22nd Sep 2005 07:03
Smiths Group PLC22 September 2005 Smiths Group: Preliminary Results for the year ended 31 July 2005 Highlights • Sales from continuing operations increased by 13% to exceed £3 billion• All divisions contributed double-digit growth in headline profit• Headline* PBT and EPS increased by 18%, to £413m and 54.3p• On a statutory basis, PBT and EPS were £310m and 39.3p (2004: £300m and 38.0p)• Cash generation below target, but expected to recover• Outlook is for continued growth in 2006• Annual dividend increased for 35th year, by 7.4% to 29.0p * Before amortisation and impairment of goodwill and other intangible assets,and exceptional items Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: "The increase in earnings came from a good performance across the company. Weachieved underlying growth, improved our productivity and added valuableacquisitions. We are also seeing the benefit of recent higher investments in R&D. Looking ahead, the principal markets for our products are robust, and wehave strengthened our competitive position within them. The plan for 2006 willfollow a consistent formula: driving the top line ahead, controlling costs andfinding value enhancing acquisitions. We are confident that we can delivercontinued growth from across Smiths Group." Media: Investors:Chris Fox Russell Plumley+44 (0) 20 8457 8403 +44 (0) 20 8457 [email protected] [email protected] A meeting with analysts will be webcast at 9:00am UK time today on www.smiths-group.com/prelims2005 and archived there shortly after the event. Ashort interview with the Chief Executive can be seen on the same url or onwww.cantos.com. Reported on a statutory basis (unaudited) £m 2005 2004 Sales - continuing 3,017 2,678 - discontinued - 55 3,017 2,733 Operating Profit - continuing 420 360 - discontinued - 2 - goodwill amortisation* (61 ) (39 ) - exceptional items (48 ) (31 ) 311 292 Pre-tax profit - continuing 413 350 - goodwill amortisation* (61 ) (39 ) - exceptional items (42 ) (11 ) 310 300Basic earnings per share - continuing (headline) 54.3 p 45.9 p - statutory basis 39.3 p 38.0 p *goodwill amortisation includes impairment, and amortisation of otherintangible assets On a statutory basis, Smiths Group recorded pre-tax profit of £310m (2004:£300m) and earnings per share of 39.3p (2004: 38.0p) for the year ended 31 July2005. The remainder of this statement refers to the continuing activities ofthe company before amortisation and impairment of goodwill and other intangibleassets, and exceptional items. This measure is used because the companybelieves that it provides valuable additional information on underlying earningstrends. Results on this basis are referred to as "Headline" in the remainder ofthis statement. Headline performance £m 2005 2004Sales 3,017 2,678Headline operating profit 420 360Headline profit before tax 413 350 Headline earnings per share 54.3 p 45.9 p Annual dividend 29.0 p 27.0 p Smiths Group achieved double digit growth in headline earnings in 2005,combining higher organic sales, a valuable contribution from acquisitions and animproved profit margin. All four divisions have contributed to the goodperformance for the year. These results demonstrate the effectiveness of the company's Full Potentialprogramme adopted two years ago with the purpose of generating sales growth andenhancing profitability. The programme focuses on six fundamental strengthswhich drive Smiths' strategy: • Choosing markets with above-average long term growth and establishing competitive positions where Smiths can outperform these sectors.• Working continuously to improve productivity, including establishing production in low-cost countries where this is more efficient.• Building the scale and infrastructure to operate globally and support customers in all their markets, including the aftermarket.• Investing heavily in R&D to win technological advantage and meet the most demanding specifications.• Acquiring businesses which will add value to Smiths and being prepared to sell those worth more to others.• Ensuring that the company's ethical standards are respected throughout the organisation. Sales from continuing operations increased by 13% after an adverse currencytranslation impact of 3%, principally due to a 10 cent year-on-year decline inthe US dollar compared to sterling. Acquisitions made during the yearcontributed 4% of the growth. Excluding acquisitions and currency, sales grewby 12%. Headline operating profit increased by 17%, of which 6% (£21m) was contributedby acquisitions made during the year. The currency translation impact reducedreported profit by 3% (£10m). Excluding acquisitions and currency, headlineoperating profit grew by 14%. The net operating margin improved by a halfpercent to 14%, with margins ahead of last year in all four divisions. At the year-end, net debt stood at £931m compared with £273m a year earlier,principally reflecting the acquisition of Medex Inc. The interest charge for theyear was £23m, and was 18 times covered by headline profit before interest andtax. Other financing income was £15m, reflecting an improved FRS17 pensionfunding position. Consequently, headline profit before tax increased by 18% to£413m, as did headline earnings per share, to 54.3p. The company's effectivetax rate on headline profit for the year was 26% (2004: 26.5%). The Board has recommended a final dividend of 19.75p, an increase of 8.2%, whichwill bring the annual dividend to 29.0p, an increase of 7.4%. This dividend iscovered 1.9 times by headline earnings and will mark the 35th year in successionthat the Smiths dividend has been increased. In the 2005 Accounts the company has charged £48m of operating exceptionalitems. These comprise £10m for the integration of Medex, £15m for thesettlement of a patent dispute relating to the Cozmo (R) insulin pump and £23mfor the completion of a restructuring programme announced during 2004. It isexpected that there will be further costs of about £40m to complete theintegration of Medex. Operating cash-flow was £280m, after net capital expenditure but beforeexceptional items. This represents a 67% conversion rate from headlineoperating profit, below the company's 80% target. There were several reasonsfor this. The largest effect was the concentration of sales in the final monthsof the year. This concentration was greater than last year, and causedyear-end debtors to be some £40m higher, including the effect of the timing ofpayments on major defence programmes. These high year end debtors will turninto cash in the first quarter of the current financial year. Stocks alsoincreased, over and above the growth in activity. This was to safeguard theability to supply during a period of relocation of manufacturing (medical) andvolume growth (commercial aerospace). The final reason was capital investmentwhere net spend at £105m, exceeded depreciation by £28m. The cash expenditureon exceptional items was £35m. Free cash-flow, after interest and tax but before acquisitions and dividends,was £147m, compared with £255m in 2004. The reduction reflects the investmentalready mentioned plus tax and interest payments which were £47m higher than in2004. During the year the company spent £595m on acquisitions. The largest was Medex,a leading US supplier of medical safety devices, purchased in March for £499mincluding debt. On a pro-forma basis, Medex adds 35% to the annual sales of theMedical division. The remaining acquisitions added technologies, product linesand market reach to all four divisions of the company. The acquisitions,including Medex, are performing well and exceeding the initial returns expectedat the time they were acquired. Smiths has announced separately today two moreacquisitions, costing £20m. Increasing investment in research and development (R&D) reflects the company'sfocus on using innovation and advanced technology to gain competitive advantageand generate future sales. In 2005, R&D expenditure reached £295m, equivalentto 10% of sales, including £152m funded by customers. In 2004, the comparablefigures were £260m, 10% and £123m respectively. Significant developmentprogrammes in the year included the Boeing 787, Airbus A380, F-35, C-130 AMP,B767 Tanker and new explosive detection portals for homeland securityapplications. Under UK GAAP, Smiths expensed the £143m company-funded R&Dagainst profits in the year. The funding position of the company's pension schemes continued to improve. Theyear-end Balance Sheet includes net retirement benefit liabilities of £148mafter tax (2004: £162m) of which £63m related to the funded schemes in the UKand US. Measured on an FRS 17 basis, the UK pension plans, which are the majorproportion of funded plans are, in total, fully funded. The company made cashcontributions of £52m to the funded plans in the year, £14m above the regularservice cost. Litigation continues involving a US subsidiary, John Crane Inc (JCI) which onceused encapsulated asbestos in certain products. JCI contests every case inwhich it is named and, with the benefit of its "safe product" defence, has beendismissed before trial from cases involving approximately 113,000 claimants. Itis currently a defendant in cases involving approximately 174,000 claims. Overthe past 26 years, only 46 cases have been upheld against JCI, with judgementstotalling $39m. These, and all material legal costs incurred to date, werecovered by insurance. No provision relating to this litigation has been made. At the year-end, the company employed 30,600 people, including 17,600 in NorthAmerica and 7,200 in the UK. North America is the company's largest market,accounting for 58% (£1,745m) of total 2005 sales by origin and 59% (£249m) ofheadline operating profit, figures that will increase in 2006 as a result ofrecent acquisitions. Direct exports from the UK were £529m, an increase of 12%on the prior year. Aerospace £m 2005 2004 Sales 1,158 1,006Headline operating profit 118 100 Smiths Aerospace sales grew by 15% and headline operating profit by 18%, withthe margin edging above 10%. The profit increase reflects higher volume andbetter cost control, together with the impact of cost growth on some contracts,which was partly offset by additional recoveries from customers. Good progresson other contracts allowed the company to recognise additional profit in theyear. The division benefited from increased production rates by Boeing and Airbus.Sales in the commercial sector were 25% higher. Most of the growth related toB737 and A320 narrowbody aircraft. The first delivery of systems for Airbus'new A380 was made during the year, and this aircraft will eventually become asignificant source of revenue. A 7% growth in world air traffic was reflected in an improvement in sales to thecommercial aftermarket, an important source of profit. Sales of defence equipment were 60% of the total, and increased by 9%.Deliveries were maintained on key US programmes, including F-18 Super Hornet,Apache Longbow and C-17 Globemaster, but there was a lull between tranches 1 and2 of Eurofighter Typhoon. Activity on military development programmes remainedat a high level, notably on F-35 JSF, C-130 AMP and KC-767 Tanker, although, asstated earlier, some cost growth was experienced. Systems for the Tanker weresupplied to meet Japanese and Italian requirements. Defence aftermarket salesgrew by 6%. Smiths Aerospace has in recent years been increasing its investment in R&D andlow-cost manufacturing facilities to improve its competitive position.Company-funded R&D is largely related to commercial aircraft such as B787 andA380, but also includes B767 Tanker. Spending on the first of these is stillincreasing, but is declining on the other two as they move closer to seriesproduction. Customer-funded R&D also increased. Phase 1 of the Smiths Aerospace plant in China, serving commercial enginecustomers, is now operational and a second stage, to be used for airframeequipment manufacture, has been completed. The two-year restructuring programme announced in March 2004 has involvedstreamlining business processes, transferring production and outsourcing, andhas started to deliver valuable savings. Integrated Aerospace was acquired in November 2004 for £57m, expanding Smiths'landing gear business. This Californian operation supplies systems for smallermilitary aircraft such as helicopters, fighters and UAVs, and for business jets.It has secured a significant award on the X-47B since joining Smiths. Smiths Aerospace is in a strong position. Increased production of narrowbodyjets is bringing benefit in the near term. Cost reduction from restructuring isimproving the margin. The division should perform well in the year ahead. Inthe longer term, recent successful selection on new commercial and militaryprogrammes will ensure long term growth. Detection £m 2005 2004 Sales 367 317Headline operating profit 67 56 Smiths Detection sales grew by 16% and headline operating profit by 20%,confirming margins of 18%. The division has grown rapidly since it wasestablished as a separate reporting unit two years ago, driven in the firstinstance by acquisition but now equally by strong organic growth. Theacquisitions have given Smiths an extensive global presence - its products havebeen sold in 160 countries and are now installed in 3,500 of the world'sairports - and an unrivalled range of technologies, including trace detection,X-ray, millimetre wave, infra-red and biological agent analysis. Customers aremainly government and public service operators, including homeland security,customs and immigration authorities, first responders and military forces.Initially event-driven, purchase decisions now involve careful threat assessmentand re-equipment with more advanced technologies which are more cost-effective. Smiths Detection operates in clearly defined sub-sectors of the market,categorised as Transportation, Military, Ports & Borders, CriticalInfrastructure and First Responders. All of these saw good growth in 2005.Additionally, the division is starting to benefit from a potentially valuableaftermarket keeping the installed base operating at maximum capability. Transportation accounts for 35% of sales and includes airport, rail andunderground transit systems. Deliveries of both trace and X-ray equipmentincreased, helped by the introduction of new products. The latest Ionscan traceequipment simultaneously screens for both explosives and narcotics. TheSentinel II portal speeds the processing of passengers through the checkpoint,and the US Transportation Security Agency has taken delivery of its first 25units. Sales in the military sector grew by a third, meeting substantial orders placedby the US and UK governments. Delivery of the 5,200 ACADA systems ordered bythe US Department of Defense are now well underway. The LCAD system wasaccepted into service by the UK MoD, triggering a £20m production contract.Other chemical agent detector orders were secured from the Dutch, Japanese andIndian governments. The Ports & Borders business is benefiting from the dual use of X-ray systems toaddress security threats and to prevent the smuggling of contraband. Therevenue generated by the latter quickly repays the investment for countries withless secure borders. A new mobile cargo inspection system, HCV2, launched lastyear, can screen 25 trucks per hour, and 20 of these high value systems weresold in 2005. Another system launched in the year detects radio-activematerials alongside its X-ray capability. The US Customs authority continues toevaluate Smiths equipment as it considers how to improve security at US ports. Sales of Critical Infrastructure and First Responders products also made goodprogress. Deliveries of anthrax detection systems for the US Post Office havecontinued, and the SensIR products acquired in June 2004 are now being soldworldwide. A new portable unit which can identify any of 5,500 gases present atthe scene of an incident was launched, less than a year after the concept wasfirst demonstrated. Technology enhancement remains a high priority for Smiths Detection.Company-funded R&D was equivalent to 7% of sales in the year and governmentfunding added a further 2%. Among 400 engineers are 100 scientists identifyingthe most appropriate technologies for still-emerging threats. Alongside these in-house developments, two acquisitions brought in additionalknow-how. Farran Technology was acquired in February for £15m plus a furtherpotential deferred performance payment. This Irish company is developing amillimetre wave portal to screen people for hidden explosives or weapons. ETITechnology, acquired in May for £3m plus a further potential deferredperformance payment, is a US specialist in detecting bio-threats, withopportunities in military, critical infrastructure and first responder markets.Smiths has also invested in a US venture capital fund which will give thecompany an early view of potentially attractive innovation. After the year-end,Smiths Heimann Biometrics (SHB) was merged with Cross Match Technologies Inc inreturn for a 40% share of the enlarged group. SHB's sales in 2005 were £13m andnet assets were £7m. The future of the security equipment market lies in the increasingsophistication of hardware and the integration of currently separate units intomulti-sensor systems. Smiths Detection is well placed to lead this next stageof the industry's rapid evolution. Meanwhile, the division's strong growth isexpected to continue in the period ahead. Medical £m 2005 2004 Sales 563 488Headline operating profit 108 92 Smiths Medical sales grew by 16% in the year and headline operating profit by18%, raising the margin above 19%. The growth came from the inclusion of Medexfor the last four months of the year. With the largest part of its sales in theUS, the division's reported performance was held back by the currencytranslation impact. Excluding Medex and currency effects, sales improved by 4%and profits by 3%. In general the medical device market continues to grow steadily, due to ageingpopulations and increased healthcare spending in advanced economies. SmithsMedical's specialised market niches include Safety Devices, Critical Care andMedication Delivery & Patient Monitoring (MDPM). Demand for Safety Devices grew, driven by the progressive conversion of the USmarket from traditional products. Smiths Medical now has a wide range of safetydevices which protect hospital staff from accidental needle-stick injuries,including hypodermic needles and intravenous (IV) catheters. New products addedduring the year include the SAF T Wing inducer and the Edge hypodermic withunique colour coding to show physicians the gauge of the needle. Sales ofsafety devices outside the US are in their infancy, but growing fast. Critical Care includes the anaesthesia, airway and pain management products usedprimarily during intensive procedures in hospitals. The global market ismaturing, and sales growth is mainly achieved by offering more highly-featuredproducts. The Smiths range is continuously renewed to enhance its competitiveposition. New products in 2005 included the Omnifuse PCA syringe pump featuringadvanced software to reduce medication errors, the Tracer III nerve stimulatorproviding anaesthetists with more precise pain management, and the Equatorfast-flow fluid warmer which detects air in the blood supply. The MDPM product range includes ambulatory pumps to help patients remain mobilewhile medication is administered automatically, an area in which Smiths is amarket leader. Two years ago the company added a small pump which helps Type 1diabetics manage their essential supply of insulin while maintaining anear-normal lifestyle. Cozmo (R) has achieved considerable success, with almost18,000 units sold to date, nearly all in the US. It has clear competitiveadvantages, including user-friendly software and a built-in blood/sugar monitor.As with safety devices, the market outside the US is in its infancy butgrowing rapidly, and Smiths launched the pump in eight countries during theyear. In a settlement with a competitor, the company agreed to make a one-time paymentand pay a royalty on future sales of the current design, but this is notexpected to limit the continued success of Cozmo (R). Overall, MDPM achievedsales growth and margins above the divisional average in 2005. There were a number of factors which constrained the performance of SmithsMedical in 2005. The company withdrew from selling third party products inJapan because of their lower margins. Expenditure on quality assuranceincreased, partly associated with new product launches, including taking Cozmo(R) into new markets. There were some product supply constraints and one-offinventory growth while manufacturing processes were upgraded or outsourced tolow cost locations. In May, the company acquired its Italian medical distributor Sevit, for £3m.Smiths agreed the disposal of pvb Critical Care GmbH in Germany for £7m. It hadsales of £11m in 2005 and net assets of £3m. The most significant event in the year was the acquisition of Medex Inc ofCarlsbad, California for £499m (including £189m of assumed debt) in March.Medex is a leading supplier of infusion equipment used during intensive care,specialising in IV safety catheters which prevent needle-stick injuries. Itsproducts are complementary to the existing Smiths range, selling to the samecustomer base in hospitals and other healthcare locations. Two thirds of itssales are now included in Safety Devices, with the remainder in Critical Care. There are major synergies to be achieved from the integration of Medex. Thecombined product offering is more attractive to hospital purchasingorganisations and this is expected to generate incremental sales growth. Costsavings are already being realised. The two sales organisations were combinedshortly after the acquisition, and tax and debt service charges have beenreduced by bringing Medex within the Smiths financial orbit. Marketing, backoffice processing, distribution and the supply chain are each being unified.Looking ahead, manufacturing will be rationalised and opportunities taken totransfer more assembly to low-cost locations. When fully implemented, thesavings are expected to be up to £25m per annum. Smiths recorded £10m in 2005in exceptional charges related to integrating this acquisition, and plans tospend up to a further £40m to complete the task. By 2008, the incremental salesgrowth and margin improvement in Smiths Medical is expected to enable thecompany to achieve a rate of return on this investment which is well above thecompany's cost of capital. Medex has already made a good start within Smiths, with sales and profits aheadof expectations at the time of the acquisition. Smiths' strategy is to build a global medical device business concentrating on anumber of niche markets, including Safety Devices, Critical Care and MedicationDelivery & Pain Management. With an attractive product range, high margins andoperating costs under tight control, Smiths Medical is now focused on achievingstrong sales growth in the period ahead. Specialty Engineering £m 2005 2004 Sales 929 868Headline operating profit 127 113 Sales in Specialty Engineering grew by 7% and headline operating profit by 12%,leading to a one percent improvement in margins, to 14%. The division comprisesJohn Crane, Interconnect, Flex-Tek and - somewhat smaller - Marine Systems. Allfour businesses grew, with Interconnect performing most strongly. John Crane's sales grew in high single digits in 2005 and its margin improved.The largest markets for its rotating mechanical seals are in oil & gas,petrochemicals, pulp & paper and other process industries. The oil industry isworking at close to maximum capacity striving to keep existing plants fullyoperational while bringing additional sources into production. This environmentis beneficial for John Crane. Major projects were secured in Abu Dhabi, Bahrainand Lanzhou in China. Maintenance and service generates a valuable aftermarketrevenue stream. Performance Plus, a partnership with customers to managelife-cycle costs, received the Queen's Award for Enterprise in 2005. During theyear, John Crane introduced the type 8600 heavy duty wet seal, which has beenwell received in the oil & gas upstream market. In December 2004, Tianjin Timing Seals in China was acquired for £3m, givingJohn Crane higher penetration in this key market. In March, US Seals wasacquired for £6m. After the year-end, Smiths agreed to purchase the 34%minority in the John Crane Tianjin joint venture from its long-term localpartner for £1.5m. The Interconnect business grew strongly in 2005, benefiting from higher sales tothe aerospace & defence sector and a resurgence of the wireless telecomsinfrastructure market due to the introduction of 3G services. In aerospace &defence, the products include antennae, complex microwave cable assemblies,Hypertac connectors and frequency sources. During the year, valuable contractswere secured for interface connectors on tranche 2 of Eurofighter Typhoon andfor avionics connectors on the Boeing 787. For telecoms, Interconnect providesequipment to protect networks against power surges and lightning strikes. Newtowers are being installed across the US and in other countries, includingChina, to meet the growing demand. Following a series of targeted acquisitionsand an active product development programme, Smiths has an extensive range ofelectronic components for this specialised market. Smiths today announced the acquisition of Millitech Inc, based in Northampton,Massachussets, for £19m. The company specialises in millimetre wave componentsfor defence applications, highly complementary with other products in theInterconnect range. It had sales of £14m in 2004. Flex-Tek makes ducting and hosing for a wide range of applications includingHVAC and domestic appliances. It performed well in 2005, benefiting from movingsome production to Malaysia in step with customers. It won good orders for anew retracting hose system and developed hoses for the central vacuum systemsbeing installed in American homes. Two acquisitions in the US strengthened itsproduct range in July and August: Hi-Tech Hose for £9m and Farnam CustomProducts for £3m. The Marine Systems business makes radar displays for ships and suppliesnavigational charts in paper and electronic form. It increased its profits in2005. Smiths has taken full control of ChartCo, which delivers navigationalinformation to ships via satellite. It was formerly part-owned by Fugro. Specialty Engineering's outlook is for further growth in the year ahead, helpedby the continued upturn in the investment cycles for oil & gas and telecomsinfrastructure. Accounting changes For the 2006 financial year, the company will adopt International FinancialReporting Standards. Under IFRS, the cost of current development work will becapitalised in cases where the expectation of future income is robust. Reportedperformance will no longer be impacted by expenditure that relates to thefuture. Consequently, in addition to underlying growth, reported profits inperiods of increasing investment will be higher than under current reportingrules. Later this year the company will restate the 2005 results under the newstandards. Further information on our transition to IFRS is included in ourAnnual Report and Accounts. AGM The Annual General Meeting of the company will be held at The Banqueting Suite,Lord's Cricket Ground, Grace Gate, St John's Wood Road, London NW8 8QN onTuesday, 15 November at 2.30pm. If approved at the meeting, the recommendedfinal dividend on the ordinary shares will be paid on 18 November 2005 toshareholders registered on the close of business on 21 October 2005. Theex-dividend date will be 19 October 2005. Prospects The prospects for the year ahead are encouraging. Growth in the company'sprincipal markets is set to continue. With the higher investment in R&D and inlow cost manufacturing of recent years, the company has been gaining competitiveadvantage. This puts the company in a strong position to benefit from thecurrent economic conditions. Additionally, if opportunities for acquisitionswith good synergies occur, the company will make them. The Board is confidentthat Smiths is on track to deliver continued growth in 2006. Tables attached - Profit & loss account- Statement of total recognised gains and losses- Summarised balance sheet- Cash-flow statement- Notes to the accounts -o- PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2005 Ordinary Amortisation Exceptional activities and impairment items Total of goodwill and other intangible assets Note £m £m £m £m Continuing operations 2,923.7 2,923.7Acquisitions 93.1 93.1Discontinuedbusinesses - Turnover 2 3,016.8 3,016.8 Continuing operations 399.0 (51.2) (48.2) 299.6Acquisitions 21.4 (9.8) 11.6 Operating profit 2 420.4 (61.0) (48.2) 311.2 Exceptional items 3 6.4 6.4 Profit before interestand tax 420.4 (61.0) (41.8) 317.6Net interest payable (22.9) (22.9)Other finance income - Retirement benefits 15.1 15.1 Profit before taxation 412.6 (61.0) (41.8) 309.8Taxation 8 (107.3) 5.7 12.6 (89.0) Profit after taxation 305.3 (55.3) (29.2) 220.8Dividends 4 (163.3) (163.3) Retained profit 142.0 (55.3) (29.2) 57.5 Earnings per share 5Basic 54.3p (9.8p) (5.2p) 39.3pDiluted 54.0p (9.8p) (5.2p) 39.0p PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2004 Ordinary Discontinued Goodwill Exceptional activities businesses amortisation items Total Note £m £m £m £m £m Continuing operations 2,678.4 2,678.4Discontinuedbusinesses 55.0 55.0 Turnover 2 2,678.4 55.0 2,733.4 Continuing operations 360.1 (37.1) (30.9) 292.1Discontinuedbusinesses 2.2 (1.9) 0.3 Operating profit 2 360.1 2.2 (39.0) (30.9) 292.4 Exceptional items 3 19.9 19.9 Profit beforeinterest and tax 360.1 2.2 (39.0) (11.0) 312.3Net interest payable (13.0) (2.4) (15.4)Other finance income- Retirement benefits 3.2 3.2 Profit before taxation 350.3 (0.2) (39.0) (11.0) 300.1Taxation 8 (92.8) 4.4 1.2 (87.2) Profit after taxation 257.5 (0.2) (34.6) (9.8) 212.9Dividends 4 (151.6) (151.6) Retained profit 105.9 (0.2) (34.6) (9.8) 61.3 Earnings per share 5Basic 45.9p (6.2p) (1.7p) 38.0pDiluted 45.8p (6.2p) (1.7p) 37.9p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (unaudited) Year ended Year ended 31 July 2005 31 July 2004 £m £m Profit for the financial year attributable to shareholders 220.8 212.9 Exchange adjustments 8.2 (45.0)Taxation recognised on exchange gains/(losses): Current - United Kingdom 5.9 (0.4) FRS 17 - Retirement benefits: Actuarial (losses)/gains on retirement benefit schemes (23.4) 145.5 Deferred tax credit related thereto 11.8 (39.3) Total recognised gains and losses for the financial year 223.3 273.7 SUMMARISED BALANCE SHEET (unaudited) 31 July 31 July Note 2005 2004 £m £mFixed assetsIntangible assets 9 1,225.6 728.2Tangible assets 525.8 423.5Investments: TI Automotive Ltd 10 325.0 325.0 Other 3.5 2.3 2,079.9 1,479.0 Stocks 11 570.0 423.5Debtors 12 783.8 629.6Creditors 13 (1,047.9) (854.8) 2,385.8 1,677.3 Net debt 14 (930.8) (272.7)Provisions for liabilities and charges 17 (102.3) (120.0) Net assets excluding retirement benefits 1,352.7 1,284.6Retirement benefits - net liabilities 16 (147.9) (162.1) Net assets 1,204.8 1,122.5 Capital and reservesShare capital 140.9 140.3Share premium 197.5 183.0Reserves 866.4 799.2 1,204.8 1,122.5 SUMMARY CASH-FLOW STATEMENT (unaudited) Year ended Year ended 31 July 2005 31 July 2004 Total Total £m £mOperating profit before goodwill amortisationand exceptional expenditure 420.4 362.3 Depreciation 77.0 72.1Retirement benefits (16.5) (22.9)Working capital (96.0) (28.6) Net cash inflow from ordinary activities beforecapital expenditure and exceptional expenditure 384.9 382.9 Net capital expenditure (104.9) (53.9) Net cash inflow from ordinary activities afternet capital expenditure and before exceptionalexpenditure 280.0 329.0 Interest and financing (paid)/received (19.9) 10.5Tax paid (77.9) (61.5)Exceptional expenditure (35.2) (23.0) Free cash-flow 147.0 255.0 Acquisitions (including term debt acquired) and disposals (598.3) 291.4 Dividends (154.5) (145.6) Other (52.3) 41.6 (Increase)/decrease in net debt (658.1) 442.4 Net debt at beginning of period (272.7) (715.1) Net debt at end of period (930.8) (272.7) CASH-FLOW STATEMENT (unaudited) Year ended Year ended 31 July 2005 31 July 2004 £m £mOperating Profit (before exceptional expenditure) 359.4 323.3Amortisation and impairment of goodwill & other intangibleassets 61.0 39.0Depreciation of tangible fixed assets 77.0 72.1Retirement benefits (16.5) (22.9)Increase in stocks (91.2) (2.4)Increase in debtors (53.6) (78.8)Increase in creditors 48.8 52.6 Net cash inflow from normal operating activities 384.9 382.9 Exceptional expenditure (35.2) (23.0) Net cash inflow from operating activities 349.7 359.9 Returns on investments and servicing of finance (19.9) 10.5Tax paid (77.9) (61.5)Net capital expenditure (104.9) (53.9)Acquisitions and disposals (409.5) 291.4Equity dividends paid (154.5) (145.6)Management of liquid resources 398.9 (383.7)Financing 53.0 21.2 Increase in cash 34.9 38.3 (Decrease)/increase in short-term deposits (398.9) 383.7Increase in other borrowings (38.7) (10.9)Loan note repayments 0.3 2.9Term debt acquired with acquisitions (188.8) -Exchange variations (66.9) 28.4 (Increase)/decrease in net debt (658.1) 442.4 Net debt at beginning of period (272.7) (715.1) Net debt at end of period (930.8) (272.7) NOTES TO THE ACCOUNTS (unaudited) 1) Accounting Policies There have been no changes to the accounting policies used in preparing thesefinancial statements from those used in the annual report and accounts for 2004. 2) Analyses of turnover and headline* profit - continuing ordinary activities Market Turnover Headline* Profit 2005 2004 2005 2004 £m £m £m £m Aerospace 1,157.6 1,005.8 117.9 99.7Detection 366.5 317.1 66.8 55.6Medical 563.3 487.7 108.2 91.6Specialty Engineering 929.4 867.8 127.5 113.2 3,016.8 2,678.4 420.4 360.1 Net interest (22.9) (13.0)Other finance income 15.1 3.2 Headline profit before taxation fromcontinuing ordinary activities 412.6 350.3 Geographical origin Turnover Headline* Profit 2005 2004 2005 2004 £m £m £m £m United Kingdom 821.4 784.9 62.9 46.0North America 1,744.6 1,472.6 249.6 221.0Continental Europe 514.7 471.7 74.6 69.5Other overseas 245.2 188.6 33.3 23.6Inter-company (309.1) (239.4) 3,016.8 2,678.4 420.4 360.1 * before amortisation & impairment of goodwill & other intangible assets, andexceptional items. 3) Exceptional items 2005 2004 £m £mOperating items: Aerospace (16.5) (15.2) Detection - (3.1) Medical (31.7) (12.6) (48.2) (30.9) A restructuring programme has given rise to exceptional charges spread over 2004and 2005, of which £22.9m has been charged in this period (2004: £30.9m). Thecosts relate to improving competitiveness in Aerospace, and the rationalisationof distribution and manufacturing in Medical. Further restructuring costs inconnection with the integration of Medex amounting to £10.4m have been incurredin the year, and £14.9m has been charged to exceptional items in respect of thesettlement of a patent dispute relating to the Cozmo (R) insulin pump. Of the£35.2m exceptional cashflow disclosed in the Cashflow statement, £33.5m relatedto restructuring, and £1.7m to other exceptional items. Non-operating items: Profit on disposal of businesses 8.7 7.8Write-down of goodwill on anticipated future disposal (2.3) -Exceptional property surplus - 12.1 6.4 19.9 The gain on disposal of businesses includes a total of £12.1m arising fromsettlement and curtailment gains in respect of pension and other retirementbenefits. Two small product lines with a net asset value of £2.6m were soldduring the year for net cash proceeds of £0.5m. This gave rise to a loss of£3.4m after provisions. The company has written off £2.3m of goodwill previously set against reservesrelating to a small Aerospace business sold after the end of the financial year. 4) Dividends A final dividend of 19.75p per share (2004 18.25p) has been recommended and, ifapproved, will be paid on 18 November 2005 to holders of all ordinary shareswhose names are registered at close of business on 19 October 2005. 5) Earnings per share Separate figures are given for earnings per share related to the average numberof shares in issue for each year: Year ended Year ended 31 July 2005 31 July 2004 Basic 562,445,323 560,656,310Effect of dilutive share options 3,117,079 893,394Diluted 565,562,402 561,549,704 6) Acquisitions During the year ended 31 July 2005 the company acquired the businesses set outbelow. The fair values of the net assets acquired, set out in the followingtables, are provisional and will be finalised in the 2006 accounts. ConsiderationBusinesses acquired (including associated costs) Goodwill Net Assets £m £m £m Integrated Aerospace 56.6 47.9 8.7Medex Inc. 310.1 358.0 (47.9)Farran Technology 15.0 13.2 1.8Hi-Tech Hose 8.6 5.0 3.6Other 16.0 16.2 (0.2) 406.3 440.3 (34.0) Consistency of accounting Book value Revaluation policy Fair value £m £m £m £mMedex Assets acquiredTrademarks 21.0 16.4 37.4Patents 7.3 9.1 16.4Tangible fixed assets 55.0 (3.5) 51.5Stocks 30.6 (1.1) 29.5Debtors 35.6 (6.5) 29.1Creditors (25.4) (1.1) (26.5)Term debt acquired (173.8) (14.8) (188.6)Provisions (1.4) (1.4)Taxation (3.6) 5.7 2.6 4.7 Net assets acquired (54.7) 12.9 (6.1) (47.9)Goodwill 358.0 Consideration - total 310.1 - satisfied by cash 310.1 Consistency of accounting Book value Revaluation policy Fair value £m £m £m £mOther Assets acquiredPatents 0.6 0.3 0.9Tangible fixed assets 6.9 (0.1) 6.8Stocks 13.2 (2.9) 10.3Debtors 7.0 0.2 7.2Creditors (8.6) (3.0) (11.6)Term debt acquired (0.1) (0.1) (0.2)Provisions (0.1) (0.1)Taxation 0.6 0.6 Net assets acquired 19.5 0.3 (5.9) 13.9Goodwill 82.3 Consideration - total 96.2 - deferred (2.4) - deferred from prior period, now paid 6.1 - satisfied by cash 99.9 7) Operating profit is after charging 2005 2004 £m £m Depreciation of tangible fixed assets 77.0 72.1Company funded research and development expenditure 143.6 136.8 8) Taxation 2005 2004 £m £m The taxation charge for the year comprisesCurrent taxation 101.2 66.5Deferred taxation (12.2) 20.7 89.0 87.2 Current taxation: Taxation on the profit for the year:UK corporation tax at 30% (2004: 30%) (2.5) 39.3Double taxation relief (4.9) (49.2) (7.4) (9.9)Overseas taxation 125.3 82.2 117.9 72.3Tax relief on exceptional items - Exceptional costs and property disposals (note 3) (16.7) (5.8) Current taxation charge for the year 101.2 66.5 Deferred taxation:On ordinary and discontinued activities (16.3) 16.1On exceptional items - disposal of businesses 4.1 4.6 Deferred taxation charge for the year (12.2) 20.7 9) Intangible Assets 2005 2004 £m £m Goodwill 1,167.0 728.2Trademarks 40.3 -Patents 18.3 - 1,225.6 728.2 Of the £61m charged for amortisation and impairment of intangible assets, £21.8m(2004: £11.5m) relates to Aerospace, £16.1m (2004: £14.0m) relates to Detection,£13.0m (2004: £3.9m) relates to Medical and £10.1m (2004: £9.6m) relates toSpecialty Engineering. 10) TI Automotive Limited The investment comprises £325m in preference shares held at cost. No dividendson the shares have been recognised in the Accounts. 11) Stocks 2005 2004 £m £m Stocks comprise: Raw materials and consumables 161.3 128.6 Work in progress 190.6 151.6 Finished goods 240.2 187.4 592.1 467.6Less: payments on account (22.1) (44.1) 570.0 423.5 12) Debtors 2005 2004 £m £m Amounts falling due within one year:Trade debtors 584.6 502.2Amounts recoverable on contracts 92.3 61.7Other debtors 8.9 15.7Prepayments and accrued income 41.4 40.8 727.2 620.4Amount falling due after more than one year:Other debtors 9.9 9.2Deferred taxation 46.7 Total debtors 783.8 629.6 13) Creditors 2005 2004 £m £m Amounts falling due within one year:Trade creditors 214.7 185.8Bills of exchange payable 2.6 3.0Other creditors 84.6 24.4Proposed dividend 111.3 102.5Corporate taxation 160.8 135.8Other taxation and social security costs 23.7 20.6Accruals and deferred income 375.8 329.6 973.5 801.7Amount falling due after more than one year: 74.4 53.1 Total creditors (excluding borrowings) 1,047.9 854.8 14) Borrowings and net debt Fixed rate borrowings Weighted average Floating Interest Years rate Total Total Rate Fixed Amount borrowings 2005 2004 £m £m £m £mCurrencies:Sterling 6.91% 8 300.1 89.8 389.9 304.4US Dollar 5.48% 7 57.2 313.8 371.0 179.0Euro 5.00% 17 12.4 208.5 220.9 220.3Japanese Yen 2.2 2.2 15.1Other 7.7 7.7 3.1 369.7 622.0 991.7 721.9Cash and deposits (60.9) (449.2) Net debt 930.8 272.7 Maturity:On demand/under one year 54.0 275.4One to two years 0.4 0.4Two to five years 635.9 0.8Over five years 301.4 445.3 991.7 721.9 15) Movements in shareholders' equity 2005 2004 £m £m Total recognised gains and losses for the financial year 223.3 273.7Dividends (163.3) (151.6) 60.0 122.1ESOP Trusts - disposal of company shares 5.4Write back of goodwill on disposals 2.3 130.0Share issues 14.6 13.2 Net increase in shareholders' equity 82.3 265.3Shareholders' equity: At start of year 1,122.5 857.2 At end of year 1,204.8 1,122.5 16) Post retirement benefits The company has adopted the full accounting requirements of FRS17- RetirementBenefits. The FRS17 valuations of the principal pension schemes in the UK andUS are summarised below: 2005 2004 UK USA UK US £m £m £m £m Funded pension plans-market value of assets 2,548.7 343.9 2,262.3 295.7 Funded pension plans surplus/(deficit) 19.6 (123.3) (57.7) (70.4)Unfunded plans and post retirement healthcare (49.7) (81.4) (46.2) (73.0)liabilities (30.1) (204.7) (103.9) (143.4)Deferred tax asset 3.7 83.2 25.5 59.7 Retirement benefits - net liabilities (26.4) (121.5) (78.4) (83.7) The impact of FRS17 on the profit and loss account is summarised below: 2005 2004 Funded schemes Unfunded Funded schemes Unfunded plans plans UK US UK & US UK US UK & US £m £m £m £m £m £m Service cost 26.5 12.4 2.9 31.9 12.7 2.8 Exceptional item - curtailment gain (6.3) (1.3) (4.5) (13.6) - - Expected return on scheme assets (152.4) (21.9) - (142.5) (20.9) -Interest on scheme liabilities 129.3 22.8 7.1 128.9 22.9 8.4 Net return (23.1) 0.9 7.1 (13.6) 2.0 8.4 Total charged to profit and lossaccount (2.9) 12.0 5.5 4.7 14.7 11.2 17) Provisions for liabilities and charges 2005 2004 £m £m Service guarantees and product liability 51.6 47.9Reorganisation 9.2 19.0Property 12.1 16.8Litigation 17.6 18.1 90.5 101.8 Deferred tax 11.8 18.2 Total provisions for liabilities and charges 102.3 120.0 18) Contingent liabilities In common with many other enterprises of similar size, the Company and itssubsidiaries are from time to time engaged in litigation in respect of a varietyof commercial issues. As previously reported, John Crane, Inc ("John Crane"), a subsidiary of theCompany, is one of many co-defendants in numerous law suits pending in theUnited States in which plaintiffs are claiming damages arising from exposure to,or use of, products containing asbestos. The John Crane products generallyreferred to in these cases are ones in which the asbestos fibres wereencapsulated in such a manner that, according to tests conducted on behalf ofJohn Crane, the products were safe. John Crane ceased manufacturing productscontaining asbestos in 1985. John Crane has resisted every case in which it has been named, and will continueits robust defence of all asbestos-related claims based upon this "safe product"defence. In addition, John Crane has access to insurance cover which, while itis kept under review, is judged sufficient to meet all material costs ofdefending these claims for the foreseeable future. As a results of its defence policy, John Crane has been dismissed before trialfrom cases involving approximately 113,000 claims over the last 26 years. JohnCrane is currently a defendant in cases involving approximately 174,000 claims.Despite these large numbers of claims, John Crane has had final judgmentsagainst it, after appeals, in only 46 cases, amounting to awards of some US$39m.These awards, the related interest and all material defence costs have to datebeen met in full by insurance. No provision relating to litigation has been made in these accounts, other thanas disclosed in Note 17. Note: As stated in note 1, the above financial statements have been prepared inaccordance with the accounting policies used in preparing the company's accountsfor the year ended 31 July 2004. They do not constitute the full financialstatements within the meaning of S240 of the Companies Act 1985. Figuresrelating to the year ended 31 July 2004 are abridged. Full accounts for SmithsGroup plc for that period have been delivered to the Registrar of Companies.The auditors' report on those accounts was unqualified and did not contain astatement under S237(2) or S237(3) of the Companies Act 1985. -ends- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smiths Group