15th Mar 2006 07:02
Smiths Group PLC15 March 2006 Smiths Group: Interim Results 2006 Highlights • Sales increased by 19% to £1,590m in the first half of the year• Headline operating profit up 22% to £194m, headline EPS up 18% to 24.0p• Statutory operating profit up 19% to £188m, EPS up 12% to 23.7p• Cash conversion at 90% in the first half, with working capital reduced• Company-funded R&D at 6% of sales, driving future growth and returns• Interim dividend increased by 6.5% to 9.85p• Aerospace sales up 10% with continued investment for future returns• Strong sales and profit growth in Detection, with technology base broadened• Underlying sales growth of 6% in Medical; Medex integration on track• Increased sales and margins in Specialty Engineering Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: "Forthe first half of 2006, Smiths has recorded another period of strong growth.Headline pre-tax profit grew by 18%, following the 18% increase in the 2005 fullyear. We have improved the operating margin, generated a robust cash-flow andstepped up our investment to drive future sales and profits. Market conditionsare positive, and we expect to sustain the pace of growth through the secondhalf. The dividend increase reflects the Board's confidence that Smiths willcontinue to perform well." Media: Chris Fox Investors: Russell Plumley+44 (0) 20 8457 8403 +44 (0) 20 8457 [email protected] [email protected] A meeting with analysts will be webcast at 9:00am UK time today on www.smiths-group.com/interims2006 and archived there soon after the event. Ashort interview with the Chief Executive can be seen on the same url or onwww.cantos.com. Results (unaudited) (6 months ended 31 January) 2006 2005£mSales 1,590 1,338 +19% Operating profit - headline* 194 158 +22% - statutory 188 158 +19% Pre-tax profit - headline* 183 155 +18% - statutory 179 162 +11% Basic EPS (p) - headline* 24.0p 20.4p +18% - statutory 23.7p 21.2p +12% Dividend (pps) 9.85p 9.25p +6.5% * In addition to statutory reporting, Smiths Group reports on a headline basis,a measure which shows underlying performance. Headline profit is after chargingrestructuring costs, but excludes exceptional items, amortisation of acquiredintangible assets and financing gains or losses from currency hedging. In these first interim accounts since adopting International Financial ReportingStandards, Smiths Group recorded pre-tax profit of £179m for the six monthsended 31 January 2006, up 11% on this statutory basis compared with the sameperiod a year earlier. To give a clearer picture of underlying performance, theremainder of this report refers to the results on a headline basis. Headline performance Smiths Group continued to grow strongly in the first half of its 2006 financialyear, benefiting from organic growth, the inclusion of recent acquisitions andproductivity gains, which together contributed to an improved operating margin. Since adopting its Full Potential initiative two years ago, Smiths' strong salesand profit growth has been accompanied by higher investment in productdevelopment and acquisitions to strengthen market presence. While reinforcingleadership positions in aerospace and in medical devices, the company hasestablished a significant presence in the detection, interconnect and oil & gassectors, fuelling its expansion over this period. With a robust cash-flow and astrong balance sheet, the company has the resources to continue investing forgrowth and returns in the years ahead. Sales for the six months were £1,590m. This was 19% higher than for thecomparable period a year ago, of which 7% came from underlying growth and thebalance from acquisitions and currency translation benefits. Sales in all fourdivisions were well ahead, as the company benefited from rising demand and acompetitive position in each of its markets. Headline operating profit, at £194m, increased by 22% on the prior period, andthe operating margin for the period was 12.2% (2005: 11.8%). Headline operatingprofit is after charging £9m (£8m) for restructuring in Aerospace and Medical.In earlier years, restructuring in these divisions was reported as anexceptional item. The stronger US dollar contributed to a currency translationbenefit of £36m on sales (3%) and £5m on profit (3%). Headline profit before tax increased by 18% in this period, after interest costsof £27m and a pensions financing credit of £16m. Headline earnings per shareincreased by 18% to 24.0p. The company's effective tax rate on headline profitfor the period was 26%. Items not included in the headline results reduced statutory profit before taxby £4m, comprising charges of £3m for the integration of Medex (acquired lastApril) and £8m for the amortisation of intangible assets arising fromacquisitions, and benefits of £2m for the foreign exchange impacts of currencyhedging and £5m from profit on disposal of businesses. The Board has raised the interim dividend by 6.5% to 9.85p. It will be paid on21 April to shareholders listed on the register on 24 March. The ex-dividenddate is 22 March. As indicated six months ago, the company was targeting strong cash generation inthis period, and the operating cash-flow of £174m represents a 90% conversionfrom headline operating profit. Operating cash is measured before acquisitionintegration and after expenditure on property, plant and equipment and oncapitalised development costs. There was a £31m reduction in working capital,despite increased inventories in the expectation of strong growth in the secondhalf. Free cash-flow, after interest and tax but before acquisitions and dividends,was £93m, compared with £36m a year earlier. Net debt was £970m, up £39m fromthe start of the year, after dividend payments and acquisitions. Smiths is investing in developing new products to drive future growth.Company-funded R&D rose to £95m or 6% of sales (2005: £72m, 5%).Customer-funded R&D also increased, to £70m (£63m). Smiths capitalised £49m(£25m) of its development expenditure and amortised £6m (£4m) in this period. The process of acquiring businesses which strengthen market presence hascontinued. In August, Smiths paid £4m for Farnam Custom Products, a US companywhich extends Flex-Tek's product range. In September, the company paid £19m forMillitech Inc, a US business specialising in millimetre wave technologies forcommunications systems, complementing Smiths' Interconnect activities. InNovember, the company acquired Livewave Inc for £9m. This US business enhancesSmiths Detection's ability to network the sensors used in wide-area securitysystems. In February, Smiths completed the £15m acquisition of Lorch MicrowaveLLC, a US specialist in microwave filters, products which fit neatly into theInterconnect range. In August, Smiths transferred Smiths Heimann Biometrics GmbH into Cross MatchTechnologies Inc, in exchange for a minority equity holding in the enlargedCross Match. Disposals of a number of small businesses generated £5m in cash inthe half year. Productivity, in terms of sales per employee, improved as a result of businessrestructuring. Average employment in the half year was 32,000, an increase of1%. Higher input costs, including raw materials such as high performance alloysused in jet engine components, plastics used in medical devices and fibreglassused in flexible ducting, were largely passed on. Smiths generated 57% of its sales by origin and 70% of its headline operatingprofit in North America (US, Canada and Mexico). Aerospace £m 2006 2005 Sales 559 507Headline operating profit 43 45 Smiths Aerospace sales grew by 10%, reflecting strong demand from bothcommercial and defence customers. However, headline operating profit fell by4%, resulting in a margin of 8% (2005: 9%). Profitability was held back by anincrease in development costs charged to profit. Additionally, UK exports inthis period had been secured at less favourable exchange rates than in the priorperiod. Smiths is a first-tier supplier of integrated systems to the aircraft primemanufacturers. As the primes consolidate their supply chains, the company istaking on greater project management responsibilities and raising its investmentin R&D. The rewards are technology leadership with competitive advantage, and amore strategic level of partnership with key customers, with the prospect ofimproved growth and profitability. The higher R&D included three key programmes, the Airbus A380, the Boeing 767Tanker and the Boeing 787 Dreamliner, which will drive long-term growth. Theyprovide entry into market segments where the company had not previouslycompeted. Development of the A380 has now been largely completed. The firstB767 Tankers are scheduled for delivery later this year, and a decision on howto replace the US tanker fleet is awaited. Development of the Smiths commoncore computing system for the Boeing 787 continues, with the opportunity tomigrate this technology to other new aircraft. With substantial orderbooks forthe two commercial aircraft, development costs are being capitalised. TheTanker development costs are being charged against Aerospace profit. Military sales in this period continued to increase, and the outlook in thedefence sector is positive. The outcome of the recent Quadrennial DefenseReview by the US government was favourable for the company. The key programmesfor Smiths remain funded, including the F-18, F-22 and F-35 JSF combat aircraft,the C-17 and C-130J transporters and the Apache Longbow helicopter. Demand from airline customers for spares and repairs remains healthy. SmithsAerospace has formed a partnership with Aviall Services to distribute thecomplete range of Smiths commercial spare parts. This agreement will make apositive contribution from the outset and is expected to cover sales totalling$2 billion over the next ten years, taking advantage of Aviall's specialistglobal network and advanced logistics, and will improve working capitalefficiency. The engine components business performed strongly. Investment is being made inadditional capacity in North Carolina to meet rising demand and greateroutsourcing by engine makers. At the same time output from the Suzhou, Chinaplant has increased. The rising cost of special alloys used to make jet enginecomponents has been largely borne by customers. In summary, the outlook for Smiths Aerospace is for sustained growth andincreased returns, driven by positive market dynamics and by the increase inbusiness resulting from recent R&D investment to secure new contracts in bothcommercial and defence sectors. Detection £m 2006 2005 Sales 171 153Headline operating profit 25 22 Smiths Detection's sales in the first half increased by 12%, with headlineoperating profit 12% ahead, giving a margin of 14%. The improvement came fromstrong organic growth across all of the division's activities. Smiths Detection is a leading supplier of equipment which helps identifydangerous or illegal materials that threaten the state, its citizens orcommercial enterprise. Its products cover a wider range of applications of thecore technologies than any competitor, and its success is not dependent on salesin any one sector. While transportation is the largest area of business, salesin other markets, including ports & borders, military and commercialinfrastructure and first responders are all significant and continue to grow. Sales to transportation and airport authorities, accounting for one third of thedivision's total, increased steadily, and new business secured in this periodwill sustain growth ahead. To help the US Transportation SecurityAdministration automate and speed up the search for explosives on passengers, 30Sentinel II portals have been deployed at 13 international airports across theUS, from Washington, DC to Sacramento, CA. Elsewhere, airport operators around the world continue to acquire Smithsequipment, including in this period those in Thailand, China, Malaysia,Singapore, India, Pakistan, Japan, Australia and New Zealand. The company'sX-ray and trace equipment is also being installed widely beyond airports. TheAustralian Prison Service, for instance, is using it to prevent visitorsbringing drugs or weapons into its premises. There has been strong growth in the ports & borders business, which supplieslarge X-ray systems to check containers in transit. Turkey, Abu Dhabi and Omanplaced orders to screen shipments through their borders and airports. TheBelgian Customs are deploying new fixed and mobile scanners at Zeebrugge andAntwerp. They are the first in Europe to include a material discriminationcapability, warning customs officers of the possible presence of narcotics orexplosives. The Smiths systems for this market can also check for radioactivesources during the inspection process. Smiths is now often bidding with infrastructure project management partners fornational government programmes which are funded from revenues collected. Theopportunities at this level are attractive and will sustain growth ahead. Military sales can vary from one period to the next, as substantial one-offorders are fulfilled. In the past six months deliveries have been steady,sustained by two large, continuing contracts: deliveries of the lightweightchemical agent detector (LCAD) worn by British soldiers are on schedule; and inthe US, the ACADA chemical agent detector programme for the US Army is goingwell, with a follow-on order secured. Among other applications of detection technologies, the company is establishinga good position in the market for monitoring the integrity of food processing.A new US facility to make this specialised equipment has been opened in Alcoa,TN, and a European sales and service centre has been located in Grimsby, closeto the UK's main food producers. Product development continues at a rapid pace. A new Hi-Scan X-ray system forairport security checkpoints will help to identify and pinpoint explosives incarry-on baggage. A further refinement of the Sentinel II walk-throughexplosives detection system has integrated the compressor and all peripheralsinto the main unit, considerably reducing its footprint. An innovativepeople-screening system, Tadar, will use passive millimetre wave technology toreveal potentially threatening items hidden under clothing, eliminating pat-downsearches and speeding the flow of people entering a secure area. The company isattracting government funding for a number of its development programmes. Looking ahead, Smiths Detection is transitioning from selling stand-aloneequipment to offering more highly networked systems, integrating sensors andsurveillance across a wide area for better management of security. The recentacquisition of Livewave enhances the capability to meet this requirement. Medical £m 2006 2005 Sales 355 237Headline operating profit 61 38 Smiths Medical sales increased by 50%, with the inclusion of Medex, acquired inMarch 2005, accounting for much of the rise. The margin for this periodimproved from 16% to 17%. Underlying sales were 6% ahead, reflecting organicgrowth in critical care, safety devices and medication delivery. Medexcontributed an operating profit of £21m to the total. Business was strong inthe US, where 58% of divisional sales are generated. The world market for devices and equipment of the type supplied by Smithsamounts to some $7 billion and is growing consistently at 5% per annum. Thecompany has respected brands, competitive positions, considerable expertise indesign and manufacture and a worldwide sales network. The programme to achieve synergies from the Medex acquisition is proceedingsatisfactorily, and contributed to the division's better margin. The Medexrange has been fully integrated, with two thirds of its products in safetydevices and one third in critical care. Sales and marketing were integratedlast year, and in this period customer service and back office functions for allcritical care and safety products in the US were consolidated into Dublin, OH.Rationalisation of manufacturing has now commenced, with production from twoother US plants being brought into St Paul, MN and Dublin, OH. Financing andtax synergies from the acquisitions have also been obtained. Reorganisation of the division's global distribution system is under way.Working with logistics specialists, a European centre is being established inHolland to serve all markets outside the US, eliminating 6 existing nationalwarehouses. This will enable the business to reduce inventories while stillgiving the required level of service to customers. Sales of single-use devices moved ahead. In January, Smiths signed a three-yearagreement with Novation, which offers contracting services to 2,500 VHA and UHChospitals throughout the US, under which the company will be one of the twosuppliers of regional anaesthesia trays. These are standard or customised kitswhich provide all the necessary products for clinicians to perform regionalanaesthesia. Sales of temperature monitoring equipment and disposables grewstrongly, benefiting from regulatory issues affecting a competitor. A valuablecontract to supply the Medfusion infusion pump to the Massachusetts Generalhospital group was won in this period. Safety devices continue to sell well in the US. Combining the Smiths and Medexproducts has improved the range's competitive strength and is generatingincremental sales. Legislation, which has driven the growth of safety devicesin the US, has not yet been introduced in other countries. Growth in medication delivery was more modest in this period. After withdrawingits own product, Baxter is filling the gap in its range by sourcing anambulatory pump from Smiths, which will in turn generate an additional revenuestream from disposables. Smiths has recently introduced its innovative Cleodevice which helps diabetics insert and attach the delivery line from Cozmo andother insulin pumps. An order for Pneupac ventilators was received from theIndian Army for home defence use. A new divisional head for Medical, Srini Seshadri joined on 1 March. He comesfrom GE Healthcare where he had held progressively more senior roles over a 20year period, most recently as Chief Marketing Officer for GE HealthcareTechnologies. He brings a breadth of global business experience, deep knowledgeof the medical devices industry and a track record of successfully integratingacquisitions. Across Smiths Medical, business processes are being standardised and this isalready achieving improved productivity. The addition of Medex has broughtseveral state-of-the art manufacturing facilities. Recently-introduced productsnow comprise a high proportion of the range and there is a good flow ofinnovative devices being launched. Together, these features provide theopportunity for accelerated growth. Specialty Engineering £m 2006 2005 Sales 504 441Headline operating profit 64 53 Specialty Engineering sales increased by 14% and profit by 21%, improving thedivisional margin from 12% to 13%. For the first time, the company isreporting the performance of John Crane separately, although it remains managedas part of Specialty Engineering. John Crane is the leading supplier of seals and couplings used in rotatingmechanical equipment for applications including oil, gas and petrochemicalindustries, food processing and pulp & paper manufacturing. Its sales increased by 12% to £245m (2005: £218m) and its headline profitincreased by 22% to £29m (£24m) over the comparable period, the result of strongdemand from customers around the world. The margin improved from 11% to 12%.The oil producers are operating their plants at maximum capacity, and thisdrives service revenues, which are more than half of total sales. Thesecustomers are also investing heavily to increase output, extending John Crane'soriginal equipment (OEM) orderbook. Business throughout the Americas has been strong, reflecting the buoyant USeconomy and increased oil production from Canadian and Venezuelan sources.Following the disruption caused by hurricane Katrina, demand for replacementitems increased. Business in Europe, Africa and Asia also increased, although the Middle Eastremains a difficult area for large OEM projects due to security concerns.Expansion into new territories is proceeding steadily: the joint venture inRussia, John Crane Iskra is making progress; in China, the partner's minorityinterest in John Crane Tianjin was purchased in December; and a 45,000 sq ftIndian centre of excellence has just been opened in Bangalore. Theopportunities in all three countries are considerable. With efficient operations, including low cost manufacturing in Mexico and theCzech Republic, strong customer relationships built on Performance Plusprogrammes, and a global service network, John Crane is well-positioned to takeadvantage of continuing growth in its markets. The other Specialty Engineering businesses are also performing well.Interconnect, making components to protect and connect electronic equipment, hasbenefited from a resurgence of investment in mobile phone networks, and fromcontinued spending on advanced military communications. Key developments underway include connectors and electronic filters for thesecond phase of Eurofighter Typhoon, cables and assemblies for F-35 JSF, satcomantennae for the Boeing 787 and microwave assemblies for Raytheon's MFRFSnetwork-centric system. Recently-acquired Millitech has been awarded thecontract to make QinetiQ's Tarsier system, which detects debris on airportrunways. In the medical field, high-grade connectors are being designed forGE's MRI machines. All of these programmes will sustain growth. In addition to US and European plants, Interconnect has low-cost manufacturingin Costa Rica and China, the latter supplying commercial-grade components forapplications such as mobile telephony, which is expanding rapidly in thecountry. Recent acquisitions, including Millitech and Lorch, have strengthened the rangeof complementary components offered by Interconnect, enabling it to meet themost demanding specifications. Sales and profit in Flex-Tek were well ahead of the comparable period. Thebusiness supplies hoses, ducting and pipe connectors used in HVAC installations,domestic appliances and many industrial applications, and the robust performancewas driven by strong demand from customers in the US. Additional low-costmanufacturing in Malaysia is helping sustain margins, and raw material costincreases are being passed on. Sales and profit were steady in the business supplying marine radar displays andelectronic or paper charts for large ships. In total, Specialty Engineering is benefiting from a positive economicenvironment, particularly in the US. While driving top line growth, thedivision has controlled its costs to achieve higher productivity in all of itsoperations. Changes to the Board Lord Robertson of Port Ellen, a non-executive director, resigned from the Boardat the end of February due to other commitments. Prospects The outlook for the year is positive. Market conditions are favourable, andSmiths continues to benefit from the strength of its competitive positions. Thecompany expects to sustain the pace of growth through the second half.Continuous investment in the business, selective acquisitions and a focus oncost and capital management will drive future growth and returns. 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 NW11 8DS. -o- Consolidated Income Statement (unaudited) 6 months ended 31 January Year Ended 2006 2005 31 July 2005 (restated) (restated) £m £m £m Revenue (note 2) 1,589.5 1,337.6 3,005.4Cost of sales (950.5) (807.5) (1,814.7) __________ ____________ _____________Gross profit 639.0 530.1 1,190.7 Sales and distribution costs (164.8) (145.4) (283.3)Administrative expenses (290.9) (226.8) (537.9)Profit on disposal of businesses (note 7) 4.8 8.7 __________ ____________ _____________Operating profit (note 2) 188.1 157.9 378.2 Interest receivable 2.5 6.1 15.0Interest payable (29.5) (16.8) (48.0)Other financing gains 1.7 7.0 5.6Retirement benefits - return on plan assets 94.8 89.4 174.3 - interest cost (78.7) (81.9) (159.2) __________ ____________ _____________Finance (costs) / income (9.2) 3.8 (12.3)Share of post tax profit of associate 0.1 __________ ____________ ____________Profit before taxation 179.0 161.7 365.9 Comprising: headline profit before taxation (note 3) 182.7 155.2 394.0 exceptional operating items (note 4) 2.1 (28.0) amortisation of acquired intangible assets (note (7.5) (0.5) (5.7) 8) financing gains 1.7 7.0 5.6 __________ ____________ _____________ 179.0 161.7 365.9 Taxation (45.5) (42.6) (94.1) __________ ____________ _____________Profit for the period 133.5 119.1 271.8 __________ ____________ _____________Profit for the period attributable to equity shareholdersof the parent company 133.5 119.1 271.8 __________ ____________ _____________Earnings per share (note 5) Basic 23.7p 21.2p 48.3p Diluted 23.5p 21.1p 48.2p __________ ____________ _____________Dividend per share (see note 15) Interim 9.85p 9.25p 9.25p Final 19.75p Note The results for the periods ended 31 January 2005 and 31 July 2005 have beenrestated to conform to International Financial Reporting Standards as adopted inthe EU (see note 1). Consolidated Statement of Recognised Income and Expense (unaudited) 6 months ended 31 January Year Ended 2006 2005 31 July 2005 (restated) (restated) £m £m £m Exchange (loss) / gain (1.7) (12.9) 50.2Taxation recognised on exchange losses- Current 5.9Actuarial losses on retirement benefit schemes (73.4) (23.4)Taxation recognised on actuarial losses- Deferred 22.0 11.8Cash-flow hedges- Gains taken to equity 2.6- Transfers to profit for the period (0.1) ____________ __________ _____________Net income recognised directly in equity (50.6) (12.9) 44.5 Profit for the period 133.5 119.1 271.8 ____________ __________ _____________Total recognised income and expense for the periodAttributable to equity shareholders of Smiths Group plc 82.9 106.2 316.3 ____________ __________ _____________Effect of change in accounting policy (IAS 32 and IAS 39) (6.8) ____________ Note The results for the periods ended 31 January 2005 and 31 July 2005 have beenrestated to conform to International Financial Reporting Standards as adopted inthe EU (see note 1). Consolidated Balance Sheet (unaudited) 31 January 31 January 31 July 2006 2005 2005 (restated) (restated) £m £m £mNon-current assetsIntangible assets (note 8) 1,578.4 920.1 1,481.7Property, plant and equipment 504.5 420.6 502.8Investment accounted for using the equity method 13.7 Financial assets (note 9) 330.1 327.9 328.5 Retirement benefit assets 106.6 110.6 134.6Deferred tax assets 251.2 183.9 199.1Trade and other receivables 17.8 7.1 24.7 ___________ __________ _________ 2,802.3 1,970.2 2,671.4Current assetsInventories 600.4 481.6 564.2Trade and other receivables 645.2 620.4 720.5Financial assets 6.4Cash and cash equivalents (note 11) 359.9 343.0 60.9 Assets held for sale (note 10) 4.4 ___________ __________ _________Total assets 4,418.6 3,415.2 4,017.0 Non-current liabilitiesFinancial liabilities:Borrowings (note 11) (964.5) (442.6) (937.7)Financial derivatives (3.0) Provisions for liabilities and charges (26.4) (25.5) (26.4)Retirement benefit obligations (343.0) (344.0) (371.2)Deferred tax liabilities (130.4) (127.1) (101.2)Trade and other payables (194.6) (92.3) (133.2) Current liabilitiesFinancial liabilities:Borrowings (note 11) (385.9) (292.0) (54.0)Financial derivatives (12.6) Provisions for liabilities and charges (59.4) (72.8) (64.1)Trade and other payables (686.2) (593.9) (684.6) Current tax payable (145.4) (120.1) (160.8) ___________ __________ _________Total liabilities (2,951.4) (2,110.3) (2,533.2) ___________ __________ _________Net Assets 1,467.2 1,304.9 1,483.8 ___________ __________ _________ Consolidated Balance Sheet (unaudited) 31 January 31 January 31 July 2006 2005 2005 (restated) (restated) £m £m £m Shareholders' equityShare capital 141.4 140.6 140.9Share premium account 211.6 190.4 197.5Revaluation reserve 1.7 1.7 1.7Merger reserve 234.8 234.8 234.8Retained earnings 874.8 737.4 908.9Hedge reserve 2.9 ___________ __________ _________Total shareholders' equity (note 12) 1,467.2 1,304.9 1,483.8 ___________ __________ _________ Note The assets and liabilities for the periods ended 31 January 2005 and 31 July2005 have been restated (see note 12). CASH-FLOW STATEMENT (unaudited) 6 months ended 31 January Year ended 31 July 2006 2005 2005 (restated) (restated) Note £m £m £m Net cash inflow from operating activities 13 193.2 106.3 319.3 Cash flows from investing activitiesCapitalisation of development expenditure (48.8) (23.7) (67.4)Capitalisation of other intangible assets (16.5)Purchases of property , plant and equipment (49.3) (48.9) (114.2)Disposals of property, plant and equipment 3.2 1.9 9.3Acquisition of businesses (32.8) (57.7) (410.0)Disposals of businesses 5.0 0.5 _______ __________ ___________Net cash flow used in investing activities (139.2) (128.4) (581.8) Cash flows from financing activitiesProceeds from issue of ordinary share capital 14.6 11.3 14.6Dividends paid to equity shareholders (111.3) (102.5) (154.5)Increase / (decrease) in other borrowings 32.5 (8.4) 38.4 _______ __________ ___________Net cash flow used in financing activities (64.2) (99.6) (101.5) Net decrease in cash and cash equivalents (10.2) (121.7) (364.0)Cash and cash equivalent at 1 August 11.9 421.0 421.0Exchange differences 0.1 (1.2) (45.1) _______ __________ ___________Cash and cash equivalents at end of period 1.8 298.1 11.9 _______ __________ ___________Cash and cash equivalents at end of period comprise:Cash at bank and in hand 344.6 34.4 51.1Deposits 15.3 308.6 9.8Bank overdrafts (358.1) (44.9) (49.0) _______ __________ ___________ 1.8 298.1 11.9 _______ __________ ___________ Note The results for the periods ended 31 January 2005 and 31 July 2005 have beenrestated to conform to International Financial Reporting Standards as adopted inthe EU (see note 1). Notes to the accounts (unaudited) 1 Basis of preparation These interim financial statements are the first interim financial statementsfollowing the implementation of International Financial Reporting Standards ("IFRS") as adopted by the EU. The information for the periods to 31 January 2005and 31 July 2005, previously reported to shareholders under UK GenerallyAccepted Accounting Principles ("UK GAAP"), has been restated to conform toIFRS. These financial statements do not comply with the requirements of IAS 34. These financial statements have been prepared in accordance with accountingpolicies expected to be followed for the year ending 31 July 2006 and theListing Rules of the London Stock Exchange. European Union (EU) law requiresthat the consolidated financial statements for the year ending 31 July 2006 beprepared in accordance with IFRS adopted for use in the EU. This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areendorsed by the EU and effective at 31 July 2006, or are expected to be endorsedand effective at 31 July 2006, the first annual reporting date at whichreporting under EU-adopted IFRS is required. Based on these IFRS, the directorshave made assumptions about the accounting policies expected to be applied whenthe first annual IFRS financial statements are prepared for the year ending 31July 2006. The EU-adopted IFRS that will be effective in the annual financialstatements for the year ending 31 July 2006 are still subject to change and toadditional interpretation, and therefore cannot be determined with certainty.In addition, practice in this area is still evolving. Accordingly, theaccounting policies for that annual period will be finally determined only whenthe annual financial statements are prepared for the year ending 31 July 2006. As allowed by IFRS 1 First Time Adoption of IFRS, the international standardsIAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 FinancialInstruments: Recognition and Measurement were adopted prospectively from 1August 2005. Therefore, until 31 July 2005, financial instruments were reportedunder UK GAAP, and the comparative financial statements exclude the impact ofthese standards. IFRS 1 requires that, upon initial adoption of IFRS, a reconciliation isreported of net assets and equity from amounts previously reported under UKGAAP. On 21 November 2005, an analysis of the impact of adopting IFRS from 1August 2004 was published on the Company's website www.smiths-group.com/ir.This included income statement (January and July 2005), balance sheet (August2004, January 2005 and July 2005) and cash flow (July 2005) reconciliations, aswell as details of the accounting policies applied in restating the financialstatements for the year ended 31 July 2005, and as at 1 August 2005. The interim financial statements were approved by the directors on 15 March2006. 2 Analyses of revenue and operating profit A segmental analysis of profit is possible only to the level of operatingprofit, as financing activities are not specific to segments. 6 months ended 31 January Year endeda) by business segment 2006 2005 31 July 2005 (restated) (restated) £m £m £m RevenueAerospace 559.4 507.2 1,146.2Detection 171.2 152.9 366.5Medical 355.0 236.7 563.3Specialty Engineering:Technology Group 259.0 222.6 466.2John Crane Group 244.9 218.2 463.2 ________ ___________ _____________ 1,589.5 1,337.6 3,005.4 ________ ___________ _____________ Operating profitAerospace 40.3 44.7 118.5Detection 29.9 21.8 68.5Medical 54.6 38.3 57.1Specialty Engineering:Technology Group 34.1 29.1 69.8John Crane Group 29.2 24.0 64.3 ________ ___________ _____________ 188.1 157.9 378.2 ________ ___________ _____________ Headline operating profitAerospace 43.4 45.2 131.0Detection 24.5 21.8 68.5Medical 61.4 38.3 87.0Specialty Engineering:Technology Group 35.0 29.1 63.5John Crane Group 29.2 24.0 61.9 ________ ___________ _____________ 193.5 158.4 411.9 ________ ___________ _____________ Headline operating profit is stated after chargingrestructuring as follows: £m £m £m Aerospace 6.5 6.0 16.5Medical 2.2 1.6 6.4 ________ ___________ _____________ 8.7 7.6 22.9 ________ ___________ _____________ b) by geographical origin £m £m £mRevenueUnited Kingdom 401.5 367.5 818.4North America 973.9 770.4 1,736.2Europe 264.9 227.2 514.7Other overseas 130.5 104.8 245.2Inter-company (181.3) (132.3) (309.1) ________ ___________ _____________ 1,589.5 1,337.6 3,005.4 ________ ___________ _____________ Operating profitUnited Kingdom 9.7 7.5 50.5North America 124.3 106.9 230.3Europe 39.6 31.6 66.5Other overseas 14.5 11.9 30.9 ________ ___________ _____________ 188.1 157.9 378.2 ________ ___________ _____________ Headline operating profit £m £m £mUnited Kingdom 11.0 7.5 47.5North America 134.9 107.4 264.6Europe 33.1 31.6 68.7Other overseas 14.5 11.9 31.1 ________ ___________ _____________ 193.5 158.4 411.9 ________ ___________ _____________ Headline operating profit is stated after chargingrestructuring as follows:United Kingdom 2.2 6.4 13.9North America 6.2 0.7 7.8Europe 0.2 0.2Other overseas 0.1 0.5 1.0 ________ ___________ _____________ 8.7 7.6 22.9 ________ ___________ _____________ 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 - see note 4; - 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 - these represent the results ofderivatives and other financing instruments which do not fall to be hedgeaccounted under IAS 39. The application of IFRS accounting principles makesthis item potentially volatile, and it is therefore excluded to give a clearerpicture 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: 6 months ended 31 January Year ended 31 July 2006 2005 2005 £m £m £m Integration of acquisitions (2.7) - (10.4)Patent dispute settlement - - (14.9)Profit on disposal of businesses 4.8 - 8.7Impairment of goodwill - - (11.4) ____________ ____________ ______________ 2.1 - (28.0) ____________ ____________ ______________ 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. 6 months ended 31 January Year ended 31 July 2006 2005 2005 £m £m £m Profit for the period 133.5 119.1 271.8 ____________ ____________ ___________Average number of shares in issue during the period 564,601,013 561,914,824 562,445,323 ____________ ____________ ___________ Diluted earnings per share are calculated in the same manner, using an averagenumber of shares in issue which takes account of existing share options. A reconciliation of basic earnings per share and headline earnings per share isas follows: £m EPS (p) £m EPS (p) £m EPS (p) Attributable to equity shareholders of the parent company 133.5 23.7 119.1 21.2 271.8 48.3 _____ _____ _____ Exclude: integration of acquisitions 2.7 10.4 disposal of businesses (4.8) (8.7) patent dispute settlement 14.9 impairment of goodwill 11.4 amortisation of acquired intangible assets 7.5 0.5 5.7 financing (gains) (1.7) (7.0) (5.6) -_____ _____ _____ 3.7 (6.5) 28.1 less tax (2.1) 2.1 (9.7) _____ _____ _____ 1.6 0.3 (4.4) (0.8) 18.4 3.3 _____ _____ _____ Headline 135.1 24.0 114.7 20.4 290.2 51.6 _____ _____ _____ _____ _____ _____Headline EPS - diluted (p) 23.8 20.4 51.5 ____ ____ ____ 6 Acquisitions During the period the company made a number of acquisitions; the issued sharecapital of Livewave, Inc. on behalf of Detection, and the issued share capitalof Millitech, Inc., together with the businesses and assets of Farnam and LorchMicrowave LLC on behalf of Specialty Engineering. In addition, the company alsoacquired the minority interest in a subsidiary company operating in China. The values set out below are provisional pending finalisation of the fair valuesattributable, and will be finalised in subsequent periods. All acquisitions arewholly owned. Goodwill and net assets in respect of prior year acquisitionshave been adjusted by £1.5m and £1.7m as a result of finalising theirattributable fair values. Date of acquisition Consideration Goodwill Net assets £m £m £m £mBusinesses acquired Farnam 1.8.05 3.5 2.7 0.8Millitech, Inc. 16.9.05 19.3 9.5 9.8Livewave, Inc. 28.10.05 8.5 10.2 (1.7)Lorch Microwave LLC 4.1.06 14.5 7.4 7.1 _____________ _________ __________ 45.8 29.8 16.0 _________ __________Minority interest acquired 1.5 _____________ 47.3 _____________Consideration: paid during 32.8 the period deferred 14.5 _____________ 47.3 _____________ 7 Disposals The most significant disposal transaction during the period was the sale of thecompany's interest in Heimann Biometric Systems GmbH to Cross MatchTechnologies, Inc. in exchange for 43% of the issued share capital in thatcompany, which is regarded as an associate and its results are thereforeaccounted for on an equity basis. Consideration Net assets Profit (net of costs) on disposal £m £m £m Businesses sold 15.5 10.7 4.8 _____ _____ _____ 8 Intangible assets Acquired Development Intangibles Goodwill costs (see below) Other Total £m £m £m £m £m CostAt 1 August 2005 1,296.1 198.7 141.6 72.2 1,708.6Exchange adjustments (7.6) (0.3) (0.8) (0.5) (9.2)Transfers (1.1) 1.1Business combinations 29.8 11.3 41.1Additions at cost 55.4 25.0 80.4 At 31 January 2006 1,318.3 253.8 151.0 97.8 1,820.9 AmortisationAt 1 August 2005 143.5 27.0 8.8 47.6 226.9Exchange adjustments (0.8) 0.2 (0.2) (0.8)Transfers (1.1) 1.1Charged 5.8 7.5 3.1 16.4 At 31 January 2006 142.7 33.0 15.2 51.6 242.5 Net book valueAt 31 January 2006 1,175.6 220.8 135.8 46.2 1,578.4 At 31 July 2005 1,152.6 171.7 132.8 24.6 1,481.7 The net book value of other intangible assets includes £26.4m (31 July 2005£22.7m) of software. In addition to goodwill, the acquired intangible assets comprise: Patents, licences and Customer trademarks Technology relationships Total £m £m £m £m CostAt 1 August 2005 41.9 64.3 35.4 141.6Exchange adjustments (0.2) (0.4) (0.2) (0.8)Transfers (1.1) (1.1)Business combinations 6.4 4.9 11.3 At 31 January 2006 48.1 62.8 40.1 151.0 AmortisationAt 1 August 2005 1.1 4.7 3.0 8.8Exchange adjustmentsTransfers (1.1) (1.1)Charged 1.4 3.2 2.9 7.5 At 31 January 2006 2.5 6.8 5.9 15.2 Net book valueAt 31 January 2006 45.6 56.0 34.2 135.8 Net book valueAt 31 July 2005 40.8 59.6 32.4 132.8 9 Non-current financial assets 31 January 31 January 31 July 2006 2005 5005 £m £m £m TI Automotive Limited preference shares 325.0 325.0 325.0Other trade investments 3.6 2.9 3.5Financial derivatives 1.5 ____________ ___________ __________ 330.1 327.9 328.5 ____________ ___________ __________ 10 Assets held for sale Assets held for sale comprise assets of a subsidiary company stated at estimatedrealisable value. 11 Cash and borrowings 31 January 31 January 31 July Fixed Floating 2006 2005 2005 £m £m £m £m £m Cash and cash equivalentsNet cash 43.8 343.0 60.9Impact of cash pools (note 1) 316.1 359.9 343.0 60.9 Borrowings - at costOn demand/under one year Net overdrafts and loans 5.6 43.5 49.1 292.0 54.0 Impact of cash pools (note 1) 316.1 316.1 One to two years 0.4 0.4 0.3 0.4Two to five years 150.1 513.5 663.6 0.9 635.9Over five years 215.8 84.7 300.5 441.4 301.4 371.9 957.8 1,329.7 734.6 991.7 Net debt 969.8 391.6 930.8 Borrowings - valuation adjustments (note 2)Interest accrual 23.0Fair value of swapped debt (2.3) Total borrowings per balance sheet 1,350.4 734.6 991.7 Note 1 IAS 32 requires that cash and overdraft balances within cash pooling systems bereported gross on the balance sheet. Note 2 IAS 39 requires that the carrying value of borrowings includes accrued interest,and the fair value of any interest rate or currency swaps held to hedge theborrowings. The company's measure of "net debt" is stated before thoseadjustments. 12 Changes in shareholders' equity Reconciliation between previously reported UK GAAP and IFRS As at As at 31 July 2005 1 August 2004 £m £m Shareholders' equity as reported under UK GAAP 1,204.8 1,122.5Amendments to inter-company swap accounting (note 1) 35.4 _____________ _____________ 1,240.2 1,122.5 Adjustments to comply with IFRS as reported on 21 November 2005 247.5 158.5Additional IFRS adjustments:Amendment to creditors (note 2) (5.6)Revisions to fair values in respect of prior year acquisitions (note 3 ) 1.7 _____________ ______________Shareholders' equity under IFRS 1,483.8 1,281.0 Change in accounting policy to adopt IAS 32 and IAS 39 (6.8) _____________ ______________Shareholders' equity under IFRS as at 1 August 2005 1,477.0 1,281.0 Note 1 An adjustment to the prior year has been made to amend the accounting of aninter-company swap. The adjustment results in a decrease in creditors of £35.4mand an increase in shareholders' equity of £35.4m. Note 2 During the period since 21 November 2005 the company has made a minor amendmentto its previously published IFRS information as a result of emerginginterpretations of standards. Note 3 As allowed by IFRS 3, the fair values of assets and liabilities acquired inprior year acquisitions have been finalised. These adjustments result in anincrease in goodwill of £1.5m, an increase in other assets of £0.2m and anincrease in shareholders' equity of £1.7m. 12 Changes in shareholders' equity (continued) 6 months ended 6 months ended Year ended 31 January 2006 31 January 2005 31 July 2005 £m £m £m At 1 August 1,477.0 1,281.0 1,281.0 Profit for the period 133.5 119.1 271.8Share-based payment 3.5 2.7 5.0Deferred taxation benefit thereon 0.5 4.4 16.0Dividends paid to equity shareholders (111.3) (102.5) (154.5)New share capital subscribed 14.6 7.7 14.6ESOP Trusts - disposal of company shares - 5.4 5.4Exchange (losses)/gains (1.7) (12.9) 50.2Taxation recognised on exchange losses 5.9Movement on cash flow hedge reserve: Gains taken to equity 2.6 Transfers to profit for the period (0.1)Actuarial gains and losses on retirementbenefit schemes (73.4) (23.4)Deferred taxation benefit thereon 22.0 11.8 __________________ ________________ ____________ 1,467.2 1,304.9 1,483.8 __________________ ________________ ____________ 13 Cash flows from operating activities 6 months ended 6 months ended Year ended 31 January 2006 31 January 2005 31 July 2005 £m £m £m Profit before taxation 179.0 161.7 365.9Net interest payable 27.0 10.7 33.0Financing (gains) (1.7) (7.0) (5.6)Share of post-tax profit from associate (0.1)Other finance income - retirement benefits (16.1) (7.5) (15.1) _________________ ________________ ____________ 188.1 157.9 378.2 Amortisation of intangible assets 16.4 4.5 41.7Profit on disposal of business (4.8) (8.7)Depreciation of property, plant and equipment 40.4 35.2 77.0Share-based payment expense 5.0 3.0 6.3Retirement benefits 6.3 (3.6) (16.5)(Increase) / decrease in inventories (49.6) (56.9) (89.3)(Increase) / decrease in trade and other receivables 76.5 9.1 (53.7)(Decrease) / increase in trade and other payables (9.8) (5.7) 68.1Other non-cash movements 14.0 _________________ ________________ ____________Cash generated from operations 268.5 143.5 417.1 Interest (12.0) 6.3 (19.9)Tax paid (63.3) (43.5) (77.9) _________________ ________________ ____________Net cash inflow from operating activities 193.2 106.3 319.3 _________________ ________________ ____________ 14 Contingent liabilities In common with many other enterprises of similar size, the Company and itssubsidiaries are from time to time engaged in litigation in respect of a varietyof commercial issues. As previously reported, John Crane , Inc ("John Crane "), a subsidiary of theCompany, is one of many co-defendants in numerous law suits pending in theUnited States in which plaintiffs are claiming damages arising from exposure to,or use of, products containing asbestos. The John Crane products generallyreferred to in these cases are ones in which the asbestos fibres wereencapsulated in such a manner that, according to tests conducted on behalf ofJohn Crane , the products were safe. John Crane ceased manufacturing productscontaining asbestos in 1985. John Crane has resisted every case in which it has been named and will continueits robust defence of all asbestos-related claims based upon this 'safe product'defence. In addition John Crane has access to insurance cover which, while itis kept under review, is judged sufficient to meet all material costs ofdefending these claims for the foreseeable future. As a result of its defence policy, John Crane has been dismissed before trialfrom cases involving approximately 118,000 claims over the last 27 years. JohnCrane is currently a defendant in cases involving approximately 169,000 claims.Despite these large numbers of claims, John Crane has had final judgementsagainst it, after appeals, in only 49 cases, amounting to awards of someUS$45.5m over the 27 year period. These awards, the related interest and allmaterial defence costs have been met in full by insurance. No provision relating to this litigation has been made in these accounts. 15 Dividends An interim dividend of 9.85p per share (2005 9.25p) has been declared and willbe paid on 21 April 2006 to holders of all ordinary shares whose names areregistered at close of business on 21 March 2006. The dividend has not beenaccrued at 31 January 2006 in accordance with IFRS. 16 Comparative figures This financial information does not comprise full financial statements withinthe meaning of Section 240 of the Companies Act 1985. Figures relating to theyear ended 31 July 2005 are abridged. Full accounts of Smiths Group plc forthat period, prepared under UK GAAP, have been reported on by the auditors anddelivered to the Registrar of Companies. The report of the auditors was notqualified and did not contain statements under section 237 (2) or 237 (3) of theCompanies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smiths Group