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Smiths Group PLC Smiths Group plc Interim Results 2021

26/03/2021 7:00am

UK Regulatory (RNS & others)


Smiths (LSE:SMIN)
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TIDMSMIN

RNS Number : 5644T

Smiths Group PLC

26 March 2021

Smiths Group plc - Interim Results for the half year ended 31 January 2021

Robust first half performance with improving trends

Highlights

   --      Robust performance despite market disruption 

o Underpinned by our market-leading positions and high proportion of aftermarket revenues

   --      Good profit conversion and excellent cash generation 

o Group-wide operating model driving efficiency, innovation and consistent execution

o Strategic restructuring on track to deliver full GBP70m annualised benefit from FY2022

   --      Further portfolio strengthening for long-term value creation 

o Continued investment in new technologies

o Flex-Tek acquisition of Royal Metal in February 2021

   --      Smiths Group of the future - aligned to long-term trends of sustainability and digitisation 

o All businesses united by the shared purpose of making a safer, cleaner and more efficient world

   --      Smiths Medical - continuing to strengthen ahead of separation in Q4 FY2021 

o Finalising key separation workstreams

 
                                               Headline(1)                        Statutory 
                                  HY 2021  HY 2020  Reported  Underlying  HY 2021  HY 2020  Reported 
                                   GBPm     GBPm     growth    growth(2)   GBPm     GBPm     growth 
--------------------------------  -------  -------  --------              -------  -------  -------- 
Smiths continuing operations(3) 
Revenue                           1,150    1,240    (7)%      (5)%        1,150    1,240    (7)% 
Operating profit                  166      186      (11)%     (6)%        143      145      (1)% 
Smiths Medical - discontinued 
 operations(3) 
Profit after tax                  67       70       (4)%      +5%         107      133      (20)% 
Total Group(4) 
Profit for the half year          171      187      (9)%      (3)%        129      145      (11)% 
Basic EPS                         42.9p    46.9p    (9)%      (3)%        32.3p    36.3p    (11)% 
Free cash-flow(5)                 188      110      +71% 
Cash conversion(5)                129%     98%      +31%      +33% 
                                  -------  -------  --------  ----------  -------  -------  -------- 
Dividend(6)                       11.7p    11.0p    +6%                   11.7p    11.0p    +6% 
                                  -------  -------  --------  ----------  -------  -------  -------- 
 

The differences between headline and statutory operating profit are non-headline items as defined in note 3 to the condensed financial statements, of which the largest constituents are the amortisation of acquired intangibles, cost recovery for asbestos litigation in John Crane, Inc and subrogation claims in Titeflex Corporation.

Outlook

   --      Improving H2 trends 
   --      Restructuring benefits supporting further good profit conversion 
   --      Continued strong cash generation 
   --      Dividend increase reflects our confidence in the medium and longer term prospects 

-- Subject to continued market recovery, Group is confident of meeting market expectations for the full year

Andy Reynolds Smith , Group Chief Executive, commented:

"This is a robust set of results relative to our end markets, with a resilient top line, good profit conversion and excellent cash generation. This has been delivered by our exceptional people in very challenging circumstances and my sincere thanks go to them. We have continued to position Smiths in the very best way - strategically, operationally, and financially - to enable us to take full advantage of market recovery when it comes.

The Group is united by the shared purpose of making a safer, cleaner and more efficient world. The accelerating global trends of sustainability and digitisation play to the core strengths and capabilities of Smiths' existing business model. We continue to enhance the positioning of the Group for outperformance through targeted investment in innovation and disciplined transactions - including the planned separation of Smiths Medical by the end of FY2021, which will focus and simplify the Group and maximise value for all stakeholders.

Whilst economic uncertainty remains, against the backdrop of our robust first half performance and the improving second half trends, the Group is confident of meeting market expectations for the full year and delivering long-term sustainable value."

Statutory reporting

Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, total Group profit for the half year was GBP129m (HY 2020: GBP145m) and basic earnings per share were 32.3p (HY 2020: 36.3p).

See accounting policies for an explanation of the presentation of results and note 3 to the condensed financial statements for an analysis of non-headline(5) items.

Definitions

The following definitions are applied throughout the financial report and are Alternative Performance Measures (APMs) as defined in note 19 to the condensed financial statements:

(1) 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 condensed financial statements.

(2) Underlying modifies headline performance to adjust prior year to reflect an equivalent period of ownership for divested businesses, exclude the effects of foreign exchange, acquisitions, restructuring costs and write-downs, and include depreciation and amortisation of discontinued operations for comparability purposes.

(3) Continuing operations exclude Smiths Medical which is accounted for as 'Discontinued operations - businesses held for distribution to owners'. Discontinued operations are defined in note 17 to the condensed financial statements.

(4) Total Group comprises continuing operations and discontinued operations.

(5) APMs are defined in note 19 to the condensed financial statements.

(6) HY 2020 dividend was declared in September 2020 as part of the full year announcement.

 
Investor enquiries         Media enquiries             Alex Le May, FTI Consulting 
 Jemma Spalton, Smiths      Richard Mountain, FTI       +44 (0)20 3727 1308 
 Group                      Consulting                  +44 (0)770 244 3312 
 +44 (0)20 7004 1637        +44 (0)20 3727 1374         smiths@fticonsulting.com 
 +44 (0)78 6739 0350        +44 (0)790 968 4466 
 jemma.spalton@smiths.com   smiths@fticonsulting.com 
 

Presentation

The management presentation via webcast will begin at 09.00 (UK time) today at https://smiths.com/investors/results-reports-and-presentations, with a recording available from 13.00 (UK time).

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the "Company") and its subsidiaries (together, the "Group") and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and the businesses operated by the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. 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.

 
Results overview 
 
 
Continuing operations   HY 2020   Foreign   Restructuring  Acquisitions  Underlying  HY 2021 
 (GBPm)                           exchange      costs       & disposals 
======================  =======  =========  =============  ============  ==========  ======= 
Revenue                  1,240     (34)           -             1           (57)      1,150 
======================  =======  =========  =============  ============  ==========  ======= 
Headline operating 
 profit                   186       (7)          (1)           (0)          (12)       166 
======================  =======  =========  =============  ============  ==========  ======= 
Headline operating 
 margin                  15.0%    (20)bps      (10)bps       (10)bps      (20)bps     14.4% 
======================  =======  =========  =============  ============  ==========  ======= 
 
 
HY 2021                 Underlying revenue  Underlying margin  Underlying variance 
                              growth                            in margin to prior 
                                                                       year 
======================  ==================  =================  =================== 
John Crane                    (10)%               19.8%             (130)bps 
Smiths Detection               (6)%               12.7%             (240)bps 
Flex-Tek                       (1)%               18.5%              +20bps 
Smiths Interconnect            +11%               12.1%              +560bps 
======================  ==================  =================  =================== 
Continuing operations          (5)%               14.6%              (20)bps 
======================  ==================  =================  =================== 
 

Smiths (continuing operations)

The commentary below refers to continuing operations (excluding Smiths Medical), unless otherwise stated.

Revenue

Revenue for continuing operations was down GBP(57)m or (5)%, on an underlying basis, against a very challenging market backdrop and pre-COVID comparators. The robust results reflect the Group's market-leading positions and high proportion of aftermarket revenues. Aftermarket represented 49% of underlying revenue during the period.

Revenue declined (7)% on a reported basis, to GBP1,150m (HY 2020: GBP1,240m). This included GBP(34)m of adverse foreign exchange translation and +GBP1m from PathSensors, a leading bio-technology solutions and environmental-testing company acquired by Smiths Detection in August 2020.

Operating profit and margin

The Group delivered good profit conversion, with headline operating profit down GBP(12)m or (6)% on an underlying basis. Central costs decreased by GBP(7)m to GBP(20)m, as the Group continues to focus on optimising operational efficiency.

Headline operating profit decreased (11)% on a reported basis, to GBP166m (HY 2020: GBP186m). This included GBP(7)m of adverse foreign exchange translation, and GBP(1)m of restructuring costs.

Headline operating margin decreased (20)bps on an underlying basis, reflecting the strong cost controls, and (60)bps on a reported basis to 14.4%.

The GBP(23)m difference between headline operating profit of GBP166m and statutory operating profit of GBP143m is non-headline items as defined in note 3 of the condensed financial statements. The largest constituents relate to amortisation of acquired intangible assets, cost recovery for asbestos litigation in John Crane, Inc and subrogation claims in Titeflex Corporation. On a statutory basis, after taking into account all items excluded from headline performance, operating profit of GBP143m was GBP(2)m lower than last year (HY 2020: GBP145m), reflecting the lower headline profit.

Finance costs

Headline finance costs of GBP(21)m (HY 2020: GBP(26)m) were GBP5m lower than last year. This reflects the impact of lower US dollar interest rates. Statutory finance costs were GBP(59)m (HY 2020: GBP(99)m) mainly due to a GBP(38)m foreign exchange loss on an intercompany loan with Smiths Medical (HY 2020: GBP(68)m) ; the matching credit in discontinued operations nets out to zero in Total Group earnings.

Taxation

The headline tax charge for the half year of GBP(41)m (HY 2020: GBP(43)m) represents an effective rate of 28% (FY2020: 28%). The Total Group headline effective tax rate was 27% (FY2020: 26%).

Non-headline taxation items of GBP(21)m (HY 2020: GBP(9)m) related to the write-off of deferred tax driven by pension movements. The statutory effective tax rate was 74.4% (HY 2020: 74.3%) due to the non-headline items. Please refer to notes 3 and 6 of the condensed financial statements for further details.

R&D and capex

Technology and innovation are driving the future of Smiths. To support that, we have increased Group-wide R&D spend by 34% in the last five years. Through our Group-wide innovation framework we selectively invest in future-focused projects that are aligned with our purpose and strategy. Due to the timing of some large R&D projects, the income statement cost of R&D of GBP(41)m was below prior year (HY 2020: GBP(46)m). The cash cost decreased to GBP(48)m or 4.2% of sales (HY 2020: GBP(62)m or 5.0%).

Capex of GBP(29)m (HY 2020: GBP(37)m) represented 1.2x depreciation and amortisation (HY 2020: 1.4x).

Portfolio

The Group continues to enhance its strategic positioning through the recycling of capital out of lower growth and lower return businesses into higher growth and higher return opportunities. Since 2016 the Group has completed 11 disposals with proceeds of c.GBP540m and 12 acquisitions for c.GBP1bn.

In February 2021, the Group acquired Royal Metal Products LLC ("Royal Metal"), a leading manufacturer of residential and light commercial HVAC products for $107m. Royal Metal will be integrated into Flex-Tek with adjacent product offerings for the air distribution market and access to a larger customer base, including wholesalers. The acquisition will complement the organic growth that Flex-Tek is already driving through the development of innovative air distribution products that support improved energy efficiency and indoor air quality. For more information, please see note 18 of the condensed financial statements.

Smiths Medical (discontinued operations)

The Group is committed to completing the separation of Smiths Medical by the end of the financial year, with the primary focus on ensuring we maximise shareholder value. We are finalising the key separation workstreams including governance, tax planning, debt structure, transaction documents and pensions.

Accounting standards require the Group to stop charging depreciation and amortisation within Smiths Medical, since it has been reclassified as discontinued operations. For comparability purposes, depreciation and amortisation of GBP21m (HY 2020: GBP23m) have been included in the calculation of underlying measures.

Smiths Medical delivered revenue of GBP427m, up +0.2% on an underlying basis, with good growth held back by the impact of fewer elective procedures as a result of COVID-19. Revenue was down (2)% on a reported basis, including GBP(8)m of adverse foreign exchange translation.

Headline operating profit of GBP89m was up +2% on an underlying basis. Headline operating profit was down (5)% on a reported basis, due to GBP(2)m of adverse foreign exchange and GBP(3)m of restructuring costs. Restructuring costs include site consolidation, as well as delayering and decentralisation to increase efficiency and effectiveness. Headline operating margin was up +30bps on an underlying basis, but down (80)bps to 20.9% on a reported basis due to restructuring charges.

The difference between statutory and headline operating profit is GBP1m of separation costs.

Further detail on Smiths Medical's performance can be found in the divisional section later in the release.

Total Group

The commentary below refers to Total Group, unless otherwise stated.

COVID-19

The health, safety and wellbeing of our people and our operations have always been our number one priority. During the COVID-19 pandemic we have put in place measures to ensure that our colleagues and others are kept safe and well while continuing to serve our customers. We have maintained business continuity throughout with minimal interruption to our aftermarket support.

We adopted a Group-led approach to managing the global challenges; as a result we were able to respond better, faster and more cost effectively. This unified response supported our robust performance in the first half of FY2021 despite the challenging market backdrop. Pleasingly we are beginning to see improvements in some end markets and improving order books in some of our businesses. We are very well positioned to maximise the growth opportunities when they come.

Restructuring costs

 
                         HY 2021            Total 
HY 2021                restructuring     restructuring       HY 2021 
 GBPm                    P&L costs     P&L costs to date   cash outflow 
John Crane                 (0)               (14)              (5) 
Smiths Detection           (0)               (14)              (2) 
Flex-Tek                   (0)               (0)               (0) 
Smiths Interconnect        (1)               (3)               (2) 
Centre                      -                (1)               (1) 
Group - continuing 
 operations                (1)               (32)             (10) 
====================  ==============  ==================  ============= 
Smiths Medical             (3)               (7)               (0) 
====================  ==============  ==================  ============= 
Total Group                (4)               (39)             (10) 
====================  ==============  ==================  ============= 
 

The Group announced last year that it was undertaking a strategic restructuring programme; this brings together a number of pre-COVID initiatives to ensure that the Group is better positioned for long-term growth and consistent outperformance. The programme supports the achievement of our goal to deliver operating margins of 18-20%.

The programme impacts all divisions and is on track to deliver full annualised benefits of at least GBP70m from FY2022 onwards. The total cost of the programme is now anticipated to be c.GBP(60)-(65)m spread across FY2020 and FY2021. In H1 2021 the restructuring benefits were ahead of the programme's costs but are still expected to be neutral for the full year. In the first half we incurred GBP(4)m of P&L costs and a cash outflow of GBP(10)m. The overall programme is on track, despite some phasing changes related to local consultations.

Total profit and EPS

Total headline profit after tax decreased by (9)% on a reported basis. Headline basic EPS was down (3)% on an underlying basis and (9)% on a reported basis. Total statutory profit after tax decreased by (11)% to GBP129m (HY 2020: GBP145m), with non-headline items flat to HY 2020. Statutory basic EPS was also down (11)% to 32.3p (HY 2020: 36.3p).

Cash-flow

Strong cash generation is a key characteristic of our business. The Group delivered an excellent cash performance in the first half. Operating cash-flow* was GBP301m (HY 2020: GBP252m). This was achieved despite ongoing disruption associated with the COVID-19 pandemic. Operating headline cash conversion was 129% (HY 2020: 98%), or 131% excluding restructuring costs.

Free cash-flow of GBP188m (HY 2020 restated to include lease payments: GBP110m) increased by GBP78m, underpinned by the strong operating cash-flow. Free cash-flow as a percentage of operating profit has now been added as a key performance measure to our long-term incentive programmes, to ensure closer alignment with shareholder interests.

Net cash inflow from operating activities was GBP262m (HY 2020: GBP187m). See note 15 to the condensed financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow.

Debt

Net debt* (including leases) at 31 January 2021 was GBP1,075m, a decrease of GBP(66)m in the period. Annualised headline EBITDA* from continuing and discontinued operations was GBP582m. Net debt to EBITDA was 1.7x after inclusion of lease liabilities under IFRS16 (1.8x including restructuring costs).

Gross debt* was GBP1,574m (FY2020: GBP1,609m). There are no covenants associated with this debt. The weighted average maturity was 3.7 years and there are no maturities before October 2022. Cash balances increased to GBP399m (FY2020: GBP386m).

An $800m (c.GBP584m at the period-end exchange rate) revolving credit facility ('RCF') remains undrawn and matures in November 2024. The only covenant relates to interest cover which must be greater than or equal to 3 times, compared with 11 times for the half year. Taking cash and the RCF together, total liquidity was approximately GBP1bn at the end of the period.

Strong cash conversion and a conservative balance sheet are the foundations of our strong financial framework, ensuring we are well positioned to deliver sustainable, long-term shareholder value.

* APMs are defined in note 19 to the condensed financial statements

Pensions

On 27 October 2020, the Smiths Industries Pension Scheme ('SIPS') secured an additional GBP146.5m bulk annuity buy-in agreement with Canada Life, which insured the benefits of a further c.1,000 pensioners. This followed the TI Group Pension Scheme ('TIGPS') securing a buy-in bulk annuity with Aviva in September 2020 (as previously announced). Both buy-ins demonstrate continued progress in the de-risking of the Company's pension liabilities.

The two main UK pension schemes and the US pension plan are well positioned to withstand a volatile market environment. They are well hedged against changes in interest and inflation rates. Approximately 90% of assets are invested in third-party annuities, government bonds and investment grade credit. Approximately 1% of assets is invested in equities. As at 31 January 2021 approximately 40% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.

The net accounting surplus decreased to GBP293m (FY2020: GBP372m) principally driven by asset returns underperforming the discount rate over the period and the accounting treatment of the UK schemes' recent bulk annuity purchases.

The formal triennial valuation for TIGPS at 5 April 2020 has recently concluded. It shows a surplus on a technical provsions basis and further progress towards full buy-out. Barring unforeseen events, we now expect to reach a full buy-out of TIGPS ahead of the target date of 2028 and without any further cash cost to the company. As a result pension contributions are expected to reduce by GBP4m this year and by GBP12m in FY2022.

The triennial valuation for SIPS is still being finalised and is due to be completed by the end of June 2021.

Dividend

The Group maintains a progressive dividend policy, aiming to increase dividends in line with long-term underlying growth in earnings and cash-flow. The policy enables us to retain sufficient cash-flow to finance investment in the drivers of growth to meet our financial obligations. In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans, along with the objective to maintain minimum dividend cover* of around 2 times.

In FY2020 the Board recommended a total dividend of 35.0p per share for the year. This included a delayed interim dividend of 11.0p. The Board has declared an interim FY2021 dividend of 11.7p per share, up 6% reflecting the Board's confidence in the Group's performance and improving trajectory. The interim dividend will be paid on 14 May 2021 to shareholders on the register at close of business on 9 April 2021.

The Company offers a Dividend Reinvestment Plan (DRIP) - see our website for details. To participate in the DRIP shareholders must submit their election notice to be received by 23 April 2021 (the Election Date). Elections received after the Election Date will apply to dividends paid after 14 May 2021. Purchases under the DRIP are made on or as soon as practicable after the dividend payment date and at prevailing market prices.

Return on Capital Employed (ROCE)*

ROCE was 11.2% (HY 2020: 14.7%). This is calculated using the Group's 12-month rolling average capital employed and therefore includes 10 months of COVID-related disruption. The decrease reflects lower profitability and restructuring costs during that 12-month period. For further detail of its calculation, please refer to note 19 to the condensed financial statements.

Foreign exchange

The results of overseas operations are translated into sterling at average exchange rates. The 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 January  31 January  31 January  31 January 
       2021 (6     2020 (6     2021        2020 
       months)     months) 
----  ----------  ----------  ----------  ---------- 
USD   1.32        1.27        1.37        1.32 
EUR   1.11        1.15        1.13        1.19 
----  ----------  ----------  ----------  ---------- 
 

Brexit

Given that over 95% of Group revenue originates outside the UK, the impact of Brexit was, as anticipated, very limited.

* APMs are defined in note 19 to the condensed financial statements

Outlook

Whilst economic uncertainty remains, against the backdrop of a robust first half performance and the improving second half trends, the Group is confident of meeting market expectations for the full year. This is supported by improving order books and the benefits of the strategic restructuring programme. The Group is well positioned to maximise growth opportunities and deliver long-term sustainable outperformance and value creation.

 
Business review 
 

John Crane

John Crane is a leading provider of mission-critical engineered solutions for global energy and process industries, supporting improved efficiency and emission reductions. c.59% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable sources of energy). c.41% comes from other process industries (including chemical, pharmaceutical, mining, water treatment, and pulp & paper). 68% of John Crane revenue comes from aftermarket sales. John Crane represents 36% of continuing Group revenue.

 
                                         HY 2021  HY 2020  Reported  Underlying 
                                            GBPm     GBPm    growth      growth 
-------------------------------  ---------------  -------  --------  ---------- 
Revenue                                      410      474     (14)%       (10)% 
            Original Equipment               130      154     (16)%       (14)% 
            Aftermarket                      280      320     (13)%        (9)% 
Headline operating profit                     81      101     (20)%       (16)% 
Statutory operating profit                    82       94     (13)% 
Return on capital employed                 16.9%    23.3%  (640)bps 
R&D cash costs as % of sales                2.1%     1.9%    +20bps 
-------------------------------  ---------------  -------  --------  ---------- 
 

Revenue

 
(GBPm)      HY 2020    Foreign  Acquisitions  Underlying    HY 2021 
           reported   exchange   & disposals               reported 
========  =========  =========  ============  ==========  ========= 
Revenue         474       (16)             -        (48)        410 
========  =========  =========  ============  ==========  ========= 
 

John Crane's market-leading positions and the strength of its global service network continued to underpin its performance, despite the challenges in the energy market and COVID-19 disruptions. As anticipated, revenue was down (10)% on an underlying basis. Revenue was down (14)% on a reported basis, as foreign exchange had a GBP(16)m adverse impact.

Underlying revenue from John Crane's Energy segment was down (16)%, impacted by the market downturn and pandemic related disruptions. Underlying revenue from Industrial activities was marginally down at c.(1)%, with good growth in chemical processing offset by a slowdown in general industry.

Underlying revenue from Original Equipment ('OE') declined (14)%, as volatility in energy prices and COVID-19 disruptions put pressure on customers across all geographies. However, the rate of orders is improving, and John Crane secured multiple new contracts during the period. These include some important wins for midstream upgrade projects, using our new pipeline technologies that reduce emissions, as well as further liquified natural gas projects incorporating our digital sensor technology and methane reduction solutions. These contracts draw on John Crane's core capabilities of supporting our customers' enhanced efficiency, performance and sustainability. These are examples of where our leading technology, asset management capabilities and global footprint drive competitive advantage and ensure we are well positioned to capture growth opportunities when markets recover.

Underlying aftermarket revenue declined (9)%, with continued economic uncertainty driving slower customer upgrades and retrofits. In previous cycles postponed maintenance has typically lasted 6-9 months and this cycle is following a similar pattern. John Crane's large installed base and leading service offering positions it well to meet the pent-up demand for aftermarket repairs, maintenance and upgrades. Customer need for improving overall equipment effectiveness is driving increased commercial interest for our unique digital solutions, including John Crane Sense(TM) . Aftermarket now represents 68% of John Crane's revenue (HY 2020: 67%).

Operating profit

 
(GBPm)               HY 2020 reported    Foreign  Acquisitions  Restructuring  Underlying  HY 2021 reported 
                                        exchange   & disposals          costs 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 profit                           101        (4)             -            (0)        (16)                81 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 margin                         21.3%    (20)bps                                 (130)bps             19.8% 
===================  ================  =========  ============  =============  ==========  ================ 
 

Headline operating profit of GBP81m decreased by (16)% on an underlying basis, reflecting the lower volumes and adverse programme mix. Headline operating profit declined (20)% on a reported basis, due to GBP(4)m of adverse foreign exchange. John Crane continues to make good progress on its restructuring actions, which are focused on enhancing its flexibility to withstand the cyclicality of its end markets and improve its efficiency. Some restructuring projects planned for the first half were delayed until later this year as we engage in the necessary consultation processes.

Headline operating margin was 19.8%, down (150)bps on a reported basis and (130)bps on an underlying basis. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation.

ROCE

ROCE was down (640)bps at 16.9%, due to the lower profitability in the last twelve months.

R&D

Cash R&D expenditure during the period represented 2.1% of sales, +20bps higher than last year. John Crane's innovation is primarily focused on enhancing efficiency, performance and sustainability by using materials science advancements, coatings and additive manufacturing. John Crane is also leveraging the Group's digital expertise to support the development of predictive diagnostic platforms and other innovative digital technologies. During the first half of the year, John Crane introduced several new technologies, including a booster and filter to support dry gas seals on turbo compressors and further product developments to reduce the effects of friction and extreme pressure on pipeline applications.

Smiths Detection

Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement. It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets. 48% of Smiths Detection's sales are derived from the aftermarket. Smiths Detection represents 30% of continuing Group revenue.

 
                                     HY 2021  HY 2020  Reported  Underlying 
                                        GBPm     GBPm    growth      growth 
-----------------------------------  -------  -------  --------  ---------- 
Revenue                                  350      378      (7)%        (6)% 
            Aviation                     260      254       +2%         +4% 
            Other Security Systems        90      124     (27)%       (27)% 
Headline operating profit                 44       57     (23)%       (21)% 
Statutory operating profit                33       44     (25)% 
Return on capital employed              6.3%    11.5%  (520)bps 
R&D cash costs as % of sales            7.6%    10.5%  (290)bps 
-----------------------------------  -------  -------  --------  ---------- 
 

Revenue

 
(GBPm)      HY 2020    Foreign  Acquisitions  Underlying    HY 2021 
           reported   exchange   & disposals               reported 
========  =========  =========  ============  ==========  ========= 
Revenue         378        (6)             1        (23)        350 
========  =========  =========  ============  ==========  ========= 
 

The strength of Smiths Detection's market position and its leading technology drove its resilient performance, with revenue down (6)% on an underlying basis, and a continued strong performance in its Aviation segment.

The delivery of previously announced contract wins underpinned Original Equipment ('OE'), down (6)% on an underlying basis despite the significant declines in its markets. Aftermarket revenue also declined (6)% on an underlying basis, as service and maintenance levels reduced during the COVID-19 pandemic. Revenue was down (7)% on a reported basis, including GBP(6)m of adverse foreign exchange translation and GBP1m contribution from PathSensors Inc, a leading bio-technology solutions and environmental-testing company acquired in August 2020.

Revenue from Aviation increased +4% on an underlying basis as a result of the division's existing strong order book. Aviation is Smiths Detection's largest segment, representing 74% of total revenue. Deliveries included computed tomography ('CT') hold baggage systems for AENA in Spain and CT cabin baggage screening systems for the TSA in the US.

Despite a slower rate of new tenders, Smiths Detection continues to secure new contracts. It is announced today that Smiths Detection has been selected by London Heathrow to be the supplier of their new integrated checkpoint systems throughout the airport incorporating CT cabin baggage scanners and integrated lane and tray return technology with installation beginning later this year.

Other recent orders for its CT cabin baggage systems include Milan Airports Malpensa and Linate, Kuwait International Airport and Hamad International Airport (HIA) in Qatar. HIA also placed an order for ultraviolet light kits, capable of destroying up to 99.9% of microorganisms present on baggage trays at the security checkpoint. This new technology supports heightened hygiene standards which will be important as airports seek to restore the confidence of travellers and staff during and after the COVID-19 pandemic.

Revenue from Other Security Systems declined by (27)% on an underlying basis. This performance reflects both the strong comparator and a slowdown in urban security markets due to the pandemic. Smiths Detection secured new contracts with U.S. and French customs agencies and the Greek police force for mobile x-ray inspection systems. It also won an order from the Phoenix Suns Arena, Arizona for systems that include our digital iCMORE weapons detection technology; this enhances the arena's security and reduces the need for hands-on searches.

Smiths Detection continues to respond to the pandemic by driving its digital portfolio and investing selectively in chemical and biological detection capabilities that will support a safer post COVID-19 world. This response has been strengthened by the successful integration of PathSensors Inc which brought additional capability in the areas of environment monitoring, food safety and mail screening. Smiths Detection's environment monitoring tool, BioFlash(R), has been proven to detect and identify the COVID-19 virus in the air. Further testing is underway to understand how this technology can be used in environments such as hospitals, schools and commercial buildings, representing an important future opportunity for the division. Smiths Detection also gained certification for a pathogen identifier that gives food and beverage companies a new, rapid solution to ensure food safety. There continues to be good demand for Smiths Detection's mail room screening solutions that can detect dangerous biological agents as well as other hazards.

Operating profit

 
 (GBPm)              HY 2020 reported    Foreign  Acquisitions  Restructuring  Underlying  HY 2021 reported 
                                        exchange   & disposals          costs 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 profit                            57        (1)             0            (0)        (12)                44 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 margin                         15.0%     +10bps                      (10)bps    (240)bps             12.6% 
===================  ================  =========  ============  =============  ==========  ================ 
 

Headline operating profit decreased (21)% on an underlying basis, reflecting programme volume and mix. Headline operating profit of GBP44m was down (23)% on a reported basis, including GBP(1)m adverse foreign exchange translation. Headline operating margin was 12.6%, down (240)bps on a reported and underlying basis. The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles.

ROCE

ROCE decreased by (520)bps to 6.3%, impacted by reduced profitability.

R&D

Cash R&D expenditure was 7.6% of sales, (290)bps lower than last year. R&D excluding customer funding was 6.5% for HY 2021 (HY 2020: 7.9%). We continue to invest in the development of the next generation of detection devices for the defence market, new algorithms to improve the detection of dangerous goods for cargo applications and digital solutions to strengthen our aftermarket proposition to make people and infrastructure safer. Certain programmes are co-funded by strategic customers seeking next-generation solutions to security challenges.

Flex-Tek

Flex-Tek provides innovative components to heat and move fluids and gases for aerospace and industrial applications that support energy efficiency and improved air quality. 80% of Flex-Tek's revenue is derived from Industrials and 20% from the Aerospace sector. 46% of Flex-Tek's revenue comes from aftermarket sales. Flex-Tek represents 21% of continuing Group revenue.

 
                               HY 2021  HY 2020  Reported  Underlying 
                                  GBPm     GBPm    growth      growth 
-----------------------------  -------  -------  --------  ---------- 
Revenue                            238      248      (4)%        (1)% 
            Industrials            190      171      +11%        +14% 
            Aerospace               48       77     (38)%       (35)% 
Headline operating profit           44       46      (4)%         +0% 
Statutory operating profit          38       25       52% 
Return on capital employed       17.9%    20.6%  (270)bps 
R&D cash costs as % of sales      0.5%     0.5%      0bps 
-----------------------------  -------  -------  --------  ---------- 
 

Revenue

 
 (GBPm)     HY 2020    Foreign  Acquisitions  Underlying    HY 2021 
           reported   exchange   & disposals               reported 
========  =========  =========  ============  ==========  ========= 
Revenue         248        (8)             -         (2)        238 
========  =========  =========  ============  ==========  ========= 
 

Flex-Tek's revenue decreased (1)% on an underlying basis, as strong revenue growth in Industrials offset almost all of the downturn in Aerospace. Revenue declined (4)% on a reported basis, including GBP(8)m adverse foreign exchange translation.

Industrials underlying revenue was up +14%. This strong growth was driven by demand for our construction related products in the US, particularly for HVAC applications, where we continued to outperform the underlying market. Other drivers included good growth of our industrial heat applications. Aerospace revenue was down (35)%, driven by the sharp downturn in commercial aerospace, however defence aerospace remained more resilient.

Operating profit

 
(GBPm)               HY 2020 reported    Foreign  Acquisitions  Restructuring  Underlying  HY 2021 reported 
                                        exchange   & disposals          costs 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 profit                            46        (2)             -              -           0                44 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 margin                         18.4%    (10)bps                                   +20bps             18.5% 
===================  ================  =========  ============  =============  ==========  ================ 
 

Headline operating profit was flat on an underlying basis, with lower volumes offset by strong cost controls. Headline operating profit was down (4)% at GBP44m on a reported basis, including GBP(2)m adverse foreign exchange translation. Headline operating margin was up 10bps to 18.5%, on a reported basis. The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets and provision for Titeflex Corporation subrogation claims.

In February 2021, the Group acquired Royal Metal Products LLC ("Royal Metal"), a leading manufacturer of residential and light commercial HVAC products for $107m. Royal Metal will be integrated into Flex-Tek with adjacent product offerings for the air distribution market and access to a larger customer base, including wholesalers. The acquisition will complement the organic growth that Flex-Tek is already driving through the development of innovative air distribution products that support improved energy efficiency and indoor air quality. For more information, please see note 18 of the condensed financial statements.

ROCE

ROCE decreased (270)bps to 17.9%, mainly driven by lower profitability in the second half of FY2020.

R&D

Cash R&D expenditure remained consistent at 0.5% of sales. R&D is focused on developing new products for construction, and an expanded product offering in aerospace.

Smiths Interconnect

Smiths Interconnect designs solutions for high-speed, secure connectivity in demanding applications for various end markets including defence, semiconductor test, medical, space, commercial aerospace, and rail. Smiths Interconnect represents 13% of continuing Group revenue.

 
                               HY 2021  HY 2020  Reported  Underlying 
                                  GBPm     GBPm    growth      growth 
-----------------------------  -------  -------  --------  ---------- 
Revenue                            152      140       +9%        +11% 
Headline operating profit           17        9      +89%       +109% 
Statutory operating profit          16        7     +129% 
Return on capital employed        8.2%    10.1%  (190)bps 
R&D cash costs as % of sales      7.1%     8.2%  (110)bps 
-----------------------------  -------  -------  --------  ---------- 
 

Revenue

 
 (GBPm)     HY 2020    Foreign  Acquisitions  Underlying    HY 2021 
           reported   exchange   & disposals               reported 
========  =========  =========  ============  ==========  ========= 
Revenue         140        (4)             -          16        152 
========  =========  =========  ============  ==========  ========= 
 

Smiths Interconnect delivered a strong first half performance with revenue up +11% on an underlying basis, reflecting the division's continued good momentum. Revenue increased by +9% on a reported basis, including GBP(4)m adverse foreign exchange translation.

This strong performance reflects high growth in the semiconductor test business, as customers increased capacity for the production of graphics chips and other microprocessors to support demand for laptops, data centres and games consoles, as well as new customer wins. There was also growth in the space and defence market segments from specific projects and satellite programmes. This growth was partly offset by a slight decline in the industrials market driven in part by the timing of medical orders.

During the period, Smiths Interconnect received significant orders for its space qualified products for space exploration projects and commercial satellite constellations. Smiths Interconnect is proud that its high-performance connectors are onboard NASA's six-wheeled science rover, Perseverance, which recently landed safely on Mars to begin the search for traces of ancient microbial life.

Operating profit

 
 (GBPm)              HY 2020 reported    Foreign  Acquisitions  Restructuring  Underlying  HY 2021 reported 
                                        exchange   & disposals          costs 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 profit                             9        (0)             -            (1)           9                17 
===================  ================  =========  ============  =============  ==========  ================ 
Headline operating 
 margin                          6.5%                                 (90)bps     +560bps             11.2% 
===================  ================  =========  ============  =============  ==========  ================ 
 

Headline operating profit increased +109% on an underlying basis, reflecting strong volumes and the benefits of restructuring actions. Headline operating profit was up +89% to GBP17m on a reported basis, including GBP(1)m of restructuring costs to further optimise the operational footprint. Headline operating margin was 11.2%, up +470bps on a reported basis and +560bps to 12.1% on an underlying basis, excluding the impact of the restructuring costs. The difference between statutory and headline operating profit reflects adjustments for amortisation of acquired intangibles.

ROCE

ROCE decreased (190)bps to 8.2%, driven by lower profitability in the second half of FY2020.

R&D

Cash R&D expenditure decreased to 7.1% of sales (6.7% excluding customer funded R&D, HY 2020: 7.4%), as we continued to invest in technology-led growth. R&D is focused on bringing to market new products that improve connectivity and product integrity in demanding operating environments. Product launches included the new Volta 180 wafer test solution for semiconductor test customers.

Smiths Medical - discontinued operations

Smiths Medical supplies quality, cost-effective medical devices and consumables vital to patient care globally. Its portfolio incorporates established brands, with strong positions in select segments of the Infusion Systems, Vascular Access, and Vital Care markets. 82% of Smiths Medical's sales are from consumable and disposable products.

 
                               HY 2021  HY 2020  Reported  Underlying 
                                  GBPm     GBPm    growth      growth 
-----------------------------  -------  -------  --------  ---------- 
Revenue                            427      434      (2)%       +0.2% 
Headline operating profit           89       94      (5)%         +2% 
Statutory operating profit          88       83       +6% 
Return on capital employed       13.2%    13.2%     +0bps 
R&D cash costs as % of sales      5.6%     6.1%   (50)bps 
-----------------------------  -------  -------  --------  ---------- 
 

Accounting standards require the Group to stop charging depreciation and amortisation within Smiths Medical, from the point of reclassifcation as discontinued operations. For comparability purposes, depreciation and amortisation of GBP21m (HY 2020: GBP23m) have been included in the calculation of underlying measures.

Update on separation

The Group is committed to completing the separation of Smiths Medical by the end of the financial year with the primary focus on ensuring we maximise shareholder value. We are finalising key separation workstreams including governance, tax planning, debt structure, transaction documents and pensions.

Smiths Medical is pursuing a focused strategy to accelerate growth and drive enhanced performance to deliver the medium-term ambition to grow ahead of its markets, with operating margin in excess of 20% and attractive returns. The division's first half performance demonstrated an uninterrupted focus on these underlying improvement plans.

Revenue

 
 (GBPm)     HY 2020    Foreign  Acquisitions  Underlying    HY 2021 
           reported   exchange   & disposals               reported 
========  =========  =========  ============  ==========  ========= 
Revenue         434        (8)             -           1        427 
========  =========  =========  ============  ==========  ========= 
 

Smiths Medical delivered a resilient performance with revenue of GBP427m, up 0.2% on an underlying basis. Good growth was held back by the impact of fewer elective procedures due to COVID-19. Revenue was down (2)% on a reported basis, including GBP(8)m of adverse foreign exchange translation.

Underlying revenue from Infusion Systems was up +5% driven by increased sales to alternate care environments such as emergency medical services, clinics, hospices and homes. Underlying revenue from Vital Care grew +2% with growth driven by tracheostomy tubes and respiratory products. Underlying revenue from Vascular Access decreased (6)% with good growth of syringe and needle products offset by the impact of fewer elective procedures as a result of COVID-19. Smiths Medical is successfully delivering on its agreement with the U.S. Government to expand syringe and needle device production to support COVID-19 vaccine efforts. Smiths Medical has also received large orders for vaccination devices for Australia and Japan to be delivered throughout the remainder of 2021.

Operating profit

 
 (GBPm)              HY 2020    Foreign  Restructuring     Depreciation  Underlying    HY 2021 
                    reported   exchange          costs   & amortisation               reported 
=================  =========  =========  =============  ===============  ==========  ========= 
Operating profit          94        (2)            (3)              (2)           2         89 
=================  =========  =========  =============  ===============  ==========  ========= 
Operating margin       21.7%    (10)bps        (70)bps          (30)bps      +30bps      20.9% 
=================  =========  =========  =============  ===============  ==========  ========= 
 

Headline operating profit of GBP89m was up +2% on an underlying basis, reflecting the drive for enhanced performance. Headline operating profit was down (5)% on a reported basis, due to GBP(2)m of adverse foreign exchange and GBP(3)m of restructuring costs. Restructuring costs include site consolidation, as well as delayering and decentralisation to increase efficiency and effectiveness. Headline operating margin was up +30bps on an underlying basis, but down (80)bps to 20.9% on a reported basis due to restructuring charges.

The difference between statutory and headline operating profit is GBP1m of separation costs.

ROCE

ROCE remained at 13.2% in HY 2021.

R&D

Cash R&D expenditure was 5.6% of sales, down (50)bps year on year. Smiths Medical continues to invest in the development of innovative, commercially focused products across the portfolio to support long-term, sustainable growth. Product launches included:

   --      PharmGuard software enhancements for the CADD(TM) Solis Infusion Pump 
   --      Comprehensive pain management solutions with new dedicated connectors 
   --      A new endotracheal tube range 
   --      DeltaVen Fast Flash, expanding our PIVC offering 
 
Other financial matters 
 

Risk management

The Group's principal risks and uncertainties and relevant mitigating activities were set out on pages 67-76 of the FY2020 Annual Report. In the view of the Board, the principal risks and uncertainties affecting the Group for the remaining six months of the financial year continue to be those set out briefly below and more fully in the Annual Report.

COVID-19: COVID-19 is impacting our colleagues, customers, suppliers and operations to varying degrees across different territories and different parts of our business. This includes, but is not limited to: risks to the wellbeing of our people, their families and communities; our customers, who have in many cases revised their demand forecasts; our suppliers, whose businesses have had challenges maintaining continuity of supply; and our own operations which have had to deal with all the combined challenges of the pandemic.

Technology: Differentiated new products and services are critical to our success. We may be unable to maintain technological differentiation or to meet customers' needs and may face disruptive innovation by a competitor.

Economy and geopolitics: COVID-19 has triggered a highly significant global economic downturn. In many sectors, demand has reduced. There is a likelihood that the impact on demand will be prolonged, especially in commercial aerospace. A global recession may also lead to an increase in bankruptcies of both customers and suppliers. Conversely, the crisis is opening up new opportunities, most obviously in Smiths Medical and Smiths Detection; and inorganic opportunities are likely to arise more frequently and at better values. Geopolitical tensions continue to rise, most notably between China and the US, but also affecting other Governments, which pose threats to the free movement of goods, capital and people.

Group Portfolio: Our strategy is predicated primarily on organic growth. However, acquisitions/divestments can also play a role in building and/or strengthening competitive positions. Acquisitions bring risk as well as opportunity. We may invest substantial funds and resources in acquisitions which fail to deliver on expectations - due to incorrect appraisal of the target and/or poor execution. The opposite risk is that (perhaps through an excess of caution) we miss out on opportunities to build market-leading positions and growth. Divestments also carry risk. We may divest an asset at the wrong time, or may not realise appropriate value for the asset. Separation may be complex and, if poorly executed, may impact the wider business.

Liquidity: COVID-19 has triggered a highly significant global economic downturn. In many sectors, demand has reduced, in some cases close to zero. We, along with our customers and suppliers, have also faced disruption to operations and higher costs. If disruption were to be deep and sustained over many months, our financial position could be eroded by lower revenues, higher costs and cash write-offs (e.g. non-payment by customers). We might not be able to rely on access to committed facilities, either through breach of our financial covenant or because lenders were unable to meet their obligations.

Product quality: In the ordinary course of business, we are potentially subject to product liability claims and lawsuits, including potential class actions. The mission-critical nature of many of our solutions makes the potential consequences of failure more serious than may otherwise be the case.

Customers: Our markets are evolving at a fast pace, creating potential for customers to change their business models as they look to deliver products and services at higher quality, with better service and at lower cost. Failure of the Group to keep pace with customer changes/requirements (innovation, go-to-market strategies) could have a materially adverse impact on Group performance.

People: People are our only truly sustainable source of competitive advantage and competition for key skills is intense, especially around science, technology, engineering and mathematics (STEM) disciplines. We may not be successful in attracting, retaining, developing, engaging and inspiring the right people with the right skills to achieve our growth ambitions

Cyber security: Cyber attacks seeking to compromise the confidentiality, integrity and availability of IT systems and the data held on them are a continuing risk. We operate in markets and product areas which are known to be of interest to criminals.

Integrated Supply chain: Timely, efficient supply of raw materials and purchased components is critical to our ability to deliver to our customers. Manufacturing and supply chain continuity are exposed to external events that could have significant adverse consequences, including natural catastrophes, civil or political unrest, changes in regulatory conditions, terrorist attacks and disease pandemics - this applies to our own manufacturing sites and those of our key component suppliers.

Markets: A significant proportion of our revenue comes from the US and European markets, with a notable proportion coming from governments. In addition to geographical markets, there is a risk we do not focus on attractive sectors where we have, or could have, a sustainable position.

Ethical breach: We operate in highly regulated markets requiring strict adherence to laws with risk areas including: Bribery and corruption; Anti-trust matters; International trade laws and sanctions; Human rights, modern slavery and international labour standards; General Data Protection Regulation (GDPR); and Government contracting regulations. There is a risk that a significant ethical or compliance breach may occur which could seriously harm our reputation and impact our financial performance, customer relationships and ability to retain talent.

Contractual obligations: We may fail to deliver the products and services or fail in our contractual execution due to delays or breaches by our suppliers or other counterparties.

Statement of directors' responsibilities

The directors confirm that, to the best of our knowledge:

the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ("EU") pursuant to Regulation (EC) No 1606/2002 as it applies in the EU and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 ;

   --    the interim management report includes a fair review of the information required by: 

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board of directors:

 
 
 
  Andy Reynolds Smith  John Shipsey 
Chief Executive        Chief Financial Officer 
 

25 March 2021

Independent review report to Smiths Group plc

Conclusion

We have been engaged by Smiths Group plc ("the Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 January 2021 which comprises the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 January 2021 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union ("EU") and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the latest annual financial statements of the group were prepared in accordance with International Financial Reporting Standards as adopted by the EU and the next annual financial statements will be prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this 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 for our review work, for this report, or for the conclusions we have reached.

Michael Maloney

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London

E14 5GL

25 March 2021

Consolidated income statement (unaudited)

 
                                                                                          Six months ended 
                                                         Six months ended                 31 January 2020 - 
                                                          31 January 2021                    represented* 
                                                  ===============================  =============================== 
                                                            Non-headline                     Non-headline 
                                                                   (note                            (note 
                                                  Headline            3)    Total  Headline            3)    Total 
                                           Notes      GBPm          GBPm     GBPm      GBPm          GBPm     GBPm 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Continuing operations 
Revenue                                        2     1,150             -    1,150     1,240             -    1,240 
Operating costs                                2     (984)          (23)  (1,007)   (1,054)          (41)  (1,095) 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Operating profit/(loss)                                166          (23)      143       186          (41)      145 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Interest receivable                                      5             -        5         4             -        4 
Interest payable                                      (26)             -     (26)      (30)             -     (30) 
Other financing losses                                   -          (41)     (41)         -          (77)     (77) 
Other finance income - retirement 
 benefits                                                -             3        3         -             4        4 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Finance costs                                         (21)          (38)     (59)      (26)          (73)     (99) 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Continuing operations - profit/(loss) 
 before taxation                                       145          (61)       84       160         (114)       46 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Taxation                                       5      (41)          (21)     (62)      (43)             9     (34) 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Continuing operations - profit/(loss) 
 for the period                                        104          (82)       22       117         (105)       12 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Discontinued operations 
Profit from discontinued operations           17        67            40      107        70            63      133 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
PROFIT/(LOSS) FOR THE PERIOD                           171          (42)      129       187          (42)      145 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
 
  Attributable to 
Smiths Group shareholders - continuing 
 operations                                            103          (82)       21       116         (105)       11 
Smiths Group shareholders - discontinued 
 operations                                             67            40      107        70            63      133 
Non-controlling interests                                1             -        1         1             -        1 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
                                                       171          (42)      129       187          (42)      145 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Earnings per share                             4 
Basic                                                                       32.3p                            36.3p 
Basic - continuing                                                           5.3p                             2.8p 
Diluted                                                                     32.2p                            36.2p 
Diluted - continuing                                                         5.3p                             2.8p 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
Dividends per share (declared)                14                            11.7p                                - 
=========================================  =====  ========  ============  =======  ========  ============  ======= 
 

* Results in the comparatives for the period ended 31 January 2020 have been represented to show operating costs on the face of the income statement; see note 2 'Operating costs' for further details.

Consolidated statement of comprehensive income (unaudited)

 
                                                                      Six months   Six months 
                                                                           ended        ended 
                                                                      31 January   31 January 
                                                                            2021         2020 
                                                              Notes         GBPm         GBPm 
===========================================================  ======  ===========  =========== 
Profit for the period                                                        129          145 
===========================================================  ======  ===========  =========== 
 Other comprehensive income 
 Re-measurement of post retirement benefits assets 
  and obligations                                                 6         (94)            1 
 Taxation thereon                                                             17            - 
===========================================================  ======  ===========  =========== 
 Other comprehensive income which will not be reclassified 
  to the consolidated income statement                                      (77)            1 
 
 Other comprehensive income which will be reclassified 
  and reclassifications 
 Exchange losses                                                           (104)        (257) 
 Fair value gains and reclassification adjustments: 
 - on financial assets at fair value through other 
  comprehensive income                                                         3            1 
 - deferred in the period on cash-flow and net investment 
  hedges                                                                      51          112 
 - reclassified to income statement on cash-flow and 
  net investment hedges                                                        1          (1) 
===========================================================  ======  ===========  =========== 
Total other comprehensive expenditure                                      (126)        (144) 
Total comprehensive income                                                     3            1 
===========================================================  ======  ===========  =========== 
Attributable to 
Smiths Group shareholders                                                      3            1 
Non-controlling interests                                                      -            - 
===========================================================  ======  ===========  =========== 
                                                                               3            1 
===========================================================  ======  ===========  =========== 
 
Total comprehensive income attributable to Smiths Group 
 shareholders arising from 
Continuing operations                                                       (53)         (37) 
Discontinued operations                                                       56           38 
===========================================================  ======  ===========  =========== 
                                                                               3            1 
===========================================================  ======  ===========  =========== 
 

Consolidated balance sheet (unaudited)

 
                                                     31 January  31 July 
                                                           2021     2020 
                                              Notes        GBPm     GBPm 
============================================  =====  ==========  ======= 
Non-current assets 
Intangible assets                                 7       1,492    1,564 
Property, plant and equipment                     8         212      218 
Right of use assets                               9          87       94 
Financial assets - other investments                         13       19 
Retirement benefit assets                         6         432      516 
Deferred tax assets                                          97      102 
Trade and other receivables                                  49       52 
Financial derivatives                                       100       82 
============================================  =====  ==========  ======= 
                                                          2,482    2,647 
Current assets 
Inventories                                                 394      446 
Current tax receivable                                       44       46 
Trade and other receivables                                 551      627 
Cash and cash equivalents                        10         375      366 
Financial derivatives                                         4        2 
Assets held for distribution to owners           17       1,251    1,279 
============================================  =====  ==========  ======= 
                                                          2,619    2,766 
============================================  =====  ==========  ======= 
Total assets                                              5,101    5,413 
============================================  =====  ==========  ======= 
Current liabilities 
Financial liabilities: 
- borrowings                                     10        (19)     (10) 
- lease liabilities                              10        (27)     (31) 
- financial derivatives                                     (3)      (4) 
Provisions                                       12        (39)     (55) 
Trade and other payables                                  (471)    (527) 
Current tax payable                                        (74)     (79) 
Liabilities held for distribution to owners      17       (257)    (295) 
============================================  =====  ==========  ======= 
                                                          (890)  (1,001) 
Non-current liabilities 
Financial liabilities: 
- borrowings                                     10     (1,422)  (1,455) 
- lease liabilities                              10        (64)     (65) 
Provisions                                       12       (264)    (276) 
Retirement benefit obligations                    6       (134)    (139) 
Corporation tax payable                                     (4)      (5) 
Deferred tax liabilities                                   (22)     (27) 
Trade and other payables                                   (50)     (51) 
============================================  =====  ==========  ======= 
                                                        (1,960)  (2,018) 
============================================  =====  ==========  ======= 
Total liabilities                                       (2,850)  (3,019) 
============================================  =====  ==========  ======= 
Net assets                                                2,251    2,394 
============================================  =====  ==========  ======= 
Shareholders' equity 
Share capital                                               149      149 
Share premium account                                       363      361 
Capital redemption reserve                                    6        6 
Revaluation reserve                                           1        1 
Merger reserve                                              235      235 
Cumulative translation adjustments                          571      674 
Retained earnings                                         1,165    1,259 
Hedge reserve                                             (260)    (312) 
============================================  =====  ==========  ======= 
Total shareholders' equity                                2,230    2,373 
Non-controlling interest equity                              21       21 
============================================  =====  ==========  ======= 
Total equity                                              2,251    2,394 
============================================  =====  ==========  ======= 
 

Consolidated statement of changes in equity (unaudited)

 
                                                                 Share             Cumulative 
                                                               capital            translation 
                                                                   and            adjustments                            Equity 
                                                                 share     Other         GBPm  Retained    Hedge  shareholders'  Non-controlling   Total 
                                                               premium  reserves               earnings  reserve          funds         Interest  equity 
                                                        Notes     GBPm      GBPm                   GBPm     GBPm           GBPm             GBPm    GBPm 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
At 31 July 2020                                                    510       242          674     1,259    (312)          2,373               21   2,394 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
Profit for the period                                                -         -            -       128        -            128                1     129 
Other comprehensive income: 
 
   *    exchange losses net of recycling                             -         -        (103)         -        -          (103)              (1)   (104) 
 
   *    re-measurement of post-retirement benefits and 
        related tax                                                  -         -            -      (77)        -           (77)                -    (77) 
 
   *    fair value gains and related tax                             -         -            -         3       52             55                -      55 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
Total comprehensive income 
 for the period                                                      -         -        (103)        54       52              3                -       3 
 
Transactions relating to 
 ownership interests 
Issue of new equity shares                                           2         -            -         -        -              2                1       3 
Purchase of own shares                                               -         -            -      (16)        -           (16)                -    (16) 
Dividends: 
 
   *    equity shareholders                                14        -         -            -     (138)        -          (138)                -   (138) 
 
   *    non-controlling interests                                    -         -            -         -        -                             (1)     (1) 
Share-based payment                                                  -         -            -         6        -              6                -       6 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
At 31 January 2021                                                 512       242          571     1,165    (260)          2,230               21   2,251 
------------------------------------------------------  -----  -------  --------  -----------  --------  -------  -------------  ---------------  ------ 
 
 
                                                                 Share             Cumulative 
                                                               capital            translation 
                                                                   and            adjustments                            Equity 
                                                                 share     Other         GBPm  Retained    Hedge  shareholders'  Non-controlling   Total 
                                                               premium  reserves               earnings  reserve          funds         Interest  equity 
                                                        Notes     GBPm      GBPm                   GBPm     GBPm           GBPm             GBPm    GBPm 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
At 31 July 2019                                                    508       242          878     1,115    (383)          2,360               21   2,381 
Impact of adopting IFRS 
 16                                                                  -         -            -       (1)        -            (1)                -     (1) 
Impact of adopting IFRIC 
 23                                                                  -         -            -       (4)        -            (4)                -     (4) 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
Profit for the period                                                -         -            -       144        -            144                1     145 
Other comprehensive income: 
 
   *    exchange losses net of recycling                             -         -        (256)         -        -          (256)              (1)   (257) 
 
   *    re-measurement of post-retirement benefits and 
        related tax                                                  -         -            -         1        -              1                -       1 
 
   *    fair value gains and related tax                             -         -            -         1      111            112                -     112 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
Total comprehensive income 
 for the period                                                      -         -        (256)       146      111              1                -       1 
 
Transactions relating to 
 ownership interests 
Exercises of share options                                           2         -            -                  -              2                -       2 
Purchase of own shares                                               -         -            -      (18)        -           (18)                -    (18) 
Dividends: 
 
   *    equity shareholders                                14        -         -            -     (126)        -          (126)                -   (126) 
 
   *    non-controlling interests                                    -         -            -         -        -              -              (1)     (1) 
Share-based payment                                                  -         -            -         6        -              6                -       6 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
At 31 January 2020                                                 510       242          622     1,118    (272)          2,220               20   2,240 
======================================================  =====  =======  ========  ===========  ========  =======  =============  ===============  ====== 
 

Retained earnings in the comparatives for the period to 31 January 2020 have been represented to show the cumulative foreign exchange translation differences as a separate component of equity.

Consolidated cash-flow statement (unaudited)

 
                                                                      Six months   Six months 
                                                                           ended        ended 
                                                                      31 January   31 January 
                                                                            2021         2020 
                                                              Notes         GBPm         GBPm 
===========================================================  ======  ===========  =========== 
Net cash inflow from operating activities                        15          262          187 
Cash-flows from investing activities 
Expenditure on capitalised development                                      (15)         (18) 
Expenditure on other intangible assets                                       (7)          (8) 
Purchase of property, plant and equipment                                   (33)         (29) 
Income from financial assets                                                   4            - 
Acquisition of businesses                                                    (5)         (24) 
===========================================================  ======  ===========  =========== 
Net cash-flow used in investing activities                                  (56)         (79) 
 
Cash-flows from financing activities 
Proceeds from issue of new equity shares                                       2            2 
Purchase of own shares                                                      (16)         (18) 
Dividends paid to equity shareholders and non-controlling 
 interests                                                                 (139)        (126) 
Settlement of share awards in cash                                             -          (1) 
Cash outflow from matured derivative financial instruments                   (5)          (1) 
Lease payments                                                              (23)         (22) 
===========================================================  ======  ===========  =========== 
Net cash-flow used in financing activities                                 (181)        (166) 
 
Increase/(decrease) in cash and cash equivalents                              25         (58) 
Cash and cash equivalents at beginning of the period                         366          289 
(Increase)/decrease in cash held in disposal group                           (4)            4 
Exchange differences                                                        (12)         (29) 
===========================================================  ======  ===========  =========== 
Cash and cash equivalents at end of the period                               375          206 
===========================================================  ======  ===========  =========== 
Cash and cash equivalents at end of the period comprise: 
- cash at bank and in hand                                                   193          179 
- short-term deposits                                                        182           27 
===========================================================  ======  ===========  =========== 
                                                                             375          206 
===========================================================  ======  ===========  =========== 
 

Notes to the condensed interim financial statements (unaudited)

   1   Basis of preparation 

The financial information for the period ended 31 January 2021 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 July 2020 has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU pursuant to Regulation (EC) No 1606/2002 as it applies in the EU.

The annual financial statements of the Group for the year ended 31 July 2021 will be prepared in accordance with International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, this condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 July 2020 which were prepared in accordance with IFRSs as adopted by the EU.

The Directors have assessed the principal risks discussed on page 16. As part of this, they have modelled a severe but plausible downside scenario for COVID-19 (incorporating latest thinking on possible winter timing and severity of a COVID-19 resurgence), whereby the Group experiences:

   (i)   Continuation of challenges in FY2021: 

- ongoing weakness (and no recovery) in end markets across all divisions for the second half of FY2021, resulting in a -5% decline on forecast revenues.

(ii) COVID-19 resurgence in FY2022:

- a significant increase in COVID-19, further lockdowns at the start of winter, and severe disruption to both customer demand and supply chain; and

- plant closures across most sites for a full two months (November/December 2021) with inventory build-up during shutdown, delays in customer receipts, and increases in customer defaults.

This scenario assumes a curtailment of dividend payments but no additional mitigating actions in terms of staff reductions, restructuring or government subsidies. Based on past experience the likelihood of this scenario is remote and throughout this severe but plausible downside scenario the Group continues to have significant liquidity headroom on existing facilities and against the Rolling Credit Facility financial covenant.

The Directors believe that the Group is well placed to manage its financing and other business risks satisfactorily, and 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 condensed consolidated interim financial statements. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

The interim financial information was approved by the Board on 25 March 2021.

Accounting policies

The same accounting policies, estimates, presentation and methods of computation are followed in the condensed interim financial statements as applied in the Group's latest annual audited financial statements.

New standards and interpretations not yet adopted

No 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.

Presentation of results

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 a form consistent with the prior year.

Judgement is required in determining which items should be included as non-headline. The amortisation 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.

Performance measures for the Group's ongoing trading activity are described as 'headline' and used by management to measure and monitor performance. See note 2 for disclosures of headline operating profit and note 19 for more information about the alternative performance measures ('APMs') used by the Group and the calculation of return on capital employed and credit metrics.

In addition, the Group reports underlying growth rates for sales and profit measures where the determination of adjustments requires judgement. Underlying growth excludes the effects of foreign exchange, acquisitions and disposals, restructuring charges, impairment of capitalised development and COVID-19 related balance sheet write-downs, by making the following adjustments:

   -       exclude acquisitions from the current period for the first 12 months of ownership; 

- exclude the performance of divested businesses after the date of disposal from comparative period;

   -       exclude charges recognised due to the strategic restructuring programme in either period; 

- exclude the impairment of capitalised development and COVID-19 related balance sheet write-downs from the comparative period; and

- retranslate the comparative to current year exchange rates before calculating growth measures.

   2   Analysis of revenue, operating costs and segment information 

Analysis by operating segment

The Group is organised into five divisions: John Crane, Smiths Detection, Flex-Tek, Smiths Interconnect and Smiths Medical. These divisions design and manufacture 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 which heat and move fluids and gases;

- 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; and

- Smiths Medical - infusion systems, vascular access products, patient airway and temperature management equipment and specialised devices in areas of diagnostics and emergency patient transport.

The position and performance of each division is 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 divisional results and operating assets to monitor divisional position. See note 3 and note 19 for more information on which items are excluded from headline profit measures.

Following the reclassification of the Smiths Medical business as a discontinued operation, the segmental information for the Smiths Medical division is disclosed in note 17.

Intersegment sales and transfers are charged at arm's length prices.

Segment trading performance

 
                                                                 Six months ended 31 January 2021 
                                    ============================================================= 
                                      John      Smiths                   Smiths  Corporate 
                                     Crane   Detection  Flex-Tek   Interconnect      costs  Total 
                                      GBPm        GBPm      GBPm           GBPm       GBPm   GBPm 
=================================   ======  ==========  ========  =============  =========  ===== 
Revenue                                410         350       238            152          -  1,150 
==================================  ======  ==========  ========  =============  =========  ===== 
Divisional headline operating 
 profit                                 81          44        44             17          -    186 
Corporate headline operating 
 costs                                   -           -         -              -       (20)   (20) 
==================================  ======  ==========  ========  =============  =========  ===== 
Headline operating profit/(loss)        81          44        44             17       (20)    166 
Items excluded from headline 
 measures (note 3)                       1        (11)       (6)            (1)        (6)   (23) 
==================================  ======  ==========  ========  =============  =========  ===== 
Operating profit/(loss) for the 
 period                                 82          33        38             16       (26)    143 
==================================  ======  ==========  ========  =============  =========  ===== 
Headline operating margin            19.8%       12.6%     18.5%          11.2%          -  14.4% 
==================================  ======  ==========  ========  =============  =========  ===== 
 
 
                                                                 Six months ended 31 January 2020 
                                    ============================================================= 
                                      John      Smiths                   Smiths  Corporate 
                                     Crane   Detection  Flex-Tek   Interconnect      costs  Total 
                                      GBPm        GBPm      GBPm           GBPm       GBPm   GBPm 
=================================   ======  ==========  ========  =============  =========  ===== 
Revenue                                474         378       248            140          -  1,240 
==================================  ======  ==========  ========  =============  =========  ===== 
Divisional headline operating 
 profit                                101          57        46              9          -    213 
Corporate headline operating 
 costs                                   -           -         -              -       (27)   (27) 
==================================  ======  ==========  ========  =============  =========  ===== 
Headline operating profit/(loss)       101          57        46              9       (27)    186 
Items excluded from headline 
 measures (note 3)                     (7)        (13)      (21)            (2)          2   (41) 
==================================  ======  ==========  ========  =============  =========  ===== 
Operating profit/(loss) for the 
 period                                 94          44        25              7       (25)    145 
==================================  ======  ==========  ========  =============  =========  ===== 
Headline operating margin            21.3%       15.0%     18.4%           6.5%          -  15.0% 
==================================  ======  ==========  ========  =============  =========  ===== 
 

Segment assets and liabilities

Segment assets

 
                                                                                             31 January 2021 
                                          ================================================================== 
                                                                                           Corporate 
                                            John      Smiths                   Smiths            and 
                                           Crane   Detection  Flex-Tek   Interconnect   non-headline   Total 
                                            GBPm        GBPm      GBPm           GBPm           GBPm    GBPm 
=======================================   ======  ==========  ========  =============  =============  ====== 
Property, plant, equipment, right 
 of use assets, development projects, 
 other intangibles and investments           136         122        62             48             21     389 
Inventory, trade and other receivables       343         377       133            119             22     994 
========================================  ======  ==========  ========  =============  =============  ====== 
Segment assets                               479         499       195            167             43   1,383 
========================================  ======  ==========  ========  =============  =============  ====== 
 
 
                                                                                                31 July 2020 
                                           ================================================================= 
                                                                                            Corporate 
                                             John      Smiths                   Smiths            and 
                                            Crane   Detection  Flex-Tek   Interconnect   non-headline  Total 
                                             GBPm        GBPm      GBPm           GBPm           GBPm   GBPm 
========================================   ======  ==========  ========  =============  =============  ===== 
Property, plant, equipment, development 
 projects, other intangibles and 
 investments                                  143         125        64             49             26    407 
Inventory, trade and other receivables        395         438       144            136             11  1,124 
=========================================  ======  ==========  ========  =============  =============  ===== 
Segment assets                                538         563       208            185             37  1,531 
=========================================  ======  ==========  ========  =============  =============  ===== 
 

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

Segment liabilities

 
                                                                                             31 January 2021 
                                          ================================================================== 
                                                                                           Corporate 
                                            John      Smiths                   Smiths            and 
                                           Crane   Detection  Flex-Tek   Interconnect   non-headline   Total 
                                            GBPm        GBPm      GBPm           GBPm           GBPm    GBPm 
=======================================   ======  ==========  ========  =============  =============  ====== 
Divisional liabilities                     (120)       (263)      (59)           (46)              -   (488) 
Corporate and non-headline liabilities         -           -         -              -          (336)   (336) 
========================================  ======  ==========  ========  =============  =============  ====== 
Segment liabilities                        (120)       (263)      (59)           (46)          (336)   (824) 
========================================  ======  ==========  ========  =============  =============  ====== 
 
 
                                                                                               31 July 2020 
                                          ================================================================= 
                                                                                           Corporate 
                                            John      Smiths                   Smiths            and 
                                           Crane   Detection  Flex-Tek   Interconnect   non-headline  Total 
                                            GBPm        GBPm      GBPm           GBPm           GBPm   GBPm 
=======================================   ======  ==========  ========  =============  =============  ===== 
Divisional liabilities                     (142)       (288)      (60)           (55)              -  (545) 
Corporate and non-headline liabilities         -           -         -              -          (364)  (364) 
========================================  ======  ==========  ========  =============  =============  ===== 
Segment liabilities                        (142)       (288)      (60)           (55)          (364)  (909) 
========================================  ======  ==========  ========  =============  =============  ===== 
 

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

Reconciliation of segment assets and liabilities to statutory assets and liabilities

 
                                                      Assets             Liabilities 
                                                ===================  =================== 
                                                31 January  31 July  31 January  31 July 
                                                      2021     2020        2021     2020 
                                                      GBPm     GBPm        GBPm     GBPm 
=============================================   ==========  =======  ==========  ======= 
Segment assets and liabilities                       1,383    1,531       (824)    (909) 
Goodwill and acquired intangibles                    1,415    1,489           -        - 
Derivatives                                            104       84         (3)      (4) 
Current and deferred tax                               141      148       (100)    (111) 
Retirement benefit assets and obligations              432      516       (134)    (139) 
Cash and borrowings                                    375      366     (1,532)  (1,561) 
Assets and liabilities held for distribution 
 to owners                                           1,251    1,279       (257)    (295) 
==============================================  ==========  =======  ==========  ======= 
Statutory assets and liabilities                     5,101    5,413     (2,850)  (3,019) 
==============================================  ==========  =======  ==========  ======= 
 

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 GBP787m (31 July 2020: GBP787m), and eliminate post-retirement benefit assets and liabilities and litigation provisions relating to non-headline items, both net of related tax, and net debt. See note 19 for additional details.

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

 
                                                                                         31 January 2021 
                                                      ================================================== 
                                                        John      Smiths                   Smiths 
                                                       Crane   Detection  Flex-Tek   Interconnect    Total 
                                                        GBPm        GBPm      GBPm           GBPm     GBPm 
====================================  ======  ======  ======  ==========  ========  =============  ======= 
Average divisional capital employed                      988       1,103       452            415    2,958 
Average capital employed - assets held 
 for distribution to owners                                                                          1,355 
Average corporate capital employed                                                                      13 
====================================================  ======  ==========  ========  =============  ======= 
Average total capital employed                                                                       4,326 
====================================================  ======  ==========  ========  =============  ======= 
Return on capital employed                             16.9%        6.3%     17.9%           8.2%    11.2% 
====================================================  ======  ==========  ========  =============  ======= 
 
 
 
                                                                                         31 January 2020 
                                                      ================================================== 
                                                        John      Smiths                   Smiths 
                                                       Crane   Detection  Flex-Tek   Interconnect    Total 
                                                        GBPm        GBPm      GBPm           GBPm     GBPm 
====================================  ======  ======  ======  ==========  ========  =============  ======= 
Average divisional capital employed                      962       1,125       469            380    2,936 
Average capital employed - assets held 
 for distribution to owners                                                                          1,290 
Average corporate capital employed                                                                    (70) 
====================================================  ======  ==========  ========  =============  ======= 
Average total capital employed                                                                       4,156 
====================================================  ======  ==========  ========  =============  ======= 
Return on capital employed                             23.3%       11.5%     20.6%          10.1%    14.7% 
====================================================  ======  ==========  ========  =============  ======= 
 
 

Analysis of revenue

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

 
                                            Original 
                                           equipment  Aftermarket  Total 
John Crane                                      GBPm         GBPm   GBPm 
====================================      ==========  ===========  ===== 
Revenue six months ended 31 January 
 2021                                            130          280    410 
Revenue six months ended 31 January 
 2020                                            154          320    474 
========================================  ==========  ===========  ===== 
 
 
                                                        Other 
                                                     security 
                                          Aviation    systems  Total 
Smiths Detection                              GBPm       GBPm   GBPm 
====================================      ========  =========  ===== 
Revenue six months ended 31 January 
 2021                                          260         90    350 
Revenue six months ended 31 January 
 2020                                          254        124    378 
========================================  ========  =========  ===== 
 
 
                                          Aerospace  Industrials  Total 
Flex-Tek                                       GBPm         GBPm   GBPm 
====================================      =========  ===========  ===== 
Revenue six months ended 31 January 
 2021                                            48          190    238 
Revenue six months ended 31 January 
 2020                                            77          171    248 
========================================  =========  ===========  ===== 
 
 
                                              Components, 
                                               Connectors 
                                             & Subsystems 
Smiths Interconnect                                  GBPm 
====================================        ============= 
Revenue six months ended 31 January 
 2021                                                 152 
Revenue six months ended 31 January 
 2020                                                 140 
==========================================  ============= 
 

The Group's statutory revenue is analysed as follows:

 
                                                           Six months 
                                                     Six        ended 
                                                  months   31 January 
                                                   ended         2020 
                                              31 January    Restated* 
                                                    2021         GBPm 
                                                    GBPm 
=======================================      ===========  =========== 
Sale of goods recognised at a point in 
 time                                                840          905 
Sale of goods recognised over time                    24           23 
Services recognised over time                        286          312 
===========================================  ===========  =========== 
Revenue - continuing operations                    1,150        1,240 
===========================================  ===========  =========== 
 

* Following a review of the Group's revenue disclosures, the comparative period ended 31 January 2020 has been adjusted to reclassify GBP74m of repairs revenue from 'Sale of goods recognised at a point in time' to 'Services recognised over time'. This reclassification has no impact on total revenue, profit or net assets recorded in the comparative period ended 31 January 2020.

Operating costs

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

 
                                                Six months   Six months 
                                                     ended        ended 
                                                31 January   31 January 
                                                      2021         2020 
                                                      GBPm         GBPm 
=========================================      ===========  =========== 
Direct materials, labour, production and 
 distribution overheads                                709          743 
Selling costs                                          105          126 
Administrative expenses                                170          185 
=============================================  ===========  =========== 
Headline operating costs                               984        1,054 
=============================================  ===========  =========== 
 

Income statement representation

Following a review of the Group's external and internal reporting requirements, management have decided to present the consolidated income statement in a revised format disclosing operating costs on the face of the income statement instead of cost of sales, sales and distribution costs and administrative expenses separately.

The results in the comparatives for the period ended 31 January 2020 have been represented accordingly. Management consider that the revised income statement presentation provides users of the financial statements

with more accessible, reliable and relevant information about the Group's   financial performance. 

Strategic restructuring programme

In June 2020 the Group commenced a strategic restructuring programme to ensure that the Group emerges stronger from the COVID-19 crisis and better able to deliver consistent outperformance. In the current period, restructuring costs of GBP1m (31 January 2020: GBPnil) were recognised in continuing operations and GBP3m (31 January 2020: GBPnil) in discontinued operations.

The table below shows a reconciliation of h eadline operating profit excluding restructuring costs to headline operating profit for continuing operations. See note 19 for further detail.

 
                                                         Six months   Six months 
                                                              ended        ended 
                                                         31 January   31 January 
                                                               2021         2020 
                                                               GBPm         GBPm 
==================================================      ===========  =========== 
Headline operating profit                                       166          186 
Strategic restructuring costs recognised 
 in headline administrative expenses                            (1)            - 
======================================================  ===========  =========== 
Headline operating profit excluding restructuring 
 costs                                                          167          186 
======================================================  ===========  =========== 
 
   3   Non-statutory profit measures 

Headline profit measures

The Group seeks to present a measure of performance which is not impacted by material non-recurring items or items considered non-operational in nature. This measure of profit is described as 'headline' and is used by management to measure and monitor performance. 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

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

 
                                                                 Six months   Six months 
                                                                      ended        ended 
                                                                 31 January   31 January 
                                                                       2021         2020 
                                                                       GBPm         GBPm 
=============================================================   ===========  =========== 
Post-acquisition integration costs and fair value adjustment 
 unwind 
Integration programmes                                                  (1)          (3) 
Acquisition related transactions costs 
Business acquisition costs                                                -          (2) 
Legacy pension scheme arrangements 
Guaranteed Minimum Pension (GMP) equalisation                           (6)            - 
Settlement gains on post-retirement benefit schemes                       -            8 
Non-headline litigation provision movements 
Provision for John Crane, Inc. asbestos litigation                      (2)         (11) 
Cost recovery for John Crane, Inc. asbestos litigation                    6            - 
Movement in provision held against Titeflex Corporation 
 subrogation claims                                                       7          (5) 
Other items 
Amortisation of acquisition related intangible assets                  (27)         (28) 
==============================================================  ===========  =========== 
Non-headline items in operating profit - continuing 
 operations                                                            (23)         (41) 
==============================================================  ===========  =========== 
 

Post-acquisition integration costs and fair value adjustment unwind

The GBP1m (31 January 2020: GBP3m) of integration programme costs relate to defined projects for the integration of United Flexible into the existing Flex-Tek business. Integration programme costs include the direct costs of organisational change, site rationalisation and entity closure costs. The United Flexible integration programme is due to conclude in calendar year 2021. Integration costs are recognised as non-headline items because they are considered to be non-operational in nature and bear no relation to the ongoing performance of the acquired businesses.

Acquisition related transaction costs

In the prior year the GBP2m of business acquisition costs related to the acquisition of Reflex Photonics Inc. which completed in October 2019. These costs do not include the cost of employees working on transactions, and are reported as non-headline because they are dependent on the level of acquisition and disposal activity in the period.

Legacy pension scheme arrangement

In the current year GBP6m of past service costs (31 January 2020: GBPnil) were recognised following a further ruling from the UK High Court on GMP equalisation. In the prior year the GBP8m settlement gain on post-retirement benefit schemes is due to changes to the US post-retirement healthcare plans as a result of the US Patient Protection and Affordable Care Act. These are recognised as 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 GBP2m (31 January 2020: GBP11m) charge in respect of John Crane, Inc. asbestos litigation is principally due to litigation management expenses and discount rate movements following an increase in US treasury bond yields. The costs recovered via insurer settlements in the current period were GBP6m. See note 12 for further details; and

- A GBP7m credit (31 January 2020: GBP5m charge) has been recognised by Titeflex Corporation in respect of changes to the estimated cost of future claims. The current year credit is driven by discount rate movements. See note 12 for further details.

Other items

Acquisition related intangible asset amortisation costs of GBP27m (31 January 2020: GBP28m) 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.

Non-headline finance costs items

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

 
                                                                                      Six 
                                                                 Six months        months 
                                                                      ended         ended 
                                                                 31 January    31 January 
                                                                       2021          2020 
                                                                       GBPm          GBPm 
=============================================================   ===========  ============ 
Unwind of discount on provisions                                        (1)           (3) 
Other finance income - retirement benefits                                3             4 
Foreign exchange loss on intercompany loan with discontinued 
 operations                                                            (38)          (68) 
Other financing losses                                                  (2)           (6) 
==============================================================  ===========  ============ 
Non-headline items in finance costs - continuing operations            (38)          (73) 
==============================================================  ===========  ============ 
Continuing operations - non-headline loss before taxation              (61)         (114) 
==============================================================  ===========  ============ 
 

The financing elements of non-headline legacy liabilities, including the GBP1m (31 January 2020: GBP3m) unwind of discount on provisions, are 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 GBP3m (31 January 2020: GBP4m) of financing credits relating to retirement benefits. These are excluded from headline finance costs because the ongoing costs and credits are a legacy of previous employee pension arrangements.

Foreign exchange gains or losses on intercompany financing between Smiths Medical and the continuing group are recognised on the face of the income statement as a non-headline item due to the classification of Smiths Medical as a discontinued operation. The GBP38m foreign exchange loss in continuing operations (31 January 2020: GBP68m) matches the foreign exchange gain in discontinued operations. This is excluded from headline net finance costs as these fair value movements are non-operational in nature and are purely a consequence of the presentational requirements for discontinued operations.

Other financing losses represent fair value movements on financial instruments and foreign exchange movements on borrowings, which the Group excludes from headline net finance costs. The current period loss of GBP2m (31 January 2020: GBP6m) is principally due to hedge ineffectiveness on the Group's 2027 Eurobonds, which will reverse over the remaining period to maturity. These fair value movements are excluded from headline net finance costs when the following requirements are met:

- Fair value gains and losses on the interest element of derivative financial instruments hedging the Group's net debt exposures are excluded from headline, as they will either reverse over time or be matched in future periods by interest charges.

- Fair value gains and losses on the currency element of derivative financial instruments hedging the Group's net debt and exposures, and exchange gains and losses on borrowings are excluded, as the relevant foreign exchange gains and losses on the commercially hedged items are recognised as a separate component of other comprehensive income, in accordance with the Group's foreign currencies accounting policy.

Non-headline taxation items

The GBP21m non-headline taxation charge for continuing operations (31 January 2020: GBP9m credit) represents the tax attributable to the non-headline items above and the write-off of UK deferred tax, the latter matched by a credit in other comprehensive income.

Non-headline items for discontinued operations

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

 
                                                              Six months   Six months 
                                                                   ended        ended 
                                                              31 January   31 January 
                                                                    2021         2020 
                                                                    GBPm         GBPm 
==========================================================   ===========  =========== 
Acquisition and disposal related transactions costs 
 and provision releases 
Medical separation costs                                             (1)         (11) 
Non-headline finance costs items 
Foreign exchange gain on intercompany loan with parent                38           68 
Non-headline taxation items 
Taxation on non-headline profit                                        3            6 
===========================================================  ===========  =========== 
Non-headline items in profit from discontinued operations             40           63 
===========================================================  ===========  =========== 
Profit for the period - non-headline items for continuing 
 and discontinued operations                                        (42)         (42) 
===========================================================  ===========  =========== 
 

The GBP1m of Medical separation costs (31 January 2020: GBP11m) represent incremental costs incurred by the Group to separate Smiths Medical. This cost has been reported as non-headline as the full year effect of the transaction on the Group's financial statements is both material and non-recurring.

The GBP38m foreign exchange gain on intercompany loan with parent (31 January 2020: GBP68m) directly offsets the foreign exchange loss in continuing operations. This is excluded from headline net finance costs as these fair value movements are non-operational in nature and are purely a consequence of the presentational requirements for discontinued operations.

   4   Earnings per share 

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

 
                                                                Six months   Six months 
                                                                     ended        ended 
                                                                31 January   31 January 
                                                                      2021         2020 
                                                                      GBPm         GBPm 
-------------------------------------------------------------  -----------  ----------- 
Profit attributable to equity shareholders for the period 
 - Continuing                                                           21           11 
 - Discontinuing                                                       107          133 
-------------------------------------------------------------  -----------  ----------- 
Total                                                                  128          144 
-------------------------------------------------------------  -----------  ----------- 
Average number of shares in issue during the period            396,331,156  396,181,277 
-------------------------------------------------------------  -----------  ----------- 
Statutory earnings per share continuing operations - basic             5.3          2.8 
Statutory earnings per share continuing operations - diluted           5.3          2.8 
-------------------------------------------------------------  -----------  ----------- 
Statutory earnings per share total - basic                            32.3         36.3 
Statutory earnings per share total - diluted                          32.2         36.2 
-------------------------------------------------------------  -----------  ----------- 
 

Diluted earnings per share are calculated by dividing the profit attributable to ordinary shareholders by 397,355,869 (31 January 2020: 397,628,603) ordinary shares, being the average number of ordinary shares in issue during the year adjusted by the dilutive effect of employee share schemes.

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

 
                                             Six months ended      Six months ended 
                                              31 January 2021       31 January 2020 
                                           --------------------  -------------------- 
                                                 Basic  Diluted        Basic  Diluted 
                                                   EPS      EPS          EPS      EPS 
                                           GBPm    (p)      (p)  GBPm    (p)      (p) 
-----------------------------------------  ----  -----  -------  ----  -----  ------- 
Basic earnings per share: 
Total profit attributable to equity 
 shareholders of the Parent Company         128   32.3     32.2   144   36.3     36.2 
Exclude: Non-headline items (note 
 3)                                          42                    42 
-----------------------------------------  ----  -----  -------  ----  -----  ------- 
Headline earnings per share                 170   42.9     42.8   186   46.9     46.8 
-----------------------------------------  ----  -----  -------  ----  -----  ------- 
Profit from continuing operations 
 attributable to equity shareholders 
 of 
 the Parent Company                          21    5.3      5.3    11    2.8      2.8 
Exclude: Non-headline items (note 
 3)                                          82                   105 
-----------------------------------------  ----  -----  -------  ----  -----  ------- 
Headline earnings per share - continuing 
 operations                                 103   26.0     25.9   116   29.3     29.2 
-----------------------------------------  ----  -----  -------  ----  -----  ------- 
 
   5   Taxation 

The interim tax rate of 74.4% (31 January 2020: 74.3%) is calculated by applying the estimated effective headline tax rate for continuing operations of 28.0% (31 January 2020: 27.0%) for the year ended 31 July 2021 to headline profit before tax and then taking into account the tax effect of non-headline items in the interim period.

A reconciliation of headline and total tax charge is as follows:

 
                                                       Six months             Six months 
                                                     ended 31 January       ended 31 January 
                                                           2021                   2020 
                                                  ---------------------  --------------------- 
                                                   Continuing             Continuing 
                                                   operations             operations 
                                                         GBPm  Tax rate         GBPm  Tax rate 
------------------------------------------------  -----------  --------  -----------  -------- 
Headline tax rate 
Headline profit before taxation                           145                    160 
Taxation on headline profit                              (41)     28.0%         (43)     27.0% 
------------------------------------------------  -----------  --------  -----------  -------- 
Adjustments 
Non-headline items excluded from profit before 
 taxation (note 3)                                       (61)                  (114) 
Taxation on non-headline items and non-headline 
 tax adjustment                                          (21)                      9 
------------------------------------------------  -----------  --------  -----------  -------- 
Total interim tax rate 
Profit before taxation                                     84                     46 
Taxation                                                 (62)     74.4%         (34)     74.3% 
------------------------------------------------  -----------  --------  -----------  -------- 
 

The changes in the value of the net tax asset/(liability) in the period were:

 
                                       Current  Deferred   Net tax 
                                           tax       tax   balance 
                                          GBPm      GBPm      GBPm 
----------------------------------     -------  --------  -------- 
At 31 July 2020                           (38)        75        37 
Foreign exchange gains and losses            1       (3)       (2) 
Charge to income statement                (45)      (17)      (62) 
Credit to equity                             -        20        20 
Tax paid                                    48         -        48 
-------------------------------------  -------  --------  -------- 
At 31 January 2021                        (34)        75        41 
-------------------------------------  -------  --------  -------- 
 

Developments in the Group tax position

Franked Investment Income Group Litigation Order (FII GLO)

The Group joined the FII GLO litigation against HM Revenue & Customs (HMRC) in 2009. The court actions were first filed in 2003 and the Group joined the GLO shortly before the then understood latest date by which it was "in time" to make a claim. Since then there have been about 12 years of litigation in the both the EU and English Courts. In November 2020 the Supreme Court, in allowing HMRC's appeal, decided that the time limit for claims should be determined as 6 years from when the claimants, including the Group knew, or by undertaking reasonable diligence could have known, that they had a valid claim. The case has now returned to the High Court to determine the actual date on the facts of the matter. This is expected to add at least three years to the litigation.

In the light of this decision, management's view of the likelihood of a successful outcome in the Courts has changed. So rather than incurring the costs and management time in continuing with litigation, with a worst case involving an outflow of cash of around GBP2m, the Group has chosen to settle with HMRC. The settlement amount of GBP0.8m was paid to the Group on 11 February 2021. This amount is in addition to GBP2m which the Group received in FY2018. The Group has now withdrawn from the FII GLO.

European Commission Investigation regarding Claims for Partial (75%) Exemption for Profits from qualifying loan relationships under Chapter 9 FA2012

The Group continues to disclose a contingent liability in relation to the European Commission decision that the UK's tax rules constituted illegal State Aid. The maximum amount has slightly reduced from GBP15m to GBP14m as a result of clarification of applicable interest rates. In June 2019 the UK government appealed to the General Court of the EU against the decision. Many UK based international companies have also appealed the decision, including the Group in October 2019. Nonetheless, the UK Government is required to commence recovery from beneficiaries of the alleged aid in line with the European Commission's decision. The recovery process by the UK tax authorities is underway and HMRC has begun issuing charging notices. The Group has not yet received a charging notice. If it does, UK tax authority guidance states that tax reliefs (including losses) can be taken into account in computing the amount of the State Aid to be paid. These reliefs should mean there is no material cash outlay for the Group, even if the European Commission's decision is ultimately upheld. Nevertheless, the use of these attributes is not certain and the estimated maximum potential liability (which includes both tax and interest) is GBP14m. Based on our current assessment, no provision is being made in respect of this issue.

   6   Post retirement benefits 

The Group provides post-retirement benefits to employees in a number of countries throughout the world. The arrangements include defined benefit and defined contribution plans and, mainly in the United Kingdom (UK) and United States of America (US), post-retirement healthcare. The principal defined benefit pension plans are in the UK and US, and these have been closed so that no future benefits are accrued.

Where any individual scheme shows a 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 arises from the rights of the employers to recover the surplus at the end of the life of the scheme. The schemes in surplus are mature, with a duration averaged over all scheme participants, of 16 years.

The amounts recognised in the balance sheet are as follows:

 
                                                    31 January        31 July 
                                                          2021           2020 
                                                          GBPm           GBPm 
-------------------------------------------------   ----------  ------------- 
Market value of scheme assets                            4,379          4,582 
Present value of funded scheme liabilities             (3,957)        (4,078) 
--------------------------------------------------  ----------  ------------- 
Surplus                                                    422            504 
--------------------------------------------------  ----------  ------------- 
Unfunded pension plans                                   (121)          (123) 
Post-retirement healthcare                                 (8)            (9) 
--------------------------------------------------  ----------  ------------- 
Present value of unfunded obligations                    (129)          (132) 
--------------------------------------------------  ----------  ------------- 
Net retirement benefit asset                               293            372 
--------------------------------------------------  ----------  ------------- 
Post-retirement assets                                     432            516 
Post-retirement liabilities                              (134)          (139) 
Liabilities held for distribution to owners (see 
 note 17)                                                  (5)            (5) 
--------------------------------------------------  ----------  ------------- 
Net retirement benefit asset                               293            372 
--------------------------------------------------  ----------  ------------- 
 

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

 
                                                31 January 2021    31 July 2020 
                                               -----------------  -------------- 
                                                     UK       US      UK      US 
---------------------------------------------  --------  -------  ------  ------ 
Rate of increase for active deferred members       3.9%      n/a    3.8%     n/a 
Rate of increase in pensions in payment            3.0%      n/a    2.9%     n/a 
Rate of increase in deferred pensions              3.0%      n/a    2.9%     n/a 
Discount rate                                      1.5%     2.7%    1.4%    2.4% 
---------------------------------------------  --------  -------  ------  ------ 
 

The methods for setting the mortality assumptions for the UK schemes are consistent with the 31 July 2020 valuation. The US schemes have adopted the mortality improvement scale MP-2020 (31 July 2020: MP-2019).

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

 
                                                  31 January 2021 - 
                                                         GBPm                  31 July 2020 - GBPm 
                                             ----------------------------  ---------------------------- 
                                                SIPS    TIGPS  US schemes     SIPS    TIGPS  US schemes 
-------------------------------------------  -------  -------  ----------  -------  -------  ---------- 
Present value of funded scheme liabilities 
- Active deferred members                       (43)     (30)        (83)     (44)     (61)        (95) 
- Deferred members                             (831)    (638)       (124)    (961)    (593)       (138) 
- Pensioners                                 (1,256)    (816)        (74)  (1,178)    (866)        (81) 
-------------------------------------------  -------  -------  ----------  -------  -------  ---------- 
Present value of funded scheme liabilities   (2,130)  (1,484)       (281)  (2,183)  (1,520)       (314) 
Market value of scheme assets                  2,377    1,669         280    2,466    1,754         311 
-------------------------------------------  -------  -------  ----------  -------  -------  ---------- 
Surplus/(deficit)                                247      185         (1)      283      234         (3) 
-------------------------------------------  -------  -------  ----------  -------  -------  ---------- 
 

Contributions

Group contributions to the funded defined benefit pension plans in the period totalled GBP16m (31 January 2020: GBP12m), comprising regular contributions of GBP6m (31 January 2020: GBP6m) to SIPS, GBP6m (31 January 2020: GBP6m) to TIGPS and GBP4m (31 January 2020: GBPnil) to funded US Schemes. In addition, GBP3m (31 January 2020: GBP4m) was paid to unfunded defined benefit pension schemes and post-retirement healthcare plans. No additional contributions to support risk reduction programmes were made in the current or previous period.

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

 
                                                   Six months      Year 
                                                        ended     ended 
                                                   31 January   31 July 
                                                         2021      2020 
                                                         GBPm      GBPm 
----------------------------------------------    -----------  -------- 
At beginning of period                                    372       311 
Foreign exchange rate movements                             3         2 
Current service cost                                      (1)       (3) 
Scheme administration costs                               (3)       (5) 
Past service cost, curtailments, settlements              (6)         8 
Finance income - retirement benefits                        3         7 
Contributions by employer                                  19        33 
Actuarial gain/(loss)                                    (94)        19 
------------------------------------------------  -----------  -------- 
Net retirement benefit asset at end of period             293       372 
------------------------------------------------  -----------  -------- 
 

Past service costs, curtailments and settlements

The past service cost of GBP29m was recognised in the year ended 31 July 2019 to reflect the estimated cost of equalising benefits in the Group's UK schemes, in line with the requirements of the court judgment on 26 October 2018 in the case involving Lloyds Banking Group and relating to Guaranteed Minimum Pensions. In the current period, a further past service cost of GBP6m has been recognised in relation to the subsequent court judgment addressing the need to equalise historical transfer values. In the prior period the Group recognised a curtailment gain of GBP8m due to changes to the US post-retirement healthcare plans.

Buy-in agreements

In September 2020 TIGPS purchased a buy-in annuity policy with Aviva for a premium of approximately GBP141m. An actuarial loss of GBP23m was recognised in the period as a result of this buy-in agreement. In October 2020 SIPS purchased a buy-in annuity policy with Canada Life for a premium of approximately GBP146m. An actuarial loss of GBP17m was recognised in the period as a result of this buy-in agreement. Across SIPS and TIGPS, approximately 70% of pensioner liabilities are now de-risked through 10 bulk annuities.

   7   Intangible assets 
 
                                                                                     Software, 
                                                                                       patents 
                                                  Development      Acquired   and intellectual 
                                        Goodwill        costs   intangibles           property   Total 
                                            GBPm         GBPm          GBPm               GBPm    GBPm 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
Cost 
At 31 July 2020                            1,254          155           546                174   2,129 
Exchange adjustments                        (42)          (4)          (22)                (4)    (72) 
Business combinations               13         3            -             2                  -       5 
Additions                                      -            4             -                  6      10 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
At 31 January 2021                         1,215          155           526                176   2,072 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
Amortisation 
At 31 July 2020                               62          112           249                142     565 
Exchange adjustments                         (2)          (2)          (10)                (4)    (18) 
Charge for the period                          -            3            27                  3      33 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
At 31 January 2021                            60          113           266                141     580 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
Net book value at 31 January 2021          1,155           42           260                 35   1,492 
Net book value at 31 July 2020             1,192           43           297                 32   1,564 
----------------------------------      --------  -----------  ------------  -----------------  ------ 
 
   8   Property, plant and equipment 
 
                                                             Fixtures, 
                                                             fittings, 
                                          Land       Plant       tools 
                                           and         and         and 
                                     buildings   machinery   equipment  Total 
                                          GBPm        GBPm        GBPm   GBPm 
----------------------------------  ----------  ----------  ----------  ----- 
Cost or valuation 
At 31 July 2020                            175         383         133    691 
Exchange adjustments                       (1)        (13)         (3)   (17) 
Additions                                    -          17           1     18 
Disposals                                    -         (5)         (3)    (8) 
----------------------------------  ----------  ----------  ----------  ----- 
At 31 January 2021                         174         382         128    684 
----------------------------------  ----------  ----------  ----------  ----- 
Depreciation 
At 31 July 2020                            102         261         110    473 
Exchange adjustments                       (1)        (11)         (2)   (14) 
Charge for the period                        4          12           3     19 
Disposals                                    -         (3)         (3)    (6) 
----------------------------------  ----------  ----------  ----------  ----- 
At 31 January 2021                         105         259         108    472 
----------------------------------  ----------  ----------  ----------  ----- 
Net book value at 31 January 2021           69         123          20    212 
Net book value at 31 July 2020              73         122          23    218 
----------------------------------  ----------  ----------  ----------  ----- 
 
   9   Right of use assets 
 
                                      Properties  Vehicles  Equipment  Total 
                                            GBPm      GBPm       GBPm   GBPm 
------------------------------------  ----------  --------  ---------  ----- 
Cost 
At 31 July 2020                              110        14          1    125 
Exchange adjustments                         (2)         -          -    (2) 
Recognition of right of use assets             8         1          -      9 
Modification of right of use assets            1         -          -      1 
------------------------------------  ----------  --------  ---------  ----- 
At 31 January 2021                           117        15          1    133 
------------------------------------  ----------  --------  ---------  ----- 
Depreciation 
At 31 July 2020                               26         5          -     31 
Charge for the period                         12         3          -     15 
------------------------------------  ----------  --------  ---------  ----- 
At 31 January 2021                            38         8          -     46 
------------------------------------  ----------  --------  ---------  ----- 
Net book value at 31 January 2021             79         7          1     87 
Net book value at 31 July 2020                84         9          1     94 
------------------------------------  ----------  --------  ---------  ----- 
 

10 Borrowings and net debt

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

 
                                                               31 January  31 July 
                                                                     2021     2020 
                                                                     GBPm     GBPm 
-------------------------------------------------------------  ----------  ------- 
Cash and cash equivalents 
Net cash and cash equivalents                                         375      366 
-------------------------------------------------------------  ----------  ------- 
Short-term borrowings 
Lease liabilities                                                    (27)     (31) 
Interest accrual                                                     (19)     (10) 
-------------------------------------------------------------  ----------  ------- 
                                                                     (46)     (41) 
-------------------------------------------------------------  ----------  ------- 
Long-term borrowings 
$400m 3.625% US$ Guaranteed notes 2022                              (294)    (308) 
EUR600m 1.25% Eurobond 2023                                         (536)    (546) 
EUR650m 2.00% Eurobond 2027                                         (592)    (601) 
Lease liabilities                                                    (64)     (65) 
-------------------------------------------------------------  ----------  ------- 
                                                                  (1,486)  (1,520) 
-------------------------------------------------------------  ----------  ------- 
Borrowings                                                        (1,532)  (1,561) 
-------------------------------------------------------------  ----------  ------- 
Derivatives managing interest rate risk and currency profile 
 of the debt                                                          100       82 
-------------------------------------------------------------  ----------  ------- 
Net debt (excludes net debt of GBP18m in businesses held 
 for distribution (31 July 2020: GBP28m))                         (1,057)  (1,113) 
-------------------------------------------------------------  ----------  ------- 
 

Total Group net debt including net debt in businesses held for distribution is GBP1,075m (31 July 2020: GBP1,141m).

Movements in net debt

 
                                                                                        Interest 
                                                                                            rate 
                                                      Cash                             and cross 
                                                       and   Short-term    Long-term    currency 
                                                  deposits   borrowings   borrowings       swaps  Net debt 
                                                      GBPm         GBPm         GBPm        GBPm      GBPm 
----------------------------------------------   ---------  -----------  -----------  ----------  -------- 
At 31 July 2020                                        366         (41)      (1,520)          82   (1,113) 
Foreign exchange gains and losses                     (12)          (1)           33           -        20 
Net cash inflow from continuing operations*             21            -            -           -        21 
Net movement arising from lease modifications            -            -         (12)           -      (12) 
Fair value movement from interest 
 rate hedging                                            -            -            3           -         3 
Revaluation of derivative contracts                      -            -            -          18        18 
Finance costs recognised in income 
 statement**                                             -         (15)          (1)           -      (16) 
Interest paid                                            -            5            -           -         5 
Payment of lease liabilities                             -           17            -           -        17 
Reclassification to short-term                           -         (11)           11           -         - 
-----------------------------------------------  ---------  -----------  -----------  ----------  -------- 
At 31 January 2021                                     375         (46)      (1,486)         100   (1,057) 
-----------------------------------------------  ---------  -----------  -----------  ----------  -------- 
 

* The GBP21m of net cash inflow from continuing operations excludes GBP4m of net cash inflow from discontinued operations. Net cash inflow for the total Group including discontinued operations was GBP25m.

** The Group has also incurred GBP5m of bank charges that are expensed when paid and are not included in net debt.

11 Fair value of financial instruments

 
                                            As at 31 January 2021                             As at 31 July 2020 
                                ----------------------------------------------  ---------------------------------------------- 
                         Basis             At fair                                         At fair 
                           for               value  At fair                                  value  At fair 
                   determining         At  through    value     Total    Total         At  through    value     Total    Total 
                          fair  amortised   profit  through  carrying     fair  amortised   profit  through  carrying     fair 
                         value       cost  or loss      OCI     value    value       cost  or loss      OCI     value    value 
                                     GBPm     GBPm     GBPm      GBPm     GBPm       GBPm     GBPm     GBPm      GBPm     GBPm 
----------------  ------------  ---------  -------  -------  --------  -------  ---------  -------  -------  --------  ------- 
Financial assets 
Other 
 investments                 A          -        7        -         7        7          -       11        -        11       11 
Other 
 investments*                E          -        -        6         6        6          -        -        8         8        8 
Cash and cash 
 equivalents                 A        259      116        -       375      375        206      160        -       366      366 
Trade and other 
 financial 
 receivables               A/B        600        -        -       600      600        679        -        -       679      679 
Derivative 
 financial 
 instruments                 B          -      104        -       104      104          -       84        -        84       84 
----------------  ------------  ---------  -------  -------  --------  -------  ---------  -------  -------  --------  ------- 
Total f inancial 
 assets                               859      227        6     1,092    1,092        885      255        8     1,148    1,148 
------------------------------  ---------  -------  -------  --------  -------  ---------  -------  -------  --------  ------- 
Financial 
liabilities 
Trade and other 
 financial 
 payables                    A      (521)        -        -     (521)    (521)      (578)        -        -     (578)    (578) 
Lease 
 liabilities 
 (long and short 
 term)                       C       (91)        -        -      (91)     (91)       (96)        -        -      (96)     (96) 
Other short-term 
 borrowings                  D       (19)        -        -      (19)     (19)       (10)        -        -      (10)     (10) 
Other long-term 
 borrowings                  D    (1,422)        -        -   (1,422)  (1,471)    (1,455)        -        -   (1,455)  (1,473) 
Derivative 
 financial 
 instruments                 B          -      (3)        -       (3)      (3)          -      (4)        -       (4)      (4) 
----------------  ------------  ---------  -------  -------  --------  -------  ---------  -------  -------  --------  ------- 
Total financial liabilities       (2,053)      (3)        -   (2,056)  (2,105)    (2,139)      (4)        -   (2,143)  (2,161) 
------------------------------  ---------  -------  -------  --------  -------  ---------  -------  -------  --------  ------- 
 

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

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 2 as defined 
      by IFRS 13 Fair Value Measurement). 
 B   Fair values of derivative financial assets and liabilities and 
      trade receivables held to collect or sell are estimated by discounting 
      expected future contractual cash-flows using prevailing interest 
      rate curves. Amounts denominated in foreign currencies are valued 
      at the exchange rate prevailing at the balance sheet date. These 
      financial instruments are included on the balance sheet at fair 
      value, derived from observable market prices (Level 2 as defined 
      by IFRS 13 Fair Value Measurement). 
 C   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). 
 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   The fair value of instruments is estimated by using unobservable 
      inputs to the extent that relevant observable inputs are not available. 
      Unobservable inputs are developed using the best information available 
      in the circumstances, which may include the Group's own data, taking 
      into account all information about market participation assumptions 
      that is reliably available. (Level 3 as defined by IFRS 13). 
      IFRS 13 defines a three level valuation hierarchy: 
      Level 1 - quoted prices for similar instruments 
      Level 2 - directly observable market inputs other than Level 1 
      inputs 
      Level 3 - inputs not based on observable market data 
 

12 Provisions and contingent liabilities

 
                                                  Non-headline and 
                                Headline               legacy               Total 
                                --------  --------------------------------  ----- 
                                                 John 
                                               Crane,      Titeflex 
                                                 Inc.   Corporation 
                                           litigation    litigation  Other 
                                    GBPm         GBPm          GBPm   GBPm   GBPm 
-----------------------------   --------  -----------  ------------  -----  ----- 
Current liabilities                   12           26            13      4     55 
Non-current liabilities                2          205            53     16    276 
------------------------------  --------  -----------  ------------  -----  ----- 
At 31 July 2020                       14          231            66     20    331 
Exchange adjustments                 (1)         (10)           (3)    (1)   (15) 
Provision charged                      4            1             -      -      5 
Provision released                   (1)            -           (7)      -    (8) 
Unwind of provision discount           -            1             -      -      1 
Utilisation                          (3)          (6)           (2)      -   (11) 
------------------------------  --------  -----------  ------------  -----  ----- 
At 31 January 2021                    13          217            54     19    303 
------------------------------  --------  -----------  ------------  -----  ----- 
Current liabilities                   12           15             9      3     39 
Non-current liabilities                1          202            45     16    264 
------------------------------  --------  -----------  ------------  -----  ----- 
At 31 January 2021                    13          217            54     19    303 
------------------------------  --------  -----------  ------------  -----  ----- 
 

The John Crane, Inc. and Titeflex Corporation litigation provisions are the only provisions which are discounted.

Headline provisions and contingent liabilities:

Warranty provision and product liability

At 31 January 2021 there are warranty and product liability provisions of GBP11m (31 July 2020: GBP13m). Warranties over the Group's products typically cover periods of between one and three years. Provision is made for the likely cost of after-sales support based on the recent past experience of individual businesses.

Commercial disputes and litigation in respect of ongoing business activities

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

Contingent liabilities

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

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

Non-headline and legacy provisions and contingent liabilities:

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

The table below summarises the JCI claims experience over the last 40 years since the start of this litigation:

 
                                                 31 January  31 July 
                                                       2021     2020 
--------------------------------------------     ----------  ------- 
JCI claims experience 
Claims against JCI that have been dismissed         304,000  297,000 
Claims which JCI is currently a defendant 
 in                                                  22,000   25,000 
Cumulative final judgments, after appeals, 
 against JCI since 1979                                 149      149 
Cumulative value of awards ($m) since 
 1979                                                   175      175 
-----------------------------------------------  ----------  ------- 
 

John Crane, Inc. litigation insurance recoveries

JCI has certain excess liability insurance which may provide coverage for certain asbestos claims. JCI has also collected recoveries from its insurers in settlement of now concluded litigation in the United States. JCI meets its asbestos defence costs directly. The calculation of the provision does not take account of any recoveries from insurers. See note 3 for the cost recovery achieved in both the current and prior periods.

John Crane, Inc. litigation provision

The provision is based on past history and published tables of asbestos incidence projections and is determined using 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 judgments awarded. The provision utilised in the period is lower than previous periods, principally due to court closures and trial delays arising from the COVID-19 pandemic.

The JCI asbestos litigation provision has developed in the period as follows:

 
                                                               Six months 
                                                                    ended  Year ended 
                                                               31 January     31 July 
                                                                     2021        2020 
                                                                     GBPm        GBPm 
------------------------------------------------------------  -----------  ---------- 
John Crane, Inc. litigation provision 
Gross provision                                                       224         235 
Discount                                                              (7)         (4) 
------------------------------------------------------------  -----------  ---------- 
Discounted provision                                                  217         231 
Taxation                                                             (55)        (59) 
------------------------------------------------------------  -----------  ---------- 
Discounted post-tax provision                                         162         172 
------------------------------------------------------------  -----------  ---------- 
Operating profit (credit)/charge 
Increased provision for adverse judgments and legal defence 
 costs                                                                  4          14 
Change in US risk free rates                                          (3)          16 
============================================================  ===========  ========== 
Subtotal - items charged to the provision                               1          30 
Litigation management expense - legal fees in connection 
 with litigation against insurers and defence strategy                  1           1 
Recoveries from insurers                                              (6)         (3) 
============================================================  ===========  ========== 
Total operating profit (credit)/charge                                (4)          28 
============================================================  ===========  ========== 
Cash-flow 
Provision utilisation - legal defence costs and adverse 
 judgements                                                           (6)        (23) 
Litigation management expense                                           -         (1) 
Recoveries from insurers                                                3           3 
============================================================  ===========  ========== 
Net cash outflow                                                      (3)        (21) 
============================================================  ===========  ========== 
 

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 may be incurred because of the significant uncertainty associated with the future level of asbestos claims and of the costs arising out of related litigation.

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 GBP203m and future spend at the 95th percentile of GBP259m (31 July 2020: GBP214m and GBP271m, respectively). Statistical analysis of the distribution of these outcomes indicates that there is a 50% probability that the total future spend will fall between GBP212m and GBP233m (31 July 2020: between GBP222m and GBP244m), compared with the gross provision value of GBP224m (31 July 2020: GBP235m).

Sensitivity of the projections to changes in the time horizon used

If the asbestos litigation environment becomes more volatile and uncertain, for example if defendants are successful in legal cases against plaintiff law firms and this impacts the nature of claims filed, the time horizon over which the provision can be calculated may reduce. Conversely, if the environment became more stable, or JCI changed approach and committed to long term settlement arrangements, the time period covered by the provision might be extended.

The projections use a 10 year time horizon. Reducing the time horizon by one year would reduce the discounted pre-tax provision by GBP18m (31 July 2020: GBP20m) and reducing it by five years would reduce the discounted pre-tax provision by GBP98m (31 July 2020: GBP106m).

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 discounted pre-tax provision by GBP15m (31 July 2020: GBP17m); extending it by five years would increase the discounted pre-tax provision by GBP61m (31 July 2020: GBP69m). 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 may evolve beyond 10 years is not reasonably estimable.

John Crane, Inc. contingent liabilities

Provision has been made for future defence costs and the cost of adverse judgments expected to occur. JCI's claims experience is significantly impacted by other factors which influence the US litigation environment. These 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 number of future claims, the nature of such claims or the cost to resolve them for years beyond the 10 year time horizon.

Titeflex Corporation litigation

In recent years 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. Equivalent third-party products in the US marketplace face similar challenges.

Titeflex Corporation litigation provision

The continuing progress of claims and the pattern of settlement 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 (revised in 2008) 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 GBP54m (31 July 2020: GBP66m) 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.

 
                                31 January  31 July 
                                      2021     2020 
                                      GBPm     GBPm 
==============================  ==========  ======= 
Gross provision                         79       86 
Discount                              (25)     (20) 
==============================  ==========  ======= 
Discounted pre-tax provision            54       66 
Taxation                              (13)     (16) 
==============================  ==========  ======= 
Discounted post-tax provision           41       50 
==============================  ==========  ======= 
 

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 may 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 discounted pre-tax provision would be GBP4m (31 July 2020: GBP6m) lower, and if the benefit were 0.5% lower, the discounted pre-tax provision would be GBP5m (31 July 2020: GBP7m) higher.

The projections use assumptions of future claims that are based on both the number of future settlements and the average amount of those settlements. If the assumed average number of future settlements increased 10%, the discounted pre-tax provision would rise by GBP5m (31 July 2020: GBP5m), with an equivalent fall for a reduction of 10%. If the assumed amount of those settlements increased 10%, the discounted pre-tax provision would rise by GBP4m (31 July 2020: GBP3m), also with an equivalent fall for a reduction of 10%.

Other non-headline and legacy

Legacy provisions comprise provisions relating to former business activities and properties no longer used by Smiths. Non-headline provisions comprise all provisions that were disclosed as non-headline items when they were charged to the consolidated income statement. These provisions include non-headline reorganisation, disposal indemnities and litigation in respect of old products and discontinued business activities.

13 Acquisitions

On 2 August 2020, Smiths Detection completed the acquisition of 100% of the share capital of PathSensors Inc for an enterprise value of US$7.4m. PathSensors Inc is a leading biotechnology solutions and environmental testing company providing, high-speed, high-sensitivity pathogen detection and biothreat prevention. This acquisition brings new technology to Smiths Detection to strengthen its position in the markets in which it operates.

Goodwill represents the expected synergies from the strategic fit of the acquisition and the value of the expertise in the workforce. From the date of acquisition to 31 January 2021, PathSensors Inc contributed GBP1m to revenue and less than GBP1m to profit before taxation. If the Group had acquired this business at the beginning of the financial year, the acquisition would have contributed the same value to revenue and profit.

The provisional balance sheet at the date of acquisition is:

 
                                 PathSensors 
                                         Inc 
                                        GBPm 
==============================   =========== 
Non-current assets - acquired 
 intangible assets                         2 
===============================  =========== 
Total identifiable net assets              2 
Goodwill                                   3 
===============================  =========== 
Total                                      5 
===============================  =========== 
Satisfied by: 
Cash paid during the period                5 
===============================  =========== 
Total consideration                        5 
===============================  =========== 
 

These provisional fair values contain amounts which will be finalised no later than one year after the date of acquisition. Provisional amounts have been included at 31 January 2021 as a consequence of the timing and complexity of the acquisition.

14 Dividends

The following dividends were declared and paid in the period:

 
                                Six months   Six months 
                                     ended        ended 
                                31 January   31 January 
                                      2021         2020 
                                      GBPm         GBPm 
=============================  ===========  =========== 
Dividends paid in the period           138          126 
=============================  ===========  =========== 
 

In the current period a total dividend of 35.0p, comprising a delayed interim dividend of 11.0p and an ordinary final dividend of 24.0p, was paid on 20 November 2020. In the comparative period an ordinary final dividend of 31.8p was paid in respect of FY2019.

An interim dividend of 11.7 pence per share was declared by the Board on 25 March 2021 and will be paid to shareholders on 14 May 2021. This dividend has not been included as a liability in these accounts and is payable to all shareholders on the register of members at close of business on 9 April 2021.

15 Cash-flow from operating activities

 
                                                            Six months ended               Six months ended 
                                                             31 January 2021                31 January 2020 
                                                      =============================  ============================= 
                                                                Non-headline                   Non-headline 
                                                                       (note                          (note 
                                                      Headline            3)  Total  Headline            3)  Total 
                                                          GBPm          GBPm   GBPm      GBPm          GBPm   GBPm 
===================================================   ========  ============  =====  ========  ============  ===== 
Operating profit/(loss) - continuing 
 operations                                                166          (23)    143       186          (41)    145 
                                   - discontinued 
                                    operations              89           (1)     88        94          (11)     83 
Amortisation of intangible assets                            6            27     33         7            28     35 
Depreciation of property, plant 
 and equipment                                              19             -     19        20             -     20 
Depreciation of right of use 
 assets                                                     15             -     15        16             -     16 
Loss on disposal of property, 
 plant and equipment                                         1             -      1         1             -      1 
Loss on disposal of businesses                               -             -      -         -             1      1 
Share-based payment expense                                  6             -      6         8             -      8 
Retirement benefits                                          2          (12)   (10)         4          (24)   (20) 
Distribution from trading investment                         4             -      4         -             -      - 
Recycling of cash flow hedge 
 reserve                                                     1             -      1         -             -      - 
Decrease/(increase) in inventories                          35             -     35      (98)             -   (98) 
Decrease/(increase) in trade 
 and other receivables                                      88           (2)     86       149             -    149 
Decrease in trade and other payables                      (73)           (4)   (77)      (78)             -   (78) 
(Decrease)/increase in provisions                          (3)          (14)   (17)       (2)             3      1 
====================================================  ========  ============  =====  ========  ============  ===== 
Cash generated from operations                             356          (29)    327       307          (44)    263 
Interest paid                                             (12)             -   (12)      (17)             -   (17) 
Interest received                                            2             -      2         1             -      1 
Tax paid                                                  (55)             -   (55)      (60)             -   (60) 
====================================================  ========  ============  =====  ========  ============  ===== 
Net cash inflow/(outflow) from 
 operating activities                                      291          (29)    262       231          (44)    187 
====================================================  ========  ============  =====  ========  ============  ===== 
 

The split of tax payments between headline and non-headline only considers the nature of payments made. No adjustment has been made for reductions in tax payments required as a result of tax relief received on non-headline items.

Headline cash measures

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 19 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:

 
                                                 Six months ended               Six months ended 
                                                  31 January 2021                31 January 2020 
                                           =============================  ============================= 
                                           Headline  Non-headline  Total  Headline  Non-headline  Total 
                                               GBPm          GBPm   GBPm      GBPm          GBPm   GBPm 
=========================================  ========  ============  =====  ========  ============  ===== 
Net cash inflow/(outflow) from operating 
 activities                                     291          (29)    262       231          (44)    187 
=========================================  ========  ============  =====  ========  ============  ===== 
Include: 
Expenditure on capitalised development, 
 other intangible assets and property, 
 plant and equipment                           (55)             -   (55)      (55)             -   (55) 
Repayment of lease liabilities                 (23)             -   (23)      (22)             -   (22) 
Investment in financial assets relating 
 to operating activities and pensions 
 financing outstanding at the balance 
 sheet date                                       4             -      4         -             -      - 
=========================================  ========  ============  =====  ========  ============  ===== 
Free cash-flow                                                       188                            110 
=========================================  ========  ============  =====  ========  ============  ===== 
Exclude: 
Investment in financial assets relating 
 to operating activities and pensions 
 financing outstanding at the balance 
 sheet date                                     (4)             -    (4)         -             -      - 
Repayment of lease liabilities                   23             -     23        22             -     22 
Interest paid                                    12             -     12        17             -     17 
Interest received                               (2)             -    (2)       (1)             -    (1) 
Tax paid                                         55             -     55        60             -     60 
=========================================  ========  ============  =====  ========  ============  ===== 
Operating cash-flow                             301          (29)    272       252          (44)    208 
=========================================  ========  ============  =====  ========  ============  ===== 
 

Headline cash conversion

Headline operating cash conversion for the total Group is calculated as follows:

 
                                                                      Six months   Six months 
                                                                           ended        ended 
                                                                      31 January   31 January 
                                                                            2021         2020 
                                                                            GBPm         GBPm 
===================================================================  ===========  =========== 
 Headline operating profit - including discontinued operations               255          280 
 Depreciation and amortisation of held for distribution assets              (21)         (23) 
===================================================================  ===========  =========== 
Pro-forma operating profit including depreciation and amortisation 
 on held for distribution assets                                             234          257 
Headline operating cash-flow                                                 301          252 
===================================================================  ===========  =========== 
Headline operating cash conversion                                          129%          98% 
===================================================================  ===========  =========== 
 

Reconciliation of free cash-flow to total movement in cash and cash equivalents

 
                                                        Six months   Six months 
                                                             ended        ended 
                                                        31 January   31 January 
                                                              2021         2020 
                                                              GBPm         GBPm 
=====================================================  ===========  =========== 
Free cash-flow                                                 188          110 
Acquisition of business                                        (5)         (24) 
Net cash-flow used in financing activities                   (158)        (144) 
=====================================================  ===========  =========== 
Net increase/(decrease) in cash and cash equivalents            25         (58) 
=====================================================  ===========  =========== 
 

16 Related party transactions

The related party transactions in the period were consistent with the nature and size of transactions disclosed in the Annual Report for the year ended 31 July 2020.

17 Discontinued operations and businesses held for distribution to owners

The Group is currently pursuing the demerger of the Smiths Medical business to list it separately on the UK Stock Exchange; accordingly the Smiths Medical business has been accounted for as a discontinued operation and as a business held for distribution to owners at 31 January 2021.

We are finalising the key separation workstreams to deliver the separation of Smiths Medical in Q4 of the current financial year.

Discontinued operations

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

 
                                                                              Six months ended 
                                               Six months ended               31 January 2020 - 
                                                31 January 2021                  represented* 
                                         =============================  ============================= 
                                                   Non-headline                   Non-headline 
                                                          (note                          (note 
                                         Headline            3)  Total  Headline            3)  Total 
                                             GBPm          GBPm   GBPm      GBPm          GBPm   GBPm 
======================================   ========  ============  =====  ========  ============  ===== 
Revenue                                       427             -    427       434             -    434 
=======================================  ========  ============  =====  ========  ============  ===== 
 Direct materials, labour, production 
  and distribution overheads                (224)             -  (224)     (216)             -  (216) 
 Selling costs                               (58)             -   (58)      (59)             -   (59) 
 Administrative expenses                     (56)           (1)   (57)      (65)          (11)   (76) 
=======================================  ========  ============  =====  ========  ============  ===== 
Operating costs                             (338)           (1)  (339)     (340)          (11)  (351) 
=======================================  ========  ============  =====  ========  ============  ===== 
Operating profit/(loss)                        89           (1)     88        94          (11)     83 
Finance costs                                   -            38     38       (2)            68     66 
Taxation                                     (22)             3   (19)      (22)             6   (16) 
 
Profit from discontinued operations            67            40    107        70            63    133 
 
 

* Results in the comparatives for the period ended 31 January 2020 have been represented to show operating costs on the face of the income statement; see note 2 for further details.

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

 
                                                        Six months   Six months 
                                                             ended        ended 
                                                        31 January   31 January 
                                                              2021         2020 
                                                              GBPm         GBPm 
=====================================================  ===========  =========== 
Net cash inflow from operating activities                       50           44 
Net cash-flow used in investing activities                    (27)         (18) 
Net cash-flow used in financing activities                    (15)         (48) 
=====================================================  ===========  =========== 
Net increase/(decrease) in cash and cash equivalents             8         (22) 
=====================================================  ===========  =========== 
 

Businesses held for distribution to owners

The carrying value of the assets and liabilities of the Smiths Medical business as at 31 January 2021 and 31 July 2020 is as follows:

 
                                                         31 January  31 July 
                                                               2021     2020 
                                                               GBPm     GBPm 
Assets classified as held for distribution to owners: 
Intangible assets                                               718      734 
Property, plant and equipment                                   151      141 
Right of use assets                                              55       54 
Inventories                                                     164      164 
Deferred tax assets                                              12       14 
Current tax receivable                                            3        3 
Trade and other receivables                                     121      148 
Cash and cash equivalents                                        24       20 
Financial derivatives                                             3        1 
Assets classified as held for distribution to owners          1,251    1,279 
Liabilities classified as held for distribution to 
 owners: 
Financial liabilities 
- lease liabilities                                            (42)     (48) 
- financial derivatives                                         (4)      (4) 
Trade and other payables                                      (130)    (167) 
Current tax payable                                            (10)     (10) 
Deferred tax liabilities                                       (61)     (53) 
Retirement benefit obligations                                  (5)      (5) 
Provisions                                                      (5)      (8) 
Liabilities classified as held for distribution to 
 owners                                                       (257)    (295) 
 

Additional segmental information for discontinued operations

Revenue for the Smiths Medical discontinued operation is analysed by the following product lines: Infusion Systems GBP152m (31 January 2020: GBP148m), Vascular Access GBP133m (31 January 2020: GBP145m) and Vital Care/Other GBP142m (31 January 2020: GBP141m).

Pro-forma balance sheet of the Group excluding Smiths Medical

 
                                           31 January 
                                                 2021 
                                                 GBPm 
Non-current assets 
Intangible assets                               1,492 
Property, plant and equipment                     212 
Right of use assets                                87 
Financial assets - other investments               13 
Retirement benefit assets                         432 
Deferred tax assets                                97 
Trade and other receivables                        49 
Financial derivatives                             100 
                                                2,482 
Current assets 
Inventories                                       394 
Current tax receivable                             44 
Trade and other receivables                       551 
Cash and cash equivalents                         375 
Financial derivatives                               4 
                                                1,368 
Total assets                                    3,850 
Current liabilities 
Financial liabilities 
- borrowings                                     (19) 
- lease liabilities                              (27) 
- financial derivatives                           (3) 
Provisions                                       (39) 
Trade and other payables                        (471) 
Current tax payable                              (74) 
                                                (633) 
Non-current liabilities 
Financial liabilities 
- borrowings                                  (1,422) 
- lease liabilities                              (64) 
Provisions for liabilities and charges          (264) 
Retirement benefit obligations                  (134) 
Corporation tax payable                           (4) 
Deferred tax liabilities                         (22) 
Trade and other payables                         (50) 
                                              (1,960) 
Total liabilities                             (2,593) 
Net assets                                      1,257 
 

18 Post Balance Sheet Events

On 16 February 2021, the Group's Flex-Tek division completed the acquisition of 100% of the share capital of Royal Metal Products, LLC (Royal Metal) for a provisional cash cost of GBP78m ($107m).

Royal Metal is a manufacturer of metal duct products and flexible ducting used in commercial and residential construction, mainly in the South Eastern states of the US. This acquisition strengthens Flex-Tek's market leadership of the heating, ventilation, and air conditioning (HVAC) sub-segment of the US construction market by broadening its offerings.

Royal Metal had revenue of GBP56m in the year ended 31 December 2020. The acquisition accounting for this business combination is in progress and therefore incomplete. The fair value of goodwill, customer relationships, branding, business combination consideration and other assets and liabilities is currently being determined and will be reported in the Group's 2021 Annual Report.

In March 2021, the formal triennial valuation for the TI Group Pension Scheme (TIGPS) at 5 April 2020 was concluded. It shows a surplus on a technical provisions basis and further progress towards full buy-out, see page 6 for further detail.

19 Alternative performance measures

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 APMs which are common across the industry, in both planning and reporting, 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:

 
Term                                                     Definition and purpose 
Capital employed                                         Capital employed is a non-statutory measure of invested 
                                                         resources. It comprises statutory 
                                                         net assets and is adjusted to add goodwill recognised 
                                                         directly in reserves in respect of subsidiaries 
                                                         acquired before 1 August 1998 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. 
Dividend cover - headline                                Dividend cover is the ratio of headline earnings per share 
                                                         (see note 4) to dividend per share 
                                                         (see note 14). 
Divisional headline                                      DHOP comprise divisional earnings before central costs, 
 operating profit ('DHOP')                               finance costs and taxation. DHOP is 
                                                         used to monitor divisional performance. A reconciliation of 
                                                         DHOP to operating profit is shown 
                                                         in note 2. 
Free cash-flow                                           Free cash-flow is calculated by adjusting the net cash inflow 
                                                         from operating activities to 
                                                         include capital expenditure, the repayment of lease 
                                                         liabilities and proceeds from the disposal 
                                                         of property, plant and equipment. 
                                                         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 15. 
Gross debt                                               Gross debt is total borrowings (bank, bonds and lease 
                                                         liabilities). It is used to provide 
                                                         an indication of the Group's overall level of indebtedness. 
Gross vitality                                           Gross vitality is calculated as the percentage of revenue 
                                                         over the last 12 months derived 
                                                         from new products and services launched in the last three 
                                                         years. 
Headline                                                 The Group has defined a 'headline' measure of performance 
                                                         that excludes material non-recurring 
                                                         items or items considered non-operational/trading in nature. 
                                                         Items excluded from headline 
                                                         are referred to as non-headline items. This measure is used 
                                                         by the Group to measure and monitor 
                                                         performance excluding material non-recurring items or items 
                                                         considered non-operational. See 
                                                         note 3 for an analysis of non-headline items. 
Headline EBITDA                                          EBITDA is a widely used profit measure, not defined by IFRS, 
                                                         being earnings before interest, 
                                                         taxation, depreciation and amortisation. A reconciliation of 
                                                         headline operating profit to 
                                                         headline EBITDA is shown in the note below. 
Headline EBITDA before restructuring costs               Headline EBITDA, as defined above, is adjusted to exclude 
                                                         restructuring costs from the Group's 
                                                         strategic restructuring programme which commenced in FY2020. 
                                                         A reconciliation of Headline 
                                                         EBITDA to Headline EBITDA before restructuring costs is shown 
                                                         in the note below. 
Headline cash conversion ratio                           Comprises cash flow from operations before non-headline items 
                                                         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. This 
                                                         measure is presented for the total Group including 
                                                         discontinued operations and the calculation 
                                                         is shown in note 15. 
Net debt                                                 Net debt is total borrowings (bank, bonds and lease 
                                                         liabilities) less cash balances and derivatives 
                                                         used to manage the interest rate risk and currency profile of 
                                                         the debt. This measure is used 
                                                         to provide an indication of the Group's overall level of 
                                                         indebtedness and is widely used by 
                                                         investors and credit rating agencies. See note 10 for an 
                                                         analysis of net debt. 
Headline operating profit excluding restructuring costs  Headline operating profit is adjusted for strategic 
                                                         restructuring programme costs and write-downs. 
                                                         See note 2. 
Non-headline                                             The Group has defined a 'headline' measure of performance 
                                                         that excludes material non-recurring 
                                                         items or items considered non-operational/trading in nature. 
                                                         Items excluded from headline 
                                                         are referred to as non-headline items. This is used by the 
                                                         Group to measure and monitor material 
                                                         non-recurring items or items considered non-operational. See 
                                                         note 3 for an analysis of non-headline 
                                                         items. 
Operating cash-flow                                      Comprises free cash-flow and excludes cash-flows relating to 
                                                         interest, taxation, lease repayments 
                                                         and non-headline cash items. The measure shows how cash is 
                                                         generated from operations in the 
                                                         Group. A reconciliation of operating cash-flow is shown in 
                                                         note 15. 
Operating profit                                         Operating profit is earnings before finance costs and 
                                                         taxation. A reconciliation of operating 
                                                         profit to profit before tax is shown on the income statement. 
                                                         This common measure is used 
                                                         by the Group to measure and monitor performance. 
Ratio of capital expenditure                             Represents the amount of capital expenditure as a proportion 
 to depreciation and amortisation                        of the depreciation and amortisation 
                                                         charge for the period. This measure shows the level of 
                                                         reinvestment in operations. 
Return on capital                                        ROCE is calculated over a rolling 12-month period and is the 
 employed ('ROCE')                                       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 2 for 
                                                         divisional headline operating profit 
                                                         and divisional capital employed. 
Stock turns                                              Stock turns during the year is calculated as the last 12 
                                                         month cost of sales divided by the 
                                                         12 month average inventory. This measure is included as a key 
                                                         performance indicator of the 
                                                         Group to measure the efficiency of the Group 
Underlying                                               Underlying measures are calculated by excluding the effects 
                                                         of foreign exchange, disposals 
                                                         and acquisitions, strategic restructuring programme costs and 
                                                         write-downs (see note 2), and 
                                                         to include depreciation and amortisation charges for Smiths 
                                                         Medical. Underlying measures are 
                                                         used by the Group to monitor performance. 
Working capital                                          Working capital is calculated as the sum of the 12-month 
                                                         rolling average of inventory, trade 
                                                         receivables, contract assets, trade payables, trading 
                                                         provisions and contract liabilities. 
 
 

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 GBP787m (31 January 2020: GBP787m), and to eliminate post-retirement benefit assets and liabilities and litigation provisions relating to John Crane, Inc. and Titeflex Corporation, both net of related tax, and net debt.

 
                                                                       31 January  31 January 
                                                                             2021        2020 
                                                                Notes        GBPm        GBPm 
                                                                       ==========  ========== 
Net assets                                                                  2,251       2,240 
Adjust for: 
Goodwill recognised directly in reserves                                      787         787 
Post-retirement benefit assets and liabilities                      6       (293)       (343) 
Tax related to post-retirement benefit assets and liabilities                  55          61 
John Crane, Inc. litigation provision and related tax              12         162         174 
Titeflex Corporation litigation provision and related 
 tax                                                               12          41          53 
Net debt (including GBP18m of net debt in discontinued 
 operations (31 January 2020: GBP19m))                             10       1,075       1,270 
                                                                       ========== 
Capital employed                                                            4,078       4,242 
 

Return on capital employed

 
                                                              31 January  31 January 
                                                                    2021        2020 
                                                       Notes        GBPm        GBPm 
                                                              ==========  ========== 
Headline operating profit for previous twelve months                 486         608 
Monthly average capital employed                           2       4,326       4,156 
ROCE                                                               11.2%       14.7% 
                                                                          ========== 
 

Credit metrics - Total Group including discontinued operations

The Group monitors the ratio of net debt to headline earnings before interest, tax, depreciation and amortisation as part of its management of credit ratings. This ratio is calculated as follows:

Headline earnings before interest, tax, depreciation and amortisation ("headline EBITDA") - Total Group including discontinued operations

 
                                                                         Six months   Six months 
                                                                              ended        ended 
                                                                         31 January   31 January 
                                                                               2021         2020 
                                                                 Notes         GBPm         GBPm 
                                                                        ===========  =========== 
Headline operating profit                                            2          166          186 
Include: 
- headline operating profit of discontinued operations 
 (excludes depreciation and amortisation)                           17           89           94 
Add back: 
- depreciation of property, plant and equipment                      8           19           20 
- depreciation of right of use assets                                9           15           16 
- amortisation of development costs                                  7            3            3 
- amortisation of software, patents and intellectual 
 property                                                            7            3            4 
                                                                        =========== 
Headline EBITDA                                                                 295          323 
Add back: restructuring costs (including GBP3m in discontinued 
 operations (31 January 2020: GBPnil))                               2            4            - 
Headline EBITDA before restructuring costs                                      299          323 
 

Annualised headline EBITDA - Total Group including discontinued operations

 
                                                                            Year         Year 
                                                                           ended        ended 
                                                                      31 January   31 January 
                                                                            2021         2020 
                                                              Notes         GBPm         GBPm 
                                                                     ===========  =========== 
Headline EBITDA for the period                                               295          323 
Add: 
- headline EBITDA for the previous year                                      610          666 
Exclude: 
- headline EBITDA for the first six months of the previous 
 year                                                                      (323)        (290) 
                                                                     =========== 
Annualised headline EBITDA                                                   582          699 
Add back: restructing costs and write-downs in past 
 twelve months (including GBP7m in discontinued operations 
 (31 January 2020: GBPnil))                                                   51            - 
                                                                     ===========  =========== 
Annualised headline EBITDA before restructuring costs 
 and write-downs                                                             633          699 
                                                                     ===========  =========== 
 

Ratio of net debt to annualised headline EBITDA - Total Group including discontinued operations

 
                                                          31 January  31 January 
                                                                2021        2020 
                                                                GBPm        GBPm 
                                                          ==========  ========== 
Annualised headline EBITDA                                       582         699 
Net debt (including GBP18m of net debt in discontinued 
 operations (31 January 2020: GBP19m))                         1,075       1,270 
                                                          ========== 
Ratio of net debt to headline EBITDA                             1.8         1.8 
                                                          ==========  ========== 
 

Ratio of net debt to annualised headline EBITDA before restructuring costs and write-downs - Total Group including discontinued operations

 
                                                             31 January  31 January 
                                                                   2021        2020 
                                                                   GBPm        GBPm 
                                                             ==========  ========== 
Annualised headline EBITDA before restructuring costs 
 and write-downs                                                    633         699 
Net debt (including GBP18m of net debt in discontinued 
 operations (31 January 2020: GBP19m))                            1,075       1,270 
                                                             ========== 
Ratio of net debt to headline EBITDA before restructuring 
 costs and write-downs                                              1.7         1.8 
                                                             ==========  ========== 
 

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