19th Mar 2008 07:00
Smiths Group PLC19 March 2008 Smiths reports a 7% increase in sales and headline operating profit Interim Results for the six months ended 2 February 2008 £m Headline* StatutoryContinuing activities 2008 2007 growth 2008 2007Sales 1,088 1,021 7% 1,088 1,021Operating profit 158 148 7% 170 149Operating margin 14.5% 14.5% - 15.6% 14.6%Pre-tax profit 159 134 19% 165 136Basic EPS (p) 30.8p 17.4p 34.3p 18.6pInterim dividend (pps) 10.5p 10.5p 10.5p 10.5p * In addition to statutory reporting, Smiths Group reports its continuingoperations on a headline basis. Headline profit is before exceptional items(incl. impairment of assets and income and expenditure relating to John Cranelitigation), amortisation of acquired intangible assets, profit/loss on disposalof businesses and financing gains/losses from currency hedging. BUSINESS HIGHLIGHTS • Smiths Detection: Headline operating profit up 13% to £31mo Strong sales of checkpoint explosive detection systems to UK and US customerso Roll-out of the joint chemical agent detector (JCAD) to the US militaryo Customs and border cargo screening continues to grow • Smiths Medical: Headline operating profit flat at £61mo 24-month performance improvement programme underwayo New product launches to be boosted with increased investment in R&D • Smiths Specialty Engineering: Headline operating profit up 10% to £66mo John Crane reports strong demand from petrochemical customerso Margins to be enhanced through cost control and top line growtho Smiths Interconnect has benefited from the roll-out of 4G communications in the US Philip Bowman, Smiths Group Chief Executive, said: "Smiths Specialty Engineering and Detection divisions delivered strong sales andprofit growth in the first half, offsetting a flat performance from Medical. InMedical, we have initiated a detailed performance improvement programme and itsdelivery is a key priority. "Since joining three months ago, I have begun a thorough review of operationsand I find a business that has many strong positions in growing markets. Thereare significant opportunities to improve performance progressively over atwo-year period. Smiths will focus on margin improvement, top line growth -especially in developing markets - and financial returns. There is also scopeto grow the business through bolt-on acquisitions, such as Indufil and Fiberodannounced today. Going forward, I believe there are clear opportunities to growSmiths and improve returns for shareholders." CONTACT DETAILS Investor enquiries:Peter Durman, Smiths Group +44 (0)20 8457 8343 [email protected] Media enquiries:Chris Fox, Smiths Group +44 (0)20 8457 8403 [email protected] Cardew, Cardew Group +44 (0)20 7930 0777 [email protected] Website From 09.00 (UK time) on 19 March 2008, the results presentation will beavailable from: (UK time) at www.smiths.com/results. Webcast A live webcast of the presentation to analysts will be available atwww.smiths.com/results at 09.00 (UK time) on Wednesday 19 March. A recording ofthe webcast will be available later that day. Photography Original high-resolution photography is available to the media, please contact: Laura Guerin, Smiths Group +44 (0)20 8457 [email protected] This press release contains certain forward-looking statements with respect tothe operations, performance and financial condition of the Group. By theirnature, these statements involve uncertainty since future events andcircumstances can cause results and developments to differ materially from thoseanticipated. The forward-looking statements reflect knowledge and informationavailable at the date of preparation of the Interim Report and the Companyundertakes no obligation to update these forward-looking statements. Nothing inthis press release should be construed as a profit forecast. Statutory reporting Statutory reporting takes account of all items excluded from headlineperformance. On a statutory basis, pre-tax profit from continuing operationswas £165m (2007: £136m) and earnings per share were 34.3p (2007: 18.6p). Theitems excluded from headline performance comprise amortisation of acquiredintangible assets of £7m (2007: £7m), profit on disposal of businesses of £27m(2007: £15m), acquisition integration costs of £2m (2007: £5m), financing lossesof £3m (2007: £1m gain) and adjustments to the discounted provision for JohnCrane litigation of £8m (2007: nil). These adjustments to the provision arisefrom changes in US interest rates and the unwind of the discount and do notrepresent any change in the underlying assessment of the base provision beforediscount. The discontinued operations represent items in respect of theAerospace division, sold in May 2007. CHIEF EXECUTIVE'S REVIEW Smiths Group has a strong set of technology-based businesses, well-positioned ingrowth markets and with the capacity to demonstrate resilience in an economicdownturn. There are clear opportunities to improve performance progressivelyover a two year period. Our focus will be on enhancing margins in all thedivisions through a combination of improved data, cost control and top linegrowth - especially in developing markets such as India and China. There arealso opportunities to drive future growth through a targeted increase in R&Dinvestment, and to focus it more tightly on high growth areas that can deliverattractive returns. We also recognise the need to invest capital in additionalmanufacturing capacity and that our working capital requirement is likely togrow as we exploit these growth opportunities. For example, John Crane hassignificant scope to build further manufacturing capacity and aftermarketservice centres to meet the strong demand from the petrochemical industry.Detection is succeeding in winning new contracts but the increasing size, thedifferent counterparties and the changing nature of those contracts has raisedits working capital requirements, which is reflected in its first halfperformance. In order to improve data flow and speed up decision making, we arealso investing in information systems, such as Enterprise Resource Planning(ERP) in a number of areas. Looking across the Group, there are opportunities to leverage the Group's scale- particularly as the divisions have been run independently with littleincentive to share best practice or back office services. The structure of theorganisation will be reviewed to deliver efficiencies. The Board will alsocontinue to consider the structure of the Group, with the objective ofmaximising shareholder value. In the current environment, the Board believesthat there are valuable opportunities to build the business with bolt-onacquisitions - particularly in John Crane, Interconnect and Detection. Suchacquisitions may bring complementary technologies, support geographic expansioninto new markets or leverage existing infrastructure. We announced todayagreements to acquire Indufil BV (Indufil) and Fiber Composite Company Inc.(Fiberod) which will both expand John Crane's offering. Indufil is aDutch-based specialist in filters for the petrochemical and process industries.Fiberod is a Texas-based equipment manufacturer that will extend John Crane'supstream oilfield services offering. Completion of both acquisitions is subjectto regulatory approvals. The profile of Smiths Group offers significant opportunities for growth inresilient markets. Given the current conditions in financial markets and thescope for investment in organic growth and acquisitions, the Board has reviewedits dividend policy and intends to grow dividends consistent with increasingcover to around 2.5 times in the medium term. In pursuit of this policy, theBoard has declared an unchanged interim dividend of 10.5p per share and intendsto recommend a total dividend for the year of at least 34p per share. Theinterim dividend will be paid on 25 April to shareholders registered at theclose of business on 28 March. The ex-dividend date is 26 March. Smiths Group delivered a good first half performance with sales from continuingactivities up 7% to £1,088m. On an underlying basis*, sales increased by 8%with the main contributors being Specialty Engineering and Detection; Medicalwas flat. Headline operating profit grew by 7%, or £10m, to £158m on both anunderlying and a reported basis. Overall headline operating margin for theGroup was maintained at 14.5%. Of the £10m reported increase in headlineoperating profit, £6m came from Specialty Engineering while Detectioncontributed £4m. The key drivers for the growth in headline operating profitwere: • Strong demand from the petrochemical industry for John Crane'sproducts and services; • Good progress at Interconnect with new contracts to support USA 4Gwireless broadband and the next generation of Satellite Communications On TheMove (SOTM) for the military; and • Benefit of new contracts in Detection, particularly for checkpointdetection systems; the Joint Chemical Agent Detector (JCAD) with the USDepartment of Defense; and high energy x-ray screening systems. * Underlying performance excludes the year-on-year impact of currencytranslation, acquisitions and disposals. The net interest charge reduced from £30m to £20m reflecting the lower net debtposition following the Aerospace sale and lower interest rates. There was apensions financing gain of £21m (2007: £16m) relating to continuing activities,which reflected the funding position of the company's retirement benefit schemesat July 2007. Headline pre-tax profit increased by 19% to £159m (2007: £134m). The company'stax rate on headline profit for the period was 25% (2007: 26%). Headlineearnings per share were 30.8p (2007: 17.4p). The comparison in earnings pershare is distorted by the share consolidation carried out in June last year; ona pro-forma basis, earnings per share grew by 20%. Headline operating cash-flow from continuing operations totalled £99m,representing 63% of headline operating profit, and reflects investment incapital projects and increased working capital to support business growth. Theworking capital investment was particularly driven by the timing and nature ofcontracts in Detection and John Crane. Net debt has increased since July 2007by £85m to £675m. Outlook Smiths Detection is expected to deliver continued growth, although the rate ofincrease is not likely to be as strong as in the first half. John Crane andInterconnect will continue to benefit from their strong market positions.Flex-Tek will be held back by the ongoing uncertainty in the US residentialconstruction market. A detailed performance improvement programme for Medicalis underway and its delivery is a key priority. The first six months provide asolid foundation for meeting expectations for the full year. OPERATIONAL REVIEW Smiths Detection Growth£m 2008 2007 Reported UnderlyingSales 222 182 22% 21%Headline operating profit 31 27 13% 10%Headline operating margin 14.0% 15.0%Statutory operating profit 31 27 Smiths Detection has grown strongly over recent years and is a global leader inits field. It has a broad geographic reach and benefits from significantinvestment in technology and intellectual property. Sales grew by 22% andheadline operating profit increased by 13%. This growth was driven by contractwins, particularly for airport checkpoint explosive detection systems; for JCAD,the advanced chemical point detector; and for cargo screening systems. Marginswere held back in the period by the start-up costs associated with thescaling-up of our manufacturing to meet the strong customer demand for newproducts and by the timing and mix of the new contracts compared with last year. In transportation, Detection won substantial contracts in the UK and US for theroll-out of new airport checkpoint explosive detection systems. Theintroduction of these systems helps airports speed up passenger security checks. Demand has remained strong for advanced, high-energy cargo screening solutionsin the ports and borders segment to inspect inbound and outbound shippingcontainers and trucks. Deliveries to the Russian authorities from the StPetersburg facility were completed in December, while a major order from USCustoms and Border Protection is now being fulfilled. In the military segment, the recently developed JCAD programme has begun toroll-out with further orders received from the US Department of Defense. TheJCAD is an advanced chemical point detector designed to help safeguard troops byautomatically detecting, identifying and quantifying both chemical warfareagents and toxic industrial chemicals. Throughout the period, preparations have been underway for the launch during thesecond half of a new ERP implementation. This single system will replace 14legacy business software systems. A project team of some 50 in-house andexternal staff has planned the staged implementation of this system which isexpected to conclude by June 2009. Investment to date has been £11m, with atotal budget investment of £22m. We anticipate the project will generateefficiencies in costs and working capital of equivalent to between 1% and 2% ofsales over the next three years and that these savings will be re-invested togrow the business. Smiths leadership in the sector is maintained by ongoing product innovationdeveloped by in-house R&D, government-funded research and through partnershipsand licences. Company-funded R&D over the period increased by 11% to some £13mor 6% of sales. Smiths Detection actively seeks customer and government supportfor R&D, which totalled £4m in the period (2007: £3m). Looking ahead, the sector is set for continued growth and Detection shouldbenefit from its leadership position and the roll-out of new technologies. Theorder book is at record levels which supports a positive outlook in line withexpectations for the full year. Smiths Medical Growth£m 2008 2007 Reported UnderlyingSales 346 347 0% 1%Headline operating profit 61 60 0% 4%Headline operating margin 17.5% 17.4%Statutory operating profit 53 50 Smiths Medical focuses on three distinct therapy areas - vital care, medicationdelivery and safety - within the much broader medical devices market. It aimsto leverage these products through a widespread and growing international salesnetwork. Medical reported sales and margin at broadly similar levels to last year.Growth was hampered by a weak performance in Critical Care, which faced twospecific supplier problems, and adverse currency translation. In addition,Medical has continued to experience supply chain problems caused by severallong-term initiatives. The simultaneous relocation of manufacturing to lowercost regions, the integration of the Medex acquisition, and the implementationof a new ERP system have all posed operational challenges. These factorscombined to adversely affect relationships with major customers. A 24-monthperformance improvement programme has begun and a new global operations teamrecruited to address these issues. The implementation of a global ERP systemhas now restarted and this will help support the creation of an effective supplychain. The volume of unfulfilled orders with customers has been reduced in thefirst half but there is long way to go in rebuilding relationships withcustomers. Delivering this improvement programme is a key priority. In early March, in consultation with the US Food and Drugs Administration (FDA),Medical began notifying a small proportion of people using certain ambulatorypumps, of the need for a voluntary recall of their equipment. Medical'sinternal processes had identified a fault in a component supplied by a thirdparty and some 2,000 pumps will be replaced. The issue has been traced to aquality breach by a longstanding supplier who has taken appropriate actions toensure future consistency. A number of significant two- or three-year contracts were secured across theproduct portfolio during the period. These include a three-year GroupPurchasing Organisation (GPO) contract with Premier Purchasing Partners, tosupply PORT-A-CATH(R) implantable access systems to Premier's 1,700 hospitalsand almost 50,000 other healthcare sites across the US. Since the period end, anew three-year agreement has also been signed with MedAssets for five categoriesof anaesthesia products and a contract has been secured with Amerinet, forclosed suction products. In addition we have agreed a ground-breakinginitiative with Cardinal Health that will see co-branding of Smiths EDGE safetyneedles. This agreement adds a significant new potential market for this highlysuccessful line. Over the course of the past three months, these and other GPOcontracts totalling $18m have been secured. We have seen double digit growth, albeit from a low base, in emerging marketsserved via our distributors, particularly in Latin America, Russia and SaudiArabia. Last year's investment in new infrastructure for Greater Chinacontributed to a 31% growth in sales in that territory. There is an ongoing focus on margin improvement through cost control andefficiencies. For example, the manufacturing rationalisation programmeincreased the proportion of all employees working in low-cost countries from 28%last year to 34% for this period. 61% of direct manufacturing employees are nowworking in Mexico, compared with 53% in the same period last year. Total R&D investment has increased by 4%, and as a proportion of sales hasincreased from 3.4% to 3.6%. Looking forward, we expect this commitment toincrease further. We are now focusing our investment more tightly on productareas and segments which will deliver higher growth. For example, our R&Dinvestment in medication delivery infusion pumps is typically much higher ataround 7% of sales. We plan to increase the number of new product launches byabout 50% in the current year, with the aim of raising the percentage of salesfrom products that are less than three years old. To support this aim, we have recently introduced an improved new productdevelopment process. Over the course of the past six months, the US Food andDrugs Administration (FDA) has issued clearance for the Saf-T Closed BloodCollection System(R) Devices, the dual-lumen implantable access systems (P.A.S.PORT(R) T2 POWER P.A.C. and PORT-A-CATH(R) II POWER P.A.C), the Theraheatheated humidification system and the GRIPPER(R) Micro Safety Needle. We havealso launched this month CADD SolisTM, a next generation ambulatory pump system,which features error detection software and data connectivity to hospital ITsystems. A full range of EDGE safety needles has also been recently launched,together with the latest closed blood sampling product, Hemodraw, which isalready winning market share in the US. Looking ahead, the key priority for Medical is to reduce unfulfilled orders andaddress the issues caused by the supply chain disruption last year, whilerefreshing the existing customer offering through the introduction of newproducts. It will also focus on operating efficiencies and margin improvementwhile improving service to regain customers. Specialty Engineering £m GrowthJohn Crane 2008 2007 Reported UnderlyingSales 283 252 12% 8%Headline operating profit 37 31 18% 8%Headline operating margin 13.0% 12.4%Statutory operating profit 30 43 Specialty - Other* GrowthInterconnect and Flex-Tek* 2008 2007 Reported UnderlyingSales 237 240 (2)% 7%Headline operating profit 30 29 1% 7%Headline operating margin 12.5% 12.2%Statutory operating profit 56 29 \* The reported figures include three months of trading for Marine Systems and sixmonths in the comparative period. Specialty Engineering is Smiths largest division, accounting for 48% of sales.Following the disposal of Marine Systems in November, it now operates in threeareas: John Crane, Interconnect and Flex-Tek. John Crane is a market leader insealing systems and related technologies with a strong presence in thepetrochemical sector. It has opportunities to increase margins, create furtherefficiencies and grow through bolt-on acquisitions. Interconnect, whichmanufactures electronic sub-systems, performed well in its major markets ofmilitary and wireless communications. It has demonstrated the potential toimprove margins, expand its low cost manufacturing and extend its geographicreach. Flex-Tek designs and manufactures heating and fluid movement componentsfor the domestic appliance, aerospace and medical devices markets. It has beenadversely affected by the US housing recession but has the opportunity to expandits non-construction business, reduce costs and rationalise its productionsites. John Crane John Crane grew sales by 12%, headline operating profit by 18% and marginsincreased by 60 basis points to 13.0%. On an underlying basis, both sales andheadline operating profit rose by 8%. This growth has been driven by highlevels of investment by the petrochemical industry, reflecting the strong demandfor oil and gas. John Crane's largest sector is the petrochemical industry where growth isfocused in two areas. First to broaden its technological footprint by addingnew product lines and services that complement John Crane's market-leadingpositions in mechanical seals and related sectors. Second to expand intoupstream energy services which leverage its strong global service and supportinfrastructure. Investments reflect this two-track strategy. For example, larger and higherpressure gas seals are now being developed for customers as a result of ourinvestment in high-pressure test equipment at a new world-leading testingfacility in Slough (UK). In addition, the acquisition of Sartorius BearingTechnology in November 2007 expands John Crane's offering into the area ofrotating bearings for turbo machinery. We announced today the agreement,subject to approvals, to acquire Indufil which will add specialist filtrationsystems to John Crane. Indufil designs and manufactures systems for rotatingequipment in the oil and gas, chemical and power sectors. It serves similarcustomers to John Crane and has a strong aftermarket for its products which fitswell with John Crane's business model. Indufil had estimated sales of £26m inthe financial year ending 31 December 2007. Acquisition of CDI Energy Servicesin March 2007 expanded John Crane's upstream energy services capability. TheCDI service and product offering extends the reliability of artificial liftsystems which pump oil from depths of more than 10,000 feet. Over the course ofthe last six months, John Crane has already begun to benefit from CDI's serviceoffering being leveraged across John Crane's geographic footprint. Theagreement to acquire Fiberod, announced today, will complement the CDI business.Fiberod is a world-leading manufacturer of fibre-glass sucker rods. These areused as a light-weight alternative to traditional metal rods for the artificiallift of oil and gas from the reservoir and will add to the upstream service weare now internationalising. In the financial year to 31 December 2007, itreported sales of £12m. The growth in the petrochemical sector has increased original equipment ordersto record levels. To help meet these requirements John Crane has invested over£4m worldwide to increase manufacturing capacity by over 20%. The provision of maintenance and repair services to customers through theaftermarket represents two-thirds of John Crane's sales. The sale of originalequipment for new production facilities creates subsequent aftermarket serviceopportunities that are delivered via John Crane's network of service centres,and the business has continued to build its global service base. Local servicecentres are now present in 52 countries worldwide. This capabilitysignificantly reduces downtime for customers by avoiding seals being shippedover long distances for repair. Current developments are focused on key growthmarkets. For example, in Saudi Arabia we are building a new service, sales andmanufacturing facility in Dammam. This new facility has an upgraded gas sealstest capability and adds significant service capacity in an area where extensiveinvestment is planned by the petrochemical industry over the next 10 years. Another growth opportunity is China where construction began in August 2007 on anew facility in Tianjin. This will support further growth as well as enable therelocation and consolidation of two existing businesses to a single site. Thisnew facility will accommodate sophisticated manufacturing, including assemblytesting and enhanced product development, as well as providing a sales andservice centre for the domestic Chinese market. Looking ahead, sustained growth in demand for oil and gas is likely to continueto drive investment by petrochemical companies and original equipmentmanufacturers into new technology and facilities. John Crane is building on itsstrong position to support this demand in the future. Specialty - Other Specialty - Other comprises Interconnect and Flex-Tek. Interconnect recordeddouble-digit growth in sales and profit, while at Flex-Tek a good performance insales of components and services for commercial and military aircraft helpedoffset the impact of the substantial decline in the US residential constructionmarket. A third business element, Marine, was disposed of after three months oftrading in this financial year. The reported results for Specialty - Otherinclude the three months of trading in the current period and the whole sixmonths in the prior period. The underlying performance adjusts for the impactof this disposal and currency translation. Sales for Specialty- Other fell by2% and headline operating profit rose by 1%. Operating margin increased by 30basis points to 12.5%. Interconnect Smiths Interconnect delivered strong sales and profit growth with increasedmargin. Performance in the period was enhanced by sales of lightning and surgeprotection solutions supplied to major US 4G wireless broadband providers formobile internet access. A development contract was secured for Interconnect'snext generation Satellite Communications On The Move (SOTM) antenna systems,which deliver effective mobile communications for the armed forces in areas ofconflict. Interconnect has seen good progress from a number of important militaryprogrammes that will continue for some years. These include three-frequencyband data link (MDAS) to support multiple unmanned aircraft systems; theMulti-Function Radio Frequency System (MFRFS) that can detect and track a fullspectrum of threats to current and future ground vehicles; and the WarfighterInformation Network-Tactical (WIN-T) the US army system for reliable, secure andseamless high bandwidth communications. Interconnect is seeking opportunities, where appropriate, to bring itsmanufacturing together in lower-cost environments and progress on this continuedin the half year. Manufacturing in Mexico and Tunisia has risen significantlywhile manufacturing in China and Costa Rica continues to play an important role. There are good opportunities for Interconnect to grow - particularly in AsiaPacific - and it operates in an industry with scope for bolt-on acquisitions.Looking ahead, Interconnect's markets remain robust and good opportunities areexpected over the next six months. Flex-Tek Flex-Tek's sales remained flat while profit declined. Sales of fluiddistribution components and services for commercial and military aircraft helpedto offset the impact of the decline in the US residential construction market.Illustrating this, Flex-Tek announced today an $18m contract for the provisionof flexible and rigid fuel and hydraulic hoses on the Boeing 787 Dreamliner. During the period, Flex-Tek completed the reorganisation of its tubular systemsbusiness with a relocation and consolidation of manufacturing in Tennessee.This project will cut costs and improve customer service. Flex-Tek is facing continued uncertainty in the US residential constructionmarket. The challenge is to reduce costs and position this business to deliverfuture value when its main markets improve. FINANCIAL REVIEW Cash-flow and net debt Operating cash-flow from continuing operations (before the cash impact ofexceptional items and special pension payments and after capital expenditure)totalled £99m, representing 63% of headline operating profit, and reflectsinvestment in capital projects and increased working capital to support businessgrowth. The working capital investment was particularly driven by the timingand nature of contracts in Smiths Detection and John Crane. On a statutory basis, net cash inflow from continuing operations was £64m. Cashexpenditure on exceptional items was £14m. The company made special pensioncontributions of £7m. Free cash-flow from continuing operations (after interestand tax but before acquisitions and dividends) was £26m. Net debt at the period end was £675m, up from £590m at the start of the fiscalyear. The net debt at both period ends is stated after taking account ofaccrued interest and the fair value of swapped debt, in line with therequirements of IFRS. During the period, the company invested £19m onacquisitions and received £37m from disposals. Acquisitions and disposals Smiths made a number of acquisitions and disposals in the period to improve thebusiness mix of its continuing activities. In November, Sartorius BearingTechnology, a leading provider of high performance rotating equipment for theoil and gas industry, was acquired for €20m. In November, Smiths sold itsMarine Systems business for £44m, after a working capital adjustment. InDecember, Smiths acquired the majority ownership of the John Crane business inJapan for a consideration of £4m, increasing its ownership share from 49% to70%. After the period end, the Heating Element Division of Fast Heat wasacquired for $18m: it manufactures a wide range of specialty heating elementsfor HVAC, industrial and medical applications. We announced today thatagreements have been signed to acquire Indufil BV and Fiber Composite CompanyInc., both of which are subject to approvals Research & development Company-funded R&D in this period was £34m (2007: £34m). This represents anaverage across the three divisions of 3% of sales, with Medical and Detectionabove that level and Specialty Engineering below it. Of the total, £26m wascharged against profit and the balance capitalised. The company is currentlycarrying £46m of capitalised development costs, which are amortised overtimescales 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 (2007:22,000) during the half year. The US remains the company's largest market,accounting for 46% of sales by origin and 58% of headline operating profit. In all three divisions, the Group has ongoing projects focused on businesssystems efficiency. ERP projects are underway in Detection, Medical and JohnCrane. The successful completion of these new ERP systems over the coming yearswill help to enhance margins and improve service quality. Retirement benefits The balance sheet continues to reflect a net surplus in retirement benefit plansdespite the economic turbulence in the global financial sectors. The fundedschemes show a surplus of £242m, compared to £297m at July 2007. Risks and uncertainties The principal risks and uncertainties affecting the business activities of theGroup remain those identified on pages 17 and 18 of the Report and Accounts forthe year ended 31 July 2007, a copy of which is available at the Company'swebsite at www.smiths.com. In the view of the Board, these properly reflect theuncertainties in respect of the remaining six months of the year. B share repurchase The Company expects to advise holders of B shares shortly of arrangements fortheir shares to be repurchased at 365p per share. Copies of the Interim Report and Accounts will be sent to shareholders who haverequested copies, and will be available on the website and at the company'sregistered office, 765 Finchley Road, London NW11 8DS. -o- Consolidated income statement (unaudited) Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 Notes £m £m £m Continuing operationsRevenue 2 1,087.8 1,021.2 2,160.9Cost of sales (595.9) (544.0) (1,159.1) Gross profit 491.9 477.2 1,001.8Sales and distribution costs (151.9) (155.7) (311.5)Administrative expenses- normal activities (191.5) (185.2) (394.2)- provision for John Crane, Inc. litigation 4 (5.7) (44.3) (100.7)Other operating income 42.9 66.9Profit/(loss) on disposal of businesses 27.0 14.5 (5.2) Operating profit 2 169.8 149.4 257.1Interest receivable 5.7 3.3 21.4Interest payable (25.5) (32.8) (57.8)Other financing gains/(losses) 3 (5.2) 1.1 2.1Other finance income - retirement benefits 20.6 16.0 33.7Finance costs (4.4) (12.4) (0.6)Share of post-tax loss of associates (0.7) (0.5)Profit before taxation 165.4 136.3 256.0 Comprising- headline profit before taxation 3 158.9 134.0 344.4- exceptional items 4 - profit/(loss) on disposal of businesses 27.0 14.5 (5.2) - commutation of insurance policies 42.9 42.9 - provision for John Crane, Inc. litigation 4 (8.2) (44.3) (100.7) - other (2.4) (5.0) (35.2)- amortisation of acquired intangible assets (7.2) (7.0) (14.8)- other financing gains/(losses) 3 (2.7) 1.2 0.6- profit on sale of financial asset 24.0 165.4 136.3 256.0Taxation (32.5) (30.4) (53.1) Profit after taxation - continuing operations 132.9 105.9 202.9Profit after taxation - discontinued operations 6 8.5 43.1 1,525.2Profit for the period 141.4 149.0 1,728.1Profit for the period attributable to equity shareholders of 141.4 149.0 1,728.1the Parent Company Earnings per share 8Basic 36.5p 26.2p 314.7pBasic - continuing operations 34.3p 18.6p 36.9pDiluted 36.0p 26.1p 310.3pDiluted - continuing operations 33.8p 18.5p 36.4p Dividends per share (declared)- interim 10.5p 10.5p 10.5p- final 23.5p 10.5p 10.5p 34.0p Consolidated statement of recognised income and expense (unaudited) Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Exchange gain/(loss) 78.7 (51.1) (72.2)Cumulative exchange losses recycled on disposals 49.2Fair value gain on acquisition of former associate 0.2Taxation recognised on exchange losses- current 2.4Taxation recognised on share-based payment- current 10.3- deferred (3.6) 2.7 (9.4)Actuarial (losses)/gains on retirement benefits (88.2) 17.5 70.3Taxation recognised on actuarial (losses)/gains - deferred 26.9 (5.8) (30.1)Fair value (losses)/gains:- on cash-flow hedges (2.2) 7.2 (11.9)- on net investment hedges (40.1) 13.4 8.2 Net (cost)/income recognised directly in equity (28.3) (16.1) 16.8Profit for the period 141.4 149.0 1,728.1 Total recognised income and expense for the periodattributable to equity shareholders of Smiths Group plc 113.1 132.9 1,744.9 Consolidated balance sheet (unaudited) Notes 2 February 3 February 31 July 2008 2007 2007 £m £m £m Non-current assetsIntangible assets 12 1,100.5 1,018.9 1,021.3Property, plant and equipment 13 283.8 289.2 260.9Investments accounted for using 10.3 12.8 12.0the equity methodFinancial assets - other 0.2 0.7 0.7investmentsRetirement benefit assets 9 306.6 179.2 333.7Deferred tax assets 135.6 94.8 94.0Trade and other receivables 17.3 10.1 14.7Financial derivatives 3.7 0.1 0.4 1,858.0 1,605.8 1,737.7Current assetsInventories 382.2 319.8 319.7Trade and other receivables 496.5 465.4 489.8Cash and cash equivalents 14 142.6 274.1 186.2Financial derivatives 6.8 16.4 13.5 1,028.1 1,075.7 1,009.2Assets of businesses held for 1,316.6 31.3saleTotal assets 2,886.1 3,998.1 2,778.2 Non-current liabilitiesFinancial liabilities:- borrowings 14 (639.9) (897.6) (567.1)- financial derivatives (0.2) (3.3) (2.5)Provisions for liabilities and 15 (166.7) (57.2) (143.4)chargesRetirement benefit obligations 9 (184.9) (173.1) (150.1)Deferred tax liabilities (130.3) (48.7) (118.0)Trade and other payables (23.0) (34.1) (22.5) (1,145.0) (1,214.0) (1,003.6)Current liabilitiesFinancial liabilities:- borrowings 14 (177.6) (328.3) (212.1)- financial derivatives (29.7) (12.3) (2.8)Provisions for liabilities and 15 (88.0) (60.1) (90.1)chargesTrade and other payables (375.8) (385.5) (412.6)Current tax payable (139.1) (130.9) (137.5) (810.2) (917.1) (855.1)Liabilities of businesses held (449.3) (16.2)for saleTotal liabilities (1,955.2) (2,580.4) (1,874.9) Net assets 930.9 1,417.7 903.3 Shareholders' equityShare capital 145.5 143.3 144.6Share premium account 302.9 265.6 289.0Capital redemption reserve 5.7 5.7Revaluation reserve 1.7 1.7 1.7Merger reserve 234.8 234.8 234.8Retained earnings 261.7 725.2 208.9Hedge reserve (23.5) 47.1 18.6 Total shareholders' equity 17 928.8 1,417.7 903.3Minority interest equity 2.1 Total equity 930.9 1,417.7 903.3 Consolidated cash-flow statement (unaudited) Notes Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Net cash inflow from operating activities 18 64.3 190.5 246.0Cash-flows from investing activitiesExpenditure on capitalised development (8.4) (52.8) (87.4)Expenditure on other intangible assets (7.4) (16.6) (29.6)Purchases of property, plant and equipment (25.9) (51.1) (118.3)Disposal of property, plant and equipment 2.0 1.4 25.6Proceeds from sale of/(additions to) financial assets 1.0 (0.3) 15.0Acquisition of businesses (18.8) (14.7) (34.9)Disposal of Aerospace (5.1) 2,495.0Disposals of businesses 42.2 11.2 9.1 Net cash-flow used in investing activities (20.4) (122.9) 2,274.5 Cash-flows from financing activitiesProceeds from issue of ordinary share capital 17.3 22.3 77.7Purchase of own shares (20.7) (7.0)Dividends paid to equity shareholders (90.8) (122.3) (182.4)Cash paid to shareholders under B share scheme (2,090.9)Increase in new borrowings 99.3 19.0Reduction and repayment of borrowings (47.6) 56.8 (284.7) Net cash-flow used in financing activities (42.5) (43.2) (2,468.3) Net increase in cash and cash equivalents 1.4 24.4 52.2Cash and cash equivalents at beginning of period 3.1 (51.1) (51.1)Exchange differences (0.4) 2.6 2.0 Cash and cash equivalents at end of period 4.1 (24.1) 3.1 Cash and cash equivalents at end of period comprise:- cash at bank and in hand 124.4 268.4 148.5- deposits 18.2 8.0 40.8- bank overdrafts (138.5) (300.5) (186.2) 4.1 (24.1) 3.1 Included in cash and cash equivalents per the balance 142.6 274.1 186.2sheetIncluded in overdrafts per the balance sheet (138.5) (299.7) (186.2)Included in the assets of the disposal group 1.5 3.1 4.1 (24.1) 3.1 Notes to the interim report and accounts (unaudited) 1. Basis of preparation The condensed interim financial information covers the six month period ended 2February 2008 and has been prepared under International Financial ReportingStandards (IFRS) as adopted by the European Union, in accordance withInternational Accounting Standard 34 'Interim Financial Reporting' and theDisclosure and Transparency Rules of the Financial Services Authority. It isunaudited but has been reviewed by the auditors and their report is attached tothis document. The interim financial information does not constitute statutory accounts asdefined in Section 240 of the Companies Act 1985. It should be read inconjunction with the statutory accounts for the period ended 31 July 2007, whichwere prepared in accordance with IFRS as adopted by the European Union and havebeen filed with the Registrar of Companies. The auditors' report on thesestatutory accounts was unqualified and did not contain a statement under Section237(2) or (3) of the Companies Act 1985. Accounting policies The condensed interim financial information has been prepared on the basis ofthe accounting policies applicable for the year ending 31 July 2008. Theseaccounting policies are consistent with those applied in the preparation of thefinancial statements for the period ended 31 July 2007, except for the adoptionof IFRS 7:'Financial Instruments: Disclosures'. The adoption of this standard has no impact on the consolidated financialresults or position of the Group for the six months ended 2 February 2008. Recent accounting developments The following standards, amendments and interpretations have been issued by theInternational Accounting Standards Board or by the IFRIC, but have not yet beenadopted. Subject to endorsement by the European Union, these will be adopted infuture periods. IFRS 8 has been endorsed, and the other standards, amendmentsand interpretations are being considered for endorsement. • IFRS 8 'Operating segments' • IAS 23 'Borrowing costs' (revised) • IFRIC 12 'Service concession arrangements' • IFRIC 13 'Customer loyalty programmes' • IFRIC 14 'The limit of a defined benefit asset, minimum funding requirements and their interaction' • IAS 27 'Consolidated and separate financial statements' (revised) • IFRS 3 'Business combinations' (revised) The adoption of IFRS 3 (revised) will significantly change the recognition ofgoodwill, acquisition costs and contingent consideration relating toacquisitions. However, it applies only to acquisitions made after it has beenadopted, which will minimise any restatements required. IAS 27 (revised)requires different accounting treatment for minority interests but it is notexpected to affect the Group's financial results or position materially. Smithswill determine an appropriate implementation date after these standards havebeen adopted by the European Union. For the other standards and interpretations, there has been no change to theexpected impact on future annual reports and accounts from those disclosed inthe Annual Report and Accounts for the period ended 31 July 2007. Date of approval The interim financial statements were approved by the directors on 19 March2008. 2 Analyses of revenue and operating profit by business segment For management purposes, the Group is organised into three business segments -Detection, Medical and Specialty Engineering. These business segments are thebasis on which the Group reports its primary segment information. For reporting purposes, Specialty Engineering is analysed into two segments:John Crane and Specialty - Other. Period ended 2 February 2008 Specialty Engineering John Specialty Detection Medical Crane - Other Total £m £m £m £m £m Revenue 222.0 346.3 282.8 236.7 1,087.8 Headline operating profit 31.0 60.6 36.8 29.7 158.1Exceptional operating items (note 4) (0.1) (2.4) (6.1) 27.5 18.9Amortisation of acquired intangible assets (0.2) (5.5) (0.6) (0.9) (7.2) Operating profit 30.7 52.7 30.1 56.3 169.8 Exceptional finance costs - adjustment to discounted (2.5) (2.5)provision (note 4)Net finance costs - other (1.9)Share of post-tax (losses)/profits of associated companies (0.4) 0.4 Profit before taxation 165.4Taxation (32.5) Profit for the period - continuing operations 132.9 Period ended 3 February 2007 Specialty Engineering John Specialty Detection Medical Crane - Other Total £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 (note 4) 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 28.7 149.4 Net finance costs (12.4)Share of post-tax (losses)/profits of associated companies (1.0) 0.3 (0.7) Profit before taxation 136.3Taxation (30.4) Profit for the period - continuing operations 105.9 Period ended 31 July 2007 Specialty Engineering John Specialty Detection Medical Crane - Other Total £m £m £m £m £m Revenue 437.5 690.6 532.4 500.4 2,160.9 Headline operating profit 78.6 127.3 75.3 66.4 347.6Exceptional operating items (note 4) (13.0) (9.6) (73.2) (2.4) (98.2)Amortisation of acquired intangible assets (0.4) (11.5) (0.6) (2.3) (14.8)Financing losses (0.1) (0.2) (0.2) (1.0) (1.5) 65.1 106.0 1.3 60.7 233.1Profit on sale of financial assets 24.0 Operating profit 257.1 Net finance costs (0.6)Share of post-tax (losses)/profits of associated companies (1.1) 0.6 (0.5) Profit before taxation 256.0Taxation (53.1) Profit for the period - continuing operations 202.9 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 againstprofits. The following items have been excluded from the headline measure: • exceptional items, including income and expenditure relating to JohnCrane, Inc. asbestos litigation; • amortisation of intangible assets acquired in a business combination -the amortisation charge is a non-cash item, and the directors believe that itshould be added back to give a clearer picture of underlying performance; and • other financing gains and losses. Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Other financing gains and lossesFinancing gains and losses on financial instruments (2.7) 1.1 2.1Exceptional finance costs - adjustment to discounted provision (2.5)(note 4) Other financing gains/(losses) (5.2) 1.1 2.1Financing gains and losses in operating profitFinancing gains and losses on financial instruments 0.1 (1.5) (5.2) 1.2 0.6 Financing gains and losses on financial instruments represent the results ofderivatives and other financial instruments which do not fall to be hedgeaccounted under IAS 39. These items are included either within operating profitor profit before taxation depending on the nature of the transaction. Theapplication of IFRS accounting principles makes this item potentially volatile,and it is therefore excluded to give a clearer picture of the underlyingperformance. 4 Exceptional items Items which are material either because of their size or their nature, or whichare non-recurring, are presented within their relevant consolidated incomestatement category, but highlighted separately on the face of the incomestatement. The separate reporting of exceptional items helps provide a betterpicture of the Company's underlying performance. Items which may be includedwithin the exceptional category include: • profits/(losses) on disposal of businesses;• spend on the integration of significant acquisitions;• significant goodwill or other asset impairments;• income and expenditure relating to John Crane, Inc. asbestos litigation; and• other particularly significant or unusual items. An analysis of the amounts presented as exceptional items in these financialstatements is given below: Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Operating itemsIntegration of acquisitions (2.4) (5.0) (9.0)Impairment of goodwill and other assets (10.3)Profit/(loss) on disposal of businesses (note 11) 27.0 14.5 (5.2)Aborted transaction costs (12.7)Litigation- Commutation of insurance policies (note 15) 42.9 42.9- Provision for John Crane, Inc. litigation (note 15) (5.7) (44.3) (100.7)- Provision for other litigation (note 15) (8.6)- Class action settlement 5.4 18.9 8.1 (98.2)Financing itemsExceptional finance costs - adjustment to discounted (2.5)provision (note 15) 16.4 8.1 (98.2) Restructuring costs in connection with the integration of Medex amounting to£2.4m (period ended 3 February 2007 £5.0m; period ended 31 July 2007 £9.0m) wereincurred in the period. The charge of £5.7m in respect of John Crane, Inc.litigation arises from changes in US interest rates (see note 15) and does notrepresent a change in the assessment of the gross cash flows expected to beincurred before discount. 5 Taxation The interim tax charge of 19.6% (six months ended 3 February 2007: 22.3%) iscalculated by applying the estimated effective headline tax rate of 25% for theyear ending 31 July 2008 (six months ended 3 February 2007: 26%) to headlineprofit before tax and then taking into account the tax effect of non-headlineitems in the interim period. A reconciliation of total and headline tax charge - continuing is as follows: Period ended Period ended Period ended 2 February 2008 3 February 2007 31 July 2007 Continuing Continuing Continuing operations Tax operations Tax operations Tax rate rate rate £m £m £m Profit before taxation 165.4 136.3 256.0Taxation (32.5) 19.6% (30.4) 22.3% (53.1) 20.7%AdjustmentsNon-headline items excluded from profit before (6.5) (2.3) 88.4taxation (note 8)Taxation on non-headline items (7.2) (4.4) (33.3)HeadlineHeadline profit before taxation 158.9 134.0 344.4Taxation on headline profit (39.7) 25.0% (34.8) 26.0% (86.4) 25.1% 6 Discontinued operations Discontinued operations disclosed in the income statement consist of theAerospace operations, which were sold to General Electric Company on 5 May 2007.The Aerospace operations comprised the Aerospace business segment previouslyreported and the microwave company previously reported in Specialty - Other. During the period the proceeds of sale of the Aerospace business were adjustedfollowing ongoing negotiations with the purchaser after completion, as laid outin the sale agreement. As a result, further proceeds were received andadjustments made to net assets. The resultant profit of £5.6m has been recordedwithin discontinued operations as a profit on disposal. In addition, ongoing negotiations in respect of the transfer of Aerospace activepensioners have led to a reduction in the disposal provision (see note 15) of£1.3m; £2.0m of the pensions financing credit relates to the expected transferand all these amounts are treated within discontinued operations as profit ondisposal of Aerospace. A tax charge of £0.4m has been recorded. Net cash outflows from investing activities of £5.1m are included within theconsolidated cash flow statement. The assets and liabilities of businesses held for sale on the 3 February 2007balance sheet relate to the Aerospace operation. 7 Dividends The following dividends were declared and paid in the period: Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Ordinary final dividend of 23.50p for 2007 (2006: 21.50p) paid 23 90.8 122.3 122.3November 2007Ordinary interim dividend 10.50p for 2007 paid 27 April 2007 60.1 90.8 122.3 182.4 An interim dividend of 10.5p per share (2007: 10.5p) was declared by the Boardon 19 March 2008 and will be paid to shareholders on 25 April 2008. Thisdividend has not been included as a liability in these accounts and is payableto all shareholders on the register of Members at the close of business on 28March 2008. 8 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 ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Profit for the period- continuing 132.9 105.9 202.9- total 141.4 149.0 1,728.1 Average number of shares in issue during the period 387,070,514 569,049,918 549,153,733 Diluted earnings per share are calculated by dividing the profit attributable toequity shareholders by 393,138,707 (period ended 3 February 2007: 571,928,823;period ended 31 July 2007: 556,934,401) ordinary shares, being the averagenumber of ordinary shares in issue during the period, adjusted by the dilutiveeffect of share options. A reconciliation of basic and headline earnings per share - continuing is asfollows: Period ended Period ended Period ended 2 February 2008 3 February 2007 31 July 2007 Continuing Continuing Continuing operations EPS(p) operations EPS(p) operations EPS(p) £m £m £m Attributable to equity shareholders of the Parent 132.9 34.3 105.9 18.6 202.9 36.9Company Exclude- exceptional operating items (note 4) (18.9) (8.1) 98.2- profit on sale of financial asset (24.0)- amortisation of acquired intangible assets 7.2 7.0 14.8- financing gains - charged to administrative expenses (0.1) 1.5 - exceptional finance cost - adjustment to discounted provision (note 4) 2.5 - charged to financing 2.7 (1.1) (2.1) (6.5) (2.3) 88.4 less tax (7.2) (4.4) (33.3) (13.7) (3.5) (6.7) (1.2) 55.1 10.1 Headline 119.2 30.8 99.2 17.4 258.0 47.0Headline EPS - diluted (p) 30.3 17.3 46.3 9 Post-retirement benefits Smiths operates a number of defined benefit plans throughout the world. Theprincipal schemes are in the United Kingdom and in the United States and are ofthe defined benefit type, with assets held in separate trustee-administeredfunds. The principal changes to the assumptions used in updating the valuationsfor defined benefit pension plans are as follows: 2 February 2008 31 July 2007 UK US UK US Rate of increase in salaries 4.3% 3.8% 4.1% 3.8%Rate of increase in pensions in payment 3.3% n/a 3.1% n/aRate of increase in deferred pensions 3.3% n/a 3.1% n/aDiscount rate 6.2% 6.3% 5.8% 6.4%Inflation rate 3.3% 2.8% 3.1% 2.8% An operating charge of £10.7m and an interest credit of £22.6m have beenrecognised in the six months to 2 February 2008 in respect of defined benefitpension and post-retirement healthcare plans. The operating charge includes acurtailment gain of £1.1m relating to the disposal of Marine Systems and isreported as a profit on business disposal. The interest credit includes £2.0mrelating to the disposal of the Aerospace operations and is reported withindiscontinued operations. Special contributions of £4.1m in relation to the sale of Aerospace have beenmade in the period. Changes in the market value of post-retirement benefit scheme assets werelargely due to a decline in global stock market values. The amounts recognised in the balance sheet were as follows: 2 February 2008 3 February 2007 31 July 2007 £m £m £m Market value of funded plan assets 3,245.7 3,221.4 3,318.9Present value of funded scheme liabilities (3,000.9) (3,033.9) (3,019.2)Unfunded pension plans (55.8) (43.7) (51.5)Post-retirement healthcare (64.9) (60.8) (62.2)Unrecognised asset due to surplus restriction (2.4) (76.9) (2.4) Net retirement benefit asset 121.7 6.1 183.6 Retirement benefit assets 306.6 179.2 333.7Retirement benefit liabilities (184.9) (173.1) (150.1) Net retirement benefit asset 121.7 6.1 183.6 The unrecognised asset due to surplus restriction shown at 3 February 2007 wasbased on an estimate of the impact of the Aerospace disposal on the Smithspension plans. At 31 July 2007 the unrecognised asset was reduced to £2.4mfollowing a detailed actuarial review. 10 Acquisitions Acquisitions during the period include the acquisition of the entire issuedshare capital of Sartorius Bearing Technology on 15 October 2007 and acquisitionof a controlling interest over an associate on 21 December 2007. Both companieshave been included in the Specialty - John Crane business segment. The values set out below are provisional pending finalisation of the fair valuesattributable, and will be finalised in subsequent periods. Fair value Provisional Book Value adjustment fair value £m £m £m Non-current assets- Intangible assets 0.5 4.8 5.3- Property, plant and equipment 2.9 2.9Current assets- Cash and cash equivalents 3.1 3.1- Other current assets 13.3 0.4 13.7Current liabilities- Overdrafts (1.1) (1.1)- Other current liabilities (8.1) (1.4) (9.5)Minority interest and assets accounted for using the equity (5.0) (5.0)method Net assets acquired 10.6 (1.2) 9.4Asset revaluation surplus (0.2)Goodwill 11.4 Consideration 20.6- cash paid during the period - current year acquisitions 19.4- direct costs relating to current year acquisitions 0.7- deferred consideration paid in respect of prior year 0.5 acquisitions Total consideration satisfied by cash 20.6 The fair value adjustments in respect of intangible assets are due to therecognition of £4.8m in respect of customer relationships. The adjustments tocurrent assets and liabilities relate to valuation adjustments and areprovisional, based on management's best estimates. The goodwill is attributable to synergies and intangibles which do not qualifyfor separate recognition. Included within goodwill above is £0.5m in respect ofan additional payment relating to a prior year acquisition. The minority interest and assets accounted for using the equity methodadjustment represents assets not acquired by Smiths Group plc when a controllinginterest in the associate was acquired. The asset revaluation surplus representsfair value gains and losses on the associate's net assets. From the date of acquisition to 2 February 2008 the acquisitions contributed£4.0m to revenue, £0.5m to headline profit before taxation and £0.9m to profitbefore taxation. If Smiths had acquired the assets at 1 August 2007, theacquisitions would have contributed £16.4m to revenue and £1.8m to profit forthe period. 11 Disposals On 8 November 2007 the Marine Systems business was sold to KH Finance Limited, acompany owned by ECI Partners LLP. Marine Systems was part of Specialty - Other.In addition to the consideration recognised there is an unrecognised deferredpayment of £4m contingent on the terms of any future disposal of KH FinanceLimited by the purchasers. The assets and liabilities of businesses held forsale on the 31 July 2007 balance sheet relate to the Marine Systems business. Additional costs relating to prior year disposals amounted to £0.7m. Total £mMarine SystemsConsideration 43.9Transaction costs (2.8)Disposal provisions (2.0)Net consideration received 39.1 Net assets disposed of:- Intangible assets 2.2- Property, plant and equipment 2.2- Inventory 8.6- Trade and other receivables 14.0- Cash and cash equivalents 0.9- Trade and other payables (16.5) 11.4 Profit on disposal of Marine Systems 27.7Other disposal adjustments (0.7) 27.0 12 Intangible assets Development Acquired Goodwill Costs Intangibles Other Total £m £m £m £m £mCostAt 31 July 2007 921.3 51.2 131.3 76.3 1,180.1Exchange adjustments 56.2 2.7 6.1 3.3 68.3Business combinations 10.9 5.3 16.2Adjustments to prior year acquisitions 0.5 1.3 (1.3) 0.5Additions at cost 8.4 7.4 15.8Disposals (0.4) (0.4) At 2 February 2008 988.9 62.3 144.0 85.3 1,280.5 AmortisationAt 31 July 2007 77.0 12.5 29.1 40.2 158.8Exchange adjustments 4.0 0.9 1.7 2.5 9.1Adjustments to prior year acquisitions 0.5 (0.5)Disposals (0.4) (0.4)Charge for the period 2.7 7.2 2.6 12.5At 2 February 2008 81.0 16.1 38.5 44.4 180.0Net book value at 2 February 2008 907.9 46.2 105.5 40.9 1,100.5Net book value at 3 February 2007 852.2 32.8 102.4 31.5 1,018.9Net book value at 31 July 2007 844.3 38.7 102.2 36.1 1,021.3 13 Property, plant and equipment Fixtures Fittings, Land and Plant and Tools and buildings machinery equipment Total £m £m £m £m Net book value at 31 July 2007 92.4 123.7 44.8 260.9Exchange adjustments 4.7 5.6 2.8 13.1Business combinations 0.9 1.2 0.8 2.9Additions 2.3 15.2 8.4 25.9Transfer from disposal group 0.5 0.5Disposals and business disposals (0.4) (1.0) (0.5) (1.9)Adjustment to disposal of Aerospace operations 6.4 6.4Depreciation charge for the period (2.6) (13.8) (7.6) (24.0)Net book value at 2 February 2008 104.2 130.9 48.7 283.8Net book value at 3 February 2007 114.0 126.3 48.9 289.2 14 Cash and borrowings 2 February 3 February 31 July 2008 2007 2007 £m £m £m Cash and cash equivalentsNet cash and deposits including assets of disposal group 142.6 276.4 189.3Short-term borrowingsBank overdrafts including impact of cash pooling gross up (note 1 below) (138.5) (300.5) (186.2)Bank loans (1.5) (5.9) (0.2)Other loans (2.8) (3.1) (3.1)B shares (18.5) (18.1)Interest accrual (16.3) (19.6) (4.5)Disposal group loans (4.6) (177.6) (333.7) (212.1) Long-term borrowingsOne to two years (0.5) (0.3) (0.5)Two to five years (479.6) (614.2) (287.8)After five years (159.8) (283.1) (278.8) (639.9) (897.6) (567.1)Borrowings (817.5) (1,231.3) (779.2)Net debt (674.9) (954.9) (589.9) Total cash and overdrafts, including that disclosed as part of the disposalgroup, as at 2 February 2008 are as follows: 2 February 3 February 31 July 2008 2007 2007 £m £m £m Cash and cash equivalentsContinuing operations 142.6 274.1 186.2Disposal group 2.3 3.1 142.6 276.4 189.3Bank overdraftsContinuing operations (138.5) (299.7) (186.2)Disposal group (0.8) (138.5) (300.5) (186.2) 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 2February 2008 to £98.8m (3 February 2007: £243.5m; 31 July 2007: £123.2m). 15 Provisions for liabilities and charges At At 31 July Exchange Provisions Provisions 2 February 2007 Adjustments Charged Released Discounting Utilisation 2008 £m £m £m £m £m £m £m Warranty provision and 34.5 2.7 14.9 (1.2) (5.8) 45.1product liabilityReorganisation 10.8 1.3 (0.3) (4.1) 7.7Property 6.7 0.5 (0.5) (0.5) 6.2Disposal 60.3 10.3 (2.7) 67.9Litigation 121.2 3.5 0.5 8.2 (5.6) 127.8 233.5 6.2 27.5 (4.7) 8.2 (16.0) 254.7 Analysed as: 2 February 2008 3 February 2007 31 July 2007 £m £m £m Current liabilities 88.0 60.1 90.1Non-current liabilities 166.7 57.2 143.4 254.7 117.3 233.5 Warranty provision and product liability Warranties over the Group's products typically cover periods of between one andthree years. Provision is made for the likely cost of after-sales support basedon the recent past experience of individual businesses. Reorganisation Significant parts of the Group's operations have been undergoing a phasedrestructuring programme. Full provision is made for reorganisation approved andcommitted by the end of each financial year. Reorganisation provisions include £4.9m costs relating to restructuring supplyarrangements following the automotive seals disposal. This provision isexpected to be utilised over the next five years. Disposal The terms of disposal of businesses include certain obligations for whichprovision has been made, including £23.0m in respect of the costs oftransferring Aerospace active pensioners. These costs are expected to be agreedin the current financial year. Litigation John Crane, Inc. As stated in note 16 John Crane, Inc. ("JCI") is one of many co-defendants inlitigation relating to products previously manufactured which containedasbestos, the manufacture of which ceased in 1985. Until recently, the awards,the related interest and all material defence costs were met directly byinsurers. In the previous period, JCI secured the commutation of certaininsurance policies in respect of product liability. While substantial insuranceremains in place, JCI has begun to meet defence costs directly, seekingappropriate contribution from insurers thereafter. No account has been taken ofrecoveries from insurers as their nature and timing are not yet sufficientlycertain to permit recognition as an asset for these purposes. Last year, JCIestablished a provision to meet defence costs. No provision is held againstawards (note 16). The provision is based upon an assessment of the probable costs of defendingknown and expected future claims to the extent that such costs can be reliablyestimated. The assumptions made in assessing the appropriate level of provisioninclude the number of years over which claims will continue to be received -currently estimated at a 20 year period: the future trend of legal costs -assuming four years based on historical experience (allowing for 3% costinflation) before allowing for decreasing costs in line with a published tableof asbestos incidence projections. In the light of the significant uncertaintyassociated with asbestos claims, there can be no guarantee that the assumptionsused to estimate the provision will be an accurate prediction of the actualcosts that may be incurred and, as a result, the provision may be subject torevision from time to time as more information becomes available. The provision shown in the table above is a discounted pre-tax provision using adiscount rate of 4.4% (2007: 5.3%), being the risk-free rate on US debtinstruments. The deferred tax asset related to this provision is shown withinthe deferred tax balance. Set out below is the gross, discounted and post-taxinformation relating to this provision: 2 February 2008 31 July 2007 £m £m Gross provision 142.2 142.2Discount (39.0) (45.8)Discounted pre-tax provision 103.2 96.4Deferred tax (39.2) (36.6)Discounted post-tax provision 64.0 59.8 The movement in discounting on this provision comprises £5.7m relating to thechange in the discount rate, which is recognised in exceptional operating items(note 4), and £2.5m relating to the unwinding of the discounting, which isrecognised in exceptional finance costs (note 3). Other litigation The Group has on occasion been required to take legal action to protect itspatents and other business intellectual property rights against infringement,and similarly to defend itself against proceedings brought by other parties.Provision is made for the expected fees and associated costs, based onprofessional advice as to the likely duration of each case. Most of the balanceis expected to be utilised within the next five years. Apart from that relating to John Crane, none of the other provisions arediscounted. 16 Contingent liabilities John Crane, Inc. ("JCI"), a subsidiary of the Company, is one of manyco-defendants in numerous law suits pending in the United States in whichplaintiffs are claiming damages arising from exposure to, or use of, productscontaining asbestos. The JCI products generally referred to in these cases areones in which the asbestos fibres were encapsulated in such a manner that,according to tests conducted on behalf of JCI, the products were safe. JCIceased manufacturing products containing asbestos in 1985. JCI has resisted every case in which it has been named and will continue itsrobust defence of all asbestos-related claims based upon this 'safe product'defence. As a result of its defence policy, JCI has been dismissed before trialfrom cases involving approximately 156,000 claims over the last 29 years. JCI iscurrently a defendant in cases involving approximately 138,000 claims. Despitethis large number, JCI has had final judgments against it, after appeals, inonly 67 cases, amounting to awards of some US$60.5m over the 29 year period. Whilst this represents a very low proportion of claims that has historicallyresulted in final judgment against JCI, the incidence of such judgments in thefuture cannot be meaningfully estimated and the scale of future awards isaccordingly unquantifiable and therefore no provision is made for any futureawards. As explained in note 15, a provision for the legal costs of defending asbestos claims has been established. 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. 17 Changes in shareholders' equity Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m At beginning of period 903.3 1,362.9 1,362.9Exercises of share options 17.3 43.0 77.7Purchase of own shares (20.7) (7.0) (7.0)Return of capital to shareholders and redemption of B shares (2,108.9)Fair value gains and losses on cash-flow and net investmenthedging:- transfers to profit for the period (0.7) (4.7) (16.7)- (losses)/gains taken to equity (41.6) 25.3 13.0Profit for the period 141.4 149.0 1,728.1Dividends paid to equity shareholders (90.8) (122.3) (182.4)Dilution of interest in associated company (1.2)Share-based payment 6.6 8.2 17.3Deferred tax (charge)/ benefit related thereto (3.6) 2.7 (9.4)Current tax credit related thereto 10.3Actuarial gains and losses on retirement benefit schemes (88.2) 17.5 70.3Deferred tax charge/(credit) related thereto 26.9 (5.8) (30.1)Cumulative exchange losses recognised on disposals 49.2Fair value gain on acquisition of former associate 0.2Exchange rate changes (including tax on recognised gains) 78.7 (51.1) (69.8) At end of period 928.8 1,417.7 903.3 18 Cash-flows from operating activities Period ended Period ended Period ended 2 February 3 February 31 July 2008 2007 2007 £m £m £m Profit before taxation - continuing operations 165.4 136.3 256.0Profit before taxation - discontinued operations 8.9 59.4 1,613.4 174.3 195.7 1,869.4 Net interest payable 19.8 30.3 37.6Financing losses/(gains)- charged to administrative expenses (0.1) 1.5- charged to financing 5.2 18.2 (2.8)Share of post-tax loss from associate 0.7 0.5Other finance income - retirement benefits (20.6) (17.7) (36.8)Profit on sale of financial asset (24.0)Profit on disposal of discontinued operation (8.9) (1,469.6) 169.8 227.1 375.8Amortisation of intangible assets 12.5 15.6 29.7Impairment of intangible assets 2.2Provision against non-current investment 0.3Profit on disposal of property, plant and equipment (0.7) (0.4)Profit/(loss) on disposal of business (27.0) (8.5) 5.2Depreciation of property, plant and equipment 24.0 31.9 52.2Impairment of property, plant and equipment 8.2Share-based payment expense 6.6 9.5 13.9Retirement benefits (5.9) 3.5 (66.2)(Increase) in inventories (38.9) (71.4) (84.2)Decrease/(increase) in trade and other receivables 30.8 20.1 (84.8)(Decrease)/increase in trade and other payables (60.2) 24.2 29.7Increase in provisions 5.3 84.5 Cash generated from operations 117.0 251.6 365.8Interest (10.2) (15.5) (27.0)Tax paid (42.5) (45.6) (92.8) Net cash inflow from operating activities 64.3 190.5 246.0 19 Related party transactions There were no significant changes in the nature and size of related partytransactions for the period to those disclosed in the Annual Report and Accountsfor the period ended 31 July 2007. 20 Events after the balance sheet date On 4 February 2008, the Company acquired the Heating Element division of FastHeat, Inc. for cash consideration of $18m, subject to closing adjustments. 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