Smiths Aerospace Components entered into three long-term supply agreements with GE Aviation. These include contracts to supply the full combustor assembly for the GEnx family of engines; a 29.3% share of a J85 upgrade kit to be supplied to the US Air Force; and a contract to machine critical rotating parts such as disks and shafts across the full range of GE engines. In order to support the latter, a new facility was opened in North Carolina, US.

Smiths Aerospace continues to streamline business processes and use lower-cost locations or outsourcing as alternatives for lower-value-added work. During the year, progress continued on the development of shared service centres and various manufacturing site consolidations. Smiths Aerospace's facility in Suzhou, China increased its capacity during the year.

Markets
Smiths Aerospace serves both military and commercial aerospace markets. Military is the larger market for Smiths, accounting for 54% of the division's sales.

Military
In 2006, the overall global market for advanced military aircraft continued to be stable. The chart below shows the trend in the build of fixed-wing military aircraft, expressed in units.

Commercial
Demand in the commercial market followed a different trend from military. The number of commercial jets built by Airbus and Boeing is shown by the chart below.

As in the military market, the success of the actual aircraft and engines that have high Smiths content is a key factor. For Smiths, the most important commercial aircraft in current production are the Boeing 737, the Boeing 777 and the Airbus A320 family. The build rate for narrow-bodied jets (B737 and A320) is forecast to increase by 21% in 2006 with demand for the 737 expected to be particularly strong. In addition, production of the 777 in 2006 is expected to increase by 50%.

Aftermarket
The aftermarket for further sales and service, once aircraft are in operation, is important in both the commercial and military markets. The largest driver of aftermarket demand is aircraft utilisation.

In 2006, commercial air traffic is estimated to grow by 6%, while usage of military aircraft remains stable.

Performance

Underlying business growth varied by sector. Sales to the commercial market increased by more than 25% benefiting from increased production of Boeing 737, 777 and Airbus A320 aircraft. Particular successes were Smiths selection by Boeing to provide the Thrust Reverser Actuation System (TRAS) for the 747-8 and also an agreement to support its GoldCare service solution for Boeing 787 Dreamliner operators.

In addition, the components business secured a long-term contract from Rolls-Royce for engine components on the Trent 1000 engine for the Boeing 787 Dreamliner.

Sales of defence equipment increased by 5%. Activity on military development remained high, particularly on C130 AMP, F-35 JSF and 767 Tanker. The first flights of the C130 AMP and JSF are planned in the latter half of 2006. The 767 Tanker programme experienced some schedule changes and additional investment in meeting initial commitments for Italy and Japan. Meanwhile, the process for replacing the US KC135 tankers has now begun. Defence aftermarket sales were level with the prior year.

Key defence contracts won included the selection of Smiths to supply the new SDS-5000 large area cockpit display system for the new Future Lynx Helicopter by AgustaWestland, and to provide the next generation Health and Usage Monitoring System (HUMS) for both the Future Lynx and for the South Korean Helicopter Programme.

Headline operating profit
Headline operating profit rose by 15%. The profit increase reflects higher volume, including the initial supply of goods to Aviall, together with improved cost control. Profit improvement was, however, held back by higher R&D costs. On a statutory basis, operating profit was £146m (2005: £120m).

Research and development (R&D)
Investment in R&D, whether charged against profit or capitalised, increased to £273m (2005: £223m), including £148m (2005: £141m) funded by customers. R&D is discussed more fully in the forward-looking section below.

Queen's Award for Enterprise
Smiths won the UK Queen's Award for Enterprise 2006 in Innovation for its Remote Interface Unit (RIU) product family which has the ability to digitise signals such as voltage, current, frequency and temperature, and effectively communicate these to a large number of aircraft systems over the 'central nervous system' of a modern airliner.

Forward-looking issues
Smiths Aerospace has, for the last several years, invested increasingly in R&D and in low-cost facilities to secure positions on future programmes and drive revenue growth in future years.

Military
On the military side, Smiths has high content on the platforms which have prospects of significant sales over the years ahead. Unlike the commercial business, Smiths military sales are less concentrated in a few key programmes. Particular original equipment programmes of importance to Smiths are the F-18, F-35, Eurofighter Typhoon, Apache Longbow and Future Lynx helicopters. Update programmes include the C130 AMP.

Commercial
In the commercial business, prospects are supported by firm business: the Airbus A380; the Boeing 787; and key engine programmes, notably GEnx, Trent 1000, the CFM56 for narrow bodies, and the CF34 for regional jets. Further, the value of Smiths products on the A380 and B787 is much higher than on older generation aircraft.

The last several years of high self funded investment have been dominated by three programmes: A380, 767 Tanker, and B787. The first two are now effectively complete so R&D expenditure will reduce accordingly.

The division is expecting to see further strong growth in the commercial aircraft sector during the current year. In the longer term, recent successful selection for new commercial and military programmes should ensure a positive outlook for Smiths Aerospace.