Performance review
The division performed well
during the year through a combination of organic growth and acquisition.
Sales increased by 16% to £1,329m and operating profits by
18% to £210m. There were robust levels of orders across the
businesses. This strong performance reflects the competitiveness
of products following previous investment in product and manufacturing
capabilities. Additionally, businesses acquired during the year
made a valuable contribution to turnover and profits.
A number of important contracts were won. In the military sector,
Smiths Aerospace was selected by Boeing to supply key avionics systems
for the modernisation programme of more than 500 Lockheed
Martin C-130 military transport aircraft in US Air Force service.
The division was also awarded two contracts to supply avionics to
Indian Air Force jets. Both contracts were for 'open architecture'
systems, which facilitate the development of more integrated avionics
equipment. Winning such contracts bolsters Smiths Aerospace's position
as a first-tier supplier of systems to military and civil aircraft.
There was a growing volume of sales supplying mainstream military
aircraft. Production delivery of mainly avionics equipment has started
for the Eurofighter Typhoon and orders are expanding on a wide range
of equipment for US fighter planes, including the F-16, F-18, and
F-22. The division's position as a supplier to both the Lockheed-Martin
and Boeing aircraft competing for the Joint Strike Fighter programme
was also further developed. In recognition of Smiths Aerospace Actuation
Systems' product quality, on-time delivery and responsiveness, Lockheed
Martin's missile and fire control division recognised the company
as one of only two 'gold' suppliers under its preferred supplier
initiative.
In the civil market, Smiths Aerospace competed strongly to supply
components to both Airbus and Boeing aircraft. Smiths Aerospace
Actuation Systems won an order from Goodrich, the US aerospace company,
to provide the entire hydraulic actuation package for the body and
wing landing gear on the new Airbus A380 aircraft. The Smiths Aerospace
Electronic Systems business has been selected to develop electrical
load management and fuel quantity indication systems for the Boeing
777 derivative.
Health and usage monitoring systems (HUMS) were also in demand.
Contracts were received for installation on the Bell 412 helicopter,
UK Royal Air Force Chinook helicopters and the Royal Navy's entire
fleet of Sea King helicopters.
The Components business benefited strongly during the year from
increased outsourcing of engine and airframe components from key
customers such as General Electric and Boeing.
Within Marine Systems, Kelvin Hughes won a prestigious order to
provide the integrated bridge system for Cunard's Queen Mary II
luxury cruise liner, which is currently under construction. Chartco,
the joint venture company with Fugro, has now secured a total of
over 500 orders for its unique digital navigation
data and information update service.
Strategic development
Following the merger of the Dowty and Smiths Industries
aerospace businesses to form Smiths Aerospace, the division has embarked
upon an extensive integration process. There are now six business
areas centred on particular customer solutions: Electronic Systems,
Actuation Systems, Components, Customer Services, Detection &
Protection Systems, and Marine Systems. Key account managers have
been appointed to ensure customer satisfaction across the Aerospace
division.
Considerable progress has been made in the adoption
of lean principles into all areas of the division. These techniques
are improving flexibility, customer service, inventory management
and cost control. A major new programme of training to support the
transformation of the business into a lean enterprise has been launched.
The division has also continued to make strategic
purchases. Two acquisitions in North America extended Smiths Aerospace's
product range and provided access to new customers. In October,
Fairchild Defense was acquired for £75m, enhancing Smiths' leadership
in data recording and transfer, and strengthening the rapidly growing
HUMS, mission planning and related product ranges. In May, Barringer
Technologies, a specialist in explosive and narcotic detection equipment,
was bought for £39m. This acquisition provided access to civilian
security markets and added to Smiths' leading global position in chemical
and biological detection systems.
In April, Smiths Aerospace Customer Services,
which provides a valuable link with end users of the division's technology,
expanded its global reach with the acquisition of Chapman Avionics,
an important Australian independent maintenance provider.
Balanced portfolio
In the immediate future, the
strengthening of the defence sector will provide some counter to
the imminent weakening of the civil aircraft market. A strong forward
military order book provides valuable business many years into the
future.
The division's balanced military and civil portfolio, the widely
recognised quality of its products, and its ability to supply from
both sides of the Atlantic put Smiths Aerospace
in a good position to increase market share in years to come.
The division plans to continue investment in product research
and development. This, along with investment in new production
capabilities, will drive organic growth in the medium term. Aftermarket
support services and upgrade programmes principally for military
aircraft already in service are expected to generate a valuable
income stream.
Strategically, the transformation of the aerospace supply chain
now taking place will undoubtedly provide new business opportunities
and challenges. The division will continue
to seek targeted acquisitions, but only where this will create
shareholder value through better access to technology, enhanced
market coverage or increased access to funding.
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