AEROSPACE
SMITHS AEROSPACE IS A FIRST TIER SUPPLIER OF INTEGRATED SYSTEMS TO AIRCRAFT PRIME MANUFACTURERS AND ENGINE BUILDERS. THE MAJORITY OF OUR SALES ARE IN LONG-TERM GROWTH AREAS.

In Aerospace there was strong demand for military systems and detection equipment. Notably, both of these sectors are on strong growth trends that should underpin sales in the years ahead. However, civil aerospace experienced a marked downturn in demand, which was exacerbated by the tragic events of September 11th, 2001.

Sales were a little higher for the year at £1,346m, 3% ahead of 2001. Operating profit, however, fell by 9% to £191m. The comparatively weaker operating profit chiefly reflects lower sales of retrofits and spares to the civil airlines.

Sales to military aircraft programmes grew significantly as the US government stepped up defence procurement. Defence equipment now represents about half of the division's sales and we are chosen suppliers to most of the high-value military aircraft programmes of the next decade, including the Joint Strike Fighter F-35, which will be the highest volume fighter aircraft in production.

Smiths Detection, which makes devices to detect explosives, narcotics and biological and chemical agents, doubled sales. Although Detection is a relatively small business, accounting for roughly 10% of divisional turnover in 2002, it achieves good margins and is the fastest growing part of Smiths. We anticipate rapid growth as governments – particularly the US – increase the capabilities of their national security systems.

In civil aerospace, sales suffered principally because of a reduction in the number of aircraft being built. Our main customers, Boeing and Airbus, are building considerably fewer planes today than when the cycle peaked at the turn of the Millennium. Within the industry, it is generally expected that aircraft production is likely to be some 25% below recent peak rates.

Production facilities have been consolidated and there has been a reduction in overall employment, but we have been able to retain key skills in many areas by transferring engineers to defence programmes where there is a growing demand.

Systems integrator
As mentioned earlier in this review, a number of contracts validated our guiding strategy of enlarging the Aerospace division in order to supply integrated systems to the prime manufacturers. We are now firmly established as a systems supplier, as shown by our winning sizeable contracts for the B767 Global Tanker Transport Aircraft (GTTA) and the new A380 super jumbo.

In the case of GTTA, Boeing selected us in March to supply the hose and drogue refuelling system. This requires capabilities in aerostructures, systems/software engineering and microprocessor-based refuelling control systems. We acquired Able Corp., a US engineering company, to supply the hose systems. The GTTA programme offers the opportunity to generate more than $1bn in sales.

The A380 contract to supply the integrated system that operates the plane's landing gear was awarded by Airbus in April 2002. This system combines electronic and actuation components to control one of the biggest structures on the whole aircraft. Contracts so far secured on the A380 are expected to generate lifetime revenues approaching $1bn.

However, the biggest business win of the year was the F-35 fighter aircraft, where we have secured business worth around $1m per plane. Lockheed Martin, which has selected us as a supplier, won the manufacturing programme in October 2001. More than 3,000 F-35s are planned to be built and the programme should make a major contribution to the division's long-term growth.

Our relationship with Lockheed has evolved in just a few years from that of sub-contractor to business partner. We are now one of only seven members of the company's Strategic Supplier Alliance Programme. We have similar partnership agreements with Boeing and BAE Systems.

Smiths Detection
Smiths Detection experienced huge growth in demand as the US government and others came to terms with the need to increase homeland security. US government departments are making extensive use of our trace detection technology as they upgrade counter terrorism detection systems for facilities such as airports and public buildings. Our inclusion in a team to develop a complete bio-agent detection system for the US Postal Service indicates the strength of our competitive position.

We expect US spending on detection equipment to more than treble from its 2001 level by 2003 and then to remain at a high level for the rest of the decade. Over the past year, we have prepared for this market expansion, increasing our R&D spend by a multiple of four, launching seven new products and investing substantially in our business infrastructure. We have a strong product range, including a recently introduced walk-through portal system for explosive detection that is creating worldwide interest.

Outlook – Aerospace
Aerospace is well positioned for long–term growth. Actions taken to adjust our manufacturing to reflect demand will help us to weather the civil downturn. We believe the strong prospects for defence and detection, which make up 60% of divisional sales, mean the division as a whole has the prospect of a return to growth.