Press Releases - Preliminary results for the year to 28 March 2009

Preliminary results for the year to 28 March 2009

16 June 2009

Halma raises dividend for thirtieth consecutive year

Halma, the leading safety, health and sensor technology group, today announces its preliminary results for the year to 28 March 2009.

Highlights include:

• Revenue from continuing operations up 15% to £455.9m (2008: £395.1m) reflecting double-digit growth in all three sectors and strong underlying organic revenue growth⁽¹⁾ of 11%.
• Profit before tax from continuing operations⁽²⁾ up 9% to £79.1m (2008: £72.8m), with organic profit growth⁽¹⁾ of 5%.
• These record revenue and profit performances both benefited from an 8% positive contribution from currency translation.
• Revenues outside Europe and the USA grew by 31% and now represent 22% of Group revenue (2008: 19%), in line with our key strategic objective of international expansion.
• Adjusted earnings per share⁽³⁾ from continuing operations up 10% to 15.30p (2008: 13.86p). Statutory earnings per share increased to 14.07p (2008: 12.97p).
• Strong margins and returns maintained with Return on sales⁽²⁾ of 17% (2008: 18%) and ROTIC⁽¹⁾ of 13.1% (2008: 14.1%).
• Tougher trading conditions during the second half of 2008/09 have led to profit improvement initiatives which are expected to deliver annualised cost savings in excess of £15m p.a. during 2009/10.
• Strong financial position with modest net debt. Substantial headroom on bank facilities to support continued investment in our existing businesses and in acquisitions.
• Acquisitions of Fiberguide Industries and Oerlikon Golden bring new technology strengths to our Photonics business.
• A record dividend, increased by 5%, marking the thirtieth consecutive year of dividend increases of 5% or more p.a., a record in our sector.

1. Organic growth rates and Return on total invested capital (ROTIC) are non–GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See note 7 for details.
2. Adjusted to remove the amortisation of acquired intangible assets of £6.3m (2008: £4.8m).
3. Adjusted to remove the amortisation of acquired intangible assets. See note 4 for details.

Andrew Williams, Chief Executive of Halma, commented:

"We aim to deliver value to shareholders by growing market share, continuing to deliver high returns, maintaining a strong balance sheet and generating cash. This supports our progressive dividend policy and enables ongoing investment in our existing businesses. We will also continue to invest in selected acquisitions as and when suitable, value-adding opportunities present themselves. Although short-term market demand remains difficult to predict, our balanced approach of maintaining returns by responding quickly to market changes and protecting medium-term growth through disciplined investment will continue through the coming year. Despite the current market conditions, this underpins our confidence in continuing to deliver a resilient performance."

For further information, please contact:

Halma p.l.c.
Andrew Williams, Chief Executive, Tel: +44 (0)1494 721111
Kevin Thompson, Finance Director, Tel: +44 (0)1494 721111

Hogarth Partnership Limited
Rachel Hirst/Andrew Jaques, Tel: +44 (0)20 7357 9477

Note to editors

1. Halma develops and markets products used worldwide to protect life and improve the quality of life. The Group comprises three business sectors:

   • Infrastructure Sensors
     We make products which detect hazards to protect assets and people in public and commercial buildings.
   • Health and Analysis
     We make components and products used to improve personal and public health. We also develop technologies and products which are used for analysis in safety, environmental and leisure related markets including water.
   • Industrial Safety
     We make products which protect assets and people at work.

   The key characteristics of Halma's businesses are that they are based on advanced technology and offer strong growth potential. Many Group businesses are clear market leaders in their specialist field and, in a number of cases, are the dominant world supplier.

2. High resolution photos of Halma senior management, including Chief Executive Andrew Williams, and images illustrating Halma business activities can be downloaded from the Image Library. Photo queries: David Waller +44 (0)20 8205 0038, e-mail: [email protected].

3. You can view or download copies of this announcement and our latest Half year and Annual reports from this website or request free printed copies by contacting [email protected].

A copy of the Annual report and accounts will be made available to shareholders on 29 June 2009 either by post or on-line and will be available to the general public on-line or on written request to the Company's registered office at Misbourne Court, Rectory Way, Amersham, Bucks HP7 0DE, UK.

HALMA p.l.c.

Group results for the 52 weeks to 28 March 2009

Financial highlights

Pro-forma information:

1. Adjusted to remove the amortisation of acquired intangible assets of £6.3m (2008: £4.8m).
2. Adjusted to remove the amortisation of acquired intangible assets. See note 4 for details.
3. Return on sales is defined as adjusted⁽¹⁾ profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.
4. Organic growth rates, Return on total invested capital and Return on capital employed and are non-GAAP performance measures used by management in measuring the returns achieved from the Group's asset base. See note 7 for details.

Chairman's statement

Thirty years of dividend growth of 5% or more per annum

Introduction

This financial year marks an historic milestone for Halma. Subject to shareholders approving the final recommended dividend of 4.78p per share, an increase of 5% for the year, this will be the thirtieth consecutive year of dividend increases of 5% p.a. or more, which we believe is a record for our sector.

I thought it might be useful to reflect on some of the important principles which have contributed to that performance over the three decades.

• Firstly, we invest in companies with robust market drivers, making products which target non-discretionary spend where it is difficult for competitors to get into the market and where value far exceeds costs thereby helping to drive strong margins.
• Secondly, our management philosophy is to devolve responsibility for all aspects of performance to the individual companies themselves. This keeps them close to their markets, understanding customer needs and driving strong innovation where it counts – in the market.
• Thirdly, we standardise reporting and risk assessment across all companies.
• Fourthly, as a result, we produce good returns on total invested capital (this year 13.1%) and generate cash which we use to finance dividends, and the balance we reinvest in the businesses themselves or invest in acquiring more companies which meet these business criteria.

Reading this, you might think that all sounds rather obvious – why don't more companies do it? Some do. The difference perhaps is that we stick to it, because we believe it works. Take one example: surely we do not need so many managing directors, finance directors and so on; why not consolidate dramatically and save swathes of cost? The answer is that we could do and occasionally we will consolidate two or more companies. However, in the process of consolidation, typically what happens is that everyone becomes internally focused, attention on the market reduces, innovation falters and ground is lost (often permanently) all for a transient one-off cost saving.

Having said that, we are not frozen in time, we continually question the basics and change where needed. Some examples of this over the last few years are:

Geographic markets

We have seen recently the strong emergence of the developing economies. However, if like many of our companies you had little or no experience of operating there, where would you start? Our response was to set up hubs in China and more recently India, to help our individual companies enter the market. In effect, making the water slightly warmer for them. As a result, for example, we started with three and now have nineteen companies operating in China and last year our sales there increased by 25%.

Innovation

The pace of change gets faster by the day and advances in technology are there to be seized. Within the Group we have strong pockets of deep expertise in many domains and recognise that certain technologies and techniques have applications across the Group in more than just the originating company. So this year we hosted an innovation event to encourage the cross-fertilisation of ideas, which in turn we believe will increase the speed and effectiveness of innovation across the Group.

People development

Our results are a function of the dedication, capability and quality of our people. Over the last few years we have significantly increased our investment in training, running tailor-made programmes for our key people. Increasingly, we have been looking to promote from within, which in turn improves the career prospects for all.

In summary, the Group has very strong, sound foundations which we continuously seek to improve without eroding them. It is these values which have driven our performance consistently over three decades.

Halma: what we do and our strategy

Our business is to make products which protect lives and improve the quality of life for people worldwide. We do this through continuous innovation in market-leading products which meet the increasing demands for improvements to health, safety and the environment. We build strong positions in niche markets where the demand is global. Our businesses are autonomous and highly entrepreneurial.

Strategically we aim to grow profit and revenue in excess of 5% p.a. organically, to have Return on sales in the region of 18% or above and generate post-tax Return on total invested capital of more than 12%. As a result we are highly cash generative and reinvest in our businesses through people, product and market development, continue to acquire more companies with like characteristics, and strive to give annual dividend growth of 5% or more to our shareholders.

Results

Unsurprisingly, the second half saw a weakening in our order intake (the detail is provided in Andrew Williams' report) and action was taken, where necessary, across the Group to bring costs in line with new levels of demand. Nevertheless, full year revenue from continuing operations increased 15.4% to £455.9m (2008: £395.1m) underlying organic revenue growth¹ was 10.7% with currency having a net impact of 8.2%, i.e. 2.5% organic growth at constant currency. Profit before tax and amortisation of acquired intangibles on continuing operations was £79.1m (2008: £72.8m), an increase of 8.7% and organic profit growth¹ was 5.1%, at constant currency a decline of 3.3%. Statutory profit before tax increased 7.0% to £72.8m. The Board is recommending a final dividend of 4.78p per share, an increase of 5%. Our dividend cover² has increased to 1.93 times (2008: 1.83 times). Return on total invested capital was 13.1% (2008: 14.1%).

Acquisitions and disposals

During the year we acquired Fiberguide Industries, which manufactures optical fibre cables and assemblies, for an initial cash payment of $14m. We also purchased the business and assets of Oerlikon Optics USA Inc.'s operation located in Golden, Colorado, USA for $6m in cash, a business which designs and manufactures optical coatings and optomechanical assemblies and which will operate as part of the newly created Ocean Thin Films, Inc. These two new businesses form part of our Photonics sub-sector within the Health and Analysis sector. There were two very small disposals in the year. Details are included in the Chief Executive's review and Financial review.

Governance

Other than Adam Meyers' appointment to the Board at the beginning of the year and Keith Roy's retirement at the 2008 AGM, there have been no changes at Board level during the year.

People

The second half in particular has been testing for all of us for the economic reasons which saturate our news channels daily. In these uncertain times, people across the Group have reacted to adjust to the circumstances they find in the markets. Often this has been difficult and trying. I give my sincere appreciation and thanks to them all.

Outlook

Visibility in most of our markets is still limited. Different countries, sectors and products are at differing places in the economic cycle. Therefore, we are encouraging all our management teams to react to their markets as they see fit, keeping costs in line with order intake, but not cutting back on vital product investment. When we see improving demand, our operational gearing should show through strongly. In the meantime, we will concentrate on delivering the high level of returns and cash generation that have been the cornerstone of our resilience over 30 years.

Geoff Unwin
Chairman

1. See Financial highlights
2. Subject to the approval of this year's recommended dividend increase at our AGM on 30 July 2009

Chief Executive's review

Our balanced approach of maintaining short-term returns and protecting medium-term growth will continue through the coming year

Revenue and profit growth

Revenue for the full year increased by 15% to a record £455.9m (2008: £395.1m) with underlying organic revenue growth of 11% (after excluding acquisitions). Profit¹ for the full year grew by 9% to a record £79.1m (2008: £72.8m) with underlying organic profit growth¹ of 5% (after excluding acquisitions). Our revenue and profit performance both benefited from an 8% positive contribution from currency movements.

In the second half, organic revenue growth was 8%, benefiting from a 12% positive impact from currency. Order intake during the same period was 3% lower than revenue.

We operate in diverse markets and macro-economic factors affected each of our markets differently in terms of the scale and timing of their impact. Whilst some of our businesses continued to grow revenues, others were affected by lower demand - for example, due to customers reducing inventory or delaying investment decisions. However, the overall impact of lower revenues in the second half was reduced profitability which required action to reduce costs in those businesses affected. The cost of these actions was £1.2m in 2008/09.

In anticipation of current trading trends continuing, we are taking further steps to reduce costs in early 2009/10. We expect the costs of these further actions to be approximately £2.5m. In combination with the action already taken in 2008/09, we anticipate that we will achieve annualised fixed-cost savings in excess of £15m relative to our overhead base during the second half of 2008/09. These savings are in addition to our continuing activities aimed at product cost reductions through value engineering.

Sector review

Our three reporting sectors all achieved double digit revenue growth.

Infrastructure Sensors increased revenue by 11% and profit by 16% with underlying organic growth in both revenue and profit at constant currency. There was organic profit growth in all four sub-sectors - Fire Detection, Security Sensors, Automatic Door Sensors and Elevator Safety - although there were differences in the revenue growth levels achieved across geographic regions. For example, our Fire Detection business grew revenue strongly in the UK whilst our Security Sensor business continued to experience soft market conditions there. The majority of our Infrastructure Sensors products are fitted to existing commercial and public buildings to comply with safety regulations. During the year, the impact of the slowdown in new commercial/public building construction was mitigated somewhat by increasing sales into existing buildings - particularly where major customers also refocused their efforts on selling more into existing installations.

Revenue in Health and Analysis grew by 23% whilst profits increased by 3%. Fluid Technology and Health Optics achieved revenue and profit growth. Our Photonics business was adversely affected by high overhead costs and delayed new products (now launched) whilst our Water business suffered a major reduction in UK demand. As expected, UK water utilities reduced capital expenditure in year four of their five-year investment cycle but a number also delayed investment due to concerns over constraints within their business. As highlighted in our February Interim Management Statement, significant action was taken in both Photonics and Water to improve profitability. These actions included senior management changes, organisational restructuring and headcount reduction. We anticipate seeing the benefits of these actions come through most strongly in the second half of 2009/10.

Our Industrial Safety businesses delivered a good performance with revenue up 12% and profit up 14%. There was underlying organic growth in both revenue and profit at constant currency. There were particularly strong returns from Gas Detection and Safety Interlocks. Our Bursting Disk businesses grew market share and implemented common manufacturing and sales processes which improved their competitiveness. Following good growth in recent years, Asset Monitoring experienced weaker demand for subsea survey products in the North Sea due to some customers delaying major survey projects.

Growing revenue in export markets

Double digit revenue growth was achieved in all major geographic regions except the UK where revenue fell by 4% mainly due to weakness in our Water, Security Sensor and Asset Monitoring businesses. It was encouraging that we were able to mitigate the impact of this reduction in UK revenue with continued growth in international markets. Revenue outside our traditional operating bases of the USA, UK and Mainland Europe increased by 31% and now represents 22% of Group revenue (2008: 19%). International expansion remains one of our key strategic objectives.

It was pleasing to see revenue from China grow by a further 25% this year to £12m, building on the success of the Halma hubs established there in 2006 (at which time our annualised revenue was £6m). Our new manufacturing hub in Shanghai is operational and an additional three companies are starting to build their products in the region for the first time.

In September 2008, we launched a new Halma hub in Mumbai, India where we are recruiting commercial and technical staff for Group companies in all three sectors. We remain committed to increasing our revenues from developing markets. In the coming year, we will continue to make modest investments towards achieving this goal.

Acquisitions and disposals

We made two acquisitions and two small disposals during the year.

Our two acquisitions added new technology and products to our Photonics business. In September 2008 we acquired Fiberguide Industries, a manufacturer of specialist fibre optic components, for $14m. In November 2008 we acquired the Colorado operating assets of Oerlikon Optics USA for $6m, adding new optical coating capabilities and capacity to our existing Ocean Thin Films business. Fiberguide is based in New Jersey, USA and Oerlikon in Colorado, USA. Since acquisition, both businesses have required some reorganisation which is now substantially complete and both are expected to be earnings enhancing in 2009/10.

In January 2009, we sold the assets of the South African based portion of our Security business, Texecom, to local management at book value. This significantly simplified our continuing security business whilst maintaining strong distribution channels in an important territory.

In February 2009, we sold our remaining high-power resistor business, Fortress Systems Pty based in Melbourne, Australia, to Telema SpA based in Milan, Italy for Aus$2.6m. Prior to this disposal, Fortress Systems also distributed our Safety Interlock products and we have merged this retained activity under the management of Fortress Interlocks, UK.

A strong balance sheet

We ended the year with a strong balance sheet and net debt of £51m (2008: £44m). Our bank facilities are in place until 2013. This gives us plenty of headroom within our core borrowing facilities of £165m to invest in existing businesses and in acquisitions. Our cash generation throughout the year was satisfactory, although the effect of currency exchange rate changes increased the value of our loans by £17m. Almost all of our borrowings are in Euro and US Dollars and financed the recent acquisitions in Europe and the USA.

Capital expenditure in existing operations increased by 7% to £16.8m (2008: £15.7m) as our companies continued to invest in their business to maintain high returns. The average return on capital employed in our operating companies was 56%.

Innovation maintains high returns

Halma's resilience over the years is reflected in our ability to maintain high returns. Key to this is our investment in value engineering existing products and developing new products. It is pleasing to report that, despite tougher market conditions this year, our product margins were robust. In Halma, product pricing is determined within each operating company and is typically based on the 'value' to customers. Looking ahead, we are not complacent and our efforts to maintain healthy returns continue apace. This year our expenditure on R&D increased by 23% to £22.9m, equivalent to 5% of revenue (2008: 4.7%).

Encouraging more collaboration inside Halma

Following the period end, in May 2009 we held our first Innovation and Technology Exposition. For the first time, the senior managers from all Halma companies were brought together in one location to identify new collaboration opportunities by sharing their expertise in technology, manufacturing, finance, sales and marketing. In recent years, we have been encouraging more interaction between Halma companies and this event showed that we have benefited from this already but still have a lot of new opportunities. In future I hope to highlight a number of successful new products or significant process improvements which were first initiated at this inaugural event.

Corporate responsibility and sustainability

Halma's commitment to the environment, safety and improving the quality of life for individuals continues to be reflected in both the way we do business and the products we create for our customers.

Our 'operational' commitment is shown by setting clear objectives in areas ranging from carbon policy to the safety of our employees. We set objectives because they make good business sense. These are regularly reviewed and, where necessary, acted upon by the Board.

The positive impact that our products have on society and the environment is significant and is a source of satisfaction for employees.

Benefiting from investment in people development

We have continued to benefit from our efforts to develop the quality and depth of management talent throughout the Group. We are committed to maintaining this investment since it not only equips people to lead our businesses through the current market uncertainty but also ensures we have effective succession planning and renewed momentum when markets improve.

The Halma Executive Development Programme (HEDP) is our flagship training programme and has had a major influence on the careers of many of our senior managers since it was launched three years ago. I would like to take this opportunity to record our thanks to Nigel Young, the Executive Board member who successfully led the creation of HEDP, who retired in March 2009. Nigel worked in Halma for many years as a Managing Director and Divisional Chief Executive, and we wish him a long and happy retirement.

Delivering consistently high returns requires not just talented people but leaders who set demanding goals and build strong teams with the commitment and innovation to achieve them. The efforts of all Halma employees to achieve such high standards so consistently is appreciated and I thank all of them for their contributions during the past year.

Outlook

We aim to deliver value to shareholders by growing market share, continuing to deliver high returns, maintaining a strong balance sheet and generating cash. This supports our progressive dividend policy and enables ongoing investment in our existing businesses. We will also continue to invest in selected acquisitions as and when suitable, value-adding opportunities present themselves.

One of Halma's strengths is that we operate in diverse niche markets, which have robust long-term demand drivers and where we build strong global market positions. In the past year, there have been some unexpected and sometimes conflicting market trends. However, this variation in market characteristics also contributes to our resilience since whilst some might be in decline, others continue to trade well or are in the process of recovery.

Currently, we are managing the business on the basis that many of our end markets are unlikely to support organic revenue growth in the coming year. We believe we can grow market share and have a flexible manufacturing base which can cope if revenue grows faster than anticipated. In order to maintain returns and absolute earnings, individual businesses have taken action to reduce direct and indirect costs and the benefits are expected to show through in the second half of the year.

We will continue to invest in innovation, people development and growth in developing markets. Although short-term market demand remains difficult to predict, our balanced approach of maintaining short-term returns by responding quickly to market changes and protecting medium-term growth through disciplined investment will continue through the coming year. Despite the current market conditions, this underpins our confidence in continuing to deliver a resilient performance.

Andrew Williams
Chief Executive

1. See Financial highlights

Financial review

A strong financial position

Another year of good progress

For the sixth consecutive year we are reporting record results. Results from continuing operations were as follows:

Organic growth¹ is calculated before the inclusion of acquisitions and our target is 5% year on year improvement. We benefited from favourable currency movements in the translation of our results to Sterling.

Revenue from continuing operations

These results include the cost of reorganisation activities undertaken in the second half of the year to reduce the base level of overhead cost. This charge against profits amounted to £1.2m and we expect that approximately a further £2.5m will be expensed in 2009/10 for the cost of further actions. It is anticipated that these combined actions will reduce overheads by at least £15m compared with the run rate in the second half of the year, being approximately 7% of 2008/09 total overheads.

Whilst in this year one profit-related measure fell slightly below the demanding targets we set for ourselves, the KPIs collectively show the high returns and good performance delivered by Halma, even in a tougher environment. Our balance sheet remains strong.

In the second half of the year revenues increased by 12% but profits increased by only 2%. There was an approximately 12% benefit to revenue and profit from currency translation in the second half compared with approximately 5% in the first half. The profit performance in the second half of the year was heavily influenced by the increased overhead costs in the Health and Analysis sector discussed in the Chief Executive's and Sector reviews.

Strong sector revenue growth

All three sectors increased revenues once again. Infrastructure Sensors, our largest sector at 41% of total revenue, grew by 11%, all organic growth. Health and Analysis increas