Annual Financial Report

RNS Number : 8741D

Smiths Group PLC

12 October 2018

 

12 October 2018

SMITHS GROUP PLC

ANNUAL FINANCIAL REPORT 2018

LISTING RULE LR 9.6.3 R

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

1. Annual Report 2018 (for the financial year ended 31 July 2018);

2. Notice of Annual General Meeting 2018; and

3. Annual General Meeting Proxy Form.

The above-mentioned documents will be uploaded to the National Storage Mechanism website, in pdf file format, and will shortly be available for viewing by visiting www.morningstar.co.uk/uk/NSM.

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 2018 and the Notice of Annual General Meeting 2018 can now be viewed online by visiting the Company's website, www.smiths.com.  Printed copies may be obtained by writing to the Company Secretary, Smiths Group plc, 4th Floor, 11-12 St James's Square, London SW1Y 4LB, UK or sending an e-mail request to [e-mail].

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 2018 and their impact on the financial statements were contained in the Final Results announcement issued by the Company, through the Regulated News Service of the London Stock Exchange, at 07:00 on 21 September 2018 (RNS No. 4796B) (the 'Results announcement'). 

Other than the information set out below (which is extracted from the Annual Report 2018), the regulated information in the Annual Report 2018 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 2018 (available online from www.smiths.com and www.morningstar.co.uk/uk/NSM). The statutory accounts of the Company for the financial year ended 31 July 2018 will be delivered to the Registrar of Companies in due course.

This announcement is not a substitute for reading the full Annual Report 2018.

An extract comprising the unedited full text on pages 52 to 59 in the Annual Report 2018 is set out below. Certain non-reproducible graphics contained in the Annual Report are not reproduced.  The graphic version of pages 52 to 59 of the Annual Report 2018 is attached as a pdf file.

http://www.rns-pdf.londonstockexchange.com/rns/8741D_1-2018-10-12.pdf

PRINCIPAL RISKS AND UNCERTAINTIES

We maintain a register of principal risks and uncertainties covering the strategic, operational, financial and compliance risks faced by the Group. We review each risk and rate them according to the current net risk position i.e. the likelihood of occurrence, taking into account external factors and current internal mitigating controls, and we consider an appropriate target exposure or risk appetite. This, and our 'velocity' metric, which reflects the expected time we would have to react should a risk materialise, drives mitigation priorities. Our trend metric shows the net position of the risk year-on-year.

We updated our register of principal risks and uncertainties following the Executive Committee workshop held during FY2018. While we continue to monitor and manage a wider range of risks, the tables below summarise those which might have the greatest impact if they were to materialise, and the key mitigating controls in place to address them.

These principal risks are ordered based on our current consideration of potential impact, taking into account the time we would have to react.

Risk	Potential impact	Key mitigating controls
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. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	Loss of market share Material adverse effect on profitable growth Erosion of our reputation as a leader in our markets and of our ability to attract and retain talent Need for higher R&D spend to maintain sales growth	Diversified technology portfolio serving a range of sectors and geographies, mitigating exposure to any one sector or area Proactive repositioning of the portfolio around the most attractive markets, where we can sustainably hold a top three position based on technology leadership Sustained and smarter investment in R&D (FY2018: 4.6% of revenue, FY2017: 4.6%) Focus on building a culture of innovation Innovation Fund to leverage critical mass and accelerate key areas New Product Introduction (NPI) process rolled out across divisions to accelerate time to market
Current exposure to risk: Medium Target exposure to risk: Medium Trend: Net position of risk vs FY2017: No change Velocity: Time to react:Years
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. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	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	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
Current exposure to risk: Medium Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Years
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. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	Recall of products due to manufacturing flaws, component failures and/or design defects in order to avoid serious, or potentially catastrophic, failure Exposure to losses in the event of a cyber security breach relating to our products, particularly at Smiths Detection and Smiths Medical. These include not only customer losses, but also those of a potentially large class of third parties Damage to our reputation and reduction in market acceptance of, and demand for, our products from an adverse event involving one of our products	The US SAFETY Act provides legislative protection for certain Smiths Detection products in the US. We support efforts to implement similar legislation in other markets 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 (e.g. FAA, FDA, API, etc.) Quality development and quality integration built into NPI processes Material litigation managed under the oversight of the Group General Counsel Group-wide Quality Council drives standard definitions, identifies and shares best practice and reduces the cost of poor quality Insurance cover for product liability 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
Current exposure to risk: Medium Target exposure to risk: Target Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Days / Weeks
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 cyber criminals. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	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	Board oversight of the approach to mitigating cyber risks 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 Risk analysis and mitigation processes relating to product cyber- resilience embedded in the product lifecycle process
Current exposure to risk: Low Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Days / Weeks
ECONOMY AND GEOPOLITICS While global economic conditions remain relatively benign, there is concern that we are in the late stage of the economic cycle. Threats to free trade are increasing. Strategic objective: 1 OUTPERFORM OUR TARGET MARKETS Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	Stresses on operational capacity resulting from a recovery in volumes driven by higher oil prices Governments continue to look for ways to improve tax revenues to ease fiscal budget pressures Adverse impact on business performance due to the imposition of tariffs. Sanctions have already affected trade with Iran and Russia. 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 Geopolitical tensions, most notably in the Middle East and the Koreas, carry a direct financial threat, particularly if the latter escalates into a global issue	Diversified portfolio of businesses which mitigates exposure to any one country or sector and geographic spread that 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 Identification and application of learnings from past downturns through the cycle Sustainable tax strategy to optimise the Group's position Representation of our interests by our Government Relations team Trade compliance officers monitor compliance with sanctions and other trade restrictions Monitoring of the ongoing negotiations between the UK and the EU in order to assess the potential impact of Brexit and any transitional arrangements that may be agreed
Current exposure to risk: Medium Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Years
GROWTH MARKETS A significant proportion of our revenue comes from the US and European markets, with a notable proportion coming from governments. Strategic objective: 1 OUTPERFORM OUR TARGET MARKETS	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 Detection, Smiths Medical and Smiths Interconnect, impacting financial performance	A diversified portfolio of businesses mitigates exposure to any one country, sector or customer Growth strategy that places emphasis on expanding operations in higher- growth markets and regions that are currently underserved, including Asia Strategic process to capture continuing opportunities in current markets Government Relations function that collaborates with colleagues across the Group to advise on developments More resilient services and consumable components built into some of our government-related business
Current exposure to risk: Medium Target exposure to risk: Medium Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Years
ETHICS AND COMPLIANCE We have c.22,000 employees in more than 50 countries. Individuals may not all behave in accordance with the Company'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; and General Data Protection Regulation (GDPR). Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	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, due to operating in relatively consolidated markets. 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	Group-wide ethics framework which includes the Smiths Way, 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 a non- retaliation policy) Reporting and investigation mechanisms Competition law/anti-trust training programmes and guidance Network of trade compliance officers across the Group that oversee import and export activities Dedicated staff at Smiths Medical who maintain close contact with the FDA and other key regulators Group General Counsel and divisional General Counsels monitor legislative changes and report and monitor actions as necessary Anti-Modern Slavery Policy and procedures to reduce the risk of modern slavery within the Company and our supply chain GDPR working group driving programme to ensure compliance
Current exposure to risk: Low Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Days / Weeks
CONTRACTUAL LIABILITIES We may fail to deliver the products and services we are obliged to deliver, or fail in our contractual execution due to delays or breaches by our suppliers or other counterparties. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	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 Smiths reputation with other customers/ prospective customers, and loss of revenue and profit due to higher costs, liquidated damages or other penalties. Smiths 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 Smiths expense.	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 that harmonise the contract review process Cross divisional US Government working group determines and shares best practice on government contracting
Current exposure to risk: Low Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Months
ACQUISITIONS AND INTEGRATION Our strategy is predicated primarily on organic growth. However, acquisitions can also play a role in building and/or strengthening competitive positions. Acquisitions carry risk, but also 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. Strategic objective: 1 OUTPERFORM OUR TARGET MARKETS Strategic objective: 3 STRONG FINANCIAL FRAMEWORK	Poor acquisitions lead directly to financial damage and indirectly to loss of shareholder confidence in management 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	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 Larger transactions approved only by the full Board Post-acquisition reviews with lessons learned incorporated into future projects
Current exposure to risk: Medium Target exposure to risk: Medium Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Months
SUPPLY CHAIN - MANUFACTURING Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers drive growth. Manufacturing continues to be exposed to external events which could have significant adverse consequences, including natural catastrophes, disease pandemics and terrorist attacks. We are also affected by the social, economic, regulatory and political conditions where we operate. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	Inability to deliver products/solutions to customers, impacting financial performance and reputation	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 Business interruption and property damage insurance
Current exposure to risk: Low Target exposure to risk: Low Trend: Net position of risk vs FY2017: Velocity: Time to react: Days / Weeks
SUPPLY CHAIN - SOLE SOURCE Our businesses depend on the availability and timely delivery of raw materials and purchased components. Where sole or single source suppliers are the only qualified source of raw material and/or components, any disruption to supply could adversely impact production, associated customers and the downstream supply chain. Strategic objective: 2 DELIVER WORLD-CLASS COMPETITIVENESS	Inability to deliver products/solutions to customers, impacting financial performance and reputation	Risk management process based on failure mode and effects analysis (FMEA) principles developed by the Group Strategic Sourcing team that includes sole or single suppliers Mitigation plans, including qualification of alternative sources of supply where appropriate, in place All critical suppliers screened on a daily basis with any change to risk status communicated to the appropriate procurement leader for analysis and follow-up
Current exposure to risk: Low Target exposure to risk: Low Trend: Net position of risk vs FY2017: No change Velocity: Time to react: Days / Weeks

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

-    select suitable accounting policies and then apply them consistently;

-    make judgements and accounting estimates that are reasonable and prudent;

-    state whether the consolidated accounts comply with International Financial Reporting Standards ('IFRS'), and the Parent Company accounts comply with applicable UK Accounting Standards, subject to any material departures disclosed and explained in the accounts; and

-    prepare the accounts on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the accounts and the Directors' remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors consider that the Annual Report, 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. Each of the Directors (who are listed on pages 72 to 75) confirms that to the best of his or her knowledge:

-    the Group's financial statements have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the Group's assets, liabilities and financial position as at 31 July 2018 and of its profit for the financial year then ended;

-    the Group Directors' report and Strategic report include a fair review of the development and performance of the business and the position and performance of the Group, together with a description of the principal risks and uncertainties that the Group faces; 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 auditors are aware of that information.

Signed on behalf of the Board of Directors:

Andy Reynolds Smith                  John Shipsey

Chief Executive                          Chief Financial Officer

20 September 2018

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

Enquiries:

Matthew Whyte

Deputy Company Secretary

[e-mail]

[phone]

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.

 

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