Against a persistently difficult economic backdrop and significant constraints on government spending in developed economies, Smiths Group has again delivered improved performance by enhancing operational efficiencies and exploiting its broad business reach across markets and geographies.
up to £2,842m
Headline operating profit
up to £517m
Statutory operating profit
up to £438m
Margins in most of the divisions continued to improve, benefiting from the excellent work of our employees and such self-help initiatives as the ongoing restructuring programmes, global procurement savings and vastly improved information systems. These cost-saving moves have again helped drive profitability to new highs. However, we recognise the need for more focus on sales growth if we are to capitalise on the opportunities that emerge when the global economy finally recovers on a sustainable basis.
With this in mind we continue to increase investment in research and development, a prerequisite for sustained growth in an advanced technology business like ours. In the divisional reports we detail significant new product developments.
We are also keenly aware of the growth potential in emerging markets and continue to extend our geographic footprint outside the mature economies of North America and Europe. Recent acquisitions have a significant presence in emerging markets. Smiths Detection has acquired its distributors in Brazil and India to take full control of its routes to market in these fast-growing economies. For example, the security equipment installed at Delhi’s new international airport terminal and at the Commonwealth Games was supplied by Smiths Detection. Smiths Interconnect has significantly expanded its presence in China through a number of acquisitions. John Crane has invested heavily in developing its service centres in the Middle East, Asia and Latin America while Smiths Medical has expanded its sales capabilities in China and India.
Although our focus on operational improvement and margin enhancement will continue, we are likely to enter a phase of continuous improvement, with the exception of Smiths Detection where there is more substantial restructuring work yet to be done. At the same time, we intend to manage the portfolio more actively over the next few years through seeking appropriate acquisitions that satisfy our strategic and financial objectives and disposals that realise additional value for our shareholders. For example, Smiths Interconnect will transform its power protection group through the recently announced $235m purchase of Power Holdings Inc., a leading designer and maker of a range of specialist power systems, and John Crane has agreed to acquire the business of Turbo Components and Engineering Inc. to expand its bearings aftermarket services. Equally important, we must carefully manage the legacy liabilities of the actuarial deficits on the defined benefit pension plans and ongoing product liability litigation.
In managing any portfolio of assets, your Board is duty bound to consider whether we are the best owner of each business or if we could generate more value by divestment and redeploying the capital to drive superior returns, always subject to market conditions. During the year, we received an unsolicited approach for Smiths Medical from a private equity firm. The indicative valuation was £2.45 billion in cash, as a best and final offer, but subject to extensive due diligence and completion of financing. After careful consideration, the Board concluded it would not be in the interests of shareholders to pursue this approach. In reaching this decision, we took into account the quality and highly cash-generative nature of Smiths Medical, both standalone and in the context of the Group as a whole.
In parallel with improving our business operations, our continued promotion of a culture of responsibility has been rewarded with a steady improvement in our safety record. Lost time and recordable incident rates are down. Similarly, we have been able to reduce greenhouse gas emissions, waste generation and water consumption, all key environmental metrics.
The strict anti-bribery legislation recently passed by the UK Parliament aligns well with our robust Code of Business Ethics which has already been in place for several years. It commits us all to a set of common values ‑ integrity, honesty, fairness and transparency. Details on health, safety, environment and business ethics are contained in our corporate responsibility report.
A successful board requires the right interaction between the individuals at both a personal and professional level and a mixture of skills and outlooks that brings balanced judgements, relevant variety of experience and industry knowledge, and the ability to rise above day-to-day detail. There needs to be respect for the stature and intellect of the board members throughout the company.
At Smiths the Board is, by design, small. This facilitates intense discussion with every voice fully heard. Substance trumps form. The Nominations Committee has worked hard to obtain the right balance as the Board has been reduced in size from 15 members to eight. As a multi-industry company it has judged that the individual business presidents are best focused on their divisional responsibilities rather than on the company as a whole. The Board in consequence has two executive directors – the Chief Executive and the Finance Director.
Amongst our non-executive directors, we have expertise in government and defence, international manufacturing and supply chain, healthcare, oil and gas, finance and the Asian region.
The engineering industry is notoriously masculine globally and this is reflected in the proportion of female executives in senior positions in the company. To meet Lord Davies’s aspiration for female board representation, which we support, presents a particular challenge for a small board. With one out of eight members (and four nationalities ‑ five, if Scottish is allowed), the female proportion today is 12.5%. To reach 25% requires the replacement of a present director. When the company next has cause to recruit to the board it will do so with Lord Davies’s objective in mind consistent with the need for the specialist expertise that the company at that time requires. It is not possible to set out an artificial timetable for this action.
Looking ahead, there is no lack of daunting challenges to our goal of sustained sales growth and improved profitability. Foremost is the unremittingly tough economic climate. Grave concerns linger over the health of many major economies and much of the Western world still teeters on the edge of a financial crisis.
However, we have an excellent management team and these results have again shown what Smiths Group can achieve even against tough economic headwinds. On behalf of the Board, I thank Philip and all the staff for their dedication and commitment to performance improvement and creating value for shareholders.