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Strong
cash-flow leads to growth
In his review, the Chief Executive
emphasises the importance of our strong cash generation.
This focus on cash generation extends throughout the enlarged group,
and our five-year 'free cash' generation is in excess of £1bn.
This is the balance left over from our profits after funding capital
expenditure, working capital, interest and tax – but before acquisitions
or dividends. For Smiths, the link between cash generation and growth
has long been a key element of our strategy. Our ability to generate
cash is a valuable extra mechanism for growth, over and above the
growth achieved by our businesses. We add to our growth by reinvesting
this cash-flow in acquisitions in our chosen specialist sectors. The
extent to which we fund acquisitions from internally generated cash
is an important distinguishing feature of Smiths.
Acquisitions
Acquisitions have contributed much
to our growth in recent years, particularly in Aerospace, Medical,
Interconnect and Polymer activities.
2001 has been a year of consolidation, and our relatively modest acquisition
spend of £198m was less than our free cash-flow. There are two
reasons for this. First, management effort was firmly focused on the
merger, the Automotive demerger and related restructuring. Second,
with turbulent markets in some sectors – particularly Interconnect
– the balance of advantage lay in deferring purchases until market
conditions stabilised. The spend comprised £166m on new acquisitions
plus £32m deferred consideration from prior year acquisitions,
principally Automotive.
Cash-flow
Our management approach is geared
to maximising the benefits of businesses that are naturally highly
cash generative. We
monitor the correlation between profit and cash generation, and expect
only a small proportion of the cash from profits to be absorbed into
funding additional balance sheet assets.
We measure this both at the operating level – pre-interest and
tax – and at the free cash level.
The table below shows cash-flow for both total group and the continuing
businesses:
 |
|
|
|
|
2001
|
|
|
| £m |
Continuing |
Total
|
|
| Operating profit |
525 |
648 |
|
Depreciation
|
91 |
140 |
| Working capital |
(86) |
(87) |
|
Cash-flow from
operating activities
|
530 |
701 |
| Capital spend (net) |
(111) |
(188) |
|
Operating cash-flow
after capex
|
419 |
513 |
| Tax and interest |
(208) |
(233) |
|
Free cash-flow
|
211 |
280 |
| Exceptionals |
|
(128)
|
|
Dividends
|
|
(171)
|
| Acquisitions |
|
(198)
|
| Disposals |
|
605
|
| Other |
|
(42)
|
|
| Net cash-flow |
|
346
|
|
The cash dividend
incorporates the £61m special dividend paid to TI shareholders
as part of the merger agreement.
Net borrowings at year-end were £1,120m, down from £1,466m
at the beginning of the year.
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