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Smiths Group made significant
progress in the year ended July 2001. In the first half we completed
the strategically important merger with TI Group, which has substantially
enlarged the company and in particular given it a much stronger position
in the fast-consolidating aerospace industry. We then successfully
demerged the TI automotive business, which – good performer though
it is – was never intended to be part of the continuing enterprise.
These steps gave Smiths the
shape that it now has: four strong divisions with excellent growth
prospects and market-leading positions in aerospace systems, mechanical
and polymer seals, medical devices and electronic interconnect components.
The result was that, at the end of the year, the company was able
to deliver an improved operating performance directly in line with
projections made when the merger was first proposed in September
2000. At the same time, we have also made rapid strides in reshaping
and restructuring the entire business so that it is lean and competitive
even in an uncertain economic environment.
To complete the picture, Smiths Group is again ready to meet the
challenge of achieving the good margins, profits and cash-flow which
have long been our track record, but now from a much higher baseline.
Focusing on the continuing activities,
because this is how we shall be measured going forward, the company
recorded operating profits of £525m, an increase of 13% from
the previous year, on sales similarly increased to £3.5bn.
The comparisons are with the same – but then separate –
businesses now merged into the combined entity. After allocating
a proportion of total interest costs to the discontinued activities,
the pre-tax profit for continuing Smiths was up 5% at £448m,
and earnings per share were 6% ahead at 57.4p. These earnings are
before exceptional costs which I will explain overleaf, and also
before amortisation of goodwill on acquisitions.
The four divisions all contributed to this improved performance,
mainly as a result of organic growth and, in a clear signal of the
company's good health, their average operating profit margin remained
at a very satisfactory 15%. We spent £166m on new acquisitions
to strengthen the divisions, and these made a part-year contribution
of £9m to profits. We maintain a constant search for additions
of this type, but our prudent requirement that they quickly recover
their cost of capital leads us to reject far more than we finally
acquire. We also sold a number of non-core businesses for £37m
during the year, and several others since. This is the process by
which we progressively improve the quality of our assets.
The restructuring I mentioned which has followed the merger has
already started to yield benefits. Corporate offices from four locations
have been consolidated into the existing Smiths' HQ in North London.
Smiths Aerospace, which has brought together the Smiths and Dowty
avionics and equipment businesses, has made rapid progress in eliminating
overlap. Sealing Solutions is well advanced on relocating manufacturing
to lower-cost countries. Together, these measures improved profit
by £15m in 2001. The company is on target to raise the annualised
savings to £50m in 2002 and £80m from 2003 onwards.
The matter of exceptional charges is quite complex – only to
be expected following a merger of this size and the consequent reshaping
of the company. The operational restructuring of the continuing
activities described above led to a charge of £116m. The expenses
of the merger itself were £54m, and the charge for restructuring
Automotive prior to its demerger was £18m. Altogether, the
exceptional charges with a cash impact came to £188m before
tax relief, or £150m net. We then took a write-down on the
value of assets being sold and a goodwill adjustment on a number
of others, including the former EIS businesses, which were part
of TI. These gave rise to a non-cash exceptional charge of £411m,
of which the demerger of Automotive accounted for £299m.
The company's net debt at year-end stood at £1,120m, after
receipt of the £615m cash consideration for the Automotive
transaction in July. Including both continuing and discontinued
activities, interest costs for the year were £116m. Operating
cash-flow was £513m after capital spending of £188m. The
high level of cash-flow generated by all our divisions gives us
considerable flexibility to reduce debt or use the
money as acquisition currency.
Our commitment to technology leadership is a fundamental principle.
Investment in research and development for the continuing activities
totalled £188m in 2001, of which £91m was directly charged
against profits, with the balance recovered from customers. The
majority of research and development is carried out in Aerospace,
but a growing proportion is spent on developing new medical devices
to keep Smiths Medical at the forefront of technology in its field.
There are 37,700 people now working for Smiths, and we have a wide
geographical spread of activities. Continuing US operations generated
52% of the profit, while the UK accounted for 25%. Half of UK output,
worth £600m, was directly exported. Looked at by market, Aerospace
contributed 40% of the profit, Sealing Solutions 24%, Medical 18%
and Industrial 18%.
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