PIONEERS
OF PROGRESS
IMPROVING OUR
WORLD THROUGH
SMARTER ENGINEERING
Annual Report
FY2022
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.
We are united by our Purpose. It is what we do,
how we think, and how we will continue to use
our passion for technology and engineering to
be successful in the future.
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CONTENTS
01 Overview
Our Purpose
FY2022 highlights
Our priorities and targets
Our key global markets
Our divisions
02 Strategic Report
Chairman’s statement
Chief Executive Officer’s review
- Our business model
- Our strategy
- Review of the year
Chief Financial Officer’s review
- Divisional review
Key performance indicators
Sustainability at Smiths
Task Force on Climate-related Financial Disclosures
Stakeholders and Section 172 Statement
Non-Financial Information Statement
Risk management
- Principal risks and uncertainties
Going Concern and Viability Statement
IFC-4
03 Governance
56-92
IFC
Chairman’s introduction
1
2
2
3
Board biographies
Nomination & Governance Committee Report
Audit & Risk Committee Report
Remuneration & People Committee Report
Science, Sustainability & Excellence Committee Report
5-55
Directors’ Report
Statement of Directors’ responsibilities
56
58
66
69
75
89
90
92
04 Financial statements
93-187
Independent auditor’s report
Consolidated primary statements
Accounting policies
Notes to the accounts
Unaudited Group financial record 2018-2022
Unaudited US dollar primary statements
Smiths Group plc Company accounts
Subsidiary undertakings
Shareholder information
93
103
108
116
164
165
171
180
187
5
9
9
10
11
15
17
21
24
35
41
45
46
47
54
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS FY2022 HIGHLIGHTS
A YEAR OF ACCELERATING
GROWTH AND STRONGER
EXECUTION
Accelerating growth – +3.8% organic revenue growth, fastest in nearly a decade
– Organic revenue growth ahead of expectations; +3.8%1 (H1: +3.4%; H2: +4.1%);
five consecutive quarters of growth; reported growth of +6.7%
– Headline2 EPS growth +17.8%
– High demand across most end markets with strong order growth of +11%3
– £51m of revenue from new products launched in FY2022; R&D investment increased +14%
– Targeted M&A contributed +1.8% of reported growth
– Increasing returns to shareholders with proposed total dividend of 39.6p, +5%
Stronger execution – Smiths Excellence System fully embedded
– Resilient operating margin of 16.3% with headline operating profit2 of £417m
– Price offsetting inflation and mitigating other supply chain impacts
– Solid operating cash conversion4 of 80%; investment in working capital and
capex to support growth and mitigate supply chain impacts
– More focused portfolio following completion of Smiths Medical sale and
rapid return of proceeds with share buyback programme now 76% complete
– Smiths Excellence System now fully embedded, with high-impact projects
underway and targeted savings actions to drive enhanced efficiency
Inspiring and empowering our people – an energised
and focused team
– A refreshed leadership team with new senior appointments throughout the year
– Introduced Smiths Leadership Behaviours to build on our strong culture
– Driving an even more dynamic and inclusive culture with greater focus on diversity
– Continuing to translate our commitment to ESG leadership into action
Strong balance sheet – well positioned to execute our growth strategy
– £380m reduction in gross debt; leverage of 0.3x net debt/headline EBITDA4
– Final buy-in of the TI Group Pension Scheme, delivering certainty for scheme
members and shareholders
1
GROSS VITALITY
Percentage of revenue
from new products FY2022
31%
FY2021: 25%
GREENHOUSE GAS REDUCTION
GHG reduction normalised
to revenue FY2022
(7.2)%
SAFETY
Recordable Incident Rate
FY2022
0.54
FY2021: 0.47
DIVERSITY
% of senior leadership positions
taken by females FY2022
24%
FY2021: 23%
DIRECT ECONOMIC CONTRIBUTION
Taxes paid + employee costs
+ supplier costs FY2022
HEADLINE2
Revenue
Operating profit
Operating profit margin4
Basic earnings per share (EPS)
Operating cash conversion4
ROCE4,5
STATUTORY
Revenue
Operating profit
Profit for the year (after tax)
Basic EPS
Dividend per share
FY2022
£2,566m
£417m
16.3%
69.8p
80%
14.2%
FY2022
£2,566m
£117m
£1,035m
267.1p
39.6p
FY2021
£2,406m
£372m
15.5%
59.3p
129%
13.9%
FY2021
£2,406m
£326m
£285m
71.7p
37.7p
Reported
+6.7%
+12.0%
+80bps
+17.8%
(49)%
+30bps
Reported
+6.7%
(64.1)%
263.2%
272.5%
+5.0%
Organic1
+3.8%
+1.7%
(30)bps
£2.33bn
FY2021: £1.95bn
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The following definitions are applied throughout this 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 are defined in note 29 to the financial statements.
5 Excludes the impact of restructuring charges and spend.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 2
OUR PRIORITIES
AND TARGETS
OUR KEY GLOBAL
MARKETS
General Industrial
Customers put their trust in our products and
services to support a wide range of general
industrial applications in sectors including
petrochemical, mining, pulp & paper, water
treatment, semiconductor testing, heating
elements, automotive and rail transportation
Safety & Security
Our threat detection equipment helps keep people
and assets safe. Demand in the security market
is driven by persistent and evolving terror threats,
changing security regulations, and increased
global air travel and trade
Energy
John Crane’s mechanical seals and systems
support energy operations worldwide including
downstream and midstream oil & gas and power
generation. Growth is driven by increases in global
demand for energy, productivity, and enhanced
environmental and safety requirements
Aerospace
Satellite launches and emerging activities like
deep space exploration are driving demand
for high-reliability solutions in the space
market. Growth in aerospace is coming from
the development of new fuel-efficient aircraft
and increasing passenger and freight traffic
Smiths is intrinsically strong with world-
class engineering, leading positions in critical
markets, and distinctive global capabilities, all
underpinned by a strong financial framework.
Our priority is to build on our strengths to unlock
value by moving with greater pace and urgency
to deliver performance in line with our significant
potential.
Our focused plan, which is captured in the
Smiths Value Engine, has three top priorities:
Accelerating growth
Strengthening execution
Doing even more to inspire
and empower our people
We have set the following medium-term targets:
Organic revenue growth
EPS growth
ROCE
Operating profit margin
Operating cash conversion
4-6% (+M&A)
7-10% (+M&A)
15-17%
18-20%
100%+
These targets are underpinned by Smiths operational KPIs
and environmental targets, including a commitment to Net
Zero for Scope 1 & 2 emissions by 2040 and Net Zero for
Scope 3 emissions by 2050.
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Our business model
and Our strategy
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KPIs
REVENUE BY GLOBAL MARKET General Industrial42% Safety & Security31% Energy21% Aerospace6%REVENUE BY DESTINATION Americas55% Europe19% Asia Pacific16% Rest of the World10%01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 3
OUR DIVISIONS
Our four divisions operate in more than 50 countries.
Together, our divisions and Group employ more than 14,700 people.
John Crane
Mission-critical flow control
solutions for increased
efficiency, reliability, and
environmental sustainability.
% OF REVENUE
35%
69% of John Crane revenue
is from aftermarket sales
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P 17
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Smiths Detection
Detection and screening
technologies for safety, security
and freedom of movement.
% OF REVENUE
26%
54% of Smiths Detection revenue
is from aftermarket sales
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P 18
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John Crane is a global leader in the design,
manufacture, installation and support of rotating
equipment solutions that drive efficiency, safety,
and environmental sustainability in large-scale
industrial processes.
Customers
– Energy – down- and mid-stream activities (e.g. pipelines and
refineries) of energy multinationals and power generation
– Other process industries – a significant presence in chemical,
life sciences, mining, water treatment, and pulp & paper
– Aftermarket – increasing demand for full lifecycle
asset management
– Ideally positioned to help customers meet their
decarbonisation and energy transition objectives
Competitive strengths
– Strong and differentiated proprietary technologies and
expertise across industries
– Largest installed base in the Energy and Industrials markets
– Innovation focused, growing digital capability
– Customer intimacy and strategic alignment with end users
through a network of ~200 service and support centres, and
unique capabilities of field service engineers
Growth drivers
– Near-term global demand for stable energy supply
– Secular growth in energy and primary resource demand,
especially in emerging markets
– Increasing demand for enhanced efficiency
– Energy transition – environmental safeguarding and cleaner
processes. Requirement to reduce emissions, with particular
emphasis on methane. Growth of a more diversified and
cleaner low-carbon energy eco-system, including hydrogen
and renewables, which drive more demanding needs in
compression, pumping and filtration
– Long-term customer partnerships and outsourcing
Competitors
Competitors include Flowserve, EagleBurgmann and AES
Smiths Detection is a global leader in
threat detection and screening technologies
that protect people and assets.
Customers
– Aviation – airports and governments. Regulators are also
highly involved and shape market development
– Other Security Systems – a significant presence in high-
energy cargo inspection systems (ports and borders),
integrated screening systems for a broad range of urban
situations (court houses, prisons, offices, shopping malls, rail
stations, etc.), long-standing partnerships with governments
for detection of chemicals and explosives in national defence
Competitive strengths
– Global reach and market-leading brand
– Differentiated proprietary technologies leveraged across a
broad range of markets
– Significant research and development and digital capabilities
– Focus on minimising product energy use
– Customer intimacy and loyalty through equipment cycle and
aftermarket offer
– Operating in regulated market segments that require
product certification
– Network of ~100 locations
Growth drivers
– Persistent and evolving threats to national security, public
safety and critical infrastructure
– Changing aviation security regulations and customer
requirements across our industries
– Growing populations and urbanisation
– Growth of global transportation infrastructure
– Global growth of international trade and e-commerce
– Need for integrated digital solutions
– Staffing constraints are driving demand for digital image
analysis software such as automated threat recognition
– Equipment replacement cycle, typically 8–10 years
Competitors
Competitors include Rapiscan, Leidos, Nuctech, Flir, Chemring
and Bruker
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 4
Flex-Tek
Safe and efficient
movement of fluids
and gases.
% OF REVENUE
25%
READ MORE
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P 19
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Smiths Interconnect
Advancing the world
through cutting-edge
connectivity.
% OF REVENUE
14%
READ MORE
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P 20
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Flex-Tek is a global provider of high-performance
engineered solutions that support the safe and
efficient movement of fluids and gases in a range of
industry sectors.
Customers
– Construction – heating, ventilation and air-conditioning
(HVAC) customers and builders (full range of heating
elements, gas piping, flexible and metal ducting)
– Aerospace – aircraft manufacturers and their tier-one
suppliers (a full range of rigid and flexible, high-and low-
pressure tubing and ducting for fluid conveyance)
– Industrial – Electrical Process Heating (highly engineered,
medium-high voltage) and specialist end-use applications
such as medical hoses
Competitive strengths
– Leading capability in design, manufacture and
cost engineering
– High-performance differentiated products
– Innovation focused
– Strong customer relationships and brand reputation
Growth drivers
– Through-cycle growth of the US housing construction market
– Expanding international market for construction products
– Long-term increase in commercial and military
aircraft production
– Customer focus on efficient performance and
environmental safeguarding
– Industrial heat solutions
– Growth in use of medical devices
Competitors
Competitors include Parker-Hannifin, Eaton, OmegaFlex,
Warren, Watlow and Southwark Metal
Smiths Interconnect is a preferred supplier of
advanced electronic components, sub-systems,
optical and radio frequency products for customers
requiring reliable, high-speed and secure
connectivity, often in harsh environments.
Customers
– Semiconductor test – test socket and probe card solutions
for higher-performing applications (graphics processing,
artificial intelligence and data communication) for a broad
range of chip manufacturers
– Connectors – high-reliability electrical interconnect
solutions for specialised applications across a broad range of
healthcare, industrial, transport and aerospace customers
– Fibre-optics and radio frequency (RF) components –
broad range of devices, transceivers for demanding
high-reliability environments – especially with space and
aerospace customers
– Smiths Interconnect Inc. – antenna systems, multi-function
RF systems, as well as time and frequency solutions for
aerospace and defence customers
Competitive strengths
– Broad portfolio of cutting-edge technologies and products
– Strong research and engineering capabilities
– Customer intimacy and product customisation
– Global reach and support
Growth drivers
– Increased demand for faster data transmission, greater
bandwidth and faster processing power in aerospace,
defence and communications
– Growth of connectivity, as the world becomes more
connected, driven by trends including the Internet of Things,
Big Data, Internet of Space, Industry 4.0
– Development of healthcare technology
Competitors
Competitors include Amphenol, TE Connectivity, Molex,
Cobham, Glenair, Honeywell, Anaren, Leeno and Winway
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
CHAIRMAN’S
STATEMENT
Over the years, I have tried to make my
Chairman’s letters interesting and relevant to
topical events and describe how we address them
at Smiths. Last year, I described why we believed
that, by the summer of 2022, the coronavirus’s
mutations would become less virulent, and
COVID-19’s impact on society and business
would gradually decline and disappear into the
background of other infectious diseases we live
with in perpetuity, like colds or influenza.
The big issues that have unfolded for Smiths and other companies
in 2022 are:
– Supply chain shortages;
– Inflation; and
– The effects of the Ukraine war, particularly its impacts
on food and energy supply.
This set of topics is incredibly complex and connects the fiscal and
monetary policies of the world’s governments, economic growth
expectations, energy shortages, social dislocation, food shortages,
personal safety, labour shortages, global migration patterns and
societal pressures. This is obviously not something I can cover in
a short letter. So, I will try to deal with just one or two confusing
pieces of this puzzle. So, supply chain shortages and related
inflation will be my focus for this year’s letter.
In any commodity situation, only three factors impact a
commodity’s price at any time: supply, demand, and inventory.
Price fluctuations occur continuously in globally traded
commodities like copper and aluminium, and on any day there
can be significant differences in spot and future pricing, depending
on expected future demand. Oil prices are especially sensitive
to an imbalance in supply and demand because most contracts
never result in the actual delivery of oil, only in speculation.
But pricing variations like these appear everywhere, even in
non-commodity items.
5
The war in Ukraine has caused energy and food inflation to
worsen both locally and globally. But in the longer term, energy
is a zero-sum game. Suppose Russia sells more energy to
countries such as India or China. In that case, assuming they sell
a full allotment, those volume demands are missing from the
world marketplace and, given time, that volume will be available
to others.
There will be some temporary spikes in oil prices, but they should
not last because there is a well-developed shipping network for
oil supply worldwide and rebalancing regional supply and demand
is possible. There may be incremental costs due to the difference
between oil shipped via ocean cargo versus that transported by
pipeline, but it is unlikely to last. Natural gas is more problematic
because pipeline infrastructure from Russia is more well-
developed than LNG shipped by sea. Syngas can also be made
from coal and, along with fracking, these might offer a solution
if the gas supply does not resume from Russia. Nuclear power
generation is also possible in countries where nuclear units have
been mothballed for political or environmental reasons. But these
issues are as connected to political decisions as to economic or
technological ones.
During any economic or secular disturbance, executives face
two primary challenges. The first is to predict how long a
disturbance will last, and the second is to predict how deep it
will get. We saw this in the 9/11 attacks, the ‘08-’09 debt crisis,
and again in the COVID-19 pandemic, plus recent supply chain
shortages and inflation. Without a sensible forecasting model,
we don’t know whether we are falling into a 1m deep ditch or off a
1,000m cliff.
When we speak about a ‘supply chain’, we refer to the flow of
inbound materials to a company and its conversion into finished
goods via a manufacturing process. There is a complementary
outbound flow from the company through various distribution
channels until the product eventually reaches the final customer.
Every manufacturing company has these building blocks, the
inbound flow of raw material, conversion via a manufacturing
or assembly process, and then outbound delivery of finished
goods to their customers.
Understanding supply chains is a problem in dynamics, not
in statics. Just like the vibrating string of a violin, when it is
figuratively ‘plucked’, everything in the supply chain is moving up,
down, backwards, and forwards. Perhaps the closest analogy
to supply chain dynamics is the pulsating noise we hear when
our plumbing at home experiences a ‘water hammer’. This is
caused by pressure waves oscillating backwards and forward
between discontinuities in the plumbing system and is analogous
to the waves of demand that ripple up and down dynamically in
a supply chain.
On the outbound side of this process, companies sell their
products to customers through various forms of distribution.
Some go directly to customers to be built into product platforms
such as vehicles or electronics, some through distribution
channels that hold buffer inventory to smooth out supply and
demand imbalances, and others sell their products direct
to consumers online. The dynamics are different in detail, but
they all suffer varying degrees of transient problems.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 6
What happens to orders when
end-market demand falls?
Let’s perform a thought experiment on our supply chain.
Let’s consider a make-to-stock original equipment manufacturer
(OEM) and imagine there are three or four inventory storage
locations in the outbound supply chain. Let’s imagine a reduction
in end-market demand by 100bps and examine what happens in
our supply chain.
The management at the inventory storage location closest
to the end-market sees demand fall by 100 basis points.
Local management knows they must cut orders; otherwise,
they will have too much inventory. So, to be conservative, they
cut their orders by 200 basis points, say. The management at
the next location further up the supply chain sees their demand
fall by 200 basis points, and they also worry they will have too
much inventory, so they cut orders by 300 basis points, and so on.
The order reduction numbers chosen here are just illustrative,
and the actual numbers will differ depending on a company’s
risk tolerance, distribution method and the number of inventory
storage locations. The greater the number of inventory storage
locations in your supply chain, the more likely there will be an
overreaction. Even with ‘just-in-time’ pull system ordering,
it’s natural that management overreacts to some degree in
controlling inventory. So, the net effect is that there’s always
an amplification in the supply chain of any fluctuation in end-
market demand.
Consequently, if you are an OEM in a downturn, you will almost
always see your demand temporarily fall by multiples of that seen
in the end-market as the supply chain adjusts to new demand
conditions. The downstream effect is different for make-to-order
manufacturers than for make-to-stock. But we must remember
this is a two-sided problem, both on the inbound supply chain
and on the outbound one. So, an upstream supply chain’s impact
can still cause problems, particularly when there is an increase
in demand. I’ve seen this amplification phenomenon happen at
every B2B company I have worked at. The same phenomenon also
happens when, instead, there is an increase in demand, which I
will explain later.
In one case, an industrial manufacturer I’m familiar with sells
through extended distribution channels and has an amplification
of 2.84. So, if their end-market demand falls by 100 basis points,
they see their orders temporarily fall by 284 basis points. In steel
distribution, that amplification number is about 400 basis points.
The amplification factor in seasonal businesses with lower
inventory turns is about 160 basis points. Consumer electronics
can be as high as a staggering 2,000 basis points.
How long do these temporary supply chain
transients last?
The next question is, how long will this transient reduction in
demand last? If the supply chain were 100% efficient, it would
clear the excess inventory in one turn. But we know that supply
chains are never 100% efficient. When I was making these
calculations earlier in my career, because I didn’t know the exact
supply chain efficiency number, like any typical engineer, I chose
50% as my working hypothesis. Fill rates are a complex function
of demand and inventory and weren’t always valid in highly
disturbed situations.
Let’s make the numbers easy in our thought experiment.
The 50% efficiency number means that a four inventory turn
company would experience a transient fall in demand lasting for
six months, in other words, two inventory turns. Although the
end market has only fallen by 100 basis points, it feels like your
company is selling into an artificially much worse market than it
really is. The industrial company I mentioned earlier felt like the
end-market – and sales – had temporarily fallen by 284 basis
points, not 100 basis points. But correspondingly, when there’s
an increase in demand, it feels like your company is selling into
an artificially much better market than it is. That overshoot in
demand is only a temporary illusion, and we’ll deal with that
case shortly.
Order demand falls until supply and demand come into
equilibrium. Meanwhile, the transient reduction in orders has
removed the excess inventory from the supply chain and, in
my example, demand returns to a new quiescent value, albeit
now 100 basis points smaller.
So, in this simple case of falling demand, the sales challenge
of this hypothetical make-to-stock company is made worse
by ordering undershoot. This has important financial impacts
because it artificially reduces a company’s reported growth.
In public companies, we report to the market periodically and,
if a temporary undershoot in demand – one not reflective of the
real end-market conditions – lasts six months, it can seriously
affect the projected growth rate in the full-year results, depending
on which quarter of the fiscal year the disturbance happens.
What happens when there is an
increase in demand?
Now let’s consider the opposite case, one where there is
a sudden increase in demand, which we’ve seen recently,
particularly in electronics. The simple answer to why this
is happening is an imbalance in supply and demand. But I
will show now that the problem is again mostly artificial and
temporary, and so are the associated inflationary tendencies
as people over-order to fill an illusionary high demand.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 7
The effects of container shortages
This artificial and synchronised surge in demand has resulted
in a shortage of shipping containers on some routes worldwide.
Instead of the historical $2,000 for a container transit from China
to Europe or the United States, container costs peaked at $23,000
in 2021. Today it’s around $13,000. China’s zero-COVID policy
caused holdups and delays in the major East Coast China ports
and factories, with similar inefficiencies in other ports in the US
and Europe. So, in part, container pricing is a proxy for supply
chain shortages and inflation, making the artificial demand
problem even worse.
Synchronised demand
Clearly, the world economy has not suddenly grown by 15% or
20%, so why have companies experienced this sudden increase
in demand, particularly for electronics? The cause lies squarely
in the synchronised economic ‘start up’ after the COVID-19
pandemic, plus the transient artificial demand described earlier.
Although we have been using videoconferencing tools for many
years, COVID-19 forced unpractised staff into the user population
and accelerated acceptance of this as a way of working – and a
substitute for some face-to-face meetings at the office. That, in
part, drove part of the high demand for electronics. Likely, we will
not fully return to pre-COVID-19 ways of working ever again.
But there is an additional factor at work here; synchronisation.
Although the world’s major connected economies have similar
periodicity in their economic cycles, they are not normally all in
phase. In the same way that demand fell precipitously in late 2008,
it did so because of the synchronised collapse in all debt markets.
Similarly, here we have a synchronised increase in demand
in most markets, made worse by an illusory demand curve.
However, global economies will gradually settle into historical
phasing patterns, easing some of this synchronisation problem.
So, the ‘08-’09 downturn occurred because of a debt crisis
happening simultaneously across the world, which produced a
synchronised economic downturn. Here, we had a similar but
opposite problem: a synchronised upturn and, to make it worse,
synchronised artificial excess demand.
The case of increased demand
When there is a sudden increase in demand, manufacturing
capacity is limited, so the supply chain cannot fully respond
unless there is excess idle capacity. Normally, manufacturers
load factories to somewhere between 85% and 90% capacity
for fixed cost absorption reasons. So now the efficiency of our
supply chain is, de facto, only about 10%. So even if we can
increase capacity temporarily, say from 85% to 95% or even
100%, unless we add new capacity, the time for supply and
demand to return to equilibrium is extended. Some companies
may have extra shifts available, but then they might not have
trained workers to staff them, and with labour shortages
driven by this excess demand, automation is often the answer,
but that is a long-term solution.
In my earlier case of demand reduction, I used 50% as the
efficiency number for the supply chain. But now, because of
manufacturing capacity limits, that efficiency is effectively
only 10%, so the recovery time for equilibrium to be reached is
nominally five times as long as it did with 50%. So, a company
that once experienced a six-month recovery on falling demand
could now experience a 2.5 year transient before complete
recovery. This is an extreme case; naturally, companies take
every possible corrective action to reduce this timing. But this
problem partly explains why we see extended recoveries
and shortages in our supply chains.
In practice, the supply chain may take 18 months to recover
as we engage in countermeasures. Meantime, a massive
amount of new fixed capacity is being added to the supply
chain, especially in the semiconductor area, which will also
help gradually reduce these disturbance times and inflation
along with it.
Companies must control the
temptation to over-order
In this increased demand case, our supply chain manager’s
temptation is to over-order out of fear of experiencing component
shortages. After all, you can’t ship a car with even one missing
door handle. That new demand temporarily increases a company’s
growth, but it can have serious financial consequences,
particularly on our inventory’s pricing. We can end up with
long-dated orders at much higher-than-normal pricing. This is a
problem queuing for an unhappy ending.
There is typically one overshoot, and one undershoot in
any dynamic system like the one I describe here. For the
mathematically inclined, when simplified, the dominant mode
makes the dynamic response look like a second-order system.
The precise effect of these temporary increases in demand
depends very much on the company’s distribution method.
The inevitable outcome is that companies can end up with too
much inventory, possibly at higher prices, producing variances
against standard manufacturing costs. In an extreme case,
companies may face expensive excess and obsolete (E&O)
inventory write-offs when the inevitable demand falls later in the
transient cycle, with its own overreaction tendancies.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 8
Inflation
Some economists argue that inflation has been caused by
excessive stimulus packages that crashed headlong into supply
chain shortages. However, they are two sides of the same coin.
But the real problem is much more complex, and the solutions
are possibly simpler. Inflation has been made worse by artificial
synchronised demand that created shortages, combined with
high-cost slow-moving containers and the war in Ukraine, which
has driven up food and energy prices. Additionally, zero-COVID-19
policies in China have plugged up or slowed supply chains and
attendant labour shortages were caused by all the above. I have
described here why we are experiencing some parts of these
supply chain difficulties and why they have lasted so long.
It’s important to remember the maxim that the solution to
high prices is high prices. Similarly, the solution to low prices
is low prices. Companies redesign their products, re-source
suppliers and use lower-cost substitutes for expensive materials,
which is part of the companies’ mechanism to control inflation.
The size of the US economy is approximately $21 trillion, and the
US uses approximately 6.9 billion barrels of oil a year. So each $10
increase in the price of a barrel of oil reduces spending power
in the US economy by about 30 basis points. A $60 increase in the
price of a barrel of oil, which we saw at its peak, if maintained,
reduces spending power in the US economy by 180 basis points.
Similarly, increasing interest rates simultaneously increases
inflation and later reduces it by cooling demand.
Those companies suffering the greatest near-term challenge are
those in process industries that use a lot of energy. Smiths does
not have high energy-intensive manufacturing processes.
So how does all of this end?
The Chinese Communist Party Congress will take place in
October. It may be when China declares victory over COVID and
eliminates its zero-COVID policy. That will gradually free up
plugged ports, ease supply chain shortages, reduce container
costs, and ease some pressure on component supply from China.
Supply chain transients will end naturally with time, though not
without some pain, and artificial demand will reduce. A reduction
in economic stimulus will also help, though I have reservations
that a rapid increase in interest rates may work against
policymakers and create recessions in some economies across
the Western world. Together, these factors will reduce labour
shortages and ease the pressure on pricing and inflation.
Lastly, problems that Western economies have suffered over
the past two years will almost certainly create a swathe of
manufacturing repatriation initiatives. That is likely to reduce
economic growth in China and other parts of the Asian economy.
But it will also create new jobs and investments in Western
economies and drive efficiency initiatives and automation
investments. My grandmother would have said, “it’s an ill wind that
blows nobody any good”.
I hope this letter has helped readers, in some small way, to
understand the complexities and effects of this very unusual time.
Sir George W. Buckley
CHAIRMAN
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 9
CHIEF EXECUTIVE OFFICER’S REVIEW
OUR BUSINESS MODEL
Our compelling business model leverages our world-class engineering, leading positions
in critical markets, and global capabilities to help customers solve their toughest
problems. The Smiths Value Engine is supported by a robust financial framework
characterised by recurring revenues, high margins, and strong cash generation.
SMITHS VALUE ENGINE
OUR PURPOSE
OUR STRENGTHS
OUR PRIORITIES
PIONEERS OF
PROGRESS
Improving our world
through smarter
engineering
World-Class
Engineering
Leading Positions
in Critical Markets
Global
Capabilities
Robust Financial
Framework
Growth
Execution
People
OUR CULTURE
OUR STAKEHOLDERS
Our culture inspires and empowers our
people. We live our Values of integrity,
respect, customer focus, ownership, and
passion every day, in each action and
decision that we take. A strong culture
grounded in Values is what has enabled
Smiths to prosper for more than
170 years.
Our Leadership Behaviours provide a
unified description of what leadership
means at Smiths and a shared
commitment to how we act in service of
our stakeholders. Smiths Leadership
Behaviours align to our three core
priorities of growth, execution and people.
Growth
– Innovates for impact
– Sets vision to inspire
Execution
– Takes accountability and ownership
– Delivers results at pace
People
– Lives Smiths Values
– Develops self and others
– Leads inclusively and empowers
People
Our capable, dedicated and passionate
colleagues are our greatest asset. We aim to
attract and retain the very best by creating an
environment for colleagues based on respect,
personal growth, recognition and development
of talent, and a sense of belonging
and purpose.
Customers
Strong and enduring customer relationships
will sustain Smiths into the future.
Meeting customer needs and exceeding
their expectations, not just with products,
quality and service, but in the way we conduct
business and pay attention to the things
that matter to them – for example, ethics
and environmental performance – is a
fundamental part of our business model and
our Values.
Suppliers
Developing mutually beneficial relationships
with our suppliers and building resilience,
quality and efficiency across our supply chain
is a fundamental contributor to our customer
offering and the long-term competitiveness
of Smiths.
Communities and society
We aim to improve our world by contributing
positively to our communities and society
in general. Smiths products and services
support critical global industries where we
are pioneering progress in safety, efficiency
and environmental performance. We play a
beneficial role in local economies through job
creation and skills development, procurement
and generating tax revenues, operating safely,
environmentally responsibly and ethically, and
engaging directly.
Regulators and governments
We build relationships with governments,
policymakers and regulators across the
world. We do this so that we can operate
effectively, to ensure our interests and those
of the industries in which we operate are
represented in decision-making, and in order
to contribute our expertise on emerging
national, regional and global needs.
Investors
We are committed to openness and
transparency with all capital providers and the
effective management of risk while we unlock
value and returns for our investors.
P 28
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Our culture
P 41
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Engaging with our stakeholders
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 10
OUR STRATEGY
We are committed to performing to our potential – growing faster to unlock enhanced
value creation for the Group. We actively manage our portfolio of businesses and seek to
optimise their performance through organic investment and disciplined use of capital for
mergers and acquisitions. In FY2022 we made good progress in advancing our strategy.
MEGATRENDS
OUR STRATEGIC PRIORITIES
The strategy for each division is tailored to its
individual circumstances and takes account of
trends in overall demand, specific customer
needs, relative competitor performance,
and underlying business models. In addition,
we track the evolution of key Group-wide
secular themes and trends and their impact
on our business.
Our Purpose and commitment to sustainability
leadership are reflected in our intent to prioritise
ESG performance at Smiths. As a result, whilst
each of these themes is important, we place
additional emphasis on our response to those
megatrends which relate to the energy transition
agenda and the overall reduction of waste and
energy use. This will allow us to leverage our
unique capabilities to enable our customers to
meet their sustainability goals while we deliver
on our own commitments.
General Industrial
– Efficient,
cleaner processes
– Waste reduction,
re-use/recycle
– Safe operations
Safety & Security
– Safe travel
– Secure trade
– Safe people
Energy
– Environmental
urgency
– Energy efficiency
– Lower emissions
– Equipment reliability
– Asset life
maximisation
– Lightweight
materials
– Secure places
– Smart cities
– Energy
transformation
– Air quality
Aerospace
– Faster/seamless
connectivity
– Satellite applications
– Personalised
integrated
mobility solutions
FY2022 PROGRESS AGAINST TARGETS
– Taking full advantage of strong demand we currently see across most of
our markets
Growth
– Improving new product development and commercialisation
– Extending our reach by building out priority adjacencies
– Supplementing organic growth with disciplined M&A
– Developing high-value green technology solutions for our customers
FY2022 progress
– Five consecutive quarters of organic revenue growth
– Accelerated organic revenue growth towards target range
– £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
– Embedding the Smiths Excellence System across the Group
– Accelerating pace and establishing a more consistent operating rhythm
– Continuously improving to deliver value for customers
– Executing against our environmental commitments
Execution
FY2022 progress
– Resilient operating profit margins amidst challenging
macro environment
– Price offsetting inflation and mitigating other supply chain impacts
– SES fully embedded across the Group, with a well-resourced team and
25 high-impact projects underway
– New sustainability strategy launched
– Solid operating cash conversion achieved
– Building upon our world-class safety record
– Accelerating talent development through the Smiths
Leadership Behaviours
People
– Creating an ever-more diverse and inclusive environment
– Living Smiths Values each and every day
FY2022 progress
– 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
+M&A
4-6%
+M&A
7-10%
FY2021
FY2022
Organic revenue growth
EPS growth
(2.2)%
3.8%
19.3%
17.8%
18-20%
100%+
Operating profit margin
Operating cash conversion
15.5%
16.3%
129%
80%
15-17%
ROCE
13.9%
14.2%
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 11
FY2023 outlook
– Expect to deliver 4.0% to 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
FY2022 business performance
Commentary refers to Smiths Group performance excluding
Smiths Medical, which was accounted for as ‘discontinued
operations’ before the sale completed on 6 January 2022.
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 leaderships means at Smiths and a
shared commitment to how we will act as employees.
CHIEF
EXECUTIVE’S
REVIEW OF
THE YEAR
“
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.”
Paul Keel,
CHIEF EXECUTIVE OFFICER
FY2022 BUSINESS PERFORMANCE
(£m)
Revenue
Headline operating profit
Headline operating profit margin
ORGANIC REVENUE GROWTH (BY BUSINESS)
John Crane
Smiths Detection
Flex-Tek
Smiths Interconnect
Smiths Group
H1 2022
+5.1%
(7.2)%
+10.0%
+12.9%
+3.4%
H2 2022
+2.5%
(11.3)%
+20.9%
+14.8%
+4.1%
FY2021
restructuring
charges
Foreign
exchange
Acquisitions
Organic
movement
–
21
26
5
42
11
92
8
+90bps
+0bps
+20bps
(30)bps
FY2021
2,406
372
15.5%
ORGANIC REVENUE GROWTH IN OUR END MARKETS
% of Smiths
revenue
H1 2022
H2 2022
FY2022
2,566
417
16.3%
FY2022
General Industrial
Safety & Security
Energy
Aerospace
42%
31%
21%
6%
+5.7%
(3.5)%
+7.5%
+16.5%
+11.4%
(8.9)%
+0.3%
(6.4)%
+3.5%
+16.7%
+14.2%
+15.4%
FY2022
+3.7%
(9.4)%
+16.1%
+13.9%
+3.8%
Smiths Group
100%
+3.4%
+4.1%
+3.8%
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
12
Our second lever for faster growth is improved new 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
$107m (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.
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.
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 original
equipment (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 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 Smiths 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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 13
Execution
People
Stronger execution is our second key priority.
Inspiring and empowering our people is our third 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).
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-flow 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 six 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.
Safety and well-being 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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
14
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 reduction 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 preparation for setting science-based targets
aligned to our Net Zero commitments, we made further progress
understanding and categorising the underlying data. In FY2022,
normalised GHG emissions reduced by (7.2)%, normalised water
usage reduced by (4.5)% and normalised non-recyclable waste
reduced 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 & 2 by 2040. We have a clear
roadmap for how we will achieve this, published on our website.
It details the path we are taking to achieve Net Zero Scope 1 & 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.
P 24
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Sustainability at Smiths
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 15
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 debt 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 EBITDA 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 two 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 Smiths 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 debt 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.
CHIEF FINANCIAL
OFFICER’S
REVIEW OF
THE YEAR
“
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.”
Clare Scherrer,
CHIEF FINANCIAL OFFICER
Free cash-flow
In FY2022, free cash-flow 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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 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.
16
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:
USD
EUR
Average rates
Period-end rates
31 July 2022
(12 months)
31 July 2021
(12 months) 31 July 2022 31 July 2021
1.32
1.18
1.36
1.13
1.22
1.19
1.39
1.17
Litigation
Smiths Group faces different types of litigation in different
jurisdictions. Please see below an update on the two significant
litigation provisions. For more information, refer to note 23 of
the financial statements.
John Crane, Inc. litigation
John Crane, Inc. (JCI) a subsidiary of the Group, continues to
actively monitor the conduct and effect of its current and expected
asbestos litigation, including the effective presentation of its ‘safe
product’ defence, and intends to resist asbestos cases based
on this defence. Approximately 306,000 claims against JCI have
been dismissed before trial over the last 40 years. JCI is currently
a defendant in cases involving approximately 22,000 claims.
Despite these large numbers of claims, since the inception of
asbestos litigation against JCI it has had 149 cases and has had to
pay awards amounting to approximately $175m.
At 31 July 2022, the aggregate provision for JCI asbestos litigation,
including for adverse judgements and defence costs, amounted to
£229m (FY2021: £212m) expressed at the then current exchange
rate. In deciding upon the amount of the provision, JCI has relied
on independent expert advice from a specialist.
Titeflex Corporation litigation
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek
division, has received a number of claims in recent years from
insurance companies seeking recompense on a subrogated
basis for the effects of damages allegedly caused by its flexible
gas piping products being energised by lightning strikes. It has
also received a number of product liability claims relating to
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. 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.
At 31 July 2022, a provision of £52m (FY2021: £47m) has been
made for the costs which the Group expects to incur in respect of
these claims. For the Group’s litigation provisions, because of the
significant uncertainty associated with the future level of claims
and of the costs arising out of the related litigation, there is no
guarantee that the assumptions used to estimate the provision
will result in an accurate prediction of the actual costs that may
be incurred.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 17
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 and 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.
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.
DIVISIONAL REVIEW
JOHN CRANE
FY2022 FINANCIAL PERFORMANCE
FY2022
£m
FY2021
£m
Reported
growth
H1
organic
growth
H2
organic
growth
FY
organic
growth
READ MORE
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Revenue
Original Equipment
Aftermarket
Energy
Industrials
Headline operating profit
Headline operating profit margin
Statutory operating profit
Return on capital employed
R&D cash costs as % of sales
REVENUE
(£m)
Revenue
OPERATING PROFIT
(£m)
+5.1%
+4.2%
+1.8%
+2.2%
+5.1% +6.6%
+3.9%
+4.5%
+0.2% +6.3%
+2.5% +3.7%
+2.7% +2.3%
+2.4% +4.3%
+7.5% +0.3% +3.5%
+1.7% +5.8% +3.9%
(8.9)% (2.8)%
+20bps (270)bps (140)bps
901
279
622
530
371
188
865
273
592
510
355
187
20.9% 21.6% (70)bps
(9.2)%
184
19.4% 20.0% (60)bps
2.5% 2.1% +40bps
167
FY2021
reported
Foreign
exchange
Organic
movement
FY2022
reported
865
4
32
901
FY2021
reported
FY2021
restructuring
costs
Foreign
exchange
Organic
movement
FY2022
reported
Headline operating profit
Headline operating profit margin
187
21.6%
4
+50bps
2
(5)
+10bps (140)bps
188
20.9%
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 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.
18
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SMITHS DETECTION
FY2022 FINANCIAL PERFORMANCE
FY2022
£m
FY2021
£m
Reported
growth
H1
organic
growth
H2
organic
growth
FY
organic
growth
Revenue
Original Equipment
Aftermarket
Aviation
Other Security Systems
Headline operating profit
Headline operating profit margin
Statutory operating profit
Return on capital employed
R&D cash costs as % of sales
REVENUE
(£m)
Revenue
OPERATING PROFIT
(£m)
+7.3% +4.0%
(7.2)% (11.3)% (9.4)%
(23.1)% (17.5)% (26.7)% (22.6)%
+7.7% +5.9%
(14.5)% (12.5)% (16.5)% (14.7)%
+7.1%
+8.1% +6.2%
(26.8)% (13.0)% (42.0)% (30.7)%
(80)bps (570)bps (340)bps
+7.4%
(9.1)%
655
300
355
467
188
73
721
390
331
546
175
99
11.1% 13.7% (260)bps
77
(53.2)%
7.1% 9.7% (260)bps
9.3% 7.4% +190bps
36
FY2021
reported
Foreign
exchange
Organic
movement
FY2022
reported
721
2
(68)
655
FY2021
reported
FY2021
restructuring
cost
Foreign
exchange
Organic
movement
FY2022
reported
Headline operating profit
Headline operating profit margin
99
13.7%
6
+90bps
(1)
(31)
(10)bps (340)bps
73
11.1%
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 expect
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 and
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 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.
19
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FLEX-TEK
FY2022 FINANCIAL PERFORMANCE
FY2022
£m
FY2021
£m
Reported
growth
H1
organic
growth
H2
organic
growth
FY
organic
growth
Revenue
Industrials
Aerospace
Headline operating profit
Headline operating profit margin
Statutory operating profit
Return on capital employed
R&D cash costs as % of sales
REVENUE
(£m)
Revenue
OPERATING PROFIT
(£m)
647
531
116
133
508
409
99
97
+27.4% +10.0% +20.9% +16.1%
+29.8% +8.5% +22.6% +16.3%
+17.5% +16.1% +13.4% +14.6%
+37.1% +18.3% +24.3% +21.7%
+60bps +90bps
20.6% 19.1% +150bps +150bps
106
+27.7%
83
25.6% 21.6% +400bps
0.4% 0.5% (10)bps
FY2021
reported
Foreign
exchange
Acquisitions
Organic
movement
FY2022
reported
508
14
42
83
647
FY2021
reported
Foreign
exchange
Acquisitions
Organic
movement
FY2022
reported
Headline operating profit
Headline operating profit margin
97
3
19.1% +10bps
11
+50bps
22
+90bps
133
20.6%
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
greenfield 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.
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 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.
20
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SMITHS INTERCONNECT
FY2022 FINANCIAL PERFORMANCE
FY2022
£m
FY2021
£m
Reported
growth
H1
organic
growth
H2
organic
growth
FY
organic
growth
Revenue
Headline operating profit
Headline operating profit margin
Statutory operating profit
Return on capital employed
R&D cash costs as % of sales
REVENUE
(£m)
Revenue
OPERATING PROFIT
(£m)
363
65
+16.3% +12.9% +14.8% +13.9%
+88.2% +58.7% +28.0% +39.7%
18.0% 11.2% +680bps +490bps +190bps +330bps
312
35
64
34
+88.2%
16.3% 8.8% +750bps
5.6% 6.3% (70)bps
FY2021
reported
Foreign
exchange
Organic
movement
FY2022
reported
312
6
45
363
FY2021
reported
FY2021
restructuring
costs
Foreign
exchange
Organic
movement
FY2022
reported
Headline operating profit
Headline operating profit margin
35
10
11.2% +330bps
1
19
+10bps +330bps
65
18.0%
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.
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.
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.
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 21
KEY
PERFORMANCE
INDICATORS
Key
Link to strategy
Growth
Execution
People
Financial targets
Our financial targets were set out at our Capital Markets Day in November 2021. Our robust financial framework
underpins the Smiths Value Engine powered by recurring revenue growth, high margins, low asset intensity and
exceptional cash generation.
All measures exclude Smiths Medical. Alternative Performance Measures (APMs) and key performance indicators are defined in note 29
to the financial statements.
ORGANIC REVENUE GROWTH
Growing faster is the primary driver of unlocking value
creation for the Group.
STRATEGY
PERFORMANCE
LINKED TO
REMUNERATION
FY2022 PROGRESS
In FY2022 we delivered organic revenue growth in all four
quarters of the year and full year growth of +3.8%. Growth
accelerated in H2 vs H1 to +4.1%.
MEDIUM-TERM
TARGET
+4-6%
OPERATING PROFIT MARGIN
Stronger execution is the second key priority for the Group
and will drive higher margins.
STRATEGY
PERFORMANCE
FY2022 PROGRESS
In FY2022 margin was resilient at 16.3%, amidst a challenging
macro environment, while continuing to invest in future
growth.
MEDIUM-TERM
TARGET
18-20%
EARNINGS PER SHARE GROWTH
Strong margins will convert revenue growth into
earnings growth.
STRATEGY
PERFORMANCE
FY2022 PROGRESS
In FY2022 we delivered strong EPS growth of 17.8%, driven
by operating profit growth, a reduction in the effective
headline tax rate, and the benefit from the ongoing share
buyback programme.
MEDIUM-TERM
TARGET
+7-10%
FY2022
FY2021
FY2020
FY2019
FY2018
FY2022
FY2021
FY2020
FY2019
FY2018
FY2022
FY2021
FY2020
FY2019
FY2018
3.8%
(2.2)%
(1.0)%
3.0%
3.4%
16.3%
15.5%
12.8%
17.1%
16.6%
17.8%
19.3%
(27.4)%
11.0%
11.7%
P 11
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CEO review of the year
LINKED TO
REMUNERATION
P 11
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CEO review of the year
LINKED TO
REMUNERATION
P 11
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CEO review of the year
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
22
STRATEGY
PERFORMANCE
LINKED TO
REMUNERATION
RETURN ON CAPITAL EMPLOYED (ROCE)
Monitoring our return on capital acts as a discipline on both
organic and inorganic investment to drive maximum value
from our growth.
FY2022 PROGRESS
In FY2022 ROCE increased +30bps to 14.2% as high
profitability more than offset investment in working capital.
OPERATING CASH CONVERSION
Maintaining our strong track record of cash conversion is a
key component of our robust financial framework.
FY2022
FY2021
FY2020
FY2019
FY2018
MEDIUM-TERM
TARGET
15-17%
STRATEGY
PERFORMANCE
FY2022 PROGRESS
In FY2022 we delivered solid operating cash conversion
of 80% while navigating supply chain disruption and the
associated investment in working capital.
MEDIUM-TERM
TARGET
100%+
FY2022
FY2021
FY2020
FY2019
FY2018
14.2%
13.9%
12.8%
15.7%
15.3%
80%
129%
112%
74%
104%
P 11
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CEO review of the year
LINKED TO
REMUNERATION
P 11
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CEO review of the year
Operational targets
Our operational targets are also aligned to our three Smiths Value Engine priorities.
Alternative Performance Measures (APMs) and key performance indicators are defined in note 29 to the financial statements.
GROSS VITALITY
Gross Vitality measures the revenue contribution of
products launched in the last five years. Improved new
product development and commercialisation is a key
component of our growth strategy.
STRATEGY
PERFORMANCE
FY2022
FY2021
P 11
31%
25%
READ MORE
CEO review of the year
FY2022 PROGRESS
In FY2022 revenue from new products increased to 31% of
total revenue, demonstrating the success of our continued
investment in R&D and commercialisation of new products.
MEDIUM-TERM
TARGET
30%+
Gross Vitality is a new KPI in FY2022
GREENHOUSE GAS REDUCTION
Meeting our commitment to deliver Net Zero Scope 1 &
2 GHG emissions by 2040 is a fundamental part of our
sustainability strategy. Performance data is normalised to
revenue.
FY2022 PROGRESS
In FY2022 we achieved a reduction in Scope 1 & 2 emissions
of (7.2)% normalised to revenue. Absolute Scope 1 & 2
emissions fell by (1.1)%.
STRATEGY
PERFORMANCE
LINKED TO
REMUNERATION
FY2022
(7.2)%
MEDIUM-TERM
TARGET
Net Zero
Scope 1 &
2 emissions
by 2040
FY2021 data was restated in FY2022 using the basis
of preparation described on page 29. Historic Scope
1 & 2 data is therefore not comparable.
P 24
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Sustainability at Smiths
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 23
P 24
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Sustainability at Smiths
P 24
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Sustainability at Smiths
P 24
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Sustainability at Smiths
0.54
0.47
0.35
0.50
0.44
72
71
73
72
71
24%
23%
RECORDABLE INCIDENT RATE
Our commitment to our people starts with keeping us
all safe and healthy. This is our essential foundation and
number one focus. Our key safety metric is Recordable
Incident Rate (RIR) per 100 colleagues.
STRATEGY
PERFORMANCE
FY2022 PROGRESS
Group RIR in FY2022 was 0.54, 15% above FY2021, but
continued to track below the industry average and in the top
quartile of industry performance.
MEDIUM-TERM
TARGET
A zero harm
workplace
MY SAY SURVEY ENGAGEMENT SCORE
Engaging our people is key to the success of our strategy.
We have been tracking employee engagement on a range of
important cultural measures since 2017.
STRATEGY
PERFORMANCE
FY2022
FY2021
FY2020
FY2019
FY2018
FY2022
FY2021
FY2020
FY2019
FY2018
FY2022 PROGRESS
Our overall global engagement score remained stable
in FY2022 and we continued to have a very high survey
response rate of 82%.
MEDIUM-TERM
TARGET
Upper
quartile
DIVERSITY
We are focused on proactively increasing the number of
women in leadership roles at Smiths, with our measure
being percentage of senior leadership positions taken by
females.
FY2022 PROGRESS
We made progress during FY2022 to reach 24% senior
leadership positions taken by females.
STRATEGY
PERFORMANCE
FY2022
FY2021
MEDIUM-TERM
TARGET
30% by
the end of
FY2024
Percentage of senior leadership positions taken by
females is a new KPI in FY2022.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUSTAINABILITY
AT SMITHS
24
Environment, Social and Governance (ESG) performance
is at the very centre of our Purpose, and we are committed
to sustainability leadership.
We believe in doing business responsibly, the right way every day,
and translating our Purpose and Values into practical action that
mobilises Smiths strengths to improve our world. We are pioneering
progress towards a sustainable future through our products,
services, operations, and our people – pursuing excellence in
everything we do. We are committing to ambitious targets and taking
tangible action to deliver value for all our stakeholders.
See our Sustainability at Smiths Report for further information
on our ESG framework, priorities and performance.
READ MORE
Sustainability at Smiths Report
Our ESG framework
We distinguish ten foundational ESG elements that are essential to our success.
SUSTAINABILITY AT SMITHS
T
N
N M E
O
V I R
N
E
Delivering
Net Zero GHG
Commercialising
high-value
green technologies
Respecting natural
resources
Improving safety,
health and well-being
L
C I A
O
S
N
R
E
V
O
G
Developing
talent
Promoting diversity,
equity and inclusion
E
C
N
A
Contributing to our
communities
Behaving ethically
and legally
Effective long-term
decision making and
transparency
Managing risk and
maintaining strong and
effective controls
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 25
ENVIRONMENT
SOCIAL
COMMERCIALISING HIGH-VALUE
GREEN TECHNOLOGIES
IMPROVING SAFETY,
HEALTH AND WELL-BEING
Our commitment to our people starts with keeping us
all safe and healthy. This is our essential foundation
and number one focus. We strive to always improve
and be proactive, including designing for safety;
strengthening our safety culture every day; and
working to improve our colleagues’ lives in the round.
We are thankful for those who came before us and
helped establish robust safety cultures at our sites that
we work to continuously renew, strengthen and connect.
We understand that strong safety culture is fundamentally
about keeping safety personal and must reflect, and
respect, our diverse and global organisation.
P 31
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Safety
DEVELOPING TALENT
Our organisational commitment is to
ensure that all our colleagues have opportunities to
develop their skills and reach their full potential.
Smiths colleagues have access to training and resources
to undertake their roles safely, effectively, and in line with
our policies. Colleagues also have access to a developing
range of personal and skills growth resources as they
progress in their careers including specialist technical
and functional and externally accredited programmes.
We are currently honing our leadership programmes to
better support business needs and so that our leaders
can more effectively support their teams.
READ MORE
Sustainability at Smiths report
Among our biggest opportunities to deliver
stakeholder value is running our businesses well and
driving growth through delivery of top commercial
programmes that enable sustainability performance
for and through our customers.
We support customers and industries that are leading the
way to a sustainable future by developing and implementing
green technology solutions targeting climate risk, energy
transition and next generation, efficient infrastructure.
Our unique engineering capabilities and technologies
position us strongly to support customers on this vital
journey and we are targeting new product development
opportunities in growth markets where our technology and
capabilities offer differentiated value through improved
sustainability performance.
Developing and commercialising sustainability-advantaged
products and services will enable Smiths to have an even
greater positive impact on global environmental priorities
than we could achieve on our own.
READ MORE
Sustainability at Smiths report
DELIVERING NET ZERO GHG
We have a successful record of delivering
reductions in our operational GHG emissions.
We are now taking big steps forward.
In FY2022, we committed to ambitious Net Zero targets that
align Smiths with the UN’s critical global climate objectives:
Net Zero emissions from our operations (Scope 1 & 2) by
2040 and Net Zero emissions from our supply chain and
products in use (Scope 3) by 2050.
P 30
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Environment
RESPECTING NATURAL
RESOURCES
Natural resources are finite, and we
believe that all businesses have a responsibility
to use them respectfully and safely – minimising
consumption and preventing pollution.
Our longstanding commitments to use energy efficiently
and minimise waste are increasingly of interest and value
to our customers as they also seek to manage their own
environmental footprints.
P 30
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Environment
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
26
SOCIAL continued
GOVERNANCE
PROMOTING DIVERSITY,
EQUITY AND INCLUSION
BEHAVING ETHICALLY
AND LEGALLY
Our team of colleagues represents dozens
of nations, speaking a multiplicity of languages,
and embodying many different perspectives. We strive
to embrace these differences and promote actions and
behaviours that will deliver an inclusive and supportive
work environment where every member of the Smiths
team can be the best version of themselves.
We know that when colleagues feel included, valued, and
encouraged to make a meaningful contribution, Smiths will
thrive as we continue to attract and retain the diverse talent
that we need.
P 33
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People
CONTRIBUTING TO
OUR COMMUNITIES
We aim to improve our world by
contributing positively to our communities
and society in general.
Smiths products and services support critical global
industries where we are pioneering progress in
safety, efficiency, and environmental performance.
Our operations around the world play a beneficial
role in local economies through job creation and skills
development; procurement and generating tax revenues;
and operating safely, environmentally responsibly and
ethically. We also engage directly through fundraising,
charitable giving and education initiatives.
READ MORE
Sustainability at Smiths report
Behaving ethically and with integrity is a
fundamental part of our Values. We also operate in
some highly regulated markets and sectors which
require strict adherence to local and international
industry regulations.
We have a mature governance environment with exacting
standards, robust diligence processes and a proactive
management approach. And we seek to work with partners
who support our Values to minimise risk and maximise
our positive social and environmental impact.
READ MORE
Sustainability at Smiths report
MANAGING RISK AND
MAINTAINING STRONG
AND EFFECTIVE CONTROLS
Continual assessment and management of risks,
and assurance through internal controls, is an
integral part of day-to-day operations at Smiths.
Our enterprise risk management (ERM) process supports
open communication on risk between the Board and the
Audit & Risk Committee, the Executive Committee, our
divisions, and sites, and ensures that risk is appropriately
managed to deliver our business objectives. ESG matters
are fully integrated into the ERM process and are identified
and managed in the same way as other Group risks.
P 46
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Risk management
EFFECTIVE LONG-TERM
DECISION MAKING
AND TRANSPARENCY
Good quality, ethical and effective decision-
making builds sustainable businesses and
enables them to create long-term value for
all stakeholders.
Our overall governance framework provides the structures
and systems through which our strategies and objectives
are set and achieved, how risk is monitored and managed
via controls, and how our performance is managed and
optimised with appropriate oversight from the Board.
P 56
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Governance
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
27
Our ESG strategic priorities
Our sustainability strategy follows our Smiths Value Engine priorities – Growth, Execution and People.
Within this framework, we focus on our highest-impact opportunities to accelerate performance and create value with specific actions
that will lead to concrete and measurable results.
Deliver sustainable growth by targeting high-growth markets where we can
leverage our unique capabilities to develop and deliver differentiated technology
solutions which help solve some of the world’s biggest challenges for our
customers and global communities
Growth
P 12
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about Growth
– Prioritise new product development (NPD) programmes that deliver the sustainability
performance our customers need and want. Develop and designate top sustainable
growth NPD programmes in each division that contribute significantly to divisional
revenue growth and where commercial success will deliver corresponding
sustainability performance benefits, such as energy efficiency, GHG reduction,
and renewable energy production
– Integrate environmental sustainability metrics into our NPD processes to enable
our own Net Zero delivery, and our customers’ and the industries we serve
Deliver our commitments to Net Zero Science-Based Targets (SBTs)
and further improve the environmental performance of our operations
Execution
– Deliver operational targets for renewable energy, waste generation, water use
and packaging
– Deliver Net Zero GHG emissions commitments for Scopes 1, 2 and 3 and associated
SBTs through energy efficiency and renewable energy, including optimising product
design and our supply chains
Deliver for people, ensuring that we grow our business in line with our Values,
our Leadership Behaviours, and plan for the long-term future of Smiths
People
– Sustain and vitalise our safety culture and performance
– Develop and empower Smiths talent for the future
– Embed an inclusive and diverse culture and increase gender diversity
P 13
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about Execution
P 13
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about People
Remuneration
To align decision-making and ownership of our ESG goals, SSE
metrics will form part of the Smiths annual and long-term incentive
plans for FY2023. A GHG reduction metric formed part of our long-
term incentive plan in FY2022.
P 75
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Remuneration & People Committee Report
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
28
OUR VALUES
SMITHS LEADERSHIP BEHAVIOURS
Our enabling culture
At Smiths our culture empowers and enables our people to deliver
on our Purpose. Living our five Values every day, in each action and
decision that we take, makes Smiths a place where we are happy
and proud to work. It’s what makes us reliable, trustworthy, and
valued partners for our customers and suppliers and supports the
long-term sustainability and success of our business model.
The Smiths Leadership Behaviours incorporate our Values
and apply them to delivering for all stakeholders. The seven
Leadership Behaviours describe how we work with one another,
demonstrate our Values, and create value through our actions.
Importantly, the Leadership Behaviours apply to everyone at
Smiths – from the shop floor to senior executives. Whatever role
we play, we can all demonstrate and develop our Leadership
Behaviours to improve and deliver as a team, developing
and sharing our talents to support each other and improve
our tomorrow.
Our goal is to use the Leadership Behaviours to inspire and help
strengthen and shift the Smiths culture to be even more dynamic,
inclusive, and focused on delivering results that create value for
our people, customers and other stakeholders.
We have been tracking engagement on a range of important
cultural measures including safety, ethics, belonging, inclusivity,
leadership, and service since 2017. Our overall global engagement
score remained stable for May 2022 and November 2021,
just below the benchmark provided by our survey partner.
We continued to have a very high survey response rate of 82% in
May 2022 with nearly 19,000 comments submitted. See our KPIs
on page 23.
We will continue to use the survey in a transparent and meticulous
way to surface issues and more precisely understand what we
are doing well and where we need to do better. We also intend
to flex the questions in future surveys to test engagement
within focus areas and to ensure that we continue to work and
communicate effectively.
Ethics
Behaving ethically and with integrity is a fundamental part of our
Values. Our Code of Business Ethics guides Smiths colleagues
to recognise and deal appropriately with legal and ethical issues
that they may encounter in the course of their work. This is
supplemented by a suite of policies and procedures relating to
specific ethics and compliance matters.
Our colleagues and business partners are expected to report any
activity – whether in our business or those of our partners – that
they consider may be in breach of our ethics codes and policies.
Both our colleagues and partners have access to our confidential
‘Speak Out’ reporting hotline, which is accessible 24 hours a day,
seven days a week. Reports can be made anonymously.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
29
ESG governance and oversight
The Smiths Board of Directors and Executive Committee
have ultimate responsibility for Smiths ESG performance and
associated governance and oversight. The Science, Sustainability
& Excellence (SSE) Committee of the Board, chaired by Dame
Ann Dowling, is responsible for overseeing the Group’s approach
to science, sustainability, and excellence. The oversight
covers R&D, commercialisation and sustainability strategies,
including the impact of climate change and related metrics
and targets. The Remuneration & People Committee oversees
our approach to people and culture matters, and the Audit &
Risk Committee oversees our risk management processes
and systems of internal control. The Nomination & Governance
Committee keeps the Group’s high-level governance framework
under review to ensure appropriate guidance and oversight is
maintained. Sustainability strategy and delivery are led by members
of the Smiths Executive Committee: our Chief Sustainability
Officer; Chief People Officer; Group General Counsel; and our
divisional Presidents.
Our strategic oversight and collaboration model enables us to
bring together the skills and knowledge of our Board, our executive
team and business and functional leaders to drive effective long-
term decision making, ESG innovation and best practices across
Smiths. Our Smiths Excellence System supports the whole, driving
business-wide results-focused execution. ESG metrics and targets
are cascaded through the divisions and embedded in our core
operating model.
ESG reporting
We follow established reporting standards and regularly report our
performance, transparently sharing our data and engaging with third-
party ratings agencies. We use this information to evaluate our own
progress and inform the work we are doing in our focus areas.
Environmental data – basis of preparation
Group environmental data in this report excludes Smiths Medical.
Smiths Medical energy use and GHG Scope 1 & 2 emissions data is
shown separately in the table on page 30.
In preparation for setting Science-Based Targets aligned to
our Net Zero commitments, in FY2022 a robust review of our
FY2021 Scope 1 & 2 GHG inventory and historic assessments of
materiality and classification was undertaken by our external
specialist partner, Ramboll. This was undertaken in accordance
with ISO standards. This process resulted in the reclassification
of certain activities and site data, previously determined to be
immaterial and Scope 3. The reclassification meant that such
activities and data is now incorporated within our Scope 1 & 2
inventories. In addition, our GHG emissions are calculated using
revised regional emissions factors. Based on this work, energy
use and emissions data for Smiths Group has been restated from
that previously disclosed for FY2021. The same approach has been
used for FY2022 emissions data and calculations.
FY2021 restatement:
– Smiths leased ground fleet and small leased offices/sites
(previously considered to be Scope 3) re-classified as Scopes
1&2 (added 39,083 MWh)
– Inclusion of our Royal Metal acquisition’s site and transportation
fleet (added 5,289 MWh)
– Energy use updated for some sites (added less than 500 MWh)
– Regional Scope 2 emission factors updated (reduced emissions
by 9,981 t CO2e)
– Base revenue data has also been updated for all normalised
calculations including GHG emissions, water and waste
Stakeholder expectations, standards and third-party assurance
practices continue to evolve in this area. Our methods and
practices will continue to improve and be reflected in our
environmental performance results and associated disclosures.
ESG governance and oversight model
Smiths Board
Science, Sustainability &
Excellence Committee
Remuneration &
People Committee
Nomination &
Governance Committee
Audit &
Risk Committee
Executive Committee
Divisional Presidents
Chief Sustainability
Officer
Chief People Officer
Group General
Counsel
Division Commercial
Teams – Technology/
Sustainable design
ESG
Leadership
Teams
Group HSE
HR Leadership
Team
Group
Ethics and
Compliance
Company
Secretary
Director of
Internal Audit
and Risk
NPD management
– customer value and
sustainable design
Energy Team
– energy
efficiency and
GHG delivery
HSE Technical
Committee
– safety and
environment
HR Business
Partners
Business
Ethics
Councils
Smiths Excellence System
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 30
We have committed to set Science-Based Targets (SBTs) with
the SBT initiative (SBTi) and signed on to the 1.5° C Business
Ambition under the UN Race to Zero, covering Scope 1, 2 and 3
GHG emissions. We will submit proposals to the SBTi in 2022 to
establish our bespoke plans and interim SBTs.
Based on our review of data materiality, our Scope 3 emissions will
likely significantly exceed our operational emissions (Scopes 1 &
2). As is typical and expected for diversified industrial businesses,
emissions associated with our supply chain (Category 1 Purchased
Goods and Services) and Products in use (Category 11) are
anticipated, pending in-process verification, to account for the
majority of our Scope 3 emissions. As required by the SBTi, our
proposed interim reduction target will cover more than two thirds
of our total Scope 3 GHG inventory.
We recognise that delivering our Net Zero targets will require
consistent and priority focus across all aspects of our global
operations for the next 15-25 years. In FY2023, we will be
focused on establishing foundational processes and approaches
necessary to define and deliver near- and mid-term targets,
including the interim SBTs required under the SBTi framework.
Energy use and GHG (Scope 1 & 2) emissions
Smiths includes its Streamlined Energy and Carbon Reporting
(SECR) for FY2022, including our emissions and global energy
use and intensity (normalised) metric below. Our GHG emissions
calculations and reporting follows the WRI/WBCSD Greenhouse
Gas protocol (operational approach) and covers emissions from
all sources under our control, grouped under Scope 1 and Scope 2.
FY2022-2024 target
Progress FY2022
+5% increase to 66%
5% reduction
5% reduction
5% reduction
10 in FY2022
8 in FY2022
+2% increase to 63%
7.2% reduction
11.5% reduction
4.5% reduction
12 projects
5 projects
ENVIRONMENT
Smiths has had environmental improvement targets since FY2007.
Since FY2007 we have reduced water use and non-recyclable
waste by more than 30% on an absolute basis and we have
increased the use of renewable electricity in our operations to 63%
of total electricity use (sites reporting utility data under Smiths
HSE Reporting Policy, with 20 or more employees). We achieved
this by engaging our people, changing our processes, investing in
low-carbon and energy efficient technologies, and increasing our
use of renewable electricity.
Climate-related risks and their potential impact on the business
and its strategy form part of risk reporting and risk management
across the Group. Due to its long-term nature, climate change is not
considered to be a principal risk, but we recognise the importance
of assessing both physical and transition risk from climate change
in a formal way. See our TCFD disclosure on page 35.
We have agreed the three standards relevant to our business under
the Sustainability Accounting Standards Board (SASB) framework
(Aerospace Defence; Electronic and Electric Equipment; and
Industrial Machinery and Goods) and we are reviewing the potential
applicability of a fourth (Electronic Manufacturing and Original
Design Manufacturing). In FY2022, we undertook a gap analysis to
identify the reporting areas we need to progress to fully align to the
framework and are targeting alignment during FY2023.
In FY2022, we committed to ambitious Net Zero targets that
align Smiths with the UN’s critical global climate objectives:
Net Zero emissions from our operations (Scope 1 & 2) by 2040
and Net Zero emissions from our supply chain and products
in use (Scope 3) by 2050.
Performance in current three-year goal period
Use of renewable electricity1,2
Normalised greenhouse gas emissions3,4
Normalised non-recyclable waste2,3
Normalised water use in stressed areas (11 locations)2,3
Water reduction projects
Packaging reduction projects
1 Non-GHG producing electric sources including hydroelectric and nuclear.
2 Sites reporting utility data under Smiths HSE Reporting Policy, with 20 or more employees
3 Normalised to revenue. Absolute GHG emissions down 1.1%.
4 We have built a more aggressive GHG reduction target trajectory to meet our SBTs and an energy efficiency target into our colleague and executive incentive plans for FY2023.
Energy use and GHG (Scope 1 & 2) emissions
Global energy use – absolute values
UK energy use
Smiths Medical2
Smiths Medical UK2
Global emissions – absolute values
Scope 1 (direct emissions)
Scope 2 (indirect emissions)
Total
UK Scope 1 & 2 emissions
Smiths Medical Scope 1 & 2 emissions2
Smiths Medical UK Scope 1 & 2 emissions2
Global emissions – normalised values
Scope 1 (direct emissions)
Scope 2 (indirect emissions)
Total
KWh
KWh
KWh
KWh
t CO2e
t CO2e
t CO2e
t CO2e
t CO2e
t CO2e
t CO2e/£m revenue
t CO2e/£m revenue
t CO2e/£m revenue
FY2022
224,334,020
10,445,900
27,463,800
461,800
FY20211
224,394,230
n/a
75,006,500
n/a
19,131
32,539
51,670
1,755
6,176
7
7.46
12.68
20.14
20,378
31,865
52,243
n/a
16,740
n/a
8.47
13.24
21.71
1
FY2021 data updated following verification. See basis of preparation paragraph on page 29.
2 Smiths Medical FY2021 and FY2022 data is not included in Group data and has not been updated for the changes described above.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
Energy efficiency and renewable electricity
Accelerating projects that reduce overall energy use and increase
our use of electricity from renewable sources will be critical to our
success in achieving our Scope 1 & 2 targets.
In FY2022, we established a Group-wide Energy Team to prioritise,
coordinate and ensure delivery of the projects necessary to
meet our Net Zero and SBT commitments, including energy
efficiency, onsite renewable energy (e.g., solar), and procuring
renewable energy. The Energy Team will play a critical role in
identifying, aggregating, supporting and tracking projects as we
move forward.
63% of the electricity currently used in our operations is from
renewable sources (sites reporting utility data under Smiths HSE
Reporting Policy, with 20 or more employees) and our goal is to
increase this to 66% by the end of FY2024 and to 100% by 2040.
We undertook a global survey of onsite renewable opportunities in
FY2021 and have been evaluating a range of technologies including
solar, wind, low-carbon heating and cooling (LCHC), and combined
heat and power (CHP). An onsite renewable energy system is
already in place in Suzhou, China and we have recently completed
a solar installation at Smiths Detection, Johor Bahru, Malaysia.
Environmental management
Performance against our comprehensive portfolio of
environmental policies is overseen by our internal audit process
and we maintain an external environmental compliance audit
programme of approximately 15 sites every year. All Smiths
operational sites with over 50 colleagues are required under
Group policy to be certified under ISO environmental and safety
standards (18001 or 45001 and 14001) – approximately 60 sites
– unless they were recently acquired just before or during the
COVID-19 pandemic. Those sites were not allowed third party
visitors during the pandemic and are now working towards
certification as local conditions allow. We had no environmental
spills or environmental compliance penalties or fines in FY2022.
Restricted substances
All divisions participate in a regular forum to share best
practices and ensure compliance with global restricted
substance regulations including WEEE, RoHS, Prop65, REACH,
TSCA and Responsible Minerals. We operate a Restricted
Substance Steering Committee to ensure that we are
adequately resourced in this area.
31
SOCIAL
Safety
We have an extensive set of health and safety policies and procedures
that all operations are required to follow. Performance against these
policies is overseen by an audit process that also covers all Smiths
production facilities including ISO HSE management systems.
We report all injuries globally in accordance with US OSHA guidance.
Our headline safety metrics are Recordable Incident Rate (RIR) –
where incidents require medical attention beyond first aid – and
Lost Time Incident Rate (LTIR) – where a colleague is unable to work
following an incident – per 100 colleagues, per year across Smiths.
In addition to preparing injury reduction plans, each of our divisions
is required to set completion targets for the Safety Leading
Indicator (SLI) proactive and preventative safety measures most
relevant to their operations, with an expectation of achieving 95% of
target annually. SLIs include activities such as safety inspections,
leadership tours, training, and our safety look out peer-to-peer
observation programme.
Our Group Recordable Incident Rate in FY2022 was 0.54; 15%
above FY2021 but continued to track below the industry average
and in the top quartile of industry performance1. Our Group Lost
Time Incident Rate was 0.24.
While our focus on safety did not waver during FY2022, like many
companies, we faced several challenges that likely affected our
safety performance. Evidence indicates that these increased injury
rates have been broadly experienced across the industrial sector
more recently. Staffing and supply chain challenges during and
following the COVID-19 pandemic have meant that at some Smiths
sites colleagues have had to work irregular or extended hours.
Nearly 3,000 colleagues reported having COVID-19 during the year;
returning to work and suffering the after-effects of COVID-19 is
challenging. We have seen the further impact of limited face to face
interaction; safety committees unable to meet; limits on travel; and
the general impact of people dealing with the upheaval of COVID-19.
This performance does not reflect the work environment we wish
to have, and we intend to improve safety performance consistently
year on year by continuing to invest in new programmes, training
activities and site-specific injury reduction plans.
During FY2022 Smiths recorded zero work-related colleague or
contractor fatalities. Three contractor recordable incidents were
reported. We received no significant safety fines or penalties.
Including Smiths Medical, we achieved an RIR of 0.50 and an LTIR
of 0.21. The nature of work in the Smiths Medical operations meant
that the division previously had a positive impact on injury rates.
1 BLS data – NAICS 339900; https://www.bls.gov/iif/oshsum.htm#20Quartile_Data
RECORDABLE INCIDENT RATE
Per 100 colleagues
0.54
FY2021: 0.47
FY2022
FY2021
FY2020
FY2019
FY2018
LOST TIME INCIDENT RATE
Per 100 colleagues
0.24
FY2021: 0.20
0.54
FY2022
0.47
FY2021
0.35
FY2020
0.50
FY2019
0.44
FY2018
0.24
0.20
0.17
0.24
0.19
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 32
Developing talent
There are many opportunities for people to grow their careers at
Smiths. Our more structured and diverse approach to succession
planning following the talent reviews this year has enabled us to
identify and develop high-potential individuals from a broader pool
of diverse colleagues from all geographical regions, specialised
skill sets and industry experience. Separately, appointments to our
most senior roles are discussed at a monthly Talent Development
Committee comprising all members of the Executive Committee.
This year also saw the introduction of a new organisational metric
to enable meaningful measurement of talent progression through
the organisation. We will continue to invest in internal talent
mobility as a significant source of value for Smiths.
While our divisions serve different markets, there is much
common ground in the qualities and skill sets required in our
technical teams as they enable us to deliver efficiently and create
new products for the future. We see opportunities to leverage
this common ground more effectively by creating formal Group-
wide technical communities where groups of specialists can
connect, share problems and ideas, and contribute to delivery of
our strategy – for example energy reduction projects. We plan to
introduce a common technical career ladder across the Group
that will provide career visibility for individuals and enhance
internal talent mobility.
Reward and recognition
Recognising and rewarding colleagues in a fair, open and
meaningful way is an important underpin to developing talent.
We are committed to fair pay practices and ensuring that
colleagues participate in our success.
We have been an accredited Living Wage employer in the
UK since 2018.
In the UK, we operate an all-employee Sharesave Scheme,
which enables colleagues to buy Smiths shares at a discounted
rate. We have also been undertaking a process to align employee
benefits across markets, so they are the same for colleagues in
any of our four divisions or Group. We have completed this work in
China, India and Mexico to date.
The Board is conscious of the challenging impact of current
inflationary pressures on colleagues and this is reflected in the
management decision to focus more of the salary increase budget
on those who are more significantly affected in the coming year.
COVID-19
Safety precautions relating to COVID-19 have been an important
feature of our overall safety efforts over the last 30 months.
While many restrictions have now been lifted, we continue to
monitor the situation, and each of our locations continues to
comply with local requirements as infection rates fluctuate.
Practical measures to support our colleagues across the period
have included:
– An unwavering focus on COVID-safe work environments
– Pursuing a consistent approach to core employee benefits including
life cover, critical illness, disability, and medical insurance
– Rolling out a global Employee Assistance Programme (EAP)
– Regular communication, bespoke resource sites and
wellness materials
As a Group, we are honoured by the incredible efforts made
by our teams in supporting their own safety and the safety of
others, including in our communities, while continuing to serve
our customers across this extended period. Our data indicates
that colleague COVID-19 cases have typically tracked local
community cases and that there have been very few instances
of transmission at work.
Engaging with our colleagues
Our global communications activities are designed to engage
colleagues around the world with our Purpose and our strategy.
Key communications materials are translated into our ten
core languages.
Our Smiths Now app is a platform for colleagues to receive news
from around the business and share their views and stories and
is always active with grassroots content. There is also a global
fortnightly e-newsletter, Signal, which amplifies key company
news to the global business. Our intranet web portal acts as an
online hub for holding resources for many areas including safety,
well-being, ethics and compliance, diversity and inclusion, and
IT tips.
We undertook our My Say colleague engagement survey in
November 2021 and May 2022 and communicated the key
outcomes to colleagues.
We undertook a number of engagement projects in
FY2022 including:
– Communications around our results announcements
and Capital Markets event;
– Communications around our SES Awards and My Say surveys;
– A global Town Hall in May 2022;
– Our Smiths Day celebration of Smiths culture in June 2022.
Members of the Executive Committee shared video messages
and visited sites around the world to share Smiths Day
with colleagues;
– Global leadership summits for our Senior Leadership team in
November 2021, February 2022 and July 2022 with the next one
planned for November 2022; and
– An online presentation and Q&A about pay and the work of the
Remuneration (now the Remuneration & People) Committee
hosted by Committee Chair Bill Seeger.
Members of our Executive Committee and Board have also visited
a range of Smiths sites during the year. Read more on page 60.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
33
GENDER DIVERSITY IN THE GROUP
Diversity, equity and inclusion
We provide equal employment opportunities. We recruit, support
and promote our people based on their qualifications, skills,
aptitude and attitude. In employment-related decisions, we comply
with all applicable anti-discrimination requirements in the
relevant jurisdictions. We have zero tolerance for discrimination,
harassment or retaliation.
People with disabilities are given full consideration for
employment and subsequent training (including re-training,
if needed, for people who have become disabled), career
development and promotion based on their aptitude and ability.
We endeavour to find roles for those who are unable to continue
in their existing job because of disability.
We are focused on proactively increasing the number of women in
leadership roles at Smiths, as well as understanding the
challenges and barriers that may be impeding them from fulfilling
their potential. We have some way to go, which is why it is one
of our ESG strategic priorities.
We have five female members of the Smiths Board (45%),
and we welcomed three new female members to our Executive
Committee in FY2022 (31% women). Women make up 28% of
our global colleague population, but only 24% of our 656 senior
leaders. We are working to change this with a programme
of activities designed to identify, support and advance the
careers of the high-potential women we already have at Smiths.
Our target is to reach 27% by the end of FY2023 and 30% by
the end of FY2024.
The opportunity to improve in the diversity, equity and
inclusion area has been recognised and prioritised in our
People strategy. Besides clearly articulated diversity metrics
and objectives, in FY2023 we will also introduce our revised
people leader development programme, which is fully aligned
to our Smiths Leadership Behaviours. One entire learning
module in the programme will be focused on emotional
and cultural intelligence, conscious inclusion, and the role
of leaders in setting and leading diverse teams. In addition,
every division has introduced its own diversity and inclusion
priorities, often supported by dedicated individuals, and
including underrepresented group networks, education,
communication and other support activities.
Communities
Our direct economic contribution to communities and society
was £2.33bn in FY2022.
Employee costs
Supplier costs
Tax paid
Total
FY2022
£823m
£1,364m
£140m
£2.33bn
1 Senior Leadership Team is the KPI used to track gender diversity at Smiths. It is
defined as all colleagues that are Grade 14 or above. Data for Grade 14 and above
plus Directors of subsidiary companies, in line with the definition in the Companies
Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 is Female: 171
and Male: 561.
BOARD OF DIRECTORS Male6 (55%) Female5 (45%) EXECUTIVE COMMITTEE Male9 (69%) Female4 (31%) SENIOR LEADERSHIP TEAM1 Male498 (76%) Female158 (24%) TOTAL COLLEAGUES Male10,631 (72%) Female4,133 (28%) 01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
34
Anti-bribery and anti-corruption
Bribery and corruption matters are covered by our Code of
Business Ethics. We also have specific policies and procedures
relating to activities that create bribery and corruption risks, and
an umbrella anti-bribery and anti-corruption policy that provides
a single view of our approach. These policies cover a broad range
of matters including the giving and receiving of gifts, meals, and
hospitality; invitations to government officials; our approach to
facilitation payments; and controls around the appointment of
distributors and agents, customs brokers, and freight forwarders.
Our ethics dashboard enables us to interrogate our register of
gifts, meals and entertainment in an effective and useful way.
GOVERNANCE
Human rights
We consider violations of human rights to be appalling crimes.
Conduct that exploits workers or denies them the rights and
benefits to which they are legally entitled is wholly inconsistent
with our Values and policies and is not tolerated. We recognise the
important responsibility we have, and we support the vision of a
world where everyone can enjoy their universal human rights.
Our Human Rights Policy is guided by the international human
rights principles encompassed in the Universal Declaration
of Human Rights, the International Labour Organization’s
Declaration on Fundamental Principles and Rights at Work, and
the United Nations Guiding Principles on Business and Human
Rights. We adhere to national law and regulations in each market
in which we operate and, should we encounter conflict between
internationally recognised human rights and national laws, we will
seek ways to honour the principles of international human rights.
All persons working for, or on behalf of, Smiths are required to
adhere to our Policy and approach.
Our Responsible Minerals Sourcing Policy addresses our
commitment to the sourcing of minerals in an ethical and
sustainable manner that safeguards human rights and aims to
ensure that tin, tungsten, tantalum, gold and cobalt are sourced
with due respect for human rights and in a manner that does not
finance armed groups. To achieve this objective, we take guidance
from the OECD Due Diligence Guidance for Responsible Supply
Chains of Minerals from Conflict-Affected and High-Risk Areas.
We expect those with whom we have a business relationship –
suppliers, contractors, subcontractors, and anyone else in our
supply chains, including any recruitment agents or other providers
of labour (temporary or otherwise) – to share our commitment to
human rights and to be free from practices associated with human
rights violations, including forced/involuntary labour or modern
slavery. We take very seriously any allegations that human rights
are not properly respected.
We have not identified any serious human rights issues in our
operations or in those of our suppliers in FY2022.
The Smiths Modern Slavery and Human Trafficking Statement
FY2022 can be found on the Smiths corporate website
www.smiths.com
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS TASK FORCE
ON CLIMATE-
RELATED
FINANCIAL
DISCLOSURES
The Task Force on Climate-related Financial Disclosures
(TCFD) helps to improve transparency on climate-related
risks and opportunities by providing an internationally
recognised framework to guide companies in making
more effective climate-related financial disclosures.
Over the last three years we have demonstrated our continued
commitment to aligning with the recommendations of the TCFD
through expanding and updating our assessment of climate-
related risks and opportunities. This ongoing systematic
assessment has allowed us to identify the potential risks and
opportunities that climate change presents to our business,
enabling us to better prepare for an uncertain future and ensure
that our business strategy is resilient to future changes.
Mitigating our risks and realising our opportunities
Our diversified portfolio, responsiveness to new market
requirements and geographic spread of assets mean that
our business is well prepared to respond to climate risks
in the short term.
However, the future is uncertain, so in FY2022 we have and will
continue to take action to strengthen our longer-term climate
resilience, implementing measures to reduce our exposure to the
potential climate risks we have identified and ensuring that Smiths
is best positioned to realise our opportunities. For example:
Climate-resilient assets: John Crane has undertaken analysis to
identify facilities vulnerable to the effects of climate change and
has put in place monitoring and mitigation measures to account
for extreme weather. For example, one site has been relocated
as a result of recent insurance claims caused by flooding issues.
John Crane has also considered the risk of extreme weather
during site selection of new facilities, including consideration
of hurricane paths and proximity to flood plains.
Mitigating supply chain risks: Across all the divisions, single
source materials are avoided wherever possible and instead,
an approach of sourcing from multiples sites in multiple
locations across the globe is taken. This increases resilience
of the supply chain against regional disruption caused by
extreme weather events.
35
Keeping costs down: To mitigate the risks associated with rising
resource costs, the Procurement team has evaluated Smiths
Detection’s supply chain and transportation processes for
efficiency improvements. This included implementing measures
such as optimisation of space in freight through reusable stacking
solutions and exploring localised business models to reduce
product transportation distances.
Strengthening oversight and ownership: Our newly formed
Science, Sustainability & Excellence (SSE) Committee of
the Board, chaired by Dame Ann Dowling, is responsible for
overseeing the Group’s approach to science, sustainability,
and excellence. The oversight covers R&D, commercialisation
and sustainability strategies, including the impact of climate
change and related metrics and targets. We also appointed a Chief
Sustainability Officer to the Executive Committee.
The SSE oversees the following:
– Prioritising new product development programmes whose
commercial success will deliver revenue growth and
corresponding sustainability performance benefits to and
through our customers. This includes energy efficiency, GHG
reductions and renewable energy production and use.
– Delivering Net Zero GHG emission commitments for Scopes 1, 2
and 3 and associated SBTs through energy efficiency, renewable
energy, and optimising product design and our supply chains.
TCFD recommended disclosures
At the time of publication of this Annual Report, the Group has
made climate-related financial disclosures consistent with the
TCFD’s recommendations and Recommended Disclosures
pursuant to Listing Rule 9.8.6 (R) (8). The following table
summarises our disclosures and refers to where further detail
on climate-related financial disclosures can be found in this
Annual Report.
In completing this work the Group made use of TCFD guidance
material including the TCFD technical supplement on the use
of scenario analysis, TCFD Guidance on Metrics, Targets, and
Transition Plans, and the TCFD Guidance for All Sectors.
The Group is continuing to make progress across all four pillars of
the recommendations and is working to further align and be more
transparent in its disclosures in line with the evolving guidelines to
better communicate the work that is being done internally.
In FY2023 we intend to undertake a materiality assessment to
demonstrate that Smiths has considered the most important
topics in ESG, including climate risk and opportunities.
We are also developing a Group-wide strategic response to
energy transition in relation to our own targets, the implications
on current customers and end use markets, and opportunities
for Smiths.
In FY2023 we intend to prepare and publish a detailed, standalone
TCFD document to enhance our disclosures to cover these
matters and take account of progress.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 36
GOVERNANCE
Disclose Smiths governance
around climate-related risks
and opportunities.
a. Describe the Board’s oversight of climate-related risks and opportunities.
The Board oversees the Group’s approach to sustainability, including climate change. The Board has
oversight of our Group and divisional strategies, receiving regular updates on performance and deep
dives into divisional strategy on a rotational basis. Climate change opportunities are integrated into
our strategic planning processes, including our ESG framework and ESG strategic priorities. The SSE
Committee of the Board is responsible for overseeing the Group’s approach to science, sustainability
and excellence. The oversight covers R&D, commercialisation and sustainability strategy, including
the impact of climate change and related metrics and targets. The Audit & Risk Committee of the
Board is responsible for reviewing and assessing the effectiveness of risk management, including
climate risk in the business. The results of our annual assessment of climate change risks and
opportunities are reported to the Audit & Risk Committee.
– See Board governance model page 57
– See ESG governance and oversight model page 29
– See Enterprise Risk Management (ERM) process page 46
– See Board activity page 60
– See SSE Committee Report page 89
– See our ESG framework page 24
– See our ESG strategic priorities page 27
– See Stakeholders and S172 Statement page 41
b. Describe management’s role in assessing and managing climate-related risks
and opportunities
The Executive Committee is responsible for the Group’s approach to sustainability, including climate
change. Climate-related risk is reported and managed in the same way as other risks in the business.
Over and above this, the results of our annual assessment of climate change risk and opportunities are
reported to the Executive Committee and integrated into our strategic planning processes, including
our ESG strategic priorities. Our Group and divisional strategic review and planning processes consider
and respond to climate-related opportunities as part of our divisional strategic planning processes and
our ESG framework and ESG strategic priorities. To align decision-making and ownership of our ESG
goals, sustainability metrics form part of the Smiths annual and long-term incentive plans.
– See Enterprise Risk Management (ERM) process page 46
– See ESG governance and oversight model page 29
– See our ESG framework page 24
– See our ESG strategic priorities page 27
– See Our business model page 9
– See Our strategy and megatrends page 10
– See Remuneration & People Committee Report page 75
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
STRATEGY
Disclose the actual
and potential impacts of
climate-related risks and
opportunities on the Group’s
business, strategy and
financial planning, where
such information is material.
37
a. Describe the climate-related risks and opportunities the organisation has identified
over the short, medium and long term.
We conduct a systematic assessment on an annual basis to identify physical and transition risks
and opportunities over the short, medium and long term. Further, our Purpose and commitment
to sustainability leadership are reflected in our intent to prioritise ESG performance at Smiths.
We therefore place additional emphasis on our response to megatrends in our sectors which relate to
the energy transition agenda and overall reduction of waste and energy use.
– See this year’s reporting on Key transition risks and opportunities and Key physical risks
and opportunities page 40
– See Mitigating our risks and realising our opportunities page 35
– See Our business model page 9
– See Our strategy and megatrends page 10
b. Describe the impact of climate-related risks and opportunities on the organisation’s
businesses, strategy and financial planning.
We incorporate the climate-related risks and opportunities we identify into our business planning
and strategy development processes at both the division and Group-level, including our ESG
framework and strategic priorities. To align decision-making and ownership of our ESG goals,
sustainability metrics form part of the Smiths annual and long-term incentive plans.
– See Mitigating our risks and realising our opportunities on page 35
– See our ESG framework page 24
– See our ESG strategic priorities page 27
– See Environment performance page 30
– See Our strategy and megatrends page 10
– See Chief Executive Officer’s review of the year page 11
– See Remuneration & People Committee Report page 75
c. Describe the resilience of the organisation’s strategy. Taking into consideration
different climate-related scenarios, including a 2°C or lower scenario.
The scenarios we use to assess the resilience of our business always include consideration of a 2°C
or lower scenario. This year we have expanded the range of scenarios we assess ourselves against
and have disclosed our ratings of the resilience of our business against our identified potential
risks. Whilst climate risk is not considered a principal risk for Smiths, failure to meet stakeholder
expectations on ESG obligations is considered a principal risk. This is addressed through Group
strategy and our ESG strategic priorities.
– See Scenario analysis – building upon previous work on page 39
– See Key transition risks and opportunities and Key physical risks and opportunities page 40
– See Principal risks page 49
– See our ESG strategic priorities page 27
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
RISK MANAGEMENT
Disclose how Smiths identifies,
assesses and manages
climate-related risks.
METRICS AND
TARGETS
Disclose the metrics
and targets used to
assess and manage relevant
climate-related risks and
opportunities, where such
information is material.
38
a. Describe the organisation’s processes for identifying and assessing
climate-related risks.
Climate-related risk is reported and managed in the same way as other risks in the business.
Over and above this, we conduct a systematic scenario analysis exercise on an annual basis to
identify and assess climate-related risks and opportunities. This uses the following staged process:
i. Understand revenue streams as base case; ii. Climate scenario analysis – high-level risk and
opportunity mapping conducted over two physical and two transition climate scenarios over two
time horizons (medium- and long-term); iii. Integrated financial impact assessments – risks and
opportunities identified to uncover the financial drivers that will inform and shape future investment;
and iv. Testing and validation – workshops conducted at Group and divisional level to refine the risk
and opportunity mapping by reviewing potential materiality over time, identify potential mitigation
measures to inform strategy, and refine metrics and targets.
– See ERM process page 46
– See this year’s approach in Scenario analysis - building upon previous work on page 39
b. Describe the organisation’s processes for managing climate-related risks
Climate-related risk is reported and managed in the same way as other risks in the business. As part
of our annual scenario analysis exercise, we also identify key actions to mitigate potential climate-
related risks and to realise our identified opportunities. See staged process described above.
– See ERM process on page 46
– See Mitigating our risks and realising our opportunities on page 35
c. Describe how processes for identifying, assessing, and managing climate-related risks
are integrated into the organisation’s overall risk management.
We incorporate the climate-related risks we identify into our ERM process.
– See Mitigating our risks and realising our opportunities on page 35
– See ERM process on page 46
a. Disclose the metrics used by the organisation to assess climate-related risks and
opportunities in line with its strategy and risk management processes.
We report against our environmental metrics annually. This year we have also undertaken a gap
analysis of our metrics and targets to identify key areas where we can improve our monitoring of
climate-related performance. We have built a more aggressive GHG reduction target trajectory to
meet Science-Based Targets and energy efficiency and new product commercialisation targets into
our incentive arrangements for FY2023.
Our climate-related metrics and targets now include:
– Total energy use
– Energy efficiency target, and new product commercialisation revenue target per programme,
both linked to remuneration for FY2023 AIP
– Scope 1 & 2 emissions absolute reduction target linked to remuneration for FY2023 LTIP
– Scope 1 & 2 emissions normalised to revenue target linked to remuneration for FY2022 LTIP
– See Environment performance on page 30
– See Remuneration & People Committee Report on page 75
b. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions,
and the related risks.
We disclose our Scope 1 and 2 emissions annually. We have created a baseline inventory of our Scope
3 emissions which will be validated before being submitted to the SBTi in FY2023.
– See Energy use and GHG (Scope 1 & 2) emissions on page 30
– See Scope 3 information on page 30
– See Environment performance on page 30
c. Describe the targets used by the organisation to manage climate-related risks and
opportunities and performance against targets.
We report on our progress against our environmental targets annually. This year we have also
undertaken a gap analysis to identify key additional metrics and targets which could improve
monitoring of our climate-related performance. See metrics and targets described above.
– See Environment performance on page 30
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 39
Scenario analysis – building upon previous work
During FY2021, climate-related physical and transition risks and
opportunities were assessed under two climate scenarios and
time periods, and the actions that could be taken to mitigate risks
and capture opportunities were incorporated into our strategic
planning processes.
Our most recent scenario analysis exercise, conducted in Q3
FY2022, builds upon the assessment of previous years, and seeks
to provide a more in-depth understanding and comparison of
physical and transition risks and opportunities. A wider range
of scenarios was considered, including two transition scenarios
and two physical risk scenarios.
Physical scenarios
For the physical scenarios, the Intergovernmental Panel on
Climate Change’s (IPCC) Representative Concentration Pathway
(RCP) 4.5 and RCP8.5 scenarios were used.
RCP4.5
– RCP4.5 represents an intermediate emissions scenario whereby
climate policies are implemented to limit GHG emissions.
– In the 2040s, global mean surface temperature is projected
to increase by 1.1°C. By the 2080s, this reaches 1.4°C.
RCP8.5
– RCP8.5 is a high-emissions scenario and represents a future
where levels of greenhouse gas (GHG) emissions continue to rise
throughout the 21st century with minimal policy intervention.
As such, GHG emissions were assumed to continue to increase
throughout the century, without significant interventions.
– In the 2040s, global mean surface temperature is projected
to increase by 1.8°C. By the 2080s, this reaches 3.7°C.
Across both scenarios:
– Some regions will experience increased annual rainfall,
whilst other regions will receive less annual rainfall.
– Regions are likely to experience seasonal differences in
temperature and precipitation patterns. For example, annual
precipitation in the UK is projected to increase but this is due
to projected wetter winters, increasing the risk of flooding; in
contrast, summers are projected to become drier, increasing
the risk of drought.
Transition scenarios
For the transition scenarios, the International Energy Agency’s
(IEA) World Energy Outlook Sustainable Development Scenario
(SDS) and Stated Policies Scenario (STEPS) were used.
2021 Stated Policies Scenario (STEPS)
– This scenario reflects current policy-setting based on sector-
by-sector assessment of the specific policies in place, as well
as those that have been announced by governments around
the world.
– It aims to provide a benchmark to assess the potential
achievements (and limitations) of recent developments in energy
and climate policy:
– Risks to oil security remain
– Gas markets are changing rapidly
– Electricity moves to the heart of modern energy security
2021 Sustainable Development Scenario (SDS)
– The assumptions on public health and the economy are the
same as in the STEPS
– Full alignment with the Paris Agreement to hold the rise in
global average temperature to “well below 2 °C … and pursuing
efforts to limit (rises) to 1.5 °C”
– It works backwards from the achievement of sustainable energy-
related goals – universal access to affordable, reliable and
modern energy services by 2030, a substantial reduction in air
pollution, and effective action to combat climate change – and
shows what would be required to meet them
– Major transformation of the global energy system
– Net Zero by 2070
– Surge in clean energy policies (promotion of hydrogen, biogas,
biomethane and Carbon Capture, Utilisation and Storage
(CCUS) across sectors)
– Staggered introduction of CO2 prices
– Fossil fuel subsidies phased out by 2025 in net-importing
countries and by 2035 in net-exporting countries
As well as assessing risks and opportunities under a greater
number of scenarios, this year’s assessment included detailed
engagement with each of the four divisions to enable a ‘deep dive’
into issues specific to each and to better understand the Group-
level implications of these risks and opportunities.
– Extreme weather events such as flooding, wildfires and drought
are likely to become more severe and more frequent.
– The difference between the two scenarios is particularly evident
In addition, we have assessed the level of each risk and
opportunity in more detail to better understand the potential
financial impacts of the identified risks and opportunities.
in the projections towards the end of the century, which are
much more extreme under RCP8.5.
Although a quantitative assessment was not undertaken, risk and
opportunity ratings were defined in line with the Group and division
level risk registers to allow a better understanding of the scale
of identified risks and opportunities, enabling Smiths to prioritise
actions for risk mitigation.
These additional activities allow us to better understand the
nuanced nature of risks and opportunities posed across our
business, at Group and division level, under a wider range of future
scenarios. This ultimately enables us to improve our resilience,
by addressing risks across our portfolio and ensuring that
opportunities are incorporated within our business strategy.
Priority risks and opportunities are summarised in the tables
below across the range of scenarios.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 40
Key physical risks and opportunities
Over the medium and longer term, key physical risks relate to the potential effect that projected increases in the frequency and severity
of extreme weather events could have on our assets and supply chain. These risks become more severe under the high-emissions
RCP8.5 scenario.
However, we have also identified several opportunities where each of our divisions can work to develop innovative solutions to our
customers’ climate-related challenges.
Risks
Damage to Group assets from extreme weather events: Increased costs and resulting
revenue losses due to repair and insurance costs.
Temperature regulation requirements during heatwaves and cold snaps: Health and
safety risks from overheating, higher operating costs from increased air conditioning
and heating. Capital costs associated with retrofitting assets to provide sufficient
temperature controls.
Damage to key supply chain assets from extreme weather events: Loss of revenue due
to disruption/delay of manufacturing processes.
Disruption to transportation and distribution networks from extreme weather events:
Loss of revenue due to delays getting products to market, caused by supply chain
disruption.
Opportunities
RCP4.5 physical scenario
RCP8.5 physical scenario
2040s
medium term
2080s
long term
2040s
medium term
2080s
long term
Level of risk categories: Very Low – Low – Moderate – High – Very High
Low
Moderate
Low
Low
Low
Low
Moderate
High
Moderate
Moderate
High
Moderate
High
Low
High
High
Growth in remote sensing market: Increased revenue from growth in demand
for satellite technology for environmental monitoring and tracking.
Increased demand for cooling systems: Increased revenue from increased demand for
residential and domestic cooling systems, driven by ongoing variation in global temperatures.
Moderate
High
Moderate
Very High
Low
Moderate
Moderate
Moderate
Key transition risks and opportunities
Key transition risks identified over the next 30 years primarily result from increasing costs associated with the price and availability of
resources and compliance with increased reporting requirements, although increased competition also poses a risk.
New and emerging markets present us with significant opportunities for growth, with demand for energy efficient products and services
increasing greatly as we transition to a lower carbon global economy.
Risks
Increased regulations and pricing on GHG emissions: Greater costs associated with
emissions reduction, monitoring and reporting obligations.
Increased transportation costs: Greater fuel costs due to increased pricing on GHG
emissions.
Cost and availability of resources: Increased price and reduced availability of critical raw
materials. Limited supply of materials and components could lead to price volatility and
production constraints.
New and emerging competitors: Reduced accessible market due to increased
competition in Net Zero/energy efficiency spaces, such as methane leakage.
Opportunities
Growth in aviation/aerospace energy efficiency market: Increased revenue from
development of new products for aviation/aerospace, such as energy efficiency detection
products and solutions.
Growth in energy efficiency products market: Increased revenue from Smiths efficiency
products and services, particularly methane detection and remediation. Increased
investment for new technologies e.g., carbon capture, utlisation and storage (CCUS) and
hydrogen.
Growth in power industry energy efficiency: Increased revenue from development of
emerging low-carbon emission technologies to reduce electricity transmission losses.
STEPS transition scenario
SDS transition scenario
2030
medium term
2050
long term
2030
medium term
2050
long term
Low
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
High
Moderate
Moderate
Moderate
Moderate
Moderate
Low
High
Low
Moderate
High
High
Very High
High
Moderate
Very High
Moderate
High
Very High
High
Moderate
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS STAKEHOLDERS
AND SECTION 172
STATEMENT
Understanding the needs and priorities of our key
stakeholders and building strong and positive relationships
is critical to our success. Stakeholder engagement takes
place across the Group, operationally by our divisional
teams and management, at Group level, and by the Board.
In a business as diversified as Smiths, engagement with most
stakeholder groups is handled locally by management, or by
specialist Group teams. The Board maintains oversight and
only engages directly if there are issues which truly warrant its
involvement or where it can add value. This is particularly true of
engagement with customers and suppliers (the majority of whom
are unique to a specific division) but is also usually the case for
governments, regulators and our local communities.
41
The outcomes of stakeholder engagement, including concerns
raised, are reported to the Board and Board Committees on a
regular basis through our usual processes that support informed
decision-making. Discussion and decision-making by the Board
takes the views of key stakeholders into account, in order to balance
their needs, and effectively build the sustainable, long-term success
of the Group.
During the year ended 31 July 2022, the Board has acted in
accordance with Section 172(1) of the Companies Act 2006 with
each Director acting in the way they consider, in good faith, would
be most likely to promote the success of the Company for the
benefit of its members as a whole. In doing so, the Directors had
regard to the interests of other stakeholders, whilst maintaining
and overseeing high standards of business conduct. Our approach
to key stakeholders and stakeholder considerations that influenced
Board discussions and the outcomes of these discussions are
outlined below.
Further examples of how stakeholders views have been brought into
the boardroom can be found in our Governance Report on pages 60
and 61.
P 60
READ MORE
Governance
SEE MORE
Sustainability at Smiths Report
PEOPLE
OUR APPROACH
Our people are vital to the success
of Smiths.
We aim to attract and retain the very best
by creating an environment for colleagues
based on respect, personal growth,
recognition and development of talent,
and a sense of belonging and purpose.
Our culture is a powerful asset and
empowers and enables our people to
deliver our Purpose. It is supported by our
Values and our Leadership Behaviours
which influence every decision, guide
how we behave, and help make Smiths
a place where people are happy and
proud to work.
KEY PEOPLE PRIORITIES
– Health, safety and well-being
– Purpose and culture
– Ethical behaviour
– Reward and recognition
– Employee retention and engagement
– Talent development
– Diversity, equity and inclusion
– Sustainability
– Community contribution
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Management engages with colleagues through regular town hall meetings, Company news
updates and through our online tools where colleagues can share their views. See page 32
for more information
– Non-executive Directors undertake workforce engagement activities, including in-person
site visits and attendance at colleague meetings, forums and events. See page 60 for
more information
– The Board and Remuneration & People Committee receive regular updates from the Chief
People Officer on employee engagement, reward, talent, and diversity and inclusion
– The Audit & Risk Committee is provided with updates on ‘Speak Out’, our confidential
reporting hotline, and other reports and statistics relating to the Group’s ethical policies
and performance
– The Board receives health and safety reports at every Board meeting
– The Board also receives regular updates on the Group’s pension arrangements
OUTCOMES OF ENGAGEMENT IN FY2022
– Given the importance of, and focus on, People in the Smiths Value Engine, the Board
approved the evolution of the Remuneration Committee into the Remuneration &
People Committee
– Based on feedback from colleagues through the My Say engagement survey, the Board
was supportive of the launch of our new Smiths Leadership Behaviours, which are
shown on page 28, and the focus on diversity and inclusion, with an enhanced gender
diversity measure added as a KPI described on page 23
– The Board supported the de-risking of the TI Group Pension Scheme by way of a £640m
bulk annuity buy-in. The Board considered and declined the request from the SI Pension
Scheme Trustees to pay enhanced member benefits
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
CUSTOMERS
OUR APPROACH
Meeting customer needs and exceeding
their expectations with products,
quality and service. The way we conduct
business and pay attention to the things
that matter to them – for example, ethics
and environmental performance – is a
fundamental part of our operating model
and our Values.
We recognise that strong and enduring
customer relationships will sustain
Smiths into the future.
42
KEY CUSTOMER PRIORITIES
– Product innovation, quality and service
– Environmental performance of products
to help customers meet their own
environmental goals
– Long-term strategic relationships
– Mutual confidence and respect
– Ethical behaviour and data protection
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Management teams engage with customers through formal feedback activities such
as surveys, quarterly business reviews and senior team meetings with key customers.
They also integrate informal feedback from conversations had with customers by our
operational and field-based teams
– Management teams use Key Account Management structures and Customer
Relationship Management tools across our business to deliver timely and high-quality
responses to our customers. We aim to apply best practices, develop skills and
capabilities, and deliver continuous improvement in execution to enhance the overall
customer experience
– Customers and market challenges are considered as part of the monthly divisional
performance updates to the Executive Committee with a deep dive every quarter
– Divisional performance reports are sent to the Board on a quarterly basis and deep dives
on divisional performance and strategy are held on a rotational basis
– The Board monitors performance indicators relating to customer satisfaction such as
On-Time-In-Full (OTIF) and Cost of Poor Quality (COPQ)
– In FY2022 the Audit & Risk Committee was updated on product quality and customers
in divisional risk deep dives. See page 73 for more information
OUTCOMES OF ENGAGEMENT IN FY2022
– The Board approved the creation of the Science, Sustainability & Excellence (SSE)
Committee. The Committee oversees the Group’s approach to sustainability and to
new product development, both key priorities for our customers. See page 89 for
more information
– The Board approved our divisional strategies, including an increased focus on
commercialising high-value green technologies that enable sustainability performance
for and through our customers
– As part of the Board evaluation, the Board requested greater visibility of macro
conditions, external markets and the impact of opportunities arising from technology
– The SSE Committee requested more oversight on product ideation strength and early-
stage new product development to ensure that the Group is appropriately focused on
megatrends and new markets
– The Board considered inflation and supply chain pressures and the impact on pricing
and margins
– The Board was satisfied that the culture of the Group is appropriately focused on
customer needs and that customer risks are being managed appropriately
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 43
SUPPLIERS
OUR APPROACH
Developing mutually beneficial
relationships with our suppliers and
building resilience, quality and efficiency
across our supply chain is a fundamental
contributor to our customer offer and the
long-term sustainability of Smiths.
We operate a total value supply chain
approach that considers all aspects of a
supplier’s contribution to generate and
capture value. This includes ethical and
environmental matters, including GHG
reduction, and alignment with our Values,
continuous improvement and risk.
COMMUNITIES
AND SOCIETY
OUR APPROACH
We aim to improve our world by
contributing positively to our communities
and society in general.
Smiths products and services support
critical global industries where we are
pioneering progress in safety, efficiency,
and environmental performance.
Our operations around the world play a
beneficial role in local economies through
job creation and skills development;
procurement and generating tax revenues;
operating safely, environmentally
responsibly and ethically; and direct
engagement. Healthy and prosperous
communities and strong relationships are
aligned with our Values and inspire and
promote a sense of pride and ownership
in our people.
KEY SUPPLIER PRIORITIES
– Long-term relationships with Smiths
– Mutual confidence and respect
– Ethical behaviour
– Return for all partners
– Innovation partnerships
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Management teams meet regularly with suppliers to review performance,
discuss new business opportunities, set goals and work on improvement areas. For our
higher value and/or more complex products, management engages with our suppliers
at the highest level to partner on R&D, new product introduction, quality and continuous
improvement projects
– Updates on suppliers and supply chain are included in divisional performance updates
to the Executive Committee
– Divisional performance reports are sent to the Board on a quarterly basis and
deep dives on divisional performance and strategy are discussed by the Board on a
rotational basis
– In FY2022 the Audit & Risk Committee was updated on supply chain risk and ethics and
compliance in each division
OUTCOMES OF ENGAGEMENT IN FY2022
– Each division developed and implemented appropriate contingency plans to mitigate
the impact of supply chain challenges arising from the COVID-19 pandemic, the Russia/
Ukraine conflict, transportation and labour issues, and other challenges
– The Board was supportive of the ongoing project to mitigate the risk from high-
dependency sole source suppliers
– Management approved the implementation of a source-to-pay solution with a single
portal access for our supplier base which aims to improve procurement efficiency
and effectiveness
– The Board was supportive of the refreshing of the Group’s Supplier Code of Conduct
during the year to increase focus on ESG matters, including environmental policies
and performance
KEY COMMUNITY PRIORITIES
– Safe and effective operations
– Green technology, environmental
performance, respecting
natural resources
– Fair employment, skills development,
and prosperity
– Ethical behaviour
– Direct engagement – education
and community support
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Our teams across the world engage directly with their local communities through
fundraising, charitable giving, and education initiatives
– Science, Technology, Engineering and Maths (STEM) education initiatives are particularly
important to management and to our colleagues as a way to share their passion for
engineering and encourage young people to consider careers in the sector. Many of our
sites run STEM programmes
– The Board is provided with updates on the elements of the Group’s operations which
impact the wider community, including the Group’s Global Tax Strategy. This describes our
approach to the responsible management of tax affairs to enhance long-term shareholder
value while contributing to public expenditure and the welfare of our local communities
– The Audit & Risk Committee receives regular reports on issues raised through the Group’s
‘Speak Out’ reporting hotline which enables reporting of matters affecting communities
such as safety, ethical behaviour, human rights and modern slavery
– At our July Leadership Summit senior leaders took time out to volunteer at five
London charities
– Colleagues are regularly involved in and support local community events
OUTCOMES OF ENGAGEMENT IN FY2022
– The Board approved the Group’s new ESG strategic priorities which outline our focus on
new product development programmes which deliver sustainability performance and on
delivering our environmental commitments
– The Group donated to the Red Cross to support the people of Ukraine. Smiths also
matched colleague donations
– In FY2022 we began a pilot for a new community engagement programme – Improving
Our World – which will include paid volunteering time for colleagues
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
GOVERNMENTS AND
REGULATORS
OUR APPROACH
Governments and regulators are vital to
our business as they are policy setters
and influencers in the markets where
we operate. We operate in some highly
regulated markets and sectors requiring
strict adherence to local and international
industry and product regulations, and strong
ethical practices.
We have a mature governance environment
with exacting standards, robust diligence
processes and a proactive management
approach to reduce the likelihood of an
ethical, legal or regulatory breach impacting
our business.
In the normal course of business, we
build relationships with governments,
policymakers and regulators across the
world. We do this at both Group and at
divisional level so that we are able to operate
effectively and to ensure our interests and
those of the industries in which we operate
are represented in decision-making. We also
contribute our expertise on emerging
national, regional and global needs.
INVESTORS
OUR APPROACH
We are committed to openness and
transparency with all capital providers and
to the effective management of risk.
We report routinely to shareholders
through our formal results activities and
undertake regular meetings and one-off
events such as Capital Markets Days and
investor conferences. Third-party analyst
and broker briefings also form part of our
communications schedule.
Shareholders are directly consulted by the
Board on such matters as Remuneration
Policy and views are sought on key
corporate activity.
44
KEY GOVERNMENT AND REGULATOR PRIORITIES
– Product and operational safety
– Net Zero and environmental policies
– Protection of natural resources
– Defence and security
– Safe and fair working conditions
– Economic growth and prosperity
– Trade compliance
– Ethical behaviour
– Privacy and data protection
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Our Group Corporate Affairs team based in the UK, US, Europe and Asia guides and
supports our relationships with key regulators, local policymakers, budget holders and
industry groups. It also leads our outreach and relationship programme with government
bodies and regulators, with the aim of promoting a deeper understanding of the Smiths
culture and products
– Government policy and regulators are considered during formulation of
divisional strategies
– Updates on regulatory processes for approval of new products are provided
during divisional performance reviews at the Executive Committee
OUTCOMES OF ENGAGEMENT IN FY2022
– Management approved policy guidelines and an operational framework within which
government relations are conducted. The business sustains harmonious relations with
the governments in the countries where we manufacture and operate and with the
relevant regulatory authorities
– Policy guidance was issued to the business to navigate issues such as the COVID-19
pandemic and the Russia/Ukraine conflict
KEY INVESTOR PRIORITIES
– Sustainable growth
– Shareholder returns
– Delivering against our strategy
– Openness and transparency
– Maintaining effective controls and
managing risk
– Environmental performance and
social impact
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– The Board attends the AGM and General Meetings where shareholders are invited to
submit questions to the Board in person and remotely
– The Chief Executive Officer and the Chief Financial Officer host results presentations and Q&A
sessions and meet with a broad spread of the Group’s capital providers throughout the year
– Members of the Board engaged with investors at the Capital Markets Day in November 2021
– Analyst and broker briefings, and reports of meetings with major or prospective
shareholders, are circulated to Directors outside the formal Board meeting schedule
– In FY2022 the Board sought shareholder feedback on the best course of action on the use
of the proceeds following the completion of the sale of Smiths Medical
– In FY2022 the Chair of the Remuneration & People Committee met with our top
shareholders to discuss Smiths Remuneration Policy
– The Board considers its dividend policy and the UK Pensions Act 2021, prior to approving the
payment of a dividend
OUTCOMES OF ENGAGEMENT IN FY2022
– The Board reaffirmed the Group’s strategy including the Smiths Value Engine and focus
on our three priorities of Growth, Execution and People
– The Board approved holding a Capital Markets Day in November 2021 to update investors
and other stakeholders on the Group’s strategy and medium-term targets
– The Board approved the planned creation of a Sustainability at Smiths Report
– The Board considered the Group’s capital allocation and dividend policy in light of the
cash proceeds received from the sale of Smiths Medical. The Board determined that the
proceeds would be split between investment in growth and a significant return of capital
to shareholders through a share repurchase programme
– The Board approved the payment of the final dividend for FY2021 and the FY2022
interim dividend
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NON-FINANCIAL
INFORMATION
STATEMENT
The following disclosure aligns to the non-financial reporting
requirements contained in sections 414CA and 414CB of
the Companies Act 2006 and reflects our commitment to
and management of the environment, employees, social
matters, human rights and anti-bribery and anti-corruption.
Our Smiths culture and Values support our efforts in these
areas and are described on page 9.
Environment
We committed to ambitious Net Zero targets: Net Zero emissions
from our operations (Scope 1 and 2) by 2040 and Net Zero emissions
from our supply chain and products in use (Scope 3) by 2050. We also
have longstanding commitments to use energy and other natural
resources efficiently and minimise waste. The policies that support
our approach include:
– Environmental Sustainability Policy
– Health, Safety and Environment (HSE) Policy
– HSE Reporting Policy
– Responsible Minerals Sourcing Policy
– Restricted Substances Policy
Employees
Our people are vital to the success of Smiths, and we aim to attract
and retain the very best by creating an environment for employees
based on respect, personal growth, recognition and development
of talent, and a sense of belonging and purpose. The policies that
support our approach include:
– Fair Employment Policy
– Global Mobility Assignment Policy
– Recruitment Policy
Social matters
We aim to improve our world by contributing positively to our
communities and society. Smiths products and services support
critical global industries and our operations around the world play
a role in local economies through job creation; procurement and
generating tax revenues; operating responsibly and ethically; and
engaging directly. The policies that support our approach include:
– Code of Business Ethics
– Data Protection and Privacy Policy
– Data Protection Code of Conduct
– Supplier Code of Conduct
45
Human rights and anti-bribery
and anti-corruption
We are committed to upholding high ethical standards wherever
we operate around the world, and we require our suppliers and
other business partners to do the same. Bribery and corruption
matters are covered by our Code of Business Ethics. We also have
specific policies and procedures relating to activities that create
bribery and corruption risks, and an umbrella anti-bribery and
anti-corruption policy that provides a single view of our approach.
These policies cover a broad range of matters including the
giving and receiving of gifts, meals, and hospitality; invitations
to government officials; our approach to facilitation payments;
and controls around the appointment of distributors and agents,
customs brokers, and freight forwarders. The Smiths Modern
Slavery and Human Trafficking Statement and our Human Rights
Policy can be found on our website.
Policy due diligence and outcomes
Smiths operates a confidential ‘Speak Out’ reporting hotline
to report behaviour and activities that breach our Values, our
policies, or the law. This is critical to assessing the effectiveness
of our policies. All reports to the ‘Speak Out’ hotline are
investigated, and metrics associated with reporting monitored.
Reports can be made anonymously. Our ethics training operates in
two tiers – online modules delivered in all our core languages, and
group training activities covering specific subjects. Additionally,
we run regional ethics workshops for leaders across Smiths to
embed a deeper understanding of our ethics and compliance
critical drivers.
During FY2022 we continued to review the effectiveness of certain
of our policies, including:
– Reviewing our ethics dashboard which enables us to interrogate
our register of gifts, meals, and entertainment
– Requiring all colleagues to take a modern slavery awareness
training module every two years
– Implementing a new Supplier Code of Conduct, including details
of how third parties can report concerns to our ‘Speak Out’ hotline
– Updating the Human Rights Policy, including the commitment
to ensure that recruitment agents are free from practices
associated with human rights violations
– Creating a working group, comprised of divisional and Group
Procurement leadership and the Ethics & Compliance team, to
monitor and review procurement related modern slavery and
human rights risks and controls
– Introducing micro-awareness videos that enable us to
communicate quickly and effectively on issues that arise
– Conducting our third climate risk and opportunities assessment
for the divisions and Group
Other information
Other information to support this statement can be found
as follows:
– Business model on page 9
– Principal risks and uncertainties on page 47
– Non-financial KPIs on pages 22 and 23
– Task Force on Climate-related Financial Disclosures on page 35
– Viability Statement on page 54
– Sustainability at Smiths Report which can be found on
our website
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 46
Risk governance
The Board and its Committees set the culture and approve the
strategy of the Group. The Board ensures appropriate oversight
and monitoring through a number of mechanisms, including
strategy reviews, Committee meetings, management reports
and focused reviews of selected risk areas.
On behalf of the Board, the Audit & Risk Committee is responsible
for reviewing and assessing the effectiveness of the Group’s risk
management and internal control systems. The review process
covers the Group’s principal risks, as well as financial, operational
and compliance controls.
The Executive Committee is responsible for designing the
Enterprise Risk Management framework and ensuring that
it is effectively deployed throughout the Group. The Executive
Committee also ensures that the Board’s risk appetite is
understood by risk owners and decision-makers, ensures risks,
including climate risk, are adequately managed, and conducts an
annual assessment of strategic risk. Each principal risk is owned
by a member or members of the Executive Committee.
RISK
MANAGEMENT
We operate across a number of markets and geographies.
We are prepared to accept certain levels of risk to realise
our ambitions, and our Purpose, to improve our world
through smarter engineering.
We understand the risks we face and take a proactive
approach to risk management in order to maximise
opportunities, drive better commercial decision-making,
and protect our people and our businesses.
Enterprise Risk Management (ERM) roles and responsibilities
3rd
LINE OF DEFENCE
2nd
LINE OF DEFENCE
BOARD AND AUDIT &
RISK COMMITTEE
– Approve the strategy and set the culture and risk appetite of the Group
– Review and assess the effectiveness of risk management and internal
INTERNAL AUDIT
control systems
– Monitor through Board processes and good governance
Independent assurance
– Provide assurance on internal controls, programmes, systems and risk
management processes
EXECUTIVE COMMITTEE
AND SENIOR MANAGEMENT
– Design and establish risk management and internal control systems
– Ensure that the risk appetite of the Board is understood by risk owners
RISK AND COMPLIANCE
FUNCTIONS
and decision-makers
– Ensure risks are adequately managed
Monitoring and compliance
– Develop and manage the ERM process
– Monitor risks and controls
– Develop and manage policies and control frameworks
– Ensure financial, legal and ethical compliance
– Ensure security, quality and health and safety
1st
LINE OF DEFENCE
DIVISIONAL MANAGEMENT
Risk ownership and mitigation
– Identify, manage and escalate risks
– Set division’s strategic objectives
– Establish and apply internal control systems
OPERATIONAL TEAMS
– Escalate issues to the Executive Committee as required
Conducting business activities in accordance with Group policies and standards
– Understand roles and responsibilities
– Comply with policies
– Follow risk management processes
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 47
PRINCIPAL
RISKS AND
UNCERTAINTIES
We maintain a register of principal risks and uncertainties
covering the strategic, financial, operational and
compliance risks faced by the Group.
Risk process
We review each risk and rate a number of factors: gross impact,
applying the hypothetical assumption there are no mitigating
controls in place; residual impact and likelihood, taking into
account existing mitigating controls; the reputational impact of
a risk; and velocity, which reflects the expected time we would
have to react should a risk materialise. These, in turn, drive
mitigation priorities. A trend metric shows the net position of the
risk year-on-year. We report on the connectivity between risks to
help understand the potential for one risk to have an impact on
another. This is presented against each risk in the form of a ‘risk
relationship’ chart indicating the linkage between each principal
risk and others on the list. This has been used as an input to the
Viability Statement assessment and will be used more widely in
future risk scenario planning and mitigation work.
Changes to principal risks
Our principal risks continue to evolve in response to our changing
risk environment. This year, based on our current assessment
of their materiality, we have included two new principal risks:
Growth, reflecting our renewed focus on growth in our strategy;
and environment, social and governance (ESG), reflecting an
increased focus from investors, employees, customers and
suppliers. We have removed our Group Portfolio risk with the
completion of the sale of Smiths Medical. We have combined a
number of risks including COVID-19 and Integrated Supply Chain
into a Business Continuity risk; Customers and Markets risks
into a Commercial risk; and Ethical Breach and Contractual
Obligations into Legal and Compliance risk.
While we continue to monitor and manage a wide range of risks,
the tables that follow summarise those risks considered to have
the greatest potential impact if they were to materialise.
Running a business involves continual assessment and
management of risks – it is an integral part of day-to-day
operations. Our Enterprise Risk Management (ERM) process
supports open communication on risk between the Board and
Audit & Risk Committee, the Executive Committee, our divisions,
functions and sites. It enables us to manage and monitor the
risks which threaten successful execution of our strategy and
ensures our strategic, financial, compliance and operational risks
are appropriately considered by the Executive Committee and by
the Board.
Our divisional and functional teams are responsible for day-
to-day management and reporting of risks, including climate
risk. They identify new and emerging risks, escalate where
appropriate, and take action to ensure risks are managed as
required. Our divisions also conduct annual assessments of the
risks they face. In FY2022 these were updated to ensure that the
latest views were presented and considered.
Internal audit provides independent and objective assurance to
both the Audit & Risk and Executive Committees on the adequacy
and effectiveness of our risk management and internal control
processes. It facilitates the ERM process and provides site-based
controls and assurance reviews of key programmes, processes
and systems.
The Audit & Risk Committee, on behalf of the Board, reviews
the effectiveness of the risk management process, considering
principal risks and uncertainties and actions taken by
management to manage those risks.
During FY2022 the Executive Committee agreed the ERM
timetable, and the risks selected for ‘deep-dive’ discussions at
Executive and Audit & Risk Committee meetings. These were:
supply chain; product quality; and contractual obligations.
The Group’s list of principal risks was also discussed and
recalibrated by the Executive Committee.
There is a requirement for risk owners to demonstrate how
they provide assurance that controls are working effectively.
Examples are provided in the tables of principal risks from
page 49.
In addition, a further 32 risk workshops were facilitated at
operational sites during the year to support the bottom-up view of
risk that has fed into divisional and functional risk assessments.
The Directors consider the risk management process to
be effective.
Emerging risks
Emerging risks and horizon scanning are integrated into the
ERM process. Functions in the business often take the lead in
identifying and promoting risk awareness and mitigation activities.
Climate change remains an emerging risk and forms part of
reporting and risk management in the business. During FY2022
we undertook scenario analysis, including climate risk
and opportunities workshops for Group and the divisions.
Outcomes from this work are described in the Task Force
on Climate-related Financial Disclosures (TCFD) section on
page 35.
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48
Principal risks and uncertainties
Principal risk
1. ORGANIC GROWTH
Ability to achieve organic growth
in line with market opportunity
2. ESG
Failure to meet stakeholder expectations
on environmental, social and
governance obligations
3. TECHNOLOGY
Technology disruption by existing
or future competitor
4. PEOPLE
Ability to attract and retain people
5. BUSINESS CONTINUITY
Business disruption to supply chain
or operations
6. ECONOMY AND GEOPOLITICS
Impact of economic and geopolitical environment
7. COMMERCIAL
Loss of focus on customers and not competing
in the right markets
8. PRODUCT QUALITY
Failure of product causes serious harm
to people/property
9. CYBER SECURITY
Impact of enterprise or product cyber event
10. LEGAL AND COMPLIANCE
Significant ethical breach or failing
to meet contractual obligations
Key
Link to strategy
Growth
Execution
People
Link to strategy
Gross risk
Residual risk
Likelihood
Velocity
Trend
Very High
Moderate
Possible
Years
High
Low
Possible
Years
Very High
Moderate
Probable
Years —
Moderate
Low
Possible
Months
High
Moderate
Probable
Weeks
High
Moderate
Likely
Months
High
Low
Possible
Moderate
Low
Probable
High
Low
Probable
High
Low
Possible
Years —
Weeks —
Days —
Days —
Likelihood
Almost Certain
Likely
Probable
Possible
Unlikely
Trend
New
Stable
Up
> 80%
> 60%
> 40%
> 20%
< 20%
—
Connectivity between principal risks
ORGANIC
GROWTH
ESG
TECHNOLOGY
PEOPLE
BUSINESS
CONTINUITY
ECONOMY AND
GEOPOLITICS COMMERCIAL
PRODUCT
QUALITY
CYBER
SECURITY
LEGAL AND
COMPLIANCE
ORGANIC GROWTH
ESG
TECHNOLOGY
PEOPLE
BUSINESS CONTINUITY
ECONOMY
AND GEOPOLITICS
COMMERCIAL
PRODUCT QUALITY
CYBER SECURITY
LEGAL AND COMPLIANCE
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
49
1. ORGANIC GROWTH – Ability to achieve organic growth in line with market opportunity
RISK OWNER
Divisional Presidents
TREND
NEW RISK
The risk of not growing means we become less
relevant and discounted by the market, resulting
in erosion of shareholder value. A growth culture
is a key component of the Group’s strategy. Growth
is a framework that drives the operational tasks,
projects and initiatives of the Group. The Group’s
heritage depends on innovation, which presents
numerous opportunities for growth that are
constantly pursued. Companies that do not grow
typically do not attract the most talented team
members, as great people seek opportunities
for advancement.
How this could impact our strategy
or business model
– Material adverse effect on valuation
– Erosion of our reputation as a leader
in our markets and of our ability to
attract and retain talent
Examples of how we manage this risk
– A clear Group strategy to achieve organic
growth goals, underpinned by detailed
divisional strategies
Examples of how we know the controls
are working effectively
– Divisional performance and forecast
reviews completed monthly
– Detailed reviews of existing and potential
– Performance and KPIs monitored
new markets to identify opportunities with
significant growth potential
and tracked by the Board
– Functional reviews of Smiths Excellence
– Securing and retaining the best talent to
and People strategies
execute strategy and deliver organic growth
– Annual incentive programme to support
profitable growth
– Annual strategic planning, budgeting
process and monthly forecasting
– Ongoing investment in research and
development to drive innovation and growth
– Smiths Excellence System in place to ensure
effective execution
2. ESG – Failure to meet stakeholder expectations on environmental, social and governance obligations
Examples of how we know the controls
are working effectively
– SSE Committee meets four times a year to
review progress
– Progress on environmental metrics
– All divisions engaged in product areas that
support environmental performance of, and
through, customers
– Strong scores for safety and ethical matters
in the My Say employee survey
RISK OWNER
Chief Sustainability Officer
TREND
NEW RISK
Environmental, Social and Governance (ESG)
areas are essential matters for all companies
and stakeholders. Failure to meet stakeholder
expectations on increasing ESG obligations may
expose the Group to reputational or financial
risk. This includes risks associated with
shifting investor sentiment, evolving customer
requirements, supply chain trends, social attitudes
toward the environmental impact of products, and
our ability to attract and retain talent. Failure to act
appropriately may well increase the magnitude of
the risk over the long term.
How this could impact our strategy
or business model
– Loss of key talent committed to
working for a socially responsible and
sustainable organisation
– Limit the number of debt and equity investors
– Adverse impact on the ability to
meet customer expectations on
sustainability performance
– Limiting the sustainable growth potential of
our key business segments
– Failure to maintain strong controls and
corporate governance on ESG-related
non-financial metrics could lead to fraud
or errors
Examples of how we manage this risk
– Report on ESG in a transparent way with
appropriate verification activity, including
publication of our first Sustainability at
Smiths report in FY2022
– Science, Sustainability & Excellence (SSE)
Committee of the Board established to
oversee and support delivery of ESG targets
and goals
– Sustainability strategy integrated to Group
and division strategies, aligning and
leveraging the Smiths Value Engine to deliver
value for all stakeholders
– Executive management responsible for
setting and delivering ESG goals
– ESG targets built into long-term and annual
remuneration incentive plans
– Meet Task Force on Climate-related
Financial Disclosures (TCFD)
reporting requirements
– Committed to setting Science-Based Targets
to meet Net Zero Scope 1 & 2 emissions by
2040 and Net Zero Scope 3 emissions by
2050; also set 3-year targets FY2022-24 for
GHG, waste, water and renewable electricity
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50
3. TECHNOLOGY – Technology disruption by existing or future competitor
RISK OWNER
Divisional Presidents
TREND
—
Differentiated products and services are critical
to our success. We may be unable to maintain
technological differentiation; to meet customers’
existing needs or anticipate emerging demand
trends; and may face disruptive innovation by
a competitor. This could affect our strategy or
business model through a material adverse effect
on revenue, revenue growth or profit margin;
erosion of our reputation as a technology leader
in our markets; and our ability to attract and
retain talent.
How this could impact our strategy
or business model
– Material adverse effect on margin
and profitable growth
– Erosion of our reputation as a leader
in our markets and of our ability to
attract and retain talent
Examples of how we manage this risk
– Proactive repositioning of the portfolio
– Gross Vitality as a KPI
– Robust intellectual property (IP) protection
around the most attractive markets where
we can sustainably hold a top three position
based on technology leadership
– Diversified technology portfolio serving a
range of sectors and geographies, mitigating
exposure to any one sector or area
– Continuing and smarter investment in R&D
(FY2022: 4.2% of Group revenue, FY2021:
3.9%)
– Focus on building a culture of innovation
with a long-range technology roadmap
for each division
– Focus on next generation and
transformational initiatives
– New Product Introduction (NPI)
process operating across divisions
to accelerate projects
via patents and other protections, and
litigation where appropriate
Examples of how we know the controls
are working effectively
– New product development progress is
reviewed by the SSE Committee and
is part of our internal performance
indicator tracking system
– Adherence to NPI process is audited
and embedded in systems with monthly
‘pipeline’ overview provided by divisions
– Technology roadmap is part of the
Group strategic cycle
4. PEOPLE – Ability to attract and retain people
RISK OWNER
TREND
Chief People Officer
People are our only truly sustainable source
of competitive advantage and competition for
key skills is intense, especially around science,
technology, engineering and mathematics (STEM)
disciplines. We may not be successful in attracting,
retaining, developing, engaging and inspiring the
right people with the right skills to achieve our
growth ambitions.
How this could impact our strategy
or business model
– Inability to attract key talent leading
to a loss of competitive advantage
– Difficulty in retaining personnel, at all
levels of the organisation, leading to a
loss of competitive advantage
– In acquisitions, losing key personnel from
the newly-acquired business which may
significantly impact performance and value
Examples of how we manage this risk
– Remuneration regularly evaluated
against market trends
– Focus on Smiths Leadership Behaviours
– Introduction of technical engineering
communities, technical career ladder,
and early career programme
– Targeted talent and succession
planning strategy
– Focus on onboarding and initial
experience improvement
– Increase internal talent mobility
– Structured assessment, development,
and reward programme
– Diversity and inclusion initiatives
Examples of how we know the controls
are working effectively
– Formal and informal measures of culture,
for example regular engagement surveys
with follow-up action planning
– Remuneration & People Committee
tracks key people metrics
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
51
5. BUSINESS CONTINUITY – Business disruption to supply chain or operations
RISK OWNER
TREND
Divisional Presidents
Major disruption to the Group’s operations can
result in failure to meet our customer needs.
Timely, efficient supply of raw materials and
purchased components is critical to our ability
to deliver to our customers. Manufacturing
and supply chain continuity is exposed to
external events that could have significant
adverse consequences, including natural
catastrophes, civil or political unrest, changes
in regulatory conditions, terrorist attacks
and disease pandemics – this applies to our
own manufacturing sites and those of our
key component suppliers.
How this could impact our strategy
or business model
– Inability to deliver products/solutions
to customers, impacting financial
performance and reputation
Examples of how we manage this risk
– Smiths Excellence System operating model
delivers increased focus on resilient and
cost-effective supply
Examples of how we know the controls
are working effectively
– Business continuity plans tested annually
– Risk mitigation plans reviewed and
– Business continuity and disaster recovery
reported by divisions
– Business interruption risk surveys
completed by an external provider
for key operational sites
– Insurance requirements driven by the
risk appetite of the Group and divisions
are validated at least annually
plans in place and tested for critical locations
– Regular evaluation of key sites for a
range of risk factors using externally
benchmarked assessments – risk reduction
measures for critical products and dual
manufacturing capabilities
– Mitigation plans for sole source suppliers,
sub-contractors and service providers
developed and deployed by divisions to
include qualification of alternative sources
of supply where appropriate
– Property damage and business
interruption insurance
6. ECONOMY AND GEOPOLITICS – Impact of economic and geopolitical environment
Examples of how we know the controls
are working effectively
– Cost and price inflation are tracked
and actively managed monthly
– Order tracking reported and monitored
– Business indicators reported weekly
RISK OWNER
TREND
Chief Financial Officer
The world is experiencing widespread global
inflation and severe inflation in energy markets.
The Russian invasion of Ukraine has resulted in
new trade sanctions and introduced additional
supply and pricing uncertainties to tight energy
and commodity markets. China’s approach to
managing COVID-19 is further contributing to
rising costs and disrupted supply chains. Central
banks globally are raising rates in order to curb
inflation. Smiths faces the risk of rising labour,
material, and transportation costs which it may
not be able to pass on through pricing. In addition,
as central banks take action to curtail inflation,
there is a risk of a regional or global recession
which would pressure our revenue growth and
profitability. Geopolitical tensions and trading
bloc formation may further impact the free
movement of capital, goods, and people and add
volatility to our supply chains or constrain our
market opportunities.
How this could impact our strategy
or business model
– Significant and prolonged reduction
in global demand for our products
– Geopolitical tensions relating to Russia,
China, India, and the Middle East adversely
impact trade
– Adverse impact on business performance
due to the imposition of tariffs
– Governments continue to look for ways
to improve tax revenues to ease fiscal
budget pressures
Examples of how we manage this risk
– Diversified portfolio of businesses which
mitigates exposure to any one country
or sector
– Geographic spread which mitigates the
impact of trade barriers between regions
– Divisions monitor order flows and other
leading indicators so that they may respond
quickly to deteriorating trading conditions
and tariffs/barriers to free trade
– Representation of our interests by the Group
Corporate Affairs team
– Network of trade compliance officers across
the Group who monitor upcoming changes
in regulation and oversee import and
export activities
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
52
7. COMMERCIAL – Loss of focus on customers and not competing in the right markets
RISK OWNER
Divisional Presidents
TREND
—
Our markets are evolving at a fast pace, creating
potential for customers to change their business
models as they look to deliver products and
services at higher quality, with better service
and at lower cost. Failure of the Group to keep
pace with customer changes/requirements
(innovation, go-to-market strategies) could have a
materially adverse impact on Group performance.
A significant proportion of our revenue comes
from the US and European markets, with a notable
proportion coming from governments. In addition
to geographical markets, there is a risk that we
do not focus on attractive sectors where we have,
or could have, a sustainable position. The Group’s
growth strategy is expanding our operations in
developing/higher-growth markets – particularly
markets that are underserved in Asia Pacific.
How this could impact our strategy
or business model
– Failure to develop other markets and
geographies impacts strategic progress
and financial performance
– Significant disruption to government budgets
results in fewer contracts being awarded
to Smiths, impacting financial performance
– Loss of market share and adverse impact
on Group results
– Strategic process to capture
continuing opportunities in current
and adjacent markets
– Government relations function which
collaborates with colleagues across
the Group to advise on developments
Examples of how we know the controls
are working effectively
– Strategic review process; divisional
deep dives
– Customer input gathered on a frequent basis
– Strong and long-term customer
relationships provide assurance
– Managing Director councils established
in India and China
Examples of how we manage this risk
– New product innovation feedback through
market research and direct feedback from
existing and potential customers
– A diversified portfolio of businesses
mitigates exposure to any one country,
sector or customer
– Growth strategy which places emphasis
on expanding operations in higher-growth
markets and regions which are currently
underserved, including Asia
8. PRODUCT QUALITY – Failure of product causes serious harm to people/property
RISK OWNER
Divisional Presidents
TREND
—
The mission-critical nature of many of our
products, services and solutions makes the
potential consequences of failure more serious
than for other businesses. In the ordinary course
of business, we are potentially subject to material
product liability claims and lawsuits, including
potential class actions, from customers or
third parties. Internal risks can originate from
inadequacies or insufficiencies in processes
for procurement of materials and components,
change control, manufacturing, internal quality
systems, adaptation to changing industry
regulations, and systems maintenance and
compliance. External risks can result from failure
to manage product certification and compliance,
inspections and audits or challenges to product
registrations or certifications, which can lead to
inability to bid for business and/or sell products
and ultimately regulatory action and fines.
How this could impact our strategy
or business model
– One of our businesses or Smiths, as a whole,
has its reputation damaged leading to a loss
of customers/future business
– Material harm caused to people or property
and/or business interruption for customers
due to quality issues, design defects,
manufacturing failures, component failures,
etc results in reputational damage, loss of
business and higher costs beyond (costed in)
warranty claims
– Contractual claims for penalties,
indemnities, and damages and also product
liability claims arising from end-users and
other affected third parties (potentially
large class)
Examples of how we manage this risk
– Divisional quality risk assessments
that address product failures, product
performance, product safety, product
compliance, regulatory compliance, and
market authorisation
– Quality assurance processes embedded
in manufacturing locations for critical
equipment, supporting compliance
with customer requirements and
industry regulations
– Quality development and quality
integration built into new product
development processes
– Risk analysis and mitigation processes
relating to product cyber resilience
embedded in the product lifecycle process.
Proactive steps taken to ensure product
cyber related risks are continually
monitored and managed
– Insurance cover for product liability
and other related risks such as aviation
grounding – Insurance and Legal teams
partner to ensure contracts (and supplier
flow downs) cover insurance issues and
claims are notified
– Contracting and litigation managed under the
oversight of the Group General Counsel with
regular reporting to Executive Committee
and Board
Examples of how we know the controls
are working effectively
– Quality measures (e.g. defective parts per
million (DPPM) and cost of poor quality
(COPQ)) are measured and action plans put
in place to drive their improvement – these
are regularly reported
– Group and divisional governance frameworks
(including Delegation of Authority) ensure
a close working relationship between legal
and commercial teams (including quality) to
manage risks
– Fewer quality issues at launch of
new products
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53
9. CYBER SECURITY – Impact of enterprise or product cyber event
RISK OWNER
Chief Financial Officer
TREND
—
Cyber attacks seeking to compromise the
confidentiality, integrity and availability of
IT systems and the data held on them are a
continuing risk. We operate in markets and
product areas which are known to be of interest
to cyber criminals. Digitalisation and increased
interconnectivity of our products intensify the risk
and the number of areas under potential attack.
How this could impact our strategy
or business model
– Compromised confidentiality, integrity and
availability of our assets resulting from a
cyber attack, impacting our ability to deliver
to customers and, ultimately, financial
performance and reputation
– Exposure to significant losses in the event of
a cyber security breach, particularly relating
to our security products. These include not
only customer losses, but also those of a
potentially large class of third parties
Examples of how we manage this risk
– Board oversight of the approach to mitigating
cyber risk
Examples of how we know the controls
are working effectively
– Formal reviews with the Executive
– Proactive focus on information and cyber
Committee and the Board
– Vulnerability scanning/event reporting
– External reviews of vulnerability controls
– Mandatory staff training
– Compliance with recognised standards
security risks supported by a strong
governance framework
– Group-wide assessment of critical
information assets and protection to
enhance security
– Information Security Awareness programme
– Security monitoring to provide
early detection of hostile activity on
Smiths networks and an incident
management process
– Partnership and monitoring arrangements
in place with critical third parties, including
communications service providers
– Cyber risk analysis and mitigation processes
embedded in the product lifecycle process
to increase resilience
10. LEGAL AND COMPLIANCE – Significant ethical breach or failing to meet contractual obligations
RISK OWNER
Group General Counsel
TREND
—
We have more than 14,700 colleagues in more
than 50 countries. Individuals may not all behave
in accordance with the Group’s Values and in
accordance with ethical and legal requirements.
We operate within increasingly complex legal
regimes, often in highly regulated markets and
with governments, customers and suppliers
requiring strict adherence to laws. We may fail
to deliver contracted products and services or
fail in our contractual execution due to delays or
breaches by our suppliers or other counterparties.
How this could impact our strategy
or business model
– Ethics or compliance breach causes harm
to our reputation, financial performance,
customer relationships and our ability to
attract and retain talent
– Failure to comply with trade compliance
(import and export) leads to significant fines
and/or delays procurement or supplies
– Failure to meet strict conditions within
government contracts, particularly in the
US, could prevent us bidding for contracts
or have other serious financial and
reputational consequences
– Breach of contract resulting in significant
expenses due to disputes and claims, loss
of customers, damage to our reputation with
other customers/prospective customers,
and loss of revenue and profit due to higher
costs, liquidated damages or other penalties
– Contracts, particularly those with
– Network of trade compliance officers
governments, may include terms that provide
for unlimited liabilities, including for loss of
profits, IP indemnities, perpetual warranties
or allowing the counterparty to cancel,
modify or terminate unilaterally and seek
alternative sources of supply at our expense
Examples of how we manage this risk
– Ethics and Compliance team run a proactive
programmatic approach, areas of which are
at different stages of maturity including:
– Managing an independent ‘Speak Out’
reporting line and investigations process
with communications encouraging the
reporting of ethics violations (includes
ability to report anonymously and a non-
retaliation policy)
– Anti-bribery and anti-corruption and other
mandatory training for all employees on-
line and in person training with process
for monitoring and reporting compliance
– Policies and process to mitigate risks
including policies and procedures to
mitigate distributor and agent-related
risks, including due diligence, contractual
controls and internal approvals
– Anti-trust training programmes and
guidance and dawn raid processes
– Modern Slavery and Transparency
Statement and procedures to reduce
the risk of modern slavery within the
Group and our supply chain
across the Group who monitor upcoming
changes in regulation and oversee import
and export activities
– Monitoring and acting on upcoming
legislative changes
– Multi-functional programme for General
Data Protection Regulation (GDPR)
compliance
Examples of how we know the controls
are working effectively
– Multiple sources to assess culture including
My Say results, ‘Speak Out’ reports, Ethics
Pulse surveys, internal audit findings,
exit interviews and ethics questions in
performance reviews
– Monitoring and reporting on compliance with
ethics and compliance policies, on training
statistics, on investigations, on results of the
Ethics Pulse metrics (Executive Committee
and Audit & Risk Committee oversight)
– Divisional legal teams embedded in the
business, working cross-functionally
throughout the contract lifecycle, contract
risk tool rolled out in three divisions and
used to assess mitigation of risk through
contract negotiations
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54
The Directors have determined that a three-year period to 31 July
2025 is an appropriate timeframe for the viability assessment.
The selected period is considered to be appropriate as, based
on the historical performance of the Group, a three-year outlook
represents an optimum balance of long-term projection and
acceptable forecasting accuracy. The three-year viability
assessment timeframe also takes into account considerations
such as the maturity of the Group’s borrowing facilities and
the cyclicality of the performance of the Group’s underlying
markets. In making this viability assessment, the Directors have
considered the current financial position and prospects of the
Group, including the current year business performance, the
detailed operating plan for 2023 and forecasts for 2024 and 2025.
Against these financial projections, the Directors took into account
the principal risks (as outlined on pages 48 to 53) to develop a set
of plausible scenarios (as set out overleaf) with potentially high-
impact outcomes.
In addition to the scenario specific assumptions (detailed overleaf)
the principal assumptions for this three-year viability assessment
are as follows:
– FY2023 forecasts are based on the detailed operating
plan reflecting the actual FY2022 performance
– FY2024 and FY2025 are based on forecast percentage
growth rates from the FY2023 forecast
– The severe but plausible downside scenario for the recurrence
of COVID-19 disruption has been modelled assuming a
significant decline in demand and supply chain disruption
(as outlined in Scenario 1 on page 55)
– No mitigating activities such as further restructuring
or the access to additional financing have been reflected
in the forecast estimates
Consideration was then given to the magnitude of the gross risks
and their potential impact, directly or indirectly, on the Group’s
future performance and liquidity. The assessment included stress
testing of the Group’s financial capacity to absorb the impact of
such adverse events, either individually or in combination, and
what mitigating actions the Group could take to respond to them
in order to protect its business.
The Directors also considered the Group’s ability to raise
additional liquidity. In performing this assessment, the Directors
have taken comfort from the diversity of the Group’s businesses
across different markets, industries, geographies, products and
customers. In order to ensure consistency, the base case used
for the three-year viability assessment has also been reconciled
against divisional impairment review models.
Based on the robust assessment, the Directors confirm that they
have a reasonable expectation the Group will remain viable for
the period being assessed and will continue to operate and meet
its liabilities as they fall due. The Directors have no reason to
doubt that the Group will continue in business beyond the period
under assessment.
GOING CONCERN
AND VIABILITY
STATEMENT
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 on pages 5 to
55. The financial position of the Company, its cash-flows,
liquidity position and borrowing facilities are described
on pages 15 and 16. In addition, the notes to the financial
statements include the Company’s objectives, policies
and processes for managing its capital; its financial
risk management objectives; details of its financial
instruments and hedging activities; and its exposures
to credit risk and liquidity risk.
The Group has undertaken a detailed going concern review with
a severe but plausible downside scenario taking into account
everything that has been learnt since March 2020.
At 31 July 2022 the net debt of the Group was £150m, a £872m
decrease from 31 July 2021. At the end of July, the Group had
available cash and short-term deposits of £1,056m. These liquid
resources are immediately available with 99% invested with
the Group’s global banking partners. The Group’s debt profile
shows an average maturity of 2.5 years (from 3.2 years at 31 July
2021), with the next debt maturity being the €600m Eurobond in
April 2023.
The Group maintains a core US$800m committed revolving
credit facility from these banks which matures in November
2024. The facility was undrawn at 31 July 2022 and has not been
drawn since its last renewal in November 2017. This facility has an
interest cover financial covenant. However, this is not forecast to
prevent utilisation at the Group’s discretion if required.
The Directors, having made appropriate enquiries, have a
reasonable expectation that the Company and the Group have
adequate resources to continue in operation for a period of at
least 12 months from the date of this Report. Thus, they continue
to adopt the going concern basis of accounting in preparing the
financial statements of the Company and the Group.
In accordance with the requirements of the 2018 UK Corporate
Governance Code, the Directors have assessed the longer-term
prospects of the Group, taking into account its current position and
a range of internal and external factors, including the principal
risks detailed on pages 47 to 53 (the ‘viability assessment’).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 55
Scenarios modelled
Scenarios
Link to principal risks
Scenario-specific assumptions
Scenario 1
A global event, such as a significant
COVID-19 resurgence lockdown, leads
to the enforced closure of key production
sites for a 2-3 month period with ongoing
supply chain disruption, low customer
demand and recessionary circumstances
extending into the following year.
Scenario 2
One of John Crane’s mechanical seals is
identified as faulty and the cause of an
explosion at a major refinery causing the
deaths of two staff and significant damage
to the plant. John Crane is sued for the
costs of repair and restoration of the plant
in addition to the consequential losses
of plant closure.
Scenario 3
Following a product cyber-attack, a
terrorism related incident occurs at a
US airport. As a consequence, the US
Government revokes Smiths Detection’s
licence. Sales of Detection’s products to
the US military and all other governmental
contracts have been banned and due to the
reputational damage, the impact of the ban
will spread to other divisions.
Scenario 4
Smiths Detection are found guilty of bribing
government officials in Asian countries
in order to land significant contracts.
This damages the Group’s reputation and
leads to worldwide regulators imposing
significant sanctions on the Group.
Scenario 5
A major fire at the John Crane plant
in Czech Republic renders the facility
unusable, causing severe disruption
to production.
Business continuity
and Economy and
geopolitics
– 20% fall in revenue across the Group in FY2023 and a 10% fall
in FY2024 compared to the base case.
– 65% reduction in operating profit in FY2023 due to plant closures,
customer and supply chain disruption and a 35% fall in FY2024.
– Increased working capital due to stock builds and customer defaults.
– No mitigating activities such as restructuring and
headcount reductions.
Product
quality
– Legal defence costs of £20m per annum plus a one-off payment
of £100m in FY2023 in settlement of deceased’s claims.
– Legal defence costs of £5m per annum over the review period
in relation to agreement of restoration costs.
– Restoration costs of £50m spread over the 3-year review period.
– Legal defence costs of £25m per annum over the review period
in relation to mitigation of consequential loss claims.
– One-off payment of £250m payable in FY2023 in settlement
of the losses claim.
– Insurance claim rejected.
Cyber security
– Immediate loss of all US based Government contracts within
Smiths Detection.
– 25% fall in other Smiths Detection revenue over FY2023.
– Loss of 50% of Interconnect’s North America revenue.
– Legal defence costs of £10m per annum.
– £100m fine levied by US Government for security breach.
– £50m compensation paid to US Government in FY2023 in respect
of previous products purchased that may have security flaws.
– Insurance claim under product liability is not met or delayed
outside of the review period.
– Regulatory fines globally amounting to £100m.
– Loss of all future revenue in both China and Japan.
– 10% sales erosion in Detection’s USA and EMEA markets due
to reputational damage.
– £50m of severance costs incurred.
– 10% fall in revenue within other Smiths businesses due to the
reputational impact.
Legal and
compliance
Business
continuity
– Loss of six months EMEA revenue and margin in FY2023.
– 20% reduction in future (FY2024 and FY2025) EMEA revenue due
to loss in market shares and competitiveness.
– Breach of supply contracts leading to legal defence costs of £20m
per annum plus a one-off settlement of £50m in FY2023.
– Refurbishment and repair costs of £50m in Czech Republic
(net of insurance claims).
– Costs of increasing capacity at other John Crane sites incurs an
additional £50m of cost.
– Capital expenditure on replacement equipment in Czech Republic
of £10m (net of insurance claims).
Scenario 6
Combination of scenarios 2 and 3.
Product quality and
Cyber security
As above.
The Strategic Report was approved by the Board on 22 September 2022.
By order of the Board
Paul Keel
CHIEF EXECUTIVE OFFICER
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
56
03 Governance
56-92
UK Corporate Governance Code Compliance
In FY2022, and at the date of this report, the Company applied the
Principles and complied with all Provisions of the UK Corporate
Governance Code (the Code) in full, as explained throughout
this Report. A copy of the Code is available from the Financial
Reporting Council’s website at frc.org.uk. Further information on
compliance with the Code can be found as follows:
Board Leadership and Company Purpose
Division of responsibilities
Evaluation, composition and succession
Audit, risk and internal control
Remuneration
57
62
64
69
75
Having a strong governance framework that supports the
Group’s long-term strategic goals is critical if we are to support
the business and enhance the interests of all our stakeholders
for the future. The Board continually keeps its governance
arrangements under review. During the year the Board agreed
to the formal constitution of three new Committees: the Science,
Sustainability & Excellence Committee; the Remuneration &
People Committee; and the Finance Committee which each
evolved from the previous Remuneration and Transaction
Committees respectively.
These new Committees allow for greater oversight in the
areas of innovation, sustainability, people and financial agility
to help better support the Smiths Value Engine, that connects
our Purpose, our strengths and our priorities of Growth,
Execution and People.
Finally, I would like to thank the Smiths workforce and my
fellow Directors for their work on shareholders’ behalf this
year. In particular, I would like to thank Tanya Fratto who will
be retiring from the Board at the conclusion of the 2022 AGM.
During her tenure, Tanya has provided an invaluable contribution
to the Company and I would like to thank her for her wise counsel
and humour along the way. On behalf of the Board, I would also
like to thank John Shipsey for his service to Smiths as Chief
Financial Officer until April this year.
I hope you find the following report interesting, and, along with my
fellow Committee Chairs, I would be happy to discuss any of the
content at our upcoming AGM.
Sir George W. Buckley
CHAIRMAN
CHAIRMAN’S
INTRODUCTION
I am pleased to introduce our Corporate Governance Report,
in which we describe our governance arrangements, the
operation of the Board and its Committees, and how the
Board discharged its responsibilities during the year.
Following the COVID-19 disruption that so many of us suffered,
this year we returned to face-to-face Board and Committee
meetings and have had the opportunity to engage with and hear
from many of our colleagues in person. This included a Board
visit to our Flex-Tek operation in Portland, Tennessee. There is
no substitute for meeting people to recognise the challenges they
face, the aspirations they hold and the culture within which they
operate. Understanding key components like these help the Board
support a healthy business. It was also good to see, and for me
to personally meet with, some of our shareholders at our Capital
Markets event and the AGM last November.
The Board took some critical strategic decisions during the year,
including the decision to sell Smiths Medical to ICU Medical, Inc.
The transaction completed in January, and we wish our former
Smiths Medical colleagues every success moving forward.
More information can be found on page 61. Board succession
planning has also been a key focus this year. The Board made
the decision to appoint Clare Scherrer as Chief Financial Officer
in April, and to appoint Richard Howes as an independent Non-
executive Director in September 2022. The Board now comprises
six males and five females, two Directors from historically
under-represented ethnic groups and seven with a birthplace
or background outside the UK. More information can be found
in the Nomination & Governance Committee Report on page
66. For a Group such as Smiths, with a diverse workforce and a
wide geographic spread, that diversity is crucial, but it is equally
important that the Directors are capable and suitably experienced
individuals. The biographies of our Directors can be found on
pages 58 and 59.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 BOARD LEADERSHIP AND COMPANY PURPOSE
ROLE OF
THE BOARD
57
The primary role of the Board is to lead Smiths in a
way that ensures its long-term success. The Board
is responsible for approving Group strategy and for
overseeing its implementation. Subject to applicable
legislation and regulation and the Articles of Association,
the Directors may exercise all powers of the Company.
The Board exercises oversight of our Company and in doing so
ensures that the strategy is consistent with our Purpose and is
delivered in line with our Values. In support of protecting and
growing stakeholder value the Board continually monitors the
internal controls, risk management and viability of the Company,
as well as considering the views of stakeholders.
The Board has approved a governance framework of systems
and controls to effectively discharge its collective responsibility.
The framework includes the delegation of specific authorities
to the Board’s five Committees, as set out below. The Terms of
Reference for these Committees, which were reviewed during
the year, can be found on our website www.smiths.com.
Governance model
BOARD
BOARD COMMITTEES
Nomination &
Governance
Committee
Reviews and makes
recommendations to the
Board on the structure,
size and composition
of the Board and its
Committees. It also leads
the process for Director
appointments and Director
and senior management
succession planning.
Oversees the ongoing
suitability of the
Group’s governance
framework.
Audit & Risk
Committee
Remuneration
& People
Committee
Science, Sustainability
& Excellence
Committee
Finance
Committee
Ensures the integrity of the
Group’s financial reporting
and audit processes, and
the maintenance of sound
internal control and risk
management systems,
including oversight of the
internal audit function and
the Group’s ethics and
compliance activities.
Manages the relationship
with the external auditor,
including making
recommendations to the
Board and shareholders in
relation to the appointment
and re-appointment of the
external auditor.
Responsible for the Group’s
Directors’ Remuneration
Policy and reviews and
oversees the Group’s
remuneration strategy for
the Executive Directors and
senior management.
Oversees, on behalf of the
Board, the implementation
of the People strategy
for the Group, including
the Group’s approach
to diversity, equity
and inclusion.
Oversees the Group’s
culture and approach to
science, sustainability
and excellence (SSE).
This includes reviewing
the scientific and
technology strategy,
innovation, research and
development; overseeing
the Group’s sustainability
strategy; overseeing
the Smiths Excellence
System; and reviewing and
determining SSE targets,
metrics and KPIs relating
to remuneration.
Oversees and provides
agility to the Group’s
approach to capital
management including
sources and uses of cash,
portfolio activity, changes
to capital structure and
budgetary planning.
This Committee evolved
from the Transaction
Committee which
previously focused on
supporting the Smiths
Medical sale.
P 66
READ MORE
Committee Report
P 69
READ MORE
Committee Report
P 75
READ MORE
Committee Report
P 89
READ MORE
Committee Report
SEE MORE
www.smiths.com
EXECUTIVE MANAGEMENT COMMITTEES
Executive Committee
Assists the Chief Executive Officer in
discharging his responsibilities and is
collectively responsible for implementing
strategy, ensuring consistent execution and
embedding the culture and Values.
Investment Committee
Assesses high-value and high-risk proposals,
capital expenditure, asset disposal and special
revenue expenditure projects which require
Chief Executive Officer or Board approval.
Disclosure Committee
Advises the Chief Executive Officer and the
Board on the identification of inside information,
and the timing and method of its disclosure.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 58
BOARD BIOGRAPHIES
Sir George Buckley
Chairman
Appointed: 1 August 2013
N
R
S
F
I
Pam Cheng
Non-executive Director
Appointed: 1 March 2020
A
N
R
S
I
Skills and experience: Sir George has extensive experience of large, multi-
industry businesses operating in global markets and has had a long career
in engineering and innovation. As Chairman, Sir George ensures effective
communication with key stakeholders and that the Board provides strong
leadership and guidance for the executive management team. During the
year, Sir George provided invaluable leadership on the sale of Smiths
Medical alongside his support of the Finance Committee. He holds a PhD in
Electrical Engineering.
Skills and experience: Pam’s experience in the areas of R&D, manufacturing,
sales and marketing, commercial operations, supply chain management
and technology gained within large global businesses in strategically
important regions for Smiths, further strengthens the Board’s discussions
on embedding world class operations. Pam holds a Bachelor of Science
and a Master’s degree in Chemical Engineering from Stevens Institute of
Technology, New Jersey and an MBA in Marketing from Pace University, New
York, USA.
Career experience: Sir George has held previous roles of Chairman and
CEO at 3M Company, a US based global technology company and Dow Jones
30 component, Chairman and CEO of Brunswick Corporation and Chief
Technology Officer for appliances, motors and controls at Emerson Electric
Company. Sir George also brings non-executive experience to the Board,
having served as Non-executive Director at PepsiCo Inc. and Hitachi Limited,
and as Chairman of Stanley Black & Decker, Inc.
Career experience: Pam is Executive Vice-President, Operations and
Information Technology at AstraZeneca plc, a multinational pharmaceutical
and biopharmaceutical company. Prior to joining AstraZeneca in 2015, Pam
was President of MSD (Merck & Co., Inc.) in China. Pam has also previously
held various engineering and project management positions at Universal Oil
Products, Union Carbide Corporation and GAF Chemicals.
Paul Keel
Chief Executive Officer
Appointed: 25 May 2021
Skills and experience: Paul has a strong track record of delivering results
in innovation-led and diversified global industrial technology businesses.
His international experience positions him well to allow Smiths to deliver on
its significant potential. He is a graduate of Carleton College and Harvard
Business School.
Career experience: Prior to joining Smiths Paul worked at 3M Company
between 2004 and 2020, within the US and UK. During this period, he led
a number of global businesses including the $5bn revenue Consumer
Business Group and several industrial businesses ranging in size from
$400m in revenue to over $1bn. He also led a number of enterprise functions
including Manufacturing and Supply Chain, Marketing and Sales, Strategy
and Business Development. In the short period between 3M and Smiths, Paul
completed a variety of consulting projects. Paul’s other experience includes
roles of increasing responsibility at General Electric, McKinsey & Company
and General Mills.
Clare Scherrer
Chief Financial Officer
Appointed: 29 April 2022. Clare will stand for election at the 2022 AGM
Skills and experience: Clare has extensive experience working with and
advising a broad range of industrial companies around the globe. She has
particularly relevant experience in the sectors in which Smiths has strong
positions, including energy, safety & security and aerospace. She holds a BA
from Harvard University and an MBA from the Harvard Business School.
Career experience: Clare joined Smiths from Goldman Sachs where she
spent more than 25 years, and was a Partner for more than a decade, and
most recently Co-Head of the Global Industrials business. Prior to joining
Smiths, Clare had been a close adviser to the Group for a number of years,
including having advised on the sale of Smiths Medical as well as having
contributed to the development of the strategy announced at the November
2021 Capital Markets event. Prior to Goldman Sachs, Clare was a consultant
at McKinsey & Company.
Dame Ann Dowling
Non-executive Director
Appointed: 19 September 2018
A
N
R
S
I
Skills and experience: Dame Ann’s contribution to engineering research
is internationally recognised, and her knowledge and background offer
a different perspective to Board discussions, particularly as they relate
to engineering, innovation and sustainability. Dame Ann has a degree in
Mathematics and a PhD in Engineering.
Career experience: Dame Ann has had a distinguished academic career
and is currently a Deputy Vice Chancellor and an Emeritus Professor of
Mechanical Engineering at the University of Cambridge, where she served as
Head of Engineering for five years until 2014. She served as the President and
Chairman of Trustees of the Royal Academy of Engineering from 2014 to 2019
and as a Non-executive Director of BP plc from 2012 until May 2021, where
she was a member of the Safety and Sustainability Committee.
Tanya Fratto
Non-executive Director
Appointed: 1 July 2012. Tanya will retire from the Board
at the conclusion of the 2022 AGM
A
N
R
I
Skills and experience: In addition to her experience in manufacturing and
operations, Tanya brings insight into product innovation, sales and marketing
across a range of sectors and an extensive knowledge of operating in the US,
to Board discussions. As one of the longest serving members of the Board,
she has a deep knowledge of the Group. She is a qualified electrical engineer
and has a BSc in Electrical Engineering.
Career experience: Tanya has had a successful career running
businesses over 20 years with General Electric Corporation, a multinational
conglomerate. Prior to joining the Smiths Board, she was the CEO of Diamond
Innovations Inc, a manufacturer of industrial diamonds. Tanya also served as
a non-executive director on the Board of Mondi plc from 2017 to May 2022.
Other significant appointments: Non-Executive Director of Advanced
Drainage Systems, Inc. and Ashtead Group plc.
Key
A Audit & Risk Committee
R Remuneration & People Committee
F Finance Committee
Committee Chair
N Nomination & Governance Committee
S
Science, Sustainability
& Excellence Committee
I
Independent Director or in the Chairman’s
case independent on appointment
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 59
Karin Hoeing
Non-executive Director
Appointed: 2 April 2020
N
R
S
I
Mark Seligman
Non-executive Director
Appointed: 16 May 2016
A
N
R
F
I
Skills and experience: Karin brings current executive experience of oil & gas,
defence, security, and aerospace to the Board gained from a range of roles
at large multinational groups. Karin has also provided valuable assistance
and advice in executive and non-executive succession planning and ESG and
sustainability matters. Karin holds a Diploma Geophysics (MSc Geophysics)
from the University of Hamburg, Germany.
Career experience: Karin is Group ESG, Culture and Business Transformation
Director at BAE Systems plc. Prior to joining BAE she led one of the major
international business divisions at Schlumberger, a multinational oil services
company. Karin spent 20 years at Schlumberger, where she held a number of
senior HR, marketing, technology and line management leadership positions
across Europe, the Middle East and Asia.
Richard Howes
Non-executive Director
Appointed: 1 September 2022. Richard will stand for appointment at the
2022 AGM
A
N
R
I
Skills and experience: Richard’s background in senior financial positions at
large listed companies in a variety of sectors brings valuable insight to the
Board’s discussions. Richard holds a BSc in Geography from Loughborough
University and is a Fellow of the ICAEW.
Career experience: Richard is Chief Financial Officer of Bunzl plc, the
specialist international distribution and services Group. Richard qualified as a
Charted Accountant with Ernst & Young before moving to the investment bank
Dresdner Kleinwort Benson. Prior to joining Bunzl in 2019, Richard held CFO
positions at various multinational businesses including Inchcape plc, Coats
Group plc and Bakkavor plc.
Bill Seeger
Senior Independent Director
Appointed: 12 May 2014
A
N
R
F
I
Skills and experience: Bill has had a long and successful career in finance
in the engineering sector, gaining an in-depth knowledge of global markets.
Bill’s extensive experience in global engineering businesses supports the
Board’s robust decision-making. Bill has a BA in economics and an MBA.
Career experience: Bill was appointed Chair of the Remuneration & People
Committee on 1 July 2018, and as Senior Independent Director at the 2018
AGM. Bill has been Chair of the Finance Committee since it was formalised in
November 2021. With effect from 1 February 2022 Bill was appointed to the
Board of ICU Medical, Inc. in accordance with the terms of the shareholders
agreement entered into with the sale of Smiths Medical. He is also a member
of ICU’s Audit and Compliance Committee. Bill was Group Finance Director
at GKN plc, a global engineering group, until his retirement in 2014. At GKN
he also held the roles of CEO of the Propulsion Systems Division and
CFO of the Aerospace Division. Prior to that, Bill spent 30 years at TRW, a
US-based automotive and aerospace group, where he held various senior
finance positions.
Other significant appointments: Senior Independent Director at Spectris plc
and Lecturer at UCLA Anderson School of Management.
Skills and experience: Mark’s extensive experience in corporate finance
and capital markets supports Board discussion of the Group’s portfolio
management and strategy. He provided significant counsel during the sale
of Smiths Medical through his support of the Transaction and now Finance
Committee. Mark also brings non-executive experience to the Board, having
served as senior independent director and audit committee chairman at
several FTSE100 companies. Mark is a Chartered Accountant and has an MA
in philosophy, politics and economics.
Career experience: Mark is a former senior investment banker and during his
executive career he held various roles at Credit Suisse, including Chairman
of UK Investment Banking. Mark served as a non-executive director on the
Board of Kingfisher plc from 2012 to January 2021.
Other significant appointments: Senior Independent Director at NatWest
Group plc and Alternate member at Panel on Takeovers and Mergers for the
Association for Financial Markets in Europe.
Noel Tata
Non-executive Director
Appointed: 1 January 2017
A
N
R
I
Skills and experience: Noel has had a successful career in global business.
He has extensive experience of the high-growth economies which are key
markets for our growth strategy and has been invaluable in developing
key strategic relationships in Asia since joining the Board. Noel has a BA
in Economics.
Career experience: Noel was the Managing Director of Tata International
Limited (TIL), a global trading and distribution company and a trading
arm of the Tata Group, a privately owned multinational holding company.
Under the terms of the Tata Group governance guidelines, he retired from the
position of Managing Director on 12 November 2021. He was thereafter re-
appointed as a Director and Non-Executive Chairman of TIL with effect from
15 November 2021.
Other significant appointments: Each of the following companies forms
part of the Tata Group: Non-independent Non-executive Chairman at Tata
Investment Corporation, Trent Ltd and Voltas Ltd. Non-independent Non-
executive Vice Chairman at Tata Steel Limited and Titan Company Ltd.
Matthew Whyte
Company Secretary
Appointed: 1 August 2021
Skills and experience: Matthew is a Chartered Company Secretary and a
Fellow of The Chartered Governance Institute UK and Ireland. Matthew joined
Smiths in 2017 having previously gained governance and legal experience in
senior roles in large multinational listed groups in a variety of sectors, most
recently at Schroders plc and Rio Tinto plc.
Other Directors who served during FY2022
John Shipsey stepped down from the Board and as Chief Financial Officer
in April 2022. His biography can be found in our FY2021 Annual Report.
READ MORE
The biographies of the Executive Committee
members can be found on our website.
Key
A Audit & Risk Committee
R Remuneration & People Committee
F Finance Committee
Committee Chair
N Nomination & Governance Committee
S
Science, Sustainability
& Excellence Committee
I
Independent Director or in the Chairman’s
case independent on appointment
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 60
People, Values and culture
– Approved a workforce engagement strategy where individual Non-
executive Directors have been allocated divisional or functional
and geographic areas of responsibility in order to reflect the global
nature of our business and international composition of our Board.
The Senior Independent Director is the designated Non-executive
Director responsible for workforce engagement and oversees
this activity
– Received updates from the Non-executive Directors on their
workforce engagement activities. This included Dame Ann
Dowling’s visits to the Smiths Detection Hemel Hempstead site and
to a Service Team on-site at a large customer; Pam Cheng’s visits
to the Flex-Tek Tutco and Gastite operations; Mark Seligman’s visit
to the Qualification and Test laboratory at Interconnect’s Dundee
site; and Bill Seeger and Karin Hoeing’s attendance at colleague
meetings about Ethics and Compliance and ESG
– Conducted one-on-one and group online meetings between
Directors and employees during the COVID-19 pandemic.
This ensured that Directors stayed in touch with the Group’s
employees given that many were working from home
– Received a report from the new Chief People Officer on her
key observations since joining the Company and priorities for the
new People strategy
– Supported the Executive Committee in the launch of the new
Smiths Leadership Behaviours to guide how we want our
people to act in support of our culture
– Oversight of the Assessment, Develop and Reward Project
to align key elements of Smiths HR processes with the three
priorities of Growth, Execution and People
– Received regular updates on employee engagement, the
Group’s pension arrangements and health and safety
Succession and leadership
– Focused on Board succession planning and key roles within
the business
– Approved the appointment of a new Chief Financial Officer
and Non-executive Director
– Approved changes to the Executive Committee, including
the appointment of seven new members
– Reviewed senior management succession plans and the talent
pipeline across the Group
BOARD
ACTIVITY
During FY2022, the Directors continued to provide
oversight, challenge and guidance on a broad range of
topics. This included the development and implementation
of the Group’s strategic objectives, culture and operational
performance. The key areas of focus for the Board during
the year are set out below.
Purpose
– Ensured that our focus on strategy and business decisions
aligned with our Purpose
Strategy
– Reaffirmed the Group strategy, including the Smiths Value
Engine and focus on our three priorities of Growth, Execution
and People
– Endorsed the refreshed divisional strategies and implementation
of the new in-market operating model for China
– Completed deep-dives on the implementation of each division’s
strategy providing constructive feedback and guidance
– Ensured stakeholder considerations were embedded in
discussions and decision-making through enhanced reporting
from each of the divisions
– Approved a new sustainability strategy
– Agreed the sale of Smiths Medical to ICU Medical, Inc (ICU)
and the subsequent £742m share buyback programme
– Supported the relaunch of the Smiths Excellence System (SES)
– Discussed and considered opportunities for inorganic growth
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 61
Finance
– Considered business performance through a series of
divisional deep-dives at Board meetings
– Reviewed and approved the Group’s results announcements and
the FY2021 Annual Report
– Supported the de-risking of the TI Group Pension Scheme by
way of a £640m bulk annuity buy-in. The Board considered and
declined the request from the SI Pension Scheme Trustees to
pay enhanced member benefits
– Approved the final dividend for FY2021 and the FY2022
interim dividend
– Considered the feedback from stakeholders on the Capital
Markets event held in November 2021
– Other key matters considered by the Audit & Risk Committee
are set out on pages 71 and 72
Governance and risk
– Received updates on our principal risks
– Ongoing oversight of our internal controls in order to ensure
an effective control environment
– Continued monitoring of risk management and internal controls
by the Audit & Risk Committee, including deep-dives from the
divisions on supply chain and product quality
– Approved and provided oversight of the Ethics and Compliance
annual work programme
– Ongoing consideration of the Group’s compliance with the
Code and related activities
– Undertook an internal Board evaluation to review the
effectiveness of the Board and its Committees, which included
discussing the progress made from the previous year’s
evaluation and agreeing actions for the next financial year.
See pages 64 and 65
– Approved the establishment of the Science, Sustainability &
Excellence Committee and the evolution of the Remuneration
& People Committee and the Finance Committee
– Established a forward agenda focused on strategy and a deep-
dive programme to ensure regular reviews of key areas of focus
Principal decisions
Having an effective and diverse Board has enabled high quality
discussions ahead of executing several key decisions during the year.
The Board engages with stakeholders where relevant and takes their
interests into account when making decisions. Below are examples
of the principal decisions taken during the year. Further examples of
how stakeholder views have been considered in the boardroom can
be found on pages 41 to 44.
Sale of Smiths Medical to ICU
Smiths Medical was sold to ICU on 6 January 2022. However, the
separation of Smiths Medical had been a key focus of the Board
since 2018. The Board had determined that the separation of Smiths
Medical would enable Smiths to concentrate on growing as a leading
industrial technology group and enable Smiths Medical to focus on
realising its full potential in the medical device market.
Stakeholders were a key consideration during the decision-making
process. The Board actively engaged with all options to maximise
value for all stakeholders and to provide the Company with an
enhanced platform for future growth. This led to the Board approving
the sale of Smiths Medical to ICU. Another key Board decision was
the use of the proceeds once the sale had completed. The Board
sought shareholder feedback on the best course of action and
determined that the proceeds would be split between investment
in growth and a significant return of capital to shareholders through
a share buyback programme.
More information can be found on the website.
Reaffirming the Group’s strategy
Paul Keel joined the Board in May 2021 as the Group’s Chief
Executive Officer. His first objective was to review the Group’s
strategy, what was working well and where opportunities existed.
In his first six months, Paul visited more than a dozen of Smiths
largest operations around the world. To seek feedback he met with
some of the Group’s suppliers and customers and Smiths largest
investors. Paul reported his findings back to the Board and the new
priorities, being accessing growth, improving execution and doing
more to inspire and empower our people, were discussed and
endorsed by the Board. The Capital Markets event in November 2021
successfully communicated to shareholders and other stakeholders
the Group’s strategy, including our ESG priorities and how each of
the divisions were accelerating growth and value creation. At the
Board’s strategy meeting in May 2022, the Board had the opportunity
to review in detail and challenge the refreshed divisional strategies
and the new in-market operating model for China.
The Board also decided to make several governance enhancements
to support the strategy. This included the creation of the Science,
Sustainability & Excellence Committee to oversee the Group’s
approach to science, sustainability, and excellence, including R&D,
commercialisation, and sustainability strategies. As well as the
evolution of the Remuneration & People Committee to support the
People priority in the Smiths Value Engine. In addition, it was agreed
that the Finance Committee would oversee the Group’s sources and
uses of cash including its approach to portfolio activity, evolving from
the Transaction Committee which focused on supporting the Smiths
Medical sale. Finally, to support accelerated growth and deliver
on Smiths significant potential, the Board approved a number of
changes to the Executive Committee.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 DIVISION OF RESPONSIBILITIES
HOW THE BOARD
OPERATES
The following role specifications set out the clear division
of responsibility between executive and non-executive
members of the Board, which support the integrity of the
Board’s operations.
62
There is a schedule of matters which are considered
significant to Smiths and have therefore been reserved
for decisions by the Board. This is due to their strategic,
financial, or reputational implications or consequences.
The formal schedule can be found on our website.
The Chief Executive Officer is responsible for preparing and
recommending the strategy and for the day-to-day management
of the Company. Executive management implement the Group’s
strategy and provide the Chief Executive Officer, and the Board
as a whole, with the information they need to make decisions that
will determine the long-term success of the Group.
At each scheduled Board meeting the Chief Executive Officer
and the Chief Financial Officer present separate reports,
detailing business performance and progress against strategy.
These are supplemented by regular performance updates from
the Chief Executive Officer to the Directors between meetings.
When appropriate, invitations to Board meetings are extended
to divisional presidents, heads of functions and subject matter
experts, supporting visibility of talent and executive succession
planning. External advisers are invited to attend as necessary.
Director attendance at Board and Committee meetings in
FY2022 is set out on page 63.
To ensure the continued effectiveness of the Board, the
Chairman meets the Non-executive Directors without the
Executive Directors present after each Board meeting. He also
has separate meetings with the Senior Independent Director
and the Chairs of the Board Committees on a regular basis and
with each of the other Non-executive Directors at least annually.
The Senior Independent Director consults with the other Non-
executive Directors without the Chairman present at least
annually, to assess the performance of the Chairman.
CHAIRMAN
– Ensures the Board’s continued effectiveness
– Shapes boardroom culture and encourages individual
Director engagement
– Leads the Board and sets the Board agenda, determining
the style and tone of discussions at Board meetings
– Leads the annual Board evaluation
CHIEF EXECUTIVE OFFICER
– Develops and proposes strategy to the Board
– Sets and communicates the culture, Values,
and behaviours for the Group
– Leads the Executive Committee
– Manages the day to day operations of the Company
– Manages relationships with key stakeholders
CHIEF FINANCIAL OFFICER
– Supports the Chief Executive Officer in ensuring the
development and execution of strategy
– Ensures the accuracy and completeness of the Group’s
financial statements to ensure they reflect a true and
accurate rendition of the Company’s performance
– Ensures the Group operates robust risk
management and internal control systems to ensure
accurate and timely financial and non-financial reporting
and ultimately to safeguard stakeholders’ interests
SENIOR INDEPENDENT DIRECTOR
– Supports the Chairman in the delivery of the
Board’s objectives
– Is available to shareholders if they wish to raise
any concerns
– Oversees workforce engagement by the Non-
executive Directors
– Leads the Chair succession process
NON-EXECUTIVE DIRECTORS
– Provide constructive challenge and strategic guidance
to Board and Committee discussions
– Oversee management and the business and offer
specialist advice
– Assess the effectiveness of systems of internal control
and risk management
COMPANY SECRETARY
– Advises the Board on governance matters
– Supports the Chairman in the efficient and effective
functioning of the Board and its Committees
– Ensures the Board receives quality information
in a timely manner
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 63
Time commitment
All Directors must allocate sufficient time to their work in order to discharge their responsibilities effectively. An expected time
commitment of 25 days per annum is set out in the Non-executive Director letter of appointment. However, Committee Chairs, the
Senior Independent Director and the Chairman commit more time as required. In the normal course of business, Directors are
expected to familiarise themselves with business priorities and challenges, prepare for and attend Board and Committee meetings,
attend the AGM, engage with stakeholders and participate in the Board evaluation process. Executive Directors are not permitted to
take on the chairmanship or more than one non-executive directorship in a FTSE100 company, or any other significant appointment.
Any appointment to other directorships are reviewed in advance by the Board for conflicts and time commitment considerations.
In FY2022 the Board concluded that the Chairman and the Non-executive Directors devoted sufficient time to fulfil their commitments
to Smiths. Particular consideration was given to Noel Tata’s other commitments as he holds a number of Board level positions outside
the Group all of which are at Tata Group companies as shown in his biography on page 59. The Board reaffirmed that Noel’s other
commitments do not prevent him from committing sufficient time to his work as a Director, as evidenced by his attendance and effective
participation at all Board and Committee meetings and ad hoc Board update calls. As a current executive with contacts in higher-growth
countries which are a strategic focus for Smiths, he brings valuable and distinct experience to our Board discussions.
Advice and insurance
Our Directors are able to seek independent professional advice at the expense of Smiths to enable them to fulfil their obligations as
members of the Board. In addition, the Directors and Officers of Smiths and its subsidiaries have the benefit of a Directors’ and Officers’
liability insurance policy. During FY2022, and at the date of this report, qualifying third-party indemnity provisions (as defined by section
234 of the Act) have remained in force for the Directors of the Company and certain other employees in respect of their directorships of
some subsidiary companies in relation to certain losses and liabilities which they may incur (or may have incurred) to third parties in the
course of their professional duties for the Company, or a subsidiary.
Director attendance
Sir George Buckley
Paul Keel
John Shipsey1
Clare Scherrer1
Pam Cheng2
Dame Ann Dowling
Tanya Fratto
Karin Hoeing
Bill Seeger
Mark Seligman
Noel Tata
Nomination &
Governance
Committee
Audit & Risk
Committee
Remuneration
& People
Committee
Science,
Sustainability
& Excellence
Committee
Finance
Committee
5/5
–
–
–
4/5
5/5
5/5
5/5
5/5
5/5
5/5
–
–
–
–
3/4
4/4
4/4
–
4/4
4/4
4/4
4/4
–
–
–
3/4
4/4
4/4
4/4
4/4
4/4
4/4
3/3
–
–
–
3/3
3/3
-
3/3
–
–
–
7/7
–
–
–
–
–
–
–
7/7
7/7
–
Board
10/10
10/10
7/8
2/2
9/10
10/10
10/10
10/10
10/10
10/10
10/10
1 On 29 April 2022 Clare Scherrer was appointed to the Board and John Shipsey stood down as a Director. John Shipsey did not attend the meeting where his ongoing appointment
was discussed.
2 Pam Cheng was unable to attend the March Board and Committee meetings due to personal circumstances. Pam Cheng provided her comments and input on the matters under
consideration to the Chairs of the relevant forums prior to the meetings being held.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 EVALUATION, COMPOSITION AND SUCCESSION
BOARD
EVALUATION
64
Each year an evaluation of the Board and its Committees
is conducted to monitor their effectiveness and to help
identify any improvement opportunities. It is externally
facilitated every three years.
The annual evaluation of the performance of the Non-executive
Directors and the Chief Executive Officer is led by the Chairman.
The evaluation of the Non-executive Directors includes individual
meetings with the Chairman. Feedback is given to the Chief
Executive Officer by the Chairman after each Board meeting and
on an ad hoc basis throughout the year. The Senior Independent
Director and the Chief Executive Officer lead the evaluations for
the Chairman and the Chief Financial Officer respectively.
Following the externally facilitated evaluation in FY2021, the
FY2022 evaluation was carried out internally. Independent Audit
Ltd, who have supported the evaluation process since FY2019,
but have no other connection to the Company, assisted with the
interpretation of the results of a self-assessment questionnaire
issued to the Board. The actions following the FY2022 evaluation
have been grouped in four themes: strategic decision making;
succession planning; Board communication; and stakeholder
engagement and are set out below. Overall, the Board agreed that
significant progress had been made since the external evaluation.
It is the present intention that the FY2023 evaluation will be
internally facilitated.
Board evaluation findings and actions
STRATEGIC DECISION MAKING
FY2021 external
evaluation findings
– Seek to reach a clearer
consensus on the Group-wide
strategic objectives and how
the Company will achieve them
– Ensure the Remuneration
Committee has a balanced
focus on both financial and non-
financial considerations
Action taken in FY2022
FY2022 evaluation findings
and actions for FY2023
– Following the appointment of Paul Keel the corporate
strategy and communications plan for the Group
post the sale of Smiths Medical were re-evaluated
by the Board and reaffirmed. The strategy and
accompanying KPIs are described on pages 10 and 21
to 23 respectively
– The Company held a Capital Markets event in
November 2021
– Enhanced 5 year strategic planning discussions were
held with Group and divisional leadership, with a focus
on delivering the strategic objectives in line with the
Smiths Value Engine
– Non-financial incentive measures for management
are now part of Executive Director and senior
management incentive arrangements
– Greatly enhanced strategic discussions
were held during the year resulting
in clearer alignment on the Group’s
strategic priorities. Going forward, the
areas of focus would be greater visibility of
macro conditions, external markets and
the impact or opportunities arising from
technology. The appointment of a Chief
Sustainability Officer and the development
and embedding of a sustainability strategy
were particular improvements
– When formulating its agendas, the
Board will encourage increased time for
strategic deep-dives to underscore the
Board focus on organic growth
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 65
SUCCESSION PLANNING
FY2021 external
evaluation findings
Action taken in FY2022
FY2022 evaluation findings
and actions for FY2023
– Hold regular discussions
between the Non-executive
Directors and Chief Executive
Officer on his own to discuss
senior management succession
and development
– Continue the Board’s
engagement activities with key
talent across the Group
– Prepare for the transition
of the Chairman and Senior
Independent Director roles in
the next few years
– Executive and non-executive succession planning was
a key focus during the year with the Board approving a
number of Executive management changes
– The Chief Executive Officer updated the Board on enhanced
talent and succession planning for senior leadership roles
– Chair succession planning commenced led by the Senior
Independent Director
– The Board continued its interaction with high-potential
employees to improve their understanding of the internal
‘bench strength’ with virtual and in person one-to-one
talent spotlights frequently taking place
– Face-to-face exposure at Board and Committee meetings
for high-potential talent within the Group was reintroduced
once travel restrictions were lifted
– The Board visited Flex-Tek’s operation in Portland,
Tennessee and met with members of the Flex-Tek
leadership team
– Board succession planning for non-
executive positions was identified to be
a key focus for consideration during
the year
– Changes to the Executive management
team were well managed and
succession planning oversight had
been enhanced significantly
– Further focus would be arranged on
Executive Committee development
and succession planning, including
providing opportunities for the Non-
executive Directors to meet individually
and in small groups with a cross-
section of employees
BOARD COMMUNICATION
FY2021 external
evaluation findings
Action taken in FY2022
FY2022 evaluation findings
and actions for FY2023
– More frequent updates for
the Board as the Smiths
Medical separation transaction
progressed were requested
– Consider the scheduling of
Committee meetings and
holding hybrid meetings
– Continue to improve the
timeliness of Board information
– Structure Chief Executive Officer
and Chief Financial Officer
reports to tie in more closely
with progress on strategic
priorities of the business
– Regular updates on the Smiths Medical sale were provided
through the formation of the Transaction Committee which
met eight times during FY2022 prior to its formalisation as
the Finance Committee (which met a further seven times)
– The Board continued to identify opportunities to improve
communication between itself and Group executives.
The new ways of working which were adopted during the
pandemic were retained with one Board meeting and a
number of Committee meetings held remotely or partially
remotely to reduce international travel. This promoted
good governance through agile and timely decision making
– The new processes introduced to facilitate early stage
information flows and ensure that the Non-executive
Directors (specifically the Chairman and Committee
Chairs) had the opportunity for earlier input into Board
and Committee papers were further evolved and briefing
processes refined
– Significant improvements were
evidenced at Board meetings both in
the quality and timeliness of Board
and Committee materials and also
the openness and quality of debate
arising therefrom
– Meeting dynamics had improved
leading to better conversations
– The success of the Transaction
Committee led to the formalisation of
its activities with the establishment of
the Finance Committee. This helped to
improve information flows and decision-
making and guidance in an agile manner
– Remote or hybrid meetings will
continue and the organisation of Board
and Committee meetings works well
STAKEHOLDER ENGAGEMENT
FY2021 external
evaluation findings
Action taken in FY2022
– Restructure the Board’s
interaction with stakeholders
with more focus on ESG,
employee engagement
and hearing customer and
supplier perspectives
– Transfer the role of designated
Non-executive Director for
employee engagement from the
Senior Independent Director to
another Non-executive Director
– A stakeholder map has been developed
– A Director workforce engagement strategy was
developed with individual Non-executive Directors being
allocated divisional or functional and geographic areas of
responsibility. Oversight is provided by the Remuneration
& People Committee
– The Science, Sustainability & Excellence Committee was
established, which provided oversight for many activities
connected with the Group’s stakeholders
FY2022 evaluation findings
and actions for FY2023
– The Board acknowledged that
continued focus on ESG, people,
talent, culture and suppliers was
critical, and that the ongoing focus on
the successful establishment of the
Science, Sustainability & Excellence
Committee’s role were key
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 66
Committee membership and meetings
The members of the Committee, their biographies and attendance
at meetings during the year can be found on pages 58, 59 and 63.
The Chief Executive Officer is normally invited to attend Committee
meetings and attended all but one of the meetings in FY2022.
Other members of senior management are invited to attend
as necessary.
Committee performance evaluation
In FY2022, the performance of the Committee was considered
as part of the internal Board evaluation process. Overall, it was
confirmed that the Committee continues to operate effectively.
Committee activities
Board succession
The Board has a duty to keep succession plans under regular
review. The Non-executive Directors, without the Chairman
present and led by the Senior Independent Director, discussed
the succession arrangements for the Chairman who reached
his nine-year anniversary since appointment on 1 August 2022.
Following the appointment of Paul Keel, the Committee agreed
and the Board supported that Sir George Buckley should be invited
to remain as Chairman to oversee a period of significant strategic
change for the Group. Board succession will continue to be a key
focus during FY2023.
Tanya Fratto is stepping down from the Board at the conclusion
of the 2022 AGM, and the Chairman led the search for a Non-
executive Director to replace her. The Committee recommended
the appointment of Richard Howes to the Board, and he joined as
a Non-executive Director on 1 September 2022. As with all Board
appointments, there was a formal, rigorous and transparent
process, involving all Directors and with recommendations based
on the merit of the individual candidates. Buchanan Harvey & Co.
were used as executive search consultants. The firm has no other
connection to Smiths and is a signatory to the Voluntary Code of
Conduct on Gender Diversity.
The Chairman and the Chief Executive Officer carried out the
search process for the role of Chief Financial Officer without the
formal support of an external search firm. Multiple candidates
were considered. The Committee was intimately involved in this
process and was regularly updated on progress. Clare Scherrer,
who was well known to the Company, was identified as being
the preferred candidate. Clare previously worked for Goldman
Sachs where she spent more than 25 years and was a Partner
for more than a decade, and most recently Co-Head of the Global
Industrials business. Clare has extensive experience working
with a broad range of industrial companies around the globe,
accelerating growth and increasing value. She has particularly
relevant experience in the sectors in which Smiths operates.
NOMINATION &
GOVERNANCE
COMMITTEE
REPORT
Chairman’s statement
I am pleased to present the Committee’s report for
FY2022. The Committee has delegated responsibility
from the Board to review the structure, size and
composition of the Board and its Committees, and to
ensure that they are fit for purpose.
The Board wholeheartedly supports the principles of the FTSE
Women Leaders Review and the Parker Review on gender
and ethnic diversity and we were delighted to recommend
the appointment of a new Chief Financial Officer. We were
also pleased to recommend a new Non-executive Director
to the Board. When making these recommendations, we
considered the balance of skills, knowledge and experience on
the Board. Diversity of gender, social and ethnic background
of the Directors are also important considerations along with
country of origin to ensure the continued international diversity
of the Board. We also take into account the Group’s strategy,
business performance, current and future leadership needs,
challenges and opportunities.
We oversaw the senior management succession pipeline
and planning and during the year we approved the appointment
of seven new Executive Committee members. At least once a
year we review senior management succession plans and the
quality of the talent pipeline across the Group.
Periodically we review the Board’s governance framework.
This year we recommended establishing the Science,
Sustainability & Excellence Committee, and decided to change
the terms of reference of the Remuneration Committee to ensure
more focus on people. The Finance Committee was formalised
and focuses on the sources and use of cash including portfolio
activity, changes to capital structure and budgetary planning.
More information about our activities can be found on the following
pages. I would like to thank my fellow Committee members for
their continued hard work over the period.
Sir George W. Buckley
CHAIRMAN OF THE NOMINATION & GOVERNANCE COMMITTEE
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022
67
The Committee considered that it was in the best interests of
the Group and its stakeholders to recommend to the Board that
Clare Scherrer be appointed as Chief Financial Officer with effect
from 29 April 2022. John Shipsey stepped down as Chief Financial
Officer and from the Board of Smiths Group with effect from
29 April 2022. His remuneration arrangements were approved by
the Remuneration & People Committee.
Diversity
Smiths Board is highly diverse. It supports the principles of the
FTSE Women Leaders Review and Parker Review on gender and
ethnic diversity and pays close attention to the international nature
of its makeup. Members of the Board and senior management will
collectively possess diversity of gender, national birthplace, social
and ethnic backgrounds, cognitive and personal strengths, along
with a combination of skills, experience and knowledge. This is
important for the effective operation of the Board and oversight of
the Group.
The Committee is responsible for recommending appointments
to the Board following its regular assessment of the Board and
its Committees’ composition, whilst also considering the Group’s
strategic objectives. The Committee makes recommendations
based on the merit of the individual candidates, having due regard
for the benefits of diversity in the broadest sense, including gender
and ethnicity and also the need to ensure the effective functioning
of the Board at all times, especially as membership of the Board
is refreshed.
In order to help achieve these aspirations, the Committee only
uses the services of executive search firms who have signed up to
the Voluntary Code of Conduct on Gender Diversity. This applies
to management positions, not just to the Board. Executive search
firms are also required to ensure non-UK nationals, women and
candidates from historically under-represented ethnic groups are
represented on the shortlist for all Board positions.
The Board meets all of its diversity targets, the FTSE Women
Leaders Review target of 40% representation of women on FTSE
350 Boards, the Parker Review recommendation for FTSE 100
companies to have one director of ethnic diversity, and the Financial
Conduct Authority’s Listing Rule whereby at least one senior board
position is held by a woman.
Diversity information for the Board, Executive Committee, senior
managers and the Group as a whole can be found on page 33.
The Board extends its work on diversity to senior leadership
positions in the business and across the Group. The Board Diversity
Policy was reviewed during the year and can be found on our
website www.smiths.com.
Governance
The Committee is responsible for keeping the Board’s governance
framework under review. In FY2022 the Committee recommended
the establishment of the Science, Sustainability & Excellence
Committee to oversee the Group’s approach to science,
sustainability and excellence, including R&D, commercialisation,
and sustainability strategies. It also reviewed the operation of the
Remuneration Committee and its oversight of the Group’s wider
People-related activities, and recommended its evolution into the
Remuneration & People Committee. In addition the Committee
recommended the evolution of the Transaction Committee into the
Finance Committee, with responsibility for oversight of the Group’s
sources and uses of cash including portfolio activity, changes to
capital structure and budgetary planning.
During the year the Committee reviewed the Board skills and
experience matrix, Board Diversity Policy and its own Terms of
Reference. The Committee also considered Director engagement
with stakeholders, including the workforce, before this
responsibility moved to the Remuneration & People Committee.
Induction
To ensure that they are able to effectively contribute to discussions
and decision-making, all of our Directors participate in an induction
programme on joining the Board. Each induction plan is tailored to
provide the individual Director with the necessary knowledge and
understanding of the Group, based on their personal experience
and background. Given her already extensive knowledge of Smiths,
for Clare Scherrer this included meeting with key stakeholders
including investors, advisers, the external auditor KPMG and
receiving briefings on the role and responsibilities of being a listed
company director. Clare Scherrer has also visited numerous Group
operations in the US and Europe. The induction programme for
Richard Howes has similarly been tailored to his experience and is
currently underway.
Diversity Performance
BIRTHPLACE OR BACKGROUND
GENDER
ETHNICITY
Policy target: 50%
Policy target: 40%
Policy target: 1
Outside the UK
UK
64%
36%
Female
Male
Current composition
2
45%
55%
Policy target
At least 50% of the Board with a birthplace
or background outside of the UK
Correct as at 16 September 2022.
Policy target
At least 40% of the Board to be female
Policy target by 2025
At least one of the Chairman, Senior Independent
Director, Chief Executive Officer or Chief
Financial Officer position will be held by
a female
Current composition
Female Chief Financial Officer
Policy target
At least one Director from a historically under-
represented ethnic group
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022
68
Conflicts of interest
All of our Directors must avoid situations where they have a direct
or indirect interest that conflicts, or may possibly conflict, with the
best interests of Smiths. The Board has the authority to authorise
conflicts and potential conflicts in accordance with our Articles of
Association and the Companies Act 2006 (Act), and Board approval
must be granted before a Director accepts a new external
appointment, whether it amounts to a conflict or not. The Company
Secretary maintains a Register of Conflicts which is reviewed by
the Directors at least twice a year, and the Board retains the power
to vary or terminate any authorisation previously provided.
Director election and re-election
Each year Smiths Directors are subject to election or re-
election by shareholders at our Annual General Meeting (AGM).
Our Chairman, on behalf of the Board, has confirmed that each
Non-executive Director standing for re-election at this year’s
AGM continues to be an effective member of the Board, and has
demonstrated the commitment required. The Senior Independent
Director has confirmed that the Chairman continues to be effective
and supports his re-election to the Board at the AGM. The rules
regarding the appointment and replacement of Directors are
determined by our Articles of Association and the Act. The Articles
of Association can be found on our website and can only be
amended by a special resolution of shareholders.
Information and training
The Board recognises the importance of ongoing training and
our Directors are given the opportunity to update their skills and
experience on a regular basis. Any individual development needs
are discussed with the Directors at the annual performance
evaluation. In order for the Directors to remain aware of business
priorities and external developments, the Board is provided with
formal reports and updates from the divisions, functional leaders
and external advisers on a regular basis.
Further to the sale of Smiths Medical to ICU, in which the Group
holds a 10% stake, Bill Seeger was provided with specific training
in connection with his duties as a US Company Director and
potential conflicts of interest between ICU and Smiths.
In order to operate effectively our Directors must receive accurate,
timely and high-quality information. The Company Secretary
and his team assist the Chairman and Chief Executive Officer in
ensuring effective information flows and that the Board is provided
with all relevant information to enable the Directors to discharge
their responsibilities.
Independence and objectivity
The Board keeps the independence of the Non-executive Directors
under continuous review. In July 2022, the Committee reviewed the
guidance contained in the Code and assessed the performance and
independence of each of the Non-executive Directors. It concluded
that each of them contributed effectively to the operation of the
Board and that they should all be considered as independent.
Tanya Fratto was appointed as a Director on 1 July 2012 and as she
had served on the Board for more than nine years a particularly
rigorous review of her performance was undertaken. The Board
concluded that she contributed to constructive challenge and
debate at meetings and that she continues to demonstrate the
qualities of objectivity and independence. It is anticipated that
Tanya Fratto will step down from the Board at the 2022 AGM.
Having served on the Board for more than six years, Bill Seeger
and Mark Seligman’s continued objectivity and independence were
also subject to rigorous review. It was agreed that they continue to
be independent and objective. Having served on the Board for more
than six years, the Board also considered and confirmed that Sir
George Buckley continues to be objective.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 69
Our external auditor, KPMG, continues to provide robust challenge
to management and provides its independent view to the
Committee on specific financial reporting judgements and the
control environment.
I’d like to thank my colleagues on the Committee for their
contribution during the year and I look forward to continuing our
work in FY2023.
Mark Seligman
CHAIRMAN OF THE AUDIT & RISK COMMITTEE
Committee membership and meetings
All members of the Committee are independent Non-executive
Directors and collectively have recent and relevant financial,
accounting and sector experience. Committee member biographies
and attendance at meetings during the year can be found on
pages 58, 59 and 63. The Board considers that Mark Seligman
has the recent and relevant financial experience required to chair
the Committee.
At the invitation of the Chairman of the Committee, and in order to
maintain effective communications, the Chairman, Chief Executive
Officer and Chief Financial Officer and an audit partner of KPMG
attended all meetings. Other regular attendees included the
Group Financial Controller, the Director of Internal Audit, Senior
Vice President and General Counsel, Ethics and Compliance, the
Company Secretary and Deputy Secretary. Divisional Presidents,
the Vice President Finance Excellence and senior management
were also invited to attend as appropriate. PwC, as the auditor of
Smiths Medical, also attended one Committee meeting. At the
conclusion of meetings, KPMG and the Director of Internal Audit
were each given the opportunity to discuss matters with the
Committee without executive management being present.
The heads of Internal Audit and Ethics and Compliance, together
with KPMG, have direct access to the Committee should they wish
to raise any concerns outside formal Committee meetings.
The Committee works to a structured programme of activities and
meetings to coincide with key events around our financial calendar
and, on behalf of the Board, to provide oversight of the Group’s
risk management and internal control process. The Chairman of
the Committee reports formally to the Board on the Committee’s
activities after each meeting.
Committee performance evaluation
Through the annual Board evaluation process, see pages 64
and 65, the Board has again confirmed the effectiveness of this
Committee in its role of supporting the Board in compliance with
its duties.
AUDIT, RISK AND INTERNAL CONTROL
AUDIT & RISK
COMMITTEE
REPORT
Chairman’s statement
I am pleased to present the Committee’s report for
FY2022. The Committee fulfils an important oversight role,
monitoring the integrity of the Group’s financial reporting
and the effectiveness of its system of internal control and
risk management framework.
The membership of the Committee has recently changed.
We welcomed Richard Howes to the Committee following his
appointment to the Board on 1 September 2022. Tanya Fratto will
be stepping down from the Board and therefore the Committee
after the AGM in November. I would like to commend Tanya’s
membership over many years.
The Committee met four times during the year. Each meeting
agenda included a range of topics across the Committee’s areas of
responsibility, including:
– Consideration of financial reporting matters at each meeting.
At the March meeting the Committee reviewed the half-year
results announcement and at the September meeting we
reviewed the Annual Report and accompanying materials, prior
to the release of the Group’s results. Our work included reviewing
the material judgements and issues, including the treatment of
the sale of Smiths Medical and the discontinuation of the Group’s
operations in Russia, the results of impairment testing and the
going concern and long-term viability assessments.
– We performed deep-dive reviews on our principal risks
including supply chain, product quality, customers and
contractual obligations. Divisional Presidents and their teams
attended Committee meetings on a rotational basis and
presented their risk registers and principal risk deep-dives.
This allowed the Committee to gain an understanding of the
culture and risks present throughout the organisation.
– Our Finance Excellence Programme, particularly in relation
to internal controls, continues to be a focus for the Committee
and we are monitoring potential developments in relation to the
audit and governance reforms, as well as how we might respond
to changes in regulation.
– Behaving ethically and with integrity is a fundamental part of our
Values. The Senior Vice President and General Counsel, Ethics
and Compliance attended our March and September Committee
meetings and provided updates on our Ethics and Compliance
(E&C) programme. Our E&C programme focuses on higher risk
and critical areas such as bribery and corruption, human rights,
international trade and privacy/data protection. We receive
a report on data compiled from ‘Speak Out’, our confidential
reporting hotline, and any material investigations.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 70
Committee activities
Financial and narrative reporting
The Committee reviewed the full and half yearly results
announcements, the Annual Report and the viability and going
concern statements before recommending them to the Board
for approval.
The Group has internal control and risk management
arrangements in place to support the financial reporting
process which provide reasonable assurance that the financial
statements are prepared in accordance with applicable standards.
These arrangements included seeking divisional confirmation that
the reported information gives a true and fair view of the results
for the period and ensuring that record keeping allows an accurate
and fair reflection of transactions. More information on risk
management and internal controls can be found on page 73.
An important responsibility of the Committee is to review and
agree the most significant management accounting estimates
and judgements which impact the financial statements. The key
areas of judgement in the year are set out on pages 71 and 72.
After receiving reports on the significant estimates and areas
of judgement and after discussion with KPMG, the Committee
agreed that the judgements made were appropriate and correctly
reflected and presented in the Annual Report.
Fair, balanced and understandable
The Committee applied the same due diligence approach adopted
in previous years in order to assess whether the Annual Report is
fair, balanced and understandable, one of the key UK Corporate
Governance Code requirements. This included being updated
on the internal verification process carried out to support the
Committee’s assessment of the disclosures made in the Annual
Report. The Committee also reviewed various materials on
risk management and internal controls, going concern and
the assessment of the Group’s long-term viability. In doing so
it considered:
– the accuracy, integrity and consistency of the messages
conveyed in the Annual Report;
– the appropriateness of the level of detail in the
narrative reporting;
– the correlation between judgements, estimation of uncertainties
and issues and the associated disclosures; and
– the explanations of the differences between statutory and
headline reported results.
Taking the above into account, together with the views expressed
by KPMG, the Committee recommended, and in turn the Board
confirmed, that the 2022 Annual Report, taken as a whole, is
fair, balanced and understandable and provides the necessary
information for shareholders to assess the Company’s position,
performance, business model and strategy.
External audit
The Committee places great importance on the quality,
effectiveness and independence of the external audit process.
Following a tender process KPMG was appointed as the
Company’s external auditor at the 2019 Annual General Meeting.
Michael Maloney, the KPMG audit partner responsible for the
Company’s audit since 2019 will retire following the completion
of the FY2022 audit. Further to an extensive selection process
overseen by the Chairman of the Committee, Michael Barradell
will be appointed as the lead engagement partner for the next
financial year. His tenure will be limited to five years in line with audit
standards and due to KPMG partner rotation policies.
The Committee confirms that the Company has complied with
the provisions of the Statutory Audit Services Order 2014 relating
to the UK audit market for large companies throughout the year
under review and as at the date of this report.
Scope of the external audit plan and fee proposal
At its November 2021 meeting the Committee reviewed and
approved KPMG’s proposed audit plan. The fee for the FY2022
audit was agreed in July 2022. The Committee continued to
monitor KPMG’s execution of the 2022 audit plan during the year.
Smiths Medical
Due to PwC’s understanding of Smiths Medical’s financial
reporting and internal control environment and the work necessary
to support the separation of that business, PwC continued to act
as the auditor for Smiths Medical until the sale of the business on
6 January 2022. PwC provided an update to the Committee at its
September 2021 meeting.
Independence and objectivity
The Committee is responsible for the implementation and
monitoring of the Group’s policies on external audit, which
are designed to maintain the objectivity and safeguard the
independence of the external auditor. These policies are reviewed
annually. They cover the engagement of the external auditor for
non-audit services and the appointment by the Group of former
employees of the external auditor.
In addition to monitoring compliance with Group policies, the
Committee’s review of KPMG’s independence included examining
written confirmation from KPMG that they remained independent
and objective within the context of applicable professional
standards and considering the performance of the audit
engagement partner.
Non-audit services
Notwithstanding developing practice being adopted by audit firms
not to provide non-audit services to audit clients, the Committee
recognises that certain permissible non-audit services can be
completed more efficiently by, and be purchased more cost-
effectively from, the incumbent auditor due to the audit firm’s
existing knowledge of the Group and its systems. Under the policy
approved by the Committee, it has delegated its responsibility for
authorising the purchase of non-audit services from the external
auditor to the Chairman of the Committee and/or the Chief
Financial Officer within specific limits.
Details of the fees paid to KPMG for the year ended 31 July
2022 can be found in note 2 of the financial statements on page
120. Non-audit fees as a percentage of audit fees totalled 11%
(FY2021: 13%). Non-audit fees comprise audit related assurance
services and fees in connection with the sale of Smiths Medical.
The Group would not expect in the ordinary course of business for
non-audit fees to exceed 20% of the average of the previous three
years’ total Group audit fees unless exceptional circumstances
existed. The Committee confirms that the non-audit work
performed by KPMG, which included work in preparation for
the separation of Smiths Medical during the year, was properly
assessed and authorised in accordance with the Group’s policy.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 71
SIGNIFICANT FINANCIAL REPORTING MATTERS
The key areas of judgement for FY2022 are as follows:
Areas of focus
Actions taken
MEDICAL DISPOSAL ACCOUNTING
On 6 January 2022, the Group completed the
sale of Smiths Medical to ICU Medical, Inc. (ICU).
As part of the sale the Group has incurred and
provided for separation expenses, that arise from
contractual and commercial obligations due to
the separation, and has retained a 10% holding in
ICU and received $100m of deferred contingent
consideration, the values of which are dependent
on the ICU share price.
REVENUE RECOGNITION
Smiths Detection and Smiths Interconnect have
multi-year contractual arrangements for the sale
of goods and services. Estimates are required
at the Balance Sheet date when determining
the stage of completion of contracts for
revenue recognition.
TAXATION
The Group has extensive international operations
and in the normal course of business the
Directors make judgements and estimates in
relation to potential tax exposures.
The Committee considered the constituent elements of the separation expenses
included within the net gain on sale of Smiths Medical and reviewed the
appropriateness of the provisions made relating to the sale and the transition
services being provided by Smiths Group to Smiths Medical.
The Committee reviewed the financial reporting treatment and the basis for
determining the fair value of the deferred contingent consideration, which
has been classified as a financial asset at fair value through profit and loss.
The 31 July 2022 ICU share price of circa $177 (6 January 2022: $231) was 23%
down from when the sale completed. This reduction in share price has resulted
in Smiths recognising fair value losses through the Income Statement and Other
Comprehensive Income. See notes 14 and 27 of the financial statements.
The Committee reviewed management’s revenue recognition judgements.
The Committee noted that the timing of revenue recognition involves judgements
as to when control of an asset passes to the customer or, particularly in Smiths
Detection and Smiths Interconnect, as to the stage of completion of contract
activity and whether the separate performance obligations have been fulfilled.
The Committee reviewed and concurred with management’s conclusions on
the significant judgements for complex programmes and contract accounting.
See note 1 of the financial statements.
The assets and liabilities recognised in income and deferred tax, as well as the
treatment of losses in the UK, were assessed. Particular focus was given to the
recognition of UK deferred tax assets; deferred tax assets relating to the John
Crane, Inc. asbestos provision; and the Titeflex Corporation CSST provision.
The Committee noted the ongoing tax audits that are likely to conclude in
the next 12 to 24 months, and the uncertainty associated with their outcome.
The Committee noted that the final outcome may vary significantly from the
amounts currently provided for tax risks. See note 6 of the financial statements.
IMPAIRMENT – INTANGIBLE ASSETS (INCLUDING GOODWILL) AND RUSSIA
The Group holds a significant amount of goodwill,
especially in relation to the Smiths Detection cash
generating unit (CGU).
The intangible assets and the assumptions used to justify their carrying values
were reviewed, including the applicable discount rate used for impairment
testing purposes.
Smiths Detection was the Group’s only CGU where the impairment headroom was
more limited for FY2022 and where a plausible downside scenario or a reasonable
change in key assumptions could cause the carrying value of the CGU to exceed
its recoverable value. Smiths Detection’s limited impairment headroom is driven
by a lower starting point from the FY2022 outturn, reflecting a difficult market
subsequent to COVID-19 that has impacted its aviation security customers, an
increased discount rate driven by the macroeconomic hurdles in FY2022 and the
impact of temporary supply chain issues. Earnings growth within the impairment
model is from the lower FY2022 base position and the CGU recoverable amount
exceeded its carrying value - therefore no impairment was necessary. The
Committee has reviewed the additional disclosures made around this impairment
review. See note 11 of the financial statements.
As announced with the HY2022 interim results, the Group suspended sales into
Russia. The Committee agreed with the Russia impairment charge and related
wind down costs. The Committee has also agreed that these items are material
in quantum and should be separately disclosed through the non-headline items
within the income statement. See note 3 of the financial statements.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 72
Areas of focus
Actions taken
PROVISIONS FOR LIABILITIES AND CHARGES
The Group holds significant material provisions
for John Crane, Inc. asbestos resolution; and the
Titeflex Corporation CSST product claims.
POST-RETIREMENT BENEFITS
The Group has material pension plan assets
and liabilities and there is a high degree of
estimation uncertainty.
The Committee considered the appropriateness of the level of the provisions
held against John Crane, Inc. asbestos litigation and the Titeflex Corporation
CSST claims. In particular, the Committee considered the treatment of
potential liabilities, the changes to the assumptions made in calculating
the provisions, sensitivities to changes in assumptions and advice received
from the Group’s specialist external advisers. The Committee agreed the
continued appropriateness of the ten-year time period for John Crane, Inc.
asbestos litigation. In the case of the John Crane, Inc. asbestos litigation, the
Committee also agreed with the judgement that, whilst large numbers of claims
are made against John Crane, Inc. and other defendants every year, due to both
known and as yet unknown developments in the US legal system and other events
that will impact the asbestos legal environment, a sufficiently reliable estimate
cannot be made to cover the full period over which it is expected that costs will
be incurred. In both these cases, it was determined that the assumptions fairly
reflect the position. See note 23 of the financial statements.
The Committee reviewed the financial reporting treatment for the final TI Group
Pension Scheme (TIGPS) bulk annuity buy-in. This buy-in has been secured with
a commitment to fully buy-out the Scheme over the next few years so has been
accounted for as a settlement, with the resulting settlement loss and past service
cost shown in the Group’s income statement in FY2022. A surplus restriction has
been applied to the remaining Scheme assets to bring the net surplus to zero.
The Committee has also reviewed and agreed the methods, assumptions and
benchmarks used by the actuaries to calculate the position of the UK and US
schemes at 31 July 2022, which have continued to show a net accounting surplus
position which has been reduced by £219m in FY2022.
The Committee agreed the treatment and the corresponding disclosures on these
matters. See note 8 of the financial statements.
PRESENTATION OF HEADLINE PROFITS AND ORGANIC GROWTH
The Group presents headline profits and organic
growth measures which require adjustment to
IFRS required data. This is a material judgement
and requires a consistent application of the
Group’s accounting policy on this topic.
The Committee considered the policy, presentation and judgements in relation
to the Group’s performance, in particular the separation of headline and non-
headline items. This included the consideration of which items related to the
Group’s ongoing trading activity or those which should be recorded as non-
headline.
The Committee reviewed the appropriate level of disclosure for the impairment
charge recognised in FY2022 against the Group’s Russian businesses and related
wind down costs. The Committee agreed that the combined impairment charge
required separate presentation as a non-headline item.
In addition, the Committee also considered those judgements in connection
with items to be reflected or adjusted in organic performance. See note 3 of the
financial statements.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 73
Effectiveness of the Group’s risk management
and internal controls
In FY2022, the Committee, on behalf of the Board and with the
assistance of the Internal Audit function, monitored, reviewed and
assessed the effectiveness of the Group’s risk management and
internal control systems in the context of the Group’s strategy,
business model and risk appetite.
Deep-dives were carried out during the year on the following
principal risks. The principal risks have since been updated as
detailed on page 47:
– Product quality – John Crane, Smiths Detection and Flex-Tek
– Customers – Smiths Detection and Smiths Interconnect
– Supply chain – John Crane and Flex-Tek
– Contractual obligations
Consideration of the risk registers alongside the principal
risk deep-dives and other thematic risk areas enables the
Committee and full Board to understand the culture, risks and
opportunities and assurance processes throughout the business
and the potential impact on the Group. No significant failings
or weaknesses were identified.
The Committee were also provided with updates in relation to the
Finance Excellence Programme particularly in relation to projects
to improve and standardise finance activity across the Group
and ongoing activity to improve general IT controls. They also
monitored the potential development of audit and governance
reforms and how the business might respond to changes
in regulation.
Principal risks update
The Committee carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its
business model, future performance, solvency and liquidity.
We have refreshed the FY2022 principal risks to reflect the critical
risks facing the business and the following changes were made:
– Growth and ESG have been added as principal risks
– Group portfolio risk has been removed with the completion of
the sale of Smiths Medical
– A number of risks, including COVID-19 and Integrated supply
chain, have been combined into a Business continuity risk
– Ethical breach and Contractual obligations have merged into a
Legal and compliance risk
– Customers and markets risks have merged into a
Commercial risk
A description of the principal risks facing the Group and how these
were reviewed to assess the Group’s viability can be found on
pages 47 to 53.
Effectiveness of the external audit
The Committee continually assessed the effectiveness of the
external auditor during the year, including its independence,
objectivity, appropriate mindset and professional scepticism.
The Committee considered:
– the conclusion of the FY2021 audit process
– the review of audit plans
– content, insight and value of KPMG’s reports
– robustness and perceptiveness of KPMG in handling of key
accounting and audit judgements
– management’s responses to any audit findings
– discussions with management (both with and without the
external auditor present) and with the external auditor
(both with and without management present)
– the findings of the FRC’s 2022 Audit Quality Inspection Report
with KPMG to understand the activities being undertaken to
address the findings and KPMG’s position regarding the various
areas of audit reform which are currently under review
As FY2022 was KPMG’s third year as the Group’s external auditor,
the Committee paid particular attention to ensuring that it was
satisfied that the Committee’s and management’s feedback from
previous effectiveness reviews had been adequately addressed.
This included the close out of previously discussed audit matters.
In addition it also considered other statutory reporting, audit
planning and scope deliverables, and that KPMG had continued to
devote sufficient time and resources to understand and assess the
business, its key risks and controls.
Prior to the sale of Smiths Medical, the Smiths Medical business
continued to be audited by PwC. The Committee also considered
the effectiveness of the process whereby KPMG was able to
achieve comfort from PwC on its work for that division in respect
of the FY2021 financial statements.
After taking into account the factors above and its general
interaction with KPMG throughout the period, the Committee
was satisfied that the audit was effective. The Committee
therefore agreed that it was appropriate to recommend to the
Board that the reappointment of KPMG as the Company’s auditor
for a further year be proposed to shareholders at the 2022 AGM.
A further review of the FY2022 audit will be conducted ahead
of the FY2023 half year results.
Risk management and internal control
The Board is responsible for ensuring that sound risk
management and internal control systems are in place.
The Executive Committee is responsible for designing the risk
management and internal control systems and ensuring they are
effectively deployed throughout the Group. The internal control
system is a framework to manage risks and monitor compliance
with procedures. It is designed to meet the Group’s particular
needs and the risks to which it is exposed. However, it can provide
only reasonable, not absolute, assurance against material loss to
the Group or material misstatement in the financial statements.
More detail can be found on pages 46 to 53.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 74
Ethics and compliance
During the year, the Committee reviewed the Ethics and
Compliance annual work programme and provided oversight of
investigations into allegations of non-compliance with the Code of
Business Ethics. This included matters raised through the Group’s
ethics reporting procedures including the Group’s ‘Speak- Out’
hotline which allows for anonymous reporting. Smiths ‘Speak
Out’ hotline comprises a number of different channels (including
call centres operated by an independent third party across the
Group’s global operations) for employees and other stakeholders
to report concerns.
During the year there were no matters raised that required
the Committee’s direct intervention or investigations which
resulted in a material loss to the Group or a detrimental impact
on our customers or suppliers. The Committee receives regular
reports on the total number and nature of cases by region, the
ratio of anonymous vs attributed ethics reports, and the ratio
of substantiated vs unsubstantiated cases. The anonymous
vs attributed metric is used to monitor trust in the Group’s
reporting system. Accordingly, the Committee considered that
the Group’s processes and arrangements for employees to report
concerns, including anonymously and without retaliation, about
any improprieties and the arrangements for any subsequent
investigation as necessary, were both appropriate and effective.
During the year, the Committee provided oversight of a number
of areas targeted by the Ethics and Compliance work programme.
More information on the Group’s approach to Ethics and
Compliance can be found on page 34 and in the Sustainability at
Smiths report found on our website.
Assessment of internal control and
risk management arrangements
The Committee was satisfied that the Group’s processes
governing financial reporting and controls, its culture, ethical
standards and its relationships with stakeholders continued
to be effective.
The Committee was also satisfied with the appropriateness
and adequacy of the Group’s risk management arrangements,
internal control framework and three lines of defence model.
Internal Audit
Internal Audit is independent of the business and so has no
responsibility for operational business management. This ensures
the integrity and objectivity of its annual Audit Plan, which is
approved by the Committee. The authority of the Internal Audit
function is derived from the Committee. The Director of Internal
Audit is accountable to the Board through the Committee
Chairman, although administratively the Director of Internal Audit
reports to the Chief Financial Officer.
In order to carry out the responsibilities, as set out in a charter
approved by the Committee, the Internal Audit function has:
– full and unrestricted access to all records, property
and personnel;
– independent access to the Committee Chairman and members
of the Committee;
– the right to request meetings with the Committee; and
– the authority and obligation to report significant findings
or other concerns to the Committee.
During the period, the Committee received progress reports
on the execution of the FY2022 Internal Audit Plan and discussed
any high priority control enhancement opportunities and
action plans to address these. The Committee also approved
the FY2023 Internal Audit Plan, including the proposed audit
scope, approach, coverage and budget including the allocation
of resources.
The Committee oversees the performance of the Internal
Audit function through the Director of Internal Audit’s
attendance at Committee meetings, review of work presented
throughout the course of the year, and a review of agreed
KPIs which are reported to the Committee at each Committee
meeting. The Committee also considered the results of an
anonymous survey circulated to the Audit & Risk Committee,
senior management and the Group’s external auditor on the
performance of the function during the year. Overall, Internal
Audit is seen as a valued assurance function throughout
the Group. It is appropriately resourced and conforms with
industry standards in its approach.
In accordance with the International Standards for the
Professional Practice of Internal Auditing, the assessment
of the Internal Audit function is required to be carried out by
an independent third party at least every five years. The last
independent third-party assessment was carried out in 2018.
The next independent third-party assessment will take place
during FY2023.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 75
Business context for FY2022
We have made good progress this year with a renewed focus
on technology and new product development. Following the
successful sale of Smiths Medical, we have an ambitious growth
strategy which will amplify Smiths post the Medical sale. Our
Remuneration Policy is strongly aligned to the priorities in the
Smiths Value Engine and our AIP and LTIP metrics for FY2023
outlined later in this statement are designed to support this.
We have not been immune to the macroeconomic challenges
including the COVID-19 pandemic, but we have shown resilience
in the face of these challenges and continue to be agile to maintain
the performance of the business and support our people and
communities. Organic revenue growth has been ahead of
expectations and we have delivered five consecutive quarters
of growth. This has been supported by stronger execution and
operational resilience. Inspiring and empowering our people has
been an important element of building this momentum.
Shareholder consultation
We are conscious of the competitive global environment for
executive talent. During the year, we reached out to major
shareholders to discuss their views on the introduction of an
additional share plan designed to reward superior performance
over a five-year period, in line with the strategy announced at
the Capital Markets Event in November 2021. Feedback from
shareholders was that they were sympathetic to this objective
but preferred the simplicity of delivery within the parameters of
the current Remuneration Policy. We were delighted to have the
opportunity to talk and would like to thank shareholders for the
feedback provided.
Board changes
In April 2022 we announced the appointment of Clare Scherrer as
Chief Financial Officer, alongside a number of executive leadership
appointments, continuing the good progress made over recent
years in positioning the Company for the future. Clare was
appointed on a salary of £553,750, which will be next reviewed
in October 2023, and a pension allowance in line with the rate
available to the wider UK workforce. Her incentive arrangements
and benefits entitlement are in line with the Remuneration Policy.
A summary of the remuneration for the outgoing Chief Financial
Officer is provided on page 83.
Implementation for FY2023
The Board is conscious of the challenging impact of current
inflationary pressures on our colleagues and this is reflected in the
management decision to focus more of the salary increase budget
on those sectors of the workforce which are more significantly
affected. Paul Keel’s salary has been increased by 2.5% and is
effective from 1 October 2022. The increase is in line with senior
management and is below the increment for the wider workforce.
Clare Scherrer’s salary will remain unchanged for FY2023.
We continue to assess and evolve how our sustainability strategy
should be reflected within our remuneration framework.
Following careful consideration by the Committee, we will be
introducing new objectives within the Annual Incentive Plan (AIP)
for FY2023, aligned to our strategy and the commitments made at
the November 2021 Capital Markets event.
REMUNERATION
& PEOPLE
COMMITTEE
REPORT
Our objectives are to create clear alignment between
remuneration and sustainable, long-term stakeholder
interests. We take account of shareholder views and ensure
that performance supports the delivery of business strategy
through targeting our key performance indicators (KPIs).
Chairman’s statement
I am pleased to present the Remuneration Report for the year
to 31 July 2022. This will be my fourth year as Chairman of the
Committee. In this time we have adapted our Policy to align
with stakeholder expectations and guidelines whilst ensuring
it supports business strategy. We have also been mindful of
unprecedented sociopolitical pressures.
The Directors’ Remuneration Policy was approved at the AGM
on 17 November 2021. The Directors’ Remuneration Report for
FY2022 will be put to an advisory shareholder vote at the 2022
AGM on 16 November 2022. I look forward to your continued
support at the upcoming AGM.
Remuneration & People Committee
During FY2022 we took the important step of expanding the
responsibilities of the Committee to include overseeing the
implementation of the People strategy and, as necessary, make
recommendations to the Board regarding changes to or approval
of the strategy.
The broader Remuneration & People Committee now oversees
the process for the Group’s talent strategy and the development
of a diverse pipeline of succession below senior management.
Responsibility extends to the Group’s diversity, equity and inclusion
strategy and approach to workforce engagement including
reviewing the results of the employee engagement survey and the
related action plans.
There is a programme of Board engagement activities to enable
the Non-Executive Directors to have regular dialogue with
colleagues across the Group to inform their view of employee
engagement and ensure well-being policies and programmes
are effective.
The Committee remains responsible for the Group’s overall
remuneration strategy, overseeing the Group’s Remuneration
Policy for Directors and senior management. The Committee
seeks to achieve a strategy that attracts, motivates and retains
executive management of the quality required to run the Group
successfully. The strategy promotes the long-term success of
Smiths, while reflecting the views of all stakeholders.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION & PEOPLE COMMITTEE REPORT
76
For the FY2023 AIP, we will introduce two new performance
metrics based on reductions in energy usage across the business
and revenue from new product programmes, including our
sustainable products. The new measures will each have a
weighting of 10%. This builds on the quantifiable and measurable
Scope 1 and 2 Greenhouse gas reduction metrics incorporated
in our Long-Term Incentive Plan (LTIP), driving achievement
of our commitment to Net Zero emissions from operations by
2040. There will no longer be a personal objectives metric in AIP,
reinforcing the focus on team performance.
Committee performance evaluation
The annual evaluation of the Committee was conducted as part
of the internally facilitated evaluation process of the Board and
its Committees. The findings relating to the Committee were
discussed with me. More information can be found on page 64.
Overall, the Committee is viewed as effective and performing well
and is rigorous in discharging its responsibilities.
There were three scheduled Committee meetings held during the
year and one special meeting.
Looking forward
The Committee will continue its focus on all stakeholder groups
and the wider workforce when discussing executive pay strategy.
It will also consider the broader impact of non-financial measures
such as Smiths Leadership Behaviours and how these should be
reflected in remuneration decisions. In particular the Committee
will seek to assess how the macroeconomic environment is
impacting the market for global talent and the search for talent
will continue to be a priority as we grow.
Bill Seeger
CHAIRMAN OF THE REMUNERATION & PEOPLE COMMITTEE
Other activities of the Committee in FY2022
In addition to those highlighted elsewhere in this statement, the
Committee has also undertaken the following activities in FY2022
– Reviewed business plans and performance to assess their
potential impact on existing and future incentive arrangements
– Reviewed remuneration of the wider workforce and related
policies to ensure internal alignment of reward
– Approved FY2023 salary increases for the Executive Committee
considering available budget, individual performance rating and
position in salary range
– Reviewed the Committee’s performance and Terms of Reference
– Approved the Remuneration Report for inclusion in the
Annual Report
– Approved the service contracts of the Executive Directors
Committee membership and meetings
The membership of the Committee and their meeting attendance
during the year is set out on pages 58, 59 and 60 of this report.
I had served on a remuneration committee for at least 12 months
prior to my appointment as Remuneration Committee Chairman.
Sir George Buckley is absent when his own remuneration as
Chairman of the Board is under consideration.
The Chief Executive attends meetings of the Committee by
invitation but he is not involved in the determination of his own
remuneration, or present during consideration of any changes
to it.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 EXECUTIVE REMUNERATION AT A GLANCE
IMPLEMENTATION OF REMUNERATION POLICY IN FY2022
77
Pension and benefits
– Pensions contributions of 12% of base salary for Paul Keel
and Clare Scherrer, in line with the rate available to the wider
UK workforce. John Shipsey received contributions of 20.5%
– Benefits included healthcare, insurance, car benefit and
relocation benefits for the CEO.
Base salary
Paul Keel received:
£875,000
Clare Scherrer received:
£140,567
John Shipsey (former CFO) received:
£551,496
Annual bonus (AIP)
Long term incentive (LTIP)
Total bonus payout (% of maximum):
Total vesting (% of maximum):
Paul Keel:
Clare Scherrer:
John Shipsey:
38.8%
38.8%
37.8%
Paul Keel:
N/A
Clare Scherrer:
John Shipsey:
N/A
14.1%
Threshold
(25% payout)
Maximum
(100% payout)
Achievement
Threshold
(25% payout)
Maximum
(100% payout)
Vesting
Operating profit
(40%)
£459m
£464m
£502m
Organic revenue
growth (30%)
£2,784m
£2,926m
£2,832m
Headline operating cash conversion (20%)
93%
H1 (10%)
FY (10%)
Personal objectives
(10%)*
90%
81%
95%
0%
110%
115%
9%
10%
* Personal objectives outturn for John Shipsey was 8% of maximum
SINGLE FIGURE (£000)
Paul Keel
Clare Scherrer
John Shipsey
12.8%
13.8%
3.2%
0.0%
9.0%
Organic revenue
growth (30%)
0.6%
3%
6%
0%
Group EPS growth
after tax (25%)
1.8%
4% p.a.
11% p.a.
0%
Average ROCE
(20%)
Average headline
operating cash
conversion (25%)
Total
13.7%
15% p.a.
18% p.a.
0%
96%
90%
105%
14.1%
14.1%
£1,832
£256
£1,257
£0
£500
£1,000
£1,500
£2,000
Salary
Pension and benefits
Annual bonus
Long term incentives
Salary
Pension and benefits
Annual bonus
Long term incentives
Paul Keel
Clare Scherrer
John Shipsey
875
279
678
-
141
24
91
-
551
139
344
223
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 EXECUTIVE REMUNERATION AT A GLANCE
78
STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN FY2023
Base salary
Paul Keel:
£896,875
(2.5% increase)
Clare Scherrer:
£553,750
(0% increase)
UK wider workforce increases of 3.0%.
Pension Benefits
Paul Keel:
12%
of base salary
Clare Scherrer:
12%
of base salary
Benefits package consisting of
healthcare, insurance, car benefit
and relocation benefits.
Benefits package consisting
of healthcare, insurance and
car allowance.
Annual bonus (maximum opportunity)
Long term incentives (LTIP)
Paul Keel:
200%
of base salary
Clare Scherrer:
165%
of base salary
Paul Keel:
189,900
number of shares
Clare Scherrer:
91,342
number of shares
Performance measure
Operating Profit
Revenue
Headline Operating Cash Conversion
New Product Commercialisation
Energy Efficiency
Weighting
Performance measure (3 year)
Weighting
Threshold
(25% vesting)
Maximum
(full vesting)
30%
30%
20%
10%
10%
EPS growth after tax
Revenue growth
Free cash-flow
Average ROCE
Reduction in GHG
20%
30%
20%
15%
15%
6%
3.5%
45%
14%
15%
11%
6.5%
55%
17%
20%
– 33% of annual bonus deferred into shares for three years.
– Specific targets are considered to be commercially sensitive
and will be disclosed retrospectively.
– Two-year post-vesting holding period applies.
– The same fixed number of shares as in 2021 will be granted to
Paul Keel in October 2022 , per the Policy.
– Clare Scherrer’s award will be in line with her contract of
employment (value of 250% of salary).
PERFORMANCE MEASURES AND LINK TO STRATEGY
Annual bonus (AIP)
OPERATING PROFIT
REVENUE GROWTH
OPERATING CASH CONVERSION
NEW PRODUCT COMMERCIALISATION
ENERGY EFFICIENCY
Long Term Incentive Plan (LTIP)
EPS GROWTH AFTER TAX
REVENUE GROWTH
FREE CASH-FLOW
AVERAGE ROCE
REDUCTION IN GHG EMISSIONS
GROWTH
EXECUTION
PEOPLE
GROWTH
EXECUTION
1
2
3
4
5
1
2
3
4
1
2
3
4
5
1. Strong execution to
1. Operational
maximise underlying
market expansion
2. Improved product
development
and commercialisation
3. Building out
priority adjacencies
4. Disciplined M&A
5. Sustainable Smiths
2. Financial
3. Functional
4. Sustainable Smiths
PEOPLE
1. Safety and wellbeing
2. Inspire and empower talent
3. Diversity, Equity, Inclusion
4. Communities
5. Sustainable Smiths
Shareholding requirements
– Executive Directors should build a minimum shareholding equivalent to the annual fixed number of shares awarded under the LTIP
within five years and are required to hold shares equivalent to their full in-employment shareholding guideline, or actual holding if
lower, for two years post-employment.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 79
REMUNERATION
Alignment with the UK Corporate Governance Code
The table below details how the Committee addresses the factors set out within Provision 40 of the UK Corporate Governance Code:
Clarity
– The Committee welcomes transparency and regular engagement with shareholders with regard to executive remuneration.
Simplicity
During 2022, the Committee Chairman has consulted with shareholders to fully understand their views particularly in
relation to share based remuneration
– Participants in incentive plans receive annual communications to confirm award levels and performance measures.
Supporting guidance documents and instructional videos are available online. The Remuneration Policy for Executive
Directors underpins that of the wider workforce and the 2021 Policy review further simplified the arrangements
Risk
– The Committee considers the effective management of risk throughout the delivery of incentive plans, applying reasonable
discretion to override formulaic outcomes if necessary
– The Committee considers that the structure of incentive arrangements does not encourage unnecessary risk taking
– For Executive Directors, one third of the annual bonus payment is deferred into shares with an additional three years
until vesting
– Robust malus and clawback provisions are in place for incentive plans and are clearly communicated
Predictability
– Our Policy clearly outlines the maximum award levels and vesting outcomes applicable to annual bonus and LTIP. As stated
above under ‘risk’, the Committee has the ability to apply discretion to formulaic outcomes and clear malus and clawback
provisions exist
Proportionality
– There is a link between strategic business objectives and performance outcome, as outlined on page 78
– Our Policy for our incentive plans outlines threshold, target and maximum opportunity levels, with actual outcomes
dependent on performance achieved against pre-determined measures
– Through the design of the Policy and the discretion of the Committee, poor performance is not rewarded
Alignment to culture
– Smiths Group Values of passion, integrity, respect, ownership and customer focus underpin the design and operation of
the incentive programmes. The business strategy is supported by these Values which are widely communicated across
the Company
Consideration of wider workforce
The Committee considers all stakeholder groups when setting executive pay, including our people. The Committee is briefed on
pay arrangements across the business and receives reports on remuneration issues raised by employees through the employee
engagement survey and at divisional and functional town hall meetings.
In September 2021 the Committee Chairman discussed executive pay and sustainable business performance at an employee Q&A
event. A video was circulated in advance, explaining why we have a Remuneration & People Committee, how wider Company pay policies
are aligned with executive pay structures, and how executive pay structures align to our Purpose, Values and culture drive sustainable
business performance for the benefit of all our stakeholders. Employees were encouraged to submit questions in advance, and ask
questions on the day.
The overall responsibility for workforce engagement rests with the Senior Independent Director while each Non-executive Director has
responsibility for workforce engagement in a specific geographical region and business area. Nine events attended by Non-executive
Directors specifically relating to workforce engagement took place in FY2022, further details of which are outlined on page 60.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 80
REMUNERATION
Single figure of annual remuneration (audited)
Executive Directors
Salary
Benefits
Payments in
lieu of pension
contribution
Total fixed
Annual bonus 2
Long-term
incentives
Total performance
related
Total
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
875
141
163
–
183
7
54
–
96
17
10
–
1,154
165
227
–
678
91
223
–
–
–
–
–
678
91
223 1,832
256
–
450
–
551
540
26
11
113
131
690
682
344
567
2233
2814
567
848 1,257
1,530
Paul Keel 1
Clare Scherrer
John Shipsey
(former CFO)
1 An advance payment of $87,349 was made to Paul Keel in August 2022 for him to settle US taxes due on benefits which are also taxable in the UK. Upon receipt of the refund relating to this
foreign tax credit on his UK tax return, a full refund will be provided to the Company.
2 Executive Directors defer 33% of the bonus into Smiths shares. The total bonus paid during the year, including deferral, is captured under Annual Bonus above. The deferral is for a three-
year period and is not subject to any further performance or other conditions.
3 The share price appreciation attributable to the FY2022 Long Term Incentive for John Shipsey was 8.0% (£7,663). For FY2021 it was 11.3% (£20,526). No discretion has been applied to the
amounts attributable to share price appreciation.
4 The Long Term Incentive value for FY2021 for John Shipsey has been restated to show the actual amount (rather than the estimated amount in last year’s report) and to include dividend
accrual payments of £22,461 which was paid on vesting. The total remuneration is also restated accordingly. The estimated Long Term Incentive values for FY2022 are calculated using the
vesting percentage of 14.1% and the average share price over the three months to 29 July 2022 of 1,479p; it also includes the dividend accrual payment of £16,791 for John Shipsey, payable
on vesting. The average share price for the five days to 29 July 2022 of 1,512p is used to calculate the dividend equivalent value.
Salary
Clare Scherrer was appointed to the Board as Chief Financial Officer on 29 April 2022 with an annual base salary of £553,750. The values
in the single figure table above reflect the remuneration paid from 29 April 2022.
John Shipsey stepped down from the Board as Chief Financial Officer on 29 April 2022 and remained employed by the Group until 31 July
2022 to ensure a smooth transition. The values in the single figure table above reflect the remuneration paid to 31 July 2022.
Benefits
Benefits for Executive Directors include life assurance, disability insurance, private healthcare insurance, car related benefits and
relocation benefits (CEO only).
Pension
Executives may choose either to participate in the Company’s defined contribution pension plan or to receive a pension allowance in lieu
thereof. Paul Keel and Clare Scherrer received an allowance in lieu of pension contribution equivalent to 12% of salary during the year.
This is aligned to the rate available to the wider UK workforce.
John Shipsey received an allowance in lieu of pension contribution of 20.5% of salary during the year.
FY2022 annual bonus outcome
The maximum annual bonus opportunities for FY2022 were 200% of salary for Paul Keel, 165% of salary for Clare Scherrer (pro-rated
for time since appointment) and 165% of salary for the former CFO, John Shipsey.
For FY2022, financial metrics made up 90% of the annual bonus, with the final 10% based on performance against personal objectives.
The table below summarises the financial targets and the Company’s actual performance (restated at budget exchange rates) against
these for the FY2022 annual bonus.
Performance targets, actual performance and outturn
Measure
Operating Profit
Revenue Growth
Headline Operating Cash Conversion
H1
FY
Total Financial
Personal Objectives
Total
Weighting
Threshold
25% payout
Target
50% payout
Maximum
100% payout
£459m
40%
£502m
30% £2,784m £2,841m £2,926m
£478m
90%
95%
100%
105%
110%
115%
10%
10%
90%
10%
100%
Actual
£464
£2,832
93%
81%
90%
Outturn
12.8%
13.8%
3.2%
0.0%
29.8%
9.0%
38.8%
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
81
Personal objectives
Challenging personal objectives are set each year for the Executive Directors, to reinforce the Company’s operating and strategic
priorities. The personal objectives for the Executive Directors for FY2022 comprised a number of strategic long-term enablers, some
of which remain commercially sensitive, together with short-term projects aligned to innovation, operational excellence and capability
planning. Achievements against personal objectives in the year (which have a 10% weighting) are in the table below. During the process
of stepping down, the performance of John Shipsey was considered and assessed by the Committee and an overall rating of 80% was
agreed (outturn of 8% of maximum bonus).
Paul Keel
Growth
(including
financials)
Category
Achievement
Outturn
Group Strategy
Developed and communicated a compelling enterprise strategy
for the Group including extensive investor engagement, a
highlight of which was the November 2021 Capital Markets Event.
Environmental,
Social & Governance
Established a Board-level sustainability focused Committee -
the Science, Sustainability & Excellence (SSE) Committee and
appointed Chief Sustainability Officer. Oversaw the development and
implementation of a compelling Group-wide sustainability strategy
which was incorporated into incentive compensation programmes.
Set and communicated environmental goals, to support the
delivery of our commitment to Net Zero GHG Emissions from
operations by 2040. Mapped our approach, signing on to the
Science Based Targets Initiative and the UN Race to Zero pledge.
Portfolio
Closed the Smiths Medical transaction with an enterprise value
of $2.7bn and an equity value of $2.4bn after adjustments for
debt, liabilities and working capital.
44.2/50.0
Execution
Smiths Excellence
System (SES)
Operations
Developed and deployed a Group-wide SES programme, building
on the foundations of the SES Academy and embedding lean
methodology. Appointment of Master Black Belts and Black
Belts in all divisions to ensure delivery of results.
Navigated global supply chain headwinds, including impacts
from Ukraine invasion. Delivered productivity and pricing gains to
offset raw material inflation. Managed working capital levels to
support growth.
Customer
Improved On Time in Full (OTIF) and reduced
Cost of Poor Quality (COPQ).
23.0/25.0
People
Team
Key Executive Committee appointments including CFO, CPO,
CSO, John Crane President and Group SES Director.
Inclusion
and Diversity
Established an extended leadership team comprised of the top
200 leaders, with improved diversity. In addition, the number of
senior leadership positions taken by females is 24%.
Talent Development
Developed and launched an assessment, development and
reward programme that ensures all critical leadership roles
have ‘ready now’ successor and talent pipeline is constantly
reviewed and in development.
Total (9% of maximum bonus opportunity)
Clare Scherrer (from 29 April 2022)
Achievement
Growth
Execution
People
Clare has made an excellent start in her first quarter with Smiths including: -
– Concluding the final buy-in for the £1bn legacy TI Group Pension Scheme
– Developing and deploying strong internal controls
– Structuring an effective Finance Leadership team with key appointments
– Delivering good H2 financial results and fifth consecutive quarter of growth
22.8/25.0
90.0/100.0
Outturn
Overall rating of
90% was approved
by the Committee
representing 9% of
maximum bonus
(pro-rated for service)
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
82
Overall FY2022 annual bonus outturn
The following table sets out the overall FY2022 bonus outturn for Executive Directors:
Paul Keel
Clare Scherrer1
John Shipsey (former CFO)
Maximum opportunity
Outturn (percentage of maximum)
200%
165%
165%
38.8%
38.8%
37.8%
1 Clare Scherrer joined the Board as Chief Financial Officer on 29 April. The maximum bonus opportunity of 165% of salary has been pro-rated to reflect the time since appointment.
The Committee considered the amounts carefully in the context of the Group’s performance, individual performance and the current
macroeconomic environment, and determined that the amounts were a fair reflection of performance in the past financial year.
FY2020 long-term incentive plan outcome
John Shipsey received an award under the LTIP in October 2019, subject to the following performance conditions:
Measure
Organic sales growth
Group EPS growth after tax
Average ROCE
Average headline operating cash conversion
Total vesting
Weighting
Performance period
30%
25%
20%
25%
1 August 2019 to
31 July 2022
1 August 2019 to
31 July 2022
1 August 2019 to
31 July 2022
1 August 2019 to
31 July 2022
Threshold
(25%)
Maximum
(100%)
3%
6%
Actual
0.6%
Outturn
(% of vesting)
0.0%
4% p.a.
11% p.a.
1.8%
0.0%
15% p.a.
18% p.a.
13.7%
0.0%
90%
105%
96%
14.1%
14.1%
No discretion was exercised by the Remuneration & People Committee in respect of the formulaic outcomes under the LTIP. No awards
were due to vest to Paul Keel or Clare Scherrer under this award.
Scheme interests awarded in respect of FY2022 (audited)
Scheme interests awarded are outlined below.
Paul Keel
Paul Keel
Scheme
Form of award
Date of grant
LTIP
Conditional shares
5 November 2021
Deferred bonus
Conditional shares
5 November 2021
John Shipsey
LTIP
Conditional shares
5 November 2021
John Shipsey
Deferred bonus
Conditional shares
5 November 2021
No awards were granted to Clare Scherrer in FY2022.
The performance measures for the FY2022 LTIP award are as follows:
Measure
Three-year EPS growth after tax
Three-year organic revenue growth
Three-year average free cash-flow (as a percentage of operating profit)
Three-year average return on capital employed
Three-year reduction in greenhouse gas emissions (normalised)
Total
Number
of shares
awarded
189,900
5,378
100,150
13,680
Award
price
Face value
(£000)
% vesting at
threshold
performance
Performance
period end date
1,435p
1,435p
1,435p
1,435p
2,725
77
1,437
196
25% 31 July 2024
N/A
N/A
25% 31 July 2024
N/A
N/A
Weighting
20%
30%
20%
15%
15%
100%
Threshold
(25% vesting)
4% p.a.
2% p.a.
45%
13%
5%
Maximum
11% p.a.
6% p.a.
55%
17%
10%
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
83
Payments to past Directors (audited)
Andy Reynolds Smith was paid an amount of £876,451 in lieu of notice for the unserved part of his twelve month notice period which
ended on 24 May 2022. In addition, the FY2020 LTIP will vest in 2022, pro-rated for service to 31 July 2021. 179,627 shares, pro-rated for
service will vest at 14.1%. This is equivalent to 16,885 shares a with an estimated value of £249,729.
Payments for loss of office (audited)
John Shipsey stepped down from the Board on 29 April 2022 but remained an employee of the Company on his existing terms of
employment until 31 July 2022.
Mr Shipsey will be paid in lieu of notice for the unserved part of his 12 month notice period. The payment in lieu of notice will be made in
monthly instalments to enable a reduction in the payments in the event that Mr Shipsey finds alternative employment prior to 29 April
2023. Further details in relation to the payment in lieu of notice will be provided in the FY2023 Annual Report.
Mr Shipsey remained entitled to receive an annual bonus for FY2022, the full value of which has been included in the single figure table.
One third of the annual bonus will be deferred into shares for three years.
Mr Shipsey’s share awards under the Company’s Long-Term Incentive Plan (LTIP), will be preserved in accordance with the good leaver
provisions of the LTIP, subject to a time pro-rating adjustment and normal vesting dates. Information relating to the vesting of shares
under the LTIP will be updated in the relevant Directors’ Remuneration Reports.
The Company made a contribution towards Mr Shipsey’s legal fees of up to £12,000.
Directors’ share options and long-term share plans (audited)
Options
and awards
held on 31
July 2022
Number
Options
and awards
held on 31
July 2021
Number
141,059
189,900
141,059
0
5,378
1,547
0
0
Director and Plan
Paul Keel
LTIP
Deferred bonus award
SAYE
John Shipsey (Former CFO)
LTIP
Deferred bonus award
SAYE
0
95,837
95,837
100,150
0
6,933
3,406
13,680
1,969
95,837
95,837
95,837
0
6,393
6,933
0
0
1,969
Performance
test
Exercise
price
Grant
date
Vesting
date+
Expiry
date++ Date vested
Number
Exercise
price
Market
price at
date of
grant
Market
price at
date of
vesting
Option and award data
Awards vested
FY2021
B
C
–
–
A
A
B
C
–
–
–
–
n/a 28/09/21 Nov 2023
05/11/21 Nov 2024
n/a 05/11/21 05/11/24
1163p 17/05/22 01/08/25 01/02/26
n/a 31/10/18 Oct 2021
n/a 03/10/19 Oct 2022
n/a 04/11/20 Nov 2023
05/11/21 Nov 2024
n/a 31/10/18 31/10/21
n/a 03/10/19 03/10/22
n/a 04/11/20 04/11/23
05/11/21 05/11/24
914p 20/05/20 01/08/23 01/02/24
13/10/21
18,209
n/a
1,369p 1,421p
31/10/21
6,393
n/a
1,369p 1,421p
Key
LTIP The Smiths Group Long-Term Incentive Plan 2015.
SAYE The Smiths Group Sharesave Scheme.
+ The vesting dates shown above in respect of awards made under the LTIP are subject to the relevant performance test(s) being passed.
++ The expiry dates shown above apply in normal circumstances.
Performance tests
A LTIP awards in 2018 and 2019 – 25% subject to EPS growth; 20% subject to ROCE; 25% subject to cash conversion; 30% subject to organic revenue growth.
B LTIP awards in 2020 – 25% subject to EPS growth; 25% subject to ROCE; 25% subject to free cash-flow; 25% subject to organic revenue growth.
C LTIP awards in 2021 – 20% subject to EPS growth; 15% subject to ROCE; 20% subject to free cash-flow; 30% subject to organic revenue growth; 15% subject to reduction in greenhouse
gas emissions.
– There are no performance criteria for the Deferred Bonus Shares awards or SAYE.
Notes
– The high and low market prices of the ordinary shares during the period 1 August 2021 to 29 July 2022 were 1,629p and 1,356p respectively. The mid-market closing price on 31 July 2021
was 1,555.5p and on 29 July 2022 was 1,543p.
– The mid-market closing price of a Smiths Group share on the date of the awards made to Directors in the FY2022 financial year was 1,435p (5 November 2021).
– The option over 1,547 shares granted to and held by Paul Keel at 31 July 2022 were granted at an exercise price below the market price of a Smiths Group share on 17 May 2022 (1,454p).
Shares are granted in May but the savings period commences in August.
– The options over 1,969 shares granted to and held by John Shipsey at 31 July 2022 were granted at an exercise price below the market price of a Smiths Group share on 20 May 2020 (1,268p).
Shares are granted in May but the savings period commences in August.
– None of the options or awards listed above was subject to any payment on grant.
– No other Directors held any options over the Company’s shares during the period 1 August 2021 to 31 July 2022.
– No options or awards have been granted to or exercised by Directors or have lapsed during the period 1 August to 16 September 2022.
– At 31 July 2022, the trustee of the Employee Share Trust held 618,662 shares. The market value of the shares held by the trustee on 31 July 2022 was £9,545,955 and all dividends were
waived in the year in respect of the shares held by the trustee.
– Special provisions permit early exercise of options and vesting of awards in the event of retirement, redundancy, and death.
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Share ownership requirement for Executive Directors
Executive Directors are required to build a minimum shareholding equivalent to the annual fixed number of shares awarded under the
LTIP within five years. Executive Directors are required to retain at least 50% of any net vested share awards (after sales to meet tax
liabilities) until those guidelines are achieved. Shares under deferred bonus awards and LTIP awards which have vested but are subject
to a further holding period (net of assumed income tax) count towards the requirement. Awards that are still subject to performance
conditions do not count towards the requirement.
Executive Directors will be required to hold shares equivalent to their full in-employment shareholding guideline, or actual holding
if lower, for two years post-employment, in line with best practice guidance. To enforce this requirement, vested shares are held in a
nominee account provided by Smiths share plan administrator. This policy applies to Andy Reynolds Smith, who stepped down from
the Group during FY2021, and John Shipsey who stepped down from the Group during FY2022. Mr Reynolds Smith is required to hold a
number of shares in the Company with a value at least equal to £2,109,450 at 31 July 2021 until at least 31 July 2023, while Mr Shipsey is
required to hold 54,959 shares in the Company until at least 31 July 2024.
Share scheme dilution limits
The Company complies with the guidelines laid down by the Investment Association. These restrict the issue of new shares under all the
Company’s share schemes in any ten-year period to 10% of the issued ordinary share capital and under the Company’s discretionary
schemes to 5% in any ten-year period. As at 31 July 2022 the headroom available under these limits was 8.28% and 3.79% respectively.
Executive Directors’ shareholdings (audited)
The table below shows the shareholding for each Executive Director against their respective shareholding requirement as at
31 July 2022.
Director and Plan
Paul Keel
Clare Scherrer
Shareholding
requirement
Shares owned
outright
Shares
subject to
performance
Vested
shares in
holding period
Shares
arising from
bonus deferral
189,900 shares
91,342 shares
25,000
25,000
330,959
0
0
0
5,378
0
Save As
You Earn
(SAYE)
1,547
0
Current
shareholding
(% of
requirement)1
14.6%
27.4%
Shareholding
requirement
met
No
No
1 Shares owned outright (including vested shares in holding period), and the net of income tax value of shares arising from bonus deferral are taken into account for the shareholding
requirement. Executive Directors have five years from the date of appointment to meet the required personal shareholding; Paul Keel has until 25 May 2026 and Clare Scherrer has until
29 April 2027 to meet the requirement.
There have been no changes to the Directors’ shareholdings between 1 August 2022 and 16 September 2022.
TSR performance
The following graph shows the Company’s total shareholder return (TSR) performance over the past ten years compared to the FTSE
100 Index. The FTSE 100 Index, of which the Company has been a member throughout the period, has been selected to reflect the TSR
performance of other leading UK-listed companies. The values of hypothetical £100 investments in the FTSE 100 Index and Smiths Group
plc shares at 31 July 2022 were £187.25 and £191.44 respectively.
Total Shareholder Return
Value of £100 invested on 31 July 2012
£220
£200
£180
£160
£140
£120
£100
£100
2012
£195.66
£195.53
£170.34
£175.63
£182.50
£158.07
£178.50
£149.00
£202.90
£176.01
£191.44
£187.25
£134.58
£120.21
£129.86
£129.14
£131.40
£121.19
£136.72
£133.74
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Smiths Group
FTSE100
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 85
REMUNERATION
Chief Executive’s remuneration for the last ten years
Total remuneration
£000
Annual bonus
outcome (% max)
Common Investment
Plan outcome
(% max)
LTIP outcome
(% max)
FY2022
P Keel
FY2021
P Keel
FY2021
A Reynolds
Smith
FY2020
A Reynolds
Smith
FY2019
A Reynolds
Smith
FY2018
A Reynolds
Smith
FY2017
A Reynolds
Smith
FY2016
A Reynolds
Smith
FY2016
P Bowman
FY2015
P Bowman
FY2014
P Bowman
FY2013
P Bowman
1,832
450
2,753
2,196
4,130
3,251
2,320
2,964
1,602
4,195
3,912
3,864
39%
76%
70%
17%
41%
42%
96%
89%
88%
80%
43%
39%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
19%
31%
75%
32%
n/a
n/a
n/a
100%
100%
100%
100%
n/a
18%
17%
18%
n/a
Chief Executive pay ratios
These ratios set out the comparison between the Chief Executive’s remuneration and that for employees in the UK workforce.
Method
Option B
Option B
Option B
Option B
Method
Option B
Option B
Option B
Option B
Total remuneration
Year
FY2022
FY2021
FY2020
FY2019
Salary
Year
FY2022
FY2021
FY2020
FY2019
Chief Executive
25th percentile employee
Median employee
75th percentile employee
25th percentile ratio
Median pay ratio
75th percentile ratio
58:1
105:1
75:1
133:1
39:1
75:1
53:1
97:1
26:1
47:1
34:1
65:1
25th percentile ratio
Median pay ratio
75th percentile ratio
28:1
35:1
31:1
36:1
20:1
25:1
22:1
26:1
13:1
17:1
15:1
18:1
Salary (£)
Total Remuneration (£)
875,000
31,200
44,000
64,866
1,832,130
31,375
47,507
69,420
The pay data for employees in the UK workforce has been calculated using Option B, based on the data used for gender pay reporting,
due to the availability of data at the time the Annual Report was published. The gender pay reporting basis comprises salary and benefits
as at 15 April 2022 and incentive payments payable in respect of FY2022. The Committee considers that this provides an outcome that is
representative of the employees at these pay levels. It is assumed that the value of employee benefits is 7.0% of base salary.
The workforce remuneration figures are those paid to UK employees whose pay is at the 25th, median and 75th percentile of pay for
the Group’s UK employees. Figures are shown on both the prescribed basis using total pay and also salary only which provides a useful
ongoing comparison as it is a less volatile basis. The total remuneration ratios have reduced primarily due to the CEO not currently being
in receipt of LTIP payments. The Committee monitors ratios on an annual basis.
Percentage change in Directors’ remuneration
Chief Executive Officer
Chief Financial Officer
Outgoing Chief Financial Officer
Non-executive Director remuneration
Average of all employees
FY2021 to FY2022
FY2020 to FY2021
Salary/Fees
Benefits
0%
n/a
2.5%
2.5%
2.5%
239%
n/a
100%
100%
2.5%
Bonus
204%
n/a
-39%
n/a%
-34%
Salary/Fees
n/a
n/a
0%
-4.0%
0%
Benefits
n/a
n/a
-1.0%
-100%
0%
Bonus
n/a
n/a
308%
n/a
267%
‘All employees’ is defined as all UK Group employees, 200 and 196 employees at all grades in FY2022 and FY2021 respectively.
Remuneration for the Chief Executive Officer was pro-rated for service from 25 May 2021 - 31 July 2021 for FY2021.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
86
Relative importance of spend on pay
The table below shows shareholder distributions (i.e. dividends and share buybacks) and total employee pay expenditure for FY2021 and
FY2022, and the percentage change.
Shareholder distributions
Employee costs
- Continuing operations
- Total Group (including Smiths Medical)
FY2022
£m
661
823
930
FY2021
£m
185
–
1,019
Change
257%
N/A
-8.73%
Executive Directors’ service contracts
The Company’s policy is that Executive Directors are normally employed on terms which include a one-year rolling period of notice from
the Company and six months’ notice from the individual. The contract includes provision for the payment of a predetermined sum in the
event of termination of employment in certain circumstances (but excluding circumstances where the Company is entitled to dismiss
without compensation). In addition to payment of basic salary, pension allowance and benefits in respect of the unexpired portion of the
one-year notice period, the predetermined sum would include annual bonus and share awards only in respect of the period they have
served, payable following the end of the relevant performance period and subject to the normal performance conditions.
Paul Keel is employed under a service contract with the Company dated and effective from 25 May 2021. He became an Executive Director
with effect from 25 May 2021.
Clare Scherrer is employed under a service contract with the Company dated 13 April 2022 and effective 29 April 2022. She became an
Executive Director with effect from 29 April 2022.
The service contracts for both Executive Directors may be terminated by 12 months’ notice given by the Company or six months’ notice
given by the Director. The Company may elect to terminate the contract by making a payment in lieu of notice equal to the Director’s
base salary and benefits (including pension allowance) in respect of any unserved period of notice. The service contracts contain specific
provisions enabling a reduction in any phased payments in lieu of notice, in the event that the Director finds alternative employment during
the notice period. The service contracts are available for viewing at the Company’s Registered Office.
Leaving and change-of-control provisions
When determining leaving arrangements for an Executive Director the Committee takes into account any contractual agreements
including the provisions of any incentive arrangements, typical market practice and the performance and conduct of the individual.
For those individuals regarded as ‘bad leavers’ (e.g. voluntary resignation or dismissal for cause), annual bonus awards are forfeited, and
outstanding awards under the LTIP automatically lapse. Deferred bonus awards are forfeited on dismissal for cause.
A ‘good leaver’ will typically remain eligible for a pro-rated annual bonus award, normally to be paid after the end of the financial year.
The Committee retains discretion to pay the bonus early and not to apply deferral where it would otherwise apply, but would do so only
in compassionate circumstances. Deferred bonus awards shall continue in full and vest on the originally anticipated vesting dates.
Alternatively, in compassionate circumstances, the Committee may determine that awards should vest when the participant ceases
employment. Awards in the form of options may be exercised in accordance with the rules of the applicable scheme.
LTIP awards will typically vest at the normal vesting date to the extent that the associated performance conditions are met, but will
normally be pro-rated on the basis of actual service within the performance period. Any holding period will ordinarily continue to apply.
The Committee retains discretion to vest the award before the end of the originally anticipated performance period, and to assess
performance accordingly, and to waive the continuation of the holding period or to shorten its application, but would do so only in
compassionate circumstances.
Vested LTIP awards which are subject to a holding period will ordinarily continue to be subject to the holding period, although the
Committee retains discretion to waive the continuation of the holding period or to shorten its application but would do so only in
compassionate circumstances.
In cases of death or disability, individuals are automatically deemed to be good leavers under the plan rules of the LTIP. All other good
leavers will be defined at the discretion of the Committee on a case-by-case basis.
In connection with the termination of an Executive Director’s contract, the Company may make a payment on account of accrued but untaken
leave. The Company has the power to enter into settlement agreements with Directors and to pay compensation to settle potential legal claims.
In addition, and consistent with market practice, in the event of the termination of an Executive Director, the Company may make a contribution
towards that individual’s legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees will be disclosed as part
of the detail of termination arrangements.
In the event of a change of control, LTIP awards will vest to the extent that each of the performance conditions is met based on the Committee’s
assessment of performance over the performance period to the date of change of control. For internal performance measures, the Committee
may exercise its judgement in determining the outcome based on its assessment of whether or not the performance conditions would have been
met to a greater or lesser extent at the end of the full performance period. Awards will also normally be pro-rated to reflect the time that has
elapsed between the grant of the award and the date of change of control. The Committee retains discretion to vary these provisions on a case-
by-case basis.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
Non-executive Directors
Single figure of annual remuneration (audited)
Sir George Buckley2
Bruno Angelici
Olivier Bohuon
Pam Cheng
Dame Ann Dowling3
Tanya Fratto
Karin Hoeing
Bill Seeger4
Mark Seligman5
Noel Tata
87
Salary/fees
Benefits1
Total
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
FY2022
£000
FY2021
£000
461
–
–
77
87
81
73
146
100
89
461
24
24
71
71
71
71
119
99
71
47
-
-
-
3
-
-
-
-
-
–
–
–
–
–
–
–
–
–
–
508
-
-
77
90
81
73
146
100
89
461
24
24
71
71
71
71
119
99
71
1 Benefits for the Chairman and Non-executive Directors relate to reimbursed travel-related and other expenses (including flight costs where applicable), which are grossed-up for the UK
income tax and National Insurance contributions paid by the Company on their behalf.
2 Sir George Buckley’s fee is in respect of all his responsibilities for Smiths Group.
3 Dame Ann Dowling’s fee comprised her Non-executive Director’s fee and her additional fee for chairing the Science, Sustainability & Excellence Committee.
4 Bill Seeger’s fees comprised his Non-executive Director’s fee, his additional fee for chairing Remuneration & People Committee, his additional fee as Senior Independent Director and a
supplementary fee provided to the Chairs of each of the Committees related to the sale of Smiths Medical (payable until 31 January 2022).
5 Mark Seligman’s fees comprised his Non-executive Director’s fee, his additional fee for chairing the Audit & Risk Committee and a supplementary fee provided to the Chairs of each of the
Committees related to the sale of Smiths Medical (payable until 31 January 2022).
Non-executive Director fees
Non-executive Director fees paid during FY2022 and payable during FY2023 are shown below. The Remuneration & People Committee
made the decision to focus more of the FY2023 salary increase budget on those sectors of the workforce who are more impacted by
current inflationary pressures. It was determined that the NED fee increase should mirror that awarded to senior employees and lower
than that of the wider UK workforce. The fee increases of 2.5% will be effective from 1 October 2022.
Fee payable to Chairman of the Board for all responsibilities
Non-executive Director base fee
Additional fee payable to the Senior Independent Director
Additional fee for Committee Chairs
Supplementary fee1
Attendance allowance for each meeting outside the Non-executive Director’s home continent
FY2022
£461,250
£73,030
£20,000
£20,000
£15,000
£4,000
FY2023
£466,920
£74,855
£20,000
£20,000
£N/A
£4,000
1 Supplementary fee provided to the Chairs of the Audit & Risk and Remuneration & People Committees in respect of additional workload related to the separation of Smiths Medical from
the period 1 February 2021 to 31 January 2022.
Share ownership guidance for Non-executive Directors
Non-executive Directors are encouraged to acquire shares in the Company with a value of one times the annual base fee, over a five year
period. The five year period is from the later of 1 August 2021 or the date of appointment to the Board. In addition, the Non-executive
Directors are encouraged to retain a shareholding of one times the annual base fee for at least two years after the Director leaves
the Board.
Non-executive Directors’ shareholdings (audited)
The table below shows the shareholding for each Non-executive Director.
Sir George Buckley
Pam Cheng
Dame Ann Dowling
Tanya Fratto
Karin Hoeing
Richard Howes1
Bill Seeger
Mark Seligman
Noel Tata
31 July 2022
26,591
6,000
5,813
1,500
503
-
10,000
6,000
6,000
1 Richard Howes was appointed as an independent Non-executive Director with effect from 1 September 2022. He was not a member of the Board during FY2022.
Following their quarterly acquisition of Ordinary Shares, under a share purchase agreement using a fixed proportion of the after-tax fees
received from the Company (20%), Sir George Buckley acquired 812 shares on 1 August 2022 and Karin Hoeing acquired 211 shares on
1 August 2022. There have been no further changes to the Directors’ shareholdings between 1 August 2022 and 16 September 2022.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 REMUNERATION
88
Chairman’s and Non-executive Directors’ letters of appointment
The Chairman and the Non-executive Directors serve the Company under letters of appointment and do not have contracts of service
or contracts for services. Except where appointed at a General Meeting, Directors stand for election by shareholders at the first AGM
following appointment. The Board has resolved that all Directors who are willing to continue in office will stand for re-election by the
shareholders each year at the AGM. Either party can terminate the appointment on one month’s written notice and no compensation is
payable in the event of an appointment being terminated early. The letters of appointment or other applicable agreements are available
for viewing at the Company’s Registered Office.
Non-executive Director
Sir George Buckley
Pam Cheng
Dame Ann Dowling
Tanya Fratto
Karin Hoeing
Richard Howes
Bill Seeger
Mark Seligman
Noel Tata
Date of appointment
1 August 2013
1 March 2020
19 September 2018
1 July 2012
2 April 2020
1 September 2022
12 May 2014
16 May 2016
1 January 2017
Statement of shareholder voting
The table below sets out the Company voting outcome of the advisory resolution for approval of the Directors’ Remuneration Report and
the approval of the Directors’ Remuneration Policy at the 2021 AGM:
Resolution
Directors’ Remuneration Report
Directors’ Remuneration Policy
Votes for
315,633,416
282,034,458
% of votes
cast for
95.86%
86.69%
Votes
against
% of votes
cast against
Total
votes cast
Votes withheld
(abstentions)
13,615,338
43,312,009
4.14%
13.31%
329,248,754
325,346,467
469,665
4,371,952
Advisers to the Committee
During the year, the Committee received material assistance and advice from the Chief Executive Officer, the Chief People Officer, the
Global Reward Director, Deloitte LLP and Freshfields Bruckhaus Deringer LLP. The Committee’s appointed independent remuneration
adviser is Deloitte LLP. The Company Secretary is secretary to the Committee.
The Company paid a total fee of £167,800 to Deloitte LLP in relation to remuneration advice to the Committee during the year. Fees were
determined on the basis of time and expenses.
During FY2022, Deloitte LLP provided the Committee with information on market, compliance support for this year’s Directors’
Remuneration Report, advice on remuneration of the incoming Chief Financial Officer, the shareholder consultation process and
the provision of other advice relating to remuneration governance and market practice. Deloitte LLP is a founding member of the
Remuneration Consultants Group and a signatory to its Code of Conduct. Deloitte LLP provided additional tax advisory services including
global corporation tax compliance and employee mobility advice, as well as company secretarial, internal audit co-source, transaction
and consultancy services. The Committee is satisfied that the advice provided by Deloitte LLP is objective and independent and that they
do not have connections with the Group that may impair their independence.
Summary of Remuneration Policy
Full details of the Remuneration Policy for Executive Directors, which was approved by shareholders at the AGM on 17 November 2021,
are set out on the Company’s website and in the 2021 Annual Report and Accounts on pages 112 to 119.
The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:
Bill Seeger
CHAIRMAN OF THE REMUNERATION & PEOPLE COMMITTEE
22 September 2022
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 89
SCIENCE,
SUSTAINABILITY
& EXCELLENCE
COMMITTEE
REPORT
Chair’s Statement
I am pleased to present our first Science, Sustainability
& Excellence (SSE) Committee Report. SSE are critical
elements in the execution of our strategy.
Reflecting the importance and commitment to this topic, this year
the Board approved the creation of the SSE Committee to provide
the Board with enhanced oversight of SSE matters including
the Group’s innovation and new product development process,
environmental and sustainability performance, and the embedding
and delivery of operational excellence through the Smiths Excellence
System. When establishing the Committee, the Board ensured that
members brought a range of experience on the SSE related topics
that fall within the Committee’s remit. I have had a keen interest in
engineering excellence, innovation and sustainability throughout
my career including leadership roles as Head of the Engineering
Department at the University of Cambridge and as President of the
Royal Academy of Engineering. This interest continues through my
current positions as Deputy Vice Chancellor and Emeritus Professor
of Mechanical Engineering at Cambridge. I was a member of bp plc’s
Safety and Sustainability Committee until May 2021.
I am delighted to be joined on the Committee by Sir George
Buckley, Pam Cheng and Karin Hoeing. Sir George has extensive
experience of leading large innovative multinational groups which
has been instrumental in our consideration of matters relating to
new product development. Pam brings challenge to operational
excellence from her role as Executive Vice-President, Operations
and Information Technology at AstraZeneca plc. Finally, Karin’s
current executive experience as Group ESG, Culture and Business
Transformation Director at BAE Systems plc has been invaluable as
we have developed our sustainability strategy and priorities. We are
also all members of the Remuneration & People Committee and
were delighted to be able to recommend the introduction of key and
stretching sustainability measures into our incentive arrangements in
support of Smiths strategy.
Over the next year, I look forward to the Committee’s continued
oversight of Smiths SSE agenda, including further presentations from
our divisions and Group experts. I am excited by the opportunities
presented by the innovation and new products we have in the pipeline
to support our growth strategy. I would like to thank my colleagues
on the Committee for their contributions during the year and I look
forward to continuing our work in FY2023.
Dame Ann Dowling
CHAIR OF THE SCIENCE, SUSTAINABILITY &
EXCELLENCE COMMITTEE
Committee membership and meetings
There were three scheduled meetings during the year. The members
of the Committee, their biographies and attendance at meetings
during the year can be found on page 58, 59 and 63.
The Chief Executive Officer, Chief Sustainability Officer and
Group Operational Excellence Director attended every meeting.
Other members of senior management were invited to attend
as necessary.
Committee performance evaluation
Through the annual Board evaluation process (pages 64 and 65),
the Board confirmed the effectiveness of the Committee in its role
of supporting the Board in compliance with its remit.
Committee activities
The main topics considered at Committee meetings were as follows:
Science
John Crane, Smiths Detection and Flex-Tek updated the
Committee on their new product development (NPD) processes
and pipelines and how technology, innovation and sustainability
were influencing their next generation of products. In July the
Committee visited Flex-Tek’s operations in Portland, Tennessee,
and experienced the new Python line sets at first-hand.
Understanding each of the divisions’ NPD processes from ideation
to commercialisation of new products in support of the Group’s
Gross Vitality KPI has been important. The Committee are highly
engaged in this area and are excited by the product opportunities
in the NPD pipeline and by ways in which the development
processes can be expedited.
Sustainability
Smiths new Chief Sustainability Officer joined the business in
January 2022 and led the development of the new sustainability
strategy which was approved by the Board during the year.
See page 27 for a summary of the strategy. The Committee
received regular updates on the development and implementation
of the strategy and how the divisions were driving sustainability
in their businesses and embedding it in their new product
pipeline. The Committee continued to monitor progress
against Smiths sustainability metrics including GHG emissions,
renewable electricity, energy efficiency, water use and waste
disposal. The Committee monitored progress towards setting
Science Based Targets to achieve Net Zero through the SBTi.
The Committee approved the new Sustainability at Smiths Report
which will provide stakeholders with an enhanced understanding
of Smiths approach to ESG. The report can be found on our
website www.smiths.com.
Excellence
The Group Operational Excellence Director attended each
Committee meeting to report on the Smiths Excellence System
(SES). The Committee were updated on the rollout and embedding
of phase two of SES and how the business is targeting excellence
through results-orientated process improvements and the
continuing development of our talented people. SES supports
our ability to innovate and deliver new technology for customers.
It also supports the execution of our sustainability and Net Zero
strategies. The Committee was provided with deep-dives on SES
from Flex-Tek which demonstrated how SES was being embedded
in the business.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 90
DIRECTORS’
REPORT
The Strategic Report is a requirement of the Companies Act 2006
(the ‘Act’) and can be found on pages 5 to 55. The Company has
chosen, in accordance with section 414C(11) of the Act, to include
certain matters in its Strategic Report that would otherwise be
disclosed in this Directors’ Report. The Strategic Report and
the Directors’ Report together are the management report for
the purposes of Rule 4.1.8R of the Disclosure Guidance and
Transparency Rules.
Other information that is relevant to the Directors’ Report, and which is also incorporated by reference, can be found as follows:
Disclosure
Location
Likely future developments in the Company
Directors’ dividend recommendation
Research and development activities
Employment of disabled persons
Engagement with UK employees
Strategic Report pages 5 to 23
Strategic Report page 15
Strategic Report pages 17 to 20
Sustainability at Smiths page 33
Sustainability at Smiths page 32
Engagement with suppliers, customers and others in a business relationship
with the company
Sustainability at Smiths pages 41 to 44
Political donations and expenditure
Political donations page 91
Greenhouse gas emissions, energy consumption and energy efficiency
Sustainability at Smiths page 30
Corporate Governance Statement
Directors during FY2022
Director appointment
Amendment of Articles of Association
Indemnities
Change of control
Directors’ Responsibility Statement
Disclosure of information to the auditor
Financial Instruments
Share capital disclosures
Acquisition of own shares (share buyback programme)
Directors’ Powers
Post Balance Sheet Events
Overseas branches
Governance Report pages 56 to 92
Governance Report pages 58 and 59
Governance Report page 68
Governance Report page 68
Governance Report page 63
Remuneration Report page 86
Borrowings and net debt note page 141
Statement of Directors’ responsibilities page 92
Statement of Directors’ responsibilities page 92
Financial risk management note pages 142 to 148
Share capital note page 155
Share capital note page 155
Governance Report page 57
Share capital note page 155
Post Balance Sheet Event note page 163
Subsidiary undertakings note page 186
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 91
Listing Rules Disclosure
Information required by the Financial Conduct Authority’s Listing Rules can be found as set out below. There are no further disclosures
required in accordance with Listing Rule 9.8R.
Listing Rule
9.8.4R(1)
Disclosure
Capitalised interest
9.8.4R(12)(13)
Dividend waiver
9.8.6R(1)
9.8.6R(2)
9.8.6R(3)(a)(b)
9.8.6R(4)(a)
Directors’ interests
Major shareholders’ interests
Going Concern and Viability Statement
Purchase of own shares
9.8.6R(5)(6)(a) and (b)
UK Corporate Governance Code compliance
9.8.6R(7)
9.8.6R(8)(a)
9.8.6R(9)
Unexpired term of Service Contract
Statement on inclusion of TCFD
Board diversity targets
Location
Discontinued operations note page 157
Dividend note page 156
Remuneration Report pages 84 and 87
Table on page 91
Strategic Report page 54
Share capital note page 155
Governance Report page 56
Remuneration Report page 86
Sustainability at Smiths page 35
Governance Report page 67
Political donations
The Group did not give any money for political purposes in the UK, the EU or outside of the EU, nor did it make any political donations
to political parties or other political organisations, or to any independent election candidates, or incur any political expenditure during
the year. In accordance with the US Federal Election Campaign Act, Smiths provides administrative support to a federal Political
Action Committee (PAC) in the US funded by the voluntary political contributions of eligible employees. The PAC is not controlled by
the Company and all decisions regarding the amounts and recipients of contributions are directed by a steering committee comprising
Government Relations employees and reported to all eligible to contribute to the PAC. Contributions to political organisations reported by
the PAC during FY2022 totalled $8,000 (FY2021: $30,500).
Major shareholder’ interests
As at 31 July 2022, the Company had been notified under the Financial Conduct Authority’s Disclosure Guidance & Transparency Rules,
or had received disclosures pursuant to the Companies Act 2006, of the following holdings of voting rights in its shares:
Number of voting rights
BlackRock, Inc.
Ameriprise Financial, Inc.
Artemis Investment Management LLP
Harris Associates L.P.
Dodge & Cox
Jupiter Asset Management
Number of voting rights
% of total voting rights
23.3m
20.8m
19.8m
19.7m
19.2m
14.8m
5.9
5.3
5.0
5.0
5.0
3.8
No further notifications were received between 1 August and 16 September 2022
Date of notification
31 May 2018
3 October 2018
14 April 2020
22 July 2019
12 March 2022
22 September 2016
By order of the Board
Matthew Whyte
COMPANY SECRETARY
22 September 2022
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 92
In accordance with Disclosure Guidance and Transparency Rule
4.1.14R, the financial statements will form part of the annual
financial report prepared using the single electronic reporting
format under the Transparency Directive European Single
Electronic Format (‘ESEF’) Regulation. The auditor’s report
on these financial statements provides no assurance over the
ESEF format.
Directors’ responsibility statement
Each of the Directors (who are listed on pages 58 and 59) confirms
that to the best of his or her knowledge:
– The financial statements, which have been prepared in
accordance with the applicable set of accounting standards, give
a true and fair view of the assets, liabilities, financial position and
profit or loss of the Company and the undertakings included in
the consolidation taken as a whole;
– The Strategic Report and Group Directors’ Report, together the
management report, includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face; and
– As at the date of this Annual Report and financial statements,
there is no relevant audit information of which the Company’s
auditor is unaware. Each Director has taken all the steps he or
she should have taken as a Director in order to make himself or
herself aware of any relevant audit information and to establish
that the Company’s auditor is aware of that information.
We consider the Annual Report and financial statements, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
position and performance, business model and strategy.
Signed on behalf of the Board of Directors:
Paul Keel
CHIEF EXECUTIVE OFFICER
Clare Scherrer
CHIEF FINANCIAL OFFICER
22 September 2022
Statement of Directors’ responsibilities
in respect of the Annual Report and the
financial statements
The Directors are responsible for preparing the Annual Report,
including a Strategic Report, Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement,
and the Group and Parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. Under that
law the Directors have elected to prepare the Group financial
statements in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006
and applicable law and have elected to prepare the Parent
Company financial statements in accordance with UK accounting
standards and applicable law (UK Generally Accepted Accounting
Practice), including FRS 101 ‘Reduced Disclosure Framework.’
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Parent Company
and of their profit or loss for that period. In preparing each of the
Group and Parent Company financial statements, the Directors
are required to:
– Select suitable accounting policies and then apply
them consistently;
– Make judgements and estimates that are reasonable, relevant,
reliable and prudent;
– For the Group financial statements, state whether applicable
UK-adopted international accounting standards have been
followed for the group financial statements;
– For the Parent Company financial statements, state whether
applicable United Kingdom Accounting Standards have been
followed subject to any material departures disclosed and
explained in the Parent Company financial statements;
– Assess the Group and Parent Company’s ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
– Use the going concern basis of accounting unless they either
intend to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation. The Directors are
also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or
error and have a general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate governance and financial information included
on the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of the financial
statements may differ from legislation in other jurisdictions.
01 OVERVIEW02 STRATEGIC REPORT03 GOVERNANCE04 FINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2022 93
INDEPENDENT AUDITOR’S REPORT
INDEPENDENT
AUDITOR’S
REPORT
to the members of Smiths Group plc
1 Our opinion is unmodified
We have audited the financial statements of Smiths Group plc
(“the Company”) for the year ended 31 July 2022 which comprise
the consolidated income statement, consolidated statement of
comprehensive income, consolidated balance sheet, consolidated
statement of changes in equity, consolidated cash-flow statement,
Company balance sheet, Company statement of changes in equity,
and the related notes, including the accounting policies on pages
108 to 115.
In our opinion:
– the financial statements give a true and fair view of the state of
the Group’s and of the Parent Company’s affairs as at 31 July
2022 and of the Group’s profit for the year then ended;
– the Group financial statements have been properly
prepared in accordance with UK-adopted international
accounting standards;
– the parent Company financial statements have been properly
prepared in accordance with UK accounting standards, including
FRS 101 Reduced Disclosure Framework; and
– the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities are described below. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis for
our opinion. Our audit opinion is consistent with our report to the
Audit & Risk Committee.
We were first appointed as auditor by the shareholders on
13 November 2019. The period of total uninterrupted engagement
is for the three financial years ended 31 July 2022. We have
fulfilled our ethical responsibilities under, and we remain
independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to
listed public interest entities. No non-audit services prohibited by
that Standard were provided.
04 Financial statements
93-187
Independent auditor’s report
Consolidated primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash-flow statement
Accounting policies
Notes to the accounts
1 Segment information
2 Operating costs
3 Non-statutory profit measures
4 Net finance costs
5 Earnings per share
6
Taxation
7 Employees
8 Retirement benefits
9 Employee share schemes
10
Intangible assets
11
Impairment testing
12 Property, plant and equipment
13 Right of use assets
14 Financial assets – other investments
15
Inventories
16 Trade and other receivables
17 Trade and other payables
18 Borrowings and net debt
19 Financial risk management
20 Derivative financial instruments
21 Fair value of financial instruments
22 Commitments
23 Provisions and contingent liabilities
24 Share capital
25 Dividends
26 Reserves
27
Discontinued operations and
businesses held for sale
28
Cash-flow
29
Alternative performance measures and
key performance indicators
30
Post Balance Sheet Events
31 Audit exemption taken for subsidiaries
Unaudited five-year Group financial record
Unaudited US dollar primary statements
Smiths Group plc Company accounts
Company balance sheet
Company statement of changes in equity
Company accounting policies
Notes to the Company accounts
Subsidiary undertakings
93
103
104
105
106
107
108
116
120
121
123
124
124
127
128
133
134
135
137
138
138
138
139
140
140
142
148
150
151
151
155
156
156
157
159
160
163
163
164
165
171
172
173
176
180
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
Overview
Materiality: group financial statements
as a whole
94
£16 million (2021: £11.3 million).
5.1% of Group profit before taxation from continuing operations normalised to exclude the
effect of specific items as explained in section 5 of this report.
(2021: 4.5% of Group profit before taxation from continuing operations normalised to
exclude the effect of specific items and by averaging over the last three years).
Coverage:
82% (2021: 70%) of Group profit before taxation from continuing operations.
Key audit matters
Recoverability of Goodwill in respect of the Smiths Detection cash generating unit (CGU) (Group)
Estimation of litigation provisions for asbestos in John Crane, Inc. (Group)
Valuation of UK defined benefit SIPS’s pension scheme liabilities and accounting of settlement loss in TIGPS
pension scheme (Parent Company)
vs 2021
▲
‹ ›
▼
Recoverability of goodwill in respect of the Smiths
Detection cash generating unit (CGU) (Group) (£644
million (2021: £610 million)) Refer to page 71 (Audit & Risk
Committee Report), page 108 (accounting policies) and
page 135 (financial disclosures)
Risk vs 2021: increase
The risk – subjective estimate and forecast
based assessment
The Group holds a significant amount of goodwill, especially in relation
to the Smiths Detection cash generating unit (CGU). The value in
use calculation for the Smiths Detection CGU, which represents
the estimated recoverable amount, is subjective due to the inherent
uncertainty involved in forecasting and discounting estimated future
cash flows (specifically the key assumptions - discount rate, projected
cost inflation and 5-year revenue growth rate).
As part of our risk assessment, we determined that the value in
use of the CGU has a high degree of estimation uncertainty, with a
potential range of reasonable outcomes greater than our materiality
for the financial statements as a whole, and possibly many times
that amount.
The financial statements (note 11) disclose the sensitivity estimated
by management. These disclosures give relevant information about
the estimation uncertainty including the risk of a reduction in the
headroom or need for an impairment as a result of a reasonably
possible change in one or more of the key assumptions used in the
value in use calculation for this CGU.
2 Changes to Key Audit Matters
As at 31 July 2021, we identified a key audit matter (Group) in
relation to the recoverability of capitalised development costs
for the Intellifuse programme within assets held for sale in the
Smiths Medical division. Following the sale of the Smiths Medical
division during the year, this is no longer a relevant risk of material
misstatement and therefore no longer a key audit matter.
As at 31 July 2021, we identified a key audit matter (Parent
Company) in relation to defined benefit pension liabilities which
included both the TIGPS and SIPS pension schemes. Following the
execution of a buy-in insurance policy for the TIGPS scheme
during the current year, this is no longer a relevant risk of
material misstatement and therefore no longer a key audit matter.
We continue to recognise UK SIPS pension scheme as a key audit
matter (Parent Company) in the current year. In addition, the audit
of the buy-in transaction is considered to be an area which had
significant effect on our overall audit strategy and allocation of
resources in planning and completing the audit and is therefore
included as a key audit matter.
3 Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters that, in our professional
judgement, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. We summarise below the key
audit matters, in decreasing order of audit significance, in arriving
at our audit opinion above, together with our key audit procedures to
address those matters and, as required for public interest entities,
our results from those procedures. These matters were addressed,
and our results are based on procedures undertaken, in the context
of, and solely for the purpose of, our audit of the financial statements
as a whole, and in forming our opinion thereon, and consequently are
incidental to that opinion, and we do not provide a separate opinion on
these matters.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
Our response
We performed the tests below rather than seeking to rely on any
of the Group’s controls because the nature of the balance is such
that we would expect to obtain audit evidence primarily through
the detailed procedures described. Our procedures included:
– Benchmarking assumptions and historical comparison:
Assessing and challenging the key assumptions through
retrospective review and comparison to external
industry forecasts.
– Our sector experience: Using our valuations specialists to
challenge the appropriateness of discount rates by deriving
our own independent range and used external market data
to challenge management assumption of 5-year revenue
growth rates.
– Sensitivity analysis: Estimating the value in use utilising
independent and more conservative forecasts and discount
rates and assessing whether this resulted in impairment.
– Comparing valuations: Using our valuation specialist,
comparing the valuation per the value in use impairment model
against expected enterprise valuations per analyst reports and
comparable companies’ earnings multiple.
– Assessing transparency: Assessing the adequacy of the
Group’s disclosures in respect of the judgement and estimates
around goodwill recoverability for the Smiths Detection CGU,
including disclosures of the sensitivity in the value in use
calculations to changes in the key assumptions.
Our results
We found the carrying amount of goodwill related to the Smiths
Detection CGU to be acceptable (2021: acceptable) and we found
the sensitivity disclosure made to be acceptable (2021: acceptable).
95
Estimation of litigation provisions for asbestos in John
Crane, Inc. £229 million (2021: £212 million)) Refer to page
72 (Audit & Risk Committee Report), page 108 (accounting
policies) and page 151 (financial disclosures)
Risk vs 2021: unchanged
The risk – subjective estimate
There are significant judgements and estimates involved in the
assumptions underlying the provisions in respect of John Crane,
Inc. asbestos litigation, including the projection period, forecast
number of future claims and associated claim and defence costs
applied to the forecast and the methodology applied for estimating
the provision.
The effect of these matters is that, as part of our risk assessment,
we determined that the litigation provision has a high degree
of estimation uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the financial statements
as a whole and possibly many times that amount. The financial
statements (note 23) disclose the sensitivity estimated by
the Group.
Our response
We performed the tests below rather than seeking to rely on any
of the Group’s controls because the nature of the balance is such
that we would expect to obtain audit evidence primarily through
the detailed procedures described. Our procedures included:
– Our actuarial expertise: Challenging the key judgement of the
ten-year projection period using our own actuarial specialist and
our sector knowledge and expertise.
– Benchmarking assumptions: Using our own actuarial
specialists, we derived our own independent range of the
estimated provision.
– Enquiry of lawyers: Obtaining external independent legal
confirmations of historical and ongoing claims and agreeing to
the historical and ongoing claims data used by management
expert for estimating the future projected cost and claims.
– Assessed management’s expert: Assessing the competency,
knowledge and independence of the expert using our
own specialist.
– Assessing methodology: Evaluating the methodology applied by
management to the estimation to assess that the methodology
utilised is in line with industry practice.
– Historical comparison: Assessing and challenging the projected
indemnity and defence expenditure through retrospective review
of incurred cost.
– Assessing transparency: Assessing whether the disclosures
of the effect of reasonably possible changes in key judgements
and assumptions reflects the risks inherent in the provisions’
estimation.
Our results
We found the level of litigation provisioning and related disclosures
in the financial statements in respect of John Crane Inc.
asbestos litigation to be acceptable (2021: acceptable).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
96
Valuation of UK defined benefit SIPS pension scheme
liabilities (£1,603 million (2021: 2,078 million)) and
accounting of settlement loss and past service cost in
relation to TIGPS pension scheme buy-in ((£195 million
(2021: Nil)) (Parent Company) Refer to page 72 (Audit &
Risk Committee Report), page 108 (accounting policies)
and page 128 (financial disclosures)
Risk vs 2021: decrease
The risk - subjective valuation and
significant transaction
Significant estimates are made in valuing the Company’s
post retirement defined benefit plan obligations in particular
the discount rates, the inflation rates, mortality and pension
increase assumptions. Small changes in the assumptions used
to determine the liabilities, in particular those relating to discount
rates, inflation and mortality can have a significant impact on
the valuation of the liabilities. The effect of these matters is that,
as part of our risk assessment, we determined that the pension
assumptions have a high degree of estimation uncertainty, with
a potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole, and possibly
many times that amount.
In conducting our final audit work, following the buy-in secured
during the current year with an intention to fully buy-out the
scheme in the near future, we reassessed the degree of
estimation uncertainty for TIGPS scheme to be less than that
materiality. However, the audit of the buy-in transaction is
considered to be an area which had significant effect on our
overall audit strategy and allocation of resources in planning and
completing the audit with regard to the quantum of the settlement
loss and the accounting of the transaction as a settlement rather
than an investment decision.
Our response
We performed the tests below rather than seeking to rely on any
of the Group’s controls because the nature of the balance is such
that we would expect to obtain audit evidence primarily through
the detailed procedures described. Our procedures included:
– Benchmarking assumptions: Challenging the key assumptions
applied in the calculation of the liability, including the discount
rates, inflation rates, mortality and pension increases with the
support of our own actuarial specialists by comparing against
market data.
– Assessing actuary’s credentials: Assessing the competence,
independence and integrity of the scheme’s actuary.
– Inspection of relevant documents: Inspecting contract
documents, trustee minutes, project plan and communications
to assess whether the buy-in transaction has been accounted for
appropriately in accordance with IAS 19 using our own actuarial
specialists and our sector knowledge and expertise.
– Test of detail: Confirmed the transfer of assets to the insurer to
fund the initial premium for the buy-in. We reconciled the benefit
cash flows, administration and other expenses with external
evidence obtained.
– Assessing transparency: Considering the adequacy of the
disclosures in respect of the sensitivity of the obligation to
key assumptions and the disclosure in respect of the buy-
in transaction.
Our results
We found the valuation of the pension scheme liabilities of SIPS
scheme to be acceptable (2021: acceptable) and we found the
sensitivity disclosure made to be acceptable (2021: acceptable).
We found the accounting of the settlement loss and past service
cost for TIGPS scheme in the period to be acceptable (2021: Nil).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
4 The impact of climate change on our audit
We have considered the potential impacts of climate change on the
financial statements as part of planning our audit. As the Group
has set out on page 40, climate change has the potential to give
rise to a number of transition risks and opportunities and physical
risks and opportunities. The Group has stated their commitment
to achieve Net Zero for Scope 1 and 2 emissions by 2040 and to
achieve Net Zero for Scope 3 emissions by 2050. The areas of the
financial statements that are most likely to be potentially affected
by climate related changes and initiatives are future loss of revenue
due to supply chain challenges. The Group considered the impact
of climate change and the Group’s targets in the preparation of
the financial statements, as described on page 39, and concluded
this did not have a material effect on the consolidated financial
statements. We performed a risk assessment, taking into account
climate change risks and the commitments made by the Group.
We held inquiries of management regarding their processes for
assessing the potential impact of climate change risk on the Group’s
financial statements and held discussions with our own climate
change professionals to challenge our risk assessment.
Based on our risk assessment we determined that the balances
in these financial statements are not at significant risk in relation
to climate change. This is because, based on our risk assessment,
the long-term growth rate is not identified as a key assumption a
reasonably possible change in which could result in an impairment
in relation to the estimated value in use of the Smiths Detection
CGU. Hence, we assessed that there is not a significant impact on
our audit for this financial year. There was no impact of climate
change on our key audit matters included in section 3. We have read
the Group’s disclosure of climate related information in the front half
of the Annual Report as set out on pages 35 to 40 and considered
consistency with the financial statements and our audit knowledge.
97
5 Our application of materiality and an
overview of the scope of our audit
Materiality
Materiality for the Group financial statements as a whole was set
at £16 million (2021: £11.3 million), determined with reference to a
benchmark of Group profit before tax from continuing operations
normalised to exclude foreign exchange gain on intercompany
loan with discontinued operations, of £22 million (2021: £50 million
loss), retirement benefit scheme settlement loss £171 million
(2021: Nil), past service equalisation cost £43 million (2021: Nil)
and impairment of assets £19 million (2021 : Nil). Materiality for
the 2021 Group financial statements as a whole was determined
with reference to a benchmark of Group profit before tax from
continuing operations normalised as described above and also
by averaging over the last three years due to the impact of the
COVID-19 pandemic. The Group team performed procedures on
the excluded items.
Materiality for the Parent Company financial statements as a
whole was set at £15.8 million (2021: £11.0 million), determined
with reference to a benchmark of Parent Company total assets,
limited to be less than materiality for Group materiality as a whole.
It represents 0.4%% (2021: 0.5%) of total assets.
In line with our audit methodology, our procedures on
individual account balances and disclosures were performed
to a lower threshold, performance materiality, so as to reduce
to an acceptable level the risk that individually immaterial
misstatements in individual account balances add up to a
material amount across the financial statements as a whole.
Performance materiality was set at 65% (2021: 65%) of materiality
for the financial statements as a whole, which equates to
£10.4 million (2021: £7.3million) for the Group and £10.2 million
(2021: £7.2 million) for the Parent company. We applied this
percentage in our determination of performance materiality
based on the level of identified audit misstatements and control
deficiencies during the prior year. We agreed to report to the
Audit & Risk Committee any corrected or uncorrected identified
misstatements exceeding £0.8 million (2021: £0.6 million),
in addition to other identified misstatements that warranted
reporting on qualitative grounds.
Materiality
Group profit before tax from continuing operations, normalised to exclude specific items - £ 314 million (2021: Group
profit before tax from continuing operations, normalised to exclude specific items and by averaging over the last three
years due to the impact of the COVID-19 pandemic - £253 million)
£16m
(2021: £11.3 million)
Whole financial statements materiality
£10.4m
(2021: £7.3 million)
Whole financial statements performance materiality
£15.8m
(2021: £11.0 million)
Range of materiality at 32 (2021: 34) components
(£0.6m – £15.8m) (2021: £0.6m – £11m)
£0.8m
(2021: £0.6m)
Misstatements reported to the Audit & Risk Committee
Group profit before tax from continuing
operations, normalised to exclude
specific items
Group materiality
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
Scope
The Group operates in more than 50 countries across six
continents with the largest footprints being in the US, Europe
and Asia. The Group is organised into four divisions: John
Crane, Smiths Detection, Flex-Tek and Smiths Interconnect is a
consolidation of over 250 reporting components. Smiths Medical
division was sold in current year (discontinued operations). We
scoped the audit by obtaining an understanding of the Group and
its environment and assessing the risk of material misstatement
at the Group level. We have considered components based on
their contribution to Group revenue; Group Assets and Group
profit before tax for continuing operations including whether we
had sufficient coverage over each division and the specific risks in
the components.
Of the Group’s 253 (2021: 254) reporting components, we
subjected 23 (2021: 24) to full scope audits for Group purposes
and 9 (2021:8) to specified risk-focused audit procedures or audit
of specific account balances. The components for which we
performed audit of specific account balances were not individually
financially significant enough to require a full scope audit for Group
purposes but were included in the scope of our Group reporting
work in order to provide further coverage over the Group’s results.
The components for which we performed specified risk-focused
audit procedures were not individually financially significant
enough to require an audit for Group reporting purposes but did
present specific individual risks that needed to be addressed.
Specified risk-focused audit procedures were performed over a
number of areas, including litigation provisions and defined benefit
pension assets and liabilities.
The Group audit performed analytical procedures over the trading
results of the discontinued operation (the Smiths Medical division)
and substantive test over the disposal accounting and resultant
profit on sale recognized in the consolidated financial statements.
The scope of the audit work performed was predominately
substantive as we placed limited reliance upon the Group’s
internal control over financial reporting.
The components within the scope of our work accounted for
the following percentages of the Group’s results for continuing
operations are shown, right.
The remaining 26% (2021: 26%) of total Group revenue, 18%
(2021: 30%) of Group profit before tax from continuing operations
and 25% (2021: 21%) of total Group assets is represented by
reporting components which individually did not represent more
than 1% (2021: 3%) of any of total Group revenue for continuing
operations, Group profit before tax for continuing operations or
total Group assets. For these residual components, we performed
an analysis at an aggregated Group level to re-examine our
assessment that there were no significant risks of material
misstatement within these components.
98
The Group’s results
GROUP REVENUE
74%
(2021 74%)
GROUP PROFIT BEFORE TAX
GROUP TOTAL ASSETS
82%
(2021 70%)
75%
(2021 79%)
2022
Group
revenue
Group profit
before tax
Group total
assets
Full scope for group audit
57%
76%
68%
purposes
Audit of Account Balance
Specified risk-focused
audit procedures
17%
–
6%
–
3%
4%
Residual components
26%
18%
25%
2021
Full scope for group audit
60%
61%
69%
purposes
Audit of Account Balance
Specified risk-focused
audit procedures
14%
–
7%
2%
7%
3%
Residual components
26%
30%
21%
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 99
We considered whether these risks could plausibly affect the
liquidity or covenant compliance in the going concern period by
comparing severe but plausible downside scenarios that could
arise from these risks individually and collectively against the
level of available financial resources and covenant thresholds
indicated by the Group’s financial forecasts. We also assessed the
completeness of the going concern disclosure.
Our conclusions based on this work:
– we consider that the Directors’ use of the going concern basis
of accounting in the preparation of the financial statements
is appropriate;
– we have not identified, and concur with the Directors’
assessment that there is not, a material uncertainty related to
events or conditions that, individually or collectively, may cast
significant doubt on the Group’s or Company’s ability to continue
as a going concern for the going concern period;
– we have nothing material to add or draw attention to in relation to
the Directors’ statement on page 92 to the financial statements
on the use of the going concern basis of accounting with no
material uncertainties that may cast significant doubt over the
Group and Company’s use of that basis for the going concern
period, and we found the going concern disclosure on page 54 to
be acceptable; and
– the related statement under the Listing Rules set out on page
91 is materially consistent with the financial statements and our
audit knowledge.
However, as we cannot predict all future events or conditions and
as subsequent events may result in outcomes that are inconsistent
with judgements that were reasonable at the time they were made,
the above conclusions are not a guarantee that the Group or the
Company will continue in operation.
INDEPENDENT AUDITOR’S REPORT
The Group audit team instructed component auditors as to the
significant areas to be covered, including the relevant risks
detailed above and the information to be reported back. The Group
audit team set the component materiality which ranged from
£0.6 million to £15.8 million (2021: £0.6 million to £11.0 million),
having regard to the mix of size and risk profile of the Group
across the components. The work on 30 of the 32 (2021: 33 of the
34) components was performed by component auditors and the
audit of the Parent Company was performed by the Group team.
The work on Smiths Medical including disposal accounting was
performed by the Group team.
Regular video conference meetings were held with all in-scope
components attended by senior group audit team members.
These meetings involved explanation of Group audit instructions,
involvement in planning audit procedures, discussing progress
updates and emerging findings, reviewing outcomes of testing
performed and involvement in discussing audit findings with
component management. The Group audit team routinely
reviewed the audit documentation of all component audits through
various stages of their audits. We were unable to visit one China
component (not financially significant) and remote access to
audit documentation is prohibited by local law. As a result of this
restriction, we extended our oversight of this component’s audit
through extended discussion with component audit team.
6 Going concern
The Directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Group or the
Company or to cease their operations, and as they have concluded
that the Group’s and the Company’s financial position means that
this is realistic. They have also concluded that there are no material
uncertainties that could have cast significant doubt over their ability
to continue as a going concern for at least a year from the date of
approval of the financial statements (“the going concern period”).
We used our knowledge of the Group, its industries and the general
economic environment to identify the inherent risks to its business
model and analysed how those risks might affect the Group’s and
Company’s financial resources or ability to continue operations
over the going concern period. The risks that we considered most
likely to adversely affect the Group’s and Company’s available
financial resources and metrics relevant to debt covenants over this
period were:
– Adverse trading conditions and impact on the Group’s operations
or that of its suppliers and customers, such as delays and
cancellations of orders and deliveries, as a result of recurrence
of COVID 19 disruption, resulting in a significant deterioration in
the Group’s liquidity position.
– Product quality failure which would result in reputational
damage amongst customers and therefore reduction in orders
and customer loss as well as potential significant liability claims
raised against the Group.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 100
Identifying and responding to risks of material
misstatement due to non-compliance with laws
and regulations
We identified areas of laws and regulations that could reasonably
be expected to have a material effect on the financial statements
from our general commercial and sector experience, through
discussion with the Directors and other management (as required
by auditing standards), and from inspection of the Group’s
regulatory and legal correspondence and discussed with the
Directors and other management the policies and procedures
regarding compliance with laws and regulations.
As the Group is regulated, our assessment of risks involved
gaining an understanding of the control environment including the
entity’s procedures for complying with regulatory requirements.
We communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance
throughout the audit. This included communication from the
group to full-scope component audit teams of relevant laws
and regulations identified at the Group level, and a request for
full scope component auditors to report to the Group team any
instances of non-compliance with laws and regulations that could
give rise to a material misstatement at Group.
The potential effect of these laws and regulations on the financial
statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly
affect the financial statements including financial reporting
legislation (including related companies legislation), distributable
profits legislation, taxation legislation and pensions legislation,
and we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial
statement items.
Secondly, the Group is subject to many other laws and regulations
where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for
instance through the imposition of fines or litigation. We identified
the following areas as those most likely to have such an effect:
health and safety, anti-bribery and corruption, considering
dealings with government customers, employment law, and
certain aspects of company legislation recognising the regulated
nature of the Medical division activities and its legal form.
Auditing standards limit the required audit procedures to identify
non-compliance with these laws and regulations to enquiry of the
Directors and other management and inspection of regulatory and
legal correspondence, if any. Therefore, if a breach of operational
regulations is not disclosed to us or evident from relevant
correspondence, an audit will not detect that breach.
INDEPENDENT AUDITOR’S REPORT
7 Fraud and breaches of laws and
regulations – ability to detect
Identifying and responding to risks of material
misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud
risks”) we assessed events or conditions that could indicate an
incentive or pressure to commit fraud or provide an opportunity to
commit fraud. Our risk assessment procedures included:
– Enquiring of Directors, the Audit & Risk Committee, internal
audit and inspection of policy documentation as to the Group’s
high-level policies and procedures to prevent and detect fraud,
including the internal audit function, and the Group’s channel for
“whistleblowing”, as well as whether they have knowledge of any
actual, suspected or alleged fraud.
– Reading Board, Audit & Risk, Disclosure, Transactions,
Nomination & Governance, Remuneration & People,
Investments and Executive Committee minutes.
– Considering remuneration incentive schemes and performance
targets for management and Directors including the EPS target
for management remuneration.
– Using analytical procedures to identify any unusual or
unexpected relationships.
We communicated identified fraud risks throughout the audit team
and remained alert to any indications of fraud throughout the audit.
This included communication from the Group to full scope and
audit of specific account balances scope component audit teams of
relevant fraud risks identified at the Group level and requesting the
full scope and audit account balance scope component audit teams
to report to the Group audit team any instances of fraud that could
give rise to a material misstatement at Group.
As required by auditing standards and taking into account possible
pressures to meet profit targets, and our overall knowledge of the
control environment, we perform procedures to address the risk of
management override of controls and the risk of fraudulent revenue
recognition, in particular in the Smiths Detection Inc, USA and
Smiths Detection Germany GmbH components a significant portion
of multi- year contracts (programme revenue) revenue is normally
recognised in the last month of the year. Therefore, there is a risk of
revenue being overstated during the year end closing period through
the manipulation of the timing of recording of the sale transaction
from such pressure. We did not identify any additional fraud risks.
We performed procedures including:
– Identifying journal entries to test for all components within full
scope and audit of specific account balances scope based on
risk criteria and comparing the identified entries to supporting
documentation. These included unusual entries in revenue
accounts, cash and cash equivalents or borrowings accounts
and entries posted by senior finance management.
– Testing consolidation adjustment entries posted and comparing
the identified entries to supporting documentation.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
Context of the ability of the audit to detect fraud
or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the financial statements, even though we have
properly planned and performed our audit in accordance with
auditing standards. For example, the further removed non-
compliance with laws and regulations is from the events and
transactions reflected in the financial statements, the less likely
the inherently limited procedures required by auditing standards
would identify it.
In addition, as with any audit, there remained a higher risk of
non-detection of fraud, as these may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal controls. Our audit procedures are designed to detect
material misstatement. We are not responsible for preventing
non-compliance or fraud and cannot be expected to detect non-
compliance with all laws and regulations.
8 We have nothing to report on the other
information in the Annual Report
The Directors are responsible for the other information presented
in the Annual Report together with the financial statements. Our
opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion
or, except as explicitly stated below, any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with
the financial statements or our audit knowledge. Based solely on
that work we have not identified material misstatements in the
other information.
Strategic Report and Directors’ Report
Based solely on our work on the other information:
– we have not identified material misstatements in the Strategic
Report and the Directors’ Report;
– in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
– in our opinion those reports have been prepared in accordance
with the Companies Act 2006.
101
Directors’ Remuneration Report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of emerging and principal risks and
longer-term viability
We are required to perform procedures to identify whether there
is a material inconsistency between the Directors’ disclosures in
respect of emerging and principal risks and the viability statement,
and the financial statements and our audit knowledge.
Based on those procedures, we have nothing material to add or
draw attention to in relation to:
– the Directors’ confirmation within the viability statement page 54
that they have carried out a robust assessment of the emerging
and principal risks facing the Group, including those that would
threaten its business model, future performance, solvency
and liquidity;
– the Principal Risks disclosures describing these risks and how
emerging risks are identified, and explaining how they are being
managed and mitigated; and
– the Directors’ explanation in the viability statement of how they
have assessed the prospects of the Group, over what period
they have done so and why they considered that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We are also required to review the Viability Statement, set out on
page 54 under the Listing Rules. Based on the above procedures,
we have concluded that the above disclosures are materially
consistent with the financial statements and our audit knowledge.
Our work is limited to assessing these matters in the context of
only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with judgements that were reasonable at the time they were made,
the absence of anything to report on these statements is not a
guarantee as to the Group’s and Company’s longer-term viability.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
Corporate governance disclosures
We are required to perform procedures to identify whether there
is a material inconsistency between the Directors’ corporate
governance disclosures and the financial statements and our
audit knowledge.
Based on those procedures, we have concluded that each of the
following is materially consistent with the financial statements and
our audit knowledge:
– the Directors’ statement that they consider that the Annual
Report and financial statements taken as a whole is fair,
balanced and understandable, and provides the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy;
– the section of the Annual Report describing the work of the
Audit & Risk Committee, including the significant issues that the
Audit & Risk Committee considered in relation to the financial
statements, and how these issues were addressed; and
– the section of the Annual Report that describes the review of
the effectiveness of the Group’s risk management and internal
control systems.
We are required to review the part of the Corporate Governance
Statement relating to the Group’s compliance with the provisions
of the UK Corporate Governance Code specified by the Listing
Rules for our review. We have nothing to report in this respect.
9 We have nothing to report on the other
matters on which we are required to
report by exception
Under the Companies Act 2006, we are required to report to you if,
in our opinion:
– adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
– the parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law
are not made; or
102
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue
our opinion in an auditor’s report. Reasonable assurance is a
high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually
or in aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of the
financial statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
The Company is required to include these financial statements
in an annual financial report prepared using the single electronic
reporting format specified in the TD ESEF Regulation. This
auditor’s report provides no assurance over whether the annual
financial report has been prepared in accordance with that format.
11 The purpose of our audit work and to
whom we owe our responsibilities
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company’s members, as a body, for our audit work, for this report,
or for the opinions we have formed.
Michael Maloney
SENIOR STATUTORY AUDITOR
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
– we have not received all the information and explanations we
Date: 22 September 2022
require for our audit.
We have nothing to report in these respects.
10 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 90,
the Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing
the Group and parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent Company or
to cease operations, or have no realistic alternative but to do so.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS CONSOLIDATED PRIMARY STATEMENTS
Consolidated income statement
CONTINUING OPERATIONS
Revenue
Operating costs
Operating profit/(loss)
Interest receivable
Interest payable
Other financing gains/(losses)
Other finance income – retirement benefits
Finance (costs)/income
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
DISCONTINUED OPERATIONS
Profit/(loss) from discontinued operations
PROFIT/(LOSS) FOR THE YEAR
Profit/(loss) for the year attributable to:
Smiths Group shareholders – continuing operations
Smiths Group shareholders – discontinued operations
Non-controlling interests
EARNINGS PER SHARE
Basic
Basic – continuing
Diluted
Diluted – continuing
103
Year ended 31 July 2022
Year ended 31 July 2021
Total
£m
2,566
(2,449)
117
14
(55)
20
7
(14)
103
(90)
13
–
(300)
(300)
–
–
20
7
27
(273)
14
(259)
973
714
1,022
1,035
(259)
973
–
714
11
1,022
2
1,035
267.1p
2.8p
266.0p
2.8p
Headline
£m
Non-headline
(note 3)
£m
2,406
(2,034)
372
9
(49)
–
–
(40)
332
(96)
236
134
370
235
134
1
370
–
(46)
(46)
–
–
(52)
6
(46)
(92)
13
(79)
(6)
(85)
(79)
(6)
–
(85)
Total
£m
2,406
(2,080)
326
9
(49)
(52)
6
(86)
240
(83)
157
128
285
156
128
1
285
71.7p
39.4p
71.3p
39.1p
Headline
£m
Non-headline
(note 3)
£m
Notes
2,566
(2,149)
417
14
(55)
–
–
(41)
376
(104)
272
49
321
270
49
2
321
1
2
2
4
4
4
4
4
6
27
5
References in the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet,
consolidated statement of changes in equity and consolidated cash-flow statement relate to notes on pages 116 to 163, which form an
integral part of the consolidated accounts.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS CONSOLIDATED PRIMARY STATEMENTS
Consolidated statement of comprehensive income
PROFIT FOR THE YEAR
Other comprehensive income (OCI)
OCI which will not be reclassified to the income statement:
Re-measurement of retirement benefits assets and obligations
Taxation on post-retirement benefits movements
Fair value movements on financial assets at fair value through OCI
OCI which will be reclassified and reclassifications:
Fair value gains and reclassification adjustments:
– deferred in the period on cash-flow and net investment hedges
– reclassified to income statement on cash-flow and net investment hedges
Foreign exchange (FX) movements net of recycling:
Exchange gains/(losses) on translation of foreign operations
Exchange gains recycled to the income statement on disposal of business
Total other comprehensive income, net of taxation
Total comprehensive income
Attributable to:
Smiths Group shareholders
Non-controlling interests
Total comprehensive income attributable to Smiths Group shareholders arising from:
Continuing operations
Discontinued operations
104
Year ended
31 July 2022
£m
Notes
Year ended
31 July 2021
represented*
£m
1,035
285
8
6
14
(17)
–
(63)
(80)
(82)
5
(77)
276
(196)
80
(77)
958
957
1
958
131
827
958
13
(6)
4
11
82
2
84
(166)
–
(166)
(71)
214
214
–
214
152
62
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
CONSOLIDATED PRIMARY STATEMENTS
Consolidated balance sheet
NON-CURRENT ASSETS
Intangible assets
Property, plant and equipment
Right of use assets
Financial assets – other investments
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Financial derivatives
CURRENT ASSETS
Inventories
Current tax receivable
Trade and other receivables
Cash and cash equivalents
Financial derivatives
Assets held for sale
TOTAL ASSETS
CURRENT LIABILITIES
Financial liabilities:
– borrowings
– lease liabilities
– financial derivatives
Provisions
Trade and other payables
Current tax payable
Liabilities held for sale
NON-CURRENT LIABILITIES
Financial liabilities:
– borrowings
– lease liabilities
– financial derivatives
Provisions
Retirement benefit obligations
Corporation tax payable
Deferred tax liabilities
Trade and other payables
TOTAL LIABILITIES
NET ASSETS
SHAREHOLDERS’ EQUITY
Share capital
Share premium account
Capital redemption reserve
Revaluation reserve
Merger reserve
Cumulative translation adjustments
Retained earnings
Hedge reserve
Total shareholders’ equity
Non-controlling interest equity
TOTAL EQUITY
105
Notes
31 July 2022
£m
31 July 2021
£m
10
12
13
14
8
6
16
20
15
6
16
18
20
27
18
18
20
23
17
6
27
18
18
20
23
8
6
6
17
24
26
26
26
26
26
1,588
243
106
395
309
95
69
–
2,805
570
50
738
1,056
4
–
2,418
5,223
(509)
(29)
(27)
(88)
(682)
(64)
–
(1,399)
(538)
(90)
(20)
(247)
(115)
(3)
(44)
(46)
(1,103)
(2,502)
2,721
136
365
19
–
235
487
1,659
(202)
2,699
22
2,721
1,498
212
108
11
546
92
59
75
2,601
381
75
630
405
2
1,243
2,736
5,337
(9)
(27)
(3)
(46)
(530)
(89)
(283)
(987)
(1,372)
(94)
–
(241)
(128)
(5)
(28)
(59)
(1,927)
(2,914)
2,423
149
363
6
1
235
509
1,367
(228)
2,402
21
2,423
The accounts on pages 103 to 163 were approved by the Board of Directors on 22 September 2022 and were signed on its behalf by:
Paul Keel
CHIEF EXECUTIVE OFFICER
Clare Scherrer
CHIEF FINANCIAL OFFICER
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
CONSOLIDATED PRIMARY STATEMENTS
Consolidated statement of changes in equity
Share capital
and share
premium
£m
Other
reserves
£m
Cumulative
translation
adjustments
£m
Notes
At 31 July 2021
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits
after tax
– FX movements net of recycling
– fair value gains and related tax
Total comprehensive income for the year
Transactions relating to ownership
interests:
Issue of new equity shares
Purchase of shares by Employee Benefit
Trust
Proceeds from exercise of share options
Share buybacks
Dividends:
– equity shareholders
Share-based payment
At 31 July 2022
24
24
25
9
512
–
–
–
–
–
2
–
–
(13)
–
–
501
242
–
–
(1)
–
(1)
–
–
–
13
–
–
509
–
–
(22)
–
(22)
–
–
–
–
–
–
106
Total
equity
£m
2,423
1,035
(17)
80
(140)
958
2
(16)
1
(511)
(150)
14
Retained
earnings
£m
1,367
1,033
Hedge
reserve
£m
(228)
–
(17)
1
(63)
954
–
(16)
1
(511)
(150)
14
–
103
(77)
26
–
–
–
–
–
–
Equity
shareholders’
funds
£m
Non-
controlling
interest
£m
2,402
1,033
(17)
81
(140)
957
2
(16)
1
(511)
(150)
14
21
2
–
(1)
–
1
–
–
–
–
–
–
254
487
1,659
(202)
2,699
22
2,721
Equity
shareholders’
funds
£m
Non-
controlling
interest
£m
Share capital
and share
premium
£m
Other
reserves
£m
Cumulative
translation
adjustments
£m
Notes
At 31 July 2020
510
242
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits
after tax
– FX movements net of recycling
– fair value gains and related tax
Total comprehensive income for the year
Transactions relating to ownership
interests:
Exercises of share options
Receipt of capital from non-controlling
interest
Purchase of own shares
Dividends:
– equity shareholders
– non-controlling interest
Share-based payment
24
24
25
9
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
674
–
–
(165)
–
(165)
–
–
–
–
–
–
Retained
earnings
£m
1,259
284
Hedge
reserve
£m
(312)
–
7
–
4
295
–
–
(16)
(185)
–
14
–
–
84
84
–
–
–
–
–
–
2,373
284
7
(165)
88
214
2
–
(16)
(185)
–
14
At 31 July 2021
512
242
509
1,367
(228)
2,402
Total
equity
£m
2,394
285
7
(166)
88
214
2
1
(16)
(185)
(1)
14
2,423
21
1
–
(1)
–
–
–
1
–
–
(1)
–
21
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS CONSOLIDATED PRIMARY STATEMENTS
Consolidated cash-flow statement
Net cash inflow from operating activities
Cash-flows from investing activities
Expenditure on capitalised development
Expenditure on other intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Capital returned by other investments
Acquisition of businesses
Investment in financial asset – discontinued operations
Proceeds on disposal of subsidiaries, net of cash disposed
Net cash-flow used in investing activities
Cash-flows from financing activities
Proceeds from exercise of share options
Share buybacks
Purchase of shares by Employee Benefit Trust
Proceeds received on exercise of employee share options
Settlement of cash-settled options
Dividends paid to equity shareholders
Lease payments
Reduction and repayment of borrowings
Cash inflow from matured derivative financial instruments
Net cash-flow used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Movement in net cash held in disposal group
Foreign exchange rate movements
Cash and cash equivalents at end of year
Cash and cash equivalents at end of year comprise:
– cash at bank and in hand
– short-term deposits
– bank overdrafts
107
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
279
535
Notes
28
(22)
(8)
(58)
3
–
–
–
1,331
(27)
(12)
(78)
2
7
(83)
(14)
–
1,246
(205)
24
24
26
25
2
(511)
(16)
1
(1)
(150)
(38)
(295)
23
(985)
540
405
48
62
18
1,055
242
814
1,056
(1)
1,055
2
–
(16)
–
–
(185)
(44)
–
4
(239)
91
366
(28)
(24)
405
219
186
405
–
405
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 108
ACCOUNTING POLICIES
Basis of preparation
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 on pages 5 to 55. The Group’s financial position,
cash-flows, liquidity and borrowing facilities are described in the CFO
review section on pages 15 to 16.
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
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS ACCOUNTING POLICIES
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.
109
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).
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110
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 on pages 180 to 186.
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
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– 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
(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.
– 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.
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 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.
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.
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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.
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.
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 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.
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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
Technology
Customer relationships
up to 20 years
up to 13 years
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
Patents and intellectual
property
up to 7 years
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
Short leasehold property
Plant, machinery, etc.
Fixtures, fittings, tools and
other equipment
2% per annum
over the period of the lease
10% to 20% per annum
10% to 33% per annum
113
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS ACCOUNTING POLICIES
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.
114
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 115
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.
Parent Company
The ultimate Parent Company of the Group is Smiths Group plc,
a company incorporated in England and Wales and listed on the
London Stock Exchange.
The accounts of the Parent Company, Smiths Group plc, have been
prepared in accordance with the Companies Act 2006 and Financial
Reporting Standard 101, 'Reduced Disclosure Framework'.
The Company accounts are presented in separate financial
statements on pages 171 to 179. The principal subsidiaries of the
Parent Company are listed in the above accounts.
ACCOUNTING POLICIES
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 116
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
Revenue
Divisional headline operating profit
Corporate headline operating costs
Headline operating profit/(loss)
Items excluded from headline measures (note 3)
Operating profit/(loss)
Revenue
Divisional headline operating profit
Corporate headline operating costs
Headline operating profit/(loss)
Items excluded from headline measures (note 3)
Operating profit/(loss)
Operating profit is stated after charging (crediting) the following items:
John
Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate
costs
£m
901
188
–
188
(21)
167
655
73
–
73
(37)
36
John
Crane
£m
Smiths
Detection
£m
865
187
–
187
(3)
184
721
99
–
99
(22)
77
647
133
–
133
(27)
106
Flex-Tek
£m
508
97
–
97
(14)
83
Year ended 31 July 2022
363
65
–
65
(1)
64
–
–
(42)
(42)
(214)
(256)
Total
£m
2,566
459
(42)
417
(300)
117
Year ended 31 July 2021
Smiths
Interconnect
£m
Corporate
costs
£m
312
35
–
35
(1)
34
–
–
(46)
(46)
(6)
(52)
Total
£m
2,406
418
(46)
372
(46)
326
Year ended 31 July 2022
Depreciation – property, plant and equipment
Depreciation – right of use assets
Amortisation of capitalised development costs
Amortisation of software, patents and intellectual property
Amortisation of acquired intangibles
Share-based payment
Russia impairment charges and related closure costs
Transition services cost reimbursement
Depreciation – property, plant and equipment
Depreciation – right of use assets
Amortisation of capitalised development costs
Amortisation of software, patents and intellectual property
Amortisation of acquired intangibles
Share-based payment
Strategic restructuring costs
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
15
15
–
3
–
3
9
–
10
7
3
1
–
2
10
–
7
5
–
–
–
2
–
–
5
2
–
2
–
1
–
–
1
1
–
1
51
4
–
(7)
Total
£m
38
30
3
7
51
12
19
(7)
Year ended 31 July 2021
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
15
14
–
3
–
3
4
12
7
7
1
–
2
6
6
4
–
–
–
1
–
6
5
–
2
–
1
10
1
2
–
1
53
6
1
Total
£m
40
32
7
7
53
13
21
The corporate and non-headline column comprises central information technology, human resources and headquarters costs and non-headline
expenses (see note 3).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Segment assets and liabilities
Segment assets
Property, plant, equipment, right of use assets, development projects,
other intangibles and investments
Inventory, trade and other receivables
Segment assets
167
429
596
127
524
651
84
244
328
54
167
221
399
13
412
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Property, plant, equipment, right of use assets, development projects,
other intangibles and investments
Inventory, trade and other receivables
Segment assets
152
356
508
117
417
534
75
160
235
44
127
171
18
10
28
Non-headline assets comprise receivables relating to non-headline items, acquisitions and disposals.
Segment liabilities
Divisional liabilities
Corporate and non-headline liabilities
Segment liabilities
Divisional liabilities
Corporate and non-headline liabilities
Segment liabilities
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
(155)
–
(155)
(347)
–
(347)
(91)
–
(91)
(85)
–
(85)
–
(385)
(385)
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
(137)
–
(137)
(276)
–
(276)
(66)
–
(66)
(61)
–
(61)
–
(336)
(336)
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
117
31 July 2022
Total
£m
831
1,377
2,208
31 July 2021
Total
£m
406
1,070
1,476
31 July 2022
Total
£m
(678)
(385)
(1,063)
31 July 2021
Total
£m
(540)
(336)
(876)
Segment assets and liabilities
Goodwill and acquired intangibles
Derivatives
Current and deferred tax
Retirement benefit assets and obligations
Cash and borrowings
Assets and liabilities held for sale
Statutory assets and liabilities
31 July
2022
£m
2,208
1,501
4
145
309
1,056
–
5,223
Assets
31 July
2021
£m
1,476
1,423
77
167
546
405
1,243
5,337
31 July
2022
£m
(1,063)
–
(47)
(111)
(115)
(1,166)
–
Liabilities
31 July
2021
£m
(876)
–
(3)
(122)
(128)
(1,502)
(283)
(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:
Capital expenditure year ended 31 July 2022
Capital expenditure year ended 31 July 2021
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
24
19
23
23
11
9
12
9
1
2
Total
£m
71
62
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
118
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:
Average divisional capital employed
Average corporate capital employed
Average total capital employed – continuing operations
Average divisional capital employed
Average corporate capital employed
Average total capital employed – continuing operations
Analysis of revenue
The revenue for the main product and service lines for each division is:
John Crane
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Smiths Detection
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Flex-Tek
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Smiths Interconnect
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
John Crane
£m
Smiths
Detection
£m
970
1,019
Flex-Tek
£m
520
Smiths
Interconnect
£m
400
John Crane
£m
Smiths
Detection
£m
937
1,018
Flex-Tek
£m
449
Smiths
Interconnect
£m
395
Original
Equipment
£m
Aftermarket
£m
279
273
622
592
Aviation
£m
Other security
systems
£m
467
546
188
175
Aerospace
£m
Industrials
£m
116
99
531
409
31 July 2022
Total
£m
2,909
31
2,940
31 July 2021
Total
£m
2,799
31
2,830
Total
£m
901
865
Total
£m
655
721
Total
£m
647
508
Components,
connectors &
subsystems
£m
363
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).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Divisional revenue is analysed by the Smiths Group key global markets as follows:
John Crane
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Smiths Detection
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Flex Tek
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Smiths Interconnect
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
Total
Revenue year ended 31 July 2022
Revenue year ended 31 July 2021
The Group’s statutory revenue is analysed as follows:
Sale of goods recognised at a point in time
Sale of goods recognised over time
Services recognised over time
119
General
Industrial
£m
Safety &
Security
£m
Energy
£m
Aerospace
£m
Total
£m
371
355
–
–
531
409
166
139
1,068
903
–
–
655
721
–
–
144
128
799
849
530
510
–
–
–
–
–
–
530
510
–
–
–
–
116
99
53
45
169
144
901
865
655
721
647
508
363
312
2,566
2,406
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
1,849
99
618
2,566
1,723
94
589
2,406
Analysis by geographical areas
The Group’s revenue by destination and non-current operating assets by location are shown below:
Americas
Europe
Asia-Pacific
Rest of the World
Intangible assets, right of use
assets and property, plant and
equipment
Revenue
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
1,423
1,244
480
421
242
522
390
250
31 July 2022
£m
31 July 2021
£m
1,324
498
76
39
1,195
512
70
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).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 120
NOTES TO THE ACCOUNTS
2 Operating costs
The Group's operating costs for continuing operations are analysed as follows:
Cost of sales – direct materials, labour, production and
distribution overheads
Selling costs
Administrative expenses
Transition services cost reimbursement
Total
Year ended 31 July 2022
Year ended 31 July 2021
Headline
£m
Non-headline
(note 3)
£m
1,605
200
351
(7)
2,149
–
–
300
–
300
Total
£m
1,605
200
651
(7)
2,449
Headline
£m
Non-headline
(note 3)
£m
1,491
188
355
–
2,034
–
–
46
–
46
Total
£m
1,491
188
401
–
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):
Research and development expense
Depreciation of property, plant and equipment
Depreciation of right of use assets
Amortisation of intangible assets
Strategic restructuring programme and write-downs
Russia impairment and related closure costs (see note 11)
Transition services cost reimbursement
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
80
38
30
61
–
19
(7)
76
40
32
67
21
–
–
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.
Audit services
Fees payable to the Company’s auditors for the audit of the Company’s annual financial statements
Fees payable to the Company’s auditors and its associates for other services:
– the audit of the Company’s subsidiaries
All other services
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
2.8
4.6
7.4
0.8
2.3
4.2
6.5
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 121
NOTES TO THE ACCOUNTS
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:
Post-acquisition integration costs and fair value adjustment unwind
Unwind of acquisition balance sheet fair value uplift
Integration programme costs
Acquisition and disposal related transaction costs and provision releases
Business acquisition/disposal costs
Legacy pension scheme arrangements
Past service costs for benefit equalisation and improvements
Retirement benefit scheme settlement loss
Non-headline litigation provision movements
Movement in provision held against Titeflex Corporation subrogation claims
Provision for John Crane, Inc. asbestos litigation
Cost recovery for John Crane, Inc. asbestos litigation
Other items
Russia impairment charges and related closure costs
Amortisation of acquired intangible assets
Non-headline items in operating profit – continuing operations
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
Notes
(2)
–
(5)
(43)
(171)
(2)
(7)
–
(19)
(51)
(300)
(1)
(1)
(1)
(6)
–
13
(6)
9
–
(53)
(46)
8
8
23
23
11
10
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
122
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:
Unwind of discount on provisions
Other finance income – retirement benefits
Fair value gain on investment in early stage business
Foreign exchange gain (loss) on intercompany loan with discontinued operations
Non-headline items in finance costs – continuing operations
Continuing operations – non-headline loss before taxation
Notes
23
8
14
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
(3)
7
1
22
27
(273)
(2)
6
–
(50)
(46)
(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:
Tax credit on non-headline loss
(Increase)/decrease in unrecognised UK deferred tax asset
Non-headline items in taxation – continuing operations
Continuing operations – non-headline loss for the year
Notes
6
6
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
19
(5)
14
(259)
9
4
13
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
ii. DISCONTINUED OPERATIONS
The non-headline items for discontinued operations were as follows:
Non-headline operating profit items
Medfusion documentation remediation costs
Impairment of investment in Ivenix, Inc convertible debt
Medical separation costs
Impairment of capitalised development costs and related assets
Non-headline finance costs items
Foreign exchange (loss)/gain on intercompany loan with parent
Gain on sale of discontinued operation
Gain on the sale of Smiths Medical to ICU Medical, Inc.
Non-headline taxation items
Tax on non-headline loss
Non-headline items in profit from discontinued operations
Profit for the year – non-headline items for continuing and discontinued operations
123
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
Notes
(33)
(14)
–
–
(22)
1,036
6
973
714
27
27
–
–
(18)
(61)
50
–
23
(6)
(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
Interest receivable
Interest payable:
– bank loans and overdrafts, including associated fees
– other loans
– interest on leases
Interest payable
Headline net finance costs
Other financing gains/(losses):
– valuation movements on fair value hedged debt
– valuation movements on fair value derivatives
– foreign exchange and ineffectiveness on net investment hedges
– retranslation of foreign currency bank balances
– other items including counterparty credit risk adjustments and non-hedge accounted derivatives
Other financing gains/(losses)
Non-headline finance cost items:
Foreign exchange gain on intercompany loan with discontinued operations
Unwind of discount on provisions
Fair value gain on investment in early stage business
Net interest income on retirement benefit obligations
Non-headline finance cost items
Net finance costs
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
Notes
14
(12)
(40)
(3)
(55)
(41)
(32)
33
(2)
(1)
2
–
22
(3)
1
7
27
(14)
9
(7)
(39)
(3)
(49)
(40)
22
(25)
3
(3)
3
–
(50)
(2)
–
6
(46)
(86)
3
3
14
8
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
124
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.
Profit attributable to equity shareholders for the year:
– continuing
– discontinued
Total
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
11
1,022
1,033
156
128
284
Average number of shares in issue during the year (note 24)
386,678,211
396,350,586
Statutory earnings per share total – basic
Statutory earnings per share total – diluted
Statutory earnings per share continuing operations – basic
Statutory earnings per share continuing operations – diluted
267.1p
266.0p
2.8p
2.8p
71.7p
71.3p
39.4p
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:
Total profit attributable to equity shareholders of the Parent Company
Exclude: Non-headline items (note 3)
Headline earnings per share
Profit from continuing operations attributable to equity shareholders of
the Parent Company
Exclude: Non-headline items (note 3)
Headline earnings per share – continuing operations
Year ended 31 July 2022
Basic EPS
(p)
Diluted EPS
(p)
267.1
266.0
82.5
82.1
2.8
2.8
69.8
69.5
£m
1,033
(714)
319
11
259
270
Year ended 31 July 2021
Basic EPS
(p)
Diluted EPS
(p)
71.7
71.3
93.1
39.4
59.3
92.6
39.1
59.0
£m
284
85
369
156
79
235
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.
The taxation charge in the consolidated income statement for the year comprises:
Continuing operations
– current income tax charge
– current tax adjustments in respect of prior periods
Current taxation
Deferred taxation
Total taxation expense – continuing operations
Analysed as:
Headline taxation expense
Non-headline taxation credit
Total taxation expense in the consolidated income statement
Tax on items charged/(credited) to equity
Deferred tax:
– retirement benefit schemes
– foreign exchange
– share-based payment
The £nil (FY2021: £6m) charge to equity for retirement benefits related to UK retirement schemes.
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
68
5
73
17
90
104
(14)
90
71
7
78
5
83
96
(13)
83
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
–
–
(1)
(1)
6
(5)
(1)
–
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Current taxation liabilities
At 31 July 2020
Foreign exchange gain
Charge to income statement
Tax paid
At 31 July 2021
Current tax receivable
Current tax payable within one year
Corporation tax payable after more than one year
At 31 July 2021
Foreign exchange gain
Charge to income statement
Tax paid
At 31 July 2022
Current tax receivable
Current tax payable within one year
Corporation tax payable after more than one year
At 31 July 2022
125
Current tax
£m
(38)
1
(78)
96
(19)
75
(89)
(5)
(19)
(4)
(73)
79
(17)
50
(64)
(3)
(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:
Profit before taxation
Notional taxation expense at UK corporate rate of 19.0% (FY2021: 19.0%)
Different tax rates on non-UK profits and losses
Non-deductible expenses and other charges
Tax credits and non-taxable income
Non-headline UK deferred tax asset recognition adjustment
Other adjustments to unrecognised deferred tax
Non-tax relievable loss on UK pensions schemes
Tax on Smiths Medical consolidation adjustments
Prior year true-up
Total taxation expense in the consolidated income statement
Comprising:
Taxation on headline profit
Non-headline taxation items:
– Tax on non-headline loss
– UK deferred tax asset recognition adjustment
Taxation on non-headline items
Total taxation expense in the consolidated income statement
The head office of Smiths Group is domiciled in the UK; so the tax charge has been reconciled to UK tax rates.
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
103
240
20
13
11
(6)
5
10
41
2
(6)
90
104
(19)
5
(14)
90
46
16
30
(8)
(4)
(4)
–
8
(1)
83
96
(9)
(4)
(13)
83
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Deferred taxation assets/(liabilities)
At 31 July 2020
Reallocations
Charge to income statement – continuing operations
Credit to equity
Foreign exchange rate movements
At 31 July 2021
Deferred tax assets
Deferred tax liabilities
At 31 July 2021
Reallocations
Charge to income statement – continuing operations
Credit to equity
Foreign exchange rate movements
At 31 July 2022
Deferred tax assets
Deferred tax liabilities
At 31 July 2022
126
Total
£m
75
–
(5)
(1)
(5)
64
92
(28)
64
–
(17)
(1)
5
51
95
(44)
51
Property, plant,
equipment and
intangible
assets
£m
Employment
benefits
£m
Losses
carried
forward
£m
Provisions
£m
Other
£m
(74)
11
4
–
3
(56)
2
(58)
(56)
(15)
4
–
(9)
(76)
(1)
(75)
(76)
(66)
(1)
(31)
(6)
(1)
(105)
(113)
8
(105)
1
50
3
–
(51)
(56)
5
(51)
128
(14)
27
5
(2)
144
126
18
144
9
(54)
–
4
103
76
27
103
86
2
(5)
–
(5)
78
62
16
78
1
(10)
–
10
79
65
14
79
1
2
–
–
–
3
15
(12)
3
4
(7)
(4)
–
(4)
11
(15)
(4)
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:
Restricted losses – Asia
Unrestricted losses – operating losses
Total unrecognised deferred tax on losses
Expiry of
losses
n/a
No expiry
2022
£m
–
335
335
Expiry of
losses
2022-2027
No expiry
2021
£m
30
77
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
7 Employees
Staff costs during the period
Wages and salaries
Social security
Share-based payment (note 9)
Pension costs (including defined contribution schemes) (note 8)
127
Year ended 31 July 2022
Year ended 31 July 2021
Continuing
operations
£m
Discontinued
operations
£m
700
81
13
29
823
91
9
2
5
107
Total
£m
791
90
15
34
930
Continuing
operations
£m
Discontinued
operations
£m
627
85
13
26
751
234
22
1
11
268
Total
£m
861
107
14
37
1,019
The average number of persons employed, rounded to the nearest 50 employees, was:
John Crane
Smiths Detection
Flex-Tek
Smiths Interconnect
Corporate (including central/shared IT services)
Continuing operations
Discontinued operations – Smiths Medical (in period to 6 January 2022)
Total
Year ended
31 July 2022
Year ended
31 July 2021
6,050
3,100
3,300
2,500
300
15,250
6,700
21,950
5,950
3,000
3,000
2,300
300
14,550
7,500
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 & People Committee on
pages 75 to 88.
Key management compensation
Salaries and short-term employee benefits
Cost of retirement benefits
Cost of share-based incentive plans
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
10.3
0.7
4.7
12.8
0.9
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:
SEP
LTIP
Restricted stock
SAYE
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
–
1,411
8
16
£11.43
169
1,645
82
11
£10.11
Related party transactions
The only related party transactions in FY2022 were key management compensation (FY2021: key management compensation).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
128
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:
At beginning of period
Foreign exchange rate movements
Current service cost
Scheme administration costs
Past service cost, curtailments, settlements – continuing operations
Settlements – discontinued operations
Finance income – retirement benefits
Contributions by employer
Actuarial gain
Retirement benefit obligations disposed of with Smiths Medical (note 27)
Unrecognised assets due to surplus restriction
Net retirement benefit asset
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
413
-
(2)
(4)
(214)
(3)
7
9
3
5
(20)
194
372
5
(2)
(5)
(6)
–
6
30
13
–
–
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
129
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:
Rate of increase in salaries
Rate of increase for active deferred members
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Discount rate
Inflation rate
Healthcare cost increases
2022
UK
n/a
4.0%
3.4%
3.4%
3.5%
3.4%
4.4%
2022
US
n/a
n/a
n/a
n/a
4.5%
n/a
n/a
2022
Other
2.2%
n/a
1.2%
n/a
1.1%
1.3%
n/a
2021
UK
n/a
4.2%
3.3%
3.3%
1.7%
3.3%
4.4%
2021
US
n/a
n/a
n/a
n/a
2.7%
n/a
n/a
2021
Other
2.5%
n/a
1.5%
n/a
0.7%
1.5%
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
130
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
Member who retires next year at age 65
Member, currently 45, when they retire
in 20 years’ time
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
22
23
24
25
22
23
24
25
21
22
22
24
20
22
22
24
UK schemes
US schemes
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.
Rate of mortality – 1 year increase in life expectancy
Rate of mortality – 1 year decrease in life expectancy
Rate of inflation – 0.25% increase
Discount rate – 0.25% increase
Market value of scheme assets – 2.5% increase
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
(2)
2
(1)
2
1
84
(84)
34
(49)
40
(135)
136
(69)
97
–
(2)
2
(1)
3
1
99
(97)
30
(38)
73
(209)
206
(98)
146
–
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Retirement benefit plan assets
Cash and cash equivalents
Pooled funds:
– Pooled equity
– Pooled Diversified Growth
– Pooled credit
Corporate bonds
Government bonds/LDI
Insured liabilities
Property
Other
Total market value
131
31 July 2022 – £m
31 July 2021 – £m
UK
schemes
US
schemes
Other
countries
90
–
–
379
412
498
1,649
39
–
3,067
1
–
–
–
167
57
–
–
–
225
1
3
15
–
–
3
–
–
–
22
Total
92
3
15
379
579
558
1,649
39
–
3,314
UK
schemes
US
schemes
Other
countries
71
–
–
420
791
1,298
1,462
62
–
4,104
1
–
–
–
192
79
–
–
–
272
–
3
19
–
–
3
–
–
5
30
Total
72
3
19
420
983
1,380
1,462
62
5
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 of interest and inflation swap assets (FY2021: £5m 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
Present value of funded scheme liabilities:
– Active deferred members
– Deferred members
– Pensioners
Present value of funded scheme liabilities
Market value of scheme assets
Surplus restriction
Surplus/(deficit)
Net retirement benefit obligations
Market value of scheme assets
Present value of funded scheme liabilities
Surplus restriction
Surplus/(deficit)
Unfunded pension plans
Post-retirement healthcare
Present value of unfunded obligations
Net pension asset/(liability)
Retirement benefit assets
Retirement benefit liabilities
Liabilities held for sale
Net pension asset/(liability)
31 July 2022 – £m
31 July 2021 – £m
SIPS
TIGPS
US
schemes
SIPS
TIGPS
US
schemes
(32)
(561)
(1,010)
(1,603)
1,912
–
309
(23)
(442)
(670)
(1,135)
1,155
(20)
–
(41)
(109)
(88)
(238)
225
–
(13)
(42)
(810)
(1,226)
(2,078)
2,410
–
332
(29)
(632)
(809)
(1,470)
1,684
–
214
(73)
(119)
(81)
(273)
272
–
(1)
31 July 2022 – £m
31 July 2021 – £m
UK
schemes
US
schemes
Other
countries
3,067
(2,738)
(20)
309
(43)
(4)
(47)
262
309
(47)
–
262
225
(238)
–
(13)
(7)
(1)
(8)
(21)
–
(21)
–
(21)
22
(27)
–
(5)
(40)
(2)
(42)
(47)
–
(47)
–
(47)
Total
3,314
(3,003)
(20)
291
(90)
(7)
(97)
194
309
(115)
–
194
UK
schemes
US
schemes
Other
countries
4,104
(3,558)
272
(273)
–
546
(54)
(4)
(58)
488
546
(58)
–
488
–
(1)
(7)
(1)
(8)
(9)
–
(9)
–
(9)
30
(38)
–
(8)
(55)
(3)
(58)
(66)
–
(61)
(5)
(66)
Total
4,406
(3,869)
–
537
(116)
(8)
(124)
413
546
(128)
(5)
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Amounts recognised in the consolidated income statement
Amounts charged to operating profit
Current service cost
Past service costs – benefit equalisations
Settlement loss
Scheme administration costs
The operating cost is charged as follows:
Headline administrative expenses
Non-headline settlement loss
Non-headline administrative expenses
Amounts credited to finance costs
Non-headline other finance income – retirement benefits
Amounts recognised directly in the consolidated statement of comprehensive income
Re-measurements of retirement defined benefit assets and liabilities
Difference between interest credit and return on assets
Experience gains on scheme liabilities
Actuarial gains arising from changes in demographic assumptions
Actuarial gains/(losses) arising from changes in financial assumptions
Movement in surplus restriction
Changes in present value of funded scheme assets
132
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
2
43
171
4
220
6
171
43
220
2
6
–
5
13
7
–
6
13
(7)
(6)
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
(835)
(31)
1
868
(20)
(17)
(57)
44
10
16
–
13
At beginning of period
Interest on assets
Actuarial movement on scheme assets
Employer contributions
Scheme administration costs
Foreign exchange rate movements
Assets transferred on business disposal
Assets distributed on settlements
Curtailment gains/(losses)
Benefits paid
At end of period
31 July 2022 – £m
31 July 2021 – £m
UK
schemes
US
schemes
Other
countries
4,104
70
(773)
3
(3)
–
–
(180)
–
(154)
3,067
272
8
(62)
–
(1)
33
–
–
(9)
(16)
225
30
1
–
1
–
–
(5)
–
–
(5)
22
Total
4,406
79
(835)
4
(4)
33
(5)
(180)
(9)
(175)
3,314
UK
schemes
US
schemes
Other
countries
4,240
58
(40)
20
(4)
–
–
–
–
(170)
4,104
311
7
(17)
4
(1)
(17)
–
–
–
(15)
272
31
1
–
1
–
–
–
–
–
(3)
30
Total
4,582
66
(57)
25
(5)
(17)
–
–
–
(188)
4,406
Changes in present value of funded defined benefit obligations
At beginning of period
Current service cost
Past service costs
Interest on obligations
Actuarial movement on liabilities
Foreign exchange rate movements
Liabilities transferred on business disposal
Curtailment gains/(losses)
Liabilities extinguished on settlements
Benefits paid
At end of period
31 July 2022 – £m
31 July 2021 – £m
UK
schemes
US
schemes
Other
countries
(3,558)
–
(43)
(61)
761
–
–
–
9
154
(2,738)
(273)
–
–
(8)
54
(33)
–
6
–
16
(238)
(38)
–
–
(1)
2
–
5
–
–
5
(27)
Total
(3,869)
–
(43)
(70)
817
(33)
5
6
9
175
(3,003)
UK
schemes
US
schemes
Other
countries
(3,724)
–
(6)
(51)
53
–
–
–
–
170
(3,558)
(314)
–
–
(7)
16
17
–
–
–
15
(273)
(40)
(1)
–
(2)
–
2
–
–
–
3
(38)
Total
(4,078)
(1)
(6)
(60)
69
19
–
–
–
188
(3,869)
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Changes in present value of unfunded defined benefit pensions and post-retirement healthcare plans
133
At beginning of period
Current service cost
Interest on obligations
Actuarial movement
Employer contributions
Foreign exchange rate movements
Liabilities transferred on business disposal
Benefits paid
At end of period
Changes in the effect of the asset ceiling over the year
Irrecoverable asset at beginning of period
Actuarial movement on scheme assets
At end of period
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
–
–
–
–
5
–
–
(5)
–
–
–
–
–
5
–
–
(5)
–
(124)
(1)
(2)
21
–
–
4
5
(97)
(132)
(1)
(1)
2
–
3
–
5
(124)
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
–
(20)
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Ordinary shares under option/award (’000)
31 July 2020
Granted
Exercised
Lapsed
31 July 2021
Reclassification
Granted
Exercised
Lapsed
31 July 2022
134
Weighted
average
exercise
price
£1.89
£0.68
£2.03
£0.75
£1.63
–
£0.71
£1.90
£0.97
£1.45
Long-term
incentive
plans
SEP
Restricted
stock
Save as you
earn
scheme
3,937
2,143
(346)
(819)
4,915
348
2,255
(224)
(1,984)
5,310
1,295
358
(411)
(391)
851
(348)
–
(313)
(190)
–
131
11
(60)
(18)
64
–
212
(163)
(30)
83
1,207
139
(165)
(96)
1,085
–
167
(138)
(229)
885
Total
6,570
2,651
(982)
(1,324)
6,915
–
2,634
(838)
(2,433)
6,278
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
£0.00 – £2.00
£6.01 – £10.00
£10.01 – £12.00
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)
5,393
490
395
19
18
29
5,830
655
430
15
30
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
Cost
At 31 July 2020
Foreign exchange rate movements
Business combinations
Additions
Disposals
At 31 July 2021
Foreign exchange rate movements
Additions
At 31 July 2022
Amortisation and impairments
At 31 July 2020
Foreign exchange rate movements
Amortisation charge for the year
Disposals
At 31 July 2021
Foreign exchange rate movements
Amortisation charge for the year
Impairment charge for the year
At 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
Goodwill
£m
Development
costs
£m
Acquired
intangibles
(see table
below)
£m
Software,
patents and
intellectual
property
£m
1,254
(68)
21
–
–
1,207
104
–
1,311
62
(3)
–
–
59
4
–
4
67
1,244
1,148
1,192
155
(7)
–
8
–
156
6
12
174
112
(5)
7
–
114
6
3
–
123
51
42
43
546
(30)
46
–
–
562
68
–
630
249
(15)
53
–
287
35
51
–
373
257
275
297
174
(6)
–
10
(1)
177
10
6
193
142
(4)
7
(1)
144
6
7
–
157
36
33
32
Total
£m
2,129
(111)
67
18
(1)
2,102
188
18
2,308
565
(27)
67
(1)
604
51
61
4
720
1,588
1,498
1,564
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
In addition to goodwill, acquired intangible assets comprise:
Cost
At 31 July 2020
Foreign exchange rate movements
Business combinations
At 31 July 2021
Foreign exchange rate movements
At 31 July 2022
Amortisation
At 31 July 2020
Foreign exchange rate movements
Charge for the year
At 31 July 2021
Foreign exchange rate movements
Charge for the year
At 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
135
Patents,
licences
and
trademarks
£m
Technology
£m
Customer
relationships
£m
Total
acquired
intangibles
£m
15
(1)
3
17
2
19
4
–
1
5
1
2
8
11
12
11
139
(7)
2
134
18
152
60
(3)
10
67
10
10
87
65
67
79
392
(22)
41
411
48
459
185
(12)
42
215
24
39
278
181
196
207
546
(30)
46
562
68
630
249
(15)
53
287
35
51
373
257
275
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:
John Crane
Smiths Detection*
Flex-Tek
Smiths Interconnect
Smiths Medical
2022
£m
132
644
194
274
–
1,244
2022
Number of
CGUs
1
2
1
1
–
5
2021
£m
129
610
169
240
–
1,148
2021
Number of
CGUs
1
1
1
1
1
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
136
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:
Net book value of goodwill (£m)
Basis of valuation
Discount rate
– pre-tax
– post-tax
Period covered by management projections
Revenue – compound annual growth rate over projection period
Average earnings before interest and tax margin
Long-term growth rates
Net book value of goodwill (£m)
Basis of valuation
Discount rate
– pre-tax
– post-tax
Period covered by management projections
Revenue – compound annual growth rate over projection period
Average earnings before interest and tax margin
Long-term growth rates
John Crane
132
Smiths
Detection
640
As at 31 May 2022
Smiths
Interconnect
266
Flex-Tek
187
Value in use
Value in use
Value in use
Value in use
12.3%
9.1%
5 years
5.3%
24.9%
1.9%
Smiths
Detection
610
11.3%
8.7%
5 years
3.8%
14.1%
2.4%
Flex-Tek
169
11.7%
9.2%
5 years
3.8%
19.7%
1.7%
11.5%
9.3%
5 years
6.0%
17.8%
2.1%
As at 31 July 2021
Smiths
Interconnect
240
Smiths
Medical
535
John Crane
129
Value in use
Value in use
Value in use
Value in use
Value in use
13.2%
9.5%
5 years
6.4%
25.4%
2.1%
10.3%
8.2%
5 years
2.8%
13.4%
1.8%
11.4%
9.1%
5 years
5.0%
20.0%
1.9%
11.1%
9.0%
5 years
5.9%
19.0%
2.4%
9.9%
8.0%
5 years
5.9%
18.8%
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
Revenue – compound annual growth rate (CAGR) over 5-year projection period
Average earnings before interest and tax margin
Post-tax discount rate
Smiths Detection
-240 bps decrease
-130 bps decrease
+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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Change required for carrying value to equal recoverable amount – FY2021
Revenue – compound annual growth rate (CAGR) over 5-year projection period
Post-tax discount rate
137
Smiths Detection
-560 bps decrease
+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:
Goodwill
Working capital balances
Net impairment charge
Related closure costs
Russian impairment and related closure costs
12 Property, plant and equipment
Cost or valuation
At 31 July 2020
Foreign exchange rate movements
Business combinations
Additions
Disposals
At 31 July 2021
Foreign exchange rate movements
Additions
Disposals
At 31 July 2022
Depreciation
At 31 July 2020
Foreign exchange rate movements
Charge for the year
Disposals
At 31 July 2021
Foreign exchange rate movements
Charge for the year
Disposals
At 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
John Crane
£m
Smiths
Detection
£m
–
9
9
–
9
4
4
8
2
10
Land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings,
tools and
equipment
£m
175
(6)
–
6
(3)
172
14
4
(14)
176
102
(3)
10
(3)
106
9
7
(14)
108
68
66
73
383
(21)
2
38
(14)
388
37
42
(10)
457
261
(15)
26
(12)
260
25
24
(10)
299
158
128
122
133
(6)
–
–
(5)
122
6
6
(5)
129
110
(6)
4
(4)
104
5
7
(4)
112
17
18
23
Total
£m
4
13
17
2
19
Total
£m
691
(33)
2
44
(22)
682
57
52
(29)
762
473
(24)
40
(19)
470
39
38
(28)
519
243
212
218
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
13 Right of use assets
Cost or valuation
At 31 July 2020
Foreign exchange rate movements
Business combinations
Recognition of right of use asset
Derecognition of right of use asset
At 31 July 2021
Foreign exchange rate movements
Recognition of right of use asset
Derecognition of right of use asset
At 31 July 2022
Depreciation
At 31 July 2020
Foreign exchange rate movements
Charge for the year
Derecognition of right of use asset
At 31 July 2021
Foreign exchange rate movements
Charge for the year
Derecognition of right of use asset
At 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
Properties
£m
Vehicles
£m
Equipment
£m
110
(5)
9
44
(12)
146
12
18
(2)
174
26
(2)
27
(5)
46
5
25
(1)
75
99
100
84
14
(1)
1
3
–
17
1
4
(1)
21
5
–
5
–
10
1
5
(1)
15
6
7
9
1
–
–
–
–
1
–
–
–
1
–
–
–
–
–
–
–
–
–
1
1
1
14 Financial assets – other investments
Cost or valuation
At 31 July 2020
Disposals
Fair value change through Other Comprehensive Income
At 31 July 2021
Foreign exchange rate movements
Additions
Disposal
Fair value change through Profit and Loss
Fair value change through Other Comprehensive Income
At 31 July 2022
Investment in
ICU Medical,
Inc equity
£m
Deferred
contingent
consideration
£m
Investments
in early stage
businesses
£m
Cash
collateral
deposit
£m
–
–
–
–
–
426
–
–
(62)
364
–
–
–
–
–
30
–
(11)
–
19
8
–
(1)
7
1
4
(4)
1
(1)
8
11
(7)
–
4
–
–
–
–
–
4
138
Total
£m
125
(6)
10
47
(12)
164
13
22
(3)
196
31
(2)
32
(5)
56
6
30
(2)
90
106
108
94
Total
£m
19
(7)
(1)
11
1
460
(4)
(10)
(63)
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
Raw materials and consumables
Work in progress
Finished goods
Total inventories
31 July 2022
£m
31 July 2021
£m
187
106
277
570
117
81
183
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Inventory provisioning
Gross inventory carried at full value
Gross value of inventory partly or fully provided for
Inventory provision
Inventory after provisions
16 Trade and other receivables
Non-current
Trade receivables
Contract assets
Other receivables
Current
Trade receivables
Prepayments
Contract assets
Other receivables
139
31 July 2022
£m
31 July 2021
£m
492
131
623
(53)
570
324
104
428
(47)
381
31 July 2022
£m
31 July 2021
£m
1
58
10
69
506
33
127
72
738
–
49
10
59
431
26
131
42
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
Trade receivables which are not yet due
Trade receivables which are between 1-30 days overdue
Trade receivables which are between 31-60 days overdue
Trade receivables which are between 61-90 days overdue
Trade receivables which are between 91-120 days overdue
Trade receivables which are more than 120 days overdue
Expected credit loss allowance provision
Trade receivables
Movement in expected credit loss allowance
Brought forward loss allowance at the start of the period
Exchange adjustments
Increase in allowance recognised in the income statement
Amounts written off or recovered during the year
Carried forward loss allowance at the end of the year
31 July 2022
£m
31 July 2021
£m
396
51
24
11
7
54
543
(36)
507
338
45
15
8
5
52
463
(32)
431
31 July 2022
£m
31 July 2021
£m
32
4
8
(8)
36
35
(2)
6
(7)
32
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
17 Trade and other payables
Non-current
Other payables
Contract liabilities
Current
Trade payables
Other payables
Other taxation and social security costs
Accruals
Contract liabilities
140
31 July 2022
£m
31 July 2021
£m
13
33
46
282
57
30
183
130
682
13
46
59
188
39
28
188
87
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.
Cash and cash equivalents
Net cash and deposits
Short-term borrowings
€600m 1.25% Eurobond 2023
Overdrafts
Lease liabilities
Interest accrual
Long-term borrowings
$400m 3.625% US$ Guaranteed notes 2022
€600m 1.25% Eurobond 2023
€650m 2.00% Eurobond 2027
Lease liabilities
Borrowings / Gross debt
Derivatives managing interest rate risk and currency profile of the debt
Net cash/(debt) (31 July 2021 comparative excludes £4m of net cash in businesses held for sale)
Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
Cash and cash equivalents
31 July 2022
£m
31 July 2021
£m
1,056
405
(502)
(1)
(29)
(6)
(538)
–
–
(538)
(90)
(628)
(1,166)
(40)
(150)
–
–
(27)
(9)
(36)
(289)
(516)
(567)
(94)
(1,466)
(1,502)
75
(1,022)
31 July 2022
£m
31 July 2021
£m
242
814
1,056
219
186
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
Analysis of financial derivatives on balance sheet
Derivatives managing interest rate risk and currency profile of the debt
Foreign exchange forward contracts
At 31 July 2022
Derivatives managing interest rate risk and currency profile of the debt
Foreign exchange forward contracts
At 31 July 2021
141
Non-current
assets
£m
Current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
Net balance
£m
–
–
–
75
–
75
–
4
4
–
2
2
(20)
(7)
(27)
–
(3)
(3)
(20)
–
(20)
–
–
–
(40)
(3)
(43)
75
(1)
74
Movements in assets/(liabilities) arising from financing activities
At 31 July 2020
Foreign exchange gains/(losses)
Net cash inflow from continuing operations *
Lease liabilities acquired
Net movement from lease modifications
Fair value movement from interest rate hedging
Revaluation of derivative contracts
Interest expense taken to income statement**
Interest paid
Reclassification to short-term borrowings
At 31 July 2021
Foreign exchange gains/(losses)
Net cash inflow from continuing operations *
Net movement from lease modifications
Fair value movement from interest rate hedging
Revaluation of derivative contracts
Interest expense taken to income statement**
Interest paid
Reclassification to short-term borrowings
At 31 July 2022
Changes in net debt
Cash
and cash
equivalents
£m
Other
short-term
borrowings
£m
Long-term
borrowings
£m
Interest rate
& cross-
currency
swaps
£m
366
(24)
63
–
–
–
–
–
–
–
405
62
589
–
–
–
–
–
–
1,056
(41)
2
33
(1)
(46)
–
–
(4)
–
21
(36)
(3)
34
(22)
2
–
(35)
–
(478)
(538)
(1,520)
79
–
(10)
–
8
–
(31)
29
(21)
(1,466)
4
295
–
27
–
–
34
478
(628)
82
–
–
–
–
–
(7)
–
–
–
75
–
–
–
–
(115)
–
–
–
(40)
Changes in
other financing
items: FX
contracts
£m
Total
liabilities
from financing
activities
£m
(2)
(3,200)
3,200
–
–
–
3
–
–
–
1
(6,799)
6,799
–
–
(4)
–
–
–
(3)
(1,115)
(3,143)
3,296
(11)
(46)
8
(4)
(35)
29
–
(1,021)
(6,736)
7,717
(22)
29
(119)
(35)
34
–
(153)
Net debt
£m
(1,113)
57
96
(11)
(46)
8
(7)
(35)
29
–
(1,022)
63
918
(22)
29
(115)
(35)
34
–
(150)
*
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%).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
142
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 143
NOTES TO THE ACCOUNTS
(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.
Financial assets and liabilities
Financial instruments included in trade and other receivables
Financial instruments included in trade and other payables
Cash and cash equivalents
Borrowings not designated as net investment hedges
Exclude balances held in operations with the same functional currency.
Exposure arising from intra-Group loans
Future forward foreign exchange contract cash-flows
Financial assets and liabilities
Financial instruments included in trade and other receivables
Financial instruments included in trade and other payables
Cash and cash equivalents
Borrowings not designated as net investment hedges
Exclude balances held in operations with the same functional currency
Exposure arising from intra-Group loans
Future forward foreign exchange contract cash-flows
Sterling
£m
41
(52)
355
(28)
316
(322)
–
(42)
(48)
Sterling
£m
28
(49)
46
(31)
(6)
7
–
(51)
(50)
US$
£m
423
(239)
506
(58)
632
(149)
(419)
(40)
24
US$
£m
326
(167)
187
(55)
291
(110)
(182)
(67)
(68)
At 31 July 2022
Euro
£m
Other
£m
Total
£m
114
(98)
74
(14)
76
(80)
(27)
(38)
(69)
Euro
£m
113
(79)
80
(12)
102
(80)
(19)
22
25
169
(101)
120
(19)
169
(142)
(89)
120
58
Other
£m
177
(64)
92
(21)
184
(183)
(75)
96
22
747
(490)
1,055
(119)
1,193
(693)
(535)
–
(35)
At 31 July 2021
Total
£m
644
(359)
405
(119)
571
(366)
(276)
–
(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:
US dollar
Euro
Sterling
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
(3)
8
4
1
(1)
–
3
2
(1)
2
(5)
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
144
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:
Brought forward cash-flow hedge reserve at start of year
Foreign exchange forward contracts:
Net fair value gains on effective hedges
Amount reclassified to income statement – cost of sales
Amount reclassified to income statement – finance costs
Carried forward cash-flow hedge reserve at end of year
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
2
(6)
–
1
(3)
–
1
1
–
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
Sales and
purchases
Foreign currency
risk
Foreign exchange
contracts
FY2022
FY2021
Changes in value of the
hedged item for calculating
ineffectiveness
£m
Changes in value of the
hedging instrument for
calculating ineffectiveness
£m
(6)
1
6
(1)
Cash-flow
hedge reserve
£m
(6)
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:
Loans designated as net investment hedges
Cross-currency swap
At 31 July 2022
At 31 July 2021
US$
£m
–
(615)
(615)
Euro
£m
(451)
–
(451)
Total
£m
(451)
(615)
(1,066)
US$
£m
(285)
(539)
(824)
Euro
£m
(459)
–
(459)
Total
£m
(744)
(539)
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
145
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:
Brought forward net investment hedge reserve at start of year
Cross-currency swaps
Bonds
Net fair value gains on effective hedges
Net fair value gains on effective hedges
Amounts removed from the hedge reserve and
recognised in the income statement
Carried forward net investment hedge reserve at end of year
Profit/(loss) on business disposal
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
(238)
(82)
5
103
(314)
14
62
–
(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
Overseas
operation
Foreign currency
risk
Cross-currency swaps FY2022
FY2022
Bonds
Overseas
operation
Foreign currency
risk
Cross-currency swaps FY2021
FY2021
Bonds
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
82
(5)
77
(14)
(62)
(76)
(82)
5
(77)
17
62
79
(82)
5
(77)
14
62
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:
US dollar
Euro
Loss
recognised
in hedge
reserve
31 July 2022
£m
Loss
recognised
in hedge
reserve
31 July 2021
£m
68
50
92
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%).
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
146
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
Between one and five years
Greater than five years
Total fixed interest financial liabilities
Floating rate interest financial assets/(liabilities)*
Total interest-bearing financial
assets/(liabilities)
Non-interest-bearing assets in the same category
Total
–
–
–
–
390
390
4
394
–
–
–
–
970
970
86
1,056
(203)
(357)
(24)
(584)
(582)
(1,166)
–
(1,166)
(203)
(359)
(24)
(586)
(586)
(1,172)
–
(1,172)
–
–
–
–
4
4
7
11
–
–
–
–
333
333
72
405
(36)
(418)
(321)
(775)
(727)
(36)
(434)
(353)
(823)
(736)
(1,502)
–
(1,502)
(1,559)
–
(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:
Hedged item
Hedged exposure
Fixed rate
bonds (a)
Interest rate risk
Interest rate & currency rate risk
Financial
year
FY2022
FY2022
Fixed rate
bonds (a)
Interest rate risk
Interest rate & currency rate risk
FY2021
FY2021
(a) Classified as borrowings
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
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
8
21
29
5
4
9
(8)
(20)
(28)
(5)
(7)
(12)
–
–
–
–
–
–
336
252
588
449
256
705
–
–
–
–
–
–
(2)
(5)
(7)
6
16
22
Fair value hedges generated a £1m ineffectiveness in FY2022 (FY2021: £3m) which was recognised in the income statement through
finance costs.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
147
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).
Cash in AAA liquidity funds
Cash at banks with at least a AA- credit rating
Cash at banks with all other A credit ratings
Cash at other banks
Investments in bank deposits
Other investments
31 July 2022
£m
31 July 2021
£m
551
104
397
4
4
7
1,067
116
46
237
6
4
7
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:
Expiring after more than two years
31 July 2022
£m
31 July 2021
£m
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
Less than one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Greater than five years
Total
Borrowings
(note 18)
£m
Fair value
adjustments
£m
As at 31 July 2022
Contractual
interest
payments
£m
Total
contractual
cash-flows
£m
Borrowings
(note 18)
£m
Fair value
adjustments
£m
As at 31 July 2021
Contractual
interest
payments
£m
Total
contractual
cash-flows
£m
(539)
(23)
(20)
(14)
(552)
(24)
(1,172)
2
–
–
–
5
–
7
(17)
(11)
(11)
(11)
(11)
–
(61)
(554)
(34)
(31)
(25)
(558)
(24)
(36)
(823)
(20)
(14)
(10)
(577)
(1,226)
(1,480)
–
(6)
–
–
–
(16)
(22)
(28)
(23)
(11)
(11)
(11)
(11)
(95)
(64)
(852)
(31)
(25)
(21)
(604)
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 148
NOTES TO THE ACCOUNTS
Gross contractual cash-flows for derivative financial instruments
Assets
Less than one year
Greater than one year
Liabilities
Less than one year
Greater than one year
Total
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
495
270
212
8
985
(521)
(290)
(209)
(8)
(1,028)
(26)
(20)
3
–
(43)
142
642
220
3
1,007
(144)
(568)
(219)
(2)
(933)
(2)
74
1
1
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:
Contract or
underlying
nominal
amount
£m
Assets
£m
Liabilities
£m
Foreign exchange contracts (cash-flow hedges)
Foreign exchange contracts (not hedge accounted)
Total foreign exchange contracts
Cross-currency swaps (fair value and net investment hedges)
Total financial derivatives
Balance sheet entries:
Non-current
Current
Total financial derivatives
Foreign exchange contracts (cash-flow hedges)
Foreign exchange contracts (not hedge accounted)
Total foreign exchange contracts
Cross-currency swaps (fair value and net investment hedges)
Interest rate swaps (fair value hedges)
Total financial derivatives
Balance sheet entries:
Non-current
Current
Total financial derivatives
141
226
367
615
982
269
713
982
Contract or
underlying
nominal
amount
£m
107
251
358
539
108
1,005
655
350
1,005
3
1
4
–
4
–
4
4
(5)
(2)
(7)
(40)
(47)
(20)
(27)
(47)
Assets
£m
Liabilities
£m
1
1
2
72
3
77
75
2
77
(2)
(1)
(3)
–
–
(3)
–
(3)
(3)
At 31 July 2022
Fair value
Net
£m
(2)
(1)
(3)
(40)
(43)
(20)
(23)
(43)
At 31 July 2021
Fair value
Net
£m
(1)
–
(1)
72
3
74
75
(1)
74
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
149
The maturity profile, average interest and foreign currency exchange rates of the hedging instruments used in the Group's hedging
strategies are as follows:
Hedged exposure
Hedging instrument
Maturity at 31 July 2022
Maturity at 31 July 2021
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
Interest rate swaps
– EUR
– Notional amount (£m)
– Average spread over
6 month USD LIBOR
– Notional amount (£m)
– Average spread over
3 month EUR LIBOR
–
–
336
1.015%
–
–
–
–
Interest rate risk/
Foreign currency risk
Cross-currency swaps
(EUR:GBP)
– Notional amount (£m)
– Average exchange rate
– Average spread over
3 month GBP LIBOR
–
–
–
254
0.845
1.750%
Net investment hedges
Foreign currency risk Cross-currency swaps
– Notional amount (£m)
(EUR:USD)
– Average exchange rate
Cross-currency swaps
(GBP:USD)
– Notional amount (£m)
– Average exchange rate
Cash-flow hedges
Foreign currency risk Foreign exchange
– Notional amount (£m)
354
1.0773
–
–
–
–
261
1.2534
77
4.1785
28
–
–
8
6
1.5226
16
1.3273
6
–
–
–
–
–
–
– Average exchange rate
0.8323
1.1676
contracts (EUR:USD)
Foreign exchange
contracts (EUR:GBP)
– Average exchange rate
– Notional amount (£m)
Foreign exchange
contracts (EUR:AUD)
– Notional amount (£m)
– Average exchange rate
Foreign exchange
contracts (USD:GBP)
– Notional amount (£m)
– Average exchange rate
Foreign exchange
contracts (GBP:CZK)
– Notional amount (£m)
– Average exchange rate
30.2988
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
47
108
1.797%
341
1.015%
–
–
–
–
–
–
–
254
0.845
1.750%
310
1.0773
–
–
5
1.1915
1.2205
31
3
0.8996
0.9094
7
1.5832
8
1.3577
6
29.7028
–
–
–
–
–
–
–
–
229
1.2534
–
–
–
–
–
–
–
–
–
–
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 on page 148.
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.
Gross value of assets and liabilities
Related assets and liabilities subject to master netting agreements
Net exposure
Assets
31 July 2022
£m
Liabilities
31 July 2022
£m
Assets
31 July 2021
£m
Liabilities
31 July 2021
£m
4
(4)
–
(47)
4
(43)
77
(1)
76
(3)
1
(2)
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
21 Fair value of financial instruments
As at 31 July 2022
Financial assets
Other investments
Other investments
Cash and cash equivalents
Trade and other financial receivables
Derivative financial instruments
Total financial assets
Financial liabilities
Trade and other financial payables
Short-term borrowings
Long-term borrowings
Lease liabilities
Derivative financial instruments
Total financial liabilities
As at 31 July 2021
Financial assets
Other investments
Other investments
Cash and cash equivalents
Trade and other financial receivables
Derivative financial instruments
Total financial assets
Financial liabilities
Trade and other financial payables
Short-term borrowings
Long-term borrowings
Lease liabilities
Derivative financial instruments
Total financial liabilities
150
Basis for
determining
fair value
At amortised
cost
£m
Notes
At fair value
through profit
or loss
£m
At fair value
through OCI
£m
Total
carrying
value
£m
Total
fair value
£m
14
14
18
16
20
17
18
18
18
20
A
F
A
B/C
C
B
D
D
E
C
–
–
506
807
–
1,313
(728)
(509)
(538)
(119)
–
(1,894)
4
19
550
–
4
577
–
–
–
–
(47)
(47)
364
8
–
–
–
372
–
–
–
–
–
–
368
27
1,056
807
4
2,262
(728)
(509)
(538)
(119)
(47)
368
27
1,056
807
4
2,262
(728)
(509)
(544)
(119)
(47)
(1,941)
(1,947)
Basis for
determining
fair value
At amortised
cost
£m
Notes
At fair value
through profit
or loss
£m
At fair value
through OCI
£m
Total
carrying
value
£m
Total
fair value
£m
14
14
18
16
20
17
18
18
18
20
A
F
A
B/C
C
B
D
D
E
C
–
–
289
689
–
978
(589)
(9)
(1,372)
(121)
–
(2,091)
4
–
116
–
77
197
–
–
–
–
(3)
(3)
–
7
–
–
–
7
–
–
–
–
–
–
4
7
405
689
77
4
7
405
689
77
1,182
1,182
(589)
(9)
(1,372)
(121)
(3)
(2,094)
(589)
(9)
(1,429)
(121)
(3)
(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
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS
151
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
At 31 July 2020
Foreign exchange rate movements
Provision charged
Provision released
Unwind of provision discount
Utilisation
Business combinations
At 31 July 2021
Current liabilities
Non-current liabilities
At 31 July 2021
Foreign exchange rate movements
Provision charged
Provision released
Unwind of provision discount
Utilisation
At 31 July 2022
Current liabilities
Non-current liabilities
At 31 July 2022
John Crane,
Inc.
litigation
£m
Titeflex
Corporation
litigation
£m
Other
£m
231
(12)
5
–
1
(13)
–
212
26
186
212
30
6
–
2
(21)
229
34
195
229
66
(4)
–
(13)
1
(3)
–
47
8
39
47
6
2
–
1
(4)
52
14
38
52
20
(1)
–
–
–
(2)
–
17
2
15
17
2
26
–
–
(2)
43
30
13
43
£m
14
(1)
7
(4)
–
(6)
1
11
10
1
11
1
6
(3)
–
(4)
11
10
1
11
£m
331
(18)
12
(17)
2
(24)
1
287
46
241
287
39
40
(3)
3
(31)
335
88
247
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 152
NOTES TO THE ACCOUNTS
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:
JCI claims experience
Claims against JCI that have been dismissed
Claims JCI is currently a defendant in
Cumulative final judgements, after appeals, against JCI since 1979
Cumulative value of awards ($’m) since 1979
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
306,000
22,000
149
175
305,000
22,000
149
175
297,000
25,000
149
175
285,000
38,000
144
168
277,000
43,000
140
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
153
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:
John Crane, Inc. litigation provision
Gross provision
Discount
Discounted pre-tax provision
Deferred tax
Discounted post-tax provision
Operating profit charge/(credit)
Increased provisions for adverse judgements and legal defence costs
Change in US risk-free rates
Subtotal – items charged to the provision
Litigation management, legal fees in connection with litigation against insurers and
defence strategy
Recoveries from insurers
Total operating profit charge/(credit)
Cash-flow
Provision utilisation – legal defence costs and adverse judgements
Litigation management expense
Recoveries from insurers
Net cash outflow
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
258
(29)
229
(57)
172
24
(18)
6
1
–
7
(21)
(1)
–
(22)
220
(8)
212
(54)
158
10
(5)
5
1
(9)
(3)
(13)
–
9
(4)
235
(4)
231
(59)
172
14
16
30
1
(3)
28
(23)
(1)
3
(21)
257
(20)
237
(50)
187
7
8
15
2
(11)
6
(24)
(2)
11
(15)
251
(28)
223
(48)
175
13
(6)
7
3
–
10
(27)
(3)
–
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
154
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).
Gross provision
Discount
Discounted pre-tax provision
Deferred tax
Discounted post-tax provision
31 July 2022
£m
31 July 2021
£m
87
(35)
52
(12)
40
69
(22)
47
(11)
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
155
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
Ordinary shares of 37.5p each
Total share capital at 31 July 2020
Issue of new equity shares – exercise of share options
Total share capital at 31 July 2021
Issue of new equity shares – exercise of share options
Share buybacks
Total share capital at 31 July 2022
Number of shares
Average number
of shares
Issued
capital
£m
Consideration
£m
396,211,180
396,193,310
165,934
157,276
396,377,114
396,350,586
131,942
125,354
(34,152,897)
(9,797,729)
362,356,159
386,678,211
149
–
149
–
(13)
136
2
2
(511)
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
25 Dividends
The following dividends were declared and paid in the period:
Ordinary final dividend of 26.0p (FY2021: 24.0p) paid 19 November 2021
Ordinary delayed interim dividend of nil (FY2021: 11.0p) paid 19 November 2021
Ordinary interim dividend of 12.3p (FY2021: 11.7p) paid 13 May 2022
156
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
103
–
47
150
94
44
47
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:
Net investment hedge reserve (net of £8m of deferred tax (FY2021: £8m)
Cash-flow hedge reserve
31 July 2022
£m
31 July 2021
£m
(205)
3
(202)
(230)
2
(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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
157
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:
Revenue
Direct materials, labour, production and distribution overheads
Selling costs
Administrative expenses
Operating costs
Operating profit
Finance costs
Gain on sale of discontinued operation
Taxation
Profit from discontinued operations
Year ended 31 July 2022
Year ended 31 July 2021
Headline
£m
Non-headline
(note 3)
£m
356
(193)
(46)
(51)
(290)
66
(1)
–
(16)
49
–
–
–
(47)
(47)
(47)
(22)
1,036
6
973
Total
£m
356
(193)
(46)
(98)
(337)
19
(23)
1,036
(10)
1,022
Headline
£m
Non-headline
(note 3)
£m
849
(385)
(117)
(170)
(672)
177
(1)
–
(42)
134
–
–
–
(79)
(79)
(79)
50
–
23
(6)
Total
£m
849
(385)
(117)
(249)
(751)
98
49
–
(19)
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:
Net cash inflow from operating activities
Net cash-flow used in investing activities
Net cash-flow used in financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents in disposal group
Foreign exchange movements
Cash and cash equivalents disposed of
Cash and cash equivalents at close of period
31 July 2022
£m
31 July 2021
represented*
£m
47
(17)
(14)
16
48
(7)
(57)
–
163
(67)
(68)
28
20
–
–
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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
NOTES TO THE ACCOUNTS
Effect of disposal on the financial position of the Group
Intangible assets
Property, plant and equipment
Right of use assets
Inventories
Deferred tax assets
Current tax receivable
Trade and other receivables
Cash and cash equivalents
Financial derivatives
Lease liabilities
Trade and other payables
Current tax payable
Deferred tax liabilities
Retirement benefit obligations
Provisions
Net assets disposed of
Consideration received:
Cash and cash equivalents
Transaction costs
Cash and cash equivalents, net of transaction costs
ICU Medical, Inc shares
Deferred contingent consideration – contingent on ICU Medical, Inc future share price:
– Fair value at date of disposal
– Movement in fair value to 31 July 2022
Separation expenses – arising from contractual and commercial obligations due to the separation recognised in year
Gain on sale before reclassification of foreign currency translation reserve
Exchange movements recycled to the income statement
Cash-flow hedge reserve recycled to the income statement
Gain on sale of discontinued operation
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents
Transaction costs and separation expenses paid in period
Less cash and cash equivalents disposed of
158
Year ended
31 July 2022
£m
695
170
64
166
20
3
110
57
4
(41)
(167)
(13)
(56)
(5)
(39)
968
1,421
(31)
1,390
426
30
(11)
19
(32)
835
196
5
1,036
1,421
(33)
(57)
1,331
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
28 Cash-flow
Cash-flow from operating activities
Operating profit
– continuing operations
– discontinued operations
Amortisation of intangible assets
Impairment of intangible assets
Impairment of tangible assets
Impairment of investment within discontinued operations
Depreciation of property, plant and equipment
Depreciation of right of use assets
(Gain)/loss on disposal of property, plant and equipment
Share-based payment expense
Retirement benefits**
Distribution from trading investment
Recycling of cash-flow hedge reserve
Decrease/(increase) in inventories
Decrease/(increase) in trade and other receivables
Increase/(decrease) in trade and other payables
Increase/(decrease) in provisions
Cash generated from operations
Interest paid
Interest received
Tax paid
Net cash inflow from operating activities
– continuing operations*
– discontinued operations*
159
Year ended 31 July 2022
Year ended 31 July 2021 represented*
Headline
£m
Non-headline
£m
417
66
10
–
–
–
38
30
(2)
13
5
–
–
(173)
(87)
131
(1)
447
(51)
13
(88)
321
274
47
(300)
(47)
51
4
–
14
–
–
–
–
207
–
–
4
4
(2)
22
(43)
–
1
–
(42)
(42)
–
Total
£m
117
19
61
4
–
14
38
30
(2)
13
212
–
–
(169)
(83)
129
21
404
(51)
14
(88)
279
232
47
Headline
£m
Non-headline
£m
372
177
14
1
–
–
39
32
1
13
6
5
(5)
62
(14)
46
(4)
745
(40)
2
(109)
598
430
168
(46)
(79)
53
52
6
–
1
–
–
–
(23)
–
–
4
4
(10)
(26)
(64)
–
1
–
(63)
(58)
(5)
Total
£m
326
98
67
53
6
–
40
32
1
13
(17)
5
(5)
66
(10)
36
(30)
681
(40)
3
(109)
535
372
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
Net cash inflow from operating activities
Include:
Expenditure on capitalised development, other intangible assets
and property, plant and equipment
Repayment of lease liabilities
Disposals of property, plant and equipment
Investment in financial assets relating to operating activities and
pensions financing outstanding at the balance sheet date
Free cash-flow
Exclude:
Investment in financial assets relating to operating activities and
pensions financing outstanding at the balance sheet date
Repayment of lease liabilities
Interest paid
Interest received
Tax paid
Operating cash-flow
Headline
£m
Non-headline
£m
274
(42)
(71)
(34)
3
–
–
34
46
(13)
79
318
–
–
–
–
–
–
–
–
–
Total
£m
232
(71)
(34)
3
–
130
–
34
46
(13)
79
Headline
£m
Non-headline
£m
430
(58)
(62)
(33)
–
7
(7)
33
24
(2)
96
–
–
–
–
–
–
–
–
–
Total
£m
372
(62)
(33)
–
7
284
(7)
33
24
(2)
96
(42)
276
486
(58)
428
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 160
NOTES TO THE ACCOUNTS
Headline cash conversion
Headline operating cash conversion for continuing operations is calculated as follows:
Headline operating profit
Headline operating cash-flow
Headline operating cash conversion
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
417
318
76%
–
14
417
332
80%
372
486
130%
21
24
Pro-forma
excluding
restructuring
costs
£m
393
510
129%
Reconciliation of free cash-flow to net movement in cash and cash equivalents:
Free cash-flow
Investment in financial assets and acquisition of businesses
Disposal of businesses and discontinued operations
Other net cash-flows used in financing activities (note: repayment of lease liabilities is included in free cash-flow)
Net decrease in cash and cash equivalents for discontinued operations
Net increase/(decrease) in cash and cash equivalents
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
130
–
1,331
(937)
16
540
284
(83)
–
(138)
28
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
Capital employed
Capital expenditure
Definition and purpose
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.
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
Gross debt
Headline
Headline EBITDA
Headline EBITDA before
restructuring costs
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 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.
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.
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, 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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
161
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
Non-headline
Operating cash-flow
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).
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.
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 on page 103. 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)
Percentage of senior
leadership positions taken
by females
R&D cash costs as a
% of sales
Ratio of capital expenditure
to depreciation and
amortisation
Recordable Incident Rate
(RIR)
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 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.
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.
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 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.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
162
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.
Net assets
Adjust for:
Goodwill recognised directly in reserves
Retirement benefit assets and obligations
Tax related to retirement benefit assets and obligations
John Crane, Inc. litigation provisions and related tax
Titeflex Corporation litigation provisions and related tax
Investment in ICU Medical, Inc equity
Deferred contingent consideration
Net debt (FY2021: includes £4m of net cash in discontinued operations)
Capital employed
Return on capital employed ('ROCE')
Notes
31 July 2022
£m
31 July 2021
£m
2,721
2,423
8
23
23
14
14
18
478
(194)
57
172
40
(364)
(19)
150
3,041
787
(413)
108
158
36
–
–
1,018
4,117
Year ended
31 July 2022
£m
Year ended
31 July 2021
represented*
£m
Notes
Headline operating profit for previous 12 months – continuing operations
Restructuring costs
Headline operating profit before restructuring costs – continuing operations
Average capital employed – continuing operations (excluding investment in ICU Medical, Inc equity)
1
ROCE
417
–
417
2,940
14.2%
372
21
393
2,830
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)
Headline operating profit
Headline operating profit of discontinued operations
Exclude:
– depreciation of property, plant and equipment
– depreciation of right of use assets
– amortisation and impairment of development costs
– amortisation of software, patents and intellectual property
Headline EBITDA
Add back: restructuring costs and write-downs (FY2021 comparative includes £9m in discontinued operations)
Headline EBITDA before restructuring costs and write-downs
Ratio of net debt to headline EBITDA – total Group including discontinued operations
Headline EBITDA
Net debt (FY2021 comparative includes £4m of net cash in discontinued operations)
Ratio of net debt to headline EBITDA
* The figures for the comparative period in the credit metrics tables above include discontinued operations.
Year ended
31 July 2022
Continuing
operations
£m
Year ended
31 July 2021
Total
operations*
£m
Notes
27
12
13
10
10
2
417
–
38
30
3
7
495
–
495
372
177
40
32
7
7
635
30
665
Year ended
31 July 2022
Continuing
operations
£m
Year ended
31 July 2021
Total
operations*
£m
495
150
0.3
635
1,018
1.6
Notes
18
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS
163
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
EIS Group Plc
Company
number Company name
61407 Smiths Detection Investments Limited
Flexibox International Limited
394688 Smiths Finance Limited
Flex-Tek Group Limited
Graseby Limited
SI Properties Limited
SITI 1 Limited
11545405 Smiths Group Finance EU Limited
894638 Smiths Group Finance US Limited
160881 Smiths Group Innovation Limited
4257042 Smiths Interconnect Group Limited
Smiths Detection Group Limited
5138140 Smiths Pensions Limited
Company
number
5146644
7888063
10440573
10440608
10953689
6641403
2197444
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS UNAUDITED GROUP FINANCIAL RECORD 2018-2022
Unaudited Group financial record 2018-2022
The headline income statement metrics shown below for the year ended 31 July 2018 has been represented to show the results of Smiths
Medical as a discontinued operation.
164
Income statement metrics – headline*
Continuing operations
Revenue
Headline operating profit
Headline profit before tax
Discontinued operations
Revenue
Headline operating profit
Headline profit before tax
Income statement metrics – statutory**
Revenue
Operating profit
Profit before taxation
Profit for the year
Balance sheet metrics***
Net debt
Shareholders’ equity
Average capital employed
Ratios***
Headline operating profit: revenue (%)
Headline effective tax rate (%)
Return on capital employed (%)
Return on shareholders’ funds (%)
Cash-flow metrics***
Headline operating cash
Headline operating cash conversion (%)
Free cash-flow
Free cash-flow per share (p)
Earnings per share***
Headline earnings per share (p)
Dividends and dividend cover***
Pence per share
Headline dividend cover
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
2,566
417
376
356
66
65
2,566
117
103
1,035
2,406
372
332
849
177
176
2,406
326
240
285
2,548
327
278
918
184
180
2,548
241
133
267
2,498
427
376
874
147
144
2,498
326
304
227
(150)
2,699
2,940
(1,018)
2,402
4,165
(1,141)
2,373
4,315
(1,197)
2,360
3,972
16.5
27.2
14.2
10.0
318
76
130
35.9
16.9
27.1
13.2
11.6
630
125
383
96.6
14.7
26.2
11.8
10.8
575
123
273
68.9
17.0
25.9
14.4
12.3
474
83
234
59.1
2,328
388
333
869
156
154
2,328
342
287
279
(893)
2,272
3,735
17.0
25.8
14.6
12.1
538
99
302
76.3
82.5
93.1
84.8
96.8
90.7
39.60
2.1
37.70
2.5
35.00
2.4
45.90
2.1
44.55
2.0
*
The headline income statement metrics in the above five-year record have been presented to reflect the reclassification of the Smiths Medical business as a discontinued operation and
the Group's current accounting policy of including restructuring and pension administration costs within headline profit. The discontinued operations comparatives for the year ended
31 July 2018 have also been restated for the adoption of IFRS 15.
**
The statutory income statement metrics are presented based on continuing operations for both the current and comparative years.
*** Balance sheet metrics, ratios, cash-flow metrics, earnings per share, dividend cover and number of employees are presented based on both continuing and discontinued operations for
all years.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS Unaudited supplementary consolidated income statement – US dollar translation
Year ended 31 July 2022
Year ended 31 July 2021
165
Headline
$m
Non-headline
(note 3)
$m
CONTINUING OPERATIONS
Revenue
Operating costs
Operating profit/(loss)
Interest receivable
Interest payable
Other financing gains/(losses)
Other finance charges – retirement benefits
Finance costs
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
DISCONTINUED OPERATIONS
Profit on discontinued operations
PROFIT/(LOSS) FOR THE YEAR
Profit/(loss) for the year attributable to:
Smiths Group shareholders – continuing operations
Smiths Group shareholders – discontinued operations
Non-controlling interests
EARNINGS PER SHARE
Basic
Basic – continuing
Diluted
Diluted – continuing
3,377
(2,828)
549
18
(72)
–
–
(54)
495
(137)
358
64
422
355
64
3
Total
$m
3,377
(3,223)
154
18
(72)
26
9
(19)
135
(119)
16
–
(395)
(395)
–
–
26
9
35
(360)
18
(342)
1,280
938
1,344
1,360
(342)
1,280
–
13
1,344
3
351.5c
3.7c
350.0c
3.7c
Headline
$m
Non-headline
(note 3)
$m
3,264
(2,760)
504
12
(66)
–
–
(54)
450
(130)
320
182
502
319
182
1
502
–
(62)
(62)
–
–
(71)
8
(63)
(125)
18
(107)
(8)
(115)
(107)
(8)
–
(115)
Total
$m
3,264
(2,822)
442
12
(66)
(71)
8
(117)
325
(112)
213
174
387
212
174
1
387
97.2c
53.4c
96.7c
53.1c
Assets and liabilities have been translated into US dollars at the exchange rate at the date of that balance sheet and income, expenses and
cash-flows are translated at average exchange rates for the period. This reflects the accounting approach that Smiths Group plc would use
if the Group moved to reporting in US dollars without making any changes to its Group structure or financing arrangements.
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS Unaudited supplementary consolidated statement of comprehensive income –
US dollar translation
166
PROFIT FOR THE YEAR
Other comprehensive income (OCI):
OCI which will not be reclassified to the income statement:
Re-measurement of post-retirement benefits assets and obligations
Taxation on post-retirement benefits movements
Fair value movements on financial assets at fair value through OCI
OCI which will be reclassified and reclassifications:
Fair value gains/(losses) and reclassification adjustments:
– deferred in the year on cash-flow and net investment hedges
– reclassified to income statement on cash-flow and net investment hedges
Foreign exchange (FX) movements net of recycling:
Exchange losses/(gains) on translation of foreign operations
Exchange gains recycled to the income statement on disposal on business
Total other comprehensive income, net of taxation
Total comprehensive income
Attributable to:
Smiths Group shareholders
Non-controlling interests
Year ended
31 July 2022
$m
Year ended
31 July 2021
represented*
$m
1,360
387
(22)
–
(83)
(105)
(108)
7
(101)
363
(258)
105
(101)
1,259
1.258
1
1,259
18
(8)
5
15
111
3
114
(32)
–
(32)
97
484
484
–
484
* 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.
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS Unaudited supplementary consolidated balance sheet – US dollar translation
31 July 2022
$m
31 July 2021
$m
167
NON-CURRENT ASSETS
Intangible assets
Property, plant and equipment
Right of use assets
Financial assets – other investments
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Financial derivatives
CURRENT ASSETS
Inventories
Current tax receivable
Trade and other receivables
Cash and cash equivalents
Financial derivatives
Assets held for sale
TOTAL ASSETS
CURRENT LIABILITIES
Financial liabilities
– borrowings
– lease liabilities
– financial derivatives
Provisions for liabilities and charges
Trade and other payables
Current tax payable
Liabilities held for sale
NON-CURRENT LIABILITIES
Financial liabilities
– borrowings
– lease liabilities
– financial derivatives
Provisions for liabilities and charges
Retirement benefit obligations
Current tax payable
Deferred tax liabilities
Trade and other payables
TOTAL LIABILITIES
NET ASSETS
SHAREHOLDERS’ EQUITY
Share capital
Share premium account
Capital redemption reserve
Revaluation reserve
Merger reserve
Retained earnings
Hedge reserve
Total shareholders’ equity
Non-controlling interest equity
TOTAL EQUITY
1,933
296
129
481
376
116
84
–
3,415
694
61
897
1,286
5
–
2,943
6,358
(620)
(35)
(33)
(107)
(829)
(78)
–
2,082
295
150
15
759
128
82
104
3,615
530
105
876
563
3
1,728
3,805
7,420
(13)
(38)
(4)
(64)
(737)
(124)
(393)
(1,702)
(1,373)
(655)
(110)
(24)
(301)
(140)
(4)
(54)
(56)
(1,344)
(3,046)
3,312
166
444
23
–
286
2,612
(246)
3,285
27
3,312
(1,907)
(131)
–
(335)
(178)
(7)
(39)
(82)
(2,679)
(4,052)
3,368
207
505
8
1
327
2,608
(317)
3,339
29
3,368
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS Unaudited supplementary consolidated statement of changes in equity – US dollar translation
168
At 31 July 2021
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits after tax
– FX movements net of recycling
– fair value gains/(losses) and related tax
Total comprehensive income for the year
Transactions relating to ownership interests:
Issue of new equity shares
Purchase of shares by Employee Benefit Trust
Proceeds from exercise of share options
Share buybacks
Dividends:
– equity shareholders
Share-based payment
At 31 July 2022
At 31 July 2020
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits after tax
– FX movements net of recycling
– fair value gains/(losses) and related tax
Total comprehensive income for the year
Transactions relating to ownership interests:
Exercises of share options
Receipt of capital from non-controlling interest
Purchase of own shares
Dividends:
– equity shareholders
– non-controlling interests
Share-based payment
Share capital
and share
premium
$m
Other
reserves
$m
Retained
earnings
$m
2,608
1,357
(22)
(377)
(83)
875
–
(21)
1
(672)
(197)
18
Hedge
reserve
$m
(317)
–
–
172
(101)
71
–
–
–
–
–
–
Equity
shareholders’
funds
$m
Non-
controlling
interest
$m
3,339
1,357
(22)
(337)
(184)
814
3
(21)
1
(672)
(197)
18
29
3
–
(5)
–
(2)
–
–
–
–
–
–
Total
equity
$m
3,368
1,360
(22)
(342)
(184)
812
3
(21)
1
(672)
(197)
18
336
–
–
(44)
–
(44)
–
–
–
17
–
–
712
–
–
(88)
–
(88)
3
–
–
(17)
–
–
610
309
2,612
(246)
3,285
27
3,312
Share capital
and share
premium
$m
Other
reserves
$m
667
–
–
42
–
42
3
–
–
–
–
–
319
–
–
17
–
17
–
–
–
–
–
–
Retained
earnings
$m
2,534
386
10
(72)
5
329
–
–
(22)
(252)
–
19
Hedge
reserve
$m
(413)
–
–
(18)
114
96
–
–
–
–
–
–
Equity
shareholders’
funds
$m
Non-
controlling
interest
$m
3,107
386
29
1
10
(31)
119
484
3
–
(22)
(252)
–
19
–
(1)
–
–
–
1
–
–
(1)
–
Total
equity
$m
3,136
387
10
(32)
119
484
3
1
(22)
(252)
(1)
19
At 31 July 2021
712
336
2,608
(317)
3,339
29
3,368
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS Unaudited supplementary consolidated cash-flow statement – US dollar translation
169
Net cash inflow from operating activities
Cash-flows from investing activities
Expenditure on capitalised development
Expenditure on other intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Capital returned by/(investment in) financial assets
Acquisition of businesses
Investment in financial asset – discontinued operations
Proceeds on disposal of subsidiaries, net of cash disposed
Net cash-flow used in investing activities
Cash-flows from financing activities
Proceeds from exercise of share options
Share buybacks
Purchase of shares by Employee Benefit Trust
Proceeds received on exercise of employee share options
Settlement of cash-settled options
Dividends paid to equity shareholders
Lease payments
Reduction and repayment of borrowings
Cash inflow from matured derivative financial instruments
Net cash-flow used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash held in disposal group
Exchange differences
Cash and cash equivalents at end of year
Cash and cash equivalents at end of year comprise:
– cash at bank and in hand
– short-term deposits
– bank overdrafts
Year ended
31 July 2022
$m
Year ended
31 July 2021
$m
367
726
(29)
(11)
(76)
4
–
–
–
1,751
(37)
(16)
(106)
3
9
(113)
(19)
–
1,639
(279)
3
(672)
(21)
1
(1)
(197)
(50)
(388)
30
3
–
(22)
–
–
(251)
(60)
–
5
(1,295)
(325)
711
563
63
(52)
1,285
295
991
1,286
(1)
1,285
122
480
(38)
(1)
563
304
259
563
–
563
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 170
Unaudited Group US dollar financial record 2018-2022
The headline income statement metrics shown below for the year ended 31 July 2018 has been represented to show the results of Smiths
Medical as a discontinued operation.
Income statement metrics – headline*
Continuing operations
Revenue
3,377
3,264
3,216
3,218
3,139
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
Headline operating profit
Headline profit before tax
Discontinued operations
Revenue
Headline operating profit
Headline profit before tax
Income statement metrics – statutory**
Revenue
Operating profit
Profit before taxation
Profit for the year
Balance sheet metrics***
Net debt
Shareholders’ equity
Average capital employed
Ratios***
Headline operating profit: revenue (%)
Headline effective tax rate (%)
Return on capital employed (%)
Return on shareholders’ funds (%)
Cash-flow metrics***
Headline operating cash
Headline operating cash conversion (%)
Free cash-flow
Free cash-flow per share (c)
Earnings per share***
Headline earnings per share (c)
Dividends and dividend cover***
Cents per share (c)
Headline dividend cover
549
495
468
87
86
3,377
154
135
1,362
504
450
1,152
240
239
3,264
442
325
387
412
351
1,159
232
227
3,216
304
169
337
550
484
1,126
189
185
3,218
420
391
291
523
449
1,172
210
208
3,139
461
386
375
(183)
3,285
3,578
(1,415)
3,339
5,790
(1,495)
3,107
5,652
(1,462)
2,882
4,852
(1,172)
2,982
4,903
16.5
27.2
14.2
9.9
829
76
171
47.2
16.9
27.1
13.2
12.2
855
125
520
131.1
14.7
26.2
11.8
10.6
726
123
345
68.9
17.0
25.9
14.4
12.1
611
83
301
76.1
17.0
25.8
14.6
12.5
725
99
407
102.9
108.6
126.3
107.0
124.7
122.3
52.1
2.1
51.1
2.5
44.2
2.4
59.1
2.1
60.1
2.0
*
The headline income statement metrics in the above five-year record have been presented to reflect the reclassification of the Smiths Medical business as a discontinued operation and
the Group's current accounting policy of including restructuring and pension administration costs within headline profit. The discontinued operations comparatives for the year ended
31 July 2018 have also been restated for the adoption of IFRS 15.
**
The statutory income statement metrics are presented based on continuing operations for both the current and comparative year.
*** Balance sheet metrics, ratios, cash-flow metrics, earnings per share, dividend cover and number of employees are presented based on both continuing and discontinued operations for
all years.
UNAUDITED US DOLLAR PRIMARY STATEMENTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SMITHS GROUP PLC COMPANY ACCOUNTS
Company balance sheet
NON-CURRENT ASSETS
Right of use assets
Investments
Loans due from subsidiaries
Retirement benefit assets
Financial derivatives
CURRENT ASSETS
Trade and other receivables
Current tax receivable
Cash and cash equivalents
Financial derivatives
TOTAL ASSETS
CURRENT LIABILITIES
Trade and other payables
Lease liabilities
Financial derivatives
NON-CURRENT LIABILITIES
Borrowings
Lease liabilities
Provisions for liabilities and charges
Retirement benefit liabilities
Financial derivatives
Deferred tax liabilities
TOTAL LIABILITIES
NET ASSETS
SHAREHOLDERS' EQUITY
Called up share capital
Share premium account
Capital redemption reserve
Other reserves
Profit and loss account
TOTAL EQUITY
171
Notes
31 July 2022
£m
31 July 2021
£m
2
3
3
10
8
5
7
8
6
7
8
7
7
9
10
8
4
11
11
11
11
11
5
2,422
561
309
–
3,297
62
5
770
9
846
6
2,414
611
546
75
3,652
52
5
158
2
217
4,143
3,869
(588)
(1)
(29)
(618)
(545)
(5)
(2)
(47)
(20)
–
(619)
(1,237)
2,906
136
365
19
181
2,205
2,906
(91)
(1)
(2)
(94)
(1,354)
(6)
(2)
(58)
–
(28)
(1,448)
(1,542)
2,327
149
363
6
181
1,628
2,327
The Company's profit for the period was £1,257m (FY2021: £2m loss).
The accounts on pages 171 to 179 were approved by the Board of Directors on 22 September 2022 and were signed on its behalf by:
Paul Keel
CHIEF EXECUTIVE OFFICER
Clare Scherrer
CHIEF FINANCIAL OFFICER
Smiths Group plc – registered number 137013
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS
Company statement of changes in equity
At 31 July 2021
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits
– taxation recognised on retirement benefits
Total comprehensive income for the year
Transactions with owners:
Issue of new equity shares
Purchase of shares by Employee Benefit Trust
Proceeds received on exercise of employee share options
Shares purchased under a buyback programme
Dividends paid to equity shareholders
Share-based payment
Total transactions with owners recognised in equity
At 31 July 2022
At 31 July 2020
Profit for the year
Other comprehensive income:
– re-measurement of retirement benefits
– taxation recognised on retirement benefits
Total comprehensive income for the year
Transactions with owners:
Issue of new equity shares
Purchase of shares by Employee Benefit Trust
Dividends paid to equity shareholders
Share-based payment
Total transactions with owners recognised in equity
At 31 July 2021
172
Share
capital
£m
149
Share
premium
£m
363
–
–
–
–
–
–
–
(13)
–
–
(13)
–
–
–
–
2
–
–
–
–
–
2
136
365
Share
capital
£m
149
Share
premium
£m
361
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
2
149
363
Capital
redemption
reserve
£m
6
–
–
–
–
–
–
–
13
–
–
13
19
Capital
redemption
reserve
£m
6
–
–
–
–
–
–
–
–
–
6
Other
reserves
£m
181
–
–
–
–
–
–
–
–
–
–
–
181
Retained
profit
£m
Shareholders’
equity
£m
1,628
1,257
2,327
1,257
(23)
6
(23)
6
1,240
1,240
–
(16)
1
(511)
(150)
13
(663)
2,205
2
(16)
1
(511)
(150)
13
(661)
2,906
Other
reserves
£m
Retained
profit
£m
Shareholders’
equity
£m
181
1,812
2,509
–
–
–
–
–
–
–
–
–
(2)
12
(6)
4
–
(16)
(185)
13
(188)
(2)
12
(6)
4
2
(16)
(185)
13
(186)
181
1,628
2,327
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 173
Company accounting policies
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’).
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of UK-adopted
international accounting standards (‘Adopted IFRSs’), but makes amendments where necessary in order to comply with Companies Act 2006
and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.
These accounts have been prepared on a going concern basis and 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 permitted by Section 408(3) of the Companies Act 2006, the Company’s income statement and statement of comprehensive income have
not been presented. As permitted by Section 408(2), information about the Company’s employee numbers and costs is not presented.
Going concern
The Directors are satisfied that the Group, (of which the Company is the holding company) 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. Details of the going concern
assessment for the Group are provided in the accounting policies note of the consolidated financial statements.
Exemptions from the requirements of IFRS applied in accordance with FRS 101
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements,
in accordance with FRS 101:
– Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’ (details of the number and weighted-average exercise prices of share
options, and how the fair value of goods or services received was determined)
– IFRS 7, ‘Financial Instruments: Disclosures’
– Paragraphs 91 to 99 of IFRS 13, ‘Fair value measurement’ (disclosure of valuation techniques and inputs used for fair value measurement
of assets and liabilities).
– Paragraph 38 of IAS 1, ‘Presentation of financial statements’ comparative information requirements in respect of:
– paragraph 79(a)(iv) of IAS 1;
– paragraph 73(e) of IAS 16 ‘Property, plant and equipment’;
– The following paragraphs of IAS 1, ‘Presentation of financial statements’
– 10(d) (statement of cash-flows),
– 16 (statement of compliance with all IFRS),
– 38A (requirement for minimum of two primary statements, including cash flow statements),
– 38B-D (additional comparative information),
– 111 (cash flow statement information), and
– 134-136 (capital management disclosures)
– IAS 7, ‘Statement of cash-flows’
– Paragraph 30 and 31 of IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (requirement for the disclosure
of information when an entity has not applied a new IFRS that has been issued but is not yet effective)
– Paragraph 17 of IAS 24, ‘Related party disclosures’ (key management compensation)
– The requirements in IAS 24, ‘Related party disclosures’ to disclose related party transactions entered into between two or more members
of a group.
– The requirements of paragraphs 52 and 58 of IFRS 16 Leases
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 174
Significant judgements, key assumptions and estimates
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 in these Parent Company financial
statements are set out below.
Sources of estimation uncertainty
Taxation
The Company has recognised deferred tax assets of £66m (FY2021: £89m) relating to revenue losses brought forward. The recognition of
these assets requires management to make significant estimates as to the ability to recover them against the unwind of other tax positions
and forecast UK taxable profits of the tax group. Further detail on the Company’s deferred taxation position is included in note 4.
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 Company uses previous experience and independent
actuarial advice to select the values for critical estimates. A portion of the Company’s 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 Company's principal defined benefit pension plans 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 to the consolidated financial statements.
Significant judgements made in applying accounting policies
Taxation
As stated in the previous section 'Sources of estimation uncertainty', the Company has recognised deferred tax assets of £66m
(FY2021: £89m) relating to revenue losses brought forward. The decision to recognise deferred tax assets requires judgement in
determining whether the Company 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.
Retirement benefits
At 31 July 2022 the Company has recognised £309m of retirement benefit assets (FY2021: £546m), 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 Company
under the relevant Trust deed and rules, it has been determined that the surplus is recoverable by the Company and therefore can be
recognised. If the pension schemes were wound up while they still had members, the schemes would need to buy out the benefits of all
members. The buyouts 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.
Foreign currencies
Foreign currency transactions are recorded at the exchange rate ruling on the date of transaction. Foreign exchange gains and losses
resulting from the settlement of such transactions, and from the retranslation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies, are recognised in the profit and loss account.
Leases
At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be
made over the lease term, which includes periods covered by renewal options the Company is reasonably certain to exercise. In calculating
the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date.
The Company 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
subject to impairment and are depreciated over the shorter of the lease term and the useful life of the right of use asset.
The Company has a buildings lease with a term of seven years. Other leases with lease terms of 12 months or less and leases of office
equipment with low value (typically below £5,000) are recognised as an expense on a straight-line basis over the lease term with the
Company having applied ‘short-term lease’ and ‘lease of low-value assets’ recognition exemptions.
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 175
Investments in and loans to Group companies
The Company’s investments in shares in Group companies are stated at cost less provision for impairment. Any impairment is charged to
the profit and loss account as it arises.
The recoverability of intercompany loans is assessed applying the methodology of IFRS 9 by looking at the credit quality of the subsidiary
and any support available to the entity. These calculations require the use of estimates including projected future cash-flows and other
future events. The application of the expected credit loss model has not had a material impact on the Company's loan receivables
provisioning position.
Financial instruments
The policies disclosed in the Group accounting policies on pages 108 to 115 for recognition, measurement and presentation of financial
instruments are applied in the Company accounts.
Taxation
Deferred tax is provided 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.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the
temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.
Provisions
Provisions for 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.
Retirement benefits
The Company has both defined benefit and defined contribution plans. The policies disclosed in the Group accounting policies on pages 108
to 115 for recognition, measurement and presentation of retirement benefits are applied in the Company accounts. Note 8 to the consolidated
accounts explains the valuation basis for the Company's retirement benefit schemes assets and liabilities.
Share-based payment
The Company operates a number of equity-settled and cash-settled share-based compensation plans.
The fair value of the shares or share options granted is recognised over the vesting period to reflect the value of the employee services
received. The charge relating to grants to employees of the Company is recognised as an expense in the profit and loss account and the
charge for grants to employees of other Group companies is recognised as an investment in the relevant subsidiary.
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 that are likely to vest.
For cash-settled share-based payment schemes, a liability is recognised based on the fair value of the payment earned by the balance sheet
date. For equity-settled share-based payment schemes, the corresponding credit is recognised directly in reserves.
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.
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 176
Notes to the Company accounts
1 Audit fee and directors emoluments
The audit fee paid to KPMG LLP for the Parent Company was £0.1m (FY2021: £0.1m).
Directors' emoluments in the year amounted to £4m (FY2021: £5m). Further information is in the Remuneration & People Committee Report
on pages 75 to 88.
2 Right of use assets
Cost or valuation
At 31 July 2020
At 31 July 2021
At 31 July 2022
Depreciation
At 31 July 2020
Charge for the year
At 31 July 2021
Charge for the year
At 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
3 Investments and loans due from subsidiaries
Cost or valuation
At 31 July 2020
Foreign exchange rate movements
Contribution through share options
Decrease in advances due from subsidiaries
At 31 July 2021
Foreign exchange rate movements
Contribution through share options
Decrease in advances due from subsidiaries
At 31 July 2022
Provision for impairment
At 31 July 2020, 31 July 2021 and 31 July 2022
Net book value at 31 July 2022
Net book value at 31 July 2021
Net book value at 31 July 2020
Properties
£m
8
8
8
1
1
2
1
3
5
6
7
Total
£m
3,279
(74)
9
(183)
3,031
21
8
(71)
2,989
6
2,983
3,025
3,273
Shares in
subsidiary
undertakings
£m
Loans
due from
subsidiaries
£m
2,410
–
9
–
2,419
–
8
–
2,427
5
2,422
2,414
2,405
869
(74)
–
(183)
612
21
–
(71)
562
1
561
611
868
Loans due to subsidiaries are offset against loans due from subsidiaries to the extent that there is a legal right of set off and an intention to
settle the balances net. At 31 July 2022 £1,664m of loans payable are offset against loans receivable (FY2021: £2,790m). The Company has
large offsetting loan balances because it uses loans to reduce its foreign currency exposures and separately monitor net cash generated
from trading activities.
The Company’s subsidiaries are largely held according to business lines by the following holding companies, which are incorporated
in England:
Smiths Group International Holdings Limited
Smiths Detection Group Limited
John Crane Group Limited
Flex-Tek Group Limited
Smiths Interconnect Group Limited
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 177
The principal subsidiaries and their countries of incorporation are:
England
Smiths Detection – Watford Ltd
John Crane UK Limited
Other
Smiths Detection Germany GmbH (Germany)
Smiths Detection (Asia-Pacific) Pte Ltd (Singapore)
John Crane Middle East FZE (UAE)
John Crane Technology (Tianjin) Co Limited (China)
John Crane Saudi Arabia Ltd (Saudi Arabia)
John Crane Canada Inc (Canada)
United States
Smiths Detection, Inc.
John Crane, Inc.
Titeflex Corporation
Flexible Technologies, LLC.
Tutco, LLC.
Royal Metal Products, LLC
Smiths Interconnect Americas, Inc
Smiths Interconnect, Inc
Kreisler Manufacturing Corp
Smiths Tubular Systems – Laconia Inc
Of the companies above, Smiths Group International Holdings Limited is 100% owned directly by the Company. The others are 100% owned
through intermediate holding companies. Shareholdings are of ordinary shares or common stock. All of the above subsidiaries operate in
their country of incorporation.
See pages 180 to 188 for a complete list of subsidiary undertakings.
4 Deferred tax assets and liabilities
The Company has recognised the following deferred tax assets and liabilities:
At 31 July 2020
(Charge)/credit to income statement
Charge to equity
At 31 July 2021
(Charge)/credit to income statement
Charge to equity
At 31 July 2022
Share-
based
payment
£m
Retirement
benefit
obligations
£m
Losses
carried
forward
£m
3
–
–
3
(2)
(1)
–
(88)
(29)
(6)
(123)
51
6
(66)
72
17
–
89
(23)
–
66
Other
£m
2
1
–
3
(3)
–
–
Total
£m
(11)
(11)
(6)
(28)
23
5
–
The Company is part of a UK tax group including all its UK-based subsidiaries. The Company has recognised deferred tax assets of £66m
(FY2021: £89m) relating to revenue losses brought forward. The recognition of these assets is dependent on the ability to recover them
against the unwind of other tax positions and forecast UK taxable profits of the tax group. The treatment of these assets is reviewed at each
reporting date.
As at 31 July 2022 the Company has unrecognised deferred tax assets relating to losses of £142m (FY2021: £nil).
In June 2021, it was announced that from 1 April 2023, there would be an increase in the rate of UK corporation tax from 19% to 25%.
Deferred tax, as at 31 July 2022 has been calculated at the 25% rate.
5 Trade and other receivables
Amounts owed by subsidiaries
Other receivables
6 Trade and other payables
Amounts owed to subsidiaries
Term loans due within one year
Other creditors
Accruals and deferred income
31 July 2022
£m
31 July 2021
£m
61
1
62
51
1
52
31 July 2022
£m
31 July 2021
£m
58
504
15
11
588
56
–
21
14
91
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 7 Borrowings and net debt
Cash at bank
Short-term deposits
Cash and cash equivalents
Lease liabilities falling due within one year
Lease liabilities falling due after one year
Term loans falling due within one year
Term loans falling due after one year
Borrowings
Net debt
Term loans and lease liabilities
The currency and coupons for the term loans are disclosed in note 18 of the Group accounts.
Less than one year
Between one and two years
Between two and five years
Greater than five years
Smiths Group plc term loans and lease liabilities
178
31 July 2022
£m
31 July 2021
£m
10
760
770
(1)
(5)
(504)
(545)
(1,055)
(285)
20
138
158
(1)
(6)
(23)
(1,354)
(1,384)
(1,226)
31 July 2022
£m
31 July 2021
£m
505
1
548
1
24
290
516
554
1,055
1,384
See the liquidity risk disclosures in note 19 in the Group accounts for information on the cash and borrowing facilities available to the Group.
Smiths has Revolving Credit Facilities of $800m maturing on 1 November 2024.
8 Derivatives
The tables below set out the nominal amount and fair value of derivative contracts held by the Company:
Contract or underlying
nominal amount
£m
Assets
£m
Liabilities
£m
Foreign exchange contracts (not hedge accounted)
Cross-currency swaps (fair value and net investment hedges)
Interest rate swaps (fair value hedges)
Total financial derivatives
Balance sheet entries
Non-current
Current
Total financial derivatives
Foreign exchange contracts (not hedge accounted)
Currency swaps (fair value and net investment hedges)
Interest rate swaps (fair value hedges)
Total financial derivatives
Balance sheet entries
Non-current
Current
Total financial derivatives
593
615
–
1,208
9
–
–
9
–
9
9
(9)
(40)
–
(49)
(20)
(29)
(49)
Contract or underlying
nominal amount
£m
Assets
£m
Liabilities
£m
325
539
108
972
2
72
3
77
75
2
77
(2)
–
–
(2)
–
(2)
(2)
At 31 July 2022
Fair value
Net
£m
–
(40)
–
(40)
(20)
(20)
(40)
At 31 July 2021
Fair value
Net
£m
–
72
3
75
75
–
75
Derivatives, including forward exchange contracts, currency swaps, interest rate instruments and embedded derivatives are Level 2 fair
value instruments and are valued at the net present value of the future cash-flows calculated using market data at the balance sheet date
(principally exchange rates and yield curves).
The debit to the income statement arising from change in fair value in the year was £28m (FY2021: £5m).
9 Provisions for liabilities and charges
Disposals
At
31 July 2021
£m
Charged
against profit
£m
Utilisation
£m
At
31 July 2022
£m
2
–
–
2
The closing disposal provision relates to warranties and other obligations in respect of a past disposal and is expected to be utilised within
the next five years.
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 179
10 Post-retirement benefits
The Company is the principal employer for the two major defined benefit plans in the UK. The Company is accounting for all the UK defined
benefit schemes (funded and unfunded) and virtually all of the post-retirement healthcare schemes.
The retirement benefit assets and liabilities comprise:
Market value of scheme assets
Present value of funded scheme liabilities
Surplus restriction
Surplus
Unfunded pension plans
Post-retirement healthcare
Present value of unfunded obligations
Net pension asset
Retirement benefit assets
Retirement benefit liabilities
Net pension asset
31 July 2022
£m
31 July 2021
£m
3,067
(2,738)
(20)
4,104
(3,558)
–
309
(43)
(4)
(47)
262
309
(47)
262
546
(54)
(4)
(58)
488
546
(58)
488
See the disclosures for UK schemes in note 8 to the consolidated accounts for the circumstances of the major schemes, risk management,
principal assumptions, assets and liabilities and the funding position of the two major schemes.
11 Share capital and reserves
Share capital
Ordinary shares of 37.5p each
Total share capital at 31 July 2020
Issue of new equity shares – exercise of share options
Total share capital at 31 July 2021
Shares purchased under a buyback programme
Issue of new equity shares – exercise of share options
Total share capital at 31 July 2022
Number of shares
Issued
capital
£m
Consideration
£m
396,211,180
165,934
396,377,114
(34,152,897)
131,942
362,356,159
149
–
149
(13)
–
136
2
2
At 31 July 2022, all of the issued share capital was in free issue. All issued shares are fully paid. See note 9 to the consolidated accounts
for information about share schemes, including total shares under options and options exercisable at the balance sheet date. During the
year, the Company received £3m (FY2021: £2m) on the issue of shares in respect of the exercise of options awarded under various share
option schemes.
Smiths Industries Employee Benefit Trust
The retained earnings include the purchase of Smiths Group plc shares by the Smiths Industries Employee Benefit Trust, and the issue of
these shares upon the exercise of share options. The consideration paid was £16m (FY2021: £16m) and £3m (FY2021: £2m) was received,
£2m from the issue of new shares (FY2021: £2m) and £1m (FY2021: £nil) directly to the Employee Benefit Trust. At 31 July 2022 the Trust held
618,662 (FY2021: 326,364) ordinary shares.
Distributable profits
The Company’s profit and loss reserve of £2,205m (FY2021: £1,628m) includes £1,328m (FY2021: £638m) of distributable profits. See note 26
in the Group accounts for a discussion of capital management and the factors which the Board considers when proposing dividends.
Other reserves
Other reserves arose from the cancellation of the share premium arising from an equity-funded acquisition in the year ended 30 July 1988.
Differential between consolidated and parent Company net assets
The Group's consolidated balance sheet shows net assets that are £185m lower (FY2021: £96m higher) than the net assets shown on the
Parent Company's balance sheet. This deficit principally arose in 2007 when the Group returned £2.1bn of capital to shareholders, creating
a net asset deficit of £1.9bn. Earnings retained within the Group have subsequently reduced this deficit. The current year reversal has arisen
from the dividend paid to the Company by Smiths Group International Holdings Ltd following the sale of the Medical business.
12 Contingent liabilities
The Company has provided guarantees and arranged letter of credit facilities to support the Group’s pension plans. The current amount
outstanding under letters of credit is £56m (FY2021: £54m). The Company has guaranteed the US$800m revolving credit facility available to
a subsidiary.
13 Post Balance Sheet Event
Details of the proposed final dividend announced since the end of the reporting period are given in note 25 to the Group consolidated
financial statements.
SMITHS GROUP PLC COMPANY ACCOUNTS01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
A full list of the Group’s related undertakings as at 31 July 2022 is provided below. The entities are grouped by the country in which they
are incorporated and details of their registered office address, classes of shares and ownership is disclosed. Related undertakings
include subsidiaries, associated undertakings, joint ventures and associates.
Name
Security
Direct (%)
Total (%)
180
UNITED KINGDOM
11-12 St James’s Square, London, SW1Y 4LB
Air Log Limited
EIS Group Plc
Flex-Tek Group Limited
Flightspares Limited
Francis Shaw And Company (Manchester) Limited
Francis Shaw PLC
Graseby Limited
Roof Units (Group) Limited
S.I. Pension Trustees Limited
SI Properties Limited
SITI 1 Limited
Smiths Aerospace Components Tyseley Limited
Smiths Aerospace Gloucester Limited
Smiths Finance Limited
Smiths Group Finance EU Limited
Smiths Group Finance US Limited
Smiths Group Innovation Limited
Smiths Group International Holdings Limited
Smiths Industries Limited
Smiths Nominees Limited
Smiths Wolverhampton Limited
Sovos Limited
TI Corporate Services Limited
TI Group Limited
Tigrup No. 7 Limited
Tigrup No. 14 Limited
XDG Limited
XDG Services Limited
29 Dunsinane Avenue, Dundee, DD2 3QF
Flexible Ducting Limited
Trak Microwave Limited
54 Hagley Road, Edgbaston, Birmingham, B16 8PE
CVE Trustee Limited
Smiths Pensions Limited
TI Pension Trustee Limited
Abercanaid, Merthyr Tydfil, Mid Glamorgan, CF48 1UX
Amnitec Hose Limited
Amnitec Limited
Brooklyn House, 44 Brook Street, Shepshed, Loughborough, LE12 9RG
Gastite Systems Limited
Buckingham House, 361-366 Buckingham Avenue, Slough, Berkshire, SL1 4LU
Flexibox International Limited
John Crane Group Limited
John Crane Investments Limited
John Crane UK Limited
Project Sugar Limited
Smiths Business Information Services Limited
Century House, Maylands Avenue, Hemel Hempstead, Hertfordshire, HP2 7DE
Smiths Detection Group Limited
Smiths Detection Investments Limited
Smiths Detection Limited
Smiths Detection-Watford Limited
Smiths Heimann Limited
No 1 Exchange, Market Street, Aberdeen, Scotland
John Crane Asset Management Solutions Limited
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
37% 2nd Pref Ordinary; 5.25% Cum Pref;
Dif; Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary; Ordinary A
Ordinary; RDM
Ordinary
Ordinary
Ordinary
Ordinary
7% Non Cum Pref; Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Limited By Guarantee
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
Name
Unit 130 Centennial Park, Elstree, Hertfordshire, WD6 3TJ
Hypertac Limited
Smiths Industries Industrial Group Limited
Smiths Interconnect Group Limited
ANGOLA
Rue Kwamme Nkrumah, Torres Impor-Africa, 3 Andar, Apt A, Luanda
John Crane (Angola) Prestacao De Services Ltd
ARGENTINA
Av. Leandro N. Alem 1110, 13 Floor, Baker Mackenzie Office, Buenos Aires
John Crane Argentina SA
TI Group Automotive Systems (Argentina) SA
AUSTRALIA
549 – 551, Somerville Road, Sunshine, Melbourne, VIC 3020
Flexibox Pty Limited
John Crane Australia Pty Limited
Botany Grove Estate Unit 5, 14A Baker Street, Botany, NSW 2019
Smiths Detection (Australia) Pty Ltd
AZERBAIJAN REPUBLIC
32, Dostluq Street, Salyan Highway PO Box AZ1023, Baku
John Crane Baku LLC
BELGIUM
Glasstraat 37, Antwerpen, 2170
John Crane Belgium NV
BRAZIL
Rua Tabapoã, 422, 10th floor, conj. 101, Itaim Bibi, 04533-001
Smiths Detection Brasil Comérico De Equipamentos Ltda
Industrial District of The City of Rio Claro, State of São Paulo,
AV. Brasil Number 4.700, CEP 13505-600
Smiths Brasil Ltda
CANADA
423, Green North Road, Stoney Creek, Ontario, L8E 3A1
John Crane Canada Inc
3700, Stock Exchange Tower, P.O. Box 242, 800 Place Victoria,
Montreal, PQ, H4Z 1E9
Smiths Detection Montreal Inc.
4610, Eastgate Parkway, Unit 3, Mississauga, Ontario, L4W 3W6
Flexible Technologies (Canada) Ltd.
16771, Sainte Marie Rd, Kirkland, Quebec, H9H 5H3
Smiths Interconnect Canada Inc
Security
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Common
Class A Shares; Class B Shares
Ordinary
Common Shares
CHILE
Americo Vespucio 2542, Complejo Empresarial El Cortijo, Conchali, Santiago
John Crane Chile SA
CHINA
No. 1, Lane 65, Huanlong Road, Pudong New District, Shanghai
Smiths (Shanghai) Management Co., Ltd
No. 7, Factory Building, Maqiao Industrial Square, Changshu Economic
Development Zone, Changshu, Jiangsu 215536
Changshu Flex-Tek Thermal Fluid Systems Manufacturer Co. Ltd
No.9, No. 1, Haitai Huake Road, Huayuan Industrial District (Outside The Ring),
Binhai Hi-Tech, Industrial Park, Tianjin
John Crane Technology (Tianjin) Co Limited
No. 14 Unit, No. 78, XingLin Road, Suzhou Industrial Park, Suzhou 215026
Antares Advanced Test Technologies (Suzhou) Co. Ltd
No. 120, Sanjiang Avenue, Economic Development Zone, Mianyang,
Sichuan Province
Huafeng Smiths Interconnect (Sichuan) Co., Ltd
Room 923B, No 55, Xili Road, Shanghai, (China) Pilot Free Trade Zone
SMO Detection Equipment (Shanghai) Co., Ltd
Room 1668, No. 14F Floor 3 Datong Building, Huanghe Avenue,
Nankai District, Tianjin
John Crane China Co Limited
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
181
Direct (%)
Total (%)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
60
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
182
Name
Security
Direct (%)
Total (%)
COLOMBIA
Calle 46A No 82-54 Int 14, Parque Empresarial San Cayetano, Bogota
John Crane Colombia SA
COSTA RICA
33rd St. Number 777 Barrio Francisco Peralta, Central Avenue & 8th, San Jose
Smiths Interconnect Sociedad Anonima
CZECH REPUBLIC
Jana Sigmunda 78, Lutin, 78349
John Crane A.S.
DOMINICAN REPUBLIC
Calle El Recodo, #2 Bella Vista, Santa Domingo
John Crane Dominicana SA
EGYPT
139, Mogamaa El Masanea Street, El Amireya, Cairo
John Crane Egypt Llc
John Crane Egypt Sealing Systems Llc
Nile City Towers, North Tower, 22nd Floor, Ramlet Boulaq, Nile Cournich, Cairo
Detection Technologies Egypt
FINLAND
PO Box 10, Punasillantie 15, Muurame, 40950
John Crane Safematic Oy
FRANCE
22, Avenue Maurice Chevalier, 77833 Ozoir-La-Ferriere, Paris
Titeflex Europe S.A.S.
31 Rue Isidore Maille, Saint-Aubin-Les-Elbeuf, 76410
Hypertac S.A.
36 Rue Charles Heller, Vitry Sur Seine, F-94400
Smiths Detection France S.A.S.
114, Rue Jules Ferry, B.p.35, Deville-Les-Rouen, 76250
John Crane France S.A.S.
T I S A (France)
GERMANY
Am Zirkus 2, Berlin, 10117
John Crane Filtration Technologies GmbH
Gewerbestraße 15 a, Graben, 86836
Gastite Systems Deutschland GmbH
Im Herzen 4, Wiesbaden, 65205
Smiths Detection GmbH
Smiths Detection Germany GmbH
Neckarweg 3, Vellmar, 34246
Herkules Holding GmbH
Seebach GmbH
Reepschlager Str., 10B, Lubeck, 23556
Flexschlauch Produktions GmbH
Tolzer Strasse, 15 82031, Grunwald
Zamor KG
Ulrichsberger Strasse 17, Deggendorf, 94469
Hypertac GmbH
Werner–Von–Siemens – Str.6, Fulda, 36041
John Crane GmbH
GREECE
3 Stratigou Tobre Street, Municipality Of Agia Paraskevi, Athens, 153 42
John Crane Hellas – Engineered Sealing Systems Monoprosopi Epe
GUERNSEY
Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ
Smiths Group Insurance Limited
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quotas
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
100
48
100
100
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
183
Name
Security
Direct (%)
Total (%)
HONG KONG
4008-4009, 40/F, One Pacific Place, 88 Queensway
Smiths Interconnect Group (HK) Limited
Smiths Interconnect Hong Kong Co Limited
Smiths Detection Hong Kong Limited
HUNGARY
2040 Budaors, Gyar U. 2
John Crane Hungary Kft
INDIA
D-196 Okhla Industrial Area, Phase-1, New Dehli, 110020
Plenty India Limited
No 11, 1st Phase, Peenya, Industrial Area, Bangalore, 560058
John Crane Sealing Systems India Private Limited
Smiths Interconnect India Private Limited
No 38, Kiadb Industrial Area, Bangalor, 561203
STS Titeflex India Pvt Ltd
Shirwal, Maharashtra 412801
Seebach Filter Solutions India Pvt Ltd
Vardhman Crown Mall, Unit No. 300 3rd Floor, Sector 19 Dwarka, New Delhi 110075
Smiths Detection Systems Private Limited
INDONESIA
Cilandak Commercial Estate Bldg 401A, Ji. Kko Cilandak, Jakarta, 12560
PT John Crane Indonesia
IRELAND
Riverside One, Sir John Rogerson’s Quay, Dublin, D02X576
John Crane Pension Trustee (Ireland) Ltd
Deloitte Offices, 6 Lapps Quay, Cork
Smiths Detection Ireland Limited
T53/54, Shannon Industrial Estate, Shannon, Co. Clare
John Crane (Ireland) Limited
ITALY
Via Da Bissone 7A, Genova, 16153
Hypertac SpA
Via Giotto 3, Muggio, 20835
John Crane Italia SpA
Smiths Detection Italia srl
Smiths Group Italia Srl
JAPAN
1-1-1 Uchisaiwaicho, Chiyoda-ku, Tokyo
Smiths Detection Japan Gk
2222, Kamitoyama Ritto City, Ritto-Shi, Shiga-Ken
John Crane Japan Inc
KAZAKHSTAN
Atyrau Region, Gatyrau, Station K Arabathan, House Production Site 14, 060000
John Crane Kazakhstan
KOREA, REPUBLIC OF
Migeundong, Westgate Tower 15F, 70 Chungjeong-Ro, Seodaemun-Gu, Seoul
John Crane Korea Co Ltd
MALAYSIA
207, Jalan Tun Razak, Suite 13.03, 13th Floor, Menara Tan & Tan, Kuala Lumpur, 50400
Flexible Ducting Malaysia Sdn Bhd (in liquidation)
Menara LGB, 1, Jalan Wan Kadir Taman Tun Dr Ismail, 60000 Kuala Lumpur, WPKL
John Crane Malaysia Sdn Bhd
Smiths Detection Malaysia Sdn Bhd
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary Shares
Ordinary
Ordinary
Ordinary
Ordinary
Class A Equity Shares;
Class B Equity Shares
Ordinary
Ordinary
Ordinary; Ordinary B; Ordinary D; Series C
Ordinary
Ordinary
Ordinary
Quota Value of Shares
Ordinary
Cash Contribution
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
70
100
100
100
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
184
Name
Security
Direct (%)
Total (%)
MEXICO
679, Poniente 152, Vallejo Delegacion Azcapotzalco, Mexico City, 2300
Industrias John Crane Mexico S.A. de C.V.
Av. Primero De Mayo Lote 3 Edificio 1B, Prologis Park, Reynosa, 88780
Tutco De Mexico SRL de CV
Carretera Ciudad Victoria Matamoros, Km.173+600, Solonia San Fernando Centro,
Tamaulipas, San Fernando, CP 87600
John Crane Sociedad De Responsibilidad Limitada De Capital Variable
Carretera Libre Antiguo Camino Tijuana 20221-B, Fideicomiso el Florido, Tijuana,
Baja California, 22234
Smiths Interconnect Mexico S. de Rl de C.v.
Paseo De La Reforma 505, Col, Cuauhtemoc, 6500, Ciudad De Mexico
Smiths Detection Mexico S. de Rl de C.v.
Series A; Series B
Ordinary
Ordinary
Equity Quotas
Partes Sociales
NETHERLANDS
Abraham van Stolkweg 118, Rotterdam, 3041 JA
Amnitec BV
Bergen 9 – 17, Barendrecht, Zuid, 2993LR
John Crane Holland BV
Smiths Detection Benelux BV
Buckingham House, 361-366 Buckingham Avenue, Slough, Berkshire,
SL1 4LU, England
Smiths Group Holdings Netherlands BV
Hydrograaf 25, PO Box 442, 6900 Ak Zevenaar, Duiven, 6921 RS
Indufil BV
NEW ZEALAND
Deloitte, Level 18, 80 Queen Street, Auckland 1010
Smiths Detection New Zealand Limited
PERU
Av. Guillermo Dansey 2124, Urbanizacion Industrial Conde, Lima
John Crane Peru Sac
POLAND
1327, ul. Bielska, Poland, 43-374 Buczkowi
John Crane Poland Sp Z O.O.
PUERTO RICO
654 Plaza, Suite #933, 654 Munoz Rivera Ave, San Juan, 00918
John Crane Caribe Ltd
RUSSIAN FEDERATION
Room 501, Floor 5, bld.1, 5-104 Octyabrskaya Emb., St. Petersburg 193079
Smiths Detection Rus LLC
B.savvinsky Per, D.11, Moscow, 119435
LLC John Crane Rus
SAUDI ARABIA
Dammam Industrial City, Dammam, 3243
John Crane Saudi Arabia Ltd
Building 7, Zone A, Airport road, Business Gate, P.O Box Riyadh 11683, 93597
Smiths Detection Saudi Arabia Ltd
SINGAPORE
6 Shenton Way, OUE Downtown #26-00, 068809
John Crane Singapore Pte Limited
20, Pasir Panjang Road, #13-26 Mapletree Business City, 117439
Smiths Connectors Asia Pte. Ltd.
Smiths Detection (Asia Pacific) Pte. Ltd
SLOVAKIA
Dvorakovo nabrezie 10, Bratislava-mestska cast Stare Mesto, 811 02
John Crane Slovakia SRO
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Shares
Ordinary
Common Shares
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
185
Name
Security
Direct (%)
Total (%)
SOUTH AFRICA
2, Jansen Road, Nuffield Industrial Sites, Springs Gauteng, 1559
Flexibox (Pty) Limited
John Crane Pty Ltd
SPAIN
Cemento 1, Torrejon De Ardoz, Madrid
John Crane Iberica SA
SWEDEN
Knivsta, 74180
Habia Teknofluor AB
Teknofluor Holding AB
Faltspatsgatan 4, Se-421 30 Vastra Frolunda
John Crane Sverige AB
SWITZERLAND
Hohenrainstrasse 10, 4133 Pratteln
John Crane (Switzerland) AG
TAIWAN
324-4, Fong-Jen Road, Renwu District, Kaohsiung City 814
John Crane Taiwan Co Ltd.
Ordinary
Ordinary
Ordinary
Shares
Shares
Ordinary
Ordinary
Ordinary
THAILAND
9/311, 31st Floor, Um Tower, Ramkhamhaeng Road, Suanluang District, Bangkok
John Crane (Thailand) Limited
99/3 Moo 5, Kingkaew Road, Tambol Rajatheva, Amphoe Bangplee,
Samutprakarn Province, 10540
Smiths Detection (Thailand) Limited
Ordinary; Pref
Pref; Ordinary
TUNISIA
Zone Industrielle Route De Khniss, Monastir, 5000
Smiths Connectors Tunisia SARL
TURKEY
Istanbul Sariyer, Huzur Mahallesi, Ahmet Bayman Caddessi, Dis,
Reklamcilik Apt No:17-19/1
John Crane Endustriyel Sizdirmazlik Sistemleri Ltd
UNITED ARAB EMIRATES
Building B10, Industrial Mussaffah, M44, Sector 15, Abu Dhabi
Smiths Detection Security Systems Llc
Dubai Airport Free Zone, PO Box 48225, Building No. 8WA (West Side), 401, Dubai
Smiths Detection Middle East Fze
S20113, Jebel Ali Free Zone, 61040
John Crane Middle East Fze
UNITED STATES OF AMERICA
51 Growth Road, Laconia, NH, 03246
Lakes Region Tubular Products Inc.
116, Pine Street, 3rd Floor, Suite 320, Harrisburg, PA 17101
Tutco, Llc
180 Van Riper Avenue, Elmwood Park, NJ 07407
Kreisler Industrial Corp
Kreisler Manufacturing Corp
208 S. Lasalle Street, Suite 814, Chicago, IL, 60604
John Crane International Inc.
815 Forestwood Drive, Romeoville, IL 60446
United Flexible, Inc.
US Hose Corp
2801 Red Dog Lane, Knoxville, TN 37914
Fulton Bellows LLC
Corporation Service Company, 251 Little Falls Drive, Wilmington, DE, 19808
United Flexible Technologies, Inc.
Ordinary
Ordinary
Shares
Shares
Ordinary
Common Stock
Ordinary
Common Stock
Common Stock
Common Shares
Common Stock
Common Stock
Limited Liability Company Interests
Common Stock
100
100
100
100
100
100
100
100
100
100
100
100
49
100
100
100
100
100
100
100
100
100
100
100
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS SUBSIDIARY UNDERTAKINGS
186
Name
Security
Direct (%)
Total (%)
The Corporation Trust Company, 1209 Orange Street, Wilmington, DE, 19801
Asset And Intelligence Management Services, LLC
Flexible Technologies, LLC
Flex-Tek Group (US) LLC
John Crane Group, Llc
John Crane Inc
John Crane USA, Inc
MDII Investments LLC
Powercam-Houdaille, Inc.
Royal Metal Products, LLC
Smiths Business Information Services, Inc.
Smiths Detection International, Llc
Smiths Detection US Holdings, LLC
Smiths Detection US, Llc
Smiths Group Services Corp.
Smiths Interconnect Americas, Inc.
Smiths Interconnect, Inc.
Smiths US Innovation LLC
CT Corporation System, 9 Capitol Street, Concord, NH 03301
Smiths Tubular Systems-Laconia, Inc
CT Corporation System, 155 Federal Street, Suite 700, Boston, MA 02110
Titeflex Commercial, Inc.
One Corporate Center, Hartford, CT 06103-3220
Titeflex Corporation
The Corporation Trust Company of Nevada, 701 S Carson Street, Suite 200,
Carson City, NV, 89701
Smiths Detection Inc
VENEZUELA
Carretera Vía A Perijá, Km 8 ½, Avenida 50, Local N° 185-72,
Zona Industrial El Silencio, Maracaibo, 4001
John Crane Venezuela CA
Ordinary Stock
Ordinary Shares
Ordinary
Ordinary
Common; Preferred
Ordinary
Ordinary
Common Shares
Ordinary
Common Stock
Equity Interests
Limited Liability Company Interests
Ordinary
Common Stock
Common Stock
Common Stock
Ordinary
Ordinary Shares
Ordinary
Ordinary
Common Stock
Class A; Class B;
Common
ASSOCIATES
RUSSIAN FEDERATION
28, Academica Vedeneeva Street, Perm, Permskiy Region, 614038
Llc John Crane Iskra
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
Overseas branches
The Company does not operate through any branches. Some Group subsidiary companies have established branch operations outside
the UK.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 2022
23 September
20 October
21 October
28 October
16 November
18 November
187
2023
(provisional)
24 March
6 April
11 April
25 April
17 May
31 July
September
Dividends
Since November 2019 Smiths no longer issues dividend cheques. In
order to have your dividends paid directly to your bank or building society
account please contact Equiniti for a copy of the Bank Mandate Form,
or register your nominated bank or building society account by visiting
www.shareview.co.uk.
By registering your account all future dividends will be paid securely
by direct credit on the dividend payment date.
Alternatively, Smiths offers a Dividend Reinvestment Plan. For more
information please visit our website or contact Equiniti.
Ordinary shares
The market value of an ordinary share of the Company on 31 March 1982
for the purposes of capital gains tax was 136.875p (taking into account the
sub-division of 50p shares into 25p shares on 14 January 1985 and the sub-
division and consolidation of 25p shares into 37.5p shares on 18 June 2007).
SHAREHOLDER INFORMATION
Financial calendar
Announcement of FY2022 Results
Dividend Ex-Dividend Date
Dividend Record Date
Last DRIP Election Date
Annual General Meeting
Dividend Payment Date
Announcement of FY2023 Interim Results
Interim Dividend Ex-Dividend Date
Interim Dividend Record Date
Last DRIP Election Date
Interim Dividend Payment Date
FY2023 Financial Year End
Announcement of FY2023 Results
Registered Office
Smiths Group plc
4th Floor
11-12 St James’s Square
London SW1Y 4LB, UK
+44 (0)20 7004 1600
Incorporated in England & Wales
Company No. 137013
www.smiths.com
Registrars
Our share register is maintained by Equiniti. If you have any questions about
your Smiths shares, please contact Equiniti at: www.shareview.co.uk.
Telephone:
T: + 44 (0)371 384 2943 (in the UK)
Textel: 0870 384 2255
Lines open 8:30am to 5:30pm (UK time),
Monday to Friday (excluding public holidays in England and Wales)
Write to: Equiniti Limited, Aspect House
Spencer Road, Lancing, West Sussex, BN99 6DA
Equiniti offer the Shareview portfolio service to investors; visit
www.shareview.co.uk to register for an account. Through Shareview
you can access information about your investments, including balance
movements and indicative share prices, as well as practical help about
transferring your shares or updating your personal details.
Annual General Meeting (AGM)
The 2022 Smiths Group plc AGM will be held at 11.00am on Wednesday 16 November 2022 at Freshfields Bruckhaus Deringer, 100 Bishopsgate,
London EC2P 2SR. The Notice of AGM is a separate document which is sent out at least 20 working days before the AGM and made available on our
website. If you are in any doubt as to what action you should take in relation to the resolutions being proposed at the AGM, you are recommended to
consult your stockbroker, bank manager, solicitor, accountant or other independent professional adviser authorised under the Financial Services and
Markets Act 2000. The meeting will be webcast and may be viewed online by registering on our website www.smiths.com.
Shareholders who are unable to attend the AGM in person are encouraged to vote their shares by appointing a proxy and issuing voting instructions.
Electronic and paper proxy appointments and voting instructions must be received by the Company’s Registrar not later than 48 hours before the
AGM is held in order to be valid. Shareholders who are not CREST members can appoint a proxy and vote online by visiting www.sharevote.co.uk.
CREST members, CREST personal members and other CREST-sponsored members should consult the CREST Manual or their sponsor or voting
service provider for instructions on electronic proxy appointment and voting.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS 188
Forward-looking statements
This report contains certain 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. Forward-looking statements can be identified by the use
of forward-looking terminology, including terms such as "believes",
"estimates", "anticipates", "expects", "forecasts", "intends", "plans",
"projects", "goal", "target", "aim", "may", "will", "would", "could" or
"should" or, in each case, their negative or other variations or comparable
terminology. By their nature, these statements involve uncertainty and are
subject to known and unknown risks, including, without limitation, those
discussed under the section titled ‘Principal risks and uncertainties’ in this
report. Future events and circumstances can cause performance, results
and developments to differ materially from those expressed, implied or
anticipated. The past business and financial performance of the Group is
not to be relied on as an indication of its future performance. 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. Undue reliance should not be placed
on such forward-looking statements. Nothing in this document should
be construed as a profit forecast or be interpreted to mean that future
earnings per share of the Company will necessarily match or exceed its
historical published earnings per share. 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. Some of the products described in these materials
are under development and are not available for sale, and we make no
definitive claims about the final features or benefits of these products.
01 OVERVIEW02 STRATEGIC REPORTSMITHS GROUP PLC ANNUAL REPORT FY202203 GOVERNANCE04 FINANCIAL STATEMENTS This report was printed by Pureprint Group
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SMITHS GROUP PLC
4th Floor
11-12 St James’s Square
London SW1Y 4LB, UK
+44 (0)20 7004 1600
www.smiths.com
LSE: SMIN
ADR: SMGZY
TO VIEW THIS REPORT ONLINE
go to www.smiths.com/investors