Interim Results

Smiths Group PLC 15 March 2006 Smiths Group: Interim Results 2006 Highlights • Sales increased by 19% to £1,590m in the first half of the year • Headline operating profit up 22% to £194m, headline EPS up 18% to 24.0p • Statutory operating profit up 19% to £188m, EPS up 12% to 23.7p • Cash conversion at 90% in the first half, with working capital reduced • Company-funded R&D at 6% of sales, driving future growth and returns • Interim dividend increased by 6.5% to 9.85p • Aerospace sales up 10% with continued investment for future returns • Strong sales and profit growth in Detection, with technology base broadened • Underlying sales growth of 6% in Medical; Medex integration on track • Increased sales and margins in Specialty Engineering Commenting on the results, Keith Butler-Wheelhouse, Chief Executive said: 'For the first half of 2006, Smiths has recorded another period of strong growth. Headline pre-tax profit grew by 18%, following the 18% increase in the 2005 full year. We have improved the operating margin, generated a robust cash-flow and stepped up our investment to drive future sales and profits. Market conditions are positive, and we expect to sustain the pace of growth through the second half. The dividend increase reflects the Board's confidence that Smiths will continue to perform well.' Media: Chris Fox Investors: Russell Plumley +44 (0) 20 8457 8403 +44 (0) 20 8457 8203 chris.fox@smiths-group.com russell.plumley@smiths-group.com A meeting with analysts will be webcast at 9:00am UK time today on www.smiths-group.com/interims2006 and archived there soon after the event. A short interview with the Chief Executive can be seen on the same url or on www.cantos.com. Results (unaudited) (6 months ended 31 January) 2006 2005 £m Sales 1,590 1,338 +19% Operating profit - headline* 194 158 +22% - statutory 188 158 +19% Pre-tax profit - headline* 183 155 +18% - statutory 179 162 +11% Basic EPS (p) - headline* 24.0p 20.4p +18% - statutory 23.7p 21.2p +12% Dividend (pps) 9.85p 9.25p +6.5% * In addition to statutory reporting, Smiths Group reports on a headline basis, a measure which shows underlying performance. Headline profit is after charging restructuring costs, but excludes exceptional items, amortisation of acquired intangible assets and financing gains or losses from currency hedging. In these first interim accounts since adopting International Financial Reporting Standards, Smiths Group recorded pre-tax profit of £179m for the six months ended 31 January 2006, up 11% on this statutory basis compared with the same period a year earlier. To give a clearer picture of underlying performance, the remainder of this report refers to the results on a headline basis. Headline performance Smiths Group continued to grow strongly in the first half of its 2006 financial year, benefiting from organic growth, the inclusion of recent acquisitions and productivity gains, which together contributed to an improved operating margin. Since adopting its Full Potential initiative two years ago, Smiths' strong sales and profit growth has been accompanied by higher investment in product development and acquisitions to strengthen market presence. While reinforcing leadership positions in aerospace and in medical devices, the company has established a significant presence in the detection, interconnect and oil & gas sectors, fuelling its expansion over this period. With a robust cash-flow and a strong balance sheet, the company has the resources to continue investing for growth and returns in the years ahead. Sales for the six months were £1,590m. This was 19% higher than for the comparable period a year ago, of which 7% came from underlying growth and the balance from acquisitions and currency translation benefits. Sales in all four divisions were well ahead, as the company benefited from rising demand and a competitive position in each of its markets. Headline operating profit, at £194m, increased by 22% on the prior period, and the operating margin for the period was 12.2% (2005: 11.8%). Headline operating profit is after charging £9m (£8m) for restructuring in Aerospace and Medical. In earlier years, restructuring in these divisions was reported as an exceptional item. The stronger US dollar contributed to a currency translation benefit of £36m on sales (3%) and £5m on profit (3%). Headline profit before tax increased by 18% in this period, after interest costs of £27m and a pensions financing credit of £16m. Headline earnings per share increased by 18% to 24.0p. The company's effective tax rate on headline profit for the period was 26%. Items not included in the headline results reduced statutory profit before tax by £4m, comprising charges of £3m for the integration of Medex (acquired last April) and £8m for the amortisation of intangible assets arising from acquisitions, and benefits of £2m for the foreign exchange impacts of currency hedging and £5m from profit on disposal of businesses. The Board has raised the interim dividend by 6.5% to 9.85p. It will be paid on 21 April to shareholders listed on the register on 24 March. The ex-dividend date is 22 March. As indicated six months ago, the company was targeting strong cash generation in this period, and the operating cash-flow of £174m represents a 90% conversion from headline operating profit. Operating cash is measured before acquisition integration and after expenditure on property, plant and equipment and on capitalised development costs. There was a £31m reduction in working capital, despite increased inventories in the expectation of strong growth in the second half. Free cash-flow, after interest and tax but before acquisitions and dividends, was £93m, compared with £36m a year earlier. Net debt was £970m, up £39m from the start of the year, after dividend payments and acquisitions. Smiths is investing in developing new products to drive future growth. Company-funded R&D rose to £95m or 6% of sales (2005: £72m, 5%). Customer-funded R&D also increased, to £70m (£63m). Smiths capitalised £49m (£25m) of its development expenditure and amortised £6m (£4m) in this period. The process of acquiring businesses which strengthen market presence has continued. In August, Smiths paid £4m for Farnam Custom Products, a US company which extends Flex-Tek's product range. In September, the company paid £19m for Millitech Inc, a US business specialising in millimetre wave technologies for communications systems, complementing Smiths' Interconnect activities. In November, the company acquired Livewave Inc for £9m. This US business enhances Smiths Detection's ability to network the sensors used in wide-area security systems. In February, Smiths completed the £15m acquisition of Lorch Microwave LLC, a US specialist in microwave filters, products which fit neatly into the Interconnect range. In August, Smiths transferred Smiths Heimann Biometrics GmbH into Cross Match Technologies Inc, in exchange for a minority equity holding in the enlarged Cross Match. Disposals of a number of small businesses generated £5m in cash in the half year. Productivity, in terms of sales per employee, improved as a result of business restructuring. Average employment in the half year was 32,000, an increase of 1%. Higher input costs, including raw materials such as high performance alloys used in jet engine components, plastics used in medical devices and fibreglass used in flexible ducting, were largely passed on. Smiths generated 57% of its sales by origin and 70% of its headline operating profit in North America (US, Canada and Mexico). Aerospace £m 2006 2005 Sales 559 507 Headline operating profit 43 45 Smiths Aerospace sales grew by 10%, reflecting strong demand from both commercial and defence customers. However, headline operating profit fell by 4%, resulting in a margin of 8% (2005: 9%). Profitability was held back by an increase in development costs charged to profit. Additionally, UK exports in this period had been secured at less favourable exchange rates than in the prior period. Smiths is a first-tier supplier of integrated systems to the aircraft prime manufacturers. As the primes consolidate their supply chains, the company is taking on greater project management responsibilities and raising its investment in R&D. The rewards are technology leadership with competitive advantage, and a more strategic level of partnership with key customers, with the prospect of improved growth and profitability. The higher R&D included three key programmes, the Airbus A380, the Boeing 767 Tanker and the Boeing 787 Dreamliner, which will drive long-term growth. They provide entry into market segments where the company had not previously competed. Development of the A380 has now been largely completed. The first B767 Tankers are scheduled for delivery later this year, and a decision on how to replace the US tanker fleet is awaited. Development of the Smiths common core computing system for the Boeing 787 continues, with the opportunity to migrate this technology to other new aircraft. With substantial orderbooks for the two commercial aircraft, development costs are being capitalised. The Tanker development costs are being charged against Aerospace profit. Military sales in this period continued to increase, and the outlook in the defence sector is positive. The outcome of the recent Quadrennial Defense Review by the US government was favourable for the company. The key programmes for Smiths remain funded, including the F-18, F-22 and F-35 JSF combat aircraft, the C-17 and C-130J transporters and the Apache Longbow helicopter. Demand from airline customers for spares and repairs remains healthy. Smiths Aerospace has formed a partnership with Aviall Services to distribute the complete range of Smiths commercial spare parts. This agreement will make a positive contribution from the outset and is expected to cover sales totalling $2 billion over the next ten years, taking advantage of Aviall's specialist global network and advanced logistics, and will improve working capital efficiency. The engine components business performed strongly. Investment is being made in additional capacity in North Carolina to meet rising demand and greater outsourcing by engine makers. At the same time output from the Suzhou, China plant has increased. The rising cost of special alloys used to make jet engine components has been largely borne by customers. In summary, the outlook for Smiths Aerospace is for sustained growth and increased returns, driven by positive market dynamics and by the increase in business resulting from recent R&D investment to secure new contracts in both commercial and defence sectors. Detection £m 2006 2005 Sales 171 153 Headline operating profit 25 22 Smiths Detection's sales in the first half increased by 12%, with headline operating profit 12% ahead, giving a margin of 14%. The improvement came from strong organic growth across all of the division's activities. Smiths Detection is a leading supplier of equipment which helps identify dangerous or illegal materials that threaten the state, its citizens or commercial enterprise. Its products cover a wider range of applications of the core technologies than any competitor, and its success is not dependent on sales in any one sector. While transportation is the largest area of business, sales in other markets, including ports & borders, military and commercial infrastructure and first responders are all significant and continue to grow. Sales to transportation and airport authorities, accounting for one third of the division's total, increased steadily, and new business secured in this period will sustain growth ahead. To help the US Transportation Security Administration automate and speed up the search for explosives on passengers, 30 Sentinel II portals have been deployed at 13 international airports across the US, from Washington, DC to Sacramento, CA. Elsewhere, airport operators around the world continue to acquire Smiths equipment, including in this period those in Thailand, China, Malaysia, Singapore, India, Pakistan, Japan, Australia and New Zealand. The company's X-ray and trace equipment is also being installed widely beyond airports. The Australian Prison Service, for instance, is using it to prevent visitors bringing drugs or weapons into its premises. There has been strong growth in the ports & borders business, which supplies large X-ray systems to check containers in transit. Turkey, Abu Dhabi and Oman placed orders to screen shipments through their borders and airports. The Belgian Customs are deploying new fixed and mobile scanners at Zeebrugge and Antwerp. They are the first in Europe to include a material discrimination capability, warning customs officers of the possible presence of narcotics or explosives. The Smiths systems for this market can also check for radioactive sources during the inspection process. Smiths is now often bidding with infrastructure project management partners for national government programmes which are funded from revenues collected. The opportunities at this level are attractive and will sustain growth ahead. Military sales can vary from one period to the next, as substantial one-off orders are fulfilled. In the past six months deliveries have been steady, sustained by two large, continuing contracts: deliveries of the lightweight chemical agent detector (LCAD) worn by British soldiers are on schedule; and in the US, the ACADA chemical agent detector programme for the US Army is going well, with a follow-on order secured. Among other applications of detection technologies, the company is establishing a good position in the market for monitoring the integrity of food processing. A new US facility to make this specialised equipment has been opened in Alcoa, TN, and a European sales and service centre has been located in Grimsby, close to the UK's main food producers. Product development continues at a rapid pace. A new Hi-Scan X-ray system for airport security checkpoints will help to identify and pinpoint explosives in carry-on baggage. A further refinement of the Sentinel II walk-through explosives detection system has integrated the compressor and all peripherals into the main unit, considerably reducing its footprint. An innovative people-screening system, Tadar, will use passive millimetre wave technology to reveal potentially threatening items hidden under clothing, eliminating pat-down searches and speeding the flow of people entering a secure area. The company is attracting government funding for a number of its development programmes. Looking ahead, Smiths Detection is transitioning from selling stand-alone equipment to offering more highly networked systems, integrating sensors and surveillance across a wide area for better management of security. The recent acquisition of Livewave enhances the capability to meet this requirement. Medical £m 2006 2005 Sales 355 237 Headline operating profit 61 38 Smiths Medical sales increased by 50%, with the inclusion of Medex, acquired in March 2005, accounting for much of the rise. The margin for this period improved from 16% to 17%. Underlying sales were 6% ahead, reflecting organic growth in critical care, safety devices and medication delivery. Medex contributed an operating profit of £21m to the total. Business was strong in the US, where 58% of divisional sales are generated. The world market for devices and equipment of the type supplied by Smiths amounts to some $7 billion and is growing consistently at 5% per annum. The company has respected brands, competitive positions, considerable expertise in design and manufacture and a worldwide sales network. The programme to achieve synergies from the Medex acquisition is proceeding satisfactorily, and contributed to the division's better margin. The Medex range has been fully integrated, with two thirds of its products in safety devices and one third in critical care. Sales and marketing were integrated last year, and in this period customer service and back office functions for all critical care and safety products in the US were consolidated into Dublin, OH. Rationalisation of manufacturing has now commenced, with production from two other US plants being brought into St Paul, MN and Dublin, OH. Financing and tax synergies from the acquisitions have also been obtained. Reorganisation of the division's global distribution system is under way. Working with logistics specialists, a European centre is being established in Holland to serve all markets outside the US, eliminating 6 existing national warehouses. This will enable the business to reduce inventories while still giving the required level of service to customers. Sales of single-use devices moved ahead. In January, Smiths signed a three-year agreement with Novation, which offers contracting services to 2,500 VHA and UHC hospitals throughout the US, under which the company will be one of the two suppliers of regional anaesthesia trays. These are standard or customised kits which provide all the necessary products for clinicians to perform regional anaesthesia. Sales of temperature monitoring equipment and disposables grew strongly, benefiting from regulatory issues affecting a competitor. A valuable contract to supply the Medfusion infusion pump to the Massachusetts General hospital group was won in this period. Safety devices continue to sell well in the US. Combining the Smiths and Medex products has improved the range's competitive strength and is generating incremental sales. Legislation, which has driven the growth of safety devices in the US, has not yet been introduced in other countries. Growth in medication delivery was more modest in this period. After withdrawing its own product, Baxter is filling the gap in its range by sourcing an ambulatory pump from Smiths, which will in turn generate an additional revenue stream from disposables. Smiths has recently introduced its innovative Cleo device which helps diabetics insert and attach the delivery line from Cozmo and other insulin pumps. An order for Pneupac ventilators was received from the Indian Army for home defence use. A new divisional head for Medical, Srini Seshadri joined on 1 March. He comes from GE Healthcare where he had held progressively more senior roles over a 20 year period, most recently as Chief Marketing Officer for GE Healthcare Technologies. He brings a breadth of global business experience, deep knowledge of the medical devices industry and a track record of successfully integrating acquisitions. Across Smiths Medical, business processes are being standardised and this is already achieving improved productivity. The addition of Medex has brought several state-of-the art manufacturing facilities. Recently-introduced products now comprise a high proportion of the range and there is a good flow of innovative devices being launched. Together, these features provide the opportunity for accelerated growth. Specialty Engineering £m 2006 2005 Sales 504 441 Headline operating profit 64 53 Specialty Engineering sales increased by 14% and profit by 21%, improving the divisional margin from 12% to 13%. For the first time, the company is reporting the performance of John Crane separately, although it remains managed as part of Specialty Engineering. John Crane is the leading supplier of seals and couplings used in rotating mechanical equipment for applications including oil, gas and petrochemical industries, food processing and pulp & paper manufacturing. Its sales increased by 12% to £245m (2005: £218m) and its headline profit increased by 22% to £29m (£24m) over the comparable period, the result of strong demand from customers around the world. The margin improved from 11% to 12%. The oil producers are operating their plants at maximum capacity, and this drives service revenues, which are more than half of total sales. These customers are also investing heavily to increase output, extending John Crane's original equipment (OEM) orderbook. Business throughout the Americas has been strong, reflecting the buoyant US economy and increased oil production from Canadian and Venezuelan sources. Following the disruption caused by hurricane Katrina, demand for replacement items increased. Business in Europe, Africa and Asia also increased, although the Middle East remains a difficult area for large OEM projects due to security concerns. Expansion into new territories is proceeding steadily: the joint venture in Russia, John Crane Iskra is making progress; in China, the partner's minority interest in John Crane Tianjin was purchased in December; and a 45,000 sq ft Indian centre of excellence has just been opened in Bangalore. The opportunities in all three countries are considerable. With efficient operations, including low cost manufacturing in Mexico and the Czech Republic, strong customer relationships built on Performance Plus programmes, and a global service network, John Crane is well-positioned to take advantage of continuing growth in its markets. The other Specialty Engineering businesses are also performing well. Interconnect, making components to protect and connect electronic equipment, has benefited from a resurgence of investment in mobile phone networks, and from continued spending on advanced military communications. Key developments underway include connectors and electronic filters for the second phase of Eurofighter Typhoon, cables and assemblies for F-35 JSF, satcom antennae for the Boeing 787 and microwave assemblies for Raytheon's MFRFS network-centric system. Recently-acquired Millitech has been awarded the contract to make QinetiQ's Tarsier system, which detects debris on airport runways. In the medical field, high-grade connectors are being designed for GE's MRI machines. All of these programmes will sustain growth. In addition to US and European plants, Interconnect has low-cost manufacturing in Costa Rica and China, the latter supplying commercial-grade components for applications such as mobile telephony, which is expanding rapidly in the country. Recent acquisitions, including Millitech and Lorch, have strengthened the range of complementary components offered by Interconnect, enabling it to meet the most demanding specifications. Sales and profit in Flex-Tek were well ahead of the comparable period. The business supplies hoses, ducting and pipe connectors used in HVAC installations, domestic appliances and many industrial applications, and the robust performance was driven by strong demand from customers in the US. Additional low-cost manufacturing in Malaysia is helping sustain margins, and raw material cost increases are being passed on. Sales and profit were steady in the business supplying marine radar displays and electronic or paper charts for large ships. In total, Specialty Engineering is benefiting from a positive economic environment, particularly in the US. While driving top line growth, the division has controlled its costs to achieve higher productivity in all of its operations. Changes to the Board Lord Robertson of Port Ellen, a non-executive director, resigned from the Board at the end of February due to other commitments. Prospects The outlook for the year is positive. Market conditions are favourable, and Smiths continues to benefit from the strength of its competitive positions. The company expects to sustain the pace of growth through the second half. Continuous investment in the business, selective acquisitions and a focus on cost and capital management will drive future growth and returns. Tables attached - Income statement - Statement of recognised income & expense - Summarised balance sheet - Cash-flow statement - Notes to the accounts Copies of the interim report will be sent to shareholders shortly, and will be available at the company's registered office, 765 Finchley Road, London NW11 8DS. -o- Consolidated Income Statement (unaudited) 6 months ended 31 January Year Ended 2006 2005 31 July 2005 (restated) (restated) £m £m £m Revenue (note 2) 1,589.5 1,337.6 3,005.4 Cost of sales (950.5) (807.5) (1,814.7) __________ ____________ _____________ Gross profit 639.0 530.1 1,190.7 Sales and distribution costs (164.8) (145.4) (283.3) Administrative expenses (290.9) (226.8) (537.9) Profit on disposal of businesses (note 7) 4.8 8.7 __________ ____________ _____________ Operating profit (note 2) 188.1 157.9 378.2 Interest receivable 2.5 6.1 15.0 Interest payable (29.5) (16.8) (48.0) Other financing gains 1.7 7.0 5.6 Retirement benefits - return on plan assets 94.8 89.4 174.3 - interest cost (78.7) (81.9) (159.2) __________ ____________ _____________ Finance (costs) / income (9.2) 3.8 (12.3) Share of post tax profit of associate 0.1 __________ ____________ ____________ Profit before taxation 179.0 161.7 365.9 Comprising: headline profit before taxation (note 3) 182.7 155.2 394.0 exceptional operating items (note 4) 2.1 (28.0) amortisation of acquired intangible assets (note (7.5) (0.5) (5.7) 8) financing gains 1.7 7.0 5.6 __________ ____________ _____________ 179.0 161.7 365.9 Taxation (45.5) (42.6) (94.1) __________ ____________ _____________ Profit for the period 133.5 119.1 271.8 __________ ____________ _____________ Profit for the period attributable to equity shareholders of the parent company 133.5 119.1 271.8 __________ ____________ _____________ Earnings per share (note 5) Basic 23.7p 21.2p 48.3p Diluted 23.5p 21.1p 48.2p __________ ____________ _____________ Dividend per share (see note 15) Interim 9.85p 9.25p 9.25p Final 19.75p Note The results for the periods ended 31 January 2005 and 31 July 2005 have been restated to conform to International Financial Reporting Standards as adopted in the EU (see note 1). Consolidated Statement of Recognised Income and Expense (unaudited) 6 months ended 31 January Year Ended 2006 2005 31 July 2005 (restated) (restated) £m £m £m Exchange (loss) / gain (1.7) (12.9) 50.2 Taxation recognised on exchange losses - Current 5.9 Actuarial losses on retirement benefit schemes (73.4) (23.4) Taxation recognised on actuarial losses - Deferred 22.0 11.8 Cash-flow hedges - Gains taken to equity 2.6 - Transfers to profit for the period (0.1) ____________ __________ _____________ Net income recognised directly in equity (50.6) (12.9) 44.5 Profit for the period 133.5 119.1 271.8 ____________ __________ _____________ Total recognised income and expense for the period Attributable to equity shareholders of Smiths Group plc 82.9 106.2 316.3 ____________ __________ _____________ Effect of change in accounting policy (IAS 32 and IAS 39) (6.8) ____________ Note The results for the periods ended 31 January 2005 and 31 July 2005 have been restated to conform to International Financial Reporting Standards as adopted in the EU (see note 1). Consolidated Balance Sheet (unaudited) 31 January 31 January 31 July 2006 2005 2005 (restated) (restated) £m £m £m Non-current assets Intangible assets (note 8) 1,578.4 920.1 1,481.7 Property, plant and equipment 504.5 420.6 502.8 Investment accounted for using the equity method 13.7 Financial assets (note 9) 330.1 327.9 328.5 Retirement benefit assets 106.6 110.6 134.6 Deferred tax assets 251.2 183.9 199.1 Trade and other receivables 17.8 7.1 24.7 ___________ __________ _________ 2,802.3 1,970.2 2,671.4 Current assets Inventories 600.4 481.6 564.2 Trade and other receivables 645.2 620.4 720.5 Financial assets 6.4 Cash and cash equivalents (note 11) 359.9 343.0 60.9 Assets held for sale (note 10) 4.4 ___________ __________ _________ Total assets 4,418.6 3,415.2 4,017.0 Non-current liabilities Financial liabilities: Borrowings (note 11) (964.5) (442.6) (937.7) Financial derivatives (3.0) Provisions for liabilities and charges (26.4) (25.5) (26.4) Retirement benefit obligations (343.0) (344.0) (371.2) Deferred tax liabilities (130.4) (127.1) (101.2) Trade and other payables (194.6) (92.3) (133.2) Current liabilities Financial liabilities: Borrowings (note 11) (385.9) (292.0) (54.0) Financial derivatives (12.6) Provisions for liabilities and charges (59.4) (72.8) (64.1) Trade and other payables (686.2) (593.9) (684.6) Current tax payable (145.4) (120.1) (160.8) ___________ __________ _________ Total liabilities (2,951.4) (2,110.3) (2,533.2) ___________ __________ _________ Net Assets 1,467.2 1,304.9 1,483.8 ___________ __________ _________ Consolidated Balance Sheet (unaudited) 31 January 31 January 31 July 2006 2005 2005 (restated) (restated) £m £m £m Shareholders' equity Share capital 141.4 140.6 140.9 Share premium account 211.6 190.4 197.5 Revaluation reserve 1.7 1.7 1.7 Merger reserve 234.8 234.8 234.8 Retained earnings 874.8 737.4 908.9 Hedge reserve 2.9 ___________ __________ _________ Total shareholders' equity (note 12) 1,467.2 1,304.9 1,483.8 ___________ __________ _________ Note The assets and liabilities for the periods ended 31 January 2005 and 31 July 2005 have been restated (see note 12). CASH-FLOW STATEMENT (unaudited) 6 months ended 31 January Year ended 31 July 2006 2005 2005 (restated) (restated) Note £m £m £m Net cash inflow from operating activities 13 193.2 106.3 319.3 Cash flows from investing activities Capitalisation of development expenditure (48.8) (23.7) (67.4) Capitalisation of other intangible assets (16.5) Purchases of property , plant and equipment (49.3) (48.9) (114.2) Disposals of property, plant and equipment 3.2 1.9 9.3 Acquisition of businesses (32.8) (57.7) (410.0) Disposals of businesses 5.0 0.5 _______ __________ ___________ Net cash flow used in investing activities (139.2) (128.4) (581.8) Cash flows from financing activities Proceeds from issue of ordinary share capital 14.6 11.3 14.6 Dividends paid to equity shareholders (111.3) (102.5) (154.5) Increase / (decrease) in other borrowings 32.5 (8.4) 38.4 _______ __________ ___________ Net cash flow used in financing activities (64.2) (99.6) (101.5) Net decrease in cash and cash equivalents (10.2) (121.7) (364.0) Cash and cash equivalent at 1 August 11.9 421.0 421.0 Exchange differences 0.1 (1.2) (45.1) _______ __________ ___________ Cash and cash equivalents at end of period 1.8 298.1 11.9 _______ __________ ___________ Cash and cash equivalents at end of period comprise: Cash at bank and in hand 344.6 34.4 51.1 Deposits 15.3 308.6 9.8 Bank overdrafts (358.1) (44.9) (49.0) _______ __________ ___________ 1.8 298.1 11.9 _______ __________ ___________ Note The results for the periods ended 31 January 2005 and 31 July 2005 have been restated to conform to International Financial Reporting Standards as adopted in the EU (see note 1). Notes to the accounts (unaudited) 1 Basis of preparation These interim financial statements are the first interim financial statements following the implementation of International Financial Reporting Standards (' IFRS') as adopted by the EU. The information for the periods to 31 January 2005 and 31 July 2005, previously reported to shareholders under UK Generally Accepted Accounting Principles ('UK GAAP'), has been restated to conform to IFRS. These financial statements do not comply with the requirements of IAS 34. These financial statements have been prepared in accordance with accounting policies expected to be followed for the year ending 31 July 2006 and the Listing Rules of the London Stock Exchange. European Union (EU) law requires that the consolidated financial statements for the year ending 31 July 2006 be prepared in accordance with IFRS adopted for use in the EU. This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRS in issue that either are endorsed by the EU and effective at 31 July 2006, or are expected to be endorsed and effective at 31 July 2006, the first annual reporting date at which reporting under EU-adopted IFRS is required. Based on these IFRS, the directors have made assumptions about the accounting policies expected to be applied when the first annual IFRS financial statements are prepared for the year ending 31 July 2006. The EU-adopted IFRS that will be effective in the annual financial statements for the year ending 31 July 2006 are still subject to change and to additional interpretation, and therefore cannot be determined with certainty. In addition, practice in this area is still evolving. Accordingly, the accounting policies for that annual period will be finally determined only when the annual financial statements are prepared for the year ending 31 July 2006. As allowed by IFRS 1 First Time Adoption of IFRS, the international standards IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement were adopted prospectively from 1 August 2005. Therefore, until 31 July 2005, financial instruments were reported under UK GAAP, and the comparative financial statements exclude the impact of these standards. IFRS 1 requires that, upon initial adoption of IFRS, a reconciliation is reported of net assets and equity from amounts previously reported under UK GAAP. On 21 November 2005, an analysis of the impact of adopting IFRS from 1 August 2004 was published on the Company's website www.smiths-group.com/ir. This included income statement (January and July 2005), balance sheet (August 2004, January 2005 and July 2005) and cash flow (July 2005) reconciliations, as well as details of the accounting policies applied in restating the financial statements for the year ended 31 July 2005, and as at 1 August 2005. The interim financial statements were approved by the directors on 15 March 2006. 2 Analyses of revenue and operating profit A segmental analysis of profit is possible only to the level of operating profit, as financing activities are not specific to segments. 6 months ended 31 January Year ended a) by business segment 2006 2005 31 July 2005 (restated) (restated) £m £m £m Revenue Aerospace 559.4 507.2 1,146.2 Detection 171.2 152.9 366.5 Medical 355.0 236.7 563.3 Specialty Engineering: Technology Group 259.0 222.6 466.2 John Crane Group 244.9 218.2 463.2 ________ ___________ _____________ 1,589.5 1,337.6 3,005.4 ________ ___________ _____________ Operating profit Aerospace 40.3 44.7 118.5 Detection 29.9 21.8 68.5 Medical 54.6 38.3 57.1 Specialty Engineering: Technology Group 34.1 29.1 69.8 John Crane Group 29.2 24.0 64.3 ________ ___________ _____________ 188.1 157.9 378.2 ________ ___________ _____________ Headline operating profit Aerospace 43.4 45.2 131.0 Detection 24.5 21.8 68.5 Medical 61.4 38.3 87.0 Specialty Engineering: Technology Group 35.0 29.1 63.5 John Crane Group 29.2 24.0 61.9 ________ ___________ _____________ 193.5 158.4 411.9 ________ ___________ _____________ Headline operating profit is stated after charging restructuring as follows: £m £m £m Aerospace 6.5 6.0 16.5 Medical 2.2 1.6 6.4 ________ ___________ _____________ 8.7 7.6 22.9 ________ ___________ _____________ b) by geographical origin £m £m £m Revenue United Kingdom 401.5 367.5 818.4 North America 973.9 770.4 1,736.2 Europe 264.9 227.2 514.7 Other overseas 130.5 104.8 245.2 Inter-company (181.3) (132.3) (309.1) ________ ___________ _____________ 1,589.5 1,337.6 3,005.4 ________ ___________ _____________ Operating profit United Kingdom 9.7 7.5 50.5 North America 124.3 106.9 230.3 Europe 39.6 31.6 66.5 Other overseas 14.5 11.9 30.9 ________ ___________ _____________ 188.1 157.9 378.2 ________ ___________ _____________ Headline operating profit £m £m £m United Kingdom 11.0 7.5 47.5 North America 134.9 107.4 264.6 Europe 33.1 31.6 68.7 Other overseas 14.5 11.9 31.1 ________ ___________ _____________ 193.5 158.4 411.9 ________ ___________ _____________ Headline operating profit is stated after charging restructuring as follows: United Kingdom 2.2 6.4 13.9 North America 6.2 0.7 7.8 Europe 0.2 0.2 Other overseas 0.1 0.5 1.0 ________ ___________ _____________ 8.7 7.6 22.9 ________ ___________ _____________ 3 Headline profit measures The Company seeks to present a measure of underlying performance which is not impacted by exceptional items or items considered non-operational in nature. This measure of profit is described as 'headline' and is used by management to measure and monitor performance. Normal restructuring costs are charged against profits. The following items have been excluded from the headline measure: - Exceptional items - see note 4; - Amortisation of intangible assets acquired in a business combination - the amortisation charge is a non-cash item, and the directors believe that it should be added back to give a clearer picture of underlying performance; and - Other financing gains and losses - these represent the results of derivatives and other financing instruments which do not fall to be hedge accounted under IAS 39. The application of IFRS accounting principles makes this item potentially volatile, and it is therefore excluded to give a clearer picture of the underlying performance. 4 Exceptional operating items Items which are material either because of their size or their nature, and which are non-recurring, are presented within their relevant consolidated income statement category, but highlighted separately within the line 'exceptional operating items'. The separate reporting of exceptional items helps provide a better picture of the company's underlying performance. Items which may be included within the exceptional category include: - Profits/(losses) on disposal of businesses; - Spend on the integration of significant acquisitions; and - Significant goodwill or other asset impairments An analysis of the items presented as exceptional in these financial statements is given below: 6 months ended 31 January Year ended 31 July 2006 2005 2005 £m £m £m Integration of acquisitions (2.7) - (10.4) Patent dispute settlement - - (14.9) Profit on disposal of businesses 4.8 - 8.7 Impairment of goodwill - - (11.4) ____________ ____________ ______________ 2.1 - (28.0) ____________ ____________ ______________ 5 Earnings per share Basic earnings per share are calculated by dividing the profit for the period attributable to equity shareholders of the parent company by the average number of ordinary shares in issue during the period. 6 months ended 31 January Year ended 31 July 2006 2005 2005 £m £m £m Profit for the period 133.5 119.1 271.8 ____________ ____________ ___________ Average number of shares in issue during the period 564,601,013 561,914,824 562,445,323 ____________ ____________ ___________ Diluted earnings per share are calculated in the same manner, using an average number of shares in issue which takes account of existing share options. A reconciliation of basic earnings per share and headline earnings per share is as follows: £m EPS (p) £m EPS (p) £m EPS (p) Attributable to equity shareholders of the parent company 133.5 23.7 119.1 21.2 271.8 48.3 _____ _____ _____ Exclude: integration of acquisitions 2.7 10.4 disposal of businesses (4.8) (8.7) patent dispute settlement 14.9 impairment of goodwill 11.4 amortisation of acquired intangible assets 7.5 0.5 5.7 financing (gains) (1.7) (7.0) (5.6) -_____ _____ _____ 3.7 (6.5) 28.1 less tax (2.1) 2.1 (9.7) _____ _____ _____ 1.6 0.3 (4.4) (0.8) 18.4 3.3 _____ _____ _____ Headline 135.1 24.0 114.7 20.4 290.2 51.6 _____ _____ _____ _____ _____ _____ Headline EPS - diluted (p) 23.8 20.4 51.5 ____ ____ ____ 6 Acquisitions During the period the company made a number of acquisitions; the issued share capital of Livewave, Inc. on behalf of Detection, and the issued share capital of Millitech, Inc., together with the businesses and assets of Farnam and Lorch Microwave LLC on behalf of Specialty Engineering. In addition, the company also acquired the minority interest in a subsidiary company operating in China. The values set out below are provisional pending finalisation of the fair values attributable, and will be finalised in subsequent periods. All acquisitions are wholly owned. Goodwill and net assets in respect of prior year acquisitions have been adjusted by £1.5m and £1.7m as a result of finalising their attributable fair values. Date of acquisition Consideration Goodwill Net assets £m £m £m £m Businesses acquired Farnam 1.8.05 3.5 2.7 0.8 Millitech, Inc. 16.9.05 19.3 9.5 9.8 Livewave, Inc. 28.10.05 8.5 10.2 (1.7) Lorch Microwave LLC 4.1.06 14.5 7.4 7.1 _____________ _________ __________ 45.8 29.8 16.0 _________ __________ Minority interest acquired 1.5 _____________ 47.3 _____________ Consideration: paid during 32.8 the period deferred 14.5 _____________ 47.3 _____________ 7 Disposals The most significant disposal transaction during the period was the sale of the company's interest in Heimann Biometric Systems GmbH to Cross Match Technologies, Inc. in exchange for 43% of the issued share capital in that company, which is regarded as an associate and its results are therefore accounted for on an equity basis. Consideration Net assets Profit (net of costs) on disposal £m £m £m Businesses sold 15.5 10.7 4.8 _____ _____ _____ 8 Intangible assets Acquired Development Intangibles Goodwill costs (see below) Other Total £m £m £m £m £m Cost At 1 August 2005 1,296.1 198.7 141.6 72.2 1,708.6 Exchange adjustments (7.6) (0.3) (0.8) (0.5) (9.2) Transfers (1.1) 1.1 Business combinations 29.8 11.3 41.1 Additions at cost 55.4 25.0 80.4 At 31 January 2006 1,318.3 253.8 151.0 97.8 1,820.9 Amortisation At 1 August 2005 143.5 27.0 8.8 47.6 226.9 Exchange adjustments (0.8) 0.2 (0.2) (0.8) Transfers (1.1) 1.1 Charged 5.8 7.5 3.1 16.4 At 31 January 2006 142.7 33.0 15.2 51.6 242.5 Net book value At 31 January 2006 1,175.6 220.8 135.8 46.2 1,578.4 At 31 July 2005 1,152.6 171.7 132.8 24.6 1,481.7 The net book value of other intangible assets includes £26.4m (31 July 2005 £22.7m) of software. In addition to goodwill, the acquired intangible assets comprise: Patents, licences and Customer trademarks Technology relationships Total £m £m £m £m Cost At 1 August 2005 41.9 64.3 35.4 141.6 Exchange adjustments (0.2) (0.4) (0.2) (0.8) Transfers (1.1) (1.1) Business combinations 6.4 4.9 11.3 At 31 January 2006 48.1 62.8 40.1 151.0 Amortisation At 1 August 2005 1.1 4.7 3.0 8.8 Exchange adjustments Transfers (1.1) (1.1) Charged 1.4 3.2 2.9 7.5 At 31 January 2006 2.5 6.8 5.9 15.2 Net book value At 31 January 2006 45.6 56.0 34.2 135.8 Net book value At 31 July 2005 40.8 59.6 32.4 132.8 9 Non-current financial assets 31 January 31 January 31 July 2006 2005 5005 £m £m £m TI Automotive Limited preference shares 325.0 325.0 325.0 Other trade investments 3.6 2.9 3.5 Financial derivatives 1.5 ____________ ___________ __________ 330.1 327.9 328.5 ____________ ___________ __________ 10 Assets held for sale Assets held for sale comprise assets of a subsidiary company stated at estimated realisable value. 11 Cash and borrowings 31 January 31 January 31 July Fixed Floating 2006 2005 2005 £m £m £m £m £m Cash and cash equivalents Net cash 43.8 343.0 60.9 Impact of cash pools (note 1) 316.1 359.9 343.0 60.9 Borrowings - at cost On demand/under one year Net overdrafts and loans 5.6 43.5 49.1 292.0 54.0 Impact of cash pools (note 1) 316.1 316.1 One to two years 0.4 0.4 0.3 0.4 Two to five years 150.1 513.5 663.6 0.9 635.9 Over five years 215.8 84.7 300.5 441.4 301.4 371.9 957.8 1,329.7 734.6 991.7 Net debt 969.8 391.6 930.8 Borrowings - valuation adjustments (note 2) Interest accrual 23.0 Fair value of swapped debt (2.3) Total borrowings per balance sheet 1,350.4 734.6 991.7 Note 1 IAS 32 requires that cash and overdraft balances within cash pooling systems be reported gross on the balance sheet. Note 2 IAS 39 requires that the carrying value of borrowings includes accrued interest, and the fair value of any interest rate or currency swaps held to hedge the borrowings. The company's measure of 'net debt' is stated before those adjustments. 12 Changes in shareholders' equity Reconciliation between previously reported UK GAAP and IFRS As at As at 31 July 2005 1 August 2004 £m £m Shareholders' equity as reported under UK GAAP 1,204.8 1,122.5 Amendments to inter-company swap accounting (note 1) 35.4 _____________ _____________ 1,240.2 1,122.5 Adjustments to comply with IFRS as reported on 21 November 2005 247.5 158.5 Additional IFRS adjustments: Amendment to creditors (note 2) (5.6) Revisions to fair values in respect of prior year acquisitions (note 3 ) 1.7 _____________ ______________ Shareholders' equity under IFRS 1,483.8 1,281.0 Change in accounting policy to adopt IAS 32 and IAS 39 (6.8) _____________ ______________ Shareholders' equity under IFRS as at 1 August 2005 1,477.0 1,281.0 Note 1 An adjustment to the prior year has been made to amend the accounting of an inter-company swap. The adjustment results in a decrease in creditors of £35.4m and an increase in shareholders' equity of £35.4m. Note 2 During the period since 21 November 2005 the company has made a minor amendment to its previously published IFRS information as a result of emerging interpretations of standards. Note 3 As allowed by IFRS 3, the fair values of assets and liabilities acquired in prior year acquisitions have been finalised. These adjustments result in an increase in goodwill of £1.5m, an increase in other assets of £0.2m and an increase in shareholders' equity of £1.7m. 12 Changes in shareholders' equity (continued) 6 months ended 6 months ended Year ended 31 January 2006 31 January 2005 31 July 2005 £m £m £m At 1 August 1,477.0 1,281.0 1,281.0 Profit for the period 133.5 119.1 271.8 Share-based payment 3.5 2.7 5.0 Deferred taxation benefit thereon 0.5 4.4 16.0 Dividends paid to equity shareholders (111.3) (102.5) (154.5) New share capital subscribed 14.6 7.7 14.6 ESOP Trusts - disposal of company shares - 5.4 5.4 Exchange (losses)/gains (1.7) (12.9) 50.2 Taxation recognised on exchange losses 5.9 Movement on cash flow hedge reserve: Gains taken to equity 2.6 Transfers to profit for the period (0.1) Actuarial gains and losses on retirement benefit schemes (73.4) (23.4) Deferred taxation benefit thereon 22.0 11.8 __________________ ________________ ____________ 1,467.2 1,304.9 1,483.8 __________________ ________________ ____________ 13 Cash flows from operating activities 6 months ended 6 months ended Year ended 31 January 2006 31 January 2005 31 July 2005 £m £m £m Profit before taxation 179.0 161.7 365.9 Net interest payable 27.0 10.7 33.0 Financing (gains) (1.7) (7.0) (5.6) Share of post-tax profit from associate (0.1) Other finance income - retirement benefits (16.1) (7.5) (15.1) _________________ ________________ ____________ 188.1 157.9 378.2 Amortisation of intangible assets 16.4 4.5 41.7 Profit on disposal of business (4.8) (8.7) Depreciation of property, plant and equipment 40.4 35.2 77.0 Share-based payment expense 5.0 3.0 6.3 Retirement benefits 6.3 (3.6) (16.5) (Increase) / decrease in inventories (49.6) (56.9) (89.3) (Increase) / decrease in trade and other receivables 76.5 9.1 (53.7) (Decrease) / increase in trade and other payables (9.8) (5.7) 68.1 Other non-cash movements 14.0 _________________ ________________ ____________ Cash generated from operations 268.5 143.5 417.1 Interest (12.0) 6.3 (19.9) Tax paid (63.3) (43.5) (77.9) _________________ ________________ ____________ Net cash inflow from operating activities 193.2 106.3 319.3 _________________ ________________ ____________ 14 Contingent liabilities In common with many other enterprises of similar size, the Company and its subsidiaries are from time to time engaged in litigation in respect of a variety of commercial issues. As previously reported, John Crane , Inc ('John Crane '), a subsidiary of the Company, is one of many co-defendants in numerous law suits pending in the United States in which plaintiffs are claiming damages arising from exposure to, or use of, products containing asbestos. The John Crane products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of John Crane , the products were safe. John Crane ceased manufacturing products containing asbestos in 1985. John Crane has resisted every case in which it has been named and will continue its robust defence of all asbestos-related claims based upon this 'safe product' defence. In addition John Crane has access to insurance cover which, while it is kept under review, is judged sufficient to meet all material costs of defending these claims for the foreseeable future. As a result of its defence policy, John Crane has been dismissed before trial from cases involving approximately 118,000 claims over the last 27 years. John Crane is currently a defendant in cases involving approximately 169,000 claims. Despite these large numbers of claims, John Crane has had final judgements against it, after appeals, in only 49 cases, amounting to awards of some US$45.5m over the 27 year period. These awards, the related interest and all material defence costs have been met in full by insurance. No provision relating to this litigation has been made in these accounts. 15 Dividends An interim dividend of 9.85p per share (2005 9.25p) has been declared and will be paid on 21 April 2006 to holders of all ordinary shares whose names are registered at close of business on 21 March 2006. The dividend has not been accrued at 31 January 2006 in accordance with IFRS. 16 Comparative figures This financial information does not comprise full financial statements within the meaning of Section 240 of the Companies Act 1985. Figures relating to the year ended 31 July 2005 are abridged. Full accounts of Smiths Group plc for that period, prepared under UK GAAP, have been reported on by the auditors and delivered to the Registrar of Companies. The report of the auditors was not qualified and did not contain statements under section 237 (2) or 237 (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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