UPDATE 1-Smiths Group sees slow demand hurting second half

Wed Mar 20, 2013 5:28am EDT

* Co sees spending cuts and medical device tax in U.S. hurting demand

* First-half underlying headline revenue up 6 pct

* First-half headline pretax profit up 3 pct

* Shares fall as much as 7 pct

By Richa Naidu

March 20 (Reuters) - British engineering company Smiths Group Plc said it expects its second half to be hurt by slower demand in its core John Crane business, and medical device tax and increased government spending cuts in the United States.

Sequestration may muddy the situation, with the July financial year-end potentially working against the company, Jefferies & Co analyst Sandy Morris said in a note.

"Despite the fact that over the past five years we've reduced the percentage of revenue from government contracts from around 50 percent to 35 percent, we will be impacted by sequestration in the U.S.," Chief Executive Philip Bowman said in a post-earnings call.

First-half turnover from the John Crane unit, a maker of seals, couplings and bearings for customers such as BP Plc , Total SA and Rolls-Royce Holdings Plc, grew 4 percent.

But the order book at John Crane - which generates a third of Smiths' revenue - points to a slower growth rate, with a similar level of sales in the second half.

Smiths Group, whose products range from explosive detectors to surgical needles, reported a 3 percent rise in first-half headline pretax profit to 223 million pounds ($337 million).

Underlying headline revenue rose 6 percent to 1.48 billion pounds.

Smiths Medical reported a 2 percent rise in revenue in the first half, but said profitability was expected to be lower partly hurt by a tax on medical devices that went into effect in January in the United States, its biggest market.

The company had said in November that the tax would constrain sales and margins at its second-largest Smiths Medical division.

Smiths shares were down about 3 percent at 1285 pence at 0847 GMT on the London Stock Exchange. They fell as much as 7 percent earlier in the day.

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