Risks and uncertainties
Smiths is exposed to the following principal risks. If any of these risks, or other significant unforeseen risks, materialise, they could have a significant adverse effect on not only our business and financial condition but also our reputation and the trading prices and liquidity of our securities. This could lead to a loss for investors of part or, in a worst case all, of their investment.
Smiths seeks to mitigate significant identified risks through risk management processes, appropriate Group policies and other measures (including insurance where we regard it as appropriate and economic) but there can be no assurance that such measures will be effective in any particular case.
Competition, innovation and major projects
Smiths operates in highly competitive markets where some competitors may have greater resources than we do and where the entry of new competitors, the consolidation of competitors and changed or irrational behaviour by competitors could all have a significant adverse impact on our business.
Continued development of new products and improvements to existing products is critical to the future of the business and competitors may innovate in these areas more effectively than we do with significant adverse consequences for Smiths.
Smiths develops new technologies and introduces new products, in some cases contracting to supply the products to the customer before the design is established or proven. All new technologies and products involve risk, including possible abortive expenditure, reputational risk, and potential customer claims or onerous contracts. The same is true for investment in new facilities and other major projects. Such risks, if they materialise, may have significant adverse consequences for Smiths.
Raw materials and inability to supply
Smiths products contain various raw materials or purchased components including electronic components, metals and plastics. Increases or volatility in prices and shortages in supply could have a significant adverse effect.
Inability to supply against contractual commitments is a risk, which could materialise in a number of different scenarios and which could have a significant adverse effect.
Given the competitive nature of the markets in which Smiths operates, any loss of customer confidence resulting from failure to supply may be difficult or impossible to recover.
Global political and economic conditions
Operating in over 50 countries, Smiths is exposed to political and economic risks, including possible terrorist action.
Some 43% of total sales are to customers in the US, and the Group is therefore particularly affected by US economic conditions.
Smiths may be impacted by adverse changes in general economic conditions including interest rates, and the availability of credit, exchange rates and inflation, and the effect of these could be significant. In addition, demand for products from the Detection and Interconnect divisions is significantly dependent on spending by governments and government agencies, and aside from the impact of general economic conditions, these businesses may suffer significant adverse effects if these customers reduce their spending.
Information technology
Smiths is dependent on information technology systems for both internal and external communications and for the day to day management of its operations with a number of key enterprise resource planning projects in the course of implementation across the Group. Any disruption to these systems, or delays or failures in the implementation of these projects, could have significant adverse consequences for the Group.
Acquisitions and disposals
Smiths is an active acquirer of other businesses and companies: acquisitions may involve risks that might have a material impact on the Group.
The sale and purchase agreement governing the sale of the Aerospace business to GE Aviation UK in 2007 contains certain warranties and indemnities in favour of GE Aviation UK. If costs should be incurred under any of these warranties or indemnities (or similar such provisions in other agreements for the disposal of businesses) these could have a significant adverse effect.
Controls
Smiths information systems, personnel and facilities are subject to security risk, and failures in security systems or processes could have significant adverse consequences as could failures in the Group’s various corporate governance and internal controls or non compliance with the Smiths Code of Business Ethics.
Legislative and regulatory
Smiths is subject to a broad range of laws, regulations and standards in the jurisdictions in which it operates. Unexpected changes in these laws or regulations or failure to comply with them could have significant adverse consequences.
The Detection, Interconnect and Medical divisions are particularly subject to regulation, with certain customers and regulatory or other enforcement bodies routinely inspecting the Group's practices, processes and premises. A compliance problem arising in one of these (or any other of Smiths) Divisions could have significant adverse consequences for the Group as a whole.
Litigation and product liability
Smiths is subject to litigation risk including but not limited to product liability risks. Many Smiths products are used in critical applications where the consequences of a failure could be extremely serious and, in some cases, potentially catastrophic, with significant adverse consequences for the Group.
Remediation of design, manufacturing or other product defects could require Smiths to recall products with significant adverse consequences for the Group.
John Crane, Inc., a subsidiary of Smiths, is currently one of many defendants in litigation relating to products previously manufactured which contained asbestos.
The outcome of legal action is always uncertain and there is always the risk that it may prove more costly and time consuming than expected. Both current and potential future litigation could have significant adverse impact on the Group.
Environmental and external
The environmental laws of the jurisdictions in which Smiths operates impose actual and potential obligations to remediate contaminated sites, including some sites no longer owned by Smiths. There is a risk that remediation could prove more costly than expected or that further contamination could be discovered with significant adverse consequences for the Group. Because of the location of its operations, Smiths is also exposed to a number of natural catastrophe risks, such as earthquakes, floods, hurricanes and other types of storm, which like other external events, such as terrorist attacks or a disease pandemic could have significant adverse consequences for the Group.
Financial
Smiths is exposed to two types of currency risk: transaction risk in respect of products manufactured in one currency region and sold in another currency; and translation risk in that the results of non-UK businesses will translate into differing pounds sterling values depending on the exchange rate.
Smiths is exposed to credit risk particularly in relation to customers, banks and insurers. Both currency and credit risk could result in significant adverse consequences for the Group.
In addition, whilst in recent times Smiths has had an effective tax rate of approximately 24%, there can be no guarantee that this rate will remain below the prevailing tax rate applicable in the territories in which Smiths operates.
Pension funding
The Group operates significant pension plans as a result of which Smiths is subject to various funding risks, including poor performance of the investments (particularly equity investments), increased longevity of members and changes in valuation and funding assumptions, any of which could have significant adverse effects.
Human resources
Smiths employs approximately 22,000 people around the world and faces considerable competition in recruiting and retaining the talented individuals it needs to ensure that it is successful. Failure to recruit these staff and/or a loss of key personnel could have significant adverse consequences.