Full year results 2020

Halma, the global group of life-saving technology companies focused on growing a safer, cleaner and healthier future, today announces its full year results for the 12 months to 31 March 2020.

Highlights

  Change 2020 2019
Continuing Operations      
Revenue +11% £1,338.4m £1,210.9m
Adjusted Profit before Taxation1 +9% £267.0m £245.7m
Adjusted Earnings per Share2, 3
+9% 57.39p 52.74p
       
Statutory Profit before Taxation
+8% £224.1m £206.7m
Statutory Earnings per Share +9% 48.66p 44.78p
Total Dividend per Share4 +5% 16.50p 15.71p
       
Return on Sales5   19.9% 20.3%
Return on Total Invested Capital3   15.3% 16.1%
Net Debt6   £375.3m £232.0m

 

  • Record revenue and profit for the 17th consecutive year.
  • Good growth with revenue up 11%, Adjusted1 profit before tax up 9% and statutory profit before tax up 8%.
  • Solid organic constant currency revenue growth3 of 5%; organic constant currency3 Adjusted1 profit before tax growth of 2%, or 4% excluding £5.0m of COVID-19-related customer bad debt provisions.
  • Widespread growth: All sectors delivered revenue growth and three out of four sectors grew Adjusted1 operating profit. Revenue grew in all major regions on a reported and organic constant currency basis3.
  • Strong contribution from acquisitions, adding 5% to revenue and Adjusted1 profit before tax growth; ten acquisitions completed and healthy acquisition pipeline.
  • Continued increased investment while maintaining high Return on Sales5 and ROTIC3. R&D expenditure up 14%, representing 5.4% of revenue.
  • Strong cash generation, with cash conversion of 97%, and robust balance sheet and liquidity position with gearing (net debt to EBITDA) at the year-end of 1.1 times.
  • Total dividend for the year7 up 5%, the 41st consecutive year of dividend per share increases of 5% or more.
  • Resilient Q1 FY2021 trading: revenue 4% lower than in Q1 FY2020 reflecting the ‘non-discretionary’ demand for many Halma products; good cash generation; order intake ahead of revenue and the same period last year.
  • Timing and profile of recovery remains uncertain; currently expect Adjusted1 profit before tax for FY2021 to be 5%-10% below FY2020, and more weighted to the second half than in previous years.

Andrew Williams, Group Chief Executive of Halma, commented:

“Halma delivered a record financial performance in the past year, and trading in the first quarter has been resilient despite the effects of the COVID-19 pandemic. This reflects our clear purpose and focused strategy, our flexible and agile organisation, and the resilient, long-term growth drivers in our chosen markets. We expect these strengths, combined with the quality of our people and our increasing investment in innovation and technology, to enable us to continue to create value for all of our key stakeholders in the years ahead.”

Notes:

  1. Adjusted to remove the amortisation of acquired intangible assets, acquisition items, significant restructuring costs, profit or loss on disposal of operations and in the prior year the effect of equalising pension benefits for men and women in the defined benefit pension plans, totaling £42.9m (2019: £39.0m). See note 1 to the Results for details.
  2. Adjusted to remove the amortisation of acquired intangible assets, acquisition items, significant restructuring costs, profit or loss on disposal of operations, in the prior year the effect of equalising pension benefits for men and women in the defined benefit pension plans and the associated taxation thereon. See note 2 to the Results for details.
  3. Adjusted1 Profit before Taxation, Adjusted1 Earnings per Share, organic growth rates, Return on Sales5 and Return on Total Invested Capital (ROTIC) are alternative performance measures used by management. See notes 1, 2 and 3 to the Results for details.
  4. Total dividend paid and proposed per share.
  5. Return on Sales is defined as Adjusted1 Profit before Taxation from continuing operations expressed as a percentage of revenue from continuing operations.
  6. Includes IFRS 16 lease liabilities of £61.5m (2019: £50.3m).
  7. Comprising interim dividend of 6.54p and proposed final dividend of 9.96p.

For further information, please contact:

Halma plc: +44 (0)1494 721 111
Andrew Williams, Group Chief Executive
Marc Ronchetti, Chief Financial Officer
Charles King, Head of Investor Relations +44 (0)7776 685948

MHP Communications: +44 (0)20 3128 8788
Rachel Hirst/Andrew Jaques/Giles Robinson

Halma’s purpose is to grow a safer, cleaner, healthier future, for everyone, every day. We play a positive role in society by addressing some of the world’s most fundamental needs and challenges, from safer work and public spaces, to a cleaner, more sustainable environment, and improved medical care.

We have a clear and sustainable growth strategy, with a disciplined approach to choosing the markets in which we invest. This is supported by a flexible and agile organisation which means we can rapidly evolve and adapt to the changing needs of our customers. We attract talented people, who are aligned with our purpose, share our values and fit well into our inclusive culture of collaboration, entrepreneurialism and integrity.

These elements have supported our further progress in the year, and particularly in our response to COVID-19 which emerged in the final quarter. Importantly, I also believe that they have become increasingly vital in positioning Halma to meet the new challenges and opportunities which are emerging, as we continue to create value for all our stakeholders.

Halma has a long track record of successfully adapting to societal shifts and evolving markets. Increased awareness of the profound and global nature of the challenges we all face, whether specifically from the COVID-19 pandemic or longer-term trends such as climate change and growing, ageing and urbanising populations, has further reinforced the importance of our purpose, as well as our business model which can adapt swiftly to changing market needs. In recent years, we have also been increasing our organic and inorganic investment in digital technologies, which is likely to be accelerated further in the future.

In recent months, our focus has been the safety and well-being of all our stakeholders, and I am proud of the way in which everyone at Halma has addressed the challenges they have faced, both personally and professionally. They have ensured the continued supply of life-critical products to our customers, contributed directly and indirectly to the global fight against COVID-19, while protecting the health and safety of their colleagues and communities. I would like to thank them all for their hard work, dedication and determination in such challenging circumstances.

In this review, I will first look back at Halma’s performance during the last financial year and then take a deeper dive into our response to the COVID-19 pandemic, our performance since the year-end and our prospects for the future.

Review of the 2019/2020 financial year


Record revenue and profit with strong returns

We delivered another record year for revenue and profit driven by solid organic growth and a record year for acquisitions.

Revenue increased by 11% to £1,338m (2019: £1,211m), including 5% organic constant currency revenue growth and a contribution from acquisitions of 5% (4% net of disposals). There was a benefit to revenue growth of 2% from currency translation, which principally arose in the first half of the year. We estimate that the adverse impact of COVID-19 during the final quarter was a reduction of approximately 1% on full year revenue.

Adjusted1 profit rose by 9% to £267.0m (2019: £245.7m). This comprised 2% organic constant currency growth, or 4% excluding £5.0m of bad debt provisions in the second half of the year given the possible impacts of COVID-19. There was a 5% contribution from acquisitions (also 5% net of disposals) and a 2% benefit from currency translation.

Statutory profit before taxation increased by 8% to £224.1m (2019: £206.7m).

Returns remained at a high level. Return on Sales1 was 19.9% (2019: 20.3%), within our target range of 18% – 22%. The post-tax Return on Total Invested Capital1 was 15.3% (2019: 16.1%), well above our estimated Weighted Average Cost of Capital of 7.7%. This slight reduction reflected a lower level of constant currency earnings growth than in the prior year, the increase in provisions, and also the weakening of Sterling against foreign currencies, which has a greater proportional effect on capital employed than on returns.

We completed a record 10 acquisitions during the year spread across all four sectors. Annualised profit growth acquired equated to around 6% of Halma’s earnings, ahead of our KPI of acquiring growth of 5% or more. This reflected our investment in increased M&A capability at the sector and company level in recent years.

Strong cash generation and robust balance sheet and liquidity

Cash generation was strong with cash conversion of 97% (2019: 88%). This excellent performance was primarily driven by good working capital control, and by the positive effects on cash conversion of the implementation of IFRS 16, the leasing accounting standard (a 5% benefit), and the increase in provisions (a 2% benefit).

The year ended with net debt of £375.3m, which included for the first time £61.5m of lease liabilities as a result of the implementation of IFRS 16. Excluding these lease liabilities, net debt increased to £313.8m (2019: £181.7m), after spending £242.6m on current year acquisitions (2019: £68.1m) and £32.3m on capital expenditure, as well as paying dividends to shareholders of £61.2m and tax of £52.4m.

Our balance sheet and liquidity position remain robust. Gearing (net debt to EBITDA) at the year-end was 1.13 times (2019: 0.63 times), at the lower end of our targeted range of 1-2 times, and we have committed facilities totalling approximately £750m (at year-end exchange rates). The earliest maturity in these facilities is for £74m (at year-end exchange rates) in January 2021, with the remaining maturities from 2023 onward. We therefore do not intend to access funding from the UK Government’s Covid Corporate Financing Facility (CCFF).

Annual dividend to increase by 5%

The Board is recommending a 3.8% increase in the final dividend to 9.96p per share (2019: 9.60p per share). Together with the 6.54p per share interim dividend, this would result in a total dividend for the year of 16.50p (2019: 15.71p), up 5%, making this the 41st consecutive year of dividend per share growth of 5% or more.

The final dividend for 2020 is subject to approval by shareholders at the AGM on 4 September 2020 and is expected to be paid on 1 October 2020 to shareholders on the register as at 28 August 2020.

Revenue growth in all major regions

We delivered revenue growth in all major regions, on a reported and organic constant currency basis, reflecting the global nature of the growth opportunities in our chosen markets of safety, health and the environment.

The USA, the UK and Asia Pacific performed strongly. The USA, our largest region, and the UK each delivered their second consecutive year of double-digit revenue growth, with increases of 15% and 10% respectively. Both regions achieved organic constant currency revenue growth of 8%.

Asia Pacific delivered the strongest reported growth, of 16%, principally driven by a good contribution from the acquisition of Ampac, based in Australia, which we completed in July 2019. Organic growth in Asia Pacific was more modest at 4%, in part reflecting a decline of 4% in China mainly as a result of the impact of the COVID-19 pandemic for most of the final quarter of the year. There was good organic growth in most other major markets in the region.

Mainland Europe grew revenue by 4%, including 1% organic constant currency growth, against a strong performance last year which had benefited from some large contracts. In the Rest of the World, revenue was ahead overall, with a reduction in Africa, Near and Middle East more than offset by growth in Other countries, which included a strong performance in Canada.

Revenue growth in all sectors

All sectors delivered record revenue, and three out of four sectors delivered record Adjusted1 profit. This widespread growth represented a good performance given strong prior year comparatives and the effects, later in the year, of the COVID-19 pandemic. The following is a brief summary of each sector’s performance with further details set out below in the sector reviews.

The Environmental & Analysis sector delivered a strong performance for the third consecutive year, supported by some large Optical Analysis projects together with continued new product development and increasing regulatory requirements in the UK water market, with profit growth consistent with that of revenue. Return on Sales was similar to last year.

Infrastructure Safety also performed strongly, with reported revenue growth benefiting from recent acquisitions, notably Ampac in Australia. Although organic revenue growth slowed in the second half, the benefit of recent investments in automation and improved mix management towards higher margin products resulted in stronger organic profit growth. There was also an improvement in Return on Sales, despite a £2.1m increase in provisions for the risk of COVID-19 related customer bad debts.

The Medical sector reported good revenue growth, with solid contributions from both organic growth and recent acquisitions. The reported profit increase was more modest, resulting in a decline in Return on Sales. There was higher R&D investment to generate future growth and a net charge of £2.5m reported in the first half of the year principally related to the rationalisation of product development strategies in two ophthalmic companies to improve their growth and profitability over the medium term. The sector’s results also included a £1.1m increase in provisions for the risk of COVID-19 related customer bad debts, resulting in a decrease in organic profit growth.

Process Safety reported a small increase in revenue, including the benefit of the Sensit acquisition and further good progress in the USA from a large logistics contract. However, unfavourable conditions in the US onshore oil and gas market, together with some customer project delays and a temporary site closure in California in the fourth quarter due to COVID-19, resulted in a decline in organic revenue, profit and Return on Sales.

Ten acquisitions completed across all four sectors

Halma’s decentralised organisational model gives us the ability to continue acquiring small- to medium-sized businesses to achieve our strategic objectives. We are also able to sell and merge businesses relatively easily, should specific market dynamics change, enabling us to maintain a growth-oriented portfolio without becoming significantly more complex to manage. For example, in 2010 Halma had revenue of £459m from 36 operating companies, while today we have revenue of over £1.3bn from 44 operating companies.

Our core acquisition strategy is to find privately owned businesses operating in niches which are aligned with our purpose and which demonstrate long-term structural market growth. We focus most of our search efforts on our core, or closely adjacent, market niches although each sector board has the freedom to find new niches which might have the right product, market and financial characteristics. Every transaction is approved by the Group Chief Executive and Chief Financial Officer, with all deals over £10m requiring Board approval.

We have a healthy acquisition pipeline and, with increased capability added at the sector and company level in recent years, this translated into a record 10 acquisitions being completed in the year for a total initial cash consideration (including fees) of £231m. These were spread across all four sectors, with performance in line with expectations during the year and we expect good contributions from them in the future. Full details of the acquisitions made in the year are given in note 9 to the Financial Statements.

In 2019, we added new expertise to manage and support small, minority investments that can bring new technology and capabilities to Halma without us taking full ownership. During the year we made two small strategic investments, totalling £4.8m, in Valencell, which provides wearable biometric solutions and Owlytics, focused on wearable-based analytics technology. In the period, we also sold our interest in Optomed Oy, a manufacturer of handheld fundus cameras, at the time of its IPO in December 2019, for £6.8m (net of disposal costs) with a small net gain on our investment of £2.9m.

For reasons of financial prudence during the COVID-19 pandemic, we do not plan to complete any acquisitions in the first half of financial year 2020/21. However, our M&A search efforts are continuing, and we have a good pipeline of potential acquisitions should conditions become more favourable in the second half.

We continue to build long-term relationships with business owners so that they see Halma as the right home for their business when they decide to sell, or as a strong strategic partner to help them grow their businesses.

Investment in central and Growth Enabler teams to support our growth strategy

With the rapid growth and evolution of the Group, we made further investments in the year in our central and Growth Enabler resources, which provide high level expertise and resources to our companies to support their growth. We made further good progress on our Halma 4.0 strategy, through which our companies are addressing the diverse challenges and opportunities presented by the digital age.

We increased strategic investment in our IT capabilities, to ensure that we have a future-ready technology infrastructure and digital architecture to support both our decentralised operational needs and the development of our digital growth initiatives. This will be an area of increased focus in the coming year, given the opportunities arising as a result of the COVID-19 pandemic, for example in enabling remote monitoring of safety and environmental systems, as well as in ensuring hygiene and facilitating remote diagnosis in healthcare.

We continued to strengthen our finance, internal audit, risk and legal teams to support continued strong governance, compliance and reporting as the Group grows. We also invested in our other Growth Enablers, for example in adding M&A capabilities in Asia-Pacific, and strengthening our Talent, Innovation and Digital Growth teams. These increased resources have already supported the purchase of several companies with digital business models, which this year included FireMate in Australia and Invenio in the UK.

Our companies increased their investment to support core growth, for example in new product development, with R&D spend up 14% to £72m (2019: £63m). Having achieved a major cultural mindset shift over the past three years, our innovation and digital accelerator programmes were re-focused from ideas generation onto the commercialisation of ideas and improving the speed and cost of innovation.

We launched a new Digital Execution Accelerator programme and an Agile NPD (New Product Development) Engine to help our companies shorten the time from investment to revenue, by addressing specific areas of challenge, such as the development of new routes to market and new technology. Approximately 7% of our revenues are currently derived from digital solutions and services or connected products (products which can transmit data wirelessly, for example through Wi-Fi or a cellular network, without the need for a further gateway device). In total, we currently have over 20 Digital and Agile NPD projects involving all four sectors.

To leverage the existing capabilities within Halma companies, we created a Digital Champions Network, to share expertise and to further embed innovation and digital programmes and tools across the Group. We also continued to build our external partnerships, with our collaboration with Hitachi’s Centre of Excellence in Lisbon currently supporting the development of seven projects. Examples include: the remote monitoring of fire systems; remote diagnosis and telemedicine for vital signs monitoring and ophthalmology; and monitoring the shelf life of fresh produce to reduce food waste.

Our Convergence Accelerator, which combines our existing capabilities and technologies to create new solutions and business models has had another productive year. An example is a new integrated warehouse safety solution, called SCOPE, which combines technologies and capabilities from companies in three sectors. It combines expertise from people and vehicle flow (Infrastructure Safety), safety interlocks (Process Safety), and real-time location monitoring technology (Medical). We expect field trials of prototype SCOPE systems to begin in the next year.

Talent and Executive Board changes

The quality and diversity of our leaders and teams is a critical component of Halma’s success. Their commitment and dedication have played a key role in our resilient response to the challenges presented by COVID-19.

We are committed to ensuring that Halma is an inclusive organisation, thereby maximising the pool of talent available to us and ensuring we recruit and retain the best people for each role. We are actively addressing the need for increasing diversity within our subsidiary companies’ leadership teams by embedding strong diversity and inclusion principles.

One measure of inclusion is gender diversity, which on the Board has improved from 18% female six years ago to 40% today. We are also making encouraging progress in executive leadership with both our Executive Board roles and the Divisional Chief Executives on our Sector Boards on track to achieve gender parity in the next year. Neither of these groups had any female representation six years ago.

We fully recognise the value of having a variety of voices, backgrounds and experiences within our leadership teams and realise that we have more work to do to increase ethnic diversity. Our recruitment patterns will be actively influenced by recognising the growing talent pool of ethnically diverse candidates and by leveraging the role models we already have within our business. We acknowledge that many of our stakeholders, including investors, customers and employees, regard leadership diversity as an important factor in facing up to the challenges of the modern world. We have begun to measure national and ethnic diversity across our workforce, to provide a benchmark on which we can demonstrate our progress in the future.

Several changes to the Executive Board in the past year have added important new capabilities and increased diversity, aligned with the needs of our growth strategy.

  • In September 2019, Catherine Michel joined Halma’s Executive Board as our first Chief Technology Officer, with global responsibility for IT and digital architecture, working closely with Inken Braunschmidt in her role of driving the execution of Halma’s Digital and Innovation growth strategy.
  • In October 2019, as planned, Laura Stoltenberg succeeded Adam Meyers as Sector Chief Executive for the Medical & Environmental sectors, which was followed by an extensive handover period up to March.
  • In July 2020, Adam Meyers succeeded Paul Simmons as Sector Chief Executive of our Safety sectors, following the announcement in April 2020 that Paul will leave Halma to join Hill & Smith plc as Chief Executive Designate. Adam has agreed to defer his retirement from Halma until 2021, to allow an orderly succession process to be completed.

Later in 2020, we look forward to welcoming Funmi Adegoke to Halma’s Executive Board as our General Counsel, replacing Ruwan De Soyza who resigned from Halma early in the year. Mark Jenkins has been re-appointed as Company Secretary.

Further progress in sustainability and living our purpose

Our purpose of growing a safer, cleaner, healthier future for everyone, every day is the foundation for our approach to sustainability. To meet the ambition which is embodied in our purpose, it is critical that our companies remain sustainable over the long term, since the issues that we help our customers address, in ensuring safety and protecting health and the environment, are likely to persist. Sustainable business is a core part of Halma’s DNA, and we seek to demonstrate it in not just our financial performance but also in terms of the positive role we can play in society, and by behaving responsibly in the markets and communities we serve.

Our further progress in the year in advancing our ESG agenda was evident across a wide range of initiatives. These ranged from reducing our carbon footprint and improving our CDP rating from “Awareness C” to “Management B”, to identifying Modern Slavery risks within our supply chain, and supporting and improving diversity and inclusion in the Group. I was also immensely pleased with the result of our first ever group-wide charitable campaign, Gift of Sight, and although the COVID-19 pandemic has delayed our next campaign, we intend to launch it later this year. Further detail on our progress in 2020 is given in the Sustainability review of the Annual Report and Accounts 2020.

Our response to the COVID-19 pandemic

Following the initial outbreak of COVID-19 in China in January 2020, we acted quickly to support our companies, to ensure the safety of our people, and to mitigate the potential adverse impacts on our businesses. As this regional outbreak evolved rapidly into a global pandemic, with health and economic challenges beyond what any of us have experienced in our lifetimes, it has become clear that it has some unique characteristics compared with previous downturns which Halma is relatively well positioned to address.

Firstly, Halma’s agility and diversity has proved to be a major asset. Over many years, we have built an organisation and culture which has been created for fast, decentralised decision making by those closest to our stakeholders, accompanied with clear lines of accountability.

Secondly, from an early stage it was clear that our ability to respond rapidly needed to be tempered with the understanding that major decisions had to be taken with a holistic view, balancing the positive and negative impacts across all of Halma’s key stakeholders. These include our employees, suppliers, customers, debt holders, shareholders and a wide range of community stakeholders, including Government. I believe the actions we have taken so far have achieved that objective and, importantly, positioned Halma to create even greater value for all of them in the future.

To support our companies, we created both central and regional COVID-19 support groups, the first of which was established in January 2020. This enabled each of our 44 companies to implement an operating plan to suit its market and local circumstances across our 54 principal operating facilities in the UK, the USA, Mainland Europe and Asia Pacific. Over 30 of our companies deliver critical safety, healthcare and environmental protection solutions and received a mandate, or permission, from their regional or national authorities to continue to operate during shutdown restrictions. Only three facilities have had to implement extended shutdown periods since the end of March and, as at the date of this report, all our facilities are operational.

Our priority throughout the pandemic has been to ensure a safe working environment for all Halma employees. In addition to working from home wherever possible, measures taken have included increased spacing between workstations, appropriate protective equipment, staggered shifts and breaks, enhanced cleaning processes and contingency planning, plus a ban on non-essential travel and visitors to facilities.

Given these challenges, it was impressive to see the efforts which many Halma employees across the world made to re-purpose their resources and capabilities in order to manufacture personal protective equipment for healthcare providers. Colleagues from at least 11 Halma companies worked around the clock, individually and collaboratively, to contribute to their national effort and demonstrated a key characteristic of Halma’s culture, which enables our companies to do the right thing without having to seek permission first.

As in previous downturns, we acted quickly to reduce costs, optimise cash flow, protect liquidity and, where necessary, change how we operate. These actions resulted in a cost reduction (net of the cost of implementation) of over £20m in the first quarter of the new financial year, compared to the previous fourth quarter’s run-rate. We implemented a significant reduction in all discretionary overheads. We also ensured that our companies continued to manage their working capital effectively, while maintaining productive relationships with customers and suppliers. We limited capital investment to essential projects and R&D only and did not complete any acquisitions during the first quarter of the current financial year.

We also implemented a freeze on hiring and promotions, while company, sector and Group employees agreed to temporary salary reductions from 1 April 2020 for a three-month period. This helped to absorb a significant proportion of the cost savings necessary to protect ongoing operations in the face of tremendous uncertainty, demonstrating their support for, and commitment to, their companies and their colleagues across Halma. The Board and Executive Board also agreed to a 20% reduction in salaries or fees for a 3 month period, from 1 April 2020.

Whilst a small percentage of our workforce have been furloughed by their companies, Halma has funded this in the UK at our own expense, without any support from the UK Government’s Coronavirus Job Retention Scheme. Unfortunately, given the significant declines in current and forecast demand in certain businesses, it is likely that there will be a small number of redundancies during the year though Halma has committed to providing additional financial support to those companies and employees which are affected. The estimated cost of these furlough and support programmes is approximately £5m, to be taken in the first half of 2020/21.

Current trading and outlook

Trading in the first quarter of the current financial year, from 1 April 2020 to 30 June 2020, has reflected the resilience of our business model and the essential nature of many of our products and services. Our order book has remained strong, with order intake ahead of revenue and ahead of the same period last year. Cash generation remains good and we continue to have a strong balance sheet and liquidity position. This has enabled us to alleviate some of the more stringent cost saving measures implemented in the first quarter.

Group revenues in the first quarter were 4% lower than the prior year, and 13% lower on an organic constant currency basis. This resilient performance, achieved during a period of lockdown in most of our major regions, also highlighted the benefits of having a diverse portfolio and agile organisational model. There was a wide variation of performances in our companies, reflecting significant changes in demand in individual end markets, as well as additional production, sales and distribution challenges due to safe working requirements and limitations on physical access to customer sites.

These revenue trends were partially offset by the savings in variable costs referred to above. We expect our companies to continue to actively manage their cost bases for the remainder of the year according to their individual market conditions.

In the Safety sectors, Infrastructure Safety saw the largest decline in revenue, particularly in the UK, which accounts for around a quarter of its revenue. The challenges of gaining physical access to installation sites and the actions of customers in furloughing a large proportion of installers of our products during the period had a significant adverse impact. We expect this trend to improve as lockdown restrictions ease and installers return to work. Revenue in Process Safety also reduced, primarily driven by a fall in demand for safety products in its oil and gas related businesses as a result of the lower oil price.

In the Medical sector, a number of our companies, notably those supporting the monitoring of vital signs and the oxygenation of patients, saw strong increases in demand, while companies supporting elective surgery and discretionary ophthalmic diagnosis procedures experienced significant reductions, leading to an overall decline in revenue. We expect the high demand in vital signs and oxygenation products to moderate over the coming months, and the demand in markets supporting elective procedures and discretionary diagnosis to recover as healthcare systems attempt to normalise.

The Environmental & Analysis sector achieved continued revenue growth, with solid performances in Environmental Monitoring and Water Analysis & Treatment and strong growth in Optical Analysis.

Summary

Halma’s performance reflects our clear purpose, focused strategy, agile organisational model and the resilient, long-term growth drivers in our chosen markets. Our continued and accelerated investment in great talent, innovation and digital technologies will enable us to create value for all our key stakeholders in the future.

We have previously announced that the COVID-19 pandemic was expected to have a net adverse impact on our markets and our full year financial results to 31 March 2021, and for those results to have a significant second half weighting. This remains our view, with the increased second half weighting in part due to the costs of our employee support programmes in the second quarter.

We have delivered a resilient financial performance in the first quarter of the new financial year, despite the initial effects of the COVID-19 pandemic. Although the timing and profile of recovery remains uncertain, based on recent trading and internal forecasts, we currently expect Adjusted1 profit before tax for the year to 31 March 2021 to be 5%-10% below that achieved in the 2020 financial year. We will provide further updates as we progress through the current year.

Andrew Williams
Group Chief Executive

1 See highlights.

Record results

Halma made good progress in the period, delivering record revenue and profit for the 17th consecutive year, despite the effects from the COVID-19 pandemic in the fourth quarter of the financial year. We continued to execute well against our growth strategy and our key performance indicators, benefiting from the clarity of our purpose, our strong culture, our agile and responsive business model, and our robust financial position.

Revenue for the year to 31 March 2020 increased by 10.5% to £1,338.4m (2019: £1,210.9m) which reflected a solid contribution from organic growth and the benefit of recent acquisitions. Adjusted1 profit grew 8.7% to £267.0m (2019: £245.7m) and statutory profit before taxation increased by 8.4% to £224.1m (2019: £206.7m).

The Board is recommending a 3.8% increase in the final dividend (2019: 7%), which would result in a 5.0% (2019: 7%) increase in the total dividend for the year. This reflects our performance in the year, our resilience in the first quarter of the current financial year, our continued confidence in the future growth prospects of the Group, and an equitable approach in relation to the Group’s stakeholders given the effects of the COVID-19 pandemic. The proposed final dividend, if approved, would result in Halma delivering the 41st consecutive year of dividend per share growth of 5% or more.

The revenue growth of 10.5% included a 4.8% increase in organic constant currency revenue, with acquisitions also contributing a 4.8% increase (4.1% net of disposals), and a positive currency impact of 1.6%. The Adjusted1 profit increase of 8.7% included charges totalling £5.0m for provisions in the second half of the year, reflecting the increased risk of customer bad debt in all sectors given the effects of the COVID-19 pandemic. Organic constant currency profit growth was 2.2%, with acquisitions contributing 4.9% to adjusted profit growth (4.7% net of disposals), and currency 1.8%.

Statutory profit before taxation of £224.1m is calculated after charging the amortisation of acquired intangible assets of £38.3m (2019: £35.6m), and other items of a net £4.6m (2019:£3.4m). Further detail on these items is given in note 1 to the Financial Statements.

Cash conversion was excellent at 97%, reflecting a strong underlying cash performance, primarily driven by good working capital control, and also benefiting from the effects of the implementation of IFRS 16 ‘Leases’ and the increase in provisions. Our financial position remained robust, with net debt excluding lease commitments at 31 March 2020 of £313.8m, or £375.3m on an IFRS 16 basis which includes lease commitments (31 March 2019: £181.7m) and committed facilities of £750m.

Revenue and profit growth

Revenue grew by 11.7% in the first half and 9.5% in the second half. There was a 3.2% effect from currency translation in the first half which, with no material effect in the second half, gave a benefit of 1.6% for the year as a whole. Organic revenue growth at constant currency in the first half was 5.4% slowing to 4.3% in the second half of the year, partly reflecting the effects of the COVID-19 pandemic, giving a solid 4.8% growth rate for the year as a whole.

Adjusted1 profit growth was 14.1% in the first half. Growth in the second half was 4.1% (7.8% excluding the customer bad debt provision). As with revenue, there was a benefit from currency translation in the first half, and no material effect in the second half. As a result, the first half/second half split of adjusted profit was 48%/52%, compared to our typical 45%/55% pattern. Organic profit growth at constant currency was 6.5% in the first half, but declined 1.5% in the second half (growth of 2.3% excluding the customer bad debt provision), reflecting the mix of performances across the sectors as detailed below, and resulting in modest growth of 2.2% for the year as a whole.

            Percentage growth
  2020
£m
2019
£m
Increase
 £m
Total Organic
 growth2
Organic
 growth2
at constant currency
Revenue 1,338.4 1,210.9 127.5 10.5% 6.4% 4.8%
Adjusted1 profit before taxation 267.0 245.7 21.3 8.7% 4.0% 2.2%
Statutory profit before taxation 224.1 206.7 17.4 8.4%

1 In addition to those figures reported under IFRS Halma uses alternative performance measures as key performance indicators, as management believe these measures enable them to better assess the underlying trading performance of the business by removing non-trading items that are not closely related to the Group’s trading or operating cash flows. Adjusted profit excludes the amortisation and impairment of acquired intangible assets; acquisition items; restructuring costs; profit or loss on disposal of operations; and, in the prior year only, the effect of equalisation of benefits for men and women in the defined benefit pension plans. All of these are included in the statutory figures. Notes 1 and 3 to the Accounts give further details with the calculation and reconciliation of adjusted figures.
2 See highlights.

Revenue growth in all sectors

All sectors delivered revenue growth and three out of four sectors reported adjusted profit growth against strong prior year comparatives in those sectors. On an organic constant currency basis, three out of four sectors grew revenue in both the first and the second half.

The Environmental & Analysis sector delivered a strong performance, with revenue growth of 16.1% and profit growth of 15.4%, driven by organic growth. All three subsectors delivered revenue and profit growth, with strong performances in the Environmental Monitoring subsector, supported by new product development and by regulatory requirements in the UK water market, and in Optical Analysis, which benefited from the delivery of some larger projects. Return on sales was broadly stable at 21.4% (2019: 21.5%), with a lower gross margin driven by business mix and a £0.9m increase in additional provisions for the increased risk of customer bad debt given the effects of the COVID-19 pandemic being balanced by good control of overhead and research and development expenditure.

Infrastructure Safety performed strongly, with recent acquisitions being the principal driver behind revenue growth of 14.2%. Organic constant currency revenue growth was modest, at 3.1%, largely reflecting planned reductions in lower margin business in the second half of the year. Return on Sales was higher at 23.1% (2019: 21.8%), despite additional provisions of £2.1m for the increased risk of customer bad debt given the effects of the COVID-19 pandemic. This reflected a higher gross margin as a result of the reduction in lower margin business, good underlying overhead control and benefits from recent investments in automation. Together with the increases in revenue, this resulted in reported profit growth of 21.0%, and 6.6% on an organic constant currency basis.

The Medical sector delivered good revenue growth of 6.8%, which included an organic contribution of 3.3% against a strong comparative of 10% organic constant currency growth in the 2019 financial year. There were mixed trends across its subsectors. Profit growth was more modest at 1.5%, principally reflecting increased investment in research and development and a charge of £2.5m in the first half of the year due to portfolio rationalisation, both of which we expect to support future growth, partly offset by good control of overheads. There were also additional provisions of £1.1m for the increased risk of customer bad debt given the effects of the COVID-19 pandemic. As a result, Return on Sales decreased by 1.3% to 24.3%.

Process Safety delivered a small increase in reported revenue of 1.2%. There was good progress in the Industrial Access Control and Gas Detection subsectors, and the sector also benefited from the recent acquisition of Sensit. However, Pressure Management revenue and profit declined, reflecting a challenging US onshore oil and gas market, and Safe Storage and Transfer suffered from customer project delays in the second half of the year and a temporary site closure in California in the fourth quarter of the year due to COVID-19. As a result, on an organic constant currency basis, revenue declined by 1.7% for the year as a whole. Profit decreased by 3.5% (6.1% on an organic constant currency basis), mainly as a result of a decline in the higher margin US onshore oil and gas business and additional provisions of £0.9m for the increased risk of customer bad debt given the effects of the COVID-19 pandemic, and Return on Sales was lower, at 21.9% (2019: 23.0%).

Central administration costs, which include Growth Enabler costs, increased to £26.3m (2019: £22.0m). This principally reflected increased investment, both in governance and compliance as the Group grows (including in our Finance, IT and Legal teams), and in support for our companies’ growth over the medium-term, in the talent, strategic communications, digital transformation and innovation Growth Enablers. We expect central costs to decrease in 2021 to approximately £20m, mainly reflecting the cost reduction measures implemented in the first quarter of the year.

Sector revenue growth

  2020 2019      
  £m % of
total
£m % of total Change
£m
%
growth
% organic
growth at
constant
currency
Process Safety 200.0 15% 197.5 16% 2.5 1.2%  (1.7)%
Infrastructure Safety 466.5 35% 408.6 34% 57.9 14.2% 3.1% 
Environmental & Analysis 325.0 24% 280.0 23% 45.0 16.1% 13.6% 
Medical 347.2 26% 325.2 27% 22.0 6.8% 3.3% 
Inter-segment sales (0.3)   (0.4)   0.1    
  1,338.4 100% 1,210.9 100% 127.5 10.5% 4.8% 

Sector profit growth

  2020 2019        
  £m % of
total
£m % of total Change
£m
%
growth
% organic
growth2 at
constant
currency
% organic
growth at
constant
currency
excluding
bad debt
provisions5
Process Safety 43.9 14% 45.5 16% (1.6) (3.5)%  (6.1)%  (4.2)%
Infrastructure Safety 107.7 35% 88.9 32% 18.8 21.0% 6.6%  8.9% 
Environmental & Analysis 69.4 23% 60.1 22% 9.3 15.4% 13.0%  14.5%
Medical 84.4 28% 83.2 30% 1.2 1.5% (2.6)%  (1.3)%
Sector profit3 305.4 100% 277.7 100% 27.7 9.9% 3.1%  5.0% 
Central administration costs (26.3)   (22.0)   (4.3)      
Net finance expense (12.1)   (10.0)   (2.1)      
Adjusted4 profit before tax 267.0   245.7   21.3 8.7% 2.2%  4.2% 

3 Sector profit before allocation of adjustments. See Note 1
4 Adjusted profit excludes the amortisation and impairment of acquired intangible assets; acquisition items; restructuring costs; profit or loss on disposal of operations; and, in the prior year, the effect of equalisation of benefits for men and women in the defined benefit pension plans. All of these are included in the statutory figures. Note 3 to the Accounts gives further details with the calculation and reconciliation of adjusted figures.
5 Provisions totalling £5.0m for the increased risk of customer bad debt given the effects of the COVID-19 pandemic.

Revenue growth in all major regions

All major regions delivered revenue growth, on a reported and an organic constant currency basis. Of our four major regions, three (the UK, USA and Asia Pacific) achieved double digit percentage increases. The UK and the USA also delivered good revenue growth on an organic constant currency basis, while organic constant currency revenue growth in Asia Pacific was modest. Mainland Europe’s revenue growth was principally driven by recent acquisitions. In the smaller regions, Africa, Near and Middle East revenue growth slowed, and Other countries delivered a strong performance.

The USA delivered strong growth of 15.2%, and remains our largest revenue destination, accounting for 38% of Group revenue, an increase of one percentage point compared to the prior year. All sectors performed well, with Environmental & Analysis and Infrastructure Safety growing very strongly, the latter principally driven by recent acquisitions. Process Safety and Medical delivered good growth, which also included the benefit of recent acquisitions.

UK revenue increased by 10.1%, with all sectors except Process Safety, which accounts for less than 15% of UK revenue, delivering growth on a reported and organic constant currency basis. Environmental & Analysis grew very strongly, benefiting from new product development and increasing regulatory requirements in the UK water market. Process Safety revenue declined, reflecting a strong prior year comparative which had benefited from some larger contracts. Other sectors made good progress, which included the benefit of recent acquisitions.

Mainland Europe revenue increased by 3.8%, principally as a result of recent acquisitions. Organic constant currency revenue growth of 0.8% included a solid performance in Infrastructure Safety, which accounts for more than half of Mainland Europe revenue, but weaker trends in Process Safety, given the non-recurrence of some larger contracts which had benefited the prior year. The Medical and Environmental & Analysis sectors delivered a mixed performance, with small revenue declines on an organic constant currency basis.

Asia Pacific grew 15.8%, with very strong growth in Infrastructure Safety, driven by the recent Ampac acquisition, and good growth in the Process Safety and Medical sectors. On an organic constant currency basis, revenue growth was 3.6%, which included a 4% decrease in China, reflecting the impact of the COVID-19 pandemic in the final quarter of the year. In the region’s other major markets, there was strong reported in Australasia, driven by the Ampac acquisition, but modest organic growth, and India, Japan and Singapore delivered good performances.

In the rest of the world, revenue grew in aggregate, with a decline in Africa, Near and Middle East revenue, principally reflecting a planned reduction in lower margin business in Infrastructure Safety, more than offset by strong growth in Other countries, which was broadly spread across all four sectors.

Revenue from territories outside the UK/Mainland Europe/the USA grew by 10.0%, in line with our 10% KPI growth target.

Geographic revenue growth

    2020   2019      
  £m % of total £m % of total Change £m % growth % organic growth at constant currency
United States of America 510.3 38% 443.2 37% 67.1 15.2% 7.8%
Mainland Europe 276.4 21% 266.3 22% 10.1 3.8% 0.8%
United Kingdom 221.2 16% 200.9 16% 20.3 10.1% 8.3%
Asia Pacific 213.3 16% 184.0 15% 29.3 15.8% 3.6%
Africa, Near and Middle East 63.2 5% 70.8 6% (7.6) (10.7)% (11.9)%
Other countries 54.0 4% 45.7 4% 8.3 18.3% 15.0%
  1,338.4 100% 1,210.9 100% 127.5 10.5% 4.8%

Continued high returns

Halma’s Return on Sales2 has exceeded 16% for 35 consecutive years. Our KPI target is to deliver Return on Sales in the range of 18–22%. This year Return on Sales remained strong at 19.9% (2019: 20.3%), with the change principally reflecting the increase in provisions for the increased risk of customer bad debt.

We successfully achieved our objective of continuing to invest in our businesses while delivering growth. This enables us to maintain a high level of Return on Total Invested Capital (ROTIC), the post-tax return on the Group’s total assets including all historical goodwill. ROTIC was 15.3% (2019: 16.1%), with the change reflecting a lower level of constant currency earnings growth than in the prior year, and the weakening of Sterling against foreign currencies which has a negative effect on ROTIC as it has a greater proportional effect on capital employed than on returns. Our ROTIC remains well ahead of our KPI target of 12% and substantially in excess of Halma’s Weighted Average Cost of Capital (WACC), estimated to be 7.7% (2019: 7.9%).

Currency effects well managed

Halma reports its results in Sterling. Our other key trading currencies are the US Dollar, Euro and to a lesser extent the Swiss Franc, the Chinese Renminbi and the Australian dollar. Over 45% of Group revenue is denominated in US Dollars and approximately 12% in Euros.

The Group has both translational and transactional currency exposure. Translational exposures are not hedged, while, for transactional exposures, after matching currency of revenue with currency costs wherever practical, forward exchange contracts are used to hedge a proportion (up to 75%) of the remaining forecast net transaction flows where there is a reasonable certainty of an exposure.

We hedge up to 12 months forward. At 31 March 2020 approximately 68% of our next 12 months’ currency trading transactions were hedged.

Sterling weakened on average in the year, principally in the first half. This gave rise to a positive currency translation impact of 1.6% on revenue and 1.8% on profit for the year as a whole.

Based on the current mix of currency denominated revenue and profit, a 1% movement in the US Dollar relative to Sterling changes revenue by £6.3m and profit by £1.3m. Similarly, a 1% movement in the Euro changes revenue by £1.6m and profit by £0.3m.

If currency rates for the financial year 2021 were US Dollar 1.25/Euro 1.13 relative to Sterling, and assuming a constant mix of currency results, we would expect approximately a £13m positive revenue and a £3m positive profit impact compared to financial year 2020, the majority of which would be in the second half of the year.

    Weighted average rates used in
the Income Statement
Exchange rates used to
translate the Balance Sheet
    2020 2019 2020 2019
  First half Full year Full year Year end Year end
US$ 1.26 1.27 1.31 1.25 1.30
Euro 1.13 1.14 1.14 1.13 1.16

Increased financing cost

The net financing cost in the Income Statement of £12.1m was above the prior year (2019: £10.0m). This was as a result of higher average net borrowings in the year, given expenditure on acquisitions, and the inclusion of lease financing costs as a result of IFRS 16. These effects were partly offset by the average cost of financing which was lower given reductions in interest rates (see the ‘Average debt and interest rates’ table in the Annual Reports and Accounts 2020 for more information).

Interest cover (EBITDA as a multiple of net interest expense as defined by our Revolving Credit Facility) was 40 times (2019: 38 times) which was well in excess of the four times minimum required in our banking covenants.

The net pension financing charge under IAS 19 is included within the net financing cost. This year the cost decreased to £0.8m (2019: £1.2m), reflecting the reduction in the deficit on our defined benefit plans.

Group tax rate

The Group has major operating subsidiaries in 10 countries and the Group’s effective tax rate is a blend of these national tax rates applied to locally generated profits. A significant proportion (approximately one fifth) of Group profit is generated and taxed in the UK.

The Group’s effective tax rate on adjusted profit was similar to the prior year at 18.5% (2019: 18.6%). This was lower than expected, principally as a result of US Federal tax changes. For the year to 31 March 2021 we currently anticipate (based on the forecast mix of adjusted profits) the Group effective tax rate on adjusted profits to be broadly stable at approximately 19% of adjusted profits.

On 2 April 2019, the European Commission published its final decision that the UK controlled Finance Company Partial Exemption (FCPE) constituted State Aid. In common with a number of other UK companies, Halma has benefited from the FCPE, and the total benefit in 2020 and prior periods is approximately £15.4m in respect of tax and approximately £1.2m in respect of interest. Halma has appealed against the European Commission’s decision, as has the UK Government and a number of other UK companies. In the meantime, the UK Government is required to commence collection proceedings and it is currently expected that the Group will have to make a payment in the second half of the year ending 31 March 2021 of up to £16.9m. Based on its current assessment, the Group believes that no provision is required in respect of this issue.

Strong cash generation

Cash generation is an important component of the Halma model, underpinning further investment in our businesses, supporting value-enhancing acquisitions and funding an increasing dividend. Our cash conversion in 2020 was strong.

Cash generated from operations was £307.9m (2019: £259.6m) and adjusted operating cash flow was £272.2m (2019: £225.2m) which represented 97% (2019: 88%) of adjusted operating profit. This was significantly ahead of our cash conversion KPI target of 85%, reflecting a strong underlying performance primarily driven by good working capital control, as well as benefits from the effects of the implementation of IFRS 16, which replaces a lease rental charge with charges for depreciation and financing costs (a 5% benefit), and from the additional provisions made in the year, which reduce operating profit but have no effect on cash generation (a 2% benefit).

A summary of the year’s cash flow is shown in the table below and in the Annual Report and Accounts 2020. The largest outflows in the year were in relation to acquisitions, dividends and taxation paid. Working capital outflow, comprising changes in inventory, receivables and creditors, reduced to £9.3m (2019: £16.3m), principally reflecting an improvement in debtor collection prior to the impact of the COVID-19 pandemic, and good control of stock and creditors.

Dividends totalling £61.2m (2019: £57.2m) were paid to shareholders in the year.

Taxation paid increased to £52.4m (2019: £40.6m), as a result of increased profitability and the acceleration of the payment timetable for UK Corporation Tax payments for larger companies which resulted in a one-off increase in cash taxation payable of approximately £5m.

In the financial year to 31 March 2021, we expect to defer the payment of tax liabilities, principally Value-Added Tax (VAT) in the UK and the employers’ share of quarterly social security tax deposits in the USA, as permitted by governments as a result of the COVID-19 pandemic. The deferral of VAT payments will result in the payment of a cash tax liability of approximately £4m being deferred from the first half of the financial year to March 2021 to the second half. There will therefore be no cash tax benefit from VAT deferral in the year as a whole. The Employer Payroll Tax deferral will result in a cash tax liability of approximately US$6m (£5m) relating to the period 27 March 2020 to 31 December 2020 being deferred, with half of this amount due by 31 December 2021 and the remainder by 31 December 2022, resulting in a modest benefit to our cash flow in the 2021 financial year.

Operating cash flow summary 2020
£m
2019
£m
Operating profit 233.4 217.8
Net acquisition costs and contingent consideration fair value adjustments 7.5 0.3
Defined benefit pension charge - 2.1
Amortisation and impairment of acquisition-related acquired intangible assets 38.3 35.6
Adjusted operating profit 279.2 255.8
Depreciation and other amortisation 51.5 31.3
Working capital movements (9.3) (16.3)
Capital expenditure net of disposal proceeds (32.2) (29.7)
Additional payments to pension plans (12.5) (11.4)
Other adjustments (4.5) (4.5)
Adjusted operating cash flow 272.2 225.2
Cash conversion % 97% 88%
Non-operating cash flow and reconciliation to net debt 2020
£m
2019
£m
Adjusted operating cash flow 272.2 225.2
Tax paid (52.4) (40.6)
Acquisition of businesses including cash/debt acquired and fees (238.0) (68.1)
Purchase of equity investments (4.8) -
Disposal of businesses 7.6 3.1
Net movement in loan notes 0.1 0.1
Net finance costs and arrangement fees (including lease interest) (8.5) (8.3)
Lease liabilities additions (26.3) -
Dividends paid (61.2) (57.2)
Own shares purchased (16.7) (3.8)
Adjustment for cash outflow on share awards not settled by own shares (6.0) (4.9)
Effects of foreign exchange (9.3) (6.9)
Movement in net debt (143.3) 38.6
Lease Liabilities on adoption of IFRS 16 (50.3) -
Opening net debt (181.7) (220.3)
Closing net debt (375.3) (181.7)
Net debt to EBITDA 2020
£m
2019
£m
Adjusted operating profit 279.2 225.8
Depreciation and amortisation (excluding acquired intangible assets) 51.5 31.4
EBITDA 330.7 287.2
Net debt to EBITDA 1.13 0.63
     
Lease liabilities (61.5)  
Net debt pre IFRS 16 (313.8)  
Lease payments (as an approximation of operating lease rentals) (15.8)  
Estimated EBITDA pre IFRS 16 314.9  
Estimated Adjusted net debt to EBITDA pre IFRS 16 1.00  
Average debt and interest rates
Excluding IFRS 16 lease liabilities
2020 2019
Average gross debt (£m) 332.7 282.6
Weighted average interest rate on gross debt 2.72% 2.97%
Average cash balances (£m) 88.3 80.4
Weighted average interest rate on cash 0.63% 0.50%
Average net debt (£m) 244.4 202.2
Weighted average interest rate on net debt 3.48% 3.95%
     
Including IFRS 16 lease liabilities 2020  
Average gross debt (£m) 388.4  
Weighted average interest rate on gross debt 2.86%  
Average cash balances (£m) 88.3  
Weighted average interest rate on cash 0.63%  
Average net debt (£m) 300.1  
Weighted average interest rate on net debt 3.52%  

Capital allocation and funding

Halma aims to deliver high returns, measured by ROTIC2, well in excess of our cost of capital. We invest to deliver the future earnings growth and strong cash returns which underpin this aim, and our capital allocation priorities are as follows:

  • Investment for organic growth: Organic growth is our first priority and is driven by investment in our existing businesses, including through capital expenditure, innovation for digital growth and in new products, international expansion and the development of our people.
  • Value-enhancing acquisitions: We supplement organic growth with acquisitions in current and adjacent market niches. This brings new technology, intellectual property and talent into the Group and expands our market reach, keeping Halma well-positioned in growing markets over the long-term.
  • Regular and increasing returns to shareholders: We have maintained a progressive dividend policy for over 40 years and this is our preferred route for delivering regular cash returns to shareholders.

Increased investment for organic growth

All sectors continue to innovate and invest in new products, with R&D spend determined by each individual Halma company. This year R&D expenditure grew by 14.5%, ahead of revenue growth, reflecting our companies’ investment in their future growth. R&D expenditure as a percentage of revenue was 5.4% (2019: 5.2%), well in excess of our KPI target of 4% or more. In the medium term we expect R&D expenditure to continue to increase broadly in line with revenue growth.

Under IFRS accounting rules we are required to capitalise certain development projects and amortise the cost over an appropriate period, which we determine as three years. In the 2020 financial year we capitalised and acquired £15.6m (2019: £11.6m), impaired £5.2m (2019: £0.7m) and amortised £7.9m (2019: £8.5m). This results in an asset carried on the Consolidated Balance Sheet, after a £0.5m gain (2019: £0.5m gain) relating to foreign exchange, of £36.1m (2019: £33.1m). All R&D projects, and particularly those requiring capitalisation, are subject to rigorous review and approval processes.

Capital expenditure on property, plant, equipment and vehicles, computer software and other intangible assets was £34.1m (2019:£31.3m). The expenditure on fixed assets was spread across all four sectors and the Group functions, supporting our operating capability, capacity and growth including investment in IT and systems upgrades. We anticipate capital expenditure of approximately £30m in the coming year, reflecting further investment across our sectors to support our future growth, including in facility expansions and automation, balanced by good control of discretionary expenditure given the effects of the COVID-19 pandemic.

Lease right-of-use asset additions, a new asset category as a result the adoption of IFRS 16, were £21.9m. These included additions of £5.8m as a result of acquisitions made in the year, and extensions or renewals of existing leases.

Value-enhancing acquisitions and investments

Acquisitions and disposals are an important part of our growth strategy, as they keep our portfolio of companies focused on markets which have strong growth opportunities over the medium and long-term.

In the year we spent £227.5m on ten acquisitions (net of cash acquired of £8.0m including acquisition costs). In addition, we paid £10.5m in contingent consideration for acquisitions made in prior years, giving a total spend of £238.0m. We also made two small strategic minority investments in the healthcare sector, totalling £4.8m, and sold our interest in Optomed Oy at the time of its IPO in December 2019, for £6.8m, net of disposal costs.

Details of the acquisitions and investments made in the year are given in the sector reviews in the Annual Report and Accounts 2020 and in note 9.

The acquisitions completed in the current and prior year contributed to revenue in 2020 in line with expectations and we expect a good performance from these acquisitions in the future.

Regular and increasing returns for shareholders

Adjusted earnings per share increased by 8.8% to 57.39p (2019:52.74p) and statutory earnings per share increased by 8.7% to 48.66p (2019: 44.78p).

The Board is recommending a 3.8% increase in the final dividend to 9.96p per share (2019: 9.60p per share), which together with the 6.54p per share interim dividend gives a total dividend per share of 16.50p (2019: 15.71p), up 5.0% in total. Dividend cover (the ratio of adjusted profit after tax to dividends paid and proposed) is 3.48 times (2019: 3.36 times).

The final dividend for 2020 is subject to approval by shareholders at the AGM on 4 September 2020 and will be paid on 1 October to shareholders on the register at 28 August.

We aim to increase the per share dividend amount each year, while maintaining a prudent level of dividend cover, with approximately 35-40% of the anticipated total dividend being declared as an interim dividend. The Board’s determination of the proposed final dividend increase has taken into account the effects of the COVID-19 pandemic on our stakeholders, while considering the Group’s medium-term rate of organic constant currency growth and the financial resources required in executing our strategy, including organic investment needs and acquisition opportunities, with the aim of maintaining moderate debt levels.

Funding capacity and liquidity

Halma operations are cash generative and the Group has access to competitively priced committed debt finance providing good liquidity for the Group. Group treasury policy remains conservative and no speculative transactions are undertaken.

We have a robust financial position, strong cash generation, and substantial available liquidity. In the final quarter of the financial year, we consulted with our lending groups following the outbreak of the COVID-19 pandemic to assess the availability of further funding should this be required and as part of our scenario planning. Our lending groups were supportive, and under the potential scenarios considered as part of our going concern review, we remain within our debt facilities and the attached financial covenants for the foreseeable future. We therefore do not currently intend to utilise the UK government’s Covid Corporate Financing Facility.

At the year-end, our committed facilities totalled approximately £750m, based on exchange rates at that time. The earliest maturity in these facilities is for £74m (at year-end exchange rates) in January 2021, with the remaining maturities from 2023 onwards. The financial covenants on these facilities are for leverage (net debt/adjusted EBITDA on a pre-IFRS 16 basis) to not be more than three times and for adjusted interest cover to be not less than four times.

At the year-end, net debt was £375.3m, a combination of £420.1m of debt, £61.5m of IFRS 16 lease liabilities and £106.3m of cash held around the world to finance local operations. Net debt at 31 March 2019, which excluded IFRS 16 lease liabilities of £50.3m, was £181.7m.

The gearing ratio at the year-end (net debt to EBITDA) was 1.13 times (2019: 0.63 times, or 0.85 times had IFRS 16 been applied). Excluding the impact of IFRS 16, the gearing ratio at the year-end would have been 1.00 times. Net debt represented 5% (2019: 3%) of the Group’s year-end market capitalisation. The Group continues to operate well within its banking covenants with significant headroom under each financial ratio.

Pensions update

We closed the two UK defined benefit (DB) plans to new members in 2002. In December 2014 we ceased future accrual within these plans with future pension benefits earned within the Group’s Defined Contribution (DC) pension arrangements.

The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net deficit on our pension plans at 31 March 2020 based on the market value of assets at that date and the valuation of liabilities using year-end AA corporate bond yields.

On an IAS 19 basis the deficit on the Group’s DB plans at the 2020 year-end had decreased to £5.2m (2019: £39.2m) before the related deferred tax asset. The value of plan assets increased to £298.8m (2019: £292.2m). Plan liabilities decreased to £304.0m (2019: £331.4m) due to movements in the discount rate and inflation rate. The discount rate increased from 2.4% to 2.55%, largely as result of the impact of the COVID-19 pandemic on bond yields at the year-end. The inflation rate reduced from 3.2% to 2.5% reflecting economic conditions at the balance sheet date.

The plans’ actuarial valuation reviews, rather than the accounting basis, determine any cash deficit payments by Halma. In 2020 these contributions amounted to £12.8m, consistent with our expectations, following a triennial actuarial valuation of the two UK pension plans in 2017/18, after which cash contributions increasing at 7% per annum aimed at eliminating the deficit were agreed with the trustees. In the unlikely event that these payments result in a surplus on winding up, the Group has an unconditional right to a refund under the Plan rules.

New accounting standards

The Group adopted required new accounting standards and interpretations with effect from 1 April 2019. There has been no material impact on the Group’s financial statements, with the exception of IFRS 16 ‘Leases’, which brings leases, principally for land and buildings, on to the balance sheet. IFRS 16 resulted in a small reduction in net assets at the start of the year of £4.0m, comprising an increase in assets of £45.4m, recognising a right-of-use asset, and an increase in liabilities (principally from the lease liability) of £49.4m. The net effect on the Group’s profit and loss account has been immaterial, with operating lease costs of approximately £15.6m being replaced by a depreciation charge of £13.2m and a financing expense of £2.1m, resulting in a benefit to operating profit of £2.4m and to Profit before tax of £0.3m. There has been no impact on the Group’s cash flows. Further details of all new accounting standards adopted, and their application to the Group’s accounts, can be found in the Accounting Policies section of the Financial Statements.

Finance and Risk: supporting our companies’ performance

Our finance and risk teams play a crucial role in supporting our companies and enabling agile commercial decisions by providing actionable and insightful data, maintaining strong financial controls and assessing and managing risk appropriately. I would like to thank all of my colleagues in these teams for their hard work in the year, and particularly for the commitment they have shown in helping our companies to adapt to the challenges and opportunities arising from the COVID-19 pandemic, in ensuring continued high standards of insight and control, and in preparing these year-end accounts in difficult circumstances.

Conclusion

We delivered a good financial performance, despite the effects of the COVID-19 pandemic in the fourth quarter of the year. Our focus in the year ahead will be to ensure Halma’s long-term sustainability as we continue to adapt to challenges and opportunities, including those arising from the COVID-19 pandemic and potential changes to international trade as a result of Brexit and revisions to cross-border tariffs. The clarity of our purpose and strategy, our agile business model and disciplined focus on critical safety, health and environmental niches, combined with a robust financial and liquidity position and continued strong cash generation, should enable us to deliver a resilient financial performance in the shorter-term and to benefit from the opportunities that our markets offer over the medium and longer term.

Marc Ronchetti
Chief Financial Officer

Process Safety Sector Review

Process Safety’s technologies protect people and assets at work, across a range of critical industrial and logistics operations.

Performance

KPIs 2020 Group target
Revenue growth1 1% -
Organic revenue growth1 (constant currency) (2)% ≥5%
Profit growth1 (3)% -
Organic profit growth1 (constant currency) (6)% ≥5%
Return on Sales2 21.9% ≥18%
R&D % of Revenue3 3.7% ≥4%

1 Revenue and adjusted operating profit are compared to the equivalent prior year figures.
2 Return on Sales is defined as adjusted operating profit expressed as a percentage of revenue.
3 R&D expenditure expressed as a percentage of revenue.

Overview

The sector delivered a small increase in revenue, and a slight reduction in profitability. The lower profit was principally driven by product mix, and particularly a decline in the high-margin USA onshore oil and gas market, although there was also increased investment in R&D and strengthening leadership talent.

Industrial Access Control and Gas Detection both performed well. However, lower global oil prices and the deterioration in the USA onshore oil and gas market resulted in lower profits in Pressure Management and in Safe Storage and Transfer, with the latter also impacted by customer project delays and a site closure in the USA during the fourth quarter due to COVID-19.

There was one acquisition in the year, of Sensit Technologies, a US-based gas leak detection company. Its products protect workers in the natural gas distribution industry, ensure compliance with regulatory standards, and reduce climate change impacts by monitoring emissions of methane. Further details are given in note 9 in the Financial statements.

Strategy

Process Safety has a key part to play in making critical industrial processes safer and cleaner.

Our strategy of investing both organically and by acquisition is ensuring that our businesses are providing innovative and increasingly digitally connected products to address our customers’ needs around the world. For example, we have made good progress in developing new odour monitoring solutions which are gaining traction in China, and in creating new products and services that combine several Halma companies’ capabilities. These include developing solutions to increase safety and efficiency in warehouses, which utilises technologies from companies in three Halma sectors. Both of these examples of early stage businesses have been developed through our digital growth enabler programmes.

We also continuously look for opportunities for acquisitions in new subsectors and of new applications. Our criteria are that they should have a strong fit to our purpose, be underpinned by strong long-term growth drivers, provide high value to our customers, and have high barriers to entry. These activities are led by our Divisional Chief Executives, supported by a small sector M&A team and also by our operating company leaders for bolt-ons to existing businesses. The increased organic and inorganic investment in this sector in recent years has resulted in greater end market diversity and less dependency on the energy markets which now represent approximately one third of sector revenue, down from around 50% five years ago.

Market trends and growth drivers

The longer-term growth prospects for our Process Safety businesses are supported by increasing health and safety regulation and associated legal risks, and growing industrialisation and automation. With an estimated 340 million injuries and 2.3 million workplace-related fatalities each year, it is likely that workplace health and safety regulations will continue to tighten. Our ability to find new applications in adjacent industrial markets is broadening our growth opportunities, both organically and through acquisition.

In Gas Detection, market growth over the longer-term is being driven by ongoing industrialisation, increased regulation, greater demand for continuous monitoring of harmful substances to protect worker safety, and the accelerated use of wireless sensors and connected devices.

Increasing automation and need for remote safety monitoring is becoming a stronger growth driver for our Industrial Access Control, Pressure Management and Safe Storage and Transfer businesses which serve a diverse range of industrial end markets.

Several of our businesses, notably in Pressure Management, operate in markets driven by the increasing need for energy and other critical resources. While the COVID-19 pandemic has resulted in a recent reduction in energy consumption, longer-term forecasts are that global energy demand is expected to grow by nearly 50% between 2018 and 2050, with most of this growth coming from non-OECD countries, particularly in Asia. The diversification of energy resources means we are repurposing our solutions to segments of the energy market where we expect good growth, for example in renewables.

Performance

Revenue grew by 1% to £200.0m (2019: £197.5m), while profit declined by 3% to £43.9m (2019: £45.5m). On an organic constant currency basis, revenue and profit declined by 2% and 6% respectively. Return on Sales was 21.9% (2019: 23.0%), reflecting a small reduction in gross margin, an increase of £0.9m in the second half of the year in COVID-19 related bad debt provisions, and a 7% increase in R&D investment to £7.5m (2019: £7.0m).

Industrial Access Control performed well, with further progress in a large US logistics contract, while Gas Detection benefited from the Sensit acquisition, which is performing in line with expectations. The unfavourable conditions in the USA market resulted in lower Pressure Management revenue, with a decline in profitability partially mitigated by proactive control of costs. As mentioned above, Safe Storage and Transfer profits were also lower because of customer project delays and a site closure in California during the fourth quarter due to COVID-19.

There was strong growth in Asia Pacific driven by Gas Detection’s investment in stronger sales resources. Despite the challenges in energy markets, there was good growth in the USA, which benefited from the Sensit acquisition and good progress in a large US logistics contract. The UK and Mainland Europe were weaker mainly due to the non-repeat of large customer contracts in the prior year. Africa, Near & Middle East declined, with weaker Pressure Management revenue partially offset by a good performance in Gas Detection, while other countries delivered a strong performance which was broadly based across all subsectors.

Infrastructure Safety Sector Review

Infrastructure Safety’s technologies save lives, protect infrastructure and enable safe movement

Performance

KPIs 2020 Group target
Revenue growth1 14% -
Organic revenue growth1 (constant currency) 3% ≥5%
Profit growth1 21% -
Organic profit growth1 (constant currency) 7% ≥5%
Return on Sales2 23.1% ≥18%
R&D % of Revenue3 6.1% ≥4%

1 Revenue and adjusted operating profit are compared to the equivalent prior year figures.
2 Return on Sales is defined as adjusted operating profit expressed as a percentage of revenue.
3 R&D expenditure expressed as a percentage of revenue.

Overview

The sector delivered a strong performance, with revenue and profit growth including a significant contribution from recent acquisitions, and an increase in gross margins partly reflecting investments in automation.

The three largest subsectors, Fire Detection, People and Vehicle Flow and Elevator Safety, delivered the highest rates of growth. There was lower organic growth from the sector in the second half, reflecting a planned elimination of lower margin business in the Elevator Safety and Fire Suppression subsectors. There was increased investment in both R&D and leadership talent, including adding more sector management resources in Asia Pacific.

There were two acquisitions in the year, both in the Fire Detection subsector, extending geographical reach and adding new highly complementary technologies. We acquired the Ampac Group, a leading fire and evacuation systems supplier in the Australasian market, and 70% of Australia-based FireMate, which provides cloud-based maintenance and approval software to fire contractors. Further detail on these acquisitions is given in note 9 to the Financial Statements.

Strategy

The Infrastructure Safety sector makes the world a safer place by protecting commercial, industrial and public buildings and spaces and enabling safe movement. Our products and services address increasing life safety concerns, more stringent regulatory requirements and accelerating demand for connected infrastructure systems globally.

Our strategy is to focus on less cyclical, niche markets, with high barriers to entry. We acquire companies with technological expertise, strength in new geographies and presences in adjacent markets. We grow them through leveraging Halma’s growth enablers, with a particular focus in recent years on leadership talent and increasing product and digital innovation. We seek to expand our geographic footprint both organically, leveraging Halma’s international hubs, and through acquisitions, such as the recent Ampac and FireMate acquisitions.

Market trends and growth drivers

Growth in our Infrastructure Safety markets is supported by expanding and ageing populations, increasing urbanisation, tighter safety regulation, and an increasing demand for remote monitoring and efficiency through digital innovation and connected products. A recent UN report projects that 68% of the world’s population will live in urban areas by 2050, increasing from 55% in 2018, adding around 2.5 billion people to urban populations. We expect this to drive demand for better, safer and more connected infrastructure and for transportation safety and security products and systems, as more people live in more densely populated areas.

Although the COVID-19 pandemic has resulted in a reduction of demand in some markets in the short-term, we expect these long-term trends to continue to drive growth across our Infrastructure Safety markets. For example, in global fire detection and suppression equipment, growth is expected to be sustained by even more stringent regulation and greater demand for connected, intelligent building systems.

The medium-term forecasts for the global elevator market also reflect the trends of rising urbanisation, increasing spending on maintenance and modernisation of existing equipment, with emerging opportunities to enhance efficiency through remote monitoring and preventative maintenance. Similarly, we expect a greater need to manage health and safety concerns as a result of the COVID-19 pandemic to present new opportunities for our People and Vehicle Flow businesses in addressing congestion, increasing the capacity of existing infrastructure and enhancing safety through automated access solutions as people move around.

Performance

Revenue increased by 14% to £466.5m (2019: £408.6m), including 3% organic constant currency growth and a 10% contribution from acquisitions. Profit grew by 21% to £107.7m (2019: £88.9m), which included 7% organic constant currency growth and a 14% contribution from acquisitions, and additional provisions for COVID-19 related bad debt of £2.1m. Return on Sales increased to 23.1% (2019: 21.8%), even after 14% growth in R&D investment to £28.3m (2019: £24.9m), principally reflecting the benefit to gross margins from automation and the planned elimination of selected lower margin business.

The three largest subsectors, Fire Detection, People and Vehicle Flow and Elevator Safety, delivered double digit revenue and profit growth, principally driven by acquisitions. However, there was also strong organic growth in People and Vehicle Flow, driven by new product innovation and good progress in Fire Detection. In the smaller subsectors, Security Sensors’ profit grew strongly from a stable revenue base, reflecting efficiency gains from automation, while Fire Suppression revenue declined as a result of the above-mentioned reduction in lower margin business.

The sector’s four largest geographic regions performed well. There was strong revenue growth in the USA and Asia Pacific, principally as a result of the benefit from recent acquisitions. There were good rates of growth in the UK and Mainland Europe, with the Fire Detection and People and Vehicle Flow businesses being key contributors to this improvement. The Africa, Near and Middle East region, which accounts for only 5% of sector revenue, declined, while the small Other countries segment grew strongly, driven by a strong performance in the Fire businesses.

Environmental & Analysis Sector Review

Environmental & Analysis’ technologies are used to preserve, monitor and protect the environment, ensure the availability, quality and sustainability of natural resources, and to analyse materials in a wide range of applications.

Performance

KPIs 2020 Group target
Revenue growth1 16% -
Organic revenue growth1 (constant currency) 14% ≥5%
Profit growth1 15% -
Organic profit growth1 (constant currency) 13% ≥5%
Return on Sales2 21.4% ≥18%
R&D % of Revenue3 6.0% ≥4%

1 Revenue and adjusted operating profit are compared to the equivalent prior year figures.
2 Return on Sales is defined as adjusted operating profit expressed as a percentage of revenue.
3 R&D expenditure expressed as a percentage of revenue.

Overview

The sector delivered an excellent performance. All three subsectors grew revenue and profit, including exceptionally strong growth in Optical Analysis, which included the delivery of some larger projects in the second-half of the year. Good growth in Environmental Monitoring was driven by new product development and by the continuing regulatory requirements in the UK water market.

Two smaller bolt-on acquisitions were completed in the year. HWM in the UK acquired Invenio, a market leader in customer-side water leak detection, and Hydreka, a water resource management business in France, acquired Enoveo, which added expertise in biotechnologies and real-time pollution monitoring.

Perma Pure, one of the Group’s gas conditioning businesses, was transferred from the Environmental & Analysis sector into the Medical sector, given that the majority of its revenues now come from medical uses following Halma’s acquisition of Maxtec; historic comparatives have been restated to reflect this change.

Further detail on the acquisitions made in the year is given in note 9 to the Financial Statements.

There was increased investment in R&D as well as in leadership at both the sector and company board levels. The planned Sector Chief Executive succession process was completed successfully.

Strategy

The Environmental & Analysis sector is focused on growing a safer, cleaner and healthier future by improving the quality and availability of life-critical natural resources such as air, water and food, and by protecting the environment and wellbeing. Our valuable solutions are technically differentiated through strong application knowledge, supported by high quality and customer responsiveness.

We grow by developing new market-led solutions (current examples under development include deploying novel sensing techniques to help reduce food waste by accurately predicting the shelf life of perishable fruits, and pairing core knowledge with new techniques and a digital service model to enhance the capability of earth-imaging satellites and airborne platforms), and by increasing our geographical reach and expansion into new niches both organically and through acquisitions or partnerships.

Our increasing R&D investment includes developing new sensors that capture accurate and effective environmental and scientific information. We are enhancing this technology by investing in digital systems that provide real-time and remote management information since increasingly our offerings are, or are components of, digital solutions.

We continually seek to attract, develop and promote high quality, talented people. We ensure that our teams represent our diverse end markets and are constantly enhanced to match existing and emerging strategic capability needs.

Market trends and growth drivers

The Environmental & Analysis sector’s long-term growth is sustained by rising demand for life-critical resources, increasing environmental regulations and worldwide population growth with rising standards of living.

Population growth continues to outpace the availability of key resources. According to the United Nations, nearly half the global population are already living in potential areas of water scarcity for at least one month per year and this could increase to some 4.8–5.7 billion people in 2050. This drives demand for our water testing and disinfection technologies, and our water network monitoring solutions which help to ensure integrity of networks.

Air pollution is a growing health risk in both developing and developed countries and is a top cause of premature deaths in the EU, contributing to an estimated 400,000 deaths in 2016. Our spectroscopy systems assist in the precise detection of contaminates, while our environmental companies support emissions and air quality monitoring and calibrate pollution monitoring equipment.

According to the World Health Organization, one in ten people fall ill each year from eating contaminated food and 420,000 people die each year as a result. Some of our more recent development activities are focused on ensuring the quality of the food supply chain.

Performance

Revenue increased by 16% to £325.0m (2019: £280.0m) and profit grew by 15% to £69.4m (2019: £60.1m), with revenue growth of 14% and profit growth of 13% on an organic constant currency basis. Acquisitions had a marginal positive effect on both revenue growth and profit growth. Currency exchange movements had a positive effect of 2.1% on revenue and 2.3% on profit. Profit included £0.9m in additional provisions for the increased risk of customer bad debt given the effects of the COVID-19 pandemic.

Return on Sales was stable at 21.4% (2019: 21.5%). There was a slightly lower gross margin, mainly due to the changing mix of business in Optical Analysis, balanced by good control of costs. R&D expenditure remained above the Group average as a percentage of sales at 6.0% (2019: 6.3%), increasing by 9% to £19.3m (2019: £17.8m), driven by rises in both Environmental Monitoring and Water Analysis and Treatment.

There was strong growth in the USA and the UK, led by, respectively, Optical Analysis and Environmental Monitoring. Revenue in the Mainland Europe, which only accounts for approximately 10% of sector revenue, was stable. Asia Pacific revenue saw a small decline, principally as a result of slower than expected Environmental Monitoring market penetration in China. There was strong growth in the Africa, Near & Middle East and Other countries, led by the Water Analysis and Treatment subsector.

Medical Sector Review

Medical’s technologies enhance the quality of life for patients and improve the quality of care delivered by healthcare providers.

Performance

KPIs 2020 Group target
Revenue growth1 7% -
Organic revenue growth1 (constant currency) 3% ≥5%
Profit growth1 1% -
Organic profit growth1 (constant currency) (3)% ≥5%
Return on Sales2 24.3% ≥18%
R&D % of Revenue3 4.8% ≥4%

1 Revenue and adjusted operating profit are compared to the equivalent prior year figures.
2 Return on Sales is defined as adjusted operating profit expressed as a percentage of revenue.
3 R&D expenditure expressed as a percentage of revenue.

Overview

The sector delivered a solid performance, which included the benefit of recent acquisitions, against a strong organic 2019 comparative. Profit growth was modest, principally reflecting increased strategic investment for growth, and a portfolio rationalisation charge of £2.5m reported in the first half of the year. There was increased investment in R&D as well as in leadership at both the sector and company board levels. The planned Sector Chief Executive succession process was completed successfully.

The sector completed five acquisitions in the year. The acquisitions of NeoMedix, a bolt-on to MST, and NovaBone enhanced our Therapeutic Solutions offering, adding new market niches in minimally-invasive glaucoma surgery and synthetic bone graft products respectively. In Health Assessment, CenTrak acquired two small businesses, InfoWave and Spreo, to further expand its addressable market and enhance its technological and data capabilities. Two small strategic minority investments were made: in Valencell, which provides wearable biometric solutions; and in Owlytics, focused on wearable-based analytics technology. The Group’s interest in Optomed Oy was also sold at the time of its IPO in December 2019.

Perma Pure, was transferred into the Medical sector from the Environmental & Analysis sector, given that the majority of its combined revenues now come from medical uses following the acquisition of Maxtec, a leader in oxygen analysis and delivery products. The integration of these acquisitions, on which further detail is given in note 9 to the Financial Statements, is progressing well, and we expect them to contribute to sector growth in the years ahead.

While a number of sector companies within the Health Assessment sub-sector saw higher demand for their products in the last weeks of the year as a result of the COVID-19 pandemic, we estimate that the overall effect on the sector was marginally negative due to order delays and deferrals of our products serving surgical procedures.

Strategy

The Medical sector is focused on growing a healthier future by enhancing the quality of life for patients and improving the quality of care delivered by providers.

We serve niche applications in global markets providing critical components, devices, systems and therapies which are embedded in the standard of care. We look for niches where there is a ‘non-discretionary’ element to long-term demand, for example cataract surgery or cardiac monitoring, or where there is a connection between medical conditions and chronic illnesses, thereby driving potentially higher rates of demand on a sustainable basis.

We are known for our brands, differentiated technologies and customer centricity. We build upon these positions of strength to enter new geographies, expand our product portfolios and leverage our technology in new and innovative ways. We are well diversified across the continuum of care in diagnostics, monitoring and therapies. This enables us to withstand individual market fluctuations and take advantage of emerging needs such as digital care models, as an example.

Market trends and growth drivers

The sector’s long-term growth is supported by increasing demand due to worldwide population growth and ageing, and the greater prevalence of chronic illnesses such as diabetes, respiratory diseases, obesity, and hypertension.

According to a recent United Nations report, the world’s population is expected to increase by two billion in the next 30 years, and by 2050 one in six people in the world is projected to be over age 65, up from one in 11 in 2019, increasing the prevalence of significant health risk factors. A growing elderly population is a key growth driver for our Therapeutic Solutions businesses, given their presence in the cataract and glaucoma surgery devices markets and the market for bone replacement products.

In Healthcare Assessment, we expect the rising prevalence of cardiac, circulatory, respiratory and ophthalmic disorders, increased health awareness and availability of healthcare to drive growth over the longer term. In addition, healthcare facilities are seeking to improve outcomes, reduce costs and ensure the safety of patients and staff, which is driving the global market for our real-time location services business.

In Life Sciences, the market for our critical fluidic components is being driven by more directed and personalised diagnostic methods combined with increased testing efficiency. North America and Europe continue to be our largest markets, with Asia Pacific exhibiting the fastest growth rate.

Performance

Revenue increased by 7% to £347.2m (2019: £325.2m), including 3% organic constant currency growth and an 1% contribution from acquisitions. Profit grew by 1% to £84.4m (2019: £83.2m), with organic constant currency profit declining 3%. Overhead spend out-paced revenue growth due to research and development investment growing by 28% to £16.5m (2019: £12.9m), and a net charge of £2.5m in the first half of the year principally related to the portfolio rationalisation of two ophthalmic companies. Profit also included additional provisions of £1.1m for the increased risk of customer bad debt given the effects of the COVID-19 pandemic. Gross margin was stable and Return on Sales decreased to 24.3% (2019: 25.6%).

The Life Sciences subsector performed well, driven by a strong performance in fluidics sold to our major OEM customers. Health Assessment’s performance was mixed, with growth in location services for healthcare facilities and weaker trends in ophthalmic diagnostics and segments of diagnostic patient devices. Therapeutic Solutions benefited from the acquisitions of NovaBone and Maxtec.

The USA, the sector’s largest region, delivered good revenue growth, which also benefited from recent acquisitions. There was modest revenue growth in Mainland Europe, with good progress in diagnostics, gases and sensor technology offset by weaker trends in ophthalmology within Health Assessment. Other regions grew in aggregate, led by CenTrak, our real-time location services business within Health Assessment.