Final Results

Smiths Group PLC 21 September 2004 Smiths Group: Preliminary Results for the year ended 31 July 2004 Highlights • £350m pre-tax, 45.9p EPS (continuing, before goodwill & exceptionals) • Statutory reporting: pre-tax £300m, EPS: 38.0p (2003: £217m, 20.0p) • At constant currency, sales up 7%, operating profit* up 2% • After currency translation, sales up 2%, operating profit* down 3% • Strong underlying sales and profit growth in the second half • Free cash-flow of 45.5p per share, equivalent to earnings • Annual dividend increased by 4% to 27.0p • Outlook for growth in all divisions in 2005 *continuing activities, before goodwill amortisation and exceptionals. Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: ' Delivery of an excellent second half performance in 2004 demonstrates that we have gained the momentum in all divisions which we expect to deliver increased sales and profit in 2005. With recent contract wins, the acquisitions made last year and investment in R&D and restructuring, we believe that growth can be sustained. The proposed final dividend reflects our confidence in the improved outlook for the company.' Media: Investors: Bernard Carey Russell Plumley +44 (0) 20 8457 8403 +44 (0) 20 8457 8203 bernard.carey@smiths-group.com russell.plumley@smiths-group.com A meeting with analysts will be simultaneously webcast at 9:00am UK time on www.smiths-group.com/prelim2004 and archived there shortly after the event. Statutory reporting 2004 2003 £m £m Sales - continuing 2,678 2,629 - discontinued 55 427 ------- ------- 2,733 3,056 ------- ------- Operating profit - continuing 360 372 - discontinued 2 52 - goodwill amortisation (39) (44) - exceptional items (31) - ------- ------- 292 380 ------- ------- Pre-tax profit - continuing 350 349 - discontinued - 35 - goodwill amortisation (39) (44) - exceptional (11) (123) ------- ------- 300 217 ------- ------- EPS - continuing 45.9p 45.6p - statutory 38.0p 20.0p On a statutory basis, including discontinued activities, goodwill amortisation and exceptional charges, Smiths Group recorded pre-tax profit of £300m (2003: £217m) and earnings per share of 38.0p (20.0p) for the year ended 31 July 2004. Discontinued activities relate to the Polymer Seals business up to the date of disposal, in September 2003. The remainder of this statement refers to the continuing activities of the company before goodwill amortisation and exceptional items, to provide a more consistent basis for comparison. Smiths Group: performance of the continuing activities (before goodwill amortisation and exceptional items) £m 2004 2003 growth at constant currency Turnover 2,678 2,629 +7% Operating profit 360 372 +2% Pre-tax profit 350 349 +6% Earnings per share 45.9p 45.6p Annual dividend 27.0p 26.0p Smiths Group today reported pre-tax profit of £350m (2003: £349m) and earnings per share of 45.9p (45.6p) on its continuing activities in 2004, before goodwill amortisation and exceptional charges. The Board is recommending a final dividend of 18.25p, bringing the total for the year to 27.0p, an increase of 4%. This will mark the 34th consecutive year of dividend increases by Smiths Group. The performance of Smiths Group in 2004 marked a significant transition point. Like-for-like sales growth gathered momentum in the second half. The cost base was reduced during the year and productivity improved. The focus of M&A shifted from non-core disposals to value-enhancing acquisitions. Markets and demand from customers began to move in a positive direction. While some of these directional changes were masked by US dollar depreciation, profits earned in North America, the company's largest market, increased in dollar terms. The benefits of the company's progress in 2004 are expected to be seen in fuller measure in 2005. On sales of £2,678m (£2,629m), the company earned operating profit of £360m (£372m), resulting in a net margin of 13% (14%). Compared with 2003, operating performance included an adverse currency translation, principally due to the weaker US dollar, which reduced sales by £137m and profit by £20m. When measured on a constant currency basis, the company's sales increased by 7% and operating profit by 2%. The second half of the financial year showed a marked improvement on the comparable period in 2003, with constant currency sales up by 8%, and profits by 10%. All four divisions strengthened their market positions: Aerospace with major programmes on the Boeing 7E7, Detection with rapid expansion beyond the airport sector, Medical with the Cozmo insulin pump and Specialty Engineering with recovery in the telecom sector. Pre-tax profits benefited from reduced financing costs, with cash balances held in sterling and low cost dollar-borrowings hedging US assets. EPS benefited from a 0.5% reduction in the company's tax rate to 26.5%. Smiths Group is recognised for its ability to generate cash, and this was again evident in the 2004 performance. Operating cash-flow of £329m, after capital expenditure, equated to 91% of operating profit, underpinned by close control of working capital. Free cash-flow after interest, tax and exceptionals was £255m or 45.5p per share, benefiting from net interest receipts Net debt at the year end fell to £273m from £715m at the start, resulting from the strong operating cash-flow and net M&A proceeds of £291m. During the year the company announced restructuring programmes to enhance operational performance, with associated costs being incurred over a two year period. Half the expenditure is for improving competitiveness in Aerospace, with the balance being spent on rationalising manufacturing and distribution in Medical and on integrating X-ray and trace product lines in Detection. A P&L charge of £31m has been recorded in 2004, of which £20m had been spent by the year end. These restructuring charges, partly offset by a £20m gain on property and business disposals, are treated as exceptional in the Accounts. In the course of 2004, the company spent £215m on acquisitions to strengthen all four divisions. For Aerospace, the engine components business DGT was acquired for £56m in May; for Detection, Cyrano Sciences and SensIR were acquired for £8m and £41m in February and June respectively; for Medical, the remaining minority in the Japanese distributor was purchased for £16m in January and the device company DHD was acquired for £30m in June; and for Specialty Engineering, microwave components company TRAK was acquired for £61m in May. A further £3m was paid in deferred considerations on earlier acquisitions. A number of small disposals from Specialty Engineering were made in the year, with net proceeds of £24m, equivalent to one times sales. In September 2003, the disposal of the Polymer Seals business was completed for net proceeds of £483m, and its contribution up to the date of disposal is shown as discontinued. An exceptional gain of £12m on this disposal was recorded after having impaired £137m of related goodwill last year. Smiths Group has continued to invest in the development of new products and technologies which ensure competitive advantage. Total spending on R&D was £260m (2003: £243m), of which £136m (an increase of £14m and representing 5% of 2004 sales) was directly funded by the company and written off against profit. The balance was recharged to customers. The year-end Balance Sheet includes retirement benefit liabilities of £162m after tax, compared to £308m a year earlier, benefiting from an improvement in investment returns, the effect of increased company contributions and changes in the assumptions used to value the liabilities. Operating profit is recorded after the £47m service costs of benefits accrued by employees in the year. The company contributed a total of £70m, the additional £23m helping to reduce the deficit. The assets of the UK pension schemes now cover 98% of the liabilities. As reported annually since 2001, Smiths Group maintains the view that no provision is necessary for litigation involving its US subsidiary John Crane Inc (JCI), which once used encapsulated asbestos in certain products. JCI contests every case in which it is named and, with the benefit of its 'safe product' defence, has been dismissed before trial from cases involving approximately 95,000 claimants. It is currently a defendant in cases involving approximately 180,000 claims. Over the past 25 years, only 39 cases have been finally upheld against JCI, with judgements totalling $25.8m. These, and all legal costs incurred to date, were covered by insurance. The company's Balance Sheet includes an investment of £325m in preference shares of TI Automotive Ltd. No dividends on the shares have been recognised in the Accounts. Smiths Group employees numbered 27,000 at the year end, including 15,000 in North America and 7,000 in the UK. North America (US, Canada and Mexico) accounted for 52% of sales by origin and 61% of profit. The benefits of strong growth in the region were largely offset in the results by the translation impact of the weaker US dollar year-on-year. UK sales by origin were 26% of the total, including £473m in exports. By division, Aerospace generated 38% of Smiths Group sales, Detection 12%, Medical 18% and Specialty Engineering 32%. Smiths Aerospace (before goodwill amortisation and exceptional items) £m 2004 2003 growth at constant currency Turnover 1,006 998 +7% Operating profit 100 105 +2% Margin 10% 11% Measured at a constant exchange rate, Smiths Aerospace sales increased by 7% and operating profits by 2%. Company-funded R&D was £6m up, at £81m, maintaining a pattern of increasing investment in recent years which has had a direct impact on profits. Commercial OE sales increased by 9%, with increased 737 production particularly benefiting Smiths. There was no pick-up in the commercial aftermarket, as airlines continued to run down stocks of spares despite higher aircraft utilisation. The military OE business now approaches half of the division's total sales, and grew by 11% in the year. The military aftermarket was flat, as the high utilisation of aircraft causes update programmes to be delayed. In commercial aerospace, the Boeing Company selected Smiths to supply three major systems for the 7E7 Dreamliner, its new generation of commercial aircraft. This confirmed Smiths' position as a first tier systems integrator and key supply chain partner of Boeing. The awards included the Common Core System which hosts the aircraft's avionics and utilities, the landing gear actuation and the high lift system in the wing. Over their lifetime, revenue from these products is expected to approach $3 billion. Airbus had earlier selected Smiths to supply systems for the other major new commercial aircraft in current development, the A380, which is scheduled to begin test flights early in 2005 before entering service in 2006. The landing gear extension and retraction system includes both actuation and electronics, and the first flight test equipment was delivered by Smiths on time in July. Military sales continued to grow, and a number of new contracts provide an assured future. Illustrating the competitiveness of its digital technologies Smiths will supply both the flight management and stores management systems for the US Navy's multi-mission maritime aircraft (MMA), as part of a Boeing-led consortium. Contracts secured on the joint unmanned combat air system (J-UCAS) led by Northrop Grumman include the vehicle management computing system, establishing a leading role for Smiths in this next generation of military air combat. In April, the first phase of a 130,000 sq ft manufacturing facility for Smiths Aerospace components was opened in Suzho, Jiang Su province, China. The plant is initially making precision-machined engine components and this will soon be followed by the transfer of other components, in both cases for commercial aerospace applications. As prime aircraft makers drive suppliers to reduce costs, so Smiths Aerospace is making progress on lean manufacturing and consolidation of facilities. At the same time, previously separate administrative operations are being moved into shared service centres. The efficiency drive includes evaluation of the company's own supply chain, and strategic partnerships are being formed with a number of key suppliers. In May, Smiths acquired the business of DGT, a US manufacturer of specialist components for jet engines. It complements existing capabilities in complex engine fabrications and also provides a low-cost manufacturing plant in Poland. Smiths Detection (before goodwill amortisation and exceptional items) £m 2004 2003 growth at constant currency Turnover 317 273 +21% Operating profit 55 71 -20% Margin 18% 26% The 21% increase in sales by Smiths Detection on a constant currency basis reflects the combination of underlying growth and the inclusion of Heimann for 12 months in this period, versus 8 months a year earlier. Conversely, the operating profit comparison is affected by the inclusion in 2003 of a one-off requirement to supply 3,000 Ionscan trace detection units, needed to provide an explosives detection capability at all major US airports ahead of a December 2002 deadline. Demand for detection equipment broadened out during the year, with military applications, critical infrastructures, ports and border controls, and public events increasingly balancing airports as sources of growth. While the urgent requirement for trace detection units provided an exceptional boost to performance in the previous financial year, the growth trend remains positive, with industry-wide sales of new equipment expected to expand at a double digit rate for some years to come. Trading in the second half of the year was considerably ahead of the comparable period in 2003, helped by the wider range of applications and by continuing growth in the established business sectors, including airports. Contracts have been secured jointly with Boeing to provide service and maintenance of the equipment supplied to US airports, and further growth in service revenues is being targeted. As part of the effort to enhance security for travellers in the US, Smiths has been selected to participate in three pilot programmes to screen rail passengers and their baggage for explosives. A contract for anthrax detection at US mail sorting offices started to generate revenue in the second half. Smiths Detection has a highly competitive mail screening product, for commercial as well as government customers, having developed a unique system which can detect biological agents and toxins. The Greek government chose Smiths equipment for security screening at the Athens Olympics, and the company supplied more than 260 X-ray systems and 200 chemical agent detectors. Detection also received an order to equip all international and regional airports throughout Greece with X-ray baggage inspection systems. Cargo inspection equipment is in increasing demand, required as much to detect contraband as for preventing terrorism. Customs authorities in Israel, Japan, Latvia, New Zealand and Russia, as well as the port of Marseilles ordered systems in the year. The Chinese Aviation Authority ordered X-ray systems to inspect baggage and freight, while both Frankfurt and Hamburg airports placed substantial orders for checked-baggage inspection systems. In the military sector, the UK Ministry of Defence and US Department of Defense bought large numbers of chemical agent detectors. An emerging market for military and other equipment is 'First Responders', the emergency services who need to know what threats they are dealing with when they attend an incident. Smiths Detection continues to invest in the development and acquisition of technologies required to reinforce market leadership. Company-funded R&D increased by £9m to £21m in 2004, resulting in new products which include the Sentinel walk-through unit and the Bio-Seeq hand held detector. The acquisition of SensIR brought in the capability of sampling suspect solids and liquids at the scene of an incident using infra-red spectrometry, while Cyrano Sciences added a miniaturised sensor, developed with funding from the US Department of Defense, which can be worn on a uniform to warn of dangerous gases in the vicinity. Smiths Detection is now established as an internationally recognised business, with market leadership across a broad range of detection technologies. At the end of the year, the division held a substantial orderbook, which underpins the outlook for strong growth in 2005. As announced earlier, Stephen Phipson was appointed Group Managing Director of this division with effect from the start of the current financial year. Mr Phipson was previously MD of Interconnect, within Specialty Engineering. Smiths Medical (before goodwill amortisation and exceptional items) £m 2004 2003 growth at constant currency Turnover 488 486 +5% Operating profit 92 88 +12% Margin 19% 18% At constant exchange rates, sales by Smiths Medical increased by 5% and operating profits by 12%. Nearly three quarters of the division's profit originates from the US. The almost one point improvement in margins to 19% resulted principally from efficiency gains in manufacturing and purchasing. In the US, sales by the Anaesthesia & Safety Devices (ASD) business continued to grow. ASD's extensive range of needle protection safety devices helped hospitals move towards greater compliance with federal legislation committing them to protect healthcare staff from accidental needle stick injuries. New products for pain management and for controlling patients' temperature during critical and intensive care procedures also contributed to a better performance. Again in the US, the Medication Delivery & Patient Monitoring (MDPM) business achieved strong growth, driven by good market penetration of the Cozmo pump for diabetics. This device, not much larger than a mobile phone, frees Type 1 diabetes sufferers from the regimen of multiple daily injections. The pump has now additionally been introduced in Canada, France, Australia and Germany and the total supplied since its launch in November 2002 exceeds 11,500. In a further development of this technology, Smiths Medical MDPM has recently introduced an integrated pump and blood/glucose monitor, named Cozmonitor, considerably strengthening its competitive advantage in this rapidly expanding market. To maximise the impact of the US salesforce, sales teams have been organised around the two main product groups and now concentrate on both individual hospitals and large-scale buying organisations. Cross-selling opportunities have been increased by a wider range of products. Outside the US, Smiths Medical International is now responsible for all markets except Japan. Closer control of distributors around the world and the ability to market the complete range of products is generating incremental business. In Japan, the company acquired the outstanding minority interests in Smiths Medical Japan from its founders, to facilitate the next stage of its development. New management has been introduced, the distribution chain is being rationalised, and the business is now focusing on high-margin Smiths Medical devices and progressively moving out of products sourced from third parties. Japan is the world's second largest market for medical devices, and the company's strong market position provides an opportunity for sales and profit growth. During the year, Smiths Medical established a global operations business unit which has centralised control of production in order to safeguard quality and improve efficiency. With the continued transfer of product lines, the majority of high volume assembly work has now been relocated to the main manufacturing facility in Tijuana, Mexico, with a number of other components outsourced to the Far East. The acquisition of DHD Healthcare in the US added a product range of respiratory devices in a high-growth sector which complements the existing airway devices. The business has now been integrated with ASD. Specialty Engineering (before goodwill amortisation) £m 2004 2003 growth at constant currency Turnover 868 872 +4% Operating profit 113 108 +11% Margin 13% 12% On a constant currency basis, the sales of Specialty Engineering increased by 4%, and operating profits by 11%. Growth in the higher margin business and consolidation of manufacturing raised the division's margin by almost a percentage point to 13%. This is the most cash-generative division of the company and this year's profit was entirely converted to cash. There were a number of small disposals early in the year, whose performance is only included up to the date of sale. There are four main business units in the division, and their markets including high technology electronics, industrial process plant and consumer durables were generally positive, although investment in the oil & gas sector was more variable. While raw material cost increases were noticeable, Specialty Engineering has been able to reflect most of them in its own pricing. Interconnect, making components and sub-assemblies for connecting, protecting and controlling critical electronic systems, was the division's principal growth driver, benefiting from a recovery in high technology spending. The increase in sales and profits was due to a combination of new product applications and improved market conditions across defence, telecoms and industrial sectors. As the mobile telecommunications industry prepared for third generation telephony, the infrastructure build-out drove demand for a variety of specialist Interconnect products. In China, the Shanghai facility, opened in 2003 to service the local wireless communications market, is already contributing to profits. Recent innovations in areas such as microwave components, lightning strike protection and microwave cable assembly strengthened the business' market position. Manufacturing efficiencies following relocation to low-cost economies in previous years have started to feed through to profits. The acquisition of TRAK Communications, a leader in the design and manufacture of microwave sub-systems, antennas and related components, extended Interconnect's offering of microwave components. This is a rapidly growing sector, with microwave technology used in a wide range of applications from mobile telecommunications to defence, homeland security and unmanned aircraft. John Crane, which is a leading provider of rotating seals for use in process plants such as oil and gas, remained steady during 2004, due to delayed investment in the oil fields of the Middle East. There was an improvement in sales in Latin America, particularly as the Venezuelan oil industry recovered from the two-month strike of the previous financial year. John Crane's joint venture to service Gazprom in Russia is now well-established. Flex-Tek makes innovative, high performance ducting and hosing for a wide range of HVAC, industrial and domestic equipment customers. The business made significant operational improvements, including the purchase of a Mexican plant and the further consolidation of facilities in North America. Flex-Tek now includes Tubular Systems, which was previously within the Aerospace division and supplies flexible and rigid hosing to both aerospace and industrial customers. Marine Systems, the marine electronics and charts business, has a strong underlying order book but profit growth was held back by delayed deliveries from one of its suppliers towards the year end. A Kelvin Hughes integrated bridge system was installed on the Queen Mary 2 cruise liner, the world's largest passenger ship launched in January 2004. Across the division, action has been taken to maximise full potential through improved sales and marketing and by broadening both the customer base and the geographic boundaries. Particular success has been achieved in selling telecommunications components increasingly into defence applications, and Interconnect plans to bring its specialised connectors to the European medical equipment market, as it has already done in North America. As announced in July, John Langston, previously Group Managing Director, Smiths Detection, has assumed the same role for Specialty Engineering, with effect from the start of the new financial year. He succeeds Einar Lindh, who will retire at the end of January 2005. The Board As previously indicated, Keith Orrell-Jones retired yesterday after six years as Chairman of Smiths Group. His place has been taken by Donald Brydon CBE, who joined the Board in April. Mr Brydon holds a number of senior posts in the City of London and was Chairman of Amersham plc until its acquisition by GE earlier this year. With the retirement of Sir Colin Chandler taking place at the AGM, Peter Jackson has today been named as the company's senior independent director. Prospects Whilst it is still early in the current financial year, Smiths' business environment appears more positive than it has been for some years. The company expects greater stability ahead, with US-led economic recovery underway and commercial aerospace volumes regaining momentum over the next two years. Additionally, the steps already taken to enhance Smiths' performance are improving the company's outlook. Increased research and development over several years is now being rewarded with notable contract wins. While the most significant awards, from Boeing for their new 7E7, will not start to pay back for some time, new products in all divisions are driving sales growth. Advanced electronic devices from Interconnect, further iterations of the Cozmo pump from Medical and on-site threat analysis from Detection will all make an early contribution. The restructuring already underway, principally to bring autonomous production and sales units into more highly integrated operations, will lead to significant efficiency gains, while the company's focus on productivity will remain constant. With improved operational gearing, sales growth will flow through to better margins. The company continues to seek a combination of organic and acquisition-led growth to maximise value creation for shareholders. With organic growth being encouraging, Smiths evaluates acquisition opportunities which align with its current areas of activity, benchmarked against demanding criteria. The strength of the Balance Sheet and the free cash-flow enable the company to move decisively when necessary. In summary, the combination of more stable business conditions, technology leadership and restructuring benefits has enhanced the prospects for profitable growth. Delivery of an excellent second half performance in 2004 demonstrates that we have gained momentum in all divisions which we expect to deliver increased sales and profit in 2005. With recent contract wins, the acquisitions made last year and investment in R&D and restructuring, we believe that growth can be sustained. The proposed final dividend reflects our confidence in the improved outlook for the company. Annual General Meeting The Annual General Meeting of the company will be held at the offices of JP Morgan, 60 Victoria Embankment, London EC4Y 0JH, on Tuesday, 16 November at 2.30pm. If approved at the meeting, the recommended final dividend on the ordinary shares will be paid on 19 November to shareholders registered at the close of business on 22 October. The ex-dividend date will be 20 October. Tables attached - Profit & loss account - Statement of total recognised gains and losses - Summarised balance sheet - Cash-flow statement - Notes to the accounts PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2004 Ordinary Discontinued Goodwill Exceptional activities businesses amortisation items Total Note £m £m £m £m £m Continuing operations 2,649.4 2,649.4 Acquisitions 29.0 29.0 Discontinued businesses 55.0 55.0 ------------------------------------------------------------------------- Turnover 2 2,678.4 55.0 2,733.4 ------------------------------------------------------------------------- Continuing operations 356.6 (35.6) (30.9) 290.1 Acquisitions 3.5 (1.5) 2.0 Discontinued 2.2 (1.9) 0.3 businesses ------------------------------------------------------------------------- Operating profit 2 360.1 2.2 (39.0) (30.9) 292.4 Exceptional items 3 19.9 19.9 ------------------------------------------------------------------------- Profit before interest and tax 360.1 2.2 (39.0) (11.0) 312.3 Net interest payable (13.0) (2.4) (15.4) Other finance (costs)/ income - retirement benefits 3.2 3.2 ------------------------------------------------------------------------- Profit/(loss) before taxation 350.3 (0.2) (39.0) (11.0) 300.1 Taxation 9 (92.8) 4.4 1.2 (87.2) ------------------------------------------------------------------------- Profit/(loss) after taxation 257.5 (0.2) (34.6) (9.8) 212.9 Minority interests ------------------------------------------------------------------------- Profit/(loss) for the period 257.5 (0.2) (34.6) (9.8) 212.9 Dividends 4 (151.6) (151.6) ------------------------------------------------------------------------- Retained profit/(loss) 105.9 (0.2) (34.6) (9.8) 61.3 ------------------------------------------------------------------------- Earnings per share 5 Basic 45.9p (6.2)p (1.7)p 38.0p Diluted 45.8p (6.2)p (1.7)p 37.9p PROFIT AND LOSS ACCOUNT (unaudited) Year ended 31 July 2003 Ordinary Discontinued Goodwill Exceptional activities businesses amortisation items Total Note £m £m £m £m £m Continuing operations 2,629.2 2,629.2 Acquisitions Discontinued businesses 426.9 426.9 ------------------------------------------------------------------------- Turnover 2 2,629.2 426.9 3,056.1 ------------------------------------------------------------------------- Continuing operations 371.9 (32.4) 339.5 Acquisitions Discontinued businesses 51.9 (11.7) 40.2 ------------------------------------------------------------------------- Operating profit 2 371.9 51.9 (44.1) 379.7 Exceptional items 3 (122.5) (122.5) ------------------------------------------------------------------------- Profit before interest and tax 371.9 51.9 (44.1) (122.5) 257.2 Net interest payable (20.3) (17.3) (37.6) Other finance (costs)/ income - retirement benefits (2.2) (2.2) ------------------------------------------------------------------------- Profit/(loss) before taxation 349.4 34.6 (44.1) (122.5) 217.4 Taxation 9 (94.3) (9.4) 3.9 (5.3) (105.1) ------------------------------------------------------------------------- Profit/(loss) after taxation 255.1 25.2 (40.2) (127.8) 112.3 Minority interests (0.5) (0.3) (0.8) ------------------------------------------------------------------------- Profit/(loss) for the period 254.6 24.9 (40.2) (127.8) 111.5 Dividends 4 (145.4) (145.4) ------------------------------------------------------------------------- Retained profit/(loss) 109.2 24.9 (40.2) (127.8) (33.9) ------------------------------------------------------------------------- Earnings per share 5 Basic 45.6p 4.5p (7.2)p (22.9)p 20.0p Diluted 45.5p 4.5p (7.2)p (22.9)p 19.9p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (unaudited) Year ended Year ended 31 July 2004 31 July 2003 £m £m Profit for the financial year attributable to shareholders 212.9 111.5 Exchange adjustments (45.0) 14.7 Taxation recognised on exchange gains/losses: Current - United Kingdom (0.4) 5.3 Deferred - United States 3.7 FRS 17 - Retirement benefits: Actuarial gains/(losses) on retirement benefit schemes 145.5 (258.6) Deferred tax credit related thereto (39.3) 73.4 ---------- ---------- Total recognised gains and losses for the financial year 273.7 (50.0) ========== ========== SUMMARISED BALANCE SHEET (unaudited) 31 July 31 July Note 2004 2003 (restated) £m £m Fixed assets Intangible assets 728.2 830.2 Tangible assets 423.5 557.6 Investments: TI Automotive Ltd 10 325.0 325.0 Other 2.3 2.8 -------- -------- 1,479.0 1,715.6 Stocks 11 423.5 489.5 Debtors 12 629.6 673.4 Creditors 13 (854.8) (870.0) -------- -------- 1,677.3 2,008.5 Net debt 14 (272.7) (715.1) Provisions for liabilities and charges 17 (120.0) (116.0) -------- -------- Net assets excluding retirement benefits 1,284.6 1,177.4 Retirement benefits - net liabilities 16 (162.1) (308.4) -------- -------- Net assets 1,122.5 869.0 ======== ======== Capital and reserves Share capital 140.3 139.8 Share premium 183.0 170.0 Reserves 799.2 547.4 -------- -------- Shareholders' equity 15 1,122.5 857.2 Minority equity interests - 11.8 -------- -------- Capital employed 1,122.5 869.0 ======== ======== The balance sheet as at 31 July 2003 has been restated following the adoption of UITF 38. SUMMARY CASH-FLOW STATEMENT (unaudited) Year ended Year ended 31 July 2004 31 July 2003 Total £m Operating profit before goodwill amortisation and exceptional restructuring costs 362.3 423.8 Depreciation 72.1 88.9 Retirement benefits (22.9) (4.6) Working capital (28.6) (41.6) -------- ------- Net cash inflow from ordinary activities before capital expenditure and restructuring 382.9 466.5 Capital expenditure (53.9) (86.3) ------- ------- Net cash inflow from ordinary activities after capital expenditure and before restructuring 329.0 380.2 Interest and financing (paid)/received 10.5 (26.1) Tax paid (61.5) (60.8) Exceptional restructuring expenditure (23.0) (22.8) ------- ------- Free cash-flow 255.0 270.5 Acquisitions (including term debt acquired) and disposals 291.4 (105.1) Dividends (145.6) (142.5) Other 41.6 (12.8) ------- ------- Decrease in net debt 442.4 10.1 Net debt at beginning of period (715.1) (725.2) ------- ------- Net debt at end of period (272.7) (715.1) ======= ======= CASH-FLOW STATEMENT (unaudited) Year ended Year ended 31 July 2004 31 July 2003 £m £m Operating Profit (before exceptional restructuring costs) 323.3 379.7 Goodwill amortisation and impairment 39.0 44.1 Depreciation 72.1 88.9 Retirement benefits (22.9) (4.6) Increase in stocks (2.4) (1.6) Increase in debtors (78.8) (55.8) Increase in creditors 52.6 15.8 ------- ------- Net cash inflow from normal operating activities 382.9 466.5 Exceptional restructuring expenditure (23.0) (22.8) ------- ------- Net cash inflow from operating activities 359.9 443.7 Returns on investments and servicing of finance 10.5 (26.1) Tax paid (61.5) (60.8) Capital expenditure and financial investment (53.9) (86.3) Acquisitions and disposals 291.4 (92.0) Equity dividends paid (145.6) (142.5) Management of liquid resources (383.7) 2.3 Financing 21.2 (68.7) ------- ------- Increase/(decrease) in cash 38.3 (30.4) Increase/(decrease) in short-term deposits 383.7 (2.3) (Increase)/decrease in other borrowings (10.9) 73.4 Loan note repayments 2.9 1.2 Term debt acquired with acquisitions - (13.1) Exchange variations 28.4 (18.7) ------- ------- Decrease in net debt 442.4 10.1 Net debt at beginning of period (715.1) (725.2) ------- ------- Net debt at end of period (272.7) (715.1) ======= ======= NOTES TO THE ACCOUNTS (unaudited) 1) Accounting Policies With the exception of the adoption of the requirements of Urgent Issues Task Force Abstract 38 (UITF 38) (note 15), there have been no changes to the accounting policies used in preparing these financial statements from those used in the annual report and accounts for 2003. 2) Analyses of turnover and profit - continuing ordinary activities, before goodwill amortisation and exceptional items Market Turnover Profit 2004 2003 2004 2003 £m £m £m £m Aerospace 1,005.8 998.2 99.7 105.5 Detection 317.1 273.3 55.6 70.6 Medical 487.7 486.1 91.6 87.9 Specialty Engineering 867.8 871.6 113.2 107.9 ------------------- ------------------- 2,678.4 2,629.2 360.1 371.9 =================== Net interest (13.0) (20.3) Other finance income /(costs) 3.2 (2.2) ------------------- Profit before taxation from continuing ordinary activities 350.3 349.4 =================== Geographical origin Turnover Profit 2004 2003 2004 2003 £m £m £m £m United Kingdom 784.9 762.3 46.0 52.6 North America 1,472.6 1,513.3 221.0 241.4 Continental Europe 471.7 399.6 69.5 58.0 Other overseas 188.6 165.1 23.6 19.9 Inter-company (239.4) (211.1) ------------------- ----------------- 2,678.4 2,629.2 360.1 371.9 =================== ================= NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 3) Exceptional items 2004 2003 £m £m Operating items: Restructuring and closure costs Aerospace (15.2) Detection (3.1) Medical (12.6) ------- ------- (30.9) ======= ======= Non-operating items: Profit/(loss) on disposal of businesses (note 7) 7.8 14.5 Write-down of goodwill on anticipated future disposal (note 7) - (137.0) Exceptional property surplus 12.1 ------- ------- 19.9 (122.5) ======= ======= 4) Dividends A final dividend of 18.25p per share (2003 17.25p) has been recommended and, if approved, will be paid on 19 November 2004 to holders of all ordinary shares whose names are registered at close of business on 22 October 2004. 5) Earnings per share Separate figures are given for earnings per share related to the average number of shares in issue for each year: Year ended Year ended 31 July 2004 31 July 2003 Basic 560,656,310 558,610,819 Effect of dilutive share options 893,394 838,286 Diluted 561,549,704 559,449,105 NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 6) Acquisitions During the year ended 31 July 2004 the company acquired the businesses set out below. The fair values are provisional and will be finalised in the 2005 accounts. Consideration Businesses acquired (including associated costs) Goodwill Net Assets £m £m £m DGT 56.5 40.2 16.3 TRAK 61.2 52.6 8.6 SensIR 41.0 39.1 1.9 Other 60.0 46.4 13.6 ------------------------------------- 218.7 178.3 40.4 ===================================== Consistency of accounting Assets acquired Book value policy Fair value £m £m £m Fixed assets 10.5 (1.1) 9.4 Stocks 24.3 (0.8) 23.5 Debtors 19.8 (1.0) 18.8 Creditors (23.1) 0.2 (22.9) Minority interest 10.7 10.7 Provisions (0.7) (0.2) (0.9) Taxation 1.1 0.7 1.8 ------- ------- ------- Net assets acquired 42.6 (2.2) 40.4 ======= ======= Goodwill 178.3 ------- Consideration - total 218.7 ======= satisfied in cash (including £2.3m previously deferred) 215.4 deferred 5.6 In accordance with the provisions of FRS 10, the Group amortises goodwill arising on acquisitions after 1 August 1998 on a straight-line basis over a period of up to 20 years. NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 7) Disposals The principal disposal during the year was the Polymer business, which was sold on 30 September 2003. The table below sets out the details of this transaction and other disposals. Polymer Other Total £m £m £m Consideration, net of expenses 483.2 23.6 506.8 Net assets sold and retained liabilities (350.6) (18.4) (369.0) ---------------------------------- Surplus over net assets/retained liabilities 132.6 5.2 137.8 Goodwill previously set directly against reserves (257.9) (9.1) (267.0) ---------------------------------- (125.3) (3.9) (129.2) Goodwill charged to profit and loss account in the prior period 137.0 137.0 ---------------------------------- 11.7 (3.9) 7.8 ================================== 8) Operating profit is after charging 2004 2003 £m £m Depreciation of fixed assets 72.1 88.9 Research and development expenditure 136.8 129.7 9) Taxation 2004 2003 £m £m Taxation on the profit for the year: UK Corporation tax at 30% (2003 - 30%) 39.3 27.8 Double taxation relief (49.2) (13.8) ------- ------- (9.9) 14.0 Overseas taxation 82.2 76.4 ------- ------- 72.3 90.4 Tax relief on exceptional items (5.8) ------- ------- Current taxation 66.5 90.4 Deferred taxation on ordinary and discontinued activities 16.1 9.4 on exceptional items 4.6 5.3 ------- ------- 87.2 105.1 ======= ======= NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 10) TI Automotive Limited The investment comprises £325m in preference shares held at cost. No dividends on the shares have been recognised in the Accounts. 11) Stocks 2004 2003 £m £m Stocks comprise: Raw materials and consumables 128.6 142.3 Work in progress 151.6 142.9 Finished goods 187.4 244.9 ------- ------- 467.6 530.1 Less: payments on account (44.1) (40.6) ------- ------- 423.5 489.5 ======= ======= 12) Debtors 2004 2003 £m £m Amounts falling due within one year: Trade debtors 502.2 533.7 Amounts recoverable on contracts 61.7 61.6 Other debtors 15.7 23.2 Prepayments and accrued income 40.8 44.1 ------- ------- 620.4 662.6 Amount falling due after more than one year: Other debtors 9.2 10.8 ------- ------- Total debtors 629.6 673.4 ======= ======= NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 13) Creditors 2004 2003 £m £m Amounts falling due within one year: Trade creditors 185.8 191.5 Bills of exchange payable 3.0 2.7 Other creditors 24.4 25.1 Proposed dividend 102.5 96.5 Corporate taxation 135.8 145.8 Other taxation and social security costs 20.6 37.4 Accruals and deferred income 329.6 295.4 ------- ------- 801.7 794.4 Amount falling due after more than one year: 53.1 75.6 ------- ------- Total creditors (excluding borrowings) 854.8 870.0 ======= ======= 14) Borrowings and net debt Fixed rate borrowings Weighted average Floating Interest Years rate Total Total Rate Fixed Amount borrowings 2004 2003 £m £m £m £m Currencies: Sterling 6.65% 9 303.0 1.4 304.4 328.0 US Dollar 5.47% 8 55.2 123.8 179.0 204.3 Euro 5.29% 18 12.1 208.2 220.3 250.1 Japanese Yen 15.1 15.1 8.0 Other 3.1 3.1 6.7 ------------------------------------------- 370.3 351.6 721.9 797.1 Cash and deposits (449.2) (82.0) ==================== ------------------- Net debt 272.7 715.1 =================== Maturity: On demand/under one year 6.2 269.2 275.4 118.3 One to two years 0.4 0.4 212.8 Two to five years 0.8 0.8 1.6 Over five years 362.9 82.4 445.3 464.4 ------------------------------------------- 370.3 351.6 721.9 797.1 =========================================== NOTES TO THE ACCOUNTS (unaudited) - CONTINUED 15) Movements in shareholders' equity 2004 2003 £m £m Total recognised gains and losses for the financial year 273.7 (50.0) Dividends (151.6) (145.4) ------- ------- 122.1 (195.4) Write back of goodwill on disposals 130.0 211.5 Share issues 13.2 5.9 ------- ------- Net increase/(decrease) in shareholders' equity 265.3 22.0 Shareholders' equity: At start of year as previously reported 862.6 840.6 Prior period adjustment - UITF 38 (5.4) (5.4) ------- ------- At end of year 1,122.5 857.2 ======= ======= UITF 38 requires shares held by ESOP Trusts to be treated as a reduction of shareholders' equity rather than as a fixed asset. In consequence the figures for Investments and shareholders' equity have been reduced by £5.4m for both 2004 and 2003. 16) Post retirement benefits The company has adopted voluntarily the full accounting requirements of FRS17- Retirement Benefits. The FRS17 valuations of the principal pension schemes in the UK and US are summarised below: 2004 2003 UK USA UK US £m £m £m £m Funded pension plans-market value of assets 2,262.3 295.7 2,173.8 294.2 ------------------- -------------------- Funded pension plans surplus/(deficit) (57.7) (70.4) (218.9) (89.3) Unfunded plans and post retirement healthcare (46.2) (73.0) (47.2) (97.8) liabilities ------------------- -------------------- (103.9) (143.4) (266.1) (187.1) Deferred tax asset 25.5 59.7 73.7 71.1 ------------------- -------------------- Retirement benefits - net liabilities (78.4) (83.7) (192.4) (116.0) =================== ==================== NOTES TO THE ACCOUNTS (unaudited) - CONTINUED The impact of FRS17 on the profit and loss account is summarised below: 2004 2003 Funded schemes Unfunded Funded schemes Unfunded plans plans UK US UK & US UK US UK & US £m £m £m £m £m £m Service cost 31.9 12.7 2.8 32.6 12.7 2.3 --------------------------------------------------------------- Exceptional item - curtailment gain (13.6) (1.5) --------------------------------------------------------------- Expected return on scheme assets (142.5) (20.9) (132.7) (20.0) Interest on scheme liabilities 128.9 22.9 8.4 122.6 24.5 7.8 --------------------------------------------------------------- Net return (13.6) 2.0 8.4 (10.1) 4.5 7.8 --------------------------------------------------------------- Total charged to profit and loss account 4.7 14.7 11.2 21.0 17.2 10.1 =============================================================== 17) Provisions for liabilities and charges 2004 2003 £m £m Service guarantees and product liability 47.9 49.1 Reorganisation 19.0 14.0 Property 16.8 17.1 Litigation 18.1 22.2 ------- ------- 101.8 102.4 Deferred tax 18.2 13.6 ------- ------- Total provisions for liabilities and charges 120.0 116.0 ======= ======= 18) Contingent liabilities As previously reported, John Crane, Inc. ('John Crane'), a subsidiary of the company, is one of many co-defendants in numerous law suits pending in the United States in which plaintiffs are claiming damages arising from exposure to, or use of, products containing asbestos. The John Crane products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of John Crane, the products were safe. John Crane ceased manufacturing products containing asbestos in 1985. John Crane has resisted every case in which it has been named and will continue its robust defence of all asbestos-related claims based upon this 'safe product' defence. In addition John Crane has access to insurance cover which, while it is kept under review, is judged sufficient to meet all material costs of defending these claims for the foreseeable future. As a result of its defence policy, John Crane has been dismissed before trial from cases involving approximately 95,000 claims over the last 25 years. John Crane is currently a defendant in cases involving approximately 180,000 claims. Despite these large numbers of claims, John Crane has had final judgments against it, after losing appeals, in only 39 cases, amounting to awards of some US$26m over the 25-year period. These awards, the related interest and all material defence costs, have been met in full by insurance. No provision relating to this litigation has been made in these accounts. Note: As stated in note 1, the above financial statements have been prepared in accordance with the accounting policies set out in the company's accounts for the year ended 31 July 2003, apart from the adoption of UITF 38 (ESOP Trusts). They do not constitute the full financial statements within the meaning of S240 of the Companies Act 1985. Figures relating to the year ended 31 July 2003 are abridged. Full accounts for Smiths Group plc for that period have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain a statement under S237(2) or S237(3) of the Companies Act 1985. -ends- This information is provided by RNS The company news service from the London Stock Exchange

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