Notes to the Interim report (unaudited)

13 Provisions for liabilities and charges

Analysed as:

Warranty provision and product liability

Warranties over the Group’s products typically cover periods of between one and three years. Provision is made for the likely cost of after-sales support based on the recent past experience of individual businesses.

Reorganisation

Reorganisation provisions include £5.4m relating to the corporate and divisional headquarters restructuring (see note 4) and £6.0m costs relating to restructuring supply arrangements following the automotive seals disposal, which are expected to be spread over the next six years.

Litigation

John Crane, Inc.

John Crane, Inc. (“JCI”) is one of many co-defendants in litigation relating to products previously manufactured which contained asbestos. Until 2006, the awards, the related interest and all material defence costs were met directly by insurers. In 2007, JCI secured the commutation of certain insurance policies in respect of product liability. While substantial excess liability insurance remains in place, the exact scope of the cover is currently the subject of litigation in the US. An adverse judgment at first instance from the Circuit Court of Cook County, Illinois is currently under appeal. In the meantime JCI is meeting defence costs directly, but intends to seek appropriate contribution from insurers in due course. Provision is made in respect of the expected costs of defending known and predicted future claims and of adverse judgments in relation thereto, to the extent that such costs can be reliably estimated. No account has been taken of recoveries from insurers as their nature and timing are not yet sufficiently certain to permit recognition as an asset for these purposes.

The JCI products generally referred to in these cases are ones in which the asbestos fibres were encapsulated in such a manner that, according to tests conducted on behalf of JCI, the products were safe. JCI ceased manufacturing products containing asbestos in 1985. JCI has resisted every case in which it has been named and will continue its robust defence of all asbestos-related claims based upon this ‘safe product’ defence. As a result of its defence policy, JCI has been dismissed before trial from cases involving approximately 165,000 claims over the last 30 years. JCI is currently a defendant in cases involving approximately 130,000 claims. JCI has had final judgments against it, after appeals, in only 74 cases, amounting to awards of some US$78m over the 30 year period.

The assumptions made in assessing the appropriate level of provision include:

• The periods over which the costs can be reliably estimated. Projections used range between 10 and 20 years.
• The future trend of legal costs allowing for 3% cost inflation.
• The rate of future claims.
• The rate of successful resolution of claims.
• The average level of judgments.

The provision is based on past history and allows for decreasing costs based on published tables of asbestos incidence projections. In the light of the significant uncertainty associated with asbestos claims, there can be no guarantee that the assumptions used to estimate the provision will be an accurate prediction of the actual costs that may be incurred and, as a result, the provision may be subject to revision from time to time as more information becomes available.

The provision shown in the table above is a discounted pre-tax provision using discount rates, being the risk-free rate on US debt instruments for the appropriate period. The deferred tax asset related to this provision is shown within the deferred tax balance. Set out below is the gross, discounted and post-tax information relating to this provision:

The movement in discounting on this provision comprises £8.6m relating to the change in the discount rate, which is recognised in exceptional operating items (note 4), and £3.7m relating to the unwinding of the discounting, which is recognised in exceptional finance costs (note 3). Movements in exchange rates in the period have increased the gross provision by £68.7m and the discounted pre-tax provision by £52.7m.

Other litigation

The Group has on occasion been required to take legal action to protect its patents and other business intellectual property rights against infringement, and similarly to defend itself against proceedings brought by other parties. Provision is made for the expected fees and associated costs, based on professional advice as to the likely duration of each case. Most of the balance is expected to be utilised within the next five years.

Apart from that relating to John Crane, Inc., none of the other provisions is discounted.

Smiths Group divisions:
Smiths Detection, John Crane, Smiths Medical, Smiths Interconnect, Flex-Tek

Smiths Group plc:
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