MANAGING DIRECTOR EINAR LINDH

SMITHS SPECIALTY ENGINEERING DEPLOYS SPECIALIST MANUFACTURING SKILLS AND INTELLECTUAL PROPERTY TO CREATE UNIQUE AND CRITICAL COMPONENTS FOR A DIVERSE RANGE OF INDUSTRIES. THROUGH PROACTIVE MANAGEMENT, WE ARE CONTINUOUSLY INCREASING THE FOCUS OF OUR BUSINESSES, DRIVING FOR INCREASED PROFITS THROUGH IMPROVED PRODUCTS, SERVICE AND EFFICIENCY.

Despite variable economic conditions across our global markets and a reduction in sales of 4% to £872m, profits improved by 5% to £108m. The benefits from both product mix and cost reductions were reflected in the margin which improved from 11% to 12%.

In particular, John Crane, the world leader in mechanical seals in terms of both market share and technology, achieved a creditable performance in its international businesses, and also benefited from the restructuring completed in 2002. Increased oil and gas exploration, together with investment in transportation pipelines, boosted demand for seals and related services.

Among the more significant developments, John Crane's leadership in dry gas seal technology helped it win a role in a joint venture which can upgrade Gazprom's pipelines in Russia. Performance Plus, the service-based initiative that maximises the performance of seals and related equipment, experienced growth in fee income and related sales. A focus on top line growth is proving successful, with the international order book ending the year at its highest level ever.

Smiths Interconnect designs and engineers connectors and electronics for highly specialised applications in industries ranging from defence to communications. Typical examples of the product applications are US military projects such as 'surge suppression' technology to protect military communications vehicles from High Altitude Electro Magnetic Pulses. Its Microwave cable systems have been selected by Lockheed Martin Aeronautics to supply the Broadband Airborne Cable Assemblies for the Joint Strike Fighter. The contract is potentially valued in excess of US$500m over the life of the programme.

The Flex-Tek division, which designs and manufactures innovative tubing and electrical components for the aerospace industry and international domestic equipment manufacturers, continues to produce excellent profit and cash ratios despite flat market conditions. The strong positions held by the businesses in their marketplace are a direct result of their innovation, with constant development of new products and enhancements.

Kelvin Hughes, the marine electronics and charts business, improved profits substantially following the streamlining of its corporate structure and an accompanying reduction in costs. It has supplied the integrated bridge system for the Queen Mary 2 cruise liner, which will be the largest passenger vessel in service following its launch in January 2004.

Where appropriate, our businesses continue to be refocused and restructured. In December 2002, we sold the Air Movement and Cable Management businesses for £125m. We have also expanded manufacturing in low-cost Central American and Eastern European countries, while consolidating facilities in North America. The telecommunications component manufacturing business established in Shanghai, China, has made good progress. Low-cost manufacturing initiatives continue to be given high priority.

OUTLOOK
Looking forward, the division should achieve modest growth in 2004 if the current market trends are sustained. Much of the sales growth is likely to come from John Crane and the defence-related Smiths Interconnect businesses, where the sales initiatives of the past year are ongoing. Increased efficiencies across the division will continue to reduce the cost base and the cash conversion success of last year is forecast to be repeated.