ d efen ce, a nd inte nd s to con tinu e to r es is t th e se a sb es to s cl ai ms b as e d up on th is de fen ce. T h e ta ble b el ow sum mar i s es t he J CI cl a ims e xp er ience o v er th e l as t 4 0 y e ar s s inc e the s t ar t of thi s l iti gat ion: Ye a r e nd e d 31 Ju ly 2 0 2 2 Y ear ended 31 Ju l y 2 0 21 Y ear ended 31 Ju l y 2 0 2 0 Y ear ended 31 Ju l y 2 019 Y ear ended 31 Ju l y 2 018 JCI claims experie nce Claims again st JCI that have been dismis sed 306 , 000 305 ,000 297 ,000 285 ,000 2 77 ,000 Cl ai ms J CI i s cu r r ent ly a d efe nd an t in 22, 000 22,000 25, 000 38, 000 43,000 Cum ul at i v e fi na l ju dg em ent s , a f te r ap pe al s, a gai ns t J CI s in ce 197 9 149 149 149 14 4 14 0 Cum ul at i v e v al ue of a w ar d s ( $’m) s in ce 197 9 17 5 17 5 17 5 16 8 16 4 Th e num be r of cl a ims o ut s t an din g at 31 Jul y 2 0 2 2 r efl ec te d th e be nef i t of 1,00 0 (F Y 2 0 21 : 8, 0 0 0 ) cl aims b ein g dis mis s e d in th e ye ar . JCI h as a l s o inc ur r e d sig nif i ca nt ad di tio nal d efe nce c os t s . T he l it iga tio n inv ol ve s c l aim s for a n umb er of a ll eg edl y as be s tos- r el ate d di se as e s , w ith a w ar d s , w hen m ad e, fo r me s othe l iom a ten din g to be l a r ger t han t ho se f or th e oth er di se as e s . JCI ’s abil it y to defen d me s oth el iom a ca s es s ucc e ss f ul ly i s, t her ef or e, l ikel y to ha ve a si gni f ic ant i mp ac t on i t s an nua l ag gr eg ate ad v er s e ju dg em ent an d def enc e cos t s . John Crane, Inc. litigation provision Th e pr o v is ion i s b as ed o n pa s t his to r y of JCI c l aim s an d we ll- e s ta bl ish ed t ab le s of a sb es to s-r e l ated d is ea s e inc ide nce p r oje c ti on s. Th e pr o v is ion i s dete r min ed u sin g ad v i ce f r om a sbe s tos v aluati on e xp er t s, B ate s W h ite L LC. T h e as s umpt io ns ma de i n as s e ss in g the app r opr iate lev el o f pr ov i si on in clu de: th e p er io d o ve r w hic h the e xp en di tur e c an b e r el iab ly e s tim ated; th e f ut ur e tr en d of le ga l cos t s; the r ate of fu tur e c l aim s f ile d; the r ate of suc ce ss f ul r e s olu ti on of c l aim s; and t he a ve r a ge am ou nt of jud ge men t s aw a r de d. T he p r ov i sio n uti li se d in t he p er i od i s lo we r tha n pr e v iou s pe r io ds , p r inc ip al ly du e to co ur t clos ur e s an d tr ia l del ays a r is ing f r om t he C O V ID - 1 9 pa nde mic . Man ag eme nt be li ev e s thi s r edu c ti on in u til is a tio n is tem po r ar y u ntil af ter the ef fec t s of t he p an de mic s ubs ide a nd t r ial a c ti v i t y r et ur n s to pr e - pandemic level s . E s ta bl is he d inc ide nce c ur v es c a n be u se d to e st ima te the l ikel y f ut ur e pat ter n of as be s tos -r el ate d di se as e . Ho we v er , JCI’s cl aim s ex pe r ie nce is al so si gni fi c antl y imp ac te d b y othe r f ac to r s w hic h inf lu enc e the U S l it igat io n env i r onm ent . T he s e c an in clu de: ch an gin g app r oa ch es o n th e pa r t of the pl a inti f f s’ ba r ; ch ang ing at titu de s am on gs t th e jud ici ar y at b oth tr ial and a pp el l ate le ve l s in s pe ci f ic jur isdi c ti ons w h ich m o ve t he ba l anc e of r is k an d opp or tun it y for cl aimant s; a nd le gi sl at i ve an d pr o ce dur al cha nge s i n bot h the s t ate an d fe der al cou r t sy s tem s. Th e pr o je c tio ns u se a l im ite d tim e ho r izo n on th e b asi s th at Ba tes W h ite L L C con si der t hat t her e i s sub s ta ntia l unce r tai nt y in t he a sb es to s li ti gati on en v ir on me nt. S o p r ob abl e ex pe ndi tu r es a re n ot r ea s ona bly e s ti mab le b ey on d th is ti me ho r iz on. A sb es to s is th e lo nge s t r u nnin g mas s to r t lit ig atio n in A m er i c an hi sto r y and i s con s t antl y ev ol v ing i n w ay s th at c an not b e anti cip ate d. J CI's d efen ce s tr ateg y al s o g ene r ate s a sig nif ic a ntly d if fere nt p at ter n o f le gal c os t s an d se t tle me nt ex pe ns e s fr o m othe r def end ant s . T hu s JCI i s in an e x tr e mel y r ar e p os it ion , an d ev i den ce f r om oth er l it ig atio n c ann ot b e us ed to i mpr o ve t he r el ia bil i t y of t he p ro je c tio ns . A ten - ye ar ( F Y 2 0 21 : ten -y ea r ) tim e ho r izo n ha s be en us ed b as e d on p as t e xp er i enc e re ga r din g sig nif i ca nt ch ang e s in th e li ti gati on e nv ir o nme nt th at ha ve o ccu r r ed e v er y fe w ye ar s a nd o n the amo unt of t ime t aken i n the p a st f or s om e of th os e ch ang e s to imp ac t t he b ro a der a sb e sto s l iti gat ion e nv i ro nm ent . Th e r a te of fu tu r e cl ai ms f ile d ha s b een e s ti mate d usi ng w el l-e s t abl i she d t abl e s of as be s tos in ci den ce pr o je c tio ns to d eter m ine t he l ikel y pop ul at io n of pote ntia l cl a iman t s, a nd J CI’s pa st e xp er ience to d eter m ine w h at pr o po r tion of t his p op ul at ion w i ll m ake a cl a im ag ain s t JCI . T he J CI pr o duc t s g en er ally r efe r r ed to in c l aim s ha d in dus t r ial a nd m ar in e app l ic ati on s. A s a re s ult , the i nci de nce c ur ve u s ed fo r JCI p r oje c ti on s excl ude s c ons t r uc t ion w o r ker s , an d is a c omp os ite of t he c ur ve s th at pr e dic t a sb es to s ex po sur e -r e l ated d is ea s e fr om shipyard s and o ther occupations. This is consisten t with JCI’ s litigation histor y . Th e r a te of suc ce s sf ul r e s ol uti on of c l aim s an d the a v er a ge a mo unt of an y jud ge me nt s aw a r de d ar e pr oj ec te d b as ed o n the p a st h is tor y of JCI c l aim s , sin ce th is is t he b e st a v ail able e v ide nc e, gi v en J CI’s unus ual s tr ateg y of d efen din g al l cl ai ms . Th e f ut ur e tr en d of le ga l cos t s i s es t imate d b as ed o n JC I’s pas t ex p er ie nc e, ad jus te d to ref l ec t t he as s ume d le v el s o f cl ai ms an d tr i al ac t i v it y, sin ce th e numb er o f tr ia l s i s a key dr i v er o f le gal c os t s . John Crane, Inc. litigation insurance recoveries W hil e JCI h as c er tai n exce s s l iab il it y insu r an ce, J CI h as me t defe nce c os t s di re c tl y. The c a lcu l ati on of t he pr o v is ion d oe s n ot t ake acc ount o f any potential reco ver ies fr om insurer s. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 2 John Crane, Inc. litigation provision history Th e JC I as be s tos l it ig atio n pr o v isi on of £ 22 9 m (F Y 2 0 21: £212m) is a d is co unted p r e- ta x pr o v is ion u sin g di sc ount r ates , be ing t he r i sk-fr e e r ate on U S de bt in s tr um ent s f or th e ap pr op r iate p er i od . T he d efer red t a x as s et r el ate d to th is pr o v is ion i s sh ow n w i thi n th e defe r r ed t a x ba l anc e (n ote 6). Th e JC I as be s tos l it ig atio n pr o v isi on h as d ev el op ed o ve r the l ast f i v e ye ar s a s fo ll ow s: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Y ear ended 31 Ju l y 2 0 2 0 £m Y ear ended 31 Ju l y 2 019 £m Y ear ended 31 Ju l y 2 018 £m John Crane, Inc. litigation provision Gross pro vision 25 8 220 235 257 2 51 Discount (29) (8) (4) ( 20) (28) Discounted pre-tax provision 229 212 231 237 223 Deferred tax (57 ) (5 4) ( 59) (50) ( 4 8) Discounted post -tax prov ision 17 2 15 8 17 2 18 7 17 5 Operating profit charge/(credit ) Inc r ea s ed p r ov i si on s fo r ad ver s e ju d ge me nt s an d le ga l de fen ce c os t s 24 10 14 7 13 Cha ng e in U S r i sk-f re e r ates (18 ) (5) 16 8 (6) Su btot al – i te ms c ha r ge d to th e pr o v i si on 6 5 30 15 7 Litigation management, legal fees in connection with litigation against insurers and defence strateg y 1 1 1 2 3 Recover ies from insur ers – (9) (3) ( 11 ) – T ota l op er atin g pr o fi t c ha r ge / (c r ed it ) 7 (3) 28 6 10 Cash-flow Pr o v is io n ut il i s ati on – l eg al d efe nc e co s t s an d ad v er se ju dg em ent s ( 2 1) (13 ) ( 2 3) ( 24) ( 27) Litigation management expens e (1) – (1) (2) (3) Recover ies from insur ers – 9 3 11 – Net c a sh o ut flo w (22) (4) ( 21) ( 15 ) (30) John Crane, Inc. litigation provision sensitivities Th e pr o v is ion m ay b e su bje c t to po tenti all y mate r ial r e v is ion f r om t ime to t ime i f ne w inf or m ati on b eco me s a v ail a ble a s a r es ult o f fu tu re ev ent s . T he r e ca n be n o gua r a ntee th at th e as s umpt io ns u se d to e st ima te the p r ov i sio n w il l re s ult in a n acc ur a te pr ed ic ti on of t he a c tua l cos t s t hat w il l be i nc ur r ed b e ca us e of th e si gni fi c ant un cer ta int y ass o cia ted w i th th e f ut ur e le ve l of as be s tos c l aim s an d of the c os t s ar isin g out o f re l ate d li ti gati on . John Crane, Inc. statistical reliability of projections over the ten-year time horizon In or d er to ev aluate th e s tat is ti c al r el iab il it y of the p r oje c ti on s, a p op ul at ion o f ou tcom es i s mo de ll ed u sin g r an do mis e d ve r dic t o utco me s . Th is g ene r ate d a di st r ib uti on of o utc ome s w i th f ut ur e sp en d at th e 5th p er ce ntil e of £ 2 0 3m and f u tur e sp en d at th e 95 th p er cent ile o f £ 26 8m (F Y 2 0 21: £ 191 m and £ 24 6m, r e sp ec t i ve ly ). St ati st ic al a nal ys is of t he di s tr ib ut io n of the s e ou tco me s in dic ate s th at th er e is a 5 0 % p r ob abi li t y that t he tot al f u tur e sp en d w il l f all b et wee n £ 2 3 9 m and £ 26 3 m (F Y 2 0 21: bet w ee n £ 2 0 9m a nd £ 2 30 m ), com pa re d to th e gr os s p r ov i sio n v alu e of £ 2 5 8 m (F Y 2 021 : £ 2 2 0 m). John Crane, Inc. sensitivity of the projections to changes in the time horizon used If th e as be s tos l it ig atio n en v ir onm ent b ec om es m or e v ol at ile a nd un cer t ain , the t ime h or izon ov er w h ich t he p ro v i sio n c an be c a lcu l ated may r e du ce. C on ve r s ely, if th e en v ir on ment b e ca me m or e s ta ble , or J CI ch an ge d app r oa ch an d co mmi t te d to lon g- ter m s et tl em ent ar r a ng eme nt s , the t im e per iod co v er ed b y th e pr o v isi on m ight b e ex tende d. Th e pr o je c tio ns u se a te n- ye ar t ime h or i zon . Red uc ing t he ti me h or iz on b y on e ye ar w oul d r ed uce t he pr o v is io n by £18m (F Y 2 021 : £1 7m) and re du cin g it b y f i ve y ea r s w oul d r ed uce t he p ro v is io n by £ 9 7m (F Y 2 0 21 : £9 3m). We con si der , af te r obt ain ing a d v ic e fr o m Bate s W h ite L LC , that to f or ec a s t be y ond te n ye ar s req uir e s th at the l i tig ati on en v ir on ment r e mai ns l ar ge ly un cha ng ed w i th r e sp ec t to th e hi sto r ic a l ex per ience u s ed fo r e st ima tin g fu tu re a sb e sto s ex pe nd it ur es . Hi s tor ic a ll y, the asb e s tos li ti gati on en v ir on me nt ha s und er go ne s ign if ic ant c ha nge s m or e of ten tha n ev er y ten y ea r s . If o ne a ss um ed th at th e as be s tos l it ig atio n env i ro nm ent w oul d r em ain un cha ng ed f or lo ng er an d ex tende d th e tim e hor izon b y one y e ar , it wo ul d inc re as e t he pr e -t a x pr ov i si on by £15m (F Y 2 0 21: £ 14m) a nd e x ten din g it b y f i ve y e ar s w ou ld in cr ea s e the p r e- ta x pr o v is ion b y £ 5 6 m (F Y 2 0 21: £5 8 m). Ho w e ver , the r e ar e al s o r ea s on abl e sc ena r io s tha t, gi v en c er tai n r ece nt ev ent s in the U S asb e s tos l it igat io n env i ro nm ent , wo ul d re s ult in n o ad di tio na l asb e s tos l it igat io n for J CI b ey on d ten y ea r s . At th is t ime, h o w the a sb e sto s l iti gat io n env i ro nm ent w il l ev ol ve b e yo nd ten y e ar s i s not reasonably es timable. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 3 John Crane, Inc. contingent liabilities Pr o v isi on h as b ee n ma de fo r f ut ur e defe nce c os t s an d th e cos t of a d v er s e ju dge me nt s ex pe c ted to o cc ur . JCI’s cl aim s ex pe r ie nce i s sig nif ic a ntly i mp ac te d by ot he r fa c tor s w h ich i nf lue nce t he U S li ti gat ion e nv ir o nme nt . Th e se c a n inc lud e: ch ang ing a pp ro a che s o n the p ar t of the p l aint if fs’ bar; chan gin g at ti tu de s am on gs t th e jud ici ar y at b oth tr ial and a pp el l ate le ve l s; an d le gi sl ati v e an d pr o ce dur al chan ge s in b oth the s t ate an d fe der al cou r t sy s tem s. A s a re s ult , w hil st th e Gr ou p anti cip ate s th at as be s tos l it ig atio n w il l cont inu e be y ond t he p er i od c ov er e d by the p r ov i sio n, t he un cer t aint y sur r ou ndi ng th e US l i tig ati on en v ir on men t be yo nd t his p oin t is su ch th at th e co st s c a nno t be r el ia bly e s ti mate d. Al tho ug h the m eth od ol og y u se d to c alc ul ate t he J CI l it igat io n pr ov i si on c an in t he or y b e app l ied to s ho w cl a ims a nd c os t s fo r lon ge r pe r io ds , the D ir ec to r s co ns id er , bas e d on ad v i ce f r om B ate s W hi te L LC, th at th e le ve l of unc er ta int y reg ar di ng th e f ac tor s use d in e s tim atin g f ut ur e cos t s i s too gr e at to pr o v id e for r e as on abl e e st ima tio n of th e num ber s of fu tur e c l aim s , the n atu re o f suc h cl ai ms o r the c os t to r e so lv e the m for y ea r s b ey on d the te n- y ear t im e hor izon. Titeflex Corporation T itef le x Co r p or at io n, a s ubs idi ar y of th e Gr ou p in th e F lex- T ek di v is ion , ha s r ec ei ve d a nu mb er of cl aims in t he U S fr o m ins ur a nce c om pa nie s se ek ing r e co mp ens e o n a sub ro ga ted b as is fo r th e ef fe c t s of d ama ge a lle g edl y c aus e d by l ig htni ng s tr i kes in r e l ati on to it s flex ib le ga s pip ing p r odu c t . It h as al so r ec ei v ed p ro du c t li abi li t y cl aim s re ga r din g thi s pr o duc t in t he U S, s om e in t he fo r m of pu r po r ted cl a s s ac t ion s . T itef le x Co r p or at io n be li ev e s that i t s p ro du c t s ar e a s afe a nd ef fec ti v e me an s of de li v er i ng g as w he n in st al le d in a cco r dan ce w it h th e man uf ac t ur er ’s ins tr u c tio ns an d lo c al an d na tio nal c od e s. H ow e ve r , some c l aim s ha ve b e en s et tl ed o n an in di v id ual b a sis w i th ou t adm is si on of li abi li t y . Equ i v ale nt thi r d- pa r t y pr o duc t s i n the U S m ar ket-pl a ce f ac e sim il ar c hal le nge s . Titeflex Corporation litigation provision Th e co ntin uin g pr og r es s of c l aim s an d th e pat tern o f se t tle me nt, to get he r w ith r e cent m ar ket-p l ace a c ti v i t y, pr o v ide s uf fic ie nt ev i den ce to re co gni s e a li abil i t y i n the a cco unt s . T he r efor e p ro v is io n has b e en ma de f or th e co st s w h ich t he G r oup i s ex pe c ted to i ncu r in r e spe c t of fu tu re c l aim s to th e ex te nt th at suc h co st s can b e r el iab ly e s tim ated . T itef l ex C or p or ation s el l s f le xi ble g as p ipi ng w i th ex tensi v e in st al l at ion and s af et y guida nce d e sign e d to as su re t he s af et y o f the p r od uc t an d min imis e t he r i sk of da ma ge a s so ci ated w i th l ight nin g s tr ike s . Th e as s ump tio ns m ad e in as s e s sin g the a pp ro pr i ate le v el of pr o v is ion , w hi ch ar e b as e d on p as t ex p er ie nc e, inc lu de: th e pe r io d ov er w h ich ex pen di tur e c an b e r el ia bly e s tim ate d; the nu mb er of f ut ur e s et tl eme nt s; th e av er a ge a mo unt of s et t lem ent s; an d th e imp ac t of s t at ute s of re po se a nd s af e ins t al l ati on in iti ati v e s on th e ex pe c te d numb er o f fu tu re c l aim s . T he a ss ump tio ns r el ating to t he nu mbe r of f ut ur e se t tl eme nt s excl ude t he u se of r e ce nt cl ai ms hi s tor y du e to the u nce r tain i mp ac t th at th e CO V ID- 1 9 loc kdo w n ha s ha d on t he nu mbe r of cl a im s. Th e pr o v is ion o f £5 2m ( F Y 2 0 21 : £ 47m) is a dis co unte d pr e -t ax p r ov i sio n us ing d is cou nt r ate s , be ing t he r i sk-fr e e r ate o n US d ebt i ns tr u me nt s for t he ap pr op r iate p er iod. T h e def er r e d ta x as s et r el ate d to th is p ro v is io n is sh ow n w i th in th e defe r r ed t a x ba l an ce ( note 6 ). 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Gross pro vision 87 69 Discount (35) (22) Discounted pre-tax provision 52 47 Deferred tax (12 ) ( 11 ) Discounted post -tax prov ision 40 36 Titeflex Corporation litigation provision history A cha r ge of £ 2 m ( F Y 2 0 21 : £1 3m c re di t ) h as b ee n re co gni s ed b y T itef l ex C or p or ation i n re s pe c t of ch ang e s to the e s ti mate d co st o f fu tu re cl ai ms f r om in sur ance c omp an ie s s eek in g r ec omp en se f or da ma ge al le ge dl y ca us ed b y l igh tnin g s tr ike s . T he h igh er gr os s p r ov i sio n v al ue has b e en dr i v en b y fo re ign e xcha ng e r ate m ov em ent s a nd an i ncr e as e in t he av er age c os t pe r cl a im. T h e inc r ea se i n the d is co unt f ac to r der i v e s f ro m inc r ea sin g US d ol l ar di s cou nt r ate s . Titeflex Corporation litigation provision sensitivities Th e si gni fi c ant un cer t aint y as so ci ated w i th th e f ut ur e le ve l of cl a ims a nd of t he co s t s ar i sin g ou t of r el ate d l iti gat ion m ea ns t hat t her e c an be n o gua r ante e th at th e as su mpt ion s us e d to es ti mate t he pr o v is io n w ill r e su lt in an a cc ur ate p r edi c ti on of th e ac t ual c os t s th at w il l be inc ur r ed . T he r efor e th e pr o v is ion m ay b e su bje c t to po tenti all y mate r ial r e v is ion f r om t ime to t ime , if n ew i nfor m ati on b ec om es a v ail a bl e as a re s ult of f u tur e e ve nt s . Th e pr o je c tio ns in co r po r ate a l on g-te r m as s umpt io n re ga r din g the i mp ac t of s af e ins t al l ati on in it iati v e s on th e le ve l of f ut ur e cl a ims . I f the as su me d ann ual b en efi t of b on din g and g r oun din g ini tia ti v es w er e 0 .5 % hig her , the p r ov i sio n w oul d be £ 3 m ( F Y 2 0 21 : £4 m ) lo w er , and if t he ben ef it w er e 0 .5 % lo w er , the pr o v is ion w ou ld b e £ 4m ( F Y 2 0 21 : £ 4m ) hi gh er . Th e pr o je c tio ns u se a s sum pti on s of f ut ur e cl ai ms th at ar e b as e d on b oth th e num be r of f ut ur e se t tle me nt s and t he a ve r a ge am ou nt of tho s e set tleme nt s . If t he as s ume d a ver age n umb er of f u tur e s et t lem ent s in cr e as ed 10 %, t he p ro v i sio n wo ul d r is e b y £5 m ( F Y 2 0 21 : £4 m ), w ith a n eq ui v al ent f al l for a r e duc t io n of 10% . If t he a s sum ed a mou nt of th os e s et tl eme nt s in cr ea s ed 10% , t he pr o v is ion w o uld r i s e by £ 4 m (F Y 2 0 21: £3m ), al s o w i th an e qu i v ale nt f all f or a r ed uc ti on of 10 % . Other non-headline and legacy provisions Non -h ea dl in e pr ov i si on s com pr i se a ll p r ov i sio ns t hat w er e di sc lo se d as n on -h ea dl in e item s w he n the y w er e ch ar ge d to th e co ns ol id ated income statemen t. Legac y prov isions comprise non-material prov isions rel ating t o former business acti v ities and disconti nued oper ations and p r op er tie s no l on ger u s ed b y Sm ith s . Thes e non-material provisions include non-headline reor ganisation, disposal indemnities, litigation and ar bitr ation in resp ect of old pr od uc t s an d di sc onti nue d bu sin e s s ac ti v i ti es , w hi ch in clu de s c l aim s r ece i ve d in co nn ec t ion w i th t he di sp os al of S mi th s Me dic al i n the y e ar . Pr o v isi on i s ma de fo r th e be s t es t imate o f the e xp ec te d ex p end it ur e r el ate d to the d efe nce a nd /or r e so lu tio n of su ch m at ter s. T her e i s an inh er ent r i sk in l eg al pr o ce ed ing s tha t the o utc ome m ay b e unf a vo ur a bl e to the G r oup, a nd a s suc h the r e c an be n o gu ar a ntee t hat s uch pr ov i si on s (w h ich m ay b e su bje c t to po tenti all y mate r ial r e v is ion f r om t ime to t ime ) w il l be s uf fic ient . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 4 Reorganisation At 31 Ju ly 2 0 2 2 , the r e we re r e or g ani s atio n pr o v isi on s of £1 m ( F Y 2 0 21 : £2 m ) re l ati ng to th e v ar i ou s re s tr uct ur i ng pr o gr amme s th at ar e ex pe c ted to b e ut il is ed i n the n ex t 1 8 mont hs . Property At 31 Ju ly 2 0 2 2 , the r e we re p r ov i sio ns o f £10m (F Y 2 0 21 : £1 1 m) re l ate d to ac tu al an d po tenti al en v ir on ment al i s su es f or si te s cur r e ntly o r prev iously occupied by Smiths oper ations. 24 Share c apit al Nu mb e r of s ha r e s Avera ge number of s ha r e s Issued capital £m Consideration £m Or di n ar y sh ar e s of 3 7 .5p e a ch T ot al s ha r e ca p it a l at 31 J uly 2 0 2 0 3 9 6 , 2 11,1 8 0 3 9 6 ,19 3 , 3 10 149 Is s ue of n e w eq ui t y s ha r es – e xer c is e of s ha re o pt io ns 16 5 ,9 3 4 1 5 7, 2 7 6 – 2 T ot al s ha r e ca p it a l at 31 J uly 2 0 21 3 9 6 , 3 7 7,11 4 39 6,35 0,58 6 149 Is s ue of n e w eq ui t y s ha r es – e xer c is e of s ha re o pt io ns 131,942 1 25,354 – 2 Share buyb acks (3 4, 1 52,897) (9,79 7 ,72 9 ) ( 13 ) ( 5 11 ) T ot al s ha r e ca p it a l at 31 J uly 2 0 2 2 362,356, 15 9 386,678,21 1 13 6 Share c apital s tr uc ture A s at 31 J uly 2 0 2 2 , th e Co mp an y’s is sue d sh ar e c api t al w a s 3 62 , 3 5 6, 1 59 o r din ar y sha r es w i th a n omi nal v a lue o f 37 .5p p er s har e . A ll of t he is su ed s har e c ap it al w a s in f r ee i s sue a nd a ll is s ue d sh ar es a r e fu ll y pai d. Th e C omp an y’s or din ar y sh ar e s ar e li s ted a nd a dmi t ted to t r a din g on th e Mai n Mar ket o f the L on do n Sto ck E xchang e. T h e Co mp an y ha s an A me r ic an D ep os it ar y Rec eipt ( A D R ) p ro gr amme a nd on e A DR e qu ate s to one o r din ar y sh ar e. A s at 31 July 2 0 2 2 , 4 , 274,70 4 ord ina r y shar e s we re h el d by t he n omin e e of the p r og r am me in r e sp ec t o f the s a me nu mb er of A D R s in is s ue. Th e ho ld er s o f or din ar y sh ar e s ar e ent itl ed to r e cei v e th e Co mp an y’s Repo r ts an d A cco unt s , to at ten d an d sp ea k at Ge ner al Me etin gs of the C om pa ny, to app oint p r oxi es a nd to e xer cis e v otin g r i ght s . Non e of th e or di nar y s har e s c ar r y an y sp ec ial r ight s w it h re ga r d to cont r ol of the C o mp any o r dis t r ibu ti on s ma de b y the C om p any. Th er e ar e n o kn o w n agr e eme nt s r el at ing to , or r e st r ic t ion s on , v otin g r ig ht s at t ac he d to the o r din ar y sha r es ( oth er th an th e 4 8 hour c ut-o f f for c a st ing p r ox y vote s pr i or to a G ene r al M ee tin g ). Th er e ar e n o r es tr ict io ns on t he t r an s fer of s har e s , an d the r e is no r e qui r eme nt to obt ai n app r ov a l for a s har e tr ans fe r . Ther e a re n o kn o w n ar r ange ment s u nd er w hi ch f ina nc ial r i ght s ar e h el d by a p er s on o the r tha n th e hol de r of the o r din ar y sha r es . T h er e ar e no k no w n l imi t atio ns o n th e hol din g of sh ar e s . Power s of Direc tors Th e Di re c tor s are a uth or i s ed to i s sue a nd al lo t sha re s an d to bu y b a ck sh ar e s sub je c t to re ce i v ing s har e hol de r app r ov a l at th e Ge ner al Mee tin g. S uc h aut ho r it ie s we r e gr a nted b y sh ar eh ol der s at the 2 0 21 A n nua l Ge ner al Mee tin g and t he b u y ba ck au th or i t y wa s sup er sed ed b y the s har e hol de r au tho r i t y p ro v id e d at the G en er al Meet in g hel d in No v emb er 2 0 21. At th e 2 0 2 2 AG M, i t w ill b e pr o po se d th at th e Dir e c tor s b e gr a nted n ew a uth or itie s to al lot a nd b u y ba ck sh ar e s. Share bu y back s A s at 16 Se ptemb er 2 0 2 2 ( th e l ate st p r a c tic a ble d ate fo r inc lus ion i n thi s r epo r t ), the C om pa ny h ad an u nex pi re d au th or i t y to r e pur ch as e or din ar y sh ar e s up to a ma x imum o f 59m o rd ina r y sha re s ( F Y 2 0 21 : 4 0 m ). A s at 16 Se ptemb er 2 0 2 2 , th e C omp an y did n ot h old a ny s har e s in tr ea sur y. A ny o r din ar y sha r es p ur ch as ed m ay b e c an cel le d or he ld i n tr ea sur y. In con ne c ti on w it h th e s ale of S mi th s Me dic al to I CU M ed ic al , In c. ( s e e note 2 7 fo r det ai l s ), and in t he l ig ht of ou r st r ong b al ance sh eet and c a sh -f lo w s, t he G r oup a nno unc ed t hat i t inten de d to r etur n an amo unt r epr e s ent ing 5 5 % of th e ini ti al c as h pr o cee ds ( eq uati ng to an ag gr eg ate pur ch as e p r ice o f up to $1 bn or £ 742m ) to sha re ho ld er s i n the f or m of a S ha re B u y ba ck P r og r am me . Al l sh ar e s pur ch as e d und er the P r og r am me w il l b e c anc ell ed . T his P r o gr a mme w as ini tiate d on 19 Nov emb er 2 021 as a nn oun ce d to the L on do n Sto ck E xc han ge o n 1 1 Nove mb er 2 0 21 an d fo ll ow in g sh ar eh ol der a pp ro v al a t the G en er al Meet ing h el d on 17 Nove mb er 2 0 21. A tota l num ber o f 3 4 , 2 81, 92 9 o r din ar y sha r es of 3 7 .5 pe nce e ac h we re r e pur ch as e d dur i ng th e pe r io d, f or a tot al c on sid er a tio n of £51 2,796 ,99 9 , of wh ich 129 ,0 32 sh ar e s w it h a v alu e of £1 ,972 ,6 0 2 w er e y et to s et tl e an d be c an cel le d. T h e se 3 4, 2 81, 92 9 s har e s r ep re s ente d 9 .4 6% of th e c all ed u p or din ar y sh ar e c ap it al a s at 31 July 2 02 2 . A f ur ther 3 , 3 6 1 ,59 9 ord ina r y shar e s ha v e be en r ep ur cha s ed d ur in g the per iod of 1 A ug us t 2 0 2 2 to 16 Septe mb er 2 0 2 2 . A ll r ep ur ch as ed s ha re s h av e be en c an cel le d w it h th e excep tio n of 128 ,91 9 shar e s that w er e yet to s et t le an d be c a nce ll ed a s at 16 Septe mbe r 2 0 2 2 . Sin ce 1 A ug us t 2 0 2 2 , the n umb er of s har e s in i s sue h as r e duc ed b y 3 , 3 6 1 , 712 as at 1 6 September 202 2 . Employ ment share scheme s Sha r es a cqu ir ed t hr ou gh C omp an y sh ar e s che me s an d pl a ns r a nk p ar i p a ss u w it h the s ha re s in i s su e and h av e no s pe ci al r ig ht s . Th e C omp an y op er ates an E mpl o ye e Be nef i t T ru st , w i th an in de pe nd ent tr uste e, to h old s ha re s p en din g emp lo ye e s be co min g enti tl ed to the m und er th e C omp an y’s sha re s ch em es a nd p l an s. O n 31 Jul y 2 0 2 2, t he t r us t he ld 6 18,6 62 ( F Y 2 0 21 : 3 26 , 3 6 4 ) o r dina r y sha re s i n the Co mp any. T he t r us t w ai v e d it s di v i de nd ent it lem ent o n it s h ol din g dur i ng th e y ear , and t he tr ust a bs t ain s fr o m vot ing a ny s har e s he ld at Gener al Meetings. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 5 25 Di v idends Th e fo ll ow i ng di v i den ds w er e d ec l ar ed a nd p ai d in th e pe r io d: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Or di na r y fi na l di v i de nd of 2 6 .0 p ( F Y 2 0 21: 24. 0 p) p ai d 19 Nov em be r 2 0 21 10 3 94 Or di na r y del aye d int er i m di v id en d of n il ( F Y 2 0 21: 1 1.0 p) p ai d 19 Nov em be r 2 0 21 – 44 Or di na r y inte r im d i v id en d of 12. 3 p (F Y 2 0 2 1 : 1 1 .7p) pa id 13 Ma y 2 0 2 2 47 47 15 0 18 5 In th e cur r e nt ye ar a tot al di v i de nd of 3 8. 3p h as b ee n pa id, c om pr i sin g a fi nal d i v id end o f 26. 0 p pa id in r e sp ec t o f F Y 2 0 21 an d an inter im di v id end o f 1 2 . 3p p ai d in r es pe c t of F Y 2 0 2 2 . In t he pr ior ye ar a tot al d i v id end o f 4 6.7p wa s p aid , com pr i sin g a de l ay ed i nter im d i v id end o f 1 1 .0p and a f in al di v i de nd of 2 4 .0 p p aid i n re s pe c t of F Y 2 0 2 0 an d an inte r im di v i de nd of 1 1 .7p paid in r e sp ec t o f F Y 2 0 21. Th e f ina l di v id en d for t he y ea r end ed 31 J uly 2 0 2 2 of 2 7 .3 p pe r sh ar e w as r e com me nde d b y the B o ar d on 2 2 S e ptem be r 2 0 2 2 and w i ll b e p aid to sha re ho ld er s o n 18 Nove mb er 2 0 2 2 , sub je c t to ap pr ov al by th e sha r eho ld er s . T hi s di v id en d is p ay a bl e to all s har e ho ld er s o n the r e gis te r of mem be r s at 6. 0 0 pm o n 21 O c tob er 2 0 2 2 (t he r e cor d d ate). Wai ver of di v idends Th e fo ll ow i ng w ai v e d all d i v id end s p ay ab le in t he y ea r , and al l fu tu re d i v ide nd s , on th eir s har eh ol din gs i n the C om pa ny : – Numis No min ee s L im ite d ( Sm ith s In dus tr ies E mp lo ye e Sh ar e T ru s t ) 26 Reser ves Reta ine d ea r nin gs i ncl ud e the v a lue o f Smi th s Gr o up pl c sha re s h eld b y th e Sm it hs In dus t r ie s Em pl oy ee B en ef it T r us t . In th e y ear t he Co mp any i s su ed ni l (F Y 2 0 21: 80 0 ,6 0 6 ) sh ar es to t he T r us t , an d the T r us t p ur ch as ed 1,0 69 ,9 9 8 sha re s ( F Y 2 0 21 : 1, 126,970 sh ar e s) i n the m ar ket for a c ons id er a tio n of £1 6m ( F Y 2 0 21 : £1 6m ). At 31 Ju ly 2 0 2 2 , th e T ru s t hel d 6 1 8, 6 62 ( F Y 2 0 21 : 3 26, 3 6 4) o r din ar y sh ar e s. Other re ser ves compr ise the capi tal redemption r eser ve, rev aluation re ser ve and merger res er ve, which arose fr om share repur chase s, re v al uat ion s of pr o pe r t y, pl ant an d eq uip ment , an d me rg er a cco unti ng fo r bu sin es s c omb ina tio ns b efo re t he a dop tio n of IF R S , r es pe c ti v ely. Capi tal man agement Ca pi ta l emp lo ye d co mpr ise s tot al e qui t y a dju s ted fo r go od w i ll r e co gnis e d dir e c tly i n re s er v es , n et r etir e ment b en ef it-r el ate d as s et s a nd li abil i tie s , ne t li ti gati on p r ov i sio ns r el a tin g to no n- he adl in e ite ms an d ne t deb t. T h e ef f ic ie nc y o f the a ll oc at ion o f ca pi ta l to the d i v isi on s is mon ito re d th r oug h the r et ur n o n c api t al emp lo y ed ( R OCE ). Thi s r at io i s c alc ul ate d ov er a r ol l ing 12-mo nth p er i od an d is t he p er cent a ge th at he adl in e op er a tin g pr of it c om pr i se s of m ont hly a ve r a ge c ap it al em pl oy ed . In F Y 2 0 2 2 R O CE w as 14 .2 % ( F Y 2 0 21 : 13.2 %); se e no te 2 9 . Ca pi ta l st r uc t ur e is b as e d on th e Di re c tor s ’ ju dg eme nt of th e ba l anc e r equ ir ed to m aint ai n fl ex ibi li t y, w hil st ac hie v in g an ef fic ient c os t of capital . Th e F Y 2 0 2 2 r atio of ne t deb t to he adl in e EB I T DA of 0 . 3 (F Y 2 021 : 1 .6 ) is w i thi n the G r oup’s sta ted p ol ic y of 2. 0 or le s s o ve r the m ed ium ter m. Th e Gr o up’ s r ob us t ba l an ce sh eet a nd r e cor d of s t ro ng c a sh ge ne r at ion a re m or e th an a ble to f un d imm ed iate in ve s tm ent n ee ds a nd le ga c y obl ig ati on s. S e e no te 2 9 for t he d efi nit io n of he ad li ne E BI T DA a nd t he c alc ul at io n of thi s r at io. A s p ar t of it s c a pi ta l man ag eme nt, t he G r oup m aint ain s a s ol id in v es tm ent g r ad e cr e dit r atin g to ens ur e ac ce s s to the w i de s t po s sib le so ur ce s of f ina nci ng an d to op timi s e the r e su lti ng co s t of c api t al . A t 31 July 2 02 2 , the G r oup h ad a c r edi t r at in g of BBB + / B aa 2 (F Y 2 021 : BBB + / Ba a2 ) w i th S ta nd ar d & Po or ’s and Mo od y ’s re spe c ti v el y. Th e B oa rd h as a p r og re s si v e di v i den d po l ic y f or f ut ur e p ay - ou t s , w ith t he ai m of inc r ea sin g di v i den ds in l in e w it h th e lon g- ter m un de r ly in g gr ow th in e ar n ing s. I n se t tin g th e le ve l of di v id en d pa y me nt s , the B o ar d w il l ta ke into acc ount p r ev a il ing e co no mic c ond it ion s an d f utu r e inv e st me nt pl an s , alo ng w i th t he ob je c ti v e to mai nta in a min imum d i v id end c ov er of a t lea s t t w o t ime s . Hedge reser ve T he h ed ge r e s er v e on t he b al a nc e sh ee t re c or d s th e cum ul a ti v e ga in or l os s o n de s ig nate d h ed gi ng in s tr umen t s , an d com pr ise s: 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Net i nv e s tm ent h ed ge r e s er v e (n et o f £8 m of d ef er r e d ta x ( F Y 2 0 21: £8m ) (205) ( 23 0) Ca sh -f l ow h e dg e r es e r ve 3 2 (202) (2 28) Se e tr ans a c tio nal c ur r en c y e xp os ur e r is k man ag em ent di sc lo sur e s in n ote 19 for add iti on al de ta il s of c a sh -f lo w he dg es , a nd tr ansl ation al cur r e nc y e xp os ur e r i sk ma na gem ent di s clo sur e a l s o in no te 1 9 fo r ad dit ion al d eta il s o f net in ve s tm ent h ed ge s . Non- contr oll ing inter es t Th e Gr o up ha s r ec or de d no n- c ontr o ll in g inter e s t s of £ 2 2 m (F Y 2 0 21: £21m), of wh ich t he m os t si gni f ic ant b al a nce i s in Jo hn Cr ane Ja pa n Inc ., w hic h re pr e se nted £ 20 m ( F Y 2 0 21 : £ 2 0 m) of t he tot al n on - cont r ol li ng inte re s t s . Th e no n- c ontr o ll in g inter e s t in Jo hn Cr ane Ja pa n Inc . r ep r es ent s a 3 0 % intere s t . Jo hn Cr ane Jap an I nc . ge ner ated op er ating p r of it s of £ 5 m in th e per iod ( F Y 2 0 21 : £5 m ), and c a sh inf l ow s f r om o pe r at ing a c ti v i tie s of £ 5 m (F Y 2 021 : £6 m). I t pa id di v i de nds o f £1 m (F Y 2 0 21: £2m ) an d ta x of £1 m (F Y 2 0 21: £3m ). At 31 J uly 2 0 2 2 , th e com pa ny c ontr ibute d £ 57m (F Y 2 021 : £5 7m) of n et a ss et s to t he G ro up. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 6 27 Discon ti nued ope r atio ns and bus inesses held for sale Fol lo w in g th e Bo ar d d eci si on in J uly 2 0 21 to p ur s ue a s al e pr o ce s s, t he S mi ths M ed ic al b usi ne s s w as c l as s if ie d as a d is cont inu ed o pe r at ion and a b us ine s s he ld fo r s ale . On 8 S e ptem be r 2 0 21, the Gr oup a nno unc ed t hat i t ha d agr e ed t he s a le of S mit hs M ed ic al to I CU Me di ca l , Inc ., and t he ap pr o v al of S mi ths s ha re ho ld er s w a s r ec ei ve d at th e Ge ne r al M eet in g on 17 Nove mbe r 2 0 21. Th e s al e w as c omp lete d on 6 J anu ar y 2 0 2 2 an d the r e su lt s of t he di sc ont inu ed op er atio n and t he ef fec t of th e di sp os al o n the f in an cia l po sit io n of the G r oup w er e a s fol lo w s: Dis continued o per ations Th e f ina nc ial p er for m anc e of th e Smi th s Me dic a l bu sin es s in t he c ur r ent a nd p r io r ye ar s i s pr e se nted b el ow : Year e n de d 31 J u ly 2 0 22 Year e n de d 31 J ul y 2 0 2 1 Headline £m Non-headline (n ot e 3) £m To t a l £m Headline £m Non-headline (n o te 3 ) £m To t a l £m Revenue 356 – 356 8 49 – 8 49 Direct materials , labour , produc tion and distr ibution overheads (19 3 ) – (19 3 ) (3 85) – (385) Sell ing costs (4 6) – ( 4 6) ( 11 7 ) – ( 117 ) Administr ati ve expense s ( 51) ( 47 ) (98) ( 17 0 ) ( 79) ( 249 ) Oper ating costs (2 90) ( 47 ) ( 337 ) ( 67 2 ) (79) ( 7 51) Operating profit 66 ( 47 ) 19 17 7 ( 7 9) 98 Finance cos ts (1) (22) ( 2 3) ( 1) 50 49 Gain on sale of discontinued oper ation – 1, 0 3 6 1, 0 3 6 – – – T axation ( 16 ) 6 ( 10 ) (42) 23 ( 19 ) Profit from discontinued operation s 49 973 1, 0 2 2 13 4 (6) 12 8 Inter e s t ca pi ta li se d a s pa r t of the co s t s of Sm ith s Me di ca l de ve lo pme nt pr o jec t s a mo unte d to £1 m (F Y 2 0 21 : £ 3m ). £ nil ( F Y 2 0 21 : £1 m) of t a x re li ef ha s be en r e co gni se d as c ur r ent t a x r el ief in t he p er i od . T he ga in on s a le of t he Sm it hs M edi c al di sc onti nue d op er ation s qu al if ie d fo r the Sub s ta ntia l Sh ar eh old ing E xempt ion a nd c ons e que ntl y w as n ot sub je c t to cor por a tio n ta x . Addi tional se gmental infor matio n for disco ntinued o per ations Hea dl in e op er a tin g pr of it f or di sc ont inu ed o per atio ns w a s s tate d af ter cha rg in g sha re - ba s ed p ay m ent s £ 2 m ( F Y 2 0 21 : £1 m). Rev enu e for t he S mi ths M ed ic al di s cont inu ed o pe r at ion i s ana ly s ed b y th e fol lo w in g pr o duc t l in e s: Inf usi on S y ste ms £1 1 6m ( F Y 2 0 21 : £3 03 m ), Vas cu l ar A cce s s £13 4m ( F Y 2 0 21 : £ 2 7 2m ) and V it al C ar e / O the r £106m ( F Y 2 0 21 : £ 2 7 4m ). Rev enu e by d e st ina tio n for t he S mi ths M ed ic al fo r di sc onti nue d op er ation s is a nal y se d as f ol lo w s: A me r ic a s £1 7 6m ( F Y 2 0 21 : £4 56 m), Eur o pe , Mid dle E a s t & Af r i c a £91m (F Y 2 0 21 : £ 2 2 8 m), an d A sia- P aci f ic £ 8 9m ( F Y 2 0 21 : £1 6 5m ). Rev en ue b y de s tin ati on ha s b een s e lec te d a s the b a sis for at tri bu tin g r ev enu e to ge og r ap hi ca l ar ea s as t his i s th e at tr ibut ion u se d b y man ag em ent to r ev i ew t he p er for m an ce of th e bu sin es s . Rev enu e by d e st ina tio n at tr ibut ab le to th e Uni ted K ingd om w a s £1 2m ( F Y 2 0 21 : £ 26 m). Re ve nue e ar n ed i n th e Uni ted St ate s of A m er i c a w as mater ial tota ll in g £1 6 1 m (F Y 2 0 21 : £41 1m). Ca sh-f lo w f rom disco ntinued o per ations Cash-flow s from discontinued operations included in the consolidated cash-flow statement are as follow s: 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 repres ented £m Net cash inflow from oper ating acti vitie s 47 16 3 Net c a sh -f lo w u s ed i n inv e s ti ng a c ti v i ti e s ( 17 ) ( 67 ) Net c a sh -f lo w u s ed i n fi na nc in g ac t i v it ie s (14 ) (6 8) Ne t in cr ea s e in c a s h an d c as h e qu i va l en t s 16 28 Op en in g c as h an d ca sh e q ui v al en t s in di sp os al gr oup 48 20 Foreign exchange movements (7) – C as h an d c a sh e qu i v al en t s di s po s ed o f (57) – C as h an d c a sh e qu i v al en t s at c l os e of p e r io d – 48 * £15m o f in tr a- gr o up r o y a lt y cha r g e s pa i d by d i sc o nt in ue d o pe r a ti o ns t o co nt i nu in g op e r a ti on s i n F Y2 0 2 1, th at w e r e pr e v i ou s ly n et t ed d o w n , ha v e b ee n r ep r e s en te d on a g r o s s up b a si s w i th in ne t c as h in f lo w f r o m op e r at in g a c ti v i t ie s a n d ne t c as h -f l ow u s e d in f i na n ci ng a c t i v it i es , a s t hi s r ep r e s en t s a co m pl et e v ie w o f th e op e r a ti ng c a s h f lo w s at tr ib u t ab le t o Sm i th s M ed i c al . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 7 Effec t of disposal on t he financi al posit ion of th e Group Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Intangible as set s 69 5 Pr o pe r t y, pl an t an d eq uip me nt 17 0 Ri ght of u s e as s et s 64 Inventories 16 6 Def er r e d t ax a s s et s 20 Cur rent t a x r ec ei v a bl e 3 T r ad e an d ot he r re ce i v ab le s 11 0 Ca sh a nd c a sh e qu i v al ent s 57 Financial der iv ative s 4 Lease liabil ities ( 41 ) T r ad e an d ot he r pa y ab le s (167 ) Cur rent t a x p ay a bl e (13 ) Deferr ed tax liabilitie s (56) Retirement benefit obligations (5 ) Prov isions (39) Net assets disposed of 96 8 Consider ation received: Ca sh a nd c a sh e qu i v al ent s 1, 4 2 1 T ransac tion costs ( 3 1) Ca sh a nd c a sh e qu i v al ent s , n et of t r a ns a c ti on c os t s 1 ,390 IC U Me di c al , In c sh ar e s 426 Deferr ed contingent consideration – contingent on ICU Medical, Inc future shar e price: – Fair v alue a t date o f di sp os a l 30 – Mo ve me nt in f a ir v al ue t o 31 Jul y 2 0 2 2 ( 11 ) 19 Separ ation expenses – arising from contractual and commercial obligations due to the separation recognised in year (32) Gain on sale before reclassif ication of foreign currenc y translation reser ve 835 E xch an g e mo ve me nt s r e c y cl ed to t he i nc om e s ta tem ent 196 Ca sh -f l ow h e dg e r es e r ve r e c y cl ed to t he i nc om e st at em ent 5 Gain on sale of discontinued oper ation 1,0 3 6 Net c a sh i nf lo w ar i si ng o n di sp os a l: Co ns id er atio n r ec ei v ed i n c as h an d c as h eq ui v a le nt s 1, 4 2 1 T ransac tion costs and separ ation expenses paid in perio d (3 3) Le s s c a sh an d c a sh e qui v alent s d is po s ed o f (57) 1, 3 31 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 8 28 C ash- flow Ca sh-f lo w f rom oper ating ac ti v i ties Year e n de d 31 J u ly 2 0 22 Ye ar e n de d 31 J u ly 2 0 2 1 r ep r e se nt e d Headline £m Non-headline £m To t a l £m Headline £m Non-headline £m To t a l £m Oper ating profit – continuing oper ations 417 ( 300) 117 372 ( 4 6) 3 26 – discontin ued oper ations 66 ( 47 ) 19 17 7 ( 79) 98 Amor tisation of intangible ass ets 10 51 61 14 53 67 Impair ment of intangible asset s – 4 4 1 52 53 Impair ment of tangible ass ets – – – – 6 6 Impairment of investment within discontinued oper ations – 14 14 – – – De pr e ci ati on o f pr op e r t y, pl ant a nd e qu ip me nt 38 – 38 39 1 40 De pr e ci ati on o f r ig ht of u se a s s et s 30 – 30 32 – 32 (G ain ) / l os s o n dis p os al o f pr o pe r t y, pl an t an d eq uip me nt (2) – (2) 1 – 1 Share-ba sed payme nt expense 13 – 13 13 – 13 Retirement benefits * 5 207 2 12 6 ( 2 3) ( 17 ) Distr ibution fr om trading inve stment – – – 5 – 5 Rec ycl in g of c a sh -f lo w h ed g e re s er v e – – – (5 ) – (5) Decrease/(increase) in inven tories (17 3 ) 4 (16 9 ) 62 4 66 Decrease/(increase) in trade and other receivables (87) 4 (83) (14 ) 4 (10 ) Inc r ea s e / (d ec r ea s e) i n tr a d e an d oth er p a y ab le s 131 (2) 12 9 46 ( 10 ) 36 Increase /(decr ease) in provisions (1) 22 21 (4) ( 26) (30) Cash gener ated from oper ations 4 47 ( 4 3) 404 74 5 (6 4 ) 6 81 In te rest pa id ( 51) – ( 51) ( 40) – ( 40) In te rest rec eived 13 1 14 2 1 3 Ta x p a i d (88) – (88) (10 9 ) – ( 10 9 ) Net cash inflow from operating activities 321 (42) 279 598 (63 ) 535 – continuing oper ations 2 74 (42 ) 232 430 (5 8) 372 – discontinued operations 47 – 47 16 8 (5) 16 3 * £15 m of i nt r a - gr o up r o y a lt y ch ar g e s p ai d by d i s co nt in ue d o p er ati on s to c o nt in ui ng o p er ati on s i n F Y2 0 2 1 h av e b e en r e pr e s en te d a s c as h in f lo w s f r o m di s co nt in u ed o p er ati on s , a s th i s re p r es e nt s a c o mp le te v i e w of t he o p er ati ng c a s h f lo w s at tr ib u t ab le t o Sm i th s M ed i c al . * * T h e r et ir e m en t be n ef i t s no n - he a dl i ne o p er ati ng a c ti vi ti e s pr inc ip a ll y r el ate to e mp l oy e r co nt r i bu t io n s to l eg a c y d ef i ne d b en ef i t a nd p o s t-r e ti r em e nt h ea lt h c ar e p l an s . Headl ine c a sh me asur es – continuing oper ations Th e Gr o up me as ur e of h ea dl ine o pe r ati ng c a sh exc lud e s inter e s t and t a x , and i nc lud es c a pi ta l ex pe ndi tu re s upp or tin g or g ani c gr ow th . Th e Gr o up us e s op er ating c a sh -fl o w for t he c alc ul at io n of c ash c on ve r si on an d fr e e c as h-f l ow f or ma na gem ent of c a pit a l pur p os e s . Se e n ote 2 9 for a dd it ion al d eta il s . Th e t abl e be lo w r ec onc ile s th e Gr o up’ s net c a sh -f lo w fr o m op er at in g ac ti v i ti es to h ea dl ine o pe r at ing c a sh -f lo w an d fr e e c ash -f lo w: Year e n de d 31 J u ly 2 0 22 Year e n de d 31 J ul y 2 0 2 1 Headline £m Non-headline £m To t a l £m Headline £m Non-headline £m To t a l £m Net cash inflow from operating activities 2 74 (42) 232 43 0 (5 8) 372 Include: E x pe nd it ur e o n c api t al i se d de v el op me nt , oth er i nt an gib le a s s et s an d pr op e r t y, pl ant a nd e qu ip me nt ( 7 1) – ( 7 1) (62) – (62 ) Repayment of lease liabilitie s (34) – (34 ) (33) – ( 3 3) Disposal s of proper ty, plant and equipme nt 3 – 3 – – – Inves tment in financial ass ets rel ating to operating acti vitie s and pe ns io ns f in an ci ng o ut st an din g at t he b al a nc e sh ee t date – – – 7 – 7 Free cash -flow 13 0 284 E xcl ud e: Inves tment in financial ass ets rel ating to operating acti vitie s and pe ns io ns f in an ci ng o ut st an din g at t he b al a nc e sh ee t date – – – (7 ) – (7 ) Repayment of lease liabilitie s 3 4 – 3 4 33 – 3 3 In te rest pa id 4 6 – 4 6 24 – 24 In te rest rec eived (13 ) – ( 13 ) (2) – (2) Ta x p a i d 79 – 79 96 – 96 Operating cash -flow 3 18 (42) 2 76 4 86 (5 8) 428 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 15 9 Headline ca sh conver sion Headline oper ating cash conversion for con tinuing operations is calculated as follow s: Year e n de d 31 J u ly 2 0 22 Year en d e d 31 Ju l y 2 0 21 A s re p or te d £m Restruc turin g cost s £m Pro-forma excluding restr uctur ing cost s £m As reported £m Restr uctur ing costs £m Pro-fo rma excluding res truc tur ing costs £m Headl ine oper ating prof it 41 7 – 417 372 21 39 3 Headl ine oper ating cash -flo w 318 14 332 486 24 51 0 Headline operating cash conversion 76% 80% 13 0 % 12 9 % Rec oncili ation o f free cash-flow to net move ment i n cash and cash equivalents: Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Free cash -flow 13 0 284 Inv e s tm ent i n f ina nc ia l as s et s a nd a cq ui si tio n of b us in es s e s – (8 3) Disposal of businesses and discontinued oper ations 1, 3 3 1 – O th er n et c as h- fl o w s us e d in f in an ci ng a c ti v i ti es ( n ote: r e pa y me nt of l ea s e l iab il i ti es i s in cl ud ed i n fr e e c a sh -f lo w ) (9 37 ) ( 13 8 ) Net d ec r ea s e in c a sh a nd c a sh e qu i v al ent s f or di s co nti nu ed o pe r a tio n s 16 28 Ne t in cr ea s e /(d e cr ea s e) i n c as h an d c a sh e qu i v al en t s 540 91 29 A lt ernative per formance m easures and k ey pe r formanc e ind icat ors Th e Gr o up us e s s ev er al alter n ati v e pe r for ma nce m ea su re s ( ‘ A P Ms’) i n or de r to pr o v ide a dd it ion al u sef ul i nfor matio n on un de r ly in g tr en ds an d th e per fo r man ce an d p osi ti on of th e Gr o up. A P M s ar e no n- G A A P a nd no t def in ed b y IF R S; th er efo re , the y ma y no t be di r ec tl y com pa r ab le w i th oth er c omp an ie s’ AP M s and s ho uld n ot b e con si der e d a sub s ti tu te for IF R S m ea sur e s . Th e Gr o up us e s th es e me a sur e s , w hic h ar e co mmo n ac ro s s the i nd us tr y, for pl a nni ng an d r ep or ting p ur p os e s , to enh anc e th e com pa r ab il it y of info r mat io n bet we en r ep or tin g pe r io ds an d bu sin e ss u ni t s. T h e me as ur e s ar e al s o u se d in di sc us s ion s w it h th e inv e st me nt ana ly s t com muni t y and b y cr ed it r ating a gen ci es . We hav e id ent if ie d an d def in ed t he fo ll ow i ng ke y me asu r es w h ich a re u s ed w i thi n the b us ine s s b y man ag eme nt to as s e s s the p er for mance o f the Group ’ s businesses: A PM t er m D efinition and purpose Capit al employed Ca pi t al e mp lo ye d i s a no n- s ta tu tor y m ea su r e of in ve s te d r e so ur ce s . I t co mp r is e s s t atu to r y net a s se t s an d is a dj us te d as fol lo ws: - to ad d go o d w il l r ec og ni se d di r ec t ly i n re s er v e s in r e sp e c t of su bs id iar ies a cq uir e d b efo r e 1 Au gu s t 199 8; - to el im in ate th e Gr o up's in ve s t me nt in I CU M ed ic a l , Inc e qu it y and d ef er r e d co ns id er atio n co nti ng ent o n th e f ut ur e sha r e pr i ce p er fo r ma nc e of I CU M ed ic al , I nc; a nd - to el im in ate p os t-r et ir em en t be nef i t as s et s a nd l i ab il it ie s an d n on -h ea dl i ne l it ig at io n pr o v is io ns r e l ate d to Jo hn C r an e, Inc . a nd T i tef le x C or p o r at io n, b ot h net o f def er r e d t ax , a nd n et d ebt . It i s us e d to mo ni tor c a pi t al al l oc at io n w i thi n th e Gr o up. S e e b el ow f or a r e co nc il ia tio n f r om n et as s et s to cap i ta l employed. Capit al expenditur e Co mp r is e s a ddi t io ns to p r op er t y, pl a nt an d e qui pm ent , c a pi ta l is e d de ve lo pm en t and o th er i nta ng ib le a s se t s , exc lu din g as s et s a cq uir e d th r ou gh b usi ne s s c om bin at io ns , s ee n ote 1 f or a n an aly s is o f c api t al e xp e ndi t ur e. T h is m ea s ur e qua nti f ie s t he l ev el o f c ap it al i nv e s tm ent i nto on go in g op er atio n s. Div isional headline oper ating profit ('DHOP') DHOP comprises div isional earnings before cen tr al costs, finance costs and taxation. DHOP is used to monit or divisional pe r for m anc e. A r e co nc il ia ti on of D HO P to op e r at in g pr of i t is s ho w n in n ote 1. Free cash- flow Fr e e c a sh -f lo w i s ca lc ul a ted b y a dju s ti ng t he n et c as h inf l ow f r o m op er atin g ac t i v it ie s to i nc lu de c ap it a l ex pe nd it ur e , the r e p ay m ent o f le as e l ia bi li ti e s , the p r o ce ed s f ro m th e di sp os a l of p r op er t y, pl a nt an d e qui pm ent a nd t he i nv e s tm ent in f in an cia l as s et s r e l at ing t o op er atin g ac t i v it ie s an d p en si on s f in anc in g ou t s t an din g at t he b al a nc e sh ee t dat e. T he m ea su r e sh ow s c a sh g en er ated b y th e Gr o up b efo r e di sc r eti on ar y e xp en di tu r e on a cq uis it io ns a nd r e tur ns to sha r eh ol de r s . A r ec on ci l iat io n of f r ee c a sh -f lo w i s sh ow n i n no te 2 8 . Gross debt Gro s s de bt i s tot al b or ro w in gs ( b an k , bo nd s an d le as e l ia bi li ti e s). I t i s us e d to pr o v id e an i nd ic at io n of th e Gr o up's o ve r a ll le ve l of in d ebte dn e s s . S ee n ote 18 for a n an al y si s of gr o s s de bt . Headl ine T h e Gr o up h as d ef in ed a ' he a dl in e' me as ur e of p er fo r ma nc e tha t exc lu de s m ater ial no n -r e cu r r in g it em s or i tem s con s id er ed n o n- o pe r at io na l /t r a din g in n at ur e. I te ms e xcl ud ed f r om h e ad li ne a r e re fer re d to as n on - he ad l ine i te ms . T hi s me as ur e i s us ed b y t he G r oup t o me as ur e an d m on ito r pe r for m an ce e xcl udi ng m ate r ia l no n- r e cur ri ng i tem s or i te ms con s id er ed n o n- o pe r at io na l . S e e not e 3 for a n an al ys is o f no n- h ea dl in e it em s. Headl ine EBIT DA EBI T DA is a w i de ly u se d pr o f it m ea su r e, n ot de fi ne d b y IF R S , be in g ea r ni ng s be fo re i nte re s t , t ax at io n, d ep r ec iat io n an d am or tis a ti on . Fo ll o w in g th e com pl et io n of th e s al e of S mi th s Me di c al , h ea dl in e EB I T D A for F Y 2 02 2 h as b e en pr e s en ted on a co nt inu in g op er atio ns b a si s. A r e co nc il ia ti on of h e ad li ne o pe r at in g pr o fi t to h ea dl in e E BI T D A is s ho w n in t he n ote be lo w. Headl ine EBIT DA befor e restructu ring costs He ad li ne E BI T D A , as def i ne d ab o ve , is a dju s te d to exc lu de r e s tr u c t ur in g co s t s f r om t he G ro up’s st r ate gi c r e st r u c tu r in g pr o gr a mm e w hi ch c omm en ce d in F Y 2 0 2 0. Fo ll ow ing th e co mp let io n of t he s a le of S mi th s Me di c al , h ea dl i ne E BI T D A bef or e r e s tr u c tu r in g co s t s fo r F Y 2 0 2 2 ha s b ee n pr e s ente d o n a co nti nui ng o pe r a tio n s ba si s . A r ec on cil i ati on o f he ad l ine EB I T DA to h e ad li ne E BI T D A b efo r e r es t r uc tur in g co s t s an d w r i te - do w ns i s sh o w n in t he n ote b el ow. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 0 Headl ine oper ating prof it excluding res tr uc tur ing He ad li ne o pe r a tin g pr o f it i s ad jus te d fo r s tr ateg ic r e s tr u c tu r in g pr o gr amme c os t s a nd w r ite- d o w ns . S e e no te 2 fo r a re c onc il i ati on . T hi s me as ur e of p r of i ta bi li t y is us e d by t he G r ou p to me as ur e a nd m on ito r p er for m an ce . Net d eb t Net d ebt i s tot a l bo r r o w ing s ( b ank , b on d s an d le as e l ia bil i ti e s) l e ss c a sh b a l an ce s an d de r i v at i v es u s ed to m an a ge th e inte re s t r ate r is k an d cur ren c y p r of il e of th e de bt . T hi s me a su re i s us e d to p ro v i de a n in dic a ti on of t he G r ou p's ov er all le v el of in de bte dn e ss a nd i s w i del y us e d b y inv e s tor s and c re d it r atin g ag en ci es . S e e no te 18 for an a na ly s is of n et c a sh / ( de bt ). Non-he adline T he G r ou p ha s def i ne d a 'h e adl i ne' me a su re o f pe r for m an ce th at e xcl ud e s mate r i al no n -r e cu r r in g i tem s or i tem s con s id er ed n o n- o pe r at io na l /t r a din g in n at ur e. I te ms e xcl ud ed f r om h e ad li ne a r e re fer re d to as n on - he ad l ine i te ms . T hi s is u se d b y th e Gr o up to m ea su r e an d mo ni tor m ate r ia l no n- r ec ur ri ng i tem s or i te ms c on si de re d n on - op er atio na l . S e e note 3 f or a n an aly s is o f no n- h ea dl in e it em s. Oper ating cash-fl ow Co mp r is e s f r ee c a sh -f lo w a nd e xcl ud e s c as h-f l o w s re l at in g to th e r ep ay m en t of le a se l i abi l it ie s , inte r e st a nd t a xa ti on . T he m ea su r e sh ow s h o w c as h is g en er ated f r om o pe r at io ns i n th e Gr o up . A re c onc il i ati on of o p er a ti ng c a sh -f lo w i s sh ow n i n no te 2 8 . Oper ating profit Op er atin g pr o fi t is e a r nin g s bef or e f in an ce c os t s a nd t a x . A re c on cil i ati on o f op er atin g pr of i t to pr o fi t b efo r e ta x i s sh ow n on the i nc om e s ta tem ent o n p ag e 10 3. T h is c om mo n me as ur e i s us e d by t he G r ou p to me as ur e a nd m on ito r p er for m an ce . Retu r n on c a pi t al e mpl o ye d ('R OCE ') Sm it hs R O CE i s c alc ul a ted o v er a r o ll in g 12-mo nth p e r io d an d is t he p er c ent a ge t hat h ea dl i ne o pe r at in g pr of i t re pr e s ent s of the m ont hl y av er age c a pi t al em pl o ye d on a r o ll i ng 12-m ont h ba si s . T hi s me as ur e of r e tur n on inv e s te d re s o ur ce s is u s ed to m o ni tor p er for man ce an d c ap it a l al lo c ati on w i th in t he G r oup . S e e be lo w fo r Gr o up R O CE an d n ote 1 for divisional headline operating profit and divisional capital employed. Th e key p er for mance i ndi c ator s ('K P I s') us e d by m an age me nt to as s e ss t he p er for m anc e of th e Gr ou p’ s bu sin es s e s ar e as f ol lo w s: K PI t er m Def inition and purpose Div idend cover – headline D i v id en d co v er i s th e r at io o f he ad l ine e ar ning s p er sh ar e ( s e e no te 5 ) to di v i de nd p e r sha r e ( s ee n ote 2 5 ). T h is co mm on ly us ed m e as ur e in di c ate s th e nu mb er of t im e s th e di v id en d in a f i na nci al y e ar i s co ve r ed b y h ea dl in e ea r ni ng s . E ar n ing s p er sh ar e ( ' EP S' ) grow th EP S gro w th is t he g r ow th in h e adl i ne b a sic E P S (s ee n ote 5 ), o n a r ep or te d ba si s . EP S gr ow th is u s ed t o me as ur e an d monitor perfor mance. Fr ee c a sh -f lo w ( a s a % of oper ating profit ) T his m e as ur e is d ef in e d as f r ee c a sh -f l ow d i v id e d by h ea dl i ne o pe r at in g pr of i t a ve r a ge d o ve r a th re e - ye ar p er fo r ma nc e pe r io d . T his c a sh g en er atio n me a sur e i s us e d b y the G r ou p as a p er fo r ma nc e me as ur e f or r em un er atio n pu r po s e s. Greenhouse Gas Emissions (GHG) reduc tion GH G re du c ti on i s c al cu l ate d as t he p er c ent a ge c han g e in n or m al is e d S co pe 1 & 2 G HG e mi s si on s . No r ma li s ed i s ca lc ul a ted a s t C O 2 e pe r £m il li on o f r ev en ue . T hi s me a sur e i s us e d to mo ni to r en v ir on me nt al p er for manc e. Gross V italit y Gro s s V i t al it y is c al cu l ate d as t he p e rc ent a ge o f re v en ue d er i v e d fr o m ne w p r od uc t s a nd s er v i ce s l au nc he d in t he l as t f i v e ye ar s. T hi s me a sur e i s us e d to mo ni to r th e ef f ec t i ve ne s s of t he G r ou p's ne w pr o du c t de v el op me nt an d commercialis ation. My Sa y engagement score The o v er all s co r e in o ur M y S a y em pl oy e e en ga ge me nt su r ve y. Th e b i- ann ua l sur v e y is un d er ta ken G ro up - w i de . T his me as ur e i s us ed b y t he G r oup t o mo ni tor e mp lo y ee e ng ag em ent . Oper ating cash conver sion Co mp r is e s h ea dl in e op er atin g c as h -f lo w, exc lu di ng r e s tr u c tu r in g co s t s , as a p er c ent a ge of h e adl i ne o pe r at in g pr o fi t . T his m e as ur e is u s ed t o sh ow t he p r op or ti on of h e ad li ne o pe r a tin g pr o fi t c on ve r ted int o ca sh -f l ow f r o m op er atio ns bef or e in v e st me nt , f ina nc e co s t s , no n- he a dl in e ite ms a nd t a x ati on . T he c a lc ul at io n is s ho w n i n note 2 8. Oper ating pr ofit mar gin Ope r a tin g pr o fi t m ar gi n is c a lc ul ate d b y di v i din g h ea dl in e op er atin g pr o fi t b y r ev e nue . T hi s me a sur e i s us e d to m oni to r the G r ou p’s abil it y to dr i v e pr o fi t ab le g ro w th an d co ntr o l co s t s . Organic gro w th Or gan ic g r ow th a dju s t s th e mo v em ent i n he ad l ine p e r f or manc e to exc lu de t he i mp ac t o f fo re ig n exc ha ng e, r e s tr u c tu r in g co st s a nd a cq ui si ti on s . Or g ani c gr o w th is u se d b y th e Gr o up to a id c omp a r ab il i t y w h en m on it or i ng p er for manc e. Organic rev enue grow th (remuner ation ) Organic rev enue grow th (r emuner ation) is compounded annualised gro w th in revenue calcul ated on an under lying ba si s . T he m ea su r e us e d for r e mu ne r at io n di f fe r s f r om o r ga ni c re v en ue g ro w th in t hat i t i s c alc ul a ted o n a co mp ou nd e d ann ua li s ed b a si s. T h is m e as ur e ha s hi s tor ica ll y be e n us e d by t he G r ou p for a l ign in g r emu ne r a tio n w i th b usi ne s s per for mance. Perc entag e of sen ior leader ship positions taken by f em ale s Per c ent a ge of s e ni or le a de r sh ip p os it io ns t a ken b y fe mal e s is c a lc ul ate d a s th e pe r cen ta ge o f se ni or l ea d er s hip r o le s (G14+ g r oup ) he l d by f em ale s . T hi s m ea su re i s us e d b y th e Gr o up to m on ito r di v er sit y per for manc e. R&D c as h co s t s as a % of s al e s T his m e as ur e is d ef in e d as t he c a sh c os t of r e s ea r ch an d d ev el op me nt a c ti v i ti es a s a p er ce nt ag e of r e ve nu e. I nn ov a tio n is an i mp or t ant dr iv er o f su st a ina bl e gr o w th for t he G r ou p an d thi s m ea su re s o ur i nv e st me nt in r e s e ar ch a nd development to drive innov ation. Rat io o f c api t al e xp en di t ur e to depreciation and amor tisation Rep re s e nt s th e am ou nt of c ap i ta l ex p en di tur e a s a pr o po r tio n of th e de pr e ci at io n an d am or tis a ti on c har g e fo r th e pe r i od . T his m e as ur e sh o w s th e le v el of r e inv e s tm ent i nto o pe r at io ns . Recordable Inciden t Rate (RIR ) Rec or d ab le In ci de nt R ate is c a lc ul at ed a s th e nu mb er of r e co r da bl e in ci de nt s – w he r e an in ci de nt r e qui r es m e dic a l at te nti on b e yo nd f ir st ai d – p er 10 0 co ll e ag ue s , pe r y ea r ac ro s s S mi th s. T h is m ea s ur e is u s ed b y th e Gr o up to m on it or health and safet y per for mance. NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 161 Capital employed Ca pi ta l emp lo ye d is a n on -s t atu tor y me as ur e of in ve s te d re s ou rc es . I t com pr i se s s t atu tor y ne t as s et s ad jus te d to ad d go od w il l r ec og nis e d dir ec t ly in r e s er ve s in r e sp e c t of sub si diar ies a cqu ir ed b efo re 1 A ug us t 199 8 of £ 478 m ( F Y 2 0 21 : £7 8 7m), to el im inate t he G ro up's inv e st me nt in IC U Me dic al , I nc e qui t y a nd d efer r e d co nsi de r at ion c onti ng ent on t he f u tur e sh ar e pr ice pe r for ma nce of I CU M ed ic al , In c and to e l imin ate po st-r et ir eme nt be nef i t as s et s an d li abi li ti es a nd n on -h ea dl ine l i tig ati on pr o v is ion s r el ate d to Jo hn Cr ane, In c. a nd T i tef lex C o r po r at ion , b oth net of r el ated ta x , an d net d ebt . Notes 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Net assets 2 ,7 2 1 2,4 23 Adjus t for : Goodwill recognised directly in reser ves 47 8 787 Retirement benefit assets and obligations 8 (19 4 ) ( 413 ) T ax r el ated to r et ir em en t be nef i t as s et s a nd o bl i gat io n s 57 10 8 John Crane, Inc. litigation prov isions and related tax 23 17 2 15 8 Titeflex Corpor ation litigation provisions and related tax 23 40 36 Inv e s tm ent i n IC U Me di c al , In c e qui t y 14 (364) – Deferr ed contingent consideration 14 (19 ) – Net d eb t (F Y 2 0 2 1 : inc lu de s £ 4 m of n et c a sh in d is co nt inu e d op er atio ns ) 18 15 0 1, 01 8 Capital employed 3 , 0 41 4 ,11 7 Return on capit al employed ('ROCE') Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 repres ented £m Headline operating profit for previous 1 2 months – continui ng operations 417 372 Restr uct uring cost s – 21 Headline oper ating profi t before restr uc tur ing costs – continuing operations 417 393 Av er age c ap i ta l em pl oy e d – co nti nui ng o pe r a tio n s (exc lu di ng i nv e st me nt in I C U Me dic a l , In c eq ui t y ) 1 2 ,94 0 2,8 30 ROCE 14 . 2 % 13 .9 % * F ol l o w in g th e c om p le ti on o f t he s a le o f S mi th s M e di c al , R O C E fo r 31 J ul y 2 0 21 h a s be e n r ep r e s en te d to e xc lu d e re s t r u c tu r i ng c os t s a n d di s co nt in u ed o p er ati on s f r o m he a dl i ne o p er ati ng pr o fi t a nd a v e r a ge c a pi t al e m pl o y ed . T h e 31 J ul y 2 0 21 f i gu r e s ha v e b ee n r ep r e s en te d to a id t h e pe r i od o n p er iod c o mp a r ab i li t y for t hi s f or w ar d - lo o ki n g me a su r e . Credi t metr i c s Smi th s Gr ou p mo nito r s th e r at io of n et de bt to he ad li ne E BI T D A as p ar t of it s m ana ge men t of cr ed it r ating s; se e no te 26 fo r det ail s. T hi s r at io is pr e s ente d for t he w h ole G r oup, i ncl udi ng di sc ont inu ed o pe r ati on s , and i s c alc ul ate d as f ol lo w s: Headline earnings before interest, tax , depreciation and amor tisation (headline EBITDA ) Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 Continuing operations £m Y ear ended 31 Ju l y 2 0 21 To t a l operations £m Headline operating profit 417 372 Headline operating profit of disconti nued operations 27 – 17 7 E xcl ud e: – dep r e cia ti on of p r op er t y, pl ant an d eq uip me nt 12 38 40 – dep r e cia ti on of r ight of u s e as s et s 13 30 32 – amor tisation and impairm ent of developm ent costs 10 3 7 – am or tis a ti on of s of t w a re , p aten t s an d inte ll ec t ua l pr o pe r t y 10 7 7 Headline EBITDA 49 5 635 Ad d b ac k: r e s tr uct ur ing co s t s an d w r i te -d o w ns ( F Y 2 0 21 c om p ar a ti v e in cl ud e s £9 m in di s co nti nu ed o pe r a tio n s) 2 – 30 He ad l in e EBI T D A be fo r e re s tr u c t ur i ng c os t s a nd w r i te - d ow n s 495 665 Ratio of net debt to headline EBITDA – total Group including d iscontinued operations Notes Ye a r e nd e d 31 Ju ly 2 0 2 2 Continuing operations £m Y ear ended 31 Ju l y 2 0 21 To t a l operations £m Headl ine EBIT DA 495 635 Net d eb t (F Y 2 0 2 1 co mp ar ati ve i nc lu de s £ 4 m of n et c as h in d is co nti nu ed o p er a ti on s) 18 15 0 1, 01 8 Ratio of net debt to headline EBITDA 0.3 1. 6 * T h e f ig ur e s f or t h e co mp a r a ti v e p er i o d in t h e cr e di t m et r i c s t ab le s a b ov e i nc l ud e di s co nt i nu e d op e r at i on s . NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 2 30 Post Bal anc e Sheet E vents Det ail s of the p r opo s ed f in al di v i den d an no unce d si nce t he en d of th e r ep or tin g per iod ar e gi v en i n note 2 5. 31 Audit exemption taken for subsi diar ies Th e fo ll ow i ng su bsi dia r ie s ar e e xempt f r om t he r e quir e ment s o f the C om p anie s A c t 2 0 0 6 r e l atin g to th e aud it of i ndi v i dua l acc ount s by v ir tue of S ec t ion 47 9A of that A c t for F Y 2 0 2 2 . Company name Company number C ompany name Company number EI S Gr o up P lc 61 4 0 7 Smiths Detectio n Investment s Limited 514 6 6 4 4 Fl ex ibox In ter nat ion al L imi ted 3 94 6 8 8 Smi ths Finance Limi ted 78880 63 F lex-T ek Gr oup L imite d 1 1 54540 5 Smi th s Gr o up F i na nc e EU L i mi ted 1 04405 73 Gr a s eb y L im it ed 8 94 6 3 8 Sm it h s Gr ou p F in an ce U S L im ite d 1 0440608 SI Proper ties Limited 16 0 8 8 1 Sm it h s Gr ou p In no v at io n L imi te d 1 0953689 SITI 1 Lim it ed 4257042 Smi ths Interconnect Group Limited 6 6 414 0 3 Sm it hs D ete c ti on G r ou p L imi te d 513 8 14 0 Smiths Pe nsions Limit ed 2 1 97 444 NOTES TO TH E ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 3 Una udit ed Grou p financ ial rec ord 2 0 1 8- 2 02 2 Th e he ad li ne in co me s ta teme nt met r ic s s ho w n be lo w fo r the y ea r en de d 31 July 2 018 ha s be en r ep r es ente d to sh ow t he r e su lt s of S mit hs Medical as a discon tinued operation. Ye a r e nd e d 31 Ju ly 2 0 2 2 £m Y ear ended 31 Ju l y 2 0 21 £m Y ear ended 31 Ju l y 2 0 2 0 £m Y ear ended 31 Ju l y 2 019 £m Y ear ended 31 Ju l y 2 018 £m Income statement metric s – headline Continuing operations Rev enue 2 ,56 6 2,40 6 2,5 4 8 2, 49 8 2, 328 Headl ine oper ating prof it 417 372 327 42 7 388 He ad li ne p r of it b ef or e t a x 3 76 332 278 3 76 333 Discontinued operations Revenue 356 8 49 918 8 74 8 69 Headl ine oper ating prof it 66 17 7 18 4 147 15 6 He ad li ne p r of it b ef or e t a x 65 176 18 0 14 4 15 4 Income statement metric s – statutor y ** Revenue 2,56 6 2,40 6 2,5 4 8 2, 49 8 2, 328 Oper ating profit 11 7 3 26 2 41 326 3 42 Profit before taxation 10 3 24 0 13 3 304 2 87 Pr o fi t fo r th e ye a r 1, 0 3 5 285 2 67 227 279 Balance sheet metrics * Net d eb t ( 15 0 ) (1, 0 1 8 ) ( 1 ,1 4 1 ) ( 1 ,1 9 7 ) (893) Shareholders’ equity 2, 69 9 2,4 02 2,373 2,360 2,2 72 Aver age capit al employed 2 ,9 4 0 4 ,1 6 5 4 , 315 3 ,9 7 2 3,7 3 5 Ratios He ad li ne o pe r a tin g pr o f it: r e v en ue ( % ) 1 6.5 16 .9 14 .7 17. 0 1 7. 0 He ad li ne e f fe c t i ve t a x r at e (% ) 2 7. 2 2 7.1 26.2 2 5 .9 25.8 Retu r n on c a pi t al e mpl o ye d ( % ) 14 . 2 13 . 2 11. 8 14 . 4 14 . 6 Return on shareholders’ funds (%) 10 . 0 11 . 6 10 . 8 12 . 3 1 2 .1 Cash-flow metric s * Headl ine oper ating cash 318 630 575 4 74 538 Headline oper ating cash conver sion (%) 76 12 5 12 3 83 99 Free cash- flow 13 0 38 3 27 3 234 302 Fr ee c a sh -f lo w p er s ha r e ( p) 3 5 .9 96. 6 6 8 .9 5 9.1 76. 3 Ea r n in gs p e r sh ar e ** He ad li ne e ar ning s pe r sh ar e ( p ) 82.5 9 3 .1 8 4.8 96 . 8 9 0 .7 Divi dends and dividend cover * Pence per share 3 9. 6 0 3 7.7 0 35.0 0 4 5 .9 0 4 4 .55 Headl ine div idend cove r 2 .1 2 .5 2.4 2 .1 2.0 * T he h e ad l in e i nc om e s t at em en t me t r ic s i n t he a b ov e f i v e -y e ar r e c or d h a ve b e e n pr e s en te d to r e f le c t t he r e c l as s i fi c at i on o f th e S mi t hs M e di c al b u si ne s s a s a d is c on ti nu e d op e r a ti on a n d th e Gr o u p's c ur r e nt a cc o un ti ng p o l ic y of in cl ud i ng r e s t r uc t u r in g a nd p e ns io n a dm in i s tr a t io n co s t s w i th in h e a dl in e p r of i t . T he d i sc o nt in ue d o pe r a ti o ns c o mp a r at i v e s fo r th e y e ar e nd e d 31 Ju l y 2 018 h av e a l s o b ee n r e s ta te d f or t he a d op ti o n of I F R S 15. * * T h e s t at u to r y inc om e s t at em e nt m et r ic s a r e p r es e nt ed b a s ed o n c on ti nu i ng o p er ati on s f or b ot h t he c ur ren t an d c om p ar ati v e y ea r s . * * * B a l an c e sh e et m et r i c s , r at i os , c a sh - f lo w m et r ic s, e ar n in g s p er s ha r e, d i v i de n d co v er a n d nu mb e r of e mp l oy e e s ar e p r e s en te d b as e d on b o th c on ti n ui ng a n d di s co nt in u ed o p er ati on s f or all years. UNAUDITED GROUP FINA NCIA L RECORD 201 8-2022 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 4 Unaudited supp lement ar y con s oli dated inco me s t atement – US doll ar tr ansl ation Year e n de d 31 J u ly 2 0 22 Year e nd e d 31 J ul y 2 0 21 Headline $m Non-headline (n ot e 3) $m To t a l $m Headline $m Non-headline (n o te 3 ) $m To t a l $m CONTINUING OPER ATIONS Revenue 3,377 – 3,377 3,26 4 – 3,26 4 Oper ating costs (2,828) (395) (3,22 3) (2,7 60) ( 62) ( 2,822 ) Operating profit/(loss) 5 49 (395) 15 4 504 (6 2 ) 4 42 In te rest rec eivabl e 18 – 18 12 – 12 In te rest pa yable (72) – ( 72) (6 6) – (6 6) Other f inancing gains /( loss es ) – 26 26 – ( 71) ( 71) Other finance charg es – retirement benefits – 9 9 – 8 8 Finance cos ts (54) 35 (19 ) (5 4) (6 3) ( 11 7 ) Profit /(loss) before taxation 49 5 (360) 13 5 450 (12 5 ) 325 T axation ( 13 7 ) 18 ( 11 9 ) (13 0 ) 18 ( 112 ) Profit /(loss) for t he year 35 8 (3 42 ) 16 32 0 (10 7 ) 213 DISCONTI NUED OPE R A TIONS Profit on discontinued operations 64 1, 2 8 0 1, 3 4 4 18 2 (8) 174 PR OF I T/(LO S S ) FO R TH E Y E AR 422 938 1 ,360 502 ( 11 5 ) 387 Profit /(loss) for t he year attributable to: Smiths Group sharehol ders – continuing operations 355 (342) 13 3 19 (10 7 ) 2 12 Smiths Group sharehol ders – discontinued oper ations 64 1, 2 8 0 1, 3 4 4 18 2 (8) 174 Non-contr olling interest s 3 – 3 1 – 1 502 ( 11 5 ) 387 EARNI NG S P ER SHAR E Basic 3 5 1. 5 c 97 .2c Basic – continuing 3 .7c 5 3.4 c Dilu ted 35 0.0 c 96 . 7c Diluted – continuing 3 . 7c 5 3 .1 c A s s et s an d l iab ili ti es h av e b ee n tr a ns l ated i nto US d ol l ar s at t he e xcha nge r ate at the d ate of th at b al an ce sh ee t and i nco me, e xp en s es a nd ca sh -f lo w s ar e tr ansl a ted at a ve r a ge e xcha nge r ates fo r th e pe r io d. T hi s r ef lec t s the acc ount ing a pp r oa ch th at Sm it hs G ro up pl c wo ul d us e if th e Gr o up mo ve d to r ep or tin g in U S dol l ar s wi tho ut m ak ing a ny c han ge s to i t s Gr ou p st r uc t ur e or f in anc in g ar r ange ment s . UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 5 Unaudited supp lement ar y con s oli dated s t atement of compr ehen si ve income – US d oll ar tr a nsl ation Ye a r e nd e d 31 Ju ly 2 0 2 2 $m Y ear ended 31 Ju l y 2 0 21 repres ented $m PR OF I T FO R T HE Y E A R 1 ,360 387 O ther comprehensive income (OCI): OCI which will not be reclassified to the income statement : Re-measur ement of post-retirement benefit s ass ets and obligations (22 ) 18 T axation on post-retirement benefits mov ements – (8) Fa ir v al ue m o ve me nt s on f i na nc ial a s s et s at f a ir v al ue t hr o ug h OC I (8 3) 5 (10 5 ) 15 O CI which will be recl assified and reclas sifications: Fair value gai ns /(los ses) and recl assific ation adjustments: – d efe r r ed i n th e ye ar o n c as h- f lo w an d ne t inv e s tm ent h e dg e s (10 8) 111 – re c l as s if i ed to i nc om e st at em ent o n c as h- fl o w an d net i nv e s tm ent h ed g es 7 3 (10 1) 11 4 Foreign ex change (FX ) movements net of recycling: E xchange loss es /(gains) on translation of foreign oper ations 363 (32 ) E xch an g e gai ns r e c y cl e d to th e in com e s t atem en t on di sp o s al on b u sin e s s (258) – 10 5 (32) T otal other comprehensive income , net of taxation (101) 97 T otal comprehensive income 1 ,259 484 Attr ibutab le to: Smiths Group s hareholder s 1 .258 484 Non-contr olling interest s 1 – 1 ,259 484 * T h e c om p ar ati v e y ea r h as b e en r e pr e s e nte d t o in cl u de ‘ Fa ir v a lu e m o ve m en t s on f i na n ci al a s s et s a t f ai r v a lu e th r ou g h O CI ’ w it h in t he ‘ O CI w h ic h w il l n ot b e r e cl a s s if i e d to t he i nc o me st a te me nt ’ s ub to ta l r a th e r th an w i t hi n th e ‘O C I w hi c h w il l b e re c l a s si f ie d a nd r e c l as s i f ic a ti on s’ s ub to t al . T h is r e c l a s si f ic a ti o n ha s n o im p ac t o n to t al o th er c o mp r eh e ns i v e in c om e in t h e co mp a r a ti v e y ea r e nd e d 31 J ul y 2 0 21. UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 6 Una udit ed su pplem entar y c onsolida ted ba l anc e sheet – U S dollar tr anslati on 31 Ju ly 2 0 2 2 $m 31 Ju l y 2 0 21 $m NON-CURR ENT A SSE T S Intangible as set s 1,9 3 3 2 ,08 2 Pr o pe r t y, pl an t an d eq uip me nt 2 96 295 Ri ght of u s e as s et s 12 9 15 0 Financial ass ets – other investments 4 81 15 Retirement benefit assets 376 759 Def er r e d t ax a s s et s 116 12 8 T r ad e an d ot he r re ce i v ab le s 84 82 Financial der iv ative s – 10 4 3 , 41 5 3 , 615 CURRENT ASSE TS Inventories 694 5 30 Cur rent t a x r ec ei v a bl e 61 105 T r ad e an d ot he r re ce i v ab le s 897 8 76 Ca sh a nd c a sh e qu i v al ent s 1, 2 8 6 563 Financial der iv ative s 5 3 A s s et s h el d fo r s al e – 1, 7 2 8 2 ,94 3 3,805 TOT AL AS SETS 6,358 7, 4 2 0 CURRE NT LIABI LITIES Financial liabili ties – bo r r o w ing s (620) ( 13 ) – lease liabilitie s (35) (38) – financial deri vati ves (33) (4) Prov isions for liabilities and charge s (10 7 ) (6 4 ) T r ad e an d ot he r pa y ab le s (82 9) ( 737 ) Cur rent t a x p ay a bl e (78) (12 4 ) Liabili ties held for sale – (393) (1,7 0 2 ) (1, 3 7 3 ) NON-CU RRENT LIABILITIES Financial liabili ties – bo r r o w ing s (655) ( 1,9 0 7 ) – lease liabilitie s ( 11 0 ) ( 131) – financial deri vati ves (24) – Prov isions for liabilities and charge s ( 3 01) (335 ) Retirement benefit obligations (14 0 ) (17 8 ) Cur rent t a x p ay a bl e (4) (7 ) Deferr ed tax liabilitie s (54) (39) T r ad e an d ot he r pa y ab le s (5 6) (82 ) (1, 3 4 4 ) ( 2 , 67 9) TOT AL LIA BILITI ES (3,0 4 6) (4,0 52) N ET ASSETS 3 , 3 12 3,3 68 SHA REHOLDER S’ EQUIT Y Share cap ital 16 6 207 Shar e premium account 444 505 Capital re demption reser ve 23 8 Revaluation re ser ve – 1 Merger re ser ve 286 327 Retained ear nings 2 , 61 2 2,6 08 He dg e r es e r ve ( 24 6) ( 3 17 ) T otal shareholder s’ equity 3, 28 5 3,33 9 Non- control ling interes t equit y 27 29 TOT AL EQU IT Y 3 , 312 3,368 UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 167 Una udit ed su pplem entar y c onsolida ted stat eme nt o f chang es in equ it y – US doll ar translatio n Share capital and share premium $m Other reserves $m Retained earnings $m Hedge reser ve $m Equity shareholders’ funds $m Non- controlling interest $m To t a l equity $m At 31 J uly 2 021 7 12 336 2,608 ( 3 17 ) 3,339 29 3,368 P r of it f or t he y e ar – – 1 ,357 – 1 ,357 3 1 ,360 O ther comprehensi ve income: – re-m easurement of retirement benefits af ter tax – – (22) – (22 ) – ( 22) – F X mo ve me nt s n et of r e c y cl in g (8 8) (4 4) (377 ) 17 2 (3 37 ) (5 ) (3 42) – f ai r v al ue g ain s / ( lo ss e s ) an d r el at ed t a x – – (8 3) (10 1) (18 4 ) – ( 18 4 ) T otal comprehensive income for the year (88) (4 4) 875 71 814 (2) 8 12 T ransac tions rela ting to owner ship interest s: Is s ue of n e w eq ui t y s ha r es 3 – – – 3 – 3 Pu r ch as e of s ha re s b y E mp lo ye e B en ef it Tru st – – ( 21) – ( 2 1) – ( 2 1) Procee ds from exercise of share options – – 1 – 1 – 1 Share buyb acks ( 17 ) 17 (67 2 ) – ( 672 ) – (67 2 ) Div idends: – equit y shareholder s – – ( 19 7 ) – ( 19 7 ) – ( 19 7 ) Share-based payment – – 18 – 18 – 18 At 31 J uly 2 0 2 2 61 0 309 2 , 61 2 (246 ) 3,285 27 3 , 312 Share capital and share premium $m Other reserves $m Retained earnings $m Hedge reser ve $m Equit y shareholders’ funds $m Non- contr oll ing int erest $m To t a l equit y $m At 31 J uly 2 02 0 6 67 319 2 ,53 4 ( 41 3 ) 3 ,1 0 7 29 3 ,1 3 6 P r of it f or t he y e ar – – 386 – 386 1 3 87 O ther comprehensi ve income: – re-m easurement of retirement benefits af ter tax – – 10 – 10 – 10 – F X mo ve me nt s n et of r e c y cl in g 42 17 (72) (18 ) ( 3 1) (1) (32 ) – f ai r v al ue g ain s / ( lo ss e s ) an d r el at ed t a x – – 5 114 11 9 – 11 9 T otal comprehensive income for the year 42 17 329 96 484 – 484 T ransac tions relating to owners hip interests: E xercises of share options 3 – – – 3 – 3 Rec eip t of c ap i ta l fr o m no n -c on tr ol l in g inte r e st – – – – – 1 1 Pu r ch as e of o w n sh ar e s – – (22) – (22 ) – ( 22) Div idends: – equit y shareholder s – – (252 ) – ( 252 ) – (252 ) – non-controll ing interest s – – – – – (1) (1) Share-based payment – – 19 – 19 – 19 At 31 J uly 2 0 21 712 336 2 ,608 ( 317 ) 3,3 39 29 3, 368 UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 16 8 Unaudited supp lement ar y con s oli dated c a sh-f lo w s t atement – US dol l ar tr an sl atio n Ye a r e nd e d 31 Ju ly 2 0 2 2 $m Y ear ended 31 Ju l y 2 0 21 $m Net cash inflow from operating activities 3 67 726 Cash-fl ows fr om i nvest ing activiti es E xpenditure on capitalised development ( 2 9) ( 37 ) E x pe nd it ur e o n oth er i nt an gib le a s s et s ( 11) ( 16 ) Pu r ch as e s of p ro p er t y, pl a nt an d eq ui pm ent ( 76 ) ( 10 6 ) Disposal s of proper ty, plant and equipme nt 4 3 Ca pi t al r et ur n ed b y /( in v es t me nt in ) f in an ci al a s se t s – 9 Acquisition of business es – ( 11 3 ) Inves tment in financial ass et – discontinued operations – ( 19 ) Pr o ce e ds o n dis p os a l of su bs id iar ies , n et of c a sh d is po se d 1,7 51 – Ne t ca s h -f lo w u se d in i nv e s tin g a c ti v i ti es 1, 6 3 9 (2 7 9) Cash-flow s from financing activ ities Procee ds from exercise of share options 3 3 Share buyb acks ( 67 2 ) – Pu r ch as e of s ha re s b y E mp lo ye e B en ef it Tru st ( 21) (22) Pr o ce e ds r e cei v e d on e xer c is e of e mp lo ye e s har e o pt io ns 1 – Set tlement of cash-set tled options (1) – Div idends paid to equity shareholders (19 7 ) ( 2 51) Lease payments (50) (6 0) Red uc t io n an d re p ay m ent o f bo r r o w in gs (3 8 8) – Ca sh i nf lo w f r om m atu r ed d er iv at i ve f i na nc ial i ns t r um ent s 30 5 Net cash-flow used in financing activities (1, 2 9 5) (325) Ne t de cr e as e i n ca s h an d c a sh e qu i v al en t s 7 11 12 2 Ca sh a nd c a sh e qu i v al ent s a t be gi nn in g of ye a r 56 3 480 Ca sh h el d in d is po s al g r oup 63 (3 8) E xchange dif fere nces (52) ( 1) Cash and cash equivalent s at end of year 1 ,285 563 Cash and cash equivalent s at end of year c ompr ise: – ca s h at b ank a nd i n ha nd 295 304 – shor t-t er m deposits 991 2 59 1, 2 8 6 56 3 – ba nk o ve r dr af t s (1) – 1 ,285 563 UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 169 Una udit ed Grou p US dollar finan cial rec ord 201 8 - 202 2 Th e he ad li ne in co me s ta teme nt met r ic s s ho w n be lo w fo r the y ea r en de d 31 July 2 018 ha s be en r ep r es ente d to sh ow t he r e su lt s of S mit hs Medical as a discon tinued operation. Ye a r e nd e d 31 Ju ly 2 0 2 2 $m Y ear ended 31 Ju l y 2 0 21 $m Y ear ended 31 Ju l y 2 0 2 0 $m Y ear ended 31 Ju l y 2 019 $m Y ear ended 31 Ju l y 2 018 $m Income statement metric s – headline Continuing operations Revenue 3,3 77 3,26 4 3 , 2 16 3, 218 3 ,1 3 9 Headl ine oper ating prof it 5 49 504 41 2 550 52 3 He ad li ne p r of it b ef or e t a x 495 450 3 51 484 4 49 Discontinued operations Revenue 468 1 ,15 2 1,1 5 9 1 ,1 2 6 1 ,1 7 2 Headl ine oper ating prof it 87 240 232 18 9 2 10 He ad li ne p r of it b ef or e t a x 86 2 39 227 18 5 208 Income statement metric s – statutor y ** Revenue 3,377 3,26 4 3 , 2 16 3 , 218 3 ,1 3 9 Oper ating profit 15 4 4 42 304 420 4 61 Profit before taxation 13 5 325 169 3 91 386 Pr o fi t fo r th e ye a r 1, 3 6 2 3 87 3 37 2 91 375 Balance sheet metrics * Net d eb t (18 3 ) (1 , 415 ) (1, 49 5 ) ( 1, 4 6 2 ) ( 1 ,1 7 2 ) Shareholders’ equity 3,28 5 3,3 39 3 ,1 0 7 2,882 2 ,9 8 2 Aver age capit al employed 3,578 5,7 9 0 5,652 4 ,8 52 4 ,9 0 3 Ratios He ad li ne o pe r a tin g pr o f it: r e v en ue ( % ) 1 6.5 16 .9 14 .7 17. 0 1 7. 0 He ad li ne e f fe c t i ve t a x r at e (% ) 2 7. 2 2 7.1 26.2 2 5 .9 25.8 Retu r n on c a pi t al e mpl o ye d ( % ) 14 . 2 13 . 2 11. 8 14 . 4 14 . 6 Return on shareholders’ funds (%) 9. 9 12 . 2 10 . 6 1 2 .1 12 . 5 Cash-flow metric s * Headl ine oper ating cash 829 855 7 26 611 725 Headline oper ating cash conver sion (%) 76 12 5 12 3 83 9 9 Free cash- flow 17 1 52 0 3 45 3 01 4 07 Fr ee c a sh -f lo w p er s ha r e (c ) 4 7. 2 1 3 1.1 6 8 .9 7 6 .1 10 2 .9 Ea r n in gs p e r sh ar e ** He ad li ne e ar ning s pe r sh ar e ( c ) 10 8 .6 12 6 . 3 1 0 7. 0 12 4 .7 12 2 . 3 Divi dends and dividend cover* * Ce nt s p er s har e ( c ) 5 2 .1 5 1 .1 4 4.2 5 9.1 6 0 .1 Headl ine div idend cove r 2 .1 2 .5 2.4 2 .1 2.0 * T he h e ad l in e i nc om e s t at em en t me t r ic s i n t he a b ov e f i v e -y e ar r e c or d h a ve b e e n pr e s en te d to r e f le c t t he r e c l as s i fi c at i on o f th e S mi t hs M e di c al b u si ne s s a s a d is c on ti nu e d op e r a ti on a n d th e Gr o u p's c ur r e nt a cc o un ti ng p o l ic y of in cl ud i ng r e s t r uc t u r in g a nd p e ns io n a dm in i s tr a t io n co s t s w i th in h e a dl in e p r of i t . T he d i sc o nt in ue d o pe r a ti o ns c o mp a r at i v e s fo r th e y e ar e nd e d 31 Ju l y 2 018 h av e a l s o b ee n r e s ta te d f or t he a d op ti o n of I F R S 15. * * T h e s t at u to r y inc om e s t at em e nt m et r ic s a r e p r es e nt ed b a s ed o n c on ti nu i ng o p er ati on s f or b ot h t he c ur ren t an d c om p ar ati v e y ea r. * * * B a l an c e sh e et m et r i c s , r at i os , c a sh - f lo w m et r ic s, e ar n in g s p er s ha r e, d i v i de n d co v er a n d nu mb e r of e mp l oy e e s ar e p r e s en te d b as e d on b o th c on ti n ui ng a n d di s co nt in u ed o p er ati on s f or all years. UNAUDITED US DOLLAR PRIMARY ST A TEM ENTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 0 Comp any b al ance she et Notes 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m NON-CURR ENT A SSE T S Ri ght of u s e as s et s 2 5 6 Inves tments 3 2,422 2 , 414 Loans due from subsidiaries 3 5 61 611 Retirement benefit assets 10 309 546 Financial der iv ative s 8 – 75 3,297 3,652 CURRENT ASSE TS T r ad e an d ot he r re ce i v ab le s 5 62 52 Cur rent t a x r ec ei v a bl e 5 5 Ca sh a nd c a sh e qu i v al ent s 7 770 15 8 Financial der iv ative s 8 9 2 846 2 17 TOT AL AS SETS 4 ,1 4 3 3, 8 69 CURRE NT LIABI LITIES T r ad e an d ot he r pa y ab le s 6 ( 58 8) ( 91) Lease liabil ities 7 (1) (1) Financial der iv ative s 8 (2 9) (2) ( 61 8 ) (94) NON-CU RRENT LIABILITIES Bor ro win gs 7 (5 45) (1 ,35 4) Lease liabil ities 7 (5) (6) Prov isions for liabilities and charge s 9 (2) (2) Retirement benefit liabilities 10 ( 47 ) (5 8) Financial der iv ative s 8 (20) – Deferr ed tax liabilitie s 4 – (28) ( 61 9 ) (1, 4 4 8) TOT AL LIA BILITI ES (1, 2 3 7 ) (1, 5 4 2 ) N ET ASSETS 2, 906 2,327 SHA REHOLDER S' EQUIT Y Calle d up share capital 11 13 6 149 Shar e premium account 11 365 363 Capital re demption reser ve 11 19 6 Other re ser ves 11 181 18 1 Pr o fi t an d lo s s ac co unt 11 2,2 05 1, 6 2 8 TOT AL EQU IT Y 2, 906 2,327 Th e C omp an y 's pr of it fo r th e per iod w a s £1 ,2 5 7m (F Y 2 0 21 : £ 2m l os s ). Th e ac cou nt s on p ag e s 1 71 to 1 79 w er e ap pr o ve d b y the B o ar d of D ir ec to r s on 2 2 S e ptemb er 2 0 2 2 and we r e sig ne d on i t s beh al f by : Paul Keel Clare S cherrer CHIE F E XEC U T I V E O F F ICE R CHIEF F I N A NC I A L OF F I CER Smi th s Gr ou p plc – r e gis te re d nu mbe r 137013 SMI TH S G RO UP P LC C OM PAN Y AC C OU NT S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 171 Compan y statem ent o f cha nges in equ it y Share capital £m Share premium £m Capital redemption reser ve £m Other reserves £m Retained profit £m Shareholders’ equity £m At 31 J uly 2 021 149 363 6 18 1 1, 6 2 8 2,327 P r of it f or t he y e ar – – – – 1,257 1 ,257 O ther comprehensi ve income: – re-m easurement of retirement benefits – – – – ( 2 3) ( 2 3) – taxation reco gnised on retirement benefit s – – – – 6 6 T otal comprehensive income for the year – – – – 1, 2 4 0 1, 2 4 0 T rans ac tions with ow ner s: I ss ue o f ne w e qu it y sha re s – 2 – – – 2 P ur ch a se o f sh ar e s by E m pl oy e e Be nef i t T r us t – – – – (16 ) (16 ) Pr o ce e ds r e cei v e d on e xer c is e of e mp lo ye e s har e o pt io ns – – – – 1 1 Share s purchased under a buyback progr amme (13 ) – 13 – ( 5 11 ) ( 5 11) Div idends paid t o equity shareholder s – – – – (15 0 ) (15 0 ) Share-bas ed payment – – – – 13 13 T ot al t r a ns a c ti on s w i th o w ne r s re co gn i se d i n eq ui t y (13) 2 13 – (6 6 3) ( 6 61 ) At 31 J uly 2 0 2 2 13 6 365 19 181 2,2 05 2, 906 Share capital £m Share premium £m Capital redemption reser ve £m Other reserves £m Retained prof it £m Shareholders’ equit y £m At 31 J uly 2 02 0 149 3 61 6 181 1, 812 2,50 9 P r of it f or t he y e ar – – – – (2) (2) O ther comprehensi ve income: – re-m easurement of retirement benefits – – – – 12 12 – taxation reco gnised on retirement benefit s – – – – (6) (6) T otal comprehensive income for the year – – – – 4 4 T rans ac tions with ow ner s: I ss ue o f ne w e qu it y sha re s – 2 – – – 2 P ur ch a se o f sh ar e s by E m pl oy e e Be nef i t T r us t – – – – (16 ) (16 ) Div idends paid t o equity shareholder s – – – – ( 18 5 ) (18 5 ) Share-bas ed payment – – – – 13 13 T ot al t r a ns a c ti on s w i th o w ne r s re co gn i se d i n eq ui t y – 2 – – (18 8) (18 6 ) At 31 J uly 2 0 21 14 9 36 3 6 181 1, 6 2 8 2,327 SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 2 Com pany accounting pol icie s Basis of prep ar ation Th e se f in an cia l st ate ment s w er e p r ep ar ed i n acc or da nce w i th F in an cia l Repo r ting S ta nd ar d 101 Reduc ed D is cl osu r e Fr am ew o r k ( ‘F R S 101 ’). In pr ep ar ing the s e f ina nc ial s t atem ent s , th e Co mp any a pp li es t he r e co gni tio n, m ea sur e ment a nd d is clo su re r e qui re me nt s of UK-a do pte d inter n ati ona l acc ount in g st an da rd s ( ‘ Ad opte d IF R S s’), bu t ma kes am en dme nt s w he re n ec e ss a r y in or d er to co mpl y w it h Co mp ani es A c t 2 0 06 and h as s et o ut b elo w w h er e ad v a nta ge of t he F R S 101 dis cl os ur e exem pti on s has b e en t aken . Th e se a cco unt s h av e be en p re p ar ed o n a goi ng c onc er n b as is an d un der t he hi s tor i c al co st c on ve ntio n mo di fi ed to i ncl ud e re v al uat ion of cer t ain f in anc ial in s tr u ment s, sh ar e opt ion s an d pe ns ion a s se t s and l ia bil i tie s he ld at f a ir v al ue. A s p er m it te d b y S ec ti on 4 08 ( 3 ) of th e Co mp ani e s Ac t 2 0 06 , the C o mp any ’s incom e s tate me nt and s t atem ent of c omp r ehe ns i ve i nco me h av e not b ee n pr e se nted . A s p er mit te d by S e c ti on 4 0 8( 2 ), infor m atio n ab ou t the C om p any ’s emplo y ee n umb er s a nd co s t s is n ot pr e s ente d. Going concer n Th e Di re c tor s are s at is f ie d tha t the G r oup, ( of w hic h th e Co mp any i s th e ho ldi ng co mp an y) h as a de qu ate r es ou rc es to c ont inu e to op er ate for a p er i od n ot le s s th an 12 month s fr o m the d ate of ap pr o v al of t he f in anc ial s t atem ent s an d th at th er e ar e no m ater i al un cer ta inti es ar oun d th eir a s se s sm ent . A cco r din gly, the D ir ec to r s co ntin ue to a dop t the g oin g co nce r n b asi s of ac cou ntin g. D et ail s of the go in g con cer n as s es s ment f or th e Gr o up ar e pr o v id ed i n the a cco unti ng p ol ic ie s note of t he c on so li date d f ina nci al s t ateme nt s . E xe mptio ns from the requirem ents of I FR S applied i n accorda nce with FRS 1 01 Th e fo ll ow i ng exe mpt ion s f r om th e r equ ir em ent s of IF R S h av e be en a ppl i ed in t he p re pa r at ion o f the s e f ina nci al s t ateme nt s , in acc or da nce w i th F R S 101 : – Pa r a gr a ph s 4 5 ( b) an d 4 6 to 5 2 of IF R S 2 , ‘S har e -b a se d p ay me nt’ ( det ai l s of th e num be r and w ei ghte d- av er a ge e xer ci se p r ic es o f sha re opti on s , and h o w the f a ir v alu e of go o ds or s er v i ce s r ece i ve d w as d eter mine d) – IFRS 7 , ‘Financial Instruments: Disclosure s ’ – Pa r a gr a ph s 91 to 9 9 of IF R S 13, ‘Fai r v alu e me as ur eme nt’ ( dis c los ur e of v al uat ion te ch niq ue s an d inp ut s u se d fo r fa ir v al ue me a sur em ent of as s et s an d l iab ili ti es ). – Pa r a gr a ph 3 8 o f I A S 1 , ‘Pr e s ent ati on of f in anc ial s t atem ent s’ com pa r at i ve inf or m ati on r eq uir em ent s in r e sp e c t of: – p ar agr aph 79 ( a )( i v ) of I A S 1 ; – p ar agr aph 7 3 (e) o f I A S 1 6 ‘Pr op er t y, pl a nt and e qu ipm ent ’ ; – Th e fo ll ow i ng p ar a gr aphs o f I A S 1 , ‘Pr e s ent atio n of f in anc ial s t atem ent s’ – 10 (d ) ( st ate ment o f c ash -f lo w s ), – 16 (s t atem ent of c omp li an ce w it h al l IF R S), – 3 8 A (r e quir e ment f or mi nim um of t wo pr i mar y s t atem ent s , inc lu din g c ash f l ow s t atem ent s ), – 3 8 B-D (additional comparativ e information), – 1 1 1 (ca sh f lo w s tate me nt info r mat ion ), an d – 134 - 136 (capital management disclosures) – I A S 7 , ‘S tate me nt of c as h-f lo w s’ – Pa r a gr a ph 3 0 an d 31 of I A S 8 ‘ Acco unti ng p ol ici e s, c han ge s in a cco unti ng e s tim ate s an d er r or s ’ (r e qui re me nt for t he di sc lo sur e of info r mat io n w hen a n enti t y has no t app li ed a n ew I F R S tha t has b e en is s ue d bu t is n ot yet e f fe c ti v e) – Pa r a gr a ph 17 of IA S 24 , ‘Rel ated pa r t y dis c los ur e s’ (key m ana ge men t com pe ns at ion ) – Th e r eq uir em ent s in I A S 2 4, ‘ Rel ate d pa r t y di sc lo sur e s’ to dis clo s e re l ated p ar t y tr an s ac ti on s enter e d into b et wee n t w o or m or e me mb er s of a gr oup . – Th e r eq uir em ent s of p ar agr a ph s 52 a nd 5 8 o f IF R S 16 Leas e s SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 3 Sign ificant judg emen t s, key assum ptions a nd estimat es Th e pr e pa r ati on of t he a cco unt s in c onfo r mi t y w i th g ene r a lly a cce pted a cco unt ing p r in cip le s r equ ir e s man ag eme nt to ma ke es ti mate s an d jud gem ent s t hat af fec t t he r ep or ted am ou nt s of as s et s an d l iab il it ie s and d is cl os ur e of con tin gent a s s et s an d li abil i tie s at t he da te of th e acc ount s a nd th e r ep or ted am oun t s of r ev enu e s and e xp en s es d ur in g th e re po r ting p er i od . A c tua l r es ult s m ay d if fer fr o m the s e e st ima tes . Th e key s o ur ce s of e st imat io n unc er tai nt y to get he r w ith t he s igni f ic ant j ud gem ent s a nd a ss ump tio ns u se d in t he se P a r ent C omp an y f ina nci al st atem ent s a re s et o ut b el ow. So urce s of e s timation un cer taint y Taxation Th e C omp an y ha s r eco gn is ed d efer red t a x as s et s of £ 6 6m ( F Y 2 0 21 : £ 8 9m ) re l ati ng to r e ve nue l os s es b r ou ght fo r w ar d. T h e r eco gn iti on of the s e as s et s r eq uir e s ma na gem ent to m ake sig nif i c ant e st im ates a s to th e abi li t y to rec ov er t hem a ga ins t th e un w ind o f othe r ta x p os iti on s and f or ec a s t UK t ax ab le pr of i t s of th e ta x gr o up. Fu r ther d eta il on t he C omp an y ’s defer r ed t a xat ion p o sit io n is in clu de d in no te 4. Retirement benefits Dete r min ing t he v al ue of t he f ut ur e def i ne d ben ef it o bl ig ati on in vo lv es s ign if ic an t es ti mate s in r e sp ec t o f the a s sum pti on s us ed to c al cul ate pr e se nt v alu e s. T h es e in cl ude f u tur e m or ta li t y , dis co unt r ate and inf l ati on . T he C om pa ny u se s pr e v io us e xp er i enc e and i nd ep end ent ac tu ar i al ad v i ce to s ele c t th e v alu e s for c r it ic al e s tim ate s . A por ti on of t he C omp an y ’s pensi on l ia bil it ie s ar e in sur e d v ia b ul k annu it y pol ic ie s w hic h br o adl y match t he s ch em e obl ig ati on to id ent if ie d gr ou ps of p en sio ne r s . T he s e as s et s ar e v al ue d by a n ex te r na l qua li f ied a c tu ar y at the actuar ial valuation of the corre sponding liabil it y, reflecting this matching relationship. Th e C omp an y 's pr in cip al d ef ine d be nef i t pe nsi on p l an s hav e b ee n clo s ed s o th at no f u tur e b enef i t s ar e ac cr u ed . Cr i tic a l es ti mate s fo r the s e pl an s , and t he ef fec t of v a r ia nce s in t he se e s ti mate s , ar e di sc lo se d in n ote 8 to the c on so l idate d f in anc ial s t atem ent s . Signif ic ant judg ement s m ade in apply ing accounting pol icie s Taxation A s s t ated i n the p r ev i ou s se c ti on ' S our ce s of e s ti mati on un ce r taint y', the Co mp an y ha s re co gni s ed d efer r e d ta x a s set s o f £6 6 m (F Y 2 0 21: £89 m) r e l atin g to r ev en ue lo s s es b r oug ht for w a r d. T h e de cis ion to r e co gni se d efe r r ed t a x as s et s r eq uir e s jud ge ment i n deter minin g w heth er t he C omp an y w il l be a ble to u til i se h is tor i c al t ax l os s e s in f ut ur e pe r io ds . It h as b e en co ncl ud ed t hat th er e ar e s uf fic ient ta xa bl e pr of it s i n fu tu re p er iods to s upp or t r ec og nit ion . Retirement benefits At 31 Ju ly 2 0 2 2 th e Co mp an y ha s re co gni s ed £ 3 0 9 m of r etir em ent b en ef it a s set s ( F Y 2 0 21 : £ 5 4 6m), w hi ch ar ise s f ro m th e r igh t s of th e emp lo ye r s to r ec ov er t he su r pl us at th e en d of th e li fe of t he s ch eme . Th e r ec og nit ion o f thi s sur plus is a s ign if ic a nt jud ge ment . T h er e is ju dg em ent r eq uir e d in dete r min in g wh eth er a n unco nd it ion al r i ght of ref un d ex is t s b as e d on th e pr o v is ion s of th e r ele v ant t r us t d ee d an d r ul es . Ha v in g ta ken le gal a d v ic e w it h re ga r d to the r ight s of th e Co mp any und er th e r ele v ant T r u st d ee d an d r ul es , i t ha s be en d eter m ine d th at the s ur p lus i s r ec ov er able b y th e Co mp any a nd t her ef or e c an b e re co gni s ed . If th e pe ns ion s c hem es w e re w ou nd up w h ile t he y s til l ha d mem be r s , th e sc hem e s wo ul d ne ed to b u y ou t the b en ef it s of a ll mem be r s . T he bu y ou t s w oul d co s t sig nif ic a ntly m or e th an t he c ar r y in g v al ue of t he s che me l ia bil it ie s w it hin t he s e fi nan cia l s tate me nt s w hic h ar e c alc ul ate d in ac cor d anc e w ith I A S 19 : Em pl oy ee b en ef it s . Foreign cur ren cies For ei gn c ur r en c y tr ans ac t io ns ar e r e cor d ed at t he e xcha ng e r ate r u li ng on t he d ate of tr ans ac t io n. Fo r eig n exch an ge ga ins a nd l os s es re s ulti ng f r om th e s et tl eme nt of su ch t r an s ac t ion s , an d fr om t he r et r an sl at io n at ye ar - en d exch an ge r a tes of m on et ar y as s et s an d l iab il iti es den omi nate d in fo r eig n cur r e nci es , a re r e co gni se d in t he pr of i t an d los s a cco unt . Leases At th e co mme nce me nt date of t he le as e, t he C om pa ny r e cog nis e s le as e l iab il it ie s me as ur ed at t he p re s ent v a lue o f lea s e pa y me nt s to be mad e o ver t he l ea se te r m, w h ich i nc lud es p er iods c ov er e d by r e ne w al o ptio ns t he C om pa ny is r e as on ab ly ce r tain to e xer cis e . In c alc ul at ing the p r es ent v alue of le a se p ay m ent s , t he C omp an y us e s the i nc re men ta l bor ro w ing r ate at the l ea se c omm en cem ent d ate. Th e C omp an y r ec ogn is e s r ight o f us e as s et s at th e co mme nce me nt date of t he le a se . Ri ght of us e a s set s a r e me asu r ed at c os t inc lu din g the a mo unt of le as e l iab il it ie s r ec ogn is ed a nd in it ial di r ec t co s t s inc ur r e d, l es s a ny in cent i ve s gr anted b y th e le s so r . Right of u se a s set s are sub jec t to i mp air m ent a nd ar e d epr e ci ated o ve r th e sho r ter of th e lea s e ter m an d th e us ef ul l ife o f the r ight of us e as s et . Th e C omp an y ha s a bui ldi ng s le as e w it h a ter m of s e ve n ye ar s . O th er l ea se s w i th le as e ter ms of 12 months o r le s s an d le as e s of of f i ce equ ipm ent w i th lo w v a lue ( t y p ic al ly b elo w £ 5 ,0 0 0) ar e r ec og nis e d as an e xp en se o n a s tr a ight-l in e ba si s ov er t he le a se te r m w it h the Co mp any h av i ng ap pl ie d ‘sho r t -ter m leas e’ and ‘ le as e of l ow - v alu e as s et s’ re co gni ti on e xempt io ns . SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 174 Investme nts in and loans t o Group com panies Th e C omp an y’s inv e st me nt s in sh ar e s in Gr ou p com p anie s a re s t ate d at cos t l es s p r ov i sio n for i mp air m ent . A n y imp air ment is c har g ed to the p r of it an d lo s s acc ount a s it a r is e s. Th e r ec ov er abil it y of inter co mp any l o ans i s as s e s se d ap ply i ng th e met ho do lo g y of IF R S 9 b y lo ok ing at t he c re di t qu al it y of the s ubs idi ar y and a ny su pp or t av ai l ab le to th e enti t y . T he s e c alc ul ati on s r equ ir e th e us e of e st ima tes i ncl udi ng p ro je c ted f u tur e c a sh -fl o w s and ot he r fu tu re e v ent s . T he ap pl ic at io n of th e ex pe c ted c re di t lo s s mo del h as n ot ha d a mate r ia l imp ac t o n the C o mp any 's lo an r e cei v a ble s prov isioning position. Fin ancial in str uments Th e p ol ici es d is cl os ed i n the G r oup a cco unti ng p ol ic ie s on p ag e s 108 to 1 1 5 for r e co gni tio n, m ea su re me nt and p r es ent at ion o f fi nan ci al ins tr ument s a re a pp li ed in t he C om pa ny ac co unt s . T ax ation Defe r r ed t a x is p ro v id ed u sin g th e ba l an ce sh eet l ia bil i t y m eth od . A defe r r ed t a x as s et is r e co gni se d w he r e it i s pr ob ab le th at f ut ur e ta x abl e inc ome w i ll b e su f f ic ient to u til i se t he a v ail a ble r e li ef. Defe r r ed t a x is p ro v id ed o n tem por ar y dif fer enc es a r is ing o n in ve s tme nt s in s ubs idi ar ie s , exc ept w h er e th e timi ng of t he r e ver sal o f the temp or ar y dif f er en ce is c ontr o ll ed b y th e Co mp an y and i t is p r ob abl e th at the te mp or a r y dif fer enc e w il l not r e ve r s e in th e for e s ee abl e f ut ur e. Pr ov isions Pr o v isi on s for d isp o s al in dem nit ie s , r es tr uc tur i ng c os t s , pr op er t y d il ap ida tio ns a nd le ga l cl ai ms a re r e co gni se d w he n: the C om pa ny h as a leg al o r con s tr u c ti v e obl ig ati on a s a re s ult of a p a st e v ent; i t is p ro ba bl e that a n ou t f lo w of r e so ur ce s w ill b e r eq uir e d to se t tle t he o bl ig atio n; and t he am ou nt ha s be en r el ia bly e s tim ate d. P r ov i sio ns a re n ot r ec og nis e d for f u tur e op er ating l os s e s. Pr o v isi on s ar e di sc ounte d w he r e the t ime v a lue o f mo ne y is ma ter ia l . Retirement benefit s Th e C omp an y ha s bot h def in ed b en ef it an d def i ne d cont r ib uti on p l an s. T h e po li ci es d is clo s ed in t he G r oup a cco untin g p ol ici e s on p ag es 10 8 to 1 1 5 for r eco gn iti on , me as ur em ent an d pr e se nt atio n of r eti re me nt ben ef it s a r e app li ed i n the C om pa ny a cco unt s . Note 8 to t he co ns ol i date d acc ount s e xp l ain s th e v alu ati on b asi s fo r the C om pa ny 's r etir em ent b en efi t s ch eme s a ss et s a nd l ia bil it ie s . Share-based pay ment Th e C omp an y op er ates a num be r of eq ui t y -s et t le d an d ca sh -s et t le d sha r e- ba s ed c omp en s ati on pl ans . Th e f air v a lue o f the s har e s or s ha re o pti on s gr a nted i s re co gni s ed o ve r th e ve s tin g pe r io d to r ef lec t t he v a lue o f the e mpl oy e e se r vi ce s re ce i ve d. T h e cha r ge r el at in g to gr a nt s to emp lo ye e s of th e Co mp an y is r ec og nis e d as an e xp en se i n the p r of it a nd lo s s acc oun t and t he cha r ge fo r gr a nt s to emp lo y ee s of oth er G r oup c omp an ie s is r e cog nis e d as a n inv e st me nt in th e re le v ant s ubs idi ar y. Th e f air v a lue o f opt ion s gr anted, e xclu din g th e imp ac t o f any n on -m ar ket v es t ing c on dit io ns , is c a lcu l ated u sin g e st ab l ish ed o pti on pr icin g mo del s, pr incip al ly b ino mia l mo del s. T he p r ob ab il it y of meet in g non - mar ket v e s tin g con di tio ns , w hi ch in cl ude p r of it ab il it y tar g et s , is us e d to es ti mate t he nu mbe r of sh ar e opt io ns th at ar e l ikel y to ve s t . For c a sh -s et t led s ha re - ba se d p ay m ent s ch eme s , a l iab il it y is r eco gn is ed b as e d on t he f air v a lue o f the p a y ment e ar n ed b y th e b al an ce sh ee t date. F or e qui t y-s et t le d sha re - ba s ed p ay m ent s ch eme s , th e co r r es po ndi ng c re di t is r e cog nis e d dir e c tly i n re s er v es . Div idends Di v id en ds ar e r e co gnis e d as a l ia bil it y in th e pe r io d in w hi ch th ey a re a ut ho r is ed . T he i nter im d i v ide nd i s re co gn is ed w h en i t is p aid a nd th e fi nal d i v ide nd i s re co gn is ed w h en i t has b e en ap pr o ve d by s ha re ho ld er s at t he A n nua l Ge ner al Me etin g. SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 5 Not es to t he Compan y acc oun ts 1 Audit fee a nd directors emolumen ts Th e au di t fee p ai d to K P MG L L P fo r th e Pa r ent C omp an y w as £ 0 . 1 m (F Y 2 0 21 : £0 . 1 m). Dir e c tor s' em olu ment s i n the y e ar am ounte d to £ 4 m (F Y 2 0 21: £5m ). Fur the r info r ma tio n is in t he Rem une r at ion & P eo pl e Co mmi t te e Repo r t on p ag es 7 5 to 8 8. 2 Righ t of use assets Proper tie s £m Cost or valuation At 31 J uly 2 02 0 8 At 31 J uly 2 0 21 8 At 31 J uly 2 0 2 2 8 Depreciation At 31 J uly 2 02 0 1 Cha r ge f or t he y ea r 1 At 31 J uly 2 0 21 2 Cha r ge f or t he y ea r 1 At 31 J uly 2 0 2 2 3 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 5 Net b o ok v a lue a t 31 Ju ly 2 0 21 6 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 7 3 Investme nts and loans due from sub sidia r ies Sh ar e s i n subsidiar y under tak ings £m Loans du e f r om subsidiaries £m To t a l £m Cost or valuation At 31 J uly 2 0 2 0 2 , 41 0 8 69 3,2 79 Foreign exchange r ate movements – ( 74 ) ( 74 ) Contribu tion through share options 9 – 9 De cr e as e i n ad v a nc es d ue f r om s ub si di ar i es – ( 18 3) (18 3 ) At 31 J uly 2 0 21 2 , 419 61 2 3, 0 31 Foreign exchange r ate movements – 21 21 Contribu tion through share options 8 – 8 De cr e as e i n ad v a nc es d ue f r o m sub si di ar i es – ( 71) ( 7 1) At 31 J uly 2 0 2 2 2,427 562 2, 989 Provisi on for impairment At 31 J uly 2 02 0 , 31 Ju ly 2 0 21 a nd 31 J uly 2 02 2 5 1 6 Ne t bo ok v a lu e a t 31 Ju ly 2 02 2 2,4 22 5 61 2 ,9 8 3 Net b o ok v a lue a t 31 Ju ly 2 0 21 2 , 41 4 6 11 3,0 25 Net b o ok v a lue a t 31 Ju ly 2 0 2 0 2,40 5 868 3,273 Lo an s due to s ub sid iar i es a r e of f s et ag ain s t lo an s due f r om s ubs idi ar ie s to t he ex tent that t he re i s a le gal r ight of s et of f a nd a n intent ion to set tle th e ba l anc es n et . At 31 Ju ly 2 0 2 2 £1,66 4m of l oa ns p ay a ble a r e of f s et ag ain s t lo ans r e cei v able ( F Y 2 0 21 : £ 2,79 0 m ). T he C om pa ny h as l ar ge of fs et t ing l oa n ba l anc e s be c aus e i t us es l o ans to r e duc e it s f or ei gn cu r r enc y exp os ur es a nd s ep ar ately mo ni tor ne t ca sh g ene r ate d from tr ading ac tiv itie s. Th e C omp an y’s sub sid iar i e s ar e l ar ge ly h eld a cco r din g to bu sin es s l in es b y th e fo ll ow in g ho ld ing c omp an ie s , w hic h ar e inc or p or ated in England : Smi th s Gr ou p Inter n ati on al Ho ldi ng s L imi ted Smi th s Dete c ti on G ro up L im ite d Joh n Cr a ne G ro up L im ite d Fl ex- T ek Gr oup L i mite d Smi th s Inter co nn ec t G ro up L im ite d SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 176 Th e pr incip al s ubs idi ar i es a nd th eir c ount r ie s of i nco r po r at ion a r e: England Smi th s Dete c ti on – W at for d L td Joh n Cr a ne UK L i mite d Other Smi th s Dete c ti on G er m any G mb H (G er m any ) Smi th s Dete c ti on ( A s ia -P ac if ic ) P te Ltd ( S ing ap or e ) Joh n Cr a ne Mi ddl e E as t F ZE (U A E ) Joh n Cr a ne T ech no lo g y ( Tia njin ) C o L imi ted ( Chi na ) John Cran e Saudi A r abia Ltd (S audi A r abia ) John Crane Canada Inc (Canada) Unite d Sta tes Smi th s Dete c ti on , Inc . John Crane, Inc. Titeflex Corp or ation Flexible T echnologies, LLC. T utco, L LC. Royal Metal Pr oduc t s, L LC Smiths Interconnect A mer icas , Inc Smiths Interconnect , Inc Kr eisler Manufactur ing Corp Smi th s T ubul ar S y s tem s – L ac oni a Inc Of t he c omp an ie s ab ov e, S mit hs G r oup In ter na tio nal H ol din gs L im ite d is 10 0 % o w ne d dir e c tly b y th e Co mp any. T he ot he r s ar e 10 0 % ow n ed thr ou gh inte r me di ate ho ldi ng c omp an ie s. S ha re ho ldi ng s ar e of or d ina r y shar e s or c om mon s to ck . A ll o f the a bo ve s ub sid iar i e s ope r ate i n their countr y of incorpor ation. Se e p ag es 18 0 to 18 8 for a c omp lete l is t of s ub sid iar y un der t ak ing s. 4 Defe r red tax as sets and liabiliti es Th e C omp an y ha s r eco gn is ed t he fo ll ow i ng d efer r e d t ax a s se t s and l ia bil i tie s: Share- based pay ment £m Retirement benef it obligations £m Losse s carr ied for war d £m Other £m To t a l £m At 31 J uly 2 0 2 0 3 (8 8) 72 2 ( 11 ) (Charge)/credit t o income statement – ( 29) 17 1 ( 11) Cha r ge to e q ui t y – (6) – – (6) At 31 J uly 2 0 21 3 (12 3 ) 89 3 (2 8) (Charge)/credit t o income statement (2) 51 ( 2 3) (3) 23 Cha r ge to e q ui t y (1) 6 – – 5 At 31 J uly 2 0 2 2 – (6 6) 66 – – Th e C omp an y is p ar t of a UK t a x gr oup i ncl udi ng al l i t s UK-b a se d sub si dia r ie s . T he C omp an y ha s r ec ogn is ed d efe r r ed t ax a s s et s of £6 6m (F Y 2 0 21: £89 m) r e l atin g to r ev en ue lo s s es b r oug ht for w a r d. T h e re co gni ti on of t he se a s s et s is d ep end ent o n the a bil i t y to r e co ve r the m aga ins t t he un w in d of oth er t ax p os it ion s an d for e c as t UK t a xab le p r of it s of t he t ax g r oup . Th e tr e atm ent of th e se a s se t s is r e v ie we d at e ach repor ting date. A s at 31 J uly 2 0 2 2 t he C omp an y ha s unr e co gni se d def er r e d ta x a ss et s r el ating to l os s es o f £142m (F Y 2 021 : £n il ). In Jun e 2 0 21, it wa s an no unce d th at f ro m 1 A p r il 2 0 2 3 , th er e w oul d be a n inc r ea se i n the r ate of UK cor por ation t a x fr o m 1 9 % to 2 5% . Defe r r ed t a x , as at 31 Ju ly 2 0 2 2 h as b ee n ca lcu l ate d at the 2 5 % r ate . 5 T r ade and othe r receiv ables 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m A mo unt s o w e d by s ub si dia r i es 61 51 Other re ceiv able s 1 1 62 52 6 T r ade and othe r pay ables 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m A mo unt s o w e d to su bs idi ar i e s 58 56 T er m lo a ns d ue w i th in on e y ea r 504 – Other credi tors 15 21 Ac cr u al s and d efe r r ed i nc om e 11 14 588 91 SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 7 7 Borrow ings and ne t debt 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Ca sh a t ba nk 10 20 Shor t-term deposit s 76 0 13 8 Ca sh a nd c a sh e qu i v al ent s 770 15 8 Le as e l ia bi li ti e s f al l ing d ue w i th in o ne y e ar (1) (1) Le as e l ia bi li ti e s f al l ing d ue a f te r on e ye ar (5 ) (6) T er m lo a ns f a ll in g du e w it hi n on e ye ar (504) (2 3) T er m lo a ns f a ll in g du e af ter on e ye ar (54 5) ( 1 ,354) Bor ro win gs (1, 0 5 5 ) (1, 3 8 4 ) Ne t de bt (285) (1, 2 2 6 ) T er m loans and lease liabili ties Th e cu r r enc y and co up on s for t he ter m loan s ar e di sc lo se d in n ote 18 of the Gr o up ac cou nt s. 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Le s s th an o ne y e ar 505 24 Bet we en o ne a nd t wo y e ar s 1 290 Bet we en t wo a nd f i v e ye ar s 548 516 Gr e ater t ha n f i ve y e ar s 1 554 Sm it hs G r oup p lc te r m l oa ns a nd l ea s e l iab il i ti es 1, 0 5 5 1, 3 8 4 Se e th e l iqu idi t y r isk dis c los ur e s in no te 1 9 in th e Gr o up acc oun t s for in for m ati on on t he c a sh an d bo r r o w ing f a cil it ie s av a il ab le to th e Gr o up. Smi th s ha s Rev ol v ing C re di t Fac il iti e s of $ 8 0 0m mat ur i ng on 1 N ov em be r 2 0 24 . 8 Der iv ati ve s Th e t abl e s bel o w set o ut t he n omi nal a mou nt an d fa ir v al ue of d er i v at i ve c ontr ac t s he ld b y th e Co mp any : At 31 J u ly 2 0 22 Co n tr ac t or u n de r ly i n g nominal amount £m Fair value Ass ets £m Liabilities £m Net £m Foreign exchange contrac ts (not hedge accoun ted) 59 3 9 (9) – Cr os s - cu r r en c y s w a ps ( f air v a lu e an d ne t inv e s tm ent h e dg es ) 61 5 – (4 0) ( 40) Inte re s t r ate sw aps ( fa ir v a lu e he dg e s) – – – – T otal financial derivati ves 1, 2 0 8 9 ( 49) (4 0) Balance sheet entries Non-cur rent – (20) (20) Curr ent 9 (2 9) (20) T otal financial derivati ves 9 ( 49) (4 0) At 3 1 Ju ly 2 0 2 1 Contrac t or underlying nominal amount £m Fair value A sset s £m Liabilitie s £m Net £m Foreign exchange contrac ts (not hedge accoun ted) 325 2 (2) – Cur ren c y s w a ps ( f ai r v alu e an d ne t in ve s tm en t he dg e s) 539 72 – 72 Inte re s t r ate sw aps ( fa ir v a lu e he dg e s) 10 8 3 – 3 T otal financial derivati ves 972 77 (2) 75 Balance sheet entries Non-cur rent 75 – 75 Curr ent 2 (2) – T otal financial derivati ves 77 (2) 75 Der iv at i ve s , inc lu din g for w a rd e xch ang e co ntr a c t s , cur ren c y s w ap s , inter e s t r ate i ns tr ument s an d em be dd ed d er i v at i ve s ar e L ev el 2 f ai r v alu e ins t r ume nt s an d ar e v al ue d at the n et pr e s ent v a lue of t he f u tur e c as h- fl ow s c a lcu l ated u sin g ma r ket dat a at th e b al an ce sh eet d ate ( pr i nci pa lly e xcha ng e r ate s an d y ie ld cu r ve s ). Th e de bi t to the i nco me s t atem ent ar ising f r om c ha nge i n f air v al ue in t he y ea r w as £ 2 8m (F Y 2 021 : £5 m ). 9 Prov isions f or liabilit ies and cha rges At 31 Ju l y 2 0 21 £m Charged against prof it £m Utilisation £m At 31 Ju ly 2 0 2 2 £m Disposal s 2 – – 2 Th e cl os ing d isp os a l pr o v isi on r el ate s to w a r r a ntie s an d oth er ob l iga tio ns in r e sp e c t of a pa s t dis po s al an d is e xp ec te d to b e uti li s ed w i thin the n ex t f i v e ye ar s. SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 8 1 0 Post-retirement benef it s Th e C omp an y is t he pr incip al e mpl oy er f or th e t w o m ajo r def in ed b en ef it p l ans i n th e UK . T h e Co mp an y is ac cou ntin g for a ll t he UK d ef ine d benefit schemes (funded and unfunded) and vir tually all o f the post -retirement healt hcar e schemes. The retir ement benefit ass ets and liabilitie s compris e: 31 Ju ly 2 0 2 2 £m 31 Ju l y 2 0 21 £m Mar ket va lu e of s ch em e as s et s 3 ,0 67 4 ,1 0 4 Pr e s ent v alue o f fu nd e d sc he me l ia bi li t ie s (2, 738) (3,55 8) Surp lus restr ic tion (20) – Sur plus 309 546 Unf un de d p en si on p l an s (4 3) (54) Post-retirement healthcar e (4) (4) Pre sent value of unfunded obligations ( 47 ) (5 8) Net pension ass et 2 62 488 Retirement benefit assets 309 546 Retirement benefit liabilities ( 47 ) (5 8) Net pension ass et 2 62 488 Se e th e di sc los ur e s for U K sc he me s in n ote 8 to the c on so l idate d ac cou nt s for t he c ir cum s ta nce s of t he ma jo r sc hem e s, r isk ma nag em ent , pr in cip al a s sum pti on s, a s s et s an d li abi li tie s a nd th e f und ing p os it ion o f the t wo m ajo r sc he me s. 1 1 Share c api tal an d re ser ves Share capital Nu mb e r of s ha r e s Issued capital £m Consideration £m Or di n ar y sh ar e s of 3 7 .5p e a ch T ota l sh ar e c ap i ta l at 31 Ju ly 2 0 2 0 3 9 6 , 2 11, 1 8 0 149 Is s ue of n e w eq ui t y s ha r es – e xer c is e of s ha re o pt io ns 16 5 ,9 3 4 – 2 T ota l sh ar e c ap i ta l at 31 Ju ly 2 0 2 1 39 6,377 , 1 14 149 Shares purchased under a buy back programme (34, 1 5 2,897 ) (13 ) Is s ue of n e w eq ui t y s ha r es – e xer c is e of s ha re o pt io ns 131,942 – 2 T ot al s ha r e ca p it a l at 31 J uly 2 0 2 2 362,356, 15 9 13 6 At 31 Ju ly 2 0 2 2 , al l of the i s su ed s har e c ap it al w a s in f r ee i s sue . A ll i ss ue d sh ar e s ar e fu ll y pa id. S e e no te 9 to the c on so li date d ac cou nt s for in for m ati on ab ou t sh ar e sc he me s , inc lu din g tota l sha r es u nde r opt io ns an d op tio ns e xer cis a ble a t the b al a nce s he et da te. Du r in g the ye ar , the C omp an y r ec ei ve d £ 3 m (F Y 2 0 21: £2m ) on t he i s sue o f sha re s in r e sp e c t of the e xer ci se o f opt ion s aw ard ed un de r v ar i ou s sha re option schemes. Smiths Industrie s Employee Benefit T r us t Th e r et ain ed e ar ni ng s inc lud e th e pur ch as e of S mi ths G r oup p lc sh ar e s by t he S mi ths I ndu s tr ie s E mp lo ye e Be nef i t T ru s t, an d th e is su e of the s e sh ar es u po n the e xer ci se o f sha re o pti on s. T h e co nsi de r at ion p ai d w as £16m (F Y 2 0 21 : £1 6m ) an d £ 3m ( F Y 2 0 21 : £ 2m ) w a s r ece i ve d, £ 2m f r om th e is s ue of n ew s har e s ( F Y 2 0 21 : £ 2m ) an d £1 m (F Y 2 0 21: £nil ) d ir ec t ly to th e Em plo y ee B en efi t T r us t . At 31 Ju ly 2 0 2 2 t he T r us t he ld 6 1 8, 6 62 ( F Y 2 0 21 : 32 6, 3 6 4) o r dina r y sha re s . Distribut able profits Th e C omp an y’s pr of it a nd lo s s r es er v e of £ 2 , 2 0 5m ( F Y 2 0 21 : £1 ,6 2 8m ) in cl ude s £1,3 2 8m ( F Y 2 0 21 : £6 3 8m ) of d is tr i bu ta ble p r of it s . S ee n ote 26 in th e Gr ou p acco unt s f or a di sc us si on of c a pi ta l man ag eme nt an d the f a c tor s w h ich t he B oa r d con si de r s w he n pr op os ing d i v ide nd s. Other res er ve s O the r re s er v es a r os e fr o m th e ca nce ll a tio n of th e sha r e pr emi um ar i sin g f ro m an e qui t y -f un de d ac qui si tio n in th e ye ar en de d 3 0 Ju ly 198 8 . Dif ferential bet ween consolidated and parent Comp any net asset s Th e Gr o up's con so li date d b al an ce sh eet s ho w s ne t as s et s th at ar e £185 m lo we r (F Y 20 21 : £96 m high er ) t han t he ne t as s et s sh ow n o n th e Pa r ent C omp an y 's bal a nce s he et . T his d ef ici t pr incip al ly ar o se i n 2 0 0 7 w he n the G r oup r et ur n ed £ 2 . 1 bn of c ap it al to s har e hol de r s , cr e atin g a net a s set d ef ici t of £1. 9bn. E a r nin gs r et ai ne d w ith in th e Gr ou p ha ve s ubs e que ntly r e duc ed t his d ef ici t . T he c ur r ent y ea r r ev er s a l ha s ar i se n fr om t he d i v ide nd p ai d to the C om pa ny b y Sm it hs Gr o up Inte r nat ion al H ol din gs L td fol lo w in g th e s ale of t he M edi c al bu sin e ss . 1 2 Contingent l iabil itie s Th e C omp an y ha s pr o v ide d gu ar antee s and a r r a ng ed l et ter of c r edi t f ac il iti e s to sup po r t the Gr o up’ s pe ns ion p l an s. T h e cu r r ent am ount out sta nd ing u nde r let ter s of cr ed it i s £ 5 6m ( F Y 2 0 21 : £5 4m ). T he C om pa ny ha s gu ar a ntee d th e US $ 8 0 0 m r ev ol v ing c re di t f ac ili t y av ail a ble to a subsidiar y . 1 3 Post Balance Sh eet Even t Det ail s of the p r opo s ed f in al di v i den d an no unce d si nce t he en d of th e r ep or tin g per iod ar e gi v en i n note 2 5 to th e Gr ou p con s ol id ated financial st atements. SMITHS GROUP PLC COMP ANY ACCOUNTS 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 17 9 A fu ll l is t of th e Gr ou p’ s re l ated un de r tak ing s as at 31 Jul y 2 0 2 2 is p ro v id ed b el ow. T he e ntit ie s ar e gr oup e d by t he co untr y in w hi ch th ey ar e inco r p or ate d an d det ail s of their r e gis ter e d of f ic e ad dr es s , cl ass e s of sh ar es a nd o w ne r shi p is di sc los e d. Rel ate d un der ta kin gs incl ud e sub sidi ar ie s , a ss o ciate d und er ta kin gs , jo int v entur e s an d as s oc iate s. Name Secur it y Direct (%) T otal (%) UNIT ED KINGD OM 1 1- 1 2 St Ja me s’s Squ ar e, L o nd o n, S W 1Y 4L B A ir L o g L imi te d Ordina r y 10 0 EI S Gr o up P lc Ordina r y 10 0 10 0 F lex-T ek Gr oup L imite d Ordinar y 10 0 Fl ightsp are s Limited Ordinar y 10 0 10 0 Fr a nci s S ha w A n d Co mp an y ( Ma nc he s ter ) L i mi te d Ordina r y 10 0 Fr a nci s S ha w P LC 37 % 2 nd P r ef O r di na r y; 5. 2 5 % Cum P r ef; Dif; Ordin ar y 10 0 Gr a s eb y L im it ed Ordina r y 10 0 10 0 Roo f Uni t s (G r ou p) L i mi ted Or dinar y 10 0 10 0 S.I. Pension T r ustees Limited Or dinar y 10 0 10 0 SI Proper ties Limited Or dinar y 10 0 10 0 SITI 1 Lim it ed Common 10 0 Smiths Aero space Component s T yseley L imited Ordinar y 10 0 10 0 Smiths Aer ospace Glouce ster Limited Ordina r y; Or dinar y A 10 0 Smiths Finan ce Limited Or dinar y; RDM 10 0 Sm it hs G r oup F inan ce E U L im ite d Ordinar y 10 0 Sm it hs G r oup F inan ce U S L im ite d Ordin ar y 10 0 Sm it hs G r oup I nn ov atio n L imi te d Ordina r y 10 0 Smiths Group I nternational Holdings Limited Or dinar y 10 0 10 0 Smiths Industr ie s Limited 7 % No n Cum P r ef; Or di na r y 10 0 10 0 Smiths Nominee s Limited Ordinar y 10 0 10 0 Smiths Wolver hampton Limited Ordina r y 10 0 Sovos Limit ed Ordina r y 10 0 T I Co r p or ate Se r v ice s L i mi ted Ordinar y 10 0 10 0 T I Gr o up L im ite d Ordina r y 10 0 10 0 T igr up No. 7 L i mi te d O rdinar y 10 0 10 0 T igr up No. 14 L im ite d Ordinar y 10 0 X DG L imite d Ordinar y 10 0 10 0 X DG S e r v ic es L i mi te d Ordin ar y 99 29 Dunsinane Avenue, Dundee, DD2 3QF Flex ible Duc ting Limited O rdinar y 10 0 T r ak Mi cr o w a ve L imite d Or dinar y 10 0 5 4 Ha g le y Ro ad , Ed g ba s to n , Bir min gh am , B16 8PE C V E T r us te e L im it ed Or dinar y 10 0 10 0 Smiths Pensions Limited Ordinar y 99 10 0 T I Pen s io n T r us te e L imi te d Limited B y Guar antee 10 0 Aberc anaid, Mer thyr T ydfil, Mid Glamorgan, CF48 1UX A mn ite c Ho s e L im ite d Ordina r y 10 0 A mni tec L imi te d Ordina r y 10 0 Br oo kly n H o us e, 4 4 Bro o k Str e et , S he ps he d , L ou gh bo r ou gh , L E12 9RG Ga st ite Sy s tem s L imi ted Ordina r y 10 0 Buckingham House, 36 1 -36 6 Buckingham Avenue, Slough, Berk shire, SL 1 4LU Fl ex ibox In ter nat ion al L imi ted Ordinar y 10 0 John Crane Group Limit ed Ordinar y 10 0 Jo hn Cr ane In v es t me nt s L im it ed Or dinar y 10 0 Jo hn Cr ane U K L imi te d Or dinar y 10 0 Pr o je c t S ug ar L im ite d Or dinar y 10 0 Smiths Busines s Information Ser v ices L imited Or dinar y 10 0 Centur y House, Mayland s Avenue , Hemel Hempstead, Hert fordshire, HP2 7DE Sm it hs D ete c ti on G r ou p L imi te d Ordina r y 10 0 Smiths Detection Inves tments Limited Or dinar y 10 0 Smiths Detection Limited Ordinar y 10 0 10 0 Smiths Detectio n-Watford Lim ited Or dinar y 10 0 Smiths Heimann L imited Ordina r y 10 0 10 0 No 1 E xchange, Market Street, Aberde en, Scotland John Crane Ass et Managemen t Solutions Limited Or dinar y 10 0 SUBSIDIA RY UNDERT AKING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 0 Name Secur it y Direct (%) T otal (%) Unit 1 30 Centennial Park , Elstre e, Hert fords hire, WD6 3T J Hyper t ac Limi ted O rdinar y 10 0 Smiths Industr ie s Industr ial Group Limited Ordin ar y 10 0 Smiths Interconnect Group Limited Ordinar y 10 0 ANGOL A Rue Kw a m me N kr u ma h , T or r e s Im po r- A fr i c a, 3 A nda r , Ap t A , Lua n da Jo hn Cr ane ( A ng o l a) P r e s t ac a o De S e r vi ce s L td Or dinar y 10 0 ARGENTI NA Av . Leandro N. Alem 1 1 10, 1 3 Floor , Baker Mack enzie Office, Buenos Aires John Crane Argentina SA Common 10 0 T I Gr o up A uto mo ti v e Sy s te ms ( A r g ent in a) S A Ordin ar y 10 0 AUSTRALI A 5 49 – 551, So me r vi ll e Ro ad , S un sh in e, M el b ou r ne , V I C 30 2 0 Flexibox Pt y Limited Ordinar y 10 0 Jo hn Cr ane A us t r al i a P t y Li mi te d Or dinar y 10 0 Bo t any G r ov e E s t ate U ni t 5 , 14 A Ba ker S tr e et , B ot a ny, NS W 2 019 Sm it hs D ete c ti on ( A us tr ali a ) P t y Ltd Ordina r y 10 0 A ZERBA I JAN REP UBLIC 32 , D os t lu q Str e et , S a ly a n Hi gh w ay P O B ox A Z1023 , B ak u Jo hn Cr ane B ak u L LC Or dinar y 10 0 BELGIUM Gl a s s tr a a t 37 , A n t we r p en , 2170 Jo hn Cr ane B el gi um N V Ordinar y 10 0 BR A ZIL Ru a T ab ap o ã, 4 22 , 10t h f lo or , co nj . 101, Ita im B ib i, 0 45 3 3 - 001 Smiths Detection Br asil Comér ico De Equipamentos Ltda Common 10 0 In du s tr i al D is t r ic t o f T he C it y of Ri o Cl aro , St at e of S ã o P au lo , AV . Br as il N um b er 4 .70 0, CEP 13 5 05 -6 0 0 Sm it hs B r a sil L td a Ordinar y 10 0 CANADA 4 2 3, G r ee n No r th Roa d , Sto n ey C re ek , O nt a r io , L 8 E 3 A 1 Jo hn Cr ane C an ad a In c Common 100 37 0 0 , Sto ck E xcha n ge Tower , P .O. B ox 2 4 2, 8 0 0 P l ac e V ic tor i a, Mo nt re al , P Q, H 4 Z 1E9 Smiths Detection Mon treal Inc. C l a ss A S h ar e s; Cl a s s B Sh ar e s 10 0 4 6 10, Ea s tg a te P ar k wa y, Uni t 3 , Mi s si s s au ga , O nt a r io , L 4 W 3 W6 Flexible T ech nologies (Canada) Ltd. Or dinar y 10 0 16 7 71, Sa in te Ma r i e Rd , K ir k l an d , Qu eb e c , H9 H 5H 3 Smiths Interconnect Canada Inc Common Shares 10 0 CHILE Amer ico V espucio 254 2, Complejo Empres arial El Cor tijo, Conchali, Santiago Jo hn Cr ane Ch il e S A Ordinar y 10 0 CHINA No. 1, L a ne 6 5 , Hu an lo ng R oa d , Pu d on g Ne w D is t r ic t , S ha ng h ai Smiths (Shan ghai) Management Co., Ltd Ordina r y 10 0 No. 7 , Factor y Building, Maqiao Industrial Squa re, Changshu Economic Development Zone, Changshu, Jiangsu 21 553 6 Changshu Flex- T ek Ther mal Fluid Sys tems Manufac turer Co. Ltd Ordinar y 10 0 No.9 , No. 1, Ha it a i Hu ake Ro a d , Hu ay u an I nd u st r i al D is t r ic t (O u t si d e Th e R in g) , Binhai Hi- T ech , Industrial Par k, Tianjin Jo hn Cr ane T e chn o lo g y ( Ti anj in ) C o L imi te d Ordin ar y 10 0 No. 14 Un it , N o. 7 8 , X in gL i n Ro ad , S uzh o u In du s tr i al P a r k , Su zh ou 2 150 26 A nt ar e s A d v an ce d T es t Techn ol o gie s ( S uz ho u ) Co . Lt d O rdinar y 10 0 No. 1 20, Sanjiang Avenue, Economic Development Zone, M ianyang , Sichuan Province Huafeng Smiths Int erconnec t (Sichuan ) Co., Ltd Ordinar y 60 Roo m 9 2 3B , No 5 5 , X il i Ro a d, S ha ng h ai , (Ch in a) P i lo t Fre e T r a de Z on e SM O De tec t io n Eq uip me nt ( S ha ng ha i) C o. , L td Or dinar y 10 0 Roo m 166 8 , No . 14F F lo or 3 D a to ng B ui ld in g , Hu an gh e Av en ue , Nankai Distric t, Tianjin Jo hn Cr ane Ch in a Co L imite d Or dinar y 10 0 SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 181 Name Secur it y Direct (%) T otal (%) COLOMBI A C al le 4 6 A N o 8 2-5 4 Int 14 , P ar qu e Em p re s a r ia l S an C a ye t an o, B o go t a John Crane Colombia SA O rdinar y 10 0 COST A R ICA 3 3r d S t. N um be r 7 7 7 B ar r i o Fr a nc is c o Pe r al t a, C e nt r al A ve nu e & 8 th , S a n Jo se Smiths Interconnect So ciedad Ano nima Ordinar y 10 0 CZECH REPUBLIC Ja na S ig mu nd a 7 8 , Lu ti n , 78 349 Jo hn Cr ane A .S . O rdinar y 10 0 DOMINIC AN REP UBL IC C al le E l Rec o do , # 2 Be ll a V ist a , S a nt a D om in go John Crane Dominic ana S A Or dinar y 10 0 EGYP T 139 , Mo g am aa E l Ma s a ne a St re et , E l A mi r ey a , C ai ro Jo hn Cr ane E g y pt L lc Ordinar y 10 0 Jo hn Cr ane E g y pt S e al in g Sy s te ms L l c Ordina r y 99 Nil e Ci t y Towe r s , No r t h T ow er, 22n d Fl oo r , Ra ml et B ou l a q, N il e C ou r ni ch , C a ir o Detectio n T echnologies Egypt Qu otas 10 0 FINL AND P O Box 10, P u na si ll anti e 15, Mu ur ame, 4 09 5 0 John Crane S afematic Oy Ordinar y 10 0 FR A NCE 22, Avenue Maurice Chevalier , 7783 3 Ozoir-La- Ferrier e, Paris T ite fl ex E ur op e S . A .S . Or dinar y 10 0 31 Rue Isidore Maille, Saint-Aubin-Les- Elbeuf, 7 64 1 0 Hy pe rta c S .A. Ordinar y 10 0 36 R ue C h ar l e s He ll er , V i tr y Sur S e in e, F -94 4 0 0 Sm it hs D ete c ti on Fr anc e S. A . S . Share s 10 0 1 14, Ru e Ju le s F er r y, B.p. 3 5 , De v il le - L e s -Ro ue n , 7625 0 Jo hn Cr ane Fr ance S . A . S. Ordinar y 10 0 T I S A (Fr anc e) O rdinar y 10 0 GE RMANY A m Zi r ku s 2 , Be r l in , 101 1 7 John Crane Filtr ation T echnologies GmbH Ordina r y 10 0 Ge we r b es t r a ße 15 a, G r a be n , 8 6 8 3 6 Gasti te Systems Deuts chlan d GmbH Ordinar y 10 0 Im Herzen 4, Wiesbaden , 65205 Smiths Detection GmbH Shar es 10 0 Smiths Detection Ger many GmbH Or dinar y 10 0 Ne ck ar we g 3 , Vell m ar , 3 4 2 46 Her kules Holding GmbH Or dinar y 10 0 Seeb ach GmbH Or dinar y 10 0 Ree ps c hl a g er St r ., 10B , Lu be c k , 2 3 55 6 Flex schlauch Pr oduktions GmbH Shar es 10 0 T ol ze r St r a s se , 15 82 0 31, Gr un w a ld Zamor KG Ordinar y 48 Ulrichsber ger Strass e 1 7 , Deggendor f, 9 4 4 69 Hy per tac GmbH Or dinar y 10 0 Werner–V on–Siemens – Str .6, Fulda, 3604 1 John Crane GmbH Or dinar y 10 0 GREECE 3 Str atig o u T ob re S tr ee t , Mu ni ci pa l it y Of A gi a P ar a s kev i , At he ns , 15 3 4 2 Jo hn Cr ane H el l as – E n gin e er ed S e a li ng S y s tem s Mo no pr o s op i Ep e O rdinar y 10 0 GUERNSE Y Le ve l 5, M il l C ou r t, L a C ha r ro te r ie , St P et er P or t, G Y1 1EJ Smiths Group Insur ance L imited O rdinar y 10 0 SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 2 Name Secur it y Direct (%) T otal (%) HONG KONG 4 0 0 8 - 4 0 0 9, 40 / F , One P a ci f ic P l a ce, 8 8 Que en s w a y Sm it hs In ter co nn e c t Gr o up ( HK ) L imi te d Ordinar y 10 0 Sm it hs In ter co nn e c t Ho ng K on g C o L imi te d Or dinar y 10 0 Smiths Detection Hong Kong Limited Or dinar y 10 0 HUNGARY 20 40 B ud a or s , G y a r U. 2 Jo hn Cr ane Hu ng ar y K f t Ordin ar y 10 0 INDIA D - 196 Okh l a In du s tr i al A r e a, P h as e -1 , Ne w De hl i , 1 100 2 0 Pl ent y Ind ia L i mi ted Ordinar y Shares 10 0 No 1 1, 1 s t Ph a se , Pe e ny a , In du s tr i al A rea , B an g al or e, 5 6 0 0 5 8 Jo hn Cr ane S e al in g Sy s te ms I nd ia P r i v at e L imi te d Or dinar y 10 0 Smiths Interconnect India Pri v ate Limited Or dinar y 10 0 No 3 8 , K i ad b In du s tr i al A rea , B an g al or , 5 6 1 2 0 3 S T S T it ef le x Ind ia P v t L td Or dinar y 10 0 Shir w al, Mahar ashtr a 4 12801 S ee ba ch F i lte r S ol ut io ns I nd ia P v t L td Ordina r y 10 0 Var d hm an C ro w n Ma l l , Un it N o. 3 0 0 3 r d Fl o or , S ec t or 19 D w ar k a , Ne w D el hi 1 100 7 5 Sm it hs D ete c ti on S y s tem s P r i v ate L i mi te d C l a s s A Equ it y Sh ar e s; Cl a s s B Equ it y Sh ar e s 10 0 INDONE SI A Cilandak Commercial Es tate Bldg 401 A , Ji. Kko Cilandak , Jakart a, 1 2560 PT John Crane Indonesia Or dinar y 99 IREL AND Ri v er s id e O ne , Sir J o hn Ro g er s on’s Qua y, Dub l in , D 0 2 X 5 76 Jo hn Cr ane P en si on T r u st ee ( Ir e l an d) L td Or dinar y 10 0 De lo it t e O f f ice s , 6 L a p ps Q u ay, Co r k Sm it hs D ete c ti on I r el an d L im it ed Or d in ar y; O r di nar y B; Or d in ar y D; S er ies C 10 0 T5 3/ 54 , Shannon Industrial Estate, Shannon, Co. Clare Jo hn Cr ane ( Ir e l an d) L i mi ted Or dinar y 10 0 I T A LY V ia D a Bi s s on e 7A, G en o v a, 16 1 5 3 H y pe r tac S p A Ordinar y 10 0 V ia G io t to 3 , M ug gi o, 2 0 8 35 Jo hn Cr ane I t al ia S p A Ordinar y 10 0 Smiths Detection Ital ia srl Q u ot a Val ue o f Sh ar e s 10 0 Sm it hs G r oup I t al ia S r l Ordinar y 10 0 JAP AN 1 - 1 - 1 Uchisaiwaich o, Chiyoda- ku, T o k yo Sm it hs D ete c ti on J ap an G k Cash Contr ibution 10 0 222 2, Kamitoya ma Ritto City, Ritto-Shi, Shiga-Ken Jo hn Cr ane J ap an I nc O rdinar y 70 K AZ AKHST AN Aty r au Region, Gat yr au, Station K Ar abathan , House Production Site 1 4, 0600 00 John Crane K azak hst an Ordinar y 10 0 KOR E A , REP U BL I C OF Migeundong, Westgate T ower 1 5F , 70 Chungjeong-Ro, Seodaemun-Gu, Seoul Jo hn Cr ane K or e a Co L td Ordinar y 10 0 MALAY SIA 20 7 , Ja l a n T un Ra z ak , S ui te 13. 0 3, 13 th F l oo r , Men a r a T an & Tan, Ku a l a Lu mp ur, 50 4 0 0 F lex i ble D u c tin g Ma l a y sia S d n Bh d (i n l iq uid at io n) Or dinar y 10 0 Me na r a L GB, 1, Ja l an W an K a d ir Taman Tun Dr Is m ai l , 6 0 0 0 0 Ku al a L u mp ur , W P K L Jo hn Cr ane M al a y sia S d n Bh d Or dinar y 10 0 Smiths Detection Mala ysia Sdn Bhd Ordinar y 10 0 SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 3 Name Secur it y Direct (%) T otal (%) ME X ICO 6 79 , Poniente 1 52, Vallejo Delegacion Azcapot zalco, Mexico Cit y, 230 0 Ind us t r ia s Jo hn C r an e Me x ic o S. A . de C.V . S er ies A; Ser ies B 10 0 Av. Pr im er o D e Ma yo L o te 3 E di fi ci o 1B, Pr ol o gi s P ar k , Re y n os a , 8 8 7 8 0 T utco D e Me x ic o SR L de C V Ordinar y 10 0 Carr etera Ciudad Vic toria Matamoros, Km . 1 73+60 0, Solonia San Fernando Centro, T amaulipas, San Fernando, CP 87 600 Jo hn Cr ane S o ci ed ad D e Re sp o ns ibi l id ad L i mi ta da D e C ap it a l Var i ab le Or dinar y 10 0 Car retera Libre A ntiguo Camino Tijuana 20221-B, Fideicomis o el Florido, Tijuana, Ba ja C a l if or n i a, 2 2 2 3 4 Sm it hs In ter co nn e c t Me xi co S . de R l de C.v. Equ it y Quo ta s 10 0 Pa s e o De L a Refo r ma 5 0 5 , C ol , C u au hte mo c , 6 5 0 0, C iu d ad D e Me x ic o Sm it hs D ete c ti on M ex ic o S . de R l de C.v. Par tes So ciales 10 0 NE THERL AND S A br aha m v an St ol k w e g 1 18, Rot t er d am , 3 0 4 1 JA A mn ite c B V O rdinar y 10 0 Be r ge n 9 – 17 , B a re nd r ec ht , Z ui d, 2 9 9 3 L R Jo hn Cr ane H ol l an d B V Or dinar y 10 0 Smiths Detection Benelux BV O rdinar y 10 0 Buckingham House, 36 1-366 Buckingham Avenue, Slough, Berk shire, SL 1 4 LU, E ng l an d Smiths Group Hold ings Netherlands BV Ordin ar y 10 0 Hy d ro gr aaf 2 5, P O B ox 4 42 , 69 0 0 A k Z ev en aa r , Du i ve n, 69 21 R S Indufil BV Ordina r y 10 0 NE W ZE A L A ND De lo it t e, L ev el 18 , 8 0 Qu e en St re e t , Au ck l an d 1010 Sm it hs D ete c ti on N e w Zea l an d L im ite d O rdinar y 10 0 PERU Av. Gui ll er m o D an s ey 212 4 , Ur b a ni z ac io n In du s tr i al C o nd e, L i ma Jo hn Cr ane P er u S a c Common Shares 10 0 POL AND 1327, ul. B ie l s ka , P ol a nd , 4 3- 374 Bu c zko w i Jo hn Cr ane P ol a nd S p Z O.O. Ordin ar y 10 0 PUERTO RICO 65 4 Pl az a , S ui te # 9 3 3 , 6 5 4 M un oz R i ve r a Av e, S a n Ju an , 0 0 918 Jo hn Cr ane C ar ibe L td C ommon Shares 10 0 RUSSI AN FEDER ATION Roo m 5 01, Fl oo r 5, b l d. 1, 5-1 0 4 O c t y a b r sk ay a E mb ., S t. P et er s bu r g 193 0 7 9 Sm it hs D ete c ti on R us L L C Ordinar y 10 0 B. s av v in sk y Per, D. 1 1, Mos co w, 1 19 4 3 5 L LC J ohn C r a ne R us Ordinar y 10 0 SAU DI ARABIA Dammam Industrial City, Dammam, 324 3 Jo hn Cr ane S a ud i A r a bi a Lt d Or dinar y 10 0 Bu il di ng 7, Zone A , Ai r p or t ro ad , Bu s in e ss G a te, P .O Box Ri y a d h 1 168 3 , 9 3 59 7 Sm it hs D ete c ti on S audi A ra bi a Lt d Share s 10 0 SINGAP ORE 6 Sh en to n Way, OU E D ow n to w n #2 6 - 0 0 , 0 6 8 8 0 9 Jo hn Cr ane S in ga po r e P te L i mi ted Ordinar y 10 0 20 , P a si r P anj a ng Ro a d , #13-26 M ap l et re e Bu s in es s C it y, 1 1743 9 Sm it hs C on ne c to r s A sia P te. Ltd . O rdinar y 10 0 Sm it hs D ete c ti on ( A sia P ac if i c ) P te . L td Or dinar y 10 0 SL OV AKIA Dvor akovo nabrezie 1 0, Bratisl ava -mest ska cast Stare Mesto, 81 1 02 Jo hn Cr ane S lo v ak i a SR O Or dinar y 10 0 SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 4 Name Secur it y Direct (%) T otal (%) SOUTH AFRI CA 2, J an s en R oa d , Nu f f ie ld I n du s tr i al S it es , S pr i n gs G au te ng , 155 9 Flexibox (Pt y ) Limit ed Ordina r y 10 0 Jo hn Cr ane P t y Lt d Ordin ar y 10 0 SPA IN Ce m en to 1, T or re jo n De A rdo z , Ma d r id Jo hn Cr ane Ib e r ic a S A Or dinar y 10 0 SW EDEN Knivsta, 7 4 1 80 Habia T eknofluor AB Sh ares 10 0 T eknofluor Holding AB Sh ares 10 0 Falt s p at s g at a n 4 , Se -4 21 3 0 Va s tr a Frol un d a Jo hn Cr ane S ve r ig e A B Or dinar y 10 0 SWITZE RLAND Hohenrains tras se 10, 4 1 33 Pratteln Jo hn Cr ane ( S w i t zer lan d ) A G Ordinar y 10 0 T AIW AN 32 4 - 4, Fo n g-J en Ro a d, R en w u Di s tr i c t , K ao h si un g Ci t y 814 Jo hn Cr ane Taiw a n Co L td . O rdinar y 10 0 THAI L AND 9 /31 1, 3 1 st Floor , Um T o wer , Ramkhamhaeng Road, Suanluang Distric t, Bangkok Jo hn Cr ane ( Th ai l an d) L i mi te d Ordinar y; Pref 10 0 99/3 Moo 5, Kingkaew Road, T ambol Rajatheva, A mphoe Bangplee, Samutpr akarn Prov ince, 1 054 0 Sm it hs D ete c ti on ( T ha il an d ) L imi te d Pref; Ordin ar y 10 0 TUNI SI A Zone Industrielle Ro ute De Khniss, Monastir , 50 00 Smiths Connec tors T unisia SAR L Or dinar y 10 0 TURK E Y Istanbul Sar iyer , Huz ur Mahallesi, Ahmet Bayman Cad dessi, Dis, Reklamcilik Apt No: 1 7 - 1 9 / 1 John Crane Endus tri yel Sizdirma zlik Sistemler i Ltd Ordina r y 10 0 UNITE D ARA B E MIRA TES Bu il di ng B10, I nd us t r ia l Mu s s af fah , M 4 4, S e c to r 15, A bu D h ab i Sm it hs D ete c ti on S e c ur i t y S y s tem s L lc Share s 49 Du ba i A i r po r t Free Z on e, P O B ox 4 82 25 , Bu il d in g No . 8 WA ( We s t Si de ), 4 01, Du ba i Sm it hs D ete c ti on M id dl e E as t Fze Sh ares 10 0 S2 01 13, Je b el A li Fr e e Zo ne , 6 104 0 Jo hn Cr ane Mi dd le E a s t Fze Or dinar y 10 0 UNITE D ST A TES OF AM ERICA 51 Gro w th Roa d , L a co ni a, N H, 0 3 2 4 6 L ake s Re gi on Tubul ar P r o du c t s In c. Common Stock 10 0 1 1 6, P i ne St r ee t , 3r d F lo o r , Sui te 3 2 0, H ar r i s bu r g, PA 17101 T utco, Llc Ordin ar y 10 0 180 Va n Ri p er Av en ue , El mw o od P a r k , N J 0 740 7 Kr eisler Industr ial Corp Common Stock 10 0 Kr eisler Manufac turing Cor p Common Stock 10 0 20 8 S . L a s al l e Str e et , S ui te 814 , Ch ic a go , IL , 6 0 6 0 4 John Crane Int ernational Inc. Common Shares 10 0 815 Fore s t w o od D r i ve , Ro me ov i ll e, I L 6 0 4 4 6 United Flex ible, Inc. Common Stock 10 0 US H os e C or p Common St ock 10 0 28 0 1 Red D o g L an e, K nox v i ll e, T N 3 7 914 Fulton Bellows LLC L im ite d L i abi l it y Co mp an y Inte r es t s 10 0 Co r p or a ti on S e r vi ce C om p an y, 251 Li t tl e Fal l s D r i ve , W il mi n gto n , DE , 198 0 8 Unit ed Flexibl e T echnologies, I nc. Common Stock 10 0 SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 5 Name Secur it y Direct (%) T otal (%) Th e C or p o r at io n T r us t C o mp a ny, 1 2 0 9 Or ang e St re et , W i lm in g to n, D E , 198 01 A ss et And Intelligence Management Ser v ices , LLC Ordin ar y St ock 10 0 Flexible T echnologies , LLC Ordina r y Shar es 10 0 F lex-T ek Gr oup ( U S ) L LC Or dinar y 10 0 John Crane Group, Llc Ordinar y 10 0 Jo hn Cr ane In c Common; Prefer red 10 0 Jo hn Cr ane U S A , Inc O rdinar y 10 0 MDII Investments L LC Or dinar y 10 0 Powerc am-Houdaille, Inc. Common Shares 10 0 Roy a l Me ta l P ro du c t s , L LC O rdinar y 10 0 Smiths Busines s Information Ser v ices , Inc. Common Stock 10 0 Smiths Detection International, Llc Equ ity In t erests 10 0 Sm it hs D ete c ti on U S Ho l din gs , L L C L imi te d L ia bil i t y C o mp an y Inte r e st s 10 0 Sm it hs D ete c ti on U S , L lc Or dinar y 10 0 Smiths Group Ser vices Cor p. Common Stock 10 0 Smiths Interconnect A meric as, Inc. Common Stock 10 0 Smiths Interconnect, Inc. Common Stock 10 0 Smiths US Innovation LLC Ordin ar y 10 0 CT C o r p or a ti on S ys t em , 9 C ap i to l Str e et , C on co r d, N H 0 3 3 01 Smiths T ubular Systems-L aconia, Inc O rdinar y Share s 10 0 CT C o r p or a ti on S ys t em , 155 Fe d er a l St re e t, S u ite 7 0 0 , Bo s to n, M A 021 10 Titeflex Commer cial, Inc. Or dinar y 10 0 On e C or p or ate C en te r , Har tf o r d, C T 0 6 103 - 3 22 0 Titeflex Corpor ation O rdinar y 10 0 Th e C or p o r at io n T r us t C o mp a ny of N ev a d a , 701 S C a r s on S tr ee t , Su it e 2 0 0, C ar s on C it y, NV, 89 701 Smiths Detection Inc Common Stock 10 0 VENE ZUEL A C ar r et er a V í a A Pe r ij á , K m 8 ½ , Ave ni d a 50 , L oc a l N° 18 5 -72 , Zona Industrial El Silencio, Maracaibo, 4001 Jo hn Cr ane Ven e zu el a C A Cl as s A ; C l as s B; Common 10 0 AS SOCIA TES RUSSI AN FEDER ATION 28 , A c ad em ic a Ve de ne e v a Str e et , P er m , Pe r m sk i y Re gi on , 6 140 38 Ll c Jo hn C r an e Is k r a Ordin ar y 50 O v er se as b r anch es Th e C omp an y do es n ot op er a te thr ou gh an y br anche s . S ome G r oup s ubs idi ar y com pa nie s ha ve e s ta bl is hed b r a nch o pe r ati on s out side the UK . SUBSIDI A RY UNDERT AK ING S 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 6 Financ ial c alendar 2022 2023 (provision al) Anno uncement of F Y20 2 2 Results 23 September Div idend Ex-Dividend Date 20 O c t ob er Di v i de nd Re co r d Da te 2 1 Oc t ob e r L as t D RI P El ec tion D ate 28 O c to b er Annual Gener al Meeting 1 6 November Div idend Payment Dat e 1 8 November Anno uncement of F Y20 2 3 Interim Results 24 March Int erim Div idend Ex-Div idend Dat e 6 A pr i l Inte r im D i v id en d Re cor d D ate 11 A p r i l L as t D RI P El ec tion D ate 25 A p r il Inte r im D i v id en d P ay m ent D at e 17 M a y F Y2 02 3 F i na nc ia l Year En d 31 July Anno uncement of F Y20 2 3 Results Sep tember Reg istered Of fice Smiths Group pl c 4th Floor 1 1 - 12 St James’ s Square Lo nd on S W1Y 4L B , UK + 4 4 (0 )2 0 7 0 04 16 0 0 Inc or p o r ate d in E n gl a nd & W ale s C o m p a n y N o . 13 7 013 w w w.smiths.com Registr ar s Our s ha r e r eg is te r is m ain ta in ed b y Eq ui ni ti. I f y ou h av e a ny qu e s ti on s ab ou t yo ur S mi th s sh ar e s , pl ea s e co nt ac t E qui ni ti at : w w w.sh ar e v ie w.c o.u k . T elephone : T : + 4 4 (0 ) 3 71 3 8 4 294 3 (in t he U K ) T ex te l: 0 87 0 3 8 4 22 5 5 L ine s o pe n 8: 3 0 am to 5 : 3 0 pm ( UK t im e), Mon d ay to Fr ida y (e xclu di ng p ub li c h ol id ay s i n En gl a nd a nd W al e s) Write to: Eq uin it i L im ite d , A s pe c t Ho u se Sp en ce r Roa d , L an ci ng , We s t Su s s ex , BN 9 9 6D A Equ in it i of f er t he S ha r ev i e w po r tf ol io s e r vi ce to i nv e s tor s; vi si t w w w. s ha re v i ew. co .uk to r e gi s ter fo r an a cc ou nt. T hro ug h Sh ar e v ie w yo u c an a cce s s in fo r ma tio n ab o ut y ou r in ve s tm en t s , inc lu di ng b al a nc e mo ve me nt s a nd in di c at i ve s ha re p r i ce s , as w el l a s pr ac ti ca l he l p ab ou t tr a ns f er r i ng y o ur sh ar e s o r up dat in g yo ur p er son al d et ai l s . Div idends Sin ce N o ve mb er 2 019 Sm it hs n o lo ng er i s su e s di v i de nd c he qu e s. I n or d er to h av e y our d i v id en ds p a id di r ec t ly to y o ur b an k or b uil di ng s o ci et y acc ou nt pl ea s e co nt ac t E qu ini ti f or a c op y of t he B an k Ma nd ate F or m , or r e gis te r y our n om in ate d b ank o r bu il din g s oc ie t y a cc oun t by v i si ti ng w w w.sharev iew.co.uk. B y r eg is te r in g yo ur a cc oun t al l f ut ur e di v i de nd s w il l b e pa id s e cu re ly by d ir e c t cr e di t on th e di v i de n d pa y me nt d ate. Alternati vely, Smiths offers a Div idend Reinvestment Pl an. For more info r m ati on p le a se v i si t ou r w ebs i te or c ont a c t Equ in it i. Ordinar y share s T he m ar ket v alue o f an or d in ar y sh ar e of t he C o mp an y on 31 M ar ch 19 8 2 for t he p ur p o se s o f ca pi t al g ain s t ax w as 136 . 87 5 p ( ta ki ng i nto a cco unt t he sub - d i v is io n of 5 0 p sh ar e s in to 25 p s ha re s o n 14 Jan ua r y 1 9 8 5 a nd t he s ub - di v is io n an d co ns o li da ti on of 2 5 p sh ar e s in to 37 .5 p s ha re s o n 18 Jun e 2 0 0 7 ). A nnu al Gene r al Meet ing ( AGM) T he 2 0 2 2 S mi th s Gr o up p lc A GM w i ll b e h el d at 1 1.0 0 am on W ed ne s da y 16 Nov em be r 2 0 2 2 at Fr e s hf ie ld s Br u ck ha us D er ing er , 100 B is ho ps g ate, Lo nd on E C2 P 2 S R . T he N oti ce o f AG M is a s ep a r ate d o cu me nt w hi ch i s se nt ou t at l ea s t 2 0 w or k in g d ay s b efo r e th e AG M an d ma d e av a il ab le o n ou r we bs ite . I f yo u ar e in a ny d ou bt a s to w ha t ac t io n yo u sh ou ld t ake i n r el a tio n to t he r e s olu ti on s b ein g p ro p os e d at th e A GM, y o u ar e r e com me nd e d to consult your stockbroker , bank manager , solicitor , accountant or o ther independent profes sional adv iser author ised under the Financial Ser vices and Mar kets A c t 2 0 00 . T he m e eti ng w i ll b e w eb c as t a nd m ay b e v ie w e d on li ne b y r eg is te r in g on o ur w eb si te w w w.s mi th s .co m. Sh ar eh ol d er s w h o ar e u nab le t o at te nd t he A GM i n pe r s on a r e en co ur a g ed to v ote t he ir s har e s b y ap po int in g a pr ox y an d is s uin g v oti ng i ns tr uc ti on s. El ec t r on ic an d p ap er p r ox y app oin tm ent s a nd v ot in g in st r u c ti on s mu st b e r e cei v e d b y th e Co mp an y ’s Regi st r a r no t l ater t ha n 4 8 hour s befo r e th e AG M is h el d in o r de r to be v ali d. S ha r eh ol de r s w h o ar e no t CR E S T me mb er s can a pp o int a p r ox y a nd v ote o nl in e b y v is it in g w w w.sh ar e v ote. co .uk . CRES T member s, CRES T per sonal member s and other CREST -sponsor ed member s should consult the CREST Manual or their spons or or voting ser vice prov ider for instruc tions on electr onic prox y appointment and voting. SHAR EHOLDER INFORMA TION 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 7 For w ar d -lo oking st atements T his r e po r t cont a in s cer t ain f or w ar d - lo ok in g s ta tem ent s. T he y ap p ea r in a nu mb er of p l a ce s th r ou gh ou t th is d oc um ent a nd i nc lu de s t ate me nt s re g ar di ng t he i ntent io n s, b el i ef s an d /or c ur r en t ex pe c t at io ns of S mi t hs Gr ou p pl c (t he ' Co mp an y ' ) an d it s s ub si dia r ie s ( to get he r , the ' Gr o up' ) an d those of their respecti ve of ficer s, dire ctor s and employees concer ning, amongst other things, the result s of oper ations , financial condition, li qu idi t y, pro sp ec t s , g r ow th , s tr a teg ie s an d t he b us ine s s e s op er ated by t he G r ou p. Fo r w ar d -l o ok in g s ta tem ent s c a n be i de nti f ie d b y th e us e of fo r w ar d -l oo ki ng t er m ino lo g y, in clu di ng te r m s su ch a s "b el i ev e s" , "e s t im at e s", " a n t ic ip a t e s", "e x p e c t s", " f o r e c a s t s", " i n t e n d s", " p l a n s", "pr oj ec t s", "goa l ", "t ar g et ", " ai m" , "ma y", "w i ll " , "w o ul d", "coul d " or "sh oul d " or , in e ac h c as e, t he ir n eg ati v e o r oth er v a r ia ti on s or c om pa r a bl e ter m in ol og y. B y t he ir na tu re , th e se s t ate me nt s in v ol ve u nce r tai nt y and ar e sub je c t to k no w n a nd u nk no w n r i sk s , in cl ud in g, w i th ou t l im it at io n, t ho s e dis c us s e d un de r the s e c ti on t it le d ‘P r i nc ip al r i sk s a nd u nce r tai nti e s’ in thi s re po r t. Fu t ur e e ve nt s an d ci rc um s t an ce s c an c a us e pe r for m an ce , re s ul t s an d de ve lo pm en t s to di f f er m ater iall y f ro m th o se e xp r e s se d , imp l ie d or ant ici p ate d. T h e pa s t bu si ne s s an d f in an ci al p er for manc e of th e G ro up i s not to b e r el i ed o n as a n in di c ati on of i t s f u tur e p er fo r ma nc e. T h e fo r wa r d - lo ok in g s ta tem ent s r e fl ec t k n o w le dg e an d inf or m at io n av a il ab le a t th e date o f pr e pa r at io n of t his d o cu men t an d, u nle s s ot he r w is e r eq ui re d b y app l ic a bl e l aw, t he C om p an y un der t ake s no o bl i gat io n to up d ate or r e v i se the s e fo r w ar d -l o ok in g s ta tem ent s . U nd ue r el i anc e sh ou ld n ot b e pl a ce d on s uch f or w a r d- lo ok in g s t atem en t s . Not hin g in t hi s do cu me nt sh o uld be c on s tr u ed a s a p ro f it f or e c as t o r be i nter p r ete d to m ea n th at f ut ur e ea r ni ng s pe r sh ar e of t he C om p an y w il l ne ce s s ar ily ma tch o r exce e d it s his to r i c al pu bl i sh ed e ar n in gs p er s ha r e. T h e Co mp a ny a nd i t s Di r ec to r s acc ep t no l ia bi li t y to thir d p a r tie s. T h is d o cum en t co nta in s br and s th at ar e tr a d ema r k s an d ar e r e gi s ter e d an d /or ot he r wi s e pr ote c te d in a cc or d anc e w it h ap pl ic a bl e l aw. S o me o f th e pr o du c t s de s cr i b ed i n the s e m ater ial s ar e un de r de v el op me nt an d ar e n ot av a il a bl e fo r s ale , an d w e ma ke no def in it i v e cl a im s ab ou t th e f in al fe at ur e s or b en ef i t s of th e se p r o duc t s. 01 OVE RVIEW 02 ST RATEGIC REPORT SM I T H S GR O UP P L C A NN U A L R EP O R T F Y2 0 2 2 03 GOV ERNA NCE 04 FINAN CIAL ST A TEM ENTS 18 8 Designed and produced by Radley Y eldar www . ry . c o m T his r e po r t wa s p r inte d b y P ur ep r in t Gr o up using their environmental print technolog y which minimises the negative env ironmental imp a c t s of th e pr intin g p ro c es s . Ve get a bl e- ba s ed i nk s w er e u se d th r ou gh ou t an d 9 9 % of th e dr y w a st e an d 95 % of t he c le an in g solvent s associated with this produc tion were re c y c le d. T h is r e po r t is pr i nte d on Re v i v e 100 , ma de f r om 10 0 % F S C ® Recy cled cer tif ied fibre sourced from de-inked post-consumer waste. T he p r inte r an d th e ma nu f ac t ur i ng m il l ar e bot h cr e di te d w it h IS O 14 0 01 En v ir on me nt al Management Sys tems Standard and both are FSC ® cer ti f ie d. T h e mi ll a l s o ho ld s E M A S, th e EU E co - l ab el . Re v i v e 10 0 is a C ar bon b al ance d pa pe r w hi ch m ea ns t ha t th e ca r b on e mi s sio n s as s oc ia ted w i th i t s m an uf a c tur e h av e b ee n me as ur e d an d of f s et u si ng t he Wo r l d L an d T rust’s Carbo n Balance d scheme. FSC ® – Forest Stewardship Council ® T his e ns ur e s th at t he r e is an a ud it ed c ha in of cu s to d y fr o m th e tr e e in th e w el l-m an ag e d for e s t th r ou gh to t he f in is he d d oc um ent i n the p r i nti ng f a c tor y. ISO 1 4001 A pa t ter n of cont r ol f or an e nv i r on me nt al man a ge me nt s y s tem a ga in st w hich a n or ga ni s at ion c a n b e acc r ed ite d b y a th ir d p ar t y. L S E: S MIN A DR : SM GZ Y SMITH S GROUP PLC 4th Flo or 1 1 - 1 2 St Jame s’ s S quar e London S W1Y 4LB, UK + 4 4 ( 0)2 0 7 0 0 4 1 60 0 w w w.smiths.com TO VIEW THIS REPORT ONLINE go to www.smiths.com/investors Advanced Fact Viewer Presentation Calculation Anchoring Exact match Text block Display English Label Facts Loading... Standard Label Element Name Value Sign Unit Period Scale Decimal Axis Member Doc Period Type Balance Type Reference {{factList.Label}} {{factList.SecondaryLabel}} {{factList.Sequence}} {{factList.TagName}}[Text Block] {{factList.Value}} {{factList.Sign == "-" ? "Negative" : factList.Sign}} {{factList.CurrencyCode}} - {{factList.UnitDenominator}} {{factList.Period}} {{factList.Scale}} {{factList.Decimal === "-99999" ? 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