Smiths Industries: Explosive growth in a volatile field

It has developed its business with production
bases in the United States, the United Kingdom and Germany—an enviable
position for any company involved in homeland security. Last year it
created a separate division, Smiths Detection, focused on physical
security, to tap the potential for growth in that field.

While a number of major companies came to
homeland security belatedly in recognition of the prospects for major
acquisitions, Smiths Industries was in the field early. In a shrewdly
prescient analysis of coming threats, Smiths Industries has been
positioning itself as a leader for years in the detection of chemical,
biological and nuclear threats.

Even before the terrorist attacks of
September 11, 2001, Smiths was buying US companies specializing in the
field. The focusthen was on securing against threats facing US and UK
troops in the battlefield, but since then those same technologies have
been applied to protecting American and European civilians. The
company’s handheld sniffing devices to detect explosives, chemical and
biological agents applied not just to battlefield situations but also
to airport and postal security.

The path to growth

Smiths began its growth with the $14 million
purchase of Baltimore, Md.-based Environmental Technologies in May
1999. It followed that acquisition with a 39 million pound sterling
($72.8 million) purchase of Barringer Technologies, a Warren, N.J.,
explosives and narcotics detection equipment manufacturer.

After 9/11, Smiths Industries slowed its
acquisition drive as it evaluated the newly elevated prices for
security-related businesses. In December 2002, Smiths moved again with
its largest purchase to date, expanding into continental Europe. It
bought Heimann Systems GmbH, a leader in x-ray security systems, for
235 million pounds sterling ($439 million). With sales of 104 million
pounds sterling ($194 million) in 2001, Heimann’s recent growth
rocketed at 50 percent annually.

Heimann’s products are used to inspect
freight and luggage for explosives or other dangerous contents. Heimann
also makes biometric systems for the security-related digital
registration of fingerprints and palmprints.

The acquisition enabled Smiths Industries to
offer both trace and x-ray systems to customers—a key advantage in
marketing to airports, which need both types of systems to detect
threats.

The Heimann acquisition also helped expand
Smiths Industries into continental Europe at a time when domestic
security budgets there are likely to pick up. The European Union is
studying a proposal by a group headed by its research and information
technology commissioners that recommends spending as much as 2 billion
euros (approximately $2.5 billion) annually on security research, an
effort to keep up with American research and development spending in
the field.

With Smiths’ strong presence in the United
States, the company’s management also hopes to expand the market for
Heimann’s checked baggage explosive detection system, bringing it
across the Atlantic. The system is potentially the only checked baggage
explosive detection system that will work within existing requirements
of airports, according to Smiths officials. It is in the process of
being certified by the Transportation Security Administration. There is
also the potential to apply Heimann expertise to shipping container
screening.

Indeed, Smiths’ growth in detection has been
truly explosive. For the company’s 2003 fiscal year, Smiths reported
273 million pounds ($510 million) of detection sales, up 129 percent
from the previous year, reflecting the Heimann acquisition and internal
growth of about 25 percent.

A telling look

It is rare to get a glimpse into the
profitability of homeland security programs, since companies usually
include them within much larger divisions—but Smiths Industries has
broken out the results for Smiths Detection. Its homeland security work
is showing high profit margins.

Smiths Detection reported sales of 273
million pounds ($510 million) in 2003 with a profit margin of 26
percent, making it more profitable than the company’s medical,
aerospace or specialty engineering segments. Heimann made an 11 percent
profit for the company within just eight months of its acquisition.

The 26 percent profit margins are unlikely to
continue for Smiths Detection. That level of profitability is likely to
ease somewhat to an ongoing profit margin of 20 percent, according to
management projections. Yet profits for typical defense and aerospace
companies are closer to 10 percent, so the profit margin remains high.  HST

Philip Finnegan is
director of corporate analysis at the Teal Group, a firm based in
Fairfax, Va., that provides strategic and market analysis to major
corporations.

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The Government Technology & Services Coalition's Homeland Security Today (HSToday) is the premier news and information resource for the homeland security community, dedicated to elevating the discussions and insights that can support a safe and secure nation. A non-profit magazine and media platform, HSToday provides readers with the whole story, placing facts and comments in context to inform debate and drive realistic solutions to some of the nation’s most vexing security challenges.

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