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Strategy

Smiths is committed to creating long-term value for shareholders by building and sustaining strong businesses in growth sectors.

The Group's objective is to create value from organic growth and from reinvestment of self-generated cash-flow. Value can also be generated by managing the portfolio of businesses and enhancing the business mix through both acquisitions and disposals.

Key performance indicators

In implementing the strategy, the Board monitors progress via a wide range of metrics. The key performance indicators are set out in the table below.

Strategy	Operational priorities	Key performance indicators
Growing the business	Investing in R&D to drive sales growth and margins Increasing our exposure to growth markets and product categories
Delivering operational efficiencies	Expanding our margins through a programme of self-help Delivering efficiencies by restructuring and using our scale more effectively Focusing on low-cost manufacturing
Reshaping the portfolio	Making bolt-on acquisitions to add complementary technologies and extend our geographic reach Rationalisation of product portfolios to maximise profitability Optimising the allocation of capital between our businesses
Generating cash	Improving working capital management and cash generation Optimising the capital structure and securing the long-term financing of the Group
Promoting responsibility	Conducting our activities to achieve the highest practicable standards of safety Minimising the impact of our activities on the environment	Greenhouse gas emissions 9% reduction on 2007 baseline

Sales

Sales increased by £344m to £2,665m. Currency translation on overseas sales contributed £449m of this increase while the net impact of acquisitions and disposals increased sales by £75m. On an underlying basis, excluding the effects of currency translation and acquisitions and disposals, sales fell by £180m, or 7%. This £180m underlying decline in sales was driven by:

• Smiths Detection down £99m reflecting the variable nature of the order flow, in particular with lower sales from the ports and borders market;
• Flex-Tek down £38m driven by the recession in US residential construction and domestic appliances, offset in part by growth in sales of fuel and hydraulic hoses to aerospace customers;
• Smiths Medical down £16m as a result of lower diabetes sales following our decision to exit the business and reduced hardware sales;
• Smiths Interconnect down £17m reflecting a slowdown in sales of components and subsystems to the wireless telecoms industry partially offset by continued growth in several military programmes; and
• John Crane down £10m because of lower sales of original equipment.

Profit

Headline operating profit rose £37m to £418m. Headline operating margin decreased by 70 basis points to 15.7% (2008: 16.4%). The increase in headline operating profit comprises £77m from favourable currency translation, £20m from the net impact of acquisitions and disposals made during the year, offset by a £60m, or 13%, decrease in underlying headline operating profit. The main drivers of this £60m underlying decline are:

• John Crane up £9m reflecting the benefit of its restructuring initiatives;
• Corporate centre costs lower by £6m, offset by;
• Smiths Detection down £47m driven by lower volumes and the associated lower cost absorption;
• Smiths Interconnect down £13m as a result of lower volumes, adverse mix and restructuring costs;
• Flex-Tek down £8m reflecting lower volumes; and
• Smiths Medical down £7m reflecting lower volumes driven by diabetes and lower hardware sales as well as increased R&D costs.

Operating profit on a statutory basis, after taking account of the items excluded from the headline figures, was £429m (2008: £326m).

The net interest charge increased to £52m (2008: £41m) which reflects the higher interest costs on the newly refinanced debt. There was a reduced pensions financing gain of £5m (2008: £42m) as a result of the worsening funding position of the company's retirement benefit schemes. As a result, the headline profit before tax decreased by £9m to £371m. On an underlying basis, headline profit before tax fell by 21%.

On a statutory basis, after taking account of items excluded from the headline figure, the profit before tax was unchanged at £371m.

The Group's tax rate on headline profit for the period was 24% (2008: 24%). Headline earnings per share decreased by 3% to 72.4p (2008: 74.5p).

Cash generation

Strong cash generation this year resulted in a free cash-flow of £256m (2008: £91m). Substantially improved headline operating cash of £435m (2008: £273m) represented 104% (2008: 72%) of headline operating profit. The improvement was a result of reduced investment in working capital, particularly inventories and debtors, and lower net capital expenditure. Although net debt increased by £114m to £885m, the increase resulted from foreign exchange translation and net investment hedges.

Dividend policy

In March 2008, the Board announced its intention to rebuild dividend cover to around 2.5 times in the medium term. In line with previous guidance, the Board has recommended an unchanged final dividend of 23.5p per share, making a total dividend for the year of 34.0p per share. Looking ahead, our focus will remain on rebuilding dividend cover as we invest in organic growth and acquisitions while maintaining a prudent approach to balance sheet financing. The final dividend will be paid on 20 November to shareholders registered at the close of business on 23 October. The ex-dividend date is 21 October.