IMPROVING
OUR WORLD
THROUGH
SMARTER
ENGINEERING
ANNUAL REPORT & ACCOUNTS
FY2023
WELCOME
WELCOME
We are pioneers of progress –
improving our world through smarter
engineering.
Smarter engineering enables us to
solve the toughest problems for our
customers and address critical global
needs such as decarbonisation and
green re-industrialisation, safety
and security, and demand for data.
At the same time building the
long-term sustainability of Smiths
and its global operations.
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.
ABOUT THIS REPORT
This is the FY2023 Annual Report of
Smiths Group plc. Data presented in this report
is for the 12 months to 31 July 2023 unless
otherwise stated.
QUICK LINKS
HOW TO NAVIGATE THIS REPORT
Throughout this report you will find extra
information, performance data and links to
additional data in the right-hand column.
STRATEGY AND
PROGRESS VS
TARGETS
Read more about our
strategic progress.
Supporting data, statistics or insights
PG 12
Links to additional content within the report
Links to additional external content
Quotes from our team and highlights
HOW TO ACCESS MORE INFORMATION
Use the links to navigate around the report and
access external content. Our FY2023 Sustainability
at Smiths report can also be found on our
corporate website www.smiths.com.
Read more about
sustainability in our
Sustainability at
Smiths report
CLICK HERE
Read more about the
Group on our website
CLICK HERE
OUR DIVISIONS
Read more about our
divisions.
PG 4
CAPITAL ALLOCATION
PRIORITIES
Read more about capital
allocation.
PG 21
CLIMATE REPORTING
Read more in our TCFD
disclosure.
PG 47
THE BOARD’S KEY
ACTIVITIES
Read more about the
Board’s key activities.
PG 82
OVERVIEW
Our purpose
FY2023 highlights
Our priorities and targets
Markets and megatrends
Our divisions
STRATEGIC REPORT
Chairman’s statement
Chief Executive Officer’s review
– Our business model
– Our strategy
– Our people and culture
– CEO message
– Review of the year
CFO review
Key Performance Indicators
Sustainability at Smiths
– ESG double materiality assessment
– 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
GOVERNANCE
Chairman’s introduction
Board biographies
Nomination & Governance Committee Report
Audit & Risk Committee Report
Remuneration & People Committee Report
Science, Sustainability & Excellence
Committee Report
Directors’ Report
Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
Independent auditor’s report
Consolidated primary statements
Accounting policies
Notes to the accounts
Unaudited Group financial record FY2019–FY2023
Unaudited US dollar primary statements
Smiths Group plc Company accounts
Subsidiary undertakings
Shareholder information
IFC
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32
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58
64
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SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FY2023 HIGHLIGHTS
1
A YEAR OF RECORD ORGANIC REVENUE
AND HEADLINE EPS GROWTH
RECORD ANNUAL GROWTH
ORGANIC1 REVENUE GROWTH OF +11.6%; HEADLINE EPS2
GROWTH OF +39.6%
– Full year growth delivered ahead of guidance, balanced between price
and volume
– +310bps of growth from new products, demonstrating the impact of innovation
– Well positioned for FY2024 growth within our medium-term targets, with orders3
up +6.7%
CONTINUED IMPROVEMENT IN EXECUTION
SMITHS EXCELLENCE SYSTEM (“SES”) DELIVERING BENEFITS
– Headline2 operating profit growth of +20.0%; with margin expansion of +20bps
GROSS VITALITY
Percentage of revenue
from new products
to 16.5%
– Return on capital employed (ROCE) up +150bps to 15.7%, benefiting from strong
profit growth
– Cash conversion2 up 6 percentage points to 86%; with improvement in working capital
– Advancing our Sustainability strategy with significant progress across our
environmental metrics
EMPOWERING OUR PEOPLE
INCREASING ENGAGEMENT WITH OUR COLLEAGUES AND
COMMUNITIES
– Continued improvement in our safety record, with a 26% reduction in our
Recordable Incident Rate
– Successful rollout of Smiths Leadership Behaviours, driving a high-performance
workforce
– High employee engagement reflected in 310bps reduction in voluntary turnover
– Launched Smiths Foundation, committing an initial £10m towards charitable
STRONG BALANCE SHEET
PROVIDING FLEXIBILITY ON CAPITAL ALLOCATION
– Successful acquisition of Plastronics in January 2023 and Heating & Cooling
Products in August 2023
– Net debt to EBITDA of 0.7x; £387m net debt
– £350m returned to shareholders through dividends and share buyback which is
now complete
– Proposed final dividend of 28.7p, up 5%, bringing the full year to 41.6p
STEM-related causes
FINANCIAL PERFORMANCE
Headline2
Revenue
Operating profit
Operating profit margin4
Basic EPS
ROCE4
Operating cash conversion4
FY2023
FY2022
Reported
Organic1
£3,037m
£501m
£2,566m
£417m
16.5%
97.5p
15.7%
86%
16.3%
69.8p
14.2%
80%
+18.3%
+20.0%
+20bps
+39.6%
+150bps
+600bps
+11.6%
+12.7%
+10bps
Statutory
Revenue
Operating profit
Profit for the year (after tax)5
Basic EPS5
Dividend per share
FY2023
FY2022
Reported
£3,037m
£2,566m
+18.3%
£403m
£232m
65.5p
41.6p
£117m
+244.4%
£1,035m
267.1p
39.6p
(77.6)%
(75.5)%
+5.1%
FY2023
(11.8)%
FY2022
(0.9)%
(11.8)%
The following definitions are applied throughout the financial report:
1 Organic is headline adjusted to exclude the effects of foreign exchange and acquisitions.
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 intake growth excludes the effects of foreign exchange.
4 Alternative Performance Measures (APMs) and Key Performance Indicators (KPIs) are defined in
note 29 to the financial statements.
5 FY2022 statutory profit and EPS includes the proceeds from the sale of Smiths Medical.
31%
31%
FY2023
FY2022
31%
SAFETY
Recordable Incident Rate
FY2023
FY2022
0.41
0.56
(26)%
GREENHOUSE
GAS REDUCTION
Scope 1 & 2
GHG reduction
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 2
OUR PRIORITIES AND TARGETS
OUR PRIORITIES AND TARGETS
OUR PURPOSE
OUR STRENGTHS
OUR PRIORITIES
WORLD CLASS
ENGINEERING
SMITHS
BEHAVIOURS
LEADING POSITIONS
IN CRITICAL MARKETS
EXECUTION
GROWTH
GLOBAL
CAPABILITIES
PIONEERS OF
PROGRESS
Improving our world through
smarter engineering
ROBUST FINANCIAL
FRAMEWORK
PEOPLE
Smiths is intrinsically strong with
world-class engineering, leading positions
in critical markets, and distinctive global
capabilities, all underpinned by a strong
financial framework. In November
2021, we set out how Smiths will deliver
performance in line with our significant
potential by focusing on three top priorities
of accelerating growth, strengthening
execution and doing even more to inspire
and empower our people.
Our focused plan, the Smiths Value Engine, is the
means through which we will deliver the medium-term
targets that we have set. In FY2023, we have continued
to make meaningful progress towards these targets,
outperforming on several metrics.
MEDIUM-TERM FINANCIAL TARGETS
Organic revenue growth
4-6% (+M&A)
Headline EPS growth
7-10% (+M&A)
ROCE
15-17%
These targets are underpinned by Smiths operational
KPIs and environmental targets, including a
commitment to Net Zero for Scope 1 and 2 emissions
by 2040 and Net Zero for Scope 3 emissions by 2050.
SMITHS
BEHAVIOURS
Operating cash conversion
100%+
Operating profit margin
18-20%
BUSINESS MODEL
See our business model.
PG 11
MARKETS AND
MEGATRENDS
Read more about our
markets and megatrends.
PG 3
KEY PERFORMANCE
INDICATORS
See our KPIs over five
years.
PG 29
SUSTAINABILITY AT
SMITHS
Read more about our ESG
framework and
sustainability.
PG 32
S M I T H S BE
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SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS MARKETS AND MEGATRENDS
MARKETS AND
MEGATRENDS
We track the evolution of key secular themes and trends and their impact on our
markets and our business.
3
OUR MARKETS
We operate in four global markets:
MEGATRENDS
Powerful megatrends that are aligned with our purpose propel long-term growth in these markets. Smiths is
uniquely positioned to access this growth.
REVENUE BY
GLOBAL MARKET
GENERAL INDUSTRIAL
Customers put their trust in our products and
services to support a wide range of general
industrial applications in sectors including
petrochemicals, 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, power
generation and low-/no-carbon energy solutions.
Growth is driven by increased global demand for
energy, decarbonisation, productivity, and enhanced
environmental and safety requirements.
AEROSPACE
Aerospace growth is driven by increasing
passenger and freight traffic and the development
of new fuel-efficient aircraft. Satellite launches and
emerging activities like deep space exploration are
driving demand for high-reliability solutions in the
space market.
DECARBONISATION AND GREEN
RE-INDUSTRIALISATION
The need to mitigate climate change and
deliver secure and affordable power is driving
a fundamental revolution in energy use,
energy sources and energy delivery to cut
emissions across all sectors.
Macroeconomic policies and private-sector
commitments are accelerating the pace of
change to disrupt established energy markets
and lock in the triple benefits of green
re-industrialisation (affordability, security
and sustainability).
Investment to deliver the Paris commitment
on global warming is projected to exceed
US$100 trillion by 2050; 3-4 times the rate
of annual historical investment.
Efficiency and circular economy solutions
– Energy savings through efficiency and reducing waste is the
most cost-effective solution to cut GHG emissions
Widespread green electrification
– Green electricity is the most efficient and best vector for
decarbonisation and can now be produced at lower cost
than fossil fuels
– Electrification is a significant and growing feature across
multiple industrial and domestic markets
Low-/no-carbon fuels in hard-to-electrify sectors
– Activities that are not amenable to electrification will need
to be fuelled by zero-carbon fuels
Carbon capture
– Carbon capture activities will accelerate as a means to
further abate carbon emissions from heavy industrial
sectors and enable the production of zero-carbon fuels
EVER-RISING SECURITY NEEDS
Persistent and evolving threats are driving security needs in a range of sectors to keep people and assets safe.
– Passenger air travel growing 6.1% per annum, freight growing 4.1%
– Consumer, business and government demands for safety are continually increasing
– Regulatory requirements amplify demand
INSATIABLE DEMAND FOR DATA
– Demand for data is continuously increasing as the world becomes more connected and computing expands.
Faster data transmission, greater bandwidth and faster processing power are required across many sectors
– Global data consumption continues to double every 4 years
– Transmission data rates continue to double every 3.5 years
– More than 2,100 satellite launches in 2022, vs 134 ten years ago
General industrial 40%
31%
Safety & Security
22%
Energy
7%
Aerospace
REVENUE BY
DESTINATION
54%
Americas
19%
Europe
Asia Pacific
16%
Rest of the World 11%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 4
OUR DIVISIONS
OUR DIVISIONS
Our four divisions operate in more than 50 countries. Together, the divisions and Group
employ more than 15,000 people.
JOHN CRANE
Mission-critical technologies and services
for energy and process industries that
enable efficient and sustainable operations
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.
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CUSTOMERS
– Energy: down- and mid-stream activities
(e.g., refineries and pipelines) of energy
multinationals and power generation, including
growing applications in hydrogen and carbon
capture
– Other process industries: a significant presence in
chemical, life sciences, mining, 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
GROWTH DRIVERS
– Global demand for stable, secure and
affordable 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 ecosystem, including hydrogen and
carbon capture, which drive more demanding
needs in compression, pumping and filtration
and expertise across industries
– Long-term customer partnerships and
– Largest installed base in the energy and industrials
outsourcing
markets
– Innovation focused, growing service capabilities
through digitisation and field engineering
– Customer intimacy and strategic alignment with end
users through a network of ~200 service and
support centres with unique field service
capabilities
COMPETITORS
Competitors include Flowserve,
EagleBurgmann, AES, FSD, A.W. Chesterton,
Pall and TM filters
36%
of Group revenue
71% of John Crane
revenue is from
aftermarket sales
c.6,100
Colleagues
£1,079m
FY2023 revenue
+15.2%
Organic growth
£244m
FY2023 headline operating
profit
+25.2%
Organic growth
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
OUR DIVISIONS
CONTINUED
5
SMITHS DETECTION
Detection and screening technologies
for safety, security, and freedom
of movement.
Smiths Detection is a global leader in
the design, manufacture, installation
and support of threat detection and
screening technologies that protect
people and assets.
CUSTOMERS
– Aviation: airports and governments, including
GROWTH DRIVERS
– Persistent and evolving threats to national
regulators who are also highly involved and help
shape market development
security, public safety and critical
infrastructure
– Other security systems: high-energy cargo
inspection systems for ports and borders;
integrated screening systems for a broad range of
urban situations (court houses, prisons, offices,
shopping malls, rail stations, etc.); and advanced
chemicals and explosives detectors for
governments with whom we have long-standing
partnerships
COMPETITIVE STRENGTHS
– Global reach and market-leading brand
– Differentiated proprietary technologies leveraged
across a broad range of markets
– 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 and cyber
security
– Increasing interest in solutions that enable the
circular economy
– Staffing constraints are driving demand for
digital image analysis software such as
automated threat recognition
– Significant research and development and digital
– Equipment replacement cycle, typically ~ten
capabilities
years
– Operating in regulated market segments that
require product certification
– Increasing product sustainability – energy
efficiency, supply chain and refurbishment
– Customer intimacy and loyalty through equipment
cycle and aftermarket offer
– Coverage for 191 countries
COMPETITORS
Competitors include Rapiscan, Leidos, Nuctech,
Flir, Analogic and Chemring
26%
% of Group revenue
51% of Smiths Detection
revenue is from
aftermarket sales
c.3,100
Colleagues
£803m
FY2023 revenue
+16.4%
Organic growth
£90m
FY2023 headline operating
profit
+15.4%
Organic growth
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 6
OUR DIVISIONS
CONTINUED
FLEX-TEK
Safe and efficient movement and
temperature management of fluids
Flex-Tek is a global provider of
high-performance engineered
solutions that support the safe and
efficient movement and temperature
management of liquids and gases in
a range of industry sectors.
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CUSTOMERS
– Construction: heating, ventilation and air-
GROWTH DRIVERS
– Through-cycle growth of the US housing
conditioning (HVAC) distributors and builders (full
range of heating elements, gas piping, flexible and
metal ducting)
construction market
– Expanding international market for
construction products
– Aerospace: aircraft manufacturers and their
– The electrification of everything, leading to
tier-one suppliers (full range of rigid and flexible,
high- and low-pressure tubing and ducting for fluid
conveyance)
broad adoption of electrical heating solutions
across industrial and domestic settings
– Long-term increase in commercial and
– Industrial: specialist end uses including medical
military aircraft production
and industrial hoses and a broad range of heating
elements for applications in industrial market
segments
– Customer focus on efficient performance and
environmental safeguarding
– Growth in use of medical devices
COMPETITIVE STRENGTHS
– Leading capability in design, manufacture and cost
engineering
– High-performance, differentiated products
– Innovation focused
– Strong customer relationships and brand reputation
COMPETITORS
Competitors include Parker-Hannifin, Eaton,
OmegaFlex, Warren, Watlow and Southwark
Metal
25%
% of Group revenue
c.3,300
Colleagues
£768m
FY2023 revenue
+10.1%
Organic growth
£149m
FY2023 headline operating
profit
+3.4%
Organic growth
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
OUR DIVISIONS
CONTINUED
7
SMITHS INTERCONNECT
Smarter interconnect solutions
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/BUSINESS UNITS
– Connectors: high-reliability electrical interconnect
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, and Industry 4.0
– Development of healthcare technology
COMPETITORS
Competitors include Amphenol, TE Connectivity,
Molex, Cobham, Samtec, Glenair, Anaren, Leeno
and Winway
solutions for specialised applications across a
broad range of healthcare, industrial, transport,
defence and aerospace 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
– Fibre-optics and radio frequency (RF) components:
broad range of devices, including 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
13%
% of Group revenue
c.2,050
Colleagues
£387m
FY2023 revenue
(2.8)%
Organic growth
£62m
FY2023 headline operating
profit
(11.9)%
Organic growth
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 8
CHAIRMAN’S STATEMENT
CHAIRMAN’S
STATEMENT
SIR GEORGE
W. BUCKLEY
Chairman
Dear shareholders,
This is the final Chairman’s shareholder
letter I’ll write to you since I retire at the
upcoming shareholders’ meeting. You’ll
have a new Chair, Steve Williams, at the
close of voting.
You will likely know I write these letters
myself, not our corporate staff. I’ve
always thought a personal letter from the
Chairman is important, and I generally use
these letters as teaching pieces. This letter
will reflect on past achievements and
postulate a few things for the future.
Over the last 20 years, Smiths Group plc experienced
only very moderate organic growth. My mission as
Board leader was to try to change that pattern. But, as
the Chairman, you are constrained by good governance
because directors are generally required to be ‘nose
in, finger out’. While the Board constantly monitors
performance, intervention only comes when the
Board senses a significant deviation from performance
and investor expectations. Until then, we are mostly
advisers, guides, and inspirers, but sometimes
cajolers and even pleaders. I’ve seen the Chair as
a position where we can help develop the senior
management team to learn new skills and approaches
to persistent historical problems. All great leaders are
great teachers.
During my tenure with Smiths, we have seen the
disposal of the medical business, the COVID-19
pandemic, tremendous supply chain shortages,
rampant inflation, the Russia-Ukraine war, tensions in
both the Middle and Far East, and a growing trade war
between the United States and China.
There are always challenges and worries in any period
of history, but this one has had several spectacular
problems. We haven’t seen a global pandemic since the
so-called ‘Spanish flu’ (Influenza type A, subtype H1N1)
between 1918 and 1919. But we got one in COVID-19.
I have written much previous commentary on supply
chain dynamics, forecasting the end of COVID-19 and
anticipating President Xi’s change of heart regarding
COVID-19. I recently spoke to the UK Parliament about
rebuilding Britain’s manufacturing and technological
capabilities. We cannot solve poverty and social
deprivation in Middlesbrough or South Wales simply
by having more bankers in London.
Two primary causative agents were at work in
producing this larger set of challenges. During the
pandemic, it created temporary peaks in demand for
certain types of services, local logistics and delivery
services, plus huge demand for electronics and things
related to safe environments where, except for factory
workers, we all largely worked from home. Other
things suffered: airline travel, transportation,
restaurants and conventional retail shopping.
After the end of the pandemic, supply chain shortages
were generated by a simultaneous start-up of all the
world’s economies. The illusory overshoot in
companies’ sales demand curves also led to panic
buying, component shortages and huge price inflation.
The outcome of panic buying was excess and
sometimes high-priced inventory, high-priced shipping
containers, and energy and food shortages because of
the Russia-Ukraine war. The illusory overshoot in
demand was the thing that could’ve been avoided most
easily, including its contribution to inflation.
Regarding inflation, I have often used the phrase that
the solution to high prices is high prices. Manufacturers
re-engineer their products, substitute new materials,
find ways to reduce waste, and find new suppliers.
A significant piece of the inflation in the UK was due to
energy. To illustrate this point, I pay nine cents per
kilowatt hour in my home in Florida for my electrical
energy. I pay 59 pence per kilowatt hour of energy in the
UK, about eight times as much as in the United States.
Therefore, any energy-intensive process manufacturing
was crushed and cannot compete long term in the UK.
We understand the obvious smelting and steelmaking
processes, but a surprising component of this problem
is manufacturing cars, where the paint process is
hugely energy intensive. One way around this might be
using body films instead of paint.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHAIRMAN’S STATEMENT
CONTINUED
9
Adaptability and
proactive measures the
Company took ensured
minimal disruptions to
our global operations
during COVID-19.
Over the last two
years, the Company
has also returned to
encouraging levels of
organic growth.
PERFORMANCE HIGHLIGHTS
Adaptability and proactive measures the Company
took ensured minimal disruptions to our global
operations during COVID-19. Over the last two years,
the Company has also returned to encouraging
levels of organic growth. Some comparisons benefit
from easier year-over-year comparisons, but the
results reported in the last two years still significantly
bettered expectations.
Smiths businesses cover many industries, but among
the largest are energy, construction and transportation
– primarily aviation and airport-related businesses.
But we also have a business in defence and vast
opportunities to move into other areas of urban safety
and food safety, for example. We have technologies
currently applied to detecting military chemical warfare
contaminants that can be applied in commercial
property applications and the home. And sealing
technologies developed by John Crane will have a
significant role to play in the decarbonisation of existing
industries, including oil & gas, and the growth of new
low- and zero-carbon energy infrastructure like
hydrogen, supported by carbon capture.
One of the most exciting developments is in Smiths
Detection, where X-ray diffraction can help identify
specific materials based on their molecular spacing,
not just material density, which is what traditional X-ray
methods use. This will make Smiths the world’s most
advanced hold baggage and carry-on baggage
screening company.
Investors naturally worry about our end markets
under pressure. Two of our end markets experienced
significant contractions during the year. The first is
electronics, particularly those related to semiconductor
testing. The second is construction.
Contraction in our Smiths Interconnect business
partially relates to silicon wafer volume and certain
types of chipsets passing through semiconductor
manufacturing. During the pandemic, those industries
saw huge increases in demand for electronic products.
Those electronic end markets contracted a few
percentage points as the pandemic eased. However,
demand in the upstream supply chain saw temporary
contractions year-over-year of around 40% in many
cases. That, in turn, reflects in the demand seen
by businesses like Smiths Interconnect. These
contractions are perfectly normal in electronics
and tend to be relatively short-lived.
In any environment experiencing demand contraction,
management has two primary responsibilities. The
first estimates how deep the contraction will go, and
the second is to estimate how long it will last. In any
make-to-stock business, demand in the channel, both
in expansion and contraction, is always many multiples
of what happens in the end market. Typically, the higher
the demand overshoot/undershoot, the shorter it lasts,
as companies in the supply chain work to clear the
excess inventory quickly. Regular readers will
remember my forecasts of high energy costs and the
consequence of panic buying during the illusory
demand increase as the global economy restarted
post-COVID-19. This is exactly what we’re seeing.
Part of our Flex-Tek business participates in the
important US construction industry. It’s a make-to-
stock business and supplies products through large
retailers and distributors in the United States. A similar
phenomenon of channel demand contractions to those
in the electronics industry happens in construction.
End market conditions change, and the channel adjusts
quickly to new circumstances. It does this in both
directions: increasing or decreasing demand. So,
there’s reason to expect that, as the calendar year 2024
unfolds, we will see improving demand conditions in
the construction segment of Flex-Tek. The aviation
segment of Flex-Tek remains robust as the demand for
new airplanes increases rapidly.
At the end of the Smiths financial year, the US inflation
rate was 3.2% compared to 6.8% in the UK. July’s
inflation rate was down to 0.2%, so it is clearly headed
in the right direction. The demand for goods and
services is up 0.3% and 0.5%, respectively. This data
can all be found at www.bls.gov. The US Federal
Reserve Bank has an inflation target of 2% and is still
cautious, but perhaps unnecessarily. US housing
starts have begun to increase again. It’s reasonable
to expect that the upward trend in housing starts will
continue and will accelerate once the Federal Reserve
either pauses or ultimately reduces interest rates. In
conclusion, the pressure on our construction-oriented
business will ease.
One of the most important data sets investors can
examine is the US Bureau of Economic Analysis on its
site, www.bea.gov. The Bureau publishes overall GDP
numbers in a sequence of three estimates, but one of
the most important Table 2 entries is the heading
“Change in private inventories”. In the first quarter of
calendar year 2023, the change in private inventories
was a full negative 214 basis points of GDP, indicating
that the economy was, as expected, reducing
inventories on a large-scale basis. The contribution to
US GDP of change in private inventories in the second
quarter is a positive 14 basis points, suggesting an
easing in the inventory bleed-off. The US economy
overall is running a little over 2% growth. While that
may not be spectacular, it’s stable in the economic
context we find ourselves in.
The only real negative I see is that, in my view, the
Federal Funds Rate is still too high and likely to produce
an overshoot in cooling demand unless the Federal
Reserve Bank eases monetary policy soon.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS We remain committed to the belief that
the best tool for new value creation is
higher than market organic growth.
The best unlock code to achieve this
objective is innovation.
REVIEW OF THE YEAR
Read more about our
performance.
PG 18
CONCLUSION
I sincerely thank our dedicated employees, esteemed
shareholders, and valued customers. Smiths journey
has been marked by resilience, innovation and a shared
vision of a better future. As we navigate the path ahead,
I am confident that our collective efforts will continue to
drive success and create lasting value.
It has been both an honour and a privilege to serve as
Chairman of this great business and, on behalf of the
Board, I would like to thank you for your continued trust
and partnership.
Sincerely,
SIR GEORGE W. BUCKLEY
Chairman of the Board, Smiths Group plc
10
CHAIRMAN’S STATEMENT
CONTINUED
INNOVATION AND R&D
We remain committed to the belief that the best tool
for new value creation is higher than market organic
growth. The best unlock code to achieve this objective
is innovation. As I have said in previous letters, the
core of every company is dying, so the contribution
to growth for innovation has to exceed the core
attrition rate caused by cannibalisation, end-of-life
technology, competitive attack, and changing
customer preferences.
As we embark on a new year, we focus on innovation,
growth, and increasing value to our shareholders.
We identified key strategic priorities guiding our
efforts in 2022 and beyond. We will continue to invest
in research and development, driving innovation across
our product lines and positioning Smiths as a leader in
cutting-edge technologies.
In an early Chairman’s letter, I said I believed the
great crystal ball of the future for engineering
companies is mathematics, electronics and materials
science. The mathematics here covers every piece of
engineering calculation and forecasting, including
artificial intelligence, deep cognitive learning, and
mathematical taxonomy. Electronics here include
sensors, controllers, software, and the like. Materials
science includes aspects of physics and chemistry,
including X-ray diffraction, special surface coatings,
nanomaterials, 3D printing, and graphene.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S REVIEW
OUR BUSINESS
MODEL
Our business model leverages our strengths to perform to our potential, deliver our
purpose, and generate value for all stakeholders.
OUR STRENGTHS
OUR STRATEGIC PRIORITIES
OUR CULTURE
OUR STAKEHOLDERS
WORLD-CLASS
ENGINEERING
LEADING POSITIONS
IN CRITICAL MARKETS
GLOBAL
CAPABILITIES
ROBUST FINANCIAL
FRAMEWORK
S MITHS LEA
D
E
R
GROWTH
Innovates
for Impact
Takes accountability
& ownership
S
H
I
P
B
E
H
EXECUTION
PEOPLE
O W T
R
G
Sets vision
to inspire
C
U
T
I
O
N
Delivers results
at pace
H
EX
E
Smiths
Value
Engine
PEOP L E
Lives Smiths
Values
Leads inclusively
& empowers
Develops self
& others
A
V
I
O
U
R
S
We create value for
our stakeholders
by focusing on what
matters most to them
OUR STRENGTHS
WORLD-CLASS ENGINEERING
We have a long track record of innovating
across our multiple markets. R&D
investment consistently ahead of
competitors ensures a strong pipeline
of new products.
LEADING POSITIONS IN CRITICAL
MARKETS
Our markets (General Industrial, Safety
& Security, Energy and Aerospace) are
secularly attractive and growing. We
have leading positions in many key
segments based on technology and/or
service differentiation.
GLOBAL CAPABILITIES
We are present in more than 50
countries and our geographical spread
and end market diversification provides
stability and growth.
ROBUST FINANCIAL FRAMEWORK
Our robust financial framework derives
from accelerating revenue growth;
recurring, higher margin aftermarket
revenues; good margins and return on
capital; and low asset intensity and
strong cash generation.
OUR STRATEGIC PRIORITIES
GROWING FASTER TO UNLOCK VALUE
We will grow faster by using our
existing market positions to invest in
focused new product development and
commercialisation; by building out
priority adjacencies; and disciplined M&A
to augment strategy implementation.
STRONGER EXECUTION
We are focused on executing with agility,
speed and greater consistency to deliver
improved results.
INSPIRE AND EMPOWER OUR PEOPLE
Our people are critical to our success.
Building an inclusive, high-performing
and engaged team, and our commitment
to development and talent progression
will facilitate our ambitions.
OUR CULTURE
Our culture inspires and empowers our
people to deliver. It has enabled Smiths
to prosper for more than 170 years.
OUR VALUES
are the things that are important to us.
OUR LEADERSHIP BEHAVIOURS
make us dynamic, inclusive and focused
on delivering results.
OUR CODE OF BUSINESS ETHICS
outlines the ethical standards we all
commit to.
THE SMITHS EXCELLENCE SYSTEM
(SES)
drives stronger execution and continuous
improvement across all of our priorities.
OUR STAKEHOLDERS
OUR PEOPLE
Decent, inclusive, safe work, and
environments where colleagues can
build careers and flourish.
OUR CUSTOMERS
Differentiated technology, engineering
and service solutions that make the
businesses of our sophisticated global
customers work and grow.
OUR SUPPLIERS
Collaborative supplier partnerships with
enduring mutually beneficial outcomes.
CULTURE
Read more about our
culture.
COMMUNITIES AND SOCIETY
Environmental/social value though our
products and direct contributions via
taxes, wages and giving.
REGULATORS AND GOVERNMENTS
Openness, transparency and support for
global policies that deliver a safe, secure
and sustainable world.
OUR INVESTORS
Long-term financial value and returns
for investors.
PG 13
STAKEHOLDERS
Read more about our
stakeholders.
PG 58
PRINCIPAL RISKS
AND UNCERTAINTIES
Read more about our
principal risks and
uncertainties.
PG 68
11
MARKETS AND
MEGATRENDS
Read more about our
markets and megatrends.
PG 3
DIVISIONS
Read about our divisions.
PG 4
STRATEGIC
PRIORITIES
Read more about our
strategy.
PG 12
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
12
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
OUR STRATEGY
FY2023 was another strong year of progress in advancing
our strategic priorities.
OUR STRATEGIC PRIORITIES
FY2023 PROGRESS
ACCELERATING
GROWTH
– Taking full advantage of strong demand in
most of our markets
– Improving new product development and
commercialisation
– Extending our reach by building out priority
adjacencies driven by megatrends of energy
transition and sustainability, increasing
security needs, and enhanced connectivity
– Record organic revenue growth; now nine consecutive quarters of growth
– Double digit organic revenue growth in three of four Smiths divisions
– +310bps of growth coming from new products. Gross vitality of 31%
– £113m invested in R&D; capex +14.1%
– Growing John Crane’s presence in hydrogen and carbon capture. Now over 70
active projects
– Growing Smiths Detection’s penetration in other security systems segment,
+34.9% revenue
– Supplementing organic growth with
– Flex-Tek supporting development of the world’s first Green Steel production
disciplined M&A
facility
– Smiths Interconnect acquisition of Plastronics
– Continued active acquisition pipeline
STRENGTHENING
EXECUTION
– Embedding the Smiths Excellence System
across the Group
– +20bps headline operating profit margin to 16.5%
– Strong profit growth in John Crane and Smiths Detection. Solid profit growth
– Accelerating pace and establishing a more
in Flex-Tek
consistent operating rhythm
– 6 Master Black Belts and 31 Black Belts across the Group; 71 SES Black Belt
– Continuously improving to deliver value for
projects underway or completed
customers
– Executing against our environmental
commitments
DOING EVEN
MORE TO INSPIRE
AND EMPOWER
OUR PEOPLE
– Building upon our world-class safety record
– Accelerating talent development through the
Smiths Leadership Behaviours
– Creating an ever-more diverse and inclusive
environment
– Living Smiths Values each and every day
– +£14m incremental profit from SES projects
– Reduction in working capital through second half supported by focused
SES projects
– Submitted Net Zero trajectory and targets for Scopes 1, 2 and 3 emissions to
the Science-Based Target initiative
– (11.8)% reduction in Scope 1 & 2 GHG emissions
– Safety Recordable Incident Rate (RIR) down (26)% and record low lost time
incident rate (LTIR)
– Continued to embed Smiths Leadership Behaviours and integrated them into
our Accelerate leadership development programme (300 trained in FY2023)
– Expansion of diversity, equity and inclusion initiatives, including significant
growth in activities to inspire and develop female leaders. 25% of senior
leadership positions now held by women
– My Say survey global e-Sat engagement score increased to 73. See page 14
– Launched Smiths Group Foundation and global volunteering policy
FY2023 PROGRESS
AGAINST TARGETS
Organic revenue growth
11.6%
FY2022: 3.8%
EPS growth
4–6%
7–10%
39.6%
FY2022: 17.8%
ROCE
15–17%
15.7%
FY2022: 14.2%
Operating profit margin
18–20%
16.5%
FY2022: 16.3%
Operating cash conversion
100%+
86%
FY2022: 80%
Target still to achieve
FY2023 progress vs
target
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
13
OUR PURPOSE
We are united by our
purpose to improve our
world through smarter
engineering. It is what we
do, how we think, and how
we will continue to use our
passion for technology and
engineering.
BOARD OVERSIGHT
Read more about this and
how the Board influences
our culture.
PG 82
SMITHS VALUES
INTEGRITY
We do the right
thing
RESPECT
We respect each
other
OWNERSHIP
We take
responsibility
CUSTOMER FOCUS
We earn our
customers’ trust
PASSION
We are united in
purpose
OUR PEOPLE AND
CULTURE
Our culture inspires and empowers our
people to deliver our strategy. The four
key elements of our cultural framework
support the Smiths business model
and drive positive outcomes for all
our stakeholders. The framework is
underpinned by governance processes set
and monitored by the Smiths Board, which
has ultimate responsibility for ensuring
that our culture remains healthy and
drives the long-term success of the Group.
1.
OUR VALUES
Our Values are the things that are important to us as an
organisation. They make us reliable, trustworthy and
valued partners for each other, our customers and
suppliers, and they make Smiths a place where we are
happy and proud to work. We live them every day, in
each action and decision that we take.
2.
SMITHS LEADERSHIP BEHAVIOURS
The Smiths Leadership Behaviours take our Values
to the next level. Grouped under growth, execution
and people, they describe the behaviours needed
to be displayed by all colleagues for the organisation
to be dynamic, inclusive and focused on delivering
results that create value and enable our growth
strategy. Leadership is a mindset at Smiths.
Everyone can be a leader.
3.
SMITHS CODE OF BUSINESS ETHICS
The Smiths Code is the foundational document that
outlines the standards of behaviour to which we all
commit at Smiths. It is a practical guide to what ‘doing
the right thing’ looks like when conducting business
and forging relationships legally, ethically and with
integrity. The Code is supplemented by a suite of
policies and procedures relating to specific ethics,
compliance and people matters.
4.
SMITHS EXCELLENCE SYSTEM
SES is central to how we solve problems and deliver
improved results at Smiths. The SES structure,
leadership, committed resources, tools and training
ensure that we explicitly prioritise and resource
projects according to impact and importance, and
execute with greater pace, urgency and consistency
in support of our Smiths Value Engine priorities.
SETS VISION TO INSPIRE
Collaborates to uncover future growth opportunities for
Smiths. Shares this in a way that inspires and energises
colleagues to take action.
INNOVATES FOR IMPACT
Committed to continuous improvement, takes
opportunities to the market that differentiate Smiths
and deliver sustainable value for all stakeholders.
TAKES ACCOUNTABILITY AND OWNERSHIP
Actively takes accountability, follows through
on commitments and empowers others to own
their outcomes.
DELIVERS RESULTS AT PACE
Takes an agile, focused and resilient approach that
delivers excellent outcomes to meet customer/
stakeholder expectations.
LEADS INCLUSIVELY AND EMPOWERS
Champions inclusion at every opportunity. Creates the
environment where others can contribute and thrive,
building trust and nurturing empowerment.
DEVELOPS SELF AND OTHERS
Visibly commits to their personal development and
encourages the development of others to reach their
full potential.
LIVES SMITHS VALUES
Embodies and promotes Smiths Values: integrity,
respect, ownership, customer focus and passion, using
these to guide all actions.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 14
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
MONITORING AND MEASURING THE
HEALTH OF OUR CULTURE
ENGAGING WITH OUR COLLEAGUES
Our global communications activities are designed to
engage colleagues around the world with our purpose,
culture and strategy. Key communications materials
are translated into our ten core languages.
MY SAY EMPLOYEE ENGAGEMENT SURVEY
We have been tracking engagement on a range of
important cultural measures since 2017. We use the
results of 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, both at a high level and at grassroots level in
individual teams.
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 and our global virtual Town Halls have an
online translation feature. Our intranet web portal acts
as an online hub holding links to support, training and
resources for many areas including SES, safety, ethics
and compliance, and diversity and inclusion.
We undertook a large range of engagement activities in
FY2023 including:
– My Say employee engagement survey (see right)
– Site visits by members of the Executive Committee
and the Smiths Board
– Global Town Halls in September and March
– Global leadership summits for our extended and
senior leadership teams (c.400 colleagues) in
November, June and February
– Live broadcasts of ‘fireside chats’ featuring female
members of the Executive Committee and the
Smiths Board
– One-to-one meetings of the Chairman and senior
leaders
– Live broadcasts and communications around our
results announcements, our Capital Markets event
in November 2022, and other key CEO and CFO
external activities
We undertook our latest survey in May 2023,
with updated questions to align the survey more
closely with our cultural focus areas, testing the
following categories:
– Overall happiness working at Smiths (our employee
engagement eSat KPI) and excitement about our
future
– Awareness and understanding of the Smiths
Leadership Behaviours and people living our Values
– Commitment to safety and the environment
– Empowerment, continuous improvement,
leadership, collaboration and understanding of
individual priorities
– Career, recognition, feedback and opportunities to
learn and grow
– Work/life balance, feeling cared about at work,
equal opportunities
– Diverse perspectives valued, and ability to express
thoughts and ideas/speak out
Strengths:
– Smiths is committed to providing a safe workplace
– I understand how my work contributes to company
success
– Smiths is committed to having a positive impact on
the environment
– We continually improve the way the work gets done
– People frequently express their thoughts and ideas
– I am able to find the balance I desire between my
work life and personal life
Opportunities:
– Everyone has an equal opportunity to succeed
– I feel satisfied with the recognition I receive for
my work
– I have good career opportunities at Smiths
Results from the survey and recommendations are
reported to, and discussed by, the Executive Committee
and the Smiths Board before being incorporated into
strategic planning to prioritise action in lower scoring
categories. Actions include continuing our efforts to
strengthen and upskill our leaders; using the
Leadership Behaviours as a driver for people to share
their opinions and ideas; building stronger diversity and
inclusion programmes; and continuing to improve our
talent development processes to make career plans
and prospects more visible. Each division and function
have also identified improvement opportunities to work
on in the coming year.
SPEAKING OUT
Engaging and communicating on ethical matters is
vitally important, as is colleague trust in our
procedures. Colleagues and business partners are
expected to be vigilant and report any activity or
behaviour – whether in our business or those of our
partners – that they consider may be in breach of our
ethics codes and policies or inconsistent with our
Values. This can be done through their line manager,
HR representative or the Legal team, or by using our
confidential Speak Out reporting hotline, which is
accessible 24 hours a day, seven days a week to
colleagues and third parties. Reports to the hotline can
be made anonymously. This is communicated regularly
to ensure that awareness remains high.
We also use colleague feedback to build understanding
of how we are doing on ethical matters, and to target
our activities effectively. Our grassroots Ethics
Ambassador network reviews plans and helps us to
bring ethics to life, and to the widest possible audience,
and our global Ethics Pulse survey delivers rich data on
colleague perceptions across Smiths. This data is
reported to the Audit & Risk Committee along with
Speak Out data.
84%
of Smiths colleagues
participated in the My
Say survey (May 2022:
82%; industry
benchmark 75%).
+2%
12,158
Comments made in the
My Say survey.
73
Overall eSat score for
the My Say survey was 73
(May 2022: 72; industry
benchmark 74).
+1 point
OUR PEOPLE
Read more about our
people.
PG 59
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
15
BUILDING SMITHS CULTURE IN FY2023
We recognise that a healthy culture requires continuous care and attention to support our ambitions. Some of the ways we nurtured our culture in FY2023 are given below.
SMITHS DAY
Our annual Smiths Day global celebration of Smiths culture took place in June 2023. Smiths Day celebrates our Values and the rich
connections and relationships we have as colleagues. This year’s theme ‘contributing to our communities’ encouraged every Smiths site to
look outwards and to undertake a locally based activity as a way of giving back to their immediate communities.
EMBEDDING THE
SMITHS LEADERSHIP
BEHAVIOURS
After their launch at the end of FY2022, embedding the Smiths Leadership Behaviours has been an important focus in FY2023. The
Behaviours are intended to become foundational to the colleague experience and are central to development, talent assessment, and
progression and reward. Our Accelerate people leadership programme, launched in FY2023, is based around the Leadership Behaviours.
LAUNCH OF
SUSTAINABILITY AT
SMITHS FRAMEWORK
The Sustainability at Smiths ESG framework was formally launched to colleagues at the beginning of FY2023 with messages from our
senior ESG leaders. Sustainability is at the heart of our purpose and the framework helps us to translate our purpose into practical action
to create sustainability value.
ESG DOUBLE
MATERIALITY
ASSESSMENT
Our ESG double materiality assessment undertaken in FY2023 provided a robust analysis of the importance of culture and other ESG topics
at Smiths. Safety, ethical behaviour and diversity were all highlighted as either highest-impact topics or critical enablers in the findings.
Read more on page 33.
This year’s Smiths Day
theme ‘contributing
to our communities’
encouraged every
Smiths site to look
outwards and to
undertake a locally-
based activity as
way of giving back
to their immediate
communities.
LAUNCH OF SMITHS
GROUP FOUNDATION
The Smiths Group Foundation, a charitable giving foundation with a committed initial fund of £10m, was launched on Smiths Day to provide
grants to charitable organisations that align with our purpose. At the same time, we launched global colleague volunteering principles
which will enable every Smiths colleague to take one day paid volunteering leave each year from FY2024, and formal budgeting
opportunities for charitable giving in our divisions, China and Group to support organisations falling outside of the scope of the Foundation.
CELEBRATION AND
RECOGNITION EVENTS
Group and team events and communications recognised and celebrated: World Day for Health and Safety at Work; Earth Day; Global
Recycling Day; International Women in Engineering Day; International Women’s Day; Black History Month; and Pride month.
NEW CODE OF
BUSINESS ETHICS
Our new Code of Business Ethics was launched by CEO Paul Keel in July 2023. The new Code is organised under our Values, is shorter
and easier to read, and more practical to apply with links to all our policies. The new Code will be embedded through a programme of
activity in FY2024.
SPEAK OUT
AWARENESS
Speak Out awareness activities have been ongoing throughout FY2023.
SMITHS EXCELLENCE
AWARDS
Our annual Smiths Excellence Awards recognise achievement across a range of disciplines and are enthusiastically supported by Smiths
colleagues. The Smiths Leadership Behaviours were reflected in this year’s award categories to emphasise their importance and impact.
This year we had more than 500 submissions to the Awards.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 16
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
CEO
MESSAGE
PAUL KEEL
Chief Executive Officer
£113m
R&D investment.
+6%
+20%
Growth in energy revenue.
Fellow shareholders,
Smiths had another strong year of
progress in fiscal 2023 as we further
accelerated our growth, sharpened
our execution, and developed and
empowered our talented people. Since
our financials and strategic progress
are covered in good detail in the following
report, I will devote the lion’s share of this
year’s message to longer-term trends
underway in the markets we serve. In
particular, I will comment on a curious
disconnect I observe between the macro
and the micro.
Most of the macro commentary at present leans
towards the cautious, and there is fair reason for this.
Inflation, while climbing less steeply, remains at historic
highs. Committed to tamping this down, central banks
have raised rates at the briskest pace since the 1980s.
The expected result is softening demand, as has been
visible in most forecasts of late. Similarly concerning,
economics and geopolitics are often inversely related,
so just as forecasts cool, tensions around the world
continue to warm. Speaking of warm, environmental
concerns, percolating for years, are reaching a boiling
point. Further still, more than a few would argue that
things may still get worse before they get better. The
macro, in short, is pretty cloudy.
The micro, however, provides grounds for optimism,
especially in our industrial technology corner of the
world. FY2023 was a record year for Smiths – record
topline and EPS growth. We commit to five medium-
term financial targets (growth, EPS, ROCE, margins,
cash conversion) and all five improved year-over-year.
Promisingly, we are not alone in this regard. Over
half of our 15 closest peers have delivered double-
digit growth across the same period. Still more
encouraging, this was not driven by a one-time bounce
from COVID lows (although we do benefit from still-
unmet demand in several end markets) or inflationary
tailwinds that will eventually weaken (roughly half our
FY2023 growth came from volume). The trends we
see in our business are longer-lived, with growth now
extending over nine consecutive quarters. The micro, in
short, looks pretty good.
So, how do we reconcile the apparent disconnect of
economic forecasts trending down but performance
trending up? A few important factors help connect
the dots.
INNOVATION
First, innovation is economically insensitive. In the
period between the ‘Panics’ of 1873 and 1893, Bell
invented the telephone and Edison patented the
lightbulb. During the Great Depression, Carlson
introduced the photocopier and Edwin brought us FM
radio. Stagflation and a raft of skyjackings in the 1970s
led to the introduction of X-ray scanning in airports.
Wikipedia, Skype, YouTube and Facebook were all
formed shortly after the Nasdaq crash of 2001, and
Uber and Airbnb were both launched during the global
financial crisis of 2008–09. Necessity helps, but
capabilities and capital are the true mothers of
invention. Knowing that innovative companies extend
their lead when storm clouds form, we increased our
R&D investment by 14% in FY2022 and another 6% this
year. Returns on our investments are good. Fully three
points of our FY2023 growth came from new products
introduced just this year alone.
MARKET SELECTION
A second factor bridging the gap is market selection. All
markets have cycles, but the most attractive ones cycle
upward, in a northeast direction. Energy and aerospace
are good examples. Energy demand has a 5- to 10-year
cycle, with global growth peaking in 1984, 1988, 1996,
2004, 2010 and 2021. Growth in energy demand may
soften in any given year, but it rarely turns negative. In
fact, global energy demand has only contracted three
times in the past 50 years (the early ‘80s recession, the
global financial crisis and COVID) leading to a near-
quadrupling of underlying demand across this time.
Over 20% of Smiths revenue comes from energy
markets, where we grew 20% in FY2023. Consistent
with other upward-cycling markets, continued energy
growth will be driven by secular long-term forces such
as decarbonisation. Our world will invest around
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
17
+24%
Market investment in clean
energy over two years.
+9%
Growth in aviation detection
revenue.
FY2024 will mark
Smiths Group’s 110th
consecutive year
of being listed on
the London Stock
Exchange, and our
173rd of continuous
operation. While a lot
has changed across
this time, our purpose
of improving our world
through smarter
engineering has
remained a steadfast
guide.
US$100 trillion over the next 30 years to evolve from
mostly fossil-based to low- and no-carbon energy
sources. Global investment in energy will be about
US$2.8 trillion in 2023, and investment in clean
technologies such as low-emission fuels, carbon
capture and heat pumps will represent more than 60%
of the total. Clean energy investment is up 24% in just
two years and participants in this market are seeing
surging demand. Our pipeline of hydrogen and carbon
capture opportunities, for example, more than doubled
over the past 12 months.
Aviation markets behave similarly. While the cycle is a
bit shorter, closer to five years, the trajectory is also
steadily positive over time. Airline passenger volume
has only dipped twice in the past three decades (9/11
and COVID), with volume up threefold across the period.
As with energy markets, we are in the early days of an
upcycle following airport closures around the globe in
2020–21. Powerful long-term forces are also at work
here, such as the world’s ever-rising need for better
security and faster screening times. You would have
experienced an example of this if you weren’t required
to remove your laptop the last time you went through
an airport checkpoint. This safer and more efficient
experience is made possible by technologies like
computed tomography, automated tray returns and
machine learning. Smiths is at the forefront of each,
and propelled by this, our aviation detection business
grew 9% in FY2023.
Not all of our end markets grew last year. As our
Chairman notes in his letter, semiconductors are
an example. Smiths has some exposure here – less
than 3% of Group sales. On the one hand, the
semiconductor market shares several similarities with
energy and aviation. It’s large (>US$500bn). It’s global.
It consistently grows over time (+10 times in 40 years).
And it is cyclical. However, unlike energy and aviation,
which are both cycling up, the global semiconductor
market is coming off a record peak in 2022. Smiths
makes test equipment used to measure chip
performance and durability. As expected, this business
contracted for us in FY2023, particularly during the
second half. We expect these challenges to continue
through the first part of FY2024, but we remain
confident in the coming upcycle that we have seen
so many times before. So much so, in fact, that we
acquired a synergistic testing business in Q2,
positioning us to extend our leadership position
once recovery begins.
Further to our Chairman’s letter, North American
construction is another example of a market that
contracted last year. Smiths also has exposure here –
around 15% of Group sales. In this case, despite a
market downturn, our business grew 9% in FY2023,
marking our 14th straight year of expansion. The two
effects mentioned earlier – innovation and market
selection – have helped our business consistently grow
even as the market naturally cycles. With respect to
innovation, we have a technology platform that
addresses specific customer needs by applying
different resin layers to metallic tubing systems. We
introduced a new product in this family at the start of
the fiscal year and it is beginning to scale. In terms of
market selection, our penetration is highest in parts
of the US where population growth is strongest, such
as the southeast, south central and the midwest. In
support of this, we opened a new manufacturing facility
in Texas in FY2023 and completed a synergistic
acquisition in Ohio at the start of FY2024. Consistent
with macro forecasts, we expect the US construction
downcycle to continue for a few more quarters.
Consistent with past performance, however, we expect
our business to post another year of growth in FY2024.
PORTFOLIO BALANCE
The many benefits of portfolio balance are a third factor
enabling industrial technology companies to shine,
even against a cloudy macro. Balance takes many
forms. The highest-performing industrials typically
serve multiple end markets (we serve four major ones).
They often balance one-time equipment sales with
recurring aftermarket service revenues (our business
is roughly half and half). They earn more price than
they absorb, especially important in high inflation
environments (our delta was +£40m in FY2023). And
they are well balanced geographically. Worldwide reach
is a prerequisite for serving global customers, and
upswings in one part of the world offset downturns in
others. Smiths has people and resources in more
than 50 countries and, aside from the US, no country
accounts for more than 5% of revenues. Our business
outpaced GDP growth in all major regions of the world
in FY2023.
LOOKING FORWARD
Looking forward to FY2024, the macro and micro
should converge. After a period of serial downgrades,
macro forecasts have recently started to improve.
The most recent data published by the OECD, IMF, and
World Bank all expect global GDP growth in 2024 to be
modestly above 2023. Specific to Smiths, we’ve guided
to 4-6% organic revenue growth, in line with the
medium-term financial commitments we made at our
November 2021 Capital Markets Day.
FY2024 will mark Smiths Group’s 110th consecutive
year of being listed on the London Stock Exchange,
and our 173rd of continuous operation. While a lot has
changed across this time, our purpose of improving our
world through smarter engineering has remained a
steadfast guide. I applaud my 15,000 colleagues around
the world who live this purpose each and every day.
I thank Sir George Buckley for his many contributions
to Smiths over the last ten years and welcome Steve
Williams, who takes over as Chair at our Annual
General Meeting in November.
In closing, we’re encouraged by our progress and proud
of our accomplishments in FY2023. Energised by this
momentum, we are even more excited by all we see
ahead for Smiths.
Thank you for your trust and support,
PAUL KEEL
Chief Executive Officer
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 18
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
REVIEW OF
THE YEAR
£3,037m
Revenue
+11.6%
Organic growth.
Smiths delivered record organic revenue
growth of +11.6%, ahead of guidance. We
generated £501m of operating profit, up
+20.0% on FY2022 as we continue to make
progress on our strategy.
GROWTH
Accelerating growth is the primary driver of unlocking
enhanced value creation for the Group. We grew in
every quarter of FY2023 and raised our guidance three
times during the year, delivering record organic
revenue growth of +11.6%. We have now delivered nine
consecutive quarters of organic revenue growth.
Strong growth continued in the second half for our two
largest businesses; with both John Crane and Smiths
Detection delivering double digit growth throughout the
year. Flex-Tek continued to grow into the second half,
with growth moderating to +3.6% reflecting the
anticipated softness in the US construction market.
Smiths Interconnect declined (8.4)% in the second half,
as anticipated, impacted by a weakening semiconductor
test market as well as delays in some large defence
and aerospace programmes.
Revenue grew +18.3% on a reported basis, to £3,037m
(FY2022: £2,566m). This included +£146m of favourable
foreign exchange translation, and +£8m from the
acquisition of Plastronics in January 2023.
Strong execution to access end market 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 in our largest end market,
General Industrial, grew +7.8% in FY2023, supported
by strong demand for John Crane’s industrial products
in chemical processing, water treatment and life
sciences. Slower H2 growth of +1.0% reflects a strong
prior year performance, and a softening in demand
for Flex-Tek’s heating, ventilation and air conditioning
(“HVAC”) products and Smiths Interconnect
semiconductor test solutions. Organic revenue growth
in Safety & Security was +11.9%, accelerating in the
second half due to Smiths Detection’s strong delivery
against its orderbook, partially offset by a decline in
Smiths Interconnect from the timing of defence
programmes. The +19.5% growth in Energy reflected
strong demand in John Crane. Growth in Aerospace of
+10.5% continued throughout the year driven by aircraft
build demand benefiting Flex-Tek; and helping to offset
the impact of delays in aerospace programmes in
Smiths Interconnect.
Our second lever for faster growth is improved new
product development and commercialisation. During
FY2023, +310bps of growth was delivered from high
impact new products including John Crane’s next-
generation diamond coating product offering for
high-speed and high-heat applications, Smiths
Detection’s next-generation CTiX scanners installed
with threat recognition software, and Flex-Tek’s ducting
in the energy efficient Rheia air management systems.
Gross vitality, which measures the proportion of
£m
FY2022
exchange Acquisitions
Foreign
2,566
146
417
27
8
0
Revenue
Headline
operating
profit
Headline
operating
profit margin
Organic
movement
FY2023
317
3,037
57
501
ORGANIC REVENUE GROWTH (BY BUSINESS)
SMITHS ORGANIC REVENUE GROWTH IN OUR
END MARKETS
H1 2023
H2 2023
FY2023
% of Smiths
revenue
H1 2023
H2 2023
FY2023
John Crane
Smiths Detection
Flex-Tek
Smiths Interconnect
+14.6% +15.8% +15.2%
+14.0% +18.8% +16.4%
+10.1%
+3.6%
+17.0%
(2.8)%
(8.4)%
+3.3%
General Industrial
Safety & Security
Energy
Aerospace
40% +15.4%
31%
22%
7%
+7.8%
+1.0%
+11.9%
+9.4% +14.4%
+17.1% +21.8%
+19.5%
+10.1% +10.8% +10.5%
16.3%
16.5%
Smiths Group
+13.5%
+9.9% +11.6%
Smiths Group
100% +13.5%
+9.9% +11.6%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
19
READ MORE
Our divisions.
PG 24
revenues coming from products launched in the last
five years, was 31% (FY2022: 31%), supported by our
successful new product commercialisation.
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 FY2023,
we invested £113m in R&D (FY2022: £107m), of which
£73m (FY2022: £80m) was an income statement
charge, £21m was capitalised (FY2022: £12m) and £19m
(FY2022: £15m) was funded by customers.
To support new product launches, and the strong
demand for our existing solutions, we increased capex
+14.1% in FY2023 to £81m (FY2022: £71m). This
represents 1.6x depreciation and amortisation
(FY2022: 1.5x).
Our third growth lever is building out priority
adjacencies. Each of our four businesses are
executing strategies to expand beyond their existing
core markets and ensure we capitalise on the long-
term megatrends of energy transition and sustainability,
increasing security needs and enhanced connectivity.
Examples in FY2023 include Flex-Tek’s high
temperature heating solution for the world’s first
green steel production facility; and Smiths Detection’s
+34.9% revenue growth in the other security systems
segment, supported by key wins in ports and borders
and parcel delivery markets.
Our fourth growth lever is using disciplined M&A to
augment our organic growth focus. In January 2023,
Smiths Interconnect acquired Plastronics, a leading
supplier of burn-in test sockets and patented spring
probe contacts, extending our reach into an attractive
market adjacency. We will benefit from Plastronics’
attractive position in artificial intelligence, data centres
and automotive end markets, and expanding
Plastronics’ sales globally by leveraging Smiths
Interconnect’s strong presence in Asia.
Following the year end, in August 2023 we acquired
Heating & Cooling Products (“HCP”) in our Flex-Tek
business. This further expands the Group’s presence in
the North American HVAC market, enabling Smiths to
serve more customers with an even broader product
range. Acquired for $82m (approximately £65m), at less
than 7x estimated 2023 EBITDA, this acquisition further
demonstrates our disciplined and targeted approach
to M&A.
EXECUTION
Stronger execution is our second key priority.
In FY2023, headline operating profit grew +12.7%
(+£57m) on an organic basis, and +20.0% (+£84m) on
a reported basis to £501m (FY2022: £417m). Headline
operating profit benefited from strong profit growth
in John Crane and Smiths Detection, and a solid
contribution in Flex-Tek, partially offset by a decline
in Smiths Interconnect.
Headline operating profit margin was 16.5%, up +20bps
on a reported basis supported by volume growth,
pricing more than offsetting inflation and the benefits of
SES and savings actions, all of which offset the impact
of product mix and investment in growth. By division,
strong operating leverage in John Crane reflected
improved execution and supply chain conditions. Smiths
Detection also improved its margin despite higher
Original Equipment (“OE”) sales mix. Flex-Tek and
Smiths Interconnect contracted from their record prior
year highs, with Flex-Tek continuing to invest in new
product development and commercialisation, and
Smiths Interconnect seeing lower volumes.
Headline EPS grew +39.6%, driven by headline
operating profit growth which contributed over a third
of the growth, the share buyback programme which
contributed a third, with the remainder of the growth
coming from FX and a reduction in both the effective
headline tax rate and interest expense. The headline tax
charge for FY2023 of £121m (FY2022: £104m)
represents an effective rate of 26.0% (FY2022: 27.6%).
ROCE increased +150bps to 15.7% (FY2022: 14.2%)
reflecting the higher profitability of the Group.
For further detail, please refer to note 29 of the
financial statements.
Headline operating cash conversion for FY2023 was
86% (FY2022: 80%), with stronger conversion in the
second half supported by improvement in working
capital. This was delivered through targeted and
disciplined working capital management helped by
focused SES projects. Headline operating cash-flow4
was £433m (FY2022: £332m). In FY2023, free cash-
flow4 generation was £178m (FY2022: £130m) or 35%
of headline operating profit (FY2022: 31%).
During FY2023 we continued to make good progress
on SES. There are currently 71 Black Belt projects
completed or underway, being driven by our 6 Master
Black Belt and 31 Black Belt employees across the
Group. Projects completed in the year contributed
£14m of profit, ahead of our plan of £12m. For FY2024,
we expect a contribution of £20m from SES as our
hopper of new projects continues to scale.
We implemented some targeted savings projects
across the Group through FY2023. These projects were
focused on simplification and improving efficiency.
Costs amounting to £36m in respect of these projects
have been charged to non-headline in the year, with no
further charges anticipated. In line with our previous
communications, £11m of benefit was realised in
FY2023 from these projects, with the annualised
benefits expected to be £25m.
£m
Headline operating profit
Headline operating profit margin
Foreign
FY2022
exchange Acquisitions
417
27
16.3% +10bps
0
Organic
movement
57
+10bps
FY2023
501
16.5%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 20
CHIEF EXECUTIVE OFFICER’S REVIEW
CONTINUED
PEOPLE
Inspiring and empowering our people is our third key
priority and our people plan is focused around four key
areas of safety, leadership development, diversity,
equity and inclusion, and engagement.
The first area, safety, is at the forefront of everything we
do. Our Recordable Incident Rate (“RIR”) for FY2023
improved to 0.41 (FY2022:0.56), and we delivered a
record low lost time injury rate of 0.14. This
improvement in safety has been achieved through
continuous reinforcement of our safety culture with
over 13,000 Safety Leadership Tours and Safety
Observations undertaken in the year. Of particular
focus was our Royal Metal site, acquired in 2021, which
delivered an 80% reduction in the number of incidents
through changes to manufacturing, new risk
management processes and leveraging technology to
make safety easier.
Our biggest people initiative this year was the continued
rollout of our Smiths Leadership Behaviours to define
our expectations for an inclusive and high-performance
culture. We continued the rollout of these seven
behaviours to fully embed them throughout the
organisation. We completed 94 workshops, attended by
over 1,600 leaders and the behaviours are now used in
our annual performance assessment process.
Alongside Smiths Leadership Behaviours, talent
development is a key priority within our People plan.
We are focused on growing and promoting talent from
within and in FY2023, 70% of open roles for manager
level and above were filled internally, versus 39% in the
past. To support our talent development, we have
relaunched the Accelerate Leadership Development
programme having trained our first 300 leaders in
FY2023, introduced mentoring programmes with the
Executive Committee for our high potential leaders and
continued to develop our Early Careers Programme,
which includes several engineering apprenticeship
programmes.
Promoting diversity, equity and inclusion is another key
part of our people strategy. We are specifically focused
on increasing gender diversity at all levels of the
organisation and we have ramped up our initiatives this
year, including introducing women’s support networks
and flexible working arrangements. As at 31 July 2023,
25% of our senior leaders, 25% of our Executive
Committee and 40% of our Board of directors are
women. With the help of the multiple initiatives
throughout the organisation, we expect to continue to
drive improvement in these metrics.
Overall, through our focus on inspiring and
empowering our people we have seen a year-on-year
improvement in our voluntary attrition, down 310bps to
12% for our global employees and down 410bps for our
engineering employees
OUR ESG APPROACH
Environment, Social and Governance (ESG)
performance is at the very centre of our purpose, and
fundamental to each of our three key priorities.
Growth
ESG at Smiths is approached with a growth mindset.
Our R&D is focused on commercialising high-value
green technology. Our progress is evident through John
Crane’s growing presence in hydrogen and carbon
capture markets with over 70 active projects and in
Flex-Tek supporting the development of the world’s first
Execution
Environmental metrics
FY2022
FY2023
Absolute Scope 1 & 2 GHG
emissions reductions
Energy efficiency6
0.9%
reduction
n/a
Proportion of electricity
from renewable sources
Non-recyclable waste7
Water use in stressed
areas7
63%
11.5%
reduction
4.5%
reduction
11.8%
reduction
7.9%
improvement
70%
9.8%
reduction
13.3%
reduction
6 Normalised to local currency revenue, excluding growth from price.
7 Normalised to reported revenue.
green steel production facility. Our proven ability to
serve these customers positions us well today and in
the future as the world increasingly relies upon smart
engineering to achieve Net Zero.
We are executing well against our ESG strategy, with
significant progress against our sustainability metrics,
which are now fully incorporated into both our annual
and long-term incentives. In the year, we launched our
first Sustainability report, submitted our Science Based
Targets for review and validated our framework
through completion of our first-ever ESG double
materiality assessment in accordance with applicable
guidance under the Corporate Sustainability Reporting
Directive (“CSRD”). We also extended the scope of the
limited assurance work carried out by KPMG to follow
the more rigorous ISAE3000/3410 standard for FY2022
and FY2023 data.
People
Engagement with our communities has long been a
strength of Smiths. This year we have gone one step
further with the launch of our new charitable
foundation, “The Smiths Group Foundation”. The
foundation committed an initial £10m of funding linked
to engineering-related good causes. The mission of the
foundation is central to Smiths purpose of “Improving
our world through smarter engineering.” We also
launched our global volunteering policy, amplifying the
multitude of grass-roots efforts already in place across
the organisation.
OUTLOOK
In FY2024, we expect organic revenue growth within
our medium-term target range of 4-6%, with growth
weighted towards the second half of the year. Our
strong orderbooks in John Crane and Smiths Detection,
along with our new product pipeline, give us confidence
in delivering this growth despite a record comparator,
moderating pricing environment, and the challenging
market conditions facing parts of Flex-Tek and Smiths
Interconnect. We also expect continued margin
expansion in FY2024, as we continue to scale the
Smiths Excellence System and reinvest to support
future sustainable growth.
ESG performance
is at the very centre
of our purpose, and
fundamental to each
of our three key
priorities.
Read more about
sustainability in our
Sustainability at
Smiths report
CLICK HERE
SMITHS LEADERSHIP
BEHAVIOURS
Read more about our
Leadership Behaviours.
PG 13
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF FINANCIAL OFFICER’S REVIEW
21
CFO
REVIEW
CAPITAL ALLOCATION
With our strong technology, market positions, and
financial frameworks, our highest capital priority
continues to be organic growth. Accretive M&A, either
to strengthen core positions or to accelerate
penetration of priority adjacencies comes second.
Third, we have a strong track record of returning capital
to shareholders, as evidenced by the £350m returned in
FY2023, on top of the £661m returned in FY2022.
ORGANIC INVESTMENT
In FY2023 we invested £81m in capex projects,
including £21m in capitalised R&D on programmes
such as next-generation hold and cabin baggage
screening and further advancements in our
defence portfolio. A further £73m in R&D was
charged to the income statement, supporting new
product development.
CLARE SCHERRER
Chief Financial Officer
£350m
Returned to shareholders
in FY2023.
+5%
Increase in dividend.
CAPITAL ALLOCATION FRAMEWORK
1.
ORGANIC
INVESTMENT
2.
M&A
– Target R&D at 4% of sales, focused on high return investments
– Capex to support growth
– Compensation linked to growth and new products
– Focus on core and adjacencies through bolt-on acquisitions
– Enhance technology roadmap
– Accelerate growth and create scale
3.
RETURNS TO
SHAREHOLDERS
– 70+ years of uninterrupted dividend
– Target dividend growth in-line with long-term earnings growth
– Maintain dividend cover of >2x
STRONG AND FLEXIBLE BALANCE SHEET TO SUPPORT GROWTH STRATEGY
M&A
In January 2023, Smiths Interconnect acquired
Plastronics, a leading supplier of burn-in test sockets
and patented spring probe contacts. In August 2023,
following the year end close, Flex-Tek acquired HCP,
a manufacturer of HVAC solutions in North America.
These acquisitions support our strategy to make
complementary inorganic investments to accelerate
our presence in adjacent markets or expand our
product offering. We have an active acquisition pipeline
and disciplined M&A approach across the Group.
SHAREHOLDER RETURNS
During the year we continued to repurchase shares
under the £742m share buyback programme initiated in
November 2021, in connection with our commitment to
return the majority of cash proceeds from the disposal
of Smiths Medical to shareholders. We have now
completed the share buyback programme.
In line with our progressive dividend policy and plan to
rebuild dividend cover after the sale of Smiths Medical,
the Board is recommending a final dividend of 28.7p,
bringing the total dividend for the year to 41.6p, a
year-on-year increase of +5.1% (FY2022: 39.6p).
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 22
CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
The final dividend will be paid on 24 November 2023 to
shareholders on the register at close of business on 20
October 2023. Our dividend policy aims to increase
dividends in line with growth in earnings and cash-flow,
with the objective of maintaining minimum dividend
cover of around 2 times. The policy enables us to retain
sufficient cash-flow to finance investment in growth
and meet our financial obligations. In setting the level of
dividend payments, the Board considers prevailing
economic conditions and future investment plans
The Company offers a Dividend Reinvestment Plan
(“DRIP”) enabling shareholders to use their cash
dividend to buy further shares in the Company – see
our website for details. To participate in the DRIP,
shareholders must submit their election notice to be
received by 3 November 2023 (“the Election Date”).
Elections received after the Election Date will apply to
dividends paid after 24 November 2023. Purchases
under the DRIP are made on, or as soon as practicable
after, the dividend payment date and at prevailing
market prices.
NET DEBT
Net debt4 at 31 July 2023 was £387m (FY2022: £150m),
an increase of £237m as we paid £143m in dividends
and returned £207m to shareholders via our share
buyback during the year. Net debt to headline EBITDA4
was 0.7x (FY2022: 0.3x).
As at 31 July 2023, borrowings were £654m (FY2022:
£1,166m) comprising a €650m bond which matures in
February 2027 and £117m of lease liabilities. The £512m
reduction in borrowings is due to repayment of a
€600m bond in April 2023. There are no financial
covenants associated with these borrowings. Cash
and cash equivalents as at 31 July 2023 were £285m
(FY2022: £1,056m).
In May 2023, we refinanced our $800m (c.£620m at
the period-end exchange rate) revolving credit facility
(“RCF”) which was due to mature in November 2024.
The new RCF is for the same amount, with the same
lenders, on substantially the same terms and matures
in May 2028. There are no financial covenants attached
to the new facility and it remains undrawn. Taking cash
and the RCF together, total liquidity was over £0.9bn at
the end of the period.
TOTAL GROUP PROFIT AFTER TAX AND EPS
Statutory profit after tax for the total Group decreased
by 77.6% to £232m (FY2022: £1,035m) as the prior year
included the profit on sale and results of Smiths
Medical of £1,022m. Statutory basic EPS was 65.5p
(FY2022: 267.1p).
ICU MEDICAL STAKE
Since the sale of Smiths Medical in January 2022 the
Group holds a financial asset reflecting our investment
in 10% of the equity in ICU Medical, Inc (“ICU”). See note
14 of the financial statements for further detail.
STATUTORY CASH-FLOW
Statutory net cash inflow from operating activities for
the total Group was £293m (FY2022: £279m). See note
28 of the financial statements for a reconciliation of
headline operating cash-flow to statutory cash-flow.
STATUTORY RESULTS
INCOME STATEMENT
The £98m difference between headline operating
profit of £501m and statutory operating profit of
£403m is non-headline items as defined in note 3 of
the financial statements. The largest constituents
relate to the amortisation of acquired intangible assets
of £52m, costs from savings projects of £36m,
acquisition related costs of £7m, £9m in costs for
asbestos litigation in John Crane, Inc and a provision
reduction of £7m for subrogation claims in Titeflex
Corporation. Statutory operating profit of £403m was
£286m higher than last year (FY2022: £117m), reflecting
higher headline operating profit and lower non-
headline charges.
Statutory finance costs were £43m (FY2022: £14m),
mainly due to a prior year non-headline £22m foreign
exchange gain on an intercompany loan with
Smiths Medical.
Non-headline taxation items of £13m 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 37% (FY2022: 87%).
Please refer to notes 3 and 6 of the financial statements
for further details.
PENSIONS
Included within free cash-flow was £5m of pension
contributions (FY2022: £9m). These contributions relate
to unfunded, overseas schemes and healthcare
arrangements.
It is not anticipated that any further contributions will be
made to the TI Group Pension Scheme (“TIGPS”), the
liabilities of which have now been insured via a series of
buy-in annuities. Smiths and the TIGPS Trustee are
working toward final buy-out of the scheme in order to
deliver certainty for the Scheme’s 21,000 members and
remove future risk for Smiths.
The other major pension scheme, Smiths Industries
Pension Scheme (“SIPS”) is estimated to be in surplus
on the Technical Provisions funding basis, and no
cash contributions are currently being made. The
Group and the SIPS Trustee continue to work together
to progress towards the long-term funding target of full
buy-out funding.
The two main UK pension schemes and the US pension
plan are well hedged against changes in interest and
inflation rates. Over 90% of their assets are invested in
third-party annuities, government bonds, investment
grade credit or cash, with no remaining equity
investments. As at 31 July 2023, over 60% of the UK
liabilities had been de-risked through the purchase of
annuities from third party insurers.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 23
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 2023, a provision of £41m (FY2022: £52m) 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.
FOREIGN EXCHANGE
The results of overseas operations are translated into
sterling at average exchange rates. Net assets are
translated at period-end rates. The Group is exposed to
foreign exchange movements, mainly the US Dollar and
the Euro. The principal exchange rates, expressed in
terms of the value of Sterling, are shown in the
following table.
Average rates
Period-end rates
31 Jul 2023
(12 months)
31 Jul 2022
(12 months)
1.21
1.15
1.32
1.18
31 Jul 2023
31 Jul 2022
1.29
1.17
1.22
1.19
USD
EUR
CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
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 310,000 claims against JCI have
been dismissed before trial over the last 40 years. JCI is
currently a defendant in cases involving approximately
20,000 claims. Despite these large numbers of claims,
since the inception of asbestos litigation against JCI it
has had 154 cases and has had to pay awards
amounting to approximately $190m.
At 31 July 2023, the aggregate provision for JCI
asbestos litigation, including for adverse judgements
and defence costs, amounted to £204m (FY2022:
£229m) 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
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 24
CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
DIVISIONAL REVIEW
JOHN CRANE
FY2023 FINANCIAL PERFORMANCE
Revenue
Original Equipment
Aftermarket
Energy
Original Equipment
Aftermarket
General Industrial
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
Headline operating profit
Headline operating profit margin
FY2023
(£m)
1,079
169
487
656
145
278
423
244
22.6%
217
23.8%
1.7%
FY2022
(£m)
FY Reported
growth
H1 organic
growth
H2 organic
growth
FY organic
growth
+14.6%
+13.3%
+18.5%
+17.1%
+14.1%
+9.2%
+10.9%
+24.6%
+190bps
+15.8%
+6.8%
+27.8%
+21.8%
(0.9)%
+12.3%
+7.6%
+25.7%
+180bps
+15.2%
+9.9%
+23.2%
+19.5%
+6.0%
+10.9%
+9.2%
+25.2%
+180bps
901
148
382
530
131
240
371
+19.8%
+14.3%
+27.5%
+23.8%
+10.5%
+16.0%
+14.0%
188
+29.7%
20.9% +170bps
+29.9%
+440bps
(80)bps
167
19.4%
2.5%
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
901
36
142
1,079
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
188
20.9%
7
49
244
22.6%
Read more about
our divisions
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Reported revenue grew
to record levels at over
£1bn for the first time.
John Crane delivered record organic revenue growth of
+15.2% for the year, accelerating to +15.8% in H2
executing well against strong demand, with orders up
+15%. Organic revenue grew across all segments and
geographies. Aftermarket organic revenue grew
+18.4% to make up 71% of sales (FY2022: 69%) and OE
grew +8.1%.
Reported revenue grew to record levels at over
£1bn for the first time, which was up +19.8% reflecting
the organic growth and a favourable foreign
exchange impact.
In Energy, organic revenue grew +19.5% benefiting from
an increased focus on energy security and higher
demand for energy efficiency and emissions reduction
solutions. John Crane is well positioned to support
customers with their decarbonisation goals as they
look to become more efficient and reduce leakage
within existing facilities or invest in new infrastructure
for low carbon alternatives. Notable contract wins in
the year included one of the world’s largest offshore
Carbon Capture and Storage (“CCS”) facilities in
Malaysia and compressor seals for use in an innovative
energy storage solution for a customer in Europe. John
Crane’s leadership in this area was recognised by the
UK government through a £925k grant awarded for its
innovative high temperature sealing solution, which is
designed to improve customer efficiency through
reduced emissions.
The Industrial segment grew +9.2% organically, driven
by strong demand across chemical processing, water
treatment and life sciences. Efficiency in industrial
processes is as important as it is to John Crane’s
Energy customers, evidenced by multiple wins across
all markets.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
25
Read more about
our divisions
CLICK HERE
Headline operating profit of £244m grew a record
+25.2% on an organic basis, resulting in +170bps of
margin expansion. This was driven by the increased
volumes and improving plant efficiency, pricing
offsetting inflation and benefits from SES and savings
projects, while continuing to invest in growth to service
the strong demand.
On a reported basis, headline operating profit was up
+29.7%, including a favourable foreign exchange
impact. The difference between statutory and headline
operating profit includes the net cost in relation to the
provision for John Crane, Inc. asbestos litigation and
charges from savings projects.
ROCE was 23.8%, up 440bps, reflecting the record
headline operating profit growth.
R&D
Cash R&D expenditure was 1.7% of sales (FY2022:
2.5%). John Crane’s continued investment in R&D is
primarily focused on reducing product lead times
and enhancing the efficiency, performance and
sustainability of high duty seals and hydrogen
compressors.
John Crane plays a significant role in its customers’
sustainability journeys through reducing leaks,
including for demanding hydrocarbon pipelines. John
Crane’s recently launched Safematic Upstream
Pumping System product nearly eliminates cooling
water requirements, delivering significant energy and
emissions reductions in liquid sealing.
SMITHS DETECTION
FY2023 FINANCIAL PERFORMANCE
Revenue
Original Equipment
Aftermarket
Aviation
Original Equipment
Aftermarket
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
Headline operating profit
Headline operating profit margin
FY2023
(£m)
FY2022
(£m)
FY Reported
growth
H1 organic
growth
H2 organic
growth
FY organic
growth
803
226
309
535
164
104
268
90
11.2%
55
7.7%
8.4%
655
198
269
467
102
86
188
73
11.1%
36
7.1%
9.3%
+22.6%
+14.2%
+14.6%
+14.5%
+60.2%
+21.5%
+42.7%
+23.1%
+10bps
+52.8%
+60bps
(90)bps
+14.0%
+10.3%
+10.3%
+10.3%
+39.2%
+2.9%
+22.9%
+4.5%
(110)bps
+18.8%
+8.6%
+7.0%
+7.7%
+64.4%
+28.3%
+47.9%
+26.8%
+70bps
+16.4%
+9.4%
+8.6%
+8.9%
+51.3%
+15.2%
+34.9%
+15.4%
0bps
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
655
34
114
803
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
73
11.1%
5
12
90
11.2%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 26
CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
Smiths Detection returned firmly to growth in FY2023
with organic revenue growth of +16.4% executing well
against the multi-year orderbook. Growth was
delivered across all segments with particularly strong
growth in lower margin OE, up +23.9% organically.
Aftermarket revenue grew +10.2% organically, making
up 51% of sales (FY2022: 54%). Orders grew +6% in the
year, supporting revenue growth in FY2024, which due
to the expected timing of order delivery will be weighted
towards the second half. Reported revenue was up
+22.6% reflecting the organic growth and a favourable
foreign exchange impact.
In Aviation, organic revenue grew +8.9% with continued
strong demand for Smith Detection’s latest range of 3D
CT machines for cabin baggage, CTIX, with over 1,000
now sold, supported by regulatory requirements in
many countries mandating upgrades. Smiths Detection
continues to achieve a good win rate in Aviation with key
contract wins in all regions of the world across the year
including provision of CTIX machines to Birmingham
and Edinburgh airports in the UK and JAL Airline in
Japan, and full-sized lane configurations to the US
Transportation Security Administration.
Other Security Systems (“OSS”) grew +34.9% driven by
high growth in all three sub-segments of urban
security, ports and borders and defence, demonstrating
good progress in these attractive market adjacencies.
Order intake in defence was very strong for both
current and future chemical and biological detection
requirements, including for the US DoD on their next
generation programme. Smiths Detection has also
been contracted to provide security screening at COP28
in November this year.
Headline operating profit was up +15.4% on an
organic basis for the year, supported by the strong
organic revenue growth, SES benefits and targeted
actions on cost. On a reported basis, headline operating
profit was up +23.1% including favourable foreign
exchange translation.
Headline operating profit margin of 11.2% was up 10bps
on a reported basis as the benefits of SES and cost
actions offset the mix impact of lower margin OE.
These OE deliveries will secure longer-term, high
margin aftermarket revenue, which together with a
building SES impact, will support future
margin expansion.
The difference between statutory and headline
operating profit primarily reflects amortisation
of acquired intangibles and charges from
savings projects.
ROCE increased by +60bps to 7.7%, driven by the
headline operating profit growth.
R&D
Cash R&D increased +9.8% representing 8.4% of sales
(FY2022: 9.3%). This includes an increase in customer
funded projects to £18m (FY2022: £14m).
Smiths Detection continued to invest in next-generation
detection devices, new algorithms to improve the
detection of dangerous goods, and digital solutions to
strengthen the aftermarket proposition. During the
year Smiths Detection launched a new high volume air
cargo screening technology, and an extension of their
automated detection algorithm.
Read more about
our divisions
CLICK HERE
Smiths Detection
continues to achieve
a good win rate in
Aviation with key
contract wins in all
regions of the world
across the year
including provision
of CTIX machines
to Birmingham and
Edinburgh airports
in the UK and JAL
Airline in Japan,
and full-sized lane
configurations to the US
Transportation Security
Administration.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
27
FLEX-TEK
FY2023 FINANCIAL PERFORMANCE
Revenue
General Industrial
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
Headline operating profit
Headline operating profit margin
FY2023
(£m)
768
624
144
149
19.4%
131
26.1%
0.4%
FY2022
(£m)
FY Reported
growth
H1 organic
growth
H2 organic
growth
FY organic
growth
+17.0%
+17.5%
+14.8%
+9.0%
(150)bps
+3.6%
+0.9%
+16.4%
(2.0)%
(110)bps
+10.1%
+9.0%
+15.6%
+3.4%
(130)bps
647
531
116
133
20.6%
106
25.6%
0.4%
+18.6%
+17.5%
+24.4%
+11.9%
(120)bps
+23.6%
+50bps
0bps
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
647
50
71
768
FY2022
reported
Foreign
exchange
Organic
movement
FY2023
reported
133
20.6%
11
5
149
19.4%
Read more about
our divisions
CLICK HERE
In Industrial, organic
revenue was up +9.0%
in the year reflecting
strong demand for our
products, primarily in
HVAC applications.
Organic revenue grew +10.1% in the year, with growth in
H2 of +3.6%. Revenue on a reported basis grew +18.6%,
supported by a favourable foreign exchange translation.
In Industrial, organic revenue was up +9.0% in the year
reflecting strong demand for Flex-Tek’s products,
primarily in HVAC applications. These products include
energy efficiency solutions such as the Rheia air
distribution system and the partnership with Midrex to
deliver heating solutions that enable the production of
commercial “green steel”. As expected, demand slowed
in the second half reflecting a softer US HVAC market.
In Aerospace, organic revenue grew +15.6% in the year,
with growth in the second half accelerating to +16.4%
supported by an increasing number of aircraft builds.
Headline operating profit grew +3.4% on an organic
basis, driven by the revenue growth which was partly
offset by higher costs including starting up a new
facility in Houston to expand capacity. This increase in
costs, together with continued investments in new
product development and a product mix impact,
contributed to a 19.4% headline operating margin, (120)
bps lower than the record prior year comparator.
The difference between statutory and headline
operating profit is due to amortisation of acquired
intangible assets and the provision for Titeflex
Corporation subrogation claims.
ROCE increased +50bps to 26.1% reflecting the
continued profit growth in FY2023.
In August 2023, Flex-Tek acquired HCP expanding its
presence in the North American HVAC market,
broadening its product range and customer base.
R&D
Cash R&D expenditure grew in-line with sales
remaining at 0.4% of sales (FY2022: 0.4%). R&D is
focused on developing new products for the
construction market, and an expanded product offering
in aerospace.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
28
CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
SMITHS INTERCONNECT
FY2023 FINANCIAL PERFORMANCE
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
Headline operating profit
Headline operating profit margin
FY2023
(£m)
387
62
16.0%
50
13.3%
6.3%
FY2022
(£m)
FY Reported
growth
H1 organic
growth
H2 organic
growth
FY organic
growth
+3.3%
(1.7)%
(80)bps
(8.4)%
(20.7)%
(250)bps
(2.8)%
(11.9)%
(170)bps
363
65
18.0%
64
+6.5%
(4.6)%
(200)bps
(21.9)%
16.3% (300)bps
+70bps
5.6%
FY2022
reported
Foreign
exchange
Acquisitions
Organic
movement
FY2023
reported
363
26
8
(10)
387
FY2022
reported
Foreign
exchange
Acquisitions
Organic
movement
FY2023
reported
65
18.0%
5
0
(8)
62
16.0%
Smith Interconnect’s organic revenue declined
(2.8)% for the year following the strong +13.9% growth
last year, with +3.3% growth in H1 more than offset
by the (8.4)% decline in H2. Reported revenue grew
+6.5% in the year including a favourable foreign
exchange impact and an £8m contribution from the
acquisition of Plastronics.
The performance in the year reflected a weakening in
the semiconductor market and delayed timing on large
aerospace and defence related programmes, partly
offset by strong demand for industrial connector
products such as a new medical cable assembly
product. Contraction into FY2024 is expected with
FY2023 orders down 17%, continued weakness in the
semiconductor market and a slowing in connectors.
During the first half, Smiths Interconnect acquired
Plastronics to strengthen the product portfolio and
leverage Plastronics’ attractive positions in artificial
intelligence, data centres and automotive end markets.
Headline operating profit declined (11.9)% on an organic
basis, resulting in a (200)bps reduction in operating
profit margin to 16.0%. This decline was driven by the
lower volumes and continued investment in R&D.
Headline operating profit was down (4.6)% on a
reported basis, reflecting the organic decline, partly
offset by a favourable foreign exchange impact.
The difference between statutory and headline
operating profit reflects the amortisation of acquired
intangibles, acquisition costs and charges from
savings projects.
ROCE reduced (300)bps to 13.3% driven by the lower
operating profit.
R&D
Cash R&D expenditure increased to 6.3% of sales
(FY2022: 5.6%). R&D is focused on bringing to market
new products that improve connectivity and product
integrity in demanding operating environments.
Product launches include the next-generation of radio
frequency components and transceivers.
Read more about
our divisions
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During the first half,
Smiths Interconnect
acquired Plastronics to
strengthen our product
portfolio and leverage
Plastronics’ attractive
positions in Artificial
Intelligence, data
centres and automotive
end markets.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
KEY PERFORMANCE INDICATORS
KEY
PERFORMANCE
INDICATORS
FINANCIAL TARGETS
Our financial targets were set out at our Capital
Markets Day in November 2021.
Alternative Performance Measures (APMs) and KPIs
are defined in note 29 of the financial statements.
All measures exclude Smiths Medical which was sold
in January 2022.
LINK TO STRATEGY
Growth
Execution
People
ORGANIC REVENUE GROWTH
Growing faster is the
primary driver of unlocking
value creation for the
Group.
FY2023 PROGRESS
In FY2023 we delivered
organic revenue growth in
all four quarters of the year
and full year growth of
+11.6%.
MEDIUM-TERM TARGET
PERFORMANCE
+4-6%
STRATEGY
FY2023
FY2022
FY2019
FY2021
FY2020
OPERATING PROFIT MARGIN
Stronger execution is the
second key priority for the
Group and will drive higher
margins.
FY2023 PROGRESS
In FY2023 we delivered
+20bps of margin
progression to 16.5%, while
continuing to invest in
growth.
MEDIUM-TERM TARGET
PERFORMANCE
18-20%
STRATEGY
FY2023
FY2022
FY2021
FY2020
FY2019
EARNINGS PER SHARE GROWTH
Strong margins will
convert revenue growth
into earnings growth.
FY2023 PROGRESS
In FY2023 we delivered
record EPS growth of
+39.6%, driven by organic
operating profit growth and
the benefit of our share
buyback programme.
MEDIUM-TERM TARGET
PERFORMANCE
+7-10%
STRATEGY
FY2023
FY2022
FY2021
FY2019
FY2020
29
LINKED TO
REMUNERATION
Read more in CEO review of
the year.
PG 18
LINKED TO
REMUNERATION
Read more in CEO review of
the year.
PG 18
LINKED TO
REMUNERATION
Read more in CEO review of
the year.
PG 18
11.6%
3.8%
(2.2)%
(1.0)%
3.0%
16.5%
16.3%
15.5%
12.8%
17.1%
39.6%
17.8%
19.3%
(27.4)%
11.0%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
30
KEY PERFORMANCE INDICATORS
CONTINUED
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.
FY2023 PROGRESS
In FY2023 ROCE increased +150bps into our target range
driven by the strong operating profit performance.
OPERATING CASH CONVERSION
Maintaining our strong track record of cash conversion
is a key component of our robust financial framework.
FY2023 PROGRESS
In FY2023 we improved our operating cash conversion
by +6 percentage points to 86%, supported by an
improvement in working capital in the second half of
the year.
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
15-17%
FY2023
FY2022
FY2021
FY2020
FY2019
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
100%
FY2023
FY2022
FY2021
FY2020
FY2019
OPERATIONAL AND NON-FINANCIAL TARGETS
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
FY2023
FY2022
FY2021
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.
FY2023 PROGRESS
In FY2023 Gross Vitality was 31% reflecting continued
investment in R&D and new product development.
GREENHOUSE GAS (GHG) REDUCTION
Meeting our commitment to deliver Net Zero Scope 1 & 2
GHG emissions by 2040 is a fundamental part of our
sustainability strategy.
FY2023 PROGRESS
In FY2023 our Scope 1 & 2 emissions reduced (11.8)% in
absolute terms due to actions on energy efficiency and a
further increase in renewable electricity.
30%+
MEDIUM-TERM TARGET
Net Zero Scope
1 & 2 emissions
by 2040
LINKED TO
REMUNERATION
Read more in CEO review of
the year.
PG 18
LINKED TO
REMUNERATION
Read more in CEO review of
the year.
PG 18
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the year.
PG 18
15.7%
14.2%
13.9%
12.8%
15.7%
86%
80%
129%
112%
74%
31%
31%
25%
STRATEGY
PERFORMANCE
LINKED TO
REMUNERATION
Read more in Sustainability
at Smiths.
FY2023 (11.8)%
FY2022
(0.9)%
PG 32
See page 45 for our statement on limited assurance.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
KEY PERFORMANCE INDICATORS
CONTINUED
RECORDABLE INCIDENT RATE (RIR)
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 RIR per
100 colleagues.
FY2023 PROGRESS
In FY2023 RIR fell by (26)% with improvement in every
division. We continue to track below the industry average
and in the top quartile of industry performance.
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.
FY2023 PROGRESS
In FY2023 we updated the questions in the My Say survey
to align it more closely with our cultural focus areas.
The overall e-Sat survey score went up by 1 point.
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 held
by women.
FY2023 PROGRESS
In FY2023 we increased the number of senior leadership
positions held by women to 25%. We also undertook a
wide range of activities to support female colleagues and
increase female talent in our pipelines.
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
A zero-harm
workplace
FY2023
FY2022
FY2021
FY2020
FY2019
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
Upper
quartile
FY2023
FY2022
FY2021
FY2020
FY2019
MEDIUM-TERM TARGET
STRATEGY
PERFORMANCE
30% by
the end of
FY2024
FY2023
FY2022
FY2021
31
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at Smiths.
PG 32
READ MORE
Read more in Our people
and culture.
PG 13
READ MORE
Read more in Sustainability
at Smiths.
PG 32
0.41
0.56
0.47
0.35
0.50
73
72
71
73
72
25%
24%
23%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Read more about
sustainability and our
ESG priorities in our
FY2023 Sustainability
at Smiths report
CLICK HERE
32
SUSTAINABILIT Y AT SMITHS
SUSTAINABILITY
AT SMITHS
Strong ESG performance is essential to deliver on our
purpose and create value for each of our stakeholders.
We organise our ESG commitments and objectives
using our Sustainability at Smiths framework that we
first introduced in FY2022.
In FY2023, we tested and further refined the framework
by completing an ESG double materiality assessment
(DMA) in accordance with requirements and best
practices developed under the EU’s Corporate
Sustainability Reporting Directive (CSRD). As
summarised from page 33 the ESG DMA validated the
framework and helped to identify our best opportunities
for value creation through our ESG performance.
During the year we submitted our Net Zero trajectory
and targets to the Science-Based Targets initiative
(SBTi). Our Net Zero/climate transition plan is published
in this report. See page 40.
Read more about sustainability in our Sustainability at
Smiths report.
GOVERNANCE AND OVERSIGHT
The Smiths Board of Directors and Executive
Committee have ultimate responsibility for Smiths ESG
performance and associated governance and oversight.
Our collaboration model enables us to bring together
the skills and knowledge of our Board, our Executive
team and our business leaders to harness the
knowledge and skills of the whole Group to drive and
deliver innovation, effective execution and best practice.
See our ESG governance and delivery model on
page 49.
METRICS AND REPORTING
ESG metrics and targets are incorporated into Smiths
overall business performance dashboard and are
reviewed annually to ensure they remain aligned with
business priorities. The metrics cascade down through
business and functional operating units as relevant and
realistic building block targets that aggregate to deliver
performance at the overall Group level. Metrics are
reported to, and discussed by, the Executive Committee
and the Board and its Committees. We report
externally metrics relating to our material ESG areas
and those required by reporting regulations.
EXTERNAL FRAMEWORKS
We also look outside the Company to benchmark and
evaluate progress and make sure that we are learning
from our peers, sector leaders and subject-matter
specialists. The measures used by third-party ratings
agencies and framework developers help us to identify
opportunities for improvement and additional
disclosure that helps our external stakeholders
understand and accurately assess our priorities and
progress. While these external frameworks do not
dictate our path, they are very helpful to inform our
reporting, planning and prioritisation.
See ESG metrics, targets and performance on page 44.
REWARD INCENTIVES
For FY2022, we began incorporating ESG performance
alongside traditional financial metrics to determine the
long-term incentive plan (LTIP) pay of our senior
executives. For FY2023, we again assigned 15% of the
LTIP award to reducing GHG emissions, now aligned to
the pace of reductions required to deliver our Science-
Based Targets (SBTs). In addition, we added an energy
efficiency metric as a component of our Annual
Incentive Plan (AIP) that potentially benefits
approximately 6,000 colleagues.
We are fully supportive of emerging sustainability
reporting obligations and will take an approach guided
by value creation and what matters to our stakeholders.
We are preparing the business and internal
workstreams for this enhanced reporting.
We currently report climate disclosures aligned with
the Task Force on Climate-related Financial
Disclosures (TCFD). See page 47.
We participate annually in the CDP global
environmental reporting initiative and during the year
completed our latest carbon and water submissions to
CDP for FY2022.
In FY2024, we are continuing the same approach,
setting:
– LTIP targets for absolute GHG reductions aligned to
the pace required to deliver SBTs; and
– AIP targets for energy efficiency tailored to reward
operational improvements that support sustainable
and high-value delivery of our SBTs.
New product revenue targets (including named
sustainability-focused products) were also included in
the AIP in FY2023.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
33
VALIDATING OUR SUSTAINABILITY AT SMITHS FRAMEWORK
AND APPROACH
In FY2023 we completed an ESG double materiality
assessment (DMA) which validated our existing
prioritisation of ESG-related topics. It also provided a
robust analysis of critical enablers and emerging
matters of interest and importance to our multiple
stakeholders and emerging regulatory requirements.
We conducted the DMA over five months with support
from a specialist team from PwC. The findings and
proposed next steps were discussed by the Smiths
Executive Committee and presented to the Science,
Sustainability & Excellence (SSE) Committee of the
Board in July 2023. We agreed next steps and these are
being integrated into short- and medium-term strategic
planning and resourcing decisions. They are also being
integrated into our ESG reporting and internal
communication and education on ESG matters to
increase impact and realise more value from our
performance.
DMA APPROACH
1. DEFINE LIST
OF TOPICS
Selection of 23 ESG
topics based on:
– Smiths existing ESG
framework elements
– Latest market
practices/peer
benchmarking
– Existing and future
regulatory standards
and frameworks
2. ASSESS TOPIC MATERIALITY
ON TWO DIMENSIONS (DOUBLE
MATERIALITY)
Impact materiality
Financial materiality
3. SYNTHESISE RESULTS
Internal stakeholder engagement
including workshops, one-to-one
interviews and a Group-wide
colleague survey.
External stakeholder research on
expectations and priorities covering
customers, key shareholders,
potential investors, key suppliers,
peers and seven upcoming ESG
regulations1.
1 Corporate Sustainability Reporting
Directive (CSRD), including European
Sustainability Reporting Standards (ESRS)
and EU Taxonomy; UK Green Taxonomy;
Task Force on Climate-Related Financial
Disclosures (TCFD); Taskforce on Nature-
related Financial Disclosures (TNFD);
Corporate Sustainability Due Diligence
Directive (CSDDD); UK and EU REACH;
Carbon Border Adjustment Mechanism
(CBAM).
Customers, investors and Smiths internal views were prioritised through
weighting to synthesise results.
Stakeholder
INTERNAL
Workshops
Employee
survey
EXTERNAL
Customers
Investors
Regulators
Peers
Suppliers
IMPACT
MATERIALITY
WEIGHTING
FINANCIAL
MATERIALITY
WEIGHTING
30
20
25
5
10
5
5
–
30
20
20
20
–
5
5
See Group materiality picture on
PG 35
4. INTEGRATE
OUTCOMES
AND COMMUNICATE
RESULTS
– Presentation/
discussion with
Executive Committee
– Presentation/
discussion with SSE
Committee
– Presentation/
discussion with
functional and divisional
leadership teams
– Integration into FY2023
reporting
– Integration into
strategic planning
FY2024 and beyond
– Preparation for future
reporting requirements
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
VALIDATION
The DMA confirmed that all topics within the
Sustainability at Smiths framework are important to
our performance and valued by our stakeholders.
Of the 23 assessed topics, 21 mapped to the diamonds
in the framework.
23 ESG TOPICS
CHOSEN FOR
ASSESSMENT
34
SUSTAINABILIT Y AT SMITHS
CONTINUED
ASSESSMENT
We chose 23 ESG topics for assessment based on the
diamonds of Smiths existing ESG framework, latest
market practices as taken from a peer benchmarking
exercise, and an analysis of existing and future
regulatory standards and frameworks.
We assessed each topic on two dimensions:
– Impact materiality – an ESG topic is material when
it pertains to Smiths material (actual or potential,
positive or negative) impacts on people or the
environment over the short, medium, or long term.
– Financial materiality – an ESG topic is material if it
triggers, or may trigger, material financial effects on
Smiths by generating risks or opportunities that
have or are likely to have a material influence on
cash-flows, development, performance, position,
cost of capital or access to finance in the short,
medium, or long term.
GROUP MATERIALITY PICTURE
The Group ESG double materiality picture is shown on
page 35. It distributes the 23 topics into three distinct
categories:
Highest-impact topics: Five key strategic and
disclosure focus ESG topics where Smiths must place
the most focus (four of which formed part of our
existing ESG framework)
Critical enablers and foundational elements: Eight
topics which we characterise as the key success
factors for enabling progress on our ESG priorities
Base expectations and emerging issues: ESG topics to
maintain and monitor performance
As expected, we observed some differences in the
divisional materiality pictures driven by market sector,
nature of operations, customers, geographies and
regulatory environments. For example, the John Crane
and Flex-Tek value propositions are highly aligned with
the commercialising high-value green technology topic;
Smiths Detection is further on its path to delivering Net
Zero, and managing risk and maintaining strong and
effective controls is an important focus due to operating
in highly regulated markets; Smiths Interconnect is
positioned in markets such as medical technology and
space exploration so products can be ascribed a social
value; and the evolving Government policy agenda in
China makes reinforcing data privacy and cyber
security an important topic for Smiths China.
Our stakeholders also place different emphasis
on topics:
Customers: many share our Net Zero goals and we can
meet their needs both with our technologies and by
decarbonising our operations (their Scope 3 emissions).
Investors: are attracted to high-value green
technologies that deliver long-term growth. Investors
also have high expectations of Net Zero delivery.
Regulators: new regulations are coming down the
track across the spectrum of ESG topics.
Peers: like Smiths, peers are moving ahead with
SBTi-aligned Net Zero goals and green product
offerings.
Suppliers: maintain their traditional focus on
compliance and controls; now expanding to Net Zero
GHG (our Scope 3 emissions).
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
GROUP MATERIALITY PICTURE
R
E
H
G
H
I
Y
T
I
L
A
I
R
E
T
A
M
T
C
A
P
M
I
R
E
W
O
L
LOWER
Safety, health and well-being
Delivering Net Zero
Commercialising green
technology
Behaving ethically
and legally
Supply chain
Product safety
HIGHEST IMPACT TOPICS
Human rights
Diversity
Data privacy
Managing risk
Developing talent
Product design
Talent attraction
Waste
Communities
Resources
Chemicals
Climate change
Water
Social value
Pollution
Biodiversity
Decision making
BASE EXPECTATIONS AND
EMERGING ISSUES
CRITICAL ENABLERS AND
FOUNDATIONAL ELEMENTS
ENVIRONMENT
SOCIAL
GOVERNANCE
FINANCIAL MATERIALITY
HIGHER
35
HIGHEST IMPACT
TOPICS
IMPROVING SAFETY,
HEALTH AND
WELL-BEING
The most material ESG
topic, aligned with the
findings of our My Say
survey.
COMMERCIALISING
HIGH-VALUE GREEN
TECHNOLOGY
Material opportunity
as viewed by external
stakeholders.
DELIVERING NET
ZERO GHG
Highly material to most
stakeholders including
customers who have set
similar objectives and to
our colleagues.
PG 40
Continued overleaf
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
36
SUSTAINABILIT Y AT SMITHS
CONTINUED
TOPIC MAPPING
Of the 23 assessed topics, 21 mapped to topics in our Sustainability at Smiths framework.
ENVIRONMENTAL
SOCIAL
GOVERNANCE
DELIVERING NET ZERO GHG
– Delivering Net Zero GHG
– Climate change adaptation and resilience
IMPROVING SAFETY, HEALTH AND WELL-BEING
– Improving safety, health and well-being
COMMERCIALISING HIGH-VALUE GREEN
TECHNOLOGIES
– Commercialising high-value green
technologies
PROMOTING DIVERSITY, EQUITY AND
INCLUSION
– Promoting diversity, equity and inclusion
BEHAVING ETHICALLY AND LEGALLY
– Behaving ethically and legally
– Protection of human rights and affected
communities
MANAGING RISK AND MAINTAINING STRONG
AND EFFECTIVE CONTROLS
– Managing risk and maintaining strong and
effective controls
– Product safety and quality assurance
– Management of chemicals and hazardous
substances
– Reinforcing data privacy and cyber security
RESPECTING NATURAL RESOURCES
– Respecting natural resources
– Preventing pollution
– Waste management
– Water conservation and stewardship
– Sustainable product design and lifecycle
management
CONTRIBUTING TO OUR COMMUNITIES
– Contributing to our communities
– Delivering social value through our products
EFFECTIVE LONG-TERM DECISION MAKING
AND TRANSPARENCY
– Effective long-term decision making and
transparency
DEVELOPING TALENT
– Developing talent
– Talent attraction and retention
TOPICS NOT INCLUDED IN EXISTING
FRAMEWORK
– Biodiversity and ecological restoration
TOPICS NOT INCLUDED IN EXISTING
FRAMEWORK
– N/A
TOPICS NOT INCLUDED IN EXISTING
FRAMEWORK
– Supply chain management and responsible
procurement
HIGHEST IMPACT
TOPICS CONTINUED
SUPPLY CHAIN
MANAGEMENT AND
RESPONSIBLE
PROCUREMENT
Customers and regulators
particularly expect
visibility across the
supply chain which will
be essential to deliver
our Net Zero Scope 3
and human rights
commitments, and new
reporting requirements
e.g., CBAM.
BEHAVING ETHICALLY
AND LEGALLY
Consistently high priority
across all stakeholder
groups – vital for employee
engagement and
managing reputational
risk.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
SUSTAINABILITY AT
SMITHS FRAMEWORK
Our Sustainability at Smiths ESG framework articulates the structure through which we manage ESG topics.
Defining these topics clearly tightens the connection with operational execution and assists us to report in a
transparent way to our stakeholders. We made minor changes to the framework to reflect the outcome of the
FY2023 DMA.
37
Read more about the
Sustainability at Smiths
framework in our
FY2023 Sustainability
at Smiths report
CLICK HERE
COMMERCIALISING HIGH-VALUE
GREEN TECHNOLOGIES
– High impact topic
– Executive Committee and Board approved
strategic focus on decarbonisation and
green re-industrialisation
– Green product data to be published
in FY2024
DELIVERING NET ZERO GHG
– High impact topic
– Climate/Net Zero transition plan completed
– Targets submitted to SBTi
– Scope 1 & 2 emissions down (11.8)% in year
– Renewable electricity 70% of total use
– Linked to remuneration
PG 40
DEVELOPING AND ATTRACTING TALENT
– 300 leaders participated in the Accelerate
leadership development programme
– 70% of open grade 11 and above roles were
filled by internal candidates
CONTRIBUTING TO OUR COMMUNITIES
– Smiths Foundation and global volunteering
policy launched
– £2.8bn direct economic contribution
BEHAVING ETHICALLY AND LEGALLY
– High impact topic
– Incorporates human rights ESG topic
– Launched new Code of Business Ethics
– 299 Speak Out reports
MANAGING RISK AND MAINTAINING
STRONG AND EFFECTIVE CONTROLS
– Incorporates product safety, product design
and data privacy topics assessed in the DMA
Sustainability at Smiths
Sustainability at Smiths
SUPPLY CHAIN
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
A
N
R
E
V
O
G
Developing and
attracting talent
Promoting diversity,
equity and inclusion
E
C
N
Contributing to our
communities
Managing risk and
maintaining strong and
effective controls
Effective long-term
decision making and
transparency
Behaving ethically
and legally
RESPECTING NATURAL RESOURCES
– (17.1)% reduction in water use in water-
stressed locations vs FY2021 baseline
– 22 water reduction projects
– (20.2)% reduction in non-recyclable waste
disposal vs FY2021 baseline
– 11 packaging reduction projects
SUPPLY CHAIN
– High impact topic
– Added to Sustainability at Smiths
framework following DMA as cross-cutting
ESG topic
– Incorporates human rights ESG topic
– Accelerated plans to implement supplier
management system
IMPROVING SAFETY, HEALTH AND
WELL-BEING
– Most material topic for Smiths
– RIR fell by (26)% during the year
– Over 13,000 safety look out observations and
leadership tours
PROMOTING DIVERSITY, EQUITY
AND INCLUSION
– 25% of senior leadership roles held by
women
– Range of events celebrated across the
Group
EFFECTIVE LONG-TERM DECISION
MAKING AND TRANSPARENCY
– Managed under our overall governance
framework
PG 79
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
38
SUSTAINABILIT Y AT SMITHS
CONTINUED
Read more about each of the diamonds in the framework in our Sustainability at Smiths report.
COMMERCIALISING
HIGH-VALUE GREEN
TECHNOLOGIES
DELIVERING NET ZERO GHG
Our unique engineering capabilities and pioneering spirit position Smiths strongly to support customers on their
journeys to decarbonise and deliver next generation efficient and sustainable infrastructure and processes.
Commercialising differentiated products and services with sustainability impact has and will continue to enable
Smiths to make a significant and positive contribution to global environmental goals.
In FY2022 Smiths committed to ambitious Net Zero targets that align us with the UN’s critical global climate
objectives and the ambition to limit global warming to 1.5°C. With the support of the Smiths Board and Executive
Committee, we are planning for success with a Net Zero/climate transition plan which describes how, through
consistent and prioritised focus across all aspects of our business over the next 25 years, we will deliver Net Zero
emissions from our operations (Scope 1 & 2) by 2040 and our value chain (Scope 3) by 2050.
RESPECTING NATURAL
RESOURCES
Natural resources are finite, and we believe that all businesses have a responsibility to use them respectfully and
safely – responsibly sourcing, minimising consumption and preventing pollution. Our longstanding commitment to
both non-GHG resource targets and product efficiency and stewardship are valued by our employees as the right
thing to do, and by our customers as they seek to manage their own environmental footprints.
SUPPLY CHAIN
A deeper understanding and ability to effect change in our multiple supply chains is becoming increasingly critical as
we seek to manage risk and make progress on all aspects of ESG.
IMPROVING SAFETY,
HEALTH AND WELL-BEING
Our commitment to our people starts with keeping us all safe and healthy. Looking after our people in the workplace
is an essential foundation and our number one focus.
DEVELOPING AND
ATTRACTING TALENT
Driving to zero injuries and improved health is a shared commitment to one another, and it requires sharp focus and
practical action. We strive to continuously improve by reducing risk across Smiths operations. This means
systematic analysis of data, proactively designing and investing for safety, and strengthening our global and local
safety cultures to deliver in our varied operating environments.
Our colleagues can do remarkable things. Their passion and expertise have driven our business forward for more
than 170 years. It is critical that we have the talent we need to meet the demands of the future. Our organisational
commitment is to ensure that all our colleagues have opportunities to develop their knowledge and skills, reach their
full potential, and build a career at Smiths. Creating an environment and infrastructure that achieves this is also the
key to attracting the right talent to Smiths, whether young people at the beginning of their working lives, or
experienced specialists should there be a gap to fill.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
39
PROMOTING DIVERSITY,
EQUITY AND INCLUSION
CONTRIBUTING TO OUR
COMMUNITIES
BEHAVING ETHICALLY AND
LEGALLY
EFFECTIVE LONG-TERM
DECISION MAKING AND
TRANSPARENCY
MANAGING RISK AND
MAINTAINING STRONG AND
EFFECTIVE CONTROLS
Our team of colleagues represents dozens of nations, speaking a multiplicity of languages, and embodying many
different perspectives. We embrace these differences and promote actions and behaviours that will deliver an
inclusive and supportive work environment where every member of the Smiths team feels that they belong and 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.
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 creating social and environmental value by making the
world safer and improving 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. Healthy and prosperous communities and supportive relationships with them inspire
and promote a sense of pride and ownership in our people.
Behaving ethically and with integrity is a fundamental part of our culture. We also operate in some highly regulated
markets and sectors which require strict adherence to local and international industry regulations. We have expert
teams in place to manage these matters and we use data and other intelligence objectively to identify relative
performance gaps and emerging risk, and continually target improvements in our procedures.
Good quality, ethical and effective decision making builds sustainable businesses and enables them to create long-
term value for all stakeholders.
Continual assessment and management of risks, and assurance through internal controls, is an integral part of
day-to-day operations at Smiths.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS COMMERCIALISING
HIGH-VALUE GREEN
TECHNOLOGIES
Read more about how
we are addressing
customer and societal
Net Zero/climate
transition needs through
our products and
services in our FY2023
Sustainability at
Smiths report
CLICK HERE
40
SUSTAINABILIT Y AT SMITHS
CONTINUED
NET ZERO/CLIMATE TRANSITION PLAN
Work on the Smiths Net Zero/climate transition plan was completed in FY2023. Our Net Zero trajectory was submitted to the Science-Based Targets initiative (SBTi) in May.
TRANSITION PLAN
OBJECTIVE
Establish a robust and credible, bottom-up, decarbonisation pathway and delivery plan, incorporating interim emission reduction targets, to
meet our long-term Net Zero commitments:
– Net Zero Scope 1 & 2 emissions by 2040
– Net Zero Scope 3 emissions by 2050
Medium term: FY2032
Long term: FY2040 and FY2050
PRIORITIES
Update and enhance bespoke emission reduction plans for every division working within agreed Group principles
Surface and action material decarbonisation opportunities to frontload trajectory
Embed plans into business planning and budget cycles
Understand risks/challenges to maintain flexibility
KEY PHASES OF
WORK
continued overleaf
Set emissions baseline (FY2021) for each Scope
Deeper dive to analyse base year Scope 3 emissions categories by division
Establish hierarchy of preference for Scope 1 & 2 delivery mechanisms to enable consistent and efficient decisions across the Group
Determine parameters/assumptions for external developments eg., decarbonisation of electricity grids, electrification and decarbonisation of
transportation and distribution, progress of green heating options, and other industry/governmental commitments
Maintain and monitor divisional Scope 1 & 2 operational transition plans to 2032 to enable approximately 50% reduction vs baseline by 2032
grouped by:
– Emissions increases associated with strategic plan growth
– Energy efficiency measures
– Onsite renewables
– Purchase of renewable electricity
– Electrification of vehicle fleets
– Green heating
– Footprint and portfolio optimisation
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
41
KEY PHASES OF
WORK
continued
Divisional analysis of supply chain and supplier progress towards SBTs
For Smiths Detection an additional analysis of the decarbonisation trajectory for products in use (Smiths Detection being the only division with
a significant emissions inventory identified in this category)
Creation of five-year divisional roadmaps of projects by Scope to embed into business planning and budget cycles
Group planning for supplier prioritisation, engagement and implementation of Group-wide supplier management platform in FY2024
ENVIRONMENTAL
PERFORMANCE
See our environmental
performance data on
page 44.
Creation of overall Scope 3 roadmap to 2028 and 2032 and strategy beyond 2032
Analysis of risks/challenges
Review and sign off by Executive Committee (owned by Divisional Presidents and Chief Sustainability Officer)
Review and sign off by SSE Committee of the Board
ELECTRICITY PREFERENCE
HIERARCHY
We require electricity to run our business and, as part
of the transition planning work, determined an
electricity preference hierarchy to ensure we are
making appropriate and consistent decisions across
the Group as we move to 100% renewable electricity.
This hierarchy has informed preparation of our
divisional Scope 1 & 2 transition plans.
PREFERENCE HIERARCHY:
1. Energy efficiency measures
2. Renewable electricity self-supply for high-demand
sites with adequate space, access to renewable
resources, cost-effective delivery, and where
regulation allows
3. Power Purchase Agreements (PPAs) – contracts to
buy electricity for a set period of time from a specific
energy system installed, owned and operated by a
third party
4. Green electricity tariffs offered by local utilities
sourcing/generating renewable electricity
5. Energy Attribution Certificates (EACs) – unbundled
renewable certificates purchased separately from
electricity. Reserved as a solution for challenging
situations where no other option is available or viable
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 42
SUSTAINABILIT Y AT SMITHS
CONTINUED
SCOPE 1 & 2 OPERATIONAL TRANSITION TO NET ZERO BY 2040
tCO2e
60,000
50,000
40,000
30,000
20,000
10,000
0
KEY ASSUMPTIONS IN MODEL:
– Delivery of our commitments in accordance with
those submitted to the SBTi with a c.50% reduction
by 2032
– Carbon intensity of revenue growth will decrease
over time
– Energy efficiency benefit is approximately 1% per
year after business growth
– Onsite renewable options/technology/incentives
improve so that they become increasingly cost-
effective over time
– Renewable electricity and EACs will be available in
necessary quantities
– Electric vehicles and associated infrastructure
suiting our fleet needs will be available
– Zero-carbon fuels will be available to power the
remaining portion of our operations not amenable
to electrification
– Carbon removal solutions will be available to
eliminate remaining emissions, if any
FY2021
baseline
Projected growth
in period
Energy
efficiency
Onsite
renewables
Green fleet
Green heat
Purchased
renewable
electricity
EFFICIENCY
GREEN ELECTRICITY
ALTERNATIVE
FUELS
Carbon
removal
solutions
CARBON
CAPTURE
EXAMPLE DELIVERY PROJECTS IN FIVE-YEAR ROADMAPS:
CROSS-
DIVISION/
GROUP
JOHN CRANE
SMITHS
DETECTION
– Energy efficiency (Turn it Off) campaign (FY2023)
– Site energy assessments using third-party partner
FLEX-TEK
– Slough heating (FY2023)
– Lutin renewable electricity contract (FY2023)
– Site solar reviews
– Fleet electrification
– Hnevotin renewable electricity contract
– Solar Hemel and Vitry
– Solar and heat pump installation Wiesbaden
– Heat pump installation Hemel, Vitry, Edgewood
– Fleet electrification
– Renewable electricity Newark and Singapore
SMITHS
INTERCONNECT
– Solar evaluation (FY2024)
– Green heat evaluation Springfield, Tutco, Scotia
– New ovens and oven insulation
– LED and motion sensors installation and air compressor
upgrades
– Renewable energy Amnitec
– Solar review for Costa Rica, Tampa and Mexico
– Tunisia solar implementation
– Fleet electrification
– Review green heat Dundee and St. Aubin
– LED projects and HVAC and air compressor replacements
– Irving renewable electricity contract
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
43
SCOPE 3 VALUE CHAIN TRANSITION TO NET ZERO BY 2050
tCO2e
1,600,000
1,400,000
1,200,000
100,0000
800,000
600,000
400,000
200,000
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EXAMPLE DELIVERY PROJECTS IN FIVE-YEAR ROADMAPS:
– Near-term cross-Group supplier engagement and diligence implementation
– Supplier platform and standardised procurement, diligence and reporting processes
– 50% of suppliers by spend to have targets aligned with the SBTi by FY2028
– Medium- and long-term cross-Group supplier engagement and diligence implementation beyond top 50%
to disclose emissions and set SBTs
– Smiths Detection customer engagement programme on efficient use of products
– Smiths Detection circular economy expansion
KEY ASSUMPTIONS IN MODEL:
– Emissions growth tracks as expected to business
growth plans
– Scope 3 plan focused on purchased goods and
services, capital goods, fuel and energy-related
activities, and Smiths Detection energy
consumption of products in use, is delivered with
c.50% reduction by 2032
– External factors progress as expected:
– Supplier action on emissions and emissions
reporting
– Energy efficiency across all sectors
– Decarbonisation of electricity grids
– Electrification and decarbonisation of
transportation and distribution
– Adoption of low-carbon heating options
– Continued governmental commitments and
actions to support cost-effective energy transition
– Successful introduction of supplier management
platform and implementation of supplier
engagement campaigns
– Continued supply chain engagement and diligence
post-2032
– Carbon removal solutions will be available to
eliminate remaining emissions, if any
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
44
SUSTAINABILIT Y AT SMITHS
CONTINUED
ESG METRICS, TARGETS AND PERFORMANCE
70%
renewable electricity.
ENVIRONMENT
NEW PRODUCT COMMERCIALISATION/GREEN TECHNOLOGIES
We report R&D spend as a percentage of sales and Gross Vitality which measures
the revenue contribution of products launched in the last five years.
Medium-term target:
Gross Vitality
Target
30%+
FY2023
FY2022
31%
31%
R&D as a percentage of sales was 3.7% in FY2023 (FY2022: 4.2%).
We are preparing for reporting under CSRD and will publish a green technology
metric in FY2024.
In FY2022, to align decision making and ownership of our Net Zero targets and
accelerate progress, new energy efficiency and emissions targets were added to
Smiths annual and long-term incentive plans for FY2023.
Plan
Annual Incentive
Plan (AIP) –
approximately
6,000 colleagues
Long-Term
Incentive Plan
(LTIP)
Performance
period
Measure
Target
Weighting
Performance
Energy
efficiency1
Scope
1 & 2 GHG
emissions
reduction2
3%
improvement
in efficiency
15-20%
reduction in
emissions
1 year
3 years
7.9%
improvement
in efficiency
10%
(11.8)%
reduction in Scope 1 & 2
emissions.
15%
N/A
ENERGY, RENEWABLE ELECTRICITY, WATER AND WASTE
A further decision was made in FY2023 for FY2024 remuneration.
Medium-term targets:
FY2022–2024 target
Status
Use of renewable electricity1
Normalised non-recyclable waste2
Normalised water use in stressed areas (11 locations)2
Water reduction projects
Packaging reduction projects
5% increase to 66%
5% reduction
5% reduction
30
24
70%
(20.2)%
(17.1)%
22
11
Plan
AIP
LTIP
Performance
period
Measure
Target
Weighting
Energy
efficiency1
Scope
1 & 2 GHG
emissions
reduction2
4.5%
improvement in
efficiency
15-20%
reduction in
emissions
1 year
3 years
10%
15%
1 Non-GHG producing electric sources including hydroelectric and nuclear.
2 Normalised to revenue.
ENERGY EFFICIENCY AND GHG EMISSIONS
Long-term targets:
– Net Zero emissions from our operations (Scope 1 & 2) by 2040
– Net Zero emissions from our supply chain and products in use (Scope 3) by 2050
1 The energy efficiency ratio is expressed as the MWh energy consumed (excluding renewable electricity
produced and consumed onsite), divided by the local-currency revenue at budget rates (excluding price
growth within the measurement year).
2 Scope 1 & 2 GHG emissions reduction (absolute): calculated in accordance with the WRI/WBCSD
Greenhouse Gas Protocol. Reductions must be achieved with a balanced portfolio of actions that
prioritise energy savings, onsite renewable electricity generation and purchase of renewable
electricity.
Medium-term targets:
Normalised greenhouse gas emissions1
1 Normalised to revenue.
FY2022–2024 target
Status
5% reduction
(30.8)%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILIT Y AT SMITHS
CONTINUED
45
70%
renewable electricity.
(11.8)%
reduction in Scope 1 & 2
emissions.
SECR GLOBAL ENERGY USE AND EMISSIONS DISCLOSURE
Global energy use – absolute values ∆
UK energy use – absolute values
Global emissions – absolute values
Scope 1 (direct emissions) ∆
Scope 2 (market-based emissions) ∆
Scope 3 (value chain emissions) ∆
Total Scope 1 & 2 emissions
UK Scope 1 & 2 emissions
Global emissions – normalised values
Scope 1 (direct emissions)
Scope 2 (indirect emissions)
Scope 3 (value chain emissions)
Total Scope 1 & 2 emissions
FY2023
FY2022
Change
MWh
MWh
218,094
11,394
223,709
10,446
(2.5)%
t CO2e
t CO2e
19,694
25,955
19,591
32,193
t CO2e 1,380,000 1,450,000
51,784
t CO2e
45,649
1,755
t CO2e
1,779
(11.8)%
t CO2e/£m revenue
t CO2e/£m revenue
t CO2e/£m revenue
t CO2e/£m revenue
6.48
8.55
454.40
15.03
7.63
12.55
565.08
20.18
(25.5)%
1 Previously published data has been restated following the FY2022 review and limited assurance
process conducted by KPMG.
LIMITED ASSURANCE
KPMG has provided limited assurance under ISAE (UK) 3000 and 3410 over selected
FY2022 and FY2023 information marked with ∆. For the full assurance opinions for
FY2022 and FY2023 please see our corporate website www.smiths.com. This
information was prepared in line with our reporting criteria which can also be found
on our website.
GHG INVENTORY
Smiths assesses the GHG emissions associated with all its global operations for all
four of its operational divisions and all sites. We have developed a GHG Inventory
Management Plan (IMP) that outlines our methodology to provide systematic and
appropriate GHG inventory data collection, manipulation and management, to
produce a relevant, credible and transparent GHG inventory that will provide visibility
into our near- and long-term goals. The IMP includes methods to estimate direct
emissions from Smiths operations (Scope 1), indirect emissions from purchased
energy (Scope 2), and value chain emissions (Scope 3).
The methods prescribed in the IMP conform to the World Resources Institute (WRI)
and World Business Council for Sustainable Development (WBCSD) GHG Protocol
and the United States Environmental Protection Agency (USEPA) Center for
Corporate Climate Leadership Greenhouse Gas Inventory Guidance.
GHG BOUNDARIES
Per the GHG protocol, we have selected the operational control approach to set the
organisational boundary for our GHG inventory, meaning 100% of GHG emissions
from assets which the Company manages and over which it has authority to
implement operational policies will be included. In selecting these organisational
boundaries, Smiths evaluated equity share, financial control and operational control
approaches and primarily considered the comprehensiveness of assets that would
be included in the inventory under each of the three approaches, as well as which
boundary would best reflect Smiths level of influence over emissions. This includes
98 locations globally.
As for our operational boundary, which determines the direct (Scope 1) and indirect
(Scope 2 and 3) emissions associated with operations within Smiths organisational
boundary, we defined this as operations where we have the full authority to introduce
and implement operating policies. Operations or activities that are outside of Smiths
operational control, and therefore excluded from our Scope 1 and Scope 2 inventories
may become relevant when accounting for Scope 3 emissions.
GHG emissions are reported in metric tons of CO2 equivalents (MT CO2e). Because
individual GHGs have different impacts on climate change, or global warming
potentials (GWPs), CO2e is used to express the impact of emissions from each GHG
on a common scale. Smiths uses the IPCC Fifth Assessment Report (AR5) GWPs.
SOCIAL
SAFETY
Medium-term target: continuous improvement towards a zero-harm workplace
PERFORMANCE
Recordable injuries
FY2023
FY2022
64
87
Recordable incident rate
Per 100 employees
Lost time incident rate
Per 100 employees
FY2023
FY2022
FY2021
FY2020
FY2019
0.41
0.561
0.47
0.35
0.50
FY2023
FY2022
FY2021
FY2020
FY2019
0.14
0.251
0.20
0.17
0.24
1 FY2022 data restated due to reclassification of incidents.
Zero work-related colleague or contractor fatalities in FY2023.
Zero contractor recordable incidents in FY2023.
Over 13,000 safety look out observations and leadership tours in FY2023.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 46
SUSTAINABILIT Y AT SMITHS
CONTINUED
EMPLOYEE ENGAGEMENT
Employee engagement is measured in our annual My Say survey. See page 14 for
more information on My Say.
GENDER DIVERSITY
Medium-term target: 30% of senior leadership positions1 held by women by end
of FY2024.
(26)%
reduction in RIR.
Medium-term target: E-sat: Upper quartile score.
FY2023
FY2022
FY2021
FY2020
FY2019
E-sat score
73
72
71
73
72
The survey response rate was 84% in FY2023 (FY2022: 82%). 12,158 comments were
submitted in FY2023.
DEVELOPING TALENT
An internal talent mobility metric, as measured by the percentage of available
roles filled by internal candidates is monitored by management and will be
published from FY2024. In FY2023 70% of open grade 11 and above roles were
filled by internal candidates.
REWARD AND RECOGNITION
Recognising and rewarding colleagues in a fair, open and meaningful way is an
important underpin to developing and attracting talent. We are committed to fair pay
practices, ensuring colleagues are rewarded fairly and equally for the work they do,
and that they have opportunities to participate in our success.
We have been an accredited Living Wage employer in the UK since 2018. In the UK,
we operate an all-colleague Sharesave Scheme, which enables colleagues to buy
Smiths shares at a discounted rate. In FY2023 we have continued with our process to
align colleague benefits across markets, so they are the same for colleagues in any
of our four divisions or Group. We completed this work in China, India and Mexico
during the year.
25%
24%
23%
FY2023
FY2022
FY2021
Other gender disclosures
Board of Directors
Executive Committee1
Senior Leadership Team2
Total colleagues3
Male
6
9
493
10,796
%
Female
60%
75%
75%
71%
4
3
163
4,360
%
40%
25%
25%
29%
25%
of senior leadership
positions held by women.
1 The Executive Committee does not include the Company Secretary.
2 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. These colleagues are able to influence and drive
business results.
2 Employees on permanent and fixed term contracts.
GENDER DIVERSITY
Senior leadership team
Data for senior managers (Executive Committee plus Directors of subsidiary
undertakings) as defined by the Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013 is Female: 34 (17%) and Male: 164 (83%).
Data for the senior management (Executive Committee, including the Company
Secretary, and their direct Reports) as defined by the UK Corporate Governance
Code 2018 is Female: 47 (36%) and Male: 82 (64%).
Data for the Women in Leadership (Executive Committee and their direct
reports) as defined by the FTSE Women Leaders definition is Female: 46 (36%)
and Male: 81 (64%).
COMMUNITIES
We report externally our direct contribution to communities and society using
a composite number of employee costs + supplier costs + tax paid.
From FY2024 we will report the total value of annual grants made by the
Smiths Foundation.
Employee costs
Supplier costs
Tax paid
Total
FY2023
£m
FY2022
£m
FY2021
£m
939
1,732
146
£2.82bn
823
1,364
140
£2.33bn
751
1,063
133
£1.95bn
Male
Female
75%
25%
Total colleagues
Male
Female
71%
29%
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
47
(26)%
reduction in RIR.
25%
of senior leadership
positions held by women.
TASK FORCE ON CLIMATE-RELATED
FINANCIAL DISCLOSURES
COMPLIANCE STATEMENT
FCA LISTING RULES
In this report, we set out our climate-related financial disclosures consistent with all of the Task Force on
Climate-related Financial Disclosures (TCFD) recommendations and recommended disclosures pursuant
to Listing Rule 9.8.6R (8). This includes all four of the TCFD pillars and the 11 recommended disclosures
set out in the report entitled 'Implementing the Recommendations of the Task Force on Climate-related
Financial Disclosures' published in October 2021 by the TCFD. In completing this work, we 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. We are reporting against
the TCFD framework in line with FCA Listing Rules.
In FY2024, we plan to continue our progress in reporting against all four pillars of the recommendations
and align with the recommendations of the Transition Plan Taskforce (TPT) which is due to be released later
this year. This will include conducting a quantitative scenario analysis. More detailed information on
FY2024 priorities in reporting against TCFD is outlined in the TCFD summary in our FY2023 Sustainability
at Smiths report.
The TCFD provides an internationally recognised framework to provide clear, comprehensive and high-
quality information on the impacts of climate change. Over several years, we have progressed our alignment
with the TCFD recommendations to embed the management of climate-related risks and opportunities into
our processes, and to ensure that our business strategy is adapting to the effects of climate change.
Our diverse range of products and geographical spread of assets allows the business to be resilient to
climate risks, such as cost and availability of resources, in the short term. We are also well prepared for
market opportunities presenting themselves due to climate change. However, we recognise the potential
impacts of climate risks on our business in the long term and have continued to implement mitigation
strategies to ensure that we remain resilient.
GOVERNANCE
BOARD
The Board has overall responsibility for our approach
to sustainability matters, including climate change.
Oversight of this is delegated to sub-committees.
Climate risk management has been delegated to
the Audit & Risk Committee and delivery on our
commitments in relation to climate change to the
Science, Sustainability & Excellence (SSE) Committee.
The Board has oversight of our Group-level and
divisional strategies, receiving performance updates
from our divisions three times a year. This includes an
annual strategy presentation, an operations update and
a half-year progress discussion. Our divisions report to
the SSE Committee on a rolling annual basis. Read
more about the work of the SSE Committee on page
111. Related Board member competencies for climate
change can be found in the Board biographies on page
80. Our governance structure is outlined on page 79.
STRATEGIC DECISIONS RELATING TO CLIMATE
RISKS AND OPPORTUNITIES
As the world transitions to a low-carbon economy,
the Group has identified a number of climate-related
opportunities relating to global investment in
decarbonisation and green re-industrialisation.
Commercialising these high-value green technologies
is a strategic priority and is built into our divisional
strategic plans. The Board also considers climate-
related issues when reviewing strategy and
performance objectives. Energy and GHG metrics are
presented and discussed in management reviews. In
FY2023, the Board approved the setting of operational
Net Zero transition targets aligned with the SBTi and
holds responsibility for overseeing performance
against these. The Board has visibility of implementation
of our climate transition plan and is regularly updated
on progress against climate metrics and targets.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS The SSE Committee is responsible for
overseeing the delivery of climate-related
commitments and opportunities, such as
the commercialisation of green products,
mitigating the impacts of climate change,
and setting and reviewing progress
against relevant climate-related targets.
SEE MORE
Our Net Zero/climate
transition plan.
PG 40
Climate-related risks are managed and reported in line
with wider risk management processes, with the
outcomes of divisional assessments integrated into
executive-level strategic planning and priorities.
Climate-related opportunities such as those relating to
the decarbonisation/energy transition agenda have
been communicated to the Executive Committee and
Board, culminating in a Group-wide strategic response
for markets and opportunities.
A number of key climate-related issues were discussed
by the Executive Committee and the Board in FY2023
including:
1. Science-based targets and transition planning for
Net Zero Scope 1, 2 and 3 emissions
2. Strategic opportunities arising from the energy
transition/decarbonisation and green revenue
tracking dashboards
3. Alignment of remuneration with environmental
targets
EXECUTIVE REMUNERATION
Scope 1 & 2 reduction targets continue to make up part
of our LTIP. From FY2023 onwards, we introduced
climate-related metrics (energy efficiency) into our AIP
and (absolute GHG reduction) into our LTIP to more
closely align decision making and ownership of climate
goals. Details can be found in the Remuneration &
People Committee Report on page 98. FY2024
remuneration metrics continue to incorporate these
climate-related targets.
48
TCFD
CONTINUED
AUDIT & RISK COMMITTEE
The Audit & Risk Committee is responsible for
reviewing the effectiveness of risk management across
the business (see page 91), including climate risks
which are integrated into our enterprise risk
management framework. On a rolling basis, divisions
attend the Audit & Risk Committee and present the
outcome of divisional assessments which include
climate risks and opportunities. Twice a year, the
Committee reviews the Group's principal risks. Climate
change has been identified as a Group principal risk
and is managed and owned by the Audit & Risk
Committee.
SCIENCE, SUSTAINABILITY AND EXCELLENCE
COMMITTEE
The SSE Committee is responsible for overseeing the
delivery of climate-related commitments and
opportunities, such as the commercialisation of green
products, mitigating the impacts of climate change, and
setting and reviewing progress against relevant
climate-related targets. The Committee met four times
during the year to assess progress against targets
including GHG emissions, renewable energy use,
energy efficiency, water use and waste disposal. On a
rolling basis, divisions provide a deep-dive on progress
against their SBT plans, new product development and
innovation. For more information on the work of the
SSE Committee see page 111.
EXECUTIVE COMMITTEE
Divisional Presidents form part of the Executive
Committee and are responsible for our divisions’
approach to sustainability, including climate change.
The Executive Committee reports to the CEO, who
reports directly to the Board six times a year.
Discussions at the Executive Committee relate to
commercial climate activities such as new product
development and operational climate activity, such as
energy and GHG reductions. The Chief Sustainability
Officer works closely with the Group Head of Strategy
and Communications and Divisional Presidents to
ensure sustainability is embedded in strategic,
commercial and operational decision making.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
CONTINUED
49
ESG GOVERNANCE AND DELIVERY
The diagram below shows how sustainability/ESG matters are managed at Smiths. As described on page 48, climate matters are integrated into this overall
management framework.
AUDIT & RISK
NOMINATION & GOVERNANCE
REMUNERATION & PEOPLE
SCIENCE, SUSTAINABILITY
& EXCELLENCE
BOARD OF DIRECTORS
CHIEF FINANCIAL
OFFICER
GENERAL COUNSEL
CHIEF PEOPLE OFFICER
CHIEF SUSTAINABILITY
OFFICER
PRESIDENTS
EXECUTIVE COMMITTEE
Group Head of Strategy and Communications
SES Director
SENIOR LEADERSHIP TEAM
Financial
Controller
Head of
Internal
Audit &
Risk
Company
Secretary
GC Ethics &
Compliance
Division
GCs
People Leadership Team
VP Safety
& Health
VP Sustainability & ESG
Technology, Operations
and Commercial Leaders
SES Master Black Belts & Black Belts
COORDINATED BUSINESS DELIVERY
Internal
controls
excellence
Enterprise
risk process
Board
Committee
reporting
Business
Ethics
Council
Talent
DE&I
Foundation
Committee
HSE Operations
Committee
Net Zero Delivery
Committee
Strategy and
product
commercialisation
Communications
SES
E
E
S
R
E
V
O
E
S
I
T
I
R
O
R
P
I
E
L
B
A
T
N
U
O
C
C
A
E
L
B
I
S
N
O
P
S
E
R
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 50
TCFD
CONTINUED
STRATEGY
The transition to a low-carbon world poses significant opportunities for Smiths as demand for green technology and energy efficient products increases.
DISTRIBUTION OF SMITHS GREEN TECHNOLOGY
EFFICIENCY AND CIRCULAR ECONOMY SOLUTIONS
Solutions that help our customers to use less, waste less and reduce emissions
– Efficient, reliable and lower emission oil and gas value streams
– Resource efficiency in industrial processes
– Water reduction for process industries and energy transition minerals
– Effective and lower energy safety and security infrastructure
– Detection solutions for resource mining and recycling
– Building efficiency – residential and commercial
– Smaller, lighter and more efficient connectivity components
WIDESPREAD GREEN ELECTRIFICATION
Solutions that help our customers move from carbon-intense fuels to green electricity
– Electrical heating for:
– Building heating, ventilation and air-conditioning (HVAC)
– Industrial processes
– High-power electrical connectors to enable efficient and reliable transmission of electricity
LOW-/NO-CARBON FUELS IN HARD-TO-ELECTRIFY SECTORS
Solutions that help our customers to make, store, move and use new fuels
– Efficient compression, transportation and storage of hydrogen
– Reliable pumping and compression of biofuels and synthetic fuels
– Filtration of hydrogen and low-carbon marine fuels
CARBON CAPTURE
Solutions that help our customers efficiently capture, transport, sequester and/or use carbon
– Proven and reliable CO2 capture technologies
– Efficient and reliable transportation, storage and injection of CO2
John Crane
Smiths Detection
Flex-Tek
Smiths Interconnect
Flex-Tek
Smiths Interconnect
John Crane
Flex-Tek
John Crane
See our Sustainability at Smiths report for more information on decarbonisation megatrends and how we are commercialising high-value green technologies.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
CONTINUED
51
CLIMATE RISKS AND OPPORTUNITIES
We have identified a range of physical and transition
risks and opportunities that could impact our business.
The climate transition also gives rise to legal risks,
such as stricter GHG emission regulations, as well
as market risks such as from new and emerging
competitors. Extreme weather events such as floods
and extreme temperatures pose physical risks,
including damage to assets, both owned by us and
within our supply chain, as well as disruption to
transportation routes. More extreme temperatures
may also lead to new opportunities in our markets,
such as remote sensing and cooling systems.
The time horizons considered for identified climate-
related risks and opportunities, found in the table
below, align to our targets which have been submitted
to the SBTi. While we recognise that climate-related
risks will occur over short-, medium- and long-term
horizons, our assessment determines that climate-
related risks and opportunities are likely to impact the
business in the medium and long term. We believe that
we remain resilient to climate risks with the adaptation
and mitigation strategies that are in place. It was
determined that the climate risks identified do not have
a significant impact on the business, although are
considered as a Group principal risk in aggregation. We
will continue to assess the materiality of any financial
impact arising.
Time horizons for materialisation:
climate risks and opportunities
Short term
Medium term
Long term
Description
2023–2028
2028–2032
2032–2040
Each of our identified risks and opportunities has been
assessed by scenario analysis, which is described
alongside an explanation of their potential impact on the
business, subsequent actions we are taking to respond,
and the associated time horizon.
SCENARIO ANALYSIS
We have carried out scenario analysis on our climate
risks and opportunities for several years and, in
FY2022, we collaborated with external consultants
to extend our qualitative scenario analysis to two
scenarios for both physical and transition risks and
opportunities. Next year, we plan to develop our
assessment of financial impacts, integrating
quantitative analysis where possible. This year, we have
reviewed the findings of the scenario analysis, finding
no significant changes to the modelled impact of
climate risks and opportunities since last year.
While scenario analysis is hypothetical and does
not provide a certain forecast, it helps to identify
how our most material climate-related risks and
opportunities will likely impact us and our operations
in the future. This subsequently informs our risk
management strategies, as well as the metrics and
targets we use to monitor such issues, enabling us to
become more resilient to risks and seize opportunities
in the long term.
PHYSICAL SCENARIOS
For the physical scenarios, the Intergovernmental
Panel on Climate Change’s (IPCC) Representative
Concentration Pathway RCP 4.5 and RCP 8.5 scenarios
were used. The impacts highlighted a change in annual
rainfall levels at our sites and seasonal differences in
temperature. Extreme weather events such as flooding,
wildfires and drought will become more severe and
frequent. See page 52 for more information on how we
are managing these impacts.
For the transition scenarios, the International Energy
Agency’s (IEA) World Energy Outlook Sustainable
Development Scenario (SDS) and Stated Policies
Scenario (STEPS) were used. The STEPS scenario
provides a benchmark to assess the potential
achievements of recent developments in energy and
climate policy and the SDS scenario assumes full
alignment with the Paris Agreement to hold the rise in
global average temperature to well below 2°C.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 52
TCFD
CONTINUED
A summary of our risk and opportunities assessment across each scenario can be found below.
Risk/
opportunity
Risk
description
PHYSICAL RISKS
Damage to Group
assets from
extreme weather
events
Extreme weather events:
hurricanes; tropical
storms; flooding;
wildfires; and sea-level
rise. A number of Smiths
divisions have already
experienced site-specific
disruption due to
wildfires and flood
events.
TCFD
category
Time
horizon for
materialisation
Which parts of
the business
will be most
impacted?
Potential impact
on the business
Response/actions we’re
taking and how they are
managed
RCP4.5 scenario
RCP8.5 scenario
2040
medium
term
2080
long
term
2040
medium
term
2080
long
term
Medium
All divisions
Environment
(acute
physical)
Increased costs and
resulting revenue losses
due to repair and
increasing insurance
costs.
All sites are required by policy to
complete annual site-specific risk
assessments through the divisional
Business Continuity Plans review, which
considers risks from a wide range of
issues, including from severe weather.
A number of John Crane sites have been
identified as vulnerable, so mitigation
measures are being put in place such as:
relocations; alert systems; guidance
from insurance providers when sites
come up for insurance policy renewal;
and local, specific mitigation measures
such as independent generators.
KEY
Black text in table =
Current activity
Blue text = Future activity
Risk key
Definition
Very high risk
High risk
Moderate risk
Low risk
Very significant
impact on the
Company
Significant
impact on the
Company
Moderate
impact on the
Company
Relatively
marginal impact
on the Company
Very low risk
Marginal impact
on the Company
Damage to key
supply chain
assets from
extreme weather
events
Temperature
regulation
requirements
during
heatwaves and
cold snaps
Disruption to
transportation
and distribution
networks from
extreme weather
events
Medium
All divisions
Loss of revenue due to
disruption/delay of
manufacturing
processes.
Development of a coordinated
procurement process for consideration
of physical risks in procuring new
suppliers.
Medium
All divisions
Environment
(chronic
physical)
Increasing average
temperatures across all
seasons, as well as more
extreme heatwaves and
cold snaps requiring the
temperature in buildings
to be regulated in order
to minimise health and
safety risks.
Weather events directly
impacting transportation
networks.
Environment
(acute
physical)
Medium
All divisions
Health and safety risks
from overheating or
freezing mean there are
higher operating costs
from increased air
conditioning and heating.
Capital costs associated
with retrofitting assets to
provide sufficient
temperature are also
high.
Loss of revenue due to
delays in getting
products to market,
caused by supply chain
disruption.
Consideration of extreme weather risk
when deciding where to expand existing
operations and annual business
continuity reviews across our sites.
We are reviewing and investigating ways
to minimise travel distances by ensuring
products are produced as close to
customers as possible.
We aim to avoid the use of single-source
materials to increase resilience over
regional disruption. This includes looking
at reducing double handling of products
by having suppliers send directly to
customers.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
category
Time
horizon for
materialisation
Which parts of
the business
will be most
impacted?
Potential impact
on the business
Response/actions we’re
taking and how they are
managed
2040
medium
term
2080
long
term
2040
medium
term
2080
long
term
RCP4.5 scenario
RCP8.5 scenario
KEY
53
Medium
Environment
(chronic
physical)
Smiths
Interconnect
Increased revenue from
growth in demand for
satellite technology for
environmental
monitoring and tracking.
Opportunities in remote sensing and
cooling systems have been incorporated
into business planning and other relevant
sectors are also being monitored for
changes in demand (e.g., communication
systems).
Medium
Environment
(chronic
physical)
Flex-Tek and
John Crane
Increased revenue from
increased demand for
residential and domestic
cooling systems, driven
by ongoing variation in
global temperatures.
Black text in table =
Current activity
Blue text = Future activity
Opportunity key Definition
Very high
opportunity
Very significant
impact on the
Company
High
opportunity
Moderate
opportunity
Significant
impact on the
Company
Moderate
impact on the
Company
Low
opportunity
Relatively
marginal impact
on the Company
Very low
opportunity
Marginal impact
on the Company
TCFD
CONTINUED
Risk/
opportunity
Risk
description
PHYSICAL OPPORTUNITIES
Growth in remote
sensing market
Increased
demand for
cooling systems
Smiths Interconnect:
Growth in satellite
demand and
requirements for climate
change/weather/
environmental tracking
and monitoring.
Ongoing extreme
variation in global
temperatures will
increase demand for
heating, ventilation and
air conditioning (HVAC)
systems from Flex-Tek
globally.
John Crane also has the
opportunity to develop
sealing and water
filtration technology for
transportation and
cleaning of water in
water-stressed locations.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 54
TCFD
CONTINUED
Risk/
opportunity
Risk
description
TRANSITION RISKS
Increased
regulations and
pricing on GHG
emissions
Regulations relating to
GHG emissions, including
the cost of reporting and
complying with
regulations (e.g., carbon
taxes, CBAM).
TCFD
category
Time
horizon for
materialisation
Which parts of
the business
will be most
impacted?
Potential impact
on the business
Political and
legal risk
Medium
All divisions
Increased
transportation
costs
Greater fuel costs related
to freight and internal
transportation.
Market risk Medium
All divisions
Market risk Medium
All divisions
Greater costs associated
with emissions reduction,
monitoring and reporting
obligations. Risk of
reduced access to
investment opportunities
from failure to meet
these.
Greater fuel costs due to
increased pricing on GHG
emissions.
Limited supply of
materials and
components could lead
to price volatility and
production constraints.
Market risk Medium
All divisions
Reduced revenue due to
greater competition in
product market.
Cost and
availability of
resources
New and
emerging
competitors
Increased price and
reduced availability of
critical raw materials.
For Smiths Interconnect,
there are concerns
around lithium and
beryllium and for Smiths
Detection there is a risk
of limited supply of key
components.
Reduced accessible
market due to increased
competition in Net Zero/
energy efficiency space
such as methane
leakage. For example,
there is a risk of
overcrowding in the
methane leak detection
and remediation market
for John Crane in 2030.
RCP4.5 scenario
RCP8.5 scenario
KEY
Black text in table =
Current activity
Blue text = Future activity
Risk key
Definition
Very high risk
High risk
Moderate risk
Low risk
Very significant
impact on the
Company
Significant
impact on the
Company
Moderate
impact on the
Company
Relatively
marginal impact
on the Company
Very low risk
Marginal impact
on the Company
Response/actions we’re
taking and how they are
managed
2040
medium
term
2080
long
term
2040
medium
term
2080
long
term
We have established the Energy
Governance Committee (now known as
the Net Zero Delivery Committee) and
other cross-functional working groups to
drive and track initiatives.
Reduction in double handling of products,
optimising space in freight through
reusable and recyclable packaging
solutions and exploring localised
business models.
The procurement team for Smiths
Interconnect tracks critical raw materials
and reports monthly. Actions are taken
based on trends such as pre-buys or
vendor managed inventory. The division
also periodically looks at alternative
materials.
Smiths Detection continually monitors
availability of critical materials and parts
for its products.
John Crane has implemented procedures
to track and respond to changes in
demand from traditional oil & gas
customers to additionally target its
portfolio of products and services to
target new customers and markets e.g.,
hydrogen and carbon capture.
Smiths Detection monitors power
consumption of its products relative to
competitors and product durability and
strives to be best in class to lower total
cost of ownership.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
CONTINUED
55
TCFD
category
Time
horizon for
materialisation
Which parts of
the business
will be most
impacted?
Potential impact
on the business
Response/actions we’re
taking and how they are
managed
2040
medium
term
2080
long
term
2040
medium
term
2080
long
term
RCP4.5 scenario
RCP8.5 scenario
KEY
Risk/
opportunity
Risk
description
TRANSITION OPPORTUNITIES
Aviation/
aerospace
energy efficiency
requirements
Demand for energy
efficient detection
products.
Products
and services
Medium
Smiths
Detection
Growth in energy
efficiency
products market
Increased demand for
efficiency and emission
reduction products.
Products
and services
Medium
John Crane
Revenue from
development of more
energy efficient safety
and security
infrastructure.
Smiths Detection monitors power
consumption of its products relative to
competitors and product durability and
strives to be best in class to lower total
cost of ownership.
Increased revenue from
sealing solutions that
reduce hydrocarbon
leakage from oil & gas
and other infrastructure.
Continuing development of next
generation solutions for oil & gas and
other industrial customers that align with
their decarbonisation targets, such as via
digitisation.
Black text in table =
Current activity
Blue text = Future activity
Opportunity key Definition
Very high
opportunity
Very significant
impact on the
Company
High
opportunity
Moderate
opportunity
Significant
impact on the
Company
Moderate
impact on the
Company
Low
opportunity
Relatively
marginal impact
on the Company
Very low
opportunity
Marginal impact
on the Company
IMPACT ON THE BUSINESSES, STRATEGY AND
FINANCIAL PLANNING
We submitted our Net Zero transition plan and GHG
emissions reduction targets to the SBTi in May 2023.
These outline our operational Net Zero GHG trajectory
to meet a 1.5°C scenario by achieving Net Zero Scope 1
& 2 emissions by 2040 and Net Zero Scope 3 emissions
by 2050. This aligns with the Net Zero by 2050 targets
set out by the UK and US governments (which are our
largest areas of operation). We are preparing to comply
with Transition Plan Taskforce (TPT) guidance next year.
Our transition plan was developed with consideration of
the updated TCFD guidance and lays out our 2028, 2032
and long-term Net Zero milestones and emission
reduction targets. See Net Zero/climate transition plan
on page 40.
Divisional-level initiatives and actions to reduce Scope 1
& 2 emissions are based on energy efficiency, green
electricity (including implementation of solar
technologies and fleet electrification), and alternative
fuels. The majority of our Scope 3 emissions will be
addressed by in-country grid decarbonisation and via
targeting significant suppliers with education and
training to set and meet their own SBT targets.
The impacts of our transition plan on our customers,
suppliers and other stakeholders, and on our
business are integrated into the roadmap. In
developing our transition plan, we have considered,
and align with, the Net Zero economy commitments in
the countries in which we operate, in particular where
we are headquartered.
The opportunities identified within the climate
scenario analysis form part of our strategic priority to
commercialise high-value green technologies to
increase green product revenues.
RISK MANAGEMENT
We adopt a Group-wide approach to risk management
which is discussed in detail on pages 66 to 74. The
Board has overall responsibility for ensuring that a
robust risk management process is in place and
delegates responsibility to the Audit & Risk Committee
to ensure that it is adhered to. Climate risk
management is considered in line with the existing
risk management framework. This year, for the first
time, climate risk was identified as a Group principal
risk. See page 68 for more information on our Group
principal risks.
Updates to climate regulation, including the emergence
of new climate-related regulation is picked up in line
with our Group-wide regulation monitoring processes.
In previous years, we have considered a wide range of
risks and opportunities relating to climate change that
were identified with the support of external technical
specialists and then evaluated through a series of
Group and divisional workshops. These include, for
example, impacts relating to damage to assets from
weather events, cost and availability of resources,
regulation related to GHG emissions and increased
demand for green technologies. The identification
process includes assessment of the full value chain,
such as impacts relating to key supply chain assets
from extreme weather events.
At the Group, divisional and site levels, risks and
mitigating controls are allocated to relevant owners.
This year, each of our divisions conducted their annual
review of climate-related risks in divisional risk
registers to ensure accuracy of impact assessment and
adequacy of mitigation actions. The results of these
reviews are consolidated and managed in our risk
register as per the enterprise risk management process.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 56
TCFD
CONTINUED
Twice a year, a top-down review of our principal risks
and opportunities, including climate risks, is conducted
as part of the wider risk management process. In
FY2023, we conducted an ESG double materiality
assessment to understand the ESG topics of most
importance to our business as outlined on page 33.
We continued our detailed procedures to assess and
manage climate risks and opportunities via scenario
analysis. This incorporates analysis of base case
revenue streams, climate scenario analysis conducted
over two physical and two transition climate scenarios
against medium- and long-term time horizons. Risks
and opportunities have been considered alongside
established mitigation measures and strategic actions
during validation workshops held at Group and
divisional level to determine materiality of impacts
over time.
The Executive Committee has responsibility for
designing the enterprise risk management framework
and ensuring that it is effectively deployed. The Audit &
Risk Committee is responsible for overseeing the
effectiveness of our management and implementation
of internal controls, including those related to climate
risks. 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 appropriately.
Prioritisation of risks is supported by matrices to
improve, monitor (controls/ability to respond), monitor
(risks) and accept/optimise.
METRICS AND TARGETS
We have identified relevant metrics and targets to
monitor progress in achieving our sustainability goals,
as well as manage and mitigate identified climate-
related risks and opportunities as detailed on page
57. Metrics and targets are monitored by the SSE
Committee and inform decision making to execute
our strategic priorities.
Sustainability metrics form part of the Smiths annual
and long-term incentive plans. These include metrics
on GHG emissions reductions (Scope 1 & 2 emissions
absolute reduction target) and energy efficiency.
We have committed to Net Zero Scope 1 & 2 emissions
across our operations by 2040, with Net Zero Scope 3
emissions reached by 2050 in line with the 1.5°C
Business Ambition under the UN Race to Zero. As per
our submission to the SBTi, we have committed to
interim targets of 50% reduction in Scope 1 & 2
emissions by 2032 and 50% of suppliers by spend with
SBTs by 2028. As required by the SBTi, our proposed
interim reduction target covers more than two-thirds
of our total Scope 3 GHG inventory.
Our Scope 1 & 2 emissions have decreased significantly
this year as we progress conversion of our energy mix
to renewable electricity, as well as undertake transition
initiatives such as fleet electrification. Our Scope 3
emissions have also decreased year-on-year. Further
details of Scope 1, 2 and 3 emissions can be found on
page 45 including progress during FY2023. More detail,
including our methodology for calculation of emissions
in line with the GHG Protocol, can be found in our
FY2023 Sustainability at Smiths report.
We continue to monitor completion of annual business
continuity plan reviews and have surpassed our
three-year targets on waste and water reduction. We
will assess whether water targets are renewed at the
end of the three-year goal period, given the relatively
low consumption required in our operations.
Information on how metrics and targets are linked
to our remuneration policy can be found in the
Remuneration & People Committee Report from page
98. Progress towards achieving other sustainability
targets is included in the Sustainability at Smiths
section from page 32. Our Scope 1, 2 and 3 emissions
for both FY2022 and FY2023 have undergone an
external limited assurance process. We anticipate that
further metrics and targets will be established during
FY2024 as we move into our next three-year goal
period. In the coming year we will review our disclosure
of other cross-industry climate-related metrics.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TCFD
CONTINUED
57
MONITORING METRICS AND TARGETS
The table below outlines the key metrics and targets used to monitor climate risks and opportunities. Performance against the majority of these metrics is monitored by the
SSE Committee. Further detail, including historical performance, can be found on pages 44 and 45. Our FY2023 Sustainability at Smiths report describes the basis of
preparation of our metrics and targets.
Unit of
measure
Metric
Metric target
set and reported?
Metric performance
for FY2023
Linked to identified climate
risks and opportunities
GHG
EMISSIONS
GHG
EMISSIONS
PHYSICAL
RISKS
TRANSITION
RISKS
TRANSITION
RISKS
TRANSITION
RISKS
tCO2e
Absolute Scope 1 & 2 emissions
Yes – zero by 2040 with 50%
reduction by 2032
(11.8)% reduction
year-on-year
Pricing on GHG emissions – tracking our GHG emissions
helps us to remain aligned with upcoming regulations and
is of value to our customers seeking to reduce emissions
in their supply chains.
tCO2e
Absolute Scope 3 emissions
Yes – zero by 2050
(4.8)% reduction
year-on-year
Pricing on GHG emissions – tracking our GHG emissions
helps us to remain aligned with upcoming regulations and
is of value to our customers seeking to reduce emissions
in their supply chains.
%
%
%
%
All site business continuity
plans to be reviewed annually
Yes, not reported externally
N/A
All identified physical risks – reviewing our site business
continuity plans enables us to plan and mitigate against
potential physical risks from climate change.
Revenue from green
technologies
No – data to be reported in
FY2024
N/A
Monitoring revenue from products with sustainability,
including climate, benefits.
% reduction in normalised non-
recyclable waste
Yes – 5% reduction between
FY2022 and FY2024
(20.2)% reduction vs
FY2021 baseline
Cost and availability of resources – monitoring our
reduction in waste and setting targets helps to reduce the
resources used by our business.
% reduction in normalised
water use in water-stressed
areas
Yes – 5% reduction between
FY2022 and FY2024
(17.1)% reduction vs
FY2021 baseline
Cost and availability of resources – monitoring our water
use and setting reduction targets helps to reduce the
resources used by our business.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS During the year ended 31 July 2023, 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, the outcomes of these discussions and the
Board's principal decisions are outlined in this section,
along with illustrative examples.
58
STAKEHOLDERS AND SECTION 172 STATEMENT
STAKEHOLDERS AND
SECTION 172 STATEMENT
During the year
ended 31 July 2023,
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.
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 a 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.
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.
The reporting was enhanced during the period to
include greater focus on macro conditions and
stakeholders. This was partly in response to feedback
received as part of the FY2022 Board Evaluation
process (see page 85). 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.
Throughout FY2023 we have matured our approach
with a focus on critical business priorities that are
regularly reported, underpinned by relevant data, in a
global performance dashboard that allows tracking
against the targets that have been set. Where needed,
corrective actions were presented and discussed.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STAKEHOLDERS AND SECTION 172 STATEMENT
CONTINUED
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 14 for more information
– Non-executive Directors undertake workforce engagement activities,
including in-person site visits and attendance at colleague meetings,
forums and events. Regular updates are provided to the Remuneration &
People Committee. Such activities included:
– Richard Howes met members of the senior leadership team over a
period of 12 months as part of his induction programme. He also
visited John Crane’s Morton Grove site, met key team members and
learnt about operational aspects of the business
– Noel Tata attended the Indian Managing Directors' Council and met
members of the India leadership team. He also toured Mumbai airport
to see Smiths Detection machinery in operation
– Sir George Buckley and Pam Cheng met SES Master Black Belts. Sir
George shared his perspective on excellence, his experience in other
companies, and what SES means for Smiths. Pam offered her
experience and expertise in the area of change management
– Across the year, the Board met with colleagues of varying seniority. This
included divisional teams and those in corporate functions, allowing for
informal introductions to Board members
– Talent Roundtables were held to discuss top talent and identify potential
Executive Committee successors. Following this process Sir George
Buckley met c.30 extended leadership team members across Smiths
– The Company established a Group mentoring scheme to give senior
leaders an Executive Committee formal mentor to foster the ‘developing
self and others’ Smiths Leadership Behaviour
– Management identified a need to increase female senior leaders’
visibility in order to amplify role modelling across the Group and
demonstrate female representation in senior positions
– The Board and Remuneration & People Committee receive regular
updates and deep-dives from the Chief People Officer on employee
engagement, reward, talent, and diversity and inclusion. It also monitors
KPI metrics relating to those areas
– 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
– Bill Seeger attended the China Ethics Committee and Global HSE team
– The Board receives health and safety reports at every Board meeting
meeting
– Mark Seligman met with senior leaders from across the Finance
function including Finance and Finance Excellence, Tax, Investor
Relations, Internal Audit and Divisional CFOs
and regular updates on the Group’s pension arrangements
– DE&I continued to be an area of focus to help create a more diverse and
inclusive Smiths and we are targeting improved gender balance
OUTCOMES OF ENGAGEMENT IN FY2023
– The Board approved the refined people strategy with a focus on the
Leadership Behaviours and developing and retaining talent. This
included: a focus on early years careers including apprenticeships and
graduate opportunities; and a global leadership training programme
aligned with the Leadership Behaviours and the talent process
– Implementation of a quarterly colleague webinar featuring a female
Executive Committee member and a female Non-executive Director,
which has included Dame Ann Dowling and Pam Cheng in FY2023, with
Karin Hoeing to lead in FY2024. Initiatives such as these are important as
we continue to foster a more diverse and inclusive environment
– Mentees of the mentoring scheme have taken on expanded roles and
responsibilities, resulting in cross-functional and cross-divisional
internal career changes. All of the mentees of the Executive Committee
have now become mentors for the next leadership tier. This is cascading
the mentoring culture at Smiths
– Engagement measured by our annual My Say engagement survey, which
had a very high response rate of 84% of our employees, improved by one
point since last year and is now just one point below the industry
benchmark. It was encouraging to see that four out of our five businesses
(including the corporate centre) tracked improvement in engagement,
while one remained flat year-on-year. My Say results can be found on
page 14
– The Board considered and declined the request from the Trustee of the
Smiths Industries Pension Scheme (SIPS) to recommend paying the
2023 stated aim discretionary increase. This decision was taken with the
security of all SIPS members benefits in mind. The Company continues
to work with the SIPS Trustee to progress towards the long-term target
of full buyout funding
59
READ MORE
Governance.
PG 78
SEE MORE
Read more about
sustainability in
our Sustainability
at Smiths report
CLICK HERE
84%
colleague participation in
My Say engagement
survey.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 60
STAKEHOLDERS AND SECTION 172 STATEMENT
CONTINUED
CUSTOMERS
OUR APPROACH
Meeting customer needs
and exceeding their
expectations with
products, quality and
service, and the way we
conduct business and pay
attention to the things
that matter to them, is a
fundamental part of our
operating model and our
Values.
Strong and enduring
customer relationships
will sustain Smiths into
the future.
KEY CUSTOMER PRIORITIES
– Product innovation, lead times, quality and aftermarket service
– ESG performance of products to help customers meet their own ESG
goals
– Long-term strategic relationships
– Mutual confidence and respect
– Ethical behaviour
– Data protection
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Management teams engage with customers through formal feedback
activities such as surveys, quarterly business reviews, aftermarket
service team 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 including customer data and
commentary 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)
– The SSE Committee reviews the progress of strategic projects as well
as new products introduced to the market. On a rotational basis divisions
provide deep-dives on innovation and new product development. For
more information see the SSE Report on page 111
– The Board reviewed key market and sector specific macroeconomic
indicators to understand the impact of the macroeconomic environment
on our customers
– The Board met with material customers of John Crane and Smiths
Detection during the year to understand what it is like to do business
with Smiths
READ MORE
CEO review of the year.
PG 18
3.7%
R&D spend as a % of
revenue.
OUTCOMES OF ENGAGEMENT IN FY2023
– The Board heard the challenges of key customers in the security and
energy sectors. This led to a deeper understanding of the solutions
required by our customers and highlighted the importance of our
continued focus on commercialising high-value green technologies to
align with our customers' decarbonisation journeys
– The Board continued to focus on reducing lead times for customers,
where it was necessary, at the expense of investment in working capital
and notably higher inventory levels, to mitigate the effects of disrupted
supply chains
– Customer input was gathered frequently to inform new product
development and customer service improvements. Management
initiated SES projects with suppliers to help them reduce lead times and
improve forecasting on key component shipments. These activities all
help maintain quality customer relationships
– The Board discussed and was satisfied that the culture of the Group is
appropriately focused on customer needs and that customer risks are
being managed appropriately. However, the Board agreed it would
dedicate more time in FY2024 to understanding customer priorities
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STAKEHOLDERS AND SECTION 172 STATEMENT
CONTINUED
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.
KEY SUPPLIER PRIORITIES
– Long-term relationships with Smiths
– Mutual confidence and respect
– Ethical behaviour, meeting ESG standards
– 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
– Divisional performance reports are sent to the Board ahead of each
Board meeting and deep-dives on divisional performance and strategy
are discussed by the Board on a rotational basis. The reports include
updates on suppliers and supply chain
– At each Board meeting the Board selects a critical priority for a
deep-dive, many of which have a link with our suppliers
– The Audit & Risk Committee was updated on cyber risks including
– Updates on suppliers and supply chain are included in divisional
potential cyber security breaches in the supply chain
performance updates to the Executive Committee
OUTCOMES OF ENGAGEMENT IN FY2023
– In order to meet our Net Zero targets, management engaged with
suppliers to determine our Scope 3 baseline for submission to the SBTi
– Supply chain was identified as a material issue in the FY2023 ESG DMA.
– Management worked with suppliers to ensure continuity of supply for
our key customers. This included working in partnership with suppliers
on SES projects in the areas of supply and customer satisfaction
– Smiths continued to strengthen its cyber resilience. In addition,
As a result, supply chain has been added to the ESG framework.
Management is reviewing actions for FY2024; these will include
introducing a global supplier management system to gather
standardised supplier data (including ESG data) and help manage
relationships with suppliers
management continue to enhance relationships with suppliers so that
cyber breaches in our supply chain are reported to us in a timely manner.
This design helps to protect Smiths, our employees, products and
customers
61
SEE MORE
Read more about
sustainability in our
Sustainability at
Smiths report
CLICK HERE
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 62
STAKEHOLDERS AND SECTION 172 STATEMENT
CONTINUED
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 COMMUNITY PRIORITIES
– Safe and effective operations
– Green technology, environmental performance, respecting natural
– Fair employment, skills development and prosperity
– Ethical behaviour
– Direct engagement – education and community support
resources
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
– Colleagues are regularly involved in and support local community events
– The SSE Committee heard how the divisions have been driving
environmental change in their businesses. It also provided challenge
and guidance on the divisions' roadmaps to achieve Net Zero
OUTCOMES OF ENGAGEMENT IN FY2023
– The Board approved the launch of the Smiths Group Foundation, a
charitable giving foundation with a committed initial fund of £10m.
Grants will be available to charitable organisations with a primary focus
on expanding access to STEM skills
– The Board approved the implementation of global colleague volunteering
principles which will enable every Smiths colleague to take one day of
paid volunteering leave each year from FY2024
– Our annual Smiths Day global celebration of Smiths culture took place
in June 2023. This year’s theme ‘contributing to our communities’
encouraged every Smiths site to look outwards into their community
and find opportunities to give back
– The SSE Committee was supportive of the submission of SBTs and
related plans for Scopes 1, 2 and 3 to the SBTi in May 2023,
demonstrating Smiths commitment to achieving our Net Zero goals
– The Company continued to contribute to society with a direct economic
– The Group introduced formal budgeting opportunities for charitable
contribution value of £2.8bn in FY2023
giving in our divisions, China and Group of at least £250,000 per year in
aggregate from FY2024 to enable continued support for local
organisations that fall outside of the scope of the Foundation
SEE MORE
Read more about
sustainability in our
Sustainability at
Smiths report
CLICK HERE
£10m
The Smiths Group
Foundation committed
initial fund.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STAKEHOLDERS AND SECTION 172 STATEMENT
CONTINUED
GOVERNMENTS AND REGULATORS
63
OUR APPROACH
Governments and regulators
are vital to our business as
they are policy setters and
influencers in the markets
where we operate.
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 levels
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.
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.
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
£925k
funding from DESNZ for
carbon capture research.
BOARD AND MANAGEMENT ENGAGEMENT ACTIVITIES
– Our Government Relations 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. The team further enables greater access
to funding both at regional and national levels, through engagement with
key agencies ahead of and during funding programmes
– 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 FY2023
– Management approved policy guidelines and an operational framework
within which government relations are conducted. The business sustains
harmonious relations with governments and the relevant regulatory
authorities in the countries where we manufacture and operate
– We completed the alignment of responsibilities for ESG and Government
Relations under the Chief Sustainability Officer
– John Crane received, together with its two university partners, circa
£925,000 in research funding from the UK Department for Energy Security
and Net Zero (DESNZ) for its high temperature sealing solution for the
supercritical CO2 power cycle in carbon capture. By engaging with the
UK Government during the application process the Government
Relations team contributed to a stronger project, clearly aligned with
DESNZ’s objectives
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
– Appropriate remuneration and incentive arrangements
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 or in advance of
the meeting
– The Chief Executive Officer and the Chief Financial Officer host results
presentations and Q&A sessions for current and prospective investors.
They attended investor conferences and met 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 2022. In addition, Bill Seeger met with an investor at their
request to discuss financial performance, progress against the Company’s
strategy and capital allocation
– Analyst and broker briefings, and feedback following meetings with major
or prospective shareholders, are circulated to Directors
– The Board considered investors and the UK Pensions Act 2021 prior
to approving the Group's capital allocation policy
– The Board considered succession planning for the Chairman,
Sir George Buckley, taking into account feedback from investors
OUTCOMES OF ENGAGEMENT IN FY2023
– The Board continued to focus on the Group’s strategy including the Smiths
Value Engine and our three priorities of growth, execution and people
– The Board discussed feedback from the Capital Markets Day with
– The Board agreed to repay the Company's €600m Eurobond at maturity from
existing cash resources, and approved the renewal of the US$800m revolving
credit facility for a further 5-year term, to provide the Company with an
efficient and flexible balance sheet which benefits all investors
management which reaffirmed that our strategic priorities aligned with the
wider investor community
– The Board continued with the share buyback programme and approved the
payment of the final dividend for FY2022 and the FY2023 interim dividend
– Meetings are being arranged with 12 investors for FY2024, representing
approximately 38% of the issued share capital of the Company, to meet the
new Chair, Steve Williams
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 64
NON-FINANCIAL INFORMATION STATEMENT
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 cultural
framework supports our efforts in these
areas and is described on page 13.
ENVIRONMENT
We have committed to ambitious Net Zero targets:
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, and present our
Net Zero/climate transition plan in this report. We also
have longstanding commitments to use natural
resources efficiently and minimise waste. The policies
that support our approach are:
– Environmental Sustainability Policy
– Health, Safety and Environment (HSE) Policy
– Responsible Minerals Sourcing Policy
You can find more information on the environment on
the following pages:
– Review of the year, page 20
– KPIs, page 30
– Sustainability at Smiths, pages 35 to 45
– Task Force on Climate-related Financial
Disclosures (TCFD), pages 47 to 57
– Principal risks and uncertainties, pages 68 to 70
– Remuneration & People Committee Report, page 101
– Science, Sustainability & Excellence Committee
You can find information on our employees on the
following pages:
Report, pages 111 and 112
EMPLOYEES
Our people are vital to the success of Smiths.
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.
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
retraining, 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 recruit using balanced slates
and interview panels where possible and have gender-
neutral job descriptions. Our procedures and training
activities advocate and enforce fair treatment for all.
Policies that support our approach are:
– Fair Employment Policy
– Recruitment Policy; helping us to attract and retain
our staff transparently
– Global Mobility Assignment Policy
– Our People and culture, pages 13 to 15
– Review of the year, page 20
– KPIs, page 31
– Sustainability at Smiths, pages 35 to 39 and 45 to 46.
– Stakeholders and Section 172 Statement, page 59
– Principal risks and uncertainties, pages 68 to 69
and 71
– Remuneration & People Committee Report, page 99
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 are:
– Code of Business Ethics
– Data Protection and Privacy Policy
– Data Protection Code of Conduct
– Supplier Code of Conduct
You can find information on social matters on the
following pages:
– Review of the year, page 20
– Sustainability at Smiths, pages 35 to 39 and 46
– Stakeholders and Section 172 Statement, page 62
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 65
OTHER INFORMATION
Other information to support this statement can be
found as follows:
– Business model on page 11
– Non-financial KPIs on pages 30 and 31
– Sustainability at Smiths on pages 33 to 46 and our
Sustainability at Smiths report which can be found
on our website www.smiths.com
– Task Force on Climate-related Financial
Disclosures on pages 47 to 57
– Stakeholders and Section 172 Statement on pages
58 to 63
– Principal risks and uncertainties on pages 68 to 74
– Viability Statement on pages 75 to 77
NON-FINANCIAL INFORMATION STATEMENT
CONTINUED
HUMAN RIGHTS AND ANTI-BRIBERY
AND ANTI-CORRUPTION
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 access decent work and
enjoy their universal human rights. We have not
identified any serious human rights issues in our
operations or in those of our suppliers in FY2023.
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 laws 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.
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 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. We also have a specific China Anti-bribery
and corruption policy.
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. The policies that support our approach are:
– Code of Business Ethics
– Anti-bribery and anti-corruption policy
– The Smiths Modern Slavery and Human Trafficking
Statement (found on our website www.smiths.com)
– Human Rights Policy (found on our website
www.smiths.com)
You can read more about the Group's whistleblowing
hotline Speak Out in the Audit & Risk Committee Report
on page 97
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 FY2023 we continued to review the effectiveness
of our policies, including:
– Revising and relaunching our Code of Business Ethics
– Reviewing our ethics dashboard which enables
us to view key information, track progress and
analyse data
– Ethics Pulse surveys to check organisational
engagement on ethical matters and Speak Out
– Undertaking targeted risk assessments to ensure
that our Human Rights Policy was being followed
– Continuing to monitor and review procurement-
related modern slavery and human rights risks
and controls
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 66
RISK MANAGEMENT
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.
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 (ERM) framework
and ensuring that it is effectively deployed throughout
the Group. The Executive Committee also ensures
that risk owners and decision makers understand the
Board’s risk appetite, and ensures that 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.
ENTERPRISE RISK MANAGEMENT ROLES AND RESPONSIBILITIES
3rd
LINE OF DEFENCE
BOARD AND
AUDIT & RISK
COMMITTEE
– Approves the strategy and set the culture and risk appetite of the
Group
– Reviews and assesses the effectiveness of risk management and
internal control systems
– Monitors through Board processes and good governance
INTERNAL AUDIT
Independent assurance
– Provides assurance on internal controls, programmes, systems and
2nd
LINE OF DEFENCE
EXECUTIVE
COMMITTEE
AND SENIOR
MANAGEMENT
RISK AND
COMPLIANCE
FUNCTIONS
1st
LINE OF DEFENCE
DIVISIONAL
MANAGEMENT
risk management processes
– Design and establish risk management and internal control systems
– Ensure that the risk appetite of the Board is understood by risk
owners 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
Risk ownership and mitigation
– Identify, manage and escalate risks
– Set division strategic objectives
– Establish and apply internal control systems
– Escalate issues to the Executive Committee as required
OPERATIONAL
TEAMS
Conducting business activities in accordance with Group policies and
standards
– Understand roles and responsibilities
– Comply with policies
– Follow risk management processes
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 67
RISK MANAGEMENT
CONTINUED
Running a business involves the continual assessment
and management of risks – it is an integral part of
day-to-day operations. Our 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 could 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
the 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 FY2023 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 FY2023 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; cyber; and
Flex-Tek commercial risks. The Group’s list of principal
risks was also discussed and recalibrated by the
Executive Committee.
The following items relating to our principal risks
were also discussed at Board, Finance Committee,
and SSE Committee meetings during FY2023: organic
growth and financial performance; tax, treasury,
liquidity, pensions and insurance; technology; health
and safety; acquisitions; litigation; our people strategy;
and ESG matters.
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 69.
In addition, a further 31 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 has moved from an emerging risk to
a Group principal risk. During FY2022 we undertook
a 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 47.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 68
PRINCIPAL RISKS AND UNCERTAINTIES
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
replaced our environment, social and governance (ESG)
risk with a broader climate-related risk, capturing both
the opportunity and risk of energy transition and
climate-related regulatory risks. We have also
increased the likelihood and residual impact of our
cyber 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.
PRINCIPAL RISKS AND UNCERTAINTIES
Principal risk
Link to strategy
Gross risk
Residual risk
Likelihood
Velocity
Trend
1. ORGANIC GROWTH
Ability to achieve organic growth
in line with market opportunity
2. CLIMATE CHANGE
Missed opportunities in energy
transition and change in climate
conditions causing business disruption
and economic loss for the Group
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
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
Weeks
High
Low
Possible
Years
Moderate
Low
Probable
Weeks
High
Moderate
Likely
Days
High
Low
Possible
Days
KEY
LINK TO STRATEGY
Growth
Execution
People
LIKELIHOOD
Almost certain
Likely
Probable
Possible
Unlikely
>80%
>60%
>40%
>20%
<20%
TREND
New
Stable
Up
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
69
CONNECTIVITY BETWEEN PRINCIPAL RISKS
ORGANIC
GROWTH
CLIMATE
CHANGE
TECHNOLOGY
PEOPLE
BUSINESS
CONTINUITY
ECONOMY AND
GEOPOLITICS
COMMERCIAL
PRODUCT
QUALITY
CYBER
SECURITY
LEGAL AND
COMPLIANCE
Principal risk
ORGANIC GROWTH
CLIMATE CHANGE
TECHNOLOGY
PEOPLE
BUSINESS CONTINUITY
ECONOMY AND GEOPOLITICS
COMMERCIAL
PRODUCT QUALITY
CYBER SECURITY
LEGAL AND COMPLIANCE
1. ORGANIC GROWTH – Ability to achieve organic growth in line with market opportunity
RISK OWNER
Divisional Presidents
Failure to deliver anticipated organic growth, which
may lead to missing strategic growth targets and
shareholder value erosion.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– Not growing could have an adverse effect on our
valuation
– Lack of growth and/or erosion of our market
leadership positions could impact 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 monthly operating reviews
– The Board’s regular review of our performance
TREND
Stable
– Detailed reviews of existing and potential new
and KPIs
– Functional reviews of SES and our people strategy
markets to identify opportunities with significant
growth potential
– A people plan focused on securing and retaining
the best talent to execute our strategy and deliver
organic growth
– An annual incentive programme to support
profitable growth
– Monthly forecasting, annual budgeting, and an
annual review of our multi-year strategic plan
– Ongoing investment in research and development
to drive innovation and growth
– The Smiths Excellence System (SES), which
contributes to effective execution
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 70
PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
2. CLIMATE CHANGE – Missed opportunities in energy transition and change in climate conditions causing business disruption and economic loss for the Group
RISK OWNER
Chief Sustainability Officer
Failure to identify and act on the significant
opportunities arising from the world’s transition to
a low-carbon economy and/or failure to respond
appropriately to climate change risks
and regulation.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If we do not position ourselves to serve our
customers and growing markets in
decarbonisation and green re-industrialisation,
we will not reach our full commercial potential
– If we do not make progress towards and then
achieve our own Net Zero commitments our
Company reputation and customer relationships
may be damaged
– We may not be able to attract and retain key talent
if we are not viewed as a socially responsible and
sustainable organisation
– If we do not communicate sufficiently our
approach to managing climate opportunities and
risk, we may limit the number of interested debt
and equity investors
– Extreme weather caused by climate change may
have an impact on our markets and our
operations if not identified and addressed
EXAMPLES OF HOW WE MANAGE THIS RISK
– The Group has reviewed and is pursuing strategic
market opportunities arising from the energy
transition/decarbonisation
– Products with a sustainability impact have been
prioritised for commercialisation in our new
product pipelines
– A comprehensive Net Zero/climate transition plan
has been prepared for Scope 1, 2 and 3 GHG
emissions and submitted to the Science-Based
Targets initiative (SBTi)
3. TECHNOLOGY – Technology disruption by existing or future competitor
If we fail to maintain our technological differentiation
and our innovation pipeline does not meet
customers’ evolving requirements, we may lose
market share to a new or existing competitor. This
could impact our financial performance and our
ability to attract and retain talent.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If our technological differentiation were to erode,
it could have an adverse effect on our financial
performance and our ability to attract and retain
talent
EXAMPLES OF HOW WE MANAGE THIS RISK
– We proactively position our portfolio around the
most attractive markets where we can
sustainably hold a leadership position based on
technology differentiation
– Our diversified portfolio serves a range of sectors
and geographies, and mitigates our exposure to
any one sector or area
– Our continuing investment in R&D (FY2023: 3.7%
of Group revenue, FY2022: 4.2%) with an
increasing focus on shared digital development
– Our focus on nurturing a culture of innovation
– Our focus on processes that support new product
development and commercialisation
– We track Gross Vitality as a KPI
– We maintain robust intellectual property (IP)
protection via patents and other protections, and
pursue litigation to protect our differentiation,
where appropriate
– GHG reduction and energy efficiency targets are
built into our performance scorecard and our
annual and long-term incentive plans
TREND
– We have published our second Sustainability at
New risk
Smiths report and communicate regularly
internally and externally on environmental
matters
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– All divisions are engaged in new product
development that contributes to sustainability
– Our FY2023 Scope 1 & 2 GHG reduction of (11.8)%
is in line with the trajectory needed for our SBTs
– The Science, Sustainability & Excellence (SSE)
Committee meets four times a year to review
sustainable products and progress on our
sustainability goals
– The environmental commitment topic scored
highly in our My Say employee survey
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Reviews of our product commercialisation
progress at our monthly operating reviews
– The consideration of technology priorities as part
of our long-term strategic planning
– Our SSE Committee’s regular reviews of both new
product development and commercialisation
RISK OWNER
Divisional Presidents
TREND
Stable
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
4. PEOPLE – Ability to attract and retain people
Failing to attract, develop and retain the right people
with the right skills may affect our ability to achieve
our commercial ambitions.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If we do not attract and retain key talent, our
business performance may suffer
– If we do not retain key management when we
make acquisitions, we may not realise the value of
those acquisitions
71
RISK OWNER
Chief People Officer
EXAMPLES OF HOW WE MANAGE THIS RISK
– Fair and competitive pay practices benchmarked
– Our onboarding for new hires
– Our structured assessment, development and
against the external market
– Our focus on embedding and evaluating
performance against Smiths Leadership
Behaviours
– Investment in early career programmes
– Planning for the introduction of technical
engineering communities, technical career
ladders
– Our targeted talent and succession planning
– Increasing internal talent mobility
reward programme
– Enhanced diversity and inclusion initiatives
TREND
Stable
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Formal and informal measures of culture, for
example, our regular employee engagement
surveys
– The Remuneration & People Committee’s regular
review of key people metrics
5. BUSINESS CONTINUITY – Business disruption to supply chain or operations
Disruption to our supply chain, manufacturing or
service operations, or customers’ operations could
impact our financial performance.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If we are unable to deliver products and services
to our customers, it will adversely affect our
financial performance and reputation
– Cost pressure and volatility in commodities,
goods and labour may affect our ability to serve
customers and erode our competitive advantage
EXAMPLES OF HOW WE MANAGE THIS RISK
– SES has increased our focus on resilient and
cost-effective supply
– We have tested business continuity and disaster
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– We test business continuity plans annually
– Divisional risk mitigation plans reviewed by the
recovery plans in place for critical locations
Audit & Risk Committee
– We regularly evaluate key sites against a range of
– Business interruption risk surveys which are
risk factors using external benchmarks
– Mitigation plans for sole source suppliers,
sub-contractors and service providers, including
qualifying alternative sources of supply where
appropriate
– Property damage and business interruption
insurance
completed annually with an external provider at
key operational sites
– Insurance is reviewed at least annually by the
Audit & Risk Committee
RISK OWNER
Divisional Presidents
TREND
Stable
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 72
PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
6. ECONOMY AND GEOPOLITICS – Impact of economic and geopolitical environment
RISK OWNER
Chief Financial Officer
India and the Middle East could adversely impact
our operations
– The introduction of new tariffs and/or taxes could
– Our government relations team actively monitors
relevant developments and represents our
interests
adversely impact our financial performance
– Our network of trade compliance officers across
TREND
Stable
The challenging economic and geopolitical
environment in which we operate may have an
adverse effect on demand for our products, our cost
structure, pricing strategies, profitability and market
share. External adverse events could cause an
unanticipated and sudden disruption to our business.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– A regional or global recession could reduce
demand for our products
– If we are unable to pass additional inflation on
through pricing, our financial performance may
suffer
– Geopolitical tensions relating to Russia, China,
EXAMPLES OF HOW WE MANAGE THIS RISK
– Our geographic footprint and diversified portfolio
of businesses mitigate the exposure we have to
any one country or sector
– Our divisions monitor order flows and other
leading indicators in order to respond quickly to
deteriorating market conditions and tariffs/trade
barriers
7. COMMERCIAL – Loss of focus on customers and not competing in the right markets
Failure to act in a timely manner and adapt our
market strategy in response to changes in the
commercial environment in which we operate may
result in an adverse effect on our financial
performance and market share.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If we fail to develop growth markets and
geographies, it could affect our strategic progress
and financial performance
– Significant disruption to government budgets
could result in fewer contracts being awarded to
Smiths, adversely affecting our financial
performance
– If we do not innovate in line with our customers’
needs, we may lose market share, and this could
adversely impact our results
EXAMPLES OF HOW WE MANAGE THIS RISK
– New product innovation feedback through market
research and direct feedback from existing and
potential customers
– Our diversified portfolio of businesses mitigates
exposure to any one country, sector or customer
– Our growth strategy places emphasis on
expanding operations in higher-growth customer
markets as well as geographic regions which are
currently underserved, including Asia
– Our regular strategy reviews evaluate adjacent
market opportunities and the evolving competitive
environment including reviewing new/potential
market entrants
– Our Government Relations function collaborates
with colleagues across the Group to advise on
developments
the Group monitors upcoming changes in
regulation and oversees import and export
activities
– In FY2023 the Board received an update from an
external speaker on geopolitical events
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Divisional reporting on order trends at monthly
operating reviews
– Active tracking of inflation and pricing at monthly
operating reviews
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Strategic reviews, including commercial
excellence reviews, and divisional deep-dives,
including detailed monitoring of pricing
– Customer input is gathered frequently to inform
new product development, marketing
segmentation/communication, and customer
service improvement
– Strong and long-term customer relationships
– Managing Director councils in India and China
provide cross-divisional alignment to support our
growth strategy
RISK OWNER
Divisional Presidents
TREND
Stable
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
73
8. PRODUCT QUALITY – Failure of product causes serious harm to people/property
Failure of one of our products, including failure due
to non-compliance with product regulation, may
result in financial loss and reputational damage. In
the ordinary course of business, we could be subject
to material product liability claims and lawsuits,
including potential class actions from customers or
third parties.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If we were to suffer reputational damage, it could
lead to a loss of customers/future business
– If our products were to cause material harm to
people or property and/or business interruption
for customers due to quality issues, design
defects, manufacturing failures or component
failures, we could suffer reputational damage,
loss of business and higher costs beyond
anticipated warranty claims. These may include
contractual claims for penalties, indemnities and
damages, and also product liability claims arising
from end-users and other affected third parties
(potentially large classes)
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 collaborate to ensure
that contracts (and supplier flow-downs) cover
insurance issues, and that claims are notified
– Contracting and litigation managed under the
oversight of the Group General Counsel with
regular reporting to the Executive Committee and
Board
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Regular quality reporting (e.g., defective parts per
million (DPPM) and cost of poor quality (COPQ))
and actions to drive improvement in key metrics
– Group and divisional governance frameworks
(including Delegation of Authority) ensure a close
working relationship between legal and
commercial teams (including quality) to manage
risks
9. CYBER SECURITY – Impact of enterprise or product cyber event
Cyber attacks attempting 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 intensifies the risk.
HOW THIS COULD IMPACT OUR STRATEGY OR
BUSINESS MODEL
– If a cyber attack compromised confidentiality,
integrity or availability of our assets, it could
adversely affect our ability to deliver to customers
and, ultimately, our financial performance and
reputation
– If we had a cyber security breach, we could be
exposed to significant losses, particularly
concerning our security products. These could
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 defence in depth approach
to mitigating cyber risk
– Proactive focus on information and cyber security
risks supported by a robust 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
EXAMPLES OF HOW WE KNOW THE CONTROLS
ARE WORKING EFFECTIVELY
– Formal reviews with the Executive Committee and
the Board
– Vulnerability scanning/event reporting
– External reviews of threats, processes, controls
and capabilities
– Mandatory staff training
– Compliance with recognised standards
RISK OWNER
Divisional Presidents
TREND
Stable
RISK OWNER
Chief Financial Officer
TREND
Up
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RISK OWNER
Group General Counsel
TREND
Stable
74
PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED
10. LEGAL AND COMPLIANCE – Significant ethical breach or failing to meet contractual obligations
We have more than 15,000 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
– An ethics or compliance breach could cause harm
to our reputation, financial performance,
customer relationships and our ability to attract
and retain talent
– Failure to comply with trade compliance
requirements (import and export) could lead to
significant fines and/or delays to procurement or
supplies
– Failure to meet strict conditions within
government contracts, particularly in the US,
could prevent us from 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 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
– Our 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 training is
mandated for all employees online; and
in-person training with a process for monitoring
and reporting compliance
– Policies and processes to mitigate risks are in
place, including policies and procedures to
mitigate distributor and agent-related risks,
including due diligence, contractual controls
and internal approvals
– Anti-trust training programmes
– Modern Slavery and Transparency Statement
and procedures to reduce the risk of modern
slavery within the Group and our supply chain
– Network of trade compliance officers 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 measures 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 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
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS GOING CONCERN AND VIABILITY STATEMENT
75
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 8 to 77. The financial position of the
Company, its cash-flows, liquidity position and
borrowing facilities are described on pages 21 to 23. 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 2023 the net debt of the Group was £387m, a
£237m increase from 31 July 2022. At the end of July,
the Group had available cash and short-term deposits
of £285m. These liquid resources are immediately
available with 96% invested with the Group’s global
banking partners. The Group’s debt profile shows an
average maturity of 3.6 years (from 2.5 years at 31 July
2022). There are no scheduled repayments of debt due
until February 2027.
The Group maintains a core US$800m committed
Revolving Credit Facility (RCF) from these banks which
was renewed in May 2023 and matures in May 2028.
The RCF remained undrawn at 31 July 2023 and has no
financial covenants attached.
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 68 to 74 (the ‘viability
assessment’).
The Directors have determined that a three-year period
to 31 July 2026 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 2024 and
forecasts for 2025 and 2026. Against these financial
projections, the Directors took into account the
principal risks (as outlined on pages 68 to 74) 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:
– FX rates for £ at US$1.22 and €1.18 and are
modelled to remain at this level in the forecast
period;
– Interest payments have been updated to reflect
latest forecast interest rate increases with no
further refinancing with overdrafts and the Group’s
RCF drawn to maintain our minimum cash
requirements;
– Dividend payments are made in line with a 7%
increase in dividend per share. Even under the
downside scenarios it has been assumed that
dividend increases are maintained, representing a
potential mitigating action that could be taken;
– The share buyback of £742m is completed in Q1 of
FY2024 in all scenarios; and
– The RCF was renewed in May FY2023 and will be
accessible throughout the period as there are no
financial covenants attached.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 76
GOING CONCERN AND VIABILITY STATEMENT
CONTINUED
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.
The Group holds a tradeable commodity through its
investment in 10% of the equity in ICU Medical, Inc. The
base case assumes that the Group could contemplate a
possible reduction in this investment, the cash inflows
from which would remove any need to utilise the RCF
over the period. The downside scenarios do not include
any cash inflows from the sale of this investment.
The downside results below show the impact on
EBITDA, net debt and headroom under each scenario.
The headroom includes the currently unutilised RCF of
US$800m (£656m). This renewal removed the only
interest covenant to which the Group was subject.
Based on the robust assessment, the Directors confirm
that given the current strong cash position, under all
scenarios 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.
SCENARIOS MODELLED
Scenarios
Link to principal risks
Scenario-specific assumptions
SCENARIO 1
An economic shock (political unrest or resurgence of
a pandemic) leads to significant supply chain
disruption, low customer demand and recessionary
circumstances extending into the following year.
Business continuity and
Economy and geopolitics
– 20% fall in revenue across the Group in FY2024 and a 10% fall in FY2025 and a
further 5% fall in FY2026 compared to the base case
– 65% reduction in operating profit in FY2024 due to plant closures, customer
and supply chain disruption, and a 35% fall in FY2025 and 20% in FY2026
– Increased working capital due to stock builds and customer defaults
– No mitigating activities such as restructuring and headcount reductions
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.
Product quality
– Legal defence costs of £20m per annum plus a one-off payment of £100m in
FY2024 in settlement of deceaseds’ 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 three-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 FY2024 in settlement of the losses claim
– Insurance claim rejected
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 77
GOING CONCERN AND VIABILITY STATEMENT
CONTINUED
SCENARIOS MODELLED CONTINUED
Scenarios
Link to principal risks
Scenario-specific assumptions
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 Group divisions.
SCENARIO 4
Smiths Detection is 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.
Cyber security
Legal and compliance
– Immediate loss of all US-based Government contracts within Smiths Detection.
– 25% fall in other Smiths Detection revenue over FY2024
– Loss of 50% of Smiths Interconnect’s North America revenue
– Legal defence costs of £10m per annum
– £100m fine levied by the US Government for security breach
– £50m compensation paid to the US Government in FY2024 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 Smiths 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
Business continuity
– Loss of six months’ EMEA revenue and margin in FY2024
– 20% reduction in future (FY2025 and FY2026) 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 FY2024
– Refurbishment and repair costs of £50m in Czech Republic (net of insurance
claims)
– Costs of increasing capacity and 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 25 September 2023.
By order of the Board
PAUL KEEL
Chief Executive Officer
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 78
CHAIRMAN’S INTRODUCTION
CHAIRMAN’S
INTRODUCTION
CHAIRMAN’S GOVERNANCE
STATEMENT
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.
Board succession planning continued to be a key focus
this year with my retirement as Chairman of the Board
at the conclusion of this year’s Annual General Meeting
(AGM). I would like to thank everyone for their
significant contribution and commitment to Smiths
since I joined the Board in 2013. I joined the Board with
a resolve to help grow Smiths which was spurred not
only by an enduring affection for a great company, but
also from the desire to give something back to Britain
after a long career. From reflecting over my time as
Chairman, I am proud to see we have reached many
significant milestones, and have continued to focus on
greater 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.
Further changes to the Board this year included the
appointment of Steve Williams as my successor as
Chair of the Board, subject to his election as Director at
this years’ AGM. Steve has over 40 years of global
business experience and brings with him a clear focus
on environment, social and governance (ESG) matters.
Richard Howes also joined us in September 2022 and
will take over as Chair of the Audit & Risk Committee
later in the year. I would like to welcome Steve and I
wish him, the Company, and our people every future
success after my retirement. The Board will continue to
comprise of six males and four females, two Directors
from historically under-represented ethnic groups and
seven with a birthplace or background outside the UK.
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 80
and 81.
We continue to monitor the ongoing regulatory reforms
in relation to audit and governance, and welcome the
FCA’s proposed changes to transform and streamline
the Listing Rules. The Listing Rules changes represent
a continuation of the efforts to reduce barriers to listed
companies in the UK, helping businesses to remain
competitive in today’s market. Smiths continues to
prioritise governance at the core of its business. I would
like to acknowledge the work undertaken by Smiths to
maintain an effective governance framework, including
oversight by the Audit & Risk Committee on the internal
controls enhancement programme.
It is evident that the expectations on governance have
increased in recent years and ensuring 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 and I
would like to thank the Committee Chairs for ensuring
governance has been constructive and effective.
Finally, I would like to thank the Smiths workforce and
my fellow Directors for their work on shareholders’
behalf this year. It has been a privilege to serve as
Chairman, and I look forward to watching this special
company continue to flourish in the future.
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
UK CORPORATE
GOVERNANCE CODE
COMPLIANCE
In FY2023, 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) as
explained throughout this
report. A copy of the Code
is available from the
Financial Reporting
Council’s (FRC) website at
frc.org.uk. Further
information on
compliance with the Code
can be found as follows:
BOARD LEADERSHIP
AND COMPANY
PURPOSE
PG 79
DIVISION OF
RESPONSIBILITIES
PG 83
EVALUATION,
COMPOSITION AND
SUCCESSION
PG 85
AUDIT, RISK AND
INTERNAL CONTROL
PG 91
REMUNERATION
PG 98
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BOARD LEADERSHIP AND COMPANY PURPOSE
ROLE OF
THE BOARD
The primary role of the Board is to lead
Smiths in a way that ensures its long-
term sustainable 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 the 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 in the table. The governance
framework, which includes the Matters Reserved for
the Board and the Terms of Reference for each of the
Board’s Committees, can be found on our website at
www.smiths.com. The governance framework was
reviewed by the Board and by each respective
Committee as applicable during the year.
GOVERNANCE MODEL
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.
BOARD
Audit & Risk
Committee
Remuneration &
People Committee
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.
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
reappointment of the
external auditor.
Science, Sustainability
& Excellence
Committee
Oversees the Group’s
culture and approach
to science,
sustainability and
excellence (SSE). This
includes overseeing:
the Company’s
strategy (as it relates
to science and
technology); the
Group’s sustainability
strategy; the Smiths
Excellence System
(SES); and reviewing
and determining SSE
targets, metrics and
key performance
indicators (KPIs)
relating to
remuneration.
Finance Committee
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.
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.
79
READ MORE
Nomination & Governance
Committee
PG 87
READ MORE
Audit & Risk Committee
PG 91
READ MORE
Remuneration & People
Committee
PG 98
READ MORE
Science, Sustainability &
Excellence Committee
PG 111
SEE MORE
Read more about our
Finance Committee
CLICK HERE
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 80
BOARD BIOGRAPHIES
KEY
Audit & Risk
Committee
Remuneration &
People Committee
Nomination &
Governance
Committee
Science, Sustainability
& Excellence
Committee
Finance
Committee
Committee Chair
All Non-executive Directors
are independent and, in the
Chairman's case,
independent on
appointment.
BOARD
BIOGRAPHIES
SIR GEORGE BUCKLEY
Chairman
Appointed: 1 August 2013. Sir George will retire from the
Board at the conclusion of the 2023 AGM
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. He holds a PhD in Electrical Engineering.
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.
PAUL KEEL
Chief Executive Officer
Appointed: 25 May 2021
Skills and experience: Paul has a strong track record of
energising stakeholders and delivering results in diversified,
innovation-led businesses. His strategic leadership and
international experience position him well to accelerate
Smiths Group’s growth and deliver on its significant
potential. He is a graduate of Carleton College and Harvard
Business School.
Career experience: Prior to joining Smiths in 2021, Paul
worked at 3M Company where he led a number of global
businesses ranging in size from US$400 million to US$5
billion. He was also SVP of several enterprise-wide functions
including Manufacturing & Supply Chain, Marketing & Sales,
and Strategy & Business Development. Paul’s other
experience includes roles of increasing responsibility at
General Mills, McKinsey & Company and General Electric.
CLARE SCHERRER
Chief Financial Officer
Appointed: 29 April 2022
DAME ANN DOWLING
Non-executive Director
Appointed: 19 September 2018
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.
Other significant appointments: Independent Non-executive
Director and Member of the Audit Committee of Legrand SA.
PAM CHENG
Non-executive Director
Appointed: 1 March 2020
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 BSc 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: Pam is Executive Vice President, Global
Operations, IT & Chief Sustainability Officer at AstraZeneca
plc, a multinational pharmaceutical and biopharmaceutical
company. Pam assumed additional responsibly for the
AstraZeneca sustainability strategy and function in January
2023. Prior to joining AstraZeneca in 2015, Pam was
President of MSD (Merck & Co., Inc.) in China. Pam has also
held various engineering and project management positions
at Universal Oil Products, Union Carbide Corporation and
GAF Chemicals.
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.
KARIN HOEING
Non-executive Director
Appointed: 2 April 2020
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 provides valuable assistance and advice in
executive and non-executive succession planning as well as
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.
Other significant appointments: Non-Executive Director at
25x25
.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
81
OTHER DIRECTORS
WHO SERVED DURING
FY2023
Tanya Fratto stepped
down from the Board in
November 2022 at the
conclusion of the AGM. Her
biography can be found in
our FY2022 Annual Report.
READ MORE
The biographies of
Executive Committee
members can be found on
our website.
CLICK HERE
BOARD BIOGRAPHIES
CONTINUED
RICHARD HOWES
Non-executive Director
Appointed: 1 September 2022
MARK SELIGMAN
Non-executive Director
Appointed: 16 May 2016
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
Skills and experience: Mark’s extensive experience in
corporate finance and capital markets supports Board
discussion of the Group’s portfolio management and
strategy. Mark brings non-executive experience to the
Board, having served as senior independent director and
audit committee chairman at several FTSE 100 companies.
Mark 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.
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
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 reappointed as a Director and Non-Executive
Chairman of TIL with effect from 15 November 2021.
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 Chairman of the
Remuneration & People Committee on 1 July 2018, and as
Senior Independent Director at the 2018 AGM. Bill has been
Chairman 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 shareholder 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: Non-Executive Director and
Chair of the Audit & Risk Committee at Spectris plc and
Lecturer at UCLA Anderson School of Management.
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.
STEVE WILLIAMS
Chair Designate and Non-executive Director
Appointed: 1 September 2023. Steve will stand for election at
the 2023 AGM. Subject to his election at the AGM, Steve will
be appointed as Chair of the Board on 16 November 2023
Skills and experience: Steve is an experienced CEO with a
track record of growth and transformation. He has more than
40 years of international global business experience. Steve
brings a clear focus on environment, social and governance
(ESG) matters and throughout his career has demonstrated
creating value for customers, shareholders, employees, and
communities as both an executive and a non-executive
director. Steve has a BSc in Engineering.
Career experience: Steve was previously a non-executive
director at TC Energy Corporation. Steve served as an
advisory board member of Canada’s Ecofiscal Commission
and a board member of the Business Council of Canada until
2019. He served as Chief Executive Officer of Suncor Energy
from 2012 to 2019 and as President from 2011 to 2018. Prior
to that, he held various senior leadership roles at Suncor and
ExxonMobil in the UK, where he spent 18 years.
Other significant appointments: Chair of Alcoa Corporation
and Non-executive Director of Enbridge Inc.
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
82
BOARD ACTIVITY
BOARD
ACTIVITY
During FY2023, 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 and activity for the Board
during the year are set out below.
STRATEGY AND PURPOSE
– Ensured that our focus on strategy and business
decisions aligned with our purpose along with the
Smiths Value Engine's three priorities of Growth,
Execution and People
– Completed strategic deep-dives, and endorsed the
implementation of each division’s strategy, including
M&A. Each deep-dive included the Group’s
response to climate change and opportunities
connected with energy transition
– Received updates on the launch of the in-market
operating model for Smiths China
– Ensured stakeholder considerations were
embedded in discussions and decision-making
through enhanced reporting from each of the
divisions
– Received reports on progress against our
sustainability targets and agreed to the external
assurance of our greenhouse gas (GHG) and energy
efficiency data
– Received reports on the successes, challenges and
financial benefits of SES
– Approved the acquisition of Plastronics, a leader in
the semiconductor test socket market, and received
updates on its integration with the business. Further
information can be found in the Strategic Report on
page 19
The Board completed
strategic deep-dives,
and endorsed the
implementation
of each division’s
strategy, including
M&A. Each deep-
dive included the
Group’s response
to climate change
and opportunities
connected with
energy transition.
– Received updates from external speakers on the
macroeconomic environment including the impact
of high inflation, financial crisis, geopolitical events
and energy transition
– Considered the feedback from stakeholders on the
Capital Markets event held in November 2022
PEOPLE, VALUES AND CULTURE
– Received updates from the Non-executive Directors
on their workforce engagement activities, including
Richard Howes’ induction programme. Further
information is included on page 88
– Received regular updates on the Group’s pension
arrangements and health and safety performance
– Ensured that incentive plans were better aligned to
business priorities
– Received updates on the Group’s People strategy
– Monitored Group-wide cultural change via the
implementation of the Smiths Leadership
Behaviours. Furthermore, the results of the My Say
colleague survey helped the Board to understand
the perception and strength of the use of the
Behaviours across the Group
– Approved the establishment of the Smiths Group
Foundation. More information on page 20
SUCCESSION AND LEADERSHIP
– Approved the appointment of a new Chair, as
detailed on page 88
– Focused on Board succession planning and key
roles within the business including senior
management succession plans and the talent
pipeline across the Group
FINANCE
– Considered business performance through a series
of divisional operating reviews at Board meetings
– Reviewed and approved the Group’s results
announcements and the FY2022 Annual Report
– Approved the renewal of the Group’s US$800m
revolving credit facility
– Approved the final dividend for FY2022 and the
FY2023 interim dividend
GOVERNANCE AND RISK
– Received updates on our principal risks including
deep-dives at the Audit & Risk Committee from the
divisions on supply chain and other key risks as
detailed on page 96
– Continued oversight of our internal controls in order
to ensure an effective control environment
– Approved and provided oversight of the Ethics &
Compliance annual work programme
– Undertook an External Quality Assessment of the
Internal Audit function
– 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 85 and 86
– Established a forward agenda focused on strategy
and business oversight to ensure regular reviews of
key areas of focus
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 83
DIVISION OF RESPONSIBILITIES
HOW THE BOARD
OPERATES
The following role specifications set
out the clear division of responsibility
between executive and non-executive
Directors, which supports the integrity
of the Board’s operations.
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, which is integrated into our
governance framework, 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 FY2023 is set out on page 84.
To ensure the continued effectiveness of the Board, the
Chairman meets the Non-executive Directors without
the Executive Directors present after each Board
DIVISION OF RESPONSIBILITIES
CHAIRMAN
– Ensures the Board’s continued effectiveness
– Shapes boardroom culture and encourages individual
SENIOR INDEPENDENT DIRECTOR
– Supports the Chairman in the delivery of the Board’s
objectives
Director engagement
– Is available to shareholders if they wish to raise any
– Leads the Board and sets the Board agenda,
concerns
determining the style and tone of discussions at Board
meetings
– Oversees workforce engagement by the Non-
executive Directors
– Leads the annual Board evaluation
– Leads the Chair succession process
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
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
CHIEF FINANCIAL OFFICER
– Supports the Chief Executive Officer in ensuring the
development and execution of strategy
COMPANY SECRETARY
– Advises the Board on governance matters
– Supports the Chairman in the efficient and effective
– Ensures the accuracy and completeness of the
functioning of the Board and its Committees
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
– Ensures the Board receives quality information in a
timely manner
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 typically will consult
with the other Non-executive Directors without the
Chairman present at least annually, to assess the
performance of the Chairman.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 84
DIVISION OF RESPONSIBILITIES
CONTINUED
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 FTSE 100 company,
or any other significant appointment. Any appointment
to other directorships is reviewed in advance by the
Board for conflicts and time commitment
considerations.
DIRECTOR ATTENDANCE
In FY2023 the Board concluded that the Chairman and
the Non-executive Directors devoted sufficient time to
fulfil their commitments to Smiths. This included
considering the Directors' positions held at other
organisations. 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 81. 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 FY2023, 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.
Sir George Buckley1
Paul Keel
Clare Scherrer
Pam Cheng
Dame Ann Dowling
Tanya Fratto2
Karin Hoeing3
Richard Howes4
Bill Seeger5
Mark Seligman
Noel Tata
Board6
6/7
7/7
7/7
7/7
7/7
1/2
7/7
7/7
7/7
7/7
7/7
Nomination &
Governance
Committee
Audit & Risk
Committee
Remuneration
& People
Committee
Science,
Sustainability
& Excellence
Committee
Finance
Committee
2/3
–
–
3/3
3/3
–
3/3
3/3
3/3
3/3
3/3
–
–
–
4/4
4/4
1/2
–
4/4
4/4
4/4
4/4
4/5
–
–
5/5
5/5
2/2
5/5
4/4
5/5
5/5
5/5
4/4
–
–
4/4
4/4
–
2/4
–
–
–
–
6/6
–
–
–
–
–
–
–
5/6
6/6
–
1 In accordance with the Code, Sir George Buckley did not attend the Nomination & Governance Committee, Remuneration & People Committee or an ad hoc Board meeting relating to the succession of the Chairman.
2 Tanya Fratto stepped down from the Board at the conclusion of the AGM on 16 November 2022. She was unable to attend the November Board and Committee meetings due to personal circumstances.
3 Karin Hoeing was unable to attend the November 2022 Science, Sustainability & Excellence Committee due to a pre-existing commitment. Karin was unable to attend the July 2023 Science, Sustainability &
Excellence Committee due to an unforeseen flight rescheduling on the day of the meeting. Karin provided her comments and input on the matters under consideration to the Chair of the Committee prior to the
meetings being held.
4 Richard Howes was appointed on 1 September 2022 and so was not eligible to attend the Remuneration & People Committee held in August 2022.
5 Bill Seeger was unable to attend the 17 January 2023 Finance Committee due to the short notice of the meeting. Immediately subsequent to the meeting the subject matter was discussed with Mr Seeger who
endorsed the proposed course of action.
6 Includes six scheduled and one ad hoc Board meeting.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 85
EVALUATION, COMPOSITION AND SUCCESSION
BOARD
EVALUATION
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. This year the
evaluation was carried out internally.
The annual evaluation of the performance of the
Non-executive Directors and the Chief Executive Officer
is led by the Chairman. The Senior Independent
Director and the Chief Executive Officer lead the
evaluations for the Chairman and the Chief Financial
Officer respectively.
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. All Directors are invited to
complete an effectiveness questionnaire, which for
FY2023 included a comprehensive review of various
aspects including strategy, risk and committee
effectiveness amongst other topics.
Independent Audit Ltd, who has supported the
evaluation process since FY2019, but has no other
connection to the Company, assisted with the
interpretation of the results of the questionnaires
issued to the Board.
The findings of the evaluation are used to inform future
Board agenda planning and develop specific actions for
improvement. The actions to be taken following the
FY2023 evaluation have been grouped in four themes:
strategic decision-making; succession planning; Board
communication; and stakeholder engagement.
A summary is set out below. Overall, the Board agreed
that significant progress had been made since the
internal evaluation last year. The Board seeks to
continuously improve the effectiveness of the Board
and its Committees and the actions identified in the
FY2023 effectiveness review support this. It is the
present intention that the FY2024 evaluation will be
externally facilitated. The last externally facilitated
Board evaluation was in FY2021.
BOARD EVALUATION FINDINGS AND ACTIONS
STRATEGIC DECISION MAKING
FY2022 EVALUATION FINDINGS
ACTION TAKEN IN FY2023
FY2023 EVALUATION FINDINGS AND ACTIONS FOR FY2024
– Seek to increase time spent on strategic
– Enhanced reporting from the divisions and senior leaders
deep-dives to underscore the Board's focus on
organic growth when formulating agendas
– Seek to increase the visibility of macro conditions
and external markets and the impact of
opportunities arising from technology
with a specific focus on macro conditions, external
markets, technology and innovation. This included
presentations from customers and the Group's external
advisers
– When formulating its agendas, the Board has dedicated
additional time for strategic deep dives on organic and
non-organic growth particularly in the areas of climate
change and the opportunities connected to customers'
decarbonisation commitments
– Increase time spent in Board discussions for in-depth debate of
scenarios, key assumptions and alternatives as well as risks on
major projects
– Continue to focus on developing a long-term growth strategy with
specific attention given to discuss the approach to be taken to
inorganic growth, particularly establishing risk appetite
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 86
EVALUATION, COMPOSITION AND SUCCESSION
CONTINUED
SUCCESSION PLANNING
FY2022 EVALUATION FINDINGS
ACTION TAKEN IN FY2023
FY2023 EVALUATION FINDINGS AND ACTIONS FOR FY2024
– Board succession planning for non-executive
positions was identified to be a key focus for
consideration including Chair, Senior Independent
Director and Committee Chair positions
– Focus 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
– The successful search for a new Chair was a key focus
– Ensure a successful handover and induction for the new Chair of
during the year. As part of an orderly succession plan, in
anticipation of the retirement of the Senior Independent
Director, a number of Committee Chair succession
changes were agreed and will take effect at the
conclusion of the AGM
– A continued focus on Executive Committee development
and succession planning. Non-executive Directors met
individually and in small groups with a cross-section of
employees, increasing Board oversight of talent within the
business. A number of senior appointments were made
from the Company’s internal talent pool
– Select Executive Committee and senior leadership talent
were allocated Board and Executive Committee level
mentors respectively
the Board
– Ensure a successful handover of the Senior Independent Director
and Committee Chair roles
– Continued focus on the executive and non-executive talent pool and
pipeline
– Align succession plans to the skills required to deliver on the
organisation’s strategic objectives
BOARD COMMUNICATION
– Remote or hybrid meetings should continue and
– Remote and hybrid meetings continue to be used when
the organisation of Board and Committee
meetings works well
practical
– Board papers continued to be well structured and provide
a strong basis for effective discussions and decision-
making
– Continuous review of the Board and Committee agendas, materials
and operation to support effective decision-making and discharge
of duties
STAKEHOLDER ENGAGEMENT
– Continue the focus on ESG, people, talent, culture
– The Science, Sustainability & Excellence Committee
and suppliers
– Focus on the establishment of the role of the
Science, Sustainability & Excellence Committee
– Continue to pursue opportunities for Non-
continued to have oversight for many activities important
to the Group’s stakeholders including approving our
Science Based Targets initiative (SBTi) submission, Net
Zero targets and ESG-related incentive targets
executive Directors to meet with employees to get
a deeper understanding of the culture within
Smiths
– New opportunities for the Board to meet with employees
were implemented including informal lunches and site
visits to gain a better understanding of culture
– Deep-dives on supplier challenges were provided to the
Board
– Enhance focus on how Company culture is embedded through
increased time on the Board agenda with specific deep-dives
scheduled for FY2024
– Dedicate additional time to communicating with, and meeting,
external stakeholders with increased focus on customers,
suppliers and site visits
– Ensure the remuneration strategy and new Remuneration Policy
continue to support delivery of our strategy and contribute to an
engaged workforce
– Continue to refine the scope of the Science, Sustainability &
– A Board workforce engagement strategy was endorsed
Excellence Committee
and implemented. Activity is reported to the
Remuneration & People Committee at each meeting
– The Board met with two customers from the security and
energy sectors
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOMINATION & GOVERNANCE COMMITTEE REPORT
87
NOMINATION & GOVERNANCE
COMMITTEE REPORT
CHAIRMAN’S STATEMENT
I am pleased to present the Committee’s
report for FY2023. The Committee has
delegated responsibility from the Board to
review the structure, size and composition
of the Board and its Committees, in
addition to assessing its effectiveness,
performance, and independence. The
Committee is dedicated to maintaining
a diverse and inclusive range of
appointments, with a wide variety of
skills, expertise and experience. This
ensures that the Board as a whole, and its
Committees, can effectively navigate the
complexities of our industry and contribute
to the long-term success of our company.
COMMITTEE
PERFORMANCE
EVALUATION
In FY2023, 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 MEMBERSHIP AND
MEETINGS
The members of the Committee, their biographies and
attendance at meetings during the year can be found on
pages 80, 81 and 84.
The Chief Executive Officer is normally invited to attend
Committee meetings. Other members of senior
management are invited to attend as necessary.
GOVERNANCE
The Committee is responsible for keeping the Board’s
governance framework under review. During the year
enhancements to the framework were approved. The
Committee also reviewed the Board skills and
experience matrix and its own Terms of Reference.
Looking ahead, the Nomination & Governance
Committee remains committed to assessing the
effectiveness of the Board and taking necessary steps
to ensure that the Company maintains an appropriate
balance of skills, experience, knowledge and diversity.
The Committee will also continue to monitor emerging
governance trends, regulatory changes, and industry
developments, allowing it to adapt and respond
effectively in a way that is appropriate for Smiths
strategic objectives and governance framework.
This is my final report as Chairman of the Committee,
having joined the Board in August 2013. In last year’s
report I highlighted that a key focus in 2023 would be
Board succession. As such, following a comprehensive
selection process, without my involvement and led by
Bill Seeger as Senior Independent Director, Steve
Williams will be appointed as Chair of the Board from
November 2023. This is subject to his election at the
2023 AGM. His role as Chair Designate commenced at
the start of September 2023. Board succession will
continue to be a focus during FY2024 as Bill Seeger
retires from the Board in May 2024.
We were also pleased to welcome Richard Howes to
the Board as a Non-executive Director in September
2022. In the FY2022 Annual Report we disclosed the
details of the rigorous search process that was
undertaken when recommending his appointment.
During the year we oversaw the development of senior
management succession plans and the talent pipeline.
We endorsed the appointments of Ted Wan and James
Down to the Executive Committee. Ted leads our China
business and the opportunities that presents. James is
the General Counsel of the Group. Pleasingly, both were
internal promotions.
More information about our activities can be found on
the following pages.
I would like to thank both past and present members of
the Committee for their hard work and contributions
throughout my tenure.
SIR GEORGE W. BUCKLEY
Chairman of the Nomination &
Governance Committee
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 88
NOMINATION & GOVERNANCE COMMITTEE REPORT
CONTINUED
SELECTION AND APPOINTMENT OF A NEW CHAIR
As part of the Committee's succession planning,
Bill Seeger, as the Senior Independent Director,
oversaw the search process and appointment of
Steve Williams as successor to Sir George
Buckley. The search process was facilitated by
Russell Reynolds, an independent executive
search consultant which has no connection to the
Company, other than in assisting and facilitating in
the search for senior management. Russell
Reynolds was selected after a comprehensive
review of search firms. Russell Reynolds is a
signatory to the Enhanced Code of Conduct for
Executive Search Firms. The Committee held
several unscheduled meetings to focus on the
appointment to ensure a comprehensive selection
process.
IDENTIFY
Initially, the Committee developed a candidate
profile and then a small working group comprising
Karin Hoeing, Mark Seligman and Paul Keel was
established to support Bill Seeger. The agreed
profile included key attributes required for the
role such as previous experience, cultural fit,
management of complex stakeholder
relationships, and driving growth. The details of
the role profile and requirements of the role were
shared with Russell Reynolds. Russell Reynolds
then identified an extensive and diverse list of
potential candidates who were appraised by the
working group against the agreed brief. This
created a longlist which was reviewed by the
Committee to produce a shortlist which complied
with the Board's Diversity Policy.
INTERVIEW
The shortlisted candidates were interviewed
by the working group, who together determined
the preferred list of candidates for consideration
by the Committee. As well as meeting the
candidates, the working group discussed timings
of the appointment and handover of the role.
The preferred candidates then met with all
Non-executive Directors, after which the Board
met to discuss feedback.
SELECT
Prior to the final selection and appointment, the
Senior Independent Director obtained references
from key stakeholders. The Committee was
unanimous in its selection and recommended to
the Board that Steve Williams be appointed as
Chair, given his breadth of experience and fit to
the attributes in the agreed brief.
CONSIDERATIONS
Steve Williams' external roles were considered
prior to his appointment and the Board agreed
that there was no conflict which might impact his
role at Smiths. The Board also considered his
other commitments from a time perspective. The
Board considered that he would have sufficient
time to fulfil his responsibilities to the Company.
APPOINT
Steve Williams' appointment as a Non-executive
Director and Chair Designate took effect on
1 September 2023. Subject to his election by
shareholders, he will be appointed as Chair of the
Board at the conclusion of the 2023 AGM when
Sir George Buckley steps down.
INDUCTION
A comprehensive induction programme developed
specifically for Steve Williams, taking into account
his previous experience, knowledge, and skills is
underway. This involves briefings on the role and
responsibilities of being a UK listed Company
Director, meeting with senior leaders in the
business, corporate advisers, investors and other
stakeholders, as well as visits to the Group's
operations.
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 programme is tailored to provide
the individual Director with the necessary knowledge
and understanding of the Group, its markets and its
material stakeholders based on their personal
experience and background.
On joining the Board, Richard Howes was given a
tailored induction programme to develop the necessary
knowledge and understanding of the Group and his
role. It included visiting Group operations in the US and
Europe and meeting with key senior leaders across the
business. Information on Steve Williams' induction can
be found in the adjacent box.
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. This year the Board was given an update
from external speakers on the macroeconomic
environment including the impact of high inflation,
financial crises, geopolitical events and energy
transition.
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOMINATION & GOVERNANCE COMMITTEE REPORT
CONTINUED
89
Diversity information for
the Group, including the
disclosure required by the
UK Corporate Governance
Code, can be found on
page 46.
The Board Diversity
Policy can be found on
our website.
Read more about Diversity,
Equity and Inclusion at
Smiths in our Sustainability
at Smiths report.
CLICK HERE
DIVERSITY
The Board supports the principles of 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 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 partners with firms accredited under the Enhanced
Code of Conduct for Executive Search Firms. The use of Executive search firms helps to ensure non-UK nationals,
women and candidates from historically under-represented ethnic groups are represented on the shortlist for all
Board positions.
As at 31 July 2023, the Board met all of its own diversity targets, as well as the targets set out in the Financial
Conduct Authority’s Listing Rule 9.8.6R(9)(a). Steve Williams was appointed to the Board on 1 September 2023.
As Sir George Buckley will step down from the Board at the conclusion of the AGM in November 2023, the Board is
satisfied that its gender and ethnicity targets will not be impacted on a long-term basis. Numerical diversity data,
in the format required by Listing Rule 9.8.6R(10), is outlined below as at 31 July 2023. The Board and executive
management were asked to disclose which characteristic they identified with.
SEX/GENDER REPRESENTATION
Men
Women
Not specified/prefer not to say
ETHNICITY REPRESENTATION
White British or other White
(including minority white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/Black British
Other ethnic group including Arab
Not specified/prefer not to say
Number of
Board members
Percentage of
the Board
Number of senior
positions on the Board
(CEO, CFO, SID and Chair)
Number in
executive
management1
Percentage of
executive
management1
6
4
0
60%
40%
0%
3
1
0
10
3
0
77%
23%
0%
Number of
Board members
Percentage of
the Board
Number of senior
positions on the Board
(CEO, CFO, SID and Chair)
Number in
executive
management1
Percentage of
executive
management1
8
0
2
0
0
0
80%
0%
20%
0%
0%
0%
4
0
0
0
0
0
12
0
1
0
0
0
92%
0%
8%
0%
0%
0%
1 Defined as the Executive Committee and the Company Secretary in accordance with Listing Rule 9.8.6R(10).
DIVERSITY PERFORMANCE AGAINST
SMITHS TARGETS
BIRTHPLACE OR BACKGROUND
Policy target
At least 50% of the Board with a birthplace or
background outside of the UK
Outside the UK 60%
UK 40%
Policy target: 50%
GENDER – BOARD
Policy target
At least 40% of the Board to be female
Policy target: 40%
Female 40%
Male 60%
GENDER – KEY BOARD POSITIONS
Policy target
At least one of the Chairman, Senior Independent
Director, Chief Executive Officer or Chief
Financial Officer position will be held by a female
Policy target: 1
Female 1
Male 3
ETHNICITY
Policy target
At least one Director from a historically under-
represented ethnic group
Policy target: 1
Historically under-represented ethnic group 2
Non-historically under-represented ethnic group 8
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 90
NOMINATION & GOVERNANCE COMMITTEE REPORT
CONTINUED
INDEPENDENCE AND OBJECTIVITY
The Board keeps the independence of the Non-
executive Directors under continuous review. In July
2023, the Committee reviewed the guidance contained
in the Code and assessed the performance and
independence of each of the Non-executive Directors.
Bill Seeger was appointed as a Director in May 2014
and as such he has served on the Board for more
than nine years. A particularly rigorous review of Bill’s
performance and independence was undertaken.
The Board concluded that he contributed to
constructive challenge and debate at meetings and
that he continues to demonstrate the qualities of
objectivity and independence.
Having served on the Board for more than six years,
Mark Seligman’s continued objectivity and
independence was also subject to rigorous review.
The Committee concluded that each of the Non-
executive Directors that were assessed contributed
effectively to the operation of the Board and that they
should all be considered as independent and objective.
CONFLICTS OF INTEREST
All 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 the AGM. The 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 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.
Sir George Buckley reached the nine-year
anniversary since his appointment on 1 August 2022.
Notwithstanding his tenure, following the appointment
of Paul Keel, the Committee agreed and the Board
supported that Sir George Buckley should be invited at
the 2022 AGM to seek re-election and to remain as
Chairman to oversee a period of significant strategic
change for the Group. Following the appointment of
Steve Williams on 1 September 2023 and after a short
handover period, Sir George Buckley will retire from the
Company at the conclusion of the 2023 AGM and as
such will not be standing for re-election.
On behalf of the Board, the Senior Independent Director
has confirmed that he supports Steve Williams’ election
to the Board at the 2023 AGM.
The Board determined that notwithstanding that
Bill Seeger reached his nine-year anniversary since
appointment on 12 May 2023, he should nonetheless be
invited to seek re-election by shareholders at the 2023
AGM. As the serving Senior Independent Director, his
re-election will facilitate continuity and support the
Chair transition process for a period of approximately
six months. Bill Seeger will retire from the Board in
May 2024.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT, RISK AND INTERNAL CONTROL
91
AUDIT & RISK COMMITTEE
REPORT
GHG emissions inventories. The completion of
International Standard on Assurance Engagement
(ISAE) Limited Assurance on our FY2022 and FY2023
emissions inventories and energy efficiency metric has
been an important achievement.
In accordance with the International Standards for the
Professional Practice of Internal Auditing, this year the
Committee undertook an External Quality Assessment
(EQA) of the Internal Audit function by an independent
third party, PwC. We were pleased with the results of
the EQA. Our Internal Audit function's performance
against the Standards is strong, which is a testament to
their focus on quality and continuous improvement.
Looking ahead to FY2024, the Committee will remain
focused on the Group’s internal controls programme
and we will continue to oversee the development of
plans to meet the Government’s audit and governance
reform proposals. As I hand over the Chairmanship to
Richard Howes, I would like to thank my colleagues on
the Committee for their contribution during the year.
I look forward to continuing our work in FY2024.
MARK SELIGMAN
Chairman of the Audit & Risk Committee
CHAIRMAN’S STATEMENT
I am pleased to present the Committee’s
report for FY2023 which is my last one
as Chairman of the Committee. The
Committee continues to fulfil 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.
Details of our work can be found on pages
92 to 97.
A key focus for the Committee this year has been
the development and maturity of the Group’s control
environments. At each meeting we were provided
with updates from the Finance Excellence function,
particularly in relation to our internal controls
enhancement programme. We were pleased to hear
positive feedback from EY, who are supporting us on
the programme. The work we have undertaken this
year puts us in a strong position for readiness for the
FRC proposed changes to the UK Corporate
Governance Code.
This year we challenged the business to embed the
level of controls we have in our financial information,
into our non-financial information, specifically in
respect of GHG emissions and energy data. Additional
assurance layers were therefore established for the
Group’s GHG and energy efficiency metrics. The Smiths
finance teams have implemented control procedures to
provide a second line of defence in the review and
validation of our site and divisional Scope 1 & 2 energy
use data, with KPMG engaged to provide a third line of
defence in the limited assurance of our Scope 1, 2, & 3
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 92
AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
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 80, 81 and 84. The Board considers that
Mark Seligman and Richard Howes have 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 Board Chairman, Chief Executive Officer, 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 and Deputy Secretary.
Divisional Presidents, the Vice President Finance
Excellence and senior management were also invited
to attend as appropriate. At the conclusion of each
meeting, 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 85 and 86, the Board has again confirmed the
effectiveness of this Committee in its role of supporting
the Board in compliance with its duties.
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 Statement 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 96.
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 overleaf. 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 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;
– Appropriateness of the level of detail in the narrative
reporting;
– Correlation between judgements, estimation of
uncertainties and issues, and the associated
disclosures; and
– 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 2023 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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
93
SIGNIFICANT FINANCIAL REPORTING MATTERS
The key areas of judgement for FY2023 are as follows:
AREAS OF FOCUS
ACTIONS TAKEN
IMPAIRMENT – INTANGIBLE ASSETS (INCLUDING GOODWILL)
The Group holds a significant amount of
goodwill, especially in relation to the Smiths
Detection cash generating unit (CGU).
Smiths Detection was the Group’s only CGU where the impairment headroom was limited for FY2023 and where a plausible downside
scenario or a reasonable change in key assumptions could cause the carrying value of the CGU to be close to its recoverable value. During
FY2023, strong demand drove historical levels of growth in revenue and increased profits. In FY2023 Smiths Detection continued to navigate
issues with the supply of key components. As orders and revenues have grown, it has been necessary for Smith Detection to build inventory
to compensate for the supply chain variability. This has reduced cash conversion but increased the carrying value of the CGU.
The Committee challenged the level of intangible assets and the assumptions used to justify their carrying values, including the applicable
discount rate used for impairment testing purposes. It also reviewed and agreed additional disclosures in the sensitivity of the impairment
model and movements in the key judgements. See note 11 of the financial statements.
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 Committee reviewed management’s revenue recognition judgements. The timing of revenue recognition involves judgements as to when
control of an asset passes to the customer or, particularly with 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 timing of revenue recognition, significant judgements for complex programmes and contract accounting.
See note 1 of the financial statements.
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.
Management assesses the assets and liabilities recognised in income and deferred tax, as well as the treatment of losses in the UK.
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 was updated on the ongoing tax audits and the uncertainty associated
with the outcome of tax audits that are likely to conclude in the next 12 to 24 months. 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.
VAT ERROR ON CHAIN EXPORT TRANSACTIONS
During FY2023 a historic VAT classification
error was identified, which has resulted in
certain European intercompany chain export
transactions being treated as VAT exempt when
they should have been initially classified as
subject to VAT with subsequent refund at the
time of export.
In correcting this error the Group has
recognised £2m of irrecoverable VAT and £7m
of interest on the late payment of VAT.
The Committee was updated on the status of the investigation into this VAT classification error and the wider Group review of VAT
classification. The Group-wide investigation identified similar classification issues in other European entities, against which provisions have
been made.
The Committee challenged management on the treatment and agreed that the classification errors had been appropriately treated as
non-headline. The errors uncovered relate to up to six years of past VAT practice and involve the payment and recovery of European VAT,
spanning FY2023 and FY2024. This would have materially impacted the Group’s headline cash conversion metric during those years.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 94
AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
AREAS OF FOCUS
ACTIONS TAKEN
PROVISIONS FOR LIABILITIES AND CHARGES
The Group holds significant material provisions
for John Crane, Inc. asbestos litigation and the
Titeflex Corporation CSST product claims.
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 ten-year time period for John Crane, Inc. asbestos litigation remained appropriate. In the case of the John Crane,
Inc. asbestos litigation, the Committee also agreed with the judgement. However, 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.
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 impact of the extreme spike in gilt yields following the 23 September 2022 'mini-budget' on Smiths Industries
Pension Scheme’s (SIPS) Liability Driven Investments (LDIs). The gilt yield spike resulted in a sudden increase in the collateral required to be
posted to LDI funds. SIPS maintained sufficient collateral during the spike in gilt yields, and its hedging remained intact. However, the SIPS
Trustee acted in accordance with advice and took steps to disinvest a proportion of assets from the corporate bond/credit fund to bolster the
LDI collateral readily available.
The Committee 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 2023. These continue to show a net accounting surplus position which was reduced by £114m in FY2023.
The Committee agreed with the treatment and 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 recognised that, as announced in the FY2022 Annual Report, the Group’s restructuring project to better serve our
customers, maximise growth opportunities and improve efficiency has been treated as non-headline due to the project being material and
part of a pre-approved programme. The Committee also reviewed the appropriate level of disclosure for the restructuring charge
recognised in FY2023.
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.
INVENTORY MANAGEMENT AND PROVISIONING
The Group’s inventory position has increased
over the past reporting periods due in part to
investment to mitigate post-COVID-19 supply
chain inefficiencies.
The increasing level of working capital held by
the business increases the risk that the controls
and processes may no longer be appropriate to
adequately address inherent risks.
The Committee considered the results and conclusions from inventory management and provisioning review with each division. The reviews
challenged the divisions' inventory management and provisioning policies, procedures and practices.
The Committee noted that Detection contributed significantly to the Group’s increased inventory and had the largest inventory balance in
the Group. However, it recognised that 80% of Detection’s inventory was either a finished good directly related to a sales order or an
aftermarket spare.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 95
AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
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 AGM. Michael Maloney, the KPMG audit partner
responsible for the Company’s audit since 2019 retired
following the completion of the FY2022 audit. Mike
Barradell was appointed as the lead engagement
partner for FY2023. 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
The Committee reviewed and approved KPMG’s
proposed audit plan and fee for the FY2023 audit.
The Committee continued to monitor KPMG’s execution
of the audit plan during the year.
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 2023 can be found in note 2 of the financial
statements. Non-audit fees as a percentage of audit
fees totalled 6% (FY2022: 10%). Non-audit fees in
FY2023 principally comprised audit-related assurance
services for the interim report and the limited
assurance of the Group’s Scope 1-3 Greenhouse Gas
emissions metrics.
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 during the year, was properly
assessed and authorised in accordance with the
Group’s policy.
In early 2023, KPMG identified that KPMG network
firms in Argentina, China, Egypt, Hong Kong and Qatar
had provided financial statement preparation
assistance services and/or foreign language translation
services over the period 2020 to 2023 to Smiths entities
in those regions. The services, which have since been
terminated, were administrative in nature and did not
involve any management decision-making or
bookkeeping. None of the impacted entities are
material or significant components of the Group audit.
In addition, there was no self-review threat in relation to
the work performed by KPMG’s group audit team, and
no direct or indirect effect on Smiths Group plc
consolidated financial statements. KPMG sent a letter
to the Audit & Risk Committee explaining the cause,
analysis of implications and actions taken. The Audit &
Risk Committee reviewed the letter and following
discussions, have concurred with KPMG’s professional
judgement, that based on the assessment of the
breach, KPMG’s integrity, objectivity, impartiality of
judgement, and professional scepticism were not
impaired with respect to the impacted periods. Apart
from this matter, KPMG has not performed any
non-audit services during the year ended 31 July 2023
or subsequently which are prohibited by the FRC
Ethical Standard.
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 FY2022 audit process;
– The audit review of FY2023 interim results;
– Early-stage delivery of the FY2023 audit;
– 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); and
– The findings of the various FRC’s Audit Quality
Inspection Reports with regard to KPMG and the
implications and learnings for the Smiths audit.
The Committee ensured that it was satisfied that the
Committee’s and management’s feedback from
previous effectiveness reviews had been adequately
addressed. 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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 96
AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
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 2023
AGM. A further review of the FY2023 audit will be
conducted ahead of the FY2024 interim 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 risk management and internal control
processes identify, assess, manage and monitor risks
that have the potential to affect the achievement of our
strategy. The Executive Committee and risk owners
review our principal risks throughout the year. They
assess the effectiveness of existing controls and the
resulting residual risks and identify any additional
necessary actions. We have a sound risk management
and internal control systems in place. However, they
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 66 to 74.
EFFECTIVENESS OF THE GROUP’S RISK
MANAGEMENT AND INTERNAL CONTROLS
In FY2023, 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.
The Committee receives risk deep-dive reports from
the divisions and principal risk owners throughout the
year. The divisional reports take place on a rotational
basis to enable the Committee to cover all principal
risks over time. The deep-dives are intended to inform
the Committee’s assessment of the effectiveness of
risk management and internal control systems. This
year the divisions also provided reviews on business
continuity, in particular supply chain, and other key
risks as applicable to their business, for example,
procurement, market trajectory and disruption, quality
and ESG. It also received updates on cyber, and ethics
and compliance risks. The deep-dives on cyber covered
Smiths cyber security framework, employee
communication and training programmes to increase
cyber awareness, and planned investment to improve
resilience. The Committee relies on other inputs to
assess if the risk management and internal controls
system is effective. For example, the following items
relating to our principal risks were discussed at the
Board, Finance Committee, and SSE Committee
meetings during FY2023: organic growth and financial
performance; tax, treasury, liquidity, pensions and
insurance; technology; health and safety; acquisitions;
litigation; our people strategy; and ESG.
Consideration of the divisional 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 was 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 the financial control
framework. The current year activity puts Smiths
in a strong position for readiness for the FRC
proposed changes regarding internal controls over
financial reporting.
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 replaced our ESG principal
risk with climate risk on our risk register. Climate risk
covers the energy transition opportunity and risks as
well as climate-related regulatory risks. Due to the
increasing proliferation of cyber attacks, the Committee
approved increasing the probability of Smiths cyber
security risk from probable to likely and the residual
impact from low to moderate. Other risks remain
relatively stable. Economic and geopolitical risks remain
elevated, although the risk of regional or global
recession is subsiding. Actions we have taken to mitigate
supply chain challenges remain evident in our inventory
levels and the divisions are working to reduce inventory
to appropriate levels while also supporting growth.
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 68, 75 and 76.
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 97
AUDIT, RISK AND INTERNAL CONTROL
CONTINUED
During the period, the Committee received progress
reports on the execution of the FY2023 Internal Audit
Plan and discussed any high-priority control
enhancement opportunities and action plans to address
these. The Committee also approved the FY2024
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. This year, in
accordance with the International Standards for the
Professional Practice of Internal Auditing, the
Committee undertook an EQA of the Internal Audit
function by an independent third party. The results of
the EQA conducted by PwC recognise that Internal
Audit’s performance against standards is strong, with
minor improvements suggested. This is a testament to
the function's focus on quality and continuous
improvement. The improvement opportunity identified
related to redefining the function’s future, considering
the increasing emphasis on internal controls and the
changing risk environment. These will be addressed
through the Internal Audit FY2024 Plan.
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 behaving ethically and legally can be found
on page 39 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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 98
REMUNERATION & PEOPLE COMMITTEE REPORT
REMUNERATION & PEOPLE
COMMITTEE REPORT
BILL SEEGER
Chairman of the
Remuneration & People
Committee
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 KPIs.
CHAIRMAN’S STATEMENT
I am pleased to present the Remuneration Report for
the year to 31 July 2023.
The Directors’ Remuneration Policy was approved
at the AGM on 17 November 2021. The Directors’
Remuneration Report for FY2023 will be put to an
advisory shareholder vote at the AGM on 16 November
2023. I look forward to your continued support at the
upcoming annual meeting.
BROADER CONTEXT FOR FY2023
We have continued to show resilience in the face of
wider economic challenges and maintain our
commitment to growth, execution and empowering our
people. In terms of our people priorities, we have
further improved our world class safety record,
developed our internal talent pool with a significant
increase in internal hires and launched a charitable
foundation. The Smiths Foundation has an initial £10m
commitment which will be used towards STEM-related
non-profit organisations.
FY2023 has seen the successful introduction of
leadership behaviours at Smiths. The Smiths
Leadership Behaviours serve as a foundation to unlock
the full potential of our company. They describe the
behaviours needed for the organisation to be dynamic,
inclusive and focused on delivering results that create
value. They apply to everyone at Smiths and are
relevant to every role. The Smiths Leadership
Behaviours provide a basis for which our people can be
assessed not only on what they do, but how they do it.
We introduced a GHG emissions reduction metric into
our LTIP two years ago and more recently reinforced
our commitment to our focused sustainability goals
with the introduction of an energy efficiency metric for
all divisions in the annual bonus. Setting the right
metrics is undertaken in collaboration with the Science,
Sustainability and Excellence (SSE) Committee. Further
detail on our commitment to having relevant and robust
sustainability metrics in our incentive plans is available
on page 12 of the Sustainability at Smiths Report.
INCENTIVE OUTTURNS FOR THE YEAR
The Committee considered outcomes under the
FY2023 annual bonus and the FY2021 LTIP awards in
the context of the performance of the business and
wider stakeholder experience. FY2023 was a year of
record organic revenue and EPS growth. We have
posted nine consecutive quarters of growth and
year-on-year improvement on all five of our medium-
term financial targets. We are well positioned for
growth within our medium-term targets next year,
supported by a healthy order intake.
As a result, it was considered appropriate to award
an AIP bonus of 70.0% of maximum opportunity for
FY2023, representing an achievement between target
and maximum against the financial and non-financial
metrics. One-third of the bonus earned will be deferred
into shares for the Executive Directors.
The FY2021 LTIP award vested at 75.6% of maximum,
reflecting performance over a three-year period
aligned to the sustainable growth of the business over
that period of time.
The Committee did not exercise any discretion in
respect of the incentive outcomes.
IMPLEMENTATION FOR FY2024
The base salaries of the Executive Directors have been
increased by 5.0% effective from 1 October 2023. In
2022, management elected to focus a greater
proportion of the salary increase budget on employees
who were more significantly affected by inflationary
pressures. This resulted in a below-market salary
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 99
REMUNERATION & PEOPLE COMMITTEE REPORT
CONTINUED
increase of 2.5% for Paul Keel. Clare Scherrer did not
receive a salary increase in October 2022. For 2023, the
salary increase budget is aligned across all employees
in the wider UK workforce and the increases of 5% for
both Paul Keel and Clare Scherrer reflect this.
There are minimal changes to either the Annual
Incentive Plan (AIP) or Long-Term Incentive Plan (LTIP)
for the FY2024 awards. New Product
Commercialisation (NPC) remains an important
strategic driver of growth. For the FY2024 AIP, the
weighting on the NPC metric has been incorporated
into the broader Revenue metric. Payment of the
Revenue outcome will be subject to meeting minimum
NPC criteria. There are no changes to the LTIP metrics,
weightings or ranges for the FY2024 awards which will
be made in October 2023. The metrics in both the short-
term and long-term incentive plans are aligned to the
delivery of our strategy.
CONSIDERATION OF THE WIDER WORKFORCE
Our colleagues are our greatest asset. The
Remuneration & People Committee is responsible for
the Group’s overall remuneration strategy and
monitors pay and employment conditions across our
workforce. During the year, the Committee received an
update from HR leaders in a number of business areas,
to understand how pay policies are implemented
across the Group and highlighting a range of new
initiatives. This included an extensive review of the
benefits offered to our colleagues, and the introduction
of a global parental leave policy.
The Board as a whole continues to pursue opportunities
for Non-executive Directors to meet with employees
under an organised programme of in-person site visits
to get a deeper understanding of the culture within
Smiths. Non-executive Directors attend employee
forums and events engaging directly with our People.
Updates are provided to the Remuneration & People
Committee and further details on these activities are
provided on page 59.
REMUNERATION POLICY REVIEW
As part of the three-yearly cycle, the Remuneration
Policy will be formally reviewed during FY2024
to ensure that it remains clearly aligned to sustainable,
long-term stakeholder interests and market
best practice.
During this review we will consult with key
shareholders to explain any proposed changes and
take their views into account. The new Policy will be
presented to shareholders for approval at the
2024 AGM.
COMMITTEE MEMBERSHIP AND MEETINGS
The membership of the Committee and their meeting
attendance during the year is set out on pages 80, 81
and 84 of this report. I had served on a remuneration
committee for at least 12 months prior to my
appointment as Chairman of the Committee.
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.
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 85. Overall, the
Committee is viewed as effective and performing well
and is rigorous in discharging its responsibilities.
There were four scheduled Committee meetings held
during the year and one special meeting.
OTHER ACTIVITIES OF THE COMMITTEE IN FY2023
In addition to those highlighted elsewhere in this
statement, the Committee has also undertaken the
following activities in FY2023:
– 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 FY2024 salary increases for the Executive
Committee considering available budget, individual
performance rating, position in salary range and the
increases provided across the wider workforce;
– Reviewed the Committee’s performance and Terms
of Reference; and
– Approved the Remuneration Report for inclusion in
the Annual Report.
LOOKING FORWARD
It has been my pleasure to serve Smiths and its
stakeholders as a Non-executive Director since May
2014. This is my fifth and final year as Chairman of the
Remuneration & People Committee and I am confident
the Committee is in safe hands as I pass responsibility
to Karin Hoeing. Karin is an experienced Non-executive
Director and has been a member of the Remuneration
& People Committee since April 2020. I wish Karin
every success in this role.
BILL SEEGER
Chairman of the Remuneration & People Committee
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 100
EXECUTIVE REMUNERATION AT A GLANCE
IMPLEMENTATION OF REMUNERATION POLICY IN FY2023
BASE SALARY
Paul Keel received:
£893,229
PENSION AND BENEFITS
Clare Scherrer received:
£553,750
– Pension contributions of 12% of base salary for Paul Keel and Clare
Scherrer, in line with the rate available to the wider UK workforce.
– Benefits included healthcare, insurance, car benefit, tax return preparation
and relocation benefits for the CEO.
ANNUAL BONUS (AIP)
LONG-TERM INCENTIVE (LTIP)
Total bonus payout (% of maximum):
Total vesting (% of maximum):
Paul Keel:
70.0%
Clare Scherrer:
70.0%
Paul Keel:
75.6%
Clare Scherrer:
N/A
Performance measure
Threshold
(25%
payout)
Outturn
Maximum
(full
payout)
Achievement
(% of max)
Performance measure
Threshold
(25%
payout)
Outturn
Revenue (30%)
£2,700m
£3,013m
£2,977m
100%
Organic revenue growth (25%) 2.0%
4.4%
Maximum
(full
payout)
Achievement
(% of max)
6.0%
70%
0.000000
430.428571
860.857143
1291.285714
1721.714286
2152.142857
2582.571429
3013.000000
0.0
12.5
25.0
37.5
50.0
62.5
75.0
87.5
100.0
Operating Profit (30%)
£441m
£497m
£512m
79.5%
EPS growth after tax (25%)
5.0%
17.3%
14.0%
100%
0.000000
16.666667
33.333333
50.000000
66.666667
83.333333
100.000000
0.0000
2.1625
4.3250
6.4875
8.6500
10.8125
12.9750
15.1375
17.3000
Headline operating cash conversion (20%)
Free cash-flow (25%)
40%
47.6%
H1 (10%)
FY (10%)
New product
commercialisation (10%)
90%
63%
0.000000
18.333333
36.666667
55.000000
73.333333
91.666667
110.000000
95%
87%
0.000000
19.166667
38.333333
57.500000
76.666667
95.833333
115.000000
110%
115%
0%
0%
£62.4m
£76.1m
£93.6m
61.5%
0
20
40
60
80
100
Energy efficiency (10%)
-1.5%
-7.9%
-4.5%
100%
-7.9000
-6.9125
-5.9250
-4.9375
-3.9500
-2.9625
-1.9750
-0.9875
0.0000
Average ROCE (25%)
13%
14.8%
0.0
12.5
25.0
37.5
50.0
62.5
75.0
87.5
100.0
0.0
12.5
25.0
37.5
50.0
62.5
75.0
87.5
100.0
55%
16%
63%
70%
SINGLE FIGURE (£000)
Paul Keel:
Clare Scherrer:
£0
£1,500
£3,000
£4,500
£4,285
£1,291
Salary
Pension and benefits
Annual bonus
Long term incentives
Paul Keel
Clare Scherrer
893
381
1,251
1,760
554
97
640
–
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS EXECUTIVE REMUNERATION AT A GLANCE
CONTINUED
101
STATEMENT OF IMPLEMENTATION OF REMUNERATION POLICY IN FY2024
BASE SALARY
ANNUAL BONUS (MAXIMUM OPPORTUNITY)
LONG-TERM INCENTIVE (LTIP)
Paul Keel:
£941,719
(5% increase)
Clare Scherrer:
£581,438
(5% increase)
Paul Keel:
200%
of base salary
Clare Scherrer:
165%
of base salary
Paul Keel:
189,900
shares
Clare Scherrer:
91,342
shares
UK wider workforce increases of 5%.
PENSION
BENEFITS
Paul Keel:
12%
of base salary
Benefits package consisting of
healthcare, insurance, car
benefit, tax return preparation
and relocation benefits
Clare Scherrer:
12%
of base salary
Benefits package consisting
of healthcare, insurances,
car benefit and tax return
preparation.
Weighting
Performance measure
Weighting
Threshold
(25%
vesting)
Maximum
(full
vesting)
Performance measure
Revenue1
Operating profit
Headline operating cash conversion
Energy efficiency
40%
30%
20%
10%
– 33% of annual bonus deferred into shares for
three years
– Specific targets are considered to be commercially
sensitive and will be disclosed retrospectively
1 Subject to a new product commercialisation underpin
Revenue growth
EPS growth after tax
Average free cash-flow
Average ROCE
Absolute reduction in
GHG
30%
20%
20%
15%
3.5%
6%
45%
14%
6.5%
11%
55%
17%
15%
15%
20%
– Two-year post-vesting holding period applies
– The same fixed number of shares as in 2022 will
be granted to Paul Keel and Clare Scherrer in
October 2023, per the Policy
PERFORMANCE MEASURES AND LINK TO STRATEGY
Annual bonus (AIP)
Operating profit
Revenue growth
Operating cash conversion
New product commercialisation1
Energy efficiency
Long-Term Incentive Plan (LTIP)
EPS growth after tax
Revenue rogwth
Free cash-flow
Average ROCE
Reduction in GHG emissions
GROWTH
EXECUTION
PEOPLE
1
2
3
4
5
1
2
3
4
1
2
3
4
5
GROWTH
1. Strong execution to
maximise underlying
market expansion
2. Improved product
development and
commercialisation
3. Building out priority
adjacencies
4. Disciplined M&A
5. Sustainability at
Smiths
EXECUTION
1. Operational
2. Financial
3. Functional
4. Sustainability at
Smiths
PEOPLE
1. Safety and wellbeing
2. Inspire and
empower talent
3. Diversity, equity and
inclusion
4. Communities
5. Sustainability at
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.
1 Acts as an underpin to the revenue performance measure in AIP.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
102
ALIGNMENT WITH THE UK CORPORATE GOVERNANCE CODE
The table below details how the Committee addresses the factors set out within Provision 40 of the Code:
CLARITY
SIMPLICITY
– The Committee welcomes transparency and regular engagement with shareholders with regard to executive remuneration. During 2023,
as there have been no changes to Remuneration Policy, the Committee Chairman has not been required to consult with shareholders on
remuneration matters. The Committee intends to consult with shareholders as part of the upcoming Remuneration Policy review in 2024.
– 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 claw back 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 claw back provisions exist
PROPORTIONALITY
– There is a link between strategic business objectives and performance outcome, as outlined on page 101
– Our Policy for our incentive plans outlines threshold, target and maximum opportunity levels, with actual outcomes dependent on
performance achieved against predetermined 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. The addition of the
Smiths Leadership Behaviours, of which ‘Living Smiths Values’ is one, describe the behaviours needed for the organisation to be dynamic,
inclusive and focused on delivering results that create value
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 103
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 people priorities within each of the divisions. In addition, a summary of remuneration related issues raised by employees through the employee
engagement survey is presented to the Committee. As part of a comprehensive schedule of Non-executive Director engagement with the workforce, in 2023 all Board
members, including the Committee Chairman attended events across our regional markets to discuss culture, people priorities, employee remuneration and benefit
arrangements across the Group. Details of the engagement programme and in-person site visits are summarised on page 59. 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.
SINGLE FIGURE OF ANNUAL REMUNERATION (AUDITED)
EXECUTIVE DIRECTORS
Salary
FY2022
£000
875
141
Benefits
FY2022
£000
361
7
FY2023
£000
274
31
FY2023
£000
893
554
Payments in lieu of
pension contribution
FY2023
£000
FY2022
£000
107
66
96
17
Total fixed
FY2022
£000
1,332
165
FY2023
£000
1,274
651
FY2023
£000
1,251
640
Annual
bonus
FY2022
£000
678
91
Long-term
incentives
Total
performance related
FY2023
£000
1,760
–
FY2022
£000
–
–
FY2023
£000
3,011
640
FY2022
£000
678
91
FY2023
£000
4,285
1,291
Total
FY2022
£000
2,010
256
Paul Keel
Clare Scherrer
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 in
respect of FY2022 reflect the remuneration paid from 29 April 2022.
BENEFITS
Benefits for Executive Directors include life assurance, disability insurance, private
healthcare insurance, car related benefits, tax return preparation and relocation
benefits (CEO only). The benefit value for Paul Keel has been restated for FY2022 to
include UK tax of £177,597 settled by the company in October 2022 on a grossed up
basis for housing, car and relocation payments. This is in accordance with the CEO
service contract. The benefit figure for FY2023 includes an estimated UK tax payment
of £116,197, calculated on the same basis.
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.
FY2023 ANNUAL BONUS OUTCOME
The maximum annual bonus opportunities for FY2023 were 200% of salary for
Paul Keel and 165% of salary for Clare Scherrer.
For FY2023, financial metrics made up 90% of the annual bonus, with the final
10% based on performance against energy efficiency objectives. The table below
summarises the financial targets and the Company’s actual performance (restated
at budget exchange rates) against these for the FY2023 annual bonus.
Measure
Revenue
Operating profit
Headline operating cash
conversion
H1
FY
New product commercialisation
Total financial
Energy efficiency
Total
Performance targets, actual performance and outturn
Weighting
Threshold
25% payout
Target
50% payout
Maximum
100% payout
Actual
Outturn
30% £2,700m £2,835m £2,977m £3,013m 30.0%
30% £441m £474m £512m £497m 23.9%
90%
95%
110%
115%
63%
100%
10%
10%
87%
105%
10% £62.4m £70.9m £93.6m £76.1m
90%
10% -1.5%
-3.0%
-4.5%
-7.9%
100%
0.0%
0.0%
6.1%
60.0%
10%
70.0%
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 104
OVERALL FY2023 ANNUAL BONUS OUTTURN
The following table sets out the overall FY2023 bonus outturn for Executive
Directors:
SCHEME INTERESTS AWARDED IN RESPECT OF FY2023 (AUDITED)
Scheme interests awarded are outlined below.
Maximum opportunity
Outturn (percentage of maximum)
Scheme
Form of
award
Date of
grant
Number
of shares
awarded
Award
price
Face
value
(£000)
% vesting at
threshold
performance
Performance
period end
date
Paul Keel
Clare Scherrer
200%
165%
70.0%
70.0%
Paul Keel
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. One-third of the annual bonus will be deferred into Smiths shares for
three years.
FY2021 LONG-TERM INCENTIVE PLAN OUTCOME
Paul Keel received an award under the FY2021 LTIP, subject to the following
performance conditions:
Measure
Weighting
Performance
period
Threshold
25%
Maximum
100%
Outturn
(% of vesting)
Actual
Average organic
revenue growth
Average annual Group
EPS growth after tax
Average ROCE
Free cash-flow
Total vesting
1 August 2020
to 31 July 2023
1 August 2020
to 31 July 2023
1 August 2020
to 31 July 2023
1 August 2020
to 31 July 2023
25%
25%
25%
25%
2%
5%
6%
4.4%
17.5%
14%
17.3%
25.0%
13%
16%
14.8%
17.4%
Total
40%
55%
47.6%
15.7%
75.6%
The Group EPS growth after tax performance has been calculated to exclude the
impact of the share buy-back scheme in order to ensure the targets were not
materially easier to achieve than when originally set.
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 Clare
Scherrer under this award. The value included in the single figure table has been
calculated using an estimated share price, based on the share price over the last
quarter of the financial year of £16.51. The share price appreciation attributable to the
FY2021 LTIP for Paul Keel was 19.29% (£284,729).
An additional holding period of two years will apply to the shares vesting.
Paul Keel Deferred
bonus
LTIP Conditional
shares
Conditional
shares
LTIP Conditional
shares
Conditional
shares
2 November
2022
3 October
2022
2 November
2022
3 October
2022
189,900 1,554p 2,951
25%
14,941 1,513p
226
N/A
91,342 1,554p 1,419
25%
2,009 1,513p
30
N/A
31 July
2025
N/A
31 July
2025
N/A
Deferred
bonus
Clare
Scherrer
Clare
Scherrer
The performance measures for the FY2023 LTIP award are as follows:
Measure
EPS growth after tax
Revenue growth
Average free cash-flow (as a percentage of
operating profit)
Average ROCE
Reduction in GHG emissions (normalised)
Threshold
(25% vesting)
6.0% p.a.
3.5% p.a.
45%
14%
15%
Maximum
11.0% p.a.
6.5% p.a.
55%
17%
20%
Weighting
20%
30%
20%
15%
15%
100%
PAYMENTS TO PAST DIRECTORS (AUDITED)
Andy Reynolds Smith’s FY2021 LTIP will vest in 2023, pro-rated for service to 31 July
2021. 59,875 shares will vest at 75.6%. This is equivalent to 45,265 shares a with an
estimated value of £747,325.
John Shipsey was paid an amount of £498,129 in lieu of notice for the unserved part
of his 12-month notice period. The payment in lieu of notice was made in monthly
instalments to 29 April 2023.
Mr Shipsey’s share awards under the Company’s LTIP are preserved in accordance
with the good leaver provisions of the LTIP, subject to a time pro-rating adjustment
and normal vesting dates. Mr Shipsey’s FY2021 LTIP will vest in 2023, pro-rated for
service to 31 July 2022. 63,892 shares will vest at 75.6%. This is equivalent to 48,302
shares with an estimated value of £797,466.
PAYMENTS FOR LOSS OF OFFICE
There were no payments for loss of office in FY2023.
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ SHARE OPTIONS AND LONG-TERM SHARE PLANS (AUDITED)
Director and Plan
Paul Keel
LTIP
Deferred bonus award
SAYE
Clare Scherrer
LTIP
Deferred bonus award
SAYE
Options and
awards held
on 31 July
2023
Options and
awards held
on 31 July
2022
Performance
test
Exercise
price
Grant
date
Vesting date+
date++
Date vested
Number
Expiry
Exercise
price
Market price
at date
of grant
Market
price at
date of
vesting
141,059
189,900
189,900
5,378
14,941
1,547
91,342
2,009
1,346
141,059
189,900
0
5,378
0
1,547
0
0
0
A
B
B
–
–
–
B
–
–
n/a
n/a
n/a
n/a
n/a
28/09/21
05/11/21
02/11/22
01/10/23
01/10/24
15/10/25
05/11/21
03/10/22
04/11/24
03/10/25
1163p
17/05/22
01/08/25
01/02/26
n/a
02/11/22
15/10/25
n/a
03/10/22
03/10/25
1,337p
16/05/23
01/08/26
01/02/27
NOTES
– The high and low market prices of the ordinary shares during the period 1 August 2022 to 31 July 2023 were 1,807p and 1,478p respectively. The mid-market closing price on 29 July 2022 was 1,543p and on 31 July
2023 was 1,699p.
– The mid-market closing price of a Smiths Group share on the date of the LTIP awards made to Directors in the FY2023 financial year was 1,554p (2 November 2022).
– The SAYE options over 1,547 shares granted to and held by Paul Keel at 31 July 2023 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 SAYE options over 1,346 shares granted to and held by Clare Scherrer at 31 July 2023 were granted at an exercise price below the market price of a Smiths Group share on 16 May 2023 (1,337p). 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 options or awards have been granted to or exercised by Directors or have lapsed during the period 1 August to 15 September 2023.
– At 31 July 2023, the trustee of the Employee Share Trust held 1,742,929 shares. The market value of the shares held by the trustee on 31 July 2023 was £29,612,364 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.
105
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 2020 – 25%
subject to EPS growth;
25% subject to ROCE; 25%
subject to free cash-flow;
25% subject to organic
revenue growth.
B LTIP awards in 2021 and
2022 – 20% subject to EPS
growth; 15% subject to
ROCE; 20% subject to free
cash-flow; 30% subject
to revenue growth; 15%
subject to reduction in
greenhouse gas emissions.
– There are no performance
criteria for the Deferred
Bonus Shares awards or
SAYE.
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 106
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 was 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 2023
the headroom available under these limits was 7.93% and 3.67% respectively.
FOOTNOTES
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.
EXECUTIVE DIRECTORS’ SHAREHOLDINGS (AUDITED)
The table below shows the shareholding for each Executive Director against their respective shareholding requirement as at 31 July 2023.
Director
Paul Keel
Clare Scherrer
Shareholding
requirement
Shares owned
outright
Shares
subject to
performance
Vested
shares in
holding period
Shares
arising from
bonus deferral
Save As
You Earn
(SAYE)
Current
shareholding
(% of requirement)1
Shareholding
requirement
met
189,900 shares
91,342 shares
25,000
25,000
520,859
91,342
0
0
20,319
2,009
1,547
1,346
20%
30%
No
No
There have been no changes to the Directors’ shareholdings between 1 August 2023 and 15 September 2023.
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 107
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 2023 were £168.33 and £164.37 respectively.
TOTAL SHAREHOLDER RETURN
£180
£170
£160
£150
£140
£130
£120
£110
£100
£90
£80
£100
£100
2013
£107.43
£109.31
£96.49
2014
£90.05
2015
£168.33
£164.37
£150.77
£146.42
£155.77
£142.25
£145.39
£141.70
£146.10
£145.29
£135.61
£131.49
£132.60
£123.95
£113.73
£99.38
2016
2017
2018
2019
2020
2021
2022
2023
SMITHS
FTSE 100
CHIEF EXECUTIVE’S REMUNERATION FOR THE LAST TEN YEARS
Total remuneration £000
Annual bonus outcome (% max)
Common Investment Plan outcome
(% max)
LTIP outcome (% max)
FY2023
P Keel
4,285
70%
n/a
76%
FY2022
P Keel
1,832
39%
n/a
n/a
FY2021
P Keel
450
76%
n/a
n/a
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
2,753
70%
n/a
19%
2,196
17%
n/a
31%
4,130
41%
n/a
75%
3,251
42%
n/a
32%
2,320
96%
n/a
n/a
2,964
89%
n/a
n/a
1,602
88%
100%
18%
4,195
80%
100%
17%
3,912
43%
100%
18%
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 108
CHIEF EXECUTIVE PAY RATIOS
These ratios set out the comparison between the Chief Executive’s remuneration and
that for employees in the UK workforce.
total remuneration. Strong business performance this year has resulted in a bonus
between target and maximum for the CEO and FY2023 is the first time the LTIP has
vested for the CEO since the date of his appointment.
Total remuneration
PERCENTAGE CHANGE IN DIRECTORS’ REMUNERATION
Year
FY2023
FY2022
FY2021
FY2020
FY2019
Salary
Year
FY2023
FY2022
FY2021
FY2020
FY2019
Method
Option B
Option B
Option B
Option B
Option B
Method
Option B
Option B
Option B
Option B
Option B
Chief Executive
25th percentile employee
Median employee
75th percentile employee
25th percentile
ratio
Median pay
ratio
75th percentile
ratio
128:1
58:1
105:1
75:1
133:1
92:1
39:1
75:1
53:1
97:1
62:1
26:1
47:1
34:1
65:1
25th percentile
ratio
Median pay
ratio
75th percentile
ratio
27:1
28:1
35:1
31:1
36:1
19:1
20:1
25:1
22:1
26:1
13:1
13:1
17:1
15:1
18:1
Salary
(£)
Total
Remuneration
(£)
893,229
33,260
46,521
68,720
4,285,650
33,452
46,789
69,392
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 2023 and incentive payments payable in respect of
FY2023. 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 as an average across the workforce.
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 CEO pay ratio
for salary has seen a slight decrease at the 25th percentile and median and remained
static at the 75th percentile. There is a significant increase in all ratios with regard to
FY2022 to FY2023
FY2021 to FY2022
FY2020 to FY2021
Salary/
Salary/
Salary/
fees Benefits
Bonus
fees Benefits
Bonus
fees Benefits
Bonus
2.1% -24.1% 185%
0.0% 10.7% 176%
0% 239% 204%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2.5% 12.0%
n/a
2.5% 100% n/a% -4.0% -100%
n/a
2.5% 2.5% 180% 2.5% 2.5% -34% 0.0% 0.0% 267%
CEO
CFO
Non-executive
Director
remuneration
Average of all
employees
‘All employees’ is defined as all UK Group employees. This was 190 employees at
all grades in FY2023. It was 200 employees and 196 employees for FY2022 and
FY2021 respectively.
Remuneration for the CEO Paul Keel was pro-rated for service from 25 May 2021 –
31 July 2021 for FY2021. Remuneration for the CFO Clare Scherrer was pro-rated for
service from 29 April 2022 – 31 July 2022 for FY2022.
RELATIVE IMPORTANCE OF SPEND ON PAY
The table below shows shareholder distributions (i.e., dividends and share
buybacks) and total employee pay expenditure for FY2023 and FY2022, and the
percentage change. The distributions are lower for FY2023 owing to a significantly
lower number of share buybacks than in FY2022.
Shareholder distributions
Employee costs
FY2023
£m
FY2022
£m
350
939
661
823
Change
-47%
14%
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 and for good leavers only, 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.
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
CHANGE OF CONTROL PROVISIONS
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.
NON-EXECUTIVE DIRECTOR FEES
Non-executive Director fees paid during FY2023 and payable during FY2024 are
shown below. It was determined that the fee increase for the outgoing Chairman
and the Non-executive Directors should mirror that awarded to senior employees
and that of the wider UK workforce. The fee increases of 5.0% will be effective from
1 October 2023.
Fee payable to Chair of the Board for all responsibilities1
Non-executive Director base fee
Additional fee payable to the Senior Independent Director
Additional fee for Committee Chairs
Attendance allowance for each meeting outside the Non-executive
Director’s home continent
FY2024
FY2023
£467,000
£78,598
£20,000
£20,000
£466,920
£74,855
£20,000
£20,000
£4,000
£4,000
1 The fee stated above will be payable to Steve Williams when he takes over as Chair of the Board at the
conclusion of the 2023 Annual General Meeting
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.
NON-EXECUTIVE DIRECTORS
Single figure of annual remuneration (audited)
Salary/fees
Benefits1
Total
FY2023
£000
FY2022
£000
FY2023
£000
FY2022
£000
FY2023
£000
FY2022
£000
465
91
99
26
79
68
151
99
95
461
77
87
81
73
–
146
100
89
44
-
2
3
-
-
4
-
3
47
–
3
–
–
–
–
–
–
509
91
101
29
79
68
155
99
98
508
77
90
81
73
–
146
100
89
Sir George
Buckley2
Pam Cheng
Dame Ann
Dowling3
Tanya Fratto4
Karin Hoeing
Richard Howes
Bill Seeger5
Mark Seligman6
Noel Tata
Sir George Buckley
Pam Cheng
Dame Ann Dowling
Tanya Fratto1
Karin Hoeing
Richard Howes
Bill Seeger
Mark Seligman
Noel Tata
31 July 2023
29,649
6,000
5,813
1,500
1,299
3,307
10,000
6,000
6,000
1 Tanya Fratto retired as a Non-executive Director on 16 November 2022. The shareholding shown
represents shares held as at 16 November 2022.
Following a quarterly acquisition of ordinary shares, under a share purchase
agreement using a fixed proportion of his after-tax fees received from the Company
(20%), Sir George Buckley acquired 783 shares. Karin Hoeing acquired 193 shares
and Richard Howes acquired 104 shares on 1 August 2023. There have been no
further changes between 1 August 2023 and 15 September 2023.
109
FOOTNOTES
1 Benefits for the Chairman
and Non-executive
Directors relate to
reimbursed travel-related
and other expenses
(including flight costs
and tax support 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 Tanya Fratto retired as a
Non-executive Director
effective from 16 November
2022.
5 Bill Seeger’s fees
comprised his Non-
executive Director’s fee, his
additional fees for chairing
the Remuneration & People
and Finance Committees
and his additional fee
as Senior Independent
Director.
6 Mark Seligman’s fees
comprised his Non-
executive Director’s fee
and his additional fee for
chairing the Audit & Risk
Committee.
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 110
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.
Sir George Buckley
Pam Cheng
Dame Ann Dowling
Karin Hoeing
Richard Howes
Bill Seeger
Mark Seligman
Noel Tata
Date of appointment
1 August 2013
1 March 2020
19 September 2018
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 at the 2022 AGM and the approval of
the Directors’ Remuneration Policy at the 2021 AGM:
Resolution
Directors’
Remuneration Report
Directors’
Remuneration Policy
Votes for
% of votes
cast for
Votes
against
% of votes
cast
against
Total
votes cast
Votes
withheld
(abstentions)
282,175,313
96.01% 11,719,764
3.99% 293,895,077
192,763
282,034,458
86.69% 43,312,009
13.31% 325,346,467 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 £89,450 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 FY2023, Deloitte LLP provided the Committee with information on market,
compliance support for this year’s Directors’ Remuneration Report 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 it does not have connections with the Group that may impair
its 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
SMITHS GROUP PLC ANNUAL REPORT FY2023REMUNERATIONCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SCIENCE, SUSTAINABILITY & EXCELLENCE COMMITTEE REPORT
111
I would like to thank colleagues across Smiths who
are driving sustainability, innovation, more efficient
processes and the commercialisation of new products.
The Committee has observed a real step change in
enthusiasm for SSE matters over recent years. I would
also like to thank my colleagues on the Committee for
their contributions during the year and I look forward
to continuing our work in FY2024.
DAME ANN DOWLING
Chair of the Science, Sustainability
& Excellence Committee
SCIENCE, SUSTAINABILITY &
EXCELLENCE COMMITTEE REPORT
The Committee received deep-dive presentations from
our divisions on a rolling basis throughout the year.
The deep-dives from Smiths Interconnect and Smiths
Detection covered science in the form of innovation
and new product development (NPD). From March, the
deep-dives were expanded for John Crane and Flex-Tek
to include presentations on their divisional roadmaps to
deliver our SBT trajectory. We also received updates on
SES projects. These deep-dives are important to the
Committee as they enable us to review the culture,
opportunities and risks in relation to SSE across the
Group. They also bring to life the innovative and exciting
work taking place in the divisions which, in turn,
ensures the long-term sustainability of Smiths
business model.
Over the next year, I look forward to the Committee’s
continued oversight of our SSE agenda, including
further deep-dives from the divisions and Group
experts, together with regular progress updates on
the development and commercialisation of our new
products and on our journey to Net Zero. I am
particularly excited by the opportunities presented
when these combine, with the innovation and new
products we have in the pipeline supporting us and our
customers in meeting ESG commitments and the wider
green agenda. We believe this is a continuing and
significant commercial opportunity for Smiths.
CHAIR’S STATEMENT
I am pleased to present our Committee
Report for FY2023. Science, Sustainability
and Excellence (SSE) are critical elements
of support for the execution of our strategy.
We had a full agenda this year on SSE
topics and have made good progress.
We submitted our proposed Science-Based Targets
(SBTs) and related plans for Scopes 1, 2 and 3 to the
SBTi in May 2023, demonstrating our absolute
commitment to achieving our Net Zero goals.
Completion of ISAE Limited Assurance on our FY2022
and FY2023 emissions inventories and energy efficiency
metric was also an important step forward. This work
was performed by our auditors KPMG and was a
valuable exercise to test our processes and controls
for monitoring the accuracy of these critical
underpinning data.
Our ESG double materiality assessment was finalised
with support from PwC, with the assessment
confirming that our ESG strategy and framework are fit
for purpose and capture well the most material issues
for our stakeholders.
Linking our environmental targets in the form of energy
efficiency to remuneration for a larger group of Smiths
colleagues has generated enthusiasm across the
Company, focusing the business on the necessary
cultural change and building critical foundations to
achieve our Net Zero goals. As such, we were pleased
to recommend further targets to the Remuneration &
People Committee for FY2024. More information can be
found on page 98.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 112
SCIENCE, SUSTAINABILITY & EXCELLENCE COMMITTEE REPORT
CONTINUED
COMMITTEE MEMBERSHIP AND
MEETINGS
There were four scheduled meetings during the year.
The members of the Committee, their biographies, and
attendance at meetings during the year can be found on
pages 80, 81 and 84. The Chief Executive Officer, Chief
Sustainability Officer and Group SES Director attended
every meeting. Other senior leaders were invited to
attend as necessary.
COMMITTEE PERFORMANCE
EVALUATION
Through the annual Board evaluation process,
described on pages 85 and 86, the Board confirmed the
effectiveness of the Committee in its role supporting
the Board in compliance with its remit.
COMMITTEE ACTIVITIES
The main topics considered at Committee meetings
were:
SCIENCE
All divisions updated the Committee on their NPD
processes and pipelines and how science, technology,
sustainability and a deep understanding of customer
needs and aspirations are influencing their next
generations of products. These divisional deep-dives
brought to life NPD in each division and enabled the
Committee to test future developments to ensure they
are sufficiently aspirational and aligned with Smiths
strategic aims. The Committee is highly engaged in
this area, regularly tracking the development and
commercialisation of new and emerging technologies
and products. We are excited by the differentiated
product opportunities in the pipeline, particularly
those designed to support our customers to
decarbonise and deliver efficient and sustainable
infrastructure and processes.
SUSTAINABILITY
The Committee continued to monitor progress against
Smiths sustainability metrics including GHG emissions,
renewable electricity, energy efficiency, water use and
waste disposal. The Committee was updated on the
work of the Energy Governance Committee (now known
as the Net Zero Delivery Committee), a cross-divisional
working group set up to coordinate a diverse mix of
projects to meet our Net Zero targets. These projects
include energy efficiency projects, onsite renewable
projects, procurement of green electricity, moving to
green fleets and alternative energy solutions.
During the divisional deep-dives, the Committee heard
how the divisions have been driving environmental
change in their businesses. As part of these updates,
John Crane and Flex-Tek’s roadmaps to achieve their
SBT trajectories were reviewed by the Committee who
provided challenge and guidance.
The Committee recommended to the Audit & Risk
Committee the approval of the ISAE Limited Assurance
of FY2022 and FY2023 energy efficiency and GHG data.
Internal controls and rigour relating to sustainability
data have progressed during the year and the Limited
Assurance review by KPMG was an important exercise
which highlighted where control efforts should be
focused in the future. The Limited Assurance review
also supported the Committee's confirmation to the
Remuneration & People Committee of the attainment
of the FY2023 energy efficiency targets and its
recommendation for the new FY2024 targets to be
included in remuneration.
An ESG double materiality assessment was undertaken
during the year, with oversight from the Committee.
While this was an important exercise, it brought no
surprises but, rather, confirmed that our current
prioritisation of ESG-related topics is indeed on those
of highest importance to our multiple stakeholders.
The results highlighted five key ESG topics where
Smiths must place the most focus. These are: 1)
improving safety, health and well-being; 2) delivering
Net Zero GHG; 3) commercialising high-value green
technologies; 4) behaving ethically and legally; and
5) supply chain management. As well as confirming the
material ESG topics for Smiths, the assessment also
supported our choice of key development areas for
FY2024. The Committee is pleased with the outcome of
the assessment and that so many colleagues engaged
with the process through an internal survey. For more
information on the ESG double materiality assessment,
see page 32.
We were pleased to approve the FY2023 Sustainability
at Smiths report which provides stakeholders with an
enhanced understanding of the Group’s approach to,
and measurement of, ESG progress. The report can be
found on our website.
EXCELLENCE
The Group SES Director attended each Committee
meeting to report on SES. The Committee was updated
on the embedding of phase two of SES which leverages
our Group focus on continuous improvement towards
greater results-orientated process improvements.
The Committee heard how the appointment of Master
Black Belts and Black Belts, as well as projects that
align with business priorities and deliver results, have
helped drive support for SES through the business. High
demand in the business for SES training has also shown
the Committee that the value of SES is understood.
Deep-dives from each division demonstrated how SES
is becoming truly embedded in the business and in
Smiths culture.
Our divisions also highlighted how they have been
working in partnership with our suppliers on SES
projects in the areas of supply and customer
satisfaction to ensure continuity of supply for
key customers.
Finally, the Committee was updated on the Internal
Audit review of SES. The team assessed various
SES projects and metrics to ensure that the
communicated benefits were accurate. This was
a valuable assurance exercise.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 113
DIRECTORS' REPORT
DIRECTORS’
REPORT
The Strategic Report is a requirement of the Companies
Act 2006 (the Act) and can be found on pages 8 to 77.
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
Engagement with suppliers, customers and others in a business
relationship with the Company
Political donations and expenditure
GHG, energy consumption and energy efficiency
Corporate Governance Statement
Directors during FY2023
Director appointment
Amendment of Articles of Association
Indemnities
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 event
Overseas branches
Change of control
Strategic Report pages 8-31
Strategic Report pages 21-22
Strategic Report pages 24-28
Non-Financial Information Statement pages 64-65
Our People and Culture page 13-15
Sustainability at Smiths page 46
Employee Share Schemes note 9
Stakeholders and Section 172 Statement pages 60-61
Directors' Report page 114
Sustainability at Smiths pages 44-45
Governance Report pages 78
Governance Report pages 80-81
Governance Report page 90
Governance Report page 90
Governance Report page 84
Statement of Directors’ responsibilities page 115
Statement of Directors’ responsibilities page 115
Financial risk management note 19
Share capital note 24
Share capital note 24
Governance Report page 79
Share capital note 24
Post balance sheet event note 30
Subsidiary undertakings page 210
Remuneration Report page 109
Directors' Report page 113
Borrowings and net debt note 18
CHANGE OF CONTROL
The Company and two of its divisions, Smiths Detection and Smiths Interconnect, have Special Security Agreements with
the US Department of Defense in order to comply with the US government’s national security requirements. In the event of a
change of control of the Company, the agreements may be terminated or altered by the US Department of Defense.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 114
DIRECTORS' REPORT
CONTINUED
LISTING RULES DISCLOSURE
Information required by the FCA'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)
9.8.4R(12)(13)
9.8.6R(1)
9.8.6R(2)
9.8.6R(3)(a)(b)
9.8.6R(4)(a)
9.8.6R(5)(6)(a) and (b)
9.8.6R(7)
9.8.6R(8)(a)(b)
9.8.6R(9)(10)(11)
Disclosure
Location
Capitalised interest
Dividend waiver
Directors’ interests
Major shareholders’ interests
Going Concern and Viability Statement
Purchase of own shares
UK Corporate Governance Code compliance
Unexpired term of Service Contract
Statement on inclusion of TCFD
Board diversity targets
There was no interest capitalised during FY2023
Dividend note 25
Remuneration Report pages 109
Directors' Report page 114
Strategic Report pages 75-77
Share capital note 24
Governance Report page 78
Remuneration Report pages 108-109
Sustainability at Smiths page 47
Governance Report page 89
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 FY2023 totalled US$6,000
(FY2022: US$8,000).
MAJOR SHAREHOLDER’ INTERESTS
As at 31 July 2023, the Company had been notified under the FCA's Disclosure Guidance & Transparency Rules, or had received disclosures pursuant to the Act, of the
following holdings of voting rights in its shares:
Number of voting rights
% of total voting rights
BlackRock, Inc.
Harris Associates L.P.
Dodge & Cox
Ameriprise Financial, Inc.
Artemis Investment Management LLP
23.3m
19.7m
19.2m
17.7m
17.6m
5.9
5.0
5.0
5.0
4.9
No further notifications were received between 1 August and 15 September 2023.
Date of notification
31 May 2018
22 July 2019
12 March 2022
5 December 2022
25 October 2022
By order of the Board
MATTHEW WHYTE
Company Secretary
25 September 2023
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT
OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE ANNUAL REPORT AND THE
FINANCIAL STATEMENTS
115
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 UK-adopted international accounting
standards in conformity with the requirements of the
Act 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 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 Act
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.
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 80 and
81) 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 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
25 September 2023
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 116
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
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
Basis of preparation
Key estimates and significant judgements
Sources of estimation uncertainty
Significant judgements made in applying
accounting policies
Significant accounting policies
New accounting standards effective 2023
New standards and interpretations
not yet adopted
Parent Company
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
116
130
131
132
133
134
135
135
135
136
137
143
143
143
144
147
148
150
151
151
153
154
161
162
163
165
165
166
166
166
167
168
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 Acquisitions
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
169
176
178
179
179
183
184
184
185
185
186
189
189
190
191
197
198
199
201
205
KPMG LLP’S INDEPENDENT
AUDITOR’S REPORT
TO THE MEMBERS OF SMITHS GROUP PLC
1. OUR OPINION IS UNMODIFIED
In our opinion:
– the financial statements of Smiths Group Plc give a true and fair view of the state of the Group’s and of
the Parent Company’s affairs as at 31 July 2023, 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 Group and Parent Company financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
WHAT OUR OPINION COVERS
We have audited the Group and Parent Company financial statements of Smiths Group Plc (“the Company”) for
the year ended 31 July 2023 (FY2023) included in the Annual Report, which comprise:
GROUP (SMITHS GROUP PLC AND ITS SUBSIDIARIES)
PARENT COMPANY (SMITHS GROUP PLC)
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
Notes 1 to 31 to the Group financial statements,
including the accounting policies.
Notes 1 to 13 to the Parent Company financial
statements, including the accounting policies.
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 and matters included in this report are consistent with
those discussed and included in our reporting to the Audit & Risk Committee (“ARC”).
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 117
Key Audit Matters
vs FY2022
Item
Recoverability of goodwill in respect of the
Smiths Detection CGU (a)
Estimation of litigation provisions for asbestos
in John Crane, Inc (a)
Defined benefit pension plan liabilities for SIPS (b)
4.1
4.2
4.3
(a) Key audit matter to the Group financial statements
(b) Key audit matter to the Parent Company financial statements
2. OVERVIEW OF OUR AUDIT
FACTORS DRIVING OUR
VIEW OF RISKS
Following our FY2022 audit, and considering developments affecting the Group since then, we have
updated our risk assessment decisions.
The Group recognises a goodwill balance in the Detection CGU of £630m which is subject to impairment
assessment annually. The impairment assessment relies on assumptions and estimates which are
subject to a high degree of uncertainty. These assumptions are sensitive to changes. Consistent with
FY2022, there is significant auditor judgement involved in evaluating the assumptions and our assessment
of the risk associated with this as a key audit matter remained consistent with the prior year.
The Group recognises a provision of £204m arising from ongoing asbestos litigation claims in John Crane
Inc. There are significant judgements and estimates involved in the assumptions underlying the provision
in respect of JCI asbestos litigation including the quantified projection period, the forecast number of
future claims and associated claim and defence costs respectively and complex estimation methodology.
Consistent with FY2022, there is significant auditor judgement involved in evaluating the assumptions and
our assessment of the risk associated with this as a key audit matter remained consistent with the prior
year.
The Parent company has material pension plan assets and liabilities, especially in the UK. 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 we determined that the pension assumptions have a high degree of estimation uncertainty. Due to the
increase in discount rates in the year, the carrying value of the pension liability has reduced by £400m in
the year. Consequently, while there is significant auditor judgement involved in evaluating the assumptions,
our assessment of the risk associated with this as a key audit matter indicates a decrease in the potential
impact of a material misstatement on the Group financial statements in the current year.
During the year, the ARC met 4 times. KPMG are invited to attend all ARC meetings and are provided with
an opportunity to meet with the ARC in private sessions without the Executive Directors being present. For
each key audit matter, we have set out communications with the ARC in section 6, including matters that
required particular judgement for each.
The matters included in the Audit & Risk Committee Chairman’s report on pages 93 and 94 are materially
consistent with our observations of those meetings.
AUDIT COMMITTEE
INTERACTION
SMITHS GROUP PLC ANNUAL REPORT FY2023KPMG LLP’S INDEPENDENT AUDITOR’S REPORTCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 118
OUR INDEPENDENCE
We have fulfilled our ethical responsibilities and remain independent of the Group in accordance with UK
ethical requirements, including the FRC Ethical Standard as applied to listed public interest entities. Apart
from the matters noted below, we have not performed any non-audit services during the year ended
31 July 2023 or subsequently which are prohibited by the FRC Ethical Standard.
During 2023, we identified that certain KPMG member firms had provided preparation of local GAAP
financial statement services and, in some cases, foreign language translation services over the period
FY2020 to FY2023. Some of those entities to whom services were provided are and have been in scope for
the Group audit. The services, which have been terminated, were administrative in nature and did not
involve any management decision-making or bookkeeping. The work had no direct or indirect effect on
Smiths Group plc’s consolidated financial statements
In our professional judgment, we confirm that based on our assessment of the breach, our integrity and
objectivity as auditor has not been compromised and we believe that an objective, reasonable and
informed third party would conclude that the provision of this service would not impair our integrity or
objectivity for any of the impacted financial years. The Audit & Risk Committee concurred with this view.
We were first appointed as auditor by the shareholders for the year ended 31 July 2020. The period of total
uninterrupted engagement is for the four financial years ended 31 July 2023.
The Group engagement partner is required to rotate every 5 years. As these are the first set of the Group’s
financial statements signed by Mike Barradell, he will be required to rotate off after the FY2027 audit.
The average tenure of partners responsible for component audits as set out in section 7 below is 4 years,
with the shortest being 1 year and the longest being 4 years.
MATERIALITY
(ITEM 6 BELOW)
The scope of our work is influenced by our view of materiality and our assessed risk of material
misstatement.
We have determined overall materiality for the Group financial statements as a whole at £18m (FY2022:
£16m) and for the Parent Company financial statements as a whole at £17.8m (FY2022: £15.8m).
A key judgement in determining materiality was the most relevant metric to select as the benchmark, by
considering which metrics have the greatest bearing on shareholder decisions.
Consistent with FY2022, we determined that Group profit before tax from continuing operations
normalised to exclude the effect of specific items as explained in section 5 of this report remains the
benchmark for the Group. We determined that normalised profit before tax remains the benchmark for
the Group as Smiths Group Plc is publicly traded and a profit seeking entity. The Group is well established
and operates in a stable environment across multiple geographies. The profitability and prospects for
future net cash inflows is important to the users of the financial statements. We based our Group
materiality on normalised PBTCO of £392m (FY2022: £314m), of which it represents 4.6% (FY2022: 5.1%).
Materiality for the Parent Company financial statements was determined with reference to a benchmark
of Parent Company total assets, limited to be less than materiality for Group materiality as a whole of
which it represents 0.4% (FY22: 0.4%).
Total audit fee
Audit related fees (including interim review)
Other services
Non-audit fee as a % of total audit and audit related
fee %
£8.1m
£8.4m
£0.1m
1.2%
Date first appointed
13 November 2019
Uninterrupted audit tenure
Next financial period which requires a tender
Tenure of Group engagement partner
4 years
2030
1 year
Average tenure of component signing partners
4 years
MATERIALITY LEVELS USED IN OUR AUDIT
Group
GPM
HCM
PLC
LCM
AMPT
1.1
0.5
0.9
0.8
11.7
10.4
11
18
16
17.8
15.8
FY2023 £m
FY2022 £m
Group
GPM
HCM
PLC
LCM
AMPT
Group Materiality
Group Performance Materiality
Highest Component Materiality
Parent Company Materiality
Lowest Component Materiality
Audit Misstatement Posting Threshold
SMITHS GROUP PLC ANNUAL REPORT FY2023KPMG LLP’S INDEPENDENT AUDITOR’S REPORTCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS GROUP SCOPE
(ITEM 7 BELOW)
We have performed risk assessment and planning procedures to determine which of the Group’s
components are likely to include risks of material misstatement to the Group financial statements, the
type of procedures to be performed at these components and the extent of involvement required from our
component auditors around the world.
We subjected 7 (FY2022: 23) to full scope audits for Group purposes and 10 (FY2022:9) 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 scope of the audit work performed was predominately substantive as we placed limited reliance
upon the Group’s internal control over financial reporting.
In the prior year, all components were identified based on the Group’s legal entities. In the current year,
we considered the Flex-Tek division as a single component, with the component auditor providing an
opinion on the sub-consolidation prepared at the division level. This change to component scoping
accounts for the reduction in the number of full scope components when compared to FY2022.
The components within the scope of our work accounted for the percentages illustrated opposite.
In addition, we have performed Group level analysis on the remaining components to determine
whether further risks of material misstatement exist in those components.
We consider the scope of our audit, as communicated to the Audit & Risk Committee, to be an
appropriate basis for our audit opinion.
119
COVERAGE OF GROUP FINANCIAL STATEMENTS
Profit
before tax
Total
assets
Revenue
Full scope audits
Audits of one or more account
balances
Specified risk-focused audit
procedures
Remaining components
Full scope audits
Audits of one or more account
balances
Specified risk-focused audit
procedures
Remaining components
Full scope audits
Audits of one or more account
balances
Specified risk-focused audit
procedures
Remaining components
62%
12%
0%
26%
80%
4%
3%
13%
56%
13%
1%
30%
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 47, 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 & 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 47 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 that there was no significant impact of
climate change on our key audit matters included in section 4 or other key areas of the audit.
We have read the Group’s disclosure of climate related information in the front half of the
Annual Report as set out on pages 47 to 57 and considered consistency with the financial
statements and our audit knowledge.
SMITHS GROUP PLC ANNUAL REPORT FY2023KPMG LLP’S INDEPENDENT AUDITOR’S REPORTCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 120
3. GOING CONCERN, VIABILITY AND PRINCIPAL RISKS AND UNCERTAINTIES1
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the Parent Company or to cease their operations, and as they have concluded that the Group’s and the
Parent 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”).
GOING CONCERN
We used our knowledge of the Group, its industry, 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 Parent 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 Parent Company’s available financial resources 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, driven by geo-political and economic factors,
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.
OUR CONCLUSIONS
– 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
Parent 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 135 on
the use of the going concern basis of accounting with no material uncertainties that may cast significant
doubt over the Group and Parent Company’s use of that basis for the going concern period, and we found
the going concern disclosure on page 135 to be acceptable; and
– The related statement under the Listing Rules set out on page 75 is materially consistent with the financial
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.
Accordingly, based on those procedures, we found the Directors’ use of the going concern basis of accounting
without any material uncertainty for the Group and Parent Company to be acceptable. 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 Parent Company will continue in operation.
DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER-TERM VIABILITY
OUR RESPONSIBILITY
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 going concern and viability statement on page 75 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;
– risk management 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 going concern and 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 75 under the Listing Rules.
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 Parent Company’s longer-
term viability.
OUR REPORTING
We have nothing material to add or draw attention to in relation to these disclosures.
We have concluded that these disclosures are materially consistent with the financial statements and our
audit knowledge.
SMITHS GROUP PLC ANNUAL REPORT FY2023KPMG LLP’S INDEPENDENT AUDITOR’S REPORTCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 121
4. KEY AUDIT MATTERS
WHAT WE MEAN
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 include below the key audit matters in decreasing order of audit significance together with our key audit procedures to address those matters and our results from those procedures. These matters were addressed, and
our results are based on procedures undertaken, for the purpose of our audit of the financial statements as a whole. We do not provide a separate opinion on these matters.
4.1 VALUATION OF GOODWILL FOR DETECTION DIVISION (GROUP)
FINANCIAL STATEMENT ELEMENTS
OUR ASSESSMENT OF RISK VS FY2022
Carrying Value of Goodwill
FY2023
FY2022
£630m
£644m
We have not identified any significant changes to our assessment of
the level of risk relating to Valuation of Goodwill for the Detection
division compared to FY2022
OUR RESULTS
FY2023: Acceptable
FY2022: Acceptable
DESCRIPTION OF THE KEY AUDIT MATTER
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 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). The effect
of these matters is that, as part of our risk assessment, we determined that the value in use of the Smiths
Detection 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.
OUR RESPONSE TO THE RISK
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 to address the risk included:
Benchmarking assumptions and historical comparison: Assessing and challenging the key assumptions
through retrospective review and comparison to external industry forecast.
Our sector experience: Using our valuations specialists to challenge the appropriateness of discount rates by
deriving our own independent range and using external market data to challenge the Group’s assumption of
5-year revenue growth rates and EBIT margin.
Comparing valuations: Using our valuation specialist, we developed an independent valuation of the CGU’s value
in use. In doing so, we considered relevance and reliability of expected enterprise valuations per analyst reports
and comparable companies’ earnings multiple.
Sensitivity analysis: We performed sensitivity analysis on key assumptions of discount rate, revenue growth rate
and EBIT margin projection
Assessing transparency: We assessed whether 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 key assumptions
COMMUNICATIONS WITH THE SMITHS GROUP PLC’S AUDIT & RISK COMMITTEE
Our discussions with and reporting to the Audit & Risk Committee included:
– Our audit procedures relying fully on substantive audit procedures including engaging our valuation
specialist team to test key assumptions in the impairment model.
– Our conclusion on the overall assessment of the assumptions underlying the impairment model.
– Our assessment of the adequacy of the disclosures in the financial statements particularly as it
relates to sensitivity of the recoverable amount of the goodwill to changes in key assumptions.
AREAS OF PARTICULAR AUDITOR JUDGEMENT
We identified the following as the areas of particular auditor judgement:
– Estimate of the cumulative average revenue growth rate including estimate of EBIT margin projections
over the forecast period being within a range we consider to be reasonable.
– Whether the discount rate used in the impairment model falls within an acceptable range.
OUR RESULTS
We found the Group’s conclusion that there is no impairment of goodwill to be acceptable (FY2022 result:
acceptable). We found the sensitivity disclosures made to be acceptable (FY2022 result: acceptable).
Further information in the Annual Report and Accounts: See the Audit & Risk Committee Report on page 93 for details on how the Audit & Risk Committee considered Valuation of Goodwill for Detection Division as an area of
significant attention, page 140 for the accounting policy on Valuation of Goodwill for Detection Division, and page 163 note 11 for the financial disclosures.
SMITHS GROUP PLC ANNUAL REPORT FY2023KPMG LLP’S INDEPENDENT AUDITOR’S REPORTCONTINUEDOVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 122
4.2 ESTIMATION OF LITIGATION PROVISIONS FOR ASBESTOS IN JOHN CRANE, INC. (GROUP)
FINANCIAL STATEMENT ELEMENTS
OUR ASSESSMENT OF RISK VS FY2022
Estimation of litigations provision for John
Crane, Inc. (‘JCI’) asbestos
FY2023
FY2022
£204m
£229m
We have not identified any significant changes to our assessment of
the level of risk relating to Estimation of litigation provisions for
asbestos in John Crane, Inc. compared to FY2022
OUR RESULTS
FY2023: Acceptable
FY2022: Acceptable
DESCRIPTION OF THE KEY AUDIT MATTER
Subjective estimate
There are significant judgements and estimates involved in the assumptions underlying the provision in respect
of JCI asbestos litigation including the quantified projection period, the forecast number of future claims and
associated claim and defence costs respectively and complex estimation methodology.
The effect of these matters is that, as part of our risk assessment, we determined that the asbestos 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.
OUR RESPONSE TO THE RISK
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 to address the risk 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. We challenged the Group’s assumptions underlying the asbestos provision relying on
industry trends across comparable peer companies, and effect of inflation and discount rate assumptions
through comparison to external market data.
Enquiry of lawyers: Obtaining external independent legal confirmations of historical and ongoing claims data
used by the Group’s management expert for estimating the future projected cost and claims.
Assessment of management’s expert: Assessing the competency, knowledge and independence of the expert
using our own specialist.
Assessing methodology: Using our own actuarial specialists, we evaluated the methodology applied by
management to the estimation to assess whether 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 provision’s estimation.
COMMUNICATIONS WITH THE SMITHS GROUP PLC’S AUDIT & RISK COMMITTEE
Our discussions with and reporting to the Audit & Risk Committee included:
AREAS OF PARTICULAR AUDITOR JUDGEMENT
We identified the following as the areas of particular auditor judgement:
– Our audit procedures relying fully on substantive audit procedures including engaging our valuation
specialist team to test the reasonableness of the provision recognised in the year
– Our conclusion on the overall assessment of the assumptions supporting the litigation provision
– Our assessment of the adequacy of the related disclosures in the financial statements
– Appropriateness of ten-year projection period for the estimation of the litigation liability
– Range of possible outcome on litigation provision based on outcome of court judgements from ongoing
litigation claims
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 (FY2022: acceptable).
Further information in the Annual Report and Accounts: See the Audit & Risk Committee Report on page 93 for details on how the Audit & Risk Committee considered estimation of litigation provision for asbestos in John Crane Inc
as an area of significant attention, page 135 for the accounting policy on estimation of litigation provision for asbestos in John Crane Inc , and page 179 note 23 for the financial disclosures.
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4.3 VALUATION OF UK DEFINED BENEFIT SIPS PENSION SCHEME LIABILITIES (PARENT COMPANY)
FINANCIAL STATEMENT ELEMENTS
OUR ASSESSMENT OF RISK VS FY2022
UK defined benefit SIPS pension scheme
liabilities
£1,251m £1,603m
FY2023
FY2022
We noted a significant reduction in the value of UK defined benefit SIPS
pension scheme liabilities and consequently a reduction in the
potential impact of a material misstatement on the financial statement.
OUR RESULTS
FY2023: Acceptable
FY2022: Acceptable
DESCRIPTION OF THE KEY AUDIT MATTER
Subjective valuation and significant transaction
The Parent Company has material pension plan assets and liabilities, especially in the UK. 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 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. We draw out amounts recognised and
corresponding disclosures made in respect of uncertainties surrounding effective equalisation of benefits as a
key audit matter for the Parent Company in our auditor’s report.
OUR RESPONSE TO THE RISK
We performed the tests below rather than seeking to rely on any of the Company’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 to address the risk 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 the Company’s estimate of these assumptions against market data.
Assessing actuary’s credentials: Assessing the competence, independence and integrity of the scheme’s
actuary.
Inspection of relevant documents: Inspecting legal advices, trustee communications and valuation documents
to assess whether the amounts in relation to equalisation of retirement ages between men and women are
accounted appropriately in the current year in accordance with the requirement of IAS 19 using our own actuarial
specialists and our sector knowledge and expertise.
Assessing legal advisor’s credentials: Assessing the competence, independence and integrity of the Trustee’s
and Company’s legal advisors.
Assessing transparency: Assessing the adequacy of the disclosures in respect of the sensitivity of the obligation
to key assumptions and uncertainties in respect of equalisation of benefits.
COMMUNICATIONS WITH THE SMITHS GROUP PLC’S AUDIT & RISK COMMITTEE
Our discussions with and reporting to the Audit & Risk Committee included:
– Assessment of the appropriateness of the amounts recognised and corresponding disclosures made in
respect of uncertainties surrounding effective equalisation of retirement ages between men and women.
– Our conclusion on the overall assessment of the assumptions and key judgements supporting the
estimation of the defined benefit obligation.
– Our assessment of the adequacy of the disclosures in the financial statements.
AREAS OF PARTICULAR AUDITOR JUDGEMENT
We identified the following as the areas of particular auditor judgement:
– Assessment of the assumptions supporting the defined benefit obligation.
OUR RESULTS
We found the valuation of the pension scheme liabilities of SIPS scheme and the amounts and corresponding
disclosures made in respect of uncertainties surrounding effective equalisation of benefits to be acceptable
(FY2022: acceptable).
Further information in the Annual Report and Accounts: See the Audit & Risk Committee Report on page 93 for details on how the Audit & Risk Committee considered valuation of UK defined benefit SIPS pension scheme liabilities
as an area of significant attention, page 140 for the accounting policy on valuation of UK defined benefit SIPS pension scheme liabilities, and page 154 note 8 for the financial disclosures.
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124
5. OUR ABILITY TO DETECT IRREGULARITIES, AND OUR RESPONSE
FRAUD – IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL MISSTATEMENT DUE TO FRAUD
FRAUD RISK ASSESSMENT
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, Finance Committee minutes.
– Considering remuneration incentive schemes and performance targets for management and Directors including the organic revenue growth targets and EPS target for
management remuneration.
– Using analytical procedures to identify any unusual or unexpected relationships
RISK COMMUNICATIONS
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.
FRAUD RISKS
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. Within these 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 revenue from such pressure. We did not identify any additional
fraud risks.
PROCEDURES TO ADDRESS
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.
– Specified procedures to be completed by relevant component teams over period end revenue recognition procedures. These procedures included tests over pre-year end and
post year end revenue transactions
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LAWS AND REGULATIONS – IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL MISSTATEMENT RELATING TO COMPLIANCE WITH LAWS AND REGULATIONS
LAWS AND REGULATIONS
RISK ASSESSMENT
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.
RISK COMMUNICATIONS
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 audit team 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 level.
DIRECT LAWS CONTEXT AND
LINK TO AUDIT
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.
MOST SIGNIFICANT
INDIRECT LAW/REGULATION
AREAS
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
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.
CONTEXT
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 fraud 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.
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6. OUR DETERMINATION OF MATERIALITY
The scope of our audit was influenced by our application of materiality. We set quantitative thresholds and overlay qualitative considerations to help us determine the scope of our audit and the nature, timing and extent of our
procedures, and in evaluating the effect of misstatements, both individually and in the aggregate, on the financial statements as a whole.
£18M
(FY2022: £16M)
MATERIALITY FOR THE
GROUP FINANCIAL
STATEMENTS AS A WHOLE
What we mean
A quantitative reference for the purpose of planning and performing our audit.
Basis for determining materiality and judgements applied
Materiality for the Group financial statements as a whole was set at £18m (FY2022: £16m).
This was determined with reference to a benchmark of Group normalised profit before tax
from continuing operations (‘PBTCO’).
Consistent with FY2022, we determined that Group normalised PBTCO remains the main
benchmark for the Group. We determined that normalised profit before tax remains the
benchmark for the Group as Smiths Group Plc is publicly traded and a profit seeking entity.
The Group is well established and operates in a stable environment across multiple
geographies. The profitability and prospects for future net cash inflows is important to the
users of the financial statements.
We normalised PBTCO (FY2022: normalised PBTCO) for these items because they do not
represent the normal, continuing operations of the Group. In making the adjustments for the
current year, we excluded the net credit of £4m due to the retirement benefit obligation past
service equalisation costs (note 8 of the financial statements) and added back restructuring
costs of £36 million (note 3 of the financial statements). (FY2022: PBTCO was normalised to
exclude foreign exchange gain on intercompany loan with discontinued operations of
£22 million, retirement benefit scheme settlement loss £171 million, past service equalisation
cost £43 million and impairment of assets £19 million). As such, we based our Group
materiality on Group normalised PBTCO of £392m (FY2022: £314m).
Our Group materiality of £18m was determined by applying a percentage to the normalised
PBTCO. When using a benchmark of normalised PBTCO to determine overall materiality,
KPMG’s approach for listed entities considers a guideline range 3% – 5% of the measure. In
setting overall Group materiality, we applied a percentage of 4.6% (FY2022: 5%) to the
benchmark.
Materiality for the Parent Company financial statements as a whole was set at £17.8m
(FY2022: £15.8m), determined with reference to a benchmark of Parent Company total assets,
of which it represents 0.4% (FY2022: 0.4%).
£11.7M
(FY2022: £10.4M
PERFORMANCE
MATERIALITY
What we mean
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.
The Parent Company performance materiality was set at £11.5m (FY2022: £10.2m), which
equates to 64.6% (FY2022: 64.6%) of materiality for the Parent Company financial statements
as a whole.
We applied this percentage in our determination of performance materiality because we did
not identify any factors indicating an elevated level of risk.
Basis for determining performance materiality and judgements applied
We have considered performance materiality at a level of 65% (FY2022: 65%) of materiality for
Smiths Group Plc Group financial statements as a whole to be appropriate.
£0.89M
(FY2022: £0.79M)
AUDIT MISSTATEMENT
POSTING THRESHOLD
What we mean
This is the amount below which identified misstatements are considered to be clearly trivial
from a quantitative point of view. We may become aware of misstatements below this
threshold which could alter the nature, timing and scope of our audit procedures, for example
if we identify smaller misstatements which are indicators of fraud.
Basis for determining the audit misstatement posting threshold and
judgements applied
We set our audit misstatement posting threshold at 5% (FY2022: 5%) of our materiality for the
Group financial statements. We also report to the Audit & Risk Committee any other identified
misstatements that warrant reporting on qualitative grounds.
This is also the amount above which all misstatements identified are communicated to Smiths
Group plc’s Audit & Risk Committee.
The overall materiality for the Group financial statements of £18m (FY2022: £16m) compares as follows to the main financial statement caption amounts:
Total Group revenue
Group profit before tax
Total Group assets
Financial statement caption
Group materiality as % of caption
£3,037m
0.6%
£2,566m
0.6%
£392m
4.6%
£314m
5%
£4,355m
0.4%
£5,223m
0.3%
FY2023
FY2022
FY2023
FY2022
FY2023
FY2022
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GROUP SCOPE
What we mean
How the Group audit team determined the procedures to be performed across the Group.
The Group audit team has also performed audit procedures on the following areas on behalf
of the components:
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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 which is a consolidation of over
200 reporting components. 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 208 (2022: 253) reporting components, we subjected 7 (2022: 23) to full scope
audits for Group purposes and 9 (2022:9) to specified risk-focused audit procedures or audit
of specific account balances. In the prior year, all components were identified based on the
Group’s legal entities. In the current year, we considered the Flex-Tek division as a single
reporting component, with the component auditor providing an opinion on the sub-
consolidation prepared at the division level. This change to component scoping accounts for
the reduction in the number of full scope components when compared to FY2022.
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 audit of account balance has been completed for revenue,
trade receivables and cash and cash equivalents accounts.
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 remaining 30% (FY2022: 26%) of total Group revenue, 26% (FY2022: 18%) of Group profit
before tax and 13% (FY2022: 25%) of total Group assets is represented by 191 (FY2022: 221)
of reporting components, none of which individually represented more than 10% (FY2022:
10%) of any of total Group revenue, Group profit before tax or total Group assets. For these
components, we performed analysis at an aggregated group level to re-examine our
assessment that there were no significant risks of material misstatement within these.
We instructed 7 (FY2022: 23) reporting components to perform full scope audits for Group
purposes, 3 reporting components (FY2022: 2) to perform specified audit procedures and 7
reporting components (FY2022: 7) to perform audit of account balances. The component
materiality for all components ranged from £1.1m to £17.8m (FY2022: £0.6m to £15.8m).
Please see table below for a summary
Scope
Range of materiality applied
Number of components
Full scope audits
Audit of one or more account balances
Specified risk focused audit procedures
7
7
3
£17.8m – £3.5m
£3m – £1.1m
£3m – £1.2m
– Intercompany balances and transactions
– Data and analytics
i. Revenue data and analytics routines
ii. Journal entry analysis
– IT Audit involvement over:
i. Understanding of information technology environment
ii. Test of design and implementation over general IT controls
iii. Test of design and implementation over automated controls
– Control environment, risk assessment, monitoring and information and communication
components (CERAMIC) of internal control over financial reporting (ICFR)
– Review of transfer pricing arrangements across the Group
These items were audited by the Group team because of the centralised nature of the data
processing activities within the Group. The Group team communicated the results of these
procedures to the component teams.
The table below shows the summary of the Group reporting scope coverage in the year.
FY2023
Full scope audits
Audit of one or more account balances
Specified risk focused audit procedures
Remaining components
FY2022
Full scope audits
Audit of one or more account balances
Specified risk focused audit procedures
Remaining components
Group
revenue
Group profit
before tax
Group
total assets
56%
13%
1%
30%
57%
17%
–
26%
62%
12%
–
26%
76%
6%
–
18%
80%
4%
3%
13%
68%
3%
4%
25%
In addition, we have performed Group level analysis on the remaining components to
determine whether further risks of material misstatement exist in those components.
The scope of the audit work performed was predominately substantive as we placed limited
reliance upon the Group’s internal control over financial reporting.
For those items excluded from normalised PBTCO, the component teams performed
procedures on items relating to their components. The Group team performed procedures
on the remaining excluded items.
The Group 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 team approved the component materialities, as detailed in the table above, having
regard to the mix of size and risk profile of the Group across the components.
The work on 14 of the 17 components (FY2022: 30 of the 32 components) was performed by
component auditors and the rest, including the audit of the Parent Company, was performed
by the Group team.
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GROUP AUDIT TEAM
OVERSIGHT
What we mean
The extent of the Group audit team’s involvement in component audits.
In working with component auditors, we:
– Held planning calls with component audit teams to discuss the significant areas of the
audit relevant to the components.
– Issued Group audit instructions to component auditors on the scope of their work.
– Held risk assessment update discussions with all component audit teams before the
commencement of the final phases of the audit led by the Group engagement partner.
– Visited 6 (FY2022: Nil) components in-person as the audit progressed to understand
and challenge the audit approach and organised 4 video conferences with the partners
and directors of the Group and component audit teams. At these visits and/ meetings/
and video conferences, the findings reported to the Group team were discussed in
more detail, and any further work required by the Group team was then performed by
the component audit teams. The Group team also attended the audit close meetings
for all component teams.
– Inspection of component audit teams’ key work papers in person or using remote
technology capabilities to evaluate the quality of execution of the audits of the
components.
8. 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.
ALL OTHER INFORMATION
OUR RESPONSIBILITY
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.
OUR REPORTING
Based solely on that work we have not identified material
misstatements or inconsistencies in the other information.
STRATEGIC REPORT AND DIRECTORS’ REPORT
OUR RESPONSIBILITY AND REPORTING
Based solely on our work on the other information described above we report to you as follows:
– we have not identified material misstatements in the Strategic Report and the Directors’ Report;
DIRECTORS’ REMUNERATION 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.
OUR RESPONSIBILITY
We are required to form an opinion as to whether the part of the Directors’ Remuneration Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
OUR REPORTING
In our opinion the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the Companies
Act 2006.
CORPORATE GOVERNANCE DISCLOSURES
OUR RESPONSIBILITY
We are required to perform procedures to identify whether there is a material inconsistency between the financial statements and our audit
knowledge, and:
– 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.
OUR REPORTING
Based on those procedures, we have concluded that each of these
disclosures is materially consistent with the financial statements and our
audit knowledge.
We are also 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.
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OUR RESPONSIBILITY
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
OUR REPORTING
We have nothing to report in these respects.
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
129
accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
9. RESPECTIVE RESPONSIBILITIES
DIRECTORS’ RESPONSIBILITIES
As explained more fully in their statement set out on page 115, 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.
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.
10. 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.
MIKE BARRADELL
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London E14 5GL
25 September 2023
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CONSOLIDATED PRIMARY STATEMENTS
CONSOLIDATED INCOME STATEMENT
CONTINUING OPERATIONS
Revenue
Operating costs
Operating profit/(loss)
Interest income
Interest expense
Other financing (losses)/gains
Other finance income – retirement benefits
Finance (costs)/income
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
DISCONTINUED OPERATIONS
Profit 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
Year ended 31 July 2023
Year ended 31 July 2022
Notes
Headline
£m
Non-headline
(note 3)
£m
Total
£m
Headline
£m
Non-headline
(note 3)
£m
1
2
2
4
4
4
4
4
6
3
5
3,037
(2,536)
501
36
(71)
–
–
(35)
466
(121)
345
–
345
344
–
1
345
–
(98)
(98)
–
(7)
(8)
7
(8)
(106)
(13)
(119)
6
(113)
(119)
6
–
(113)
3,037
(2,634)
403
36
(78)
(8)
7
(43)
360
(134)
226
6
232
225
6
1
232
65.5p
63.8p
65.1p
63.4p
2,566
(2,149)
417
14
(55)
–
–
(41)
376
(104)
272
49
321
270
49
2
321
–
(300)
(300)
–
–
20
7
27
(273)
14
(259)
973
714
(259)
973
–
714
Total
£m
2,566
(2,449)
117
14
(55)
20
7
(14)
103
(90)
13
1,022
1,035
11
1,022
2
1,035
267.1p
2.8p
266.0p
2.8p
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 144 to 189, which form an integral part of the consolidated accounts.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL 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 benefit assets and obligations
Taxation on post-retirement benefit 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 (losses)/gains 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
Notes
8
6
14
131
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
232
1,035
(114)
32
(18)
(100)
12
2
14
(101)
–
(101)
(187)
45
46
(1)
45
39
6
45
(17)
–
(63)
(80)
(82)
5
(77)
276
(196)
80
(77)
958
957
1
958
131
827
958
CONSOLIDATED PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 132
CONSOLIDATED BALANCE SHEET
Notes
31 July 2023
£m
31 July 2022
£m
Notes
31 July 2023
£m
31 July 2022
£m
SHAREHOLDERS’ EQUITY
Share capital
Share premium account
Capital redemption reserve
Merger reserve
Cumulative translation adjustments
Retained earnings
Hedge reserve
Total shareholders’ equity
Non-controlling interest equity
TOTAL EQUITY
24
26
26
26
26
131
365
24
235
386
1,431
(188)
2,384
22
2,406
136
365
19
235
487
1,659
(202)
2,699
22
2,721
The accounts on pages 130 to 189 were approved by the Board of Directors on 25 September 2023
and were signed on its behalf by:
PAUL KEEL
Chief Executive Officer
CLARE SCHERRER
Chief Financial Officer
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
CURRENT ASSETS
Inventories
Current tax receivable
Trade and other receivables
Cash and cash equivalents
Financial derivatives
TOTAL ASSETS
CURRENT LIABILITIES
Financial liabilities:
– borrowings
– lease liabilities
– financial derivatives
Provisions
Trade and other payables
Current tax payable
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
10
12
13
14
8
6
16
15
6
16
18
20
18
18
20
23
17
6
18
18
20
23
8
6
6
17
1,521
247
105
371
195
95
75
2,609
637
47
772
285
5
1,746
4,355
(3)
(26)
(2)
(70)
(723)
(74)
(898)
(534)
(91)
(18)
(216)
(106)
(3)
(43)
(40)
(1,051)
(1,949)
2,406
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
CONSOLIDATED PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
At 31 July 2022
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:
Purchase of shares by Employee Benefit Trust
Share buybacks
Receipt of capital from non-controlling interest
Dividends:
– equity shareholders
Share-based payment
At 31 July 2023
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
Notes
24
25
9
Notes
24
24
25
9
Share capital
and share
premium
£m
501
–
Other
reserves
£m
254
–
–
–
–
–
–
(5)
–
–
–
–
–
–
–
–
5
–
–
–
Cumulative
translation
adjustments
£m
487
–
–
(101)
–
(101)
–
–
–
–
–
496
259
386
Share capital
and share
premium
£m
512
–
–
–
–
–
2
–
–
(13)
–
–
501
Other
reserves
£m
242
–
–
(1)
–
(1)
–
–
–
13
–
–
Cumulative
translation
adjustments
£m
509
–
–
(22)
–
(22)
–
–
–
–
–
–
254
487
Retained
earnings
£m
1,659
231
(82)
2
(18)
133
(24)
(207)
–
(143)
13
1,431
Retained
earnings
£m
1,367
1,033
(17)
1
(63)
954
–
(16)
1
(511)
(150)
14
1,659
Hedge
reserve
£m
(202)
–
Equity
shareholders’
funds
£m
2,699
231
–
–
14
14
–
–
–
–
–
(188)
Hedge
reserve
£m
(228)
–
–
103
(77)
26
–
–
–
–
–
–
(202)
(82)
(99)
(4)
46
(24)
(207)
–
(143)
13
2,384
Equity
shareholders’
funds
£m
2,402
1,033
(17)
81
(140)
957
2
(16)
1
(511)
(150)
14
2,699
Non-controlling
interest
£m
22
1
–
(2)
–
(1)
–
–
1
–
–
22
Non-controlling
interest
£m
21
2
–
(1)
–
1
–
–
–
–
–
–
22
133
Total
equity
£m
2,721
232
(82)
(101)
(4)
45
(24)
(207)
1
(143)
13
2,406
Total
equity
£m
2,423
1,035
(17)
80
(140)
958
2
(16)
1
(511)
(150)
14
2,721
CONSOLIDATED PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 134
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
Acquisition of businesses
(Payments)/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
Receipt of capital from non-controlling interest
Lease payments
Reduction and repayment of borrowings
Cash (outflow)/inflow from matured derivative financial instruments
Net cash-flow used in financing activities
Net (decrease)/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
Notes
28
Year ended
31 July 2023
£m
293
Year ended
31 July 2022
£m
279
(21)
(7)
(53)
2
(22)
(7)
(108)
–
(207)
(24)
–
–
(143)
1
(36)
(527)
(9)
(945)
(760)
1,055
–
(10)
285
175
110
285
–
285
(22)
(8)
(58)
3
–
1,331
1,246
2
(511)
(16)
1
(1)
(150)
–
(38)
(295)
23
(985)
540
405
48
62
1,055
242
814
1,056
(1)
1,055
24
24
26
25
18
CONSOLIDATED PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES
135
BASIS OF PREPARATION
The accounts have been prepared in accordance with UK adopted 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 8 to 77. The Group’s
financial position, cash-flows, liquidity and borrowing facilities are described in the CFO review
section on pages 21 to 23.
Other factors considered by the Board as part of its 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.
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 that match all or part of 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 £204m (FY2022:
£229m) 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.
The key sources of estimation uncertainty together with the significant judgements and
assumptions used for these consolidated financial statements are set out below.
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:
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.
– 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
analysis showing the impact on the provision of reducing or increasing this time horizon; and
– 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
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 136
ACCOUNTING POLICIES
CONTINUED
the provision because JCI’s defence strategy generates a significantly different pattern of legal
costs and settlement expenses. See note 23 for a sensitivity analysis 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 £41m (FY2022: £52m) has been made for the costs which the
Group is expected to incur in respect of these claims. In preparing the provision calculation, key
estimates have been made about the impact of safe installation initiatives on the level of future
claims. See note 23 for a sensitivity analysis 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 £75m (FY2022: £103m) relating to losses and
£60m (FY2022: £69m) 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 £46m (FY2022: £38m), 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 2023, the Group held contracts with a total value of £109m (2022: £181m), of which
£83m (2022: £135m) had been delivered and £26m (2022: £47m) remains fully or partially
unsatisfied. £24m 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 £1m
(2022: 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 US$100m additional sales consideration that is contingent on the future share price
performance of the enlarged ICU Medical, Inc (ICU) business.
The earnout requires the Group to retain beneficial ownership of at least 1.25 million ICU shares and
for the ICU share price to average US$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 US$300. These valuation
simulations have determined a fair value of £13m (US$17m).
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES
CONTINUED
137
RETIREMENT BENEFITS
At 31 July 2023 the Group has recognised £195m of retirement benefit assets (FY2022: £309m)
and a net pension asset of £89m (FY2022: £194m), 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.
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.
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.
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.
CAPITALISATION OF DEVELOPMENT COSTS
Expenditure incurred in the development of major new products is capitalised as internally
generated intangible assets only when it has been judged that strict criteria are met, specifically
in relation to the products’ technical feasibility and commercial viability (the ability to generate
probable future economic benefits).
The assessment of technical feasibility and future commercial viability of development projects
requires significant judgement and the use of assumptions. Key judgements made in the
assessment of future commercial viability include:
– Scope of work to achieve regulatory clearance (where required) – including the level of testing
evidence and documentation;
– Competitor activity – including the impact of potential competitor product launches on the
marketplace 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 £75m (FY2022: £103m) relating to losses and £60m (FY2022: £69m) 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.
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 205 to 210.
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.
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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.
Foreign exchange rate movements arising on the translation of non-monetary assets and
liabilities held in hyperinflationary subsidiaries are recognised in OCI. The amounts taken to the
CTA reserve represent the combined effect of restatement and translation and are expressed as
a net change for the year.
On consolidation, foreign exchange rate movements arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments designated as
hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold,
the cumulative amount of such foreign exchange rate movements is recognised in the income
statement as part of the gain or loss on sale.
Foreign exchange rate movements arising on transactions are recognised in the income
statement. Those arising on trading are taken to operating profit; those arising on borrowings are
classified as finance income or cost.
REVENUE
Revenue is measured at the fair value of the consideration received, net of trade discounts
(including distributor rebates) and sales taxes. Revenue is discounted only where the impact of
discounting is material.
When the Group enters into complex contracts with multiple, separately identifiable components,
the terms of the contract are reviewed to determine whether or not the elements of the contract
should be accounted for separately. If a contract is being split into multiple components, the
contract revenue is allocated to the different components at the start of the contract. The basis of
allocation depends on the substance of the contract. The Group considers relative stand-alone
selling prices, contractual prices and relative cost when allocating revenue.
The Group has identified the following different types of revenue:
(i) Sale of goods recognised at a point in time – generic products manufactured by Smiths
Generic products are defined as either:
– Products that are not specific to any particular customer;
– Products that may initially be specific to a customer but can be reconfigured at minimal cost,
i.e., retaining a margin, for sale to an alternative customer; or
– Products that are specific to a customer but are manufactured at Smiths risk, i.e., we have no
right to payment of costs plus margin if the customer refuses to take control of the goods.
For established products with simple installation requirements, revenue is recognised when
control of the product is passed to the customer. The point in time that control passes is defined in
accordance with the agreed shipping terms and is determined on a case-by-case basis. The time
of dispatch or delivery of the goods to the customer is normally the point at which invoicing
occurs. However for some generic products, revenue is recognised when the overall
performance obligation has been completed, which is often after the customer has completed its
acceptance procedures and has assumed control.
Products that are sold under multiple element arrangements, i.e., contracts involving a
combination of products and services, are bundled into a single performance obligation
unless the customer can benefit from the goods or services either on their own, or together with
other resources that are readily available to the customer and are distinct within the context of
the contract.
For contracts that pass control of the product to the customer only on completion of installation
services, revenue is recognised upon completion of the installation.
An obligation to replace or repair faulty products under the standard warranty terms is
recognised as a provision. If the contract includes terms that either extend the warranty beyond
the standard term or imply that maintenance is provided to keep the product working, these are
service warranties and revenue is deferred to cover the performance obligation in an amount
equivalent to the stand-alone selling price of that service.
(ii) Sale of goods recognised over time – customer-specific products where the contractual
terms include rights to payment for work performed to date
Customer-specific products are defined as being:
– Products that cannot be reconfigured economically such that it remains profitable to sell to
another customer;
– Products that cannot be sold to another customer due to contractual restrictions; and
– Products that allow Smiths to charge for the work performed to date in an amount that
represents the costs incurred to date plus a margin, should the customer refuse to take control
of the goods.
For contracts that meet the terms listed above, revenue is recognised over the period that the
Group is engaged in the manufacture of the product, calculated using the input method based on
the amount of costs incurred to date compared to the overall costs of the contract. This is
considered to be a faithful depiction of the transfer of the goods to the customer as the costs
incurred, total expected costs and total order value are known. The time of dispatch or delivery of
the goods to the customer is normally the point at which invoicing occurs.
An obligation to provide a refund for faulty products under the standard warranty terms is
recognised as a provision. If the contract includes terms that either extend the warranty beyond
the standard term or imply that maintenance is provided to keep the product working, these are
service warranties and revenue is deferred to cover the performance obligation in an amount
equivalent to the stand-alone selling price of that service.
(iii) Services recognised over time – services relating to the installation, repair and ongoing
maintenance of equipment
Services include installation, commissioning, testing, training, software hosting and
maintenance, product repairs and contracts undertaking extended warranty services.
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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;
– Onsite ad hoc product repair services are recognised rateably as the services are performed;
– Long-term product repair and maintenance contracts are recognised rateably over the
contract term; and
– Extended service warranties are recognised rateably over the contract term.
Invoicing for services depends on the nature of the service provided with some services charged
in advance and others in arrears.
Where contracts are accounted for under the revenue recognised over time basis, the proportion
of costs incurred is used to determine the percentage of contract completion.
Contracts for the construction of substantial assets, which normally last in excess of one year, are
accounted for under the revenue recognised over time basis, using an input method.
For fixed-price contracts, revenue is recognised based upon an assessment of the amount of cost
incurred under the contract, compared to the total expected costs that will be incurred under the
contract. This calculation is applied cumulatively with any over/under recognition being adjusted
in the current period.
For cost-plus contracts, revenue is recognised based upon costs incurred to date plus any
agreed margin.
For both fixed-price and cost-plus contracts, invoicing is normally based on a schedule with
milestone payments.
CONTRACT COSTS
The Group has taken the practical expedient of not capitalising contract costs as they are
expected to be expensed within one year from the date of signing.
LEASES
Lease liabilities are initially measured at the present value of the future lease payments at the
commencement date, discounted by using either the rate implicit in the lease, or if not observable,
the Group’s incremental borrowing rate. Lease payments comprise contractual lease payments;
variable lease payments that depend on an index or rate, initially measured using the index or rate
at the commencement date; and the amount expected to be payable under residual value
guarantees.
Right of use assets are measured at commencement date at the amount of the corresponding
lease liability and initial direct costs incurred. 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.
When a lease contract is modified, either from a change to the duration of the lease or a change to
amounts payable, the Group remeasures the lease liability by discounting the revised future lease
payments at a revised discount rate. A corresponding adjustment is made to the carrying value of
the related right of use asset.
Leases of buildings typically have lease terms between one and seven years, while plant and
machinery generally have lease terms between one and three 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.
Interest on lease liabilities is presented as a financing activity in the Consolidated Cash-Flow
Statement, included under the heading lease payments.
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
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 140
ACCOUNTING POLICIES
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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:
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 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; or
– Alternatively, a probability weighted expected value is used where, on the balance of
probabilities, there will be a payment to the tax authority but there are a number of possible
outcomes. In this case, a probability is assigned to each of the outcomes and the amount
provided is the sum of these risk-weighted amounts. In assessing provisions against uncertain
tax positions, management uses in-house tax experts, professional firms and previous
experience of the taxing authority to evaluate the risk.
Deferred tax is provided in full using the balance sheet liability method. A deferred tax asset is
recognised where it is probable that future taxable income will be sufficient to utilise the available
relief. Tax is charged or credited to the income statement except when it relates to items charged
or credited directly to equity, in which case the tax is also dealt with in equity.
Deferred tax is provided on temporary differences arising on investments in subsidiaries and
associates, except where the timing of the reversal of the temporary differences is controlled by
the Company and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax liabilities and assets are not discounted.
IAS 12 International Tax Reform: Pillar Two Model Rules.
On 19th July 2023, the UK Endorsement Board adopted the Amendments to IAS 12 International
Tax Reform: Pillar Two Model Rules, issued by the IASB in May 2023. The Amendments introduce
a temporary mandatory exception from accounting for deferred taxes arising from the Pillar Two
model rules and the Group has applied this exception to recognising and disclosing information
about deferred tax assets and liabilities related to Pillar Two income taxes.
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.
The income statement expense is allocated between current service costs, reflecting the
increase in liability due to any benefit accrued by employees in the current period, any past
service costs/credits and settlement losses or gains which are recognised immediately, and the
scheme administration costs.
Actuarial gains and losses are recognised in the statement of comprehensive income in the year
in which they arise. These comprise the impact on the liabilities of changes in demographic and
financial assumptions compared with the start of the year, actual experience being different to
assumptions and the return on plan assets being above or below the amount included in the net
pension interest cost.
Payments to defined contribution schemes are charged as an income statement expense as they
fall due.
INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s
share of the identifiable net assets of the acquired subsidiary at the date of acquisition.
The goodwill arising from acquisitions of subsidiaries after 1 August 1998 is included in intangible
assets, tested annually for impairment and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to
the entity sold. The goodwill arising from acquisitions of subsidiaries before 1 August 1998 was
set against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Should the test indicate that the net realisable
value of the CGU is less than current carrying value, an impairment loss will be recognised
immediately in the income statement. Subsequent reversals of impairment losses for goodwill
are not recognised.
Research and development
Expenditure on research and development is charged to the income statement in the year in
which it is incurred with the exception of:
– Amounts recoverable from third parties; and
– Expenditure incurred in respect of the development of major new products where the outcome
of those projects is assessed as being reasonably certain as regards viability and technical
feasibility. Such expenditure is capitalised and amortised over the estimated period of sale
for each product, commencing in the year that the product is ready for sale. Amortisation is
charged straight line or based on the units produced, depending on the nature of the product
and the availability of reliable estimates of production volumes.
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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 15 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 seven 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
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 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 either classified as ‘held to collect’ and initially
recognised at fair value and subsequently measured at amortised cost, less any appropriate
provision for expected credit losses or as ‘held to collect and sell’ and measured at fair value
through other comprehensive income (FVOCI).
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, adjusted for factors that are
specific to the debtor, general economic conditions of the industry in which the debtor operates
and 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.
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.
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ACCOUNTING POLICIES
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Discontinued operations are presented on the income statement as a separate line and are
shown net of tax.
Financial assets are classified as current if they are expected to be realised within 12 months of
the balance sheet date.
In accordance with IAS 21, gains and losses on intra-group monetary assets and liabilities are not
eliminated. Therefore foreign exchange rate movements on intercompany loans with discontinued
operations are presented on the income statement as non-headline finance cost items.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing
securities with maturities of three months or less.
In the cash-flow statement, cash and cash equivalents are shown net of bank overdrafts, which
are included as current borrowings in liabilities on the balance sheet.
FINANCIAL ASSETS
The classification of financial assets depends on the purpose for which the assets were acquired.
Management determines the classification of an asset at initial recognition and re-evaluates the
designation at each reporting date. Financial assets are classified as: measured at amortised
cost, fair value through other comprehensive income or fair value through profit and loss.
Financial assets primarily include trade receivables, cash and cash equivalents (comprising cash
at bank, money-market funds, and short-term deposits), short-term investments, derivatives
(foreign exchange contracts and interest rate derivatives) and unlisted investments.
– Trade receivables are classified either as ‘held to collect’ and measured at amortised cost or
as ‘held to collect and sell’ and measured at fair value through other comprehensive income
(FVOCI). The Group may sell trade receivables due from certain customers before the due date.
Any trade receivables from such customers that are not sold at the reporting date are classified
as ‘held to collect and sell’.
– Cash and cash equivalents (consisting of balances with banks and other financial institutions,
money-market funds and short-term deposits) and short-term investments are subject to low
market risk. Cash balances, short-term deposits and short-term investments are measured at
amortised cost. Money market funds are measured at fair value through profit and loss (FVPL).
– Derivatives are measured at FVPL.
– Listed and unlisted investments are measured at FVOCI.
– 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.
On initial recognition, the Group may make an irrevocable election to designate certain
investments as FVOCI, if they are not held for trading or relate to contingent consideration on a
business combination. When securities measured at FVOCI are sold or impaired, the
accumulated fair value adjustments remain in reserves.
FINANCIAL LIABILITIES
Borrowings are initially recognised at the fair value of the proceeds, net of related transaction
costs. These transaction costs, and any discount or premium on issue, are subsequently
amortised under the effective interest rate method through the income statement as interest over
the life of the loan and added to the liability disclosed in the balance sheet. Related accrued
interest is included in the borrowings figure.
Borrowings are classified as current liabilities unless the Group has an unconditional right to
defer settlement of the liability for at least one year after the balance sheet date.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Group uses derivative financial instruments to hedge its exposures to foreign exchange and
interest rates arising from its operating and financing activities.
Derivative financial instruments are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value. The method of
recognising any resulting gain or loss depends on whether the derivative financial instrument is
designated as a hedging instrument and, if so, the nature of the item being hedged.
Where derivative financial instruments are designated into hedging relationships, the Group
formally documents the following:
– The risk management objective and strategy for entering the hedge;
– The nature of the risks being hedged and the economic relationship between the hedged item
and the hedging instrument; and
– Whether the change in cash-flows of the hedged item and hedging instrument are expected to
offset each other.
Changes in the fair value of any derivative financial instruments that do not qualify for hedge
accounting are recognised immediately in the income statement.
Fair value hedge
The Group uses derivative financial instruments to convert part of its fixed rate debt to floating
rate in order to hedge the risks arising from its external borrowings.
The Group designates these as fair value hedges of interest rate risk. Changes in the hedging
instrument are recorded in the income statement, together with any changes in the fair values of
the hedged assets or liabilities that are attributable to the hedged risk to the extent that the hedge
is effective. Gains or losses relating to any ineffectiveness are immediately recognised in the
income statement.
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NEW ACCOUNTING STANDARDS EFFECTIVE 2023
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 197 to 204. The
principal subsidiaries of the Parent Company are listed in the above accounts.
Cash-flow hedge
Cash-flow hedging is used by the Group to hedge certain exposures to variability in future cash-flows.
The effective portions of changes in the fair values of derivatives that are designated and qualify as
cash-flow hedges are recognised in equity. The gain or loss relating to any ineffective portion is
recognised immediately in the income statement. Amounts accumulated in the hedge reserve are
recycled in the income statement in the periods when the hedged items will affect profit or loss (for
example, when the forecast sale that is hedged takes place).
If a forecast transaction that is hedged results in the recognition of a non-financial asset (for
example, inventory) or a liability, the gains and losses previously deferred in the hedge reserve are
transferred from the reserve and included in the initial measurement of the cost of the asset or
liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in the hedge reserve at that time remains
in the reserve and is recognised when the forecast transaction is ultimately recognised in the
income statement.
When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was
reported in other comprehensive income is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to cash-flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is
recognised in other comprehensive income; the gain or loss relating to any ineffective portion is
recognised immediately in the income statement. When a foreign operation is disposed of, gains
and losses accumulated in equity related to that operation are included in the income statement
for that period.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The fair values of financial assets and financial liabilities are the amounts at which the instrument
could be exchanged in a current transaction between willing parties, other than in a forced or
liquidation sale.
IFRS 13: ‘Fair value measurement’ requires fair value measurements to be classified according to
the following hierarchy:
– Level 1 – quoted prices in active markets for identical assets or liabilities;
– Level 2 – valuations in which all inputs are observable either directly (i.e., as prices) or indirectly
(i.e., derived from prices); and
– Level 3 – valuations in which one or more inputs that are significant to the resulting value are
not based on observable market data.
See note 21 for information on the methods which the Group uses to estimate the fair values of its
financial instruments.
DIVIDENDS
Dividends are recognised as a liability in the period in which they are authorised. The interim
dividend is recognised when it is paid and the final dividend is recognised when it has been
approved by shareholders at the Annual General Meeting.
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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.
Intersegment sales and transfers are charged at arm’s length prices.
SEGMENT TRADING PERFORMANCE
Year ended 31 July 2023
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate
costs
£m
Revenue
Divisional headline operating
profit
Corporate headline operating
costs
Headline operating profit/(loss)
Items excluded from headline
measures (note 3)
Operating profit/(loss)
Headline operating margin
1,079
803
244
–
244
90
–
90
768
149
–
149
387
62
–
62
(27)
217
22.6%
(35)
55
11.2%
(18)
131
19.4%
(12)
50
16.0%
–
–
(44)
(44)
(6)
(50)
Total
£m
3,037
545
(44)
501
(98)
403
16.5%
Revenue
Divisional headline operating
profit
Corporate headline operating
costs
Headline operating profit/(loss)
Items excluded from headline
measures (note 3)
Operating profit/(loss)
Headline operating margin
John Crane
£m
901
188
–
188
Smiths
Detection
£m
655
73
–
73
(21)
167
20.9%
(37)
36
11.1%
(27)
106
20.6%
Year ended 31 July 2022
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate
costs
£m
647
133
–
133
363
65
–
65
(1)
64
18.0%
–
–
(42)
(42)
(214)
(256)
Total
£m
2,566
459
(42)
417
(300)
117
16.3%
Operating profit is stated after charging (crediting) the following items:
Year ended 31 July 2023
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
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
Transition services cost
reimbursement
17
15
–
3
–
3
–
10
7
2
1
–
1
–
8
6
–
–
–
2
–
6
3
–
2
–
2
–
1
1
–
1
52
6
(10)
Total
£m
42
32
2
7
52
14
(10)
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSSMITHS GROUP PLC ANNUAL REPORT FY2023NOTES TO THE ACCOUNTS Non-headline assets comprise receivables relating to non-headline items, acquisitions
and disposals.
145
Year ended 31 July 2022
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Total
£m
Segment liabilities
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
15
15
–
3
–
3
9
–
10
7
3
1
–
2
10
–
7
5
–
–
–
2
–
–
5
2
–
2
–
1
–
–
1
1
–
1
51
4
–
(7)
38
30
3
7
51
12
19
(7)
The corporate and non-headline column comprises central information technology, human
resources and headquarters costs and non-headline expenses (see note 3).
SEGMENT ASSETS AND LIABILITIES
Segment assets
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Total
£m
31 July 2023
Property, plant, equipment,
right of use assets, development
projects, other intangibles and
investments
Inventory, trade and other
receivables
Segment assets
Property, plant, equipment,
right of use assets, development
projects, other intangibles and
investments
Inventory, trade and other
receivables
Segment assets
162
489
651
142
599
741
84
226
310
66
160
226
375
10
385
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
829
1,484
2,313
31 July 2022
Total
£m
167
429
596
127
524
651
84
244
328
54
167
221
399
13
412
831
1,377
2,208
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Divisional liabilities
Corporate and non-headline
liabilities
Segment liabilities
200
–
200
357
–
357
91
–
91
62
–
62
–
339
339
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Divisional liabilities
Corporate and non-headline
liabilities
Segment liabilities
(155)
(347)
–
(155)
–
(347)
(91)
–
(91)
(85)
–
(85)
–
(385)
(385)
31 July 2023
Total
£m
710
339
1,049
31 July 2022
Total
£m
(678)
(385)
(1,063)
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
Segment assets and liabilities
Goodwill and acquired intangibles
Derivatives
Current and deferred tax
Retirement benefit assets and obligations
Cash and borrowings
Statutory assets and liabilities
31 July
2023
£m
2,313
1,415
5
142
195
285
4,355
Assets
31 July
2022
£m
2,208
1,501
4
145
309
1,056
5,223
31 July
2023
£m
(1,049)
–
(20)
(120)
(106)
(654)
(1,949)
Liabilities
31 July
2022
£m
(1,063)
–
(47)
(111)
(115)
(1,166)
(2,502)
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 146
Segment capital expenditure
The capital expenditure on property, plant and equipment, capitalised development and other
intangible assets for each division is:
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
Corporate and
non-headline
£m
Capital expenditure year ended
31 July 2023
Capital expenditure year ended
31 July 2022
19
24
36
23
10
11
16
12
–
1
Total
£m
81
71
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 (FY2022: £478m) 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
John Crane
£m
Smiths
Detection
£m
Flex-Tek
£m
Smiths
Interconnect
£m
1,022
1,154
570
466
John Crane
£m
Smiths
Detection
£m
970
1,019
Flex-Tek
£m
520
Smiths
Interconnect
£m
400
Total
£m
3,212
(16)
3,196
31 July 2022
Total
£m
2,909
31
2,940
John Crane
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Smiths Detection
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Flex-Tek
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
31 July 2023
Smiths Interconnect
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
ANALYSIS OF REVENUE
The revenue for the main product and service lines for each division is:
Original
equipment
£m
314
279
Aviation
£m
535
467
Aftermarket
£m
765
622
Other security
systems
£m
268
188
Aerospace
£m
Industrials
£m
144
116
624
531
Total
£m
1,079
901
Total
£m
803
655
Total
£m
768
647
Components,
connectors &
subsystems
£m
387
363
Aftermarket sales contributed £1,545m (FY2022: £1,238m) of Group revenue: John Crane
aftermarket sales were £765m (FY2022: £622m); Smiths Detection aftermarket sales were £413m
(FY2022: £355m); Flex-Tek aftermarket sales were £367m (FY2022: £261m); and Smiths
Interconnect aftermarket sales were £nil (FY2022: £nil).
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 Divisional revenue is analysed by the Smiths Group key global markets as follows:
John Crane
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Smiths Detection
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Flex Tek
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Smiths Interconnect
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
Total
Revenue year ended 31 July 2023
Revenue year ended 31 July 2022
General
Industrial
£m
Safety &
Security
£m
Energy
£m
Aerospace
£m
Total
£m
423
371
–
–
624
531
190
166
1,237
1,068
–
–
803
655
–
–
141
144
944
799
656
530
–
–
–
–
–
–
656
530
–
–
–
–
144
116
56
53
200
169
1,079
901
803
655
768
647
387
363
3,037
2,566
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
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Total
2,244
36
757
3,037
1,849
99
618
2,566
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 World
Intangible assets, right of use
assets and property, plant and
equipment
Revenue
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
31 July 2023
£m
31 July 2022
£m
1,641
563
493
340
3,037
1,423
480
421
242
2,566
1,254
519
71
29
1,873
1,324
498
76
39
1,937
147
Revenue by destination attributable to the United Kingdom was £87m (FY2022: £75m). Other
revenue found to be significant included, the United States of America, totalling £1,383m (FY2022:
£1,206m), China (excluding Hong Kong) £150m (FY2022: £132m) and Germany £143m (FY2022:
£123m). 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 £123m (FY2022: £108m). Significant
non-current assets held in the United States of America £1,181m (FY2022: £1,260m) and Germany
£345m (FY2022: £340m).
2. OPERATING COSTS
The Group’s operating costs for continuing operations are analysed as follows:
Year ended 31 July 2023
Year ended 31 July 2022
Cost of sales – direct materials,
labour, production and
distribution overheads
Selling costs
Administrative expenses
Transition services cost
reimbursement
Headline
£m
Non-headline
(note 3)
£m
Total
£m
Headline
£m
Non-headline
(note 3)
£m
1,919
221
406
(10)
2,536
–
–
98
–
98
1,919
221
504
(10)
2,634
1,605
200
351
(7)
2,149
–
–
300
–
300
Total
£m
1,605
200
651
(7)
2,449
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
Russia impairment and related closure costs
Transition services cost reimbursement
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
73
42
32
61
–
(10)
80
38
30
61
19
(7)
Research and development (R&D) cash costs were £113m (FY2022: £107m) comprising £73m
(FY2022: £80m) of R&D expensed to the income statement, £21m (FY2022: £12m) of capitalised
costs and £19m (FY2022: £15m) of customer funded R&D.
Administrative expenses include £2m (FY2022: £3m) in respect of lease payments for short-term
and low-value leases which were not included within right of use assets and lease liabilities.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 148
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 2023.
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 2023
£m
Year ended
31 July 2022
(represented)
£m
2.6
5.5
8.1
0.5
3.0
4.7
7.7
0.8
Other services comprise audit-related assurance services of £0.5m (FY2022: £0.5m) and fees for
reporting accountant services in connection with a class 1 disposal of £nil (FY2022: £0.3m).
Audit-related assurance services include the review of the Interim Report and the limited
assurance of the Group’s Scope 1-3 Greenhouse Gas emissions metrics. Total fees for non-audit
services comprise 6% (FY2022: 10%) of audit fees.
In the current year, the Group has agreed £0.3m of additional fees with the Group auditors relating
to the audit of the prior year financial statements.
3. NON-STATUTORY PROFIT MEASURES
HEADLINE PROFIT MEASURES
The Group has identified and defined a ‘headline’ measure of performance which is not impacted
by material non-recurring items or items considered non-operational/trading in nature. This non-
GAAP measure of profit is not intended to be a substitute for any IFRS measures of performance,
but is a key measure used by management to understand and manage performance. See the
disclosures on presentation of results in accounting policies for an explanation of the
adjustments. The items excluded from ‘headline’ are referred to as ‘non-headline’ items.
NON-HEADLINE OPERATING PROFIT ITEMS
I. CONTINUING OPERATIONS
The non-headline items included in statutory operating profit for continuing operations were
as follows:
Notes
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Post-acquisition integration costs and fair value
adjustment unwind
Fair value loss on contingent consideration
Unwind of acquisition balance sheet fair value uplift
Acquisition and disposal related transaction costs and
provision releases
Business acquisition/disposal costs
Legacy pension scheme arrangements
Past service credit/(costs) for benefit equalisation and
improvements
Scheme administration costs
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
Amortisation of acquired intangible assets
Restructuring costs
Irrecoverable VAT on chain export transaction
Russia impairment charges and related closure costs
Non-headline items in operating profit – continuing
operations
8
8
8
23
23
10
11
(6)
–
(1)
4
(2)
(1)
7
(16)
7
(52)
(36)
(2)
–
(98)
–
(2)
(5)
(43)
(171)
(2)
(7)
–
(51)
–
–
(19)
(300)
Post-acquisition integration costs and fair value adjustment unwind
Following the sale of Smiths Medical to ICU Medical, Inc. (ICU) in FY2022, the Group holds a
financial asset for the fair value of US$100m additional sales consideration that is contingent on
the future share price performance of ICU. In FY2023 a fair value loss of £6m has been
recognised on this financial asset. This is considered to be a non-headline item on the basis that
these charges result from acquisition accounting and do not relate to current trading activity.
The impact of unwinding the acquisition balance sheet fair value adjustments required by IFRS 3
‘Business combinations’ has been recognised as non-headline as the charges do not relate to
trading activity. The £2m charged in the prior period was due to the unwind of fair value uplifts on
the acquisition of Royal Metal Products.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 149
Acquisition and disposal related transaction costs and provision releases
The £1m (FY2022: £5m) business acquisition/disposal costs represented incremental transaction
costs including the acquisition of Plastronics in FY2023. These costs did not include the cost of
employees working on transactions and were reported as non-headline because they are
dependent on the level of acquisition and disposal activity in the year.
Legacy pension scheme arrangements
The past service credit/(costs) comprises the following:
– A net credit of £4m (FY2022: £19m debit) has been recognised in respect of equalisation
charges of retirement benefits for men and women. The net credit comprises a further liability
of £12m and the release of £16m, recognised in previous years, following the identification of
additional evidence of the obligation for equalisation (see note 8 for further details); and
– In the prior year £24m of costs were recognised following the TI Group Pension Scheme
(TIGPS) executing an insurance buy-in policy.
These past service credits/(costs) are reported as non-headline as they are non-recurring and
relate to legacy pension liabilities.
Scheme administration costs of £2m (FY2022: £nil) relate to the TIGPS legacy pension scheme.
As the Group has no expectation of receiving a refund from the scheme, an economic benefit
value of zero has been placed on the TIGPS surplus. These are non-headline charges as the
Smiths Group effectively has no economic exposure to these costs and they are paid from cash
retained in the scheme.
Settlement losses of £1m (31 July 2022: £171m) on post-retirement benefit schemes relate to
settlement arrangements made between the Group and former employees of the now disposed
of Medical business. The prior year losses arose primarily on the buy-in of the TIGPS scheme.
These items are considered non-headline as they are non-recurring and relate to legacy
pension schemes.
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 £7m credit (FY2022: £2m charge) recognised by Titeflex Corporation was principally driven
by discount rate movements and a reduction in the expected costs to settle future claims. See
note 23 for further details; and
– The £16m charge (FY2022: £7m) in respect of John Crane, Inc. asbestos litigation is principally
due to litigation costs of £31m offset by £15m of discount rate movements following an increase
in US treasury bond yields. See note 23 for further details; and
– In FY23 £7m (FY2022: £nil) of asbestos litigation costs were recovered by John Crane, Inc. via
insurer settlements.
Other items
Acquisition related intangible asset amortisation costs of £52m (FY2022: £51m) were recognised
in the current period. This is considered to be a non-headline item on the basis that these charges
result from acquisition accounting and do not relate to current trading activity.
As announced in the FY2022 Annual Report, during FY2023 the Group has completed a
restructuring project across the Group to better serve our customers, maximise growth
opportunities and improve efficiency. In FY2023 £36m of non-headline charges have been
expensed of which £26m has been paid to date, the remainder is forecast to be paid within the
next 18 months. The restructuring project is a non-headline expense as the costs are material,
non-recurring and part of a pre-approved programme.
The £2m of irrecoverable VAT (31 July 2022: £nil) relates to a historical VAT classification error.
This error had resulted in certain intercompany chain export transactions being treated as VAT
exempt when they should have been initially classified as subject to European VAT. This has been
treated as non-headline as it relates to six years of past VAT practice and will involve payment and
recovery of European VAT, which spans FY2023 and FY2024, so may have a material impact on the
Group’s headline cash conversion metric.
In the prior year a £19m charge has been recognised in relation to Russia impairment charges
and related closure costs.
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
Interest payable on overdue VAT
Other sundry financing losses
Fair value gain on investment in early stage business
Foreign exchange gain 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 2023
£m
Year ended
31 July 2022
£m
(7)
7
(7)
(1)
–
–
(8)
(3)
7
–
–
1
22
27
(106)
(273)
The financing elements of non-headline legacy liabilities, including the £7m (FY2022: £3m)
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 (FY2022: £7m) 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.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 150
The £7m of interest payable on overdue VAT (FY2022: £nil) relates to a historic VAT classification
error. This was excluded from headline finance costs because the underlying issue was
recognised as non-headline and this treatment has been maintained for ongoing costs
and credits.
NON-HEADLINE TAXATION (CHARGE)/CREDIT
The non-headline items included in taxation for continuing operations were as follows:
Tax credit on non-headline loss
Increase in unrecognised UK deferred tax asset
Non-headline taxation (charge)/credit– continuing
operations
Continuing operations – non-headline loss for the year
Notes
6
6
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
18
(31)
(13)
(119)
19
(5)
14
(259)
Movement in unrecognised UK deferred tax asset
These movements are reported as non-headline because the original credit, related to non-
headline charges was reported as non-headline.
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
Non-headline finance costs items
Foreign exchange loss 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
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
–
–
–
6
–
6
(113)
(33)
(14)
(22)
1,036
6
973
714
In the current year the Group has recognised an additional £6m gain on transactions related to
the sale of Smiths Medical. An £11m credit was released in respect of disposal and restructuring
provisions, that are no longer required, and an offsetting additional £5m of provisions were
charged in respect of potential indemnity, litigation and arbitration costs. These items are
considered to be non-headline as they relate to discontinued former business activities.
In the prior period:
– Smiths Medical recognised a £33m provision against the costs of the remediation actions
required to address each of the observations and discussion items contained in the US Food
and Drug Administration ‘for-cause’ audit findings on the Medfusion product range; and
– The decision by Smiths Medical to exit its commercial agreement with Ivenix, Inc. triggered an
indicator of impairment to the carrying value of the Smiths Medical investment in Ivenix, Inc.
and management impaired the entire £14m value of Smiths Medical’s investment; and
– The £22m foreign exchange loss on intercompany loan with parent directly offsets the foreign
exchange gain in continuing operations.
4. NET FINANCE COSTS
Notes
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Interest income
Interest expense:
– bank loans and overdrafts, including associated fees
– other loans
– interest on leases
Interest expense
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
– interest on overdue VAT
– 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
3
3
14
8
36
(50)
(17)
(4)
(71)
(35)
(9)
9
(3)
2
(7)
–
(8)
–
(7)
–
7
–
(43)
14
(12)
(40)
(3)
(55)
(41)
(32)
33
(2)
(1)
–
2
–
22
(3)
1
7
27
(14)
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 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
Average number of shares in issue during the year (note 24)
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
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
225
6
231
352,891,120
65.5p
65.1p
63.8p
63.4p
11
1,022
1,033
386,678,211
267.1p
266.0p
2.8p
2.8p
Diluted earnings per share are calculated by dividing the profit attributable to ordinary
shareholders by 354,681,819 (FY2022: 388,349,758) 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 (FY2022: nil) were excluded from this calculation because their effect
was anti-dilutive.
A reconciliation of statutory and headline earnings per share is as follows:
Year ended 31 July 2023
Year ended 31 July 2022
£m
Basic EPS
(p)
Diluted EPS
(p)
£m
Basic EPS
(p)
Diluted EPS
(p)
151
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 charge/(credit)
Total taxation expense in the consolidated income statement
Tax on items charged/(credited) to equity
Deferred tax:
– retirement benefit schemes
– share-based payment
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
112
(7)
105
29
134
121
13
134
68
5
73
17
90
104
(14)
90
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
32
–
32
–
(1)
(1)
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
231
113
344
225
119
344
65.5
65.1
1,033
267.1
266.0
97.5
97.0
63.8
63.4
97.5
97.0
(714)
319
11
259
270
82.5
82.1
The £32m (FY2022: £nil) charge to equity for retirement benefit schemes principally related to UK
retirement schemes.
2.8
2.8
69.8
69.5
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 152
CURRENT TAXATION LIABILITIES
At 31 July 2021
Foreign exchange loss
Charge to income statement
Tax paid
At 31 July 2022
Comprising:
Current tax receivable
Current tax payable within one year
Corporation tax payable after more than one year
At 31 July 2022
Charge to income statement
Tax paid
At 31 July 2023
Comprising:
Current tax receivable
Current tax payable within one year
Corporation tax payable after more than one year
At 31 July 2023
Current tax
£m
(19)
(4)
(73)
79
(17)
50
(64)
(3)
(17)
(105)
92
(30)
47
(74)
(3)
(30)
Provisions for tax liabilities amount to £46m (FY2022: £38m) the majority of which relates to the
risk of challenge from tax authorities to the geographic allocation of profits across the Group.
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 for which provisions are recognised based on best estimates and management’s
judgements concerning the ultimate outcome of the audit. Due to the uncertainty associated with
such items, it is possible at a future date, on conclusion of open tax matters, the final outcome
may vary significantly from the amounts noted above.
RECONCILIATION OF THE TAX CHARGE
The headline tax charge for the year of £121m (FY2022: £104m) represents an effective rate of
26.0% (FY2022: 27.6%).
The tax charge on the profit for the year for continuing operations is different from the standard
rate of corporation tax in the UK, with a rate for FY2023 of 21.0% (FY2022: 19.0%). The differences
are reconciled as follows:
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Profit before taxation
Notional taxation expense at UK corporate rate of 21% (FY2022: 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 credit on non-headline loss
– UK deferred tax asset recognition adjustment
Taxation on non-headline items
Total taxation expense in the consolidated income statement
366
77
13
24
(10)
31
2
–
–
(3)
134
121
(18)
31
13
134
103
20
13
11
(6)
5
10
41
2
(6)
90
104
(19)
5
(14)
90
The table above reconciles the notional taxation charge calculated at the UK tax rate, to the actual
total tax charge. As a group operating in multiple countries, the actual tax rates applicable to
profits in those countries are different from the UK tax rate. The impact is shown above as
different tax rates on non-UK profits and losses. The Group’s worldwide business leads to the
consideration of a number of important factors which may affect future tax charges, such as: the
levels and mix of profitability in different jurisdictions; transfer pricing regulations; tax rates
imposed and tax regime reforms; acquisitions; disposals; restructuring activities; and
settlements or agreements with tax authorities.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 153
DEFERRED TAXATION ASSETS/(LIABILITIES)
Property, plant,
equipment and
intangible
assets
£m
(56)
(15)
4
–
(9)
(76)
(1)
(75)
(76)
–
13
–
3
(60)
(2)
(58)
(60)
Employment
benefits
£m
(105)
1
50
3
–
(51)
(56)
5
(51)
(2)
(3)
32
(1)
(25)
(27)
2
(25)
Losses
carried
forward
£m
Provisions
£m
Other
£m
Total
£m
144
9
(54)
–
4
103
76
27
103
6
(32)
–
(2)
75
50
25
75
78
1
(10)
–
10
79
65
14
79
(4)
(5)
–
(4)
66
60
6
66
3
4
(7)
(4)
–
(4)
11
(15)
(4)
–
(2)
–
2
(4)
14
(18)
(4)
64
–
(17)
(1)
5
51
95
(44)
51
–
(29)
32
(2)
52
95
(43)
52
At 31 July 2021
Reallocations
Charge to income statement –
continuing operations
Credit to equity
Foreign exchange rate
movements
At 31 July 2022
Comprising:
Deferred tax assets
Deferred tax liabilities
At 31 July 2022
Reallocations
Charge to income statement –
continuing operations
Credit to equity
Foreign exchange rate
movements
At 31 July 2023
Comprising:
Deferred tax assets
Deferred tax liabilities
At 31 July 2023
Of the amounts included within ‘Other’, shown in the above table, as at 31 July 2023, amounts
relating to tax on unremitted earnings were £19m (FY2022: £19m). The aggregate amount of
temporary differences associated with investments in subsidiaries for which deferred tax
liabilities have not been recognised is 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 it is probable that
they will be recovered against the reversal of deferred tax liabilities. The closing net deferred tax
asset balance related to UK activities and included in the balance at 31 July 2023 amounted to £nil
(FY2022: £nil). The deferred tax asset balance for provisions includes £51m (FY2022: £57m)
relating to John Crane Inc. litigation provision, and £9m (FY2022: £12m) relating to Titeflex
Corporation. See note 23 for additional information on provisions.
UNRECOGNISED DEFERRED TAX
The Group has £521m of unrecognised deferred tax relating to losses (FY2022: £335m).
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 in respect of which deferred tax
has not been recognised is set out below:
2023
£m
Expiry of
losses
2022
£m
Expiry of
losses
Unrestricted losses – operating losses
521 No expiry
335 No expiry
Total unrecognised deferred tax on losses
521
335
Unrecognised deferred tax relating to losses has increased by £186m (FY2022: £228m). This
comprises an increase of £78m that principally matches the reduction in the UK pensions
deferred tax liability, an increase of £75m relating to Detection and Interconnect USA current year
losses and £33m from a FY2022 change in local accounting method for tax purposes resulting in
additional losses being booked in FY2023.
DEVELOPMENTS IN THE GROUP TAX POSITION
In December 2021, the Organisation for Economic Co-operation and Development published
rules relating to global minimum taxation called ‘Pillar 2 rules’, currently timetabled to apply
in the UK to accounting periods beginning on or after 1 January 2024 (year ended 31 July 2025
for Smiths). The Group will continue to monitor the development and future implementation of
these rules globally.
Smiths is actively working to fully understand the impact of the new rules and developing
processes to enable compliance. Based upon our latest understanding, the current estimate of
additional tax payable is not expected to have a material impact on the Group.
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)
Year ended 31 July 2023
Year ended 31 July 2022
Continuing
operations
£m
Discontinued
operations
£m
802
92
14
31
939
–
–
–
–
–
Total
£m
802
92
14
31
939
Continuing
operations
£m
Discontinued
operations
£m
700
81
13
29
823
91
9
2
5
107
Total
£m
791
90
15
34
930
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 154
The average number of persons employed, including employees on permanent, fixed term and
temporary contracts, 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 2023
Year ended
31 July 2022
6,050
3,250
3,750
2,800
300
16,150
–
16,150
6,050
3,100
3,300
2,500
300
15,250
6,700
21,950
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 98
to 110.
Key management compensation
Salaries and short-term employee benefits
Cost of retirement benefits
Cost of share-based incentive plans
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
12.0
0.7
4.9
10.3
0.7
4.7
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:
LTIP
Restricted stock
SAYE
Year ended 31 July 2023
Year ended 31 July 2022
Number of
instruments
’000
1,580
–
16
Weighted
average
exercise
price
£11.45
Number of
instruments
’000
1,411
8
16
Weighted
average
exercise
price
£11.43
RELATED PARTY TRANSACTIONS
The only related party transactions in FY2023 were key management compensation
(FY2022: key management compensation).
8. RETIREMENT BENEFITS
Smiths provides retirement benefits to employees in a number of countries. This includes defined
benefit and defined contribution plans and, mainly in the United Kingdom (UK) and United States
of America (US), post-retirement healthcare.
DEFINED CONTRIBUTION PLANS
The Group operates defined contribution plans across many countries. In the UK a defined
contribution plan has been offered since the closure of the UK defined benefit pension plans. In
the US a 401(k) defined contribution plan operates. The total expense recognised in the
consolidated income statement in respect of all these plans was £31m (FY2022: £34m).
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 2023. Contributions to the
schemes are made on the advice of the actuaries, in accordance with local funding requirements.
The changes in the present value of the net pension asset in the period were:
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
At beginning of period
Foreign exchange rate movements
Current service cost
Headline scheme administration costs
Non-headline scheme administration costs
Past service cost, curtailments, settlements – continuing operations
Settlements – discontinued operations
Finance income – retirement benefits
Contributions by employer
Actuarial (losses)/gains
Retirement benefit obligations disposed of with Smiths Medical
Unrecognised assets due to surplus restriction
Net retirement benefit asset
194
1
(2)
(4)
(2)
4
–
7
5
(114)
–
–
89
413
–
(2)
(4)
(214)
(3)
7
9
3
5
(20)
194
The £413m net retirement benefit asset at the start of FY2022 included £5m of pension obligations
disclosed within liabilities held for sale.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 155
UK PENSION SCHEMES
Smiths Group’s 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 next actuarial valuation, due as at 31 March 2023, is currently in progress, with the
results expected later in 2023.
The duration of SIPS liabilities is around 18 years (FY2022: 20 years) for active deferred members,
19 years (FY2022: 20 years) for deferred members and 10 years (FY2022: 11 years) for pensioners
and dependants. Durations have reduced primarily due to the increase in discount rate
assumption, which reduces the average time it takes to receive all future pension payments when
weighted by the present value of those future pension payments.
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, a wider review is being carried out to determine if the method
used in the early 1990s to equalise retirement ages between men and women was implemented
correctly. In FY2022, an additional liability of £19m was recognised as a past service cost to reflect
the expected impact of correcting this issue for certain sections of the scheme. In the current
year, a further liability of £12m has been recognised and £16m recognised in previous years has
been released following the identification of additional evidence of the obligation for equalisation,
resulting in a net credit to the income statement of £4m. The review remains ongoing however, no
further material additional liabilities are expected.
SIPS uses a Liability Driven Investment (LDI) strategy to hedge against interest and inflation rate
changes. During the significant volatility that followed the UK Government’s mini budget in
September 2022, this hedging policy meant that SIPS asset values fell, as did the value of its
obligations. All of SIPS’s collateral requirements in respect of the LDI assets were met, with no
support required from the Group.
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. The
FY2022 income statement recognised 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. The FY 2022 income statement recognised a past
service cost of £24m in relation to the derecognition of the remaining surplus. 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 derecognised 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 next actuarial valuation, due as at 5 April 2023, is currently in progress, with
the results expected later in 2023.
The duration of the TIGPS liabilities is around 20 years (FY2022: 21 years) for active deferred
members, 18 years (FY2022: 19 years) for deferred members and 10 years (FY2022: 10 years) for
pensioners and dependants.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 156
US PENSION PLANS
The valuations of the principal US pension and post-retirement healthcare plans were performed
using census data at 1 January 2023.
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 15 years (FY2022: 16 years) for
active deferred members, 14 years (FY2022: 15 years) for deferred members and 10 years
(FY2022: 10 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;
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
2023
UK
n/a
4.0%
3.3%
3.3%
5.1%
3.3%
2023
US
n/a
n/a
n/a
n/a
5.2%
n/a
2023
Other
2.5%
n/a
1.6%
n/a
2.8%
0.4%
2022
UK
n/a
4.0%
3.4%
3.4%
3.5%
3.4%
2022
US
n/a
n/a
n/a
n/a
4.5%
n/a
2022
Other
2.2%
n/a
1.2%
n/a
1.1%
1.3%
The assumptions used in calculating the costs and obligations of the Group’s defined benefit
pension plans are set by the Group after consultation with independent professionally qualified
actuaries. The assumptions used are estimates chosen from a range of possible actuarial
assumptions which, due to the timescale covered, may not necessarily occur in practice. For
countries outside the UK and USA, assumptions are disclosed as a weighted average.
– Inflation 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
Inflation rate assumptions
The RPI inflation assumption of 3.3% has been derived using the Aon UK Government Gilt Prices
Only Curve with an Inflation Risk Premium of 0.2% p.a.
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 33% of liabilities with matching annuities, eliminating investment
return, longevity, inflation and funding risks in respect of those liabilities. It has also adopted a
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 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
0.5% p.a. (FY2022: 0.6%) reflecting the Group’s view on the market pricing of this gap over the
lifetime of the UK schemes’ liabilities, i.e., 0.9% p.a. (FY2022: 1.0%) pre-2030 and 0.1% p.a.
post-2030 (FY2022: 0.2%).
Short-term inflation has continued at rates higher than the Government’s targets, though future
inflation is expected to fall in the short term as the Bank of England increases interest rates to
combat high inflation. Consequently, the long-term inflation assumptions are similar to the prior
year. The full impact of current high inflation is mitigated to an extent by the caps in place on
index-linked increases. The Board considered and declined a request from the Trustee of SIPS to
recommend an additional discretionary increase to pensions in payment. However, there is no
change in the Group’s constructive obligations and allowance for certain discretionary increases
in future continues to be included in the defined benefit obligations shown below.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 157
Discount rate assumptions
The UK schemes use a discount rate based on the annualised yield on the Aon GBP Single Agency
Select AA Curve, using the expected cash-flows from a notional scheme with obligations of the
same duration as that of the UK schemes, whereas in previous years the Aon GBP Select AA
Curve was used. The increase in the discount rate assumption at 31 July 2023 arises from market
conditions and is not impacted by the change in discount rate methodology.
SENSITIVITY
Sensitivities in respect of the key assumptions used to measure the principal pension schemes as
at 31 July 2023 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.
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.
The discount rate assumptions have increased significantly since the prior year, largely due to
the significant volatility that followed the UK Government’s mini budget in September 2022,
though other factors have contributed to the continued rise in bond yields since then, including
heightened political uncertainty, increases to interest rates to combat persistent high inflation
and market illiquidity. A higher discount rate has led to a lower value being placed on the
retirement benefit obligations, though there has also been a corresponding reduction in the
value of assets.
Mortality assumptions
The mortality assumptions used in the principal UK schemes are based on the latest ‘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 latest
2022 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 latest CMI projections incorporate
allowance for the impact of COVID-19, equivalent to a reduction in life expectancy of around
0.5 years.
The mortality assumptions used in the principal US schemes are based on generational mortality
using the latest Pri-2012 sex-distinct, employee/non-disabled annuitant table, with a 2012 base
year, projected forward generationally with the latest MP-2021 mortality scale. No explicit
adjustment has been made to mortality assumptions in respect of COVID-19. The impact of
COVID-19 remains uncertain and further data studies are underway to better predict the impact
on future mortality.
Expected further years of life
Male
31 July 2023
Female
31 July 2023
Male
31 July 2022
Female
31 July 2022
UK schemes
Member who retires next year at age 65
Member, currently 45, when they retire in 20 years’ time
21
20
23
24
22
23
24
25
US schemes
Expected further years of life
Male
31 July 2023
Female
31 July 2023
Male
31 July 2022
Female
31 July 2022
Member who retires next year at age 65
Member, currently 45, when they retire in 20 years’ time
21
22
22
24
21
22
22
24
Profit before
tax
for year
ended
31 July 2023
£m
Increase/
(decrease) in
scheme
assets
31 July 2023
£m
(Increase)/
decrease in
scheme
liabilities
31 July 2023
£m
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
Rate of mortality – one year
increase in life expectancy
Rate of mortality – one year
decrease in life expectancy
Rate of inflation – 0.25% increase
Discount rate – 0.25% increase
Market value of scheme assets –
2.5% increase
(2)
2
(1)
2
2
60
(62)
23
(36)
30
(88)
89
(43)
60
–
(2)
2
(1)
2
1
84
(135)
(84)
34
(49)
40
136
(69)
97
–
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. Prices are generally updated daily, weekly or quarterly
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.
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 that match all or part of 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.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 158
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
Total market value
Cash and cash equivalents
Pooled funds:
– Pooled equity
– Pooled Diversified Growth
– Pooled credit
Corporate bonds
Government bonds/LDI
Insured liabilities
Property
Total market value
31 July 2023 – £m
UK
schemes
US
schemes
Other
countries
93
–
–
320
203
421
1,323
7
2,367
1
–
–
–
141
44
–
–
186
1
3
13
–
–
3
–
–
20
Total
95
3
13
320
344
468
1,323
7
2,573
31 July 2022 – £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
The UK Government bonds/LDI portfolios contain £717m (FY2022: £960m) of UK Government
bonds (gilts), £276m (FY2022: £476m) of gilt repurchase obligations and £18m of interest and
inflation swap obligations (FY2022: £9m assets) and forward FX contracts with a net obligation
of £2m (FY2022: £5m asset). These are held to hedge against foreign currency risk. The pooled
funds, insured liabilities and property assets are unquoted. The scheme assets do not include any
property occupied by, or other assets used by, the Group.
The asset valuations are effective as at the end of the period, consistent with the calculations
determining the obligations, except for a small legacy commercial property investment which is
due to be sold down over 2023. This investment is only valued at the end of each calendar quarter,
so no valuation is available as at the period end. The Group considers taking the most recent
available valuation to be appropriate given the size of the commercial property investment relative
to the overall value of invested assets and wider commercial property market returns since the
most recent valuation.
The Group acknowledges that responsibility for the effective management of the schemes’
assets lies primarily with the trustees, but also accepts that any risks inherent in the investment
strategy, including ESG and climate risk, are ultimately underwritten by the Group. Consequently,
the Group ensures that the trustees’ investment strategy and statements of investment principles
are compatible with the Group’s wider sustainability strategy. For TIGPS, where all benefits are
now secured by way of annuity purchase, all investment risks including ESG and climate risk,
have effectively now been eliminated. For SIPS, a significant portion of investment risks have
already been eliminated through annuity purchase and the scheme’s time horizon to full buy-in,
hence exposure to investment risks including ESG and climate risk, continues to reduce.
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)
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)
SIPS
TIGPS
31 July 2023 – £m
US
schemes
(25)
(388)
(838)
(1,251)
1,446
–
195
(18)
(326)
(561)
(905)
921
(16)
–
(31)
(86)
(85)
(202)
186
–
(16)
SIPS
TIGPS
31 July 2022 – £m
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)
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 Net retirement benefit obligations
Amounts recognised in the consolidated income statement
31 July 2023 – £m
159
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
2
(5)
1
4
2
4
6
1
(3)
4
2
43
171
4
–
220
6
171
43
220
UK
schemes
US
schemes
Other
countries
2,367
(2,156)
(16)
195
(37)
(3)
(40)
155
195
(40)
155
186
(202)
–
(16)
(6)
(1)
(7)
(23)
–
(23)
(23)
20
(25)
–
(5)
(36)
(2)
(38)
(43)
–
(43)
(43)
Total
2,573
(2,383)
(16)
174
(79)
(6)
(85)
89
195
(106)
89
31 July 2022 – £m
Amounts charged to operating profit
Current service cost
Past service costs – benefit equalisations
Settlement loss
Headline scheme administration costs
Non-headline 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
(7)
(7)
UK
schemes
US
schemes
Other
countries
Total
Amounts recognised directly in the consolidated statement of comprehensive income
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)
3,314
(3,003)
(20)
291
(90)
(7)
(97)
194
309
(115)
194
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
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
(660)
(54)
48
548
4
(114)
(835)
(31)
1
868
(20)
(17)
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)
Comprising:
Retirement benefit assets
Retirement benefit liabilities
Net pension asset/(liability)
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)
Comprising:
Retirement benefit assets
Retirement benefit liabilities
Net pension asset/(liability)
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.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 160
Changes in present value of funded scheme assets
Changes in present value of funded defined benefit obligations
31 July 2023 – £m
31 July 2023 – £m
At beginning of period
Interest on assets
Actuarial movement on scheme assets
Scheme administration costs
Foreign exchange rate movements
Assets distributed on settlements
Benefits paid
At end of period
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
UK
schemes
US
schemes
Other
countries
3,067
105
(638)
(5)
–
–
(162)
2,367
225
10
(21)
(1)
(10)
(4)
(13)
186
22
1
(1)
–
–
–
(2)
20
Total
3,314
116
(660)
(6)
(10)
(4)
(177)
2,573
31 July 2022 – £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
At beginning of period
Past service costs
Interest on obligations
Actuarial movement on liabilities
Foreign exchange rate movements
Liabilities extinguished on settlements
Benefits paid
At end of period
At beginning of period
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
UK
schemes
US
schemes
Other
countries
(2,738)
4
(94)
510
–
–
162
(2,156)
(238)
–
(10)
19
11
3
13
(202)
(27)
–
(1)
1
–
–
2
(25)
Total
(3,003)
4
(105)
530
11
3
177
(2,383)
31 July 2022 – £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)
Changes in present value of unfunded defined benefit pensions and post-retirement
healthcare plans
At beginning of period
Current service cost
Interest on obligations
Actuarial movement
Employer contributions
Liabilities transferred on business
disposal
Benefits paid
At end of period
Year ended
31 July 2023
£m
Assets
Year ended
31 July 2022
£m
Year ended
31 July 2023
£m
Obligations
Year ended
31 July 2022
£m
–
–
–
–
5
–
(5)
–
–
–
–
–
5
–
(5)
–
(98)
(1)
(3)
12
–
–
5
(85)
(124)
(1)
(2)
21
–
4
5
(97)
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 161
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
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
(20)
4
(16)
–
(20)
(20)
Cash contributions
Company contributions to the defined benefit pension plans and post-retirement healthcare plans
totalled £5m (FY2022: £9m). No contributions were made to funded schemes in the year (FY2022:
£3m to SIPS, £1m to Other). During the year, £5m (FY2022: £5m) was spent on providing benefits
under unfunded defined benefit pension and post-retirement healthcare plans.
In FY2024, cash contributions to the Group’s schemes are expected to be up to £10m 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 & 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.
Ordinary shares under option/award (’000)
31 July 2021
Reclassification
Granted
Exercised
Lapsed
31 July 2022
Granted
Exercised
Lapsed
31 July 2023
Long-term
incentive
plans
4,915
348
2,255
(224)
(1,984)
5,310
2,023
(309)
(2,196)
4,828
Restricted
stock
Save as you
earn
scheme
64
–
212
(163)
(30)
83
24
(20)
–
87
1,085
–
167
(138)
(229)
885
253
(109)
(71)
958
SEP
851
(348)
–
(313)
(190)
–
–
–
–
–
Weighted
average
exercise
price
£1.63
–
£0.71
£1.90
£0.97
£1.45
£1.47
£2.88
£0.33
£1.78
Total
6,915
–
2,634
(838)
(2,433)
6,278
2,300
(438)
(2,267)
5,873
Options and awards were exercised on an irregular basis during the period. The average closing
share price over the financial year was 1,629.8p (FY2022: 1,476.3p). 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 2023 was nil (31 July 2022: 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 2023
(’000)
Weighted average
remaining
contractual
life at 31 July 2023
(months)
Total shares under
options/awards
at 31 July 2022
(’000)
Weighted
average
remaining
contractual
life at 31 July 2022
(months)
4,915
444
514
17
6
33
5,393
490
395
19
18
29
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% (FY2022: 25% to 20%) and dividend yield of 2.4% (FY2022: 2.6%), 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 £15.03 (FY2022: £14.81), and restricted stock of £14.60 (FY2022:
£14.59). Staff costs included £14m (FY2022: £15m) for share-based payments, of which £13m
(FY2022: £14m) related to equity-settled share-based payments.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 162
10. INTANGIBLE ASSETS
In addition to goodwill, acquired intangible assets comprise:
Cost
At 31 July 2021
Foreign exchange rate movements
Additions
At 31 July 2022
Foreign exchange rate movements
Business combinations
Additions
Disposals
At 31 July 2023
Amortisation and impairments
At 31 July 2021
Foreign exchange rate movements
Amortisation charge for the year
Impairment charge for the year
At 31 July 2022
Foreign exchange rate movements
Amortisation charge for the year
Disposals
At 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
Goodwill
£m
Development
costs
£m
Acquired
intangibles
(see table
below)
£m
Software,
patents and
intellectual
property
£m
1,207
104
–
1,311
(45)
7
–
–
1,273
59
4
–
4
67
(3)
–
–
64
1,209
1,244
1,148
156
6
12
174
(2)
–
21
–
193
114
6
3
–
123
(1)
2
–
124
69
51
42
562
68
–
630
(31)
13
–
–
612
287
35
51
–
373
(19)
52
–
406
206
257
275
177
10
6
193
(3)
–
7
(38)
159
144
6
7
–
157
(4)
7
(38)
122
37
36
33
Total
£m
2,102
188
18
2,308
(81)
20
28
(38)
2,237
604
51
61
4
720
(27)
61
(38)
716
1,521
1,588
1,498
Cost
At 31 July 2021
Foreign exchange rate movements
At 31 July 2022
Foreign exchange rate movements
Business combinations
At 31 July 2023
Amortisation
At 31 July 2021
Foreign exchange rate movements
Charge for the year
At 31 July 2022
Foreign exchange rate movements
Charge for the year
At 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
Patents,
licences
and
trademarks
£m
Technology
£m
Customer
relationships
£m
Total
acquired
intangibles
£m
17
2
19
–
1
20
5
1
2
8
–
1
9
11
11
12
134
18
152
(9)
2
145
67
10
10
87
(6)
11
92
53
65
67
411
48
459
(22)
10
447
215
24
39
278
(13)
40
305
142
181
196
562
68
630
(31)
13
612
287
35
51
373
(19)
52
406
206
257
275
Individually material intangible assets comprise:
– £53m of customer-related intangibles attributable to United Flexible (remaining amortisation
period: 4 years);
– £48m of customer-related intangibles attributable to Morpho Detection (remaining
amortisation period: 6 years);
– £27m of customer-related intangibles attributable to Royal Metal (remaining amortisation
period: 5 years);
– £24m of development cost intangibles attributable to a computed tomography programme in
Detection that is currently under development; and
– £18m of development cost intangibles attributable to a X-ray diffraction 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.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 163
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
2023
£m
131
630
183
265
1,209
2023
Number of
CGUs
1
1
1
1
4
2022
£m
132
644
194
274
1,244
2022
Number of
CGUs
1
2
1
1
5
*
In FY2022 the Smiths Detection CGU was restructured. The Detection Russia business split into a separate CGU and
subsequently fully impaired.
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 FY2024 business plan and
the five-year detailed divisional strategic projections which have been prepared by divisional
management and approved by the Board.
The principal 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
FY2024 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 determined with reference to illustrative weighted
average cost of capital (WACC) for each CGU. In determining these discount rates, management
have considered systematic risks specific to each of the Group’s CGUs. These risk adjusted
discount rates have then been validated against the Group’s WACC, the WACCs of the CGU’s
peer group and an average of discount rates used by other companies for the industries in
which Smiths divisions operate. Pre-tax rates of 11.4% to 13.0% (FY2022: 11.3% to 12.3%) 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 detailed forecast
period. CGU-specific long-term growth rates have been calculated by revenue weighting the
long-term GDP growth rates of the markets that each CGU operates in. The long-term growth
rates used in the testing ranged from 2.2% to 2.7% (FY2022: 1.7% to 2.4%). These rates do not
reflect the long-term assumptions used by the Group for investment planning.
Of the principal assumptions above, the key assumptions that the impairment models are most
sensitive to are: the revenue growth assumption; the average earnings before interest and tax
margin assumption; and the discount rate assumption.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 164
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
Capital expenditure – annual average over projection
period (£m)
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
Smiths
Detection
135
649
As at 31 May 2023
Flex-Tek
191
Smiths
Interconnect
279
Value in use
Value in use
Value in use
Value in use
13.0%
9.7%
5 years
12.2%
9.3%
5 years
11.8%
9.4%
5 years
11.5%
9.4%
5 years
27
27
10
20
5.3%
24.6%
2.7%
4.5%
14.5%
2.4%
3.4%
19.5%
2.2%
4.7%
18.6%
2.5%
John Crane
Smiths
Detection
132
640
As at 31 May 2022
Flex-Tek
187
Smiths
Interconnect
266
Value in use
Value in use
Value in use
Value in use
12.3%
9.1%
5 years
5.3%
24.9%
1.9%
11.3%
8.7%
5 years
3.8%
14.1%
2.4%
11.7%
9.2%
5 years
3.8%
19.7%
1.7%
11.5%
9.3%
5 years
6.0%
17.8%
2.1%
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
Smiths Detection is the only CGU of the Group that has limited goodwill impairment testing
headroom. For all of the Group’s other CGUs the recoverable amount of the CGU exceeded the
carrying value, on the basis of the assumptions set out in the preceding tables and any reasonably
possible changes thereof.
The estimated recoverable amount of the Smiths Detection CGU exceeded the carrying value by
£225m. Any decline in estimated value in use in excess of this amount would result in the
recognition of impairment charges.
Management recognise that the goodwill impairment testing headroom of the Smiths Detection
CGU is most sensitive to movements in the revenue growth rate, the EBIT margin and the
discount rate assumptions. Of these key assumptions, management consider that the EBIT
margin assumption is the most sensitive.
The Smiths Detection financial model assumes that EBIT margins grow from 11.2% in FY2023 to
an average of 14.5% over the five-year financial model period. This increase in EBIT margin is
principally driven by a change in revenue and profit mix, with the proportion of higher margin
aftermarket revenue growing over the five-year projection period.
Management considers that it is plausible that this margin growth may not be fully captured by
the business. For the CGU to be impaired, the average EBIT margin over the five-year financial
model would have to be less than 12.3%; management recognises this to be a reasonably
plausible downside scenario.
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 2023:
Change required for carrying value to equal recoverable amount – FY2023
Revenue – compound annual growth rate (CAGR) over five-year projection period
Average earnings before interest and tax margin
Post-tax discount rate
Change required for carrying value to equal recoverable amount – FY2022
Revenue – compound annual growth rate (CAGR) over five-year projection period
Average earnings before interest and tax margin
Post-tax discount rate
Smiths Detection
-460 bps decrease
-220 bps decrease
+140 bps increase
Smiths Detection
-240 bps decrease
-130 bps decrease
+70 bps increase
Note: Long-term growth rates are not included in the sensitivity tables above as management
consider that there is no reasonably possible change in long-term growth rate that would result
in an impairment.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 13. RIGHT OF USE ASSETS
Properties
£m
Vehicles
£m
Equipment
£m
Cost or valuation
At 31 July 2021
Foreign exchange rate movements
Recognition of right of use asset
Derecognition of right of use asset
At 31 July 2022
Foreign exchange rate movements
Recognition of right of use asset
Derecognition of right of use asset
At 31 July 2023
Depreciation
At 31 July 2021
Foreign exchange rate movements
Charge for the year
Derecognition of right of use asset
At 31 July 2022
Foreign exchange rate movements
Charge for the year
Derecognition of right of use asset
At 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
146
12
18
(2)
174
(6)
27
(5)
190
46
5
25
(1)
75
(4)
27
(4)
94
96
99
100
17
1
4
(1)
21
(1)
7
–
27
10
1
5
(1)
15
–
4
–
19
8
6
7
1
–
–
–
1
–
1
–
2
–
–
–
–
–
–
1
–
1
1
1
1
165
Total
£m
164
13
22
(3)
196
(7)
35
(5)
219
56
6
30
(2)
90
(4)
32
(4)
114
105
106
108
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.
12. PROPERTY, PLANT AND EQUIPMENT
Cost or valuation
At 31 July 2021
Foreign exchange rate movements
Additions
Disposals
At 31 July 2022
Foreign exchange rate movements
Business combinations
Additions
Disposals
At 31 July 2023
Depreciation
At 31 July 2021
Foreign exchange rate movements
Charge for the year
Disposals
At 31 July 2022
Foreign exchange rate movements
Charge for the year
Disposals
At 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
Land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings,
tools and
equipment
£m
172
14
4
(14)
176
(6)
–
10
(2)
178
106
9
7
(14)
108
(4)
8
(2)
110
68
68
66
388
37
42
(10)
457
(14)
2
33
(15)
463
260
25
24
(10)
299
(8)
25
(14)
302
161
158
128
122
6
6
(5)
129
(2)
–
10
(17)
120
104
5
7
(4)
112
(2)
9
(17)
102
18
17
18
Total
£m
682
57
52
(29)
762
(22)
2
53
(34)
761
470
39
38
(28)
519
(14)
42
(33)
514
247
243
212
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 166
14. FINANCIAL ASSETS – OTHER INVESTMENTS
15. INVENTORIES
Cost or valuation
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
Fair value change through profit and loss
Fair value change through other
comprehensive income
At 31 July 2023
Investment in
ICU Medical,
Inc equity
£m
Deferred
contingent
consideration
£m
Investments
in early stage
businesses
£m
Cash
collateral
deposit
£m
–
–
426
–
–
(62)
364
–
(17)
347
–
–
30
–
(11)
–
19
(6)
–
13
7
1
4
(4)
1
(1)
8
–
(1)
7
4
–
–
–
–
–
4
–
–
4
Total
£m
11
1
460
(4)
(10)
(63)
395
(6)
(18)
371
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 US$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.
Raw materials and consumables
Work in progress
Finished goods
Total inventories
31 July 2023
£m
31 July 2022
£m
201
130
306
637
187
106
277
570
In FY2023, operating costs included £1,622m (FY2022: £1,323m) of inventory consumed, £26m
(FY2022: £12m) was charged for the write-down of inventory and £16m (FY2022: £12m) was
released from provisions no longer required.
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
31 July 2023
£m
31 July 2022
£m
545
158
703
(66)
637
492
131
623
(53)
570
31 July 2023
£m
31 July 2022
£m
2
65
8
75
493
40
121
118
772
1
58
10
69
506
33
127
72
738
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
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 £744m
(FY2022: £726m).
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 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
167
31 July 2023
£m
31 July 2022
£m
13
27
40
247
51
66
200
159
723
13
33
46
282
57
30
183
130
682
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 £186m (FY2022: £163m) 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 £97m (FY2022: £113m) that was included in the opening contract
liabilities balance. This revenue primarily relates to the delivery of performance obligations in the
Smiths Detection business.
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 (FY2022: £19m) principally within Smiths
Interconnect and Smiths Detection, offset by £9m decreases in John Crane and £7m (FY2022:
£15m) decrease due to foreign currency translation losses.
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 FY2023 the Group collected £128m of
receivables through these schemes (FY2022: £92m). The impact of invoice discounting on the
FY2023 balance sheet was that trade receivables were reduced by £26m (2022: £19m). Costs of
discounting were £2m (FY2022: less than £1m), charged to the income statement within financing
costs. 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, adjusted for factors that are specific to the debtor, general economic
conditions of the industry in which the debtor operates 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% (FY2022: 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 2023
£m
31 July 2022
£m
389
52
19
12
8
45
525
(30)
495
396
51
24
11
7
54
543
(36)
507
31 July 2023
£m
31 July 2022
£m
36
(1)
4
(9)
30
32
4
8
(8)
36
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023 168
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
€650m 2.00% Eurobond 2027
Lease liabilities
Borrowings/gross debt
Derivatives managing interest rate risk and currency profile of the debt
Net debt
CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Short-term deposits
Cash and cash equivalents
31 July 2023
£m
31 July 2022
£m
285
1,056
–
–
(26)
(3)
(29)
(534)
(91)
(625)
(654)
(18)
(387)
(502)
(1)
(29)
(6)
(538)
(538)
(90)
(628)
(1,166)
(40)
(150)
31 July 2023
£m
31 July 2022
£m
175
110
285
242
814
1,056
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 £17m (FY2022: £30m) was
charged to the consolidated income statement in the period in respect of public bonds.
ANALYSIS OF FINANCIAL DERIVATIVES ON BALANCE SHEET
Non-current
assets
£m
Current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
Net balance
£m
Derivatives managing interest rate risk and
currency profile of the debt
Foreign exchange forward contracts
At 31 July 2023
Derivatives managing interest rate risk and
currency profile of the debt
Foreign exchange forward contracts
At 31 July 2022
–
–
–
–
–
–
–
5
5
–
4
4
–
(2)
(2)
(20)
(7)
(27)
(18)
–
(18)
(20)
–
(20)
(18)
3
(15)
(40)
(3)
(43)
MOVEMENTS IN ASSETS/(LIABILITIES) ARISING FROM FINANCING ACTIVITIES
Changes in net debt
Cash
and cash
equivalents
£m
Other
short-term
borrowings
£m
Long-term
borrowings
£m
Interest rate
& cross-
currency
swaps
£m
Changes in
other financing
items: FX
contracts
£m
Total
liabilities
from financing
activities
£m
Net debt
£m
8
–
–
–
(3)
564
(10)
(21)
(10)
(41)
(40)
(189)
(761)
(150)
(538)
(628)
(153)
1,056
(4,031)
(4,072)
At 31 July 2022
Foreign exchange
gains/(losses)
Net cash inflow
from continuing
operations
Net movement
from new leases
and modifications
Interest rate
hedge fair value
movements
Revaluation of
derivative contracts
Interest expense
taken to income
28
–
statement*
(29)
–
Interest paid
–
(3)
Reclassifications
(384)
(625)
At 31 July 2023
* The Group has also incurred £9m (FY2022: £8m) of bank charges that were expensed when paid and were not included
28
(29)
–
(387)
28
(29)
3
(29)
–
–
–
(18)
–
–
–
285
–
–
–
3
4,031
3,842
(34)
(34)
(34)
(2)
16
14
14
14
14
20
–
–
–
–
–
–
–
–
–
6
in net debt.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Changes in net debt
Cash
and cash
equivalents
£m
Other
short-term
borrowings
£m
Long-term
borrowings
£m
Interest rate
& cross-
currency
swaps
£m
Changes in
other financing
items: FX
contracts
£m
Total
liabilities
from financing
activities
£m
Net debt
£m
405
(36)
(1,466)
75
(1,022)
1
(1,021)
At 31 July 2021
Foreign exchange
gains/(losses)
Net cash inflow
from continuing
operations*
Net movement
from lease
modifications
Interest rate
hedge fair value
movements
Revaluation of
derivative contracts
Interest expense
taken to income
statement**
Interest paid
Reclassifications
At 31 July 2022
62
(3)
4
589
34
295
–
–
–
–
–
–
1,056
(22)
2
–
(35)
–
(478)
(538)
–
27
–
–
34
478
(628)
–
–
–
–
(22)
29
(115)
(115)
–
–
–
(40)
(35)
34
–
(150)
63
(6,799)
(6,736)
918
6,799
7,717
–
–
(4)
–
–
–
(3)
(22)
29
(119)
(35)
34
–
(153)
* In FY22, the net cash inflow for the total Group including discontinued operations was £589m, £57m of which related to
the cash held by Smiths Medical at the time of disposal.
** The Group has also incurred £9m (FY2022: £8m) 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 2023 the total value of overdrafts on accounts in
interest compensation cash pooling systems was £nil (FY2022: £nil). The balances held in zero
balancing cash pooling arrangements have daily settlement of balances. Therefore netting is
not relevant.
CHANGE OF CONTROL
The Company has in place credit facility agreements under which a change of control would
trigger prepayment clauses. The Company has one bond 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.
169
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 FY2023 was 4.01%
(FY2022: 3.63%).
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 & 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 2023 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 (excluding leases) is at fixed rates. At 31 July 2023
these measures were 100% (FY2022: 100%), 3.6 years (FY2022: 2.7 years) and 54% (FY2022: 44%).
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 170
The Group has no financial covenants in its external debt agreements. Interest rate risk
management is discussed in note 19(b).
The following table shows the currency of financial instruments. It excludes loans and derivatives
designated as net investment hedges.
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 2023, these measures were £622m (FY2022: £657m) and 57
months (FY2022: 27 months). At 31 July 2023, net cash resources were £285m (FY2022: £1,055m).
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 19(a)
below.
(A) FOREIGN EXCHANGE RISK
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases by businesses in
currencies other than their functional currency. It is Group policy that, when the net foreign
exchange exposure to known future sales and purchases is material, this exposure is hedged
using forward foreign exchange contracts. The net exposure is calculated by adjusting the
expected cash-flow for payments or receipts in the same currency linked to the sale or purchase.
This policy minimises the risk that the profits generated from the transaction will be affected by
foreign exchange movements which occur after the price has been determined. Hedge accounting
documentation and effectiveness testing are only undertaken if it is cost-effective.
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
US$
£m
Euro
£m
Other
£m
Total
£m
At 31 July 2023
43
(64)
50
(27)
2
(7)
–
(63)
(68)
372
(216)
115
(54)
217
(287)
127
(23)
34
127
(93)
29
(12)
51
(57)
28
(48)
(26)
184
(103)
91
(24)
148
(153)
(73)
133
55
726
(476)
285
(117)
418
(504)
82
(1)
(5)
Sterling
£m
US$
£m
Euro
£m
Other
£m
Total
£m
At 31 July 2022
41
(52)
355
(28)
316
(322)
–
(42)
(48)
423
(239)
506
(58)
632
(149)
(419)
(40)
24
114
(98)
74
(14)
76
(80)
(27)
(38)
(69)
169
(101)
120
(19)
169
(142)
(89)
120
58
747
(490)
1,055
(119)
1,193
(693)
(535)
–
(35)
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.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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:
171
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
FY2023
£m
Gain/(loss)
recognised in
reserves
FY2023
£m
Impact on
profit
for the year
FY2022
£m
Gain/(loss)
recognised in
reserves
FY2022
£m
–
1
–
1
–
(1)
(3)
8
4
1
(1)
–
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
– finance costs
Carried forward cash-flow hedge reserve at end of year
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
(3)
1
2
–
2
(6)
1
(3)
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 2023, contracts with a nominal value of £123m (FY2022: £141m) were
designated as hedging instruments. In addition, the Group had outstanding foreign currency
contracts with a nominal value of £252m (FY2022: £226m) which were being used to manage
transactional foreign exchange exposures, but were not accounted for as cash-flow hedges. The
fair value of the contracts is disclosed in note 20.
The majority of hedged transactions will be recognised in the consolidated income statement in
the same period that the cash-flows are expected to occur, with the only differences arising
because of normal commercial credit terms on sales and purchases. It is the Group’s policy to
hedge 80% of certain exposures for the next two years and 50% of highly probable exposures for
the next 12 months.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic
prospective effectiveness assessments to ensure that an economic relationship exists between
the hedged item and hedging instrument. The foreign exchange forward contracts have similar
critical terms to the hedged items, such as the notional amounts and maturities. Therefore, there
is an economic relationship and the hedge ratio is established as 1:1.
The main sources of hedge ineffectiveness in these hedging relationships are the effect of the
Group’s and the counterparty credit risks on the fair value of the foreign exchange forward
contracts, which is not reflected in the fair value of the hedged item and the risk of over-hedging
where the hedge relationship requires re-balancing. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness is recognised immediately
in the income statement in the period that it occurs. Of the foreign exchange contracts designated
as hedging instruments, 98% are for periods of 12 months or less (FY2022: 98%).
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
Sales and
purchases
Foreign
currency risk
Foreign exchange
contracts
Financial
year
FY2023
FY2022
Changes in value
of the hedged item
for calculating
ineffectiveness
£m
Changes in value
of the hedging
instrument
for calculating
ineffectiveness
£m
Cash-flow hedge
reserve
£m
1
(6)
(1)
6
1
(6)
Cash-flow hedges generated £nil of ineffectiveness in FY2023 (FY2022: £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 2023
At 31 July 2022
US$
£m
–
(247)
(247)
Euro
£m
(293)
–
(293)
Total
£m
(293)
(247)
(540)
US$
£m
–
(615)
(615)
Euro
£m
(451)
–
(451)
Total
£m
(451)
(615)
(1,066)
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 172
At 31 July 2023, cross-currency swaps hedged the Group’s exposure to US dollars and euros
(31 July 2022: US dollars and euros). All the cross-currency swaps designated as net investment
hedges were non-current (FY2022: current and non-current). Swaps generating £247m of the US
dollar exposure (FY2022: £261m) will mature in February 2027.
In addition, non-swapped borrowings were also used to hedge the Group’s exposure to euros
(31 July 2022: US dollars and euros). Borrowings generating £293m of the euro exposure
(FY2022: £287m) 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 are the effect of the
counterparty and the Group’s own credit risk on the fair value of the foreign exchange forward
contracts which is not reflected in the fair value of the hedged item and the risk of over-hedging
where the hedge relationship requires re-balancing. No other sources of ineffectiveness
emerged from these hedging relationships. Any hedge ineffectiveness is recognised immediately
in the income statement in the period that it occurs.
The following table presents a reconciliation by risk category of the net investment hedge reserve
and analysis of other comprehensive income in relation to hedge accounting:
Brought forward net investment hedge reserve at start of year
Cross-currency swaps *
Bonds
Amounts removed from the hedge
reserve and recognised in the income
statement
Net fair value gains on effective hedges
Net fair value gains on effective hedges
Profit/(loss) on business disposal
Carried forward net investment hedge reserve at end of year
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
(207)
40
(29)
–
(196)
(238)
(77)
5
103
(207)
* The FY2022 reported amount for net fair value losses on effective hedges of cross-currency swaps was incorrectly
presented as £82m rather than £77m. The total reserve balances and net assets for FY2022 are not impacted by the
correction to this table.
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
Bonds
FY2023
FY2023
Overseas
operation
Foreign
currency risk
Cross-currency
swaps
Bonds
FY2022
FY2022
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
(40)
29
(11)
82
(5)
77
40
(29)
11
(82)
5
(77)
40
(29)
11
(82)
5
(77)
Net investment hedges generated £1m of ineffectiveness in FY2022 (FY2022: £1m) 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 2023
£m
Loss
recognised
in hedge
reserve
31 July 2022
£m
27
33
68
50
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 (excluding leases). This is achieved through fixed
rate borrowings and interest rate swaps. At 31 July 2023 54% (FY2022: 44%) of the Group’s gross
borrowings (excluding leases) 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
2023, after interest rate swaps, was 4.53% (FY2022: 3.06%).
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
Interest rate hedging
The Group also has exposures to the fair values of non-derivative financial instruments such as
EUR 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.
173
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
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
As at 31 July 2023
At fair value
through
profit or loss
£m
Cash and
cash
equivalents
£m
Borrowings
£m
Fair value of
borrowings
£m
At 31 July 2023 and 31 July 2022, the Group had designated the following hedges against
variability in the fair value of borrowings arising from fluctuations in base rates:
– €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
– €400m of the fixed/floating element of the EUR/USD interest rate swaps that partially hedged
the € 2023 Eurobond was repaid on 28 April 2022.
The fair values of the hedging instruments are disclosed in note 20. The effect of the swaps was to
convert £257m (FY2022: £588m) 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 source 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.
–
–
–
–
4
4
–
4
–
–
–
–
215
215
70
285
(29)
(365)
(24)
(418)
(236)
(654)
–
(654)
(29)
(347)
(24)
(400)
(240)
(640)
–
(640)
As at 31 July 2022
At fair value
through profit
or loss
£m
Cash and
cash
equivalents
£m
Borrowings
£m
Fair value of
borrowings
£m
–
–
–
–
4
4
–
4
–
–
–
–
970
970
86
1,056
(203)
(357)
(24)
(584)
(582)
(1,166)
–
(1,166)
(203)
(359)
(24)
(586)
(586)
(1,172)
–
(1,172)
* Floating rate interest financial assets in the prior year have been amended to remove the investments in ICU Medical
Inc., contingent consideration and investments in early-stage business that were incorrectly reported as having
interest rate exposure.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 174
The following table sets out the details of the hedged exposures covered by the Group’s fair value hedges:
Hedged item
Hedged exposure
Financial year
Fixed rate bonds (a)
Fixed rate bonds (a)
(a) Classified as borrowings.
Interest rate risk
Interest rate & currency rate risk
FY2023
FY2023
Interest rate risk
Interest rate & currency rate risk
FY2022
FY2022
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
(2)
16
14
8
21
29
2
(16)
(14)
(8)
(20)
(28)
–
–
–
–
–
–
–
233
233
336
252
588
–
–
–
–
–
–
–
(21)
(21)
(2)
(5)
(7)
Fair value hedges generated a £nil ineffectiveness in FY2023 (FY2022: £1m) which was recognised
in the income statement through finance costs.
Sensitivity of interest charges to interest rate movements
The Group has exposure to sterling, US dollar and euro interest rates. However, the Group does
not have a significant exposure to interest rate movements for any individual currency. Based on
the composition of net debt and investments at 31 July 2023, 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
(FY2022: £2m impact) on the Group’s profit before tax.
(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 £295m at 31
July 2023 (FY2022: £1,067m).
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 2023
£m
31 July 2022
£m
78
31
170
6
4
7
296
551
104
397
4
4
7
1,067
At 31 July 2023, the maximum exposure with a single bank for deposits and cash was £65m
(FY2022: £339m). The bank has a credit rating of A+. The maximum mark to market exposure with
a single bank for derivatives was out of the money in both the current and prior year and does not
represent a credit risk.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Gross contractual cash-flows for derivative financial instruments
175
Assets
Less than one year
Greater than one year
Liabilities
Less than one year
Greater than one year
Total
Assets
Less than one year
Greater than one year
Liabilities
Less than one year
Greater than one year
Total
As at 31 July 2023
Receipts
£m
Payments
£m
Net
cash-flow
£m
209
6
159
252
626
(204)
(6)
(161)
(270)
(641)
5
–
(2)
(18)
(15)
As at 31 July 2022
Receipts
£m
Payments
£m
Net
cash-flow
£m
495
270
212
8
985
(521)
(290)
(209)
(8)
(1,028)
(26)
(20)
3
–
(43)
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
£463m (FY2022: £474m) due in less than one year, £13m (FY2022: £13m) due between one and
five years.
(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 US$800m maturing 5 May 2028. At the
balance sheet date, the Group had the following undrawn credit facilities:
Expiring after more than four years (FY 2022: two years)
31 July 2023
£m
31 July 2022
£m
622
657
Cash deposits
As at 31 July 2023, £110m (FY2022: £814m) of cash and cash equivalents was on deposit with
various banks of which £78m (FY2022: £558m) was in liquidity funds. £4m (FY2022: £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
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
£m
Fair value
adjustments
£m
As at 31 July 2023
Contractual
interest
payments
£m
Total
contractual
cash-flows
£m
(29)
(27)
(20)
(13)
(561)
(24)
(674)
–
–
–
–
21
–
21
(11)
(11)
(11)
(11)
–
–
(44)
(40)
(38)
(31)
(24)
(540)
(24)
(697)
Borrowings
£m
Fair value
adjustments
£m
As at 31 July 2022
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)
(1,226)
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.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 176
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.
ACCOUNTING FOR OTHER DERIVATIVE CONTRACTS
Any foreign exchange contracts which are not formally designated as hedges and tested are
classified as ‘held for trading’ and not hedge accounted.
NETTING
International Swaps and Derivatives Association (ISDA) master netting agreements are in place
with derivative counterparties except for contracts traded on a dedicated international electronic
trading platform used for operational foreign exchange hedging. Under these agreements if a
credit event occurs, all outstanding transactions under the ISDA are terminated and only a single
net amount per counterparty is payable in settlement of all transactions. The ISDA agreements
do not meet the criteria for offsetting, since the offsetting is enforceable only if specific events
occur in the future, and there is no intention to settle the contracts on a net basis.
Assets
31 July 2023
£m
Liabilities
31 July 2023
£m
Assets
31 July 2022
£m
Liabilities
31 July 2022
£m
Gross value of assets and liabilities
Related assets and liabilities subject to master netting
agreements
Net exposure
5
(5)
–
(20)
5
(15)
4
(4)
–
(47)
4
(43)
Net
£m
–
3
3
(18)
(15)
(18)
3
(15)
At 31 July 2023
Fair value
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
123
252
375
247
622
256
366
622
1
4
5
–
5
–
5
5
(1)
(1)
(2)
(18)
(20)
(18)
(2)
(20)
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
Contract or
underlying
nominal
amount
£m
Assets
£m
Liabilities
£m
141
226
367
615
982
269
713
982
3
1
4
–
4
–
4
4
(5)
(2)
(7)
(40)
(47)
(20)
(27)
(47)
At 31 July 2022
Fair value
Net
£m
(2)
(1)
(3)
(40)
(43)
(20)
(23)
(43)
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 177
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
Fair value hedges
Interest rate risk
Interest rate/
foreign currency risk
Interest rate swaps – EUR
Cross-currency swaps (EUR:GBP)
Net investment hedges
Foreign currency risk
Cross-currency swaps (EUR:USD)
Cash-flow hedges
Foreign currency risk
Cross-currency swaps (GBP:USD)
Foreign exchange contracts (EUR:GBP)
Foreign exchange contracts (EUR:USD)
Foreign exchange contracts (USD:GBP)
Foreign exchange contracts (GBP:CZK)
Foreign exchange contracts (EUR:AUD)
– Notional amount (£m)
– Average spread over three-month EURIBOR
– Notional amount (£m)
– Average exchange rate
– Average spread over three-month GBP
SONIA
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
– Notional amount (£m)
– Average exchange rate
Maturity at 31 July 2023
Maturity at 31 July 2022
Up to
one year
One to five years
More than
five years
Up to
one year
One to five years
More than
five years
–
–
–
–
–
–
–
–
–
41
0.7842
30
1.0939
18
1.2269
10
27.7919
7
1.6603
–
–
254
0.845
1.860%
–
–
247
1..2534
8
0.8893
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
336
1.015%
–
–
–
354
1.0773
–
–
28
0.8323
77
4.1785
16
1.3273
6
30.2988
6
1.5226
–
–
254
0.845
1.860%
–
–
261
1.2534
8
1.1676
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 July 2023, the Group had forward foreign exchange contracts with a nominal value of £123m (FY2022: £141m) 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 19 September 2024. 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 176.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 178
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
At fair value
through profit
or loss
£m
At amortised
cost
£m
Basis for
determining
fair value
As at 31 July 2023
Notes
At fair value
through OCI
£m
Total
carrying
value
£m
Total
fair value
£m
As at 31 July 2022
Notes
Basis for
determining
fair value
At amortised
cost
£m
At fair value
through profit
or loss
£m
At fair value
through OCI
£m
Total
carrying
value
£m
Total
fair value
£m
Financial assets
Other investments
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
14
14
18
16
20
18
18
18
20
A
F
B
B/C
C
B
B/D
E
E
C
–
–
285
726
–
4
13
–
–
5
347
7
–
–
–
351
20
285
726
5
351
20
285
726
5
1,011
22
354
1,387
1,387
(476)
(3)
(534)
(117)
–
(1,130)
–
–
–
–
(20)
(20)
–
–
–
–
–
–
(476)
(476)
(3)
(534)
(117)
(20)
(3)
(520)
(117)
(20)
(1,150)
(1,136)
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
14
14
18
16
20
17
18
18
18
20
A
F
A
B/C
C
B
D
D
E
C
–
–
506
807
–
4
19
550
–
4
364
8
–
–
–
368
27
368
27
1,056
1,056
807
4
807
4
1,313
577
372
2,262
2,262
(728)
(509)
(538)
(119)
–
(1,894)
–
–
–
–
(47)
(47)
–
–
–
–
–
–
(728)
(509)
(538)
(119)
(47)
(728)
(509)
(544)
(119)
(47)
(1,941)
(1,947)
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).
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).
B Carrying value is assumed to be a reasonable approximation to fair value for all of these assets
F The fair value of instruments is estimated by using unobservable inputs to the extent that
and liabilities (Level 2 as defined by IFRS 13).
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).
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
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
179
22. COMMITMENTS
At 31 July 2023, commitments, comprising bonds and guarantees arising in the normal course of
business, amounted to £207m (FY2022: £234m), including pension commitments of £56m
(FY2022: £56m) and charitable funding commitments for the Smiths Group Foundation of £10m
(FY2022: Nil). In addition, the Group has committed expenditure on capital projects amounting to
£13m (FY2022: £15m).
23. PROVISIONS AND CONTINGENT LIABILITIES
Trading
Non-headline and legacy
Total
At 31 July 2021
Foreign exchange rate movements
Provision charged
Provision released
Unwind of provision discount
Utilisation
At 31 July 2022
Comprising:
Current liabilities
Non-current liabilities
At 31 July 2022
Foreign exchange rate movements
Provision charged
Provision released
Unwind of provision discount
Utilisation
At 31 July 2023
Comprising:
Current liabilities
Non-current liabilities
At 31 July 2023
John Crane,
Inc.
litigation
£m
Titeflex
Corporation
litigation
£m
Other
£m
212
30
6
–
2
(21)
229
34
195
229
(12)
13
–
6
(32)
204
27
177
204
47
6
2
–
1
(4)
52
14
38
52
(3)
–
(7)
1
(2)
41
13
28
41
17
2
26
–
–
(2)
43
30
13
43
–
18
(14)
–
(14)
33
24
9
33
£m
11
1
6
(3)
–
(4)
11
10
1
11
–
5
(4)
–
(4)
8
6
2
8
£m
287
39
40
(3)
3
(31)
335
88
247
335
(15)
36
(25)
7
(52)
286
70
216
286
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 2023, the Group had warranty and product liability provisions of £6m (FY2022: £7m).
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 alert line, 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.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 180
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 products,
primarily packing and gaskets. The asbestos was encapsulated within these products in such a
manner that causes JCI to understand, based on tests conducted on its behalf, that the products
were safe. JCI ceased manufacturing products containing asbestos in 1985.
JCI continues to actively monitor the conduct and effect of its current and expected asbestos
litigation, including the most efficacious presentation of its ‘safe product’ defence, and intends to
continue to resist these asbestos claims based upon this defence. The table below summarises
the JCI claims experience over the last 40 years since the start of this litigation:
Year ended
31 July 2023
Year ended
31 July 2022
Year ended
31 July 2021
Year ended
31 July 2020
Year ended
31 July 2019
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 (US$m) since
1979
310,000
20,000
306,000
22,000
305,000
22,000
297,000
25,000
285,000
38,000
154
190
149
175
149
175
149
175
144
168
The number of claims outstanding at 31 July 2023 reflected the benefit of 4,000 (FY2022: 1,000)
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 higher than
previous periods, principally due to the resolution of outstanding verdicts from previous periods.
Trial delays arising from the COVID-19 pandemic have largely abated and trial activity has
returned 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 (FY2022:
ten-year) time horizon has been used based on past experience regarding significant changes in
the litigation environment that have occurred every few years and on the amount of time taken in
the past for some of those changes to impact the broader asbestos litigation environment.
The rate of future claims filed has been estimated using well-established tables of asbestos
incidence projections to determine the likely population of potential claimants, and JCI’s past
experience to determine what proportion of this population will make a claim against JCI. The JCI
products generally referred to in claims had industrial and marine applications. As a result, the
incidence curve used for JCI projections excludes construction workers, and is a composite of the
curves that predict asbestos exposure-related disease from shipyards and other occupations.
This is consistent with JCI’s litigation history.
The rate of successful resolution of claims and the average amount of any judgements awarded
are projected based on the past history of JCI claims, since this is the best available evidence,
given JCI’s unusual strategy of defending all claims.
The future trend of legal costs is estimated based on JCI’s past experience, adjusted to reflect the
assumed levels of claims and trial activity, since the number of trials is a key driver of legal costs.
John Crane, Inc. litigation insurance recoveries
While JCI has certain excess liability insurance, JCI has met defence costs directly. The
calculation of the provision does not take account of any potential recoveries from insurers.
John Crane, Inc. litigation provision 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, including the unpredictability of jury verdicts.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 £180m and future spend at the 95th percentile of £245m
(FY2022: £203m and £268m, respectively). Statistical analysis of the distribution of these
outcomes indicates that there is a 50% probability that the total future spend will fall between
£228m and £257m (FY2022: between £239m and £263m), compared to the gross provision value
of £246m (FY2022: £258m).
John Crane, Inc. litigation provision history
The JCI asbestos litigation provision of £204m (FY2022: £229m) is a discounted pre-tax provision
using discount rates, being the risk-free rate on US debt instruments for the appropriate period.
The deferred tax asset related to this provision is shown within the deferred tax balance (note 6).
The JCI asbestos litigation provision has developed over the last five years as follows:
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
Year ended
31 July 2020
£m
Year ended
31 July 2019
£m
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
246
(42)
204
(51)
153
28
(15)
13
2
(7)
8
(32)
(2)
7
(27)
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)
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.
181
The projections use a ten-year time horizon. Reducing the time horizon by one year would reduce
the provision by £16m (FY2022: £18m) and reducing it by five years would reduce the provision by
£87m (FY2022: £97m).
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 £13m (FY2022: £15m) and
extending it by five years would increase the pre-tax provision by £48m (FY2022: £56m).
However, there are also reasonable scenarios that, given certain recent events in the US asbestos
litigation environment, would result in no additional asbestos litigation for JCI beyond ten years.
At this time, how the asbestos litigation environment will evolve beyond ten years is not
reasonably estimable.
John Crane, Inc. contingent liabilities
Provision has been made for future defence costs and the cost of adverse judgements expected to
occur. JCI’s claims experience is significantly impacted by other factors which influence the US
litigation environment. These can include: changing approaches on the part of the plaintiffs’ bar;
changing attitudes amongst the judiciary at both trial and appellate levels; and legislative and
procedural changes in both the state and federal court systems. As a result, whilst the Group
anticipates that asbestos litigation will continue beyond the period covered by the provision, the
uncertainty surrounding the US litigation environment beyond this point is such that the costs cannot
be reliably estimated.
Although the methodology used to calculate the JCI litigation provision can in theory be applied to
show claims and costs for longer periods, the Directors consider, based on advice from Bates
White LLC, that the level of uncertainty regarding the factors used in estimating future costs is
too great to provide for reasonable estimation of the numbers of future claims, the nature of such
claims or the cost to resolve them for years beyond the ten-year time horizon.
Titeflex Corporation
Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of
claims in the US from insurance companies seeking recompense on a subrogated basis for the
effects of damage allegedly caused by lightning strikes in relation to its flexible gas piping
product. It has also received product liability claims regarding this product in the US, some in the
form of purported class actions. Titeflex Corporation believes that its products are a safe and
effective means of delivering gas when installed in accordance with the manufacturer’s
instructions and local and national codes. However, some claims have been settled on an
individual basis without admission of liability. Equivalent third-party products in the US
marketplace face similar challenges.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 £3m (FY2022: £5m), with an
equivalent fall for a reduction of 10%. If the assumed amount of those settlements increased 10%,
the provision would rise by £2m (FY2022: £4m), 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 prior year.
Provision is made for the best estimate of the expected expenditure related to the defence and/or
resolution of such matters. There is an inherent risk in legal proceedings that the outcome may
be unfavourable to the Group, and as such there can be no guarantee that such provisions (which
may be subject to potentially material revision from time to time) will be sufficient.
Reorganisation
At 31 July 2023, there were reorganisation provisions of £7m (FY2022: £1m) relating to the various
restructuring programmes that are expected to be utilised in the next 18 months.
Property
At 31 July 2023, there were provisions of £10m (FY2022: £10m) related to actual and potential
environmental issues for sites currently or previously occupied by Smiths operations.
182
Titeflex Corporation litigation provision
The continuing progress of claims and the pattern of settlement, together with recent
marketplace 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 £41m (FY2022: £52m) 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 2023
£m
31 July 2022
£m
78
(37)
41
(9)
32
87
(35)
52
(12)
40
Titeflex Corporation litigation provision history
A credit of £8m (FY2022: £2m charge) 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 lower gross provision value has been
principally driven by an increase in the discount factor deriving 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 £2m (FY2022: £3m) lower, and if the benefit
were 0.5% lower, the provision would be £2m (FY2022: £4m) higher.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 183
In connection with the sale of Smiths Medical to ICU Medical, Inc., 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
US$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 13,008,032 ordinary shares of 37.5p each were repurchased during the period,
for a total consideration of £206,142,265, of which 84,195 shares with a value of £1,430,464 were
yet to settle and be cancelled. In total since the start of the Programme, 47,290,261 shares have
been repurchased, for a total consideration of £718,939,264, representing 11.93% of the called-up
ordinary share capital outstanding at the start of the Programme.
A further 1,379,697 ordinary shares have been repurchased during the period of 1 August
2023 to 15 September 2023, bringing the total number of shares repurchased to 48,669,958.
At 15 September 2023, the Group had paid £737m of the expected £742m payable under the
Programme, with the remaining £5m expected to be utilised within the next two weeks.
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 2023, the Trust held 1,742,929 (FY2022: 618,662)
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.
24. SHARE CAPITAL
Number of shares
Average number
of shares
Issued
capital
£m
Consideration
£m
Ordinary shares of 37.5p each
Total share capital at 31 July 2021
Issue of new equity shares – exercise of
share options
Share buybacks
Total share capital at 31 July 2022
Share buybacks
Shares held in Employee Benefit Trust
396,377,114
396,350,586
131,942
(34,152,897)
362,356,159
(13,053,169)
–
125,354
(9,797,729)
386,678,211
(32,555,024)
(1,232,067)
Total share capital at 31 July 2023
349,302,990
352,891,120
149
–
(13)
136
(5)
131
2
(511)
(207)
SHARE CAPITAL STRUCTURE
As at 31 July 2023, the Company’s issued share capital was 349,302,990 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 2023, 3,335,964 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 2022 Annual General Meeting. At the 2023 AGM, it will be proposed that the Directors be
granted new authorities to allot and buy back shares.
SHARE BUYBACKS
As at 15 September 2023 (the latest practicable date for inclusion in this report), the Company had
an unexpired authority to repurchase ordinary shares up to a maximum of 10.7 million ordinary
shares (FY2022: 59 million). As at 15 September 2023, the Company did not hold any shares in
treasury. Any ordinary shares purchased may be cancelled or held in treasury.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 184
25. DIVIDENDS
The following dividends were declared and paid in the period:
Ordinary final dividend of 27.3p (FY2022: 26.0p) paid 19 November 2022
Ordinary interim dividend of 12.9p (FY2022: 12.3p) paid 17 May 2023
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
97
46
143
103
47
150
The FY2023 ratio of net debt to headline EBITDA of 0.7 (FY2022: 0.3) 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 2023, the Group had a credit rating of BBB+/Baa2 (FY2022: BBB+/Baa2) with
Standard & Poor’s and Moody’s respectively.
In the current year a total dividend of 40.2p has been paid, comprising a final dividend of 27.3p paid
in respect of FY2022 and an interim dividend of 12.9p paid in respect of FY2023. In the prior year a
total dividend of 38.3p was 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.
The Board has a progressive dividend policy for future payouts, 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.
The final dividend for the year ended 31 July 2023 of 28.7p per share was recommended by the
Board on 21 September 2023 and will be paid to shareholders on 24 November 2023, subject to
approval by the shareholders. This dividend is payable to all shareholders on the register of
members at 6.00pm on 20 October 2023 (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:
– Winterflood Client Nominees Limited (Buck Trustees Dividend Waived Ltd)
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 (FY2022: nil) shares to the Trust, the
Trust purchased 1,553,558 shares (FY2022: 1,069,998 shares) in the market for a consideration
of £25m (FY2022: £16m) and redeemed 429,291 shares (FY2022: 777,700) to employees for a
cumulative option cost of £1m (FY2022: £nil). At 31 July 2023, the Trust held 1,742,929 (FY2022:
618,662) 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 FY2023 ROCE was 15.7% (FY2022: 14.2%); 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.
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 (FY2022: £8m))
Cash-flow hedge reserve
31 July 2023
£m
31 July 2022
£m
(188)
–
(188)
(205)
3
(202)
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 (FY2022: £22m), of which the most
significant balance is in John Crane Japan Inc., which represented £19m (FY2022: £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 (FY2022: £5m), and cash inflows from
operating activities of £2m (FY2022: £5m). It paid dividends of £1m (FY2022: £1m) and tax of £2m
(FY2022: £1m). At 31 July 2023, the company contributed £53m (FY2022: £57m) of net assets to
the Group.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 185
27. ACQUISITIONS
On 5 January 2023, the Group’s Interconnect division acquired 100% of the share capital of
Plastronics Sockets & Connectors (Plastronics) for consideration of £25m. The acquisition was
financed using the Group’s own cash resources. Plastronics is a leading supplier of burn-in test
sockets and patented spring probe contacts for the semiconductor test market segment. This
acquisition strengthens the existing portfolio of Smiths Interconnect and provides cross-selling
opportunities in Asia and the US.
The intangible assets recognised on acquisition comprise customer relationships, intellectual
property and technology. Goodwill represents the expected synergies from the strategic fit of the
acquisition and the value of the expertise in the assembled workforce. From the date of acquisition
to 31 July 2023, Plastronics contributed £8m to revenue and less than £1m to profit before taxation
and amortisation. If the Group had acquired this business from the beginning of the financial year,
the acquisition would have contributed £15m to revenue and less than £1m to profit before taxation.
Provisional balances at the date of acquisition have been provided in the table below. The amounts
remain provisional due to the fair value of the deferred consideration not being finalised.
Non-current assets
Current assets
Current liabilities
Net assets acquired
– acquired intangible assets
– plant and machinery
– inventory
– trade and other receivables
– trade and other payables
Goodwill on current period acquisitions
Cash paid during the period
Deferred consideration
Total consideration
Plastronics
£m
13
2
3
3
(3)
18
7
22
3
25
POST BALANCE SHEET DATE ACQUISITION
On 30 August 2023, the Group acquired the business of Heating & Cooling Products (HCP), for
consideration of approximately £65m, financed using the Group’s own cash resources. HCP is a
US-based manufacturer of Heating, Ventilation & Air Conditioning (HVAC) solutions. This
acquisition will further expand the Flex-Tek division’s presence in the North American HVAC
market, enabling Smiths to serve customers with an even broader product range.
The acquisition has historically contributed £47m of annualised revenue and £6m of annualised
profit before taxation. Due to the short time between the completion of the acquisition and the
announcement date, it has not been possible to complete the determination of the fair values of
the acquired balance sheet.
28. CASH-FLOW
CASH-FLOW FROM OPERATING ACTIVITIES
Year ended 31 July 2023
Year ended 31 July 2022
Headline
£m
Non-headline
£m
Total
£m
Headline
£m
Non-headline
£m
Operating profit:
– continuing operations
– discontinued operations
Amortisation of intangible assets
Impairment of intangible 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
(Gain)/loss on fair value of
contingent consideration
Share-based payment expense
Retirement benefits*
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
501
–
9
–
–
42
32
–
–
13
5
(88)
(10)
10
(2)
512
(73)
36
(92)
383
383
–
(98)
6
52
–
–
–
–
–
6
–
(7)
(1)
(53)
39
(32)
(88)
(2)
–
–
(90)
(90)
–
403
6
61
–
–
42
32
–
6
13
(2)
(89)
(63)
49
(34)
424
(75)
36
(92)
293
293
–
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
* The retirement benefits non-headline operating activities principally relate to employer contributions to legacy defined
benefit and post-retirement healthcare plans.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 186
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 2023
Year ended 31 July 2022
Headline
£m
Non-headline
£m
Total
£m
Headline
£m
Non-headline
£m
Total
£m
383
(90)
293
274
(42)
232
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 2023
£m
Year ended
31 July 2022
£m
178
(22)
(7)
(909)
–
(760)
130
–
1,331
(937)
16
540
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
Free cash-flow
Exclude:
Repayment of lease liabilities
Interest paid
Interest received
Tax paid
Operating cash-flow
(81)
(36)
2
36
73
(36)
92
433
–
–
–
–
–
–
–
(90)
(81)
(36)
2
178
36
73
(36)
92
343
(71)
(34)
3
34
46
(13)
79
318
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:
(71)
(34)
3
130
34
46
(13)
79
–
–
–
–
–
–
–
(42)
276
APM term
Definition and purpose
HEADLINE CASH CONVERSION
Headline operating cash conversion for continuing operations is calculated as follows:
CAPITAL EMPLOYED
Capital employed is a non-statutory measure of invested resources. It
comprises statutory net assets and is adjusted as follows:
Year ended 31 July 2023
Year ended 31 July 2022
As reported
£m
Restructuring
costs
£m
Pro-forma
excluding
restructuring
costs
£m
As reported
£m
Restructuring
costs
£m
Headline operating profit
Headline operating cash-flow
Headline operating cash
conversion
501
433
86%
–
–
501
433
86%
417
318
76%
–
14
Pro-forma
excluding
restructuring
costs
£m
417
332
80%
– To add goodwill recognised directly in reserves in respect of subsidiaries
acquired before 1 August 1998;
– To eliminate the Group's investment in ICU Medical, Inc. equity and
deferred consideration contingent on the future share price performance
of ICU Medical, Inc; and
– To eliminate post-retirement benefit assets and liabilities and non-
headline litigation provisions related to John Crane, Inc. and Titeflex
Corporation, both net of deferred tax, and net debt.
It is used to monitor capital allocation within the Group. See below for a
reconciliation from net assets to capital employed.
CAPITAL EXPENDITURE Comprises additions to property, plant and equipment, capitalised
development and other intangible assets, excluding assets acquired
through business combinations: see note 1 for an analysis of capital
expenditure. This measure quantifies the level of capital investment into
ongoing operations.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
OPERATING CASH-
FLOW
Comprises free cash-flow and excludes cash-flows relating to the
repayment of lease liabilities, interest and taxation. The measure shows
how cash is generated from operations in the Group. A reconciliation of
operating cash-flow is shown in note 28.
187
DIVISIONAL HEADLINE
OPERATING PROFIT
(DHOP)
FREE CASH-FLOW
GROSS DEBT
HEADLINE
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.
HEADLINE EBITDA
EBITDA is a widely used profit measure, not defined by IFRS, being
earnings before interest, taxation, depreciation and amortisation. A
reconciliation of headline operating profit to headline EBITDA is shown in
the note below.
NET DEBT
NON-HEADLINE
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.
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
130. 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
(GHG) EMISSIONS
REDUCTION
GHG reduction is calculated as the percentage change in normalised
Scope 1 & 2 GHG emissions. Normalised is calculated as tCO2e per £m of
revenue. This measure is used to monitor environmental performance.
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 188
KPI term
Definition and purpose
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
biannual 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 and acquisitions. Organic growth is used by
the Group to aid comparability when monitoring performance.
ORGANIC
REVENUE GROWTH
(REMUNERATION)
Organic revenue growth (remuneration) is compounded annualised growth
in revenue after excluding the impact of foreign exchange and acquisitions.
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
R&D CASH COSTS AS A
% OF SALES
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 (including capitalised R&D, R&D directly charged to the P&L and
customer-funded projects) 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.
RECORDABLE
INCIDENT RATE (RIR)
Recordable Incident Rate is calculated as the number of recordable
incidents – where an incident requires medical attention beyond first aid
– per 100 colleagues, per year across Smiths. This measure is used by the
Group to monitor health and safety performance.
CAPITAL EMPLOYED
Capital employed is a non-statutory measure of invested resources. It comprises statutory net
assets adjusted to add goodwill recognised directly in reserves in respect of subsidiaries acquired
before 1 August 1998 of £478m (FY2022: £478m), 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
Capital employed
RETURN ON CAPITAL EMPLOYED (ROCE)
Headline operating profit for previous 12 months – continuing
operations
Average capital employed – continuing operations (excluding
investment in ICU Medical, Inc. equity)
ROCE
Notes
31 July 2023
£m
31 July 2022
£m
2,406
2,721
8
23
23
14
14
18
Notes
1
478
(89)
31
153
32
(347)
(13)
387
478
(194)
57
172
40
(364)
(19)
150
3,038
3,041
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
501
3,196
15.7%
417
2,940
14.2%
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 calculated as follows:
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 FY2023.
189
Headline earnings before interest, tax, depreciation and amortisation (headline EBITDA)
Company name
Headline operating profit
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
Ratio of net debt to headline EBITDA
Headline EBITDA
Net debt
Ratio of net debt to headline EBITDA
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
Notes
12
13
10
10
Notes
18
501
42
32
2
7
584
417
38
30
3
7
495
Year ended
31 July 2023
£m
Year ended
31 July 2022
£m
584
387
0.7
495
150
0.3
EIS Group Plc
Flexibox International Limited
Flex-Tek Group Limited
Graseby Limited
SI Properties Limited
SITI 1 Limited
Smiths Detection Group Limited
Smiths Detection Investments Limited
Smiths Finance Limited
Smiths Group Finance EU Limited
Smiths Group Finance US Limited
Smiths Group Innovation Limited
Smiths Interconnect Group Limited
Smiths Pensions Limited
30. POST BALANCE SHEET EVENTS
Details of the proposed final dividend announced since the end of the reporting period are given in
note 25.
On 30 August 2023, the Group completed the acquisition of HCP, see note 27 for details.
Company number
61407
394688
11545405
894638
160881
4257042
5138140
5146644
7888063
10440573
10440608
10953689
6641403
2197444
NOTES TO THE ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 190
UNAUDITED GROUP FINANCIAL RECORD 2019–2023
Revenue
Headline operating profit
Headline profit before tax
Revenue
Headline operating profit
Headline profit before tax
Income statement metrics – headline*
Continuing operations
Discontinued operations
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 2023
£m
Year ended
31 July 2022
£m
Year ended
31 July 2021
£m
Year ended
31 July 2020
£m
Year ended
31 July 2019
£m
3,037
501
466
–
–
–
3,037
403
360
232
(387)
2,384
3,196
16.5
26.0
15.7
11.3
433
86
178
51.0
97.1
41.6
2.3
2,566
417
376
356
66
65
2,566
117
103
1,035
(150)
2,699
2,940
16.5
27.2
14.2
10.0
318
76
130
35.9
82.5
39.60
2.1
2,406
372
332
849
177
176
2,406
326
240
285
(1,018)
2,402
4,165
16.9
27.1
13.2
11.6
630
125
383
96.6
93.1
37.70
2.5
2,548
327
278
918
184
180
2,548
241
133
267
(1,141)
2,373
4,315
14.7
26.2
11.8
10.8
575
123
273
68.9
84.8
35.00
2.4
2,498
427
376
874
147
144
2,498
326
304
227
(1,197)
2,360
3,972
17.0
25.9
14.4
12.3
474
83
234
59.1
96.8
45.90
2.1
* 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 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.
UNAUDITED GROUP FINANCIAL RECORD 2019–2023SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS UNAUDITED US DOLLAR PRIMARY STATEMENTS
191
UNAUDITED SUPPLEMENTARY CONSOLIDATED INCOME STATEMENT – US DOLLAR TRANSLATION
Year ended 31 July 2023
Year ended 31 July 2022
CONTINUING OPERATIONS
Revenue
Operating costs
Operating profit/(loss)
Interest income
Interest expense
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
Headline
$m
Non-headline
(note 3)
$m
3,680
(3,073)
607
44
(86)
–
–
(42)
565
(147)
418
–
418
417
–
1
418
–
(119)
(119)
–
(8)
(10)
8
(10)
(129)
(16)
(145)
7
(138)
(145)
7
–
(138)
Total
$m
3,680
(3,192)
488
44
(94)
(10)
8
(52)
436
(163)
273
7
280
272
7
1
280
79.4c
77.3c
78.9c
76.8c
Headline
$m
Non-headline
(note 3)
$m
3,377
(2,828)
549
18
(72)
–
–
(54)
495
(137)
358
64
422
355
64
3
422
–
(395)
(395)
–
–
26
9
35
(360)
18
(342)
1,280
938
(342)
1,280
–
938
Total
$m
3,377
(3,223)
154
18
(72)
26
9
(19)
135
(119)
16
1,344
1,360
13
1,344
3
1,360
351.5c
3.7c
350.0c
3.7c
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.
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 192
UNAUDITED US DOLLAR PRIMARY STATEMENTS
CONTINUED
UNAUDITED SUPPLEMENTARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – US DOLLAR TRANSLATION
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 2023
$m
Year ended
31 July 2022
$m
280
1,360
(138)
39
(22)
(121)
15
2
17
(122)
–
(122)
(226)
54
55
(1)
54
(22)
–
(83)
(105)
(108)
7
(101)
363
(258)
105
(101)
1,259
1,258
1
1,259
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS UNAUDITED US DOLLAR PRIMARY STATEMENTS
CONTINUED
193
31 July 2023
$m
31 July 2022
$m
168
469
31
302
2,337
(242)
3,065
28
3,093
166
444
23
286
2,612
(246)
3,285
27
3,312
UNAUDITED SUPPLEMENTARY CONSOLIDATED BALANCE SHEET – US DOLLAR TRANSLATION
31 July 2023
$m
31 July 2022
$m
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
CURRENT ASSETS
INVENTORIES
Current tax receivable
Trade and other receivables
Cash and cash equivalents
Financial derivatives
TOTAL ASSETS
CURRENT LIABILITIES
Financial liabilities
– borrowings
– lease liabilities
– financial derivatives
Provisions for liabilities and charges
Trade and other payables
Current tax payable
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
Merger reserve
Retained earnings
Hedge reserve
Total shareholders’ equity
Non-controlling interest equity
TOTAL EQUITY
1,956
318
135
477
251
122
96
3,355
819
60
993
366
6
2,244
5,599
(4)
(33)
(3)
(90)
(930)
(95)
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)
(1,155)
(1,702)
(687)
(117)
(23)
(278)
(136)
(4)
(55)
(51)
(1,351)
(2,506)
3,093
(655)
(110)
(24)
(301)
(140)
(4)
(54)
(56)
(1,344)
(3,046)
3,312
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 194
UNAUDITED SUPPLEMENTARY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – US DOLLAR TRANSLATION
At 31 July 2022
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:
Purchase of shares by Employee Benefit Trust
Share buybacks
Dividends:
– equity shareholders
Share-based payment
At 31 July 2023
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
Share capital
and share
premium
$m
Other
reserves
$m
610
–
–
33
–
33
–
(6)
–
–
309
–
–
18
–
18
–
6
–
–
637
333
Share capital
and share
premium
$m
Other
reserves
$m
712
–
–
(88)
–
(88)
3
–
–
(17)
–
–
610
336
–
–
(44)
–
(44)
–
–
–
17
–
–
309
Retained
earnings
$m
1,617
279
(99)
999
(22)
1,157
(29)
(251)
(173)
16
2,337
Retained
earnings
$m
2,608
1,357
(22)
(377)
(83)
875
–
(21)
1
(672)
(197)
18
2,612
Hedge
reserve
$m
(246)
–
–
(13)
17
4
(242)
Hedge
reserve
$m
(317)
–
–
172
(101)
71
–
–
–
–
–
–
(246)
Equity
shareholders’
funds
$m
Non-controlling
interest
$m
3,285
279
(99)
41
(4)
217
(29)
(251)
(173)
16
3,065
27
1
–
(1)
–
–
1
28
Equity
shareholders’
funds
$m
Non-controlling
interest
$m
3,339
1,357
(22)
(337)
(184)
814
3
(21)
1
(672)
(197)
18
3,285
29
3
–
(5)
–
(2)
–
–
–
–
–
–
27
Total
equity
$m
3,312
280
(99)
40
(4)
217
(29)
(251)
(172)
16
3,093
Total
equity
$m
3,368
1,360
(22)
(342)
(184)
812
3
(21)
1
(672)
(197)
18
3,312
UNAUDITED US DOLLAR PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS UNAUDITED SUPPLEMENTARY CONSOLIDATED CASH-FLOW STATEMENT – US DOLLAR TRANSLATION
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
Receipt of capital from non-controlling interest
Acquisition of businesses
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
195
Year ended
31 July 2023
$m
Year ended
31 July 2022
$m
355
367
(25)
(8)
(64)
2
1
(27)
(8)
(129)
–
(251)
(29)
–
–
(173)
(44)
(639)
(11)
(29)
(11)
(76)
4
–
–
1,751
1,639
3
(672)
(21)
1
(1)
(197)
(50)
(388)
30
(1,147)
(1,295)
(921)
1,285
–
2
366
225
141
366
–
366
711
563
63
(52)
1,285
295
991
1,286
(1)
1,285
UNAUDITED US DOLLAR PRIMARY STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 196
UNAUDITED GROUP US DOLLAR FINANCIAL RECORD 2019–2023
Income statement metrics – headline*
Continuing operations
Discontinued operations
Revenue
Headline operating profit
Headline profit before tax
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
Year ended
31 July 2023
$m
Year ended
31 July 2022
$m
Year ended
31 July 2021
$m
Year ended
31 July 2020
$m
Year ended
31 July 2019
$m
3,680
607
565
–
–
–
3,680
488
436
280
(497)
3,065
4,109
16.5
26.0
15.7
10.9
525
86
216
61.8
3,377
549
495
468
87
86
3,377
154
135
1,362
(183)
3,285
3,578
16.5
27.2
14.2
9.9
829
76
171
47.2
117.7
108.6
50.4
2.3
52.1
2.1
3,264
504
450
1,152
240
239
3,264
442
325
387
(1,415)
3,339
5,790
16.9
27.1
13.2
12.2
855
125
520
131.1
126.3
51.1
2.5
3,216
412
351
1,159
232
227
3,216
304
169
337
3,218
550
484
1,126
189
185
3,218
420
391
291
(1,495)
3,107
5,652
(1,462)
2,882
4,852
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
107.0
124.7
44.2
2.4
59.1
2.1
* 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 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 STATEMENTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SMITHS GROUP PLC COMPANY ACCOUNTS
197
SMITHS GROUP PLC COMPANY ACCOUNTS
COMPANY BALANCE SHEET
Notes
31 July 2023
£m
31 July 2022
£m
Notes
31 July 2023
£m
31 July 2022
£m
NON-CURRENT ASSETS
Right of use assets
Investments
Loans due from subsidiaries
Retirement benefit assets
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
Loans due to subsidiaries
Provisions for liabilities and charges
Retirement benefit liabilities
Financial derivatives
TOTAL LIABILITIES
NET ASSETS
2
3
3
10
5
7
9
6
7
9
7
7
8
10
9
–
2,431
2,447
195
5,073
67
–
98
6
171
5,244
(2,180)
–
(6)
(2,186)
(557)
–
(5)
(1)
(40)
(18)
(621)
(2,807)
2,437
5
2,422
561
309
3,297
62
5
770
9
846
4,143
(588)
(1)
(29)
(618)
(545)
(5)
–
(2)
(47)
(20)
(619)
(1,237)
2,906
SHAREHOLDERS' EQUITY
Called up share capital
Share premium account
Capital redemption reserve
Other reserves
Profit and loss account
TOTAL EQUITY
11
11
11
11
11
131
365
24
181
1,736
2,437
136
365
19
181
2,205
2,906
The Company’s loss for the period was £22m (FY2022: £1,257m profit).
The accounts on pages 197 to 204 were approved by the Board of Directors on 25 September 2023
and were signed on its behalf by:
PAUL KEEL
Chief Executive Officer
CLARE SCHERRER
Chief Financial Officer
Smiths Group plc – registered number 137013
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
198
SMITHS GROUP PLC COMPANY ACCOUNTS
CONTINUED
COMPANY STATEMENT OF CHANGES IN EQUITY
At 31 July 2022
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:
Purchase of shares by Employee Benefit Trust
Shares purchased under a buyback programme
Dividends paid to equity shareholders
Share-based payment
Total transactions with owners recognised in equity
At 31 July 2023
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
Share
capital
£m
136
–
–
–
–
–
(5)
–
–
(5)
131
Share
capital
£m
149
–
–
–
–
–
–
–
(13)
–
–
(13)
136
Share
premium
£m
365
–
–
–
–
–
–
–
–
–
365
Share
premium
£m
363
–
–
–
–
2
–
–
–
–
–
2
365
Capital
redemption
reserve
£m
19
–
–
–
–
–
5
–
–
5
24
Capital
redemption
reserve
£m
6
–
–
–
–
–
–
–
13
–
–
13
19
Other
reserves
£m
181
–
–
–
–
–
–
–
–
–
181
Other
reserves
£m
181
–
–
–
–
–
–
–
–
–
–
–
181
Retained
profit
£m
Shareholders’
equity
£m
2,205
(22)
(117)
30
(109)
(24)
(207)
(142)
13
(360)
1,736
2,906
(22)
(117)
30
(109)
(24)
(207)
(142)
13
(360)
2,437
Retained
profit
£m
Shareholders’
equity
£m
1,628
1,257
(23)
6
1,240
–
(16)
1
(511)
(150)
13
(663)
2,205
2,327
1,257
(23)
6
1,240
2
(16)
1
(511)
(150)
13
(661)
2,906
SMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 199
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
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 £40m (FY2022: £66m) 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 that match all or part of 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.
SMITHS GROUP PLC COMPANY ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 200
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 £40m (FY2022: £66m) 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 2023 the Company has recognised £195m of retirement benefit assets (FY2022: £309m),
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 remaining term of five months. 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.
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 135 to 143 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 135 to 143 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.
SMITHS GROUP PLC COMPANY ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
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 (FY2022: £0.1m).
Directors’ emoluments in the year amounted to £7m (FY2022: £4m). Further information is in the
Remuneration & People Committee Report on pages 98 to 110.
2. RIGHT OF USE ASSETS
Cost or valuation
At 31 July 2021
At 31 July 2022
Derecognition of right of use asset
At 31 July 2023
Depreciation
At 31 July 2021
Charge for the year
At 31 July 2022
Charge for the year
At 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
Properties
£m
8
8
(5)
3
2
1
3
–
3
–
5
6
3. INVESTMENTS AND LOANS DUE FROM SUBSIDIARIES
201
Cost or valuation
At 31 July 2021
Foreign exchange rate movements
Contribution through share options
Decrease in advances due from subsidiaries
At 31 July 2022
Foreign exchange rate movements
Contribution through share options
Increase in advances due from subsidiaries
At 31 July 2023
Provision for impairment
At 31 July 2021, 31 July 2022 and 31 July 2023
Net book value at 31 July 2023
Net book value at 31 July 2022
Net book value at 31 July 2021
Shares in
subsidiary
undertakings
£m
Loans
due from
subsidiaries
£m
2,419
–
8
–
2,427
–
9
–
2,436
5
2,431
2,422
2,414
612
21
–
(71)
562
(16)
–
1,902
2,448
1
2,447
561
611
Total
£m
3,031
21
8
(71)
2,989
(16)
9
1,902
4,884
6
4,878
2,983
3,025
Loans due to subsidiaries are offset against loans due from subsidiaries only to the extent that
there is a legal right of set-off. At 31 July 2023 £nil of loans payable are offset against loans
receivable (FY2022: £1,664m). 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 ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 202
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 205 to 210 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 2021
(Charge)/credit to income statement
Charge to equity
At 31 July 2022
(Charge)/credit to income statement
Charge to equity
At 31 July 2023
Share-
based
payment
£m
Retirement
benefit
obligations
£m
Losses
carried
forward
£m
3
(2)
(1)
–
–
–
–
(123)
51
6
(66)
(4)
30
(40)
89
(23)
–
66
(26)
–
40
Other
£m
3
(3)
–
–
–
–
–
Total
£m
(28)
23
5
–
(30)
30
–
The Company is part of a UK tax group including all its UK-based subsidiaries. The Company has
recognised deferred tax assets of £40m (FY2022: £66m) relating to revenue losses carried
forward. The recognition of these assets is dependent on the ability to recover them against the
unwind of other tax positions and forecast of the UK tax group. The treatment of these assets is
reviewed regularly.
At 31 July 2023 the Company has unrecognised deferred tax assets of £54m (FY22: £41m)
relating to losses £51m (FY22: £36m), share-based payments £1m (FY22: £3m) and other £2m
(FY22: £2m).
From 1 April 2023, the rate increases from 19% to 25%. Deferred tax, as at 31 July 2023 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
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
31 July 2023
£m
31 July 2022
£m
66
1
67
61
1
62
31 July 2023
£m
31 July 2022
£m
2,162
–
5
13
2,180
58
504
15
11
588
31 July 2023
£m
31 July 2022
£m
20
78
98
–
–
–
(557)
(557)
(459)
10
760
770
(1)
(5)
(504)
(545)
(1,055)
(285)
SMITHS GROUP PLC COMPANY ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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
31 July 2023
£m
31 July 2022
£m
–
–
557
–
557
505
1
548
1
1,055
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 US$800m
maturing on 5 May 2028.
8. PROVISIONS FOR LIABILITIES AND CHARGES
203
At 31 July 2022
Fair value
Foreign exchange contracts (not hedge
accounted)
Cross-currency swaps (fair value and net
investment hedges)
Total financial derivatives
Balance sheet entries
Comprising:
Non-current
Current
Total financial derivatives
Contract or underlying
nominal amount
£m
Assets
£m
Liabilities
£m
593
615
1,208
9
–
9
–
9
9
(9)
(40)
(49)
(20)
(29)
(49)
Net
£m
–
(40)
(40)
(20)
(20)
(40)
Disposals
At
31 July 2022
£m
Charged
against profit
£m
Utilisation
£m
At
31 July 2023
£m
2
(1)
–
1
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 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.
The debit to the income statement arising from change in fair value in the year was £16m
(FY2022: £28m).
9. DERIVATIVES
The tables below set out the nominal amount and fair value of derivative contracts held by
the Company:
At 31 July 2023
Fair value
Foreign exchange contracts (not hedge
accounted)
Cross-currency swaps (fair value and net
investment hedges)
Total financial derivatives
Balance sheet entries
Comprising:
Non-current
Current
Total financial derivatives
Contract or underlying
nominal amount
£m
Assets
£m
Liabilities
£m
647
247
894
6
–
6
–
6
6
(6)
(18)
(24)
(18)
(6)
(24)
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:
Net
£m
–
(18)
(18)
(18)
–
(18)
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
Comprising:
Retirement benefit assets
Retirement benefit liabilities
Net pension asset
31 July 2023
£m
31 July 2022
£m
2,367
(2,156)
(16)
195
(37)
(3)
(40)
155
195
(40)
155
3,067
(2,738)
(20)
309
(43)
(4)
(47)
262
309
(47)
262
SMITHS GROUP PLC COMPANY ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 204
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 2021
Shares purchased under a buyback programme
Issue of new equity shares – exercise of share options
Total share capital at 31 July 2022
Shares purchased under a buyback programme
Total share capital at 31 July 2023
Number of shares
396,377,114
(34,152,897)
131,942
362,356,159
(13,053,169)
349,302,990
Issued
capital
£m
Consideration
£m
149
(13)
–
136
(5)
131
(511)
2
(207)
At 31 July 2023, 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 £nil (FY2022: £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 £25m (2022: £16m) and £1m (2022: £nil) was received as a result of
employees exercising share options under the SAYE. At 31 July 2023 the Trust held 1,742,929
(2022: 618,662) ordinary shares.
Distributable profits
Smiths Group plc, the Parent Company of the Group, holds investments in subsidiaries and
operates as a financing entity for the Group. Its profits are derived from dividend receipts,
royalties, corporate recharges, and loan interests from its subsidiary companies. Prior to the
declaration of interim and final dividends to shareholders, the Board conducts a review of the
level of distributable profits of the Parent Company. This ensures the profits provide sufficient
coverage for dividend payments; see note 26 in the Group accounts for a discussion of capital
management and the factors which the Board considers when proposing dividends.
In accordance with the UK Companies Act 2006 Section 831(1), a public company may only make
a distribution if, after fulfilling this distribution, the amount of its net assets is not less than the
aggregate of its called-up share capital and non-distributable reserves as it appears in the
relevant accounts. The Company establishes what is realised and unrealised in accordance
with the guidance provided by ICAEW TECH 02/17BL and the requirements of UK law.
Profits available for distribution at 31 July 2023 and 31 July 2022 were comprised as follows:
Net assets
Less:
Issued share capital
Share premium
Capital redemption reserve
Other non-distributable reserves
Distributable profits
2023
£m
2,437
(131)
(365)
(24)
(1,054)
863
2022
£m
2,906
(136)
(365)
(19)
(1,058)
1,328
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 £31m lower (FY2022: £185m
lower) 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.
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
(FY2022: £56m). 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 ACCOUNTSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
SUBSIDIARY UNDERTAKINGS
A full list of the Group’s related undertakings as at 31 July 2023 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 (%)
UNITED KINGDOM
11-12 St James’s Square, London, SW1Y 4LB
Air Log Limited
CVE Trustee 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 Pensions Limited
Smiths Wolverhampton Limited
Sovos Limited
TI Corporate Services Limited
TI Group Limited
Ordinary
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
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
Name
Security
Direct (%)
Total (%)
205
Tigrup No. 7 Limited
Tigrup No. 14 Limited
TI Pension Trustee Limited
XDG Limited
XDG Services Limited
29 Dunsinane Avenue, Dundee, DD2 3QF
Flexible Ducting Limited
Trak Microwave 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 Kuwait Security Devices and
Systems, their Installation and Maintenance (LLC)*
*registered address of parent
Smiths Detection Limited
Smiths Detection-Watford Limited
Smiths Heimann Limited
No 1 Exchange, Market Street, Aberdeen, Scotland
John Crane Asset Management Solutions Limited
Unit 130 Centennial Park, Elstree, Hertfordshire,
WD6 3TJ
Hypertac Limited
Smiths Industries Industrial Group Limited
Smiths Interconnect Group Limited
Ordinary
Ordinary
Limited By Guarantee
Ordinary
Ordinary
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Cash share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
49
100
100
100
100
100
100
100
SUBSIDIARY UNDERTAKINGSSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 206
Name
Security
Direct (%)
Total (%)
Name
Security
Direct (%)
Total (%)
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
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.
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Class A Shares; Class B
Shares
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
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
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
75
100
100
100
100
100
100
100
100
100
100
100
100
100
60
100
100
100
100
100
100
SUBSIDIARY UNDERTAKINGSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Name
Security
Direct (%)
Total (%)
Name
Security
Direct (%)
Total (%)
207
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
Ordinary
Ordinary
Quotas
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
Shares
Ordinary
Ordinary
Ordinary
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
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 Delhi,
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, Bangalore, 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
Deloitte Offices, 6 Lapps Quay, Cork
Smiths Detection Ireland Limited
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary Shares
Ordinary
Ordinary
Ordinary
Ordinary
Class A Equity Shares;
Class B Equity Shares
Ordinary
Ordinary; Ordinary B;
Ordinary D; Series C
T53/54, Shannon Industrial Estate, Shannon, Co. Clare
John Crane (Ireland) Limited
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
48
100
100
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
SUBSIDIARY UNDERTAKINGSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 208
Name
Security
Direct (%)
Total (%)
Name
Security
Direct (%)
Total (%)
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
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
Ordinary
Ordinary
Quota Value of Shares
Ordinary
Cash Contribution
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Series A; Series B
Ordinary
Ordinary
100
100
100
100
100
70
100
100
100
100
100
100
100
100
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.
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
Equity Quotas
Partes Sociales
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common Shares
Ordinary
Common Shares
Ordinary
Ordinary
Ordinary
Shares
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
SUBSIDIARY UNDERTAKINGSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Name
Security
Direct (%)
Total (%)
Name
Security
Direct (%)
Total (%)
209
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
47, Kallang Pudding Road, #06-13, The Crescent,
Kallang, Singapore, 349318
Plastronics Asia Pte. LTD
SLOVAKIA
Dvorakovo nabrezie 10, Bratislava-mestska cast
Stare Mesto, 811 02
John Crane Slovakia SRO
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.
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Shares
Shares
Ordinary
Ordinary
Ordinary
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
815 Forestwood Drive, Romeoville, IL 60446
US Hose Corp
2001, 46th St. NE, Suite 188, Kansas City, Missouri,
64116
Smiths Interconnect Americas, Inc.
2601, Texas Drive, Irving, TX, 75062
Plas2, LLC
Plastronics H-Pin, LTD
Plastronics Socket Partners, LTD
2801 Red Dog Lane, Knoxville, TN 37914
Fulton Bellows LLC
Ordinary
Ordinary
Shares
Shares
Ordinary
Common Stock
Ordinary
Common Stock
Common Stock
Common Stock
Common Stock
Membership interests
Membership interests
Membership interests
Membership interests
The Corporation Trust Company, 1209 Orange Street,
Wilmington, DE, 19801
Asset And Intelligence Management Services, LLC
Ordinary Stock
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
49
100
100
100
100
100
100
100
100
100
100
100
100
100
SUBSIDIARY UNDERTAKINGSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OVERSEAS BRANCHES
The Company does not operate through any branches. Some Group subsidiary companies have
established branch operations outside the UK.
210
Name
Security
Direct (%)
Total (%)
Flexible Technologies, LLC
Flex-Tek Group (US) LLC
John Crane Group, LLC
John Crane Inc
John Crane USA, Inc
MDII Investments LLC
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, 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
ASSOCIATES
Ordinary Shares
Ordinary
Ordinary
Common; Preferred
Ordinary
Ordinary
Ordinary
Common Stock
Equity Interests
Membership interests
Ordinary
Common Stock
Common Stock
Ordinary
Ordinary Shares
Ordinary
Ordinary
Common Stock
Class A; Class B;
Common
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
50
SUBSIDIARY UNDERTAKINGSCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 2023
2024
(provisional)
26 September
19 October
20 October
3 November
16 November
16 November
24 November
22 March
4 April
5 April
19 April
13 May
31 July
September
FINANCIAL CALENDAR
Announcement of FY2023 Results
Dividend Ex-Dividend Date
Dividend Record Date
Last DRIP Election Date
Annual General Meeting
Q1 Trading Update
Dividend Payment Date
Announcement of FY2024 Interim Results
Interim Dividend Ex-Dividend Date
Interim Dividend Record Date
Last DRIP Election Date
Interim Dividend Payment Date
FY2024 financial year-end
Announcement of FY2024 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 www.shareview.co.uk.
Telephone:
T: + 44 (0)371 384 2943 (in the UK)
Lines open 8:30am to 5:30pm (UK time), Monday to Friday (excluding public holidays in England
and Wales).
For deaf and speech impaired customers, Equiniti welcomes calls via Relay UK. Please see
www.relayuk.bt.com for more information.
Write to:
Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA
Equiniti offers 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.
211
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).
ANNUAL GENERAL MEETING (AGM)
The 2023 Smiths Group plc AGM will be held at 11.00am on Thursday 16 November 2023 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, their appointed proxies and authorised corporate representatives have the right to
ask questions at the AGM relating to the business of the meeting. Such persons will also be able
to submit questions to the AGM in advance by emailing secretary@smiths.com by 6.00pm on
Thursday, 9 November 2023 or by asking questions in person at the AGM. Shareholders who
submit questions in advance of the AGM should include their full name and Shareholder
Reference Number in their email. The responses to the pre-submitted questions will be
answered at the AGM. Please note that where a number of similar questions have been asked, we
will group these accordingly.
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.
SHAREHOLDER INFORMATIONSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 212
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.
SHAREHOLDER INFORMATIONCONTINUEDSMITHS GROUP PLC ANNUAL REPORT FY2023OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS This publication has been printed on Revive 100 Offset
an FSC® certified paper from responsible sources by
Pureprint, a CarbonNeutral® company with FSC® chain
of custody and an ISO 14001 certified environmental
management system diverting 100% of dry waste from
landfill. The paper has been balanced with the World Land
Trust, an international conservation charity, who offset
carbon emissions through the purchase and preservation
of high conservation value land.
Designed and produced by Conran Design Group
www.conrandesigngroup.com
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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