21st Mar 2007 07:03
Smiths Group PLC21 March 2007 Smiths reports a 7% increase in first half headline EPS for continuingactivities Interim Results 2007 £m 2007 2006Continuing activities Headline* Statutory Headline* Statutory Sales 1,021 1,007 Operating profit 148 149 139 136 Pre-tax profit 134 136 125 124 Basic EPS (p) 17.4p 18.6p 16.3p 16.5pEPS from discontinued activities (p) 7.6p 7.1pInterim dividend (pps) 10.5p 9.85p * In addition to statutory reporting, Smiths Group reports its continuingoperations on a headline basis, which shows underlying performance. Headlineprofit is before exceptional items (incl. impairment of assets), amortisation ofacquired intangible assets, profit/loss on disposal and financing gains/lossesfrom currency hedging. Summary In the first six months of the 2007 financial year, Smiths Group recorded a 7%increase in the headline earnings per share of its continuing activities, fromwhich the aerospace businesses being sold to General Electric Company (GE) havebeen excluded. On the same basis, operating profit also increased by 7%, andthe net margin improved from 13.8% to 14.5%, with margins in all threecontinuing businesses moving ahead. This performance was achieved despite thesignificant impact of a weaker dollar on translation of US earnings intosterling. On a statutory basis, earnings per share of the continuing activitieswere 18.6p. The operating cash-flow, after capex, was at 84% of operatingprofit. The Board has declared an interim dividend of 10.5p, an increase of6.6%. In January, the company announced it would sell Smiths Aerospace to GEfor $4.8 billion and would return £2.1 billion to shareholders, together with ashare consolidation. It also announced the intention to take a 64% stake in ajoint venture which would combine Smiths Detection with GE's Homeland Protectionbusiness. Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: "Thisis a strong start to the year for Smiths, with the continuing businessesperforming well despite the currency headwind. Additionally, we have made goodprogress on completing the sale of Aerospace and establishing the new Smiths GEDetection business. The outlook for the current financial year and beyondremains encouraging and is in line with management expectations." -o-Investor Relations [email protected] [email protected]+44 (0)20 8457 8203 +44 (0)20 8457 8403 A meeting with analysts will be webcast at 9:00am UK time today onwww.smiths.com/ir and archived there soon after the event.Highlights of the period: • Growth in continuing activities - Headline EPS and operating profit up by 7% - Margins improved in all three businesses - Growth achieved despite significant currency impact - Cash conversion from profit at 84%, after capex - Interim dividend increased by 6.6% • Announcements of 15 January - Sale of Smiths Aerospace agreed with GE for US$4.8billion, including TMS unit - Intention to return £2.1billion to shareholders, with an equivalent share consolidation - Letter of Intent to form Smiths GE Detection, in which Smiths will hold a 64% share • Good progress on transactions - Shareholder approval secured for Aerospace sale - Regulatory approval process underway - Good progress towards reaching definitive agreement on Detection JV Following the decision to sell Smiths Aerospace, these results distinguishbetween continuing and discontinued activities and, to assist comparison withthe prior period, the results for the comparative periods have been re-presentedon a consistent basis. Commentary on performance of continuing activities: Sales In the first six months of 2007, sales from continuing activities were £1,021m,compared with £1,007m on the same basis for the first half of 2006. Reportedsales growth was held back by a 15 cent weakening of the dollar between the twoperiods, which had an impact on US sales translated into sterling. On anunderlying* basis, sales in the period improved by 7%. Sales by Detection andSpecialty Engineering were ahead of management expectations, with Medicalslightly behind. * Underlying performance excludes the year-on-year impact of currencytranslation, acquisitions and disposals. Headline profit Headline operating profit from continuing activities increased by 7% to £148m(H1 2006: £139m). This was after the significant currency translation impactalready mentioned, and on an underlying basis, the growth rate was 14%. The netoperating margin on sales improved from 13.8% to 14.5%. The net interest charge for the period was £30m (£26m), partially offset by apensions financing gain of £16m (£12m), which reflected the strong fundingposition of the company's retirement benefit schemes. Headline pre-tax profit increased by 8% to £134m (£125m) and headline earningsper share by 7% to 17.4p (16.3p). The company's effective tax rate for thisperiod was unchanged at 26%. The Board has declared an interim dividend of10.5p, an increase of 6.6%. It will be paid on 27 April to shareholdersregistered at the close of business on 30 March. The ex-dividend date is 28March. Statutory reporting On a statutory basis, operating profit on the continuing activities was £149m(£136m) and earnings per share were 18.6p (16.5p). The company recordedamortisation of acquired intangible assets of £7m (£6m), profit on disposal ofbusinesses of £14m (£7m), acquisition integration costs for Medex of £5m (£3m),income from commuted insurance policies of £43m (nil) and a provision for legalfees of £44m (nil) (see below) and financing gains of £1m (£2m). In total,these items amounted to a £2m contribution to profit on the continuingactivities. Including the discontinued activities, statutory earnings per sharewere 26.2p (23.6p). Legal matters Following the commutation of the insurance policies referred to above, the legalcosts of resisting claims against John Crane Inc (JCI) will fall initially onthat company. Consequently, a provision has been established to meet thesecosts which equates to approximately four years' expected expenditure.Substantial insurance cover remains in place (see also notes 12 and 15 of theAccounts). Cash and debt The company generated a strong headline operating cash-flow on its continuingactivities in the first half of 2007. At £124m, it represents an 84% conversionratio from headline operating profit, after capital expenditure on property,plant, and equipment, and development costs. Free cash-flow, after interest andtax, was £85m. Net acquisition and disposal expenditure in the period was £9m,and the payment of the 2006 final dividend cost £122m. Net debt for the totalGroup, at the end of the period, was £938m. Investment for growth: • Acquisitions and disposals In addition to the announcements about the sale of the aerospace businesses andabout the new detection business, Smiths has made a number of smalleracquisitions and disposals which will help refine the business mix of itscontinuing activities. In August, John Crane's bearing lubrication business inFinland was sold for £15m. In the same month, Comet, an Italian manufacturer ofpressure sealing systems, was acquired for £3m. In December, Tecnicas Medicas,the Spanish distributor of Smiths Medical products, was acquired for £12m.Today, Smiths announced the acquisition of CDI Energy Services for £19m. CDI isa US business providing services to the oil & gas industry which will complementthe John Crane Performance Plus logistics management programme. It has a strongposition in the upstream sector through the equipment and support it suppliesfor oil & gas production. • Research & development Investment in technologies to enhance Smiths competitive position by helpingcustomers succeed is an essential part of the company's Full Potentialprogramme. Company-funded R&D in this period was £34m, representing an averageacross the three divisions of 3% of sales, with Medical and Detection above thatlevel and Specialty Engineering below it. Of the total, £26m was chargedagainst profit and the balance capitalised. The company is currently carrying£33m of capitalised development costs relating to the continuing activities,which are being amortised over timescales of typically 3-5 years. • Productivity The company made further efficiency gains in this period, with higher inputcosts, including raw materials and payroll costs, more than offset byrestructuring, pricing and the benefits of establishing production by a growingnumber of Smiths businesses in low-cost countries, including Mexico, India andChina. Average employment in the continuing activities was 22,000 (21,000)during the half year. North America (US, Canada, Mexico) remains the company'slargest market, accounting for 52% of sales by origin and 69% of headlineoperating profit. Smiths Detection £m 2007 2006Sales 182 171Headline operating profit 27 24 Smiths Detection sales increased by 6% and headline operating profit by 16%,driving margins from 13.7% to 15.0%. The growth was even more marked on anunderlying basis, with sales 10% and profit 22% ahead. There was strong growth in deliveries of airport security equipment in Europe,the Middle and Far East, including X-ray and trace detection systems for Dubai,Singapore and Shanghai airports. Now, more than five years after the events of9/11, many units installed as a consequence are approaching the point where theyneed replacing with more advanced technology. In the US itself, however, theTransportation Security Administration (TSA) deferred some purchases in thisperiod while it assessed how to implement new systems more effectively. At thesame time, a maintenance agreement for Smiths to provide in-service support forits equipment now out of warranty was renewed. The Ports & Borders business also grew strongly, and will continue to increaseits proportion of Detection sales. Border protection has become a major focusfor governments around the world, both to prevent terrorism and to collect taxeson imports. The US authorities have taken delivery of the first batch of mobileHGV systems, but still only 5-8% of containers arriving by sea are beingscanned. The government has stepped up its Container Security Initiative inwhich inspection is carried out at the port of origin. This initiative nowcovers 70 locations, and has encouraged the governments in those countries tobuy additional X-ray systems for their own inspection purposes. In October, the US Department of Homeland Security awarded Smiths a contract todevelop portable radiation detectors for border patrols, customs andcoastguards, with potential sales of $222m. Russia is among the countriestaking a lead in container screening, and has already begun installation ofSmiths scanners in major ports on the eastern seaboard. The Smiths plant in StPetersburg is now fully operational, with a range of products certified as madein-country. Military business was lower in this period compared to a year ago, when therewere substantial deliveries under the ACADA programme in the US. The next majorprogramme for protecting defence forces against chemical agent threats, JCAD, isexpected to commence initial low-rate production at the end of 2007. Today,Smiths announced it had been awarded three contracts by the US Air Force andDepartment of Defense with a total value of $38m. The largest was a follow-onorder for 4,100 Improved Chemical Agent Monitor (ICAM) hand-held units toprotect US military forces against nerve and blister agent attacks. Sales ofmilitary equipment to other countries included biological protection systems forJapan and lightweight chemical detectors for the Norwegian armed forces.Contract negotiation for future military business is particularly active atpresent. Demand is strong for equipment used in the protection of federal buildings inthe US, and for first responder equipment employed by civil authorities in manycountries. Smiths Detection is investing to increase capacity, in particular expanding itsplants in the US ahead of production for which orders have already beenreceived. Company-funded R&D is currently in the range of 5-6% of sales, andthe products are being continually upgraded to provide greater levels of threatdetection, working closely with customers to meet their most demandingrequirements. In January, Smiths announced that it had agreed with GE to combine SmithsDetection and GE's Homeland Protection business. Smiths will own 64% of theenlarged business, to be called Smiths GE Detection, and will consolidate itsperformance as a subsidiary, with GE holding the balancing minority interest.Smiths will nominate four of the six directors, including the chairman andpresident, while GE will nominate the other two. Good progress has been made towards reaching a definitive agreement with GE onthe terms on which the new enterprise will be established. The combination of the two businesses will create a strong competitor in theDetection sector. It will have a comprehensive range of products, in particularthe complete suite of equipment needed for checked baggage inspection atairports, including the Computed Tomography units required by the TSA. Thecombined technical resources of Smiths and GE will be available to the business,including GE's know-how in medical imaging. The outlook for Smiths in the detection sector is positive. Smiths Detectionwill continue to perform well in the remainder of the year and, beyond that, theproposed new business is well-positioned to be among the industry leaders. Smiths Medical £m 2007 2006Sales 347 355Headline operating profit 60 59 Smiths Medical sales were slightly lower than a year ago and profit was slightlyahead, both considerably impacted by currency translation. The margin on salesimproved from 16.7% to 17.4% and, on an underlying basis, sales grew by 3% andprofit by 9%. The modest underlying sales growth reflected a number of factors particular tothis reporting period: there were production constraints while manufacture ofcritical devices was consolidated from Hythe in the UK and Kirchseeon in Germanyinto other Smiths Medical facilities; and there were capacity limitations on theautomated production lines making safety catheters in the US. By contrast, the strong underlying profit growth benefited from: the ongoingplant rationalisation programme and the continued move to low-cost manufacturingcountries; the incremental gain from the continued integration of Medex; andtight control of costs as volume increased. In the US, Smiths Medical is benefiting from the move towards treatment ofillnesses in their chronic, rather than acute stages. A number of airwaymanagement products and ambulatory pumps already address this trend and it isbecoming a focus for critical care products. While the advantages of usingsafety devices are well understood in the US healthcare system, there is nowalso greater recognition of the contribution they make to improving healthcareemployees' safety and productivity. Group purchasing organisations areimportant customers and, in this period, a number of sizeable agreements werereached for a wide range of products, including those with Premier, Novation andBroadlane. Internationally, Smiths Medical is performing strongly. It has acquireddistributors in many of its key territories, most recently in Spain, and thisprovides effective routes to market when countries adopt clinical bestpractices, many of which, like the use of safety devices, have originated inAmerica. The Japanese business is one of the few not showing real growth, heldback by pricing pressure from the government reimbursement programme. Recent new product introductions which helped to drive growth include a revisedrange of epidural catheter fixation devices, in vitro fertilisation devices, aswell as consumables and software upgrades for insulin delivery pumps.Development continues of next-generation ambulatory pumps, featuring errordetection software and data connectivity to hospital IT systems. The industry in which Smiths Medical participates remains relativelyunconsolidated, with opportunities to add adjacent product lines. The outlook for Medical is for further progress in generally positive marketconditions. Specialty Engineering £m 2007 2006Sales 492 481- of which, John Crane 252 245Headline operating profit 61 56- of which, John Crane 31 27 Sales in Specialty Engineering improved by 2% and profit by 9%, raising themargin from 11.6% to 12.3%. On an underlying basis, sales improved by 8% andprofit by 16%. The largest business, John Crane, increased its underlying profit by 27%,benefiting from strong demand for its products and services, particularly in theoil, gas and petrochemical sector. At this stage of the capital investmentcycle, the growth is in the sale of original equipment for new productionfacilities. While margins are satisfactory, the subsequent aftermarketopportunities which result from these new installations are highly attractive.Among the projects John Crane has been involved with during this period are newethylene cracker plants in China, gas extraction and processing in the UAE,ethane cracker and petrochemical plants in Saudi Arabia, lube oil plants inTaiwan and ethanol production for biofuels in the US. As it approaches production constraints, and with no sign of demand reducing,John Crane has been adding capacity in low-cost manufacturing locations,particularly in India and China, while succeeding in keeping fixed costs undertight control. Locating in these countries has led to the generation ofincremental sales from local customers. Raw material prices, particularly forstainless steel and tungsten carbide, have been rising, but John Crane haspassed the majority of these through. In the aftermarket, John Crane is well placed around the world to respondquickly to operators' urgent demands for maintenance and repair. Local servicecentres with test rigs in Brazil, China, Dubai, India, Norway, Singapore, the UKand US have significantly reduced downtime for customers who previously had towait while seals were shipped over long distances for repair. The Interconnect business is also seeing strong growth. Its military businesshas benefited from increased spending on network-centric systems to provideeffective battlefield communications, where Interconnect provides a range ofmicrowave components which are developed specifically for each project. Smithsequipment is vital to the operation of Eurofighter Typhoon, for example,generating healthy sales in this period. TMS, being sold to GE, is a discreteunit, the departure of which will not affect the performance of the remainingInterconnect business. Of equal importance to Interconnect are the commercial networks providingwireless communications to the consumer market. This sector is growingstrongly, driven by the demand for increased capacity on the existing networksand for new infrastructure in the developing world. Other applications for Interconnect products include medical equipment such asMRI scanners and railway signalling systems, both of which are seeing goodgrowth at present. Flex-Tek is the Smiths company supplying ducting and hosing for construction andconsumer products. Around 50% of sales relate to house-building in the US, amarket currently experiencing a downturn. At the same time, the business isexperiencing raw material price increases which are proving difficult to pass onto customers. Sales not related to construction remain robust. Already a verylean enterprise, Flex-Tek is working hard to reduce overhead costs, andcontinues to be highly cash-generative. Across its range of activities, Specialty Engineering is experiencing well-aboveGDP growth in John Crane and Interconnect, forming the major proportion of itsactivities, and this is enabling the division to achieve a strong performance,with margins continuing to improve. Changes to the Board Stuart Chambers joined as a non-executive director in November. He is the ChiefExecutive of Pilkington Group Ltd and a main Board member of its parent company,Nippon Sheet Glass. Sir Nigel Broomfield, also non-executive, will retire atthe end of March. He was appointed in December 2000, and has made a valuablecontribution to Board's deliberations. The company is pleased to announce thathe will remain an advisor to the Detection business. Prospects Looking ahead, Smiths is now focused on technology leadership and competitivemarket positions in sectors with attractive long-term prospects. In its newshape, the company will have higher margins, better cash performance, animproved capital structure, resources for further development and a progressivedividend policy. The outlook for the current financial year and beyond remainsencouraging and is in line with management expectations. Tables attached - Income statement - Statement of recognised income & expense - Summarised balance sheet - Cash-flow statement - Notes to the accounts Copies of the interim report will be sent to shareholders shortly, and will beavailable at the company's registered office, 765 Finchley Road, London NW118DS. -o- Consolidated Income Statement (unaudited) Period Period Period Ended Ended Ended 3 February 31 January 5 August 2007 2006 2006 (restated) Note £m £m £m Continuing operations:Revenue 2 1,021.2 1,007.1 2,180.3Cost of sales (544.0) (532.4) (1,165.2) Gross profit 477.2 474.7 1,015.1Sales and distribution costs (155.7) (146.9) (316.9)Administrative expenses - normal activities (186.6) (198.0) (399.2) - impairment of financial asset (325.0)Profit on disposal of businesses 14.5 6.5 18.2 Operating profit (loss) 2 149.4 136.3 (7.8) Interest receivable 3.3 2.5 4.2Interest payable (32.8) (29.0) (57.3)Other financing gains (losses) 1.1 1.9 (0.5)Other finance income - retirement benefits 16.0 12.4 25.2 Net finance costs (12.4) (12.2) (28.4)Share of post-tax (loss) profit of associates (0.7) 0.1 (1.1) Profit (loss) before taxation 136.3 124.2 (37.3) Comprising: - headline profit before taxation 3 134.0 124.6 315.8 - exceptional operating items 4 8.1 3.8 (12.8) - amortisation of acquired intangible assets 9 (7.0) (6.1) (13.0) - financing gains (losses) 1.2 1.9 (2.3) - impairment of financial asset (325.0) 136.3 124.2 (37.3) Taxation on continuing operations (30.4) (31.3) (65.4) Profit (loss) after taxation - continuing operations 105.9 92.9 (102.7) Profit after taxation - discontinuing operations 8 43.1 40.6 126.9 Profit for the period 149.0 133.5 24.2 Profit for the period attributable to equity shareholders of the 149.0 133.5 24.2parent company Earnings per share: 5 - Basic 26.2p 23.6p 4.3p - Basic - continuing operations 18.6p 16.5p (18.2)p - Diluted 26.1p 23.5p 4.2p - Diluted - continuing operations 18.5p 16.4p (18.0)p Dividends per share (declared):Interim 10.5p 9.85p 9.85pFinal 21.50p 10.5p 9.85p 31.35p Consolidated statement of recognised income and expenditure (unaudited) Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 £m £m £m Exchange loss (51.1) (1.7) (113.1)Taxation recognised on exchange losses - deferred (7.4)Taxation recognised on share based payment 2.7 0.5 (2.6)Actuarial gains (losses) on retirement benefit schemes 17.5 (73.4) 94.5Taxation recognised on actuarial losses - deferred (5.8) 22.0 (24.0)Fair value gains (losses):- on cash-flow hedges 7.2 2.6 12.7- on net investment hedges 13.4 (0.1) 17.1 Net cost recognised directly in equity (16.1) (50.1) (22.8)Profit for the period 149.0 133.5 24.2 Total recognised income and expense for the period attributable to equityshareholdersof Smiths Group plc 132.9 83.4 1.4 Consolidated balance sheet (unaudited) 3 February 31 January 5 August 2007 2006 2006 (restated) Note £m £m £m Non-current assetsIntangible assets 9 1,018.9 1,578.4 1,530.6Property, plant and equipment 289.2 504.5 497.8Investment accounted for using the equity method 12.8 13.7 14.0Financial assets - other investments 10 0.7 328.6 0.8Retirement benefit assets 179.2 106.6 183.7Deferred tax assets 94.8 251.2 92.3Trade and other receivables 10.1 17.8 16.8Financial derivatives 0.1 1.7 6.2 1,605.8 2,802.5 2,342.2 Current assetsInventories 319.8 600.4 558.4Trade and other receivables 465.4 645.2 724.4Financial derivatives 16.4 7.5 26.1Cash and cash equivalents 11 274.1 359.9 120.6 1,075.7 1,613.0 1,429.5 Assets classified as held for sale and included in 8 1,316.6 4.4disposal groups Total assets 3,998.1 4,419.9 3,771.7Non-current liabilitiesFinancial liabilities: - borrowings 11 (897.6) (962.2) (862.3) - financial derivatives (3.3) (1.4) (4.4) Provisions for liabilities and charges (57.2) (26.4) (26.5)Retirement benefit obligations (173.1) (343.0) (235.8)Deferred tax liabilities (48.7) (130.4) (49.7)Trade and other payables (34.1) (133.6) (114.8) (1,214.0) (1,597.0) (1,293.5)Current liabilitiesFinancial liabilities: - borrowings 11 (328.3) (388.2) (185.0) - financial derivatives (12.3) (5.8) (4.9) Provisions for liabilities and charges (60.1) (59.4) (81.8)Trade and other payables (385.5) (747.2) (699.5)Current tax payable (130.9) (145.4) (144.1) (917.1) (1,346.0) (1,115.3)Liabilities included within disposal groups 8 (449.3) Total liabilities (2,580.4) (2,943.0) (2,408.8) Net assets 1,417.7 1,476.9 1,362.9 Shareholders' equityShare capital 143.3 141.4 141.8Share premium account 265.6 211.6 224.1Own shares (7.0)Revaluation reserve 1.7 1.7 1.7Merger reserve 234.8 234.8 234.8Retained earnings 732.2 884.5 734.0Hedge reserve 47.1 2.9 26.5 Total shareholders' equity 13 1,417.7 1,476.9 1,362.9 Cash-flow statement (unaudited) Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 (restated) Note £m £m £m Net cash inflow from operating activities 14 190.5 193.2 389.1Cash-flows from investing activitiesExpenditure on capitalised development (52.8) (48.8) (102.0)Expenditure on other intangible assets (16.6) (16.5) (25.1)Purchases of property, plant and equipment (51.1) (49.3) (111.2)Disposal of property, plant and equipment 1.4 3.2 12.2Additions to financial assets (0.3)Acquisition of businesses (14.7) (32.8) (54.2)Disposals of businesses 11.2 5.0 8.3 Net cash-flow used in investing activities (122.9) (139.2) (272.0)Cash-flows from financing activitiesProceeds from issue of ordinary share capital 22.3 14.6 27.3Dividends paid to equity shareholders (122.3) (111.3) (167.0)Increase (decrease) in other borrowings 56.8 32.5 (42.4) Net cash-flow used in financing activities (43.2) (64.2) (182.1) Net increase (decrease) in cash and cash equivalents 24.4 (10.2) (65.0)Cash and cash equivalents at beginning of period (51.1) 11.9 11.9Exchange differences 2.6 0.1 2.0 Cash and cash equivalents at end of period (24.1) 1.8 (51.1) Cash and cash equivalents at end of period comprise: - cash at bank and in hand 276.4 344.6 102.3 - deposits 15.3 18.3 - bank overdrafts (300.5) (358.1) (171.7) (24.1) 1.8 (51.1) Included in cash and cash equivalents per the balance (25.6) 1.8 (51.1)sheetIncluded in the assets of the disposal group 8 1.5 (24.1) 1.8 (51.1) Notes to the accounts (unaudited) 1 Basis of preparation The interim financial statements have been prepared in accordance with theCompanies Act 1985 applicable to companies reporting under InternationalFinancial Reporting Standards (IFRSs) and International Financial ReportingInterpretations Committee (IFRIC) interpretations, as adopted by the EuropeanUnion in response to the IAS regulation (EC 1606/2002), under the historic costconvention modified to include revaluation of certain financial instruments.For Smiths Group plc there are no differences between IFRS as adopted for use inthe European Union and full IFRS as published by the International AccountingStandards Board. The financial information presented in these financial statements has beenprepared in accordance with accounting policies used in the most recentfinancial statements, which are also expected to be followed in preparing theannual financial statements for the period ending 31 July 2007, and the ListingRules of the FSA, except as noted below. These financial statements do notcomply with the requirements of IAS 34. Restatement The 31 January 2006 consolidated income statement, consolidated balance sheet,changes in shareholders' equity and cash flow statements have been restated toreflect the final accounting policies which were adopted in the 2006 year endfinancial statements, the effect of which was to increase financial derivativeassets by £1.3m, decrease financial derivative liabilities by £8.4m, andincrease shareholders' equity by £9.7m. The consolidated income statement and cash flow statement for the six months to31January 2006 have been restated to reflect a £2.5m reclassification fromfinancing to operating profit, in respect of the treatment of administrationcosts for the pension schemes. In addition, in accordance with IFRS, the Group has now included in thestatement of recognized income and expense, for all periods presented, thedeferred tax credit in respect of share-based payments. Recent accounting developments The Company has adopted the following developments and interpretations witheffect from 6 August 2006. IAS 39 - 'Financial Instruments : Recognition and measurement' An amendment to IAS 39 requires financial guarantees to be initially recognisedat fair value and remeasured at each balance sheet date. The effect on theinterim financial statements is not material. IFRIC 4 - 'Determining whether an Arrangement contains a lease' This interpretation requires arrangements which may have the nature, but not thelegal form, of a lease to be accounted for in accordance with 'IAS 17 Leases'.The effect on the interim financial statements is not material. IFRIC 8 - 'Scope of IFRS 2' This interpretation clarifies that the accounting standard IFRS 2 'Share-basedpayment' applies to arrangements where an entity makes share-based payments forapparently nil or inadequate consideration. IFRIC 8 explains that, if theidentifiable consideration given appears to be less than the fair value of theequity instruments granted or liability incurred, this situation typicallyindicates that other consideration has been or will be received. The effect onthe interim financial statements is not material. IFRIC 9 - 'Re-assessment of embedded derivatives' This interpretation clarifies certain aspects of the treatment of embeddedderivatives under IAS 39 'Financial instruments: Recognition and measurement'and concludes that reassessment of an embedded derivative is prohibited unlessthere is a change in the terms of the contract that significantly modifies thecash flows that otherwise would be required under the contract, in which casereassessment is required. The effect on the interim financial statements is notmaterial. IFRIC 10 - 'Interim financial reporting and impairment'. This interpretationaddresses the apparent conflict between the requirements of IAS 34 'Interimfinancial reporting', and those in other standards on the recognition andreversal in financial statements of impairment losses on goodwill and certainfinancial assets. It states that any such impairment losses recognised in aninterim financial statement may not be reversed in subsequent interim or annualfinancial statements. There was no effect on the interim financial statements. Proposed disposal of Aerospace Division Following the announcement, on 15 January 2007, of the proposed disposal of theAerospace division and Times Microwave Systems, Inc., their activities have beendesignated a 'discontinued operation' within the terms of IFRS 5 'Non-currentassets held for sale and discontinued operations' ('IFRS 5'). The results ofthe discontinued operations are shown on the face of the Consolidated IncomeStatement and the comparative figures have been restated to reflect the resultsof discontinued operations in those periods and to reallocate certain continuingcosts previously allocated to the Aerospace division. The assets andliabilities of the discontinued operations are separately identified on theConsolidated Balance Sheet, although as prescribed by IFRS 5, no adjustment hasbeen made to comparatives. The interim financial statements were approved by the directors on 21 March2007. 2 Analyses of revenue and operating profit by business segment For management purposes, the ongoing Group is organised into three businesssegments - Detection, Medical and Specialty Engineering. These business segments are the basis on which the Group reportsits primary segment information. For reporting purposes, Specialty Engineering is analysed into two segments:John Crane and Specialty - Other. Period ended 3 February 2007 Specialty Engineering Specialty Total Detection Medical John Crane - Other £m £m £m £m £m Revenue 182.0 347.0 251.9 240.3 1,021.2 Headline operating profit 27.3 60.4 31.2 29.3 148.2Exceptional operating items 0.2 (5.1) 12.3 0.7 8.1Amortisation of acquired intangible assets (0.2) (5.4) (0.2) (1.2) (7.0)Financing losses (0.3) 0.4 0.1 (0.1) 0.1 Operating profit 27.0 50.3 43.4 28.7 149.4Net finance costs (12.4)Share of post-tax (losses) profits of associated (1.0) 0.3 (0.7)companies Profit before taxation 136.3Taxation (30.4) Profit for the period 105.9 Period ended 31 January 2006 Specialty Engineering Specialty Total Detection Medical John Crane - Other £m £m £m £m £m Revenue 171.2 355.0 244.9 236.0 1,007.1 Headline operating profit 23.5 59.4 26.7 29.0 138.6Exceptional operating items 5.3 (1.1) (0.4) 3.8Amortisation of acquired intangible assets (0.1) (5.5) (0.5) (6.1)Financing losses Operating profit 28.7 52.8 26.7 28.1 136.3Net finance costs (12.2)Share of post-tax profits (losses) of associated (0.3) 0.4 0.1companies Profit before taxation 124.2Taxation (31.3) Profit for the period 92.9 Period ended 5 August 2006 Specialty Engineering Specialty Total Detection Medical John Crane - Other £m £m £m £m £m Revenue 411.8 737.0 518.4 513.1 2,180.3 Headline operating profit 74.3 133.3 66.4 70.8 344.8Exceptional operating items 5.4 (17.2) 5.6 (6.6) (12.8)Amortisation of acquired intangible assets (0.4) (11.2) (0.3) (1.1) (13.0)Financing losses (0.3) (0.6) (0.4) (0.5) (1.8) 79.0 104.3 71.3 62.6 317.2Impairment of financial assets (325.0) Operating profit (7.8)Net finance costs (28.4)Share of post-tax (losses) profits of associated (1.5) 0.4 (1.1)companies Profit before taxation (37.3)Taxation (65.4) Profit for the period (102.7) 3 Headline profit measures The Company seeks to present a measure of underlying performance which is notimpacted by exceptional items or items considered non-operational in nature.This measure of profit is described as 'headline', and is used by management tomeasure and monitor performance. Normal restructuring costs are charged againstheadline profits. The following items have been excluded from the headline measure: • exceptional operating items - see note 4; • amortisation of intangible assets acquired in a business combination - theamortisation charge is a non-cash item, and the directors believe that it shouldbe added back to give a clearer picture of underlying performance; and • other financing gains and losses - these represent the results of derivativesand other financial instruments which do not fall to be hedge accounted underIAS 39 and do not form part of the group's financing strategy. These items areincluded either within operating profit or profit before taxation depending onthe nature of the transaction. The application of IFRS accounting principlesmakes this item potentially volatile, and it is therefore excluded to give aclearer picture of the underlying performance. 4 Exceptional operating items Items which are material either because of their size or their nature, and whichare non-recurring, are presented within their relevant consolidated incomestatement category, but highlighted separately within the line 'exceptionaloperating items'. The separate reporting of exceptional items helps provide abetter picture of the Company's underlying performance. Items which may beincluded within the exceptional category include: • profits/(losses) on disposal of businesses; • spend on the integration of significant acquisitions; and • significant goodwill or other asset impairments. An analysis of the items presented as exceptional in these financial statementsis given below: Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 £m £m £m Integration of acquisitions (5.0) (2.7) (18.7)Class action settlement (12.2)Profit on disposal of businesses (note 7) 14.5 6.5 18.1Commutation of insurance policies (note 15) 42.9Provision for litigation (note 12) (44.3) 8.1 3.8 (12.8) Restructuring costs in connection with the integration of Medex amounting to£5.0m (2006:£2.7m) have been incurred in the period. John Crane, Inc. has commuted certain insurance policies and received £42.9m incash for the period. At the same time, it has established a litigationprovision in the sum of £44.3m (see note 15). 5 Earnings per share Basic earnings per share are calculated by dividing the profit for the periodattributable to equity shareholders of the parent company by the average numberof ordinary shares in issue during the period. Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 £m £m £m Profit (loss) for the period- Continuing 105.9 92.9 (102.7)- Total 149.0 133.5 24.2 Average number of shares in issue during the 569,049,918 564,601,013 565,359,484period Diluted earnings per share are calculated by dividing the profit attributable toequity shareholders by 571,928,823 (period ended 31 January 2006: 567,972,202;period ended 5 August 2006: 569,733,560) ordinary shares, being the averagenumber of ordinary shares in issue during the period, adjusted by the dilutiveeffect of share options. A reconciliation of basic earnings per share - continuing and headline earningsper share - continuing is as follows: Period Period Period ended ended ended 3 February 2007 31 January 2006 5 August 2006 Continuing Continuing Continuing operations operations operations £m EPS (p) £m EPS (p) £m EPS (p) Attributable to equityshareholdersof the parent company 105.9 18.6 92.9 16.5 (102.7) (18.2) Exclude:- integration of acquisitions 5.0 2.7 18.7- disposal of businesses (14.5) (6.5) (18.2)- insurance commutation (42.9)- asbestos litigation provision 44.3- class action settlement 12.2- impairment of financial asset 325.0- amortisation of acquiredintangible assets 7.0 6.1 13.0- financing gains charged to administrative (0.1) 2.8 expenses charged to financing (1.1) (1.9) (0.5) (2.3) 0.4 353.0- less tax (4.4) (1.1) (15.5) (6.7) (1.2) (0.7) (0.2) 337.5 59.7 Headline 99.2 17.4 92.2 16.3 234.8 41.5 Headline EPS - diluted (p) 17.3 16.2 41.2 6 Acquisitions During the period, the Company made a number of acquisitions, including theissued share capital of Tecnicas Medicas MAB, SA, on behalf of Medical. The values set out below are provisional pending finalisation of the fair valuesattributable, and will be finalised in subsequent periods. All acquisitions are wholly owned. Goodwill and net assets in respect of prioryear acquisitions have been adjusted by £0.8m as a result of finalising theirattributable fair values. Date of Consideration Goodwill Net assets acquisition £m £m £m Businesses acquiredTecnicas Medicas 1 December, 2006 11.7 8.6 3.1Other 3.6 2.9 0.7 15.3 11.5 3.8 Consideration:- paid during the period 15.3 7 Disposals The most significant disposal transaction during the period was the sale of theGroup's bearing lubrication business to AB SKF. Additional costs and provision releases relating to prior year disposals amounted to £1.2m. Consideration Profit on (net of Net disposal costs) assets £m £m £m Businesses sold 15.2 1.9 13.3 8 Discontinuing operations and assets held for sale On 15 January, 2007, the Company announced its intention to sell its Aerospaceoperations to General Electric Company for consideration of $4.8bn. Thedisposal is expected to complete in the second half of 2007 and, as aconsequence, the assets and liabilities being sold have been disclosed as heldfor sale in the Consolidated Balance Sheet. The post-tax result of the Aerospaceoperations have been separately disclosed as a discontinuing operation in theconsolidated income statement. In the cash flow statement, the operating cashflows of the Aerospace group have been aggregated with those of the continuingoperations, but are disclosed separately in the note below. Financial information for the Aerospace operations after group eliminations ispresented below. Profit after taxation of discontinuing operations Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 £m £m £m Revenue 614.1 582.4 1,342.6Cost of sales (428.7) (418.1) (946.0) Gross profit 185.4 164.3 396.6Sales and distribution (19.4) (17.9) (37.8)costsAdministrative (88.1) (92.1) (190.4)expenses Operating profit 77.9 54.3 168.4Finance costs (18.5) 0.5 1.3 Profit before taxation 59.4 54.8 169.7Taxation (16.3) (14.2) (42.8) Profit for the period 43.1 40.6 126.9 Earnings per share from discontinuing operations -penceBasic 7.6p 7.1p 22.5pDiluted 7.6p 7.1p 22.2p Cash flows of discontinuing operations Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 £m £m £m Operating activities 54.5 109.9 250.1Investing activities (77.0) (74.5) (148.1)Financing activities 1.1 0.2 3.0 (21.4) 35.6 105.0 8 Discontinuing operations and assets held for sale (continued) Assets classified as held for sale and disposal groups 3 February 31 January 5 August 2007 2006 2006 £m £m £m Disposal groupIntangible assets 531.6Property, plant and equipment 216.5Financial 13.4derivativesInventories 296.8Trade and other 256.0receivablesCash and cash 2.3equivalents Non-current assets held for sale 1,316.6 4.4 Total assets classified as held for sale and 1,316.6 4.4assets of disposal groups Disposal groupFinancialliabilities:- borrowings (5.4)- financial (3.2)derivativesProvisions for liabilities and (20.5)chargesRetirement benefit obligations (22.4)Deferred tax (5.8)liabilitiesTrade and other (379.4)payablesCurrent tax payable (12.6) (449.3) The assets and liabilities of the disposal group as at 3 February 2007 arerequired to be separately disclosed as per the note above. However, there is no requirement to restate prior year assets and liabilities.The non-current assets held for sale at 31 January 2006comprise the assets of a subsidiary company disposed of in the second half ofthe period ended 5 August 2006. In addition to the £22.4m of retirement benefitobligations shown above, which relates to US employees, the arrangements for thedisposal allow for UK employees to opt for transfer from the UK funded pensionschemes. The above assets and liabilities reflect an estimated £156m ofliability to be transferred in this respect, matched by equivalent assets. 9 Intangible assets Acquired Development intangibles Goodwill costs (see below) Other Total £m £m £m £m £m CostAt 6 August 2006 1,241.6 293.7 139.1 112.5 1,786.9Exchange adjustments (26.6) (2.0) (3.6) (1.7) (33.9)Reclassification from property, plant and equipment 1.9 1.9Transfers to assets held for sale (note 1) (299.5) (282.8) (10.4) (50.0) (642.7)Business combinations 11.5 0.3 11.8Adjustments to prior year acquisitions 0.8 (0.9) (0.1)Additions at cost 34.3 8.0 42.3 At 3 February 2007 927.8 43.2 124.5 70.7 1,166.2 AmortisationAt 6 August 2006 133.7 39.5 20.2 62.9 256.3Exchange adjustments (2.3) (0.6) (0.6) (1.1) (4.6)Reclassification from property, plant and equipment 1.6 1.6Transfers to assets held for sale (note 1) (55.8) (33.9) (4.7) (27.2) (121.6)Charged (note 2) 5.4 7.2 3.0 15.6 At 3 February 2007 75.6 10.4 22.1 39.2 147.3 Net book valueAt 3 February 2007 852.2 32.8 102.4 31.5 1,018.9 At 5 August 2006 1,107.9 254.2 118.9 49.6 1,530.6 In addition to goodwill, the acquired intangible assets comprise: Patents, licences and Customer trade marks Technology relationships Total £m £m £m £m CostAt 6 August 2006 38.9 58.6 41.6 139.1Exchange adjustments (1.1) (1.6) (0.9) (3.6)Transfers to assets held for sale (note 1) (10.4) (10.4)Business combinations 0.3 0.3Adjustments to prior year acquisitions 0.5 0.2 (1.6) (0.9) At 3 February 2007 38.6 57.2 28.7 124.5 AmortisationAt 6 August 2006 3.4 6.9 9.9 20.2Exchange adjustments (0.1) (0.3) (0.2) (0.6)Transfers to assets held for sale (note 1) (4.7) (4.7)Charged (note 2) 1.0 2.8 3.4 7.2 At 3 February 2007 4.3 9.4 8.4 22.1 Net book valueAt 3 February 2007 34.3 47.8 20.3 102.4 At 5 August 2006 35.5 51.7 31.7 118.9 Note 1 The transfer to 'assets held for sale' was made prior to 3 February 2007 and,hence, the amounts shown do not reflect the net book value of intangible assetsat 3 February (see note 8 to the accounts). Note 2 The amortisation charge represents the charge for continuing operations, anddiscontinuing operations for the period prior to becoming a disposal group. 10 Non-current financial assets 3 February 31 January 5 August 2007 2006 2006 £m £m £m TI Automotive Limited preference shares 325.0Other trade investments 0.7 3.6 0.8 0.7 328.6 0.8 11 Cash and borrowings This note sets out the calculation of net debt, a measure considered importantin explaining our financing position. As shown below, IAS 39 requires that thecarrying value of borrowing includes accrued interest, and the fair value of anyinterest rate or currency swaps held to hedge the borrowings. The Company'smeasure of 'net debt' is a non-GAAP measure and is stated before these valuationadjustments. 3 February 31 January 5 August 2007 2006 2006Continuing operations £m £m £m Cash and cash equivalentsNet cash and deposits (note 1) 274.1 359.9 120.6 Short-term borrowingsBank overdrafts (note 1) (299.7) (365.2) (177.7)Bank loans (5.9)Other loans (3.1) (308.7) (365.2) (177.7) Long-term borrowingsOne to two years (0.3) (0.4) (0.5)Two to five years (614.2) (663.6) (575.6)After five years (285.9) (300.5) (290.0) (900.4) (964.5) (866.1) Borrowings (1,209.1) (1,329.7) (1,043.8) Net debt (935.0) (969.8) (923.2) Borrowings - valuation adjustmentsInterest accrual (19.6) (23.0) (7.3)Fair value of swapped debt 2.8 2.3 3.8 Total borrowings per balance sheet (1,225.9) (1,350.4) (1,047.3) Total cash and borrowings, including that disclosed as part of the disposalgroup, as at 3 February 2007 is as follows: Cash and cash Net debt Total borrowings equivalents £m £m £mContinuing operations 274.1 (935.0) (1,225.9)Disposal group (note 8) 2.3 (3.1) (5.4) 276.4 (938.1) (1,231.3) Note 1 IAS 32 requires that cash and overdraft balances within cash pooling systems bereported gross on the balance sheet. The gross up included above amounted at 3February 2007 to £243.5m (31 January 2006: £316.1m; 5 August 2006: £83.6m). 12 Provision for liabilities and charges As stated in note 15, John Crane, Inc ("John Crane") is one of many defendantsin litigation relating to products previously manufactured which containedasbestos. Until recently, the awards, the related interest and all materialdefence costs were met directly by insurers. During the period, John Crane hassecured the commutation of certain insurance policies in respect of productliability and, as explained in note 4, has accounted for the proceeds as otheroperating income. While substantial insurance remains in place, John Crane hasbegun to meet defence costs directly, seeking appropriate contribution frominsurers thereafter. This year, John Crane has established a provision to meetsuch costs amounting to £44m. The provision is based on assessment of the probable costs of defending knownand expected future cases to the extent that such costs can be reliablyestimated. At present, the provision equates to approximately four years ofgross spend in respect of defence costs, assuming an annual level of spend ofsome £12m. Although it is anticipated that asbestos-related claims may need tobe defended for a longer period, the Directors have concluded at this point thatno reliable estimate of the future exposure can be quantified beyond a four yearperiod. The provision established is a discounted pre-tax provision and is equivalent toan expected expenditure of £50m in future cash flows; the discount rate used is5.1%, being the risk free rate faced on US debt instruments. The discount of£6m will unwind through the income statement in future years. No account has yet been taken of recoveries from insurers as these recoveriesare not, at present, sufficiently certain. Any such recoveries will be creditedto the income statement in the period in which they are received. The recognition of the above provision is part of an ongoing assessment of JohnCrane's asbestos exposures, and the methodologies and calculations set out abovewill be reconsidered regularly to ensure that they remain appropriate. Theremay, therefore, be changes in the level of provision recognised as moreinformation about the exposures is received, or as future events occur. 13 Changes in shareholders' equity Period Period Period ended ended ended 3 February 31 January 5 August 2007 2006 2006 (restated) £m £m £m Changes in shareholders' equityAt beginning of period 1,362.9 1,486.7 1,486.7Profit for the period 149.0 133.5 24.2Share-based payment 8.2 3.5 14.5Deferred tax benefit thereon 2.7 0.5 (2.6)Dividends paid to equity shareholders (122.3) (111.3) (167.0)New share capital subscribed 43.0 14.6 27.3Purchase of own shares (7.0)Exchange losses (51.1) (1.7) (113.1)Taxation recognised on exchange losses (7.4)Fair value gains (losses)- on cash-flow hedges 7.2 2.6 12.7- on net investment hedges 13.4 (0.1) 17.1Actuarial gains and losses on retirement benefit schemes 17.5 (73.4) 94.5Deferred taxation benefit thereon (5.8) 22.0 (24.0) At end of period 1,417.7 1,476.9 1,362.9 14 Cash-flows from operating activities Period Period Period ended ended ended 3 February 31 January 5 August Note 2007 2006 2006 £m £m £m Profit (loss) before taxation - continuing 136.3 124.2 (37.3)operationsProfit before taxation - discontinued operations 59.4 54.8 169.7 195.7 179.0 132.4Net interest payable 30.3 27.0 54.2Financing (gains) losses- charged to administrative expenses (0.1) 2.8- charged to financing 18.2 (1.7) 0.5Share of post-tax profit (loss) from associate 0.7 (0.1) 1.1Other finance income - retirement benefits (17.7) (13.6) (27.6)Impairment of financial asset 325.0 227.1 190.6 488.4Amortisation of intangible assets 9 15.6 16.4 39.6Provision against non-current investment 0.3Profit on disposal of property, plant and equipment (0.7) (4.4)Profit on disposal of business (8.5) (4.8) (16.4)Depreciation of property, plant and equipment 31.9 40.4 81.0Share-based payment expense 9.5 5.0 16.3Retirement benefits 3.5 3.8 (61.5)(Increase) in inventories (71.4) (49.6) (34.8)Decrease (increase) in trade and other receivables 20.1 76.5 (35.6)Increase (decrease) in trade and other payables 24.2 (9.8) 70.7 Cash generated from operations 251.6 268.5 543.3Interest (15.5) (12.0) (49.5)Tax paid (45.6) (63.3) (104.7) Net cash inflow from operating activities 190.5 193.2 389.1 15 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. As a result of its defence policy, John Crane has been dismissedbefore trial from cases involving approximately 136,000 claims over the last 28years. John Crane is currently a defendant in cases involving approximately154,500 claims. Despite these large numbers of claims, John Crane has had finaljudgments against it, after appeals, in only 63 cases, amounting to awards ofsome US$55.4m over the 28 year period. Whilst this represents a very low proportion of claims that has historicallyresulted in final judgment against John Crane, the incidence of such judgmentsin the future cannot be meaningfully estimated and the scale of future awards isaccordingly unquantifiable. As explained in note 12, a provision for the legalcosts of defending asbestos claims has, however, been established in the periodand charged in the Income Statement. 16 Dividends An interim dividend of 10.5p per share (2006: 9.85p) has been declared and willbe paid on 27 April 2007 to holders of all ordinary shares whose names areregistered at close of business on 30 March 2007. The dividend has not beenaccrued at 3 February 2007 in accordance with IFRS. 17 Comparative figures This financial information does not comprise full financial statements withinthe meaning of Section 240 of the Companies Act 1985. Figures relating to the period ended 5 August 2006 are abridged. Full accountsof Smiths Group plc for that period, prepared under IFRS, have been reported onby the auditors and delivered to the Registrar of Companies. The report of theauditors was not qualified and did not contain statements under Section 237(2)or 237(3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smiths Group