UPDATE 1-Smiths Group warns on profit at detection business

Fri May 23, 2014 6:15am EDT

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LONDON May 23 (Reuters) - British engineer Smiths Group Plc warned that full-year profit at its detection business would be lower than it had expected due to working capital adjustments, lower volumes and additional costs.

Smiths' shares, which have lost more that a tenth of their value this year, were down 0.9 percent in mid-morning trade on Friday.

The company's detection unit, which accounts for about 18 percent of total revenue, sells its products mainly to governments and their agencies and has been hurt by budget cuts in the last few years.

The company had warned in March that full-year revenue at the unit, which makes sensors to detect explosives, chemical agents and biohazards, would be lower than a year earlier due to a weaker order book.

Smiths said on Friday profit at the detection unit would be 25 million pounds ($42 million) lower than it had expected.

This includes a 12 million pound charge related to a review of its working capital requirements, a 9 million pound hit from lower volumes and lower margin work, and 4 million pounds of additional contract-related costs, the company said.

Headline operating profit at the detection unit fell 16 percent to 58 million pounds in the year ended July 31, 2013.

The company said Richard Ingram, who was recently appointed president of the detection business, would focus on improving revenue and margin performance.

"The quality of earnings of this contract-orientated business remains a big question particularly when compared to the growth profile seen before the downturn", Numis Securities said in a note to clients.

Smiths said underlying revenue for the detection business declined in the nine months ended April 30 reflecting weaker demand from cargo screening and transportation customers.

However, its medical business returned to growth in its financial third quarter, and Smiths said it expected trading in the second half to be stronger than the first.

Smiths reiterated its March outlook that 2014 earnings would be reduced by 4-5 percent if foreign exchange rates remained at current levels. ($1 = 0.5931 British Pounds) (Reporting by Roshni Menon; Editing by Erica Billingham)

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