Restructuring benefits
By integrating Head Offices, we have been able to vacate the Abingdon, Central London and New York offices. The annualised cost reduction is £20m, with 2001 showing a part-year benefit.

The integration of the two Aerospace businesses into a single division is also under way, as is the integration of the two previously separate parts of the new Sealing Solutions division.

Altogether 2001 benefited by £15m and we are on track to achieve our £80m target savings from 2003 onwards.

Automotive transaction
Having announced on 14 March 2001 our intention to demerge the Automotive Systems division, we successfully concluded this on 3 July 2001. Smiths Group received £615m in cash, before costs.

After this demerger we hold £325m in preference shares and 19.99% of the ordinary equity in the new TI Automotive Limited. The preference shares earn an annual 15% dividend, of which 5% is receivable annually in cash starting in July 2002, provided that TI Automotive Limited meets certain financial conditions.

TI Automotive Limited is now an independent business and from 3 July 2001 is not consolidated with the Smiths Group. Our reduced holding will be held under the net investment method of accounting. The demerger was approved by both our shareholders and former TI Group plc shareholders (through their letters of continuing entitlement) and supported by our core banking group. This was described in the press as an 'elegant solution' for maximising shareholder value.

Cost of capital and return on investment
The company's cost of capital reflects the proportions of debt and equity finance, the general level of long-term interest rates, and the degree of volatility in the share price relative to market prices generally.

The weighted average cost of capital is now 8%.

The after-tax return (pre-exceptionals) on average shareholder investment is 12%, including goodwill.

Financial controls
While our decentralised organisation delegates day-to-day control to local management, we have comprehensive budgetary control systems in place, with regular reporting to the Board.

The internal audit department reports to the Audit Committee, and reviews all key business units over a rolling three-year cycle. Acquisitions are reviewed within 12 months of acquisition, to verify compliance with the company's procedures.

Taxation
The tax charge for the year represented an effective tax rate of 29% on profits before taxation on ongoing businesses and before exceptional items and goodwill amortisation (2000 30.6%). This is the lowest effective tax rate for the combined Smiths Group for over ten years. A reconciliation of the tax charge is shown in note 9 to the Accounts.

Although we have not adopted FRS19 – Accounting for Deferred Taxation – this year (as some aspects of the application of the Standard are subject to debate), we have made steps towards complying with the required disclosures of the Standard before full adoption, as required next year. We do not anticipate the adoption of the Standard will have a material impact on our annual results.