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Half-year Report

23 Mar 2018 07:00

RNS Number : 6803I
Smiths Group PLC
23 March 2018
 

News releaseSmiths Group plc announces interim results for the six months ended 31 January 2018

London, Friday 23 March 2018

 

On track for growth in FY18

Highlights

· Group underlying revenue broadly flat at £1,549m, reflecting an improving trend. Reported revenue (4)% due to adverse foreign exchange translation

· Operating profit impacted by programme phasing in Detection and higher R&D costs in Medical associated with the significant programme of new product launches

· Underlying operating margin down (20)bps, including the adjustment for restructuring and pension administration costs which are now headline items

· Continued focus on working capital with improved stock turns at 3.6x

· Good cash generation with cash conversion of 98%

· Continued investment for sustainable growth, R&D at 4.6% of sales

· Further progress on portfolio high grading:

o Morpho integration on track

o Agreement to sell John Crane's Bearings business for $35m

· ROCE declined (110)bps to 15.2% reflecting the impact of the Morpho acquisition

· Headline tax rate now expected to be 25.5-26.5% for FY2018 falling to 22-24% in FY2019

· Headline basic EPS down (11)% at 40.4p per share, down (2)% on an underlying basis. Statutory basic EPS 26.0p

· Interim dividend of 13.80 pence per share, up 1.8%

· 2018 full year outlook reaffirmed

 

Results for the six months ended 31 January 2018

 

 

Headline1

 

Statutory

 

H1 2018£m

H1 2017£m

Reported growth

Underlying2 growth

 

H1 2018£m

H1 2017£m

Revenue

1,549

1,617

(4)%

(1)%

 

1,549

1,617

Operating profit

247

277

(11)%

(2)%

 

229

377

Operating margin

16.0%

17.1%

(110)bps

(20)bps

 

14.8%

23.3%

Pre-tax profit

217

248

(12)%

(3)%

199

346

Free cash-flow

113

176

(36)%

 

 

113

176

Return on capital employed

15.2%

16.3%

(110)bps

 

 

 

Continuing basic EPS

40.4p

45.7p

(11)%

(2)%

 

26.0p

76.5p

Dividend

13.80p

13.55p

1.8%

 

 

13.80p

13.55p

1 In addition to statutory reporting, Smiths Group reports its continuing operations on a headline basis. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in the notes to the financial statements.

2 Underlying modifies headline performance to: adjust prior year to reflect an equivalent period of ownership for divested businesses; include restructuring and pension administration costs as headline for both years; and exclude the effects of foreign exchange, acquisitions and supplemental sales for divested businesses.

 

 

Andy Reynolds Smith, Group Chief Executive, commented:

"Smiths Group made an encouraging start to the year as we continued to execute our strategy for sustainable growth. Underlying revenue was broadly in line with the prior year, with John Crane returning to growth, the new product introductions in Smiths Medical contributing to its gradual improvement and strong growth in Flex-Tek. As anticipated, Smiths Detection continued to achieve good growth in Air Transportation but this was offset by programme phasing in the non-aviation segments. Following a period of significant strategic and structural change at Smiths Interconnect, sales declined as the division completes its restructuring process.

This year we have commenced our previously announced policy of including restructuring and pension administration costs as part of underlying profit. On an underlying basis the Group margin was down 20 basis points, whilst we continued to invest in commercially focused R&D and innovation. Our relentless focus on operational efficiency and cash generation delivered further stock turn improvements and good cash conversion during the period.

The outlook for 2018 is reaffirmed (on a constant currency basis). The Group's current trading, the strong order books in John Crane and Smiths Detection, as well as the substantial ongoing programme of new product launches in Smiths Medical, support our confidence that the Group's growth rate will accelerate over the balance of the year. At current rates, foreign exchange will remain a headwind for the full year.

Over the medium-term, we are confident that we will achieve organic revenue growth above our chosen markets, which in aggregate are growing 3-4% annually. This is founded on our strategy to maintain and continue to develop leadership positions in attractive growth markets, our increasing investment in technology and new products, our established operating model for excellence, and our strong financial framework. In parallel with our continued active portfolio management this will deliver long-term sustainable growth and attractive returns."

Statutory reporting

Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, pre-tax profit from continuing operations was £199m (2017: £346m) and continuing basic earnings per share were 26.0p (2017: 76.5p).

See Accounting policies for an explanation of the presentation of results and note 3 to the accounts for an analysis of non-headline items.

 

Contact details

 

Investor enquiries

Jemma Spalton, Smiths Group+44 (0)20 7004 1637+44 (0)78 6739 0350jemma.spalton@smiths.com

Marion Le Bot, Smiths Group+44 (0)20 7004 1672+44 (0)75 8315 4386marion.lebot@smiths.com

Media enquiriesAndrew Lorenz, FTI Consulting+44 (0)20 3727 1323

+44 (0)77 7564 1807

smiths@fticonsulting.com

Deborah Scott, FTI Consulting+44 (0)203 727 1459+44 (0)797 953 7449smiths@fticonsulting.com

 

 

Presentation

The presentation slides and a live webcast of the analyst presentation will be available at www.smiths.com/investors at 09.00 (UK time) today. A recording of the webcast will be made available from 13.00 (UK time).

Photography

Original high-resolution photography and broadcast quality video is available to the media from the media contacts above or from www.smiths-images.com.

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the "Company") and its subsidiaries (together, the "Group") and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and the businesses operated by the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its directors accept no liability to third parties. This presentation contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

Group results overview

 

 

Headline revenue

Headline operating profit margin

Headline return on capital employed

 

Underlying growth2

Reported growth

H1 2018

H1 2017

H1 2018

H1 2017

John Crane

3%

(2)%

21.3%

20.8%

23.4%

21.3%

Smiths Medical

0%

(5)%

18.1%

21.0%

15.8%

16.3%

Smiths Detection

(11)%

15%

16.2%

16.8%

10.6%

14.7%

Smiths Interconnect

(3)%

(41)%

10.3%

11.3%

11.4%

11.3%

Flex-Tek

10%

5%

18.6%

18.3%

36.4%

32.8%

Group

(1)%

(4)%

16.0%

17.1%

15.2%

16.3%

 

Smiths Group delivered an encouraging performance in the first half, and made further progress on the execution of our strategy - to deliver sustainable above-market growth in our chosen markets and achieve world-class competitiveness, underpinned by a strong financial framework.

Group revenue declined (4)% on a reported basis, reflecting £(49)m of adverse foreign exchange translation and £(8)m net impact of four divestitures and the acquisition of Morpho Detection ('Morpho') which were completed in FY2017. Group headline revenue fell (1)% on an underlying2 basis, reflecting an improving trend, up from (2)% in the first quarter. Good growth in John Crane and Flex-Tek, and an improved performance in Smiths Medical were offset by the anticipated decline in Smiths Detection, reflecting programme phasing in the non-aviation segments, and a decline in Smiths Interconnect as the business completes its restructuring.

Revenue from higher-growth regions, which represents 17% of Group sales, grew 6% on an underlying2 basis, driven by good sales growth in China, up 7%, reflecting our continued focus on growing the Group's activities in Asia.

Group headline operating profit of £247m was down (2)% on an underlying2 basis (including the 2017 adjustment for the restructuring and pension administration costs that are now recorded as headline items) and down (11)% on a reported basis. Restructuring and pension administration costs in H1 2017 amounted to £(19)m and were classified as non-headline items. During the reporting period foreign exchange translation reduced operating profit by £(10)m, whilst the net impact of acquisitions and disposals contributed £4m. As a result, on an underlying2 basis, operating profit reduced by £(4)m or (2)%. This reflected growth in John Crane and Flex-Tek, and a broadly flat performance in Smiths Interconnect, which were more than offset by lower operating profit in Smiths Medical, Smiths Detection and the increased investment in the Group-wide i3 innovation framework and Digital Forges.

The Group's headline operating profit margin decreased (110)bps on a reported basis, reflecting the programme phasing in Smiths Detection and higher R&D costs associated with the significant programme of new product launches in Smiths Medical. The Group operating margin on an underlying2 basis was broadly flat (including the 2017 adjustment for the restructuring and pension administration costs that are now recorded as headline items).

Driving operational excellence remains a key focus for the Group as we continue to improve speed and efficiency supporting further structural working capital reductions and strong cash generation. This focus drove further improvements in stock turns at 3.6x (July 2017: 3.5x). Working capital as a percentage of sales remained flat at 29% (July 2017: 29%) despite a build up of inventory associated with orders for delivery in the second half. This resulted in good cash conversion of 98% and free cash flow of £113m.

Group investment in R&D increased to 4.6% of sales (2017: 4.5%), to drive future growth through the development of innovative, commercially focused products.

During the period the Group made further progress on the high grading of the portfolio for long-term growth in attractive markets and in January reached agreement to sell the John Crane Bearings business to Miba AG for an enterprise value of $35m. The deal is expected to complete during the second half of the year.

ROCE declined (110)bps to 15.2% (2017: 16.3%) primarily reflecting the 10 month impact of the Morpho asset base.

The headline tax charge for the first half of 2018 of £56m (2017: £66m) represented an effective rate of 25.8% on the headline profit before taxation (2017: 26.5%).

Following the Group's announcement on 12 January 2018 regarding the impact of the new US tax legislation, Smiths Group now estimates a headline effective tax rate between 25.5% and 26.5% for FY2018, as the one-off revaluation of the deferred tax assets will now be recognised as a non-headline item, in line with market practice. For FY2019, the headline effective tax rate is now estimated to be between 22.0% and 24.0%.

Net debt at 31 January 2018 was £961m, representing a reduction of £6m in the period giving a net debt to EBITDA position of 1.5x at the end of period. Our strong balance sheet continues to allow us to deploy significant further investment capacity to support sustainable growth.

Basic headline earnings per share from continuing activities decreased (11)% to 40.4p (2017: 45.7p), (2)% on an underlying2 basis.

 

Pension

The net pension position has improved to a surplus of £237m at 31 January 2018 from a surplus of £224m at 31 July 2017. 

The Group continues to work with the Trustees to de-risk the pension schemes. In October 2017, the SIPS scheme announced a £207m buy-in with Canada Life, and in December 2017 the US scheme paid $36m to members who opted to take lump sums in lieu of annuities.

 

Dividend

The Board has a progressive dividend policy, with the aim of increasing dividends in line with the long-term underlying2 growth in earnings and cash flow. This policy will enable us to retain sufficient cash flow to finance our investment in the drivers of growth and to meet our financial obligations. In setting the level of dividend payments, the Board will take into account prevailing economic conditions and future investment plans, along with the objective to maintain minimum cash dividend cover of around 2.0x. The Board has declared an interim dividend per share of 13.80p (2017: 13.55p per share). The interim dividend will be paid on 23 April to shareholders registered at close of business on 6 April. The ex-dividend date is 5 April.

 

Statutory results

On a statutory basis, after taking into account all items excluded from headline performance, operating profit of £229m was £(148)m lower than last year (2017: £377m). In 2017, statutory operating profit included £126m of profit on disposal of businesses.

 

Outlook

The outlook for 2018 is reaffirmed (on a constant currency basis). The Group's current trading, the strong order books in John Crane and Smiths Detection, as well as the substantial ongoing programme of new product launches in Smiths Medical, support our confidence that the Group's growth rate will accelerate over the balance of the year. At current rates foreign exchange will remain a headwind for the full year.

We anticipate continued growth in John Crane, as it leverages its leading OE and aftermarket service offering in strengthening markets. In Smiths Medical, we anticipate a return to growth for the year overall supported by its significant programme of product launches. In Smiths Detection we anticipate a strong second half, driven by Air Transportation, which should generate good overall growth for the year. In Smiths Interconnect, our focus on fewer, higher-growth end markets is expected to offset declining sales associated with the segments it is exiting. Flex-Tek is expected to deliver continued strong growth.

 

Business review

John CraneJohn Crane is a leading provider of mission-critical engineered solutions for global energy and process industries. John Crane's revenue is currently comprised of 66% aftermarket sales. c.55% of revenue is derived from the energy sector (downstream and midstream oil & gas, power generation) with c.45% coming from other process industries, including chemical, pharmaceutical, power generation, water and wastewater, and pulp and paper. John Crane represents 28% of Group revenue.

 

 

H1 2018£m

H1 2017£m

Reportedgrowth

Underlying2growth

Revenue

428

435

(2)%

3%

Headline operating profit

91

90

1%

5%

Headline operating margin

21.3%

20.8%

50bps

30bps

Statutory operating profit

86

87

(1)%

 

Return on capital employed

23.4%

21.3%

210bps

 

 

Performance

John Crane delivered a good performance, returning to growth with revenue up 3% on an underlying2 basis. Reported revenue decreased (2)%, reflecting £(10)m of adverse foreign exchange translation and an £(11)m impact from the disposal of Artificial Lift in September 2016. 

Underlying2 sales from John Crane's oil & gas and non-oil & gas activities were up c.4% and c.3%, respectively, reflecting the improving trend in global energy markets and good growth in John Crane's chemical, pharma and pulp & paper activities. These market conditions were also reflected in the improving underlying2 sales of Original Equipment ('OE') that were flat. Investment in OE projects and expansion of the installed base continued during the period. Multiple new project agreements were secured, including for petro-chemical plants in Thailand and China. John Crane's large installed base and leading service offering ensured that it was well positioned to satisfy the pent-up aftermarket requirements for repairs, maintenance and upgrades, driving 5% growth in underlying2 aftermarket revenue. There was a significant number of aftermarket contract wins globally across oil & gas customers, as well as in the chemical and paper markets. We anticipate continued good growth in John Crane supported by the strong OE and aftermarket order book.

Revenue from higher-growth regions, which represents 25% of sales, grew 12% on an underlying2 basis with strong sales growth in China.

Headline operating profit increased 5% on an underlying2 basis, driven by the improved volumes. Headline operating profit margin increased by 30bps to 21.3%, on an underlying2 basis reflecting the favourable mix from strong aftermarket growth. The difference between statutory and headline operating profit primarily reflects the movements in provisions for asbestos litigation.

Return on capital increased 210bps to 23.4%, principally due to increased profitability and the impact of the Artificial Lift disposal in 2016.

John Crane has made further progress on focusing the business on scalable leading positions in attractive growth markets. During the period we announced that we had reached agreement to sell the Bearings business to Miba AG for an enterprise value of $35m. The deal is expected to complete during the second half of the year. We continue to look at opportunities to enhance John Crane's technology leadership and the innovative solutions and capabilities it provides to its customers.

R&D expenditure during the period increased by 13% to 1.4% of sales.

John Crane continued to develop Sense™, its predictive diagnostics platform, covering both wet and dry gas applications. John Crane also made further investments in research to support the enhancement of seals performance, such as reducing methane emissions with the new gas seal, the unique secondary sealing technology of John Crane's new crude oil pipeline seal and single-use seal for general industries.

 

Smiths MedicalSmiths Medical supplies high-quality, cost effective medical devices and consumables that are vital to patient care globally. Our portfolio incorporates established brands and strong positions in select segments of the Infusion Systems, Vascular Access, and Vital Care markets. 82% of Smiths Medical's sales are from consumable and disposable products. Smiths Medical represents 29% of Group revenue.

 

 

H1 2018£m

H1 2017£m

Reportedgrowth

Underlying2growth

Revenue

451

473

(5)%

0%

Headline operating profit

82

99

(18)%

(5)%

Headline operating margin

18.1%

21.0%

(290)bps

 (90)bps

Statutory operating profit

79

189

(58)%

 

Return on capital employed

15.8%

16.3%

(50)bps

 

 

Performance

During the period Smiths Medical made significant progress on its return to growth with underlying2 revenue improving to be flat year over the year. This was supported by the launch of 11 new products across its segments to support core-market category leadership. Reported revenue declined (5)%, impacted by £(15)m adverse foreign exchange translation and the £(5)m impact of the divestment of the Wallace product line in November 2016.

Underlying2 revenue was flat in Infusion Systems with good growth in the sales of disposables offset by lower sales in infusion hardware. Vascular Access underlying2 revenue declined by (1)% where an improved performance in sharps safety supported by the launch of NeoHeelTM, a safety lancet to collect blood samples for infants, was offset by declines in peripheral intravenous catheters ('PIVC'). Underlying2 revenue from Vital Care and Specialty Products was flat with growth in most product segments offset by a decline in respiratory and chronic obstructive pulmonary disease products.

Revenue from higher-growth regions, which represents 9% of sales, increased 7% on an underlying2 basis driven by growth in China.

Headline operating profit declined (5)% on an underlying2 basis. This movement reflects both the adjustment for restructuring costs in the prior year, £6m of which were related to Smiths Medical, and the impact in the reporting period of higher R&D costs, associated with the products launch. As a result, the headline operating margin of 18.1% was (90)bps lower than the prior year, on an underlying2 basis. The difference between statutory and headline operating profit included £2m of amortisation of acquired intangible assets.

Return on capital employed decreased (50)bps to 15.8%, reflecting the lower profitability during the period.

R&D expenditure during the period represented 6.0% of sales (2017: 6.8%). Smiths Medical continues to invest in research and development to support its long-term, sustainable growth, with the development of innovative, commercially focused products across the portfolio. Since the beginning of the financial year 11 new products have been launched. These included:

 

- CADDTM Solis connected pump, our first wireless connected pump

- Upgrades to the PharmGuard® server platform

- Jelco® Seriva PIVC targeted at higher growth markets

- HemoDrawTM plus closed blood sampling system which reduces the risk of injury and infection

- NeoHeelTM a safety lancet to collect blood samples from infants

- DeltaVenTM a closed system IV catheter

 

Sales from the 11 new products are gradually ramping up, contributing to the division's anticipated return to growth in the second half of the year, alongside around 12 further product launches expected during the second half. 

 

Smiths Detection

Smiths Detection is a leader in the detection and identification of security threats and contraband. It produces equipment for customers in the Air Transportation, Ports and Borders, Military and Urban Security end-use markets. 48% of Smiths Detection's sales derived from the aftermarket. Smiths Detection represents 24% of Group revenue.

 

 

H1 2018£m

H1 2017£m

Reportedgrowth

Underlying2growth

Revenue

367

318

15%

(11)%

Headline operating profit

59

54

11%

(13)%

Headline operating margin

16.2%

16.8%

(60)bps

(40)bps

Statutory operating profit

39

47

(17)%

 

Return on capital employed

10.6%

14.7%

(410)bps

 

 

Performance

As expected, Smiths Detection underlying2 revenue decreased by (11)%. This reflected continued good growth in Air Transportation, despite a strong comparator, that was offset by programme phasing in the non-aviation segments. Overall aftermarket revenue grew by 2% on an underlying2 basis, now accounting for 48% of total revenue (2017: 35%). On a reported basis, revenue increased by 15% including £91m of incremental revenue associated with the acquisition of Morpho Detection ('Morpho'), partially offset by £(8)m adverse foreign exchange translation.

Revenue in Air Transportation increased 8% on an underlying2 basis. Air Transportation is Smiths Detection's largest segment and following the acquisition of Morpho now represents 66% of Smiths Detection's total revenue. During the period there was strong growth in EMEA as a result of deliveries associated with the ECAC standard 3 regulation for hold baggage, and strong growth in Asia Pacific. Major deliveries were completed for Amsterdam, Munich, Frankfurt, Saudi Arabia and Thailand. Contract wins included orders for integrated checkpoint lanes in the Middle East, hold baggage systems in Scandinavia, Canada and nine airports in India, as well as significant orders from major air cargo customers. Revenue from Ports & Borders decreased by (26)% on an underlying2 basis following the completion of key programmes in Italy, Kuwait and Belgium last year. Underlying2 revenue in Military decreased by (75)% against last year's strong comparator and reflects the wind down of some major US military programmes. Urban Security revenues were down (4)% on an underlying2 basis, with growth from RadSeeker sales to the US Department for Homeland Security, offset by lower sales to the US Federal Protection Service and the completion of ENEC/Atlas Security deliveries in the UAE. The division's robust order book, with deliveries scheduled for the second half of the year, and further strong demand in Air Transportation supports our confidence in delivering good growth for the year as a whole.

Revenue from higher-growth regions represented 20% of sales, in line with prior year on an underlying2 basis. We continue to experience pricing pressure in some end-use markets, and in unregulated parts of the market from lower-priced competitors.

Headline operating profit declined (13)% on an underlying2 basis, reflecting the programme phasing. Headline reported operating margin decreased by (40)bps to 16.2%, on an underlying2 basis with the impact of lower volumes partially offset by a higher mix of aftermarket revenue and the Morpho synergies. The difference between statutory and headline operating profit largely constitutes the integration costs associated with the acquisition of Morpho and amortisation of acquired intangibles. The integration of Morpho continues to progress well and we are on track to the deliver the $30m of annualised cost synergies by the third year of ownership.

Return on capital employed decreased (410)bps to 10.6% driven primarily by the impact of Morpho's asset base.

Total R&D expenditure during the period represented 6.6% of sales, or 6.0% excluding customer funded R&D (2017: 6.3% and 5.4% respectively). Specific highlights include continued investment in:

 

- X-ray machines capable of meeting the new EU/ECAC Standard C3

- Newer and faster CT machines for hold baggage screening

- Next generation chemical warfare detection devices for the military market

- Launch of CORAL, our advanced predictive analytics suite for hold baggage detection systems

 

In February it was announced that Roland Carter has been appointed as President of Smiths Detection alongside his current role of President, Smiths Asia Pacific, with effect from 1 March 2018. Roland has held numerous senior management roles within Smiths Group and as a qualified engineer with the proven capability of running complex global businesses, is very well placed to lead Smiths Detection through its next stage of development.

 

Smiths Interconnect

Smiths Interconnect designs solutions for high-speed, secure connectivity in reliability applications for the defence, aerospace, space, rail, medical and semiconductor test markets. Smiths Interconnect represents 9% of Group revenue.

 

 

H1 2018£m

H1 2017£m

Reportedgrowth

Underlying2growth

Revenue

135

230

(41)%

(3)%

Headline operating profit

14

26

(46)%

(1)%

Headline operating margin

10.3%

11.3%

(100)bps

20bps

Statutory operating profit

11

45

(76)%

 

Return on capital employed

11.4%

11.3%

10bps

 

 

Performance

Following the significant strategic and structural change at Smiths Interconnect last year, declining sales associated with certain products and customers that we are exiting to complete the restructuring process offset 3% revenue growth in Smiths Interconnect's six key market segments. As a result underlying2 revenue was down (3)%. 

On a reported basis, revenue declined by (41)%, reflecting the £(82)m impact of the divestments of Power and Microwave Telecoms businesses in January and May 2017 respectively and £(9)m adverse foreign exchange translation.

Underlying2 revenue in the Defence segment grew by 10% supported by increased defence spending in the US, Europe and Middle East including programmes such as Eurofighter, Joint Strike Fighter and various naval programmes. In the Medical segment underlying2 revenue grew by 22% driven by strong sales of highly specialist connectors for patient monitoring and imaging systems. In the Space segment revenue increased 32% driven by the rise of our connectivity product content within satellite programs. The Rail segment increased by 1%. The Semiconductor Test and Commercial Aerospace sectors declined by (14)% and (18)% respectively primarily due to order timing. In the second half, with the focus on Smiths Interconnect's six key market segments, we anticipate an improved performance.

Revenue from higher-growth regions, which represents 15% of sales, decreased by (17)% as a result of the phasing of semiconductor sales in China which are expected to improve in the second half.

Headline operating profit declined (1)% on an underlying2 basis to £14m where an improvement in gross margin was offset by the lower volumes in the period. Headline operating margin was 20bps higher at 10.3%, on an underlying2 basis. The difference between statutory and headline operating profit primarily reflects adjustments for amortisation of acquired intangibles and the loss on disposal of a trade investment.

During the period we signed a memorandum of understanding to form a joint venture with Sichuan Huafeng Enterprise Group Co. Ltd - a major manufacturer of electronic components in China. Our combined portfolio of highly specialised electronic components and customer relationships will speed up penetration and growth in this important market. The joint venture agreement is expected to be signed imminently.

Return on capital employed increased 10bps to 11.4% driven by the Power and Telecoms businesses in FY2017.

Total R&D expenditure represented 7.7% of revenue (2017: 6.4%) (6.8% excluding customer funded R&D, 2017: 5.7%). Product developments during the period included:

 

- Volta semiconductor solutions for testing integrated chip packages

- SpaceNXTTM HC Series - a range of high reliability microwave components qualified for next-generation commercial space applications.

- Eclipta TM connector - a double ended edge card contact technology for disposable medical applications.

Flex-TekFlex-Tek provides engineered components that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets. Flex-Tek represents 10% of Group revenue.

 

 

H1 2018£m

H1 2017£m

Reportedgrowth

Underlying2growth

Revenue

168

161

5%

10%

Headline operating profit

31

30

7%

15%

Headline operating margin

18.6%

18.3%

30bps

80bps

Statutory operating profit

39

37

5%

 

Return on capital employed

36.4%

32.8%

360bps

 

 

Performance

Flex-Tek delivered a strong performance with revenue up 10% on an underlying2 basis, supported by growth in all segments. On a reported basis revenue increased 5%, despite a £(7)m adverse foreign exchange translation.

Construction revenue grew 4% on an underlying2 basis, with both Gastite and Thermaflex benefiting from the continued growth in the US housing market. Fluid Management revenue was up 14% on an underlying2 basis, driven by strong sales of its aerospace solutions across a range of engine and airframe platforms. Heat Solutions revenue increased by 14% on an underlying2 basis, principally due to growth in its engineered solutions as well as increased sales of clothes dryer elements and HVAC systems. Flexible Solutions underlying2 revenue growth of 8% was driven by increased demand from the medical sector, partially offset by a decline in the floor care segment. We anticipate Flex-Tek to continue to deliver a strong performance.

Revenue from higher-growth regions, which represents 10% of sales, increased 22% driven by strong sales into China, Russia and Mexico.

On an underlying2 basis headline operating profit increased 15% to £31m and the headline operating margin increased 80bps to 18.6% driven by the strong sales growth and further operational efficiency savings. The difference between statutory and headline operating profit is primarily due to the £8m reduction in the provision for Titeflex Corporation subrogation claims due to higher US discount rates.

Return on capital employed increased 360bps to 36.4%, driven by improved profitability.

In November 2017 the Heat Solutions business completed the acquisition of the heating element division of Osram. The integration of the business is now largely complete and the benefits of broadening its portfolio into faster growing engineered heating solutions are starting to flow through.

R&D expenditure remained consistent at 0.6% of sales (2017: 0.7%), focused on market-leading innovative solutions to meet specific customer needs such as Gastite's FlashShield II, the next generation of flexible gas piping, which is expected to launch by the end of the year.

 

Financial review

Headline revenue

Reported revenue decreased by £(68)m (4%) to £1,549m, including the negative effects of foreign currency translation (£(49)m) and the net impact of acquisitions and disposals (£(8)m). On an underlying2 basis, revenue declined (1)% as growth in John Crane (£14m; 3%) and Flex-Tek (£15m; 10%) and flat Medical (£(1)m; flat) was offset by declines in Detection (£(35)m; (11)%) and Interconnect (£(4)m; (3)%).

 

Operating profit

Headline operating profit of £247m was £(30)m lower than prior year (2017: £277m) including the £(10)m adverse effect of foreign exchange translation. On an underlying2 basis, adjusted for the £(19)m reclassification of restructuring and pension administration costs in H1 2017 and the £4m impact of acquisitions and disposals, operating profit decreased (2)%, driven primarily by programme phasing in Detection and higher R&D costs associated with the significant programme of new product launches in Smiths Medical. Headline operating margin decreased (110)bps to 16.0% (2017: 17.1%). The Group headline operating margin would have been broadly flat had the restructuring and pension administration costs been treated as headline items in H1 2017.

John Crane margin of 21.3% (2017: 20.8%) improved 30bps on an underlying2 basis driven by the improved volumes. Smiths Medical margin of 18.1% (2017: 21.0%) decreased (90)bps on an underlying2 basis with lower revenue and higher R&D costs associated with the launch of new products. Smiths Detection margin of 16.2% (2017: 16.8%) decreased (40)bps on an underlying2 basis due to lower volumes, partially offset by favourable mix and synergies. Smiths Interconnect margin of 10.3% (2017: 11.3%) increased 20bps on an underlying2 basis driven by the disposal of lower profitability businesses. Operating margin in Flex-Tek of 18.6% (2017: 18.3%) improved 80bps on an underlying2 basis, reflecting the impact of increased revenue and efficiencies. Central costs increased by £2m on an underlying2 basis to £30m including investment in innovation to build capabilities to support sustainable growth.

Operating profit on a statutory basis, after taking account of the items excluded from the headline figures, was £229m (2017: £377m) - see note 3 to the accounts for information on the excluded items. The decrease was driven by the non-repeat of £126m profit on disposal of businesses generated in 2017. Other non-headline charges are £8m lower at £18m reflecting the change in presentation of restructuring costs and pension administration costs as headline in the current period (2017: £15m restructuring costs and £4m operating charge for pension administration classified as non-headline).

Headline finance costs

Headline finance cost during the period totalled £30m, £1m higher than the previous period, reflecting the effect of higher US dollar interest rates.

Non-headline items relating to continuing activities excluded from headline profit before tax

These items amounted to a charge of £18m compared with a credit of £98m in 2017. They comprised:

£nil for restructuring (2017: £15m for the Fuel for Growth programme) as costs of this nature are now recorded in headline operating profit;

£12m charge in relation to the integration of Morpho and the existing Smiths Detection business (2017: £nil);

£2m credit for acquisition cost provision release (2017: £6m charge);

£8m credit (2017: £8m credit) in connection with Titeflex Corporation litigation;

£4m charge (2017: £3m charge) in connection with John Crane, Inc. asbestos litigation;

£nil operating charge for pension administration costs (2017: £4m charge) as these costs are now recorded in headline operating profit;

£4m settlement gain on post retirement benefit schemes (2017: £nil);

£15m amortisation of intangible assets acquired in business combinations (2017: £6m) increasing due to the intangible assets acquired with the Morpho acquisition. The ongoing amortisation charge relates principally to technology and customer relationships;

£1m loss on disposal of businesses relating to an investment held within Interconnect (2017: £126m gain on disposal of John Crane Artificial Lift, Smiths Medical Wallace and Smiths Interconnect Power);

£3m charge on the unwind of discounted provisions (2017: £3m charge); and

£3m gain on retirement benefit finance (2017: £1m gain).

 

Research and development

The Group invested £70m in R&D (2017: £73m), equivalent to 4.6% of revenue (2017: 4.5%). Of that, £67m was funded by the Company compared with £69m in 2017. The Group actively seeks funding from customers to support R&D and this amounted to £3m (2017: £4m). Under IFRS, certain development costs are capitalised, and this amounted to £14m in the period (2017: £20m). The gross capitalisation is shown as an intangible asset. Where customers contribute to the costs of the development, the contribution is included as deferred income and disclosed within trade and other payables.

Taxation

The £56m headline tax charge for the first half of 2018 (2017: £66m) represented an effective rate of 25.8% on the headline profit before taxation (2017: 26.5%). On a statutory basis, the tax charge on continuing activities was £95m (2017: £43m) which included an exceptional one off charge of £45m representing the revaluation of deferred tax balances and a deemed repatriation charge following US tax reform law changes effective from 1 January 2018.

The Group continues to take advantage of global manufacturing, research and development and other tax incentives, to allocate its capital in the most tax-efficient manner where the regulatory environment allows, and to ensure the effective and timely management of its tax filings and other compliance requirements.

An effective headline tax rate of between 25.5% and 26.5% is expected in the current year ending 31 July 2018, falling to between 22% and 24% in the year ending 31 July 2019.

Earnings per share

Basic headline earnings per share from continuing activities decreased (11)% to 40.4p (2017: 45.7p), (2)% on an underlying2 basis, driven by lower operating profit, which was partly offset by a decrease in the effective tax rate to 25.8% from 26.5%.

On a statutory basis, the basic earnings per share from continuing activities were 26.0p (2017: 76.5p), reflecting the impact of non-headline items which included a profit on disposal of businesses of £126m in 2017.

Cash generation and net debt

Headline operating cash-flow decreased to £241m (2017: £320m), reflecting reduced operating profit and a lower inflow from working capital. This represented 98% (2017: 115%) of headline operating profit. See note 15 to the financial statements for a reconciliation of headline operating cash and free cash-flow to statutory cash-flow measures.

Free cash-flow decreased by £63m to £113m, reflecting the £79m decrease in headline operating cash-flow, offset by lower pension contributions.

On a statutory basis, net cash inflow from operations was £159m (2017: £225m).

Net debt at 31 January 2018 was £961m, a reduction of £6m in the period. With the majority of the Group's net debt held in currencies other than pounds sterling to hedge the underlying asset base of the Group, foreign exchange translation decreased net debt by £24m in the period. Excluding foreign exchange and the associated £3m gain on hedging, net debt increased by £21m.

At the end of the period, the Group had gross debt of £1,552m (31 July 2017: £1,749m) and cash reserves of £591m (31 July 2017: £782m). Of this gross debt, £21m (31 July 2017: £151m) falls due for repayment within one year. 

Acquisitions and Disposals

In November 2017, we completed the acquisition of the heating element division of Osram for consideration of £15m.

In January 2018, we announced the proposed disposal of John Crane's Bearing business to Miba AG, for an enterprise value of $35m. The transaction is subject to the satisfaction of certain regulatory conditions and is expected to complete before the fiscal year end. The assets and liabilities of this business have been presented as held for sale in the consolidated balance sheet.

Dividend

The Board has declared an interim dividend of 13.80p per share (2017: 13.55p per share). The interim dividend will be paid on 23 April 2018 to shareholders registered at close of business on 6 April 2018.

 

Retirement benefits

As required by IFRS, the balance sheet reflects the net surplus or deficit in retirement benefit plans, taking assets at their market values at 31 July 2017 and evaluating liabilities at period-end using AA corporate bond interest rates.

The tables below disclose the net status across a number of individual plans. Where any individual plan shows a surplus under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one plan is not available to fund the IAS 19 deficit of another plan. The net pension position has improved to a surplus of £237m at 31 January 2018 from a surplus of £224m at 31 July 2017, benefitting from £30m of contributions in the period and a one-off settlement gain of £4m, being offset by an actuarial loss on the bulk annuity buy-in agreement. The accounting basis under IAS 19 does not necessarily reflect the funding basis agreed with the Trustees and, should the schemes be wound up while they had members, they would need to buy out the benefits of all members. The buyouts would cost significantly more than the present value of scheme liabilities calculated in accordance with IAS 19.

The retirement benefit position is shown below:

31-Jan-18

31-Jul-17

Funded plans

 

UK plans - funding status

111%

111%

US plans - funding status

96%

91%

Other plans - funding status

82%

81%

Total - funding status

110%

109%

 

 

31-Jan-18

31-Jul-17

Surplus / (deficit)

 

Funded plans

364

354

Unfunded plans

(127)

(130)

Total surplus / (deficit)

237

224

 

 

Retirement benefit assets

383

390

Retirement benefit liabilities

(146)

(166)

237

224

 

 

Return on capital employed

The headline return on capital employed (ROCE) is calculated over a rolling 12-month period and the percentage that headline operating profit comprises of monthly average capital employed. Capital employed comprises total equity adjusted for goodwill recognised directly in reserves, post-retirement benefit-related assets and liabilities net of tax, litigation provisions relating to non-headline items net of tax, and net debt. ROCE decreased (110)bps to 15.2% (2017: 16.3%) primarily as a result of a higher asset base from the Morpho acquisition.

Exchange rates

The results of overseas operations are translated into sterling at average exchange rates. The net assets are translated at period-end rates. The principal exchange rates, expressed in terms of the value of sterling, are shown in the following table.

31 January2018

31 January2017

31 July 2017

Average rates:

 

 

 

 

 

 

 

US dollar

1.33

1.26

 

Dollar weakened 6%

1.27

 

Dollar weakened 5%

Euro

1.12

1.16

 

Euro strengthened 3%

1.16

 

Euro strengthened 3%

Period-end rates:

 

 

 

 

 

 

 

US dollar

1.42

1.26

 

Dollar weakened 13%

1.32

 

Dollar weakened 8%

Euro

1.14

1.17

 

Euro strengthened 3%

1.12

 

Euro weakened 2%

 

 

Risk management

The principal risks and uncertainties affecting the business activities of the Group and relevant mitigating activities were set out on pages 62-67 of the Annual Report for the year ended 31 July 2017, a copy of which is available at the Company's website at www.smiths.com.

 

Developments since the Annual Report

In the view of the Board, the principal risks and uncertainties affecting the Group for the remaining six months of the financial year continue to be those set out briefly below and more fully in the Annual Report.

 

Technology disruption by existing or future competitor

Developing differentiated new products and services is critical to our success. Failure to maintain technological differentiation could lead to a loss of market share and competitive advantage.

 

People

People are our only truly sustainable source of competitive advantage. The inability to attract key talent could lead to a loss of competitive advantage and materially affect our growth prospects.

 

Wrong acquisitions and poor integration

Failure to identify suitable acquisition targets or successfully integrate newly-acquired businesses may result in less value generation, fewer synergies or require more investment than anticipated, impacting the Group's financial performance.

 

Not operating in the right markets

Failure to select the right markets and geographies could impact our strategic progress and financial performance.

 

Economic outlook and geo-political environment

Economic and financial market conditions may cause adverse effects on customers or suppliers with consequential capacity or cash-flow implications for Smiths Group.

 

Interruption to supply chain - manufacturing concentration

Our manufacturing continues to be exposed to risk of a number of external events such as natural catastrophes, disease pandemics and terrorist attacks which may result in supply disruption.

 

Interruption to supply chain - sole source of supply

We rely on sole source component suppliers to provide raw materials or purchased components for some of our products. Any failure on their part or unforeseen adverse consequences in the region or market where they operate would impact our ability to deliver solutions to customers and drive growth.

 

Product quality issue - recall / litigation / catastrophic event

Manufacturing flaws, component failures and / or design defects could require us to recall products. The group, in particular, Smiths Detection and Smiths Medical may be exposed to losses in the event of a cyber security breach relating to the Group's products.

 

Failure to meet contractual obligations

There is a risk that we may fail to deliver, in a timely fashion, or at all, the products and services we are required to deliver, or fail in our contractual execution due to delays by our suppliers or counterparties.

 

Significant ethical or compliance breach

We operate in highly regulated markets, as well as in countries where the risks of bribery, corruption and modern slavery are high, creating a risk that a significant ethical or compliance breach may occur which could seriously harm our reputation and impact our financial performance, customer relationships and ability to retain talent.

 

Cyber security

Cyber attacks could compromise the confidentiality, integrity and availability of our assets, impacting our ability to deliver to customers and ultimately, financial performance and reputation.

 

Statement of directors' responsibilities

The Interim report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim report in accordance with the Disclosure and Transparency Rules ("DTR") of the United Kingdom Financial Conduct Authority ("FCA"). The DTR require that the accounting policies and presentation applied to the half-yearly figures must be consistent with those applied in the latest published annual accounts, except where the accounting policies and presentation are to be changed in the subsequent annual accounts, in which case the new accounting policies and presentation should be followed, and the changes and the reasons for the changes should be disclosed in the Interim report, unless the FCA agrees otherwise.

The directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the European Union, and that the interim management report herein includes a fair review of:

· the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements as required by DTR 4.2.7;

· the principal risks and uncertainties for the remaining six months of the year as required by DTR 4.2.7; and

· related party transactions that have taken place in the first six months of the current financial year that have materially affected and changes in the related party transactions described in the previous annual report that could have materially affected the financial position or performance of the Smiths Group plc (the "Parent Company") and its subsidiaries (together, the "Group") during the first six months of the current financial year as required by DTR 4.2.8.

Having reassessed the principal risks, the directors consider it appropriate to adopt the going concern basis of accounting in preparing the Interim report.

The directors of the Parent Company are listed in the Parent Company's Annual Report for the year ended 31 July 2017, except for the following changes to the membership of the board, which have occurred since the Annual Report was approved on 21 September 2017:

· On 1 January 2018 John Francis Shipsey joined the Board as the Chief Financial Officer.

For and on behalf of the Board of Directors:

 

 

Andy Reynolds Smith

John Shipsey

Chief Executive

Chief Financial Officer

 

22 March 2018

Independent review report to Smiths Group plc

Report on the condensed interim financial statements

Our conclusion

We have reviewed Smiths Group plc's condensed interim financial statements (the "interim financial statements") in the interim report of Smiths Group plc for the 6 month period ended 31 January 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The condensed interim financial statements comprise:

· the consolidated balance sheet (unaudited) as at 31 January 2018;

· the consolidated income statement (unaudited) and consolidated statement of comprehensive income (unaudited) for the period then ended;

· the consolidated cash-flow statement (unaudited) for the period then ended;

· the consolidated statement of changes in equity (unaudited) for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the interim report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The interim report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the interim report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of condensed interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

PricewaterhouseCoopers LLP

Chartered AccountantsLondon

22 March 2018

 

(a) The maintenance and integrity of the Smiths Group plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Consolidated income statement (unaudited)

Period ended 31 January 2018

Period ended 31 January 2017

Notes

Headline£m

Non-headline(note 3)£m

Total£m

Headline£m

Non-headline(note 3)£m

Total£m

Continuing operations

Revenue

2

1,549

 

1,549

1,617

 

1,617

Cost of sales

(838)

 

(838)

(870)

 

(870)

Gross profit

711

 

711

747

 

747

Sales and distribution costs

(219)

 

(219)

(223)

 

(223)

Administrative expenses

(245)

(17)

(262)

(247)

(26)

(273)

(Loss)/profit on business disposal

 

(1)

(1)

 

126

126

Operating profit/(loss)

247

(18)

229

277

100

377

Interest receivable

3

 

3

1

 

1

Interest payable

(33)

 

(33)

(30)

 

(30)

Other financing losses

 

(3)

(3)

(3)

(3)

Other finance income - retirement benefits

 

3

3

1

1

Finance costs

(30)

 

(30)

(29)

(2)

(31)

Profit/(loss) before taxation

217

(18)

199

248

98

346

Taxation

5

(56)

(39)

(95)

 

(66)

23

(43)

Profit/(loss) for the period

161

(57)

104

182

121

303

 

Attributable to:

Smiths Group shareholders - continuing operations

160

(57)

103

181

121

302

Non-controlling interests in respect of continuing operations

1

1

1

 

1

161

(57)

104

182

121

303

Earnings per share

4

Basic

26.0p

76.5p

Diluted

25.7p

75.6p

Dividends per share (declared)

14

13.80p

13.55p

Consolidated statement of comprehensive income (unaudited)

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Profit for the period

104

303

Other comprehensive income:

Actuarial losses on retirement benefits

6

(24)

(62)

Taxation recognised on actuarial movements

(4)

9

Other comprehensive income and expenditure which will not be reclassified to the consolidatedincome statement

(28)

(53)

Other comprehensive income which will be, or has been, reclassified:

Exchange (losses)/gains

(179)

107

Cumulative exchange gains recycled on disposal

(31)

Fair value gains/(losses) and reclassification adjustments:

- deferred in the period on cash-flow and net investment hedges

90

(62)

- reclassified to income statement on cash-flow and net investment hedges

 

(1)

21

Total other comprehensive income/(expenditure)

(118)

(18)

Total comprehensive income/(expenditure)

(14)

285

Attributable to:

Smiths Group shareholders

(14)

285

Non-controlling interests

(14)

285

Consolidated balance sheet (unaudited)

Notes

31 January2018£m

31 July2017£m

Non-current assets

Intangible assets

7

1,908

2,015

Property, plant and equipment

8

291

315

Financial assets - other investments

18

21

Retirement benefit assets

6

383

390

Deferred tax assets

199

272

Trade and other receivables

64

57

Financial derivatives

86

56

2,949

3,126

Current assets

Inventories

439

452

Current tax receivable

37

62

Trade and other receivables

640

722

Cash and cash equivalents

9

591

782

Financial derivatives

11

13

1,718

2,031

Assets of business held for sale

13

19

Total assets

4,686

5,157

Current liabilities

Financial liabilities

- borrowings

9

(21)

(151)

- financial derivatives

(10)

(10)

Provisions for liabilities and charges

11

(81)

(85)

Trade and other payables

(529)

(576)

Current tax payable

(58)

(45)

(699)

(867)

Liabilities of business held for sale

13

(4)

Non-current liabilities

Financial liabilities

- borrowings

9

(1,531)

(1,598)

- financial derivatives

(4)

(2)

Provisions for liabilities and charges

11

(245)

(283)

Retirement benefit obligations

6

(146)

(166)

Deferred tax liabilities

(69)

(111)

Trade and other payables

(22)

(26)

(2,017)

(2,186)

Total liabilities

(2,720)

(3,053)

Net assets

1,966

2,104

Shareholders' equity

Share capital

148

148

Share premium account

358

355

Capital redemption reserve

6

6

Revaluation reserve

1

1

Merger reserve

235

235

Retained earnings

1,404

1,634

Hedge reserve

(201)

(290)

Total shareholders' equity

1,951

2,089

Non-controlling interest equity

15

15

Total equity

1,966

2,104

Consolidated statement of changes in equity (unaudited)

Notes

Share capital and sharepremium£m

Other reserves£m

Retained earnings£m

Hedgereserve£m

Equityshareholders'funds£m

Non-controllingInterest£m

Totalequity£m

At 31 July 2017

503

242

1,634

(290)

2,089

15

2,104

Profit for the period

 

 

103

 

103

1

104

Other comprehensive income:

Exchange losses net of recycling

(178)

 

(178)

(1)

(179)

Actuarial losses on retirement benefits and tax

(28)

 

(28)

 

(28)

Fair value gains/(losses)

 

 

 

89

89

 

89

Total comprehensive income/(expenditure) for the period

(103)

89

(14)

(14)

Transactions relating to ownership interests:

Exercises of share options

3

3

 

3

Purchase of own shares

(15)

 

(15)

 

(15)

Dividends - equity shareholders

14

(117)

 

(117)

 

(117)

Share-based payment

5

 

5

 

5

At 31 January 2018

506

242

1,404

(201)

1,951

15

1,966

 

 

Notes

Share capital and sharepremium£m

Other reserves£m

Retained earnings£m

Hedgereserve£m

Equity shareholders'funds£m

Non-controllingInterest£m

Totalequity£m

At 31 July 2016

500

242

1,205

(301)

1,646

14

1,660

Profit for the period

 

 

302

 

302

1

303

Other comprehensive income:

 

 

 

Exchange gains net of recycling

 

 

77

77

(1)

76

Actuarial losses on retirement benefits and tax

(53)

 

(53)

 

(53)

Fair value losses

 

(41)

(41)

 

(41)

Total comprehensive income for the period

326

(41)

285

285

Transactions relating to ownership interests:

Exercises of share options

2

 

 

 

2

 

2

Purchase of own shares

(9)

 

(9)

 

(9)

Dividends - equity shareholders

14

(114)

 

(114)

 

(114)

Share-based payment

8

 

8

 

8

At 31 January 2017

502

242

1,416

(342)

1,818

14

1,832

Consolidated cash-flow statement (unaudited)

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Net cash inflow from operating activities

15

159

225

Cash-flows from investing activities

Expenditure on capitalised development

(13)

(19)

Expenditure on other intangible assets

(5)

(3)

Purchases of property, plant and equipment

(28)

(29)

Disposals of property, plant and equipment

2

2

Investment in financial assets

(2)

 

Disposal of investment

6

 

Acquisition of businesses

(15)

 

Disposals of businesses - continuing operations

320

Net cash-flow used in investing activities

(55)

271

Cash-flows from financing activities

Proceeds from exercise of share options

3

2

Purchase of own shares

(15)

(9)

Dividends paid to equity shareholders

(117)

(114)

Cash inflow/(outflow) from matured derivative financial instruments

4

(2)

Increase in borrowings

1

Reduction and repayment of borrowings

(132)

(1)

Net cash-flow used in financing activities

(257)

(123)

Net (decrease)/increase in cash and cash equivalents

(153)

373

Cash and cash equivalents at beginning of the period

781

430

Exchange differences

(37)

10

Cash and cash equivalents at end of the period

591

813

Cash and cash equivalents at end of the period comprise:

- cash at bank and in hand

229

307

- short-term deposits

362

509

- bank overdrafts

(3)

591

813

 

Reconciliation of net cash-flow to movement in net debt

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Net debt at start of period

9

(967)

(978)

Net (decrease)/increase in cash and cash equivalents

(153)

373

Increase in borrowings

(1)

Reduction and repayment of borrowings

132

1

Movement in net debt resulting from cash-flows

(21)

373

Capitalisation, interest accruals and unwind of capitalisation of fees

(6)

Fair value movement from interest rate hedging

3

12

Foreign exchange gains/(losses)

24

(36)

Movement in net debt in the period

6

343

Net debt at end of period

9

(961)

(635)

Notes to the condensed interim financial statements

1 Basis of preparation

The financial information for the period ended 31 January 2018 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 July 2017 has been delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The financial information included in this announcement has been prepared on a going concern basis using accounting policies consistent with International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with IAS 34 Interim Financial Reporting. The current period financial information presented in this document has been reviewed, not audited and the review report is attached to this document.

The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 July 2017, which have been prepared in accordance with IFRS as adopted by the European Union.

Accounting policies

The same accounting policies, estimates, presentation and methods of computation are followed in the half year report as applied in the Group's latest annual audited financial statements.

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective for the current accounting period. None of these are expected to have a material impact on the consolidated financial statements of the Group, except the following set out below:

-- IFRS 9 - Financial Instruments, is effective for the Group's year ending 31 July 2019. Adopting IFRS 9 will impact hedge accounting and receivables provisioning. Hedge accounting under the new standard will be linked more closely to the risk management objectives of the hedging activity, which may generate different levels of ineffectiveness than the current testing under IAS 39.

Receivables provisioning will move from an incurred to an expected loss model, accelerating the recognition of provisions for credit risk, impacting the timing and value of provision recognition on higher risk balances. At 31 January 2018 the Group has £69m of receivables which are more than three months overdue or considered to be high risk; under the current methodology provisions of £31m have been recognised for these receivables.

-- IFRS 15 - Revenue from contracts with customers, is effective for the Group's year ending 31 July 2019. The new standard combines a number of previous standards, setting out a five-step model for the recognition of revenue and establishing principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.

The Group is undertaking a detailed contract level review of the impact of IFRS 15 across all revenue streams and is making good progress in developing policies and disclosures. Further details of the impact of IFRS 15 will be provided later in the year.

-- IFRS 16 - Leases, is effective for the Group's year ending 31 July 2020. This standard removes the distinction between operating and finance leases, resulting in a lease liability and corresponding asset being recognised on the balance sheet for almost all leases. The Group is currently assessing the impact of the new standard. Our initial assessment of IFRS 16 is that it will not have a material effect of the Group's net assets.

Having assessed the principal risks discussed above, the Directors believe that the Group is well placed to manage its financing and other business risks satisfactorily, and have a reasonable expectation that the Group have adequate resources to continue in operation for at least 12 months from the signing date of these financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

The interim financial information was approved by the Board on 22 March 2018.

Presentation of results

In order to provide users of the accounts with a clear and consistent presentation of the underlying performance of the Group's ongoing trading activity, the Group presents its results in the income statement with amounts relating to costs of acquisitions (including integration costs) and disposals (including transition services), amortisation of acquired intangibles, impairments, legacy liabilities, material one-off items and certain re-measurements in a separate column. See note 3 for a breakdown of the items excluded from headline operating profit and headline finance costs.

Measures of the underlying performance of the Group's ongoing trading activity are described as 'headline' and used by management to measure and monitor performance. See note 2 for disclosures of headline operating profit and note 17 for more information about the calculation of return on capital employed and credit metrics. 

In addition, the Group reports underlying growth rates for sales and profit measures, which exclude the impact of acquisitions, divestments, presentational changes and the effects of foreign exchange translation, by making the following adjustments:

• Exclude acquisitions from the current period for the first 12 months of ownership;

• Exclude the divested businesses performance after the date of disposal from comparative period;

• Include restructuring and pension administration costs as headline items for both the current and comparative periods; and

• Retranslate the comparative to current year exchange rates before calculating growth measures.

 

2 Segment information

Analysis by operating segment

The Group is organised into five divisions: John Crane, Smiths Medical, Smiths Detection, Smiths Interconnect and Flex-Tek. These divisions design and manufacture the following products:

· John Crane - mechanical seals, seal support systems, power transmission couplings and specialised filtration systems;

· Smiths Medical - infusion systems, vascular access products (including safety needles), patient airway and temperature management equipment and specialised devices in areas of diagnostics and emergency patient transport;

· Smiths Detection - sensors and systems that detect and identify explosives, narcotics, weapons, chemical agents, biohazards and contraband;

· Smiths Interconnect - specialised electronic and radio frequency board-level and waveguide devices, connectors, cables, test sockets and sub-systems used in high-speed, high reliability, secure connectivity applications;

· Flex-Tek - engineered components, flexible hosing and rigid tubing which heat and move fluids and gases.

The position and performance of each division is reported at each Board meeting to the Board of directors. This information is prepared using the same accounting policies as the consolidated financial information except that the Group uses headline operating profit to monitor divisional results and operating assets to monitor divisional position. See note 3 for an explanation of which items are excluded from headline profit measures. Intersegment sales and transfers are charged at arm's length prices.

Segment trading performance

Period ended 31 January 2018

John Crane£m

SmithsMedical£m

Smiths Detection£m

Smiths Interconnect£m

Flex-Tek£m

Corporatecosts£m

Total£m

Revenue

428

451

367

135

168

 

1,549

Divisional headline operating profit

91

82

59

14

31

 

277

Corporate headline operating costs

(30)

(30)

Headline operating profit/(loss)

91

82

59

14

31

(30)

247

Items excluded from headline measures (note 3)

(5)

(3)

(20)

(3)

8

5

(18)

Operating profit/(loss)

86

79

39

11

39

(25)

229

Headline operating margin

21.3%

18.1%

16.2%

10.3%

18.6%

 

16.0%

 

 

Period ended 31 January 2017

John Crane£m

SmithsMedical£m

Smiths Detection£m

Smiths Interconnect£m

Flex-Tek£m

Corporatecosts£m

Total£m

Revenue

435

473

318

230

161

 

1,617

Divisional headline operating profit

90

99

54

26

30

 

299

Corporate headline operating costs

(22)

(22)

Headline operating profit/(loss)

90

99

54

26

30

(22)

277

Items excluded from headline measures (note 3)

(7)

(10)

(7)

(3)

7

(6)

(26)

Profit on disposal of businesses

4

100

 

22

 

 

126

Operating profit/(loss)

87

189

47

45

37

(28)

377

Headline operating margin

20.8%

21.0%

16.8%

11.3%

18.3%

 

17.1%

 

 

Segment assets and liabilities

Segment assets

31 January 2018

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate andnon-headline£m

Total£m

Property, plant, equipment, development projects,other intangibles and investments

83

220

101

33

33

19

489

Inventory, trade and other receivables

309

241

367

100

102

24

1,143

Segment assets

392

461

468

133

135

43

1,632

 

31 July 2017

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate andnon-headline£m

Total£m

Property, plant, equipment, development projects,other intangibles and investments

96

233

107

40

35

20

531

Inventory, trade and other receivables

337

256

389

118

104

27

1,231

Segment assets

433

489

496

158

139

47

1,762

 

 

Segment liabilities

31 January 2018

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate andnon-headline£m

Total£m

Divisional liabilities

(110)

(102)

(242)

(38)

(37)

 

(529)

Corporate and non-headline liabilities

 

 

 

 

 

(348)

(348)

Segment liabilities

(110)

(102)

(242)

(38)

(37)

(348)

(877)

 

31 July 2017

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate andnon-headline£m

Total£m

Divisional liabilities

(124)

(120)

(246)

(48)

(39)

 

(577)

Corporate and non-headline liabilities

 

 

 

 

 

(393)

(393)

Segment liabilities

(124)

(120)

(246)

(48)

(39)

(393)

(970)

 

Non-headline liabilities comprise provisions and accruals relating to non-headline items, acquisitions and disposals.

 

Reconciliation of segment assets and liabilities to statutory assets and liabilities

Assets

Liabilities

31 January2018£m

31 July2017£m

31 January2018£m

31 July2017£m

Segment assets and liabilities

1,632

1,762

(877)

(970)

Goodwill and acquired intangibles

1,728

1,820

Derivatives

97

69

(14)

(12)

Current and deferred tax

236

334

(127)

(156)

Retirement benefit assets and obligations

383

390

(146)

(166)

Cash and borrowings

591

782

(1,552)

(1,749)

Assets and liabilities of business held for sale

19

 

(4)

Statutory assets and liabilities

4,686

5,157

(2,720)

(3,053)

 

Segment capital employed

Capital employed is a non-statutory measure of invested resources. It comprises statutory net assets adjusted to add goodwill recognised directly in reserves in respect of subsidiaries acquired before 1 August 1998 of £787m (31 July 2017: £787m) and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt. See note 17 for additional details.

The 12-month rolling average capital employed by division, which Smiths use to calculate divisional return on capital employed, is set out below:

31 January 2018

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate£m

Total£m

Average total capital employed

874

1,212

1,027

385

185

8

3,691

Return on capital employed

23.4%

15.8%

10.6%

11.4%

36.4%

 

15.2%

 

31 January 2017

John Crane£m

SmithsMedical£m

SmithsDetection£m

Smiths Interconnect£m

Flex-Tek£m

Corporate£m

Total£m

Average total capital employed

908

1,246

629

562

175

(30)

3,490

Return on capital employed

21.3%

16.3%

14.7%

11.3%

32.8%

 

16.3%

 

 

Analysis of revenue

The revenue for the main product and service lines for each division is:

John Crane

Originalequipment£m

Aftermarket£m

Total£m

Revenue period ended 31 January 2018

144

284

428

Revenue period ended 31 January 2017

158

277

435

 

Smiths Medical

Infusionsystems£m

Vascularaccess£m

Vital care£m

Specialtyproducts£m

Total£m

Revenue period ended 31 January 2018

149

150

122

30

451

Revenue period ended 31 January 2017

150

154

134

35

473

 

Smiths Detection

Airtransportation£m

Ports andborders£m

Military£m

Urbansecurity£m

Total£m

Revenue period ended 31 January 2018

241

31

11

84

367

Revenue period ended 31 January 2017

140

43

45

90

318

 

Smiths Interconnect

Connectors£m

Microwave£m

Power£m

Total£m

Revenue period ended 31 January 2018

95

40

 

135

Revenue period ended 31 January 2017

83

100

47

230

 

Flex-Tek

Fluid management£m

Flexiblesolutions£m

Heatsolutions£m

Constructionproducts£m

Total£m

Revenue period ended 31 January 2018

41

31

41

55

168

Revenue period ended 31 January 2017

39

30

37

55

161

 

 

3 Non-statutory profit measures

Headline profit measures

The Group seeks to present a measure of underlying performance which is not impacted by material non-recurring items or items considered non-operational in nature. This measure of profit is described as 'headline' and is used by management to measure and monitor performance. See the disclosures on presentation of results in accounting policies for an explanation of the adjustments. The items excluded from 'headline' are referred to as 'non-headline' items.

Non-headline operating profit items

The non-headline items included in statutory operating profit are as follows:

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Restructuring programmes

(15)

Integration programmes

(12)

 

Acquisition cost provision release/(accrual)

2

(6)

Provision for Titeflex Corporation subrogation claims

11

8

8

Provision for John Crane, Inc. asbestos litigation

11

(4)

(3)

Administration costs for post-retirement benefit schemes

 

(4)

Settlement gain/(losses) on post-retirement benefits schemes

6

4

 

Amortisation of acquired intangible assets

7

(15)

(6)

Profit/(Loss) on disposal of businesses

(1)

126

Non-headline items in operating profit

(18)

100

 

Material items for the period ended 31 January 2018

Integration programmes comprise £12m in respect of the integration of Morpho Detection into the Smiths Detection business.

A provision release of £8m has been recognised by Titeflex Corporation in respect of changes to the estimated cost of future claims including those from insurance companies seeking recompense for damage allegedly caused by lightning strike. The provision release is predominantly related to a fall in the expected number of claims.

The operating charge in respect of John Crane, Inc. litigation comprises a charge of £8m in respect of an increased provision for adverse judgments and legal defence costs, £2m in respect of litigation management, defence strategy and legal fees in connection with litigation against insurers, and a credit of £6m arising from the increase in US risk free rates.

Non-headline finance costs items

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Adjustment to discounted provisions

11

(3)

(3)

Other finance income - retirement benefits

6

3

1

Non-headline items in finance costs

(2)

Non-headline (loss)/profit before taxation

(18)

98

 

Non-headline taxation items

A non-headline tax charge of £39m (31 January 2017: £23m credit) has been taken in the period. See note 5 for further details.

4 Earnings per share

Basic earnings per share are calculated by dividing the profit for the period attributable to equity shareholders of the Parent Company by the average number of ordinary shares in issue during the year.

Period ended31 January 2018£m

Period ended31 January 2017£m

Profit attributable to equity shareholders for the period

- total

103

302

Average number of shares in issue during the period

395,690,311

395,383,836

 

Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 401,246,135 (period ended 31 January 2017: 399,856,483) ordinary shares, being the average number of ordinary shares in issue during the year adjusted by the dilutive effect of employee share schemes.

A reconciliation of basic and headline earnings per share is as follows:

Period ended 31 January 2018

Period ended 31 January 2017

£m

EPS(p)

£m

EPS(p)

Profit attributable to equity shareholders of the Parent Company

103

26.0

302

76.5

Exclude:

 

 

Non-headline items and related tax (note 3)

57

14.4

 

(121)

(30.8)

Headline profit attributable to equity shareholders of the Parent Company

160

40.4

181

45.7

Statutory EPS - diluted (p)

 

25.7

 

75.6

Headline EPS - diluted (p)

 

39.9

 

45.2

 

5 Taxation

The interim tax rate of 47.5% (31 January 2017: 12.4%) is calculated by applying the estimated effective headline tax rate of 25.8% (31 January 2017: 26.5%) for the year ended 31 July 2018 to headline profit before tax and then taking into account the tax effect of non-headline items in the interim period.

A reconciliation of total and headline tax charge is as follows:

Period ended 31 January 2018

Period ended 31 January 2017

Continuingoperations£m

Tax rate

Continuingoperations£m

Tax rate

Profit before taxation

199

 

 

346

Taxation

(95)

47.5%

 

(43)

12.4%

Adjustments

 

 

 

Non-headline items excluded from profit before taxation (note 3)

(18)

 

(98)

Taxation on non-headline items and non-headline tax adjustment

(39)

 

23

Headline

Headline profit before taxation

217

 

248

Taxation on headline profit

(56)

25.8%

 

(66)

26.5%

 

The changes in the value of the net tax asset/(liability) in the period were:

Currenttax£m

Deferredtax£m

Net taxbalance£m

At 31 July 2017

17

161

178

Foreign exchange gains and losses

(2)

(6)

(8)

Credit/(charge) to income statement

(56)

6

(50)

Exceptional one-off impact of US tax reform

(18)

(27)

(45)

Debit to reserves

(4)

(4)

Tax paid

38

 

38

At 31 January 2018

(21)

130

109

 

The deferred tax charge to reserves derives from the revaluation of deferred tax related to US pension plans. The exceptional one-off impact to US tax reform is discussed in more detail below.

Developments in the Group tax position

US Tax Reform

The Tax Cuts and Jobs Act enacted on 22 December 2017 reduced the US Federal tax rate from 35% to 21% from 1 January 2018. This revised rate has been used to revalue net deferred tax assets in the United States, leading to a charge to the income statement of £27 million. In addition there is a one-time deemed repatriation tax charge of £18 million related to unremitted foreign earnings, payable over 8 years. The total of £45m for these two items is included in the table above as a non-headline tax adjustment.

 

FII GLO

Smiths Group plc is one of the companies enrolled in the FII GLO litigation against HMRC. The court actions first filed in 2003 are nearing an end and some claimants with different fact patterns have received payments. There are further relevant legal actions that could impact the Group's recoveries which amount to around £28m (after deducting the 45% withholding tax). The Group has not recognised any impact to the financial statements in the current period or the prior year, due to the uncertainty of the eventual outcome, except for the amount received in the period in respect of Foreign Income Dividends.

Claims related to the impact of the Foreign Income Dividends (FID) regime are included in the FII GLO litigation claims the Group issued in 2009. Under the final relevant ECJ decision, FID claims are now conclusively successful and the only outstanding matters that could affect restitution payments are court decisions awaited regarding the amount of interest (compound or simple) and withholding tax. Accordingly the Group made its claim in respect of FID's and received £2.1m in August 2017. This amount has been calculated using simple interest and has been paid under deduction of withholding tax.

EU Commission Investigation regarding Claims for Partial (75%) Exemption for Profits from qualifying loan relationships under Chapter 9 FA2012

In October 2017, the European Commission opened a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The Group Financing Exemption was introduced in legislation by the UK government in 2013. In common with other UK-based international companies whose arrangements were in line with current UK CFC legislation, the Group may be affected by the outcome of this investigation and is monitoring developments. If the preliminary findings of the European Commission's investigation are upheld, the estimated maximum potential liability is approximately £14 million. Based on our current assessment, no provision is being made in respect of this issue.

 

6 Post retirement benefits

The Group provides post-retirement benefits to employees in a number of countries throughout the world. The arrangements include defined benefit and defined contribution plans and, mainly in the United Kingdom (UK) and United States of America (US), post-retirement healthcare. The principal defined benefit pension plans are in the UK and in the US and these have been closed so that no future benefits are accrued.

Where any individual scheme shows a surplus under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one scheme is not available to fund the IAS 19 deficit of another scheme. The retirement benefit asset arises from the rights of the employers to recover the surplus at the end of the life of the scheme. The schemes in surplus are mature, with a duration averaged over all scheme participants of 17 years. However 35% of the liabilities of these schemes are expected to be paid after 2038.

The amounts recognised in the balance sheet were as follows:

31 January2018£m

31 July2017£m

Market value of funded plan assets

4,189

4,259

Present value of funded scheme liabilities

(3,825)

(3,905)

Unfunded pension plans

(110)

(111)

Postretirement healthcare

(17)

(19)

Net retirement benefit asset

237

224

Retirement benefit assets

383

390

Retirement benefit obligations

(146)

(166)

Net retirement benefit asset

237

224

 

 

The principal assumptions used in updating the valuations are set out below:

31 January 2018

31 July 2017

UK

US

UK

US

Rate of increase in salaries

n/a

n/a

 

n/a

n/a

Rate of increase for active deferred members

4.2%

n/a

 

4.1%

n/a

Rate of increase in pensions in payment

3.3%

n/a

 

3.2%

n/a

Rate of increase in deferred pensions

3.3%

n/a

 

3.2%

n/a

Discount rate

2.6%

3.80%

 

2.6%

3.85%

Inflation rate

3.3%

n/a

 

3.2%

n/a

Healthcare cost increases

4.7%

n/a

 

4.2%

n/a

 

The methods for setting the mortality assumptions for the UK schemes are consistent with the 31 July 2017 valuation. The US schemes have adopted the mortality improvement scale MP-2017 (31 July 2017 - MP-2016).

 

Present value of funded scheme liabilities and assets for the main UK and US schemes

31 January 2018 - £m

31 July 2017 - £m

SIPS

TIGPS

US schemes

SIPS

TIGPS

US schemes

Present value of funded scheme liabilities

- Active deferred members

(61)

(60)

(95)

 

(81)

(92)

(101)

- Deferred members

(847)

(616)

(121)

 

(891)

(625)

(160)

- Pensioners

(1,110)

(826)

(29)

 

(1,053)

(809)

(31)

Present value of funded scheme liabilities

(2,018)

(1,502)

(245)

 

(2,025)

(1,526)

(292)

Market value of scheme assets

2,227

1,675

234

 

2,238

1,703

266

Surplus/(deficit)

209

173

(11)

 

213

177

(26)

 

SIPS uses repurchase arrangements, total return swaps, inflation swaps and interest rate swaps to hedge the interest and inflation risks of the scheme liabilities. At 31 January 2018 SIPS assets were net of £790m (31 July 2017: £773m) repurchase obligations, and included £2m losses (31 July 2017: £4m gains) on interest rate swaps, £6m gains (31 July 2017: £8m gains) on inflation swaps and £1m gain (31 July 2017: £1m gain) on total return assets. The scheme was holding £3m (31 July 2017: £1m) in liquidity funds to meet potential future obligations to collateralise repurchase arrangements or swap agreements.

Contributions

Group contributions to the funded defined benefit pension plans totalled £27m (31 January 2017: £42m), this comprised regular contributions of £12m to SIPS and £2m to TIGPS, a one-off £12m contribution to US schemes and contributions to other schemes of £1m. In addition, £3m (31 January 2017: £3m) was spent on providing benefits under unfunded defined benefit pension and post-retirement healthcare plans. No additional contributions to support risk reduction programmes were made in the current period.

Contributions in the second half of the year are expected to be: £12m to SIPS; £2m to TIGPS and £1m to other plans.

The changes in the present value of the net pension balance in the period were:

Period ended31 January2018£m

Year ended31 July2017£m

At beginning of period

224

80

Exchange adjustment

4

(6)

Current service cost

(2)

(4)

Scheme administration costs

(3)

(7)

Past service cost, curtailments and settlements

5

(1)

Finance credits/(charges) - retirement benefits

3

2

Contributions by employer

30

105

Actuarial (loss)/gain

(24)

55

Net retirement benefit asset

237

224

 

Actuarial losses are entirely due to a loss of £24m on the UK schemes, principally arising from a £26m loss on the bulk annuity buy-in agreement with Canada Life, announced on 20 October 2017.

7 Intangible assets

Notes

Goodwill£m

Developmentcosts£m

Acquiredintangibles£m

Software, patents and intellectual property£m

Total£m

Cost

 

At 31 July 2017

 

1,658

330

574

206

2,768

Exchange adjustments

 

(92)

(19)

(35)

(8)

(154)

Business combinations

12

22

 

6

 

28

Additions

 

 

14

 

5

19

Disposals

 

 

 

 

(8)

(8)

Assets held for sale

 

(1)

 

(28)

 

(29)

At 31 January 2018

 

1,587

325

517

195

2,624

Amortisation

 

At 31 July 2017

 

88

180

324

161

753

Exchange adjustments

 

(5)

(11)

(18)

(5)

(39)

Charge for the period

14

15

9

38

Disposals

 

(8)

(8)

Assets held for sale

(28)

 

(28)

At 31 January 2018

 

83

183

293

157

716

Net book value at 31 January 2018

 

1,504

142

224

38

1,908

Net book value at 31 July 2017

 

1,570

150

250

45

2,015

 

 

8 Property, plant and equipment

Land andbuildings£m

Plant andmachinery£m

Fixtures,fittings,tools andequipment£m

Total£m

Cost

At 31 July 2017

204

635

209

1,048

Exchange adjustments

(10)

(33)

(9)

(52)

Additions

3

20

5

28

Disposals

(4)

(21)

(16)

(41)

Assets held for sale

(1)

(19)

(2)

(22)

At 31 January 2018

192

582

187

961

Depreciation

At 31 July 2017

107

461

165

733

Exchange adjustments

(5)

(24)

(7)

(36)

Charge for the period

4

16

7

27

Disposals

(3)

(20)

(15)

(38)

Assets held for sale

(1)

(14)

(1)

(16)

At 31 January 2018

102

419

149

670

Net book value at 31 January 2018

90

163

38

291

Net book value at 31 July 2017

97

174

44

315

 

9 Borrowings and net debt

This note sets out the calculation of net debt, an important measure in explaining our financing position. The net debt figure includes accrued interest and the fair value adjustments relating to hedge accounting.

31 January2018£m

31 July2017£m

Cash and cash equivalents

Net cash and deposits

591

782

Long-term borrowings

$250m 7.20% US$ Guaranteed notes 2019

(176)

(189)

$400m 3.625% US$ Guaranteed notes 2022

(276)

(301)

€600m 1.25% Eurobond 2023

(519)

(533)

€650m 2.00% Eurobond 2027

(559)

(574)

Bank and other loans

(1)

(1)

(1,531)

(1,598)

Short-term borrowings

Bank overdrafts

(1)

$175m 7.37% US$ Private placement 2018

(133)

Bank and other loans

(1)

(1)

Interest accrual

(20)

(16)

(21)

(151)

Borrowings

(1,552)

(1,749)

Net debt

(961)

(967)

 

On 1 November 2017, the Group refinanced the US$800m Revolving Credit Facility for a new five year period until 1 November 2022. The new facility has two one-year extension options to further extend the maturity until 2024. At 31 January 2018 this Revolving Credit Facility was undrawn.

Movements in net debt

Net cashand cash equivalents£m

Othershort-term borrowing£m

Long-term borrowings£m

Net debt£m

At 31 July 2017

781

(150)

(1,598)

(967)

Foreign exchange gains and losses

(37)

1

60

24

Net cash outflow

(153)

(153)

Repayment and drawdown of borrowings

132

132

Capitalisation, interest accruals and unwind of capitalisation of fees

1

(1)

Fair value movement from interest rate hedging

(5)

8

3

At 31 January 2018

591

(21)

(1,531)

(961)

 

 

10 Fair value of financial instruments

Carrying value31 January 2018£m

Fair value31 January 2018£m

Carrying value31 July 2017£m

Fair value31 July 2017£m

Level 2 valuations

Financial assets - other investments

13

13

11

11

Financial derivatives - assets

97

97

69

69

Borrowings

(1,552)

(1,581)

(1,749)

(1,792)

Financial derivatives - liabilities

(14)

(14)

(12)

(12)

Level 3 valuations

 

 

Financial assets - other investments

5

5

10

10

 

Derivatives are valued at the net present value of the future cash-flows calculated using market exchange rates and yield curves at the balance sheet date. Borrowings are valued at the net present value of the future cash-flows using credit spreads and yield curves derived from market data.

Cash, trade receivables and trade payables are excluded from this table because carrying value is a reasonable approximation to fair value for all these assets and liabilities.

 

11 Provisions and contingent liabilities

Trading

Non-headline and legacy

Total

£m

John Crane, Inc.litigation£m

TiteflexCorporationlitigation£m

Other£m

£m

Current liabilities

25

 

30

21

9

 

85

Non-current liabilities

6

 

207

63

7

 

283

At 31 July 2017

31

 

237

84

16

 

368

Exchange adjustments

(2)

 

(16)

(5)

 

 

(23)

Provision charged

9

 

2

 

6

 

17

Provision released

(5)

 

 

(8)

(2)

 

(15)

Unwind of provision discount

2

1

3

Utilisation

(6)

 

(11)

(4)

(3)

 

(24)

At 31 January 2018

27

 

214

68

17

 

326

Current liabilities

25

 

31

15

10

 

81

Non-current liabilities

2

 

183

53

7

 

245

At 31 January 2018

27

 

214

68

17

 

326

 

The John Crane, Inc. and Titeflex Corporation litigation provisions are the only provisions which are discounted.

Warranty provision and product liability

At 31 January 2018 there are warranty and product liability provisions of £24m (31 July 2017: £28m). Warranties over the Group's products typically cover periods of between one and three years. Provision is made for the likely cost of after-sales support based on the recent past experience of individual businesses.

Commercial disputes and litigation in respect of ongoing business activities

The Group has on occasion been required to take legal action to protect its intellectual property and other rights against infringement. It has also had to defend itself against proceedings brought by other parties, including product liability and insurance subrogation claims. Provision is made for any expected costs and liabilities in relation to these proceedings where appropriate, though there can be no guarantee that such provisions (which may be subject to potentially material revision from time to time) will accurately predict the actual costs and liabilities that may be incurred.

Contingent liabilities

In the ordinary course of its business, the Group is subject to commercial disputes and litigation such as government price audits, product liability claims, employee disputes and other kinds of lawsuits, and faces different types of legal issues in different jurisdictions. The high level of activity in the US, for example, exposes the Group to the likelihood of various types of litigation commonplace in that country, such as 'mass tort' and 'class action' litigation, legal challenges to the scope and validity of patents, and product liability and insurance subrogation claims. These types of proceedings (or the threat of them) are also used to create pressure to encourage negotiated settlement of disputes. Any claim brought against the Group (with or without merit), could be costly to defend. These matters are inherently difficult to quantify. In appropriate cases a provision is recognised based on best estimates and management judgement but there can be no guarantee that these provisions (which may be subject to potentially material revision from time to time) will result in an accurate prediction of the actual costs and liabilities that may be incurred. There are also contingent liabilities in respect of litigation for which no provisions are made.

The Group operates in some markets where the risk of unethical or corrupt behaviour is material and has procedures, including an employee 'Ethics Alertline', to help it identify potential issues. Such procedures will, from time to time, give rise to internal investigations, sometimes conducted with external support, to ensure that the Group properly understands risks and concerns and can take steps both to manage immediate issues and to improve its practices and procedures for the future. The Group also co-operates with relevant authorities in investigating business conduct issues whenever requested to. The Group is not aware of any issues which are expected to generate material financial exposures.

 

Non-headline and legacy

John Crane, Inc.

John Crane, Inc. ("JCI") is one of many co-defendants in numerous lawsuits pending in the United States in which plaintiffs are claiming damages arising from alleged exposure to, or use of, products previously manufactured which contained asbestos. The JCI products generally referred to in these cases consist of industrial sealing product, primarily packing and gaskets. The asbestos was encapsulated within these products in such a manner that causes JCI to believe, based on tests conducted on its behalf, that the products were safe. JCI ceased manufacturing products containing asbestos in 1985.

The table below summarises the JCI claims experience over the last 38 years since the start of this litigation:

 

 

 

 

31 January 2018

31 July 2017

JCI claims experience

 

 

 

 

 

Claims against JCI that have been dismissed

 

 

 

275,000

273,000

Claims JCI is currently a defendant in

 

 

 

50,000

50,000

Cumulative final judgments, after appeals, against JCI since 1979

 

 

 

140

138

Cumulative value of awards ($'m) since 1979

 

 

 

164

160

 

John Crane, Inc. litigation insurance recoveries

While JCI has excess liability insurance, the availability of such insurance and scope of the cover are currently the subject of litigation in the United States. Pending the outcome of that litigation, JCI has met defence costs directly. The calculation of the provision does not take account of any potential recoveries from insurers.

John Crane, Inc. litigation provision

The provision is based on past history and published tables of asbestos incidence projections and is determined using asbestos valuation experts, Bates White LLC. The assumptions made in assessing the appropriate level of provision include: the period over which the expenditure can be reliably estimated; the future trend of legal costs; the rate of future claims filed; the rate of successful resolution of claims; and the average amount of judgments awarded.

The JCI asbestos litigation provision has developed in the period as follows:

 

Period ended31 January 2018£m

Year ended31 July 2017£m

John Crane, Inc. litigation provision

 

 

Gross provision

238

260

Discount

(24)

(23)

Discounted provision

214

237

Operating profit charge/(credit)

 

 

Increased provision for adverse judgments and legal defence costs

8

17

Decreased provision for change in US risk free rates

(6)

(13)

Litigation management expense - legal fees in connection with litigation against insurers and defence strategy

2

11

Recoveries from insurers

 

(6)

Operating profit charge

4

9

Cash-flow

 

 

Provision utilisation

(11)

(24)

John Crane, Inc. litigation spend

13

32

 

The reduction to the provision in the period is principally due to foreign exchange.

John Crane, Inc. litigation provision sensitivities

The provision may be subject to potentially material revision from time to time if new information becomes available as a result of future events. There can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of related litigation.

Statistical reliability of projections over the ten year time horizon

In order to evaluate the statistical reliability of the projections, a population of outcomes is modelled using randomised verdict outcomes. This generated a distribution of outcomes with future spend at the 5th percentile of £213m and future spend at the 95th percentile of £275m (31 July 2017: £231m and £304m, respectively). Statistical analysis of the distribution of these outcomes indicates that there is a 50% probability that the total future spend will fall between £223m and £249m (31 July 2017: between £243m and £272m), compared with the gross provision value of £238m (31 July 2017: £260m).

Sensitivity of the projections to changes in the time horizon used

If the asbestos litigation environment becomes more volatile and uncertain, for example if defendants are successful in legal cases against plaintiff law firms and this impacts the nature of claims filed, the time horizon over which the provision can be calculated may reduce. Conversely, if the environment became more stable, or JCI changed approach and committed to long term settlement arrangements, the time period covered by the provision might be extended.

The projections use a 10 year time horizon. Reducing the time horizon by one year would reduce the provision by £14m (31 July 2017: £17m) and reducing it by five years would reduce the provision by £86m (31 July 2017: £98m).

We consider, after obtaining advice from Bates White LLC, that to forecast beyond ten years requires that the litigation environment remains largely unchanged with respect to the historical experience used for estimating future asbestos expenditures. Historically, the asbestos litigation environment has undergone significant changes more often than every ten years. If one assumed that the asbestos litigation environment would remain unchanged for longer and extended the time horizon by one year it would increase the provision by £12m (31 July 2017: £14m) and extending it by five years would increase the provision by £50m (31 July 2017: £58m). However, there are also reasonable scenarios that, given certain recent events in the US asbestos litigation environment, would result in no additional asbestos litigation for JCI beyond ten years. At this time, how the asbestos litigation environment may evolve beyond 10 years is not reasonably estimable.

John Crane, Inc. contingent liabilities

Provision has been made for future defence costs and the cost of adverse judgments expected to occur. JCI's claims experience is significantly impacted by other factors which influence the US litigation environment. These can include: changing approaches on the part of the plaintiffs' bar; changing attitudes amongst the judiciary at both trial and appellate levels; and legislative and procedural changes in both the state and federal court systems. As a result, whilst the Group anticipates that asbestos litigation will continue beyond the period covered by the provision, the uncertainty surrounding the US litigation environment beyond this point is such that the costs cannot be reliably estimated.

Although the methodology used to calculate the JCI litigation provision can in theory be applied to show claims and costs for longer periods, the Directors consider, based on advice from Bates White LLC, that the level of uncertainty regarding the factors used in estimating future costs is too great to provide for reasonable estimation of the numbers of future claims, the nature of such claims or the cost to resolve them for years beyond the 10 year time horizon.

Titeflex Corporation

In recent years Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of claims from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping product. It has also received a number of product liability claims regarding this product, some in the form of purported class actions. Titeflex Corporation believes that its products are a safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and national codes; however some claims have been settled on an individual basis without admission of liability. Equivalent third-party products in the US marketplace face similar challenges.

Titeflex Corporation litigation provision

The continuing progress of claims and the pattern of settlement, together with the recent market place activity, provide sufficient evidence to recognise a liability in the accounts. Therefore provision has been made for the costs which the Group is expected to incur in respect of future claims to the extent that such costs can be reliably estimated. Titeflex Corporation sells flexible gas piping with extensive installation and safety guidance (revised in 2008) designed to assure the safety of the product and minimise the risk of damage associated with lightning strikes.

The assumptions made in assessing the appropriate level of provision, which are based on past experience, include:

· the period over which expenditure can be reliably estimated;

· the number of future settlements;

· the average amount of settlements;

· and the impact of statutes of repose and safe installation initiatives on the expected number of future claims.

The provision of £68m (31 July 2017: £84m) is a discounted pre-tax provision using discount rates, being the risk-free rate on US debt instruments for the appropriate period. The deferred tax asset related to this provision is shown within the deferred tax balance.

31 January2018£m

31 July2017£m

Gross provision

112

136

Discount

(44)

(52)

Discounted pre-tax provision

68

84

Deferred tax

(17)

(33)

Discounted post-tax provision

51

51

 

Titeflex Corporation litigation provision sensitivities

The significant uncertainty associated with the future level of claims and of the costs arising out of related litigation mean that there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred. Therefore the provision may be subject to potentially material revision from time to time, if new information becomes available as a result of future events.

The projections incorporate a long-term assumption regarding the impact of safe installation initiatives on the level of future claims. If the assumed annual benefit of bonding and grounding initiatives were 0.5% higher, the provision would be £4m (31 July 2017: £5m) lower, and if the benefit were 0.5% lower, the provision would increase by £4m (31 July 2017: £5m).

Other non-headline and legacy

Legacy provisions comprise provisions relating to former business activities and properties no longer used by the Group. Non-headline provisions comprise all provisions which were disclosed as non-headline items when they were charged to the income statement.

These provisions cover non-headline reorganisation, vacant properties, disposal indemnities and litigation in respect of old products and discontinued business activities.

 

 

12 Acquisitions

On 1 November 2017, Tutco LLC, part of Flex-Tek's Heat Solutions business, completed the acquisition of the heating element division of Osram. This acquisition has been rebranded as Tutco Sureheat.

The intangible assets recognised on this acquisition comprise technology and customer relationships. Goodwill represents synergies and the value of the expertise in the assembled workforce. The goodwill recognised is expected to be deductible for tax purposes.

From the date of acquisition to 31 January 2018, the acquired business contributed £1m to revenue, with less than a million to profit before taxation. If the Group had acquired this business at the beginning of the financial period, the acquisition would have contributed £3m to revenue with less than a million to profit before taxation.

The provisional balance sheet at the date of acquisition is:

 

 

Tutco Sureheat

 

 

£m

Non-current assets

 

 

- acquired intangible assets

 

6

Current assets

 

 

- inventory

 

1

- trade and other receivables

 

1

Net assets acquired

 

8

Goodwill on current year acquisitions

 

7

Total consideration

 

15

Cash paid during the year

 

15

Total consideration

 

15

 

Acquisitions in previous years

The Group acquired the Morpho Detection business from Safran S. A. on 6 April 2017. Since the acquisition the Group has undertaken a thorough review of the business and has adjusted the fair value of assets and liabilities on the acquisition balance sheet, resulting in a £15m increase in the Goodwill associated to this acquisition in the half year to 31 January 2018.

 

13 Businesses held for sale

At 31 January 2018 the assets and liabilities of the John Crane Bearings business were disclosed as held for sale. No impairment loss was recognised.

 

 

 

John Crane Bearings£m

Non-current assets

 

 

 

Tangible assets

 

 

6

Intangible assets

 

 

1

7

Current assets

 

Inventories

7

Trade and other receivables

 

 

5

Total assets of business held for sale

 

 

19

Current liabilities

 

 

 

Trade and other payables

 

 

(4)

Total liabilities of business held for sale

 

 

(4)

 

 

14 Dividends

The following dividends were declared and paid in the period:

Period ended31 January 2018£m

Period ended31 January 2017£m

Ordinary final dividend of 29.70p for 2017 (2016: 28.75p) paid 17 November 2017

117

114

 

 

An interim dividend of 13.80 pence per share was declared by the Board on 22 March 2018 and will be paid to shareholders on 23 April 2018. This dividend has not been included as a liability in these accounts and is payable to all shareholders on the register of Members at close of business on 6 April 2018.

15 Cash-flow from operating activities

Period ended 31 January 2018

Period ended 31 January 2017

Headline£m

Non-headline(note 3)£m

Total£m

Headline£m

Non-headline(note 3)£m

Total£m

Operating profit

247

(18)

229

 

277

100

377

Amortisation of intangible assets

21

17

38

 

23

6

29

Depreciation of property, plant and equipment

27

 

27

 

29

 

29

Loss on disposal of property, plant and equipment

1

 

1

 

4

 

4

Profit on disposal of business

 

 

 

(126)

(126)

Profit on disposal of investment

 

(1)

(1)

 

 

Share-based payment expense

5

 

5

 

8

 

8

Retirement benefits

2

(32)

(30)

 

1

(39)

(38)

(Increase)/decrease in inventories

(19)

1

(18)

 

(2)

 

(2)

Decrease/(increase) in trade and other receivables

33

33

 

62

5

67

(Decrease)/increase in trade and other payables

(30)

(1)

(31)

 

(28)

 

(28)

(Decrease)/increase in provisions

(2)

(20)

(22)

 

(5)

(31)

(36)

Cash generated from operations

285

(54)

231

 

369

(85)

284

Interest paid

(34)

(5)

(39)

 

(23)

 

(23)

Interest received

3

2

5

 

1

9

10

Tax paid

(38)

 

(38)

 

(46)

 

(46)

Net cash inflow from operating activities

216

(57)

159

 

301

(76)

225

 

The split of tax payments between headline and non-headline only considers the nature of payments made. No adjustment has been made for reductions in tax payments required as a result of tax relief received on non-headline items.

Headline cash measures

The Group measure of headline operating cash excludes interest and tax and includes capital expenditure supporting organic growth.

Period ended 31 January 2018

Period ended 31 January 2017

Headline£m

Non-headline£m

Total£m

Headline£m

Non-headline£m

Total£m

Net cash inflow from operating activities

216

(57)

159

 

301

(76)

225

Include:

Expenditure on capitalised development, other intangible assets and property, plant and equipment

(46)

 

(46)

 

(51)

 

(51)

Disposals of property, plant and equipment

2

2

 

2

 

2

Investment in financial assets relating to operating activities

(2)

(2)

 

 

 

Free cash-flow

170

(57)

113

 

252

(76)

176

Exclude:

Investment in financial assets relating to operating activities

2

 

2

 

 

 

 

Interest paid

34

5

39

 

23

 

23

Interest received

(3)

(2)

(5)

 

(1)

(9)

(10)

Tax paid

38

 

38

 

46

 

46

Headline operating cash-flow

241

(54)

187

 

320

(85)

235

 

 

Reconciliation of free cash-flow to total movement in cash and cash-equivalents

Period ended31 January 2018£m

Period ended31 January 2017£m

Free cash-flow

113

176

Acquisition of businesses

(15)

Disposal of businesses

320

Disposal of investments

6

 

Net cash-flow used in financing activities

(257)

(123)

Net (decrease)/increase in cash and cash equivalents

(153)

373

 

16 Related party transactions

The related party transactions in the period were consistent with the nature and size of transactions disclosed in the Annual Report for the year ended 31 July 2017.

17 Non-statutory capital and credit metrics

In addition to the non-statutory profit measures explained in note 3, the Group calculates credit metrics and return on capital employed incorporating the same adjustments. See the disclosures on presentation of results in accounting policies for an explanation of the adjustments.

Return on capital employed (ROCE)

The Group's ROCE is calculated over a rolling 12-month period and is the percentage which headline operating profit comprises of monthly average capital employed.

See note 2 for the divisional headline operating profit and average divisional capital employed used to calculate divisional ROCE.

Capital employed

Capital employed is a non-statutory measure of invested resources. It comprises statutory net assets adjusted to add goodwill recognised directly in reserves in respect of subsidiaries acquired before 1 August 1998 of £787m (31 January 2017: £801m) and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt.

Notes

31 January2018£m

31 January2017£m

Net assets

1,966

1,832

Adjust for:

Goodwill recognised directly in reserves

787

801

Post-retirement benefit assets and liabilities

6

(237)

(51)

Tax related to post retirement benefit assets and liabilities

30

(18)

John Crane, Inc. litigation provisions and related tax

168

168

Titeflex Corporation litigation provisions and related tax

51

59

Net debt

9

961

635

Capital employed

3,726

3,426

 

Return on capital employed

Notes

31 January2018£m

31 January2017£m

Headline operating profit for previous twelve months

560

570

Average capital employed

2

3,691

3,490

ROCE

15.2%

16.3%

 

Credit metrics

Smiths Group monitors the ratio of net debt to Headline EBITDA as part of its management of credit ratings. This ratio is calculated as follows.

Headline earnings before interest, tax, depreciation and amortisation (Headline EBITDA)

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Headline operating profit

2

247

277

Exclude:

- depreciation

8

27

29

- amortisation of development costs

7

14

14

- amortisation of software, patents and intellectual property

7

9

9

Headline EBITDA

297

329

 

Annualised headline EBITDA

Notes

Period ended31 January 2018£m

Period ended31 January 2017£m

Headline EBITDA for the period

297

329

Add:

- headline EBITDA for the previous year

690

606

Exclude:

- headline EBITDA for the first six months

(329)

(262)

Annualised headline EBITDA

658

673

 

Ratio of net debt to annualised headline EBITDA

Notes

31 January2018£m

31 January2017£m

Annualised headline EBITDA

658

673

Net debt

9

961

635

Ratio of net debt to headline EBITDA

1.5

0.9

 

 

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR FKBDKFBKDFNB
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