Regulatory News Item

RNS Number : 1802C
Smiths Group PLC
15 October 2020
 

15 OCTOBER 2020

 

SMITHS GROUP PLC 

 

ANNUAL FINANCIAL REPORT 2020

 

LISTING RULE LR 9.6.3 R

Smiths Group plc (the 'Company') is submitting today copies of the documents listed below to the Financial Conduct Authority, in compliance with Listing Rule LR 9.6.1 R.

 

1. Annual Report FY2020 (for the financial year ended 31 July 2020);

2. Notice of Annual General Meeting 2020; and

3. Annual General Meeting Proxy Form.

 

The above-mentioned documents will be uploaded to the National Storage Mechanism in pdf file format, and will shortly be available for viewing by visiting https://data.fca.org.uk.

 

Copies of the documents referred to above have today been made available to shareholders in accordance with their elections for Company communications. The Annual Report FY2020 and the Notice of Annual General Meeting 2020 can be viewed online by visiting the Company's website, www.smiths.com.  Printed copies may be obtained by sending an e-mail request to secretary@smiths.com or by writing to the Company Secretary, Smiths Group plc, 4th Floor, 11-12 St James's Square, London SW1Y 4LB, UK.

 

DISCLOSURE GUIDANCE & TRANSPARENCY RULE DTR 6.3.5(2)

A condensed set of the Company's consolidated financial statements and information on important events that occurred during the financial year ended 31 July 2020 and their impact on the financial statements were contained in the Smiths Group plc Annual Results for the year ended 31 July 2020 announcement issued by the Company through the Regulated News Service of the London Stock Exchange at 07:00 on 24 September 2020 (RNS No. 9862Z) (the 'Results announcement'). 

 

Other than the information set out below (which is extracted from the Annual Report FY2020), the regulated information in the Annual Report FY2020 that is of a type that would be required to be disseminated in a half-yearly report has already been released in unedited full text via the Results announcement.

 

Together, the regulated information set out below and the regulated information contained in the Results announcement constitute the material required by Disclosure Guidance & Transparency Rule DTR 6.3.5 to be communicated to the media in full unedited text through a Regulatory Information Service. Page and note references in the text extracts below refer to page numbers and to notes to the financial statements in the Annual Report FY2020 (available online from www.smiths.com and  https://data.fca.org.ukThe statutory accounts of the Company for the financial year ended 31 July 2020 will be delivered to the Registrar of Companies in due course. This announcement is not a substitute for reading the full Annual Report FY2020.

 

An extract comprising the unedited full text on pages 69 to 76 in the Annual Report FY2020 is set out below. Certain non-reproducible graphics contained in the Annual Report FY2020 are not reproduced.  The graphic version of pages 69 to 76 of the Annual Report FY2020 is attached as a pdf file. http://www.rns-pdf.londonstockexchange.com/rns/1802C_1-2020-10-15.pdf

 

Principal risks and uncertainties

We maintain a register of principal risks and uncertainties covering the strategic, financial, operational and compliance risks faced by the Group.

We review each risk and rate a number of factors: gross impact, applying the hypothetical assumption there are no mitigating controls in place; residual impact and likelihood, taking into account existing mitigating controls; target impact; the reputational impact of a risk; and its velocity which reflects the expected time we would have to react should a risk materialise. These, in turn, drive mitigation priorities. A trend metric shows the net position of the risk year-on-year.

In FY2020 we formalised consideration of the relationship between risks to help understand the potential for one risk to have an impact on another. This is presented against each risk in the form of 'risk relationship' charts indicating the strength of linkage between each principal risk and others on the list. This has been used as an input to the viability statement assessment and will be used more widely in future risk scenario planning and mitigation work.

We updated our register of principal risks and uncertainties following review by the Executive Committee and approval by the Board. As stated earlier, COVID-19 was added as a new principal risk, disease pandemic having previously been reported as part of the integrated supply chain risk. Additionally, in the light of the impact of COVID-19, liquidity has been promoted to the list in recognition of the large gross impact this might have. Mitigating actions result in this risk being considered low likelihood.

Due to the long-term nature of climate change this is not considered a principal risk. However, the Board recognises the importance of considering climate change in its decision-making, notably on longer- term strategic topics. See page 43 for more details.

While we continue to monitor and manage a wider range of risks, the risk map above and the tables that follow summarise those risks considered to have the greatest potential impact if they were to materialise.

COVID-19

COVID-19 is impacting our colleagues, customers, suppliers and operations to varying degrees across different territories and different parts of our business. This includes, but is not limited to: risks to the wellbeing of our people, their families and communities; our customers, who have in many cases revised their demand forecasts; our suppliers, whose businesses have had challenges maintaining continuity of supply; and our own operations which have had to deal with all the combined challenges of the pandemic.

Risk Owner: Mel Rowlands

Trend: New

Included in viability assessment: Yes

How this could impact our strategy or business model

- Exceptional external circumstances arising, including significant adverse consequences arising from the evolving pandemic and associated economic dislocation may impact the separation of Smith Medical

-
Significant reduction in global demand for our products

- Disruption to our ability to deliver products and services to customers in the event of interruptions to our supply chain and manufacturing operations

 

Examples of how we manage this risk

- Smiths Group Crisis Core team was mobilised during the first six months of the crisis overseeing various workstream sub-groups and reporting to the Executive Committee

- Workstreams comprise: Divisions, HSE, HR, Communications, Operations and Supply Chain (OSNC), Legal, Finance, Systems/ Infrastructure and Government Relations

- Divisional Crisis Teams and Site Emergency Response Teams operationalised

-
Smiths support network including partnerships with third parties providing pandemic related advice and support e.g. engaged an expert medic

Examples of how we know the controls are working effectively

- OSNC continues to provide real-time updates on status of operations, supply chain and logistics through dashboards

- Fast track issue spotting, escalation and resolution through Group and cross- divisional resources

- Over 90% of manufacturing facilities operational throughout early stages of crisis (January through to June)

- Group HSE monitoring employee health across sites and within countries/regions. Proactive case management of employee health in relation to COVID-19 regularly reported and acted upon

Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework

Link to resources and relationships: Our people; Our customers; Production and environment; Our supply chain; Our communities

Relationship to other principal risks:

Technology - N/A

Economy and geopolitics - Strong

Group portfolio - Moderate

Liquidity - Strong

Product quality - N/A

Customers - Strong

People - Moderate

Cyber security - Moderate

Integrated supply chain - Strong

Markets - Moderate

Ethical breach - Moderate

Contractual obligations - Strong

TECHNOLOGY

Differentiated new products and services are critical to our success. We may be unable to maintain technological differentiation or to meet customers' needs and may face disruptive innovation by a competitor.

Risk Owner: Andy Reynolds Smith

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

- Material adverse effect on margin and profitable growth

- Erosion of our reputation as a leader in our markets and of our ability to attract and retain talent

 

Examples of how we manage this risk

- Proactive repositioning of the portfolio around the most attractive markets where we can sustainably hold a top three position based on technology leadership

-
Diversified technology portfolio serving a range of sectors and geographies, mitigating exposure to any one sector or area

- Continuing and smarter investment in R&D (FY2020: 5.0% of Total Group revenue, FY2019: 4.8%)

- Focus on building a culture of innovation with a long-range technology roadmap for each division

- Focus on next generation and transformational initiatives

- New Product Introduction (NPI) process operating across divisions to accelerate projects

- Digital Forge works to accelerate digital transformation across the Group

- Vitality Index as a KPI

-
Robust IP protection via patents and other protections, and litigation where appropriate

Examples of how we know the controls are working effectively

- Vitality data is reviewed by the Smiths Innovation Strategy Board (SISB) and is part of the SES dashboard

- Adherence to NPI process is audited and embedded in systems with monthly 'pipeline' overview provided by divisions

- Technology roadmap is part of the Group strategic cycle

- Digital Advisory Committee as a governance mechanism to ensure the Digital Forge is working on the most value-creating projects for the Group

 

 

Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework

Link to resources and relationships: Our customers; Technology and innovation; Production and environment

Relationship to other principal risks:

COVID-19 - N/A

Economy and geopolitics - Moderate

Group portfolio - Strong

Liquidity - Moderate

Product quality - Moderate

Customers - Strong

People - Strong

Cyber security - Moderate

Integrated supply chain - Moderate

Markets - Strong

Ethical breach - N/A

Contractual obligations - Moderate

ECONOMY AND GEOPOLITICS

COVID-19 has triggered a highly significant global economic downturn. In many sectors, demand has reduced. There is a likelihood that the impact on demand will be prolonged, especially in commercial aerospace. The collapse in both the oil price and oil consumption may trigger a downturn in demand (particularly OE) for John Crane. A global recession may also lead to an increase in bankruptcies of both customers and suppliers. Conversely, the crisis is opening up new opportunities, most obviously in Smiths Medical and Smiths Detection; and inorganic opportunities are likely to arise more frequently and at better values. Geopolitical tensions continue to rise, most notably between China and the US, but also affecting other Governments, which pose threats to the free movement of goods, capital and people.

Risk Owner: John Shipsey

Trend: No change

Included in viability assessment: Yes

How this could impact our strategy or business model

- Significant and prolonged reduction in global demand for our products

-
Geopolitical tensions, most notably relating to China, the US, India, the Middle East, South Korea and North Korea, adversely impact trade

- Adverse impact on business performance due to the imposition of tariffs

- The consequences of Brexit are uncertain. Potential effects, applicable to many businesses, include economic and operational uncertainty, volatility of currency exchange, regulatory changes and the imposition of tariffs on trade between the UK and the Eurozone

- Governments continue to look for ways to improve tax revenues to ease fiscal budget pressures

Examples of how we manage this risk

- Identification and application of learnings from past downturns through the cycle

- Diversified portfolio of businesses which mitigates exposure to any one country or sector

- Geographic spread which mitigates the impact of trade barriers between regions

- Divisions monitor order flows and other leading indicators so that they may respond quickly to deteriorating trading conditions and tariffs/barriers to free trade

- Representation of our interests by the Corporate Affairs team

- Network of trade compliance officers across the Group who monitor upcoming changes in regulation and oversee import and export activities

- Monitoring of the ongoing negotiations between the UK and the EU in order to assess the potential impact of Brexit

- Sustainable tax strategy to optimise the Group's position

Examples of how we know the controls are working effectively

- Impact of US tariffs to date has been absorbed

- Order tracking reported and monitored

- Business indicators reported weekly

- Brexit coordination group working effectively, Group has relatively little exposure to Brexit

 

Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework

Link to resources and relationships: Our customers; Our supply chain; Regulators and governments

Relationship to other principal risks:

COVID-19 - Strong

Technology - Moderate

Group portfolio - Strong

Liquidity - Strong

Product quality - N/A

Customers - Strong

People - N/A

Cyber security - N/A

Integrated supply chain - Strong

Markets - Strong

Ethical breach - N/A

Contractual obligations - N/A

GROUP PORTFOLIO

Our strategy is predicated primarily on organic growth. However, acquisitions/divestments can also play a role in building and/or strengthening competitive positions.

Acquisitions bring risk as well as opportunity. We may invest substantial funds and resources in acquisitions which fail to deliver on expectations - due to incorrect appraisal of the target and/or poor execution. The opposite risk is that (perhaps through an excess of caution) we miss out on opportunities to build market-leading positions and growth.

Divestments also carry risk. We may divest an asset at the wrong time, or may not realise appropriate value for the asset. Separation may be complex and, if poorly executed, may impact the wider business.

Risk Owner: John Shipsey

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

- Poor acquisitions/ divestments, or poorly managed integrations/separations, lead directly to financial damage and indirectly to loss of shareholder confidence

- Newly-acquired products and solutions deliver less value, fewer synergies, or require more investment than anticipated

- Fall in our return on capital employed measure

- Financial performance suffers from goodwill or other acquisition-related impairment charges or inheritance of material unknown liabilities

Examples of how we manage this risk

- Investment in greater internal capability for the evaluation and execution of transactions

- Regular reviews of the acquisition pipeline and a stage-gated M&A process

-
Detailed due diligence and integration work in accordance with our acquisitions and disposals policy

- Detailed separation planning, in accordance with our acquisitions and disposals policy

- Governance ensures multi-disciplinary sign off

- Larger transactions approved by the full Board

- Post-transaction reviews with lessons learned incorporated into future projects

- Use of external advisers

Examples of how we know the controls are working effectively

- Technology acquisitions have established a strong track record

- Strong internal team

- Proper governance and oversight

- Learnings from previous acquisitions considered and applied

- Ongoing evaluation measured against original business case

Link to strategic objectives: Outperform our chosen markets; Strong financial framework

Link to resources and relationships: Technology and innovation; Production and environment

Relationship to other principal risks:

COVID-19 - Moderate

Technology - Strong

Economy and geopolitics - Strong

Liquidity - Strong

Product quality - N/A

Customers - Strong

People - Moderate

Cyber security - Moderate

Integrated supply chain - Moderate

Markets - Strong

Ethical breach - N/A

Contractual obligations - N/A

LIQUIDITY

COVID-19 has triggered a highly significant global economic downturn. In many sectors, demand has reduced, in some cases close to zero. We, along with our customers and suppliers, have also faced disruption to operations and higher costs. If disruption were to be deep and sustained over many months, our financial position could be eroded by lower revenues, higher costs and cash write-offs (e.g. non-payment by customers). We might not be able to rely on access to committed facilities, either through breach of our financial covenant or because lenders were unable to meet their obligations.

Risk Owner: John Shipsey

Trend: New

Included in viability assessment: Yes

How this could impact our strategy or business model

- Inability to fund our operations

- Inability to invest in medium to longer-term drivers of growth

- Reduced competitiveness of our businesses

 

Examples of how we manage this risk

- Diversified portfolio of businesses that mitigates exposure to any one country or sector

- Strongly cash generative businesses

- Capital expenditure and working capital are embedded in performance management and reward

- Conservative financing policy with a self- imposed limit of 2x net debt to EBITDA and significant liquidity headroom

-
Strong and diversified lending group - strong loan documentation with only one interest cover covenant on the revolving credit facility

- Ability to flex cost base in the face of reduced revenues with 60% of Cost Of Goods Sold being variable

Examples of how we know the controls are working effectively

- Resilient performance of the business

- Strong free cash-flow

- Liquidity headroom of £1bn

- Average debt maturity of 4.2 years

- Net EBITDA of 1.9x

- Cash of £386m and undrawn $800m RCF

 

 

Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework

Link to resources and relationships: Our customers; Production and environment; Our supply chain; Regulators and governments

Relationship to other principal risks:

COVID-19 - Strong

Technology - Moderate

Economy and geopolitics - Strong

Group portfolio - Strong

Product quality - Moderate

Customers - Moderate

People - N/A

Cyber security - N/A

Integrated supply chain - Moderate

Markets - Moderate

Ethical breach - Moderate

Contractual obligations - Strong

PRODUCT QUALITY

In the ordinary course of business we are potentially subject to product liability claims and lawsuits, including potential class actions. The mission-critical nature of many of our solutions makes the potential consequences of failure more serious than may otherwise be the case.

Risk Owner: Divisional Presidents

Trend: Decrease vs FY2019

Included in viability assessment: Yes

How this could impact our strategy or business model

- Damage to our reputation amongst customers and reduction in market acceptance of, and demand for, our products from an adverse event involving one of our products

- Recall of products due to manufacturing flaws, component failures, damage to persons/property, and/or design defects

- Exposure to losses in the event of a cyber security breach relating to our products

- Customers' losses but also losses arising from a potentially large class of third parties

 

Examples of how we manage this risk

- Divisional quality risk assessments that address product failures, product compliance, regulatory compliance, product performance, product safety and market authorisation risks

- Quality assurance processes embedded in manufacturing locations for critical equipment, supporting compliance with industry regulations

- Quality development and quality integration built into NPI processes

- Risk analysis and mitigation processes relating to product cyber resilience embedded in the product lifecycle process. Proactive steps taken to ensure product cyber related risks are continually monitored and managed

- Insurance cover for product liability

- Material litigation managed under the oversight of the Group General Counsel

Examples of how we know the controls are working effectively

- Quality measures (e.g. DPPM, COPQ) are measured and action plans put in place to drive their improvement - these are regularly reported

- Group and divisional governance frameworks (including Delegation of Authority) ensure a close working relationship between legal and commercial teams (includes quality) to manage risks

- Fewer quality issues at launch of new products

 

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Our people; Our customers; Production and environment; Our supply chain

Relationship to other principal risks:

COVID-19 - N/A

Technology - Moderate

Economy and geopolitics - N/A

Group portfolio - N/A

Liquidity - Moderate

Customers - Strong

People - Moderate

Cyber security - Moderate

Integrated supply chain - Moderate

Markets - N/A

Ethical breach - N/A

Contractual obligations - Strong

CUSTOMERS

Our markets are evolving at a fast pace, creating potential for customers to change their business models as they look to deliver products and services at higher quality, with better service and at lower cost.

Failure of the Group to keep pace with customer changes/requirements (innovation, go-to-market strategies) could have a materially adverse impact on Group performance.

Risk Owner: Julian Fagge

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

- Loss of market share and adverse impact on Group results

- Material adverse effect on profitable growth

- Erosion of our reputation as a leader in our markets

 

Examples of how we manage this risk

- As part of the Group innovation framework and our approach to potential technology disruption, we include customer disruption as well as competitor and product disruption

-
New product innovation feedback through market research and direct feedback from existing and potential customers

- Developing business models is a core component of the Group-wide training agenda

 

Examples of how we know the controls are working effectively

- Megatrend workshops and disruption risks reviewed annually

- Customer input gathered on a frequent basis

- Pilot programmes to test products, business models and partnerships

- Strategic review process; divisional deep dives

 

Link to strategic objectives: Outperform our chosen markets

Link to resources and relationships: Our customers; Technology and innovation; Production and environment; Our supply chain; Our communities

Relationship to other principal risks:

COVID-19 - Strong

Technology - Strong

Economy and geopolitics - Strong

Group portfolio - Strong

Liquidity - Moderate

Product quality - Strong

People - Moderate

Cyber security - Moderate

Integrated supply chain - Moderate

Markets - Strong

Ethical breach - Moderate

Contractual obligations - Strong

PEOPLE

People are our only truly sustainable source of competitive advantage and competition for key skills is intense, especially around science, technology, engineering and mathematics (STEM) disciplines. We may not be successful in attracting, retaining, developing, engaging and inspiring the right people with the right skills to achieve our growth ambitions.

Risk Owner: Sheena Mackay

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

- Inability to attract key talent leading to a loss of competitive advantage

- Difficulty in retaining personnel, at all levels of the organisation, leading to a loss of competitive advantage

- In acquisitions, losing key personnel from the newly-acquired business which may significantly impact performance and value

 

Examples of how we manage this risk

- Investment to build a learning organisation with a focus on culture, reward and recognition

- Implementation of the right HR infrastructure

- Delivery of a range of learning and development opportunities at all levels of the organisation

- Talent and succession plan reviews

- Remuneration packages evaluated regularly against market trends

- Chief Executive assessment of the leadership team

- Annual performance management reviews for the majority of employees using best- practice processes such as 360-degree feedback surveys

- Formal career counselling for senior people in the business

-
A clearly defined people integration plan for acquisitions

- People Plan oversight by the Board

- Diversity and Inclusion plan and initiatives

Examples of how we know the controls are working effectively

- Participation rates in the Smiths learning and development programmes measured. Capability and performance of alumni are tracked

- Benchmarking ratio of hires into senior roles from internal and external sources

- Formal and informal measures of culture, for example regular engagement surveys with follow-up action planning

- Measurement of the effectiveness of the Executive education programme through post-completion evaluation tests

- Post-acquisition and lessons learned reviews

 

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Our people; Our communities

Relationship to other principal risks:

COVID-19 - Moderate

Technology - Strong

Economy and geopolitics - N/A

Group portfolio - Moderate

Liquidity - N/A

Product quality - Moderate

Customers - Moderate

Cyber security - Moderate

Integrated supply chain - Moderate

Markets - Moderate

Ethical breach - Strong

Contractual obligations - Strong

CYBER SECURITY

Cyber attacks seeking to compromise the confidentiality, integrity and availability of IT systems and the data held on them are a continuing risk. We operate in markets and product areas which are known to be of interest to criminals.

Risk Owner: John Shipsey

Trend: No change

Included in viability assessment: Yes

How this could impact our strategy or business model

- Compromised confidentiality, integrity and availability of our assets resulting from a cyber attack, impacting our ability to deliver to customers and, ultimately, financial performance and reputation

- Exposure to significant losses in the event of a cyber security breach relating to our security or medical products. These include not only customer losses, but also those of a potentially large class of third parties

 

 

Examples of how we manage this risk

Board oversight of the approach to mitigating cyber risk

Proactive focus on information and cyber security risks supported by a strong governance framework

Group-wide assessment of critical information assets and protection to enhance security

Information Security Awareness programme

Security monitoring to provide early detection of hostile activity on Smiths networks and an incident management process

Partnership and monitoring arrangements in place with critical third parties, including communications service providers

Cyber risk analysis and mitigation processes embedded in the product lifecycle process to increase resilience

Examples of how we know the controls are working effectively

Formal reviews with the Executive Committee and the Board

Vulnerability scanning/event reporting

External reviews of vulnerability controls

Mandatory staff training

Compliance with recognised standards

Cyber leads at divisions

 

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Our customers; Technology and innovation; Regulators and governments

Relationship to other principal risks:

COVID-19 - Moderate

Technology - Moderate

Economy and geopolitics - N/A

Group portfolio - Moderate

Liquidity - N/A

Product quality - Moderate

Customers - Moderate

People - Moderate

Integrated supply chain - Moderate

Markets - N/A

Ethical breach - Strong

Contractual obligations - Strong

INTEGRATED SUPPLY CHAIN

Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers. Manufacturing and supply chain continuity are exposed to external events that could have significant adverse consequences, including natural catastrophes, civil or political unrest, changes in regulatory conditions, terrorist attacks and disease pandemics - this applies to our own manufacturing sites and those of our key component suppliers.

Disease pandemics were highlighted as a key component of this risk in FY2019 and in prior reports. Following the COVID-19 pandemic, a new principal risk was added capturing not only the supply chain impacts of the risk, but other consequences and our responses. See risk 1.

Risk Owner: Sheena Mackay

Trend: No change

Included in viability assessment: Yes

How this could impact our strategy or business model

Inability to deliver products/solutions to customers, impacting financial performance and reputation

 

 

Examples of how we manage this risk

Supply excellence pillar of our SES operating model delivers increased focus on efficient, resilient and cost-effective supply

Business continuity and disaster recovery plans in place and tested for critical locations

Regular evaluation of key sites for a range of risk factors using externally benchmarked assessments - risk reduction measures for critical products and dual manufacturing capabilities


Mitigation plans for sole source suppliers, sub-contractors and service providers developed and deployed by divisions to include qualification of alternative sources of suppliers where appropriate

Property damage and business interruption insurance

Examples of how we know the controls are working effectively

Business continuity planning (BCP) testing and results

Mitigation plans reviewed and reported by divisions

Externally provided business interruption risk surveys of operational sites

Insurance requirements driven by the risk appetite of the Group and divisions is validated at least annually

 

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Production and environment; Our supply chain

Relationship to other principal risks:

COVID-19 - Strong

Technology - Moderate

Economy and geopolitics - Strong

Group portfolio - Moderate

Liquidity - Moderate

Product quality - Moderate

Customers - Moderate

People - Moderate

Cyber security - Moderate

Markets - N/A

Ethical breach - N/A

Contractual obligations - Moderate

MARKETS

A significant proportion of our revenue comes from the US and European markets, with a notable proportion coming from governments. In addition to geographical markets, there is a risk we do not focus on attractive sectors where we have, or could have, a sustainable position.

Risk Owner: Roland Carter

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

Failure to develop other markets and geographies impacts strategic progress and financial performance

Significant disruption to government budgets results in fewer contracts being awarded to Smiths, impacting financial performance

 

Examples of how we manage this risk

A diversified portfolio of businesses mitigates exposure to any one country, sector or customer

Growth strategy which places emphasis on expanding operations in higher-growth markets and regions which are currently underserved, including Asia

Strategic process to capture continuing opportunities in current and adjacent markets

Government relations function which collaborates with colleagues across the Group to advise on developments

More resilient services and consumable components built into some of our government-related business

Examples of how we know the controls are working effectively

Strong and long-term customer relationships provide assurance

Managing Director councils established in India and China

Carefully crafted JV and Partnership arrangements in China

Link to strategic objectives: Outperform our chosen markets

Link to resources and relationships: Our customers; Technology and innovation

Relationship to other principal risks:

COVID-19 - Moderate

Technology - Strong

Economy and geopolitics - Strong

Group portfolio - Strong

Liquidity - Moderate

Product quality - N/A

Customers - Strong

People - Moderate

Cyber security - N/A

Integrated supply chain - N/A

Ethical breach - Moderate

Contractual obligations - Strong

ETHICAL BREACH

We have more than 22,000 employees in more than 50 countries. Individuals may not all behave in accordance with the Group's values and ethical standards. We operate in highly regulated markets requiring strict adherence to laws with risk areas including:

-     Bribery and corruption;

-     Anti-trust matters;

-     International trade laws and sanctions;

-     Human rights, modern slavery and international labour standards;

-     General Data Protection Regulation (GDPR); and

-     Government contracting regulations.

Risk Owner: Mel Rowlands

Trend: No change

Included in viability assessment: Yes

How this could impact our strategy or business model

Failure to comply with export regulations leads to significant fines and a loss of export privileges

Failure to meet strict conditions within government contracts, particularly in the US, could have serious financial and reputational consequences


Increased risk of illegal anti-competitive activity such as collusion with competitors

US fines and penalties imposed for price fixing, bid rigging and other cartel-type activities can exceed $100m per violation

Ethics or compliance breach causes harm to our reputation, financial performance, customer relationships and our ability to attract and retain talent

 

 

Examples of how we manage this risk

Group-wide ethics framework which includes our values, the Code of Business Ethics and the Supplier Code of Conduct

Policies and procedures to mitigate distributor and agent related risks including due diligence, contractual controls and internal approvals

Anti-bribery and corruption training for all employees supported by the 'Speak Out' line encouraging the reporting of ethics violations (includes ability to report anonymously and a non-retaliation policy)

Reporting and investigation mechanisms

Anti-trust training programmes and guidance


Network of trade compliance officers across the Group who monitor upcoming changes in regulation and oversee import and export activities

Monitoring and acting on upcoming legislative changes

Modern Slavery and Transparency Statement and procedures to reduce the risk of modern slavery within the Group and our supply chain

Multi-functional programme for GDPR compliance

Examples of how we know the controls are working effectively

Multiple sources to assess culture including My Say results, 'Speak Out' reports, internal audit findings, exit interviews and ethics questions in performance reviews

Monitoring and reporting on compliance with ethics and compliance policies

Tracking of online ethics training and compliance modules

Reporting non-compliance cases to business, Executive and Audit & Risk Committees

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Our people; Our customers; Our supply chain; Our communities; Regulators and governments

Relationship to other principal risks:

COVID-19 - Moderate

Technology - N/A

Economy and geopolitics - N/A

Group portfolio - N/A

Liquidity - Moderate

Product quality - N/A

Customers - Moderate

People - Strong

Cyber security - Strong

Integrated supply chain - N/A

Markets - Moderate

Contractual obligations - Strong

CONTRACTUAL OBLIGATIONS

We may fail to deliver the products and services or fail in our contractual execution due to delays or breaches by our suppliers or other counterparties.

Risk Owner: Mel Rowlands

Trend: No change

Included in viability assessment: N/A

How this could impact our strategy or business model

Production delays, unexpected increases in costs of materials, freight, quality and warranty issues resulting from differences between estimated and actual costs in our medium and long-term contracts

Breach of contract resulting in significant expenses due to disputes and claims, loss of customers, damage to our reputation with other customers/prospective customers, and loss of revenue and profit due to higher costs, liquidated damages or other penalties


Contracts, particularly those with governments, may include terms that provide for unlimited liabilities, including for loss of profits, IP indemnities, perpetual warranties or allowing the counterparty to cancel, modify or terminate unilaterally and seek alternative sources of supply at our expense

Examples of how we manage this risk

Contracts managed and delivered by programme management teams that regularly review risks and take appropriate action

Review and approval process for significant and higher-risk contracts in place at Group and divisional levels

Diversified nature of the Group mitigates exposure to any single contract


Programmes in place across the Group which harmonise the contract review process

Cross-divisional US Government working group determines and shares best practice on government contracting

 

Examples of how we know the controls are working effectively

Divisional legal teams embedded in the business, working cross-functionally throughout the contract lifecycle

Review and approval process for contracts determined by adherence to the Delegation of Authority matrix

Insurance programme tailored to reflect the risk appetite of the Group

Uniform diligence and contracting process in place for agents and distributors

 

 

Link to strategic objectives: Deliver world-class competitiveness

Link to resources and relationships: Our customers; Production and environment; Our supply chain; Regulators and governments

Relationship to other principal risks:

COVID-19 - Strong

Technology - Moderate

Economy and geopolitics - N/A

Group portfolio - N/A

Liquidity - Strong

Product quality - Strong

Customers - Strong

People - Moderate

Cyber security - Strong

Integrated supply chain - Moderate

Markets - Strong

Ethical breach - Strong

 

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK accounting standards, including IFRS 101 Reduced Disclosure Framework.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:

 

-    Select suitable accounting policies and then apply them consistently;

 

-    Make judgements and estimates that are reasonable, relevant, reliable and prudent;

 

-    For the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

 

-    For the Parent Company financial statements, state whether applicable United Kingdom Accounting Standards have been followed subject to any material departures disclosed and explained in the Parent Company financial statements;

 

-    Assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

 

-    Use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate governance and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Directors' responsibility statement

Each of the Directors (who are listed on pages 84-87) confirms that to the best of his or her knowledge:

 

-    The financial statements prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

 

-    The Group Directors' Report and Strategic Report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

 

-    As at the date of this report there is no relevant audit information of which the Company's auditor is unaware. Each Director has taken all the steps he or she should have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditor are aware of that information

 

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.

 

Signed on behalf of the Board of Directors:

 

Andy Reynolds Smith                     John Shipsey

Chief Executive                               Chief Financial Officer

23 September 2020

 

 

Enquiries:

Matthew Whyte

Deputy Company Secretary

Matthew.Whyte@smiths.com

 

 

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the "Company") and its subsidiaries (together, the "Group") and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and the businesses operated by the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its directors accept no liability to third parties. This document contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

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