Annual Financial Report

RNS Number : 6001P

Smiths Group PLC

11 October 2019

 

11 OCTOBER 2019

SMITHS GROUP PLC

ANNUAL FINANCIAL REPORT 2019

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 FY2019 (for the financial year ended 31 July 2019);

2. Notice of Annual General Meeting 2019; 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 FY2019 and the Notice of Annual General Meeting 2019 can 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 2019 and their impact on the financial statements were contained in the Smiths Group plc Annual Results for the year ended 31 July 2019 announcement issued by the Company through the Regulated News Service of the London Stock Exchange at 07:00 on 20 September 2019 (RNS No. 0370N) (the 'Results announcement'). 

Other than the information set out below (which is extracted from the Annual Report FY2019), the regulated information in the Annual Report FY2019 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 FY2019 (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 2019 will be delivered to the Registrar of Companies in due course.

This announcement is not a substitute for reading the full Annual Report FY2019.

An extract comprising the unedited full text on pages 64 to 70 in the Annual Report FY2019 is set out below. Certain non-reproducible graphics contained in the Annual Report FY2019 are not reproduced. The graphic version of pages 64 to 70 of the Annual Report FY2019 is attached as a pdf file.

http://www.rns-pdf.londonstockexchange.com/rns/6001P_1-2019-10-11.pdf

PRINCIPAL RISKS AND UNCERTAINTIES

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

We updated our register of principal risks and uncertainties following review by the Executive Committee and approval by the Board. Two risks reported in FY2018 have been merged to form the integrated supply chain risk. Customer has been added as a new principal risk.

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

RISK	POTENTIAL IMPACT	KEY MITIGATING CONTROLS	ASSURANCE
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: Increase from FY2018 Link to SES: Technology; Customer; Programme Included in viability assessment: n/a Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework	-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 -Need for higher R&D spend to maintain sales growth	-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 -Increased and smarter investment in R&D (FY2019: 4.5% of continuing operations revenue, FY2018: 4.1%) -Focus on building a culture of innovation with a long-range Technology Roadmap for each division -Targets to increase the proportion of spend on next generation and transformational initiatives -New Product Introduction (NPI) process established across divisions to accelerate projects -Vitality Index as KPI -Robust IP protection via patents and other protections, and litigation where appropriate	-Vitality data is reviewed and is part of the SES dashboard -Adherence to NPI process is audited and embedded in systems -Technology Roadmap is part of the Group strategic cycle
ECONOMY AND GEOPOLITICS There are external indicators that we are in the late stage of the economic cycle. Threats to free trade are increasing. Risk owner: John Shipsey Trend: Increase from FY2018 Link to SES: Production Included in viability assessment: n/a Link to strategic objectives: Outperform our chosen markets; Deliver world-class competitiveness; Strong financial framework	-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 -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 China, US, India, the Middle East, South Korea and North Korea	-Diversified portfolio of businesses which mitigates exposure to any one country or sector and 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 -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 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 and any transitional arrangements which may be agreed	-Impact of US sanctions to date has been absorbed -Order tracking reported and monitored -Brexit coordination group working effectively
ACQUISITION / INTEGRATION AND DIVESTMENT / SEPARATION 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 Link to SES: Programme Included in viability assessment: n/a Link to strategic objectives: Outperform our chosen markets; Strong financial framework	-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	-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 advisors	-Strong internal team -Proper governance and oversight -Learnings from previous acquisitions (Morpho Detection, Seebach GmbH, United Flexible) and divestments (PDI, Microwave, Wallace, Bearings) -Ongoing evaluation measured against original business case
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: No change Link to SES: Technology; Programme; Production Included in viability assessment: Yes Link to strategic objectives: Deliver world-class competitiveness	-Recall of products due to manufacturing flaws, component failures, damage to persons / property, and/or design defects, in order to avoid serious, or potentially catastrophic, failure -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 -Exposure to losses in the event of a cyber security breach relating to our products -These include not only customer losses, but also those of a potentially large class of third parties	-Divisional quality risk assessments which 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 -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 -Group-wide Quality Council drives standard definitions, identifies and shares best practice, and reduces the cost of poor quality -Insurance cover for product liability -Material litigation managed under the oversight of the Group General Counsel	-Quality KPIs (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 2 new products
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 Link to SES: People; Customer; Supply Included in viability assessment: Yes Link to strategic objectives: 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 as a result of 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 ability to report anonymously and a non-retaliation policy) -Reporting and investigation mechanisms -Antitrust training programmes and guidance -Network of trade compliance officers across the Group that monitor upcoming changes in regulation and oversee import and export activities -Legal function monitors legislative changes and reports and monitors actions as necessary -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	-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 on-line ethics training and compliance modules -Reporting non-compliance cases to business, Executive and Audit & Risk Committees
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. Risk owner: Philippe Roman Trend: No change Link to SES: Technology; Programme Included in viability assessment: Yes Link to strategic objectives: 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 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	-Formal reviews with Executive Committee and the Board -Vulnerability scanning/event reporting embedded -External reviews of vulnerability controls -Mandatory staff training -Compliance with recognised standards -Cyber leads at divisions
INTEGRATED SUPPLY CHAIN Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers. 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. This applies to our own manufacturing sites and those of our key component suppliers. Risk owner: Philippe Roman Trend: No change Link to SES: Supply Included in viability assessment: Yes Link to strategic objectives: 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 -Mitigation plans for sole source suppliers, sub-contractors and service providers are developed and deployed by divisions to include qualification of alternative sources of suppliers where appropriate -Business interruption and property damage insurance	-Externally provided business interruption risk surveys of operational sites -Business continuity planning (BCP) testing and results -Insurance requirements driven by the Group's / divisions' risk appetite is validated at least annually -Mitigation plans reviewed at divisional procurement leadership team meetings and reported in the procurement scorecard
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 market sectors where we have, or could have, a sustainable position. Risk owner: Roland Carter Trend: No change Link to SES: Technology; Customer Included in viability assessment: n/a Link to strategic objectives: Outperform our chosen 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, impacting financial performance	-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 -Corporate affairs 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	-Increased rate of growth provides assurance that actions are working -Managing Director councils established in India and China -Joint venture and partnership arrangement in China -Digital Forge established
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: Increase from FY2018 Link to SES: Customer; Programme Included in viability assessment: n/a Link to strategic objectives: Outperform our chosen markets	-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	-As part of the Group innovation framework and our approach to potential technology disruption, we include customer disruption as well as competitor and product -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	-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
CONTRACTUAL OBLIGATIONS 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. Risk owner: Mel Rowlands Trend: No change Link to SES: Customer; Supply; Programme; Production Included in viability assessment: n/a Link to strategic objectives: 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 -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 which harmonise the contract review process -Cross-divisional US Government working group determines and shares best practice on government contracting	-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
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 Link to SES: People Included in viability assessment: n/a Link to strategic objectives: 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 -People Plan oversight by the Board -Diversity & Inclusion Plan and initiatives	-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 review meetings

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 applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements; 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.

The Directors are responsible for the maintenance and integrity of 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

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 76 to 79) 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 2019 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;

-    the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; 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

19 September 2019

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.

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

 

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