Last updated: September 28, 2011 4:37 pm

Smiths cuts as defence spending dwindles

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Smiths Group has unveiled plans to make £40m of cost savings a year from its troublesome detection division, which makes equipment that scans for weapons and explosives, as it grapples with the impact of military spending cuts.

The engineering group made the disclosure in its full-year results a day after defence contractor BAE Systems confirmed that it planned to cut nearly 3,000 jobs in the UK.

Investors reacted favourably to the cost-cutting plans and better-than-expected results. Shares in the FTSE 100 company closed up 33p, or 3.5 per cent, at 981½p.

Operating profits at Smiths detection arm – whose head departed suddenly in May after a downturn in sales – fell 28 per cent, although better performances elsewhere helped compensate.

“The fixed cost base of this business is too high,” said Philip Bowman, chief executive, referring to Smiths Detection. “The defence industry at the moment is very tough.”

He added that it was “too early” to say whether the cuts – planned over three years – would lead to job losses as the company hoped to maximise savings from more efficient procurement. Smiths employs 23,000 people worldwide but does only a limited amount of manufacturing in the UK.

Pre-tax profits at Smiths’ collection of businesses rose from £373m to £398m as demand from other sectors – such as the oil and gas industry – helped offset weak orders from government and defence customers. Sales improved from £2.77bn to £2.84bn.

The rise was led by John Crane, which makes mechanical seals for use in pumps and compressors, where operating profits rose 15 per cent.

Smiths Medical, for which the group earlier this year rejected a £2.45bn cash offer from Apax, the private equity group, posted an increase in operating profits in spite of a 2 per cent dip in sales.

But profits came under pressure at Smiths Interconnect, which makes electronic and radio frequency products.

On an “underlying” basis – stripping out exceptional and other items such as disposals and acquisitions and assuming currencies had been constant – group sales and operating profits edged up 1 and 4 per cent, respectively.

Mr Bowman said the figures were “resilient” in the face of “very strong headwinds”.

“Lower sales came from the military sector, both as a result of funding issues for government but also as troops – from America, in particular – were withdrawn from Iraq and Afghanistan.

“The trick is one of diversity,” he added. “We try to maintain as good a balance as we can. In some years military has performed very well for us, in others the commercial side of the operation has performed well.”

The board recommended a final dividend of 25p, giving a total for the year of 36.25p, an increase of 7 per cent. It will be paid from diluted earnings per share of 97.1p, compared with 78.9p last time. Net debt fell £108m during the year to £729m.

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