Business review: Smiths Interconnect
Smiths Interconnect is a recognised leader in technically differentiated electronic components and sub-systems providing signal, power and microwave solutions.
We design and manufacture products that connect, protect and control critical systems for the global wireless telecommunications, aerospace, defence, space, medical, rail and industrial markets.
Our products are application-specific and incorporate innovative technologies to provide our customers with a competitive advantage.
Principal operating regions
Smiths Interconnect operates globally and has locations in the US, Mexico, Costa Rica, Ireland, UK, France, Germany, Italy, Tunisia, India, China and Australia.
Customers
Smiths Interconnect supplies to multiple levels of the supply chain and its blue chip customers include primes and service providers, OEMs, system suppliers and sub-system manufacturers. Amongst our largest customers are Raytheon, Finmeccanica, BAE Systems, Boeing, AAI/Textron, Northrop Grumman, General Dynamics, Lockheed Martin, Ericsson, Motorola, AT&T, Verizon, Sprint Nextel, Emerson, ZTE, Huawei, GE Medical and Alstom.
Competitors
Smiths Interconnect operates in a fragmented market with many small and medium-sized competitors in various product and technology areas. Connector competitors include Amphenol, Deutsch, Radiall, Souriau. Our high-reliability components and wireless telecoms businesses compete with, amongst others, Anaren, Spectrum Control, PowerWave, KMW, Dover and CommScope. The competitors of our microwave sub-systems companies include EMS, Herley, Cobham, Teledyne and L3. Huber & Suhner, Dehn and SL Industries offer competitive protection products.
Suppliers
Smiths Interconnect maintains a strong supply base with machined parts and electronic components each representing approximately 25% of total spend. No individual supplier accounts for more than 4% of total purchased value.
Manufacture of telecommunications products in China
With the acquisition of Allrizon and Triasx last year, Smiths Interconnect significantly increased its Chinese design and manufacturing capabilities, predominantly focusing on microwave products for the wireless telecommunications market, both domestically and globally.
Including the recent addition of the Shenzhen-based Dowin surge protection business, the number of Chinese employees in Smiths Interconnect has risen from approximately 200 in April 2008 to over 850 today, including some 67 engineers.
Although the overall wireless telecommunications market softened during the year, one notable exception was the major investment of the three major Chinese wireless operators in building out nationwide 3G networks, projects that will continue for several more years.
Markets and trends
The two largest markets for Smiths Interconnect are mil/aero (military, aerospace and space) and wireless telecommunications.
Intelligence, surveillance and reconnaissance (ISR) is a key priority for global defence spending, with improved battlespace awareness, network-centric communications systems and force protection being seen as critical success factors for future conflicts, particularly irregular warfare.
Typical military applications for Smiths Interconnect technology include unmanned aerial systems (UAS), next-generation ground vehicles, network-centric communications systems, surveillance systems and self-protection systems. Our radio frequency and rugged connectors solutions are deployed in the most extreme environments, such as enabling sensor and communications systems and keeping military personnel protected in areas of conflict.
The commercial aerospace market generally demonstrates short-term cyclicality and long-term growth driven by increased passenger and freight demand from an expanding global economy. Smiths Interconnect provides electrical and microwave connectivity solutions for various aircraft, space vehicles and satellites.
The propensity for higher data rates and true mobility are the main drivers for growth in the field of commercial mobile telecommunications. Smiths Interconnect supplies niche microwave components used in base stations and cell sites, as well as solutions to optimise network performance and integrity, and to safeguard the high value infrastructure from the effects of lightning strikes and power surges.
Other applications for Smiths Interconnect products include medical equipment such as MRI scanners, automation equipment for the test and measurement and machine tool markets, and mass transit systems.
Technology
Smiths Interconnect comprises five focused technology areas:
- Connectors provides application-specific, high-reliability electrical interconnect solutions from highly integrated assemblies to micro-miniature connectors.
- High Reliability Components provides passive microwave products used within the building blocks that generate, transmit, receive and process high-frequency signals for communication systems.
- Microwave Sub-Systems provides microwave and millimetre-wave sub-assemblies, antennas and systems solutions for both defence and commercial applications.
- Protection provides signal and power integrity components that protect high-value electrical systems from surges caused by power surges and lightning strikes.
- Wireless Technologies provides solutions that test, filter and process high-frequency signals for communications systems.
Performance
|
|
2009 |
2008 |
Reported |
Underlying |
|
Sales |
318 |
261 |
22% |
(5%) |
|
Headline operating profit |
56 |
54 |
3% |
(20%) |
|
Headline operating margin |
17.4% |
20.7% |
|
|
|
Statutory operating profit |
51 |
51 |
|
|
Reported sales for Smiths Interconnect increased by 22%, or £57m, driven by currency translation (£60m) and acquisitions (£15m). On an underlying basis, excluding the benefits of currency translation and acquisitions, sales fell 5% due to declines in sales of components to the wireless infrastructure market as well as the rail, industrial and automation markets in Europe. In particular, sales of our lightning and surge protection equipment declined against the same period last year which benefited from some significant short-term contracts. Sales to the military and aerospace markets have remained strong, medical sales were flat, while the industrial, rail and automation markets have become more challenging.
Headline operating profit increased by 3%. Excluding the benefit of currency translation (£12m) and acquisitions (£3m), headline profit declined by 20%, or £13m. Margins were adversely affected by one-off restructuring charges (£2m), lower volumes and an adverse mix effect on gross margins caused by lower wireless sales.
On an underlying basis, sales into military, aerospace and space applications increased 9% during the year. The growth came from a good mix of new research and development activities; projects transitioning from development to the initial production phase; and ongoing volume production projects such as our Mobile Directional Antenna Systems and connectors for the Eurofighter programme.
We achieved several new wins on intelligence, surveillance and reconnaissance (ISR) and communications programmes, including being selected to provide:
- an airborne antenna system for a high-frequency data link enabling air-to-ground transfer of battlespace information;
- a frequency and time reference module that will enable a network-centric radio system to connect different tactical ground, airborne and satellite communications terminals together providing total radio/network compatibility on-the-move and in variable terrain; and
- a direction-finding antenna system to support upgrades to shipboard Electronic Warfare systems.
Good progress was also made on securing key positions on major Satcom programmes within the US Department of Defense including a new win supporting a major UAV platform. We also continued high rate deliveries of telemetry and situational awareness systems for several major UAV programs such as the Shadow, Raven and Warrior.
In the area of Force Protection, high-volume manufacture of microwave filter components for systems which counter improvised explosive devices remained a strong contributor to sales. We further developed our business providing transient voltage protection devices against the potential effects of High Altitude Electromagnetic Pulse (HEMP) and Electromagnetic Pulse (EMP) weapons with several new programme wins. In addition, we were selected to provide an ultra-low noise frequency source for a next-generation integrated countermeasures system which will provide self-protection capabilities to US Navy aircraft.
In space, we were awarded a contract to develop millimetre-wave components for a joint NASA and JAXA (Japan) satellite used to monitor the earth's weather patterns. Sales to commercial aerospace declined in the period as production rates slowed.
Wireless telecommunications sales were buoyed by the full-year effect of the acquisitions of Allrizon and Triasx, as well as Dowin, the Shenzhen-based manufacturer of power and signal protection devices which was acquired in April 2009. Excluding the impact of exchange rates and acquisitions, sales to the wireless market reduced by 21%, mainly because strong prior-year sales of lightning and surge protection solutions for the roll-out of the WiMAX broadband network in the US were not repeated this year. Furthermore, there was a general softening of demand from new infrastructure deployments.
With the notable exception of the 3G network build-outs in China, most operators cut back new network capital expenditure and focused on improving the performance of their existing networks, which is supporting demand for our network optimisation products. Sales of our portable passive intermodulation analysers grew strongly, particularly in the US, as operators recognised the benefits the instrument provides in identifying network performance issues.
Other wireless telecoms developments included gaining positions to supply resistive devices to the Chinese equipment manufacturers and increasing sales of millimetre-wave point-to-multipoint antennas.
Sales to the medical, rail and automation markets declined 12% on an underlying basis. Adverse market conditions were partially offset by new product launches and programme wins in the medical sector, although the industrial markets in Europe were particularly difficult.
Microwave filters for 'Force Protection' systems
The nature of irregular warfare has caused 'Force Protection' systems to become a high-priority and well-funded segment of defence budgets.
Through its Lorch Microwave business, Smiths Interconnect provides microwave filters that are incorporated into various systems which counter radio-controlled improvised explosive devices that have been rapidly deployed to areas of conflict.
In addition to ground-based systems, Smiths Interconnect provides components and sub-systems for force protection applications in use on a variety of fixed and rotary wing military platforms.
Business developments
Smiths Interconnect executed numerous restructuring projects during the year, targeting cost savings and also increasing the percentage of manufacturing in low-cost economies. This included the combination of two US businesses with the majority of manufacturing transferring to our Mexico facility and the retention of a satellite engineering office. In addition, substantial reductions in work force were completed in Italy, Ireland, California and Florida, and short-time working was introduced in Germany and France. All of these projects started to pay back during the year and will help margin improvements in the coming year.
In April, Smiths Interconnect completed the purchase of Dowin, a Chinese manufacturer of power and signal protection devices, operating mainly in the wireless telecoms market and based in Shenzhen. This move complements our existing protection portfolio and provides a platform in Asia where we expect further investment in the roll-out of wireless infrastructure. This is the third acquisition in Asia made by Interconnect in the past two years.
Outlook
Short-term market conditions are expected to remain challenging for automation, rail and medical applications, as well as wireless telecommunications where demand has slowed after the initial surge of demand to support 3G infrastructure. Defence revenues are expected to continue to grow and the restructuring actions taken during the year are expected to generate some margin improvement.
In the longer term, Smiths Interconnect's continued focus on the technologies that support the future strategic direction of defence spending will deliver robust performance in the event of an overall reduction in military budgets. Furthermore, in the next two to three years wireless telecommunications operators are expected to increase significantly capital investment to deploy high-speed next-generation networks requiring specialist network optimisation capabilities such as ours to support high-data rate applications.