23rd May 2014 07:30
LONDON (Alliance News) - Smiths Group PLC saw its shares fall Friday after it warned that its underlying revenue in the nine months to May 3 had been slightly weaker than in the year-earlier period as growth in its John Crane and Flex-Tek units was more than offset by weakness in Detection, Medical and Interconnect.
In a statement, the engineering company said that the full year outlook for its headline operating profit is in line with expectations for all businesses except Smiths Detection, where profit is now expected to be GBP25 million lower due to a combination of working capital adjustments, reduced volumes and a higher proportion of lower margin contracts, as well as additional programme delivery costs.
It also reiterated that it expects exchange rate movements to knock about 5% off its full-year earnings.
Smiths Group said revenue at energy services business John Crane was up on a constant currency basis in the nine month period, and its order book has continued growing.
Its medical unit returned to underlying revenue growth in the fiscal third quarter, as the impact of US distributor destocking subsided, although it said year-to-date underlying revenue still remains below the prior period.
"Headline operating profit in the first nine months has been constrained by operational gearing effects related to the lower volumes, continued tough trading in developed markets and the introduction of the US medical device tax," it said of the medical unit. "The outlook for the full year is still expected to be below the prior year, as previously guided, although we continue to anticipate a stronger trading performance in the second half than the first."
Its detection unit, which makes sensors to detect thinks like explosives and radioactive material, faced "further challenging trading conditions" in the third quarter, Smiths said. Underlying revenue fell in the nine months, mostly due to weaker demand from the cargo screening and transportation markets. Lower volumes and a higher proportion of lower-margin work will knock about GBP9 million off the unit's full-year profit, while it will book about GBP4 million of additional programme delivery costs from certain long-running large contracts.
"During the quarter, following an assessment of all major contracts and programmes, we concluded a review of working capital requirements. This review, combined with the adoption of new divisional policies, will result in a full year charge of around GBP12 million for the associated adjustments to inventory and receivables," it said.
"A new divisional president was appointed this month and his immediate priority is to focus on addressing the shortcomings in programme delivery and on improving revenue and margin performance in line with the operating ranges already set out. These initiatives to address low margin programmes and other ongoing productivity initiatives are likely to take another 18 months," it said.
Smiths Interconnect, the company's electronic components business, reported better profitability and a slowing rate of underlying revenue decline in the third quarter, but year-to-date revenue and headline operating profit are below the prior year at constant currencies, it said.
The company added that Flex-Tek, which makes tubing for fluids and gas for aircraft and buildings, grew underlying revenue thanks to strong demand from US residential construction markets and for specialty heating elements.
The parent company's net debt stood at GBP895 million on May 3, down from GBP901 million on January 31.
Smiths Group shares were down 3.7% at 1,266 pence early Friday, the biggest decline on AIM.
By Steve McGrath; [email protected]; @SteveMcGrath1
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