Smiths shares slide after surprise fall in medical profits

Shares in Smiths, the aerospace to industrial seals group, fell by 12 per cent yesterday after the company reported an unexpected drop in profits in its medical equipment division.

The 15 per cent fall in earnings, blamed on increased R&D charges and the costs of launching a new insulin pump, took the shine off an otherwise solid set of half-year results and Smiths shares ended 77p lower at 553p.

Despite the setback, Keith Butler-Wheelhouse, the chief executive, said Smiths had turned in a resilient performance in the first six months and forecast that it would achieve its target of full-year profits in line with the previous 12 months.

Mr Butler-Wheelhouse cautioned that a war in Iraq would be bad news for all divisions of Smiths, including its defence business, and said the group did not anticipate any recovery in the civil aerospace market until 2005 at the earliest.

He also said Smiths would continue to shift production to lower-cost regions such as Central and South America to help maintain profit margins. In the last 12 months it has transferred 2,000 jobs in its sealings, industrial and medical divisions to Mexico and Central America where labour costs are $10 (£6.20) a day compared with $75 to $90 in the north-east of the US.

Currency movements and increased R&D costs reduced profits by £20m. Leaving these aside, operating profits for the six months to the end of January came in at £180m compared with £182m. Aerospace, which accounts for 45 per cent of total sales, saw operating profits rise from £70m to £75m but medical profits fell from £43m to £37m.

Mr Butler-Wheelhouse said there were huge opportunities for Smiths' detection systems division which specialises in explosives and metal detection as the US airline industry moved towards full screening of hold baggage. Smiths is also in talks with the Greek authorities to provide a comprehensive detection system for the 2004 Olympics in Athens capable of detecting explosives, guns and chemical and biological agents.

Smiths provided similar protection for last summer's Ryder Cup golf competition which involved all spectators, players and officials having to pass through a specially-equipped archway.

Mr Butler-Wheelhouse said Smiths had received several offers for its polymer seals unit, which makes about £50m a year in profits, but it had not yet decided whether to sell the business.