Smiths purchased Farnam Custom Products Inc and Millitech, Inc for £4m and £19m respectively, boosting Flex-Tek and Interconnect's presence in heating and ventilation and millimetre wave technologies respectively. The business and assets of Lorch Microwave LLC were purchased for £15m, increasing capability in microwave filters.

After the year end, the Company completed the disposal of Safematic Bearing Lubrication to SKF.

Markets
Smiths Specialty Engineering's principal businesses – John Crane, Interconnect and Flex-Tek – each address specific markets. Although each market is different, the demand for Specialty Engineering's products rose generally across all markets in 2006.

John Crane's largest markets are the oil and gas sector and the petrochemical and other process industries. Maintenance and support form a large part of total demand, with new projects providing an income stream many years after installation of equipment. John Crane's markets are driven by general economic expansion but in particular by growth within the oil and gas industry.

Interconnect's largest markets are aerospace, defence and wireless telecommunications. Within aerospace and defence, Interconnect's products include antenna systems, connectors, cable assemblies and frequency sources.

In the wireless telecommunications sector, Interconnect supplies devices to protect base stations from power surges, as well as coaxial cables and electronic components.

Flex-Tek serves mainly domestic appliance manufacturers and the US construction industry. Demand is normally a function of overall economic growth.

Performance

John Crane's markets have been particularly strong in 2006, specifically within the oil and gas sector in the US, Latin America and Asia Pacific. Improved market conditions combined with the benefits of focusing on enhanced customer service produced a 12% increase in John Crane sales while tight cost controls produced a profit increase of 11%.

John Crane has won several large projects which will secure future revenue streams, including the Minatitlan process plant for Pemex in Mexico and the Qatar Gas Refinery. John Crane UK is in the process of installing a new technology centre which will be capable of testing gas seals to extreme pressure.

John Crane won a Queen's Award for its turbomachinery business in recognition of its success in expanding its business well in excess of the general levels of market growth and for its efforts in developing and marketing advanced technologies.

For the rest of Specialty, a number of major new contracts in Interconnect and a strong construction market for Flex-Tek resulted in overall sales growth of 19% and profit growth of 31%. Major contract wins include a deal to manufacture the award-winning Tarsier runway debris monitoring system in the USA won by the recently acquired Millitech and satellite communications for the new Boeing 787, won by Tecom.

Headline operating profit
Headline operating profit rose by 21%. The translation of the US results at the higher dollar exchange rate and the effect of exchange translation on other non-UK businesses increased the division's profit by 4%. On a statutory basis, operating profit was £74m for John Crane (2005: £65m) and £76m for the rest of Specialty Engineering (2005: £70m).

Research and development
R&D expenditure for the division as a whole increased by £2m to £24m.

Forward-looking issues
Smiths strategy is to grow each of the principal Specialty Engineering businesses. In pursuit of this strategy, Smiths aims to broaden the customer or market base where the application of its technological expertise and engineering skills are most appropriate, for example the development of Interconnect products for the medical equipment market.

Smiths Specialty Engineering's outlook is for further growth in the year ahead, helped by the continued upturn in the investment cycles for oil and gas and telecoms infrastructure.