Strong second half for Smiths Group

Headline numbers were ahead of expectations at technology group Smiths Group, but a number of one-off items saw full-year statutory profit before tax decline.

Revenue for the year ended July 31st rose 7%, or an underlying 5%, to £3,038m from £2,842m the year before, beating the £2,978m expected by the market.

All divisions achieved a year-on-year (y/y) increase in underlying headline revenue growth, with the star performer being Flex-Tek (+36%) which, unfortunately for the group, is the smallest of Smiths' five divisions, accounting for just 8% of headline revenue.

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Adjusted profit before tax was also above market expectations, rising 7% to £554m from £517m the year before. The median forecast from the group of analysts following the stock was £451m.

Statutory profit before tax dipped to £366m from £398m, with the group flagging a laundry list of exceptional items, including £62m of amortisation of acquired intangible assets (2011: £50m), £44m in connection with asbestos litigation (2011: £34m), £55m set aside to resolve potential future claims alleging product liability at the Titeflex subsidiary (nil), £38m written off in respect of deferred UK tax (nil), a £31m profit on sold businesses (+£4m) and a £24m provision for retirement benefit finance income (£23m).

Headline earnings per share (EPS) rose 7% to 92.6p from 86.5p the year before, while statutory EPS tumbled to 65.4p from 77.8p last year. The market had been expecting an adjusted EPS figure of 90.61p.

The dividend has been hiked to 38p from the previous year's full-year pay-out of 36.25p, a 5% increase and better than the 37.48p expected by the market.

"Smiths Group has performed well in a persistently tough economic environment, growing revenue across all divisions with a stronger performance in the second half," trumpeted group Chief Executive Philip Bowman.

"Headline margins were maintained while we significantly increased our investment in sales, marketing and new product development. We achieved strong cash conversion, and return on capital was also ahead of last year," he added.

Free cash flow declined to £217m from £236m the year before, while return on capital employed edged up to 16.5% from 16.4%. Company-funded investment in new product development was up 9% y/y to £107m.

John Crane, the biggest contributor to group revenues, saw its top line grow 9% on continued demand from its end markets, particularly the oil and gas sector, although the rate of growth eased during the second half.

Smiths Medical, which contributes 28% of the group's headline revenue - four percentage points behind John Crane - found top-line growth harder to come by as healthcare organisations cut back on spending, but managed to push underlying sales up by 2%, leading to a similar increase in underlying profit growth. New product launches and emerging markets drove growth in the second half of the year.

Emerging markets growth is a key theme across the whole group, with Bowman pointing out that after a 14% increase in revenues these markets now account for around 15% of the group's turnover.

The economic environment remains uncertain across the globe, however, Bowman conceded. "Pressures on government spending are expected to continue, particularly given the risk of budget sequestration in the US and widespread concerns over national debt levels in parts of Europe. These are likely to restrain those parts of our business with government-funded customers," he predicted.

"However, our investment initiatives are building a solid foundation to accelerate medium-term revenue growth. We will continue to deliver operational improvements and efficiencies, while balancing increased investment in the drivers of long-term profitable growth with opportunities to enhance margins and returns. Subject to economic conditions, I am confident we can continue to grow sales, deliver operational improvements, achieve strong cash conversion and improve returns," Bowman asserted.

JH