18 September 2013

Annual results for the year ended 31 July 2013

£m Headline*     Statutory
Continuing activities 2013 2012 Growth Underlying# 2013 2012
Revenue 3,109 3,038 2% 2% 3,109 3,030
Operating profit 560 554 1% 1% 493 407
Operating margin 18.0% 18.2% (20) bps - 15.9% 13.4%
Pre-tax profit 498 497 0% 1% 442 366
Basic EPS 92.7p 92.6p 0%   90.7p 65.4p
Free cash flow 237 217        
Dividend 39.5p 38.0p 4%   39.5p 38.0p
Special Dividend 30.0p -     30.0p -
Return on capital employed 16.6% 16.5% 10 bps      

*In addition to statutory reporting, Smiths Group reports its continuing operations on a headline basis. Headline revenue and profit is before exceptional items, amortisation and impairment of acquired intangible assets, pension finance credit and financing gains/losses from currency hedging. Free cash-flow and return on capital employed are described in the Financial review.
#Organic growth at constant currency.


Highlights

  • Headline revenue 2% higher; driven by John Crane, Detection and Flex-Tek
  • Headline operating profit up 1% – increased investment in growth drivers
  • Strong headline operating cash conversion at 98% – with free cash-flow of £237m
  • Company-funded investment in new product development up 5% to £112m
  • Emerging market revenue up 14%; now representing 16% of Group revenues
  • Identified another phase of restructuring in all divisions to fund growth/enhance margins
  • Dividend up 4% to 39.5p and special dividend of 30p; reflecting the balance sheet strength

"We continued to invest to rebalance revenue and profit streams away from government to commercial customers, and also raise our exposure to faster growing markets. This on-going realignment allowed us to grow revenue, despite a difficult trading environment. Underlying revenue growth in Smiths Detection, John Crane and Flex-Tek more than offset declines in Smiths Medical and Smiths Interconnect. Headline margins were affected by the increased investment in future growth drivers across the Group, contract challenges in Smiths Detection, and the introduction of the US medical device tax in Smiths Medical.

"Our priority is to continue to raise our investment in sales, marketing and new product development to generate medium to long-term value for our shareholders through sustainable growth. We are funding this investment by delivering operational improvements and efficiencies with initiatives underway across all divisions. We are also committed to managing Group capital allocation to increase shareholder value.

"The Group’s capital structure and its strong and stable cash flows are more than adequate to meet the immediate investment needs of the business. The Board is recommending a return of cash to shareholders of around £118m, in the form of a special dividend of 30 pence per share."

Philip Bowman
Chief Executive



Divisional highlights*

    Headline operating profit margin Headline return on capital employed
  % of Group headline revenue Underlying headline revenue growth* Underlying headline profit growth* 2013 2012 2013 2012
John Crane 32% 2% 10% 23.4% 21.6% 25.7% 24.0%
Smiths Medical 27% (1)% (7)% 22.2% 23.5% 16.6% 17.6%
Smiths Detection 18% 8% (16)% 10.4% 13.3% 8.8% 10.3%
Smiths Interconnect 15% (1)% 3% 14.9% 14.7% 12.4% 12.3%
Flex-Tek 8% 8% 13% 17.1% 16.3% 30.8% 28.4%
Group 100% 2% 1% 18.0% 18.2% 16.6% 16.5%



John Crane

  • Revenue up 2% driven by both original equipment and aftermarket revenue, particularly in the oil and gas sector
  • Margins improved 180 basis points to 23.4%, a new high
  • Sales to emerging markets grew 7% while investment in new products rose 9%
  • Order book provides visibility for continued growth through the first half of financial year 2014.

Smiths Medical

  • Revenue declined 1% on lower hardware sales and flat single-use consumables
  • Trading in developed markets affected by constrained hospital budgets, slow procedure rates and adverse pricing
  • Invested in additional sales capabilities in emerging markets; 12% increase in new product development
  • Margins constrained by incremental investment in growth drivers (£10m) and US medical device tax (£4m)
  • Developed markets likely to be challenging; margins should benefit from restructuring initiatives

Smiths Detection

  • Revenue up 8%, driven by transportation, ports and borders
  • Margins affected by the impact of execution challenges on certain contracts
  • Strong new product pipeline: including Hi-Scan 10080 XCT scanner and CIP-300 car screener
  • Order book slightly behind last year; scope to improve margins through cost-saving initiatives

Smiths Interconnect

  • Revenue down 1% as growth in connectors offset by declines in microwave and power management
  • Investment in new products increased 5% while emerging market sales grew 5%
  • Margins up 20 basis points reflecting productivity gains
  • Markets remain challenging, particularly for US and European defence customers

Flex-Tek

  • Revenue up 8% driven primarily by aerospace and US residential construction
  • Improved volumes, mix and pricing contributed to a 13% increase in profit
  • Aerospace and US construction sectors expected to support continued sales growth
  • Margins geared to volume improvements across Flex-Tek's end markets

*All figures are on a headline basis. Revenue and profit growth are at constant currency and exclude the impact of acquisitions and disposals

 

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Statutory reporting
Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, pre-tax profit from continuing operations was £442m (2012: £366m) and earnings per share were 90.7p (2012: 65.4p).

The items excluded from headline performance comprise:

  • amortisation and impairment of acquired intangible assets of £47m (2012: £62m);
  • £17m in connection with John Crane, Inc. asbestos litigation (2012: £44m);
  • £8m associated with Titeflex Corporation litigation following establishment last year of a 10-year rolling provision in respect of future claims (2012: £55m);
  • £8m of exceptional restructuring costs (2012: £15m);
  • costs of acquisitions, disposals and aborted transactions of £3m (2012: £2m);
  • £5m profit on disposal of property (2012: nil);
  • £1m profit on disposal of diabetes intellectual property (2012: £1m);
  • £1m profit on disposal of businesses (2012: £31m);
  • £2m gain on reassessed contingent consideration provided on acquisitions (2012: £2m);
  • £4m gain on changes to pensions plans (2012: nil);
  • £16m for retirement benefit finance income (2012: £24m); and
  • financing losses of £2m (2012: £3m).

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. 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 in respect of this document save as would arise under English law.

This press release contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

Presentation
The presentation slides and a live webcast of the presentation to analysts are available at www.smiths.com/results at 09.00 (UK time) on Wednesday 18 September. A recording of the webcast is available later that day. A live audio broadcast of the presentation is also available by dialling (no access code required):

UK toll free: 0808 237 0033
International: +44 (0)20 3426 2845
US/Canada toll free: 1 866 928 6048

An audio replay is available for seven days on the following numbers (access PIN 641156#):
UK toll free: 0808 237 0026
International: +44 (0)20 3426 2807
US/Canada toll free: 1 866 535 8030

Photography
Original high-resolution photography and broadcast quality video is available to the media from the media contacts above or from http://www.smiths.com/images.aspx.