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Business Focus: Smiths finds strength in diversity

A UK-based conglomerate shows how technological development can keep a company moving in hard times, while a British defence group survives in a shrinking market.

The aerospace and the health service sectors in the UK and internationally are under tight financial constraints. So you would expect any company specialising in these markets to be feeling the pressure. Not so for Smiths Group. The British engineering and technology conglomerate announced a 7 per cent rise in profits to £497m for the year to 31 July 2012 and said that it expected sales to keep growing, depending on how much deeper the cuts in government spending would bite.

Smiths puts its success down to having strong technology positions in sectors with excellent opportunity for growth. One of the group’s five divisions, Flex-Tek, provides pipes and hoses that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets. Smiths says its order book for aerospace customers “remains positive”. It also believes that the residential construction market “will continue to improve”.

However, the financially cash-strapped health sector has affected the Smiths Medical division. This was an acquisition target for a venture capital company last year, but the group managed to repel the takeover attempt. Group chief executive Philip Bowman says the division will benefit from the company’s targeting of developing markets, particularly China, India and Brazil. Emerging markets are taking a growing share of group turnover, and now represent around 15 per cent of activity.

The John Crane division, which supplies seals for the oil and gas industries, has been particularly buoyed by its appeal in the emerging markets, and has opened new facilities in the Middle East, Asia and Latin America.

Smiths Detection - which provides security scanners for airports, military services and governments - has opened a new X-ray manufacturing hub in Malaysia for the Asian market. The division sold off its stake in Cross Match Technologies in the US, as Smiths Group decided to pull out of the biometrics sector, considered to be a non-core activity.

The fifth arm of the group, Smiths Interconnect, which focuses on wireless communications technology, has benefited from a range of new products in recent years. These include smaller high-density connectors for semiconductors; millimetre-wave components for a new helicopter flight safety radar system; and cell tower-top radio frequency protection devices. Last year the division bolstered its position by buying US company Power Holdings, which makes specialist power distribution systems primarily for data centres, though the acquisition impacted margins.

Analyst JPMorgan Cazenove gave the thumbs-up to the group’s strategy. “The increased investment in research and development is starting to translate into improved organic growth particularly in emerging markets,” it commented.

However, Smiths is not without its problems. Despite closing its final-salary pension scheme, the group’s pension-pot deficit has trebled to £620m since 2011. This rise was partly fuelled by the UK government’s pumping of cash into the economy, known as quantitative easing, said Smiths.

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