Government spending cuts a threat to Smiths profit

Airport scanners and bomb detection firm Smiths yesterday posted a 12 per cent rise in annual profits but warned three of its divisions were being squeezed by government spending cuts.

The UK-headquartered firm, which employs some 23,000 people in five divisions around the globe, saw sales advance 3 per cent to £2.84 billion in the year to 31 July.

Good growth at its oil and gas services business, John Crane, helped overall profits rise to £486 million, even though profits in the detection business fell 27 per cent to £66m as orders came under pressure.

The group has started an overhaul of the detection business, which makes X-ray scanners and bomb detection equipment, to improve its performance, which will include site closures and job losses.

About 2,500 of Smiths’ workforce are employed in the detection arm, with about 200 staff in the UK.

Smiths said the detection arm, where sales fell 11 per cent, was hit especially hard by a drop in military work, though it also saw delays for detections systems at airports as US orders were held up by budget uncertainty.

The relaxation of the rules on liquids in hand luggage for air travellers has also affected orders, it said.

Pressure on government spending has hit the medical and “interconnect” divisions and is likely to persist into the current year, which will constrain growth in these divisions, chief executive Philip Bowman warned.

Bowman said he believed the detection arm is set for sustained long-term growth, even though the sales environment is challenging in the short-term.

The medical devices business increased profits by £12m to £196m, but sales fell by 2 per cent and the group expects a tightening of healthcare expenditure and higher unemployment to put pressure on prices and volumes in the current year.

Interconnect, which makes components to regulate electricity flows, increased profits by 9 per cent to £68m, but is also being hit by a slowdown in US defence spending with margins under pressure.

Bowman added: “The economic outlook is uncertain. We still see further potential to drive operational improvements, enhance margins and deliver strong cash conversion.”

Scott Cagehin, an analyst at broker Numis, said the results were broadly in line with expectations but that the outlook was clouded by economic uncertainty, which may put some downward pressure on forecasts.

He currently expects profits of £493.5m in the year to next July.

Evolution Securities analyst, Roddy Bridge, said the results were “just comfortably ahead” of expectations and he highlighted the better than anticipated net debt position of £729m.

“However, the cautious outlook statement emphasises our view that Smiths is beholden to government spending,” Bridge said.

Shares in the firm closed up 21p, or 2.2 per cent, at 969.5p. It recommended a final dividend of 25p, giving a total divi for the year of 36.25p, up 7 per cent.