Smiths Group Plc (ticker: SMIN-GB) is a U.K.-based industrial conglomerate operating in five discrete segments. John Crane, a provider of engineered products and services to global energy services customers; Smiths Medical, a supplier of specialty medical devices and consumables related to infection and injury, patient airway and temperature management, in-vitro fertilization, diagnostics, and emergency transport; Smiths Detection, a designer and manufacturer of sensors that detect and identify explosives, weapons, chemical agents, biohazards, nuclear & radioactive material, narcotics, and contraband; Smiths Interconnect, a leader in technically differentiated electronic components and sub-systems providing signal, power, and microwave solutions; and, finally, Flex-Tek, a global provider of engineered components that heat and move fluids and gases in various applications among the aerospace, medical, industrial, construction, and domestic appliance markets. Smiths Group serves customers ranging from governments and government agencies, to hospitals, petrochemical companies, equipment manufacturers and service providers around the world.
In the company’s quarterly call earlier this week, management frequently highlighted the multi-year restructuring plan that “is on track to deliver £60 million of savings by the end of 2017.” Perhaps more interestingly, that savings is explicitly “earmarked to provide the fuel for investment in growth projects” in four key areas: sales and marketing, quality improvement, product innovation, and expansion of the company’s presence in China. In addition, CEO Philip Bowman highlighted the organization’s focus on “talent development to ensure that [they] attract, retain, and encourage the best engineers”. In short, this Knowledge Leader is focused on generating future growth via substantial investments in intellectual property (IP) and intangible assets.
Individual business segment leaders commented on their respective commitment to intangible investments. The CEO of John Crane noted a 17% increase in “innovation” investment “to address future market needs through engineered solutions and technology advances”. For Smiths Medical, “investment in new products was up…to 5.4% from 4.8% in the prior year” and the “vitality index, sales from products launched in the last three years, improved slightly to 9% from 7%”. In the Smiths Detection unit, R&D has been more focused on a smaller number of more attractive projects and some major projects moved out of the development phase and into production, resulting in a slight drop in R&D. Smiths Interconnect, meanwhile, maintained company-funded R&D at 5.4% of sales, with a focus on “higher-growth sectors”. And, finally, the President of the Flex-Tek unit cited a 13% increase in R&D investment as “proving highly effective at gaining approvals on products for next-generation airplanes and new heating technologies.”
While our fundamental analysis of intangible-adjusted financial data reveals Smiths Group spends approximately 3% of sales on its aggregate R&D efforts (a figure near the lower end of any industrial conglomerate in the developed world), we also see that the company ranks third in its spending on advertising and firm-specific resources—items such as the quality improvement, product innovation, and talent development noted above. Commitment to these investments has generated a stock of IP equivalent to nearly 17% of total assets on the company’s balance sheet. The shift to prioritizing investment in intangibles can also be seen in the gradual decline in capex (topping out at nearly 11% in 2006) to around just 3% of sales in the most recent fully reported fiscal year. Operating metrics such as 46% gross margins and 9% ROIC suggest that management’s strategic concentration on IP has, indeed, contributed to the success of the corporation.
