Flagging Smiths Medical, soaring pound weigh down Smiths Group earnings

Smiths CEO Philip Bowman

A British pound rising against the dollar cut into results at Smiths Group--but its U.S.-based Smiths Medical division, beset by competitors, led the bad-news story in the company's earnings for the first half of its 2014 fiscal year.

"Underlying revenue and margins advanced in John Crane and Flex-Tek but were primarily offset by declines in Smiths Medical," Chief Executive Philip Bowman said in a statement.

Profits at Smiths Medical, the company's second-largest division with 27% of overall sales, dropped 18% in the 6 months ended Jan. 31, as sales in the division fell 4%. Smiths' interim report cited price pressure and volume affected by U.S. distributors destocking. The U.S. medical-device tax alone brought profits down 2.8%, the company said.

Based in Minnesota, the med tech division of the British engineering conglomerate makes specialized medical devices, consumables and equipment. Its competitors include companies like Baxter, Covidien ($COV), Arizant Healthcare ($MMM) and Hospira ($HSP).

Smiths has already announced a four-year global cost-cutting program dubbed "fuel for growth." In today's earnings statement, the company said it will expand that program. Initially set to save £50 million ($83.3 million) a year, its annual savings goal is now set at £60 million ($99.7 million). Of that, £23 million is expected to come in the Smiths Medical division.

The company said globally, restructuring will focus on three areas: "site rationalization with a particular focus on manufacturing footprint"; "delayering" and "broadening management spans of control"; and upgrading information systems.

Smiths plans to invest the money it saves in R&D. Increased spending has already begun, raising Smiths' investment by 7% to £57 million ($94.7 million) in the first half of its 2014 fiscal year. A further £4 million ($6.7 million) in R&D spending will come from customer-funded investment, bringing the company's total spend for the period to 4.2% of revenue. Its 2013 R&D spend was 4.0% of revenue.

However, its medium-term target for revenue growth at Smiths Medical remains the lowest in the company--0% to 3%, compared with low-to-mid-single digits for the other Smiths divisions.

- here's the Smiths Group earnings release
- read Reuters' take

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