Strategy and key performance indicators - Smiths Group plc

We drive our top-line growth in three ways. First, we invest in research and development – the lifeblood of a technology business such as Smiths. This supports innovation and new product development. Second, we look to expand in emerging markets such as China, India and Brazil, through organic investment and acquisitions. Third, we work to improve our sales and marketing effectiveness, for example through sharing tools and best practice around the world.

Key performance indicator - headline revenue £m

The absolute level of sales achieved in the year. This includes the effect of portfolio changes and currency movements.

Headline revenue grew 7% this year reflecting organic growth and the benefit of recent acquisitions.

Priorities

We aim to accelerate our top-line growth through continued investment in new product development and sales and marketing in high-growth markets.

We intend to continue to enhance our attractive margins through further operational improvement, leveraging our scale and IT systems, and focusing on low-cost manufacturing.

Key performance indicator - headline operating margin %

Based on our headline operating profit, which excludes a number of items that do not reflect the portfolio’s underlying performance.

Headline operating margin was maintained while we targeted significantly higher investment in sales, marketing and new product development.

Priorities

To deliver continuous improvements in margins.

By emphasising working-capital management, particularly our debtors and inventories, we are able to convert a high proportion of headline operating profit into cash.

We also look to optimise our capital structure and secure long-term financing. Our borrowings are mainly through long-term bonds rather than bank debt. We also closely match the currency of our debt with our assets and earnings.

Key performance indicator - cash conversion %

This is the proportion of headline operating profit that we are able to convert to headline operating cash.

Headline operating cash conversion this year was at the upper end of our guidance of 90-100% cash conversion. Conversion in 2010 benefited from reduced working capital arising from certain one-off initiatives.

Priorities

To continue to focus on cash generation and balance sheet management, so that we have the financial strength to grow the business.

Smiths Group delivers high returns on capital. We achieve this through disciplined capital allocation to the divisions, by enhancing our profitability and through active portfolio management, with a targeted programme of acquisitions and disposals.

At the same time, we actively manage our portfolio of liabilities, such as our defined benefit pension schemes and legacy product liability issues, so that we minimise their impact on our value creation.

Key performance indicator - headline return on capital employed %

This is headline operating profit divided by monthly average capital employed, expressed as a percentage. Capital employed is total equity, adjusted for goodwill recognised directly in reserves, net post-retirement benefit assets and liabilities, litigation provisions relating to exceptional items and net debt. Return on capital for 2010 and 2011 has been restated.

Return on capital employed improved 10 basis points reflecting the improved profitability across most divisions more than offsetting the impact of lower profitability in Interconnect.

Priorities

To continue to manage our portfolio to create maximum value for shareholders.

We promote a culture of responsibility throughout Smiths Group. This requires us all to work according to our Code of Ethics. Smiths is also committed to working in a way that, as far as reasonably practicable, protects the health and safety of employees and minimises any environmental effects of its activities, products and services. This delivers real business benefits, while ensuring that we meet our obligations to all of our stakeholders.

Key performance indicator - a range of indicators for safety and environmental impact

Recordable incident rate per 100 employees FY2013 target is to be below 0.5 per 100 employees	FY2012 results 0.60
Greenhouse gas emissions 10% reduction FY2010 to FY2015	FY2012 v FY2010 -19%
Total non-recycled waste 10% reduction FY2010 to FY2015	FY2012 v FY2010 -18%
Water consumption 5% reduction FY2010 to FY2015	FY2012 v FY2010 -19%

Priorities

We will sustain our focus on working responsibly and have set targets for each of our KPIs.