Smiths Group plc Annual report and accounts 2001 >FORWARD Annual report and accounts 2001 >EQUIPPED >Being prepared is everything. At Smiths we focus on the future. What will our customers want tomorrow? How can we exploit technology to provide enhanced solutions for their most demanding applications? How can we extend our capabilities to give them the service they need? We are constantly searching for ways to add value for our customers. This is how we generate profitable organic growth. >DISCOVERY >Discovery is about being always one step ahead. It is about meeting needs in ways that others haven’t yet thought of. It is about developing products that provide innovative solutions for the toughest applications. Through total commitment to research and development, Smiths seeks sustainable competitive advantage. >TEAMWORK >At Smiths we believe in teamwork. We work closely with our suppliers and customers to build productive partnerships and long-term relationships. Within the company, too, teamwork is essential. Not just working together day by day, but focusing everyone's efforts on maximum efficiency, productivity, flexibility and responsiveness. Through teamwork we seek to be a leader. >REACH >In a world where efficiency is paramount, customers want to deal with fewer, better suppliers. At Smiths we have the necessary size and diversity. We are global. Our products are wide-ranging. We have the reach to be our customers’ preferred supplier. 01 03 01 As a first-tier supplier working directly 03 We are a leading supplier of products used with prime manufacturers, we are during critical and intensive care procedures, delivering systems for front-line defence and for continuing care during recovery. aircraft such as Eurofighter Typhoon. 04 Our solutions for demanding environments 02 Holding strong positions in world markets, include high-integrity connectors and our mechanical and polymer seals ensure devices to protect communications and reliability in critical processes, such as in other equipment against power surges and oil and gas industries, and are backed with lightning strikes. high levels of customer support and global distribution. 02 04 >FORWARD SMITHS IS A FORWARD-THINKING, FOCUSED ENGINEERING COMPANY WITH MARKET-LEADING POSITIONS WORLDWIDE IN ITS FOUR CHOSEN AREAS OF SPECIALISATION. 08 Smiths Group plc Annual report and accounts 2001 >SUMMARY PERFORMANCE 2001 >Operating profit on continuing activities up 13% to £525m. >Increased sales and profits from all four divisions. >Margins maintained at 15%, cash at 80% of profits. >Dividend increased by 5% to 25.0p for the year. >Successful demerger of Automotive. >Restructuring in Aerospace and Sealing Solutions well under way. Total, including discontinued Continuing activities 2001 2000 2001 2000 For the 12 months to 31 July £m £m £m £m Sales 4,958 4,653 3,466 3,062 Operating profit 651 622 525 465 Pre-tax 535 542 448* 428* Earnings per share 68.3p 68.6p 57.4p* 54.2p* before exceptionals and amortisation *pro-forma Contents 08 Introducing Smiths Group 48 Consolidated profit and loss account 09 Summary performance 2001 48 Statement of total recognised 10 Chairman’s statement gains and losses 12 Chief Executive’s review 50 Balance sheets 17 Smiths at a glance 51 Cash-flow statement 18 Business review 52 Notes to the accounts 27 Financial review 73 Accounting policies 31 Investing in global talent 74 Statement of value added 36 Board of Directors 75 Five year review 38 Directors’ report 76 Senior management 42 Directors’ emoluments and interests 77 Shareholder information 47 Statement of Directors’ responsibilities 78 Notice of Annual General Meeting 47 Auditors’ report ibc Index 09 Smiths Group plc Annual report and accounts 2001 >CHAIRMAN’S STATEMENT Smiths Group is nearly twice year the continuing Smiths activities the size it was when we reported a generated a 12% after-tax rate 25p year ago, directly as a result of the of return on total shareholder merger with TI Group. Consequently, investment, including goodwill, the figures in this Report and of £2.7bn. This is well above the % Accounts are all substantially company’s cost of capital, and 2001 2000 change increased, being the sum of the we are confident we can lift the Dividend (p) 25.0p 23.8p +5% two parts. More significantly, these rate of return still higher. Further figures also show a strong increase reassurance can be found in the over the previous performance of Directors’ Report, where there is the equivalent, formerly separate, a full statement of the procedures companies. The most important for internal controls, audit and 12% number to focus on for 2001 is the evaluation of potential risks to £525m of operating profits on the the business. These matters are continuing activities, because this regularly reviewed by the Board is the one that will allow the most and we are confident we have SMITHS GENERATED A 12% AFTER-TAX direct comparison when looking robust systems in place. RATE OF RETURN ON TOTAL SHAREHOLDER forward and at last year. The Chief INVESTMENT Executive therefore concentrates his The company answers to its report on the performance of these shareholders for its financial continuing activities. performance: without their equity it could not exist. However, we However, I shall first detail the recognise broader responsibilities, consolidated results of Smiths Group and we aim to report on these as it was for most of last year, which with the same degree of analysis includes the discontinued activities, as we do for our financial capital. principally the now demerged This year, in the section headed Automotive business. On sales of ‘Investing in global talent’ on page 31, £5bn, of which Automotive accounted we detail how we value our human for £1.5bn, Smiths earned operating capital, make progress on health and profits of £651m. After interest costs of safety, and meet our environmental £116m, the pre-tax profit was £535m, obligations. We respect the legitimate resulting in earnings per share of interest of customers, suppliers, 68.3p. All of these figures are reported employees and our local communities before goodwill amortisation and in these topics. exceptional charges, on which the Chief Executive gives a full report. The merger has doubled the number of people working for The Board is recommending a final Smiths, but there have been no dividend of 16.25p, bringing the total significant cultural issues from for the year to 25.0p, an increase of bringing the two companies together. 5%, and a level of payment which is We have worked hard to create an more than twice covered by earnings inclusive environment, stepping from the continuing activities alone. up our internal communications by introducing a company-wide The company’s underlying good health electronic newsflow system. will become apparent on reading the This lets employees know what Financial Director’s Review on page 27. is happening more quickly, and A highlight of this for me is that last supplements well-established 10 Smiths Group plc Annual report and accounts 2001 THE SUCCESS OF SMITHS IS ENTIRELY THE RESULT OF THE ENTHUSIASM AND COMMITMENT OF OUR PEOPLE. methods such as open-forum The Chief Executive outlines our view discussions with management. of the prospects for the company at The success of Smiths is entirely the conclusion of his Review overleaf. the result of the enthusiasm and As we prepared this Report and commitment of our people, and Accounts, our uncertainty about I would like to express here my which way the world’s economies appreciation of their support. would go was compounded by the dreadful terrorist attacks in the We took the opportunity to change US, which touched all of us. Even the company’s name slightly, taking so, it should be clear to readers of the view that ‘Industries’ implies this Report that Smiths has a great factories rather than technologies. It number of actions under way to was done with minimal expense, and improve our relative performance, the new identity and presentational and that shareholders will quickly style can be seen throughout this see the benefit of this. document. I trust you will approve. The Board was carefully rebalanced following the merger, to combine expertise from both TI and Smiths. There were two executive additions Keith Orrell-Jones from TI: John Langston joined to Chairman run Sealing Solutions, where his prior knowledge will greatly benefit the essential restructuring; David Lillycrop joined as General Counsel, and is also Company Secretary. Three former TI non-executives also came across, bringing valuable industry, government and city experience: Sir Colin Chandler, Sir Nigel Broomfield and John Hignett. Colin is my deputy and Chairman of the Audit Committee, and I chair the Nominations and Remuneration Committee myself. There are two strong features of this Board that I want to point out. First, we six non-executives provide real balance and external influence on Board deliberations, which are always lively and constructive. Secondly, our executive directors comprise the team with hands-on responsibility for the entire business. This gives us great insight into how Smiths is performing, together with a good grasp on future strategy. 11 >CHIEF EXECUTIVE’S REVIEW Financial highlights of continuing activities Smiths Group made significant to £3.5bn. The comparisons are with 2001 2000 progress in the year ended July 2001. the same – but then separate – For the 12 months to 31 July £m £m In the first half we completed the businesses now merged into the Sales 3,466 3,062 strategically important merger with combined entity. After allocating a Operating profit* 525 465 TI Group, which has substantially proportion of total interest costs to Pre-tax* 448 428 enlarged the company and the discontinued activities, the pre- Earnings per share* 57.4p 54.2p in particular given it a much tax profit for continuing Smiths was *before exceptionals and amortisation stronger position in the fast- up 5% at £448m, and earnings per consolidating aerospace industry.