Business review: Smiths Interconnect

Ralph Phillips

President

Smiths Interconnect is an electronic components and sub-systems business providing signal, power and microwave solutions that are application specific and incorporate innovative technologies to help our customers achieve ultimate system performance.

We design and manufacture specialised electronic and radio frequency products that connect, protect and control critical systems for the global wireless telecommunications, aerospace, defence, space and medical markets.

Employees

3,100

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 and system suppliers, and sub-system manufacturers. Amongst our largest customers are Raytheon, Finmeccanica, BAE Systems, AAI/Textron, Northrop Grumman, Ericsson, Motorola, Sprint Nextel, ZTE, GE Medical and Alstom.

Contribution to 2008 Group sales^#

11%

Contribution to 2008 Group headline operating profit^#+

13%

Competitors

Smiths Interconnect operates in a fragmented market with many small and medium-sized competitors. In Connectors, the competitors include Amphenol, Deutsch, Radiall and Souriau. Microwave Components competes with, amongst others, Anaren, Spectrum Control and parts of M/A-Comand Dover. The competitors of Microwave Sub-Systems include Cobham, EMS Teledyne and L3. Protection competes with Huber & Suhner, Dehn and parts of SL Industries.

^#Based on revised operating structure for 2008/09 (see Segment information)

⁺Percentage relates to headline operating profit before corporate costs.

Markets

The two largest markets for Smiths Interconnect are defence and wireless telecommunications.

Typical military applications for Smiths Interconnect technology include unmanned aerial systems (UAS), next-generation ground vehicles, communications systems, surveillance systems and self-protection systems. Its rugged connectors and radio frequency products are deployed in the most extreme environments, such as keeping military personnel and systems connected in areas of conflict.

In the evolving field of mobile telecommunications, Smiths Interconnect supplies niche microwave components used in the base stations and cell sites as well as protection solutions to safeguard the high value infrastructure from the effects of lightning strikes and power surges and maintain network integrity.

Other applications for Smiths Interconnect products include medical equipment such as MRI scanners, space and satellites, commercial aerospace and mass transit.

Smiths Interconnect comprises four focused technology areas:

Connectors provides application-specific, high-reliability electrical interconnect solutions from highly integrated assemblies to micro-miniature connectors.
Microwave 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 spikes and lightning strikes.

Performance

Smiths Interconnect delivered strong underlying sales and profit growth. Sales growth was driven primarily by three technology areas: Protection, Microwave Sub-Systems and Connectors.

The performance of the Protection technology group was enhanced by sales of lightning and surge protection solutions supplied to major US 4G wireless broadband providers for mobile internet access. It benefited from sales of protection solutions to medical and telecommunications customers. The division has also made key wins in the defence sector for protection of ground mobile communication systems.

Microwave Sub-Systems saw strong sales growth through several US military programmes including the three-frequency band data link (MDAS) which supports multiple unmanned aircraft systems. Positions on three new satellite communications programmes for US forces were also secured: one is a shipboard communications programme and the other two are Satellite Communications On The Move (SOTM) programmes and Warfighter Information Network-Tactical (WIN-T), the US army system for reliable, secure and seamless high bandwidth mobile communications in areas of conflict.

The Connector group delivered good sales growth but profit was held back by a slowdown in Italy. Key wins were secured on several major defence programmes and our connectors were selected as the high reliability standard for future NASA space applications. Major product orders were also received for medical MRI scanners, civil aerospace and rail traction.

The Microwave Components group delivered a small underlying increase in sales as a result of a lower than expected demand from Chinese and North American telecom operators. However, we have seen continued strong demand for filters used to combat improvised explosive devices and other components for a variety of applications including commercial satellite programmes.

Smiths Interconnect successfully expanded its global capacity, particularly in lower manufacturing cost environments. During the year operations were opened in Tunisia and India while we continued to build our operating base in China, Mexico and Costa Rica. Over the last year, the proportion of Smiths Interconnect products manufactured in low cost countries has more than doubled.

Business developments

Over the course of the past six months Smiths Interconnect has acquired Shanghai-based Allrizon Tongguang and Brisbane-based Triasx Pty Ltd. These strengthen our position in the growing Asian market. Allrizon offers first-class technology, providing new channels to market and enhanced relationships with the rapidly growing Chinese telecoms manufacturers. In the 2007 calendar year, Allrizon posted sales of £5.3m. Triasx has in-depth knowledge of the telecommunications radio frequency market and an excellent R&D capability. Its strong filter capabilities complement our existing products, particularly those from Allrizon, while the Triasx interference testing devices fit well with our existing Summitek test and measurement business. In the year to 30 June 2008, Triasx reported sales of £12.5m.

Outlook

There are good opportunities for Smiths Interconnect to grow organically – particularly in developing markets – and scope exists to improve the portfolio and extend its geographic reach through bolt-on acquisitions. Military communications is anticipated to be an area of continued investment by governments and the further roll-out of wireless networks is expected with the highest growth in developing markets. Smiths Interconnect's markets remain robust and are set for continued growth.

The advanced Mobile Directional Antenna System (MDAS) is a sophisticated, multiband communication system that facilitates communications with Unmanned Aerial Vehicles (UAVs). Designed and built by Smiths Interconnect business Tecom Industries, MDAS is a rugged, portable antenna, which is typically mounted on vehicles.

UAVs are commonly used in reconnaissance missions to scout an area for threats when the environment is too dangerous for it to be patrolled.

The MDAS system enables tracking and communications with multiple UAVs relaying real time pictures and video to the soldier and command forces.

Next division

Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek