19 March 2014

Interim results for the six months ended 31 January 2014

  Headline*     Statutory†
  2014
£m
2013
£m
Reported Underlying# 2014
£m
2013
£m
Revenue 1,442 1,475 (2)% (1)% 1,442 1,475
Operating profit 245 253 (3)% (2)% 170 211
Operating margin 17.0% 17.1% (10) bps  – 11.8% 14.3%
Pre-tax profit 215 223 (4)% (3)% 132 166
Basic EPS 39.5p 40.9p (4)%   23.7p 30.7p
Free cash flow 30 71        
Dividend 12.75p 12.50p 2%   12.75p 12.50p
Return on capital employed 16.6% 16.7% (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 charges and financing gains/losses from currency hedging. Free cash-flow and return on capital employed are described in the Financial review

†The statutory figures for 2013 have been restated for IAS 19 (revised 2011).

#Organic growth at constant currency.


Highlights

  • Company-funded investment in new product development up 7% to £57m
  • Strong headline operating cash conversion at 86%
  • Dividend up 2%; reflecting continued strong cash generation
  • Strength in commercial markets offset by challenging healthcare and defence markets
  • John Crane and Flex-Tek report underlying revenue and margin growth
  • Medical generated strong cash; margin affected by volume, price pressure and device tax
  • New divisional medium-term operating ranges for revenue growth and margins

 

"We made good progress in our businesses that serve commercial customers, while those with significant government and healthcare exposure continued to face challenging trading conditions. Underlying revenue and margins advanced in John Crane and Flex-Tek but were primarily offset by declines in Smiths Medical. Smiths Interconnect and Smiths Detection saw more modest reductions compared against strong prior periods.

"We continue to focus on operational improvements to support investment in both high growth markets and new products to accelerate medium-term revenue growth. We have outlined mid-term operating ranges for revenue growth and headline operating margin for each of the divisions. We also provide further details of our ‘Fuel for Growth’ programme scheduled to generate £60m of annual savings by 2017 to reinvest in growth initiatives.

"We anticipate improved underlying trading in the second half driven by a strong John Crane order book, some recovery in Smiths Interconnect and further growth in Flex-Tek. Smiths Detection will continue to be affected by government budget pressures. Smiths Medical is expected to continue to face tough trading. At current rates, foreign exchange headwinds will increase in the second half, with a 4-5% impact on full year earnings. We will maintain our focus on investing to drive sales growth in what are attractive long-term markets, and delivering further operational improvements, while providing strong cash conversion and returns."

Philip Bowman
Chief Executive



Divisional highlights*

    Headline operating profit margin Return on capital employed
  % of Group headline revenue Underlying headline revenue growth* Underlying headline operating profit growth* 2014 2013 2014 2013
John Crane 32% 2% 9% 23.2% 21.8% 26.5% 24.3%
Smiths Medical 27% (4)% (18)% 18.3% 21.1% 15.3% 16.9%
Smiths Detection 17% (1)% (7)% 11.8% 12.0% 8.6% 12.2%
Smiths Interconnect 15% (4)% (7)% 13.1% 13.5% 12.2% 12.3%
Flex-Tek 9% 3% 13% 18.3% 16.7% 32.7% 29.8%
Group 100% (1)% (2)% 17.0% 17.1% 16.6% 16.7%


John Crane

  • Revenue up 2% driven by original equipment and aftermarket revenue in mid- and downstream segments
  • Margins improved 140 bps to 23.2% to record high, driven by higher revenue and cost efficiencies
  • Strong order book signals an improving growth rate through the second half

Smiths Medical

  • Revenue down 4% driven by volume and price pressure; volume affected by distributor destocking in the US
  • Margins down 280 bps, reflecting adverse operational gearing, impact from US medical device tax
  • Full year revenue and profit expected to be below the level achieved last year

Smiths Detection

  • Revenue down 1% against a strong comparator –critical infrastructure gains offset by transportation declines
  • Margins down 20 bps with lower volumes and adverse operational gearing
  • Full year revenue expected to be lower than the level achieved last year on a slightly weaker order book

Smiths Interconnect

  • Revenue 4% lower against a strong comparator period, constrained by headwinds in defence (c. 28% of sales)
  • Margins down 40 basis points with lower volumes and investment for growth offsetting productivity gains
  • Second half should benefit from improvements in commercial markets; cost savings support margin recovery

Flex-Tek

  • Revenue up 3% driven mainly by US residential construction and specialty heating elements.
  • Margins up 160 bps, helped by better volumes, mix and pricing.
  • Aerospace and US construction demand should support continued growth; margins geared to volume

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

 

To view the full press release please click here

 

Statutory reporting
Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, pre-tax profit from continuing operations was £132m (2013: restated £166m) and earnings per share were 23.7p (2013: 30.7p).

The items excluded from headline performance comprise:

  • amortisation of acquired intangible assets of £21m (2013: £23m);
  • £36m in connection with John Crane, Inc. asbestos litigation (2013: £11m);
  • £5m in connection with Titeflex Corporation litigation (2013: £3m);
  • £14m of exceptional restructuring costs (2013: £5m);
  • £5m for retirement benefit finance charge (2013: restated charge of £12m);
  • £4m legacy retirement benefit administration costs (2013: restated £4m)
  • £2m profit on disposal of businesses (2013: £1m);
  • £1m cost of acquisition and disposals (2013: nil); and
  • £1m gain on legal settlements and diabetes royalty payments

In the period to 31 January 2013, in addition to the above, £1m gain on changes to pension plans and £1m of financing losses were also excluded from headline performance.

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 19 March. 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 0030
International: +44 (0)20 3139 4830
US/Canada toll free: 1 866 928 7517
Access code: 78370991#

An audio replay is available for seven days on the following numbers (access PIN 645568#):
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.