Smiths Interconnect
|
2009 |
2008 |
Reported |
Underlying |
Sales |
152 |
121 |
25% |
(2)% |
Headline operating profit |
24 |
23 |
3% |
(20)% |
Headline operating margin |
15.7% |
19.2% |
|
|
Statutory operating profit |
22 |
22 |
|
|
Reported sales for Smiths Interconnect increased by 25%, or £31m, driven by currency translation (£26m) and acquisitions (£7m). On an underlying basis, excluding the benefits of currency translation and acquisitions, sales fell 2% due to declines in sales of components to the wireless infrastructure market as well as the industrial 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 while the industrial and medical markets have become more challenging.
Headline operating profit increased by 3%. Excluding the benefit of currency translation (£6m) and acquisitions (£1m), headline profit declined by 20%, or £5m. Margins were adversely affected by one-off restructuring charges (£2m) and adverse currency transaction (£1m). Adjusting for these, the headline operating profit declined by 8% (£2m) mainly due an adverse mix effect on gross margins.
Smiths Interconnect manages its portfolio as five technology groups: Microwave Sub-Systems; Connectors; Protection; Interconnect Wireless Technologies and High Reliability Components.
Microwave Sub-Systems has continued to see strong sales growth through several US military programmes. Demand for the delivery of Mobile Directional Antenna Systems (MDAS), which provides a three-frequency band data link to support multiple unmanned aircraft systems, remained high and the addition of a higher frequency capability enabled an existing telemetry system to be adopted by several new US and international UAV programmes. We continue to make good progress on satellite communications programmes for US forces including Satellite Communications On The Move (SOTM); Warfighter Information Network-Tactical (WIN T); and the Navy Multiband Terminal (NMT). NMT provides seamless assured connectivity between a ship’s computer network and the US DoD Global Information Grid and will be installed in approximately 300 ships, submarines and shore locations over the next eight years. Additionally, demand for backhaul antennas remained robust despite the general weakening in wireless infrastructure.
Connectors sales reduced on an underlying basis reflecting some challenging end markets. The industrial rail traction and test & measurement markets in Europe have weakened considerably and there has also been a slowdown in the medical market and emerging geographies, particularly China. In the more robust military sector, we have seen some initial success with a new series of circular and rectangular harsh environment, high reliability connectors (SnapTac) particularly suited for ‘future soldier’ applications.
Sales of the Protection devices declined due to a general slowdown in the wireless infrastructure market and some significant contract wins last year in connection with the roll-out of the WiMAX broadband network within the US. Partially offsetting this, Protection has progressed well in diversifying its addressable markets with particular success in penetrating the defence sector. Margins were also affected by a shift in mix towards lower margin products compared with last year.
In the summer of 2008, Smiths Interconnect acquired Shanghai-based Allrizon Tongguang and Brisbane-based Triasx Pty Ltd. This led to the reorganisation of our microwave components businesses into two focused groups: Interconnect Wireless Technologies (IWT) providing microwave products and test solutions for the wireless telecommunications infrastructure market, and High Reliability Components (HRC) with more focus on the military and space markets. Both new acquisitions have been successfully integrated into the new IWT technology group. The combined trading performance is ahead of expectations due to a strong contribution from the sale of portable passive intermodulation analysers which are used by telecom operators to improve the signal quality and processing capabilities of mobile phone base stations. HRC has experienced mixed trading conditions with weaknesses in some sectors partially offset by continued strong demand for microwave filters used in counter-IED (Improvised Explosive Devices) systems.
Business developments
Smiths Interconnect initiated numerous restructuring projects in the first half that will yield direct, indirect and fixed cost savings and also increase the percentage of manufacturing in low cost economies. This included the combination of two Protection 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 Ireland, Scotland and Italy. All of these projects have already started to pay back and will be contributory factors to an improvement in operating margin in the second half of the year.
Smiths Interconnect has agreed, subject to regulatory approvals, the purchase of Dowin, a Chinese manufacturer of power and signal protection devices operating mainly in the wireless telecoms market. Based in Shenzhen, this move will complement our existing protection portfolio and provide a platform in Asia where we expect further investment in the roll-out of wireless infrastructure.
Outlook
With the exception of defence, all end markets are likely to remain challenging in the short term. In the longer term, the key focus for Smiths Interconnect will continue to be driving organic growth while seeking opportunities to add complementary technologies and extend its geographic reach through bolt-on acquisitions. Military communication is anticipated to be an area of continued investment by governments even if overall defence budgets plateau or decline. In the wireless communication infrastructure market, capital expenditure has slowed recently due to the current economic uncertainty, however growth is expected to return in 2010 as western operators plan to introduce higher speed next generation networks and new wireless networks are rolled out in developing markets.