Smiths hopes for a boost from explosives and anthrax detection

Smiths, the aerospace and medical systems group, warned yesterday that it foresaw no improvement in any of its main markets but heartened investors with an upbeat assessment of its growth prospects in defence and anti-terrorist detection systems.

The warning came as Smiths posted a 9 per cent fall in operating profits which, according to its chief executive Keith Butler-Wheelhouse, "prove our resilience in tough times".

Profits before exceptional items and amortisation for the year to 31 July fell from £499m to £452m but free cash-flow was strong at £315m, enabling the group to cut its debts by a further £395m to £725m. The shares rose 6 per cent to 644p.

Mr Butler-Wheelhouse said Smiths was not expecting near-term improvements in the US, which now accounts for just over half total sales, or in the UK and Continental Europe. He said the next 12 months would be a period of "grafting and grinding".

The group, formed just under two years ago from the merger of Smiths Industries and TI, now appears to have put the disposal of what were previously referred to as "non-core" businesses – its sealing and industrial divisions – on the back burner. This follows the failure to attract any acceptable offers. "We have had lots of expressions of interest but that is different from a cheque with the right amount on it," Mr Butler-Wheelhouse said.

The figures include a £44m charge to pay for 5,000 redundancies announced in the wake of 11 September. Mr Butler-Wheelhouse said there would be no significant job cuts this year, unless there was a further dramatic fall in its markets caused by an event such as a US invasion of Iraq.

The rapid growth of Smiths defence and detection equipment business helped limit the decline in aerospace profits caused by the slump in the air travel market. Mr Butler-Wheelhouse said a market potentially worth billions of dollars had opened up following the decision of the US authorities to equip airports with explosive detection systems for both passengers and hand baggage and now hold luggage.

Smiths has also secured an order to supply an anthrax detection system for the US postal network which will go into 300 sorting offices across the country and is capable of detecting 12 other biological and chemical agents.

The group raised £247m through disposals during the year and spent £65m on four acquisitions. But Mr Butler-Wheelhouse said it had up to £2bn of firepower to expand the group if the right opportunities came along.

The group also served notice that it may have to take a £30m charge to profits this year to increase pension provisions while a further £20m could be knocked off earnings if the dollar/pound exchange rate stays at current levels.