Financial review
Cash-flow and net debt
Operating cash-flow from continuing operations (before the cash impact of exceptional items and special pension payments and after capital expenditure) totalled £99m, representing 63% of headline operating profit, and reflects investment in capital projects and increased working capital to support business growth. The working capital investment was particularly driven by the timing and nature of contracts in Smiths Detection and John Crane.
On a statutory basis, net cash inflow from continuing operations was £64m. Cash expenditure on exceptional items was £14m. The company made special pension contributions of £7m. Free cash-flow from continuing operations (after interest and tax but before acquisitions and dividends) was £26m.
Net debt at the period end was £675m, up from £590m at the start of the fiscal year. The net debt at both period ends is stated after taking account of accrued interest and the fair value of swapped debt, in line with the requirements of IFRS. During the period, the company invested £19m on acquisitions and received £37m from disposals.
Acquisitions and disposals
Smiths made a number of acquisitions and disposals in the period to improve the business mix of its continuing activities. In November, Sartorius Bearing Technology, a leading provider of high performance rotating equipment for the oil and gas industry, was acquired for €20m. In November, Smiths sold its Marine Systems business for £44m, after a working capital adjustment. In December, Smiths acquired the majority ownership of the John Crane business in Japan for a consideration of £4m, increasing its ownership share from 49% to 70%. After the period end, the Heating Element Division of Fast Heat was acquired for $18m: it manufactures a wide range of specialty heating elements for HVAC, industrial and medical applications. We announced on 19 March 2008 that agreements have been signed to acquire Indufil BV and Fiber Composite Company Inc., both of which are subject to approvals.
Research and development
Company-funded R&D in this period was £34m (2007: £34m). This represents an average across the three divisions of 3% of sales, with Medical and Detection above that level and Specialty Engineering below it. Of the total, £26m was charged against profit and the balance capitalised. The company is currently carrying £46m of capitalised development costs, which are amortised over timescales of typically 3-5 years.
Productivity
The company made further efficiency gains in this period, with higher input costs, including raw materials and payroll costs, more than offset by restructuring, pricing and the benefits of establishing production by a growing number of Smiths businesses in low-cost countries, including Mexico, India and China. Average employment in the continuing activities was 22,000 (2007: 22,000) during the half year. The US remains the company’s largest market, accounting for 46% of sales by origin and 58% of headline operating profit.
In all three divisions, the Group has ongoing projects focused on business systems efficiency. ERP projects are underway in Detection, Medical and John Crane. The successful completion of these new ERP systems over the coming years will help to enhance margins and improve service quality.
Retirement benefits
The balance sheet continues to reflect a net surplus in retirement benefit plans despite the economic turbulence in the global financial sectors. The funded schemes show a surplus of £242m, compared to £297m at July 2007.
Risks and uncertainties
The principal risks and uncertainties affecting the business activities of the Group remain those identified on pages 17 and 18 of the Report and Accounts for the year ended 31 July 2007, a copy of which is available at the Company’s website at www.smiths.com. In the view of the Board, these properly reflect the uncertainties in respect of the remaining six months of the year.
B share repurchase
The Company expects to advise holders of B shares shortly of arrangements for their shares to be repurchased at 365p per share.