In June, Smiths Detection opened its first manufacturing facility in Russia. The new plant in St Petersburg will assemble x-ray equipment and is a base for both sales and technical support staff to serve the growing Russian security market.

Smiths Heimann Biometrics GmbH (SHB) was merged with Cross Match Technologies, Inc. in August 2005 in exchange for 43% of the issued share capital of that company. Smiths investment in Cross Match is accounted for on an equity basis.

Markets
Smiths Detection's products serve the transportation, critical infrastructure, ports and borders, military and emergency responder markets. The Company also adapts technology developed for these markets for carefully selected industrial applications.

Within transportation and critical infrastructure, growth is being driven by central and local governments and other agencies which are putting in place security systems, for example in airports and transport networks. Individual contracts can be large, causing the overall market to be volatile year-on-year.

The ports and borders market is experiencing growth caused both by security considerations and by authorities aiming to reduce contraband through clamping down on those avoiding payment of duty. The US Container Screening Initiative (CSI) in particular is driving growth in this sector.

The military market for UK and US technology is restricted by export controls, and these two governments form a large part of the market. The size of the market is influenced by significant contracts that are large in relation to the total market, although typically such contracts run for several years.

The emergency responder market is smaller than the other markets and is characterised by more localised purchasing decisions and steadier growth.

The markets served by Smiths Detection are particularly influenced by specific events and the perception of the threat of terrorist activity or other security issues. This perception itself has been and is likely to remain variable. Smiths Detection is working with a number of governments to deploy systems to counter the explosive threat identified in the UK in August 2006.

Performance

In the military sector, a number of existing military programmes have been winding down in the period, while several important new programmes including the Chem Bio Protective Shelter programme, are beginning. Smiths is well placed to benefit from new military programmes such as the US Department of Defense's requirement for a new generation of military chemical detectors.

Sales to transportation and airport authorities account for one third of the division's total, and new business secured in this period will sustain growth ahead. Elsewhere, airport operators around the world continue to acquire Smiths equipment, including in this period those in Thailand, China, Malaysia, Singapore, India, Pakistan, Japan, Australia and New Zealand. Smiths recently won a contract to supply security systems to the new terminal 3 at Dubai airport. In addition Smiths Detection equipment is now being used on the New York and Prague subways and has been trialled at a commuter station in Maryland, US and on the London Underground.

The ports and borders business supplies large x-ray systems to check containers in transit. Turkey, Abu Dhabi and Oman placed orders for systems to screen shipments through their borders and airports. Belgian Customs are deploying new fixed and mobile scanners at Zeebrugge and Antwerp. Smiths is also under contract to provide mobile cargo x-ray systems (HCV) to the US Customs and Border Protection Agency.

Headline operating profit
Headline operating profit rose 11% with the operating margin at 18.6% compared with 18.8% in 2005. The profit increase arose principally from volume growth, with changes in the business mix leading to a slight margin reduction. On a statutory basis, operating profit was £81m (2005: £69m).

Research and development
Technology enhancement remains a high priority for Smiths Detection, whether by Company funded R&D or by acquisition, and has yielded a pipeline of new products.

A new Hi-Scan x-ray system for airport security checkpoints will help to identify and pinpoint explosives in hand luggage. A new desk-top system (500DT), able to detect drugs and explosives simultaneously, was launched and has been certified by the Transportation Security Administration.

R&D expenditure was £30m, a decrease of £1m. Company funded R&D was equivalent to 5% of sales in the year and customer funding added a further 2%. Smiths employs over 400 scientists and engineers in the Detection business who identify and develop new technologies.

Forward-looking issues
Smiths' strategy is to build a global business meeting customers' needs to detect biological and chemical agents, weapons, contraband and explosives.

To fulfil this strategy Smiths Detection aims to develop technology internally and to make acquisitions of both technology start-ups and more established businesses.

Trading performance in a particular period will depend on the contracts secured, which can be large and irregular. Tendering activity is at a high level, however, and we are confident of growth in 2007.