Smiths Group Regulatory News (SMIN)

SMITHS GROUP PLC - HALF YEAR RESULTS FOR 6 MONTHS ENDED 31 JANUARY 2022

Pioneers of progress - improving our world through smarter engineering

Accelerated growth, executing against our strategy

HIGHLIGHTS

· Good growth delivered in H1

o Organic revenue +3.4%2

o Strong demand across most end markets with good order growth

· Strong profit conversion and earnings growth

o Underlying operating profit up +11.1%3 and underlying operating profit margin +110bps3

o Successfully managed cost inflation

o Underlying EPS +13.8%3,5 for continuing operations

· Good cash generation and strong returns

o 93%4 operating cash conversion despite the challenging supply chain environment

o ROCE7 up +370bps reflecting higher profitability and working capital discipline

· More focused portfolio following earlier completion of Smiths Medical sale

o £1bn profit on disposal with further value to come from ICU shareholding and potential earnout

o Stronger balance sheet enabling continued investment for growth, the early repayment of a $400m bond and capital returns

o Over 25% of the £742m share buyback already completed

· Demonstrating meaningful progress against our strategic priorities and targets

o Accelerated organic growth

o Advancing the new phase of the Smiths Excellence System, improving speed and efficiency

o Heightened focus on sustainability and maximising accompanying growth opportunities

OUTLOOK

· Strong demand in most customer end markets; but expect more challenging Aviation OE market in the near-term

· Clear strategy with improving execution

· Continued good operating leverage

· Further new product launches on schedule

· Geopolitical and macroeconomic environment creating uncertainty; navigating supply chain challenges and increasing inflation

· Maintaining full year guidance of 3% organic revenue growth

Paul Keel, Group Chief Executive, commented:

"We are shocked and appalled by the tragic events in Ukraine. We join with the broader international community in calling for peace. In response to the conflict, we have suspended sales into Russia. Our highest priority is ensuring the safety, security and wellbeing of our colleagues in the region; all are safe and continue to receive full support from Smiths. Our business in the region represented less than 1% of Smiths' revenues in FY2021.

Our performance in the first half demonstrates the meaningful progress we are making against our strategy. We accelerated Smiths' organic revenue growth to +3.4% and converted that into even stronger profit and earnings growth, despite supply chain challenges and cost inflation.

Improvement in the first half centred on the levers we are pulling to accelerate our growth and consistently deliver results, underpinned by our focus on continuous operational excellence and investment in our people and culture.

An important milestone for us was completing the sale of Smiths Medical, ahead of schedule. This has enabled us to simplify our business, focus on our higher-performing, more strategically-aligned industrial technology core, whilst investing for growth, deleveraging and returning surplus capital to our shareholders.

We're encouraged by our good progress and I thank my 14,000 colleagues around the world who make it happen. Notwithstanding the significant uncertainty in the geopolitical and macroeconomic environment, we maintain the 3% organic revenue growth guidance we previously provided for the full year. We are making good headway towards the medium-term targets set at our Capital Markets Event last year, as we move with greater pace to realise our significant potential."

Statutory reporting

Definitions

Presentation

The webcast management presentation and Q&A will begin at 08.30 (UK time) today at: https://smiths.com/investors/results-reports-and-presentations 

A recording will be available from 13.00 (UK time).

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

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 document contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

OUR PURPOSE

We are pioneers of progress - improving our world through smarter engineering. Smarter engineering means helping to solve the toughest problems, for our customers, our communities and ourselves. We help to create a safer, more efficient and better-connected world. At the heart of all that we achieved during the first half of FY2022, and all we will continue to achieve moving forward, is our purpose.

OUR PRIORITIES AND TARGETS

Smiths is intrinsically strong with world-class engineering, leading positions in critical markets, distinctive global capabilities and underpinned by a powerful financial framework. At our Capital Markets Event in November 2021, we set out how Smiths will deliver performance in line with our significant capabilities and potential by focusing on three priorities:

1) growing faster

2) executing better and

3) doing more to inspire and empower our people.

This is our focused plan, the Smiths Value Engine, through which we will deliver the medium-term targets that we have set:

These targets are underpinned by Smiths' operational KPIs and environmental targets, including a commitment to Net Zero emissions from operations by 2040.

H1 2022 BUSINESS PERFORMANCE

The commentary below refers to Smiths Group performance excluding Smiths Medical, which was accounted for as 'discontinued operations' before the sale completed on 6 January 2022.

In H1 we made good progress against our focused plan. We are growing faster, with organic revenue up +3.4%; executing better, with operating profit margins up +110bps; and doing more to inspire and empower our people; all whilst moving swiftly to build on our strong foundation in ESG.

GROWTH

Growth is our biggest upside to value creation, and we demonstrated encouraging progress in H1.

In H1, we delivered organic revenue growth of +3.4% (+£38m). Growth remained strong in Flex-Tek (+10.0%) and Smiths Interconnect (+12.9%) and we delivered acceleration in John Crane (+5.1% vs (10.4)% in H1 2021). As expected, Smiths Detection contracted in the period((7.2)%), reflecting the challenging Aviation OE market.

Revenue grew +3.7% on a reported basis, to £1,192m (H1 2021: £1,150m). This included £(38)m of adverse foreign exchange translation, and +£42m from the acquisition of Royal Metal Products LLC ("Royal Metal") in February 2021.

Growth acceleration is being driven by four actionable levers, the first being strong execution to maximise underlying market expansion that we see across most of our portfolio.

Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace.

Smiths' organic revenue growth in our largest end market, General Industrial (40% of Group revenue), was +5.7% in H1. This was driven by original equipment ("OE") and aftermarket ("AM") growth for John Crane in segments like chemical processing, pulp & paper, and mining. Demand for Flex-Tek's construction products and Smiths Interconnect's semiconductor test solutions remains strong. Smiths' organic revenue growth in the Safety & Security market was down (3.5)%, reflecting the performance from Smiths Detection and growth from Smiths Interconnect's defence related products. We grew +7.5% in Energy markets as demand continues to ramp quickly. Our fastest growth in the first half of +16.7% came in Aerospace, as accelerating aircraft builds drove strong demand for Flex-Tek and Smiths Interconnect's aerospace solutions. Our strong market positions, coupled with the balanced market exposure we have across our portfolio are distinctive long-term advantages for Smiths.

Our second lever for faster growth is improved new product development and commercialisation. We are focused on bringing our innovations to market more quickly and commercialising them more effectively. We launched nine high-impact new products in H1. One example is our space qualified connectors, which enable high-speed, reliable data processing for communication satellites and GPS navigation systems. Another example is a new seal for demanding pipelines that protects the environment from harmful leaks.

In support of our growing new product pipeline, we invested £52m in R&D in the first half, an increase of 8% over H1 2021. Roughly 90% of this recorded in the income statement, with the balance being capitalised. In addition to growing a new product pipeline, we are seeing increased return on investment. The Vitality Index7, which measures the percentage of total revenue derived from products launched in the last five years, was 28.6% for the period. This measure has been redefined to cover a five-year period to better reflect the launch profiles of our products.

Investment in capex of £(32)m (H1 2021: £(29)m) remained stable and represents 1.3x depreciation and amortisation (H1 2021: 1.2x) as we continue to invest for growth.

Our third growth lever is building out priority adjacencies. Each of our four businesses has well-scoped plans to grow beyond their strong core market positions. In H1 we launched John Crane SENSE® Turbo, a sensor enabled dry gas seal. This ground-breaking product is an extension of the John Crane SENSE® platform, which uses sensors and machine learning to monitor networks, helping customers prevent leaks, reduce downtime, and meet their environmental commitments. In Smiths Detection, we launched iCMORE Currency, an extension of our automated detection algorithm. The iCMORE software can automatically find hazards or illicit goods within inspected cargo, baggage or palleted goods, and is now able to detect multiple currencies, supporting the fight against global money laundering.

Our fourth growth lever is using disciplined M&A to augment our organic growth focus. Royal Metal, which we acquired in February 2021 for $107m is a good example. During H1, the acquisition contributed £42m of revenue and £11m of operating profit. Since acquisition, the business has grown at an annualised rate of +45%, a sharp acceleration versus prior ownership. This strong growth reflects the benefits of complementary HVAC portfolios, synergies in distribution, and positive pricing. We have converted accelerated top line growth into even stronger operating profit expansion, up +109% on an annualised basis, driven by improved operational efficiencies as well as raw material inflation pass through. We are currently exploring a number of other M&A opportunities across the Group.

In January, we successfully completed the sale of Smiths Medical to ICU Medical, Inc. ("ICU"), several months earlier than expected. This was our largest portfolio move in over a decade and positions the Group even more strongly to access the growth available in our industrial technology core. The sale generated a profit on disposal of £1.0bn, with immediate net cash proceeds of £1.35bn and further value to come from a potential $0.1bn earnout and our stake in ICU, which is recognised as a £0.4bn asset on the balance sheet. Net cash stood at £262m at the end of January 2022.

In light of our strong balance sheet and cashflows, we initiated a £742m share buyback in advance of the transaction completion. As at 24 March 2022, we had completed over 25% of the programme. At the current run-rate and share price, the average shares in issue for FY2022 would fall from 396m to 387m and we would complete the programme in early calendar 2023, with ~350m shares remaining in issue (a 12% reduction). For more information on the divestment, please see note 17 of the financial statements.

EXECUTION

Improved execution is our second key priority.

In H1, the Group delivered strong profit conversion, with headline operating profit up +£18m or +11.1% on an underlying basis. Headline operating profit increased +13.9% on a reported basis, to £189m (H1 2021: £166m). This included +£14m from improved volumes, +£1m from successful management of price and inflation, +£8m benefit from the Group's strategic restructuring programme, +£11m from acquisitions and +£1m benefit of no further restructuring charges, all of which more than offset a £(7)m impact from adverse foreign exchange and £(5)m of reinvestment in growth. Headline operating profit margin increased +150bps on a reported basis.

The £(32)m difference between headline operating profit of £189m and statutory operating profit of £157m is non-headline items as defined in note 3 of the financial statements. The largest constituents relate to amortisation of acquired intangible assets, pension equalisation, asbestos litigation in John Crane, Inc and subrogation claims in Titeflex Corporation. Statutory operating profit of £157m was £14m higher than last year (H1 2021: £143m), reflecting higher headline profit partially offset by higher non-headline charges.

We have made good progress on advancing the next phase of the Smiths Excellence System, "SES 2.0". SES 2.0 represents a step change in pace, culture and approach to operational excellence. It builds on the foundations of the Smiths Excellence System that was launched in 2018 and advances it from operational excellence theory to results focused execution. In support of this advancement, we have put in place resourcing across all divisions, rolled out additional training and tools, and established delivery targets aligned to our external commitments. We are moving faster, executing better, and doing even more to inspire and empower our people.

PEOPLE

Our primary focus is always keeping our colleagues safe and well. We have a strong and robust safety culture and strive for a zero-harm workplace, with safety considerations fully integrated into all of our activities. Our Recordable Incident Rate has been at or below 0.41 for the previous five years, roughly 50% better than US industry averages for the top quartile of similar manufacturers.

In recent weeks our particular focus has been on ensuring the safety, security and wellbeing of our colleagues in the Russia/Ukraine region. We remain in regular contact with this group and continue to pay salaries and benefits. In response to the tragic events, we have stopped all sales into Russia. Smiths has also made a donation to the Red Cross to support the vital work they are doing for the people of Ukraine, and we have implemented a donation matching scheme for our colleagues who also wish to contribute.

Leveraging the breadth and depth of talent across the Group is a competitive differentiator for Smiths and we actively promote the cross-pollination of talent between the divisions and central functions. 18% of appointments made during the first half were internal candidates and over 20 appointments were cross-business moves, demonstrating how colleagues build careers at Smiths and how skills are transferred across the Group.

In support of our focus on diversity and inclusion, we completed diversity and inclusion workshops with over 800 colleagues in the last 6 months, in 11 languages across 21 countries, and we established an extended leadership team comprised of the top 200 leaders; 33% of this group is female.

OUR ESG APPROACH

Sustainability is central to each of our priorities.

We are helping our customers meet their environmental targets by developing products and services targeted at climate risk, energy transition and other environmental needs. For example, John Crane's long experience of reducing leaks enables it to play a leading role in customer efficiency including decarbonisation through its methane reduction initiative. Flex-Tek is developing new high temperature heaters to support a significant reduction of CO2 emissions generated in the production of steel. We are also focused on making our products more sustainable through attention to raw materials, supply chain, durability, repairability, circularity and end-of-life outcomes.

We continue proactively to manage reductions in the environmental impact of our operations and manufacturing processes. We first implemented environmental targets in 2007. Since then, we have reduced greenhouse gas ("GHG") emissions in our operations by 60%, water usage by 53% and non-recyclable waste by 63%. Around 60% of the electricity currently used in our operations now comes from renewable sources, and we are currently assessing a promising list of locations for onsite renewable energy installation.

Building on this strong ESG foundation, we have re-energised our focus on sustainability to both multiply our sustainability influence and maximise the accompanying growth opportunities.

During the period, we established a Science, Sustainability & Excellence Committee of the Board, chaired by Dame Ann Dowling, to provide guidance and supervision of our sustainability strategy. In addition, we now have a dedicated Chief Sustainability Officer in place who is driving our sustainability strategy and targets through the business. To support the delivery of our sustainability strategy, targets and time horizons, executive compensation is now linked to our sustainability targets, with an ESG metric (GHG reductions) included in our long-term incentive programme.

Alongside all of this, we have set and communicated 2024 environmental goals, an important step to support the delivery of our commitment to Net Zero GHG Emissions from operations by 2040. We have a clear roadmap for how we will achieve this (as published on our website). It details the path we are taking to achieve Net Zero Scope 1 and 2 emissions from operations by 2040 and, furthermore, our ambition to achieve Net Zero Scope 1, 2 and 3 emissions by 2050. In H1, we have modelled and mapped our approach, signing on to the Science Based Targets Initiative and the UN Race to Zero pledge.

OTHER FINANCIAL MATTERS

Finance income/(costs)

Headline finance costs of £(19)m (H1 2021: £(21)m) were £2m lower than last year due to lower swap interest rates. Statutory finance costs were £3m income (H1 2021: £(59)m), mainly due to a £22m foreign exchange gain on an intercompany loan with Smiths Medical (H1 2021: £(38)m); the matching credit in discontinued operations nets out to zero in total Group earnings.

Taxation

The headline tax charge for continuing operations for H1 of £48m (H1 2021: £41m) represents an effective rate of 28% (FY2021: 29%).

Non-headline taxation items of £4m relate to amortisation of acquisition related intangible assets, legacy pension scheme arrangements, litigation provisions and non-headline finance items. The statutory effective tax rate was 28% (FY2021: 35%). Please refer to notes 3 and 5 of the financial statements for further details.

Profit after tax and EPS5

Headline profit after tax increased by +17.3% on a reported basis. Headline basic EPS was up +13.8% on an underlying basis and +17.7% on a reported basis, driven by the strong operational performance.

Discontinued operations - Smiths Medical

On 6 January 2022, the Group completed the sale of Smiths Medical to ICU Medical, Inc. ("ICU Medical") at an enterprise value of $2.7bn and an equity value of $2.4bn after adjustments for debt, liabilities and working capital.

For the 5 months that Smiths Medical remained in the Group, it delivered headline profit after tax of £49m.

The difference between statutory and headline profit after tax is £958m, which includes £1,021m gain on disposal, £(33)m of Medfusion regulatory remediation costs, £(14)m from the impairment of investments, £(22)m of foreign exchange losses on the intercompany loan with Smiths Group (continuing operations), and +£6m of tax credit on these non-headline items. Please refer to notes 3 and 17 of the financial statements for further details.

Total Group6 profit after tax and EPS

Statutory profit after tax for the total Group increased by +770.5% to £1,123m(H1 2021: £129m) which included the profit on sale of Smiths Medical. Statutory basic EPS was up +778.9% to 283.9p (H1 2021: 32.3p).

Cash-flow

Headline operating cash-flow5,7 was £167m (H1 2021: £254m) with operating cash conversion4 of 93% (H1 2021: 158%); a good result in the current challenging supply chain environment.

Free cash-flow5 was £91m (H1 2021: £163m) a decrease of £72m, reflecting the lower operating cash performance against a very strong performance in H1 2021. Free cash-flow as a percentage of operating profit was 48% (H1 2021: 98%). This metric has now been added as a key performance measure to our long-term incentive programmes, to ensure closer alignment with shareholder interests.

Statutory net cash inflow from operating activities for the total Group6 was £182m (H1 2021: £262m). See note 15 to the financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow.  

Debt

Net cash7 at 31 January 2022 was £262m (FY2021: £(1,018)m6) as a result of the proceeds received from the sale of Smiths Medical. Headline EBITDA7 for the 12 months to 31 January 2022 excluding restructuring costs for continuing operations was £500m.

Gross debt7 was £1,485m (FY2021: £1,546m). There are no financial covenants associated with this debt and the weighted average maturity was 2.4 years. On 17 February 2022, we redeemed in full the $400m bond that was due to mature in October 2022. The next maturity is due in April 2023. Cash balances increased to £1,710m (FY2021: £405m).

An $800m (c.£597m at the period-end exchange rate) revolving credit facility ("RCF") remains undrawn and matures in November 2024. The only financial covenant relates to interest cover, under which EBITDA must be greater than or equal to 3 times net interest. Taking cash and the RCF together, total liquidity was over £2bn at the end of the period.

High operating cash conversion and a strong balance sheet are the foundations of our financial framework, ensuring we are well positioned to deliver sustainable, long-term shareholder value.

Pensions

The net accounting pension surplus increased to £435m (FY2021: £413m).

Both main UK schemes (SIPS and TIGPS) are estimated to be in surplus on the Technical Provisions funding basis. Given the strength of the funding positions, no cash contributions are currently being made to these schemes. The Group and the UK Trustees continue to work together to achieve full buy-out funding for both schemes.

The two main UK pension schemes and the US pension plan are well positioned to withstand a volatile market environment. They are well hedged against changes in interest and inflation rates. Over 90% of their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments. As at 31 January 2022, over 40% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.

Pension contributions in H1 were £(6)m (H1 2021: £(19)m). For FY2022, we expect total cash contributions to be around £(12)m (including funded US schemes, unfunded schemes and post-retirement healthcare plans).

Dividend

The Group maintains a progressive dividend policy, aiming to increase dividends in line with long-term underlying growth in earnings and cash-flow, with the objective of maintaining a minimum dividend cover6 of around 2 times. The policy enables us to retain sufficient cash-flow to finance investment in the drivers of growth and meet our financial obligations. In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans.

Reflecting the Group's strong performance and financial position, the Board is recommending an interim dividend of 12.3p, a year-on-year increase of 5% (H1 2021: 11.7p). The interim dividend will be paid on 13 May 2022 to shareholders on the register at close of business on 8 April 2022.

The Company offers a Dividend Reinvestment Plan (DRIP) enabling shareholders to use their cash dividend to buy further shares in the Company - see our website for details. To participate in the DRIP, shareholders must submit their election notice to be received by 27 April 2022 ("the Election Date"). Elections received after the Election Date will apply to dividends paid after 13 May 2022. Purchases under the DRIP are made on, or as soon as practicable after, the dividend payment date and at prevailing market prices.

Return on capital employed (ROCE)5,7 

ROCE increased +370bps to 14.0% (H1 2021: 10.3%). This reflects higher profitability during the period and continued working capital discipline. For further detail of its calculation, please refer to note 19 to the financial statements.

Foreign exchange

The results of overseas operations are translated into sterling at average exchange rates. Net assets are translated at period-end rates. The Group is exposed to foreign exchange movements, mainly the US Dollar and the Euro. The principal exchange rates, expressed in terms of the value of Sterling, are shown in the following table.

JOHN CRANE

John Crane is a leading provider of mission-critical engineered solutions for global energy and process industries, supporting improved efficiency and emission reductions. 60% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable sources of energy). 40% comes from other process industries (including chemical, pharmaceutical, mining, water treatment, and pulp & paper). 69% of John Crane revenue comes from aftermarket sales. John Crane represents 35% of continuing Group revenue.

Revenue

John Crane's market-leading position and the strength of its global service network underpinned its performance. Organic revenue was up +5.1%. On a reported basis, revenue was up +1.5%, with a £(14)m adverse foreign exchange impact.

Activity levels in both of John Crane's market segments continued to strengthen during H1. Organic revenue from John Crane's Energy segment was up +7.5%. Organic revenue from Industrial activities was up +1.7%.

Aftermarket represents 69% of John Crane's revenue (H1 2021: 68%). Organic aftermarket revenue was up +6.6%. John Crane's large installed base and leading service offering position it well to meet pent-up demand for aftermarket repairs, maintenance and upgrades. Customers are increasingly focused on improving the efficiency of their plants and refineries. This is driving further interest in John Crane's unique digital solutions, including John Crane Sense®, which monitors the condition and effectiveness of equipment and helps to optimise maintenance schedules and minimise downtime.

Organic revenue from Original Equipment ("OE") was +1.8% for the first half. The rate of new orders continues to improve, with strong growth in the OE order book. John Crane secured multiple new contracts during the period including from NatureWorks, one of the largest global producers of sustainable polymers, a major European Carbon Capture and Storage ("CCS") project, further cementing John Crane's leadership in CCS, and asset management contracts in all operating regions.

These contracts draw on John Crane's core capabilities of supporting customers' enhanced efficiency, performance and sustainability in a variety of markets. They are examples of where John Crane's leading technology, asset management capabilities and global footprint drive competitive advantage and ensure it is well positioned to capture growth opportunities as markets recover and evolve.

Operating profit

Headline operating profit of £83m increased by +6.3% on an underlying basis, reflecting higher volumes and close management of price in the inflationary environment. Headline operating profit was up +2.5% on a reported basis, with £(3)m of adverse foreign exchange.

Headline operating margin was 20.0%, up +20bps on a reported and underlying basis, despite an 80bps increase in R&D investment and supply chain challenges. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation.

ROCE

ROCE was up +330bps at 20.2%, due to higher profitability.

R&D

Cash R&D expenditure represented 2.9% of sales, +80bps higher than last year. John Crane's innovation is primarily focused on enhancing efficiency, performance and sustainability by using materials science advancements, coatings and additive manufacturing. John Crane is also leveraging the Group's digital expertise to support the development of predictive diagnostic platforms and other innovative digital technologies.

John Crane sealing solutions are designed to keep process fluids and gases within systems and out of the environment. To support our customers in their environmental sustainability journeys, John Crane introduced multiple new technologies. These include a new seal for demanding hydrocarbon pipelines with a unique, patented seal technology that significantly extends the mean time between repairs, reducing maintenance, improving efficiency and protecting the environment from potentially harmful leaks, and a separation seal to minimise gas consumption in compressor applications. We also introduced John Crane SENSE® Turbo, a sensor-enabled dry gas seal. This ground-breaking technology extends the John Crane SENSE® platform, providing real-time monitoring and machine learning diagnostics on equipment, helping customers to prevent leaks and reduce downtime.

SMITHS DETECTION

Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement. It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets. 54% of Smiths Detection's sales are derived from the aftermarket. Smiths Detection represents 26% of continuing Group revenue.

Revenue

The strength of Smiths Detection's market position and its leading technology supported a strong orderbook as we entered the pandemic. Many of those orders have now been delivered and subsequent Aviation OE tender activity has been subdued. This was the primary driver of the organic revenue decline of (7.2)% in H1. Revenue was down (10.6)% on a reported basis, including £(13)m of adverse foreign exchange translation.

Original Equipment ("OE") represented 46% of H1 2022 revenues. Organic OE revenues were down (17.5)% reflecting lower Aviation OE sales, which more than offset good growth in OE sales for Other Security Systems.

Together, Aviation and Other Security Systems derived 54% of their revenues from aftermarket services. The underlying trend in aftermarket revenues continued to improve, growing +4.0% in H1, as customers resumed more typical operating patterns.

Organic revenue from Aviation decreased (12.5)% reflecting the slowdown in the Aviation OE market. Although we expect further market challenges in the near-term, we are increasingly well positioned for recovery when it comes. Organic revenue from Other Security Systems grew by +8.1%, particularly driven by demand for Ports & Borders solutions.

Despite a slower rate of tenders, Smiths Detection continues to secure new contracts and order intake is growing. Recent wins include contracts for high-energy x-ray equipment to customs organisations in Japan and the US; and hold baggage and checkpoint solutions for airports in Mexico, Korea, and the US.

Operating profit

Smiths Detection's headline operating profit was down (13.0)% on an underlying basis, impacted by lower volumes and supply chain challenges, particularly for electronic components. The business continues to manage supply chain disruptions. Headline operating profit of £36m was down (18.2)% on a reported basis, including £(3)m adverse foreign exchange translation. Headline operating profit margin was 11.5%, down (110)bps on a reported basis and (80)bps on an underlying basis. The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles.

ROCE

ROCE increased by +290bps to 9.2%, due to lower restructuring charges and write-downs in H2'2021 compared to the 12 months to H1 2021.

R&D

Cash R&D expenditure was 9.4% of sales, +180bps higher than last year.

Smiths Detection continued to invest in the development of the next generation of detection devices for the defence market, new algorithms to improve the detection of dangerous goods, and digital solutions to strengthen our aftermarket proposition to make people and infrastructure safer. Certain programmes are co-funded by strategic customers seeking next-generation solutions to security challenges. During H1, we launched a new high volume air cargo screening technology, as well as an extension of our automated detection algorithm, iCMORE, to enable currency detection, supporting the fight against global money laundering.

FLEX-TEK

Flex-Tek provides innovative components to heat and move fluids and gases for aerospace and industrial applications that support energy efficiency and improved air quality. 82% of Flex-Tek's revenue is derived from Industrials and 18% from the Aerospace sector. 49% of Flex-Tek's revenue comes from aftermarket sales. Flex-Tek represents 25% of continuing Group revenue.

Revenue 

Flex-Tek's organic revenue increased +10.0%, with strong growth in both Industrials and Aerospace. Revenue grew +24.8% on a reported basis, including £(6)m adverse foreign exchange translation and +£42m from acquisitions.

Organic revenue from Flex-Tek's Industrial segment was up +8.5%. Strong growth was driven by demand for its construction related products in the US, particularly for heating, ventilation and air conditioning ("HVAC") applications, where Flex-Tek continued to outperform the underlying market. Other drivers included good growth of its industrial heat applications.

Organic revenue from Flex-Tek's Aerospace segment was up +16.1% reflecting improving market conditions as aircraft builds begin to recover.

Operating profit

Headline operating profit increased +18.3% on an underlying basis, reflecting improved volumes and strengthened margins. Headline operating profit was up +40.9% at £62m on a reported basis, including £(1)m adverse foreign exchange translation and +£11m from acquisitions. Headline operating profit margin was up +240bps to 20.9%, on a reported basis. The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets and provision for Titeflex Corporation subrogation claims.

In February 2021, the Group acquired Royal Metal, a leading manufacturer of residential and light commercial HVAC products for $107m. During H1 the acquisition contributed £42m of revenue and £11m of operating profit.

Royal Metal complements the organic growth that Flex-Tek is already driving through the development of innovative air distribution products that support improved energy efficiency and indoor air quality. Since acquisition, the business has grown at an annualised rate of +45%, a sharp acceleration versus prior ownership. This strong growth reflects the benefits of complementary HVAC portfolios, synergies in distribution, and positive pricing. We have converted accelerated top line growth into even stronger operating profit expansion, up +109% on an annualised basis, driven by improved operational efficiencies as well as raw material inflation pass through coupled with the unwind of favourable commodity hedges. Whilst some of the contract pricing benefits will fade over time, this acquisition demonstrates the value that we can create through our highly disciplined and selective M&A process.

ROCE

ROCE increased +620bps to 24.1% reflecting the improved profitability.

R&D

Cash R&D expenditure remained broadly consistent at 0.4% of sales. R&D is focused on developing new products for the construction market, and an expanded product offering in aerospace.

SMITHS INTERCONNECT

Smiths Interconnect designs solutions for high-speed, secure connectivity in demanding applications for various end markets including defence, semiconductor test, medical, space, commercial aerospace, and rail. Smiths Interconnect represents 14% of continuing Group revenue.

Revenue

Smiths Interconnect delivered a strong performance with organic revenue up +12.9%, reflecting continued good momentum supported by a growing orderbook and new products. Revenue increased by +9.2% on a reported basis, including £(5)m adverse foreign exchange translation.

This strong performance reflects high growth in the semiconductor test business, as well as new customer wins. There was also good growth in the space and defence market segments with specific defence sub-system projects and sales of fibre-optic transceivers and microwave components driving a strong performance.

During the period, Smiths Interconnect received significant orders for its space-qualified products for commercial satellite constellations and space exploration projects, medical cable assemblies and next generation chip testing solutions.

Operating profit

Headline operating profit increased +58.7% on an underlying basis, reflecting strong volumes and the benefits of restructuring actions. Headline operating profit was up +64.7% to £28m on a reported basis, including £1m of restructuring costs in H1 2021. Headline operating profit margin was 16.9%, up +570bps on a reported basis and +490bps on an underlying basis. We feel confident that mid-teens margins are broadly sustainable. The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles.

ROCE

ROCE increased +380bps to 12.0%, driven by higher profitability.

R&D

Cash R&D expenditure decreased to 5.5% of sales (H1 2021: 7.1%) due to project phasing. R&D is focused on bringing to market new products that improve connectivity and product integrity in demanding operating environments. Product launches included the new space qualified connectors and optical transceivers, which enable high-speed, reliable data processing for communication satellites and GPS navigation systems; and new connectors for the rail market segment that are significantly smaller and lower weight than existing solutions.

RISK MANAGEMENT

The Group's principal risks and uncertainties and relevant mitigating activities were set out on pages 72-79 of the FY2021 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.

COVID-19: COVID-19 is impacting our colleagues, customers, suppliers and operations to varying degrees across different territories and different parts of our business. This includes, but is not limited to: risks to the wellbeing of our people, their families and communities; our customers, who have in many cases revised their demand forecasts; our suppliers, whose businesses have had challenges maintaining continuity of supply; and our own operations which have had to deal with all the combined challenges of the pandemic.

Technology: Differentiated new products and services are critical to our success. Disruptive technologies may limit our ability to win future business, achieve operating results, and capitalise on future growth opportunities. Failure to deliver new product introduction projects on time, within budget, to technical specifications, or significantly below customer expectations could have serious financial and reputational consequences.

Economy and geopolitics: The prolonged impact of COVID-19 on supply chains is driving inflation in developed economies. Persistently high inflation increases the risk of a wage-price spiral and costs outstripping demand for our products; conversely, this may create an opportunity for further price increases. The war between Russia and Ukraine has brought about new trading sanctions, counter-sanctions and legislation. This presents a moderate risk to our growth strategy, with further widespread impacts on global supply chains. Geopolitical tensions continue to rise, which poses threats to the free movement of goods, capital and people.

Group portfolio: Our strategy is predicated primarily on organic growth. However, acquisitions/divestments can also play a role in building and/or strengthening competitive positions. Acquisitions bring risk as well as opportunity. We may invest substantial funds and resources in acquisitions which fail to deliver on expectations - due to incorrect appraisal of the target and/or poor execution. The opposite risk is that (perhaps through an excess of caution) we miss out on opportunities to build market-leading positions and growth.

Product quality: In the ordinary course of business, we are potentially subject to product liability claims and lawsuits, including potential class actions. The mission-critical nature of many of our solutions makes the potential consequences of failure more serious than may otherwise be the case.

Customers: Our markets are evolving at a fast pace, creating potential for customers to change their business models as they look to deliver products and services at higher quality, with better service and at lower cost. Failure of the Group to keep pace with customer changes/requirements (innovation, go-to-market strategies) could have a materially adverse impact on Group performance.

People: People are our only truly sustainable source of competitive advantage and competition for key skills is intense, especially around science, technology, engineering and mathematics (STEM) disciplines. We may not be successful in attracting, retaining, developing, engaging and inspiring the right people with the right skills to achieve our growth ambitions.

Cyber security: Cyber-attacks seeking to compromise the confidentiality, integrity and availability of IT systems and the data held on them are a continuing risk. We operate in markets and product areas which are known to be of interest to criminals.

Integrated Supply chain: Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers. Manufacturing and supply chain continuity is exposed to external events that could have significant adverse consequences, including natural catastrophes, civil or political unrest, changes in regulatory conditions, sanctions, terrorist attacks and disease pandemics - this applies to our own manufacturing sites and those of our key component suppliers.

Markets: A significant proportion of our revenue comes from the US and European markets, with a notable proportion coming from governments. In addition to geographical markets, there is a risk we do not focus on attractive sectors where we have, or could have, a sustainable position.

Ethical breach: We operate in highly regulated markets requiring strict adherence to laws with risk areas including: Bribery and corruption; Anti-trust matters; International trade laws and sanctions; Human rights, modern slavery and international labour standards; General Data Protection Regulation (GDPR); and Government contracting regulations. There is 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.

Contractual obligations: We may fail to deliver the products and services or fail in our contractual execution due to delays or breaches by our suppliers or other counterparties.

Emerging risks - Climate change: We recognise the critical nature of the climate challenge and have committed to achieving net zero carbon emissions from operations by 2040. The primary risk to meeting these commitments is the requirement to transition our products and services to a lower-carbon economy. Failure to transition from carbon-intensive products and services at a rapid pace may jeopardise our ability to win new business, achieve operating results, attract and retain talent, secure funding, realise future growth opportunities, or force government intervention to limit emissions.

Statement of directors' responsibilities

The directors confirm that, to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the United Kingdom and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; and

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board of directors:

24 March 2022

Independent review report to Smiths Group plc

Conclusion

We have been engaged by Smiths Group plc ("the Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 January 2022 which comprises the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 January 2022 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

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 UK. 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. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the latest annual financial statements of the group were prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the next annual financial statements will be prepared in accordance with UK-adopted international accounting standards. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted for use in the UK.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Michael Maloney

for and on behalf of KPMG LLPChartered Accountants 15 Canada SquareLondonE14 5GL

24 March 2022

Consolidated income statement (unaudited)

Consolidated statement of comprehensive income (unaudited)

* The comparative period has been represented to include 'Fair value movements on financial assets at fair value through OCI' within the 'OCI which will not be reclassified to the income statement' subtotal rather than within the 'OCI which will be reclassified and reclassifications' subtotal. This reclassification has no impact on total other comprehensive income in the comparative period ended 31 January 2021.

Consolidated balance sheet (unaudited)

Consolidated statement of changes in equity (unaudited)

Consolidated cash-flow statement (unaudited)

Notes to the condensed interim financial statements (unaudited)

1 Basis of preparation

The financial information for the period ended 31 January 2022 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 2021 has been delivered to the Registrar of Companies. The auditor's 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 condensed consolidated interim financial report for the half-year reporting period ended 31 January 2022 included in this announcement has been prepared on a going concern basis using accounting policies consistent with UK-adopted international accounting standards, in accordance with IAS 34 Interim Financial Reporting, and in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

On 31 December 2020 EU-adopted IFRS was brought into UK law and became UK-adopted international accounting standards, with future changes to IFRS being subject to endorsement by the UK Endorsement Board. The Group transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 August 2021. This change constitutes a change in accounting framework; however, there is no impact on recognition, measurement or disclosure

The interim report does not include all of the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 31 July 2021, which has been prepared in accordance with both International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, and any public announcements made by the Group during the interim reporting period.

The interim financial statements are prepared on a going concern basis. The Directors have assessed the principal risks discussed on page 20. 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 will have adequate resources to continue in operation for at least 12 months from the signing date of these condensed consolidated interim 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 24 March 2022.

Accounting policies

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

New standards and interpretations not yet adopted

No new standards, new interpretations, or amendments to standards or interpretations have been published which are expected to have a significant impact on the Group's financial statements.

Presentation of results

In order to provide users of the accounts with a clear and consistent presentation of the performance of the Group's ongoing trading activity, the income statement is presented in a three column format with 'headline' profits shown separately from non-headline items in a form consistent with the prior year.

Judgement is required in determining which items should be included as non-headline. The amortisation of acquired intangibles, legacy liabilities, material one-off items and certain re-measurements are included in a separate column of the income statement. See note 3 for a breakdown of the items excluded from headline profit.

Performance measures for 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 19 for more information about the alternative performance measures ('APMs') used by the Group.

In addition, the Group reports organic growth rates for revenue and underlying growth rates for profit where the determination of adjustments requires judgement. See note 19 for more information about the key performance indicators (KPIs) used by the Group.

2 Analysis of revenue, operating costs and segment information

Analysis by operating segment

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

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

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

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

- 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.

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 and note 19 for more information on which items are excluded from headline profit measures.

The sale of the Group's Smiths Medical business was completed on 6 January 2022 and the results of Smiths Medical are disclosed as a discontinued operation in note 17.

Intersegment sales and transfers are charged at arm's-length prices.

Segment trading performance

Segment assets and liabilities

Segment assets

Non-headline assets comprise receivables relating to non-headline items, acquisitions and disposals.

Segment liabilities

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

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 £478m (31 July 2021: £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 19 for additional details.

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

Analysis of revenue

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