Smiths Group - FY22 Full Year Results

RNS Number : 4306A

Smiths Group PLC

23 September 2022

 

SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHS ENDED 31 JULY 2022

Pioneers of progress - improving our world through smarter engineering

A year of accelerating growth and stronger execution

· ACCELERATING GROWTH - +3.8% organic revenue growth, fastest in nearly a decade

o Organic revenue growth ahead of expectations, +3.8%¹ (H1: +3.4%; H2: +4.1%);
5 consecutive quarters of growth; reported growth of +6.7%

o Headline ² EPS growth +17.8%

o High demand across most end markets with strong order growth of +11%³

o £51m of revenue from new products launched in FY2022; R&D investment
increased +14%

o Targeted M&A contributed +1.8% of reported growth

o Increasing returns to shareholders with proposed total dividend of 39.6p, +5%

· STRONGER EXECUTION - Smiths Excellence System fully embedded

o Resilient operating margin of 16.3% with operating profit² of £417m

o Price offsetting inflation and mitigating other supply chain impacts

o Solid operating cash conversion⁴ of 80%; investment in working capital and capex to support growth and mitigate supply chain impacts

o More focused portfolio following completion of Smiths Medical sale and rapid return of proceeds with share buyback programme now 76% complete

o Smiths Excellence System now fully embedded, with high impact projects underway and targeted savings actions to drive enhanced efficiency

· INSPIRING & EMPOWERING OUR PEOPLE - an energised and focused team

o A refreshed leadership team with new senior appointments throughout the year

o Introduced Smiths Leadership Behaviours to build on our strong culture

o Driving an even more dynamic and inclusive culture with greater focus on diversity

o Continuing to translate our commitment to ESG leadership into action

· STRONG BALANCE SHEET - well positioned  to execute our growth strategy

o £380m reduction in gross debt; leverage of 0.3x net debt/headline EBITDA⁴

o Final buy-in of the TI Group Pension Scheme, delivering certainty for scheme members and shareholders

Headline2	FY2022	FY2021	Reported	Organic1
Revenue	£2,566m	£2,406m	+6.7%	+3.8%
Operating profit	£417m	£372m	+12.0%	+1.7%
Operating profit margin4	16.3%	15.5%	+80bps	(30)bps
Basic EPS	69.8p	59.3p	+17.8%
Operating cash conversion4	80%	129%	(49)%
ROCE4,5	14.2%	13.9%	+30bps

Statutory	FY2022	FY2021	Reported
Revenue	£2,566m	£2,406m	+6.7%
Operating profit	£117m	£326m	(64.1)%
Profit for the year (after tax)	£1,035m	£285m	+263.2%
Basic EPS	267.1p	71.7p	+272.5%
Dividend per share	39.6p	37.7p	+5.0%

FY2023 OUTLOOK

· Expect to deliver 4.0-4.5% organic revenue growth with moderate margin improvement

· Strong order books and leading market positions support sustained momentum

· Cost inflation being actively managed through productivity programmes and pricing actions

· Macroeconomic and geopolitical uncertainty as well as supply chain challenges continue

Paul Keel, Chief Executive Officer, commented:

" We continued to demonstrate strong progress in FY2022, executing at pace on our growth strategy. We delivered growth ahead of expectations , our fastest organic growth in nearly a decade.  Along with accelerating growth, we further strengthened our company through increased investments in innovation, commercialisation and supply chain. Still more, we returned £661m of cash to our shareholders through dividends and share repurchases. 

All of this gives us confidence for continued progress in FY2023.  Despite an uncertain macro environment, we expect to deliver 4.0-4.5% organic revenue growth with moderate margin improvement.  By focusing on our top priorities of growth, execution, and people, we are creating value for our customers, colleagues, communities and investors. Together, we're building an ever-stronger future for Smiths. 

Many thanks to my colleagues around the world for doing what we do best - improving our world through smarter engineering."

UPCOMING EVENTS

Date	Event
Wednesday 9 November 2022	Q1 Trading Update
Thursday 10 November 2022	Capital Markets Event
Wednesday 16 November 2022	Annual General Meeting

Statutory reporting

Statutory reporting takes account of all items excluded from headline performance.

See accounting policies for an explanation of the presentation of results and note 3 to the financial statements for an analysis of non-headline items.

Definitions

The following definitions are applied throughout the financial report:
¹ Organic is headline adjusted to exclude the effects of foreign exchange, acquisitions and restructuring.

² Headline: In addition to statutory reporting, the Group reports on a headline basis. Definitions of headline metrics, and information about the adjustments to statutory measures, are provided in note 3 to the financial statements. Headline performance is on a Smiths Group basis, excluding the results of Smiths Medical.

³ Order growth excludes the effects of foreign exchange and includes John Crane, Smiths Detection and Smiths Interconnect

⁴ Alternative Performance Measures ("APMs") and Key Performance Indicators ("KPIs") are defined in note 29 to the financial statements.

⁵ Excludes the impact of restructuring charges

Investor enquiries Jemma Spalton, Smiths Group [phone] [e-mail]	Media enquiries Alex Le May, FTI Consulting [phone] [e-mail]
Stephanie Heathers, Smiths Group [phone] [e-mail]

Presentation

The webcast presentation and Q&A will begin at 08.30 (UK time) today at:  https://smiths.com/investors/results-reports-and-presentations

A recording will be available from 13.00 (UK time).

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

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. 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.

OUR PURPOSE

We are pioneers of progress - improving our world through smarter engineering.  Smarter engineering means helping to solve the toughest problems, for our customers, our communities and ourselves.  We help to create a safer, more efficient and better-connected world. 

OUR PRIORITIES AND TARGETS

Smiths is intrinsically strong with world-class engineering, leading positions in critical markets, and distinctive global capabilities, all underpinned by a strong financial framework.  At our Capital Markets Event in November 2021, we set out how Smiths will deliver performance in line with our significant potential by focusing on three top priorities:

1) accelerating growth

2) strengthening execution and

3) doing even more to inspire and empower our people.

Our focused plan, the Smiths Value Engine, is the means through which we will deliver the medium-term targets that we have set.  In FY2022, we made meaningful progress towards these commitments.

Priority	Progress
Growth	· Five consecutive quarters of organic revenue growth · £51m of revenue from new products launched in FY2022 · R&D investment increased +14% to 4.2% of sales (+30bps vs FY2021) · +1.8% additional growth from targeted M&A
Execution	· Price offsetting inflation and mitigating other supply chain impacts · Smiths Excellence System ("SES") fully embedded across the company with a well resourced team and 25 high impact projects underway · New sustainability strategy launched
People	· Refreshed senior leadership team leading a faster pace · Introduced Smiths Leadership Behaviours to accelerate cultural change · More ambitious diversity goals in place · >1,000 Lean Six Sigma qualifications through our SES Academy

Targets	Medium-Term Target	FY2021	FY2022	Progress
Organic Revenue Growth	4-6% (+ M&A)	(2.2)%	+3.8%	Accelerated growth towards target range
EPS Growth4	7-10% (+ M&A)	+19.3%	+17.8%	Strong growth enhanced by ongoing share buyback programme
ROCE	15-17%	13.9%	14.2%	Reflecting higher profitability
Operating Profit Margin	18-20%	15.5%	16.3%	Resilient margins amidst challenging macro environment, while continuing to invest in future growth
Operating Cash Conversion	100%+	129%	80%	Solid operating cash conversion while navigating supply chain disruption

These targets are underpinned by Smiths operational KPIs and environmental targets, including a commitment to Net Zero for Scope 1 and 2 emissions by 2040 and Net Zero for Scope 3 emissions by 2050.

FY2022 BUSINESS PERFORMANCE

The commentary below refers to Smiths Group performance excluding Smiths Medical, which was accounted for as 'discontinued operations' before the sale completed on 6 January 2022. 

£m	FY2021	FY2021 restructuring charges	Foreign exchange	Acquisitions	Organic movement	FY2022
Revenue	2,406	-	26	42	92	2,566
Headline operating profit	372	21	5	11	8	417
Headline operating profit margin	15.5%	+90bps	+0bps	+20bps	(30)bps	16.3%

Smiths delivered growth ahead of expectations with organic revenue up +3.8%.  Growth accelerated to +4.1% in the second half, which built on the momentum we had achieved in the first half of +3.4%.  We executed well in a challenging environment with positive pricing action covering the impact of elevated input costs and maintained close management of our supply chain to mitigate other impacts. 

As we strive to continually inspire and empower our great people, we launched our enhanced sustainability strategy, and set out new Smiths Leadership Behaviours. These behaviours provide a unified description of what leadership means at Smiths and a shared commitment to how we will act as employees. 

GROWTH

Growing faster is the primary driver of unlocking enhanced value creation for the Group. Through the year we delivered growth in each quarter and FY organic revenue growth of +3.8%, our best performance in nearly a decade.

Organic revenue growth (by business)	H1 2022	H2 2022	FY2022
John Crane	+5.1%	+2.5%	+3.7%
Smiths Detection	(7.2)%	(11.3)%	(9.4)%
Flex-Tek	+10.0%	+20.9%	+16.1%
Smiths Interconnect	+12.9%	+14.8%	+13.9%
Smiths Group	+3.4%	+4.1%	+3.8%

Growth accelerated in the second half for both Flex-Tek (+20.9%) and Smiths Interconnect (+14.8%). John Crane delivered +2.5% growth in the second half, impacted by cessation of sales into Russia and supply chain disruption, which impacted our ability to convert strong order intake into revenue. As expected, Smiths Detection continued to be affected by the softer Aviation OE market through the second half, but good order growth underpins our confidence in the medium-term prospects for this segment. 

Revenue grew +6.7% on a reported basis, to £2,566m (FY2021: £2,406m). This included +£26m of favourable foreign exchange translation, and +£42m from the acquisition of Royal Metal Products LLC ("Royal Metal") in February 2021.  Since February 2022, Royal Metal results have been accounted for as organic growth.

Strong execution to maximise market recovery opportunity is the first of the four actionable levers for accelerating growth.

Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace. Our strong market positions, coupled with the balanced market exposure we have across our businesses, are distinctive long-term advantages for Smiths.

Smiths organic revenue growth in our end markets	% of Smiths revenue	H1 2022	H2 2022	FY2022
General Industrial	42%	+5.7%	+16.5%	+11.4%
Safety & Security	31%	(3.5)%	(8.9)%	(6.4)%
Energy	21%	+7.5%	+0.3%	+3.5%
Aerospace	6%	+16.7%	+14.2%	+15.4%
Smiths Group	100%	+3.4%	+4.1%	+3.8%

Smiths organic revenue growth in our largest end market, General Industrial, was +11.4% in FY2022, with growth accelerating in the second half.  This was driven by John Crane's growth in segments like chemical processing, water treatment and life sciences, demand for Flex-Tek's construction products and Smiths Interconnect's semiconductor test solutions which remained strong throughout the year.  Smiths organic revenue in Safety & Security was (6.4)%, reflecting continued contraction of the Aviation OE market. This was partially offset by growth in Smith Detection's other segments as well as growth from Smiths Interconnect's defence related products. The +3.5% growth in the Energy segment reflected strong demand in John Crane. As mentioned above, second half growth was impacted by cessation of sales into Russia and supply chain disruptions. Our fastest growth in FY2022 came in Aerospace, +15.4%, as increasing aircraft builds drove strong demand for Flex-Tek and Smiths Interconnect's aerospace solutions.

As part of our growth strategy we have introduced a new approach for our business in China.  From the start of FY2023, the Smiths China leadership team now has lead responsibility for our operations in the country (excluding Smiths Interconnect's semiconductor business unit which will continue to report globally). To reflect this, Ted Wan, President of Smiths China, has joined the Smiths Group Executive Committee. 

Our second lever for faster growth is improvednew product development and commercialisation.  During FY2022, we launched 21 high impact new products including Flex-Tek's Python line sets, a flexible, multi-layer pipe used in various heating, ventilation and air conditioning ("HVAC") applications; Smiths Detection's iCMORE automated detection algorithms; and Smiths Interconnect's space qualified connectors. Gross Vitality, which measures the contribution of products launched in the last five years increased to 31% (FY2021: 25%), demonstrating our successful commercialisation of new products.

As an industrial technology leader, continuing to invest in R&D ensures we capitalise on the wealth of opportunities in our pipeline, with increasing demand for our sustainability-related products.  During FY2022, we invested £92m in R&D (FY2021: £84m), of which £80m (FY2021: £76m) was an income statement charge and £12m capitalised (FY2021: £8m). Our customers and third parties contributed a further £15m (FY2021: £10m).

To support new product launches, and the strong demand for existing solutions, we increased capex +14.5% in FY2022 to £(71)m (FY2021: £(62)m). This represents 1.5x depreciation and amortisation (FY2021: 1.2x).

Our third growth lever is building out priority adjacencies. Each of our four businesses are executing strategies to expand their growth beyond their existing core market positions. Examples in FY2022 include the launch of Smiths Interconnect's medical cable assemblies, and John Crane's multi-purpose filter; an efficient water-saving solution for the treatment of process water in pulp & paper, mining, power generation plants and refineries. 

Our fourth growth lever is using disciplined M&A to augment our organic growth focus.  Flex-Tek's acquisition of Royal Metal in February 2021 is an excellent example of this. Acquired for $107 million (7.6x trailing EBITDA), FY2022 revenue and profit growth were +48% and +70%. During H1 2022, the acquisition contributed £42m of revenue and £11m of operating profit, adding 1.8% on top of organic revenue growth for FY2022. For H2 2022, contribution from Royal Metal was included in our organic results.  Royal Metal brought a complementary HVAC portfolio, distribution synergies, and positive pricing. While driving sustained organic growth remains our priority, we continue to explore value accretive M&A opportunities across the Group. 

In January 2022, we successfully completed the sale of Smiths Medical to ICU Medical, Inc. ("ICU"), several months earlier than expected.  This was our largest portfolio move in over a decade and positions the Group even more strongly to access the growth available in our industrial technology core.  The sale generated a profit on disposal of £1.0bn, with immediate net cash proceeds of £1.3bn and further value to come from a potential $0.1bn earnout and our stake in ICU, which is recognised as a £0.4bn asset on our balance sheet.  For more information on the divestment, please see note 27 of the financial statements.

EXECUTION

Stronger execution is our second key priority.

In FY2022, headline operating profit grew +1.7% (+£8m) on an organic basis, and +12.0% (+£45m) on a reported basis to £417m (FY2021: £372m). 

£m	FY2021	FY2021 restructuring charges	Foreign exchange	Acquisitions	Organic movement	FY2022
Headline operating profit	372	21	5	11	8	417
Headline operating profit margin	15.5%	+90bps	+0bps	+20bps	(30)bps	16.3%

Headline operating profit benefited from strong profit leverage in Flex-Tek and Smiths Interconnect.  This was partially offset by the impact of supply chain disruption on John Crane and Smiths Detection, lower volumes in the Aviation OE segment of Smiths Detection, and our continued investment in growth. On a reported basis headline operating profit increased given £21m of restructuring costs booked in FY2021, favourable FX translation of £5m and H1 2022 contribution from Royal Metal.

Headline operating profit margin was 16.3%, down (30)bps on an organic basis and up +80bps on a reported basis.

Headline EPS grew +17.8%, driven by headline operating profit growth, a reduction in the effective headline tax rate and the benefit from the ongoing share buyback programme.

The headline tax charge for FY2022 of £104m (FY2021: £96m) represents an effective rate of 27.6% (FY2021: 28.9%). 

ROCE increased +30bps to 14.2% (FY2021: 13.9%).  This reflects the higher profitability of the Group, more than offsetting the temporary increase in working capital. For further detail of the calculation, please refer to note 29 to the financial statements.

Smiths has a strong track record of operating cash conversion, having averaged 100% over the last five years.  This year, we delivered solid operating cash conversion of 80% (FY2021: 129%) while navigating supply chain disruption and the associated investment in working capital.  Headline operating cash-flow⁴ was £332m (FY2021: £510m).

In FY2022, we embedded our Smiths Excellence System across the company.  SES is a step change in approach and operating rhythm; executing with greater pace, urgency and consistency in support of our priorities.

SES is well resourced with 6 full-time Master Black Belts ("MBB") and 23 Black Belts ("BB") in place and the first high impact Black Belt projects now underway. Both the MBBs and BBs are dedicated resources leading continuous improvement projects across the organisation. Their current projects are focused on improving lead times, order book conversion, increasing capacity and cost reduction which are helping to both navigate the immediate short-term disruptions and support more efficient margin expansion as we grow the top line. SES links our actions to our strategy, prioritises for high impact and creates full-time continuous improvement career paths.

We have also identified some targeted savings projects to drive enhanced efficiency and agility in responding to our end markets. In John Crane, the focus is to simplify the organisation to better serve our customers and maximise growth opportunities. In Smiths Detection, we are restructuring the operations to be more resilient and improve efficiency in response to market conditions. The non-headline charge for these savings projects is expected to be £35-40m in FY2023, with annualised benefits of £25-30m, of which approximately 50% is expected to be delivered in FY2023.

PEOPLE

Inspiring and empowering our people is our third key priority.

Safety and wellbeing are always foremost of our priorities.  We have a strong and robust safety culture and strive for a zero-harm workplace, with safety considerations integrated into all of our activities.  Our Recordable Incident Rate for FY2022 was 0.54 and continued to track below the industry average and in the top quartile of industry performance, reflecting the importance of safety in everything we do.

We continue to support our colleagues in the Ukraine/Russia region amidst the ongoing conflict. As communicated at the interim results we stopped all sales into Russia following the invasion and are in the process of exiting our operations in Russia.  An associated non-headline charge of £19m is included in the accounts, further details can be found in note 3 of the financial statements. We made a Group-wide donation to the Red Cross to support the vital work they are doing for the people of Ukraine, and implemented a donation matching scheme for our colleagues.

During FY2022 a number of senior appointments were made to the leadership team including  Clare Scherrer as Chief Financial Officer, Bernard Cicut as President of John Crane, Vera Kirikova as Chief People Officer and John Ostergren as Chief Sustainability Officer. All of these individuals bring a wealth of experience which will help accelerate our progress in executing our strategy. 

Under this refreshed leadership as we continue to strengthen our culture, we have introduced a set of behaviours; the Smiths Leadership Behaviours, to bring our values to life. These seven behaviours describe how we work with one another and take ownership and accountability for our actions. They apply to everyone at Smiths - from the shop floor to senior executives.

We developed the Smiths Leadership Behaviours through a robust process of focus groups, which gathered the views of colleagues from 21 countries and 72 sites across the organisation. These were followed by workshops with our Executive Committee to create and refine a set of behaviours that would be relevant and compelling for the whole organisation and support future growth.

The behaviours will become foundational to processes including recruitment, development, career progression and reward. We believe that they will enable the Smiths culture to be even more dynamic and inclusive.

An important step in embedding an inclusive and diverse culture is increasing our gender diversity.  We are focused on proactively increasing the number of women in leadership roles at Smiths. We have 45% female representation on the Smiths Board, and we welcomed three new female members to our Executive Committee in FY2022 (31% female). Women make up 28% of our global employee population, but only 24% of our senior leaders are female. We are working to change this with a programme of activities designed to identify, support and advance the careers of women at Smiths. 

OUR ESG APPROACH

Environment, Social and Governance ("ESG") performance is at the very centre of our Purpose, and fundamental to each of our priorities.

During FY2022, we established a Science, Sustainability & Excellence Committee of the Board, chaired by Dame Ann Dowling, to provide guidance and supervision of our sustainability strategy.  We put in place the company's first Chief Sustainability Officer who is leading our sustainability strategy and targets throughout the business. This strategy (which will be set out in full in our inaugural Sustainability at Smiths Report in October), describes how we are embracing and prioritising ESG performance at Smiths to deliver on our Purpose and create genuine and significant value for all our stakeholders. To support the delivery of our strategy, executive compensation is now linked to our sustainability targets, with ESG metrics (GHG reductions and energy usage) included in our annual and our long-term incentive compensation programmes beginning in FY2023.

Delivering sustainable growth means leveraging our unique capabilities to develop and commercialise green technology that will help transform industries and provide our customers with solutions for their operations, enabling them to meet their own environmental targets across climate risk, energy transition and other environmental needs. Examples include methane abatement; more energy efficient critical safety infrastructure; electrical heating solutions; transmission and storage of alternative fuels; carbon capture; and next generation electrical connectors that will safely and reliably support the digitisation and electrification of infrastructure.

Delivering our ESG commitments which include targets for reduction in water, waste and packaging, and our Net Zero GHG emissions commitments for Scope 1,2 and 3, will improve the environmental execution of our operations, our products and our supply chain. In FY2022 we made further progress against these targets reducing normalised GHG emissions by (7.2)%, normalised water usage by (4.5)% and normalised non-recyclable waste by (11.5)%. These reductions are on top of significant progress already made since FY2007, when we first implemented environmental targets.

We have set and communicated FY2024 environmental goals, an important step to support the delivery of our commitment to Net Zero GHG Emissions for Scope 1 and 2 by 2040.  We have a clear roadmap for how we will achieve this ( as published on our website ). It details the path we are taking to achieve Net Zero Scope 1 and 2 emissions by 2040 and, furthermore, our ambition to achieve Net Zero Scope 1, 2 and 3 emissions by 2050. 

Our people are a key asset in delivering our ESG commitments.  We know that great things happen when we protect, respect, and support our teams. We nurture our people and develop their talents so that they flourish and can help build the Smiths of tomorrow. We are supporting our teams to strengthen our local communities and we are working every day with our unwavering commitment to strong governance and ethical practice.

FINANCIAL FRAMEWORK

Smiths simple and effective framework translates business strengths into financial strengths resulting in strong cash generation that in turn fuels reinvestment in organic growth, complementary M&A and shareholder returns. 

Free cash-flow

In FY2022, free cash-flow⁴ generation was £130m (FY2021: £284m) or 31% of headline operating profit (FY2021: 76%), reflecting an increased investment in inventory and capital expenditure.

Pensions

Included within free cash-flow was £9m of pension contributions, (FY2021: £30m).  The significant reduction in pension contributions reflects no contributions needed to the TI Group Pension Scheme ("TIGPS") and £3m to the Smiths Industries Pension Scheme ("SIPS") given the well-funded position of both schemes. For FY2023, we expect total cash contributions to be around £(12)m (including a funded US plan, unfunded schemes and post-retirement healthcare plans).

In June 2022, the TIGPS Trustee completed a deal to secure its remaining uninsured pension liabilities, by way of a £640 million bulk annuity buy-in with Rothesay Life plc.  This means that all of the Scheme's liabilities are now insured, with a final buy-out of the scheme to be completed as soon as reasonably practical, delivering certainty for the Scheme's 21,000 members and removing future risk for Smiths.  As a result of the buy-in a £171m non-headline charge was recognised in the FY2022 accounts and the net accounting pension surplus decreased to £194m (FY2021: £413m). 

SIPS is estimated to be in surplus on the Technical Provisions funding basis.  Given the funding position, no further cash contributions are currently being made.  The Group and the SIPS Trustee continue to work together to progress towards full buy-out funding.

The two main UK pension schemes and the US pension plan are well hedged against changes in interest and inflation rates.  Over 90% of their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments.  As at 31 July 2022, over 60% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.

Capital allocation

Net debt⁴ at 31 July 2022 was £150m (FY2021: £1,018m), £868m stronger as a result of the proceeds received from the sale of Smiths Medical in January 2022. Net debt to headline EBITDA⁴ has improved to 0.3x (FY2021: 1.6x). 

Given our strong balance sheet position and capital allocation approach, we initiated a £742m share buyback in November 2021. As at 16 September 2022, we had completed 76% of the programme. At the current run-rate and share price, we would complete the programme in early CY2023, with an anticipated reduction in shares to ~346m (a 13% reduction). 

In line with our progressive dividend policy the Board is recommending a final dividend of 27.3p, bringing the total dividend for the year to 39.6p, a year-on-year increase of +5% (FY2021: 37.7p).  The final dividend will be paid on 18 November 2022 to shareholders on the register at close of business on 21 October 2022. Our dividend policy aims to increase dividends in line with growth in earnings and cash-flow with the objective of maintaining minimum dividend cover of around 2 times.  The policy enables us to retain sufficient cash-flow to finance investment in growth and meet our financial obligations.  In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans.

The Company offers a Dividend Reinvestment Plan ("DRIP") enabling shareholders to use their cash dividend to buy further shares in the Company - see our website for details.  To participate in the DRIP, shareholders must submit their election notice to be received by 28 October 2022 ("the Election Date"). Elections received after the Election Date will apply to dividends paid after 18 November 2022.  Purchases under the DRIP are made on, or as soon as practicable after, the dividend payment date and at prevailing market prices. 

We also applied proceeds from the sale of Smith Medical to reduce debt by redeeming early a $400m bond on 17 February 2022 which was due to be repaid in October 2022. This resulted in gross debt⁴ of £1,166m (FY2021: £1,546m) as at 31 July 2022. There are no financial covenants associated with the gross debt. As at 31 July 2022, the weighted average maturity was 2.5 years, with the next maturity due in April 2023.  Cash increased to £1,056m (FY2021: £405m).

An $800m (c.£656m at the period-end exchange rate) revolving credit facility ("RCF") remains undrawn and matures in November 2024.  The only financial covenant relates to interest cover, under which EBITDA must be greater than or equal to 3 times net interest. Taking cash and the RCF together, total liquidity was over £1.7bn at the end of the period.

STATUTORY RESULTS

Income Statement

The £300m difference between headline operating profit of £417m and statutory operating profit of £117m is non-headline items as defined in note 3 of the financial statements. The largest constituents relate to the TIGPS buy-in which resulted in an accounting charge of £171m, amortisation of acquired intangible assets of £51m, Russia-related impairment and closure costs of £19m, past service costs for benefit equalisation and improvements of £43m, asbestos litigation in John Crane, Inc, and subrogation claims in Titeflex Corporation. Statutory operating profit of £117m was £209m lower than last year (FY2021: £326m), reflecting higher non-headline charges offsetting the increase in headline operating profit.

Statutory finance costs were £(14)m (FY2021: £(86)m), mainly due to a £22m foreign exchange gain on an intercompany loan with Smiths Medical (FY2021: £(50)m) which was settled on disposal; the matching credit in discontinued operations nets out to zero in total Group earnings.

Non-headline taxation items of £14m relate to amortisation of acquisition-related intangible assets, legacy pension scheme arrangements, litigation provisions and non-headline finance items.  The statutory effective tax rate was 87% (FY2021: 35%), driven principally by the non-headline settlement loss from the TIGPS buy-in for which there was no associated deferred tax.  Please refer to notes 3 and 6 of the financial statements for further details.

Discontinued operations - Smiths Medical

On 6 January 2022, the Group completed the sale of Smiths Medical to ICU Medical, Inc. ("ICU") at an enterprise value of $2.7bn and an equity value of $2.4bn after adjustments for debt, liabilities and working capital.

For the five months that Smiths Medical remained in the Group, it delivered headline profit after tax of £49m.

The difference between statutory and headline profit after tax is £973m, which includes £1,036m gain on disposal, £(33)m of regulatory remediation costs, £(14)m from the impairment of investments, £(22)m of foreign exchange losses on the intercompany loan with Smiths Group (continuing operations), and +£6m of tax credit on these non-headline items. Please refer to notes 3 and 27 of the financial statements for further details.

Total Group profit after tax and EPS

Statutory profit after tax for the total Group increased by +263% to £1,035m (FY2021: £285m) which included the profit on sale of Smiths Medical.  Statutory basic EPS was up +273% to 267.1p (FY2021: 71.7p).

Statutory Cash-flow

Statutory net cash inflow from operating activities for the total Group was £279m (FY2021: £535m). See note 28 to the financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow.  

Foreign exchange

The results of overseas operations are translated into sterling at average exchange rates. Net assets are translated at period-end rates. The Group is exposed to foreign exchange movements, mainly the US Dollar and the Euro.  The principal exchange rates, expressed in terms of the value of Sterling, are shown in the following table.

	Average rates		Period-end rates
	31 Jul 2022 (12 months)	31 Jul 2021 (12 months)	31 Jul 2022	31 Jul 2021
USD	1.32	1.36	1.22	1.39
EUR	1.18	1.13	1.19	1.17

Business review

JOHN CRANE

John Crane is a leading provider of mission-critical engineered solutions, improving our customers' reliability and sustainability in process industries. 59% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable energy sources). 41% is from other process industries including chemical, life sciences, mining, water treatment, and pulp & paper. 69% of John Crane revenue is from aftermarket sales. John Crane represents 35% of Group revenue.

	FY2022	FY2021	FY Reported	Organic growth
	£m	£m	growth	H1	H2	FY
Revenue	901	865	+4.2%	+5.1%	+2.5%	+3.7%
Original Equipment	279	273	+2.2%	+1.8%	+2.7%	+2.3%
Aftermarket	622	592	+5.1%	+6.6%	+2.4%	+4.3%
Energy	530	510	+3.9%	+7.5%	+0.3%	+3.5%
Industrials	371	355	+4.5%	+1.7%	+5.8%	+3.9%
Headline operating profit	188	187	+0.2%	+6.3%	(8.9)%	(2.8)%
Headline operating profit margin	20.9%	21.6%	(70)bps	+20bps	(270)bps	(140)bps
Statutory operating profit	167	184	(9.2)%
Return on capital employed	19.4%	20.0%	(60)bps
R&D cash costs as % of sales	2.5%	2.1%	+40bps

Revenue

£m	FY2021 reported	Foreign exchange	Organic movement	FY2022 reported
Revenue	865	4	32	901

John Crane's strong market position, global service network, and collaborative customer relationships underpin its performance. Organic revenue was up +3.7% for the year, with growth across both of John Crane's segments; Energy up +3.5% and Industrial up +3.9%. On a reported basis, revenue was up +4.2%, with a £4m favourable foreign exchange impact.

Activity levels remained high through FY2022 with +10.5% order growth and a record order book. Organic revenue growth in H2 of +2.5% (H1: +5.1%) was tempered by the cessation of sales into Russia from March 2022, a (110)bps impact for H2 and (60)bps for FY2022. Extended lead times on certain materials also impacted order book conversion.

Aftermarket represents 69% of John Crane's revenue (FY2021: 68%).  Aftermarket revenue was up +4.3% on an organic basis.  John Crane's large installed base and leading service offering positions it well to meet the strong demand for aftermarket repairs, maintenance and upgrades.  Organic revenue from Original Equipment ("OE") was up +2.3%. The rate of new orders continues to improve, with strong OE order growth in the second half.

Customer demand across both OE and aftermarket is strong, driven by the increasing demand for energy, along with decarbonisation and the transition to clean energy sources. Customers are requiring systems to be more reliable and energy efficient, interconnected and digitally enabled, and use diverse low-carbon energy sources. These trends benefit John Crane as they require significant investment in new infrastructure and retrofits to existing infrastructure, as well as new technology to reduce cost and accelerate the deployment of cleaner energy.

John Crane is well positioned to support customers through the energy transition. John Crane is working closely with customers and stakeholders to accelerate innovation across several decarbonisation themes to reduce methane and other GHG emissions, increase asset efficiency, and enable rapid scaling of low-carbon hydrogen, along with carbon capture, utilisation & storage. As an example, the John Crane Sense® digital platform monitors the condition and effectiveness of equipment and helps customers optimise maintenance schedules and minimise downtime.  John Crane's upstream pumping seals, used in water intensive industries save an average of one million gallons of water per seal per year.

John Crane secured multiple new contracts in sustainability and hydrogen including from NatureWorks, one of the largest producers of biopolymers and the NEOM Green Hydrogen Project, further cementing John Crane's leadership in these major environmental themes.

Operating profit

£m	FY2021 reported	FY2021 Restructuring costs	Foreign exchange	Organic movement	FY2022  reported
Headline operating profit	187	4	2	(5)	188
Headline operating profit margin	21.6%	+50bps	+10bps	(140)bps	20.9%

Headline operating profit of £188m decreased by (2.8)% on an organic basis, as pricing offset cost inflation but was impacted by increased costs associated with supply chain disruption, and increased R&D investment for future growth. To further strengthen John Crane's position for these significant growth opportunities and to better serve customers a number of targeted actions have been identified. These actions are focused on simplifying the end-to-end value chain resulting in an even more agile and efficient business.

Headline operating profit was up +0.2% on a reported basis, with +£2m of favourable foreign exchange and £4m of restructuring costs charged in FY2021. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation and Russia-related impairment and closure costs.

ROCE

ROCE was 19.4%, down (60)bps, due to investment in working capital through FY2022.

R&D

Cash R&D expenditure increased to 2.5% of sales (FY2021: 2.1%). John Crane's innovation is primarily focused on enhancing efficiency, performance and sustainability by using materials science advancements to reduce friction in high duty wet seals or increase maximum rotating speed required in next generation hydrogen compressors. John Crane is also investing in faster modelling to reduce development time and increase seal performance. 

John Crane sealing solutions have a significant role in helping our customers in their sustainability journeys through reducing leaks. Examples of such products include a seal for demanding hydrocarbon pipelines with a unique, patented seal technology that significantly extends the mean time between repair, reducing maintenance, improving efficiency and protecting the environment from potentially harmful leaks. We also launched John Crane Sense ® Turbo, which includes a first to market sensor-enabled dry gas seal.  This ground-breaking technology introduces the John Crane Sense ® platform, providing real-time monitoring and machine learning diagnostics on equipment, helping customers to prevent leaks and reduce downtime. 

SMITHS DETECTION

Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement.  It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets. 54% of Smiths Detection's sales are derived from the aftermarket.  Smiths Detection represents 26% of Group revenue.

	FY2022	FY2021	FY Reported	Organic growth
	£m	£m	growth	H1	H2	FY
Revenue	655	721	(9.1)%	(7.2)%	(11.3)%	(9.4)%
Original Equipment	300	390	(23.1)%	(17.5)%	(26.7)%	(22.6)%
Aftermarket	355	331	+7.3%	+4.0%	+7.7%	+5.9%
Aviation	467	546	(14.5)%	(12.5)%	(16.5)%	(14.7)%
Other Security Systems	188	175	+7.4%	+8.1%	+6.2%	+7.1%
Headline operating profit	73	99	(26.8)%	(13.0)%	(42.0)%	(30.7)%
Headline operating profit margin	11.1%	13.7%	(260)bps	(80)bps	(570)bps	(340)bps
Statutory operating profit	36	77	(53.2)%
Return on capital employed	7.1%	9.7%	(260)bps
R&D cash costs as % of sales	9.3%	7.4%	+190bps

Revenue

£m	FY2021 reported	Foreign exchange	Organic movement	FY2022 reported
Revenue	721	2	(68)	655

Smiths Detection grew in all segments except for Aviation original equipment ("OE") which, as anticipated, was impacted by its challenging end market.  Organic revenue declined (9.4)% or (9.1)% on a reported basis, including £2m of favourable foreign exchange. The cessation of sales to Russia resulted in a headwind of (70)bps in H2 and (40)bps for the full year.

OE represented 46% of FY2022 revenues. Organic OE revenues were down (22.6)%. Good growth in OE sales for Other Security Systems ("OSS") were more than offset by lower Aviation OE sales as customers continue to stabilise operations post the COVID pandemic.

54% of Smiths Detection's sales were derived from the aftermarket. The underlying trend in aftermarket revenues across both Aviation and Other Security Systems continued to improve, accelerating in H2 to deliver +5.9% growth in FY2022, reflecting the benefit of a large installed base and a return to more typical operating patterns.

Organic revenue from Aviation decreased (14.7)% reflecting the slowdown in the Aviation OE market. Although we e xpect continued market challenges in the near-term, we are increasingly well positioned for recovery when it comes. Tender activity in Aviation has started to increase, and Smiths Detection continues to secure new contracts with order intake  growing. Recent wins include contracts for hold baggage in the US; checkpoint security in Italy, Japan, Ireland; and for both hold baggage and checkpoint in Mexico and South Korea.

Organic revenue from OSS grew by +7.1%, driven by demand for Ports & Borders solutions.  Expanding the OSS segment is a key tenet of Smiths Detection's strategy to expand into attractive market adjacencies. This is demonstrated by key OSS contract wins in FY2022 including high-energy X-ray systems for customers in Japan and the US; this year's Commonwealth Games where Smiths Detection were the official security provider; radiation solutions to transportation customers in the US; and defence equipment development projects for the US Department of Defense. 

Given the new contract wins across Aviation and OSS and the strong order intake through FY2022 we expect a return to growth in FY2023.

Operating profit

£m	FY2021 reported	FY2021 Restructuring cost	Foreign exchange	Organic movement	FY2022  reported
Headline operating profit	99	6	(1)	(31)	73
Headline operating profit margin	13.7%	+90bps	(10)bps	(340)bps	11.1%

Smiths Detection's headline operating profit was down (30.7)% on an organic basis, impacted by lower volumes and supply chain challenges, particularly the scarcity of electronic components and increased logistics costs. Headline operating profit of £73m was down (26.8)% on a reported basis, including £(1)m adverse foreign exchange translation and £6m of restructuring charges in FY2021. 

Headline operating profit margin was 11.1%, down (340)bps on an organic basis and (260)bps on a reported basis. A number of restructuring initiatives are underway that will enable Smiths Detection to be more resilient in responding to changes in its end markets and deliver improved margins.

The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles and a charge for write-downs associated with Smiths Detection's exit from Russia.

ROCE

ROCE decreased by (260)bps to 7.1%, due to lower profitability in FY2022.

R&D

Cash R&D expenditure was 9.3% of sales, +190bps higher than last year. This includes an increase in customer funded projects to £14m (FY2021: £9m).

Smiths Detection continued to invest in the development of next generation detection devices for the defence market, new algorithms to improve the detection of dangerous goods, and digital solutions to strengthen our aftermarket proposition to make people and infrastructure safer.  Certain programmes are co-funded by strategic customers seeking next-generation solutions to security challenges. During FY2022, we launched a new high volume air cargo screening technology, as well as an extension of our automated detection algorithm, iCMORE, to enable currency detection, supporting the fight against global money laundering, weapons detection, lithium batteries and dangerous goods.

FLEX-TEK

Flex-Tek provides innovative solutions to heat and move fluids and gases for aerospace and industrial applications that support energy efficiency and improved air quality. 82% of Flex-Tek's revenue is derived from Industrials and 18% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.

	FY2022	FY2021	FY Reported	Organic growth
	£m	£m	growth	H1	H2	FY
Revenue	647	508	+27.4%	+10.0%	+20.9%	+16.1%
Industrials	531	409	+29.8%	+8.5%	+22.6%	+16.3%
Aerospace	116	99	+17.5%	+16.1%	+13.4%	+14.6%
Headline operating profit	133	97	+37.1%	+18.3%	+24.3%	+21.7%
Headline operating profit margin	20.6%	19.1%	+150bps	+150bps	+60bps	+90bps
Statutory operating profit	106	83	+27.7%
Return on capital employed	25.6%	21.6%	+400bps
R&D cash costs as % of sales	0.4%	0.5%	(10)bps

Revenue

£m	FY2021 reported	Foreign exchange	Acquisitions	Organic movement	FY2022 reported
Revenue	508	14	42	83	647

Flex-Tek's agile operating model and close customer relationships contributed to a record year for the business. Organic revenue increased +16.1%, with record growth in the second half of +20.9%.  Revenue grew +27.4% on a reported basis, including +£14m favourable foreign exchange translation and +£42m from acquisitions.

Organic revenue from Flex-Tek's Industrial segment was up +16.3%. Strong growth was driven by demand for its construction related products in the US, particularly for HVAC applications, where Flex-Tek continued to outperform the underlying market.  Other drivers included good growth of its industrial heat applications and active price management. Demand remained strong throughout the second half, and the business remains vigilant of key market indicators.

During the second half, Flex-Tek continued to execute its growth strategy, launching the Python line sets product, a multi-layer pipe used in various HVAC applications, replacing the traditional and more costly copper pipes. It also expanded its metal ducting offering which was introduced to the portfolio as part of the Royal Metals acquisition, with the opening of a dedicated green field facility in Texas.

Organic revenue from Flex-Tek's Aerospace segment was up +14.6% as the aerospace market benefits from an increasing number of aircraft builds.

Operating profit

£m	FY2021 reported	Foreign exchange	Acquisitions	Organic movement	FY2022 reported
Headline operating profit	97	3	11	22	133
Headline operating profit margin	19.1%	+10bps	+50bps	+90bps	20.6%

Headline operating profit increased +21.7% on an organic basis, reflecting increased volumes and strong cost management. Headline operating profit was up +37.1% at £133m on a reported basis, including +£3m favourable foreign exchange translation and +£11m from acquisitions. Headline operating profit margin was up +150bps to 20.6%, on a reported basis.  The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets and provision for Titeflex Corporation subrogation claims. 

In February 2021, the Group acquired Royal Metal, a leading manufacturer of residential and light commercial HVAC products for $107m. During H1 2022 the acquisition contributed £42m of revenue and £11m of operating profit.  Since February 2022, Royal Metal results have been accounted for as organic growth.

Royal Metal complements the organic growth that Flex-Tek is already driving through the development of innovative air distribution products that support improved energy efficiency and indoor air quality. The acquisition provides the benefits of complementary HVAC portfolios, synergies in distribution, and positive pricing, demonstrating the value that we can create through our highly disciplined and selective M&A process. 

ROCE

ROCE increased +400bps to 25.6% reflecting the record profit growth in FY2022.

R&D

Cash R&D expenditure remained broadly consistent at 0.4% of sales (FY2021: 0.5%). R&D is focused on developing new products for the construction market, and an expanded product offering in aerospace.

SMITHS INTERCONNECT

Smiths Interconnect designs cutting-edge connectivity solutions for demanding applications in the aerospace and defence, semiconductor test, and industrial end-markets. Smiths Interconnect represents 14% of Group revenue.

	FY2022	FY2021	FY Reported	Organic growth
	£m	£m	growth	H1	H2	FY
Revenue	363	312	+16.3%	+12.9%	+14.8%	+13.9%
Headline operating profit	65	35	+88.2%	+58.7%	+28.0%	+39.7%
Headline operating profit margin	18.0%	11.2%	+680bps	+490bps	+190bps	+330bps
Statutory operating profit	64	34	+88.2%
Return on capital employed	16.3%	8.8%	+750bps
R&D cash costs as % of sales	5.6%	6.3%	(70)bps

Revenue

£m	FY2021 reported	Foreign exchange	Organic movement	FY2022 reported
Revenue	312	6	45	363

Smiths Interconnect's cutting-edge solutions and strong positions in its market subsegments underpinned a very strong FY2022 performance with organic revenue up +13.9%. Revenue growth in H2 2022 accelerated to +14.8% reflecting ongoing momentum from a growing order book and new product launches.  Revenue increased by +16.3% on a reported basis, with +£6m favourable foreign exchange translation.

This strong performance reflects growth across the semiconductor test business with continued high demand, coupled with new product launches and new customer wins. Smiths Interconnect's space and defence products also delivered good growth in particular coming from the launch of 28G fibre-optic transceivers for satellite communications and from space -qualified connectors. During the second half, Smiths Interconnect progressed its growth into adjacencies with the successful introduction of its first medical cable assembly product.

Smiths Interconnect enters FY2023 with significant orders for its space-qualified products for commercial satellite constellations, next generation chip testing solutions and for medical cable assemblies.

Operating profit

£m	FY2021 reported	FY2021 restructuring costs	Foreign exchange	Organic movement	FY2022  reported
Headline operating profit	35	10	1	19	65
Headline operating profit margin	11.2%	+330bps	+10bps	+330bps	18.0%

Headline operating profit increased +39.7% on an organic basis, with growth driven by strong revenue performance, positive pricing actions and good supply chain management.  Headline operating profit was up +88.2% to £65m on a reported basis, including £10m of restructuring costs in FY2021.  Headline operating profit margin was 18.0%, up +680bps on a reported basis and +330bps on an organic basis. 

The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles.

ROCE

ROCE increased +750bps to 16.3%, driven by higher profitability.

R&D

Cash R&D expenditure represented 5.6% of sales (FY2021: 6.3%), with the absolute spend year on year remaining the same. R&D is focused on bringing to market new products that improve connectivity and product integrity in demanding operating environments.  Product launches included the new space qualified connectors and optical transceivers, which enable high-speed, reliable data processing for communication satellites and GPS navigation systems; medical connectors used in critical care; and upgrades of semi-test products .

Consolidated income statement

		Year ended 31 July 2022				Year ended 31 July 2021
	Notes	Headline £m	Non-headline (note 3) £m	Total £m		Headline £m	Non-headline (note 3) £m	Total £m
Continuing operations
Revenue	1	2,566	-	2,566		2,406	-	2,406
Operating costs	2	(2,149)	(300)	(2,449)		(2,034)	(46)	(2,080)
Operating profit/(loss)	2	417	(300)	117		372	(46)	326
Interest receivable	4	14	-	14		9	-	9
Interest payable	4	(55)	-	(55)		(49)	-	(49)
Other financing gains/(losses)	4	-	20	20		-	(52)	(52)
Other finance income - retirement benefits	4	-	7	7		-	6	6
Finance costs	4	(41)	27	(14)		(40)	(46)	(86)
Profit/(loss) before taxation		376	(273)	103		332	(92)	240
Taxation	6	(104)	14	(90)		(96)	13	(83)
Profit/(loss) for the year		272	(259)	13		236	(79)	157
Discontinued operations
Profit from discontinued operations	27	49	973	1,022		134	(6)	128
Profit/(LOSS) for the year		321	714	1,035		370	(85)	285
Profit/(loss) for the year attributable to:
Smiths Group shareholders - continuing operations		270	(259)	11		235	(79)	156
Smiths Group shareholders - discontinued operations		49	973	1,022		134	(6)	128
Non-controlling interests		2	-	2		1	-	1
		321	714	1,035		370	(85)	285
Earnings per share	5
Basic				267.1p				71.7p
Basic - continuing				2.8p				39.4p
Diluted				266.0p				71.3p
Diluted - continuing				2.8p				39.1p

Consolidated statement of comprehensive income

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 represented* £m
Profit for the year		1,035	285
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of retirement benefits assets and obligations	8	(17)	13
Taxation on post-retirement benefits movements	6	-	(6)
Fair value movements on financial assets at fair value through OCI	14	(63)	4
		(80)	11
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
- deferred in the period on cash-flow and net investment hedges		(82)	82
- reclassified to income statement on cash-flow and net investment hedges		5	2
		(77)	84
Foreign exchange (FX) movements net of recycling:
Exchange gains/(losses) on translation of foreign operations		276	(166)
Exchange gains recycled to the income statement on disposal of business		(196)	-
		80	(166)
Total other comprehensive income, net of taxation		(77)	(71)
Total comprehensive income		958	214
Attributable to:
Smiths Group shareholders		957	214
Non-controlling interests		1	-
		958	214
Total comprehensive income attributable to Smiths Group shareholders arising from:
Continuing operations		131	152
Discontinued operations		827	62
		958	214

* The comparative year has been represented to include 'Fair value movements on financial assets at fair value through OCI' within the 'OCI which will not be reclassified to the income statement' subtotal rather than within the 'OCI which will be reclassified and reclassifications' subtotal. This reclassification has no impact on total other comprehensive income in the comparative year ended 31 July 2021.

Consolidated balance sheet

	Notes	31 July 2022 £m	31 July 2021 £m
Non-current assets
Intangible assets	10	1,588	1,498
Property, plant and equipment	12	243	212
Right of use assets	13	106	108
Financial assets - other investments	14	395	11
Retirement benefit assets	8	309	546
Deferred tax assets	6	95	92
Trade and other receivables	16	69	59
Financial derivatives	20	-	75
		2,805	2,601
Current assets
Inventories	15	570	381
Current tax receivable	6	50	75
Trade and other receivables	16	738	630
Cash and cash equivalents	18	1,056	405
Financial derivatives	20	4	2
Assets held for sale	27	-	1,243
		2,418	2,736
TOTAL ASSETS		5,223	5,337
Current liabilities
Financial liabilities:
- borrowings	18	(509)	(9)
- lease liabilities	18	(29)	(27)
- financial derivatives	20	(27)	(3)
Provisions	23	(88)	(46)
Trade and other payables	17	(682)	(530)
Current tax payable	6	(64)	(89)
Liabilities held for sale	27	-	(283)
		(1,399)	(987)
Non-current liabilities
Financial liabilities:
- borrowings	18	(538)	(1,372)
- lease liabilities	18	(90)	(94)
- financial derivatives	20	(20)	-
Provisions	23	(247)	(241)
Retirement benefit obligations	8	(115)	(128)
Corporation tax payable	6	(3)	(5)
Deferred tax liabilities	6	(44)	(28)
Trade and other payables	17	(46)	(59)
		(1,103)	(1,927)
TOTAL LIABILITIES		(2,502)	(2,914)
NET ASSETS		2,721	2,423
Shareholders' equity
Share capital	24	136	149
Share premium account		365	363
Capital redemption reserve	26	19	6
Revaluation reserve	26	-	1
Merger reserve	26	235	235
Cumulative translation adjustments		487	509
Retained earnings		1,659	1,367
Hedge reserve	26	(202)	(228)
Total shareholders' equity		2,699	2,402
Non-controlling interest equity	26	22	21
TOTAL EQUITY		2,721	2,423

Consolidated statement of changes in equity

	Notes	Share capital  and share premium £m	Other  reserves £m	Cumulative translation adjustments £m	Retained earnings £m	Hedge reserve £m	Equity shareholders' funds £m	Non-controlling interest £m	Total equity £m
At 31 July 2021		512	242	509	1,367	(228)	2,402	21	2,423
Profit for the year		-	-	-	1,033	-	1,033	2	1,035
Other comprehensive income:
- re-measurement of retirement benefits    after tax		-	-	-	( 17 )	-	( 17 )	-	( 17 )
- FX movements net of recycling		-	(1)	( 22 )	1	103	81	(1)	80
- fair value gains and related tax		-	-	-	(63)	(77)	(140)	-	(140)
Total comprehensive income for the year		-	(1)	(22)	954	26	957	1	958
Transactions relating to ownership interests:
Issue of new equity shares	24	2	-	-	-	-	2	-	2
Purchase of shares by Employee Benefit Trust		-	-	-	(16)	-	(16)	-	(16)
Proceeds from exercise of share options		-	-	-	1	-	1	-	1
Share buybacks	24	(13)	13	-	(511)	-	(511)	-	(511)
Dividends:
- equity shareholders	25	-	-	-	(150)	-	(150)	-	(150)
Share-based payment	9	-	-	-	14	-	14	-	14
At 31 July 2022		501	254	487	1,659	(202)	2,699	22	2,721

	Notes	Share capital  and share premium £m	Other  reserves £m	Cumulative translation adjustments £m	Retained earnings £m	Hedge reserve £m	Equity shareholders' funds £m	Non-controlling interest £m	Total equity £m
At 31 July 2020		510	242	674	1,259	(312)	2,373	21	2,394
Profit for the year		-	-	-	284	-	284	1	285
Other comprehensive income:
- re-measurement of retirement benefits   after tax		-	-	-	7	-	7	-	7
- FX movements net of recycling		-	-	(165)	-	-	(165)	(1)	(166)
- fair value gains and related tax		-	-	-	4	84	88	-	88
Total comprehensive income for the year		-	-	(165)	295	84	214	-	214
Transactions relating to ownership interests:
Exercises of share options	24	2	-	-	-	-	2	-	2
Receipt of capital from non-controlling interest		-	-	-	-	-	-	1	1
Purchase of own shares	24	-	-	-	(16)	-	(16)	-	(16)
Dividends:
- equity shareholders	25	-	-	-	(185)	-	(185)	-	(185)
- non-controlling interest		-	-	-	-	-	-	(1)	(1)
Share-based payment	9	-	-	-	14	-	14	-	14
At 31 July 2021		512	242	509	1,367	(228)	2,402	21	2,423

Consolidated cash-flow statement

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Net cash inflow from operating activities	28	279	535
Cash-flows from investing activities
Expenditure on capitalised development		(22)	(27)
Expenditure on other intangible assets		(8)	(12)
Purchases of property, plant and equipment		(58)	(78)
Disposals of property, plant and equipment		3	2
Capital returned by other investments		-	7
Acquisition of businesses		-	(83)
Investment in financial asset - discontinued operations		-	(14)
Proceeds on disposal of subsidiaries, net of cash disposed		1,331	-
Net cash-flow used in investing activities		1,246	(205)
Cash-flows from financing activities
Proceeds from exercise of share options	24	2	2
Share buybacks	24	(511)	-
Purchase of shares by Employee Benefit Trust	26	(16)	(16)
Proceeds received on exercise of employee share options		1	-
Settlement of cash-settled options		(1)	-
Dividends paid to equity shareholders	25	(150)	(185)
Lease payments		(38)	(44)
Reduction and repayment of borrowings		(295)	-
Cash inflow from matured derivative financial instruments		23	4
Net cash-flow used in financing activities		(985)	(239)
Net increase in cash and cash equivalents		540	91
Cash and cash equivalents at beginning of year		405	366
Movement in net cash held in disposal group		48	(28)
Foreign exchange rate movements		62	(24)
Cash and cash equivalents at end of year	18	1,055	405
Cash and cash equivalents at end of year comprise:
- cash at bank and in hand		242	219
- short-term deposits		814	186
		1,056	405
- bank overdrafts		(1)	-
		1,055	405

Accounting policies

Basis of preparation

The financial information set out above does not constitute the Company's statutory accounts for the financial years ended 31 July 2022 or 2021, but are derived from those accounts. Statutory accounts for 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's Annual General Meeting.  Those accounts have been reported on by the company's auditor; the report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The accounts have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. The consolidated financial statements have been prepared under the historical cost convention modified to include revaluation of certain financial instruments, share options and pension assets and liabilities, held at fair value as described below .

Going concern

The Directors are satisfied that the Group has adequate resources to continue to operate for a period not less than 12 months from the date of approval of the financial statements and that there are no material uncertainties around their assessment. Accordingly, the Directors continue to adopt the going concern basis of accounting.

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report within the Annual Report 2022 . The Group's financial position, cash-flows, liquidity and borrowing facilities are described in the Strong Financial Framework section within the Annual Report 2022 .

Other factors considered by the Board as part of their going concern assessment included the inherent uncertainties in cash-flow forecasts. Based on the above, the Directors have concluded that the Group is well placed to manage its financing and other business risks satisfactorily, and they have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the signing date of these financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements .

Key estimates and significant judgements

The preparation of the accounts in conformity with generally accepted accounting principles requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

The key sources of estimation uncertainty together with the significant judgements and assumptions used for these consolidated financial statements are set out below .

Sources of estimation uncertainty

Impairment reviews of intangible assets

In carrying out impairment reviews of intangible assets, a number of significant assumptions have to be made when preparing cash-flow projections to determine the value in use of the asset or cash generating unit (CGU). These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement, and success in obtaining regulatory approvals. If actual results differ or changes in expectations arise, impairment charges may be required which would adversely impact operating results.

Critical estimates, and the effect of variances in these estimates, are disclosed in note 11.

Retirement benefits

Determining the value of the future defined benefit obligation involves significant estimates in respect of the assumptions used to calculate present values. These include future mortality, discount rate and inflation. The Group uses previous experience and independent actuarial advice to select the values for critical estimates. A portion of UK pension liabilities are insured via bulk annuity policies which broadly match the scheme obligation to identified groups of pensioners. These assets are valued by an external qualified actuary at the actuarial valuation of the corresponding liability, reflecting this matching relationship.

The Group's principal defined benefit pension plans are in the UK and the US and these have been closed so that no future benefits are accrued. Critical estimates for these plans, and the effect of variances in these estimates, are disclosed in note 8.

Provisions for liabilities and charges

The Group has made provisions for claims and litigations where it has had to defend itself against proceedings brought by other parties.  These provisions have been made for the best estimate of the expected expenditure required to settle each obligation, although there can be no guarantee that such provisions (which may be subject to potentially material revision from time to time) will accurately predict the actual costs and liabilities that may be incurred.  The most significant of these litigation provisions are described below.

John Crane, Inc. (JCI), a subsidiary of the Group, is one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. Provision of £229m (FY2021: £212m) has been made for the future defence costs which the Group is expected to incur and the expected costs of future adverse judgements against JCI. Whilst well-established incidence curves can be used to estimate the likely future pattern of asbestos-related disease, JCI's claims experience is significantly impacted by other factors which influence the US litigation environment. These can include: changing approaches on the part of the plaintiffs' bar; changing attitudes amongst the judiciary at both trial and appellate levels; and legislative and procedural changes in both the state and federal court systems. Because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of the related litigation, there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that will be incurred.

In quantifying the expected costs JCI takes account of the advice of an expert in asbestos liability estimation. The following estimates were made in preparing the provision calculation:

· the period over which the expenditure can be reliably estimated is judged to be ten years, based on past experience regarding significant changes in the litigation environment that have occurred every few years and on the amount of time taken in the past for some of those changes to impact the broader asbestos litigation environment. See note 23 for a sensitivity showing the impact on the provision of reducing or increasing this time horizon;

· the future trend of legal costs, the rate of future claims filed, the rate of successful resolution of claims, and the average amount of judgements awarded have been projected based on the past history of JCI claims and well-established tables of asbestos incidence projections, since this is the best available evidence. Claims history from other defendants is not used to calculate the provision because JCI's defence strategy generates a significantly different pattern of legal costs and settlement expenses. See note 23 for a sensitivity showing the range of expected future spend.

Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of claims from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping product. It has also received a number of product liability claims regarding this product, some in the form of purported class actions. Titeflex Corporation believes that its products are a safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and national codes; however, some claims have been settled on an individual basis without admission of liability. Provision of £52m (FY2021: £47m) has been made for the costs which the Group is expected to incur in respect of these claims. In preparing the provision calculation, key estimates have been made about the impact of safe installation initiatives on the level of future claims. See note 23 for a sensitivity showing the impact on the provision of reducing or increasing the expected impact. However, because of the significant uncertainty associated with the future level of claims, there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred.

Taxation

The Group has recognised deferred tax assets of £103m (FY2021: 144m) relating to losses and £69m (FY2021: £65m) relating to the John Crane, Inc. and Titeflex Corporation litigation provisions. The recognition of assets pertaining to these items requires management to make significant estimates as to the likelihood of realisation of these deferred tax assets and the phasing and attribution of future taxable profits. This is based on a number of factors, which management use to assess the expectation that the benefit of these assets will be realised, including expected future levels of operating profit, expenditure on litigation, pension contributions and the timing of the unwind of other tax positions.

Taxation liabilities included provisions of £38m (FY2021: £34m), the majority of which related to the risk of challenge to the geographic allocation of profits by tax authorities.

In addition to the risks provided for, the Group faces a variety of other tax risks, which result from operating in a complex global environment, including the ongoing reform of both international and domestic tax rules, new and ongoing tax audits in the Group's larger markets and the challenge to fulfil ongoing tax compliance filing and transfer pricing obligations given the scale and diversity of the Group's global operations.

The Group anticipates that a number of tax audits are likely to conclude in the next 12 to 24 months. Due to the uncertainty associated with such tax items, it is possible that the conclusion of open tax matters may result in a final outcome that varies significantly from the amounts noted above.

Revenue recognition

Revenue is recognised as the performance obligations to deliver products or services are satisfied and revenue is recorded based on the amount of consideration expected to be received in exchange for satisfying the performance obligations.

Smiths Detection and Smiths Interconnect have multi-year contractual arrangements for the sale of goods and services. Where these contracts have separately identifiable components with distinct patterns of delivery and customer acceptance, revenue is accounted for separately for each identifiable component.

The Group enters into certain contracts for agreed fees that are performed across more than one accounting period and revenue is recognised over time. Estimates are required at the balance sheet date when determining the stage of completion of the contract activity. This assessment requires the expected total costs of the contract and the remaining costs to complete the contract to be estimated.

At 31 July 2022, the Group held contracts with a total value of £181m (2021: £166m), of which £135m (2021: £99m) had been delivered and £47m (2021: £67m) remains fully or partially unsatisfied. £37m of the unsatisfied amount is expected to be recognised in the coming year, with the remainder being recognised within two years. A 5% increase in the remaining cost to complete the contracts would have reduced Group operating profit in the current year by less than £2m (2021: less than £2m).

Valuation of financial assets

Following the sale of Smiths Medical the Group has recognised a financial asset for the fair value of the $100m additional sales consideration that is contingent on the future share price performance of the enlarged ICU Medical, Inc (ICU) business.

The earnout requires the Group to retain beneficial ownership of at least 1.25m ICU shares and for the ICU share price to average $300 or more for any 30-day period during the first three years post-completion, or for any 45-day period in the fourth year post-completion.

An external valuation firm has been engaged to undertake Monte Carlo valuation simulations in order to estimate the probability of the future ICU share price exceeding $300. These valuation simulations have determined a fair value of £19m (US$23m).

Significant judgements made in applying accounting policies

Business combinations

On the acquisition of a business, the Group has to make judgements on the identification of specific intangible assets which are recognised separately from goodwill and then amortised over their estimated useful lives. These include items such as brand names and customer lists, to which value is first attributed at the time of acquisition. The capitalisation of these assets and the related amortisation charges are based on judgements about the value and economic life of such items.

Where acquisitions are significant, appropriate advice is sought from professional advisers before making such allocations.

Where the Group has a contractual option to acquire a business in the future, management have applied judgement in determining whether it has substantive voting rights in the business and whether the business should be accounted for as a subsidiary or associate. In applying these judgements, management have reviewed whether the option and any related legal/commercial agreements provide the Group with power or significant influence over the business and have assessed whether there are any barriers that prevent the Group from exercising these rights .

Retirement benefits

At 31 July 2022 the Group has recognised £309m of retirement benefit assets (FY2021: 546m) and a net pension asset of £194m (FY2021: £413m), principally relating to the Smiths Industries Pension Scheme ('SIPS'), which arises from the rights of the employers to recover the surplus at the end of the life of the scheme.

The recognition of this surplus is a significant judgement. There is judgement required in determining whether an unconditional right of refund exists based on the provisions of the relevant trust deed and rules. Having taken legal advice with regard to the rights of the Group under the relevant Trust deed and rules, it has been determined that the surplus is recoverable by the Group and therefore can be recognised. In particular, in the ordinary course of business, the trustees of the scheme do not have a unilateral power to terminate and wind-up the scheme or augment benefits. If the pension scheme was wound up while it still had members, the scheme would need to buy out the benefits of all members. The buyout would cost significantly more than the carrying value of the scheme liabilities within these financial statements which are calculated in accordance with IAS 19: Employee benefits .

Capitalisation of development costs

Expenditure incurred in the development of major new products is capitalised as internally generated intangible assets only when it has been judged that strict criteria are met, specifically in relation to the products' technical feasibility and commercial viability (the ability to generate probable future economic benefits).  

The assessment of technical feasibility and future commercial viability of development projects requires significant judgement and the use of assumptions. Key judgements made in the assessment of future commercial viability include:

· Scope of work to achieve regulatory clearance (where required) - including the level of testing evidence and documentation;

· Competitor activity - including the impact of potential competitor product launches on the market place and customer demand; and

· Launch timeline - including time and resource required to establish and support the commercial launch of a new product .

Taxation

As stated in the previous section 'Sources of estimation uncertainty', the Group has recognised deferred tax assets of £103m (FY2021: 144m) relating to losses and £69m (FY2021: £65m) relating to the John Crane, Inc. and Titeflex Corporation litigation provisions. The decision to recognise deferred tax assets requires judgement in determining whether the Group will be able to utilise historical tax losses in future periods. It has been concluded that there are sufficient taxable profits in future periods to support recognition.

The Group has also applied judgement in the decisions made to recognise provisions against uncertain tax positions; please see note 6 for further details .

Presentation of headline profits and organic growth

In order to provide users of the accounts with a clear and consistent presentation of the performance of the Group's ongoing trading activity, the income statement is presented in a three-column format with 'headline' profits shown separately from non-headline items. In addition, the Group reports organic growth rates for sales and profit measures.

See note 1 for disclosures of headline operating profit and note 29 for more information about the alternative performance measures ('APMs') used by the Group.

Judgement is required in determining which items should be included as non-headline. The amortisation/impairment of acquired intangibles, legacy liabilities, material one-off items and certain re-measurements are included in a separate column of the income statement. See note 3 for a breakdown of the items excluded from headline profit.

Calculating organic growth also requires judgement. Organic growth adjusts the movement in headline performance to exclude the impact of foreign exchange, restructuring costs and acquisitions. This definition of organic growth is the same as that used for underlying growth in previous accounting periods.

Significant accounting policies

Basis of consolidation

The Group's consolidated accounts include the financial statements of Smiths Group plc (the 'Company') and all entities controlled by the Company (its subsidiaries). A list of the subsidiaries of Smiths Group plc is provided within the Annual Report 2022 .

The Company controls an entity when it (i) has power over the entity; (ii) is exposed or has rights to variable returns from its involvement with the entity; and (iii) has the ability to affect those returns through its power over the entity. The Group reassesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of these three elements of control. Subsidiaries are fully consolidated from the date on which control is obtained by the Company to the date that control ceases.

Where the Group loses control of a subsidiary, the assets and liabilities are derecognised along with any related non-controlling interest and other components of equity. Any resulting gain or loss is recognised in the income statement. Any interest retained in the former subsidiary is measured at fair value when control is lost.

The non-controlling interests in the Group balance sheet represent the share of net assets of subsidiary undertakings held outside the Group. The movement in the year comprises the profit attributable to such interests together with any dividends paid, movements in respect of corporate transactions and related exchange differences.

Interests in associates are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the Group financial statements include the Group's share of the profit or loss and other comprehensive income of equity-accounted investees, until the date on which significant influence ceases.

All intercompany transactions, balances, and gains and losses on transactions between Group companies are eliminated on consolidation .

Foreign currencies

The Company's presentational currency and functional currency is sterling. The financial position of all subsidiaries and associates that have a functional currency different from sterling are translated into sterling at the rate of exchange at the date of that balance sheet, and the income and expenses are translated at average exchange rates for the period. All resulting foreign exchange rate movements are recognised as a separate component of equity.

On consolidation, foreign exchange rate movements arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, the cumulative amount of such foreign exchange rate movements is recognised in the income statement as part of the gain or loss on sale.

Foreign exchange rate movements arising on transactions are recognised in the income statement. Those arising on trading are taken to operating profit; those arising on borrowings are classified as finance income or cost.

Revenue

Revenue is measured at the fair value of the consideration received, net of trade discounts (including distributor rebates) and sales taxes. Revenue is discounted only where the impact of discounting is material.

When the Group enters into complex contracts with multiple, separately identifiable components, the terms of the contract are reviewed to determine whether or not the elements of the contract should be accounted for separately. If a contract is being split into multiple components, the contract revenue is allocated to the different components at the start of the contract. The basis of allocation depends on the substance of the contract. The Group considers relative stand-alone selling prices, contractual prices and relative cost when allocating revenue.

The Group has identified the following different types of revenue :

(i) Sale of goods recognised at a point in time - generic products manufactured by Smiths

Generic products are defined as either:

· Products that are not specific to any particular customer;

· Products that may initially be specific to a customer but can be reconfigured at minimal cost, i.e. retaining a margin, for sale to an alternative customer; or

· Products that are specific to a customer but are manufactured at Smiths risk, i.e. we have no right to payment of costs plus margin if the customer refuses to take control of the goods .

For established products with simple installation requirements, revenue is recognised when control of the product is passed to the customer. The point in time that control passes is defined in accordance with the agreed shipping terms and is determined on a case by case basis. The time of despatch or delivery of the goods to the customer is normally the point at which invoicing occurs. However for some generic products, revenue is recognised when the overall performance obligation has been completed, which is often after the customer has completed its acceptance procedures and has assumed control.

Products that are sold under multiple element arrangements, i.e. contracts involving a combination of products and services, are bundled into a single performance obligation unless the customer can benefit from the goods or services either on their own, or together with other resources that are readily available to the customer and are distinct within the context of the contract.

For contracts that pass control of the product to the customer only on completion of installation services, revenue is recognised upon completion of the installation.

An obligation to replace or repair faulty products under the standard warranty terms is recognised as a provision. If the contract includes terms that either extend the warranty beyond the standard term or imply that maintenance is provided to keep the product working, these are service warranties and revenue is deferred to cover the performance obligation in an amount equivalent to the stand-alone selling price of that service .

(ii) Sale of goods recognised over time - customer-specific products where the contractual terms include rights to payment for work performed to date

Customer-specific products are defined as being:

· Products that cannot be reconfigured economically such that it remains profitable to sell to another customer;

· Products that cannot be sold to another customer due to contractual restrictions; and

· Products that allow Smiths to charge for the work performed to date in an amount that represents the costs incurred to date plus a margin, should the customer refuse to take control of the goods .

For contracts that meet the terms listed above, revenue is recognised over the period that the Group is engaged in the manufacture of the product, calculated using the input method based on the amount of costs incurred to date compared to the overall costs of the contract. This is considered to be a faithful depiction of the transfer of the goods to the customer as the costs incurred, total expected costs and total order value are known. The time of despatch or delivery of the goods to the customer is normally the point at which invoicing occurs.

An obligation to provide a refund for faulty products under the standard warranty terms is recognised as a provision. If the contract includes terms that either extend the warranty beyond the standard term or imply that maintenance is provided to keep the product working, these are service warranties and revenue is deferred to cover the performance obligation in an amount equivalent to the stand-alone selling price of that service .

(iii) Services recognised over time - services relating to the installation, repair and ongoing maintenance of equipment

Services include installation, commissioning, testing, training, software hosting and maintenance, product repairs and contracts undertaking extended warranty services.

For complex installations where the supply of services cannot be separated from the supply of product, revenue is recognised upon acceptance of the combined performance obligation (see Sale of goods (i) above).

For services that can be accounted for as a separate performance obligation, revenue is recognised over time, assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Depending on the nature of the contract, revenue is recognised as follows :

· Installation, commissioning and testing services (when neither linked to the supply of product nor subject to acceptance) are recognised rateably as the services are provided;

· Training services are recognised on completion of the training course;

· Software hosting and maintenance services are recognised rateably over the life of the contract;

· Product repair services, where the product is returned to Smiths premises for remedial action, are recognised when the product is returned to the customer and they regain control of the asset;

· On-site ad hoc product repair services are recognised rateably as the services are performed;

· Long-term product repair and maintenance contracts are recognised rateably over the contract term; and

· Extended service warranties are recognised rateably over the contract term .

Invoicing for services depends on the nature of the service provided with some services charged in advance and others in arrears.

Where contracts are accounted for under the revenue recognised over time basis, the proportion of costs incurred is used to determine the percentage of contract completion.

Contracts for the construction of substantial assets, which normally last in excess of one year, are accounted for under the revenue recognised over time basis, using an input method.

For fixed-price contracts, revenue is recognised based upon an assessment of the amount of cost incurred under the contract, compared to the total expected costs that will be incurred under the contract. This calculation is applied cumulatively with any over/under recognition being adjusted in the current period.

For cost-plus contracts, revenue is recognised based upon costs incurred to date plus any agreed margin.

For both fixed-price and cost-plus contracts, invoicing is normally based on a schedule with milestone payments.

Contract costs

The Group has taken the practical expedient of not capitalising contract costs as they are expected to be expensed within one year from the date of signing .

Leases

The Group recognises right of use assets at the commencement date of the lease. Right of use assets are measured at cost including the amount of lease liabilities recognised and initial direct costs incurred, less any incentives granted by the lessor. Right of use assets are depreciated over the shorter of the lease term and the useful life of the right of use assets, unless there is a transfer of ownership or purchase option which is reasonably certain to be exercised at the end of the lease term, in which case depreciation is charged over the useful life of the underlying asset. Right of use assets are subject to impairment.

Leases of buildings typically have lease terms between 1 and 6 years, while plant and machinery generally have lease terms between 1 and 3 years. The Group also has certain leases of machinery with lease terms of 12 months or less and leases of office equipment with low value (typically below £5,000). The Group applies the 'short-term lease' and 'lease of low-value assets' recognition exemptions for these leases and recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term .

Taxation

The charge for taxation is based on profits for the year and takes into account taxation deferred because of temporary differences between the treatment of certain items for taxation and accounting purposes.

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. Tax benefits are not recognised unless it is likely that the tax positions are sustainable. Tax positions taken are then reviewed to assess whether a provision should be made based on prevailing circumstances. Tax provisions are included in current tax liabilities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income.

The Group operates and is subject to taxation in many countries. Tax legislation is different in each country, is often complex and is subject to interpretation by management and government authorities. These matters of judgement give rise to the need to create provisions for uncertain tax positions which are recognised when it is considered more likely than not that there will be a future outflow of funds to a taxing authority. Provisions are made against individual exposures and take into account the specific circumstances of each case, including the strength of technical arguments, recent case law decisions or rulings on similar issues and relevant external advice.

The amounts are measured using one of the following methods, depending on which of the methods the Directors expect will better reflect the amount the Group will pay to the tax authority :

· The single best estimate method is used where there is a single outcome that is more likely than not to occur. This will happen, for example, where the tax outcome is binary or the range of possible outcomes is very limited;

· Alternatively, a probability weighted expected value is used where, on the balance of probabilities, there will be a payment to the tax authority but there are a number of possible outcomes. In this case, a probability is assigned to each of the outcomes and the amount provided is the sum of these risk-weighted amounts. In assessing provisions against uncertain tax positions, management uses in-house tax experts, professional firms and previous experience of the taxing authority to evaluate the risk .

Deferred tax is provided in full using the balance sheet liability method. A deferred tax asset is recognised where it is probable that future taxable income will be sufficient to utilise the available relief. Tax is charged or credited to the income statement except when it relates to items charged or credited directly to equity, in which case the tax is also dealt with in equity.

Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax liabilities and assets are not discounted.

Employee benefits

Share-based compensation

The fair value of the shares or share options granted is recognised as an expense over the vesting period to reflect the value of the employee services received. The fair value of options granted, excluding the impact of any non-market vesting conditions, is calculated using established option pricing models, principally binomial models. The probability of meeting non-market vesting conditions, which include profitability targets, is used to estimate the number of share options which are likely to vest.

For cash-settled share-based payment, a liability is recognised based on the fair value of the payment earned by the balance sheet date. For equity-settled share-based payment, the corresponding credit is recognised directly in reserves .

Pension obligations and post-retirement benefits

Pensions and similar benefits (principally healthcare) are accounted for under IAS 19. The retirement benefit obligation in respect of the defined benefit plans is the liability (the present value of all expected future obligations) less the fair value of the plan assets.

The income statement expense is allocated between current service costs, reflecting the increase in liability due to any benefit accrued by employees in the current period, any past service costs/credits and settlement losses or gains which are recognised immediately, and the scheme administration costs.

Actuarial gains and losses are recognised in the statement of comprehensive income in the year in which they arise. These comprise the impact on the liabilities of changes in demographic and financial assumptions compared with the start of the year, actual experience being different to assumptions and the return on plan assets being above or below the amount included in the net pension interest cost.

Payments to defined contribution schemes are charged as an income statement expense as they fall due .

Intangible assets

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition.

The goodwill arising from acquisitions of subsidiaries after 1 August 1998 is included in intangible assets, tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. The goodwill arising from acquisitions of subsidiaries before 1 August 1998 was set against reserves in the year of acquisition .

Goodwill is tested for impairment at least annually. Should the test indicate that the net realisable value of the CGU is less than current carrying value, an impairment loss will be recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised .

Research and development

Expenditure on research and development is charged to the income statement in the year in which it is incurred with the exception of:

· Amounts recoverable from third parties; and

· Expenditure incurred in respect of the development of major new products where the outcome of those projects is assessed as being reasonably certain as regards viability and technical feasibility. Such expenditure is capitalised and amortised over the estimated period of sale for each product, commencing in the year that the product is ready for sale. Amortisation is charged straight line or based on the units produced, depending on the nature of the product and the availability of reliable estimates of production volumes .

The cost of development projects which are expected to take a substantial period of time to complete includes attributable borrowing costs.

Intangible assets acquired in business combinations

The identifiable net assets acquired as a result of a business combination may include intangible assets other than goodwill. Any such intangible assets are amortised straight line over their expected useful lives as follows :

Patents, licences and trademarks	up to 20 years
Technology	up to 13 years
Customer relationships	up to 11 years

The assets' useful lives are reviewed, and adjusted if appropriate,  at each balance sheet date.

Software, patents and intellectual property

The estimated useful lives are as follows:

Software	up to 7 years
Patents and intellectual property	shorter of the economic life and the period the right is legally enforceable

The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and any recognised impairment losses.

Land is not depreciated. Depreciation is provided on other assets estimated to write off the depreciable amount of relevant assets by equal annual instalments over their estimated useful lives. In general, the rates used are :

Freehold and long leasehold buildings	2% per annum
Short leasehold property	over the period of the lease
Plant, machinery, etc.	10% to 20% per annum
Fixtures, fittings, tools and other equipment	10% to 33% per annum

The cost of any assets which are expected to take a substantial period of time to complete includes attributable borrowing costs.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount .

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). The cost of items of inventory which take a substantial period of time to complete includes attributable borrowing costs.

The net realisable value of inventories is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provisions are made for any slow-moving, obsolete or defective inventories .

Trade and other receivables

Trade receivables and contract assets are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate provision for expected credit losses.

A provision for expected credit losses is established when there is objective evidence that it will not be possible to collect all amounts due according to the original payment terms. Expected credit losses are determined using historical write-offs as a basis, with a default risk multiplier applied to reflect country risk premium. The Group applies the IFRS 9 simplified lifetime expected credit loss approach for trade receivables and contract assets which do not contain a significant financing component .

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

Provisions for warranties and product liability, disposal indemnities, restructuring costs, property dilapidations and legal claims are recognised when: the Company has a legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Provisions are discounted where the time value of money is material.

Where there is a number of similar obligations, for example where a warranty has been given, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small .

Businesses held for sale

Businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and gains or losses on subsequent remeasurements are included in the income statement. No depreciation is charged on assets and businesses classified as held for sale.

Businesses are classified as held for sale if their carrying amount will be settled principally through a sale rather than through continuing use and the following criteria are met :

· The business must be a separate major line of business, available for immediate sale in its present condition;

· Management is committed to the plan to sell the business and an active programme to locate a buyer and complete the plan must have been initiated;

· The disposal group must be actively marketed for sale at a price that is reasonable in relation to its current fair value;

· Shareholder and regulatory approval is highly probable and the plan is unlikely to be significantly changed or withdrawn; and

· Sale is expected to be completed within 12 months of the balance sheet date .

The assets and liabilities of businesses held for sale are presented as separate lines on the balance sheet .

Discontinued operations

A discontinued operation is either:

· A component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of, has been abandoned or meets the criteria to be classified as held for sale; or

· A business acquired solely for the purpose of selling it.

Discontinued operations are presented on the income statement as a separate line and are shown net of tax.

In accordance with IAS 21, gains and losses on intra-group monetary assets and liabilities are not eliminated. Therefore foreign exchange rate movements on intercompany loans with discontinued operations are presented on the income statement as non-headline finance cost items.

Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with maturities of three months or less.

In the cash-flow statement, cash and cash equivalents are shown net of bank overdrafts, which are included as current borrowings in liabilities on the balance sheet.

Financial assets

The classification of financial assets depends on the purpose for which the assets were acquired. Management determines the classification of an asset at initial recognition and re-evaluates the designation at each reporting date. Financial assets are classified as: measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss.

Financial assets primarily include trade receivables, cash and cash equivalents (comprising cash at bank, money market funds, and short-term deposits), short-term investments, derivatives (foreign exchange contracts and interest rate derivatives) and unlisted investments.

· Trade receivables are classified either as 'held to collect' and measured at amortised cost or as 'held to collect and sell' and measured at fair value through other comprehensive income (FVOCI). The Group may sell trade receivables due from certain customers before the due date. Any trade receivables from such customers that are not sold at the reporting date are classified as 'held to collect and sell';

· Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds and short-term deposits) and short-term investments are subject to low market risk. Cash balances and short-term investments are measured at amortised cost. Money market funds and short-term deposits are measured at fair value through profit and loss (FVPL);

· Derivatives are measured at FVPL;

· Listed and unlisted investments are measured at FVOCI; and

· Deferred contingent consideration are measured at FVPL.

Financial assets are derecognised when the right to receive cash-flows from the assets has expired, or has been transferred, and the Group has transferred substantially all of the risks and rewards of ownership. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments previously taken to reserves are included in the income statement.

Financial assets are classified as current if they are expected to be realised within 12 months of the balance sheet date.

Financial liabilities

Borrowings are initially recognised at the fair value of the proceeds, net of related transaction costs. These transaction costs, and any discount or premium on issue, are subsequently amortised under the effective interest rate method through the income statement as interest over the life of the loan and added to the liability disclosed in the balance sheet. Related accrued interest is included in the borrowings figure.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least one year after the balance sheet date .

Derivative financial instruments and hedging activities

The Group uses derivative financial instruments to hedge its exposures to foreign exchange and interest rates arising from its operating and financing activities.

Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising any resulting gain or loss depends on whether the derivative financial instrument is designated as a hedging instrument and, if so, the nature of the item being hedged.

Where derivative financial instruments are designated into hedging relationships, the Group formally documents the following :

· the risk management objective and strategy for entering the hedge;

· the nature of the risks being hedged and the economic relationship between the hedged item and the hedging instrument; and

· whether the change in cash-flows of the hedged item and hedging instrument are expected to offset each other.

Changes in the fair value of any derivative financial instruments that do not qualify for hedge accounting are recognised immediately in the income statement.

Fair value hedge

The Group uses derivative financial instruments to convert part of its fixed rate debt to floating rate in order to hedge the risks arising from its external borrowings.

The Group designates these as fair value hedges of interest rate risk. Changes in the hedging instrument are recorded in the income statement, together with any changes in the fair values of the hedged assets or liabilities that are attributable to the hedged risk to the extent that the hedge is effective. Gains or losses relating to any ineffectiveness are immediately recognised in the income statement.

Cash-flow hedge

Cash-flow hedging is used by the Group to hedge certain exposures to variability in future cash-flows.

The effective portions of changes in the fair values of derivatives that are designated and qualify as cash-flow hedges are recognised in equity. The gain or loss relating to any ineffective portion is recognised immediately in the income statement. Amounts accumulated in the hedge reserve are recycled in the income statement in the periods when the hedged items will affect profit or loss (for example, when the forecast sale that is hedged takes place).

If a forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in the hedge reserve are transferred from the reserve and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in the hedge reserve at that time remains in the reserve and is recognised when the forecast transaction is ultimately recognised in the income statement.

When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for similarly to cash-flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income; the gain or loss relating to any ineffective portion is recognised immediately in the income statement. When a foreign operation is disposed of, gains and losses accumulated in equity related to that operation are included in the income statement for that period .

Fair value of financial assets and liabilities

The fair values of financial assets and financial liabilities are the amounts at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

'IFRS 13: Fair value measurement' requires fair value measurements to be classified according to the following hierarchy:

· Level 1 - quoted prices in active markets for identical assets or liabilities;

· Level 2 - valuations in which all inputs are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

· Level 3 - valuations in which one or more inputs that are significant to the resulting value are not based on observable market data.

See note 21 for information on the methods which the Group uses to estimate the fair values of its financial instruments.

Dividends

Dividends are recognised as a liability in the period in which they are authorised. The interim dividend is recognised when it is paid and the final dividend is recognised when it has been approved by shareholders at the Annual General Meeting.

New accounting standards effective 2022

No new accounting standards have been adopted in the financial year. The accounting policies adopted in the preparation of these consolidated financial statements are consistent with those followed in the previous financial year.

New standards and interpretations not yet adopted

No other new standards, new interpretations or amendments to standards or interpretations have been published which are expected to have a significant impact on the Group's financial statements.

Notes to the accounts

1 SEGMENT INFORMATION

Analysis by operating segment

The Group is organised into four divisions: John Crane, Smiths Detection, Flex-Tek and Smiths Interconnect. These divisions design, manufacture and support the following products:

· John Crane - mechanical seals, seal support systems, power transmission couplings and specialised filtration systems;

· Smiths Detection - sensors and systems that detect and identify explosives, narcotics, weapons, chemical agents, biohazards and contraband;

· Flex-Tek - engineered components, flexible hosing and rigid tubing that heat and move fluids and gases; and

· Smiths Interconnect - specialised electronic and radio frequency board-level and waveguide devices, connectors, cables, test sockets and sub-systems used in high-speed, high reliability, secure connectivity applications.

The position and performance of each division are reported at each Board meeting to the Board of Directors. This information is prepared using the same accounting policies as the consolidated financial information except that the Group uses headline operating profit to monitor the divisional results and operating assets to monitor the divisional position. See note 3 and note 29 for an explanation of which items are excluded from headline measures.

The sale of the Group's Smiths Medical business was completed on 6 January 2022 and the results of Smiths Medical are disclosed as a discontinued operation in note 27. Intersegment sales and transfers are charged at arm's length prices.

Segment trading performance

	Year ended 31 July 2022
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate costs £m	Total £m
Revenue	901	655	647	363	-	2,566
Divisional headline operating profit	188	73	133	65	-	459
Corporate headline operating costs	-	-	-	-	(42)	(42)
Headline operating profit/(loss)	188	73	133	65	(42)	417
Items excluded from headline measures (note 3)	(21)	(37)	(27)	(1)	(214)	(300)
Operating profit/(loss)	167	36	106	64	(256)	117

	Year ended 31 July 2021
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate costs £m	Total £m
Revenue	865	721	508	312	-	2,406
Divisional headline operating profit	187	99	97	35	-	418
Corporate headline operating costs	-	-	-	-	(46)	(46)
Headline operating profit/(loss)	187	99	97	35	(46)	372
Items excluded from headline measures (note 3)	(3)	(22)	(14)	(1)	(6)	(46)
Operating profit/(loss)	184	77	83	34	(52)	326

Operating profit is stated after charging (crediting) the following items:

	Year ended 31 July 2022
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate and non-headline £m	Total £m
Depreciation - property, plant and equipment	15	10	7	5	1	38
Depreciation - right of use assets	15	7	5	2	1	30
Amortisation of capitalised development costs	-	3	-	-	-	3
Amortisation of software, patents and intellectual property	3	1	-	2	1	7
Amortisation of acquired intangibles	-	-	-	-	51	51
Share-based payment	3	2	2	1	4	12
Russia impairment charges and related closure costs	9	10	-	-	-	19
Transition services cost reimbursement	-	-	-	-	(7)	(7)

	Year ended 31 July 2021
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate and non-headline  m	Total £m
Depreciation - property, plant and equipment	15	12	6	6	1	40
Depreciation - right of use assets	14	7	4	5	2	32
Amortisation of capitalised development costs	-	7	-	-	-	7
Amortisation of software, patents and intellectual property	3	1	-	2	1	7
Amortisation of acquired intangibles	-	-	-	-	53	53
Share-based payment	3	2	1	1	6	13
Strategic restructuring costs	4	6	-	10	1	21

The corporate and non-headline column comprises central information technology, human resources and headquarters costs and non-headline expenses (see note 3).

Segment assets and liabilities

Segment assets

	31 July 2022
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate and non-headline £m	Total £m
Property, plant, equipment, right of use assets, development projects, other intangibles and investments	167	127	84	54	399	831
Inventory, trade and other receivables	429	524	244	167	13	1,377
Segment assets	596	651	328	221	412	2,208

	31 July 2021
	John Crane £m	Smiths Detection £m	Flex-Tek £m	Smiths  Interconnect £m	Corporate and non-headline £m	Total £m
Property, plant, equipment, right of use assets, development projects, other intangibles and investments	152	117	75	44	18	406
Inventory, trade and other receivables	356	417	160	127	10	1,070
Segment assets	508	534	235	171	28	1,476

Non-headline assets comprise receivables relating to non-headline items, acquisitions and disposals.

Segment liabilities

	31 July 2022
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Corporate and non-headline £m	Total £m
Divisional liabilities	(155)	(347)	(91)	(85)	-	(678)
Corporate and non-headline liabilities	-	-	-	-	(385)	(385)
Segment liabilities	(155)	(347)	(91)	(85)	(385)	(1,063)

	31 July 2021
	John Crane £m	Smiths Detection £m	Flex-Tek £m	Smiths  Interconnect £m	Corporate and non-headline £m	Total £m
Divisional liabilities	(137)	(276)	(66)	(61)	-	(540)
Corporate and non-headline liabilities	-	-	-	-	(336)	(336)
Segment liabilities	(137)	(276)	(66)	(61)	(336)	(876)

Non-headline liabilities comprise provisions and accruals relating to non-headline items, acquisitions and disposals.

Reconciliation of segment assets and liabilities to statutory assets and liabilities

	Assets			Liabilities
	31 July 2022 £m	31 July 2021 £m		31 July 2022 £m	31 July 2021 £m
Segment assets and liabilities	2,208	1,476		(1,063)	(876)
Goodwill and acquired intangibles	1,501	1,423		-	-
Derivatives	4	77		(47)	(3)
Current and deferred tax	145	167		(111)	(122)
Retirement benefit assets and obligations	309	546		(115)	(128)
Cash and borrowings	1,056	405		(1,166)	(1,502)
Assets and liabilities held for sale	-	1,243		-	(283)
Statutory assets and liabilities	5,223	5,337		(2,502)	(2,914)

Segment capital expenditure

The capital expenditure on property, plant and equipment, capitalised development and other intangible assets for each division is:

	John Crane £m	Smiths Detection £m	Flex-Tek £m	Smiths  Interconnect £m	Corporate and non-headline £m	Total £m
Capital expenditure year ended 31 July 2022	24	23	11	12	1	71
Capital expenditure year ended 31 July 2021	19	23	9	9	2	62

Segment capital employed

Capital employed is a non-statutory measure of invested resources. It comprises statutory net assets adjusted to add goodwill recognised directly in reserves in respect of subsidiaries acquired before 1 August 1998 of £478m (FY2021: £787m) and eliminate retirement benefit assets and obligations and litigation provisions relating to non-headline items, both net of related tax, and net debt. See note 29 for a reconciliation of net assets to capital employed.

The 12-month rolling average capital employed by division, which Smiths uses to calculate divisional return on capital employed, is:

	31 July 2022
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths Interconnect £m	Total £m
Average divisional capital employed	970	1,019	520	400	2,909
Average corporate capital employed					31
Average total capital employed - continuing operations					2,940

	31 July 2021
	John Crane £m	Smiths  Detection £m	Flex-Tek £m	Smiths  Interconnect £m	Total £m
Average divisional capital employed	937	1,018	449	395	2,799
Average corporate capital employed					31
Average total capital employed - continuing operations					2,830

Analysis of revenue

The revenue for the main product and service lines for each division is:

John Crane	Original equipment £m	Aftermarket £m	Total £m
Revenue year ended 31 July 2022	279	622	901
Revenue year ended 31 July 2021	273	592	865

Smiths Detection			Aviation £m	Other security systems £m	Total £m
Revenue year ended 31 July 2022			467	188	655
Revenue year ended 31 July 2021			546	175	721

Flex-Tek			Aerospace £m	Industrials £m	Total £m
Revenue year ended 31 July 2022			116	531	647
Revenue year ended 31 July 2021			99	409	508

Smiths Interconnect				Components, connectors & subsystems £m
Revenue year ended 31 July 2022				363
Revenue year ended 31 July 2021				312

Aftermarket sales contributed £1,238m (FY2021: £1,198m) of Group revenue: John Crane aftermarket sales were £622m (FY2021: £592m); Smiths Detection aftermarket sales were £355m (FY2021: £331m); Flex-Tek aftermarket sales were £261m (FY2021: £270m); and Smiths Interconnect aftermarket sales were £nil (FY2021: £5m).

Divisional revenue is analysed by the Smiths Group key global markets as follows:

		General Industrial £m	Safety & Security £m	Energy £m	Aerospace £m	Total £m
John Crane
Revenue year ended 31 July 2022		371	-	530	-	901
Revenue year ended 31 July 2021		355	-	510	-	865
Detection
Revenue year ended 31 July 2022		-	655	-	-	655
Revenue year ended 31 July 2021		-	721	-	-	721
Flex Tek
Revenue year ended 31 July 2022		531	-	-	116	647
Revenue year ended 31 July 2021		409	-	-	99	508
Interconnect
Revenue year ended 31 July 2022		166	144	-	53	363
Revenue year ended 31 July 2021		139	128	-	45	312
Total
Revenue year ended 31 July 2022		1,068	799	530	169	2,566
Revenue year ended 31 July 2021		903	849	510	144	2,406

The Group's statutory revenue is analysed as follows:

		Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Sale of goods recognised at a point in time		1,849	1,723
Sale of goods recognised over time		99	94
Services recognised over time		618	589
		2,566	2,406

Analysis by geographical areas

The Group's revenue by destination and non-current operating assets by location are shown below:

	Revenue			Intangible assets, right of use assets and property, plant and equipment
	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m		31 July 2022 £m	31 July 2021 £m
Americas	1,423	1,244		1,324	1,195
Europe	480	522		498	512
Asia-Pacific	421	390		76	70
Rest of the World	242	250		39	41
	2,566	2,406		1,937	1,818

Revenue by destination attributable to the United Kingdom was £75m (FY2021: £69m). Other revenue found to be significant included, the United States of America, totalling £1,206m (FY2021: £1,047m), China (excluding Hong Kong) £132m (FY2021: £123m) and Germany £123m (FY2021: £130m). Revenue by destination has been selected as the basis for attributing revenue to geographical areas as this was the geographic attribution of revenue used by management to review business performance.

Non-current assets located in the United Kingdom total £108m (FY2021: £110m). Significant non-current assets held in the United States of America £1,260m (FY2021: £1,138m) and Germany £340m (FY2021: £350m).

2 OPERATING COSTS

The Group's operating costs for continuing operations are analysed as follows:

	Year ended 31 July 2022				Year ended 31 July 2021
	Headline £m	Non-headline (note 3) £m	Total £m		Headline £m	Non-headline (note 3) £m	Total £m
Cost of sales - direct materials, labour, production and distribution overheads	1,605	-	1,605		1,491	-	1,491
Selling costs	200	-	200		188	-	188
Administrative expenses	351	300	651		355	46	401
Transition services cost reimbursement	(7)	-	(7)		-	-	-
Total	2,149	300	2,449		2,034	46	2,080

Following the sale of the Smiths Medical business, the Group has provided transition services to the Smiths Medical Group, which is disclosed above as transition services cost reimbursement.

Operating profit is stated after charging (crediting):

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Research and development expense	80	76
Depreciation of property, plant and equipment	38	40
Depreciation of right of use assets	30	32
Amortisation of intangible assets	61	67
Strategic restructuring programme and write-downs	-	21
Russia impairment and related closure costs (see note 11)	19	-
Transition services cost reimbursement	(7)	-

Research and development (R&D) cash costs were £107m (FY2021: £94m) comprising £80m (FY2021: £76m) of R&D expensed to the income statement, £12m (FY2021: £8m) of capitalised costs and £15m (FY2021: £10m) of customer funded R&D.

Administrative expenses include £3m (FY2021: £1m) in respect of lease payments for short-term and low-value leases which were not included within right of use assets and lease liabilities..

Auditors' remuneration

The following fees were paid or are payable to the Company's auditors, KPMG LLP and other firms in the KPMG network, for the year ended 31 July 2022.

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Audit services
Fees payable to the Company's auditors for the audit of the Company's annual financial statements	2.8	2.3
Fees payable to the Company's auditors and its associates for other services:
- the audit of the Company's subsidiaries	4.6	4.2
	7.4	6.5
All other services	0.8	0.9

Other services comprise audit-related assurance services £0.5m (FY2021: £0.4m) and fees for reporting accountant services in connection with a class 1 disposal £0.3m (FY2021: £0.5m).  Audit-related assurance services include the review of the Interim Report. Total fees for non audit services comprise 11% (FY2021: 13%) of audit fees.

In the current year, the Group has additionally agreed £0.5m of additional fees with the Group auditors relating to the audit of the prior year financial statements.

3 NON-STATUTORY PROFIT MEASURES

Headline profit measures

The Group has identified and defined a 'headline' measure of performance which is not impacted by material non-recurring items or items considered non-operational/trading in nature. This non-GAAP measure of profit is not intended to be a substitute for any IFRS measures of performance, but is a key measure used by management to understand and manage performance. See the disclosures on presentation of results in accounting policies for an explanation of the adjustments. The items excluded from 'headline' are referred to as 'non-headline' items.

Non-headline operating profit items

i. CONTINUING OPERATIONS

The non-headline items included in statutory operating profit for continuing operations were as follows:

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Post-acquisition integration costs and fair value adjustment unwind
Unwind of acquisition balance sheet fair value uplift		(2)	(1)
Integration programme costs		-	(1)
Acquisition and disposal related transaction costs and provision releases
Business acquisition/disposal costs		(5)	(1)
Legacy pension scheme arrangements
Past service costs for benefit equalisation and improvements	8	(43)	(6)
Retirement benefit scheme settlement loss	8	(171)	-
Non-headline litigation provision movements
Movement in provision held against Titeflex Corporation subrogation claims	23	(2)	13
Provision for John Crane, Inc. asbestos litigation	23	(7)	(6)
Cost recovery for John Crane, Inc. asbestos litigation		-	9
Other items
Russia impairment charges and related closure costs	11	(19)	-
Amortisation of acquired intangible assets	10	(51)	(53)
Non-headline items in operating profit - continuing operations		(300)	(46)

Post-acquisition integration costs and fair value adjustment unwind

The impact of unwinding the acquisition balance sheet fair value adjustments required by IFRS 3 'Business combinations' was recognised as non-headline as the charge did not relate to trading activity. The £2m (FY2021: £1m) charge was due to the unwind of fair value uplifts on the acquisition of Royal Metal Products.

The £1m of integration programme costs in FY2021 principally related to defined projects for the integration of United Flexible into the existing Flex-Tek business. Integration programme costs included the direct costs of organisational change, site rationalisation and entity closure costs. The United Flexible integration programme concluded in the current year. Integration costs were recognised as non-headline items because they were considered material and bear no relation to the ongoing performance of the acquired businesses.

Acquisition and disposal related transaction costs and provision releases

The £5m of business acquisition/disposal costs (FY2021: £1m) principally relate to a provision for potential litigation expenses relating to an acquired business that were unknown at the time of the acquisition. These costs are recognised as non-headline items because they entirely relate to an acquisition transaction and are considered to be non-trading in nature.

Legacy pension scheme arrangements

The current year past service costs of £43m (FY2021: £6m) comprises the following:

· £19m of costs (FY2021: £6m) that were recognised in respect of the historic equalisation of retirement benefits for men and women (see note 8 for further details); and

· £24m of costs  (FY2021: £nil) that were recognised following the TI Group Pension Scheme (TIGPS) executing an insurance buy-in policy. This reflects the expectation that the TIGPS Trustee will use any surplus, remaining after the costs of buying-out and winding-up the scheme have been met, to improve member benefits (see note 8 for further details).

These past service costs  are reported as non-headline as they are non-recurring and relate to legacy pension liabilities. 

A £171m retirement benefit scheme settlement loss has been recognised in the current year (FY2021: £nil) following TIGPS executing an insurance buy-in policy for its remaining uninsured liabilities (see note 8 for further details). This item is reported as non-headline as it is non-recurring and relates to legacy pension liabilities.

Non-headline litigation provision movements

The following litigation costs and recoveries have been treated as non-headline items because the provisions were treated as non-headline when originally recognised and the subrogation claims and litigation relate to products that the Group no longer sells in these markets:

· The £2m charge (FY2021: £13m credit) recognised by Titeflex Corporation is principally in respect of an increase in the estimated cost of future claims. See note 23 for further details; and

· The £7m charge (FY2021: £6m charge) recognised for John Crane, Inc. asbestos litigation provision was principally due to an increased provision for adverse judgements and legal defence costs. The costs recovered via insurer settlements in FY2021 were £9m. See note 23 for further details.

Other items

Following the decision in March 2022 to suspend sales into Russia the Group has recognised £19m (FY2021: £nil) of Russia impairment charges and related closure costs (see note 11 for further details). These expenses are recognised as non-headline items as they are both non-recurring and material in size.

Acquired intangible asset amortisation costs of £51m (FY2021: £53m) were recognised in the current year. This was considered to be a non-headline item on the basis that these charges resulted from acquisition accounting and were non-operational in nature.

Non-headline finance costs items

The non-headline items included in finance costs for continuing operations were as follows:

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Unwind of discount on provisions	23	(3)	(2)
Other finance income - retirement benefits	8	7	6
Fair value gain on investment in early stage business	14	1	-
Foreign exchange gain (loss) on intercompany loan with discontinued operations		22	(50)
Non-headline items in finance costs - continuing operations		27	(46)
Continuing operations - non-headline loss before taxation		(273)	(92)

The financing elements of non-headline legacy liabilities, including the £3m (FY2021: £2m) unwind of discount on provisions, were excluded from headline finance costs because these provisions were originally recognised as non-headline and this treatment has been maintained for ongoing costs and credits.

Other finance income comprises £7m (FY2021: £6m) of financing credits relating to retirement benefits. These were excluded from headline finance costs because the ongoing costs and credits are a legacy of previous employee pension arrangements.

Foreign exchange gains or losses on intercompany financing between Smiths Medical and the continuing Group were recognised on the face of the income statement as a non-headline item due to the classification of the Smiths Medical division as a discontinued operation. The £22m foreign exchange gain in continuing operations (FY2021: £50m loss) matches the foreign exchange loss in discontinued operations. This was excluded from headline net finance costs as these fair value movements were non-operational in nature and were purely a consequence of the presentational requirements for discontinued operations.

Non-headline taxation items

The non-headline items included in taxation for continuing operations were as follows:

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Tax credit on non-headline loss	6	19	9
(Increase)/decrease in unrecognised UK deferred tax asset	6	(5)	4
Non-headline items in taxation - continuing operations		14	13
Continuing operations - non-headline loss for the year		(259)	(79)

Movement in unrecognised UK deferred tax asset

These movements are reported as non-headline because the prior year charge was reported as non-headline. In FY2019 £36m of deferred tax was derecognised following the decision to separate Smiths Medical which reduces the Group's profitability in the UK. This year, following sale of Medical there is an additional non-headline charge for UK losses.

ii. DISCONTINUED OPERATIONS

The non-headline items for discontinued operations were as follows:

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Non-headline operating profit items
Medfusion documentation remediation costs		(33)	-
Impairment of investment in Ivenix, Inc convertible debt		(14)	-
Medical separation costs		-	(18)
Impairment of capitalised development costs and related assets		-	(61)
Non-headline finance costs items
Foreign exchange (loss) gain on intercompany loan with parent		(22)	50
Gain on sale of discontinued operation
Gain on the sale of Smiths Medical to ICU Medical, Inc	27	1,036	-
Non-headline taxation items
Tax on non-headline loss	27	6	23
Non-headline items in profit from discontinued operations		973	(6)
Profit for the year - non-headline items for continuing and discontinued operations		714	(85)

In the current year Smiths Medical recognised a provision of £33m against the expected costs of the remediation actions required to address each of the observations and discussion items contained in the US Food and Drug Administration (FDA) 'for-cause' audit findings on the Medfusion product range.

In the current period a decision was taken by Smiths Medical to exit their commercial agreement with Ivenix, Inc. These circumstances have resulted in a change in strategy and have triggered an indicator of impairment to the carrying value of the Smiths Medical investment in Ivenix, Inc. As this change in circumstances indicates that it is not currently probable that the investment will realise economic benefits, management have impaired the entire £14m value of Smiths Medical's Ivenix, Inc. investment.

In the prior year the £18m of Medical separation costs represented incremental costs incurred by the Group to separate Smiths Medical. This cost has been reported as non-headline as the full year effect of the transaction on the Group's financial statements is both material and non-recurring. In the current year separation and transaction costs incurred on the sale of the Smiths Medical business to ICU Medical, Inc have been included within the 'Gain on sale of discontinued operation' calculation (see note 27).

The £22m foreign exchange loss on intercompany loan with parent (FY2021: £50m gain) directly offsets the foreign exchange gain in continuing operations. This is excluded from headline net finance costs as these fair value movements are non-operational in nature and are purely a consequence of the presentational requirements for discontinued operations.

4 NET FINANCE COSTS

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Interest receivable		14	9
Interest payable:
- bank loans and overdrafts, including associated fees		(12)	(7)
- other loans		(40)	(39)
- interest on leases		(3)	(3)
Interest payable		(55)	(49)
Headline net finance costs		(41)	(40)
Other financing gains/(losses):
- valuation movements on fair value hedged debt		(32)	22
- valuation movements on fair value derivatives		33	(25)
- foreign exchange and ineffectiveness on net investment hedges		(2)	3
- retranslation of foreign currency bank balances		(1)	(3)
- other items including counterparty credit risk adjustments and non-hedge accounted derivatives		2	3
Other financing gains		-	-
Non-headline finance cost items:
Foreign exchange gain on intercompany loan with discontinued operations	3	22	(50)
Unwind of discount on provisions	3	(3)	(2)
Fair value gain on investment in early stage business	14	1	-
Net interest income on retirement benefit obligations	8	7	6
Non-headline finance cost items		27	(46)
Net finance costs		(14)	(86)

5 EARNINGS PER SHARE

Basic earnings per share are calculated by dividing the profit for the year attributable to equity shareholders of the Company by the average number of ordinary shares in issue during the year.

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Profit attributable to equity shareholders for the year:
- continuing	11	156
- discontinued	1,022	128
Total	1,033	284
Average number of shares in issue during the year (note 24)	386,678,211	396,350,586
Statutory earnings per share total - basic	267.1p	71.7p
Statutory earnings per share total - diluted	266.0p	71.3p
Statutory earnings per share continuing operations - basic	2.8p	39.4p
Statutory earnings per share continuing operations - diluted	2.8p	39.1p

Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 388,349,758 (FY2021: 398,576,502) ordinary shares, being the average number of ordinary shares in issue during the year adjusted by the dilutive effect of employee share schemes. No options (FY2021: nil) were excluded from this calculation because their effect was anti ‑ dilutive.

A reconciliation of statutory and headline earnings per share is as follows:

	Year ended 31 July 2022				Year ended 31 July 2021
	£m	Basic EPS (p)	Diluted EPS (p)		£m	Basic EPS (p)	Diluted EPS (p)
Total profit attributable to equity shareholders of the Parent Company	1,033	267.1	266.0		284	71.7	71.3
Exclude: Non-headline items (note 3)	(714)				85
Headline earnings per share	319	82.5	82.1		369	93.1	92.6
Profit from continuing operations attributable to equity shareholders of the Parent Company	11	2.8	2.8		156	39.4	39.1
Exclude: Non-headline items (note 3)	259				79
Headline earnings per share - continuing operations	270	69.8	69.5		235	59.3	59.0

6 TAXATION

This note only provides information about corporate income taxes under IFRS. Smiths companies operate in over 50 countries across the world. They pay and collect many different taxes in addition to corporate income taxes including: payroll taxes; value added and sales taxes; property taxes; product-specific taxes; and environmental taxes. The costs associated with these other taxes are included in profit before tax.

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
The taxation charge in the consolidated income statement for the year comprises:
Continuing operations
- current income tax charge	68	71
- current tax adjustments in respect of prior periods	5	7
Current taxation	73	78
Deferred taxation	17	5
Total taxation expense - continuing operations	90	83
Analysed as:
Headline taxation expense	104	96
Non-headline taxation credit	(14)	(13)
Total taxation expense in the consolidated income statement	90	83

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Tax on items charged/(credited) to equity
Deferred tax:
- retirement benefit schemes	-	6
- foreign exchange	-	(5)
- share-based payment	(1)	(1)
	(1)	-

The £nil (FY2021: £6m) charge to equity for retirement benefits related to UK retirement schemes.

Current taxation liabilities

	Current tax £m
At 31 July 2020	(38)
Foreign exchange gain	1
Charge to income statement	(78)
Tax paid	96
At 31 July 2021	(19)
Current tax receivable	75
Current tax payable within one year	(89)
Corporation tax payable after more than one year	(5)
At 31 July 2021	(19)
Foreign exchange gain	(4)
Charge to income statement	(73)
Tax paid	79
At 31 July 2022	(17)
Current tax receivable	50
Current tax payable within one year	(64)
Corporation tax payable after more than one year	(3)
At 31 July 2022	(17)

Taxation liabilities included provisions of £38m (FY2021: £34m), the majority of which related to the risk of challenge to the geographic allocation of profits by tax authorities.

In addition to the risks provided for, the Group faces a variety of other tax risks, which result from operating in a complex global environment, including the ongoing reform of both international and domestic tax rules, new and ongoing tax audits in the Group's larger markets and the challenge to fulfil ongoing tax compliance filing and transfer pricing obligations given the scale and diversity of the Group's global operations.

The Group anticipates that a number of tax audits are likely to conclude in the next 12 to 24 months. Due to the uncertainty associated with such tax items, it is possible that the conclusion of open tax matters may result in a final outcome that varies significantly from the amounts noted above.

Reconciliation of the tax charge

The headline tax charge for the year of £104m (FY2021: £96m) represented an effective rate of 27.6% (FY2021: 28.9%). The headline effective tax rate for the total Group including discontinued operations was 27.2% (FY2021: 27.1%). The tax charge on the profit for the year for continuing operations was different from the standard rate of corporation tax in the UK of 19% (FY2021: 19.0%). The difference is reconciled as follows:

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Profit before taxation	103	240
Notional taxation expense at UK corporate rate of 19.0% (FY2021: 19.0%)	20	46
Different tax rates on non-UK profits and losses	13	16
Non-deductible expenses and other charges	11	30
Tax credits and non-taxable income	(6)	(8)
Non-headline UK deferred tax asset recognition adjustment	5	(4)
Other adjustments to unrecognised deferred tax	10	(4)
Non-tax relievable loss on UK pensions schemes	41	-
Tax on Smiths Medical consolidation adjustments	2	8
Prior year true-up	(6)	(1)
Total taxation expense in the consolidated income statement	90	83
Comprising:
Taxation on headline profit	104	96
Non-headline taxation items:
- Tax on non-headline loss	(19)	(9)
- UK deferred tax asset recognition adjustment	5	(4)
Taxation on non-headline items	(14)	(13)
Total taxation expense in the consolidated income statement	90	83

The head office of Smiths Group is domiciled in the UK; so the tax charge has been reconciled to UK tax rates.

Deferred taxation assets/(liabilities)

Property, plant, equipment and intangible assets £m		Employment benefits £m	Losses carried forward £m	Provisions £m	Other £m	Total £m
At 31 July 2020	(74)	(66)	128	86	1	75
Reallocations	11	(1)	(14)	2	2	-
Charge to income statement - continuing operations	4	(31)	27	(5)	-	(5)
Credit to equity	-	(6)	5	-	-	(1)
Foreign exchange rate movements	3	(1)	(2)	(5)	-	(5)
At 31 July 2021	(56)	(105)	144	78	3	64
Deferred tax assets	2	(113)	126	62	15	92
Deferred tax liabilities	(58)	8	18	16	(12)	(28)
At 31 July 2021	(56)	(105)	144	78	3	64
Reallocations	(15)	1	9	1	4	-
Charge to income statement - continuing operations	4	50	(54)	(10)	(7)	(17)
Credit to equity	-	3	-	-	(4)	(1)
Foreign exchange rate movements	(9)	-	4	10	-	5
At 31 July 2022	(76)	(51)	103	79	(4)	51
Deferred tax assets	(1)	(56)	76	65	11	95
Deferred tax liabilities	(75)	5	27	14	(15)	(44)
At 31 July 2022	(76)	(51)	103	79	(4)	51

Reallocations in FY2022 include £10m where attributes used to shelter PDCF assessments have been reallocated from losses to capital allowances, following the conclusion of the Group's PDCF audit with UK HMRC covering FY2015 to FY2020.

Of the amounts included within 'Other' in the table above as at 31 July 2022, liabilities relating to tax on unremitted earnings were £19m (FY2021: £14m). The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised was immaterial.

The deferred tax asset relating to losses has been recognised on the basis of strong evidence of future taxable profits against which the unutilised tax losses can be relieved or because it is probable that they will be recovered against the reversal of deferred tax liabilities. Deferred tax relating to provisions includes £57m (FY2021: £54m) relating to John Crane Inc. litigation provision, and £12m (FY2021: £11m) relating to Titeflex Corporation litigation provision. See note 23 for additional information on provisions.

Unrecognised Deferred Tax

The Group has unrecognised deferred tax relating to losses amounting to £335m (FY2021: £107m).

The expiry date of operating losses carried forward is dependent upon the law of the various territories in which the losses arise. A summary of expiry dates for the unrecognised deferred tax on losses is set out below:

	2022 £m	Expiry of losses	2021 £m	Expiry of losses
Restricted losses - Asia	-	n/a	30	2022-2027
Unrestricted losses - operating losses	335	No expiry	77	No expiry
Total unrecognised deferred tax on losses	335		107

Unrecognised deferred tax relating to losses has increased by £228m (FY2021: increased by £13m). Changes to unrecognised losses include an increase of £226m, mainly related to UK deferred tax on losses that were being recognised to offset the deferred tax liability related to the TI Pension surplus, now written off following the bulk annuity buy-in with Rothesay Life plc, other increases of £39m and a reduction of £37m related to the sale of Smiths Medical.

Sale of Smiths Medical

The sale of 100% of the share capital of the UK Smiths Medical holding company completed on the 6 January 2022. The profit on sale was exempt from tax under the Substantial Shareholding Exemption.

Developments in the Group tax position

In December 2021, the Organisation for Economic Co-operation and Development ('OECD') published rules relating to global minimum taxation - the so-called Pillar 2 rules, scheduled to apply from 2023, regarding the future taxation of large multinationals such as Smiths. The Group will continue to monitor the development and future implementation of these rules. However, at this time and as currently drafted, they are not expected to have a material impact on the Group.

7 EMPLOYEES

	Year ended 31 July 2022				Year ended 31 July 2021
	Continuing operations £m	Discontinued operations £m	Total £m		Continuing operations £m	Discontinued operations £m	Total £m
Staff costs during the period
Wages and salaries	700	91	791		627	234	861
Social security	81	9	90		85	22	107
Share-based payment (note 9)	13	2	15		13	1	14
Pension costs (including defined contribution schemes) (note 8)	29	5	34		26	11	37
	823	107	930		751	268	1,019

The average number of persons employed, rounded to the nearest 50 employees, was:

	Year ended 31 July 2022	Year ended  31 July 2021
John Crane	6,050	5,950
Smiths Detection	3,100	3,000
Flex-Tek	3,300	3,000
Smiths Interconnect	2,500	2,300
Corporate (including central/shared IT services)	300	300
Continuing operations	15,250	14,550
Discontinued operations - Smiths Medical (in period to 6 January 2022)	6,700	7,500
Total	21,950	22,050

 

Key management

The key management of the Group comprises Smiths Group plc Board Directors and Executive Committee members. Their aggregate compensation is shown below. Details of Directors' remuneration are contained in the report of the Remuneration and People Committee within the Annual Report 2022.

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Key management compensation
Salaries and short-term employee benefits	10.3	12.8
Cost of retirement benefits	0.7	0.9
Cost of share-based incentive plans	4.7	3.9

No member of key management had any material interest during the period in a contract of significance (other than a service contract or a qualifying third-party indemnity provision) with the Company or any of its subsidiaries.

Options and awards held at the end of the period by key management in respect of the Company's share-based incentive plans were:

	Year ended 31 July 2022			Year ended 31 July 2021
	Number of instruments '000	Weighted average exercise  price		Number of instruments '000	Weighted average  exercise  price
SEP	-			169
LTIP	1,411			1,645
Restricted stock	8			82
SAYE	16	£11.43		11	£10.11

Related party transactions

The only related party transactions in FY2022 were key management compensation (FY2021: key management compensation).

8 RETIREMENT BENEFITS

Smiths provides retirement benefits to employees in a number of countries. This includes defined benefit and defined contribution plans and, mainly in the United Kingdom (UK) and United States of America (US), post-retirement healthcare.

Defined contribution plans

The Group operates defined contribution plans across many countries. In the UK a defined contribution plan has been offered since the closure of the UK defined benefit pension plans. In the US a 401(k) defined contribution plan operates. The total expense recognised in the consolidated income statement in respect of all these plans was £34m (FY2021: £36m).

Defined benefit and post-retirement healthcare plans

The principal defined benefit pension plans are in the UK and in the US and these have been closed so that no future benefits are accrued.

For all schemes, pension costs are assessed in accordance with the advice of independent, professionally qualified actuaries. These valuations have been updated by independent qualified actuaries in order to assess the liabilities of the schemes as at 31 July 2022. Contributions to the schemes are made on the advice of the actuaries, in accordance with local funding requirements.

The changes in the present value of the net pension asset in the period were:

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
At beginning of period	413	372
Foreign exchange rate movements	-	5
Current service cost	(2)	(2)
Scheme administration costs	(4)	(5)
Past service cost, curtailments, settlements - continuing operations	(214)	(6)
Settlements - discontinued operations	(3)	-
Finance income - retirement benefits	7	6
Contributions by employer	9	30
Actuarial gain	3	13
Retirement benefit obligations disposed of with Smiths Medical (note 27)	5	-
Unrecognised assets due to surplus restriction	(20)	-
Net retirement benefit asset	194	413

The £413m net retirement benefit asset for FY2021 included £5m of pension obligations disclosed within liabilities held for sale.

UK pension schemes

Smiths funded UK pension schemes are subject to a statutory funding objective, as set out in UK pension legislation. Scheme trustees need to obtain regular actuarial valuations to assess the scheme against this funding objective. The trustees and sponsoring companies need to agree funding plans to improve the position of a scheme when it is below the acceptable funding level.

The UK Pensions Regulator has extensive powers to protect the benefits of members, promote good administration and reduce the risk of situations arising which may require compensation to be paid from the Pension Protection Fund. These include imposing a schedule of contributions or the calculation of the technical provisions, where a trustee and company fail to agree appropriate calculations.

Smiths Industries Pension Scheme ('SIPS')

This scheme was closed to future accrual effective 1 November 2009. SIPS provides index-linked (to applicable caps) pension benefits based on final earnings at date of closure. SIPS is governed by a corporate trustee (S.I. Pension Trustees Limited, a wholly owned subsidiary of Smiths Group plc). The board of trustee directors currently comprises four Company-nominated trustees and four member-nominated trustees, with an independent chairman selected by Smiths Group plc. Trustee directors are responsible for the management, administration, funding and investment strategy of the scheme.

The most recent actuarial valuation of this scheme has been performed using the Projected Unit Method as at 31 March 2020. The valuation showed a surplus of £34m on the Technical Provisions funding basis at the valuation date and the funding position has improved since then. As part of the valuation agreement, no contributions are currently being paid to SIPS and the Group's current expectation is that these contributions will not recommence (although there are circumstances relating to the Scheme's funding level in which contributions could be due to SIPS).

The duration of SIPS liabilities is around 20 years (FY2021: 23 years) for active deferred members, 20 years (FY2021: 22 years) for deferred members and 11 years (FY2021: 12 years) for pensioners and dependants.

Under the governing documentation of SIPS, any future surplus would be returnable to Smiths Group plc by refund, assuming gradual settlement of the liabilities over the lifetime of the scheme.

In SIPS, as part of ongoing data cleansing work being undertaken to prepare the scheme for a potential full buy-out in the future, it has been discovered that the method used in the early 1990s to equalise retirement ages between men and women in two of its smaller benefits sections was incorrect. An additional liability of £19m has been recognised as a past service cost to reflect the correction of this issue. A wider review is being undertaken to determine if equalisation was undertaken correctly in other sections of the Scheme. Should any issues arise from this review, any additional liability is expected to be accounted for at the point the legal investigations are completed and there is clarity on the legally effective dates that equalisation of retirement ages was implemented in respective sections.

TI Group Pension Scheme ('TIGPS')

This scheme was closed to future accrual effective 1 November 2009. TIGPS provides index-linked (to applicable caps) pension benefits based on final earnings at the date of closure. TIGPS is governed by a corporate trustee (TI Pension Trustee Limited, an independent company). The board of trustee directors comprises four Company-nominated trustees and four member-nominated trustees, with an independent trustee director selected by the trustee. The trustee is responsible for the management, administration, funding and investment strategy of the scheme.

In June 2022 the TIGPS trustee completed a deal to secure its remaining uninsured pension liabilities, by way of a bulk annuity buy-in with Rothesay Life plc. This means all of the scheme's liabilities are insured via seven buy-in policies. The final buy-in has been secured with an intention to fully buy-out the Scheme as soon as reasonably practical and within a period of four years. Consequently, the income statement recognises a settlement loss of £171m in relation to the buy-in. In terms agreed between the Group and the TIGPS trustee prior to the transaction, when TIGPS converts all of its buy-in policies to buy-out policies and subsequently winds-up, the trustee is expected to use any surplus remaining, after the costs of buying-out and winding-up the scheme have been met, to improve member benefits. A past service cost of £24m has been recognised for this in the income statement. The Group has no expectation of receiving a refund from the scheme and has placed an economic benefit value of zero on the TIGPS surplus from 10 June 2022.

As TIGPS currently retains the legal obligation to pay all scheme benefits, TIGPS liabilities remain part of the retirement benefit obligations on the balance sheet alongside the corresponding buy-in assets.  These liabilities and assets will be de-recognised at the point the buy-in policies are converted to buy-outs and the legal obligation for payment of benefits is transferred to the relevant insurers

The most recent actuarial valuation of this scheme has been performed using the Projected Unit Method as at 5 April 2020. The valuation showed a surplus of £22m on the Technical Provisions funding basis at the valuation date and the funding position has improved since then. Given TIGPS's circumstances, the Group's current expectation is that no further contributions to TIGPS will be required.

The duration of the TIGPS liabilities is around 21 years (FY2021: 23 years) for active deferred members, 19 years (FY2021: 21 years) for deferred members and 10 years (FY2021: 11 years) for pensioners and dependants.

US pension plans

The valuations of the principal US pension and post-retirement healthcare plans were performed using census data at 1 January 2022.

The pension plans were closed with effect from 30 April 2009 and benefits were calculated as at that date and are not revalued. Governance of the US pension plans is overseen by a Settlor Committee appointed by Smiths Group Services Corp, a wholly owned subsidiary of the Group.

The duration of the liabilities for the largest US plan is around 16 years (FY2021: 18 years) for active deferred members, 15 years (FY2021: 18 years) for deferred members and 10 years (FY2021: 12 years) for pensioners and dependants.

Risk management

In respect of uninsured liabilities, the pensions schemes are exposed to risks that:

· investment returns are below expectations, leaving the schemes with insufficient assets in future to pay all their pension obligations;

· members and dependants live longer than expected, increasing the value of the pensions which the schemes have to pay;

· inflation rates are higher than expected, causing amounts payable under index-linked pensions to be higher than expected; and

· increased contributions are required to meet funding targets if lower interest rates increase the current value of liabilities.

These risks are managed separately for each pension scheme. However, the Group has adopted a common approach of closing defined benefit schemes to cap members' entitlements and of supporting trustees in adopting investment strategies which aim to hedge the value of assets against changes in the value of liabilities caused by changes in interest and inflation rates.

Across SIPS and TIGPS, approximately 60% of all liabilities are now de-risked through 11 bulk annuities.

TIGPS

TIGPS has covered roughly 100% of liabilities with matching annuities, eliminating investment return, longevity, inflation and funding risks in respect of those liabilities.

SIPS

SIPS has covered roughly 30% of liabilities with matching annuities, eliminating investment return, longevity, inflation and funding risks in respect of those liabilities. It has also adopted a Liability Driven Investment (LDI) strategy to hedge interest and inflation risks of the scheme's uninsured liabilities by investment in gilts together with the use of gilt repurchase arrangements, total return swaps, inflation swaps and interest rate swaps. The strategy also takes into account the scheme's corporate bond investments.

The critical estimates and principal assumptions used in updating the valuations are set out below:

	2022 UK	2022 US	2022 Other	2021 UK	2021 US	2021 Other
Rate of increase in salaries	n/a	n/a	2.2%	n/a	n/a	2.5%
Rate of increase for active deferred members	4.0%	n/a	n/a	4.2%	n/a	n/a
Rate of increase in pensions in payment	3.4%	n/a	1.2%	3.3%	n/a	1.5%
Rate of increase in deferred pensions	3.4%	n/a	n/a	3.3%	n/a	n/a
Discount rate	3.5%	4.5%	1.1%	1.7%	2.7%	0.7%
Inflation rate	3.4%	n/a	1.3%	3.3%	n/a	1.5%
Healthcare cost increases	4.4%	n/a	n/a	4.4%	n/a	n/a

The assumptions used in calculating the costs and obligations of the Group's defined benefit pension plans are set by the Group after consultation with independent professionally qualified actuaries. The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily occur in practice. For countries outside the UK and USA, assumptions are disclosed as a weighted average.

Inflation rate assumptions

The RPI inflation assumption of 3.4% has been derived using the Aon UK Government Gilt Prices Only Curve with an Inflation Risk Premium (IRP) of 0.2% p.a., whereas in previous years the Aon UK Government RPI Curve was used. It is estimated that the impact of this change in RPI methodology is to increase the RPI assumption by 0.1% at 31 July 2022 and this is expected to increase the balance sheet liabilities, for both SIPS and TIGPS, by 1.0% of DBO at 31 July 2022.

The Government's response to its consultation on RPI reform was published on 25 November 2020, and strongly implied that RPI will become aligned with CPI-H from 2030.  No specific allowance (beyond anything already priced into markets) has been factored into the RPI assumptions for potential changes. The assumption for the long-term gap between RPI and CPI is 0.6% p.a. (FY2021:0.6%) reflecting the Group's view on the market pricing of this gap over the lifetime of the UK schemes' liabilities, i.e. 1.0% p.a. (FY2021: 1.0%) pre-2030 and 0.2% p.a. post-2030 (FY2021:0.1%).

Discount rate assumptions

The UK schemes use a discount rate based on the annualised yield on the Aon GBP Select AA Curve, using the expected cash-flows from a notional scheme with obligations of the same duration as that of the UK schemes. The US Plan uses a discount rate based on the annualised yield derived from Willis Towers Watson's RATE:Link (10th - 90th) model using the Plan's expected cash-flows.

Mortality assumptions

The mortality assumptions used in the principal UK schemes are based on the 'SAPS S3' birth year tables with relevant scaling factors based on the recent experience of the schemes. The assumption allows for future improvements in life expectancy in line with the 2021 CMI projections, with a smoothing factor of 7.0 and 'A' parameter of 0.5%/0.25% (SIPS/TIGPS) and blended to a long-term rate of 1.25%.

The mortality assumptions used in the principal US schemes are based on generational mortality using Pri-2012 sex-distinct, employee/ non-disabled annuitant table, with a 2012 base year, projected forward generationally with the MP-2021 mortality scale. No explicit adjustment has been made to mortality assumptions in respect of COVID-19.

Expected further years of life	UK schemes					US schemes
	Male 31 July 2022	Female 31 July 2022	Male 31 July 2021	Female 31 July 2021		Male 31 July 2022	Female 31 July 2022	Male 31 July 2021	Female 31 July 2021
Member who retires next year at age 65	22	24	22	24		21	22	20	22
Member, currently 45, when they retire in 20 years' time	23	25	23	25		22	24	22	24

Sensitivity

Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2022 are set out below. These sensitivities show the hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which incorporates the impact of certain correlating assumptions. In practice, such assumptions rarely change in isolation.

	Profit before tax for year ended  31 July 2022 £m	Increase/ (decrease) in scheme assets  31 July 2022 £m	(Increase)/ decrease in scheme liabilities  31 July 2022 £m	Profit before tax for year ended  31 July 2021 £m	Increase/ (decrease) in scheme assets  31 July 2021 £m	(Increase)/ decrease in scheme liabilities  31 July 2021 £m
Rate of mortality - 1 year increase in life expectancy	(2)	84	(135)	(2)	99	(209)
Rate of mortality - 1 year decrease in life expectancy	2	(84)	136	2	(97)	206
Rate of inflation - 0.25% increase	(1)	34	(69)	(1)	30	(98)
Discount rate - 0.25% increase	2	(49)	97	3	(38)	146
Market value of scheme assets - 2.5% increase	1	40	-	1	73	-

The effect on profit before tax reflects the impact of current service cost and net interest cost. The value of the scheme assets is affected by changes in mortality rates, inflation and discounting because they affect the carrying value of the insurance assets.

Asset valuation

The pension schemes hold assets in a variety of pooled funds, in which the underlying assets typically are invested in credit and cash assets. These funds are valued. The price of the funds is set by administrators/custodians employed by the investment managers and based on the value of the underlying assets held in the funds. Details of pricing methodology are set out within internal control reports provided for each fund. Prices are updated daily, weekly or monthly depending upon the frequency of the fund's dealing.

Bonds are valued using observable broker quotes. Gilt repurchase obligations are valued by the relevant manager, which derives the value using an industry recognised model with observable inputs.

Property is valued by specialists applying recognised property valuation methods incorporating current market data on rental yields and transaction prices.

Total return, interest and inflation swaps and forward FX contracts are bilateral agreements between counterparties and do not have observable market prices. These derivative contracts are valued using observable inputs.

Insured liabilities comprise annuity policies broadly matching the scheme obligation to identified groups of members. These assets are valued by an external qualified actuary at the actuarial valuation of the corresponding liability, reflecting this matching relationship.

The insurance policies are treated as qualifying insurance policies as none of the insurers are related parties of Smiths Group, and the proceeds of the policies can only be used to pay or fund employee benefits for the respective schemes, are not available to Smiths Group's creditors and cannot be paid to Smiths Group.

Retirement benefit plan assets

	31 July 2022 - £m					31 July 2021 - £m
	UK schemes	US schemes	Other countries	Total		UK schemes	US schemes	Other countries	Total
Cash and cash equivalents	90	1	1	92		71	1	-	72
Pooled funds:
- Pooled equity	-	-	3	3		-	-	3	3
- Pooled Diversified Growth	-	-	15	15		-	-	19	19
- Pooled credit	379	-	-	379		420	-	-	420
Corporate bonds	412	167	-	579		791	192	-	983
Government bonds/LDI	498	57	3	558		1,298	79	3	1,380
Insured liabilities	1,649	-	-	1,649		1,462	-	-	1,462
Property	39	-	-	39		62	-	-	62
Other	-	-	-	-		-	-	5	5
Total market value	3,067	225	22	3,314		4,104	272	30	4,406

The assets are unquoted. Government bonds/LDI portfolios contain £960m (FY2021: £1,929m) of UK Government bonds (gilts), £476m (FY2021: £626m) of gilt repurchase obligations and £9m (FY2021: £5m) of interest and inflation swap obligations.

The UK bond portfolios include forward FX contracts with a net value of £5m (FY2021: £1m). These are held to hedge against foreign currency risk in respect of overseas bonds.

The scheme assets do not include any property occupied by, or other assets used by, the Group.

Present value of funded scheme liabilities and assets for the main UK and US schemes

	31 July 2022 - £m				31 July 2021 - £m
	SIPS	TIGPS	US schemes			SIPS	TIGPS	US schemes
Present value of funded scheme liabilities:
- Active deferred members	(32)	(23)	(41)			(42)	(29)	(73)
- Deferred members	(561)	(442)	(109)			(810)	(632)	(119)
- Pensioners	(1,010)	(670)	(88)			(1,226)	(809)	(81)
Present value of funded scheme liabilities	(1,603)	(1,135)	(238)			(2,078)	(1,470)	(273)
Market value of scheme assets	1,912	1,155	225			2,410	1,684	272
Surplus restriction	-	(20)	-			-	-	-
Surplus/(deficit)	309	-	(13)			332	214	(1)

Net retirement benefit obligations

	31 July 2022 - £m					31 July 2021 - £m
	UK schemes	US schemes	Other countries	Total		UK schemes	US schemes	Other countries	Total
Market value of scheme assets	3,067	225	22	3,314		4,104	272	30	4,406
Present value of funded scheme liabilities	(2,738)	(238)	(27)	(3,003)		(3,558)	(273)	(38)	(3,869)
Surplus restriction	(20)	-	-	(20)		-	-	-	-
Surplus/(deficit)	309	(13)	(5)	291		546	(1)	(8)	537
Unfunded pension plans	(43)	(7)	(40)	(90)		(54)	(7)	(55)	(116)
Post-retirement healthcare	(4)	(1)	(2)	(7)		(4)	(1)	(3)	(8)
Present value of unfunded obligations	(47)	(8)	(42)	(97)		(58)	(8)	(58)	(124)
Net pension asset/(liability)	262	(21)	(47)	194		488	(9)	(66)	413
Retirement benefit assets	309	-	-	309		546	-	-	546
Retirement benefit liabilities	(47)	(21)	(47)	(115)		(58)	(9)	(61)	(128)
Liabilities held for sale	-	-	-	-		-	-	(5)	(5)
Net pension asset/(liability)	262	(21)	(47)	194		488	(9)	(66)	413

Liabilities held for sale in FY2021 comprise £4m of unfunded pension plans and £1m deficit on defined benefit schemes within the Smiths Medical division.

Where any individual scheme shows a recoverable surplus under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one scheme is not available to fund the IAS 19 deficit of another scheme. The retirement benefit asset disclosed arises from the rights of the employers to recover the surplus at the end of the life of the scheme i.e. when the last beneficiary's obligation has been met.

Amounts recognised in the consolidated income statement

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Amounts charged to operating profit
Current service cost	2	2
Past service costs - benefit equalisations	43	6
Settlement loss	171	-
Scheme administration costs	4	5
	220	13
The operating cost is charged as follows:
Headline administrative expenses	6	7
Non-headline settlement loss	171	-
Non-headline administrative expenses	43	6
	220	13
Amounts credited to finance costs
Non-headline other finance income - retirement benefits	(7)	(6)

Amounts recognised directly in the consolidated statement of comprehensive income

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Re-measurements of retirement defined benefit assets and liabilities
Difference between interest credit and return on assets	(835)	(57)
Experience gains on scheme liabilities	(31)	44
Actuarial gains arising from changes in demographic assumptions	1	10
Actuarial gains/(losses) arising from changes in financial assumptions	868	16
Movement in surplus restriction	(20)	-
	(17)	13

Changes in present value of funded scheme assets

	31 July 2022 - £m					31 July 2021 - £m
	UK schemes	US schemes	Other countries	Total		UK schemes	US schemes	Other countries	Total
At beginning of period	4,104	272	30	4,406		4,240	311	31	4,582
Interest on assets	70	8	1	79		58	7	1	66
Actuarial movement on scheme assets	(773)	(62)	-	(835)		(40)	(17)	-	(57)
Employer contributions	3	-	1	4		20	4	1	25
Scheme administration costs	(3)	(1)	-	(4)		(4)	(1)	-	(5)
Foreign exchange rate movements	-	33	-	33		-	(17)	-	(17)
Assets transferred on business disposal	-	-	(5)	(5)		-	-	-	-
Assets distributed on settlements	(180)	-	-	(180)		-	-	-	-
Curtailment gains/(losses)	-	(9)	-	(9)		-	-	-	-
Benefits paid	(154)	(16)	(5)	(175)		(170)	(15)	(3)	(188)
At end of period	3,067	225	22	3,314		4,104	272	30	4,406

Changes in present value of funded defined benefit obligations

	31 July 2022 - £m					31 July 2021 - £m
	UK schemes	US schemes	Other countries	Total		UK schemes	US schemes	Other countries	Total
At beginning of period	(3,558)	(273)	(38)	(3,869)		(3,724)	(314)	(40)	(4,078)
Current service cost	-	-	-	-		-	-	(1)	(1)
Past service costs	(43)	-	-	(43)		(6)	-	-	(6)
Interest on obligations	(61)	(8)	(1)	(70)		(51)	(7)	(2)	(60)
Actuarial movement on liabilities	761	54	2	817		53	16	-	69
Foreign exchange rate movements	-	(33)	-	(33)		-	17	2	19
Liabilities transferred on business disposal	-	-	5	5		-	-	-	-
Curtailment gains/(losses)	-	6	-	6		-	-	-	-
Liabilities extinguished on settlements	9	-	-	9		-	-	-	-
Benefits paid	154	16	5	175		170	15	3	188
At end of period	(2,738)	(238)	(27)	(3,003)		(3,558)	(273)	(38)	(3,869)

Changes in present value of unfunded defined benefit pensions and post-retirement healthcare plans

	Assets			Obligations
	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m		Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
At beginning of period	-	-		(124)	(132)
Current service cost	-	-		(1)	(1)
Interest on obligations	-	-		(2)	(1)
Actuarial movement	-	-		21	2
Employer contributions	5	5		-	-
Foreign exchange rate movements	-	-		-	3
Liabilities transferred on business disposal	-	-		4	-
Benefits paid	(5)	(5)		5	5
At end of period	-	-		(97)	(124)

Changes in the effect of the asset ceiling over the year

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Irrecoverable asset at beginning of period	-	-
Actuarial movement on scheme assets	(20)	-
At end of period	(20)	-

Cash contributions

Company contributions to the defined benefit pension plans and post-retirement healthcare plans totalled £9m (FY2021: £30m). This comprised regular contributions to funded schemes of £3m (FY2021: £12m) to SIPS, £nil (FY2021: £8m) to TIGPS, £nil (FY2021: £4m) to funded US schemes and contributions to other schemes of £1m (FY2021: £1m). In addition, £5m (FY2021: 5m) was spent on providing benefits under unfunded defined benefit pension and post-retirement healthcare plans.

In FY2023, cash contributions to the Group's schemes are expected to be up to £12m in total.

9 EMPLOYEE SHARE SCHEMES

The Group operates share schemes and plans for the benefit of employees. The nature of the principal schemes and plans, including general conditions, is set out below:

Long-Term Incentive Plan (LTIP)

The LTIP is a share plan under which an award over a capped number of shares will vest after the end of a three-year performance period if performance conditions are met. LTIP awards are made to selected senior executives, including the Executive Directors.

LTIP performance conditions

Each performance condition has a threshold below which no shares vest and a maximum performance target at or above which the award vests in full. For performance between 'threshold' and 'maximum', awards vest on a straight-line sliding scale. The performance conditions are assessed separately; so performance on one condition does not affect the vesting of the other elements of the award. To the extent that the performance targets are not met over the three-year performance period, awards lapse. There is no re-testing of the performance conditions.

LTIP awards have performance conditions relating to organic revenue growth, growth in headline EPS, ROCE, free cash-flow and meeting ESG targets.

Smiths Excellence Plan (SEP)

The last Smiths Excellence plan (SEP) grant was issued in October 2019, vested on 31 July 2021 and exercised in October 2021. No further SEP awards have been made.

Restricted stock

Restricted stock is used by the Remuneration and People Committee, as a part of recruitment strategy, to make awards in recognition of incentive arrangements forfeited on leaving a previous employer. If an award is considered appropriate, the award will take account of relevant factors including the fair value of awards forfeited, any performance conditions attached, the likelihood of those conditions being met and the proportion of the vesting period remaining.

Save as you earn (SAYE)

The SAYE scheme is an HM Revenue & Customs approved all-employee savings-related share option scheme which is open to all UK employees. Participants enter into a contract to save a fixed amount per month of up to £500 in aggregate for three years and are granted an option over shares at a fixed option price, set at a discount to market price at the date of invitation to participate. The number of shares is determined by the monthly amount saved and the bonus paid on maturity of the savings contract. Options granted under the SAYE scheme are not subject to any performance conditions.

		Long-term  incentive  plans	SEP	Restricted stock	Save as you earn scheme	Total	Weighted average exercise price
Ordinary shares under option/award ('000)
31 July 2020		3,937	1,295	131	1,207	6,570	£1.89
Granted		2,143	358	11	139	2,651	£0.68
Exercised		(346)	(411)	(60)	(165)	(982)	£2.03
Lapsed		(819)	(391)	(18)	(96)	(1,324)	£0.75
31 July 2021		4,915	851	64	1,085	6,915	£1.63
Reclassification		348	(348)	-	-	-	-
Granted		2,255	-	212	167	2,634	£0.71
Exercised		(224)	(313)	(163)	(138)	(838)	£1.90
Lapsed		(1,984)	(190)	(30)	(229)	(2,433)	£0.97
31 July 2022		5,310	-	83	885	6,278	£1.45

Options and awards were exercised on an irregular basis during the period. The average closing share price over the financial year was 1,476.3p (FY2021: 1,508.6p). There has been no change to the effective option price of any of the outstanding options during the period. The number of exercisable share options at 31 July 2022 was nil (31 July 2021: nil).

Range of exercise prices	Total shares under options/awards at 31 July 2022 ('000)	Weighted average remaining contractual life at 31 July 2022 (months)	Total shares under options/awards at 31 July 2021 ('000)	Weighted average remaining contractual life at 31 July 2021 (months)
£0.00 - £2.00	5,393	19	5,830	15
£6.01 - £10.00	490	18	655	30
£10.01 - £12.00	395	29	430	24

For the purposes of valuing options to arrive at the share-based payment charge, the binomial option pricing model has been used. The key assumptions used in the model were volatility of 25% to 20% (FY2021: 25% to 20%) and dividend yield of 2.6% (FY2021: 2.8%), based on historical data, for the period corresponding with the vesting period of the option. These generated a weighted average fair value for LTIP of £14.81 (FY2021: £14.10), and restricted stock of £14.59 (FY2021: £14.63). Staff costs included £15m (FY2021: £14m) for share-based payments, of which £14m (FY2021: £13m) related to equity-settled share-based payments.

10 INTANGIBLE ASSETS

	Goodwill £m	Development costs £m	Acquired intangibles (see table  below) £m	Software,  patents and intellectual property £m	Total £m
Cost
At 31 July 2020	1,254	155	546	174	2,129
Foreign exchange rate movements	(68)	(7)	(30)	(6)	(111)
Business combinations	21	-	46	-	67
Additions	-	8	-	10	18
Disposals	-	-	-	(1)	(1)
At 31 July 2021	1,207	156	562	177	2,102
Foreign exchange rate movements	104	6	68	10	188
Additions	-	12	-	6	18
At 31 July 2022	1,311	174	630	193	2,308
Amortisation and impairments
At 31 July 2020	62	112	249	142	565
Foreign exchange rate movements	(3)	(5)	(15)	(4)	(27)
Amortisation charge for the year	-	7	53	7	67
Disposals	-	-	-	(1)	(1)
At 31 July 2021	59	114	287	144	604
Foreign exchange rate movements	4	6	35	6	51
Amortisation charge for the year	-	3	51	7	61
Impairment charge for the year	4	-	-	-	4
At 31 July 2022	67	123	373	157	720
Net book value at 31 July 2022	1,244	51	257	36	1,588
Net book value at 31 July 2021	1,148	42	275	33	1,498
Net book value at 31 July 2020	1,192	43	297	32	1,564

In addition to goodwill, acquired intangible assets comprise:

	Patents, licences and trademarks £m	Technology £m	Customer relationships £m	Total acquired intangibles £m
Cost
At 31 July 2020	15	139	392	546
Foreign exchange rate movements	(1)	(7)	(22)	(30)
Business combinations	3	2	41	46
At 31 July 2021	17	134	411	562
Foreign exchange rate movements	2	18	48	68
At 31 July 2022	19	152	459	630
Amortisation
At 31 July 2020	4	60	185	249
Foreign exchange rate movements	-	(3)	(12)	(15)
Charge for the year	1	10	42	53
At 31 July 2021	5	67	215	287
Foreign exchange rate movements	1	10	24	35
Charge for the year	2	10	39	51
At 31 July 2022	8	87	278	373
Net book value at 31 July 2022	11	65	181	257
Net book value at 31 July 2021	12	67	196	275
Net book value at 31 July 2020	11	79	207	297

Individually material intangible assets comprise £71m of customer related intangibles attributable to United Flexible (remaining amortisation period: 4 years), £61m of customer relationship intangibles attributable to Morpho Detection (remaining amortisation period: 6 years), £35m of customer-related intangibles attributable to Royal Metal (remaining amortisation period:
6 years), and £19m of development cost intangibles attributable to a computed tomography programme in Detection that is currently under development.

The charge associated with the amortisation of intangible assets is included in operating costs on the consolidated income statement.

11 IMPAIRMENT TESTING

Goodwill

Goodwill is tested for impairment at least annually or whenever there is an indication that the carrying value may not be recoverable.

Further details of the impairment review process and judgements are included in the 'Sources of estimation uncertainty' section of the 'Basis of preparation' for the consolidated financial statements.

For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash-flows, known as cash generating units (CGUs), taking into consideration the commonality of reporting, policies, leadership and intra-divisional trading relationships. Goodwill acquired through business combinations is allocated to groups of CGUs at a divisional (or operating segment) level, being the lowest level at which management monitors performance separately.

The carrying value of goodwill at 31 July is allocated by division as follows:

	2022 £m	2022 Number of CGUs	2021 £m	2021 Number of CGUs
John Crane	132	1	129	1
Smiths Detection*	644	2	610	1
Flex-Tek	194	1	169	1
Smiths Interconnect	274	1	240	1
Smiths Medical	-	-	-	1
	1,244	5	1,148	5

* In FY2022 the Smiths Detection CGU has been restructured and the Detection Russia business split into a separate CGU, see the 'Russia impairment charges and related closure costs' section below for further details.

Critical estimates used in impairment testing

The recoverable amount for impairment testing is determined from the higher of fair value less costs of disposal and value in use of the CGU. In assessing value in use, the estimated future cash-flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money, from which pre-tax discount rates are determined.

Fair value less costs of disposal is calculated using available information on past and expected future profitability, valuation multiples for comparable quoted companies and similar transactions (adjusted as required for significant differences) and information on costs of similar transactions. Fair value less costs to sell models are used when trading projections in the strategic plan cannot be adjusted to eliminate the impact of a major restructuring.

The value in use of CGUs is calculated as the net present value of the projected risk-adjusted cash-flows of each CGU. These cash-flow forecasts are based on the FY2023 business plan (as approved by the Board) and the five-year detailed divisional strategic projections which have been prepared by divisional management and approved by the Chief Financial Officer.

The key assumptions used in determining the value in use were:

· Revenue: Projected sales were built up with reference to markets and product categories. They incorporated past performance, historical growth rates and projections of developments in key markets;

· Average earnings before interest and tax margin: Projected margins reflect historical performance, our expectations for future cost inflation and the impact of all completed projects to improve operational efficiency and leverage scale. The projections did not include the impact of future restructuring projects to which the Group was not yet committed;

· Projected capital expenditure: The cash-flow forecasts for capital expenditure were based on past experience and included committed ongoing capital expenditure consistent with the FY2023 budget and the divisional strategic projections. The forecast did not include any future capital expenditure that improved/enhanced the operation/asset in excess of its current standard of performance;

· Discount rate: The discount rates have been calculated based on the Group's weighted average cost of capital and risks specific to the CGU being tested. In determining the risk adjusted discount rate, management considered the systematic risk to each of the Group's CGUs and applied an average of discount rates used by other companies for the industries in which Smiths divisions operate. Pre-tax rates of 11.3% to 12.3% (FY2021: 9.9% to 13.2%) have been used for the impairment testing; and

· Long-term growth rates: For the purposes of the Group's value in use calculations, a long-term growth rate into perpetuity was applied immediately at the end of the five-year forecast period. Growth rates for the period after the detailed forecasts were based on the long-term GDP projections of the primary market for each CGU. The average growth rate used in the testing was 2.0% (FY2021: 2.1%). These rates did not reflect the long-term assumptions used by the Group for investment planning.

The assumptions used in the impairment testing of CGUs with significant goodwill balances were as follows:

		As at 31 May 2022
		John Crane	Smiths Detection	Flex-Tek	Smiths Interconnect
Net book value of goodwill (£m)		132	640	187	266
Basis of valuation		Value in use	Value in use	Value in use	Value in use
Discount rate	- pre-tax	12.3%	11.3%	11.7%	11.5%
	- post-tax	9.1%	8.7%	9.2%	9.3%
Period covered by management projections		5 years	5 years	5 years	5 years
Revenue - average annual growth rate over projection period		5.3%	3.8%	3.8%	6.0%
Average earnings before interest and tax margin		24.9%	14.1%	19.7%	17.8%
Long-term growth rates		1.9%	2.4%	1.7%	2.1%

		As at 31 July 2021
		John Crane		Smiths Detection		Flex-Tek		Smiths Interconnect		Smiths Medical
Net book value of goodwill (£m)		129		610		169		240		535
Basis of valuation		Value in use		Value in use		Value in use		Value in use		Value in use
Discount rate	- pre-tax	13.2%		10.3%		11.4%		11.1%		9.9%
	- post-tax	9.5%		8.2%		9.1%		9.0%		8.0%
Period covered by management projections		5 years		5 years		5 years		5 years		5 years
Revenue - average annual growth rate over projection period		6.4%		2.8%		5.0%		5.9%		5.9%
Average earnings before interest and tax margin		25.4%		13.4%		20.0%		19.0%		18.8%
Long-term growth rates		2.1%		1.8%		1.9%		2.4%		2.2%

Forecast earnings before interest and tax have been projected using:

· expected future sales based on the strategic plan, which was constructed at a market level with input from key account managers, product line managers, business development and sales teams. An assessment of the market and existing contracts/programmes was made to produce the sales forecast; and

· current cost structure and production capacity, which include our expectations for future cost inflation. The projections did not include the impact of future restructuring projects to which the Group was not yet committed.

Sensitivity analysis

With the exception of the Smiths Detection CGU, the recoverable amount of all CGUs exceeded their carrying value, on the basis of the assumptions set out in the table above and any reasonably possible changes thereof.

The estimated recoverable amount of the Smiths Detection CGU exceeded the carrying value by £110m. Any decline in estimated value in use in excess of this amount would result in the recognition of impairment charges. If the assumptions used in the impairment review were changed to a greater extent than as presented in the following table, the changes would, in isolation, lead to impairment losses being recognised for the year ended 31 July 2022:

Change required for carrying value to equal recoverable amount - FY2022				Smiths Detection
Revenue - compound annual growth rate (CAGR) over 5-year projection period				-240 bps decrease
Average earnings before interest and tax margin over 5-year projection period				-130 bps decrease
Post-tax discount rate				+70 bps increase

Note:  Long-term growth rates are not included in the sensitivity table above as management consider that there is no reasonably possible change in long-term growth rate that would result in an impairment.

Change required for carrying value to equal recoverable amount - FY2021				Smiths Detection
Revenue - compound annual growth rate (CAGR) over 5-year projection period				-560 bps decrease
Post-tax discount rate				+220 bps increase

Property, plant and equipment, right of use assets and finite-life intangible assets

At each reporting period date, the Group reviews the carrying amounts of its property, plant, equipment, right of use assets and finite-life intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.

The Group has no indefinite life intangible assets other than goodwill. During the year, impairment tests were carried out for capitalised development costs that have not yet started to be amortised and acquired intangibles where there were indications of impairment. Value in use calculations were used to determine the recoverable values of these assets.

In the current year the Group has recognised £17m of impairment charges against its Russia related net balance sheet exposure (FY2021: £nil), see below.

Russia impairment charges and related closure costs

As announced in March 2022, in the current year the Group suspended sales into Russia. Following this decision the Smiths Detection reporting structure has been restructured and the Detection Russia business split into a separate CGU, £4m of the Detection CGU has been apportioned to the Detection Russia CGU and fully impaired.

Management has assessed all Group operations for their exposure to Russia and the value of these Russia related net assets has been fully impaired in FY2022. The Group has recognised £19m of Russia related impairment charges and closure costs through non-headline operating expenses in FY2022 (see note 3), which are analysed as follows:

	John Crane £m	Smiths Detection £m	Total £m
Goodwill	-	4	4
Working capital balances	9	4	13
Net impairment charge	9	8	17
Related closure costs	-	2	2
Russian impairment and related closure costs	9	10	19

12 PROPERTY, PLANT AND EQUIPMENT

	Land and buildings £m	Plant and machinery £m	Fixtures, fittings, tools and equipment £m	Total £m
Cost or valuation
At 31 July 2020	175	383	133	691
Foreign exchange rate movements	(6)	(21)	(6)	(33)
Business combinations	-	2	-	2
Additions	6	38	-	44
Disposals	(3)	(14)	(5)	(22)
At 31 July 2021	172	388	122	682
Foreign exchange rate movements	14	37	6	57
Additions	4	42	6	52
Disposals	(14)	(10)	(5)	(29)
At 31 July 2022	176	457	129	762
Depreciation
At 31 July 2020	102	261	110	473
Foreign exchange rate movements	(3)	(15)	(6)	(24)
Charge for the year	10	26	4	40
Disposals	(3)	(12)	(4)	(19)
At 31 July 2021	106	260	104	470
Foreign exchange rate movements	9	25	5	39
Charge for the year	7	24	7	38
Disposals	(14)	(10)	(4)	(28)
At 31 July 2022	108	299	112	519
Net book value at 31 July 2022	68	158	17	243
Net book value at 31 July 2021	66	128	18	212
Net book value at 31 July 2020	73	122	23	218

13 RIGHT OF USE ASSETS

	Properties £m	Vehicles £m	Equipment £m	Total £m
Cost or valuation
At 31 July 2020	110	14	1	125
Foreign exchange rate movements	(5)	(1)	-	(6)
Business combinations	9	1	-	10
Recognition of right of use asset	44	3	-	47
Derecognition of right of use asset	(12)	-	-	(12)
At 31 July 2021	146	17	1	164
Foreign exchange rate movements	12	1	-	13
Recognition of right of use asset	18	4	-	22
Derecognition of right of use asset	(2)	(1)	-	(3)
At 31 July 2022	174	21	1	196
Depreciation
At 31 July 2020	26	5	-	31
Foreign exchange rate movements	(2)	-	-	(2)
Charge for the year	27	5	-	32
Derecognition of right of use asset	(5)	-	-	(5)
At 31 July 2021	46	10	-	56
Foreign exchange rate movements	5	1	-	6
Charge for the year	25	5	-	30
Derecognition of right of use asset	(1)	(1)	-	(2)
At 31 July 2022	75	15	-	90
Net book value at 31 July 2022	99	6	1	106
Net book value at 31 July 2021	100	7	1	108
Net book value at 31 July 2020	84	9	1	94

14 FINANCIAL ASSETS - OTHER INVESTMENTS

	Investment in ICU Medical, Inc equity £m	Deferred contingent consideration £m	Investments in early stage businesses £m	Cash collateral deposit £m	Total £m
Cost or valuation
At 31 July 2020	-	-	8	11	19
Disposals	-	-	-	(7)	(7)
Fair value change through Other Comprehensive Income	-	-	(1)	-	(1)
At 31 July 2021	-	-	7	4	11
Foreign exchange rate movements	-	-	1	-	1
Additions	426	30	4	-	460
Disposal	-	-	(4)	-	(4)
Fair value change through Profit and Loss	-	(11)	1	-	(10)
Fair value change through Other Comprehensive Income	(62)	-	(1)	-	(63)
At 31 July 2022	364	19	8	4	395

Following the sale of Smiths Medical the Group has recognised a financial asset for its investment in 10% of the equity in ICU Medical, Inc (ICU) and a financial asset for the fair value of $100m additional sales consideration that is contingent on the future share price performance of ICU.

The Group's investments in early stage businesses are in businesses that are developing or commercialising related technology. Cash collateral deposits represent amounts held on deposit with banks as security for liabilities or letters of credit.

15 INVENTORIES

	31 July 2022 £m	31 July 2021 £m
Raw materials and consumables	187	117
Work in progress	106	81
Finished goods	277	183
Total inventories	570	381

In FY2022, operating costs for continuing operations included £1,323m (FY2021: £1,233m) of inventory consumed, £12m (FY2021: £8m) was charged for the write-down of inventory and £12m (FY2021: £4m) was released from provisions no longer required.

Discontinued operations consumed £95m (FY2021: £218m) of inventory, £nil (FY2021: £4m) was charged for the write-down of inventory and £nil (FY2021: £1m) was released from provisions no longer required. Further details of discontinued operations are disclosed in note 27.

Inventory provisioning

	31 July 2022 £m	31 July 2021 £m
Gross inventory carried at full value	492	324
Gross value of inventory partly or fully provided for	131	104
	623	428
Inventory provision	(53)	(47)
Inventory after provisions	570	381

16 TRADE AND OTHER RECEIVABLES

	31 July 2022 £m	31 July 2021 £m
Non-current
Trade receivables	1	-
Contract assets	58	49
Other receivables	10	10
	69	59
Current
Trade receivables	506	431
Prepayments	33	26
Contract assets	127	131
Other receivables	72	42
	738	630

Trade receivables do not carry interest. Management considers that the carrying value of trade and other receivables approximates to the fair value. Trade and other receivables, including prepayments, accrued income and other receivables qualifying as financial instruments are accounted for at amortised cost. The maximum credit exposure arising from these financial assets was £726m (FY2021: 629m).

Contract assets comprise unbilled balances not yet due on contracts, where revenue recognition does not align with the agreed payment schedule. The main movements in the year arose from increases in contract asset balances of £19m (FY2021: £18m) principally within Smiths Detection, offset by £15m of foreign currency translation losses (FY2021: £6m loss).

A number of Flex-Tek's and Interconnect's customers provide supplier finance schemes which allow their suppliers to sell trade receivables, without recourse, to banks. This is commonly known as invoice discounting or factoring. During FY2022 the Group collected £92m of receivables through these schemes (FY2021: £90m). The impact of invoice discounting on the FY2022 balance sheet was that trade receivables were reduced by £19m (2021: £14m). The cash received via these schemes was classified as an operating cash inflow as it had arisen from operating activities.

Trade receivables are disclosed net of provisions for expected credit loss, with historical write-offs used as a basis and a default risk multiplier applied to reflect country risk premium. Credit risk is managed separately for each customer and, where appropriate, a credit limit is set for the customer based on previous experience of the customer and third-party credit ratings. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers. The largest single customer was the US Federal Government, representing 7% (FY2021: 7%) of Group revenue.

Ageing of trade receivables

	31 July 2022 £m	31 July 2021 £m
Trade receivables which are not yet due	396	338
Trade receivables which are between 1-30 days overdue	51	45
Trade receivables which are between 31-60 days overdue	24	15
Trade receivables which are between 61-90 days overdue	11	8
Trade receivables which are between 91-120 days overdue	7	5
Trade receivables which are more than 120 days overdue	54	52
	543	463
Expected credit loss allowance provision	(36)	(32)
Trade receivables	507	431

Movement in expected credit loss allowance

	31 July 2022 £m	31 July 2021 £m
Brought forward loss allowance at the start of the period	32	35
Exchange adjustments	4	(2)
Increase in allowance recognised in the income statement	8	6
Amounts written off or recovered during the year	(8)	(7)
Carried forward loss allowance at the end of the year	36	32

17 TRADE AND OTHER PAYABLES

	31 July 2022 £m	31 July 2021 £m
Non-current
Other payables	13	13
Contract liabilities	33	46
	46	59
Current
Trade payables	282	188
Other payables	57	39
Other taxation and social security costs	30	28
Accruals	183	188
Contract liabilities	130	87
	682	530

Trade and other payables, including accrued expenses and other payables qualifying as financial instruments, are accounted for at amortised cost and are categorised as Trade and other financial payables in note 21.

Contract liabilities comprise deferred income balances of £163m (FY2021: £133m) in respect of payments being made in advance of revenue recognition. The movement in the year arises primarily from the long-term contracts of the Smiths Detection division where invoicing under milestones precedes the delivery of the programme performance obligations. Revenue recognised in the year includes £113m (FY2021: £94m) that was included in the opening contract liabilities balance. This revenue primarily relates to the delivery of performance obligations in the Smiths Detection business.

18 BORROWINGS AND NET DEBT

This note sets out the calculation of net debt, an important measure in explaining our financing position. Net debt includes accrued interest and fair value adjustments relating to hedge accounting.

	31 July 2022 £m	31 July 2021 £m
Cash and cash equivalents
Net cash and deposits	1,056	405
Short-term borrowings
€600m 1.25% Eurobond 2023	(502)	-
Overdrafts	(1)	-
Lease liabilities	(29)	(27)
Interest accrual	(6)	(9)
	(538)	(36)
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022	-	(289)
€600m 1.25% Eurobond 2023	-	(516)
€650m 2.00% Eurobond 2027	(538)	(567)
Lease liabilities	(90)	(94)
	(628)	(1,466)
Borrowings / Gross debt	(1,166)	(1,502)
Derivatives managing interest rate risk and currency profile of the debt	(40)	75
Net cash/(debt) (31 July 2021 comparative excludes £4m of net cash in businesses held for sale)	(150)	(1,022)

Cash and cash equivalents

	31 July 2022 £m	31 July 2021 £m
Cash at bank and in hand	242	219
Short-term deposits	814	186
Cash and cash equivalents	1,056	405

Cash and cash equivalents include highly liquid investments with maturities of three months or less. Borrowings are accounted for at amortised cost and are categorised as other financial liabilities. See note 18 for a maturity analysis of borrowings. Interest of £30m (FY2021: 30m) was charged to the consolidated income statement in the period in respect of public bonds.

Analysis of financial derivatives on balance sheet

	Non-current assets £m	Current assets £m	Current  Liabilities £m	Non-current liabilities £m	Net balance £m
Derivatives managing interest rate risk and currency profile of the debt	-	-	(20)	(20)	(40)
Foreign exchange forward contracts	-	4	(7)	-	(3)
At 31 July 2022	-	4	(27)	(20)	(43)
Derivatives managing interest rate risk and currency profile of the debt	75	-	-	-	75
Foreign exchange forward contracts	-	2	(3)	-	(1)
At 31 July 2021	75	2	(3)	-	74

Movements in assets/(liabilities) arising from financing activities

	Changes in net debt						Changes in other financing items: FX contracts £m		Total liabilities from financing activities £m
	Cash and cash equivalents £m	Other short-term borrowings £m	Long-term borrowings £m	Interest rate & cross-currency swaps £m	Net debt £m
At 31 July 2020	366	(41)	(1,520)	82	(1,113)		(2)		(1,115)
Foreign exchange gains/(losses)	(24)	2	79	-	57		(3,200)		(3,143)
Net cash inflow from continuing operations *	63	33	-	-	96		3,200		3,296
Lease liabilities acquired	-	(1)	(10)	-	(11)		-		(11)
Net movement from lease modifications	-	(46)	-	-	(46)		-		(46)
Fair value movement from interest rate hedging	-	-	8	-	8		-		8
Revaluation of derivative contracts	-	-	-	(7)	(7)		3		(4)
Interest expense taken to income statement**	-	(4)	(31)	-	(35)		-		(35)
Interest paid	-	-	29	-	29		-		29
Reclassification to short-term borrowings	-	21	(21)	-	-		-		-
At 31 July 2021	405	(36)	(1,466)	75	(1,022)		1		(1,021)
Foreign exchange gains/(losses)	62	(3)	4	-	63		(6,799)		(6,736)
Net cash inflow from continuing operations *	589	34	295	-	918		6,799		7,717
Net movement from lease modifications	-	(22)	-	-	(22)		-		(22)
Fair value movement from interest rate hedging	-	2	27	-	29		-		29
Revaluation of derivative contracts	-	-	-	(115)	(115)		(4)		(119)
Interest expense taken to income statement**	-	(35)	-	-	(35)		-		(35)
Interest paid	-	-	34	-	34		-		34
Reclassification to short-term borrowings	-	(478)	478	-	-		-		-
At 31 July 2022	1,056	(538)	(628)	(40)	(150)		(3)		(153)

* In FY21, the net cash inflow for the total Group including discontinued operations was £91m. £63m from continuing operations and £28m from discontinued operations. In FY22, the net cash inflow for the total Group including discontinued operations was £589m, £57m of which related to the cash held by the Smiths Medical at the time of disposal.

**  The Group has also incurred £8m (FY2021: £9m) of bank charges that were expensed when paid and were not included in net debt.

Cash pooling

Cash and overdraft balances in interest compensation cash pooling systems are reported gross on the balance sheet. The cash pooling agreements incorporate a legally enforceable right of net settlement. However, as there is no intention to settle the balances net, these arrangements do not qualify for net presentation. At 31 July 2022 the total value of overdrafts on accounts in interest compensation cash pooling systems was £nil (FY2021: £nil). The balances held in zero balancing cash pooling arrangements have daily settlement of balances. Therefore netting is not relevant.

Secured loans

Loans amounting to £nil (FY2021: £nil) were secured on plant and equipment with a book value of £nil (FY2021: £nil).

Change of control

The Company has in place credit facility agreements under which a change in control would trigger prepayment clauses. The Company also has bonds in issue, the terms of which would allow bondholders to exercise put options and require the Company to buy back the bonds at their principal amount plus interest if a rating downgrade occurs at the same time as a change of control takes effect.

Lease liabilities

Lease liabilities have been measured at the present value of the remaining lease payments. The weighted average incremental borrowing rate applied to lease liabilities in FY2022 was 3.63% (FY2021: 3.3%).

19 FINANCIAL RISK MANAGEMENT

The Group's international operations and debt financing expose it to financial risks which include the effects of changes in foreign exchange rates, debt market prices, interest rates, credit risks and liquidity risks. The management of operational credit risk is discussed in note 16.

Treasury Risk Management Policy

The Board maintains a Treasury Risk Management Policy, which governs the treasury operations of the Group and its subsidiary companies and the consolidated financial risk profile to be maintained. A report on treasury activities, financial metrics and compliance with the Policy is circulated to the Chief Financial Officer each month and key elements to the Audit and Risk Committee on a semi-annual basis.

The Policy maintains a treasury control framework within which counterparty risk, financing and debt strategy, cash and liquidity, interest rate risk and currency translation management are reserved for Group Treasury, while currency transaction management is devolved to operating divisions.

Centrally directed cash management systems exist globally to manage overall liquid resources efficiently across the divisions. The Group uses financial instruments to raise financing for its global operations, to manage related interest rate and currency financial risk, and to hedge transaction risk within subsidiary companies.

The Group does not speculate in financial instruments. All financial instruments hedge existing business exposures and all are recognised on the balance sheet.

The Policy defines four treasury risk components and for each component a set of financial metrics to be measured and reported monthly against pre-agreed objectives.

1) Credit quality

The Group's strategy is to maintain a solid investment-grade rating to ensure access to the widest possible sources of financing at the right time and to optimise the resulting cost of debt capital. The credit ratings at the end of July 2022 were BBB+ / Baa2 (both stable) from Standard & Poor's and Moody's respectively. An essential element of an investment-grade rating is consistent and robust cash-flow metrics. The Group's objective is to maintain a net debt/headline EBITDA ratio of two times or lower over the medium term. Capital management is discussed in more detail in note 26.

2) Debt and interest rate

The Group's risk management objectives are to ensure that the majority of funding is drawn from the public debt markets with the average maturity profile of gross debt to be at or greater than three years, and between 40-60% of gross debt is at fixed rates. At 31 July 2022 these measures were 100% (FY2021: 100%), 2.7 years (FY2021: 3.2 years) and 50% (FY2021: 54%). The average maturity profile of gross debt is below the target of three years because the net cash resources of £1,055m are sufficient to cover the short-term borrowings of £538m.

The Group remains in full compliance with all covenants within its external debt agreements. Interest rate risk management is discussed in note 19(b).

3) Liquidity management

The Group's objective is to ensure that at any time undrawn committed facilities, net of short-term overdraft financing, are at least £300m and that committed facilities have at least 12 months to run until maturity. At 31 July 2022, these measures were £657m (FY2021: £575m) and 27 months (FY2021: 39 months). At 31 July 2022, net cash resources were £1,055m (FY2021: £405m). Liquidity risk management is discussed in note 19(d).

4) Currency management

The Group is an international business with the majority of its net assets denominated in foreign currency. It protects the balance sheet and reserves from adverse foreign exchange movements by financing foreign currency assets where appropriate in the same currency. The Group's objective for managing transaction currency exposure is to reduce medium-term volatility to cash-flow, margins and earnings. Foreign exchange risk management is discussed in note 18(a) below.

(a) Foreign exchange risk

Transactional currency exposure

The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency. It is Group policy that, when the net foreign exchange exposure to known future sales and purchases is material, this exposure is hedged using forward foreign exchange contracts. The net exposure is calculated by adjusting the expected cash-flow for payments or receipts in the same currency linked to the sale or purchase. This policy minimises the risk that the profits generated from the transaction will be affected by foreign exchange movements which occur after the price has been determined. Hedge accounting documentation and effectiveness testing are only undertaken if it is cost effective.

The following table shows the currency of financial instruments. It excludes loans and derivatives designated as net investment hedges.

	At 31 July 2022
	Sterling £m	US$ £m	Euro £m	Other £m	Total £m
Financial assets and liabilities
Financial instruments included in trade and other receivables	41	423	114	169	747
Financial instruments included in trade and other payables	(52)	(239)	(98)	(101)	(490)
Cash and cash equivalents	355	506	74	120	1,055
Borrowings not designated as net investment hedges	(28)	(58)	(14)	(19)	(119)
	316	632	76	169	1,193
Exclude balances held in operations with the same functional currency.	(322)	(149)	(80)	(142)	(693)
Exposure arising from intra-group loans	-	(419)	(27)	(89)	(535)
Future forward foreign exchange contract cash flows	(42)	(40)	(38)	120	-
	(48)	24	(69)	58	(35)

	At 31 July 2021
	Sterling £m	US$ £m	Euro £m	Other £m	Total £m
Financial assets and liabilities
Financial instruments included in trade and other receivables	28	326	113	177	644
Financial instruments included in trade and other payables	(49)	(167)	(79)	(64)	(359)
Cash and cash equivalents	46	187	80	92	405
Borrowings not designated as net investment hedges	(31)	(55)	(12)	(21)	(119)
	(6)	291	102	184	571
Exclude balances held in operations with the same functional currency	7	(110)	(80)	(183)	(366)
Exposure arising from intra-group loans	-	(182)	(19)	(75)	(276)
Future forward foreign exchange contract cash flows	(51)	(67)	22	96	-
	(50)	(68)	25	22	(71)

Financial instruments included in trade and other receivables comprise trade receivables, accrued income and other receivables which qualify as financial instruments. Similarly, financial instruments included in trade and other payables comprise trade payables, accrued expenses and other payables that qualify as financial instruments.

Based on the assets and liabilities held at the year-end, if the specified currencies were to strengthen 10% while all other market rates remained constant, the change in the fair value of financial instruments not designated as net investment hedges would have the following effect:

	Impact on profit  for the year FY2022 £m	Gain/(loss)  recognised in reserves FY2022 £m	Impact on profit  for the year FY2021 £m	Gain/(loss)  recognised in reserves FY2021 £m
US dollar	(3)	1	3	2
Euro	8	(1)	2	(5)
Sterling	4	-	(1)	2

These sensitivities were calculated before adjusting for tax and exclude the effect of quasi-equity intra-Group loans.

Cash-flow hedging

The Group uses forward foreign exchange contracts to hedge future foreign currency sales and purchases. At 31 July 2022, contracts with a nominal value of £141m (FY2021: £107m) were designated as hedging instruments. In addition, the Group had outstanding foreign currency contracts with a nominal value of £226m (FY2021: £251m) which were being used to manage transactional foreign exchange exposures, but were not accounted for as cash-flow hedges. The fair value of the contracts is disclosed in note 20.

The majority of hedged transactions will be recognised in the consolidated income statement in the same period that the cash-flows are expected to occur, with the only differences arising because of normal commercial credit terms on sales and purchases. It is the Group's policy to hedge 80% of certain exposures for the next two years and 50% of highly probable exposures for the next 12 months.

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The foreign exchange forward contracts have similar critical terms to the hedged items, such as the notional amounts and maturities. Therefore, there is an economic relationship and the hedge ratio is established as 1:1.

The main sources of hedge ineffectiveness in these hedging relationships are the effect of the Group's and the counterparty credit risks on the fair value of the foreign exchange forward contracts, which is not reflected in the fair value of the hedged item and the risk of over-hedging where the hedge relationship requires re-balancing. No other sources of ineffectiveness emerged from these hedging relationships. Any hedge ineffectiveness is recognised immediately in the income statement in the period that it occurs. Of the foreign exchange contracts designated as hedging instruments, 98% are for periods of 12 months or less (FY2021: 89%).

The following table presents a reconciliation by risk category of the cash-flow hedge reserve and analysis of other comprehensive income in relation to hedge accounting:

		Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Brought forward cash-flow hedge reserve at start of year		2	-
Foreign exchange forward contracts:	Net fair value gains on effective hedges	(6)	1
	Amount reclassified to income statement - cost of sales	-	1
	Amount reclassified to income statement - finance costs	1	-
Carried forward cash-flow hedge reserve at end of year		(3)	2

The following tables set out information regarding the change in value of the hedged item used in calculating hedge ineffectiveness as well as the impacts on the cash-flow hedge reserve:

Hedged item	Hedged exposure	Hedging instrument	Financial year	Changes in value of the hedged item for calculating ineffectiveness £m	Changes in value of the hedging instrument for calculating ineffectiveness £m	Cash-flow hedge reserve £m
Sales and purchases	Foreign currency risk	Foreign exchange contracts	FY2022	(6)	6	(6)
			FY2021	1	(1)	1

Cash-flow hedges generated £nil of ineffectiveness in FY2022 (FY2021: £nil) which was recognised in the income statement through finance costs.

Translational currency exposure

The Group has significant investments in overseas operations, particularly in the US and Europe. As a result, the sterling value of the Group's balance sheet can be significantly affected by movements in exchange rates. The Group seeks to mitigate the effect of these translational currency exposures by matching the net investment in overseas operations with borrowings denominated in their functional currencies, except where significant adverse interest differentials or other factors would render the cost of such hedging activity uneconomic. This is achieved by borrowing primarily in the relevant currency or in some cases indirectly using cross-currency swaps.

Net investment hedges

The table below sets out the currency of loans and swap contracts designated as net investment hedges:

	At 31 July 2022				At 31 July 2021
	US$ £m	Euro £m	Total £m		US$ £m	Euro £m	Total £m
Loans designated as net investment hedges	-	(451)	(451)		(285)	(459)	(744)
Cross-currency swap	(615)	-	(615)		(539)	-	(539)
	(615)	(451)	(1,066)		(824)	(459)	(1,283)

At 31 July 2022, cross-currency swaps hedged the Group's exposure to US dollars and euros (31 July 2021: US dollars and euros). All the cross-currency swaps designated as net investment hedges were current and non-current (FY2021: non-current).

Swaps generating £354m of the US dollar exposure (FY2021: £310m) will mature in April 2023 and swaps generating £261m of the US dollar exposure (FY2021: £229m) will mature in February 2027.

In addition, non-swapped borrowings were also used to hedge the Group's exposure to US dollars and euros (31 July 2021 US dollars and euros). Borrowings generating £285m of the US dollar exposure (FY2021: £285m) have been prepaid in February 2022.

Borrowings generating £500m of the euro exposure (FY2021: £508m) will mature in April 2023 and borrowings generating £287m of the euro exposure (FY2021: £292m) will mature in February 2027.

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The swaps and borrowings have the same notional amount as the hedged items and, therefore, there is an economic relationship with the hedge ratio established as 1:1.

The main sources of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group's own credit risk on the fair value of the foreign exchange forward contracts which is not reflected in the fair value of the hedged item and the risk of over-hedging where the hedge relationship requires re-balancing. No other sources of ineffectiveness emerged from these hedging relationships. Any hedge ineffectiveness is recognised immediately in the income statement in the period that it occurs.

The following table presents a reconciliation by risk category of the net investment hedge reserve and analysis of other comprehensive income in relation to hedge accounting:

		Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Brought forward net investment hedge reserve at start of year		(238)	(314)
Cross-currency swaps	Net fair value gains on effective hedges	(82)	14
Bonds	Net fair value gains on effective hedges	5	62
Amounts removed from the hedge reserve and recognised in the income statement	Profit/(loss) on business disposal	103	-
Carried forward net investment hedge reserve at end of year		(212)	(238)

The following table sets out information regarding the change in value of the hedged item used in calculating hedge ineffectiveness as well as the impacts on the net investment hedge reserve as at 31 July 2022 and 31 July 2021:

Hedged item	Hedged exposure	Hedging instrument	Financial year	Changes in value of the hedged item for calculating ineffectiveness £m	Changes in value of the hedging instrument for calculating ineffectiveness £m	Net investment hedge reserve  m
Overseas operation	Foreign currency risk	Cross-currency swaps	FY2022	82	(82)	(82)
		Bonds	FY2022	(5)	5	5
				77	(77)	(77)
Overseas operation	Foreign currency risk	Cross-currency swaps	FY2021	(14)	17	14
		Bonds	FY2021	(62)	62	62
				(76)	79	76

Net investment hedges generated £1m of ineffectiveness in FY2022 (FY2021: £3m) which was recognised in the income statement through finance costs.

The fair values of these net investment hedges are subject to exchange rate movements. Based on the hedging instruments in place at the year-end, if the specified currencies were to strengthen 10% while all other market rates remained constant, it would have the following effect:  

	Loss  recognised in hedge reserve 31 July 2022 £m	Loss  recognised in hedge reserve 31 July 2021 £m
US dollar	68	92
Euro	50	51

These movements would be fully offset by an opposite movement on the retranslation of the net assets of the overseas subsidiaries. These sensitivities were calculated before adjusting for tax.

(b) Interest rate risk

The Group operates an interest rate policy designed to optimise interest cost and reduce volatility in reported earnings. The Group's current policy is to require interest rates to be fixed within a band of between 40% and 60 % of the level of gross debt. This is achieved through fixed rate borrowings and interest rate swaps. At 31 July 2022, 50% (FY2021: 54%) of the Group's gross borrowings were at fixed interest rates, after adjusting for interest rate swaps and the impact of short maturity derivatives designated as net investment hedges.

The Group monitors its fixed rate risk profile against both gross and net debt. For medium-term planning, it focuses on gross debt to eliminate the fluctuations of variable cash levels over the cycle. The weighted average interest rate on borrowings and cross-currency swaps at 31 July 2022, after interest rate swaps, was 3.06% (FY2021: 2.06%).

Interest rate profile of financial assets and liabilities and the fair value of borrowings

The following table shows the interest rate risk exposure of investments, cash and borrowings, with the borrowings adjusted for the impact of interest rate hedging. Other financial assets and liabilities do not earn or bear interest, and for all financial instruments except borrowings, the carrying value is not materially different from their fair value.

	As at 31 July 2022					As at 31 July 2021
	At fair value through profit or loss £m	Cash and cash equivalents £m	Borrowings £m	Fair value of borrowings £m			At fair value through profit or loss £m	Cash and cash equivalents £m	Borrowings £m	Fair value of  borrowings £m
Fixed interest
Less than one year	-	-	(203)	(203)			-	-	(36)	(36)
Between one and five years	-	-	(357)	(359)			-	-	(418)	(434)
Greater than five years	-	-	(24)	(24)			-	-	(321)	(353)
Total fixed interest financial liabilities	-	-	(584)	(586)			-	-	(775)	(823)
Floating rate interest financial assets/(liabilities)*	390	970	(582)	(586)			4	333	(727)	(736)
Total interest-bearing financial assets/(liabilities)	390	970	(1,166)	(1,172)			4	333	(1,502)	(1,559)
Non-interest-bearing assets in the same category	4	86	-	-			7	72	-	-
Total	394	1,056	(1,166)	(1,172)			11	405	(1,502)	(1,559)

* Fair value gains and losses in this category of assets are recognised in other comprehensive income.

Interest rate hedging

The Group also has exposures to the fair values of non-derivative financial instruments such as EUR and USD fixed rate borrowings. To manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swaps and cross-currency interest rate swaps which for accounting purposes are designated as fair value hedges.

At 31 July 2022 and 31 July 2021, the Group had designated the following hedges against variability in the fair value of borrowings arising from fluctuations in base rates:

· €400m of the fixed/floating element of the EUR/USD interest rate swaps that mature on 28 April 2023 partially hedging the € 2023 Eurobond;

· €300m of the fixed/floating and € exchange exposure of EUR/USD interest rate swaps maturing on 23 February 2027 partially hedging the € 2027 Eurobond; and

· The $150m interest rate swap which matures on 12 October 2022, partially hedging the USD 2022 Guaranteed notes, was early redeemed in February 2022.

The fair values of the hedging instruments are disclosed in note 20. The effect of the swaps was to convert £588m (FY2021: £705m) debt from fixed rate to floating rate. The swaps have similar critical terms to the hedged items, such as the reference rate, reset dates, notional amounts, payment dates and maturities. Therefore, there is an economic relationship and the hedge ratio is established as 1:1. Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.

The main sources of hedge ineffectiveness in these hedging relationships is the effect of the currency basis risk on cross-currency interest rate swaps which are not reflected in the fair value of the hedged item. No other sources of ineffectiveness emerged from these hedging relationships. Any hedge ineffectiveness was recognised immediately in the income statement in the period in which it occurred.

The following table sets out the details of the hedged exposures covered by the Group's fair value hedges:

			Changes in value of hedged item for calculating ineffectiveness £m	Changes in value of the hedging instrument for calculating ineffectiveness £m	Carrying amount			Accumulated fair value adjustments on hedged item
Hedged item	Hedged exposure	Financial year			Assets £m	Liabilities £m		Assets £m	Liabilities £m
Fixed rate bonds (a)	Interest rate risk	FY2022	8	(8)	-	336		-	(2)
	Interest rate & currency rate risk	FY2022	21	(20)	-	252		-	(5)
			29	(28)	-	588		-	(7)
Fixed rate bonds (a)	Interest rate risk	FY2021	5	(5)	-	449		-	6
	Interest rate & currency rate risk	FY2021	4	(7)	-	256		-	16
			9	(12)	-	705		-	22

(a) Classified as borrowings

Fair value hedges generated a £1m ineffectiveness in FY2022 (FY2021: £3m) which was recognised in the income statement through finance costs.

Sensitivity of interest charges to interest rate movements

The Group has exposure to sterling, US dollar and euro interest rates. However, the Group does not have a significant exposure to interest rate movements for any individual currency. Based on the composition of net debt and investments at 31 July 2022, and taking into consideration all fixed rate borrowings and interest rate swaps in place, a one percentage point (100 basis points) change in average floating interest rates for all three currencies would have a £2m impact (FY2021: £5m impact) on the Group's profit before tax.

Impact of LIBOR transition

The UK Financial Conduct Authority announced on 5 March 2021 that LIBOR benchmark rates will be discontinued after 31 December 2021 except the majority of US dollar settings which will be discontinued after 30 June 2023. The Group is exposed to interest rate benchmark reform on its interest rate swaps and cross-currency interest rate swaps which reference 3-month and 6-month USD LIBOR, have an aggregate nominal value of USD 749m, and mature between April 2023 and February 2027. In April 2021 the Group confirmed adherence to the ISDA 2020 IBOR Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. (ISDA) on 23 October 2021 (the Protocol), ensuring that appropriate fallbacks can apply to these derivatives in the event of LIBOR discontinuation.

(c) Financial credit risk

The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not currently expect any counterparties to fail to meet their obligations. Credit risk is mitigated by the Board-approved policy of only placing cash deposits with highly rated relationship bank counterparties within counterparty limits established by reference to their Standard & Poor's long-term debt rating. In the normal course of business, the Group operates cash pooling systems, where a legal right of set-off applies.

The maximum credit risk exposure in the event of other parties failing to perform their obligations under financial assets, excluding trade and other receivables and derivatives, totals £1,067m at 31 July 2022 (FY2021: £416m).

	31 July 2022 £m	31 July 2021 £m
Cash in AAA liquidity funds	551	116
Cash at banks with at least a AA- credit rating	104	46
Cash at banks with all other A credit ratings	397	237
Cash at other banks	4	6
Investments in bank deposits	4	4
Other investments	7	7
	1,067	416

At 31 July 2022, the maximum exposure with a single bank for deposits and cash was £339m (FY2021: £79m), whilst the maximum mark to market exposure with a single bank for derivatives was £15m (FY2021: £26m). These banks have AAA and AA- credit ratings respectively (FY2021: Both AAA and AA-).

(d) Liquidity risk

Borrowing facilities

Board policy specifies the maintenance of unused committed credit facilities of at least £300m at all times to ensure that the Group has sufficient available funds for operations and planned development. The Group has Revolving Credit Facilities of $800m maturing 1 November 2024. At the balance sheet date, the Group had the following undrawn credit facilities:

	31 July 2022 £m	31 July 2021 £m
Expiring after more than two years	657	575

Cash deposits

As at 31 July 2022, £814m (FY2021: £186m) of cash and cash equivalents was on deposit with various banks of which £558m (FY2021: £116m) was in liquidity funds. £4m (FY2021: £4m) of investments comprised bank deposits held to secure liabilities and letters of credit.

Gross contractual cash-flows for borrowings

	As at 31 July 2022					As at 31 July 2021
	Borrowings (note 18) £m	Fair value adjustments £m	Contractual  interest  payments £m	Total  contractual cash-flows £m		Borrowings (note 18) £m	Fair value adjustments £m	Contractual  interest payments £m	Total  contractual cash-flows £m
Less than one year	(539)	2	(17)	(554)		(36)	-	(28)	(64)
Between one and two years	(23)	-	(11)	(34)		(823)	(6)	(23)	(852)
Between two and three years	(20)	-	(11)	(31)		(20)	-	(11)	(31)
Between three and four years	(14)	-	(11)	(25)		(14)	-	(11)	(25)
Between four and five years	(552)	5	(11)	(558)		(10)	-	(11)	(21)
Greater than five years	(24)	-	-	(24)		(577)	(16)	(11)	(604)
Total	(1,172)	7	(61)	(1,226)		(1,480)	(22)	(95)	(1,597)

The figures presented in the borrowings column include the non-cash adjustments which are highlighted in the adjacent column. The contractual interest reported for borrowings is before the effect of interest rate swaps.

Gross contractual cash-flows for derivative financial instruments

	As at 31 July 2022				As at 31 July 2021
	Receipts £m	Payments £m	Net cash-flow £m		Receipts £m	Payments £m	Net cash-flow £m
Assets
Less than one year	495	(521)	(26)		142	(144)	(2)
Greater than one year	270	(290)	(20)		642	(568)	74
Liabilities
Less than one year	212	(209)	3		220	(219)	1
Greater than one year	8	(8)	-		3	(2)	1
Total	985	(1,028)	(43)		1,007	(933)	74

This table above presents the undiscounted future contractual cash-flows for all derivative financial instruments. For this disclosure, cash-flows in foreign currencies are translated using the spot rates at the balance sheet date. The fair values of these financial instruments are presented in note 20.

Gross contractual cash-flows for other financial liabilities

The contractual cash-flows for financial liabilities included in trade and other payables were £474m (FY2021: £351m) due in less than one year and £13m (FY2021: £8m) due between one and five years.

20 DERIVATIVE FINANCIAL INSTRUMENTS

The tables below set out the nominal amount and fair value of derivative contracts held by the Group, identifying the derivative contracts which qualify for hedge accounting treatment:

	At 31 July 2022
	Contract or underlying nominal amount £m			Fair value
		Assets £m	Liabilities £m	Net £m
Foreign exchange contracts (cash-flow hedges)	141	3	(5)	(2)
Foreign exchange contracts (not hedge accounted)	226	1	(2)	(1)
Total foreign exchange contracts	367	4	(7)	(3)
Cross-currency swaps (fair value and net investment hedges)	615	-	(40)	(40)
Total financial derivatives	982	4	(47)	(43)
Balance sheet entries:
Non-current	269	-	(20)	(20)
Current	713	4	(27)	(23)
Total financial derivatives	982	4	(47)	(43)

	At 31 July 2021
	Contract or underlying nominal amount £m			Fair value
		Assets £m	Liabilities £m	Net £m
Foreign exchange contracts (cash-flow hedges)	107	1	(2)	(1)
Foreign exchange contracts (not hedge accounted)	251	1	(1)	-
Total foreign exchange contracts	358	2	(3)	(1)
Cross-currency swaps (fair value and net investment hedges)	539	72	-	72
Interest rate swaps (fair value hedges)	108	3	-	3
Total financial derivatives	1,005	77	(3)	74
Balance sheet entries:
Non-current	655	75	-	75
Current	350	2	(3)	(1)
Total financial derivatives	1,005	77	(3)	74

The maturity profile, average interest and foreign currency exchange rates of the hedging instruments used in the Group's hedging strategies are as follows:

			Maturity at 31 July 2022				Maturity at 31 July 2021
Hedged exposure	Hedging instrument		Up to one year	One to five years	More than five years		Up to one year	One to five years	More than five years
Fair value hedges
Interest rate risk	Interest rate swaps - USD	- Notional amount (£m)	-	-	-		-	108	-
		- Average spread over   6 month USD LIBOR	-	-	-		-	1.797%	-
	Interest rate swaps - EUR	- Notional amount (£m)	336	-	-		-	341	-
		- Average spread over   3 month EUR LIBOR	1.015%	-	-		-	1.015%	-
Interest rate risk/Foreign currency risk	Cross-currency swaps (EUR:GBP)	- Notional amount (£m)	-	254	-		-	-	254
		- Average exchange rate	-	0.845	-		-	-	0.845
		- Average spread over   3 month GBP LIBOR	-	1.750%	-		-	-	1.750%
Net investment hedges
Foreign currency risk	Cross-currency swaps (EUR:USD)	- Notional amount (£m)	354	-	-		-	310	-
		- Average exchange rate	1.0773	-	-		-	1.0773	-
	Cross-currency swaps (GBP:USD)	- Notional amount (£m)	-	261	-		-	-	229
		- Average exchange rate	-	1.2534	-		-	-	1.2534
Cash-flow hedges
Foreign currency risk	Foreign exchange contracts (EUR:USD)	- Notional amount (£m)	77	-	-		47	5	-
		- Average exchange rate	4.1785	-	-		1.1915	1.2205	-
	Foreign exchange contracts (EUR:GBP)	- Notional amount (£m)	28	8	-		31	3	-
		- Average exchange rate	0.8323	1.1676	-		0.8996	0.9094	-
	Foreign exchange contracts (EUR:AUD)	- Notional amount (£m)	6	-	-		7	-	-
		- Average exchange rate	1.5226	-	-		1.5832	-	-
	Foreign exchange contracts (USD:GBP)	- Notional amount (£m)	16	-	-		8	-	-
		- Average exchange rate	1.3273	-	-		1.3577	-	-
	Foreign exchange contracts (GBP:CZK)	- Notional amount (£m)	6	-	-		6	-	-
		- Average exchange rate	30.2988	-	-		29.7028	-	-

At 31 July 2022, the Group had forward foreign exchange contracts with a nominal value of £141m (FY2021: £107m) designated as cash-flow hedges. These forward foreign exchange contracts are in relation to sale and purchase of multiple currencies with varying maturities up to 20 July 2023. The largest single currency pairs are disclosed above and make up 100% of the notional hedged exposure. The notional and fair values of these foreign exchange forward derivatives are shown in the nominal amount and fair value of derivative contracts table above.

Accounting for other derivative contracts

Any foreign exchange contracts which are not formally designated as hedges and tested are classified as 'held for trading' and not hedge accounted.

Netting

International Swaps and Derivatives Association (ISDA) master netting agreements are in place with derivative counterparties except for contracts traded on a dedicated international electronic trading platform used for operational foreign exchange hedging. Under these agreements if a credit event occurs, all outstanding transactions under the ISDA are terminated and only a single net amount per counterparty is payable in settlement of all transactions. The ISDA agreements do not meet the criteria for offsetting, since the offsetting is enforceable only if specific events occur in the future, and there is no intention to settle the contracts on a net basis.

	Assets 31 July 2022 £m	Liabilities 31 July 2022 £m	Assets 31 July 2021 £m	Liabilities 31 July 2021 £m
Gross value of assets and liabilities	4	(47)	77	(3)
Related assets and liabilities subject to master netting agreements	(4)	4	(1)	1
Net exposure	-	(43)	76	(2)

21 FAIR VALUE OF FINANCIAL INSTRUMENTS

As at 31 July 2022	Notes	Basis for determining fair value	At amortised cost £m	At fair value through profit or loss £m	At fair value through OCI £m	Total carrying value £m	Total fair value £m
Financial assets
Other investments	14	A	-	4	364	368	368
Other investments	14	F	-	19	8	27	27
Cash and cash equivalents	18	A	506	550	-	1,056	1,056
Trade and other financial receivables	16	B/C	807	-	-	807	807
Derivative financial instruments	20	C	-	4	-	4	4
Total financial assets			1,313	577	372	2,262	2,262
Financial liabilities
Trade and other financial payables	17	B	(728)	-	-	(728)	(728)
Short-term borrowings	18	D	(509)	-	-	(509)	(509)
Long-term borrowings	18	D	(538)	-	-	(538)	(544)
Lease liabilities	18	E	(119)	-	-	(119)	(119)
Derivative financial instruments	20	C	-	(47)	-	(47)	(47)
Total financial liabilities			(1,894)	(47)	-	(1,941)	(1,947)

As at 31 July 2021	Notes	Basis for determining fair value	At amortised cost £m	At fair value through profit or loss £m	At fair value through OCI £m	Total carrying value £m	Total fair value £m
Financial assets
Other investments	14	A	-	4	-	4	4
Other investments	14	F	-	-	7	7	7
Cash and cash equivalents	18	A	289	116	-	405	405
Trade and other financial receivables	16	B/C	689	-	-	689	689
Derivative financial instruments	20	C	-	77	-	77	77
Total financial assets			978	197	7	1,182	1,182
Financial liabilities
Trade and other financial payables	17	B	(589)	-	-	(589)	(589)
Short-term borrowings	18	D	(9)	-	-	(9)	(9)
Long-term borrowings	18	D	(1,372)	-	-	(1,372)	(1,429)
Lease liabilities	18	E	(121)	-	-	(121)	(121)
Derivative financial instruments	20	C	-	(3)	-	(3)	(3)
Total financial liabilities			(2,091)	(3)	-	(2,094)	(2,151)

The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies described below:

A  Carrying value is assumed to be a reasonable approximation to fair value for all of these assets and liabilities (Level 1 as defined by IFRS 13 Fair Value Measurement).

B  Carrying value is assumed to be a reasonable approximation to fair value for all of these assets and liabilities (Level 2 as defined by IFRS 13 Fair Value Measurement).

C  Fair values of derivative financial assets and liabilities and trade receivables held to collect or sell are estimated by discounting expected future contractual cash-flows using prevailing interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value, derived from observable market prices (Level 2 as defined by IFRS 13 Fair Value Measurement).

D  Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of borrowings is estimated using quoted prices (Level 1 as defined by IFRS 13).

E  Leases are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of the lease contract is estimated by discounting contractual future cash-flows (Level 2 as defined by IFRS 13).

F  The fair value of instruments is estimated by using unobservable inputs to the extent that relevant observable inputs are not available. Unobservable inputs are developed using the best information available in the circumstances, which may include the Group's own data, taking into account all information about market participation assumptions that is reliably available (Level 3 as defined by IFRS 13).

IFRS 13 defines a three-level valuation hierarchy:

Level 1 - quoted prices for similar instruments
Level 2 - directly observable market inputs other than Level 1 inputs
Level 3 - inputs not based on observable market data

22 COMMITMENTS

At 31 July 2022, commitments, comprising bonds and guarantees arising in the normal course of business, amounted to £234m
(FY2021: £210m), including pension commitments of £56m (FY2021: £54m). In addition, the Group has committed expenditure on capital projects amounting to £15m (FY2021: £4m).

23 PROVISIONS AND CONTINGENT LIABILITIES

	Trading		Non-headline and legacy				Total
	£m		John Crane, Inc. litigation £m	Titeflex Corporation litigation £m	Other £m		£m
At 31 July 2020	14		231	66	20		331
Foreign exchange rate movements	(1)		(12)	(4)	(1)		(18)
Provision charged	7		5	-	-		12
Provision released	(4)		-	(13)	-		(17)
Unwind of provision discount	-		1	1	-		2
Utilisation	(6)		(13)	(3)	(2)		(24)
Business combinations	1		-	-	-		1
At 31 July 2021	11		212	47	17		287
Current liabilities	10		26	8	2		46
Non-current liabilities	1		186	39	15		241
At 31 July 2021	11		212	47	17		287
Foreign exchange rate movements	1		30	6	2		39
Provision charged	6		6	2	26		40
Provision released	(3)		-	-	-		(3)
Unwind of provision discount	-		2	1	-		3
Utilisation	(4)		(21)	(4)	(2)		(31)
At 31 July 2022	11		229	52	43		335
Current liabilities	10		34	14	30		88
Non-current liabilities	1		195	38	13		247
At 31 July 2022	11		229	52	43		335

The John Crane, Inc. and Titeflex Corporation litigation provisions were the only provisions that were discounted; other provisions have not been discounted as the impact would be immaterial.

Trading

The provisions included as trading represent amounts provided for in the ordinary course of business. Trading provisions are charged and released through headline profit.

Warranty provision and product liability

At 31 July 2022, the Group had warranty and product liability provisions of £7m (FY2021: £9m). Warranties over the Group's products typically cover periods of between one and three years. Provision is made for the likely cost of after-sales support based on the recent past experience of individual businesses.

Commercial disputes and litigation in respect of ongoing business activities

The Group has on occasion been required to take legal action to protect its intellectual property and other rights against infringement. It has also had to defend itself against proceedings brought by other parties, including product liability and insurance subrogation claims. Provision is made for any expected costs and liabilities in relation to these proceedings where appropriate, although there can be no guarantee that such provisions (which may be subject to potentially material revision from time to time) will accurately predict the actual costs and liabilities that may be incurred.

Contingent liabilities

In the ordinary course of its business, the Group is subject to commercial disputes and litigation such as government price audits, product liability claims, employee disputes and other kinds of lawsuits, and faces different types of legal issues in different jurisdictions. The high level of activity in the US, for example, exposes the Group to the likelihood of various types of litigation commonplace in that country, such as 'mass tort' and 'class action' litigation, legal challenges to the scope and validity of patents, and product liability and insurance subrogation claims. These types of proceedings (or the threat of them) are also used to create pressure to encourage negotiated settlement of disputes. Any claim brought against the Group (with or without merit) could be costly to defend. These matters are inherently difficult to quantify. In appropriate cases a provision is recognised based on best estimates and management judgement but there can be no guarantee that these provisions (which may be subject to potentially material revision from time to time) will result in an accurate prediction of the actual costs and liabilities that may be incurred. There are also contingent liabilities in respect of litigation for which no provisions are made.

The Group operates in some markets where the risk of unethical or corrupt behaviour is material and has procedures, including an employee 'Ethics Alertline', to help it identify potential issues. Such procedures will, from time to time, give rise to internal investigations, sometimes conducted with external support, to ensure that the Group properly understands risks and concerns and can take steps both to manage immediate issues and to improve its practices and procedures for the future. The Group is not aware of any issues which are expected to generate material financial exposures.

Non-headline and legacy

John Crane, Inc.

John Crane, Inc. (JCI) is one of many co-defendants in numerous lawsuits pending in the United States in which plaintiffs are claiming damages arising from alleged exposure to, or use of, products previously manufactured which contained asbestos. Until 2006, the awards, the related interest and all material defence costs were met directly by insurers. In 2007, JCI secured the commutation of certain insurance policies in respect of product liability. Provision is made in respect of the expected costs of defending known and predicted future claims and of adverse judgements in relation thereto, to the extent that such costs can be reliably estimated.

The JCI products generally referred to in these cases consist of industrial sealing product, primarily packing and gaskets. The asbestos was encapsulated within these products in such a manner that causes JCI to believe, based on tests conducted on its behalf, that the products were safe. JCI ceased manufacturing products containing asbestos in 1985.

JCI continues to actively monitor the conduct and effect of its current and expected asbestos litigation, including the most efficacious presentation of its 'safe product' defence, and intends to continue to resist these asbestos claims based upon this defence. The table below summarises the JCI claims experience over the last 40 years since the start of this litigation:

	Year ended 31 July 2022	Year ended 31 July 2021	Year ended 31 July 2020	Year ended 31 July 2019	Year ended 31 July 2018
JCI claims experience
Claims against JCI that have been dismissed	306,000	305,000	297,000	285,000	277,000
Claims JCI is currently a defendant in	22,000	22,000	25,000	38,000	43,000
Cumulative final judgements, after appeals, against JCI since 1979	149	149	149	144	140
Cumulative value of awards ($'m) since 1979	175	175	175	168	164

The number of claims outstanding at 31 July 2022 reflected the benefit of 1,000 (FY2021: 8,000) claims being dismissed in the year.

JCI has also incurred significant additional defence costs. The litigation involves claims for a number of allegedly asbestos-related diseases, with awards, when made, for mesothelioma tending to be larger than those for the other diseases. JCI's ability to defend mesothelioma cases successfully is, therefore, likely to have a significant impact on its annual aggregate adverse judgement and defence costs.

John Crane, Inc. litigation provision

The provision is based on past history of JCI claims and well-established tables of asbestos-related disease incidence projections. The provision is determined using advice from asbestos valuation experts, Bates White LLC. The assumptions made in assessing the appropriate level of provision include: the period over which the expenditure can be reliably estimated; the future trend of legal costs; the rate of future claims filed; the rate of successful resolution of claims; and the average amount of judgements awarded. The provision utilised in the period is lower than previous periods, principally due to court closures and trial delays arising from the COVID-19 pandemic. Management believes this reduction in utilisation is temporary until after the effects of the pandemic subside and trial activity returns to pre-pandemic levels.

Established incidence curves can be used to estimate the likely future pattern of asbestos-related disease. However, JCI's claims experience is also significantly impacted by other factors which influence the US litigation environment. These can include: changing approaches on the part of the plaintiffs' bar; changing attitudes amongst the judiciary at both trial and appellate levels in specific jurisdictions which move the balance of risk and opportunity for claimants; and legislative and procedural changes in both the state and federal court systems.

The projections use a limited time horizon on the basis that Bates White LLC consider that there is substantial uncertainty in the asbestos litigation environment. So probable expenditures are not reasonably estimable beyond this time horizon. Asbestos is the longest running mass tort litigation in American history and is constantly evolving in ways that cannot be anticipated. JCI's defence strategy also generates a significantly different pattern of legal costs and settlement expenses from other defendants. Thus JCI is in an extremely rare position, and evidence from other litigation cannot be used to improve the reliability of the projections. A ten-year (FY2021: ten-year) time horizon has been used based on past experience regarding significant changes in the litigation environment that have occurred every few years and on the amount of time taken in the past for some of those changes to impact the broader asbestos litigation environment.

The rate of future claims filed has been estimated using well-established tables of asbestos incidence projections to determine the likely population of potential claimants, and JCI's past experience to determine what proportion of this population will make a claim against JCI. The JCI products generally referred to in claims had industrial and marine applications. As a result, the incidence curve used for JCI projections excludes construction workers, and is a composite of the curves that predict asbestos exposure-related disease from shipyards and other occupations. This is consistent with JCI's litigation history.

The rate of successful resolution of claims and the average amount of any judgements awarded are projected based on the past history of JCI claims, since this is the best available evidence, given JCI's unusual strategy of defending all claims.

The future trend of legal costs is estimated based on JCI's past experience, adjusted to reflect the assumed levels of claims and trial activity, since the number of trials is a key driver of legal costs.

John Crane, Inc. litigation insurance recoveries

While JCI has certain excess liability insurance, JCI has met defence costs directly. The calculation of the provision does not take account of any potential recoveries from insurers.

John Crane, Inc. litigation provision history

The JCI asbestos litigation provision of £229m (FY2021: £212m) is a discounted pre-tax provision using discount rates, being the risk-free rate on US debt instruments for the appropriate period. The deferred tax asset related to this provision is shown within the deferred tax balance (note 6).

The JCI asbestos litigation provision has developed over the last five years as follows:

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m	Year ended 31 July 2020 £m	Year ended 31 July 2019 £m	Year ended 31 July 2018 £m
John Crane, Inc. litigation provision
Gross provision	258	220	235	257	251
Discount	(29)	(8)	(4)	(20)	(28)
Discounted pre-tax provision	229	212	231	237	223
Deferred tax	(57)	(54)	(59)	(50)	(48)
Discounted post-tax provision	172	158	172	187	175
Operating profit charge/(credit)
Increased provisions for adverse judgements and legal defence costs	24	10	14	7	13
Change in US risk-free rates	(18)	(5)	16	8	(6)
Subtotal - items charged to the provision	6	5	30	15	7
Litigation management, legal fees in connection with litigation against insurers and defence strategy	1	1	1	2	3
Recoveries from insurers	-	(9)	(3)	( 11 )	-
Total operating profit charge/(credit)	7	(3)	28	6	10
Cash-flow
Provision utilisation - legal defence costs and adverse judgements	(21)	(13)	(23)	(24)	(27)
Litigation management expense	(1)	-	(1)	(2)	(3)
Recoveries from insurers	-	9	3	11	-
Net cash outflow	(22)	(4)	(21)	(15)	(30)

John Crane, Inc. litigation provision sensitivities

The provision may be subject to potentially material revision from time to time if new information becomes available as a result of future events. There can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that will be incurred because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of related litigation.

John Crane, Inc. statistical reliability of projections over the ten year time horizon

In order to evaluate the statistical reliability of the projections, a population of outcomes is modelled using randomised verdict outcomes. This generated a distribution of outcomes with future spend at the 5th percentile of £203m and future spend at the 95th percentile of £268m (FY2021: £191m and £246m, respectively). Statistical analysis of the distribution of these outcomes indicates that there is a 50% probability that the total future spend will fall between £239m and £263m (FY2021: between £209m and £230m), compared to the gross provision value of £258m (FY2021: £220m).

John Crane, Inc. sensitivity of the projections to changes in the time horizon used

If the asbestos litigation environment becomes more volatile and uncertain, the time horizon over which the provision can be calculated may reduce. Conversely, if the environment became more stable, or JCI changed approach and committed to long-term settlement arrangements, the time period covered by the provision might be extended.

The projections use a ten-year time horizon. Reducing the time horizon by one year would reduce the provision by £18m (FY2021: £17m) and reducing it by five years would reduce the provision by £97m (FY2021: £93m).

We consider, after obtaining advice from Bates White LLC, that to forecast beyond ten years requires that the litigation environment remains largely unchanged with respect to the historical experience used for estimating future asbestos expenditures. Historically, the asbestos litigation environment has undergone significant changes more often than every ten years. If one assumed that the asbestos litigation environment would remain unchanged for longer and extended the time horizon by one year, it would increase the pre-tax provision by £15m (FY2021: £14m) and extending it by five years would increase the pre-tax provision by £56m (FY2021: £58m). However, there are also reasonable scenarios that, given certain recent events in the US asbestos litigation environment, would result in no additional asbestos litigation for JCI beyond ten years. At this time, how the asbestos litigation environment will evolve beyond ten years is not reasonably estimable.

John Crane, Inc. contingent liabilities

Provision has been made for future defence costs and the cost of adverse judgements expected to occur. JCI's claims experience is significantly impacted by other factors which influence the US litigation environment. These can include: changing approaches on the part of the plaintiffs' bar; changing attitudes amongst the judiciary at both trial and appellate levels; and legislative and procedural changes in both the state and federal court systems. As a result, whilst the Group anticipates that asbestos litigation will continue beyond the period covered by the provision, the uncertainty surrounding the US litigation environment beyond this point is such that the costs cannot be reliably estimated.

Although the methodology used to calculate the JCI litigation provision can in theory be applied to show claims and costs for longer periods, the Directors consider, based on advice from Bates White LLC, that the level of uncertainty regarding the factors used in estimating future costs is too great to provide for reasonable estimation of the numbers of future claims, the nature of such claims or the cost to resolve them for years beyond the ten-year time horizon.

Titeflex Corporation

Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of claims in the US from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping product. It has also received product liability claims regarding this product in the US, some in the form of purported class actions. Titeflex Corporation believes that its products are a safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and national codes. However, some claims have been settled on an individual basis without admission of liability. Equivalent third-party products in the US market-place face similar challenges.

Titeflex Corporation litigation provision

The continuing progress of claims and the pattern of settlement, together with recent market-place activity, provide sufficient evidence to recognise a liability in the accounts. Therefore provision has been made for the costs which the Group is expected to incur in respect of future claims to the extent that such costs can be reliably estimated. Titeflex Corporation sells flexible gas piping with extensive installation and safety guidance designed to assure the safety of the product and minimise the risk of damage associated with lightning strikes.

The assumptions made in assessing the appropriate level of provision, which are based on past experience, include: the period over which expenditure can be reliably estimated; the number of future settlements; the average amount of settlements; and the impact of statutes of repose and safe installation initiatives on the expected number of future claims. The assumptions relating to the number of future settlements exclude the use of recent claims history due to the uncertain impact that the COVID-19 lockdown has had on the number of claims.

The provision of £52m (FY2021: £47m) is a discounted pre-tax provision using discount rates, being the risk-free rate on US debt instruments for the appropriate period. The deferred tax asset related to this provision is shown within the deferred tax balance (note 6).

	31 July 2022 £m	31 July 2021 £m
Gross provision	87	69
Discount	(35)	(22)
Discounted pre-tax provision	52	47
Deferred tax	(12)	(11)
Discounted post-tax provision	40	36

Titeflex Corporation litigation provision history

A charge of £2m (FY2021: £13m credit) has been recognised by Titeflex Corporation in respect of changes to the estimated cost of future claims from insurance companies seeking recompense for damage allegedly caused by lightning strikes. The higher gross provision value has been driven by foreign exchange rate movements and an increase in the average cost per claim. The increase in the discount factor derives from increasing US dollar discount rates.

Titeflex Corporation litigation provision sensitivities

The significant uncertainty associated with the future level of claims and of the costs arising out of related litigation means that there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that will be incurred. Therefore the provision may be subject to potentially material revision from time to time, if new information becomes available as a result of future events.

The projections incorporate a long-term assumption regarding the impact of safe installation initiatives on the level of future claims. If the assumed annual benefit of bonding and grounding initiatives were 0.5% higher, the provision would be £3m (FY2021: £4m) lower, and if the benefit were 0.5% lower, the provision would be £4m (FY2021: £4m) higher.

The projections use assumptions of future claims that are based on both the number of future settlements and the average amount of those settlements. If the assumed average number of future settlements increased 10%, the provision would rise by £5m (FY2021: £4m), with an equivalent fall for a reduction of 10%. If the assumed amount of those settlements increased 10%, the provision would rise by £4m (FY2021: £3m), also with an equivalent fall for a reduction of 10%.

Other non-headline and legacy provisions

Non-headline provisions comprise all provisions that were disclosed as non-headline items when they were charged to the consolidated income statement. Legacy provisions comprise non-material provisions relating to former business activities and discontinued operations and properties no longer used by Smiths.

These non-material provisions include non-headline reorganisation, disposal indemnities, litigation and arbitration in respect of old products and discontinued business activities, which includes claims received in connection with the disposal of Smiths Medical in the year. Provision is made for the best estimate of the expected expenditure related to the defence and/or resolution of such matters. There is an inherent risk in legal proceedings that the outcome may be unfavourable to the Group, and as such there can be no guarantee that such provisions (which may be subject to potentially material revision from time to time) will be sufficient.

Reorganisation

At 31 July 2022, there were reorganisation provisions of £1m (FY2021: £2m) relating to the various restructuring programmes that are expected to be utilised in the next 18 months.

Property

At 31 July 2022, there were provisions of £10m (FY2021: £11m) related to actual and potential environmental issues for sites currently or previously occupied by Smiths operations.

24 SHARE CAPITAL

	Number of shares	Average number of shares	Issued capital £m	Consideration £m
Ordinary shares of 37.5p each
Total share capital at 31 July 2020	396,211,180	396,193,310	149
Issue of new equity shares - exercise of share options	165,934	157,276	-	2
Total share capital at 31 July 2021	396,377,114	396,350,586	149
Issue of new equity shares - exercise of share options	131,942	125,354	-	2
Share buybacks	(34,152,897)	(9,797,729)	(13)	(511)
Total share capital at 31 July 2022	362,356,159	386,678,211	136

Share capital structure

As at 31 July 2022, the Company's issued share capital was 362,356,159 ordinary shares with a nominal value of 37.5p per share. All of the issued share capital was in free issue and all issued shares are fully paid.

The Company's ordinary shares are listed and admitted to trading on the Main Market of the London Stock Exchange. The Company has an American Depositary Receipt (ADR) programme and one ADR equates to one ordinary share. As at 31 July 2022, 4,274,704 ordinary shares were held by the nominee of the programme in respect of the same number of ADRs in issue.

The holders of ordinary shares are entitled to receive the Company's Reports and Accounts, to attend and speak at General Meetings of the Company, to appoint proxies and to exercise voting rights. None of the ordinary shares carry any special rights with regard to control of the Company or distributions made by the Company.

There are no known agreements relating to, or restrictions on, voting rights attached to the ordinary shares (other than the 48 hour cut-off for casting proxy votes prior to a General Meeting). There are no restrictions on the transfer of shares, and there is no requirement to obtain approval for a share transfer. There are no known arrangements under which financial rights are held by a person other than the holder of the ordinary shares. There are no known limitations on the holding of shares.

Powers of Directors

The Directors are authorised to issue and allot shares and to buy back shares subject to receiving shareholder approval at the General Meeting. Such authorities were granted by shareholders at the 2021 Annual General Meeting and the buy back authority was superseded by the shareholder authority provided at the General Meeting held in November 2021. At the 2022 AGM, it will be proposed that the Directors be granted new authorities to allot and buy back shares.

Share buybacks

As at 16 September 2022 (the latest practicable date for inclusion in this report), the Company had an unexpired authority to repurchase ordinary shares up to a maximum of 59m ordinary shares (FY2021: 40m). As at 16 September 2022, the Company did not hold any shares in treasury. Any ordinary shares purchased may be cancelled or held in treasury.

In connection with the sale of Smiths Medical to ICU Medical, Inc. (see note 27 for details), and in the light of our strong balance sheet and cash-flows, the Group announced that it intended to return an amount representing 55% of the initial cash proceeds (equating to an aggregate purchase price of up to $1bn or £742m) to shareholders in the form of a Share Buyback Programme. All shares purchased under the Programme will be cancelled. This Programme was initiated on 19 November 2021 as announced to the London Stock Exchange on 11 November 2021 and following shareholder approval at the General Meeting held on 17 November 2021.

A total number of 34,281,929 ordinary shares of 37.5 pence each were repurchased during the period, for a total consideration of £512,796,999, of which 129,032 shares with a value of £1,972,602 were yet to settle and be cancelled. These 34,281,929 shares represented 9.46% of the called up ordinary share capital as at 31 July 2022. A further 3,361,599 ordinary shares have been repurchased during the period of 1 August 2022 to 16 September 2022. All repurchased shares have been cancelled with the exception of 128,919 shares that were yet to settle and be cancelled as at 16 September 2022. Since 1 August 2022, the number of shares in issue has reduced by 3,361,712 as at 16 September 2022.

Employment share schemes

Shares acquired through Company share schemes and plans rank pari passu with the shares in issue and have no special rights. The Company operates an Employee Benefit Trust, with an independent trustee, to hold shares pending employees becoming entitled to them under the Company's share schemes and plans. On 31 July 2022, the trust held 618,662 (FY2021: 326,364) ordinary shares in the Company. The trust waived its dividend entitlement on its holding during the year, and the trust abstains from voting any shares held at General Meetings.

25 DIVIDENDS

The following dividends were declared and paid in the period:

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Ordinary final dividend of 26.0p (FY2021: 24.0p) paid 19 November 2021	103	94
Ordinary delayed interim dividend of nil (FY2021: 11.0p) paid 19 November 2021	-	44
Ordinary interim dividend of 12.3p (FY2021: 11.7p) paid 13 May 2022	47	47
	150	185

In the current year a total dividend of 38.3p has been paid, comprising a final dividend of 26.0p paid in respect of FY2021 and an interim dividend of 12.3p paid in respect of FY2022. In the prior year a total dividend of 46.7p was paid, comprising a delayed interim dividend of 11.0p and a final dividend of 24.0p paid in respect of FY2020 and an interim dividend of 11.7p paid in respect of FY2021.

The final dividend for the year ended 31 July 2022 of 27.3p per share was recommended by the Board on 22 September 2022 and will be paid to shareholders on 18 November 2022, subject to approval by the shareholders. This dividend is payable to all shareholders on the register of members at 6.00pm on 21 October 2022 (the record date).

Waiver of dividends

The following waived all dividends payable in the year, and all future dividends, on their shareholdings in the Company:

· Numis Nominees Limited (Smiths Industries Employee Share Trust)

26 RESERVES

Retained earnings include the value of Smiths Group plc shares held by the Smiths Industries Employee Benefit Trust. In the year the Company issued nil (FY2021: 800,606) shares to the Trust, and the Trust purchased 1,069,998 shares (FY2021: 1,126,970 shares) in the market for a consideration of £16m (FY2021: 16m). At 31 July 2022, the Trust held 618,662 (FY2021: 326,364) ordinary shares.

Other reserves comprise the capital redemption reserve, revaluation reserve and merger reserve, which arose from share repurchases, revaluations of property, plant and equipment, and merger accounting for business combinations before the adoption of IFRS, respectively.

Capital management

Capital employed comprises total equity adjusted for goodwill recognised directly in reserves, net retirement benefit-related assets and liabilities, net litigation provisions relating to non-headline items and net debt. The efficiency of the allocation of capital to the divisions is monitored through the return on capital employed (ROCE). This ratio is calculated over a rolling 12-month period and is the percentage that headline operating profit comprises of monthly average capital employed. In FY2022 ROCE was 14.2% (FY2021: 13.2%); see note 29.

Capital structure is based on the Directors' judgement of the balance required to maintain flexibility, whilst achieving an efficient cost of capital.

The FY2022 ratio of net debt to headline EBITDA of 0.3 (FY2021: 1.6) is within the Group's stated policy of 2.0 or less over the medium term. The Group's robust balance sheet and record of strong cash generation are more than able to fund immediate investment needs and legacy obligations. See note 29 for the definition of headline EBITDA and the calculation of this ratio.

As part of its capital management, the Group maintains a solid investment grade credit rating to ensure access to the widest possible sources of financing and to optimise the resulting cost of capital. At 31 July 2022, the Group had a credit rating of BBB+/Baa2 (FY2021: BBB+/Baa2) with Standard & Poor's and Moody's respectively.

The Board has a progressive dividend policy for future pay-outs, with the aim of increasing dividends in line with the long-term underlying growth in earnings. In setting the level of dividend payments, the Board will take into account prevailing economic conditions and future investment plans, along with the objective to maintain a minimum dividend cover of at least two times.

Hedge reserve

The hedge reserve on the balance sheet records the cumulative gain or loss on designated hedging instruments, and comprises:

	31 July 2022 £m	31 July 2021 £m
Net investment hedge reserve (net of £8m of deferred tax (FY2021: £8m)	(205)	(230)
Cash-flow hedge reserve	3	2
	(202)	(228)

See transactional currency exposure risk management disclosures in note 19 for additional details of cash-flow hedges, and translational currency exposure risk management disclosure also in note 19 for additional details of net investment hedges.

Non-controlling interest

The Group has recorded non-controlling interests of £22m (FY2021: £21m), of which the most significant balance is in John Crane Japan Inc., which represented £20m (FY2021: £20m) of the total non-controlling interests.

The non-controlling interest in John Crane Japan Inc. represents a 30% interest. John Crane Japan Inc. generated operating profits of £5m in the period (FY2021: £5m), and cash inflows from operating activities of £5m (FY2021: £6m). It paid dividends of £1m (FY2021: £2m) and tax of £1m (FY2021: £3m). At 31 July 2022, the company contributed £57m (FY2021: £57m) of net assets to the Group.

27 DISCONTINUED OPERATIONS AND BUSINESSES HELD FOR SALE

Following the Board decision in July 2021 to pursue a sale process, the Smiths Medical business was classified as a discontinued operation and a business held for sale. On 8 September 2021, the Group announced that it had agreed the sale of Smiths Medical to ICU Medical, Inc., and the approval of Smiths shareholders was received at the General Meeting on 17 November 2021.

The sale was completed on 6 January 2022 and the results of the discontinued operation and the effect of the disposal on the financial position of the Group were as follows:

Discontinued operations

The financial performance of the Smiths Medical business in the current and prior years is presented below:

	Year ended 31 July 2022				Year ended 31 July 2021
	Headline £m	Non-headline (note 3) £m	Total £m		Headline £m	Non- headline (note 3) £m	Total £m
Revenue	356	-	356		849	-	849
Direct materials, labour, production and distribution overheads	(193)	-	(193)		(385)	-	(385)
Selling costs	(46)	-	(46)		(117)	-	(117)
Administrative expenses	(51)	(47)	(98)		(170)	(79)	(249)
Operating costs	(290)	(47)	(337)		(672)	(79)	(751)
Operating profit	66	(47)	19		177	(79)	98
Finance costs	(1)	(22)	(23)		(1)	50	49
Gain on sale of discontinued operation	-	1,036	1,036		-	-	-
Taxation	(16)	6	(10)		(42)	23	(19)
Profit from discontinued operations	49	973	1,022		134	(6)	128

Interest capitalised as part of the costs of Smiths Medical development projects amounted to £1m (FY2021: £3m). £nil (FY2021: 1m) of tax relief has been recognised as current tax relief in the period. The gain on sale of the Smiths Medical discontinued operations qualified for the Substantial Shareholding Exemption and consequently was not subject to corporation tax.

Additional segmental information for discontinued operations

Headline operating profit for discontinued operations was stated after charging share-based payments £2m (FY2021: £1m).

Revenue for the Smiths Medical discontinued operation is analysed by the following product lines: Infusion Systems £116m (FY2021: £303m), Vascular Access £134m (FY2021: £272m) and Vital Care/Other £106m (FY2021: £274m).

Revenue by destination for the Smiths Medical for discontinued operations is analysed as follows: Americas £176m (FY2021: 456m), Europe, Middle East & Africa £91m (FY2021: £228m), and Asia-Pacific £89m (FY2021: £165m). Revenue by destination has been selected as the basis for attributing revenue to geographical areas as this is the attribution used by management to review the performance of the business.

Revenue by destination attributable to the United Kingdom was £12m (FY2021: £26m). Revenue earned in the United States of America was material totalling £161m (FY2021: £411m).

Cash-flow from discontinued operations

Cash-flows from discontinued operations included in the consolidated cash-flow statement are as follows:

	31 July 2022 £m	31 July 2021 represented* £m
Net cash inflow from operating activities	47	163
Net cash-flow used in investing activities	(17)	(67)
Net cash-flow used in financing activities	(14)	(68)
Net increase in cash and cash equivalents	16	28
Opening cash and cash equivalents in disposal group	48	20
Foreign exchange movements	(7)	-
Cash and cash equivalents disposed of	( 57 )	-
Cash and cash equivalents at close of period	-	48

* £15m of intra-group royalty charges paid by discontinued operations to continuing operations in FY2021, that were previously netted down, have been represented on a gross up basis within net cash inflow from operating activities and net cash-flow used in financing activities, as this represents a complete view of the operating cash flows attributable to Smiths Medical.

Effect of disposal on the financial position of the Group

		Year ended 31 July 2022 £m
Intangible assets		695
Property, plant and equipment		170
Right of use assets		64
Inventories		166
Deferred tax assets		20
Current tax receivable		3
Trade and other receivables		110
Cash and cash equivalents		57
Financial derivatives		4
Lease liabilities		(41)
Trade and other payables		(167)
Current tax payable		(13)
Deferred tax liabilities		(56)
Retirement benefit obligations		(5)
Provisions		(39)
Net assets disposed of		968
Consideration received:
Cash and cash equivalents		1,421
Transaction costs		(31)
Cash and cash equivalents, net of transaction costs		1,390
ICU Medical, Inc shares		426
Deferred contingent consideration - contingent on ICU Medical, Inc future share price:
- Fair value at date of disposal		30
- Movement in fair value to 31 July 2022		(11)
		19
Separation expenses - arising from contractual and commercial obligations due to the separation recognised in year		(32)
Gain on sale before reclassification of foreign currency translation reserve		835
Exchange movements recycled to the income statement		196
Cash-flow hedge reserve recycled to the income statement		5
Gain on sale of discontinued operation		1,036
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents		1,421
Transaction costs and separation expenses paid in period		(33)
Less cash and cash equivalents disposed of		(57)
		1,331

28 CASH-FLOW

Cash-flow from operating activities

		Year ended 31 July 2022				Year ended 31 July 2021
		Headline £m	Non-headline £m	Total £m		Headline £m	Non-headline £m	Total £m
Operating profit	- continuing operations	417	(300)	117		372	(46)	326
	- discontinued operations	66	(47)	19		177	(79)	98
Amortisation of intangible assets		10	51	61		14	53	67
Impairment of intangible assets		-	4	4		1	52	53
Impairment of tangible assets		-	-	-		-	6	6
Impairment of investment within discontinued operations		-	14	14		-	-	-
Depreciation of property, plant and equipment		38	-	38		39	1	40
Depreciation of right of use assets		30	-	30		32	-	32
(Gain)/loss on disposal of property, plant and equipment		(2)	-	(2)		1	-	1
Share-based payment expense		13	-	13		13	-	13
Retirement benefits**		5	207	212		6	(23)	(17)
Distribution from trading investment		-	-	-		5	-	5
Recycling of cash-flow hedge reserve		-	-	-		(5)	-	(5)
Decrease/(increase) in inventories		(173)	4	(169)		62	4	66
Decrease/(increase) in trade and other receivables		(87)	4	(83)		(14)	4	(10)
Increase/(decrease) in trade and other payables		131	(2)	129		46	(10)	36
Increase/(decrease) in provisions		(1)	22	21		(4)	(26)	(30)
Cash generated from operations		447	(43)	404		745	(64)	681
Interest paid		(51)	-	(51)		(40)	-	(40)
Interest received		13	1	14		2	1	3
Tax paid		(88)	-	(88)		(109)	-	(109)
Net cash inflow from operating activities		321	(42)	279		598	(63)	535
- continuing operations*		274	(42)	232		430	(58)	372
- discontinued operations*		47	-	47		168	(5)	163

*   £15m of intra-group royalty charges paid by discontinued operations to continuing operations in FY2021 have been represented as cash inflows from discontinued operations, as this represents a complete view of the operating cash flows attributable to Smiths Medical.

**  The retirement benefits non-headline operating activities principally relate to employer contributions to legacy defined benefit and post-retirement healthcare plans.

Headline cash measures - continuing operations

The Group measure of headline operating cash excludes interest and tax, and includes capital expenditure supporting organic growth. The Group uses operating cash-flow for the calculation of cash conversion and free cash-flow for management of capital purposes. See note 29 for additional details.

The table below reconciles the Group's net cash-flow from operating activities to headline operating cash-flow and free cash-flow:

	Year ended 31 July 2022				Year ended 31 July 2021
	Headline £m	Non-headline £m	Total £m		Headline £m	Non-headline £m	Total £m
Net cash inflow from operating activities	274	(42)	232		430	(58)	372
Include:
Expenditure on capitalised development, other intangible assets and property, plant and equipment	(71)	-	(71)		(62)	-	(62)
Repayment of lease liabilities	(34)	-	(34)		(33)	-	(33)
Disposals of property, plant and equipment	3	-	3		-	-	-
Investment in financial assets relating to operating activities and pensions financing outstanding at the balance sheet date	-	-	-		7	-	7
Free cash-flow			130				284
Exclude:
Investment in financial assets relating to operating activities and pensions financing outstanding at the balance sheet date	-	-	-		(7)	-	(7)
Repayment of lease liabilities	34	-	34		33	-	33
Interest paid	46	-	46		24	-	24
Interest received	(13)	-	(13)		(2)	-	(2)
Tax paid	79	-	79		96	-	96
Operating cash-flow	318	(42)	276		486	(58)	428

Headline cash conversion

Headline operating cash conversion for continuing operations is calculated as follows:

	Year ended 31 July 2022				Year ended 31 July 2021
	As reported £m	Restructuring costs £m	Pro-forma excluding restructuring costs £m		As reported £m	Restructuring costs £m	Pro-forma excluding restructuring costs £m
Headline operating profit	417	-	417		372	21	393
Headline operating cash-flow	318	14	332		486	24	510
Headline operating cash conversion	76%		80%		130%		129%

Reconciliation of free cash-flow to net movement in cash and cash-equivalents:

	Year ended 31 July 2022 £m	Year ended 31 July 2021 £m
Free cash-flow	130	284
Investment in financial assets and acquisition of businesses	-	(83)
Disposal of businesses and discontinued operations	1,331	-
Other net cash-flows used in financing activities (note: repayment of lease liabilities is included in free cash-flow)	(937)	( 138 )
Net decrease in cash and cash equivalents for discontinued operations	16	28
Net increase/(decrease) in cash and cash equivalents	540	91

29 ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS

The Group uses several alternative performance measures ('APMs') in order to provide additional useful information on underlying trends and the performance and position of the Group. APMs are non-GAAP and not defined by IFRS; therefore, they may not be directly comparable with other companies' APMs and should not be considered a substitute for IFRS measures.

The Group uses these measures, which are common across the industry, for planning and reporting purposes, to enhance the comparability of information between reporting periods and business units. The measures are also used in discussions with the investment analyst community and by credit rating agencies.

We have identified and defined the following key measures which are used within the business by management to assess the performance of the Group's businesses:

APM term	Definition and purpose
Capital employed	Capital employed is a non-statutory measure of invested resources. It comprises statutory net assets and is adjusted as follows: •  to add goodwill recognised directly in reserves in respect of subsidiaries acquired before 1 August 1998; •  to eliminate the Group's investment in ICU Medical, Inc equity and deferred consideration contingent on the future share price performance of ICU Medical, Inc; and •  to eliminate post-retirement benefit assets and liabilities and non-headline litigation provisions related to John Crane, Inc. and Titeflex Corporation, both net of deferred tax, and net debt. It is used to monitor capital allocation within the Group. See below for a reconciliation from net assets to capital employed.
Capital expenditure	Comprises additions to property, plant and equipment, capitalised development and other intangible assets, excluding assets acquired through business combinations, see note 1 for an analysis of capital expenditure. This measure quantifies the level of capital investment into ongoing operations.
Divisional headline operating profit ('DHOP')	DHOP comprises divisional earnings before central costs, finance costs and taxation. DHOP is used to monitor divisional performance. A reconciliation of DHOP to operating profit is shown in note 1.
Free cash-flow	Free cash-flow is calculated by adjusting the net cash inflow from operating activities to include capital expenditure, the repayment of lease liabilities, the proceeds from the disposal of property, plant and equipment and the investment in financial assets relating to operating activities and pensions financing outstanding at the balance sheet date. The measure shows cash generated by the Group before discretionary expenditure on acquisitions and returns to shareholders. A reconciliation of free cash-flow is shown in note 28.
Gross debt	Gross debt is total borrowings (bank, bonds and lease liabilities). It is used to provide an indication of the Group's overall level of indebtedness. See note 18 for an analysis of gross debt.
Headline	The Group has defined a 'headline' measure of performance that excludes material non-recurring items or items considered non-operational/trading in nature. Items excluded from headline are referred to as non-headline items. This measure is used by the Group to measure and monitor performance excluding material non-recurring items or items considered non-operational. See note 3 for an analysis of non-headline items.
Headline EBITDA	EBITDA is a widely used profit measure, not defined by IFRS, being earnings before interest, taxation, depreciation and amortisation. Following the completion of the sale of Smiths Medical, headline EBITDA for FY2022 has been presented on a continuing operations basis. A reconciliation of headline operating profit to headline EBITDA is shown in the note below.
Headline EBITDA before restructuring costs	Headline EBITDA, as defined above, is adjusted to exclude restructuring costs from the Group's strategic restructuring programme which commenced in FY2020. Following the completion of the sale of Smiths Medical, headline EBITDA before restructuring costs for FY2022 has been presented on a continuing operations basis. A reconciliation of headline EBITDA to headline EBITDA before restructuring costs and write-downs is shown in the note below.
Headline operating profit excluding restructuring	Headline operating profit is adjusted for strategic restructuring programme costs and write-downs. See note 2 for a reconciliation. This measure of profitability is used by the Group to measure and monitor performance.
Net debt	Net debt is total borrowings (bank, bonds and lease liabilities) less cash balances and derivatives used to manage the interest rate risk and currency profile of the debt. This measure is used to provide an indication of the Group's overall level of indebtedness and is widely used by investors and credit rating agencies. See note 18 for an analysis of net cash/(debt).
Non-headline	The Group has defined a 'headline' measure of performance that excludes material non-recurring items or items considered non-operational/trading in nature. Items excluded from headline are referred to as non-headline items. This is used by the Group to measure and monitor material non-recurring items or items considered non-operational. See note 3 for an analysis of non-headline items.
Operating cash-flow	Comprises free cash-flow and excludes cash-flows relating to the repayment of lease liabilities, interest and taxation. The measure shows how cash is generated from operations in the Group. A reconciliation of operating cash-flow is shown in note 28.
Operating profit	Operating profit is earnings before finance costs and tax. A reconciliation of operating profit to profit before tax is shown on the income statement. This common measure is used by the Group to measure and monitor performance.
Return on capital employed ('ROCE')	Smiths ROCE is calculated over a rolling 12-month period and is the percentage that headline operating profit represents of the monthly average capital employed on a rolling 12-month basis. This measure of return on invested resources is used to monitor performance and capital allocation within the Group. See below for Group ROCE and note 1 for divisional headline operating profit and divisional capital employed.

The key performance indicators ('KPIs') used by management to assess the performance of the Group's businesses are as follows:

KPI term	Definition and purpose
Dividend cover - headline	Dividend cover is the ratio of headline earnings per share (see note 5) to dividend per share (see note 25). This commonly used measure indicates the number of times the dividend in a financial year is covered by headline earnings.
Earnings per share ('EPS') growth	EPS growth is the growth in headline basic EPS (see note 5), on a reported basis. EPS growth is used to measure and monitor performance.
Free cash-flow (as a % of operating profit)	This measure is defined as free cash-flow divided by headline operating profit averaged over a three-year performance period. This cash generation measure is used by the Group as a performance measure for remuneration purposes.
Greenhouse Gas Emissions (GHG) reduction	GHG reduction is calculated as the percentage change in normalised Scope 1 & 2 GHG emissions. Normalised is calculated as tCO2e per £million of revenue. This measure is used to monitor environmental performance.
Gross Vitality	Gross Vitality is calculated as the percentage of revenue derived from new products and services launched in the last five years. This measure is used to monitor the effectiveness of the Group's new product development and commercialisation.
My Say engagement score	The overall score in our My Say employee engagement survey. The bi-annual survey is undertaken Group-wide. This measure is used by the Group to monitor employee engagement.
Operating cash conversion	Comprises headline operating cash-flow, excluding restructuring costs, as a percentage of headline operating profit. This measure is used to show the proportion of headline operating profit converted into cash-flow from operations before investment, finance costs, non-headline items and taxation. The calculation is shown in note 28.
Operating profit margin	Operating profit margin is calculated by dividing headline operating profit by revenue. This measure is used to monitor the Group's ability to drive profitable growth and control costs.
Organic growth	Organic growth adjusts the movement in headline performance to exclude the impact of foreign exchange, restructuring costs and acquisitions. Organic growth is used by the Group to aid comparability when monitoring performance.
Organic revenue growth (remuneration)	Organic revenue growth (remuneration) is compounded annualised growth in revenue calculated on an underlying basis.  The measure used for remuneration differs from organic revenue growth in that it is calculated on a compounded annualised basis. This measure has historically been used by the Group for aligning remuneration with business performance.
Percentage of senior leadership positions taken by females	Percentage of senior leadership positions taken by females is calculated as the percentage of senior leadership roles (G14+ group) held by females. This measure is used by the Group to monitor diversity performance.
R&D cash costs as a % of sales	This measure is defined as the cash cost of research and development activities as a percentage of revenue. Innovation is an important driver of sustainable growth for the Group and this measures our investment in research and development to drive innovation.
Ratio of capital expenditure to depreciation and amortisation	Represents the amount of capital expenditure as a proportion of the depreciation and amortisation charge for the period. This measure shows the level of reinvestment into operations.
Recordable Incident Rate (RIR)	Recordable Incident Rate is calculated as the number of recordable incidents - where an incident requires medical attention beyond first aid - per 100 colleagues, per year across Smiths. This measure is used by the Group to monitor health and safety performance.

Capital employed

Capital employed is a non-statutory measure of invested resources. It comprises statutory net assets adjusted to add goodwill recognised directly in reserves in respect of subsidiaries acquired before 1 August 1998 of £478m (FY2021: £787m), to eliminate the Group's investment in ICU Medical, Inc equity and deferred consideration contingent on the future share price performance of ICU Medical, Inc and to eliminate post-retirement benefit assets and liabilities and non-headline litigation provisions related to John Crane, Inc. and Titeflex Corporation, both net of related tax, and net debt.

	Notes	31 July 2022 £m	31 July 2021 £m
Net assets		2,721	2,423
Adjust for:
Goodwill recognised directly in reserves		478	787
Retirement benefit assets and obligations	8	(194)	(413)
Tax related to retirement benefit assets and obligations		57	108
John Crane, Inc. litigation provisions and related tax	23	172	158
Titeflex Corporation litigation provisions and related tax	23	40	36
Investment in ICU Medical, Inc equity	14	(364)	-
Deferred contingent consideration	14	(19)	-
Net debt (FY2021: includes £4m of net cash in discontinued operations)	18	150	1,018
Capital employed		3,041	4,117

Return on capital employed ('ROCE')

	Notes	Year ended 31 July 2022 £m	Year ended 31 July 2021 represented* £m
Headline operating profit for previous 12 months - continuing operations		417	372
Restructuring costs		-	21
Headline operating profit before restructuring costs - continuing operations		417	393
Average capital employed - continuing operations (excluding investment in ICU Medical, Inc equity)	1	2,940	2,830
ROCE		14.2%	13.9%

*   Following the completion of the sale of Smiths Medical, ROCE for 31 July 2021 has been represented to exclude restructuring costs and discontinued operations from headline operating profit and average capital employed. The 31 July 2021 figures have been represented to aid the period on period comparability for this forward-looking measure.

Credit metrics

Smiths Group monitors the ratio of net debt to headline EBITDA as part of its management of credit ratings; see note 26 for details. This ratio is presented for the whole Group, including discontinued operations, and is calculated as follows:

Headline earnings before interest, tax, depreciation and amortisation (headline EBITDA)

	Notes	Year ended 31 July 2022 Continuing operations £m	Year ended 31 July 2021 Total operations* £m
Headline operating profit		417	372
Headline operating profit of discontinued operations	27	-	177
Exclude:
- depreciation of property, plant and equipment	12	38	40
- depreciation of right of use assets	13	30	32
- amortisation and impairment of development costs	10	3	7
- amortisation of software, patents and intellectual property	10	7	7
Headline EBITDA		495	635
Add back: restructuring costs and write-downs (FY2021 comparative includes £9m in discontinued operations)	2	-	30
Headline EBITDA before restructuring costs and write-downs		495	665

Ratio of net debt to headline EBITDA - total Group including discontinued operations

	Notes	Year ended 31 July 2022 Continuing operations £m	Year ended 31 July 2021 Total operations* £m
Headline EBITDA		495	635
Net debt (FY2021 comparative includes £4m of net cash in discontinued operations)	18	150	1,018
Ratio of net debt to headline EBITDA		0.3	1.6

* The figures for the comparative period in the credit metrics tables above include discontinued operations.

30 POST BALANCE SHEET EVENTS

Details of the proposed final dividend announced since the end of the reporting period are given in note 25.

31 AUDIT EXEMPTION TAKEN FOR SUBSIDIARIES

The following subsidiaries are exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of Section 479A of that Act for FY2022.

Company name	Company number			Company name	Company number
EIS Group Plc	61407			Smiths Detection Investments Limited	5146644
Flexibox International Limited	394688			Smiths Finance Limited	7888063
Flex-Tek Group Limited	11545405			Smiths Group Finance EU Limited	10440573
Graseby Limited	894638			Smiths Group Finance US Limited	10440608
SI Properties Limited	160881			Smiths Group Innovation Limited	10953689
SITI 1 Limited	4257042			Smiths Interconnect Group Limited	6641403
Smiths Detection Group Limited	5138140			Smiths Pensions Limited	2197444

 

END

 

 

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