Defence cuts will force us to lay off staff too, says Smiths Group

Smiths Group has warned that its key medical, weapons detection and military communications divisions are all being squeezed by spending cuts, in the latest instance of government austerity measures around the world hitting British manufacturers.

A day after the aerospace and defence giant BAE Systems confirmed it would shed 3,000 workers in the UK, Smiths said it would cut jobs and close plants in its detection unit as it seeks to slash its annual costs by £40m by 2014.

The detection unit, which makes a range of equipment from X-ray scanners at airports to biological weapon and drug detection devices, employs 2,500 people globally, with about 200 staff in the UK at its plant in Watford.

The company would not give further details about where the job cuts and site closures would occur. Philip Bowman, its chief executive, outlined the planned cost savings as the group announced a 12 per cent rise in pre-tax profit to £486m for the year to 31 July, on the back of a 3 per cent increase in sales to £2.8bn.

However, Mr Bowman said the public spending squeeze in the US, the UK and much of Europe meant the outlook was tough.

"The economic outlook remains uncertain and continued pressures on government spending, which particularly impacted Smiths Detection, Medical and Interconnect [military communications division] are likely to continue to constrain revenue opportunities," he said.

Mr Bowman said Libya presented Smiths with a great business opportunity, as the rebel-led Transitional National Council (TNC) consolidates its grip on the country. Smiths, which has carried out a handful of oil and gas projects in Libya through a local agent in the past, is in discussions with several parties in search of contracts.

"We see good opportunities and are actively pursuing those leads. We are reviewing whether to put our own presence in Libya for the first time," Mr Bowman said.

Mr Bowman expects the bulk of its work in Libya to come from rebuilding damaged oil production infrastructure and installing detection equipment across the country.

Smiths' John Crane oil and gas unit services the industry and manufactures a range of equipment, such as mechanical seals for use in pumps and compressors. The unit was Smiths' best performer last year, with underlying sales jumping by 13 per cent to account for nearly a third of the group's total revenues.

The strong performance – which Mr Bowman expects to continue for at least the next six to eight months -– helped to offset a 13 per cent slump in underlying sales at its detection unit, which was hit by delays in large orders as government agencies look to cut public spending.

The difficulties being experienced by BAE and Smiths are fuelling concerns that the Government's plan to boost the economy through manufacturing growth made be flawed.

A CBI survey last week revealed a larger-than-expected fall in factory orders this month, as the worsening global economy reduces demand for exports.