Notes to the accounts

23 Provisions for liabilities and charges

	At 31 July 2007 £m	Exchange adjustments £m	Provisions charged £m	Provisions released £m	Unwind of provision discount £m	Utilisation £m	At 31 July 2008 £m
Warranty provision and product liability	34.5	3.8	30.0	(5.5)		(16.6)	46.2
Reorganisation	10.8	0.3	5.2	(0.2)		(6.3)	9.8
Property	6.7		0.6	(3.3)		(0.5)	3.5
Disposal	60.3		11.4	(3.6)		(20.7)	47.4
Litigation	121.2	3.3	46.8	(2.2)	4.7	(10.1)	163.7
	233.5	7.4	94.0	(14.8)	4.7	(54.2)	270.6

Analysed as:

	2008 £m	2007 £m
Current liabilities	70.0	90.1
Non-current liabilities	200.6	143.4
	270.6	233.5

Warranty provision and product liability

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.

Reorganisation

On 3 June 2008 the Company announced a number of changes to its corporate centre and divisional headquarters. The total cost of this restructuring, including redundancy, relocation and consolidation of manufacturing, is expected to amount to approximately £48m over the period to 2010, of which £4.5m has been charged in the current year.

Reorganisation provisions include £4.7m (2007: £6.0m) costs relating to restructuring supply arrangements following the automotive seals disposal. These costs are expected to be spread over the next six years. The residual balance at 31 July 2007 related mainly to Medical, and was utilised during 2008.

Property

Where a property is vacant, or sub-let under terms such that rental income is insufficient to meet all outgoings, the Group provides for the expected future shortfall up to termination of the lease. Provision is also made for the cost of reinstatement work on leased properties where there is an obligation under the lease, and the costs can be reasonably estimated. Where evidence of contamination is found on property in the Group’s occupation, provision is made for estimated remedial costs pending action on the affected site. Most of the balance is expected to be utilised within the next five years.

Disposal

A provision has been made in 2008 in respect of obligations arising from the disposal of the Group’s Marine Systems business. See note 30 for details of this disposal.

The terms of the disposal of the Aerospace operations included certain obligations for which provision was made in 2007, including £24.3m in respect of costs of transferring aerospace active pensioners. In 2008 the pensioners were transferred, utilising £20.7m of this provision. The balance of £3.6m has been released to the income statement.

Most of the balance is expected to be utilised within the next five years.

Litigation

John Crane, Inc.

John Crane, Inc. (“JCI”) is one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. Until 2006, the awards, the related interest and all material defence costs were met directly by insurers. In 2007, JCI secured the commutation of certain insurance policies in respect of product liability. While substantial insurance remains in place, JCI has begun to meet defence costs directly, seeking appropriate contribution from insurers thereafter. Provision is made in respect of the expected costs of defending known and predicted future claims and of adverse judgments in relation thereto, to the extent that such costs can be reliably estimated. No account has been taken of recoveries from insurers as their nature and timing are not yet sufficiently certain to permit recognition as an asset for these purposes.

The JCI products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of JCI, the products were safe. JCI ceased manufacturing products containing asbestos in 1985. JCI has resisted every case in which it has been named and will continue its robust defence of all asbestos-related claims based upon this ‘safe product’ defence. As a result of its defence policy, JCI has been dismissed before trial from cases involving approximately 159,000 claims over the last 29 years. JCI is currently a defendant in cases involving approximately 136,000 claims. JCI has had final judgments against it, after appeals, in only 70 cases, amounting to awards of some US$70m over the 29 year period.

The assumptions made in assessing the appropriate level of provision include:

The periods over which the expenditure can be reliably estimated. Projections used range between 10 and 20 years.
The future trend of legal costs allowing for 3% cost inflation.
The rate of future claims.
The rate of successful resolution of claims.
The average level of judgments.

The provision is based on past history and allows for decreasing costs based on published tables of asbestos incidence projections. In the light of the significant uncertainty associated with asbestos claims, there can be no guarantee that the assumptions used to estimate the provision will be an accurate prediction of the actual costs that may be incurred and, as a result, the provision may be subject to revision from time to time as more information becomes available.

The provision shown in the table above 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 (note 6). Set out below is the gross, discounted and post-tax information relating to this provision:

	2008 £m	2007 £m
Gross provision	185.9	142.2
Discount	(47.0)	(45.8)
Discounted pre-tax provision	138.9	96.4
Deferred tax	(37.5)	(36.6)
Discounted post-tax provision	101.4	59.8

Other litigation

The Group has on occasion been required to take legal action to protect its patents and other business intellectual property rights against infringement, and similarly to defend itself against proceedings brought by other parties. Provision is made for the expected fees and associated costs, based on professional advice as to the likely duration of each case. Provisions totalling £2.2m (2007: £8.9m) were released relating to litigation settled at less than the expected cost. Most of the balance is expected to be utilised within the next five years.

Apart from that relating to JCI, none of the other provisions is discounted.

Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek